U.S. -China Trade War and the Fate of Zero-Interest Rate ... · US 3.63 6.20 6.28 France 2.84 3.37 1.33 Canada -0.02-1.84-2.55 Italy 1.14 3.26 5.32 Japan 7.62 8.01 5.48 Spain -7.93

Connecting Markets East & West

March 2020

U.S. - China Trade War and the Fate of Zero-Interest Rate Economies

Richard C. Koo, Chief EconomistNomura Research Institute, [email protected]

See Appendix A-1 for important disclosures and the status of non-US analysts.

1

Exhibit 1. Synchronized Global Collapse Triggered by US-China Trade War/Coronavirus Pandemic

-24

-16

-8

0

8

16

24

30

35

40

45

50

55

60

65

2012 2013 2014 2015 2016 2017 2018 2019 2020

US: ISM manufacturing index (left scale)China: Manufacturing PMI (left scale)Japan: Manufacturing DI in Economy Watchers Survey (current conditions, left scale)Eurozone: Industrial confidence indicator (right scale)

(seasonally adjusted, D.I.)

Source: Nomura Research Institute, based on data from Conference Board, National Bureau of Statistics of China, Cabinet Office of Japan, and European Commission.

Manufacturing sentiment in Japan, US, Europe and China(seasonally adjusted)

trade warbegins

coronavirus pandemic

2

-25

-20

-15

-10

-5

0

5

10

15

25

30

35

40

45

50

55

60

65

2012 2013 2014 2015 2016 2017 2018 2019 2020

US: ISM non-manufacturing index (left scale)China: Non-manufacturing PMI (left scale)Japan: Non-manufacturing DI in Economy Watchers Survey (current conditions, left scale)Eurozone: Retailers confidence indicator (right scale)

Non-manufacturing sentiment in Japan, US, Europe and China(seasonally adjusted, D.I.) (seasonally adjusted)

Source: Nomura Research Institute, based on data from Conference Board, National Bureau of Statistics of China, Cabinet Office of Japan, and European Commission.

coronavirus pandemic

Exhibit 2. Synchronized Global Collapse Triggered byCoronavirus Pandemic

3

Exhibit 3. Contrast between Balance Sheet Recession andPandemic Recession (I): the Cause

Balance sheet recession2008 2019

Pandemic recession2020 ?

bursting of debt-financed bubble emergence of new disease

collapse in asset prices collapse of economic activity

emergence of debt overhang disappearing revenue and income

increased savings and debt repayment(= disappearing borrowers)

increased dis-savings and distressborrowings (= disappearing lenders)

very loose financial condition very tight financial condition

higher stock and bond prices lower stock and bond prices

4

Exhibit 4. Contrast between Balance Sheet Recession andPandemic Recession (II): the Solution

Balance sheet recession2008 2019

Pandemic recession2020 ?

key driver(s) disappearing borrowers disappearing income & lenders

government's fiscal policy mustact as "borrower (and spender) oflast resort" to put excess private

savings back into the incomestream

government's fiscal policy mustsupplement household and

business incomes until medicalsolutions are found

central bank's monetary policy iseffective in restoring financialstability, but not effective inrestoring economic growth

central bank's monetary policymust operate as "lender of lastresort" to calm the markets and

lower the borrowing cost forgovernment and businesses

solution

5

0

1

2

3

4

02/03 02/10 02/17 02/24 03/02 03/09 03/16 03/23

FF rate (median of policy target range)

CP overnight rate (AA financial)

CP overnight rate (AA non-financial)

CP overnight rate (A2/P2 non-financial)

(%)

Source: FRB, as of March 23, 2020 (m/d)

Exhibit 5. Commercial Paper Rate in US

6

Exhibit 6. Greek Bank Loan Rate to Non-Financial Corporations

0

1

2

3

4

5

6

7

8

03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

GreeceGermanyFranceNetherlands

(%)

Source: ECB

Bank Loans to Non-Financial Corporations up to 1yrs

7

What we were taught:

“Free trade creates both winners and losers in a country. But the gainsthe winners obtain is so much larger than the losses the losers sustain,so the economy as a whole gains much from free trade.”

What was in fact true:

“Free trade creates both winners and losers in a country. But the gainsthe winners obtain is so much larger than the losses the losers sustain ifthe trade is balanced. If the country continues to run deficits, thenumber of losers may grow until they are numerous enough to electprotectionist leaders.”

Exhibit 7. Trade Theories Inadequately Taught (1)

8

Exhibit 8. Trade Theories Inadequately Taught (2)

Trade DeficitObserved outcome

Two possiblecauses

Neededremedy

Neededsupporting evidence

Domestic demand too strong for domestic

manufacturers to meet

Competitively priced importsreducing income and savings of import competing sectors

Increase savings and reduce consumption

Devalue exchange rates to regain competitiveness

Import competing manufacturers must be at full capacity and

doing well

Import competing manufacturers must be at reduced capacity and

doing badly

"Consuming more than producing"

Conventional explanation Overlooked explanation

9

Exhibit 9. Share of East Asia in US Trade Deficits

0

10

20

30

40

50

60

70

80

90

100

110

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018

Source: US Census Bureau

(%)

TradingPartners

Japan(8.1%)

China(40.5%)

19.0%65.0%

2.3%

14.7%

Taiwan(2.7%)

Korea(2.4%)

"Japan Bashing"

53.7%

US China"Trade War"

10

Exhibit 10. Losers of Free Trade now Numerous enough to Elect Trump President

•Boost economic growth with infrastructure investment, deregulation, and simplified tax code

•Review free trade framework

•Review postwar alliances

Source: ABC News website, November 30, 2016

“Flyover People”•Promote fairness in US society

•Maintain open society

•Maintain postwar alliances

11

Need a level playing field to reduce US trade deficit with China. President Xi-Jinping, a strong leader, is a worthy counterpart for negotiations.

