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J. P Morgan -Japan Flows in Pictures – July 2013

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Japan Flows in Pictures

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									                                                                                  Japan Rates & FX Research
                                                                                                  8 July 2013




Japan Flows in Pictures – July 2013


    Japan Rates & FX Research
                                                                                     Slides
    Tohru Sasaki              tohru.sasaki@jpmorgan.com         +81-3-6736-7717      3, 5
    Junya Tanase              junya.tanase@jpmorgan.com         +81-3-6736-7718      6-7, 18, 19, 36
    JPMorgan Chase Bank, N.A., Tokyo Branch

    Takafumi Yamawaki          takafumi.yamawaki@jpmorgan.com   +81-3-6736-1748       9, 11, 27-29
    Yuya Yamashita             yuya.yamashita@jpmorgan.com      +81-3-6736-1493       12-17, 31-35
    JPMorgan Securities Japan Co., Ltd

    Anna Hibino               anna.hibino@jpmorgan.com          +61-2-9003-7932       20-25
    JPMorgan Chase Bank, N.A., Sydney Branch


    Japan Equity Research
    Jesper J Koll               jesper.j.koll@jpmorgan.com      +81-3-6736-8600       37
    JPMorgan Securities Japan Co., Ltd

^
                          Table of Contents




                                       Summary
Japan Flows in Pictures




                                                 2
                                          Japan flows in pictures

                                            Summary

                                              Japanese investors continued to sell foreign stocks in June. Meanwhile, Japanese investors as a whole have net sold
                                              ¥2.8 trn of foreign bonds in June, of which ¥2.6trn of this was through banks, which means that there should not be any
JPMorgan Chase Bank, N.A., Tokyo Branch




                                              impact on FX market (since banks’ foreign bonds holdings are mostly FX-hedged).
                                              Japanese basic balance in May is estimated to be roughly flat, while JPY declined 2.2%, which suggests that JPY selling
                                              in May is mainly due to factors outside of Japan’s basic balance.

                                              According to Flow of Funds data for Q1 2013, Japanese stocks holdings by foreigners increased by ¥28trn to ¥125trn in
                                              Q1 2013 from ¥97trn in Q4 2012.
Tohru Sasaki




                                              Domestic investors’ foreign bonds sales appears to have been mainly in the US bonds, while they turned to be net-buyers
                                              of German bonds (¥1.1tn) in May. Domestic investors were the net-sellers of French bonds in May for the first time since
                                              November 2011.

                                              Looking at the Uridashi issuance numbers, MXN has overtaken BRL to become the most common issuance currency
                                              year-to-date.
             Japan Flows in Pictures




                                              Estimated USD/JPY longs declined by $10.8bn to $29.8bn between June 26th and July 3rd, reaching a low since late
                                              May.

                                              Foreign ownership of JGBs outstanding declined to 8.4% in Q1 2013 compared to 8.7% in Q4 2012, while BoJ holdings of
                                              JGBs outstanding increased to 13.2% from 12.0%.

                                              While JGB10yr yield spiked to 1% in May, investors other than City banks and Foreigners were net buyers of Intermediate
                                              and Long term JGBs in May.

                                              Global investors are still underweight Japanese equities.



                                                                                                     3
                          Table of Contents




                                       Japan’s balance of payment
Japan Flows in Pictures




                                                                    4
                                          Japanese basic balance

                                              A look into the JPY’s positive and negative flows

                                                Japanese investors continued to sell foreign stocks in June (¥0.4 trn). Japanese investors (mainly pension funds) have been net-
JPMorgan Chase Bank, N.A., Tokyo Branch




                                                selling foreign stocks for every single month up to June, with total net-sales in 1H13 reaching ¥4.6 trn. Meanwhile, Japanese
                                                investors as a whole have net sold ¥2.8 trn of foreign bonds in June, of which ¥2.6trn of this was through banks, which means that
                                                there should not be any impact on FX market (since banks’ foreign bonds holdings are mostly FX-hedged).
                                                Japan’s trade deficit came in at ¥0.9trn in May, which was almost in line with expectations with the deficit increasing 13%oya. On the
                                                other hand, the income surplus came in at ¥1.5trn in May, which was a 8.6% increase from a year ago. Japanese basic balance in
                                                May is estimated to be roughly flat, while JPY declined 2.2%, which suggests that JPY selling in May is mainly due to factors outside
                                                of Japan’s basic balance.
Tohru Sasaki




                                          JPY trillion                                                                                                                          positive=JPY sales negative=JPY sales

                                                                    Foreign stock investment by Japanese               Foreign bond investment by Japanese                                                                                        JPN stocks
                                                                                                                                                                                                                                                                   JPN fixed income
                                                                                                                                                                                        Total                                                    purchase by                                             JPY NEER, oya,
                                                                                                                                                                        FDI                         Trade Balance (b) Income Balance (c)                              purchase by       Net flow ***
                                                                                                                              Trust      Investment                                     (a) *                                                     foreigners                                               q/q, m/m (% )
                                                                           Total          by Investment      Lifers*                                    Uridashi                                                                                                    foreigners (e )**
                                                                                                                            accounts       Trusts                                                                                                    ( d )*
                                                                                              Trusts
                                                         2002               4.6                0.4             1.1             1.2           0.8             3.8         2.9            13.3               11.6                  8.3                 -1.3                 -1.4               2.1                1.4
                                                         2003               0.7                0.3             5.5             0.0           3.2             4.7         2.6            11.1               12.0                  8.3                 9.8                  -2.0               15.4               7.2
                                                         2004               3.2                1.9             2.9             0.6          3.4              1.7         2.5            11.4               13.9                  9.3                 10.5                 5.3                9.0                0.1
                                                         2005               1.5                1.0            -0.8             2.4          4.0              2.9         4.7            14.7               10.3                 11.4                 12.6                 6.3                3.6               -10.3
             Japan Flows in Pictures




                                                                                                                                                                                                                                                                                                                                JPY carry
                                                         2006               1.5                2.0            -0.2             1.9          3.4              1.8         6.6            14.9                9.5                 13.7                 8.1                 10.1                4.1                -3.9
                                                         2007               0.2                3.3             0.8             2.2          2.6              -1.3        6.0            10.5               12.3                 16.3                 4.1                 19.3                13.3               -0.1
                                                         2008               6.1                0.4            -0.1             1.7           0.6             2.7        10.7            21.8                4.0                 16.1                 -7.4                 -2.3               -6.5              32.4             unwind of
                                                                                                                                                                                                                                                                                                                                JPY carry
                                                         2009               3.5                1.0             1.8             0.5           2.5             0.0         5.9            10.5                4.0                 12.8                 0.0                 -10.0               -2.5               -3.6
                                                         2010               1.5                -0.2            3.7             1.2           4.3             2.2         5.0            12.7                8.0                 12.4                 1.8                  7.3                9.4                7.4
                                                         2011               0.5                -0.3           -0.1             1.0           0.7             3.1         8.7            11.3               -1.6                 14.0                 0.3                 21.3                7.8                7.2
                                                    2012                   -2.1                -1.5            3.6            1.1           -0.1              3.5       9.6             9.1                -5.8                 14.3                 2.1                  5.3               -2.6               -8.6
                                                   Q4 2012                 -0.6                -0.6           0.6             0.0           0.0               0.3       2.6             1.6                -1.9                 2.8                  2.3                 -1.9               -2.6               -7.6
                                                   Q1 2013                 -3.6                -0.2           -0.5            0.5           0.3              -1.3       2.0             -2.7               -2.4                 4.3                  3.7                 -2.0                3.3               -6.0
                                                    Apr-13                  -0.2               0.1             0.4             0.1          0.2              -0.5        1.4             0.7               -0.8                  2.1                 3.1                   1.9                0.0              -4.3
                                                    May-13                  -0.4               -0.1           -0.1             0.0          0.3              -0.3        0.9             0.2               -0.9                  1.5                 1.2                   0.9               -0.1              -2.2
                                                    Jun-13                  -0.4               -0.1           -0.2             0.2          0.1              -0.3                                                                                    0.8                  -1.9                                 -1.2

                                          *The foreign bonds investments by insurance companies between 2002 and 2004 and after 2009, and the purchases of Japanese equities and bonds by foreign investors between 2004 and 2008, after Nov. 2013 are excluded from the calculation of the net flow, for they are perceived to be FX-hedged
                                          ** JPN fixed income purchase by foreigners between 2000 and 2004 do not include short-term bonds investment
                                          *** Net Flow is calculated by following formula : (b)+(c×0.7)+(d)+(e×0.5)-(a <FDI after 2009=*0.7>)
                                          Source: MoF
                                                                                                                                                                                 5
                                          Japanese current account balance
                                              Japan’s current account surplus recorded ¥0.54 trn in May which is almost in line with consensus and 58% larger than that of a
                                              year ago. Trade deficit recorded ¥0.91 trn from, which increased 13% compare to last year.

