#1NOMURA Connecting Markets East & West Japan in the World Moving from With-Corona to Post-Corona January 2021#2Moving from With-Corona to Post-Corona NOMURA Japan in the World The Global Economic Environment Transformed by the COVID-19 Pandemic Progressive Rise in Share Prices During the Pandemic Unprecedented Provision of Liquidity and Strategic Shift for Monetary Policies Effects of the US Presidential Election Rapid Rise in Savings Rates Due to Disappearing Demand Progressive Integration of Fiscal and Monetary Policies The Meaning of a Weak USD Prolonged US-China Conflict and China's Dual Circulation Strategy An Inwardly-Focused World and Economic Growth Impact of the COVID-19 Pandemic on the Labor Market A Pressing Need to Address Disparities Economic Growth Supported by Digital Transformation A Focus on the Sustainability of Japanese Corporations 1 2 3 4 5 6 7 This document is copyrighted material belonging to Nomura Securities Please see the last page for details 80 9 10 10 11 23 12 13#3The Global Economic Environment Transformed by the COVID-19 Pandemic Real gross domestic product (GDP) levels for major global regions 2019=100 140 •Developed regions Emerging/developing regions 135 European Union (EU) China 130 Japan US 125 IMF World Economic NOMURA The COVID-19 outbreak which originated in China at the end of 2019 has changed the face of the global economy In particular, it is thought that economic recovery to pre-COVID-19 levels will be difficult for many developed regions to accomplish in 2021 120 115 110 105 100 95 Outlook (Oct. 2020) forecasts 90 2018 2019 2020 2021 2022 2023 2024 2025CY Source: International Monetary Fund (IMF) 1#4Progressive Rise in Share Prices During the Pandemic Major stock indexes for Japan/US/Europe Start of 2020=100 120 -TOPIX -S&P500 EUROSTOXX50 110 100 90 80 60 10 70 60 NOMURA my markets On the other hand, while stock experienced major adjustments in early March of 2020 when COVID-19 began to spread to developed regions, they actually began to rise from late March as lockdowns and other harsh restrictions on economic activity were put in place in the US and Europe and the economic slump grew severe Following that, global share prices stayed strong, and on November 5, the Nikkei Stock Average reached a new high for the year Year/month/day 2 www Source: Bloomberg materials#5Unprecedented Provision of Liquidity and Strategic Shift for Monetary Policies Total assets of Japanese/US/Eurozone central banks Start of 2005=100 1000 900 800 700 600 500 400 300 200 100 0 Bank of Japan -US Federal Reserve Board (FRB) -European Central Bank (ECB) 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 CY Source: Bank of Japan, FRB, and ECB materials NOMURA The impetus for the recovery in global share prices after the crash in early March 2020 was major central banks' success in staving off a "fire sale" chain reaction by resolving investors' concern over cash on hand through swift monetary easing and the provision of huge amounts of liquidity Furthermore, in August, the US Federal Reserve Board (FRB) announced a strategy shift for monetary policy, displaying a commitment to continued monetary easing to meet inflation targets, even if inflation temporarily exceeds the annual target of 2% The FRB's strategy shift led central banks in other regions to promote monetary easing as well, leading to peace of mind that global low interest rates would be prolonged, and providing force to boost the stock markets 3#6Effects of the US Presidential Election The non-ferrous metals market and US long-term interest rates NOMURA London Metal Exchange Index (left) 1984=1000 US 10 Year Treasury Rate (right) 3600 % 3.5 3400 3200 3000 2800 2600 2400 2200 3.0 2.5 2.0 1.5 1.0 Joe Biden overcame incumbent Donald Trump in the November 2020 US presidential election to become the next president-elect. The concurrent congressional elections were also a focus of attention, as people watched to see if the split congress, with different parties holding majorities in the Senate and the House, would be resolved. It is growing more likely that the large-scale economic countermeasures and fiscal mobilization expected by the market will not come to pass A failure to increase the scale of fiscal measures or an inability to translate upscaled fiscal measures into accelerated economic growth following the US presidential election is likely to promote a prolongation of monetary easing based on low inflation. Due to this, it is predicted that relatively active risk-taking based on an outlook for prolonged low interest rates will continue in financial markets, and the environment will remain conducive to funds flowing into futures markets for non- ferrous metals and other commodities in addition to stock 0.5 2000 0.0 2015 2016 2017 2018 2019 2020 Source: Bloomberg materials#7Rapid Rise in Savings Rates Due to Disappearing Demand Japanese and US household savings rates (as a percentage of national income) % 30.0 US Japan 25.0 20.0 15.0 10.0 5.0 NOMURA Structural changes in economic fundamentals are thought to be having an