China led by President Xi betrayed the US by moving away from open society and pushing for territorial expansions in South China Sea and elsewhere. All efforts are needed to contain the Chinese threat to the post-war global order.

Exhibit 11. “Two Governments” in Washington on China

President Trump

The rest of Washington

Exhibit 12. China May Grow Old before It Grows Rich: Working Age Population* Has Started to Contract in China

12

200

300

400

500

600

700

800

900

1000

1100

20

30

40

50

60

70

80

90

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

Japan (left scale)

China (right scale)

1993 2011

Note: The Chinese National Statistical Office defines the working age population as the people from 15 to 59. Source: United Nations, Department of Economic and Social Affairs, Population Division (2019). World Population Prospects 2019, Online Edition.

Forecast

(million people)(million people)

The Working Age Population (15-59) in China and Japan, Actual and Forecast

Exhibit 13. China only Has 13 Years to Reach First-World Living Standard

13

China’s Per-Capita Income

0

5000

10000

15000

20000

25000

30000

35000

2000 05 10 15 20 25 30 31

(US$)

yearly per-capita GDP growth: 6.5% yearly RMB appreciation: 3.0%

Source: Nomura Research Institute, based on the data from IMF, World Economic Outlook Database, April 2019

Middle Income Trap

1$ = 4.45 RMB?

yearly per-capita GDP growth: 5.0% yearly RMB appreciation: 2.0%

1$ = 5.09 RMB?

13 years until population peaks

14

Exhibit 14. Economic Textbooks Covered only Two out of Four Macro Economic Possibilities

Yes NoYe

s

1 3

No 2 4

Borrowers (=investors)Le

nder

s(=

save

rs)

Textbook world(private sector

maximizing profits)

Overlooked other-half (private sector

minimizing debt)

advanced economiesare all here

15

1) Bursting of a debt-financed bubble left the private sector with debt-overhang(=balance sheet recession)

2) Return on capital higher in emerging countries (=pursuing economies) than at home(=pursued economies)

Exhibit 15. Two Reasons for Not Borrowing Money

16

Exhibit 16. Private Sector1 Borrowers Disappeared2, 4

after 2008

(% of GDP) (% of GDP)

5 years toQ3 2008

from Q42008 topresent4

latest 4quarters

5 years toQ3 2008

from Q42008 topresent4

latest 4quarters

UK -0.15 1.33 -3.41 Germany 8.42 6.50 2.98

US 3.63 6.20 6.28 France 2.84 3.37 1.33

Canada -0.02 -1.84 -2.55 Italy 1.14 3.26 5.32

Japan 7.62 8.01 5.48 Spain -7.93 7.18 5.06

Korea -1.80 3.24 1.31 Greece 0.54 0.62 -4.68

Australia -7.35 0.55 1.49 Ireland -4.94 3.01 -20.39

Eurozone 1.25 4.51 3.09 Portugal -3.79 4.15 0.14

1. private sector = household + corporate + financial sectors2. Entered balance sheet recession in 19903. Entered balance sheet recession in 20004. Until Q3 2019. Only for US and Japan, until Q4 2019. 5. Except CanadaSource: Nomura Research Institute, based on these countries' flow of funds and national accounts data

Average Annual Private Sector Financial Surplus(+) or Deficit(-)

2

3

5

Exhibit 17. Drastic Liquidity Injections Resulted in minimal Increases in Money Supply and Credit (I): US

17

50

100

150

200

250

300

350

400

450

500

Monetary BaseMoney Supply (M2)Loans and Leases in Bank Credit

(Aug. 2008 =100, seasonally adjusted)

100

0.5

1.0

1.5

2.0

2.5

3.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

(%, yoy) Consumer SpendingDeflator (core)

Note: Commercial bank loans and leases, adjustments for discontinuities made by Nomura Research Institute.Sources: Federal Reserve Board; US Department of Commerce

417

201

146

+1.63%

Exhibit 18. Drastic Liquidity Injections Resulted in minimal Increases in Money Supply and Credit (II): Eurozone

18

75

100

125

150

175

200

225

250

275

300

325

350

375

Base MoneyMoney Supply (M3)Credit to Euro Area Residents


100

0.4

0.8

1.2

1.6

2.0

2.4

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

(%, yoy)CPI core

Note: Base money's figures are seasonally adjusted by Nomura Research Institute.Sources: European Central Bank; Eurostat

143

108

+1.2%

348

Exhibit 19. Drastic Liquidity Injections Resulted in minimalIncreases in Money Supply and Credit (III): UK

19

50100150200250300350400450500550600650700750

Reserve Balances + Notes & CoinsMoney Supply (M4)Bank Lending (M4)


1

100

-10123456

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

CPI (ex. Indirect Taxes)(%, yoy)

Notes: 1. Reserve balances data are seasonally unadjusted. 2. Money supply and bank lending data exclude intermediate financial institutions.

Sources: Bank of England; Office for National Statistics, UK

708

14999

1.8%

Exhibit 20. Drastic Liquidity Injections Resulted in minimal Increases in Money Supply and Credit (IV): Japan

20

0100200300400500600700800900

100011001200130014001500

Monetary Base

Money Supply (M2)

Bank Lending

QuantitativeEasing

(1990 Q1 = 100, seasonally adjusted)

Bubble Burst

Quantitative and Qualitative Easing

100

-3-2-101234

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

(%, yoy)

CPI Core (ex. fresh food)

Notes: 1. Figures for bank lending are seasonally adjusted by Nomura Research Institute.2. Excluding the impact of consumption tax.