                                              There was a significant improvement in service balance in May (¥44 bn of surplus, while ¥138 bn of deficit in May 2012).

                                              Although trade deficit is expected to expand further in this year, the amount of deficit will likely be smaller than previously
JPMorgan Chase Bank, N.A., Tokyo Branch




                                              expected partly due to the yen weakness.


                                            Trade balance and current account balance (annual)                                                 Current account balance (monthly)
                                                                                                                                                      ¥ tn
                                              JPY trn (JPM expectations for 2013)
                                              30                                                                                               3.5
                                              25                                current account balance    trade balance                       3.0
                                                                                                                                               2.5
                                              20
                                                                                                                             JPM forecasts     2.0
Junya Tanase




                                              15
                                                                                                                +9.6                           1.5
                                              10                                                                                    +6.4       1.0
                                                                                                                           +4.8
                                               5                                                                                               0.5
                                               0                                                                                               0.0
                                                                                                                    -1.6                       -0.5
                                              -5
                                                                                                                                               -1.0
                                             -10                                                                             -5.8      -7.4       Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
                                                      05        06         07        08        09         10       11        12       13
                                             Source:MoF                                                                                        Source:MoF
             Japan Flows in Pictures




                                             Trade balance and service balance (monthly)                                                       Income balance (monthly)
                                             ¥ tn
                                             2.0                                                                                                 ¥ tn
                                                                                                                                                  2.5
                                             1.5
                                             1.0                                                                                                  2.0
                                             0.5
                                             0.0                                                                                                  1.5

                                            -0.5
                                                                                                                                                  1.0
                                            -1.0                          Trade balance
                                            -1.5                          Service balance                                                         0.5
                                            -2.0
                                               Jan-05      Jan-06    Jan-07     Jan-08    Jan-09     Jan-10    Jan-11      Jan-12   Jan-13        0.0
                                                                                                                                                    Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
                                             Source:MoF                                                                                           Source:MoF
                                                                                                                                           6
                                          FDI outflows and income balance
                                             FDI outflow in May recorded ¥0.9 trn which is 18% smaller than that of May 2012. However, the annualized pace of FDI
                                             outflow so far this year is ¥10.4 trn, which is comparable to the record high marked in 2008 at ¥10.8 trn. The fact that FDI
                                             outflows have remained solid despite a sharp JPY decline suggests that the main driver of Japanese FDI is in the
                                             potential growth opportunity abroad, and not the cost advantage due to FX.

                                             The surplus of “Direct investment income“ and “Portfolio investment income” of income balance in May were largely
JPMorgan Chase Bank, N.A., Tokyo Branch




                                             unchanged from that of a year ago at ¥0.3 trn (v.s. ¥0.3 trn in May12) and ¥1.1 trn (v.s. ¥1.0 trn in May12) respectively.

                                            Net FDI outflow                                                                           “Direct investment income” of income balance
                                            ¥ tn                                                                                       ¥ tn
                                               1.0                                                                                     1.0
                                                                                                                                       0.9
                                               0.5
                                                                                                                                       0.8
                                               0.0                                                                                                            6m M.A.
                                                                                                                                       0.7
Junya Tanase




                                              -0.5                                                                                     0.6
                                              -1.0                                                                                     0.5
                                                                                                                                       0.4
                                              -1.5
                                                                                                                                       0.3
                                              -2.0                                                        6m M.A.                      0.2
                                              -2.5                                                                                     0.1
                                                                Net outflow
                                              -3.0                                                                                     0.0
                                                 Jan-05   Jan-06      Jan-07   Jan-08   Jan-09   Jan-10    Jan-11   Jan-12   Jan-13       Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
                                                                                                                                       Source:MoF, J.P. Morgan
                                            Source:MoF, J.P. Morgan
             Japan Flows in Pictures




                                           “Portfolio investment income” of income balance                                            Share of total Income balance
                                            ¥ tn                                                                                      90%
                                             1.6                                                                                      80%
                                             1.4                                                   6m M.A.                            70%
                                             1.2                                                                                      60%
                                             1.0                                                                                      50%                    Direct Investment Income
                                             0.8                                                                                      40%                    Portfolio Investment Income
                                             0.6                                                                                      30%
                                             0.4                                                                                      20%
                                             0.2                                                                                      10%
                                             0.0                                                                                        0%
                                               Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13                             Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
                                            Source:MoF, J.P. Morgan                                                                     Source:MoF, J.P. Morgan
                                                                                                                                7
                          Table of Contents




                                       Japan’s country balance sheet
Japan Flows in Pictures




                                                                       8
                                     Net financial asset by sectors

                                        Net financial asset by sectors (as of end-Mar.2013)                                                  Net financial asset by sectors (ex.stocks)

                                                                     Financial Institution Non-fin institution etc    Household
                                                                                                                                                             ¥ tn
                                                    ¥ tn              Asset       Liability   Asset     Liability    Asset       Liability
                                                                                                                                               1,000
                                          Domestic (ex. Stock)            2,646     2,832        642         788      1,438          364
JPMorgan Securities Japan Co., Ltd




                                                                                                                                                                                                        Household
                                             Foreign Asset                 313          38       114            4            8          0
                                                                                                                                                800
                                            Domestic (Stock)               144        139        185         524       124              0
                                                Net Asset                               95                  -375                   1,207        600
Takafumi Yamawaki




                                                                     Central + Local Govt     Social Security         Foreigners
                                                                                                                                                400
                                                    ¥ tn              Asset       Liability   Asset     Liability    Asset       Liability
                                                                                                                                                                                              Public pension
                                          Domestic (ex. Stock)             106      1,094        146          10       267           159        200
                                             Foreign Asset                 113           2         38           0        44          579
                                            Domestic (Stock)                74          15         26           0      125              0          0
                                                                                                                                                                    Non-financial corporate
                                                Net Asset                             -818                   200                     -302
                                                                                                                                                -200
                                          Source:BoJ Flow of Funds data
           Japan Flows in Pictures




                                                                                                                                                -400
                                          Holdings of Domestic stocks by foreigners increased by ¥28tn                                                                                                  Foreigner
                                          to ¥125trn in Q1 2013 from ¥97tn in Q4 2012.                                                          -600
                                          As a result of the current account surplus that has continued
                                                                                                                                                -800
                                          for many years, Japan has accumulated large net foreign
                                                                                                                                                                                          Government
                                          assets.
                                                                                                                                              -1,000
                                          The large amount of the governments’ liability has been                                                      '97               '03                      '09
                                          supported by the household sector.

                                                                                                                                                                                     Source:BoJ Flow of Funds data


                                                                                                                                       9
                          Table of Contents




                                       Outward investment
Japan Flows in Pictures




                                                            10
                                     Foreign securities held by Japanese


                                           Domestic investors have been generally increasing their investment in foreign securities.

                                           The foreign securities holdings by domestic investors plunged after the Lehman shock but have been recovering
                                           over the past few years. Especially, the increase in outstanding might have been partly driven by yen depreciation
JPMorgan Securities Japan Co., Ltd




                                           in 4Q-2012 and 1Q-2013.


                                        Total foreign securities held by Japanese                      Foreign securities held by Japanese by sector
Takafumi Yamawaki




                                                                                                                   ¥ tn
                                                                                                       160
                                                  ¥ tn

                                          400                                                          140                                            Private
                                                                                                                                       (Corporate,Household Investment Trust)

                                                                                                       120
                                                                                                                                                                         MoF
                                          350
                                                                                                                                                                     (FX Reserve)
                                                                                                       100
           Japan Flows in Pictures




                                                                                                                                                                     Depository
                                          300                                                           80                                                           Institutions

                                                                                                                                                                         Pension
                                                                                                        60                                                           (Private+Public)
                                          250
                                                                                                                                                                      Life+Casual
                                                                                                        40
                                                                                                                                                                       Insurance

                                          200                                                           20
                                                '03          '05          '07   '09   '11   '13              '03          '05   '07   '09        '11           '13


                                          Source:BoJ Flow of Funds data                                                                                Source:BoJ Flow of Funds data


                                                                                                  11
                                     Domestic investors’ outward investment

                                        Outward investment (debt securities)
                                          Domestic investors preferred US debt securities until 2011,but have been gradually moving into European ones since 2012.