effect on prolonged low interest rates in developed regions outside the US as well, in addition to any policy changes after the US presidential election or new FRB strategy A rise in savings rates has been noticed in developed regions including Japan and the US in recent years, in tandem with the aging of their populations. The COVID-19 pandemic accelerated this trend. This trend in savings rates is the flip side of stagnation in consumption- centric demand, and can be identified as one of the factors behind the low growth and low inflation underpinning prolongation of low interest rates 0.0 -5.0 95 97 99 01 03 05 07 09 11 13 15 17 19 CY Source: Cabinet office, Government of Japan and U.S. Department of Commerce materials LO 5#8Progressive Integration of Fiscal and Monetary Policies General government debt balances and the amounts held by central banks % of nominal GDP 300 250 200 150 100 I Central bank holdings of government debt (Sep. 2020) Actual general government debt balances (2019) - The same for 2020 (Oct. 2020 IMF forecast) I NOMURA Prolongation of significant global monetary easing in an attempt to break free from low growth and low inflation has been combined with the wide-reaching expansion of fiscal policy to deal with the effects of the pandemic, promoting what is effectively an integration of fiscal and monetary policies in each region There are concerns that should a connection be drawn between this integration and a subordination of central banks to fiscal authorities or an implicit loss of political independence, it will bring about a loss of confidence in currency and disrupt global financial markets 50 0 Japan US Germany France Italy Spain Note: Figures for Germany, France, Italy, and Spain are debt holdings for European Central Bank (ECB) policy targets Source: International Monetary Fund (IMF) 6#9The Meaning of a Weak USD USD nominal effective exchange rate index and gold futures COMEX gold futures (central contract month) (left) -Bloomberg USD nominal effective exchange rate index (right) $/troy ounce 2200 2000 1800 1600 1400 1200 105 100 95 90 90 85 85 NOMURA The US dollar grew weaker on an effective basis following the expansion of monetary easing during the COVID-19 pandemic. Based on the large drop in US dollar interest rates, and the prolongation of such rates, this is proof that investors are increasing their risk appetites and shifting their funds from safe dollar-denominated assets to higher risk assets. The Japanese yen, with lower interest rates than the dollar, is not becoming a target of risk-taking investors, so there is little concern of an accelerated strengthening of the yen On the other hand, taking into account the risk of reduced confidence in currency in the US due to integration of fiscal and monetary policy, caution is required regarding the possibility that over the long term the dollar may grow even weaker out of anxiety over its status as a key currency 1000 2015 80 80 2016 2017 2018 2019 2020 CY Source: Bloomberg materials 7#10Prolonged US-China Conflict and China's Dual Circulation Strategy NOMURA China's current balance and its breakdown Goods trade balance Service balance RMB bn 1200 Income balance -Current balance 900 600 300 0 -300 -600 -900 10 11 12 13 14 15 16 17 18 19 20 CY Source: Haver Analytics material Another thing that must be anticipated with the birth of the Biden administration is the possibility of change in US policies regarding China. However, there is little chance of a significant shift in economic security policies Assuming that the US will not change its tough stance, China is launching a “Dual Circulation Strategy" promoting domestic development and production of advanced technologies and high- tech products The Dual Circulation Strategy simultaneously seeks to resolve China's reliance on foreign demand. It seems that there is now a need for caution regarding the risk that over the long term, China's massive trade and current surpluses will shrink, along with the money glut that China has provided to the world 00 8#11An Inwardly-Focused World and Economic Growth NOMURA Trend in world trade volume 2010 average=100 130 120 110 100 90 80 70 170 60 0001 02 03 04 05 06 07 08 09 10 11 121314151617181920 CY Source: Netherlands Bureau for Economic Policy Analysis (CPB) material China's shift toward an inward-looking focus is an important change in direction for the economies of Japan and other developed regions that are facing shrinking domestic demand due to aging populations. Despite China's own shrinking and aging population, increased difficulty in accessing the economic demand of over 1 billion consumers with rising income levels will be a heavy blow to the economies of developed regions Japan and other developed regions should consider the need to lay out visions for post- pandemic economic recovery while launching new growth strategies that do not rely on the giant Chinese market 9#12Impact of the COVID-19 Pandemic on the Labor Market Changes in Supply-Demand for Labor by Industry ↑ Easing of supply-demand due to COVID-19 Tightening