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					May 10, 2013

ASEAN Economics

                                                                                                                                                                         MORGAN STANLEY RESEARCH
ASEAN Economics                                                                                                                                                          ASIA/PACIFIC

                                                                                                                                                                         Morgan Stanley Asia (Singapore) Pte.
Understanding the Japan-ASEAN Story: Five Facts
                                                                                                                                                                         Deyi Tan
                                                                                                                                                                         Deyi.Tan@morganstanley.com
                                                                                                                                                                         +65 (6 ) 6834 6703
Understanding Japan’s macro ties with ASEAN:
                                                                                                                                                                         Seen Meng Chew
With the recent policy developments in Japan (quantitative & qualitative easing), developments in Japan’s                                                                Seen.Meng.Chew@morganstanley.com
relationship vis-à-vis other Asia counterparts (territorial issues with China and currency competition with Korea)                                                       +65 (6 ) 6834 6739
and the macro implications these may have as well as Japan’s recent announcement that it would enhance
financial cooperation with ASEAN in the ASEAN+3 meeting in India last week, we thought it would be interesting to
outline some facts on the economic ties that Japan has with ASEAN economies. We think this would help investors
set the context on macro analysis pertaining to Japan-ASEAN. The five facts are :

Fact 1: Japanese are, globally, bigger portfolio investors than FDI investors, but in Asia/ASEAN, the reverse is
true.

Fact 2: Where Japanese portfolio investors invest, they have recently come to prefer bonds more than equities in
ASEAN.

Fact 3: Japan’s outward FDI investors favor different sectors in ASEAN (Transport, Finance/Insurance & Food)
than they do globally; Japan’s FDI investment into ASEAN is tilted toward manufacturing, whilst Japan’s FDI
investment globally is tilted toward non-manufacturing.

Fact 4: JPY appreciation from the 1985 Plaza Accord may have spurred outward FDI from Japan at the time.
However, the relationship between Japan outward FDI and currency movements since then has been somewhat
loose.

Fact 5: From a trade perspective, ASEAN’s ties with Japan are generally more complementary than competitive in
nature.


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                                                                                                                     MORGAN STANLEY RESEARCH
                                                                                                                                       ASEAN Economics
                                                                                                                                            May 10, 2013




Understanding the Japan-ASEAN Story: Five Facts

  Understanding Japan’s ties with ASEAN: With the recent policy developments in Japan (quantitative and qualitative easing), developments
  in Japan’s relationship vis-à-vis other Asia counterparts (territorial issues with China and currency competition with Korea) and the macro
  implications these may have as well as Japan’s recent announcement that it would enhance financial cooperation with ASEAN in the
  ASEAN+3 meeting in India last week, we thought it would be interesting to outline some facts on the economic ties that Japan has with
  ASEAN. We think these points would help investors set the context when it comes to macro analysis on Japan-ASEAN. Five facts as follow:


  Fact 1: Japanese are, globally, bigger portfolio investors than FDI investors, but in Asia/ASEAN, the reverse is true.

  On a global basis, the Japanese are much bigger portfolio investors than FDI investors. In the last five years (2008-12), Japan’s outward
  portfolio investment totaled US$865bn (see page 3). This is 74% higher than its outward FDI investment of US$496bn (see page 7). However,
  the Japanese have a different “capital account” relationship with Asia/ASEAN. They are much bigger FDI investors than portfolio investors in
  this part of the world. Japan’s outward FDI investment to Asia in the last five years, at US$138bn and 28% of Japan’s outward FDI investment,
  dwarfs its outward portfolio investment to Asia. The latter stands at US$17bn, or just 2% of total outward portfolio investment from Japan.
  Similarly in ASEAN5, Japan’s outward portfolio investment at US$7.7bn in 2008-12 pales in comparison to its outward FDI commitments of
  US$45bn.


  Fact 2: Where Japanese portfolio investors invest, they have recently come to prefer bonds more than equities in ASEAN.

  On a global basis, Japanese portfolio investors tend to prefer bonds more than equities (see page 3). Of the US$865bn in outward portfolio
  investment from Japan in the past five years, US$774bn went into bonds/notes and US$103bn into equities, whilst Japanese repatriated
  US$12bn from money market instruments. This is true for Asia/ASEAN too (see page 4). Over the past five years, of the US$17bn portfolio
  investment from Japan into Asia, US$22bn went into bonds/notes, whilst we saw Japanese investors repatriating US$4bn from equities and
  US$0.5bn from money market instruments. Some 44% of Japan’s outward portfolio flows into Asia have gone into ASEAN in 2008-12, and
  US$8bn of the total US$7.7bn in portfolio flows from Japan into ASEAN have gone into bonds. However, whilst Japanese portfolio investors’
  preference for global bonds versus global equities has been consistent over the years, it is less so for Asia/ASEAN. For the latter, the shift
  toward bonds has got more discernible over the past few years post 2008/2009 GFC (see pages 4-5).




                                                                                                                                                           2
                                                                                                                                                                  MORGAN STANLEY RESEARCH
                                                                                                                                                                                             ASEAN Economics
                                                                                                                                                                                                   May 10, 2013




Portfolio Linkages: Japanese Are Less of Portfolio Investors in Asia/ASEAN
            Where Do Japanese Portfolio Investment Go?                                                        Japanese Portfolio Investment: By Geography
US$bn                             2008        2009      2010       2011          2012    2008-2012
                                                                                                                                     Africa, 0.4%
                                                                                                                                                      Others, 4.1%
Net outward portfolio
investment from JP
                                                                                                                Middle East, 0.3%
                                  135.2       174.2    294.4       76.8          184.1     864.8                                                                 Asia, 2.0%
                                                                                                               East Europe & Russia,
To Asia                            -1.4        4.9       4.6       3.8            5.6      17.4
                                                                                                                       0.4%
To ASEAN 5                         -1.0        2.5       3.0       -0.8           3.9       7.7