                                          Domestic investors were large net-sellers of foreign debts over April - June. However, most of them are from banks, which
                                          suggest little impact on FX market.
JPMorgan Securities Japan Co., Ltd




                                      Outward portfolio investment                                         bn、 Negative figures (-) show net increase in investment abroad
                                                                                                         FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2012                                         FY2013
                                      International Transactions in Securites data                       avg/mth avg/mth avg/mth avg/mth avg/mth avg/mth avg/mth avg/mth             Jan-13   Feb-13   Mar-13     Apr-13   May-13   Jun-13
                                      Bonds and notes investment (by investor type)                         -1,120    -510      -1,010        -560        -760    -1,970   -630 -590   -140    2,490     530       2,190    2,550    2,960
                                                       Banks                                                  -330     -70         -540       -350        -310       -920  -290 -180   -690    1,470      70       2,430    2,440    2,650
                                                                   Banks(banking accounts)                    -400    -100         -390       -290        -260       -810  -330 -240 -1,030    1,560    -120       2,290    1,880    1,710
Yuya Yamashita




                                                                   Trust BK (banking accounts)                  70       30        -150        -60         -50       -120    40   60    340      -90     180         150      560      940
                                                       Banks (trust accounts)                                 -260    -140         -170       -110         -40        -90   -70  -70    340      140    -140        -110        0     -180
                                                       Financial instruments firms                            -470    -400         -310       -300        -200       -400  -430 -420   -280     -230    -400        -340     -470     -450
                                                       Life insurance companies                                 30       30         -90         20        -140       -380   -20 -210     70      280      80        -440      110      220
                                                       Non-life insurance companies                              0       20           0          0          10          0    10    0      0        0        0          0        0        0
                                                       Investment trust management companies                  -350    -250         -190          0        -270       -360    20  -30    -90       60     -90        -220     -270      -70
                                                       Others                                                  270     300          290        180         200        180   150  310    500      760     980         870      730      790

                                                                                                         FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2012                                         FY2013
                                      Balance of Payment data                                            avg/mth avg/mth avg/mth avg/mth avg/mth avg/mth avg/mth avg/mth  Jan-13              Feb-13   Mar-13     Apr-13   May-13   Jun-13
           Japan Flows in Pictures




                                      Bonds and notes investment (country breakdown)                       -1,580    -760  -1,400    -690    -890  -2,130    -600    -620   -210               2,650     820       1,720    2,150
                                                     North America                                           -420    -320    -540    -170    -350  -1,110    -160     370  1,160               2,300     240       1,650    2,950
                                                                 United States                               -340    -330    -530    -170    -370  -1,090    -160     370  1,100               2,250     280       1,550    2,950
                                                     Central and South America                               -280     -60    -280      20    -170    -520    -260    -350   -730                -230     260        -510     -120
                                                                 Cayman Islands                              -280     -50    -250      70     -90    -450    -270    -280   -570                -160     280        -460      -80
                                                     Oceania                                                  -40     -30    -100    -110    -160    -110    -110      40    320                 230     220          90      160
                                                                 Australia                                    -30     -20    -100    -110    -170    -100    -110      50    340                 220     210         130      180
                                                     Europe                                                  -810    -370    -360    -340    -170    -330      50    -590   -880                  70    -160         310     -930
                                                                 Germany                                     -160     -20       0    -100     -40     -20     170     -20   -140                 -30    -140         950   -1,110
                                                                 U.K.                                        -200    -130    -180    -220       0    -120     -70      60    180                 200        0        140      -20
                                                                 France                                      -160     -10      80     -30      10      20     -50    -350   -200                -120    -230        -390      350
                                                                 Netherlands                                  -50     -30     -50     -40     -10     -50    -100    -200   -790                -110     -70        -160     -120
                                                                 Belgium                                      -30       0      10      20     -10      10      20     -30      0                 -10      60        -140      -30
                                                                 Luxembourg                                   -40     -50     -20      20      40     -20     -80     -60     90                -110    -190        -420     -310
                                                                 Italy                                         10      20       0      20     -20     -40     120      10      0                   0        0         80       20
                                                                 Spain                                        -70      10      30      40     -50      10      10      20    -30                  10      40         -10      -30

                                      Source:MoF International Transactions Data and Balance of Payment Data                         12
                                     Domestic investors’ outward investment

                                       Outward investment by investor type (equities)
                                        The activity in foreign equities in the Banks category has been largely driven by the trust accounts which represent pension
                                        funds' investment.

                                        Banks (mainly trust banks) were small net-sellers of foreign equities over April - June
JPMorgan Securities Japan Co., Ltd




                                                        2.00      ¥ tn       Banks (banking and trust accounts)                                0.10    ¥ tn            Financial Instruments Firms
                                                        1.50

                                                        1.00                                                      Net-purchase                 0.05

                                                        0.50
Yuya Yamashita




                                                        0.00                                                                                   0.00

                                                       -0.50

                                                       -1.00                                                                                  -0.05

                                                       -1.50

                                                       -2.00                                                                                  -0.10
                                                               Jan-06    Jan-07   Jan-08    Jan-09   Jan-10   Jan-11   Jan-12    Jan-13            Jan-06     Jan-07    Jan-08   Jan-09   Jan-10   Jan-11   Jan-12   Jan-13

                                                        0.10      ¥ tn                      Life Insurers                                      1.00   ¥ tn                  Investment Trusts
           Japan Flows in Pictures




                                                        0.05                                                                                   0.50



                                                        0.00                                                                                   0.00



                                                        -0.05                                                                                 -0.50



                                                        -0.10                                                                                 -1.00
                                                             Jan-06      Jan-07   Jan-08    Jan-09   Jan-10   Jan-11   Jan-12    Jan-13            Jan-06     Jan-07    Jan-08   Jan-09   Jan-10   Jan-11   Jan-12   Jan-13


                                               Source:MoF International Transactions Data                                             *dashed lines show 1Y moving average
                                                                                                                                 13
                                     Domestic investors’ outward investment

                                        Outward investment by region (equities)

                                             Domestic investors have been generally cautious about foreign equities recently in a variety of regions, not only in
                                             the US but also in Asia, Oceania, Europe, etc.

                                             Domestic investors’ selling increased slightly or their buying turned to be selling in May except Central and South
JPMorgan Securities Japan Co., Ltd




                                             America which saw a small increase in buying.
                                       0.3    ¥ tn                   Asia                           1.0    ¥ tn             North America                         0.3       ¥ tn      Central and South America

                                       0.2                                                                                                                        0.2
                                                                               Net-purchase
                                                                                                    0.5
Yuya Yamashita




                                       0.1                                                                                                                        0.1


                                       0.0                                                          0.0                                                           0.0


                                      -0.1                                                                                                                        -0.1
                                                                                                    -0.5
                                      -0.2                                                                                                                        -0.2


                                      -0.3                                                          -1.0                                                          -0.3
                                          Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13       Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13       Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13
           Japan Flows in Pictures




                                                                                                     0.3    ¥ tn            Europe excl. UK                        0.3     ¥ tn                  UK
                                      0.3     ¥ tn                 Oceania
                                                                                                     0.2                                                           0.2
                                      0.2

                                                                                                     0.1                                                           0.1
                                      0.1

                                                                                                     0.0                                                           0.0
                                      0.0

                                      -0.1                                                          -0.1                                                          -0.1


                                      -0.2                                                          -0.2                                                          -0.2


                                      -0.3                                                          -0.3                                                          -0.3
                                          Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13       Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13          Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13

                                        Source:MoF Balance of Payment Data                                             *dashed lines show 1Y moving average
                                                                                                                          14
                                     Domestic investors’ outward investment

                                       Outward investment by investor type (debt securities)

                                            Domestic banks remained to be large net-sellers of foreign debts in June

                                            Also, life insurers continued to be net-sellers of foreign debts in June.
JPMorgan Securities Japan Co., Ltd




                                           5        ¥ tn                               Bank                                               2        ¥ tn             Financial Instruments Firms
                                           4                                                                 Net-purchase
                                           3
                                                                                                                                          1
                                           2
                                           1
Yuya Yamashita




                                           0                                                                                              0
                                           -1
                                           -2
                                                                                                                                          -1
                                           -3
                                           -4
                                           -5                                                                                             -2
                                                Jan-06      Jan-07   Jan-08     Jan-09         Jan-10   Jan-11   Jan-12     Jan-13             Jan-06     Jan-07   Jan-08   Jan-09   Jan-10   Jan-11   Jan-12   Jan-13

                                           2         ¥ tn                        Life Insurers                                            2        ¥ tm                 Investment Trusts
           Japan Flows in Pictures




                                           1                                                                                              1



                                           0                                                                                              0



                                           -1                                                                                             -1



                                           -2                                                                                             -2
                                                Jan-06      Jan-07   Jan-08     Jan-09         Jan-10   Jan-11   Jan-12     Jan-13             Jan-06     Jan-07   Jan-08   Jan-09   Jan-10   Jan-11   Jan-12   Jan-13

                                                  Source:MoF International Transactions Data                                                      *dashed lines show 1Y moving average
                                                                                                                                     15
                                     Domestic investors’ outward investment

                                        Outward investment by region (debt securities)
                                                Over the last few years, the investment to North America (mainly U.S) has been largely positive but has been declining
                                                recently. The regions that have benefited instead are Europe, and Central/South America (mainly Cayman Islands)

