Morning Report

22.07.2013

Everything set for big reforms in Japan

Yesterdays election result implies that Shinzo Abe only has himself to blame if he fails to carry out necessary reforms.
NOK & 3m NIBOR
8.10 1.90 1.80 1.70 1.60 1.50 22-Jul
3m (rha)

7.90
7.70

7.50 24-Jun

08-Jul

EURNOK

Yesterday Japan held its upper-house election, and as expected LDP and Shinzo Abe won the election. That means that LDP, with its coalition partner New Komeito, now has the majority in both the upper and the lower house. Thus, as long as there won't be any internal conflicts in the LDP there is a very high likelihood that Abe can sit as prime minister for his entire period. That is by itself impressive, and it will give Abe something prime ministers before him hasn't had: Time. Before Abe came to power in December last year there has been six different prime ministers since Junichiro Koizumi left office in 2006. On average each prime minister has held office for 380 days, which hardly is enough to implement reforms. Now everything seems to be set for Abe to make necessary adjustments to the economy. That is highly needed. The background is well known. Japan has completed two lost decades: average GDP growth during the last 20 years has been a meager 0.8 percent. Meanwhile employment has dropped by 0.5 percent annually, while wages have been reduced by 0.4 percent per year. Since prices have been almost unchanged, households' purchasing power has declined by almost 10 percent over the same period. As the economy is primarily focused on the domestic market, with just 15 percent of GDP being exported, that has negative ripple effects on businesses' appetite for investments. This is what Abe is trying to change. His goal is turn stagnation into growth. But to do that changes have to be made. Money printing by the Bank of Japan and public deficits helps a bit, but by far enough. More is needed, as the roots to the problems in Japan arent cyclical. On the contrary - households have responded to lower purchasing power by reducing their savings what they have been able to. Instead the Japanese problems are to a larger extent caused by lower productivity growth. During the 1970' and the 1980' Japan on average had a productivity growth of 3.3 percent, which was among the highest growth rates in the OECD. Since then, however, the tide has turned and Japan has been transformed from being one of the best to one of the worst. Structural bottlenecks can explain much if this deterioration. The country's comprehensive trade restrictions have prevented restructuring in the domestic economy for years. An outdated tax code has limited companies in expanding their business. In addition, companies find it difficult to close down business during bad times, as indicated by the World Bank' Ease of Doing Business -survey. Nor do new companies find it easy to establish themselves in existing sectors. And businesses that experience that they have a surplus of workers are having problems with layoffs. This has a stabilizing effect on aggregate employment, but reduces businesses' desire to hire new personnel during better times. In turn, the labor market has been transformed into a reversed refrigerator: warm and comfy for those who find themselves on the inside, but cold and excluding for those on the outside. As a consequence, the economy has turned inflexible, where the supply side of the economy has been unable to make adjustments in response to changes in the demand side. In other words: Abe is facing several tough challenges. The process has started, albeit somewhat too slow. In June the government presented a growth package, a set of measures which are supposed to boost activity growth. The package impressed very few though. The big measures, which are more crucial to economic growth, were absent. Instead the package focused on small-scale reforms, such as allowing sales of medicines online, in addition to statements about the importance of including women in the labor market. Most likely the government wanted to wait until after the election to unveil the big reforms. Admittedly, Abe has started talks with the US and other Asian countries about a free trade agreement. If completed this will be a step in the right direction, as it will induce liberalization of domestic sectors. But such agreement is believed to have a negative effect on the agricultural sector. Skeptics are therefore afraid that Abe will fail to reach an agreement due to the LDP s large support on the country side. Nonetheless, yesterdays election is a step in the right direction as it shows that Abe has a broader support in the population than any politician since Junichiro Koizumi in 2006 and Yashuhiro Nakasone in 1987. That may be needed, as it seems inconceivable that Abe can resolve all of the problems in the Japanese economy without losing a few supporters on the way. As there were no important incoming data on Friday there has been only minor movements in the markets. Equities globally are more or less unchanged, but Oslo Brs seems to be an exemption with an increase of 1 percent. The Norwegian krone has depreciated moderately, with EURNOK increasing by 0.2 percent to 7.85. ole.kjennerud@dnb.no Yesterdays key economic events (GMT) Japan Upper-house election Todays key economic events (GMT) 12:30 USA Chicago Fed 14:00 USA Exsisting home sales As of As of jun Jun Unit Unit Index Mn Prior Prior -0.3 5.2 Poll Poll 5.2 Actual DNB

Norw ay: 10y Gov't Bond

2.8 2.6 2.4 2.2 2.0 24-Jun
Rate

125

105
85 08-Jul

65 22-Jul
Diff (bp, rha)