To North America                  52.4        86.5     161.3       17.3          25.9      343.4
                                                                                                     Western Europe, 23.0%
                                                                                                                                                                               North America, 39.7%
To Central & South America         8.8         2.6      82.5       44.3          45.9      184.1

To Oceania                        13.6        25.1      16.6       15.0           5.0      75.2

To Western Europe                 47.6        55.8      25.1      -12.0          82.2      198.8

                                                                                                               Oceania, 8.7%
                                                                                                                                                                                         2008-2012: Total net
To East Europe & Russia            0.6         1.3      -0.6       -0.1           2.4       3.7
                                                                                                                                                                                         outward portfolio
To Middle East                     1.1         0.1       1.0       -0.2           1.1       3.0                                                                                          investment by
To Africa                          1.5         0.2      -0.3       -0.2           2.5       3.6
                                                                                                                                                                                         Japanese residents
                                                                                                                                      Central & South
To Others                         10.9        -2.2       4.2       8.9           13.6      35.4
                                                                                                                                      America, 21.3%


      Net Outward Portfolio Investment from JP to Asia                                                     Japanese Are Mainly Investors into Bonds & Notes
                   From JP to China                   From JP to HK                                  350            Net outward portfolio investment from Japan
                   From JP to Taiwan                  From JP to Korea                                              Net outward portfolio investment from Japan: Equity Securities
  9
                   From JP to Singapore               From JP to Thailand                                           Net outward portfolio investment from Japan: Bonds & Notes
                                                                                                     300
                   From JP to Indonesia               From JP to Malaysia                                           Net outward portfolio investment from Japan: Money mkt instruments
  7                From JP to Philippines             From JP to India
                                                                                                     250

  5
                                                                                                     200


  3                                                                                                  150


  1                                                                                                  100


                                                                                                      50
 -1
          Total net outward portfolio investment from JP to Asia
          (US$bn) (+ve means Japanese residents are investing abroad)
          (3Y trailing sum)
                                                                                                       0
 -3
            2007           2008             2009         2010             2011            2012              US$bn
                                                                                                     -50
Source: CEIC & Morgan Stanley Research                                                                       2005          2006         2007         2008         2009         2010         2011      2012        3
                                                                                                                                                                                                  MORGAN STANLEY RESEARCH
                                                                                                                                                                                                                                             ASEAN Economics
                                                                                                                                                                                                                                                          May 10, 2013




Portfolio Flows Linkages: Japanese Portfolio Investors Seem to Prefer Bonds
                           JP Portfolio Investment in Asia                                                             Apart from Korea, Japanese Likes ASEAN in 2012
  10      US$bn
                                                                                                                       2012, US$bn                                 Outward            portfolio   investment                 from    JP: Into others
                                                                                                                3.5
   8
                                                                                                                                                                   Outward            portfolio   investment                 from    JP: Into equities
                                                                                                                3.0                                                Outward            portfolio   investment                 from    JP: Into bonds
                                                                                                                                                                   Outward            portfolio   investment                 from    JP
   6                                                                                                            2.5

                                                                                                                2.0
   4
                                                                                                                1.5
   2
                                                                                                                1.0

   0                                                                                                            0.5

                                                                                                                0.0
   -2
                                                                                                                -0.5
   -4                                                                                                           -1.0
           2005          2006          2007          2008          2009         2010             2011    2012
                       Net outward portfolio investment from Japan to Asia                                      -1.5




                                                                                                                                                         alaysia




                                                                                                                                                                                                                        HK



                                                                                                                                                                                                                                    Taiwan
                                                                                                                                                                                       Thailand




                                                                                                                                                                                                                                                      India
                                                                                                                        Korea



                                                                                                                                     Indonesia




                                                                                                                                                                          Singapore




                                                                                                                                                                                                                                                                China
                                                                                                                                                                                                   Philippines
                       Net outward portfolio investment from Japan to Asia: Equity Securities
                       Net outward portfolio investment from Japan to Asia: Bonds & Notes




                                                                                                                                                        M
                       Net outward portfolio investment from Japan to Asia: Money mkt instruments

                   JP Portfolio Investment into ASEAN5                                                                             JP Portfolio Investment into Indonesia
  6                                                                                                              2.0
        Japan net outward portfolio investment to ASEAN5 (US$bn)                                                          Japan net outward portfolio investment into Indonesia (US$bn)

  5
                                                                                                                 1.5

  4

                                                                                                                 1.0
  3

                                                                                                                 0.5
  2


  1                                                                                                              0.0


  0                                                                                                                                                     Equities
                                                                                                                -0.5                                    Bonds & notes
                                                                                                                                                        Total
  -1
          2005          2006          2007          2008         2009          2010             2011    2012    -1.0
                                                                                                                            2005




                                                                                                                                                 2006




                                                                                                                                                                   2007




                                                                                                                                                                                      2008




                                                                                                                                                                                                                 2009




                                                                                                                                                                                                                             2010




                                                                                                                                                                                                                                               2011




                                                                                                                                                                                                                                                               2012
               Total            Equities             Bonds & notes              Money mkt instruments

Source: CEIC & Morgan Stanley Research
                                                                                                                                                                                                                                                                         4
                                                                                                                                                         MORGAN STANLEY RESEARCH
                                                                                                                                                                                 ASEAN Economics
                                                                                                                                                                                        May 10, 2013




Portfolio Flows Linkages: ASEAN Trends
                  JP Portfolio Investment into Malaysia                                                            JP Portfolio Investment into Philippines
  1.6
         Japan net outward portfolio investment into Malaysia (US$bn)                                1.2   Japan net outward portfolio investment into Philippines (US$bn)

  1.4
                                                                                                     1.0

  1.2                                                                                                0.8
                                                                 Equities
  1.0                                                            Bonds & notes                       0.6
                                                                 Total
  0.8                                                                                                0.4


  0.6                                                                                                0.2

