May 29, 2017

Evercore ISI Japan Research

Daisuke J. Nakajimadaisuke.nakajima@evercoreisi.comdaisuke.nakajima@evercoreisi.com

(212) 446-9417

E ISI J F t2016

1H 2H Real GDP * 1 0% 1 5% 1 5%

Evercore ISI Japan Forecast2017

Real GDP 1.0% 1.5% 1.5%Nominal GDP * 1.3% 2.1% 2.2%CPI Y/Y % ** 0.3% 0.8% 1.0%Core Core CPI Y/Y % ** 0.0% 0.2% 0.7%Yen/$ ** 117 115 120

* Q/Q % A.R.** End of period

Older Japanese Investors More Upbeat Than Younger Investorsp g

INVESTOR EXPECTATION FOR NIKKEI (MAR 2020) by AGE

Yen Between ¥110 and ¥120Optimal Range for Economic Growth

JAPAN REAL GDP2016:4Q ¥524.6t

¥120 or weaker

¥110 - ¥119

¥100 - ¥109

¥90 - ¥99

¥89 or strongerg

12 Economic Indicators at All-Time Highs1. Real GDP2. Profit margins3. Job openings4 Corporate cash

7. Consumer net worth in financial assets8. Number of foreign workers in Japan9. Number of tourists into Japan10 Female employment4. Corporate cash

5. Corporate profits6. Parcel shipments

10. Female employment11. BoJ balance sheet12. Help wanted ads

i

JAPAN CORPORATE PROFITSSAAR by Evercore ISI 2016:4Q 79.2

70

80

C t fit

JAPAN CORPORATE PROFITS div byJAPAN CORPORATE SALES

2016:4Q 6.0%

5

6

P fit i

40

50

60Corporate profits

4

5 Profit margins

20

30

40

2

3

0

10

1960 1970 1980 1990 2000 2010

1

1960 1970 1980 1990 2000 2010

Output Gap Approaching 1990s Bubble Peak

JAPAN OUTPUT GAP

2

2018:2Q 2.4% e

0

-4

-2

-6

-8

1980 1985 1990 1995 2000 2005 2010 2015

Corporate Cash in 4Q Up +7.5% Y/Y and at Record High

JAPAN NONFINANCIAL CORP LIQUID ASSETSQ2016:4Q 250

240

260

Japan: ¥250t ($2 25t)

220

240 Japan: ¥250t ($2.25t)US: $2.08t

180

200

160

180

140

88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

Corporate Sentiment Improving

EVERCORE ISI SURVEY OF JAPANESE COS:Do you expect business conditions toDo you expect business conditions to

improve/remain the same/worsen over the next year?% Improve

2016 20172Q 1Q

Mfg 17% 100% ++gNon-Mfg 42% 36% -T t l 36% 64% +Total 36% 64% +

EVERCORE ISI SURVEY OF JAPANESE COS:D t l th th t 12 thDo you expect sales growth over the next 12 months

to accelerate / stay the same / decelerate?% Accelerate

62%65%

55%

60%

65%

48%44%

46%44%

50%

45%

50%

55%

33%36% 36%

27%

32%30%

35%

40%

17%

27%

20%

25%

30%

15%2014 1Q

2014 2Q

2014 3Q

2014 4Q

2015 1Q

2015 2Q

2015 3Q

2015 4Q

2016 1Q

2016 2Q

2016 3Q

2016 4Q

2017 1Q

EVERCORE ISI SURVEY OF JAPANESE COS:D l t i d ti th t ?Do you plan to increase domestic capex over the next year?

% Yes81%

80%

67% 66%

73%

70%

80%

60%

52%

66%

52% 54%60%

52%

43%46%

52% 54%

43%

50%50%

39% 39%

30%

40%

30%2013 4Q

2014 1Q

2014 2Q

2014 3Q

2014 4Q

2015 1Q

2015 2Q

2015 3Q

2015 4Q

2016 1Q

2016 2Q

2016 3Q

2016 4Q

2017 1Q

EVERCORE ISI SURVEY OF JAPANESE COS:D l t i b k b i th t ?Do you plan to increase bank borrowing over the next year?