of supply-demand under the Abe administration Changes, points in the Bank of Japan Tankan Employment Conditions Diffusion Index 80 60 60 40 40 20 ° -20 -40 -60 12/2012 survey 9/2019 survey (A) 3/2020 survey 6/2020 survey (B) -A+B Mining & quarrying of stone and gravel Construction Information services Petroleum & coal products transportation machinery Shipbuilding, heavy machinery & other Retailing Processed metals Ceramics, stone & clay Services for businesses Nonmanufacturing average General-purpose, production & business Pulp & paper Wholesaling oriented machinery All industries average Iron & steel Food & beverages Transport & postal activities Other information communication Real estate Electric & gas utilities Manufacturing average Chemicals Electrical machinery Goods rental & leasing Lumber & wood products Nonferrous metals Textiles Other manufacturing Services for individuals Communications Accommodations, foodservice Motor vehicles NOMURA As commonly discussed lately, the COVID-19 pandemic is radically transforming our lifestyles, and normalizing a new way of life. At the same time, the current changes to economic and social structure dubbed With-Corona are by no means temporary, and will likely by carried on to the Post-Corona era One example of this is the mainstreaming of working from home and remote work. The establishment of new work styles is also changing the face of the labor shortage which grew rapidly through the eight years of the Abe administration on the back of demographic change. Some industries may be gaining the outlook that changes in work styles during the pandemic will lead to a systemic improvement of labor shortage Source: Bank of Japan material 10#13A Pressing Need to Address Disparities NOMURA Supply-demand and salary levels by industry Monthly base pay (June 2019), \1000 430.0 410.0 390.0 Education, Learning support Academic research, • Expert & technical services • Communications 370.0 Real estate 350.0 330.0 310.0 ●Information services Wholesaling Construction Electric, gas & water utilities Finance & insurance Manufacturing The changes in work styles brought about by the COVID-19 pandemic are presenting Japan's economic and social structures with serious challenges leading up to the Post-Corona age In Japan, average salary levels tend to be higher for industries with relatively smaller labor shortages or an ability to quickly shift to other work styles such as working from home, but lower for other industries. The normalization of new work styles leading up to Post-Corona may act as a driver to continued shifting of employment from high-income industries where labor shortages are easy to address, to low- income industries with high labor shortages. If this trend is realized, it may further widen domestic income disparities and intensify social friction. Mining Goods rental & leasing 290.0 Transport & postal activities • Healthcare & welfare 270.0 Retailing Lifestyle services, leisure Other services 250.0 230.0 -70 Accommodations, eating & drinking services -60 -50 -40 -30 -20 -10 0 Bank of Japan Tankan Employment Conditions Diffusion Index (September 2019), Surplus - shortage, % points Source: Ministry of Health, Labour and Welfare, Bank of Japan materials 11#14Economic Growth Supported by Digital Transformation Decomposition of the potential growth of the Japanese economy Year-on year (contribution), % 6.0 5.0 4.0 3.0 2.0 Hours worked Capital stock ■Total factor productivity (TFP) Number of employed persons -Potential growth rate NOMURA One key to resolving potential structural economic and social issues leading up to the Post-Corona age is digital transformation (DX) Investment in digitalization should not be perceived merely as a means to streamline work tasks and reduce required labor, rather, using digitalization to both mitigate labor shortages through streamlining of work and achieve higher added value could ultimately boost Japan's overall productivity while raising employee income levels, and heighten the country's capability for growth 1.0 0.0 -1.0 -2.0 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 CY Source: Bank of Japan materials 12#15A Focus on the Sustainability of Japanese Corporations Balance sheet for private sector non-finance corporations NOMURA Other financial assets ■Net assets % of nominal GDP 400 300 200 100 0 -100 -200 -300 -400 Stock (asset account) Stock ■Cash and deposits Non-financial assets Liabilities (liabilities account) 94959697989900010203040506070809101112131415161718 CY Source: Cabinet Office, Government of Japan material In terms of change leading up to the Post-Corona age, there is one area where Japan and Japanese corporations can exercise an advantage. This area is sustainability The traditional stance of Japanese corporations to aim for long-term stable growth in profits, combined with a financial strategy of retaining relatively generous levels of liquidity on hand, has not always been praised by global investors However, a heightening interest in sustainability brought about by the COVID-19 pandemic may mean