                                                                                                     0.0
  0.4
                                                                                                    -0.2
  0.2
                                                                                                    -0.4
  0.0                                                                                                                          Equities
                                                                                                    -0.6                       Bonds & notes
 -0.2                                                                                                                          Total
                                                                                                    -0.8
 -0.4
                                                                                                    -1.0
         2005




                     2006




                                 2007




                                             2008




                                                          2009




                                                                         2010




                                                                                   2011




                                                                                             2012




                                                                                                            2005




                                                                                                                        2006




                                                                                                                                     2007




                                                                                                                                                2008




                                                                                                                                                            2009




                                                                                                                                                                          2010




                                                                                                                                                                                 2011




                                                                                                                                                                                           2012
                 JP Portfolio Investment into Singapore                                                             JP Portfolio Investment into Thailand
         Japan net outward portfolio investment into Singapore (US$bn)                              0.6    Japan net outward portfolio investment into Thailand (US$bn)
  2.5


  2.0
                                                                                                    0.4

  1.5

                                                                                                    0.2
  1.0


  0.5                                                                                               0.0


  0.0
                                                                                                    -0.2
                                                                                                                                                        Equities
  -0.5                                                                                                                                                  Bonds & notes
                     Equities                                                                                                                           Total
                                                                                                    -0.4
                     Bonds & notes
  -1.0
                     Total
                                                                                                    -0.6
  -1.5
                                                                                                           2005




                                                                                                                       2006




                                                                                                                                     2007




                                                                                                                                                2008




                                                                                                                                                            2009




                                                                                                                                                                          2010




                                                                                                                                                                                 2011




                                                                                                                                                                                            2012
          2005




                     2006




                                 2007




                                             2008




                                                         2009




                                                                      2010




                                                                                 2011




                                                                                          2012




Source: CEIC & Morgan Stanley Research
                                                                                                                                                                                                       5
                                                                                                                   MORGAN STANLEY RESEARCH
                                                                                                                                     ASEAN Economics
                                                                                                                                           May 10, 2013




Understanding the Japan-ASEAN Story: Five Facts

  Fact 3: Japan’s outward FDI investors favour different sectors in ASEAN than they do globally; Japan’s FDI investment into ASEAN
  is tilted towards manufacturing, whilst Japan’s FDI investment globally is tilted toward non-manufacturing.

  Of Japan’s outward FDI into Asia, 33% goes into ASEAN5. Over the past five years, the top 3 sectors that Japanese outward FDI investors
  invested in globally were Finance and Insurance (23% of total), Mining (12% of total), and Wholesale & Retail (11%). Indeed, Japanese
  outward FDI investment globally tends to be tilted more toward non-manufacturing (60% of total) than manufacturing (40%). However, the
  skew is the other way around in ASEAN – i.e., 59% manufacturing and 41% non-manufacturing. The top 3 sectors that Japan’s FDI investors
  into ASEAN5 invest in are Transportation Equipment (16% of total), Finance and Insurance (15%) and Food (9%) (see pages10-11).
  Interestingly, whilst a significant portion of Japanese outward FDI investment globally is to the Mining sector, Japanese FDI investment into
  Mining/Petroleum in ASEAN5 is a very small share of the outward FDI investment into that region.

  Fact 4: The historical relationship between Japan outward FDI to ASEAN5 and currency movements has been somewhat loose.

  There was a positive correlation between JPY appreciation and increased outward FDI from Japan during the late 1980s, when the 1985 Plaza
  Accord led to sharp yen appreciation. Since then however, the movement between JPY and outward FDI from Japan has been rather loose
  (see page 8). Indeed, our empirical exercises on the outward FDI from Japan to respective ASEAN5 economies vs. the respective trade
  weighted exchange rate of ASEAN5 did not show any significant correlation either (see page 9). We believe there could be a few reasons for
  the seeming lack of sensitivity: 1) FDI decisions are longer-term in nature and, hence, may be less likely to be affected by currency
  movements. Moreover, near-term currency strength/weakness may not be perceived as a long-term trend, 2) FDI investment into non-
  manufacturing segments such as Finance and Insurance should be less sensitive to currency movements and hence may have further
  dampened the correlation. 3) In sectors such as Transport, Japanese manufactures may prefer production nearer to the end markets.




                                                                                                                                                          6
                                                                                                                                                                  MORGAN STANLEY RESEARCH
                                                                                                                                                                                          ASEAN Economics
                                                                                                                                                                                               May 10, 2013




FDI Linkages: Japanese Are More of FDI Investors in Asia/ASEAN
              Where Do Japanese Direct Investment Go?                                                                Japanese Direct Investment: By Geography
                                                                                                                                                  Africa, 0.3%   Others, 4.3%
US$bn                              2008       2009         2010      2011        2012     2008-2012                  Middle East, 0.5%
Net outward direct investment
from JP                           128.0       74.7         56.3      114.5       122.5         496.0               Eastern Europe &
                                                                                                                     Russia, 0.8%
To Asia                            23.0       20.8         21.7      39.1        33.6          138.2

To ASEAN                            5.1        6.5          8.0      17.5         8.0          45.1              Western Europe,                                      Asia, 27.9%
                                                                                                                     20.3%
To North America                   44.5       10.9          8.9      14.9        35.9          115.1
                                                                                                                                                                                    2008-2012: Total net
To Central & South America         29.0       17.4          5.5      11.0        10.5          73.3
                                                                                                                                                                                    outward direct
To Oceania                          6.0        7.5          6.4       8.8        11.1          39.8                                                                                 investment by
To Western Europe                  22.4       16.4          7.6      25.2        28.9          100.4                                                                                Japanese residents
                                                                                                                 Oceania, 8.0%
To Eastern Europe & Russia          0.7        0.8          0.6       0.6         1.3           4.0

To Middle East                      1.1        0.6         -0.4       0.7         0.4           2.5