Source: Bank of Japan

Tsunami

1428

225

0.2%2

1261

21

0

100

200

300

400

500

600

700

reserves with FRBdeposits + currency in circulationloans

(Dec. 1929 = 100)

NY stockmarket crash

1

World War II begins

10052

131

489

0

200

400

600

800

1000

23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41

banks' borrowings at Federal Reserve Banks

($ mn)

2

52% increase

Notes: 1. deposits = demand deposits adjusted + other time deposits2. Only this data series is based on member banks in 101 leading cities. All other data series are for all membr banks.

Source： Nomura Research Institute, based on the data from Board of Governors of the Federal Reserve System (1976),Banking and Monetary Statistics 1914-1941, pp.72-75 pp.138-163 and pp.409-413

Exhibit 21. 1930’s Great Depression Was also a Balance Sheet Recession (= Cases 3, 4)

22

Exhibit 22. Post-1933 US Money Supply Growth MadePossible by Government Borrowings

Credit Extended to

Private Sector

$29.63 bil.

Deposits$32.18 bil.

Credit Extended to

Public Sector

$5.45 bil.

Other Assets$8.02 bil.

Reserves$2.36 bil.

Capital$6.35 bil.

Other Liabilities$6.93 bil.

June 1929Assets Liabilities

Total Assets $45.46 bil. Total Assets $33.04 bil. (-$12.42 bil.) Total Assets $46.53 bil. (+$13.49 bil.)

Credit Extended to

Private Sector

$15.71 bil. (-$0.09 bil.)

Credit Extended to

Private Sector

$15.80 bil. (-$13.83 bil.)



Deposits$23.36 bil. (-$8.82 bil.)

Deposits$34.10 bil.

(+$10.74 bil.)(= Money Supply)

Credit Extended to

Public Sector

$8.63 bil. (+$3.18 bil.)

Credit Extended to

Public Sector

$16.30 bil. (+$7.67 bil.)

Other Assets

$6.37 bil.(-$1.65 bil.)

Other Assets$8.91 bil.

(+$2.54 bil.)

Reserves$2.24 bil.

(-$0.12 bil.)

Reserves$5.61 bil.

(+$3.37 bil.)

Other Liabilities$4.84 bil.

(-$2.09 bil.) Other Liabilities$7.19 bil.

(+$2.35 bil.)

Capital$4.84 bil.

(-$1.51 bil.)

Capital$5.24 bil.

(+$0.40 bil.)

Source: Board of Governors of the Federal Reserve System (1976), Banking and Monetary Statistics 1914-1941, pp. 72-79

23

Exhibit 23. Japanization Myth (1): Vast Majority of Japanese Have Never Expected Deflation

06/6 08/6 10/6 12/6 14/6 16/6 18/6

“Will go up significantly”+ “Will go up slightly”

(yy/m)

“Will go down significantly”+ “Will go down slightly”

Lehman Shock

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

97/3 99/3 01/3 03/3 05/3

“Will remain almost unchanged”

Double-dip recession following '97 austerity

Note: Data are discontinuous because survey methodology and wording were changed in June 2006. Question asks respondents to ignore changes in prices due to consumption tax hike.

Source: Nomura Research Institute, based on BOJ’s Opinion Survey on the General Public’s Views and Behavior.

Answer to question: How will prices change over the next year?

2.3%

24

Exhibit 24. Japanization Myth (2): Vast Majority of Japanese Have Never Expected Deflation

-2

0

2

4

6

8

10

12

14

06 07 08 09 10 11 12 13 14 15 16 17 18 19

"By what percent do you think prices will change one year from now?"

(mean response in %)

(CY)

"By what percent do you think prices have changed compared with one year ago?"

Source: Nomura Research Institute, based on BOJ’s Opinion Survey on the General Public’s Views and Behavior.

4.1%3.8%

25

Exhibit 25. Japanization Myth (3): Japan’s GDP Never Fell below the Bubble Peak despite De-leveraging

25

40

55

70

85

100

115

130

145

0

20

40

60

80

100

120

140

160

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

Land Price Index in Six Major Cities(Commercial, Left Scale)

(Sep.1990=100, seasonally adjusted)

Real GDP(Right Scale)

(Sep. 1990 = 100)

* GDP returning to the pre-bubble level of 1985Sources: Cabinet Office, Japan; Japan Real Estate Institute

Nominal GDP (Right Scale)

Last seen in 1973

US GNP Shrunk 46% 1929→1933

down87%

cumulative loss of

wealth on shares and real estate

~ ¥1500 trillion or 3 time the Japanese

GDP

Exhibit 26. Japan’s Challenge: Overcoming Problems of Debt Traumaand inferior Return on Capital relative to Emerging Markets

26

-18

-15

-12

-9

-6

-3

0

3

6

9

12

15

81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19

(Financial Deficit)

(Financial Surplus)

(as a ratio to nominal GDP, %)

Households

Rest of the World

Corporate Sector(Non-Financial Sector +

Financial Sector)

General Government

Financial Surplus or Deficit by Sector

Balance SheetRecession

Global Financial

Crisis

Private Sector Savings:

5.48% of GDP

Note: All entries are four-quarter moving averages. For the latest figures, four-quarter averages ending in 2019 Q4 are used.Sources: Bank of Japan, Flow of Funds Accounts, and Government of Japan, Cabinet Office, National Accounts