% Yes54%55%

43%

48%

45%

50%

39%

35%

40%

35%

40%

26%

22%

26%

22% 23%26%

25%

30%

20%22% 22% 23%

15%

20%

2014 1Q

2014 2Q

2014 3Q

2014 4Q

2015 1Q

2015 2Q

2015 3Q

2015 4Q

2016 1Q

2016 2Q

2016 3Q

2016 4Q

2017 1Q

EVERCORE ISI SURVEY OF JAPANESE COS:D l t i b k b i th t ?Do you plan to increase bank borrowing over the next year?

% Yes75%60% Bank Borrowing Plans (Bar LHS)

65%

70%

50%

55%

Bank Borrowing Plans (Bar, LHS)2017:1Q 54% Yes

M&A Plans (Line, RHS)2017:1Q 72% Yes

55%

60%

65%

40%

45%

2017:1Q 72% Yes

50%

55%

30%

35%

40%

45%

20%

25%

35%15%20141Q

20142Q

20143Q

20144Q

20151Q

20152Q

20153Q

20154Q

20161Q

20162Q

20163Q

20164Q

20171Q

EVERCORE ISI SURVEY OF JAPANESE COS:D l t i i th t ?Do you plan to increase prices over the next year?

% Yes

64%

68%70%

58% 58% 57%55% 57% 58%

52%

64%

55%

60%

65%

50%52%

45%

50%

55%

31%

36%35%

40%

25% 25%

20%

25%

30%

20%2013 4Q

2014 1Q

2014 2Q

2014 3Q

2014 4Q

2015 1Q

2015 2Q

2015 3Q

2015 4Q

2016 1Q

2016 2Q

2016 3Q

2016 4Q

2017 1Q

EVERCORE ISI SURVEY OF JAPANESE COS:H d l t h?How do you plan to use your cash?

% Dividend increases

71% 72% 72%71% 72%

62% 60% 59%

72%

60%

70%

45%

52% 54%

50%

60%

32%

39%

30%

40%

20% 20%24%

20%

10%2013 4Q

2014 1Q

2014 2Q

2014 3Q

2014 4Q

2015 1Q

2015 2Q

2015 3Q

2015 4Q

2016 1Q

2016 2Q

2016 3Q

2016 4Q

2017 1Q

Profit Margins at Record High 6

JAPAN CORPORATE PROFITSdiv by JAPAN CORPORATE SALES

2016:4Q 6.0%

2015 – 2016 avg:5.4%

5Q

4

1955 2014 avg: 3

cs s

tart

1955 – 2014 avg:2.9%

2

Abe

nom

ic

1

1950 1960 1970 1980 1990 2000 2010

Wage Data Probably Understating Wage GrowthUnderstating Wage Growth

114

110

112 JAPAN NOMINAL WAGE INDEXSA by EVRISI

3 Mo.Avg. Jan 100.6

106

108

g

102

104

106

100

102

98

92 94 96 98 00 02 04 06 08 10 12 14 16 18

Female Employment % Total Surging

42

43

40

41

39

40

JAPAN FEMALE EMPLOYMENT% JAPAN EMPLOYMENT

Jan 43 5%

37

38

1950 1960 1970 1980 1990 2000 2010

Jan 43.5%

Employment of 65+ Years Old Surging

Japan Non-Regular Employment

Age 4 Yr. % Ch. Level

2017 1Q g

15 - 34 -2% 5.2m

35 44 3% 3 7m35 - 44 -3% 3.7m

45 - 54 +14% 4.0m

55 - 64 0% 4.1m

Over 65 +57% 3.1m%

Household Cash Savings at Record High And Still Increasing

JAPAN HOUSEHOLD FINANCIAL ASSETS Cash2016:4Q 928Q

800

900

1000

600

700

800

400

500

Japan: ¥928t ($8.4t)

200

300 US: $10.3t

100

1980 1985 1990 1995 2000 2005 2010 2015

US Yields Still Key for YenU S 10 YEAR BOND YIELD

2 2

2.4

2.6

U.S. 10-YEAR BOND YIELDMay 5 2.35%

1.8

2.0

2.2

1.4

1.6

117

112

117

102

107

97

J F M A M J J A S O N D2016

J F M A M2017

YEN per U.S. DOLLARMay 5 ¥112.6