To Africa                           1.5        -0.3        -0.4       0.5         0.1           1.5                                                                North America, 23.2%
                                                                                                                         Central & South
To Others                          -0.3        0.6          6.4      13.6         0.8          21.2                      America, 14.8%


          Net Outward Direct Investment from JP to Asia                                                         Japanese Net Outward Direct Investment To Asia
            Net outward direct investment from JP (US$bn) (+ve means JP residents are
                                                                                                                                     Taiwan, 1.7%
  14                                                                                                   35
            undertaking direct investment overseas)                                                                           Philippines, 2.7%
  12                                                                                                   30               Malaysia, 3.6%
                                                                                                                   Vietnam, 5.0%
  10                                                                                                   25
                                                                                                             Hong Kong, 6.4%                                           China, 34.0%
   8                                                                                                   20


   6                                                                                                   15   Indonesia, 6.6%                                                      2008-2012 Total net
                                                                                                                                                                                 outward direct
   4                                                                                                   10                                                                        investment from Japan
                                                                                                                Korea, 8.0%                                                      to Asia
   2                                                                                                   5


   0                                                                                                   0
             2007            2008         2009             2010         2011            2012                         Thailand, 9.8%                              India, 12.2%
                      To   HK                     To   Taiwan                  To Korea
                      To   Singapore              To   Thailand                To Indonesia                                              Singapore, 10.0%
                      To   Malaysia               To   Philippines             To India
                      To   Vietnam                To   China (RS)

Source: CEIC & Morgan Stanley Research                                                                                                                                                                        7
                                                                                                                                                                                                                                                                                        MORGAN STANLEY RESEARCH
                                                                                                                                                                                                                                                                                                                                                   ASEAN Economics
                                                                                                                                                                                                                                                                                                                                                                        May 10, 2013




FDI Linkages: Japanese Are More of FDI Investors in Asia
                 Japanese Outward FDI into Asia (% of GDP)                                                                                                           Japanese Outward FDI into Asia (% of GDP)
  1.0%                                                                                                                                          1.4%
  0.9%                                                                                                                                                                                                                                              Japan net outward direct
                                                                                                                                                1.2%                                                                                                investment to Asia (% of respective
  0.8%
                                                                                                                                                                                                                                                    country's GDP) (2008-2012)
  0.7%                                                                                                                                          1.0%

  0.6%
                                                                                                                                                0.8%
  0.5%
                                                                                                                                                0.6%
  0.4%

  0.3%                                                                                                                                          0.4%
  0.2%
                                                                                                                                                0.2%
  0.1%

  0.0%                                                                                                                                          0.0%




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                                                                                                                                                                                                                                                                                                                                                            C in
                                                                                                                                                                                                                                                                                                                         K re
                                                                                                                                                                                                         Ta n
                 2005            2006          2007      2008             2009          2010          2011     2012




                                                                                                                                                                                                                                                                                                                                           d
                                                                                                                                                                 ie a



                                                                                                                                                                                   in a o




                                                                                                                                                                                                                                                                                                  In o e
                                                                                                                                                                                                                                                     M la
                               Japan net Outward Direct Investment to Asia (% of Asia GDP)
                               Japan net outward direct investment to ASEAN5 (% of ASEAN5 GDP)


                          JPY REER vs. Japan Outward FDI                                                                                                                                      Japan FDI to Indonesia vs. IDR
  -2.5%                                                                                                        500                                  135                                                                                                                                                                                                                     -0.1%
                               Japan net FDI (% of GDP) (Values in reverse order) (LS)
                               JPY NEER (1970=100) (RS)                                                        450
                                                                                                                                                    125                                                                                                                                                                                                                     0.0%
                                                                                                                      Appreciation


  -2.0%                        JPY REER (1970=100) (RS)
                                                                                                               400
                                                                                                                                     Appreciation
                                                                                                                                                    115                                                                                                                                                                                                                     0.1%




                                                                                                                                                                                                                                                                                                                                                                                      More FD from Japan to Indo
                                                                                                               350
  -1.5%                                                                                                                                             105                                                                                                                                                                                                                     0.2%




                                                                                                                                                                                                                                                                                                                                                                                             I
                                                                                                               300
                                                                                                                                                       95                                                                                                                                                                                                                   0.3%
                                                                                                                      Depreciation




                                                                                                               250
  -1.0%
                                                                                                                                                       85                                                                                                                                                                                                                   0.4%
                                                                                                                                      epreciation




                                                                                                               200

                                                                                                                                                       75                                                                                                                                                                                                                   0.5%
                                                                                                               150
  -0.5%
                                                                                                                                     D




                                                                                                               100                                     65                                                                                                                                                                                                                   0.6%
                                                                                                                                                            Jan-05

                                                                                                                                                                         Jul-05

                                                                                                                                                                                  Jan-06

                                                                                                                                                                                                Jul-06

                                                                                                                                                                                                                Jan-07

                                                                                                                                                                                                                         Jul-07

                                                                                                                                                                                                                                           Jan-08

                                                                                                                                                                                                                                                    Jul-08

                                                                                                                                                                                                                                                               Jan-09

                                                                                                                                                                                                                                                                               Jul-09

                                                                                                                                                                                                                                                                                         Jan-10

                                                                                                                                                                                                                                                                                                              Jul-10

                                                                                                                                                                                                                                                                                                                       Jan-11

                                                                                                                                                                                                                                                                                                                                Jul-11

                                                                                                                                                                                                                                                                                                                                          Jan-12

                                                                                                                                                                                                                                                                                                                                                   Jul-12

                                                                                                                                                                                                                                                                                                                                                                   Jan-13
   0.0%                                                                                                        50
                                                                                                                                                                                             IDRJPY (Jan2005=100)
          1970