                                                In May, domestic investors’ selling of debt securities in North America accelerated, which was partly offset by the
JPMorgan Securities Japan Co., Ltd




                                                buying of European debt securities

                                       0.5      ¥ tn                   Asia                            4    ¥ tn             North America                         1.5    ¥ tn       Central and South America
                                       0.4                                         Net-purchase
                                                                                                       3
                                                                                                                                                                   1.0
                                       0.3
                                                                                                       2
Yuya Yamashita




                                       0.2
                                                                                                                                                                   0.5
                                       0.1                                                             1

                                       0.0                                                             0                                                           0.0
                                      -0.1                                                             -1
                                                                                                                                                                   -0.5
                                      -0.2
                                                                                                       -2
                                      -0.3
                                                                                                                                                                   -1.0
                                      -0.4                                                             -3

                                      -0.5                                                             -4                                                          -1.5
                                             Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13     Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13       Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
           Japan Flows in Pictures




                                                                                                        2    ¥ tn            Europe excl. UK                       1.5    ¥ tn                    UK
                                      1.0        ¥ tn                 Oceania
                                                                                                                                                                   1.0
                                      0.5                                                               1

                                                                                                                                                                   0.5

                                      0.0                                                               0
                                                                                                                                                                   0.0

                                      -0.5                                                             -1
                                                                                                                                                                   -0.5


                                      -1.0                                                             -2                                                          -1.0
                                          Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13        Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13       Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

                                              Source:MoF Balance of Payment Data                                                 *dashed lines show 1Y moving average
                                                                                                                            16
                                     Domestic investors’ outward investment

                                       Outward investment by region (debt securities, European countries)

                                          Domestic investors’ activity in German bonds turned sharply to buying in May (¥ 1.1tn) from selling in April

                                          Domestic investors were net-sellers of French bonds in May for the first time since November 2011
JPMorgan Securities Japan Co., Ltd




                                                  1.5    ¥ tn     Germany+Netherland+Finland                     1.5       ¥ tn                   France
                                                  1.0                                                            1.0
                                                                                                                                  Net-purchase
                                                  0.5                                                            0.5
Yuya Yamashita




                                                  0.0                                                            0.0

                                                  -0.5                                                          -0.5

                                                  -1.0                                                          -1.0

                                                  -1.5                                                          -1.5
                                                      Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13          Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
           Japan Flows in Pictures




                                                  1.0    ¥ tn           Belgium+Luxembourg                      1.0        ¥ tn                  Italy+Spain

                                                  0.5                                                           0.5



                                                  0.0                                                           0.0



                                                 -0.5                                                           -0.5



                                                 -1.0                                                           -1.0
                                                     Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13        Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

                                                Source:MoF Balance of Payment Data                                                    *dashed lines show 1Y moving average
                                                                                                                  17
                                          Domestic investors’ outward investment

                                            Outward investment (weekly series)


                                               Japanese investors net-sold foreign bonds for seven consecutive weeks until the week ended Jun 28, totaling ¥6
JPMorgan Chase Bank, N.A., Tokyo Branch




                                               trillion over the period. The net selling in the week ended Jun 21 amounted to ¥1.19 trillion, which is the largest
                                               since April 2012.

                                               The momentum of Japanese foreign stock selling has eased in the recent weeks. Japanese turned to net buyers of
                                               foreign stocks in the week ended Jun 21. Although they turned to net sellers in the week ended Jun 28, the amount
                                               of net sales was quite small.
Junya Tanase




                                                               JPY bn
                                                                  2000          Japanese net purchases of foreign securities                       600

                                                                  1500
                                                                                                                                                   400
                                                                  1000
                                                                                                                                                   200
                                                                   500

                                                                        0                                                                          0
             Japan Flows in Pictures




                                                                  -500                                                                             -200

                                                                 -1000
                                                                                                                                                   -400
                                                                 -1500                                    Bonds(lhs)
                                                                                                                                                   -600
                                                                 -2000                                    Stocks(rhs)

                                                                 -2500                                                                             -800
                                                                     Jan-12      Apr-12      Jul-12       Oct-12        Jan-13   Apr-13   Jul-13


                                                             Source:MoF International Transactions Data




                                                                                                                        18
                                          Retail flows: overall (ITs+Uridashis)

                                            Japanese retail investors' net purchase of foreign assets (medium-term trend)

                                              Japanese retail investments in foreign assets was sluggish in June, partly due to the weak tone in the Nikkei index over
                                              the period which would have hurt retail investors’ risk appetite.
JPMorgan Chase Bank, N.A., Tokyo Branch




                                              Net retail flow into FX-denominated investment trusts (ITs) in June was largely flat, following a net purchase of three
                                              consecutive months. Also, Japanese retail investors net sold Uridashi bonds for the 7 consecutive months until June
                                              (they have net sold ¥2.5 trn of Uridashis in the 1st half of this year).

                                                              <ITs>                                                        <Uridashi bonds>
Junya Tanase




                                                        1.0                      Japanese net purchases                      0.8                         Japanese net purchases

                                                        0.8                                                                  0.6

                                                        0.6
                                                                                                                             0.4
                                                        0.4
                                                                                                                             0.2
                                                        0.2
             Japan Flows in Pictures




                                                                                                                             0.0
                                                        0.0

                                                                                                                             -0.2
                                                       -0.2

                                                                                           6m M.A.                                                        6m M.A.
                                                       -0.4                                                                  -0.4

                                                       -0.6                                                                  -0.6

                                                       -0.8
                                                                                                                             -0.8
                                                          Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13
                                                                                                                                Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13

                                                       Source:MoF, J.P. Morgan


                                                                                                                     19
                                          Asset type breakdown of FX-denominated ITs (monthly series)

                                             Selling in DM bond funds stand out the most among flows in FX-denominated ITs , but the pace of outflows from DM
                                             bond funds has declined notably over the past few months. Net outflows from EM bond funds are also slowing down.
                                             Currency overlay funds is the only category where the outflows seem to be slowly increasing.
JPMorgan Chase Bank, N.A., Tokyo Branch




                                            Top 100 FX-denominated ITs net flow                                                    EM funds (11 bond funds and 5 equity funds)

                                             1.2                                                                                      0.20
                                             1.0                                                                                                                                               EM equity
                                                                                                                                      0.15                                                     EM bond
                                             0.8

                                             0.6                                                                                      0.10
Anna Hibino




                                             0.4
                                                                                                                                      0.05
                                             0.2

                                             0.0                                                                                      0.00
                                             -0.2
                                                                                                                                     -0.05
                                             -0.4

                                             -0.6                                                                                    -0.10
                                                Jan-06     Jan-07    Jan-08   Jan-09   Jan-10   Jan-11     Jan-12    Jan-13              Jan-06   Jan-07   Jan-08   Jan-09   Jan-10   Jan-11     Jan-12    Jan-13
                                            Source:Bloomberg, J.P.Morgan                                                           Source:Bloomberg, J.P.Morgan
             Japan Flows in Pictures




                                            DM funds(41 bond fund and 3 equity fund)                                               Currency overlay funds (20 funds)

                                               0.6                                                                                    0.4
                                                                                                         DM equity

                                                                                                         DM bond                      0.3
                                               0.4

                                                                                                                                      0.2
                                               0.2
                                                                                                                                      0.1
                                                    0
                                                                                                                                      0.0

                                               -0.2
                                                                                                                                      -0.1


                                               -0.4                                                                                   -0.2
                                                  Jan-06    Jan-07   Jan-08   Jan-09   Jan-10   Jan-11     Jan-12    Jan-13              Jan-06   Jan-07   Jan-08   Jan-09   Jan-10   Jan-11    Jan-12     Jan-13
                                            Source:Bloomberg, J.P.Morgan                                                           Source:Bloomberg, J.P.Morgan

                                                                                                                              20
                                          Asset type breakdown of FX-denominated ITs (daily series)

                                                On daily basis, net flows from both EM equity and bond funds have been consistently small over the past month. DM
                                                equity funds are still seeing net inflows, albeit it being small.
                                                The pace of net outflows from currency overlay funds continue at roughly the same pace on average.
JPMorgan Chase Bank, N.A., Tokyo Branch




                                            Top 100 FX-denominated ITs net flow                                                 EM fund flow
                                               20                                                                                      8
                                               10                                                                                      6                           EM equity

                                                0                                                                                                                  EM bonds
                                                                                                                                       4

                                               -10                                                                                     2
Anna Hibino




                                               -20                                                                                     0

                                               -30                                                                                    -2

                                               -40                                                                                    -4

                                               -50                                                                                    -6

                                               -60                                                                                    -8
                                                 Jan-12    Apr-12     Jul-12           Oct-12   Jan-13   Apr-13   Jul-13               Jan-12    Apr-12        Jul-12      Oct-12       Jan-13   Apr-13    Jul-13
                                            Source:Bloomberg, J.P.Morgan                                                        Source:Bloomberg, J.P.Morgan
             Japan Flows in Pictures