Exhibit 27. Japanese Non-financial Companies Are finally Beginning to Borrow, but Are still Net Savers

27

-25

-20

-15

-10

-5

0

5

10

15

20

25

30-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

right scale

Note: For the latest figures, four-quarter averages ending in 2019 Q4 are used.Sources: Bank of Japan, Flow of Funds Accounts, and Government of Japan, Cabinet Office, National Accounts

Financial Liabilities

Financial Assets

left scale

(FY)

(as a percentage of nominal GDP) (as a percentage of nominal GDP, inverted)

28

Exhibit 28. Labor Market in Three Stages of Economic Development

Source: Nomura Research Institute

L

S

D3

A

B

C

D

E F I J M

H K

D2D1

Golden Erawhere everyone benefits from economic growth

Urbanization Erawhere capitalists prosper

Worker's share(consumption)

Capital's share(investment)

wages

G

Wage level high enough to invite foreign

competition

Take-off periodUrbanization

Widening income inequalityStrong investmentWeak consumption

Pursued Erawhere only those with

advanced ideas prosper

Fast growthFast wage & productivity growth

Narrowing income inequalityRapid increase in investment

Rapid increase in consumption

Weak growthSlow wage & productivity growthRe-widening income inequality

Inferior return on capitalVery careful consumers

Industrialization

Labor supply curve

Labor demand curve

number of workers

Lewis Turning Point(LTP)

P

N

Q

D4

Advancedcountries are

all here

29

Exhibit 29. Effectiveness of Monetary & Fiscal Policies inThree Stages of Economic Development

• Flat wages and prices• Return on capital higher abroad

but households still saving

• Government must borrow and spend excess private savings on

self-financing projects

• Rising wages and prices• Strong demand for funds from

businesses for capacity and productivity enhancing

investments• Central bank must remain

highly vigilant toward inflation

• Flat wages and prices• Strong demand for funds

from public sector for needed infrastructure

Effectiveness

Pursued EraGolden Era Urbanizing Era

Fiscal Policy(B/S recession) (ordinary times)

Time

Monetary Policy(ordinary times) (B/S recession)

Exhibit 30. US Monetary Policy Has Grown Less Effective Starting in 1990s

30

0

2

4

6

8

10

12

14

16

-2

-1

0

1

2

3

4

5

71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19Notes: In the Chicago Fed’s national financial conditions index (NFCI), 0 represents the average from 1971 to the present.

Prior to 1987, when the Fed began targeting fed funds rate, the policy rate in the graph refers to the official discount rate. Since the Fed began targeting a corridor of values for fed funds, the graph shows the top end of the Fed’s target range.

Sources: Board of Governors of the Federal Reserve System, The Federal Reserve Bank of Chicago, “National Financial Conditions Index”

Looser financial conditions

Tighter financial conditions

Chicago Fed’s National Financial Condition Index

(lhs)Policy rate (rhs)

(%)

31

Exhibit 31. Growth, Happiness and Maturing of Nations

Source: Nomura Research Institute

10 1580 85 90 95 00 05751950 55 60 65 70

Note: A B = A pursuing B

Golden Era Pursued by Japan US regaining high-tech leadership(but not Europe)

Golden Era Pursued by Taiwan, South Koreaand China

Golden Era

Golden Era

Pursued by China

Communist Centrally Planned Economy

Industrialization with Urbanization



Start of Socialist Market Economy

"Japan as No.1"

"Golden Sixties"Lewis Turning Point

Pursued by Myanmar, Bangladesh, etc.?

USEurope

Japan

TaiwanKorea

China

Start of Reaganomics (US only)

Lewis Turning Point

Lewis Turning Point"Asian Tigers"

...?

ASEAN (Vietnam, Myanmar…)

ASEAN (Malaysia, Thailand…)

32

Exhibit 32. Pursued Economies with Super-Low Bond YieldsShould Be Able to Find Self-Financing Public Works Projects

-1

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Germany

Italy

Spain

US

Japan

(%)

Source: Nomura Research Institute, based on the data from ECB, FRB and Ministry of Finance, Japan

10-year Government Bond Yields

33

Golden Era (Household Savings < Corporate Borrowings: naturally inflationary)

An independent central bank is both essential and effective in controllinginflation. Fiscal policy is largely ineffective if not counter-productive dueto crowding-out effect on private investment.

Pursued Era (Household Savings > Corporate Borrowings: naturally disinflationary)

An independent fiscal commission is essential in finding self-financingpublic works projects so that the government can act as the borrower oflast resort. Monetary policy is largely ineffective and may triggerundesirable cycles of bubbles and balance sheet recessions.

Exhibit 33. Different Era Requires Different Policy Mix

Exhibit 34. US Private Sector Has Been Saving 6.20% of GDP on Average with near Zero Interest Rates since 2008

34

Private sector savings 6.28%

of GDP(average

6.20% since 2008)

-15

-12

-9

-6

-3

0

3

6

9

12

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

Housing Bubble

IT Bubble

(Financial Surplus)

(Financial Deficit)

(as a ratio to nominal GDP, %, quarterly)

Rest of the WorldHouseholds

General GovernmentCorporate Sector

(Non-Financial Sector +Financial Sector)


Note: All entries are four-quarter moving averages. For the latest figures, four-quarter averages ending in 2019 Q4 are used.Sources: FRB, US Department of Commerce

Exhibit 35. US Households Are still in Large Financial Surplus even with very Low Interest Rates