                        1975



                                        1980



                                                 1985



                                                         1990



                                                                   1995



                                                                                 2000



                                                                                               2005



                                                                                                        2010




                                                                                                                                                                                             ID REER (Jan2005=100)
                                                                                                                                                                                             ID NEER (Jan2005=100)
                                                                                                                                                                                             Total DI from Japan to Indonesia, % of GDP (values in reverse order) (RS)
Source: CEIC & Morgan Stanley Research
                                                                                                                                                                                                                                                                                                                                                                                                                   8
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          MORGAN STANLEY RESEARCH
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              ASEAN Economics
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         May 10, 2013




FDI Linkages: How is FDI Affected by FX?
                                                                                      Japan FDI to Malaysia vs. MYR                                                                                                                                                                                                                                                                                                                                                                          Japan FDI to Philippines vs. PHP
                               145                                                                                                                                                                                                                                                                                                                     0.0%                                                                                                160                                                                                                                                                                                                                                                    0.0%

                                                                                                                                                                                                                                                                                                                                                       0.2%                                                                                                                                                                                                                                                                                                                                                       0.1%
                                                                                                                                                                                                                                                                                                                                                                                                                                                           150
                               135
                                                                                                                                                                                                                                                                                                                                                       0.4%                                                                                                                                                                                                                                                                                                                                                       0.2%
               Appreciation




                                                                                                                                                                                                                                                                                                                                                                                         More FDI from JP to Malaysia




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              M
                                                                                                                                                                                                                                                                                                                                                                                                                                                           140




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               ore FDI from Japan to Phils
                                                                                                                                                                                                                                                                                                                                                       0.6%                                                                                                                                                                                                                                                                                                                                                       0.3%
                               125




                                                                                                                                                                                                                                                                                                                                                                                                                                       Appreciation
                                                                                                                                                                                                                                                                                                                                                                                                                                                           130
                                                                                                                                                                                                                                                                                                                                                       0.8%                                                                                                                                                                                                                                                                                                                                                       0.4%

                               115                                                                                                                                                                                                                                                                                                                     1.0%                                                                                                120                                                                                                                                                                                                                                                    0.5%

                                                                                                                                                                                                                                                                                                                                                       1.2%                                                                                                                                                                                                                                                                                                                                                       0.6%
                                                                                                                                                                                                                                                                                                                                                                                                                                                           110
                               105
                                                                                                                                                                                                                                                                                                                                                       1.4%                                                                                                                                                                                                                                                                                                                                                       0.7%
               Depreciation




                                                                                                                                                                                                                                                                                                                                                                                                                                                           100




                                                                                                                                                                                                                                                                                                                                                                                                                                        epreciation
                                                                                                                                                                                                                                                                                                                                                       1.6%                                                                                                                                                                                                                                                                                                                                                       0.8%
                                95
                                                                                                                                                                                                                                                                                                                                                                                                                                                             90
                                                                                                                                                                                                                                                                                                                                                       1.8%                                                                                                                                                                                                                                                                                                                                                       0.9%




                                                                                                                                                                                                                                                                                                                                                                                                                                       D
                                85                                                                                                                                                                                                                                                                                                                     2.0%                                                                                                  80                                                                                                                                                                                                                                                   1.0%




                                                                                                                                                                                                                                                                                                                                                                                                                                                                    Jan-05

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                Jul-05

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            Jan-06

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        Jul-06

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     Jan-07

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  Jul-07

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               Jan-08

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            Jul-08

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         Jan-09

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       Jul-09

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     Jan-10

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   Jul-10

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 Jan-11

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   Jul-11

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     Jan-12

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       Jul-12

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         Jan-13
                                             Jan-05

                                                               Jul-05

                                                                                 Jan-06

                                                                                                   Jul-06

                                                                                                                     Jan-07

                                                                                                                                       Jul-07

                                                                                                                                                         Jan-08

                                                                                                                                                                           Jul-08

                                                                                                                                                                                             Jan-09

                                                                                                                                                                                                               Jul-09

                                                                                                                                                                                                                                 Jan-10

                                                                                                                                                                                                                                                   Jul-10

                                                                                                                                                                                                                                                                     Jan-11

                                                                                                                                                                                                                                                                                       Jul-11

                                                                                                                                                                                                                                                                                                         Jan-12

                                                                                                                                                                                                                                                                                                                           Jul-12

                                                                                                                                                                                                                                                                                                                                             Jan-13
                                                                                           JPYMYR (Jan2005=100)                                                                                                                                                                                                                                                                                                                                                                              JPYPHP (Jan2005=100)
                                                                                           MYR REER (Jan2005=100)                                                                                                                                                                                                                                                                                                                                                                            PHP REER (Jan2005=100)
                                                                                           MYR NEER (Jan2005=100)                                                                                                                                                                                                                                                                                                                                                                            PHP NEER (Jan2005=100)
                                                                                           Total DI from Japan to Malaysia, % of GDP (values in reverse order) (RS)                                                                                                                                                                                                                                                                                                                          Total DI from Japan to Philippines, % of GDP (values in reverse order) (RS)

                                                                                    Japan FDI to Thailand vs. THB                                                                                                                                                                                                                                                                                                                                                                             Japan FDI to Singapore vs. SGD
                              140                                                                                                                                                                                                                                                                                                                     0.0%                                                                                    130                                                                                                                                                                                                                                                           -0.5%

                              135
                                                                                                                                                                                                                                                                                                                                                                                                                                              125
                              130                                                                                                                                                                                                                                                                                                                     0.5%                                                                                                                                                                                                                                                                                                                                                  0.0%
                                                                                                                                                                                                                                                                                                                                                                                                                        Appreciation
Appreciation




                                                                                                                                                                                                                                                                                                                                                                                                                                              120
                                                                                                                                                                                                                                                                                                                                                              M FD from JP to Thailand




                              125
                                                                                                                                                                                                                                                                                                                                                               ore I




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     M
                                                                                                                                                                                                                                                                                                                                                                                                                                              115




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      ore FDI from JP to SG
                              120                                                                                                                                                                                                                                                                                                                     1.0%
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            0.5%
                              115
                                                                                                                                                                                                                                                                                                                                                                                                                                              110
 epreciation