                                             DM fund flow                                                                       Currency overlay fund flow
                                               10                                                                                     10

                                                5
                                                                                                                                       5
                                                0
                                                                                                                                       0
                                               -5

                                              -10                                                                                     -5

                                              -15
                                                                           DM equity                                                 -10
                                              -20                          DM bonds
                                                                                                                                     -15
                                              -25

                                              -30                                                                                    -20
                                                Jan-12    Apr-12     Jul-12            Oct-12   Jan-13   Apr-13   Jul-13               Jan-12     Apr-12       Jul-12          Oct-12   Jan-13    Apr-13    Jul-13
                                            Source:Bloomberg, J.P.Morgan                                                        Source:Bloomberg, J.P.Morgan

                                                                                                                           21
                                          Currency breakdown of FX-denominated ITs (monthly series)

                                              The outstanding amount of EUR-denominated ITs declined significantly between 2010 and 2011 amid the Euro
                                              crisis, but has since stabilized. AUD and BRL-denominated ITs increased from early 2009 until early 2012. Although
                                              BRL funds are recently starting to show signs of gradual decrease, AUD-denominated ITs are starting to increase
JPMorgan Chase Bank, N.A., Tokyo Branch




                                              once again.
                                              Meanwhile, the outstanding amount of USD denominated ITs continues to increase.


                                             Outstanding amount of FX-denominated ITs

                                                                      ¥ tn
                                                                  12.0
Anna Hibino




                                                                  10.0



                                                                   8.0
                                                                                                                                                                                USD
                                                                                                                                                                                EUR
                                                                   6.0
             Japan Flows in Pictures




                                                                                                                                                                                AUD
                                                                                                                                                                                BRL
                                                                   4.0



                                                                   2.0



                                                                   0.0
                                                                      Feb-09        Aug-09        Feb-10          Aug-10   Feb-11     Aug-11       Feb-12     Aug-12   Feb-13

                                                  *1; Adjusted changes in FX rates of each currency against JPY

                                                  *2: “USD” is USD-denominated in ITAJ minus BRL overlay. “BRL” is BRL-denominated in ITAJ plus BRL overlay

                                                   Source:The Investment Trust Association, Japan, J.P.Morgan

                                                                                                                                    22
                                           AUD-denominated ITs and Currency Overlay Funds (monthly series)


                                                    Net sales of AUD-denominated ITs ticked up in May, but has slowed down once again in June. Net selling in AUD
                                                    bond funds was notably smaller in June (¥114bn) than May (¥177bn).
JPMorgan Chase Bank, N.A., Sydney Branch




                                                    Net sales of currency overlay funds has decelerated slightly over the past two months.



                                             Net flow of AUD-denominated ITs                                            Net flow of currency overlay funds

                                             ¥ tn
                                                                                                                        ¥ tn
Anna Hibino




                                              0.3                                                                       0.4
                                                                                                                                                             BRL overlay (41 funds)
                                              0.2                                                                                                            AUD overlay (7 funds)
                                                                                                                        0.3
                                                                                                                                                             Basket overlay including AUD (2 funds)
                                              0.1                                                                                                            Total of overlay (50 funds)
                                                                                                                        0.2
                                              0.0
                                                                                                                        0.1
             Japan Flows in Pictures




                                             -0.1
                                                                 Stocks (1 fund)
                                                                 AUD overlay (7 funds)                                  0.0
                                             -0.2
                                                                 Basket overlay including AUD (2 funds)
                                             -0.3                Bonds (11 funds)                                       -0.1
                                                                 TOTAL (21 funds)
                                             -0.4                                                                       -0.2
                                                    Jan-11        Jul-11        Jan-12        Jul-12      Jan-13               Jan-11       Jul-11       Jan-12       Jul-12        Jan-13



                                             Source:Bloomberg, J.P.Morgan                                                 Source:Bloomberg, J.P.Morgan




                                                                                                                   23
                                           Uridashi bonds
                                              Looking at the issuance numbers, MXN has now overtaken BRL to become the most common issuance currency year-to-
                                              date, with BRL now in second place. TRY and RUB are neck-to-neck as third most common issuance currency.
                                               In terms of issuance amounts however, the trend is slightly different. AUD issuance is still the largest year-to-date, while
                                              MXN issuance has surged and is now the second most issued currency. TRY issuance has also surpassed BRL to come in
JPMorgan Chase Bank, N.A., Sydney Branch




                                              third.


                                              Number of Uridashi issuances by currency year-to-date                                Quarterly amount of Uridashi by currency (¥bn)
                                                 80    75                                                                            180
                                                                                                                                                                AUD       NZD       ZAR        TRY
                                                                                                                                     160
                                                 70          63                                                                                                 BRL       IDR       RUB        MXN
                                                                                                                                     140
                                                 60
                                                                                                                                     120
                                                 50
Anna Hibino




                                                                   41   41                                                           100
                                                 40                                                                                   80
                                                                              29
                                                 30                                                                                   60
                                                                                    22
                                                 20                                           15                                      40
                                                                                                        11    9
                                                 10                                                                                   20
                                                                                                                      2   1
                                                                                                                                       0
                                                  0
                                                                                                                                                1Q12     2Q12         3Q12      4Q12       1Q13         2Q13
                                                       MXN BRL TRY RUB AUD USD ZAR                      IDR NZD HUF EUR
                                             Source:Bloomberg, J.P.Morgan                                                          Source:Bloomberg, J.P.Morgan
             Japan Flows in Pictures




                                              Amount of Uridashi by currency in Jan-Jun 2013 (¥bn)                                 Uridashi amount of selected currencies (June 2013, ¥bn)
                                                 250                                                                                 170

                                                       208
                                                                                                                                     150
                                                 200
                                                                                                                                     130
                                                             147
                                                 150                                                                                 110

                                                                   92                                                                  90
                                                 100                    79   78
                                                                                   56    49                                            70
                                                  50                                               29                                                   Total of AUD, NZD, ZAR, TRY, BRL, IDR, RUB,
                                                                                                         15                            50               MXN
                                                                                                                  5   2   0
                                                   0                                                                                   30
                                                        AUD MXN TRY BRL USD RUB ZAR NZD PLN IDR INR EUR                                     Jan-11     Jul-11         Jan-12     Jul-12        Jan-13
                                             Source:Bloomberg, J.P.Morgan                                                          Source:Bloomberg, J.P.Morgan
                                                                                                                              24
                                           Retail FX margin trading
                                               Japanese retail FX margin traders briefly reversed their well-known trading tactic of “buying dips/selling rallies” in early 2013
                                               (i.e. they started increasing JPY shorts even as the trade-weighted JPY continued to decline). However, trading patterns
                                               shortly returned to the usual in late February/early March. Week-to-week changes in positions have been more volatile
                                               recently, particularly in USD/JPY where positions are most concentrated.
JPMorgan Chase Bank, N.A., Sydney Branch




                                               Estimated USD/JPY longs declined by $10.8bn to $29.8bn between June 26th and July 3rd, reaching a low since late May.
                                               USD/JPY longs recently reached a record long in the first week of June at $61.1bn.
                                              Aggregate JPY shorts (incl. USD, EUR, AUD, NZD, GBP)           USD/JPY net positions v. USD/JPY
                                                     10                                                                      125                                                                                     70
                                                                                                                                               60
                                                                                                                             120                                                                                     75
                                                      8
                                                                                                                             115               50                                                                    80
                                                      6
                                                                                                                             110                                                                                     85
Anna Hibino




                                                                                                                                               40
                                                      4
                                                                                                                             105                                                                                     90
                                                                                                                                               30
                                                      2
                                                                                                                             100                                                                                     95

                                                      0                                                                                        20
                                                                                                                             95                          USD/JPY position, $ bn, lhs                                 100
                                                                    Aggregate JPY shorts in ¥ tn, lhs
                                                                                                                                                         USD/JPY, inverted, rhs
                                                    -2              Trade-weighted JPY, rhs                                  90                10                                                                    105
                                                     Jan-12 Apr-12     Jul-12    Oct-12      Jan-13        Apr-13   Jul-13                      Jan-12   Apr-12       Jul-12    Oct-12    Jan-13   Apr-13   Jul-13
                                             Source:Bloomberg, J.P.Morgan                                                               Source:Bloomberg, J.P.Morgan
             Japan Flows in Pictures