35

-20

-15

-10

-5

0

5

10

15-15

-10

-5

0

5

10

15

20

71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19

(as a ratio to nominal GDP, %, seasonally adjusted) (as a ratio to nominal GDP, %, inverted, seasonally adjusted)

Financial Assets

Financial Liabilities right scaleleft scale Financial

Surplus/Deficit

left scale

Notes: Latest figures are for 2019 Q4.Sources: Nomura Research Institute, based on flow of funds data from FRB and US Department of Commerce

36

Exhibit 36. US Non-Financial Corporations’ Financial Liabilities Are Worse than They Look because of Share Buy-Backs

-20

-15

-10

-5

0

5

10

15

20-20

-15

-10

-5

0

5

10

15

20

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19


Financial Assets

Financial Liabilities right scaleleft scale

Financial Surplus/Deficit

left scale

Notes: Latest figures are for 2019 Q4.Sources: Nomura Research Institute, based on flow of funds data from FRB and US Department of Commerce

37

Exhibit 37. Eurozone in Balance Sheet Recession

-9

-6

-3

0

3

6

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19


(Financial Surplus)

(Financial Deficit)

Rest of the World

Corporate Sector(Non-Financial Sector + Financial Sector)

General Government

Households


Note: All entries are four-quarter moving averages. For the latest figures, four-quarter averages ending in 2019 Q3 are used.Sources: ECB and Eurostat

Private Sector Savings:

3.09% of GDP

of whichNon-FinancialPrivate Sector

Savings:2.05% of GDP

38

Exhibit 38. Eurozone Non-Financial Corporations Are Becoming Cautious Net Borrowers

-25

-20

-15

-10

-5

0

5

10

15

20

25-25

-20

-15

-10

-5

0

5

10

15

20

25

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Financial Surplus/DeficitFinancial Assets

Financial Liabilities right scale

left scale


left scale

Notes: Seasonal adjustments by Nomura Research Institute. Latest figures are for 2019 Q3.Source: Nomura Research Institute, based on the data from ECB and Eurostat

Exhibit 39. Spanish Households Are finally Coming out of Deleveraging

39

-16

-12

-8

-4

0

4

8

12

16-16

-12

-8

-4

0

4

8

12

16

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Notes: Seasonal adjustments by Nomura Research Institute. Latest figures are for 2019 Q3.Sources: Nomura Research Institute, based on flow of funds data from Banco de España and National Statistics Institute, Spain

right scale

left scale

left scale

FinancialAssets

Financial Surplus/Deficit



Exhibit 40. Irish Households Have Been Deleveragingsince 2008

40

-20

-15

-10

-5

0

5

10

15

20

25-25

-20

-15

-10

-5

0

5

10

15

20

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

right scale

left scale left scaleFinancial Assets Financial Surplus/Deficit


(as a ratio to nominal GDP, %, seasonally adjusted)

Notes: Seasonal adjustments by Nomura Research Institute. Latest figures are for 2019 Q3.Sources: Nomura Research Institute, based on flow of funds data from ECB and Central Statistics Office, Ireland

(as a ratio to nominal GDP, %, inverted seasonally adjusted)

41

Exhibit 41. German Households Have Been Deleveraging since the Bursting of 2000 Dotcom Bubble

-12

-10

-8

-6

-4

-2

0

2

4

6

8-8

-6

-4

-2

0

2

4

6

8

10

12

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

right scale



(as a ratio to nominal GDP, %, seasonally adjusted)

Note: Seasonal adjustments by Nomura Research Institute. Latest figures are for 2019 Q3.Sources: Nomura Research Institute, based on flow of funds data from Bundesbank and Eurostat

(as a ratio to nominal GDP, %, inverted, seasonally adjusted)

Collapse of the Dotcom

Bubble

"Sickman of Europe"

42

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

(Dec. 31, 1997 = 1000)

Source: Bloomberg, as of December 31, 2019

TecDAX

9694.07

306.32

-97%

3014.94

Exhibit 42. The Collapse of Neuer Markt in 2001 Pushed German Economy into Balance Sheet Recession

43

Exhibit 43. Greek Households Are Still Struggling withLow Income and Deleveraging

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25-25

-20

-15

-10

-5

0

5

10

15

20

25

30

03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

right scale




Notes: Seasonal adjustments by Nomura Research Institute. Latest figures are for 2019 Q3.Sources: Nomura Research Institute, based on flow of funds data from Bank of Greece and Hellenic Statistical Authority, Greece

44

1) For debt to grow, someone must be saving money.

2) If someone is saving money, debt must grow to keep the economy running.

3) The only relevant issue with debt is whether the borrower can pay it back.

4) If the debt number is growing faster than savings, that has to be due to double counting.

Exhibit 44. Commonly Overlooked Truth about Debt

45

1) Lack of capex-driven borrowings force investors to invest in existing assets

2) Funds invested in existing assets tend to stay in financial sector

3) Exceptionally low interest rates typical of pursued economies prompt investors to reach for yield while downplaying risk

4) Central banks with golden-era mindset continue to inject liquidity via QE in order to meet inflation targets

Exhibit 45. Pursued Economies Relying on Monetary Accommodation Are Prone to Bubbles

46

75100125150175200225250275300325350375400425450475500525550

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

IrelandGreeceSpainGermanyNetherlandsUS

(end of 1995 = 100)

92

317342

513

276293

Ireland426

Greece216

Spain261

Germany142

Netherlands303

Notes: 1. Ireland's figures before 2005 are existing house prices only.2. Greece's figures are flats' prices in Athens and Thessaloniki.