                              110                                                                                                                                                                                                                                                                                                                     1.5%
                                                                                                                                                                                                                                                                                                                                                                                                                        Depreciation




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            1.0%
                                                                                                                                                                                                                                                                                                                                                                                                                                              105
                              105

                              100                                                                                                                                                                                                                                                                                                                     2.0%                                                                                    100
D




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            1.5%
                              95
                                                                                                                                                                                                                                                                                                                                                                                                                                                      95
                              90                                                                                                                                                                                                                                                                                                                      2.5%
                                    Jan-05

                                                      Jul-05

                                                                        Jan-06

                                                                                          Jul-06

                                                                                                            Jan-07

                                                                                                                              Jul-07

                                                                                                                                                Jan-08

                                                                                                                                                                  Jul-08

                                                                                                                                                                                    Jan-09

                                                                                                                                                                                                      Jul-09

                                                                                                                                                                                                                        Jan-10

                                                                                                                                                                                                                                          Jul-10

                                                                                                                                                                                                                                                            Jan-11

                                                                                                                                                                                                                                                                              Jul-11

                                                                                                                                                                                                                                                                                                Jan-12

                                                                                                                                                                                                                                                                                                                  Jul-12

                                                                                                                                                                                                                                                                                                                                    Jan-13




                                                                                                                                                                                                                                                                                                                                                                                                                                                      90                                                                                                                                                                                                                                                    2.0%
                                                                                                                                                                                                                                                                                                                                                                                                                                                                       Jul-05




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               Jul-06




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         Jul-07




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   Jul-08




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              Jul-09




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          Jul-10




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          Jul-11




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              Jul-12
                                                                                                                                                                                                                                                                                                                                                                                                                                                           Jan-05




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   Jan-06




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            Jan-07




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Jan-08




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                Jan-09




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            Jan-10




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        Jan-11




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            Jan-12




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                Jan-13
                                                                        JPYTHB(Jan2005=100)
                                                                        THB REER (Jan2005=100)
                                                                        THB NEER (Jan2005=100)                                                                                                                                                                                                                                                                                                                                                                         JPYSGD (Jan2005=100)
                                                                        Total DI from Japan to Thailand, % of GDP (values in reverse order) (RS)                                                                                                                                                                                                                                                                                                                       SG REER (Jan2005=100)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                       SG NEER (Jan2005=100)
Source: CEIC & Morgan Stanley Research                                                                                                                                                                                                                                                                                                                                                                                                                                 Total DI from Japan to SG, 12M trailing sum, % of GDP (Values in reverse order) (RS)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             9
                                                                                                                                               MORGAN STANLEY RESEARCH
                                                                                                                                                                        ASEAN Economics
                                                                                                                                                                                May 10, 2013




FDI Linkages: Which Sectors Are Japanese FDI Investors in?
            Indonesia: Japan FDI investment by Sector                                                Malaysia: Japan FDI Investment by Sector
                 Japan outward investment to Indonesia by sector (2008-2012 aggregate)           Japan outward investment to Malaysia by sector (2008-2012 aggregate)

                                      Others, 11.8%
               Iron, non-ferrous &                                                                                     Others, 12.4%
                  metals, 1.5%
                                                                                                                                                               Finance &
                 Electrical                                              Transportation,                 Transportation                                    insurance, 27.1%
              machinery, 3.0%                                                29.4%                      equipment, 3.7%
                                                                                                     Communications,
                 Food, 3.0%
                                                                                                         4.3%
         Rubber & leather,
              3.2%                                                                                      Food, 4.5%
          Lumber & pulp,
              3.8%                                                                                 Rubber & leather,
                                                                                                        4.5%
                General
             machinery, 5.0%                                                                       General machinery,
                                                                                                                                                              Electric machinery,
                                                                                                         5.6%
                                                                                                                                                                     12.4%
                    Finance &                                                                          Iron, non-ferrous &
                                                                                                          metals, 5.6%
                 insurance, 6.4%
                                                                                                                 Wholesale & retail,            Chemicals and
                                                                    Finance &                                         8.1%                     pharmaceuticals,
                              Chemicals &
                                                                insurance, 25.3%                                                                   11.9%
                             pharma, 7.6%


         Philippines: Japan FDI Investment by Sector                                               Singapore: Japan FDI Investment by Sector
          Japan outward investment to Philippines by sector (2008-2012 aggregate)                  Japan outward investment to Singapore by sector (2008-2012 aggregate)
                             Others, 13.2%                       Iron, non-ferrous &                                            Others, 6.9%
                                                                    metals, 19.9%                                    Services, 2.0%
               Finance &                                                                                                                             Transportation,
            insurance, 1.4%                                                                                 Mining, 2.3%                                 19.7%
         Real estate, 2.2%                                                                        Glass & ceramics,
      Wholesale & retail,                                                                               3.1%
           3.6%                                                                                 Communications,
            Chemicals &                                                                              4.7%
           pharma, 4.1%                                                                     Real estate, 5.5%

        Communications,
            5.4%                                                            Food, 16.1%
                                                                                           General machinery,
                                                                                                 6.6%                                                             Food, 18.8%

                Mining, 10.4%


                                                                                                   Wholesale & retail,
                                                              Electric machinery,                                                                     Finance &
                               Transportation                                                           13.0%
                                                                     13.2%                                                                        insurance, 17.5%
                              equipment, 10.6%
                                                                                                                                                                                           10
Source: CEIC & Morgan Stanley Research
                                                                                        MORGAN STANLEY RESEARCH
                                                                                                   ASEAN Economics
                                                                                                        May 10, 2013




FDI Linkages: Which Sectors Are Japanese FDI Investors in?
            Thailand: Japan FDI Investment by Sector
      Japan outward investment to Thailand by sector (2008-2012 aggregate)

                              Others, 11.1%


                    Food, 3.4%                                     Transportation
       Precision machinery,                                       equipment, 29.3%
               4.1%

            Finance &
         insurance, 5.6%


      Wholesale & retail,
           5.9%


          Rubber & leather,
               6.3%                                               Iron, non-ferrous &
                                                                     metals, 10.5%
             General machinery,
                   6.6%
                                Chemicals &          Electric machinery,
                               pharma, 7.3%                 10.0%




                                                                                                                   11
Source: CEIC & Morgan Stanley Research
                                                                                                                   MORGAN STANLEY RESEARCH
                                                                                                                                    ASEAN Economics
                                                                                                                                          May 10, 2013




Understanding the Japan-ASEAN Story: Five Facts

  Fact 5: From a trade perspective, ASEAN’s ties with Japan are generally more complementary than competitive in nature.