                                              EUR/JPY net positions v. EUR/JPY                                                          AUD/JPY net positions v. AUD/JPY
                                                     10                                                                      90                35                                                                    75
                                                      8                                                                      95
                                                                                                                                               30                                                                    80
                                                      6                                                                      100
                                                      4                                                                                        25                                                                    85
                                                                                                                             105
                                                      2
                                                                                                                             110               20                                                                    90
                                                      0
                                                                                                                             115               15                                                                    95
                                                     -2
                                                                                                                             120
                                                     -4                                                                                        10                                                                    100
                                                     -6                                                                      125
                                                                    EUR/JPY position, € bn, lhs
                                                                                                                             130                5                 AUD/JPY position, A$ bn, lhs                       105
                                                     -8
                                                                    EUR/JPY, inverted, rhs                                                                        AUD/JPY, inverted, rhs
                                                    -10                                                                      135                0                                                                    110
                                                      Jan-12    Apr-12    Jul-12     Oct-12       Jan-13   Apr-13   Jul-13                      Jan-12   Apr-12       Jul-12    Oct-12    Jan-13   Apr-13   Jul-13
                                              Source:Bloomberg, J.P.Morgan                                                              Source:Bloomberg, J.P.Morgan
                                                                                                                                   25
                          Table of Contents




                                       JGB holders
Japan Flows in Pictures




                                                     26
                                     JGB Holdings by investors

                                      JGB holdings by investors                                                              JGB holdings by investor (%)


                                                                                                                                                          Foreigner   Gov / BoJ
                                                               March-13                   T-Bill   JGBs    Total      tn
                                                                                                                                       Private              8.4%       15.2%
                                         Outstanding                                      162.0    807.1   969.1   100.0%               8.8%
                                         Government / BoJ                                 50.4     96.6    147.1   15.2%
JPMorgan Securities Japan Co., Ltd




                                                   Central/Local Government               12.8      1.0     13.8            Pension
                                                   Bank of Japan                          34.0     93.9    127.9   13.2%     9.8%
                                                   Zaito                                   3.5      0.9     4.4
                                                                                                                                                      Insurance
                                                                                                                                                        19.9%
                                                   Agency                                 0.1       0.8     1.0
Takafumi Yamawaki




                                         Bank                                             52.1     314.9   366.9   37.9%
                                                   Domestic Bank                          36.7     122.0   158.7                                                                   Bank
                                                   Foreign Bank                            1.9      0.8    2.7                                                                    37.9%
                                                   Agricultual Bank                        7.9     24.7    32.6
                                                   Other Banks (incl : Japan Post Bank)    5.6     167.3   172.9
                                         Insurance                                         3.2     190.1   193.3   19.9%
                                                 Life Insurance                            3.1     152.2   155.3              Source:BoJ Flow of Funds data
                                                   Casual Insurance                        0.1      6.0    6.1
                                                   Mutual Aid                              0.0     31.9    31.9
                                         Pension                                           0.0     95.3    95.3    9.8%
                                                   Public Pension                          0.0     64.3    64.3               Foreign ownership of JGBs outstanding declined to
           Japan Flows in Pictures




                                                   Private Pension                         0.0     25.6    25.6
                                                   Other Pension                           0.0      5.4     5.4
                                                                                                                              8.4% in Q1 2013 compared to 8.7% in Q4 2012.
                                         Private                                          10.0     75.0    85.0    8.8%
                                                   Household                              0.0      24.2    24.2               The BoJ’s holding grew to 13.2% from 12.0% during
                                                   Corperate                               0.0     14.2    14.2               the same period. This will likely increase more from
                                                   Non-Bank                                0.1      1.1     1.2
                                                   Bond Trust Fund                         1.7      0.3     2.0
                                                                                                                              Apr under the aggressive easing by BoJ.
                                                   MMF                                     4.9      0.9     5.8
                                                   Equity trust fund                       0.5      1.9    2.4                Domestic banks (37.9%) and insurers (19.9%) are the
                                                   Dealer                                  1.9     27.9    29.8               largest investor base and pensions (9.9%) and private
                                                 Other                                    0.9       4.5    5.3
                                                                                                                              sectors (8.8%) follow.
                                         Foreigner                                        46.3     35.2    81.5    8.4%




                                       Source:BoJ Flow of Funds data
                                                                                                                   27
                                     JGB Holdings by investors

                                          Domestic investors are by far the largest investor base but the pace of investment has been slowing.

                                          The slowing purchase by domestic investors has been offset by buying by the BoJ.


                                       BoJ                                                              Government
JPMorgan Securities Japan Co., Ltd




                                                            ¥ tn                                                      ¥ tn
                                              150                                                          40
                                                                                           127.9
                                              130                                                          30
Takafumi Yamawaki




                                              110
                                                                                                           20                                            13.1
                                                90
                                                70                                                         10

                                                50                                                          0
                                                      '03          '05   '07   '09   '11    '13                 '03          '05   '07   '09     '11    '13

                                        Foreigners                                                      Domestic Investors
           Japan Flows in Pictures




                                                            ¥ tn                                                      ¥ tn
                                              100                                          81.5            800                                         746.6
                                                80
                                                                                                           700
                                                60
                                                                                                           600
                                                40
                                                20                                                         500

                                                  0                                                        400
                                                      '03          '05   '07   '09   '11    '13                  '03         '05   '07   '09     '11    '13

                                         Source:BoJ Flow of Funds data
                                                                                                   28
                                     JGB purchases by investors

                                     JGB Transaction data by investor type

                                           While JGB10yr yield spiked to 1% in May, investors other than City banks and Foreigners were net buyers of
                                           Intermediate and Long term JGBs in May.

                                           Insurers (mainly lifers) , agricultural institutions and postal insurance are the largest investor base for the super-long
JPMorgan Securities Japan Co., Ltd




                                           JGBs. In May, lifers’ purchase in super-long recovered (¥ 660bn) but was still below the last year’s average (¥
                                           740bn).
                                                                            Super-long                   FY09 av e FY10 ave FY11 ave FY12 ave 2013/01 2013/03 2013/04 2013/05
                                                           City banks                                          -10     -120       -30    -140     -310    -160    -150
Takafumi Yamawaki




                                                                                                                                                                          -180
                                                           Other depository institutions                      310       320      270      310      160    -230      -80     60
                                                                                    Regional banks             20       -10      -40       10      -30     -80     130   -160
                                                                           Second regional banks              -10         0      -30        0        0     -30     100     -60
                                                                                      Shinkin banks            90        20      -40      -50        0    -320     -10      70
                                                                    Agricultural financial institution        190       300      400      330      210     260   -300      280
                                                                           Other financial institution         30        10      -20       20      -10     -50     -10     -80
                                                           Life and non-life insurance companies              480       850      880      740      590     930       60    660
                                                           Trust banks                                        520       300      250      430      600   1,120     420     270
                                                           Foreigners                                        -130        20        20     120      140     160     640      10
                                                           Post/Postal Insurance/Direct bid/etc               460       460      460      450      540     320        0   -160
           Japan Flows in Pictures




                                                           Others                                               80       40        30      50       20      -30     -10    190
                                                                   Intermediate and Long               FY09 ave FY10 ave FY11 ave FY12 ave 2013/01 2013/03 2013/04 2013/05
                                                           City banks                                     1,010      930       20     -140    1,140     940  -2,550    -630
                                                           Other depository institutions                  1,180    1,550    1,120    1,010      940     880   2,970   2,940
                                                                                    Regional banks          530      440      630      210       10     320   1,390     110
                                                                           Second regional banks             90       70      110       30       80    -120     230     -10
                                                                                      Shinkin banks         410      430      170      240     200      200     370     900
                                                                    Agricultural financial institution      -30      110      180      210     300      120    -280     690
                                                                           Other financial institution      190      490       40      320     350      370   1,270   1,240
                                                           Life and non-life insurance companies             10       -90     170       30      -90       0      -10     80
                                                           Trust banks                                      520      120      510      560    1,640   1,930     940     990
                                                           Foreigners                                      -130      630      670      580      210    -280       80   -510
                                                           Post/Postal Insurance/Direct bid/etc           2,670    1,850    3,140    2,300    4,650   2,340     420     520
                                                           Others                                           210      390      290      190      260     550     420     770
                                        Source:JSDA JGB Transactions Data                                                  29
                          Table of Contents




                                       Inward investment
Japan Flows in Pictures




                                                           30
                                     Foreign investors’ holding of domestic debt securities

                                     Inward investment by security type (debt securities, cumulative since 2005)

                                        Foreign ownership has been increasing at a fast pace over the last few years.

                                        However, foreign investors have preferred Money Market Instruments (with shorter-than-1Y maturity) to Bonds and
                                        Notes (with longer-than-1Y maturity)
JPMorgan Securities Japan Co., Ltd




                                        The investment to Bonds and Notes has generally been sidelined


                                                               70        ¥ tn
Yuya Yamashita




                                                               60                      Money market instruments


                                                               50                      Bonds and notes


                                                               40
           Japan Flows in Pictures




                                                               30


                                                               20


                                                               10


                                                                0
                                                                 Jan-05         Jan-06         Jan-07    Jan-08   Jan-09   Jan-10   Jan-11   Jan-12   Jan-13




                                                  Source:MoF International Transactions Data
                                                                                                                     31
                                     Foreign investors’ holding of domestic debt securities

                                     Foreign investors’ holding of domestic debt securities by region (stock-base)

                                        The BoJ annually publishes data showing the outstanding of JGBs held by countries, based on where foreign investors
                                        are based*.