Sources: Nomura Research Institute, calculated from Bank for International Settlements and S&P Dow Jones data.

US300

Exhibit 46. After the Collapse, Bubbles Are Returning with Ultra Loose Monetary Policies

47

Exhibit 47. Some Bubbles Are Way Beyond 2008 Peaks

80

100

120

140

160

180

200

220

240

260

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Note*: "Policy Statement on Prudent Commercial Real Estate Loan Workouts" (October 30, 2009) Sources: Nomura Research Institute, based on the data from Real Capital Analytics; "REAL CPPI,"

and S&P Dow Jones Indices; "S&P CoreLogic Case-Shiller Home Price Indices"

(Dec. 2000 = 100)

San Francisco House PricesUS commercial real estate

(major 6 cities, all uses)

US enacts "Pretend & Extend"*

(Oct. 2009)

+46.8%

+22.1%

48

Exhibit 48. One Modification to Euro Should Normalize Eurozone Economies

→ Eliminate de-stabilizing capital flight between 19 different government bond markets→ Allow governments to exercise fiscal policy as long as their citizens allow it→ Free ECB from the lack of borrower problem (Case 3) it cannot handle→ Free Euro from vagaries of political developments in member countries→ Maintain efficiency gains from free capital mobility for the private sector

Two Structural Deficiencies Unique to the Eurozone

Governments unable to tackle recessions caused by private

sector saving more than 3% of GDP at near zero interest rates

Effectively a collection of regional governments without much fiscal space because of procyclical and destabilizing capital flights between theirgovernment bond markets

Institutional Problem Financial Problem

Replace the 3% deficit limit with a ban on issuing debt to anyone other than the country's own citizens

Exhibit 49. China’s Monetary Aggregates Are De-coupling because of FX Intervention to Support RMB

49

0

200

400

600

800

1000

1200

1400

1600

1800

Reserve Money

Money Supply (M2)

Claims on Non-financial Sectors

(Mar. 2000 = 100, seasonally adjusted)

FX interventionto neutralize

capital outflow

FX interventionto neutralize capital inflow

-4-202468

10

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

(%, yoy) CPI

Note: Seasonal adjustments by Nomura Research Institute.Source: Nomura Research Institute, based on the data from CEIC Data and People's Bank of China

+5.2%

16511625

973

50

Exhibit 50. China in Golden Era Is Enjoying Strong Demand for Funds from Corporate Sector

PrivateSector

Savings:5.62%

of GDP

-15

-10

-5

0

5

10

15

20

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018


(Financial Surplus)

(Financial Deficit)

Rest of the World

General Government

Households



Source: Nomura Research Institute, based on the data from National Bureau of Statistics China and People's Bank of China

51

Exhibit 51. Chinese Household Sector Financial Surplus Remains Steady at around 10.2% of GDP

-25

-20

-15

-10

-5

0

5

10

15-15

-10

-5

0

5

10

15

20

25

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018


Financial Assetsleft scale


left scaleFinancial

Surplus/Deficit


52

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

35-35

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018


right scale



left scale Financial Surplus/Deficit


Exhibit 52. China’s nonfinancial corporations drew down savings in 2018

Exhibit 53. Taiwan Is Not in Balance Sheet Recession

53

80

100

120

140

160

180

200

220

Monetary BaseMoney Supply (M2)Loans & Investments to Private Sector

(2008 Aug. = 100, seasonally adjusted)

GFC

100

-2

0

2

4

6

07 08 09 10 11 12 13 14 15 16 17 18 19 20

(%, y/y) Core CPI(ex. vegetables, fruits and energy)

Note: Figures for loans & investments to private sector are seasonally adjusted by Nomura Research Institute. Sources: CEIC data and the Central Bank of China (Taiwan)

207

173

+1.3%

169

Exhibit 54. Taiwan’s Household Savings Overwhelms Corporate Borrowings

54

PrivateSector

Savings:6.73%

of GDP

-30

-20

-10

0

10

20

30

40

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018


(Financial Surplus)

(Financial Deficit) Rest of the World


General Government

Households


Source: Nomura Researchi Institute, based on the data from Central Bank of the Republic of China (Taiwan) and Directorate-General of Budget, Accounting and Statistics (DGBAS) , Taiwan