Headquarter Dronning Eufemias gate 30 0191 Oslo Offices Abroad New York London Singapore Stockholm Sales Oslo (+47) Equity Fixed Income Regional Sales (+47) Bergen Bod Fredrikstad Hamar Lillehammer Kristiansand Oslo Stavanger Troms Trondheim Tnsberg lesund Private Clients Research Regional Sales (+47) Eirik Larsen Research FX/IR (+47) ystein Drum Kjersti Haugland Ole Andr Kjennerud Knut A. Magnussen Camilla Viland Magne stnor Kyrre Aamdal Credit Research (+47) Ole Einar Stokstad Martin Brter Mikael L. Gjerding Rolv Kristian Heitmann Thomas Larsen Knut Olav Rnningen Kristina Solbakken Magnus Vie Sundal

+47 03000

+ 1 212 681 2550 +44 207 283 0050 +65 6220 6144 +46 84 73 48 50

22 94 89 40 24 16 90 30

56 13 27 20 75 52 99 10 69 39 41 50 62 54 14 82 61 24 79 56 38 14 61 64 24 16 90 80 51 84 04 30 77 64 76 30 73 87 49 73 33 01 73 80 70 11 69 85 24 16 90 90

24 16 90 77

24 16 90 08 24 16 90 03 24 16 90 07 24 16 90 04 24 16 90 01 24 16 90 06 24 16 90 02

24 16 90 48 24 16 90 46 24 16 90 47 24 16 90 49 24 16 90 44 24 16 90 45 24 16 90 51 24 16 91 23

Morning Report
22.07.2013

3m LIBOR
0.150 0.145 0.140 0.135 0.130 0.125 24-Jun
EUR

08-Jul

0.28 0.28 0.27 0.27 0.26 0.26 22-Jul

USD (rha)

Oil price & NOK TWI

98 97 96 95 94 110

105
100

FX 0700 USD/JPY EUR/USD EUR/GBP EUR/DKK EUR/SEK EUR/CHF EUR/NOK USD/NOK JPY/NOK SEK/NOK DKK/NOK GBP/NOK CHF/NOK

Last 100.13 1.3138 0.8624 7.4573 8.6091 1.2376 7.8454 5.9686 5.96 91.12 105.15 9.094 6.339

Today 100.01 1.3154 0.8608 7.4571 8.5984 1.2364 7.8550 5.9720 5.97 91.45 105.35 9.133 6.357

Spot rates and forecasts In 1m Oct-13 Jan-14 Jul-14 FX 0700 -0.1 98 102 107 110 AUD 0.1 1.30 1.26 1.30 1.32 CAD -0.2 0.85 0.85 0.86 0.87 CHF 0.0 7.45 7.45 7.45 7.45 CZK -0.1 8.55 8.45 8.50 8.60 RUB -0.1 1.24 1.25 1.27 1.30 GBP 0.1 7.80 7.70 7.70 7.70 HKD 0.1 6.00 6.11 5.92 5.83 KWD 0.2 6.12 5.99 5.54 5.30 LTL 0.4 91.2 91.1 90.6 89.5 LVL 0.2 104.7 103.4 103.4 103.4 NZD 0.4 9.18 9.06 8.95 8.85 SEK 0.3 629.03 616.00 606.30 592.31 SGD

USD NOK 0.922 5.505 1.036 5.764 0.940 635.117 19.712 30.285 32.378 18.438 1.528 9.124 7.758 0.769 0.285 20.924 2.625 2.274 0.534 11.177 0.793 4.735 6.534 91.359 1.263 4.728

24-Jun

08-Jul

95 22-Jul
USD/b (rha)

NOK TWI

US dollar 6.3 6.2 6.1 6.0 5.9 5.8

24-Jun 08-Jul
USDNOK

1.33 1.31 1.29 1.27 1.25 22-Jul

EURUSD(rha)

NOK 1m 3m 6m 12m 3y 5y 7y 10y

Prior 1.60 1.70 1.77 1.93 2.12 2.55 2.91 3.24

Last 1.61 1.70 1.77 1.93 2.10 2.52 2.88 3.21

SEK 1m 3m 6m 12m 3y 5y 7y 10y

Prior 1.10 1.20 1.28 1.60 1.99 2.27 2.54

Interest rates Last USD 1.10 1m 1.20 3m 1.28 6m #N/A 12m 1.60 3y 1.99 5y 2.27 7y 2.54 10y

Prior 0.19 0.27 0.40 0.68 0.75 1.48 2.11 2.71

Last 0.19 0.26 0.40 0.68 0.75 1.48 2.11 2.71

EUR 1m 3m 6m 12m 3y 5y 7y 10y

Prior 0.07 0.14 0.25 0.45 0.62 1.03 1.40 1.84

Last 0.07 0.14 0.25 0.45 0.64 1.04 1.42 1.85 Last 99.78 1.53 -0.94 10y sw ap 1.75 1.75 2.00