                                        The data for 2012 shows that foreigners holding of domestic debt securities edged up driven by Europe excluding UK,
JPMorgan Securities Japan Co., Ltd




                                        Asia and Middle East.
Yuya Yamashita




                                                         50       ¥ tn                   Europe excl. UK
                                                         45                              UK
                                                         40                              Asia
                                                         35                              North America
                                                                                         Middle East
                                                         30
           Japan Flows in Pictures




                                                         25
                                                         20
                                                         15
                                                         10                                                                                        *BoJ says that numbers in
                                                           5                                                                                       some countries are
                                                                                                                                                   categorized based on not
                                                           0                                                                                       final investors’ location but
                                                                   00      01       02   03    04    05    06        07   08   09   10   11   12   counterparties’ location.



                                                    Source:BoJ Balance of Payment Data
                                                                                                                32
                                     Foreign investors’ inward investment

                                     Inward investment
                                          Foreign investors bought relatively large amount of Bonds and Notes (longer-than-1Y bonds) over 2005-2007 but
                                          turned to be large net-sellers in 2008 and 2009. Since 2010, foreign investors’ buying has been mainly in Money
                                          Market Instruments (shorter-than-1Y debts)
JPMorgan Securities Japan Co., Ltd




                                          In June, foreign investors were net-sellers in both Bonds/Notes and Money Market Instruments
                                         Inward portfolio investment                                  bn、 Negative figures (-) show net decrease in investment into Japan.
                                                                                                    CY2005 CY2006 CY2007 CY2008 CY2009 CY2010 CY2011 CY2012 CY2013
                                         International Transactions in Securites data               avg/mth avg/mth avg/mth avg/mth avg/mth avg/mth avg/mth avg/mth                  Jan-13   Feb-13   Mar-13   Apr-13   May-13   Jun-13
                                         Money Market Instruments ( total)                                10        300          780       120        -250         560     1,390 260  2,240     -470   -2,530    1,240    1,550   -1,120
                                         Balance of Payment data
                                         Money Market Instruments ( country breakdown, total)            -70       320      750       130        150      520     1,390       290    2,230      -470   -2,530    1,280    1,540
Yuya Yamashita




                                                         Asia                                              0        90      -10       130        -70     -240      -620      -920     -820      -720     -520     -250     -440
                                                                                China                      0        20      -20       -10          0      -40      -330       -50     -210      -100      590       60      -50
                                                                                Hong Kong                 20        80        0        90        -20        0        20      -180       40      -240     -270      -10     -120
                                                                                Singapore                -20         0       20        20        100      -60      -170      -480     -330      -350     -550     -290     -140
                                                                                Thailand                   0         0        0        30       -110     -100      -100      -160     -300        10     -250       40      -80
                                                         North America          U.S.A.                  -120      -100      -20        20       -110     -320      -620      -550     -180      -390      -30      170     -120
                                                         Europe                                         -100       300      710       800        870    1,700     3,650     3,310    5,340     2,500     -440    2,800    4,090
                                                                                U.K.                     190       670      890     2,030      2,400    3,170     5,410     6,320    8,390     5,120    5,790    6,120    6,890
                                                                                France                   -10       -50      100      -630     -1,150   -1,290    -1,150    -1,260     -740    -1,440   -1,840     -400     -610
                                                                                Luxembourg              -120      -120     -150      -340       -220      -50      -370    -1,500   -1,810      -830   -3,540   -2,420   -1,990
                                                         Middle East                                       0         0      -10      -480        -90     -100      -570      -530     -940      -630     -490     -480     -950
           Japan Flows in Pictures




                                                                                U.A.E.                     0         0        0      -460        -50      -90      -520      -450     -720      -520     -340     -390     -820
                                                         International Organization                      110        70      200      -270       -350     -470      -350      -710     -580      -750     -660     -640     -860


                                                                                                    CY2005 CY2006 CY2007 CY2008 CY2009 CY2010 CY2011 CY2012 CY2013
                                         International Transactions in Securites data               avg/mth avg/mth avg/mth avg/mth avg/mth avg/mth avg/mth avg/mth  Jan-13                   Feb-13   Mar-13   Apr-13   May-13   Jun-13
                                         Bonds and Notes ( total)                                        520     540     830    -310    -580      50     380     180   220                      -110   -1,430     620      -670     -760
                                         Balance of Payment data
                                         Bonds and Notes ( country breakdown, total)                     600      700       870        -370    -640        40      350       230       340      260    -1,270     970     -710
                                                         Asia                                             80       10        10           0       0        10       20       -20       170       50      -790      90      120
                                                                                China                     20        0        10          10     -10         0       50        30       240       60      -630     -20       20
                                                                                Hong Kong                 10       10         0          20     -10        30      -30       -10       -30       10      -100     -40       50
                                                                                Singapore                 60       20        30         -30       0       -20       10       -50        40       30       -60      40       80
                                                         North America          U.S.A.                    50      110        10         -40     -20        60       90       120        80      210       560     340     -300
                                                         Europe                                          480      540       820        -220    -570        10      280       200       140      -80      -710     530     -420
                                                                                U.K.                     390      560       720        -200    -370        10      260       250       110        0      -200     240     -380
                                                                                France                    40      -10        90         -20    -160         0       40       -20       -50     -120      -160     150     -170
                                                                                Luxembourg               -10      -50       -50         -20     -20       -10      -40       -20        10      -30       -60     -50      -10

                                        Source:MoF International Transactions Data and Balance of Payment Data                    33
                                     Foreign investors’ inward investment

                                     Inward investment by region (equities)
                                        Foreign investors remained to be net-buyers of Japanese equities but their buying decreased in May when Japanese
                                        equities started falling.
JPMorgan Securities Japan Co., Ltd




                                                    1.0    ¥ tn                Asia                               1.5    ¥ tn               North America
                                                                                           Net-inflow
                                                                                                                  1.0
                                                    0.5
Yuya Yamashita




                                                                                                                  0.5
                                                    0.0
                                                                                                                  0.0

                                                   -0.5
                                                                                                                  -0.5


                                                   -1.0                                                           -1.0
                                                       Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13        Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
           Japan Flows in Pictures




                                                    2.0    ¥ tn                  UK                               1.0    ¥ tn           Europe excluding UK
                                                    1.5
                                                                                                                  0.5
                                                    1.0

                                                    0.5
                                                                                                                  0.0
                                                    0.0

                                                   -0.5
                                                                                                                  -0.5
                                                   -1.0

                                                   -1.5                                                           -1.0
                                                       Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13        Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
                                         Source:MoF Balance of Payment Data                                         *dashed lines show 1Y moving average
                                                                                                             34
                                     Foreign investors’ inward investment
                                          Inward investment by region (debt securities)
                                             It appears that the UK is the only region that has accumulated domestic debt holdings. However, foreign investors usually
                                             buy Japanese securities mainly via London branches of securities dealers. The large buying in UK category is said to
                                             reflect these flows as the data accounts for the transactions with direct counterparties. The net-outflows in other
                                             region/country categories are said to mainly reflect redemptions.
JPMorgan Securities Japan Co., Ltd




                                             In May, inflows decreased or outflows increased in a variety of regions
                                      2     ¥ tn                     Asia                         1   ¥ tn                North America                      2    ¥ tn                  Europe excluding UK
                                                                               Net-inflow                                                                    1
                                      1                                                                                                                      0
                                                                                                  0
Yuya Yamashita




                                                                                                                                                             -1
                                      0                                                                                                                      -2
                                                                                                 -1                                                          -3
                                     -1                                                                                                                      -4
                                                                                                                                                             -5
                                                                                                 -2
                                     -2                                                                                                                      -6
                                                                                                                                                             -7
                                     -3                                                          -3                                                          -8
                                       Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13     Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13     Jan-06     Jan-07   Jan-08   Jan-09   Jan-10   Jan-11   Jan-12   Jan-13
           Japan Flows in Pictures




                                     12     ¥ tn                       UK                        1    ¥ tn                  Middle East                       2    ¥ tn            International Organizations
                                     10
                                                                                                                                                              1
                                      8
                                                                                                 0
                                      6
                                                                                                                                                              0
                                      4
                                                                                                 -1
                                      2
                                                                                                                                                             -1
                                      0

                                     -2                                                          -2                                                          -2
                                       Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13     Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13     Jan-06     Jan-07   Jan-08   Jan-09   Jan-10   Jan-11   Jan-12   Jan-13

                                          Source:MoF Balance of Payment Data                                                    *dashed lines show 1Y moving average
                                                                                                                       35
                                          Foreign investors’ inward investment

                                          Inward investment (weekly series)

                                            Foreign investors’ purchase of Japanese stocks has increased again in the recent weeks. Net foreign purchases of
JPMorgan Chase Bank, N.A., Tokyo Branch




                                            Japanese stocks amounted to ¥479.9 bn in the week ended Jun 28, the largest weekly purchase since mid-May.