55

Exhibit 55. Taiwanese Household Sector Has Been a Big Saver

-40

-30

-20

-10

0

10

20-20

-10

0

10

20

30

40

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18






Exhibit 56. Taiwanese Non-financial Corporate Sector Has not Been a Big Borrower

56

-20

-15

-10

-5

0

5

10

15

20

25-25

-20

-15

-10

-5

0

5

10

15

20

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18


Financial Assets

left scale




57

Appendix A-1

DisclaimersThis publication contains material that has been prepared by the Nomura Group entity identified on page 1 and, if applicable, with the contributions of one or more Nomura Group entities whose employeesand their respective affiliations are specified on page 1 or identified elsewhere in the publication. The term "Nomura Group" used herein refers to Nomura Holdings, Inc. and its affiliates and subsidiariesincluding: Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan; Nomura Financial Products Europe GmbH (‘NFPE’), Germany; Nomura International plc ('NIplc'), UK; Nomura Securities International, Inc. ('NSI'),New York, US; Instinet, LLC ('ILLC'); Nomura International (Hong Kong) Ltd. (‘NIHK’), Hong Kong; Nomura Financial Investment (Korea) Co., Ltd. (‘NFIK’), Korea (Information on Nomura analysts registeredwith the Korea Financial Investment Association ('KOFIA') can be found on the KOFIA Intranet at http://dis.kofia.or.kr); Nomura Singapore Ltd. (‘NSL’), Singapore (Registration number 197201440E,regulated by the Monetary Authority of Singapore); Nomura Australia Ltd. (‘NAL’), Australia (ABN 48 003 032 513), regulated by the Australian Securities and Investment Commission ('ASIC') and holder ofan Australian financial services licence number 246412; PT Nomura Sekuritas Indonesia (‘PTNSI’); Nomura Securities Malaysia Sdn. Bhd. (‘NSM’), Malaysia; NIHK, Taipei Branch (‘NITB’), Taiwan; NomuraFinancial Advisory and Securities (India) Private Limited (‘NFASL’), Mumbai, India (Registered Address: Ceejay House, Level 11, Plot F, Shivsagar Estate, Dr. Annie Besant Road, Worli, Mumbai- 400 018,India; Tel: +91 22 4037 4037, Fax: +91 22 4037 4111; CIN No: U74140MH2007PTC169116, SEBI Registration No. for Stock Broking activities : INZ000255633; SEBI Registration No. for Merchant Banking :INM000011419; SEBI Registration No. for Research: INH000001014. ‘CNS Thailand’ next to an analyst’s name on the front page of a research report indicates that the analyst is employed by CapitalNomura Securities Public Company Limited (‘CNS’) to provide research assistance services to NSL under an agreement between CNS and NSL. ‘NSFSPL’ next to an employee’s name on the front page ofa research report indicates that the individual is employed by Nomura Structured Finance Services Private Limited to provide assistance to certain Nomura entities under inter-company agreements. The"BDO-NS" (which stands for "BDO Nomura Securities, Inc.") placed next to an analyst’s name on the front page of a research report indicates that the analyst is employed by BDO Unibank Inc. ("BDOUnibank") who has been seconded to BDO-NS, to provide research assistance services to NSL under an agreement between BDO Unibank, NSL and BDO-NS. BDO-NS is a Philippines securities dealer,which is a joint venture between BDO Unibank and the Nomura Group.This document is prepared by Nomura group or its subsidiary or affiliate (collectively, “Offshore Issuers”) incorporated outside the People’s Republic of China (“PRC”, excluding Hong Kong, Macau andTaiwan, for the purpose of this document) and it is not approved or intended to be distributed in the PRC. The Offshore Issuers are not licensed, supervised or regulated in the PRC to carry out financialservices including securities investment consultancy services. The recipient should not use this document or otherwise rely on any of the information contained in this report in making investment decisionsand Offshore Issuers take no responsibility in this regard.

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58

Any MSCI sourced information in this document is the exclusive property of MSCI Inc. (‘MSCI’). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not bereproduced, re-disseminated or used to create any financial products, including any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of thisinformation. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness,merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, orrelated to, computing or compiling the information have any liability for any damages of any kind. MSCI and the MSCI indexes are services marks of MSCI and its affiliates.The intellectual property rights and any other rights, in Russell/Nomura Japan Equity Index belong to Nomura Securities Co., Ltd. ("Nomura") and Frank Russell Company ("Russell"). Nomura and Russell donot guarantee accuracy, completeness, reliability, usefulness, marketability, merchantability or fitness of the Index, and do not account for business activities or services that any index user and/or itsaffiliates undertakes with the use of the Index.Investors should consider this document as only a single factor in making their investment decision and, as such, the report should not be viewed as identifying or suggesting all risks, direct or indirect, thatmay be associated with any investment decision. Nomura Group produces a number of different types of research product including, among others, fundamental analysis and quantitative analysis;recommendations contained in one type of research product may differ from recommendations contained in other types of research product, whether as a result of differing time horizons, methodologies orotherwise. The Nomura Group publishes research product in a number of different ways including the posting of product on the Nomura Group portals and/or distribution directly to clients. Different groups ofclients may receive different products and services from the research department depending on their individual requirements.Figures presented herein may refer to past performance or simulations based on past performance which are not reliable indicators of future performance. Where the information contains an indication offuture performance, such forecasts may not be a reliable indicator of future performance. Moreover, simulations are based on models and simplifying assumptions which may oversimplify and not reflect thefuture distribution of returns. Any figure, strategy or index created and published for illustrative purposes within this document is not intended for “use” as a “benchmark” as defined by the EuropeanBenchmark Regulation.Certain securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of, or income derived from, the investment.With respect to Fixed Income Research: Recommendations fall into two categories: tactical, which typically last up to three months; or strategic, which typically last from 6-12 months. However, traderecommendations may be reviewed at any time as circumstances change. ‘Stop loss’ levels for trades are also provided; which, if hit, closes the trade recommendation automatically. Prices and yields shownin recommendations are taken at the time of submission for publication and are based on either indicative Bloomberg, Reuters or Nomura prices and yields at that time. The prices and yields shown are notnecessarily those at which the trade recommendation can be implemented.The securities described herein may not have been registered under the US Securities Act of 1933 (the ‘1933 Act’), and, in such case, may not be offered or sold in the US or to US persons unless theyhave been registered under the 1933 Act, or except in compliance with an exemption from the registration requirements of the 1933 Act. Unless governing law permits otherwise, any transaction should beexecuted via a Nomura entity in your home jurisdiction.This document has been approved for distribution in the UK as investment research by NIplc. NIplc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority andthe Prudential Regulation Authority. NIplc is a member of the London Stock Exchange. This document does not constitute a personal recommendation within the meaning of applicable regulations in the UK,or take into account the particular investment objectives, financial situations, or needs of individual investors. This document is intended only for investors who are 'eligible counterparties' or 'professionalclients' for the purposes of applicable regulations in the UK, and may not, therefore, be redistributed to persons who are 'retail clients' for such purposes. This document has been approved for distribution inthe European Economic Area as investment research by Nomura Financial Products Europe GmbH (“NFPE”). NFPE is a company organized as a limited liability company under German law registered inthe Commercial Register of the Court of Frankfurt/Main under HRB 110223. NFPE is authorized and regulated by the German Federal Financial Supervisory Authority (BaFin).This document has been approved by NIHK, which is regulated by the Hong Kong Securities and Futures Commission, for distribution in Hong Kong by NIHK. This document has been approved fordistribution in Australia by NAL, which is authorized and regulated in Australia by the ASIC. This document has also been approved for distribution in Malaysia by NSM. In Singapore, this document has beendistributed by NSL. NSL accepts legal responsibility for the content of this document, where it concerns securities, futures and foreign exchange, issued by their foreign affiliates in respect of recipients whoare not accredited, expert or institutional investors as defined by the Securities and Futures Act (Chapter 289). Recipients of this document in Singapore should contact NSL in respect of matters arising from,or in connection with, this document. 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Neither this document nor any copy thereof may be taken or transmitted or distributed, directly or indirectly, by any person other than those authorised to do so into Saudi Arabia or in the UAE or inQatar or to any person other than ‘Authorised Persons’, ‘Exempt Persons’ or ‘Institutions’ located in Saudi Arabia or a ’Market Counterparty’ or a 'Professional Client' in the UAE or a ‘Market Counterparty’ ora ‘Business Customer’ in Qatar. Any failure to comply with these restrictions may constitute a violation of the laws of the UAE or Saudi Arabia or Qatar.