  With Japan’s export manufacturing capability at the higher value-add part of the production chain, ASEAN5 exporters more likely cater to
  Japanese demand and also complement, rather than compete with Japanese exporters. Indeed within AXJ, ASEAN economies appear more
  exposed to trade with Japan in terms of the how large exports to Japan are relative to the economy and how large exports to Japan are relative
  to the export basket (see page 13). In fact, ASEAN economies run some of bigger trade surpluses in AXJ (see page 13). Interestingly, Japan’s
  demand for commodities are satisfied more via trade with ASEAN than FDI investment into ASEAN. The top exports from Malaysia, Indonesia
  and Philippines, the three economies within AXJ that run trade surpluses in Japan, are commodities such as petroleum, gas, coal and food
  (see pages 13-14). Meanwhile, Thailand’s trade deficit with Japan is due to imports of machinery, electrical machinery, transport equipment
  and iron & steel, which is likely a reflection of strong ties with Japan in terms of autos FDI (see page 14).




                                                                                                                                                     12
                                                                                                                                                                                                                                                                                      MORGAN STANLEY RESEARCH
                                                                                                                                                                                                                                                                                                           ASEAN Economics
                                                                                                                                                                                                                                                                                                                 May 10, 2013




Trade Linkages: Japan vs. ASEAN
 AXJ Exporters: Who’s More Leveraged to JP’s Demand                                                                                                                                                                                 AXJ Importers: Who Benefits from JPY Depreciation?
                                    10%                                                                                                                                                                                             18%
                                                                                                                                                                                                                                                              Hong Kong
                                     9%                                                                                                                                                                                             16%
                                                                                                                                        Malaysia
                                     8%                                                Hong Kong                                                                                                                                    14%




                                                                                                                                                                                                    Imports from Japan (% of GDP)
                                                                                                                                                                                                                                                                                                             Thailand
      Exports to Japan (% of GDP)




                                     7%
                                                                                                                                                                                                                                    12%
                                                                                         Singapore                                Thailand                                                                                                                                                        Taiwan
                                     6%
                                                                                                                                                                                                                                    10%
                                     5%
                                                                                                    Taiwan                                                                   Philippines                                             8%                   Singapore
                                     4%
                                                                                                                                                                                                                                                                             Malaysia
                                                                                                         Korea                                                                                                                       6%                                             Korea
                                     3%                                                                                                                     Indonesia
                                                                                                                                                                                                                                     4%                                 Philippines
                                     2%
                                                                                                             China
                                                                                                                                                                                                                                     2%
                                     1%                                                                                                                                                                                                                                       Indonesia
                                                                                                                                                                                                                                             India            China
                                                                        India                                                                                                                                                        0%
                                     0%
                                                0%                 2%           4%           6%           8%         10%             12%        14%          16%            18%               20%                                     0%             5%                10%                  15%            20%             25%
                                                                                                    Exports to Japan (% of total exports)                                                                                                                     Imports from Japan (% of total imports)


                                    AXJ: Who Runs a Bigger Trade Surplus with JP?                                                                                                                                                           Indonesia: Key Trade Items with JP
3%                                                                                                                                                                                                                                                        % of total                                               % of total
                                                                                                                                                                                                    Top 5 Imports from JP                                 Imports                Top 5 Exports to JP               Exports
1%                                                                                                                                                                                                  MACHINERY                                                          3.1%      PETROLEUM,THEIR PRODUCTS                  3.7%
                                                                                                                                                                                                    TRANSPORT EQUIPMENT                                                2.3%      GAS,NATURAL & MANUFACTURED                3.1%
-1%                                                                                                                                                                                                 ELECTRICAL MACHINERY                                               1.2%      COAL,COAK AND BRIQUETTES                  2.3%
                                                                                                                                                                                                    IRON AND STEEL PRODUCTS                                            1.2%      METALLIFEROUS ORES & SCRAP                1.6%
-3%
                                                                                                                                                                                                    NONFERROUS METALS                                                  0.3%      ELECTRICAL MACHINERY                      0.8%

-5%

                                                                                                                                                                                                    Top 5 Imports from JP                                      % of GDP          Top 5 Exports to JP                    % of GDP
-7%                                                  2012 Trade Balance with Japan (% of GDP)                                                                                                       MACHINERY                                                       0.7%         PETROLEUM,THEIR PRODUCTS                    0.8%
-9%
                                                                                                                                                                                                    TRANSPORT EQUIPMENT                                             0.5%         GAS,NATURAL & MANUFACTURED                  0.7%
                                                                                                                                                                                                    ELECTRICAL MACHINERY                                            0.3%         COAL,COAK AND BRIQUETTES                    0.5%
                                     Malaysia




                                                                           Indonesia




                                                                                                                      Singapore



                                                                                                                                        Korea



                                                                                                                                                   Taiwan




                                                                                                                                                                                  Hong Kong
                                                                                                             India




                                                                                                                                                                 Thailand
                                                     Philippines




                                                                                            China




                                                                                                                                                                                                    IRON AND STEEL PRODUCTS                                         0.3%         METALLIFEROUS ORES & SCRAP                  0.3%
                                                                                                                                                                                                    NONFERROUS METALS                                               0.1%         ELECTRICAL MACHINERY                        0.2%

