EFTA01449244

16 May 2013 FX Blueprint: Dashing Buck anticipates a 'virtuous cycle among production, income and spending triggered by increases in public investment and exports.' At the risk of caricature, Hayami had been all about gritting one's teeth and holding out for the eventual benefits of (Schumpeterian) creative destruction, while Shirakawa was resigned to the structural drag from demographics. Kuroda has taken a leaf out of the Fed's much more activist playbook, raising the stakes (promising almost three times as much QE) and taking a lead in talking up the economy's reflationary prospects. Policy board members' core forecasts are that the economy will exceed its potential by a factor of 5-6 times this fiscal year (2.4-3.0% versus 'around 0.5%,' albeit with the caveat that this includes frontloaded demand ahead of the April '14 consumption tax hike)! Measures of progress will come over the summer, with investors able to gauge the reaction to: (i) Abe's grand deregulation and competition plan, to be unveiled mid- June; (ii) the Tokyo metropolitan and Upper House elections, in June and July respectively; plus (iii) final social security reform and fiscal reconstruction plans in August and September. Positive domestic sentiment could well exaggerate risk-seeking outflows just as the Fed discussion about tapering down asset purchases is progressing. [fey) vu and then So how does the current backdrop stack up against previous periods of significant yen weakness? We examined seven episodes since the breakdown of Bretton Woods. They were characterized by trade shocks (mid- and late-70s, late-'80s, mid-'90s); valuation overshoots and intervention (mid-'90s); capital outflows, be they deregulation-, risk seeking- or 'sell-Japan'-driven (early and late-'80s, mid-'90s, early and mid-'00s). Clearly, today shares many of these features, with the added kicker of an unprecedented monetary backdrop. This is what raises the prospect of overshoot. But that's unlikely to be an issue in the next 3-6 months. James Malcolm, London, (+44)20754 50884 Taisuko Tanaka, Tokyo, (+81)3 5156 6714 Page 6 'Abe's delivery scheudule 30/31 May mid luny 13 Jun July late July Anus': September °Claes &.e. Puns BIM International seminar on Shenomo. Tokyo tconoMr and irtscof Poky and Economic Revreatrabon oaVaory babel MAO n44or reammendobors Tokyo (PM OMER. In elta,014 CUP haring on monetary policy and inflation Upper &lure tie :Came Soo., scanty reform pone 'womb bock Fatal reconstngtcoplon Provis:onal deadline for TPP aJPatment jPeriods of yen weakness in the 70's and early 80's 960 330 300 279 4 240 210 USEUPY (LKSI 160 I —robe to USO GIO 150 1 71 73 75 77 79 81 83 85 Scarce Diane* lieu i• 36 34 [ 32 3.0 28 1 26 r 2.4 22 a 2.3 IB 16 Periods of yen weakness since the late 130's 170 160 150 140 130 120 It 110 1 • We 90 i so 70 87 89 91 93 95 Scott Oduwch• Owl ...00•1150,1PY (1.1-15) —ratio to 050 GIC - I 1.2 97 99 01 03 OS 07 09 11 13 20 1.8 16 14 10 Deutsche Bank AG/London CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL DB-SDNY-0104570 SDNY_GM_00250754 EFTA01449244