59

For Canadian Investors: This research report was approved for distribution to Canadian investors by Instinet Canada Limited ("ICL"), member of the Investment Industry Regulatory Organization of Canada("IIROC") and member of the Canadian Investor Protection Fund. An affiliate of ICL prepared the research report (an "Affiliate Research Report") in accordance with the regulatory requirements applicable toresearch in the affiliate's local jurisdiction, which include conflict of interest disclosure. ICL reviewed this Affiliate Research Report for the purpose of ensuring Canadian disclosures required by IIROC areincluded. ICL does not receive compensation in respect of the distribution of Affiliate Research Reports. Pursuant to ICL's policies and procedures regarding the dissemination of research, ICL makesavailable Affiliate Research Reports to ICL clients and prospective clients only, in electronic and/or in printed form. ICL endeavours to make available and/or distribute Affiliate Research Reports to allintended recipients at the same time. This Affiliate Research Report is not a recommendation and does not take into account the investment objectives, financial situation or particular needs of any particularaccount.For report with reference of TAIWAN public companies or authored by Taiwan based research analyst:THIS DOCUMENT IS SOLELY FOR REFERENCE ONLY. You should independently evaluate the investment risks and are solely responsible for your investment decisions. NO PORTION OF THE REPORTMAY BE REPRODUCED OR QUOTED BY THE PRESS OR ANY OTHER PERSON WITHOUT WRITTEN AUTHORIZATION FROM NOMURA GROUP. Pursuant to Operational Regulations GoverningSecurities Firms Recommending Trades in Securities to Customers and/or other applicable laws or regulations in Taiwan, you are prohibited to provide the reports to others (including but not limited torelated parties, affiliated companies and any other third parties) or engage in any activities in connection with the reports which may involve conflicts of interests. INFORMATION ON SECURITIES /INSTRUMENTS NOT EXECUTABLE BY NOMURA INTERNATIONAL (HONG KONG) LTD., TAIPEI BRANCH IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT BE CONSTRUED AS ARECOMMENDATION OR A SOLICITATION TO TRADE IN SUCH SECURITIES / INSTRUMENTS.NO PART OF THIS MATERIAL MAY BE (I) COPIED, PHOTOCOPIED, OR DUPLICATED IN ANY FORM, BY ANY MEANS; OR (II) REDISTRIBUTED WITHOUT THE PRIOR WRITTEN CONSENT OF AMEMBER OF THE NOMURA GROUP. If this document has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free asinformation could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or omissions in the contents of thisdocument, which may arise as a result of electronic transmission. If verification is required, please request a hard-copy version.

Disclaimers required in JapanCredit ratings in the text that are marked with an asterisk (*) are issued by a rating agency not registered under Japan’s Financial Instruments and Exchange Act (“Unregistered Ratings”). For details onUnregistered Ratings, please contact the Research Production Operation Dept. of Nomura Securities Co., Ltd.Investors in the financial products offered by Nomura Securities may incur fees and commissions specific to those products (for example, transactions involving Japanese equities are subject to a salescommission (all figures on a tax-inclusive basis) of up to 1.43% of the transaction amount or a commission of ¥2,860 for transactions of ¥200,000 or less, while transactions involving investment trusts aresubject to various fees, such as commissions at the time of purchase and asset management fees, such as commissions at the time of purchase and asset management fees (trust fees), specific to eachinvestment trust).In addition, all products carry the risk of losses owing to price fluctuations or other factors. Fees and risks vary by product. Please thoroughly read the written materials provided, such as documentsdelivered before making a contract, listed securities documents, or prospectuses.

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U.S. -China Trade War and the Fate of Zero-Interest Rate ... · US 3.63 6.20 6.28 France 2.84 3.37 1.33 Canada -0.02-1.84-2.55 Italy 1.14 3.26 5.32 Japan 7.62 8.01 5.48 Spain -7.93

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