Source: CEIC & Morgan Stanley Research
                                                                                                                                                                                                                                                                                                                                    13
                                                                                                                                     MORGAN STANLEY RESEARCH
                                                                                                                                                        ASEAN Economics
                                                                                                                                                               May 10, 2013




Trade Linkages: Japan vs. ASEAN
                    Malaysia: Key Trade Items with JP                                                  Philippines: Key Trade Items with JP
                        % of total                                      % of total                               % of total                                     % of total
 Top 5 Imports from JP  Imports              Top 5 Exports              Exports          Top 5 Imports from JP   Imports          Top 5 Exports to JP           Exports
 ELECTRICAL MACHINERY              2.3%      GAS,NATURAL & MANUFACTURED         5.9%     ELECTRICAL MACHINERY            6.2%     ELECTRICAL MACHINERY                  6.2%
 TRANSPORT EQUIPMENT               1.5%      PETROLEUM,THEIR PRODUCTS           2.5%     MACHINERY                       3.3%     FRUITS AND VEGETABLS                  2.0%
 MACHINERY                         1.4%      ELECTRICAL MACHINERY               2.3%     TRANSPORT EQUIPMENT             2.3%     MACHINERY                             1.7%
 IRON AND STEEL PRODUCT            0.8%      WOOD & CORK MANUFACTURED           0.5%     IRON AND STEEL PRODUCTS         1.3%     METALLIFEROUS ORES & SCRAP            1.4%
 NONFERROUS METALS                 0.5%      MACHINERY                          0.4%     PRECISION INSTRUMENTS           0.7%     WOOD & CORK MANUFACTURED              1.3%



 Top 5 Imports                % of GDP       Top 5 Exports                   % of GDP    Top 5 Imports from JP        % of GDP    Top 5 Exports to JP              % of GDP
 ELECTRICAL MACHINERY              1.5%      GAS,NATURAL & MANUFACTURED           4.4%   ELECTRICAL MACHINERY              1.5%   ELECTRICAL MACHINERY                  1.3%
 TRANSPORT EQUIPMENT               1.0%      PETROLEUM,THEIR PRODUCTS             1.9%   MACHINERY                         0.8%   FRUITS AND VEGETABLS                  0.4%
 MACHINERY                         0.9%      ELECTRICAL MACHINERY                 1.7%   TRANSPORT EQUIPMENT               0.6%   MACHINERY                             0.4%
 IRON AND STEEL PRODUCT            0.5%      WOOD & CORK MANUFACTURED             0.4%   IRON AND STEEL PRODUCTS           0.3%   METALLIFEROUS ORES & SCRAP            0.3%
 NONFERROUS METALS                 0.3%      MACHINERY                            0.3%   PRECISION INSTRUMENTS             0.2%   WOOD & CORK MANUFACTURED              0.3%



               Singapore: Key Trade Items with JP                                                       Thailand: Key Trade Items with JP
                              % of total                                 % of total                              % of total                                  % of total
Top 5 Imports from JP         Imports         Top 5 Exports to JP        Exports         Top 5 Imports from JP   Imports           Top 5 Exports to JP       Exports
ELECTRICAL MACHINERY                  1.3%    ELECTRICAL MACHINERY               0.4%    MACHINERY                       5.1%      ELECTRICAL MACHINERY              1.8%
MACHINERY                             1.1%    MEDICAL PRODUCTS                   0.3%    ELECTRICAL MACHINERY            3.1%      MACHINERY                         1.4%
PETROLEUM,THEIR PRODUCTS              0.9%    MACHINERY                          0.3%    TRANSPORT EQUIPMENT             2.5%      TRANSPORT EQUIPMENT               0.7%
TRANSPORT EQUIPMENT                   0.5%    PRECISION INSTRUMENTS              0.1%    IRON AND STEEL PRODUCTS         2.3%      FISH AND FISH PREPARATION         0.7%
IRON AND STEEL PRODUCTS               0.3%    CHEMICAL ELEMENTS,COMPOUND         0.1%    MANUFACTURES OF METALS          0.6%      MEAT AND MEAT PREPARATION         0.5%



Top 5 Imports from JP            % of GDP     Top 5 Exports to JP            % of GDP    Top 5 Imports from JP       % of GDP      Top 5 Exports to JP            % of GDP
ELECTRICAL MACHINERY                  1.8%    ELECTRICAL MACHINERY                0.6%   MACHINERY                        3.4%     ELECTRICAL MACHINERY                1.1%
MACHINERY                             1.6%    MEDICAL PRODUCTS                    0.5%   ELECTRICAL MACHINERY             2.1%     MACHINERY                           0.9%
PETROLEUM,THEIR PRODUCTS              1.2%    MACHINERY                           0.4%   TRANSPORT EQUIPMENT              1.7%     TRANSPORT EQUIPMENT                 0.4%
TRANSPORT EQUIPMENT                   0.7%    PRECISION INSTRUMENTS               0.2%   IRON AND STEEL PRODUCTS          1.5%     FISH AND FISH PREPARATION           0.4%
IRON AND STEEL PRODUCTS               0.4%    CHEMICAL ELEMENTS,COMPOUND          0.1%   MANUFACTURES OF METALS           0.4%     MEAT AND MEAT PREPARATION           0.3%

Source: CEIC & Morgan Stanley Research
                                                                                                                                                                              14
                                                                                                                        MORGAN STANLEY RESEARCH
                                                                                                                                          ASEAN Economics
                                                                                                                                                May 10, 2013




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                                                                                                                                                              15
                                                                                                                          MORGAN STANLEY RESEARCH
                                                                                                                                             ASEAN Economics
                                                                                                                                                  May 10, 2013




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                                                                                                                       MORGAN STANLEY RESEARCH
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