102.0 100.0 98.0 96.0 94.0

Japanese yen

24-Jun
USDJ PY

08-Jul

7.0 6.5 6.0 5.5 5.0 22-Jul

Norw ay Prior NST475 94.91 10y yld 2.59 - US spread 0.08 3m nibor 1.55 1.55 1.55

Norw ay Oct-13 Jan-14 Jul-14

Governm ent bonds Last SEK Prior Last US Prior 95.20 10y 94.58 94.58 10y 93.34 2.56 10y yld 2.09 2.09 10y yld 2.52 0.09 - US spread -0.43 -0.38 30y yld 3.61 Interest rate forecasts 10y 10y Sw eden 3m libor USA 3m libor sw ap sw ap 3.00 3.00 3.25 Oct-13 Jan-14 Jul-14 1.25 1.25 1.25 2.25 2.25 2.50 Oct-13 Jan-14 Jul-14 0.30 0.35 0.35

Last Germany Prior 93.75 10y 99.84 2.47 10y yld 1.52 3.55 - US spread -1.00 10y sw ap 2.25 2.25 2.50 3m euribor 0.20 0.25 0.20

Germany Oct-13 Jan-14 Jul-14

JPYNOK(rha)

SEKNOK & CHFNOK

92 91 90 89 88 87 6.6

6.4
6.2

24-Jun
SEKNOK

08-Jul

6.0 22-Jul
CHFNOK (rha)

Equities 15700 15200 14700 14200 13700 24-Jun 08-Jul

Dow Jones

500 480 460 440 420 22-Jul

Os lo (rha)

NOK sov. NST21 NST22 NST23 NST471 NST472 NST475 NST475 NST475 NOK FRA SEP DEC MAR JUN

Miscellaneous Prior Last Change Maturity year rem. NOK-index TWI Prior 1.52 1.53 1 18.12.2013 0.41 Last 95.56 95.36 1.42 1.42 1 19.03.2014 0.66 Oil price: (Ldn,cl) 1m 1.52 1.52 0 18.06.2014 0.91 SPOT 109.44 108.39 1.45 1.44 -1 15.05.2015 1.81 Gold price 19.07.2013 PM 1.73 1.70 -2 19.05.2017 3.83 AM: 1283.3 1295.8 2.60 2.56 -4 24.05.2023 9.84 Equities Today 0700 % last 2.60 2.56 -4 24.05.2023 9.84 Dow Jones 15543.74 0.0% 2.59 2.56 -3 24.05.2023 9.84 Nasdaq C. 3587.61 -0.7% 3 mnd 6 mnd NOK NIDR NIBOR FTSE100 6630.67 -0.1% 1.70 1.79 1m 1.75 1.61 Eurostoxx50 2716.18 -0.1% 1.70 1.81 3m 1.82 1.70 DAX 8331.57 -0.1% 1.71 1.84 6m 1.87 1.77 Nikkei 225 14596.38 0.0% 1.76 1.90 12m 2.00 1.93 OSEBX 496.18 0.9% Sources to all tables and graphics: Thomson Reuters, Thomson Datastream and DNB Markets

Morning Report
22.07.2013
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Morning Report
22.07.2013

3m LIBOR
0.150 0.145 0.140 0.135 0.130 0.125 24-Jun
EUR

08-Jul

0.28 0.28 0.27 0.27 0.26 0.26 22-Jul

USD (rha)

Oil price & NOK TWI

98 97 96 95 94 110

105
100

FX 0700 USD/JPY EUR/USD EUR/GBP EUR/DKK EUR/SEK EUR/CHF EUR/NOK USD/NOK JPY/NOK SEK/NOK DKK/NOK GBP/NOK CHF/NOK

Last 100.13 1.3138 0.8624 7.4573 8.6091 1.2376 7.8454 5.9686 5.96 91.12 105.15 9.094 6.339

Today 100.01 1.3154 0.8608 7.4571 8.5984 1.2364 7.8550 5.9720 5.97 91.45 105.35 9.133 6.357

Spot rates and forecasts In 1m Oct-13 Jan-14 Jul-14 FX 0700 -0.1 98 102 107 110 AUD 0.1 1.30 1.26 1.30 1.32 CAD -0.2 0.85 0.85 0.86 0.87 CHF 0.0 7.45 7.45 7.45 7.45 CZK -0.1 8.55 8.45 8.50 8.60 RUB -0.1 1.24 1.25 1.27 1.30 GBP 0.1 7.80 7.70 7.70 7.70 HKD 0.1 6.00 6.11 5.92 5.83 KWD 0.2 6.12 5.99 5.54 5.30 LTL 0.4 91.2 91.1 90.6 89.5 LVL 0.2 104.7 103.4 103.4 103.4 NZD 0.4 9.18 9.06 8.95 8.85 SEK 0.3 629.03 616.00 606.30 592.31 SGD