                                            Foreign investors’ net sales of Japanese bonds amounted to ¥1.1 trn in the week ended Jun 21, the largest since March
                                            2012. But they turned to net buyers of Japan’s bonds in the week ended Jun 28.
Junya Tanase




                                                              JPY bn
                                                             1500               Foreign net purchase of Japanese securities
                                                                                                                                                 1700
                                                             1000
                                                                                                                                                 1200

                                                              500                                                                                700
             Japan Flows in Pictures




                                                                                                                                                 200
                                                                 0

                                                                                                                                                 -300
                                                              -500
                                                                                                                                                 -800
                                                                                                          Bonds (lhs)
                                                             -1000                                        Stocks (rhs)
                                                                                                                                                 -1300

                                                             -1500                                                                               -1800
                                                                 Jan-12       Apr-12       Jul-12       Oct-12        Jan-13   Apr-13   Jul-13



                                                           Source:MoF International Transactions Data



                                                                                                                 36
                                     Foreign investors’ Japanese equity

                                     Japan average weightings relative to MSCI Global benchmark

                                       Global equity funds have begun to raise Japan allocations: by end-May, the relative underweight was closed to a mere -
                                       0.3%, from -0.7% a couple of month ago. JPM estimates that an allocation shift of one percent implies net flows of about
                                       ¥1trillion.
JPMorgan Securities Japan Co., Ltd




                                       While still a long way from the 2% to 3% overweight positions seen in the 2006 bull run, this latest data does suggest the
                                       possible beginning of “buy on dip” catch-up from global money.
Jesper J Koll




                                      Japan average weighting relative to MSCI Global benchmark          AUM of the funds surveyed

                                        4.0                                                               140                    Global (LHS)        Japan allocation   11

                                        3.0                                                                                                                             10
                                                                                                          120
                                        2.0                                                                                                                             9
           Japan Flows in Pictures




                                        1.0                                                               100                                                           8

                                        0.0                                                                80                                                           7

                                       -1.0                                                                                                                             6
                                                                                                           60
                                       -2.0                                                                                                                             5

                                       -3.0                                                                40                                                       4
                                          Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13           Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
                                         Source:EPFR Global                                                 Source:EPFR Global




                                                                                                    37
                          Disclosures

                            金融商品取引法に基づく表示事項
                            (Below statement explains possibilities of risk of financial instruments in Japanese language. This is to follow “the Financial Instruments and Exchange Law” regulated by
                            Government of Japan.)
                            JPモルガン・チェース銀行 金融商品取引業者 関東財務局長(登金)第91号
                            株式取引は株価の変動等により損失が生じる恐れがあります。また、外国株式取引の場合、為替相場の変動によっても損失が生じるおそれがあります。
                            外国預託証券取引は価格の変動等により損失が生じる恐れがあります。また、為替相場の変動によっても損失が生じるおそれがあります。
                            債券の価格は、市場の金利水準の変化に対応して変動しますので、償還前に換金する場合には、損失が生じるおそれがあります。また、外国債券の場合、為替相場の変動によっても損失が生じるおそれが
                            あります。
                            市場先物取引(日経225株価指数先物取引、日本国債先物取引、ユーロ円3ヶ月金利先物取引、CME NIKKEI 225、HK HANGSENG INDEX等)の必要証拠金額は、SPAN○R等各取引所の定
                            める方法により、先物取引、オプション取引、先物オプション取引全体の建玉から生じるリスクに応じて計算されますので、市場先物取引の額の証拠金の額に対する比率は、常に一定ではなく、取引の額が証
                            拠金の額を上回る場合があります。市場先物の価格は、対象とする株価指数、有価証券の価格、金利、通貨の変動等により上下しますので、これにより損失が発生するおそれがあり、また当該株価指数、
                            有価証券の価格、金利、通貨が大きく変動することで発生する損失の額が差し入れていただく証拠金の額を上回る恐れがあります。また、当該市場先物取引が外貨建て取引の場合、為替相場の変動に
                            よって損失が生じるおそれがあります。
                            市場オプション取引、市場先物オプション取引(日経225株価指数オプション取引、日本国債オプション取引、金利先物オプション取引、CME Options on Three-Month Eurodollar Futures等)の証拠金
                            額は、SPAN○R等各取引所の定める方法により、先物取引、オプション取引、先物オプション取引全体の建玉から生じるリスクに応じて計算されますので、市場オプション、市場先物オプション取引の額の証
                            拠金の額に対する比率は、常に一定ではなく、取引の額が保証金の額を上回る場合があります。市場オプション取引、市場先物オプションの価格は、対象とする株価指数、有価証券の価格、金利、通貨の
                            変動等により上下しますので、これにより損失が発生するおそれがあり、また当該株価指数、有価証券の価格、金利、通貨が大きく変動することで発生する損失の額が差し入れていただく保証金の額を上回る
                            恐れがあります。また、当該市場オプション取引、市場先物オプション取引が外貨建て取引の場合、為替相場の変動によって損失が生じるおそれがあります。
                            不動産投資信託受益証券又は投資証券(J-REIT)は、不動産等を投資対象として組み入れるという仕組みを有しております。取引所における需給関係や、不動産関連資産への投資の動向、他の資産へ
                            の投資との比較、株式市場の状況、金利情勢、経済情勢等、市場を取り巻く様々な要因の影響を受けるので本証券の基準価格も変動する可能性があります。また、本証券の基準価額は、組み入れた不
                            動産等に物的・法的に瑕疵があった場合に変動する可能性があります。上記の要因により基準価格が変動することにより、元本欠損が生ずるおそれがあります。
                            転換社債の価格は、市場での株式の価格、株式への転換条件、金利水準等の変化に対応して変動しますので、償還前に換金する場合には、損失が生じるおそれがあります。債券の発行者の業務や財産
                            の状況の変化に伴い、債券の価格が変動することによって損失が生じるおそれがあります。株式への転換を選択された場合、転換後の財産の価格や評価額が債券の当初購入金額を下回るおそれがありま
                            す。新株予約権を行使できる期間に制限があります。償還等に伴って交付される株式の評価額が債券の当初購入金額を下回るおそれがあります。
                            投資信託の基準価格は、組み入れた株式や債券の値動き、為替相場の変動等の影響により上下しますので、これにより投資元本を割り込むおそれがあります。
                            店頭デリバティブ取引は、金利指標、通貨の価格、信用状況、株価等の変動を直接の原因として損失が生ずることとなるおそれがある取引です。また、ISDAマスター契約におけるクレジット・サポート・アネック
Japan Flows in Pictures




                            ス(Credit Support Annex)等の担保契約の適用がある場合、金利指標、通貨の価格等の参照指標が大きく変動することで、あるいはクレジットイベントが発生して、プロテクションの売り手側が支払うべき金
                            額が差入れ済みの担保の額を上回る場合に、発生する損失の額が差し入れていただく担保の額を上回る恐れがあります。店頭デリバティブ取引の想定元本は、当該デリバティブ取引等についてお客様に差し
                            入れていただく担保の額を上回る可能性があります。店頭デリバティブ取引にあたり差し入れていただく担保の額は担保契約の内容により異なるため、想定元本の担保額に対する比率上限を算出することはで
                            きません。店頭デリバティブ取引では反対取引を行おうとする場合は価格に差があり、原則として同じ価格での反対売買を行うことは出来ません。
                            上記記載の商品等へのご投資の際には、以下の手数料等を頂戴いたします。株式取引、外国預託証券、市場先物取引、市場オプション取引、市場先物オプション取引、不動産投資信託受益証券又は
                            投資証券の場合は事前にお客様と個別に合意した手数料率の委託手数料および消費税を、また投資信託の場合は、銘柄ごとに設定された申し込み手数料、信託財産留保金、信託報酬などの諸経費を
                            ご負担いただきます。債券および転換社債のお取引の場合は、購入対価のみお支払いいただくことになります。
                            商品毎に手数料等およびリスクは異なりますので、実際に上記取引を行っていただく前には当該商品等の契約締結前交付書面や目論見書またはお客様向け資料をよくお読みください。
                            加入協会: 日本証券業協会、一般社団法人金融先物取引業協会




                                                                                                              38
                          Disclosures
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                            010675237) and is regulated by Securities and Exchange Board of India. Thailand: JPMorgan Securities (Thailand) Limited is a member of the Stock Exchange of Thailand and is regulated by the Ministry
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                          Disclosures

                            Country and Region Specific Disclosures
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                            or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA
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                            "Other Disclosures" last revised May 4, 2013.

                            Copyright 2013 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan.
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