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1. The Japanese Economy: the business conditions DI deteriorated; FY2018 fixed investment plans were up compared to past years In the BOJ Short-term Economic Survey of Enterprises in Japan (TANKAN) (March 2018), the business conditions DI deteriorated for large enterprises both among manufacturers (+24%pts) and non-manufacturers (+23%pts). The DI fell for the first time in eight quarters for large manufacturers and for the first time in six quarters for large non-manufacturers. In addition to the rise of crude oil prices and the appreciation of the yen having a negative impact upon business sentiment, the shortage of labor appears to have weighed on sentiment mainly in the non-manufacturing sector. The forecast DI also fell. This is attributed to uncertainties regarding US trade policy, the appreciation of the yen, and concerns regarding the increase of costs due to the rise of crude oil prices and labor costs. FY2018 fixed investment plans (all enterprises, all industries) started the year (-0.7% y-o-y) on a stronger note in comparison with past years. Despite the negative growth for small enterprises which do not formulate fixed investment plans, large enterprises and medium-sized enterprises primarily in the manufacturing sector served to push up the overall level of fixed investment plans. (%Pt) 30 20 10 0-10 - 20-30 [ Business conditions DI ] Large non-manufacturers Forecast Large manufacturers Small manufacturers [ Fixed investment plans (all enterprises, all industries) ] (Y-o-y % change) 10 8 6 4 2 0 FY2017 (Old base) FY2018 FY2015 FY2017 (New base) - 40 Small non-manufacturers - 2 FY2016-50 - 4-60 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (yyyy) Source: Made by Mizuho Research Institute (MHRI) based upon Bank of Japan, Short-term Economic Survey of Enterprises in Japan (TANKAN). - 6 March survey June survey September December Forecast Actual survey survey Note: Includes land purchasing expenses and excludes software and R&D investment. Source: Made by MHRI based upon Bank of Japan, Short-term Economic Survey of Enterprises in Japan (TANKAN). 1

FY2018 profits could also fall depending on foreign exchange levels FY2017 current profit projections (all enterprises, all industries) have been revised upward by +2.6% points from the December survey to +7.1% y-o-y. The recovery of overseas economies and firm domestic demand has had a positive impact. Since the predicted exchange rate of 110.67JPY/USD does not sufficiently price in the recent strong yen, actual profits may fall. FY2018 current profit projections forecast a slight profit downturn of -1.5% y-o-y. Increased costs due to the rise of crude oil prices and labor costs served as downward pressures. Profits could fall further depending upon foreign exchange rates. [ Current profit projections (all enterprises, all industries) ] [ Predicted exchange rates and actual rates (large manufacturers) ] (Y-o-y % change) 8 6 FY2015 4 FY2017 (Old base) 2 0 FY2017 (New base) - 2-4 - 6 FY2018-8 FY2016-10 March survey June survey September survey December survey Forecast Actual Source: Made by MHRI based upon Bank of Japan, Short-term Economic Survey of Enterprises in Japan (TANKAN). Source: Made by MHRI based upon Bank of Japan, Short-term Economic Survey of Enterprises in Japan (TANKAN) and Datastream 2

Even though the rise of exports and production is pausing, look forward to an upward trend The March export volume index fell (-0.6% m-o-m) for the third month in a row. Although exports to China rose as the impact of the Chinese New Year wore off, exports to the US and Europe declined. The upward momentum for exports paused even on a quarterly base, with a decline in the Jan-Mar quarter exports (-1.1% q-o-q). Looking forward, exports should return to a moderate upward trend, particularly for capital goods, reflecting the global economic recovery. The February industrial production index was flat at +0.0% m-o-m. Compared with the Oct-Dec quarter, the average of January and February fell (-1.7%), recording a negative reading for the first time in eight quarters. However, considering forecasts of output hikes in both March and April according to industrial production plans, the odds are high that the output slump will turn out to be short-lived. [ Export volume index ] [ Industrial production index ] (2010 = 100) 120 110 100 World EU China US Asia (2010 = 100) 110 108 106 104 102 Forecast index Production plans Revised figure 90 100 98 80 70 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Note: Seasonally-adjusted by MHRI Source: Made by MHRI based upon Ministry of Finance, Trade Statistics 96 94 92 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Note: Revised annualized figure up until February 2018 Source: Made by MHRII based upon Ministry of Economy, Trade and Industry, Indices of Industrial Production 3