USD NOK 0.922 5.505 1.036 5.764 0.940 635.117 19.712 30.285 32.378 18.438 1.528 9.124 7.758 0.769 0.285 20.924 2.625 2.274 0.534 11.177 0.793 4.735 6.534 91.359 1.263 4.728

24-Jun

08-Jul

95 22-Jul
USD/b (rha)

NOK TWI

US dollar 6.3 6.2 6.1 6.0 5.9 5.8

24-Jun 08-Jul
USDNOK

1.33 1.31 1.29 1.27 1.25 22-Jul

EURUSD(rha)

NOK 1m 3m 6m 12m 3y 5y 7y 10y

Prior 1.60 1.70 1.77 1.93 2.12 2.55 2.91 3.24

Last 1.61 1.70 1.77 1.93 2.10 2.52 2.88 3.21

SEK 1m 3m 6m 12m 3y 5y 7y 10y

Prior 1.10 1.20 1.28 1.60 1.99 2.27 2.54

Interest rates Last USD 1.10 1m 1.20 3m 1.28 6m #N/A 12m 1.60 3y 1.99 5y 2.27 7y 2.54 10y

Prior 0.19 0.27 0.40 0.68 0.75 1.48 2.11 2.71

Last 0.19 0.26 0.40 0.68 0.75 1.48 2.11 2.71

EUR 1m 3m 6m 12m 3y 5y 7y 10y

Prior 0.07 0.14 0.25 0.45 0.62 1.03 1.40 1.84

Last 0.07 0.14 0.25 0.45 0.64 1.04 1.42 1.85 Last 99.78 1.53 -0.94 10y sw ap 1.75 1.75 2.00

102.0 100.0 98.0 96.0 94.0

Japanese yen

24-Jun
USDJ PY

08-Jul

7.0 6.5 6.0 5.5 5.0 22-Jul

Norw ay Prior NST475 94.91 10y yld 2.59 - US spread 0.08 3m nibor 1.55 1.55 1.55

Norw ay Oct-13 Jan-14 Jul-14

Governm ent bonds Last SEK Prior Last US Prior 95.20 10y 94.58 94.58 10y 93.34 2.56 10y yld 2.09 2.09 10y yld 2.52 0.09 - US spread -0.43 -0.38 30y yld 3.61 Interest rate forecasts 10y 10y Sw eden 3m libor USA 3m libor sw ap sw ap 3.00 3.00 3.25 Oct-13 Jan-14 Jul-14 1.25 1.25 1.25 2.25 2.25 2.50 Oct-13 Jan-14 Jul-14 0.30 0.35 0.35

Last Germany Prior 93.75 10y 99.84 2.47 10y yld 1.52 3.55 - US spread -1.00 10y sw ap 2.25 2.25 2.50 3m euribor 0.20 0.25 0.20

Germany Oct-13 Jan-14 Jul-14

JPYNOK(rha)

SEKNOK & CHFNOK

92 91 90 89 88 87 6.6

6.4
6.2

24-Jun
SEKNOK

08-Jul

6.0 22-Jul
CHFNOK (rha)

Equities 15700 15200 14700 14200 13700 24-Jun 08-Jul

Dow Jones

500 480 460 440 420 22-Jul

Os lo (rha)

NOK sov. NST21 NST22 NST23 NST471 NST472 NST475 NST475 NST475 NOK FRA SEP DEC MAR JUN

Miscellaneous Prior Last Change Maturity year rem. NOK-index TWI Prior 1.52 1.53 1 18.12.2013 0.41 Last 95.56 95.36 1.42 1.42 1 19.03.2014 0.66 Oil price: (Ldn,cl) 1m 1.52 1.52 0 18.06.2014 0.91 SPOT 109.44 108.39 1.45 1.44 -1 15.05.2015 1.81 Gold price 19.07.2013 PM 1.73 1.70 -2 19.05.2017 3.83 AM: 1283.3 1295.8 2.60 2.56 -4 24.05.2023 9.84 Equities Today 0700 % last 2.60 2.56 -4 24.05.2023 9.84 Dow Jones 15543.74 0.0% 2.59 2.56 -3 24.05.2023 9.84 Nasdaq C. 3587.61 -0.7% 3 mnd 6 mnd NOK NIDR NIBOR FTSE100 6630.67 -0.1% 1.70 1.79 1m 1.75 1.61 Eurostoxx50 2716.18 -0.1% 1.70 1.81 3m 1.82 1.70 DAX 8331.57 -0.1% 1.71 1.84 6m 1.87 1.77 Nikkei 225 14596.38 0.0% 1.76 1.90 12m 2.00 1.93 OSEBX 496.18 0.9% Sources to all tables and graphics: Thomson Reuters, Thomson Datastream and DNB Markets