there is room for reconsideration of the advantages of the Japanese style of corporate management If challenges leading up to the Post-Corona age, such as the ones stated earlier, can be overcome, there is potential for a dramatic rise in the world's appraisal of Japanese economy, industry, and corporations 13#16Biography NOMURA Takashi Miwa Chief Japan Economist Source: Cabinet Office Takashi Miwa is the Chief Japan Economist of Nomura Securities Co. Ltd. He provides in-depth analysis and forecasts of the Japanese economy, based on interregional analysis of the macro economy and financial market analysis across various asset classes. He has a particular strength in analyzing the macro economy from legal and administrative perspectives Since joining Nomura Research Institute in 1990, he has engaged in macroeconomic analysis and financial market forecasting for various regions. In 1994-96, he moved to the Fixed Income Department of Nomura Securities and analyzed the macro economy from more market-oriented perspectives while engaging in forecasting monetary policy and interest rates. He also made feasibility studies and conducted investment strategy planning with a view to the start of European Monetary Union in 1999 He received his master's degree in Law from the University of Tokyo in 2001 and his bachelor's degree in Liberal Arts and Science (majoring in Russian culture and society) from the University of Tokyo in 1990. While in the graduate school of law, he studied contract law, corporate law and bankruptcy law, and made an analysis of financial contracts and corporate behavior from the perspectives of 'Law and Economics'. This experience proved useful in analyzing banking behavior, administrative responses and price reactions of fixed income and other securities during Japan's financial turmoil through 2003 and the global financial crisis after the collapse of Lehman Brothers in 2008 From 2001, he provided economic analysis and investment ideas for major regional financial institutions including regional banks in Japan and gained an extremely good reputation among the top management of those clients. He has also authored several textbooks on economics and finance for beginners that are popular among university students and young graduates starting careers in financial institutions He moved to Nomura Securities in 2004. After belonging to the Economic Research, Investment Research, and Investment Research and Investor Services departments, he took his current position in May 2016. Since August 2018, he has been serving a dual assignment as head of the Economic Research Department 14#17A Notice from Nomura Securities NOMURA This material is intended solely for the purpose of providing information on the overall macro economy and is not to be construed as solicitation for securities or any other financial product. Furthermore, while the contents of this material are based on sources believed to be reliable, Nomura Securities does not warrant or represent that this document is accurate or complete. Economic results, appraisals, future trends, and other information expressed herein are current opinions as of the original publication date, and are subject to change without notice. This material is for the sole use of clients to whom it has been provided. This material may contain simulations, estimates, or other figures derived through specific methods based on specific conditions. Such simulations, estimates, or other figures may produce different results if derived through different methods, based on different conditions, etc. Nomura Securities does not warrant or represent that any of these results will reflect actual future conditions. Investors in the financial products offered by Nomura Securities may incur fees and commissions specific to those products (for example, transactions involving Japanese equities are subject to a sales commission of up to 1.43% on a tax-inclusive basis of the transaction amount or a commission of ¥2,808 for transactions of ¥200,000 or less, while transactions involving investment trusts are subject to various fees, such as commissions at the time of purchase and asset management fees (trust fees), specific to each investment trust). In addition, all products carry the risk of losses owing to price fluctuations or other factors. Fees and risks vary by product. Please thoroughly read the written materials provided, such as documents delivered before making a contract, listed securities documents, or prospectuses. Nomura Securities Co., Ltd. Financial instruments firm registered with the Kanto Local Finance Bureau (registration No. 142) Member associations: Japan Securities Dealers Association; Japan Investment Advisers Association; The Financial Futures Association of Japan; and Type II Financial Instruments Firms Association Publication date: December 2020 This material was created as reference material for Nomura Securities' Japan in the World event to be held in January 2021#18Green Power All electricity to print this booklet is generated by green energy.(62.3kWh) NOMURA