Japan s labor market remains tight and real wage growth remains negative The number of workers reached 66.46 million (approximately +510 thousand m-o-m) in February, the highest level since the current survey began in 1953. Although the unemployment rate rose for the first time in nine months in February (2.5%), the scale of deterioration was muted compared to the sharp fall in the previous month. The job openings-to-applicants ratio remains high (1.58), albeit falling for the first time since September 2012. February real wages fell for the third consecutive month (-0.5% y-o-y). Even though nominal wages rose for the seventh month in a row (+1.3% y-o-y), real wages were dragged down by the rise of consumer prices such as the surge of fresh food prices. [ Unemployment rate and number of workers ] (%) (10,000 people) 3.6 3.4 3.2 3.0 2.8 2.6 2.4 Unemployment rate Number of workers (rhs) 6,700 6,650 6,600 6,550 6,500 6,450 (Y-o-y % change) 2.0 1.5 1.0 0.5 0.0-0.5-1.0-1.5 [ Real wages ] Price factors Special cash earnings Non-scheduled cash earnings Scheduled cash earnings Real wages 2.2 2.0 6,350 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Source: Made by MHRI based upon Ministry of Internal Affairs and Communications, Labor Force Survey 6,400-2.0 J F M A M J J A S O N D J F M A M J J A S O N D J F (Month) 2016 2017 18 (Year) Note: CPI using price factors is the general index excluding imputed rent Source: Made by MHRI based upon Ministry of Health, Labour and Welfare, Monthly Labour Statistics 4

Even though the 2018 spring wage hike rate rose above previous year levels, it fell short of a major acceleration According to the third estimate by the Japanese Trade Union Confederation (RENGO), the 2018 spring wage hike rate (+2.13%) is slightly above the same period last year (+2.05%). Given the tight labor market, the wage hike rate surpassed previous year levels for both large and small enterprises. The wage hike rate is forecast to rise slightly above last year due to the rise of the CPI and favorable corporate earnings. However, the wage hike rate falls short of a major acceleration from the slowdown last year, keeping the level far from the government target of 3%. There has been definite progress in initiatives for improving treatment of non-regular workers and work-style reforms (correction of long working hours, etc). [ Spring wage hike rate ] [ Rate of wage hikes by industry and company size ] 2018 Response (%) FY2017 Actual (%) Difference (Points) Fewer than 99 employees 1.97 1.87 0.1 100 to 299 employees 2.09 2.03 0.06 300 to 999 employees 2.11 2.02 0.09 1,000 or more employees 2.14 2.06 0.08 Total 2.13 2.05 0.08 Note: RENGO base (third estimate) refers to the figure calculated at the end of March each year by the Japanese Trade Union Confederation (RENGO). Source: Made by MHRI based upon Ministry of Health, Labour and Welfare (MHLW), Survey on agreements for wage increases at major private sector companies and Japanese Trade Union Confederation, Tabulated Results of the Spring Struggle for a Better Life Questionnaire Note: Compares the results of the RENGO base (third estimate) at the end of March 2017 and March 2018 by the Japanese Trade Union Confederation (RENGO). Source: Made by MHRI based upon Japanese Trade Union Confederation, Tabulated Results of the Spring Struggle for a Better Life Questionnaire 5

Personal consumption is firm. Core CPI was pushed up by temporary factors The February consumption activity index was -0.2% m-o-m, recording a fall for the first time in two months. Despite a positive contribution by non-durable goods, the index was weighed down by durable goods. The average for January and February rose (+0.3%) compared to the Oct-Dec quarter. Personal consumption overall is following firm footing due to strong employment conditions. February nationwide core CPI stood at +1.0% y-o-y, recording the strongest growth since March 2015 (August 2014, when discounting the impact of the consumption tax). Apart from energy prices, the rise is attributed to temporary factors such as the rebound of mobile telephone prices from last year s price drop and the rise of travel expenses due to the PyeongChang Olympics. Looking forward, the nationwide core CPI is forecast to gradually gather pace due to the rise of crude oil prices. [ Consumption activity index ] [ CPI (trends and forecast) ] (M-o-m % change) 2.5 2.0 1.5 1.0 Services Durable goods Non-durable goods Real Consumption Activity Index (adjusting travel balance) 0.5 0.0-0.5-1.0 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Source: Made by MHRI based upon Bank of Japan, Consumption Activity Index Note: Excludes the impact of consumption tax hike. Source: Made by MHRI based upon Ministry of Internal Affairs and Communications, Consumer Price Index 6

2. State of the Financial Markets: stock prices continue to move erratically due to concerns regarding US protectionism Stock prices continue to move erratically due to concerns regarding US-China trade conflict. US stocks are sensitive to movements in US-China trade policies. The Nikkei average is moving with a heavy topside on news about a scandal involving the Japanese government. Yields on 10-year government bonds have fallen slightly in Japan, the US and Germany. The dollar is moving heavily on the topside against the yen. Crude oil prices have risen due to the escalation of the Syria crisis. Despite limited market reaction toward the missile strikes, Russian and Turkish currencies and stocks have fallen. [ Major Market Trends ] (End of Dec 2015 = 100) (%) (%) 3.0 10Y UST 2.0 155 Japan (Nikkei average) 2.8 10Y German Bund (rhs) 1.8 145 MSCI Emerging 10Y JGB (rhs) 1.6 2.6 Germany (DAX) 1.4 135 2.4 1.2 US (Dow average) 125 2.2 1.0 0.8 115 2.0 0.6 105 1.8 0.4 1.6 0.2 95 1.4 0.0-0.2 85 1.2-0.4 75 1.0-0.6 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 (End of Dec 2015 = 100) 122 Yen 120 118 Dollar 116 114 Euro 112 110 108 106 104 102 100 98 96 94 92 90 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 Note: Currency exchange rates are based upon BOE Nominal effective exchange rate Source: Made by MHRI based upon Bloomberg materials 7

3. Japanese long-term interest rates: interest rates are likely to come under downward pressure as the BOJ keeps policy fixed The benchmark 10-year JGB yield is forecast to remain below 0.1% amid ongoing concerns regarding downside risks to the economy due to the impact of US protectionism. Market participants perceive downside risks to the economy and the continuation of monetary easing as factors pushing down yields. In the interim evaluation of fiscal consolidation plans (interim evaluation of Integrated Economic and Fiscal Reforms), the FY2018 primary balance deficit is forecast to be approximately -2.9% of GDP compared to the target of -1%. The slow improvement of the primary balance is attributed to the postponement of the consumption tax hike and the slow pace of growth in tax revenues. [ JGB yields ] [ Factors causing bond market rise/fall ] (%) 1 0.8 0.6 0.4 Fixed-rate operation (7-Jul-17) Fixed-rate operation (3-Feb-17) Fixed-rate operation (2-Feb-18) 65 60 55 50 Demand and supply for bonds Monetary policy Economy Factors pushing up the market (low er yields) 0.2 45 Prices 0-0.2-0.4 2013 2014 2015 2016 2017 2018 (yyyy) Source: Made by MHRI based upon Bloomberg 40 35 30 Foreign yields Jan Mar May Jul Sep Nov Jan Mar 2017 2018 Factors pushing dow n the market (higher yields) Note: 50 is neutral. There are strong expectations for becoming a cause of market rise the closer to 100. Survey of 139 bond market participants (Survey period March 27th to 29th) Source: QSS Monthly Report (most recent report March 2018) 8

4. Japanese Stock Market: stocks are moving heavily on the topside due to concerns that the strong yen will push earnings lower Even though concerns regarding the strong yen, protectionist shift of US trade policy, and political uncertainty in Japan are weighing down upon Japanese stocks, the stock market is gradually growing firmer on the downside. Foreign investors sell-off of Japanese stocks since the beginning of the year is also coming to a pause. FY2018 profit projections in corporate earnings results are likely to be conservative in view of foreign exchange levels and thus will be difficult to foster a rally. Furthermore, more firms have already had their business results downgraded by analysts in FY2018. A calculation based on EPS extrapolated from these downgraded results yields a forward PER of just 13x, so it is hard to image stocks falling further. [ Trading trends in Japanese stocks by investor type (Weekly) and the Nikkei average ] [ TOPIX revision index and JPY/USD ] (100 billion yen) 15 10 5 0-5 Foreign investors Trust banks (pension funds, etc.) Individuals Investment trusts Corporations Nikkei average (end of week, rhs) (Points) 25,000 24,000 23,000 22,000 21,000 20,000-10 19,000-15 18,000 Jun-17 Jul-17 Aug-17 Sep-17Oct-17Nov-17 Dec-17Jan-18 Feb-18Mar-18 Apr-18 Source: Made by MHRI based upon Tokyo Stock Exchange and Bloomberg Note. Revision Index = (Number of companies with upward revisions number of companies with downward revisions)/ Number of companies with revisions. The recent next fiscal year for companies with March fiscal year ends is FY2018. Source: Made by MHRI based upon Thomson Reuters 9

5. Foreign Exchange: dollar s topside will be weighed down by the US administration s stance The Trump administration s trade policy stance and heightened geopolitical risk surrounding Syria are weighing on the dollar s topside. Japan remained on the Monitoring List in the Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States (released April 13). The report notes that the real effective exchange rate is 25% lower than its 20-year average. Given that the foreign exchange rate is currently falling below the predicted exchange rate of companies, there are concerns that this could put pressure on Japanese corporate profits. The dollar looks to trade with a heavy topside against the yen for now. As the Trump administration s trade policy stance will continue to gather attention even after the mid-term elections, the financial markets will face persistent concerns regarding yen bullishness. [ US-Japan interest rate differential and JPY/USD ] [ Positions in IMM Currency Futures ] (Contracts) 100,000 50,000 Net position in IMM currency futures JPY/USD (rhs) (JPY) 80 85 90 0 95 100-50,000 105-100,000 110 115-150,000 120 125 Source: Made by MHRI based upon Bloomberg materials -200,000 130 2013 2014 2015 2016 2017 2018 (yyyy) (yyyy) Source: Made by MHRI based upon Bloomberg materials 10

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