abenomics

MOODYS.COM
27 AUGUST 2013
Abenomics Success Prospects Constrained By Fundamental Macroeconomic
Challenges, Risks Aggravating Credit Challenges If Growth Remains Elusive
“Abenomics”—the popular colloquialism referring to the Japan Revitalization Strategy of the government led by Prime Minister Shinzo Abe—
aims to push the economy into a new era of growth and rejuvenation after more than two decades of stagnation. The first two ‘arrows’ of the
Revitalization Strategy, aggressive monetary easing and fiscal stimulus, have provided a temporary boost. But achieving long term growth
hinges on the success of structural reforms to boost the economy’s potential growth rate.
Prospects for success are constrained by the country’s fundamental macroeconomic challenges. Spurring growth and ending deflation would be
credit positive for Japan’s issuers, but the stimulatory policies risk aggravating the credit challenges facing Japan’s corporates, financial
institutions and various levels of government if growth remains elusive.
This compendium of research examines the potential cross-sector credit ramifications if the Japan Revitalisation Strategy is successful in
stimulating growth, versus the credit challenges Japan’s issuers face if the country suffers a third decade of economic stagnation. A copy of the
cross-sector presentation and associated teleconference replay is available here.
MACROECONOMIC BACKDROP
» Prospects of Success for Abenomics Constrained by Japan’s
Fundamental Macroeconomic Challenges
2
SOVEREIGN
» Higher Growth Essential to Reduce Japan’s Large Government
Debt Burden
8
SUB-SOVEREIGN
» Return to Growth Would Benefit Japan's Heavily Indebted
Regional and Local Governments
11
INSURANCE
» Japanese Insurers Would Benefit From Growth, Normalization
in Domestic Interest Rates
13
BANKING
» Japan's Banks Would Benefit From Sustainable Growth and an
End to Deflation
16
CORPORATES
» Economic Growth Would Boost Japan’s Corporate Earnings but
Immediate Effects Varied
19
STRUCTURED FINANCE
» Higher Property Prices, Increased Bank Lending Would Benefit
Japan’s Commercial Real Estate Structured Finance Sectors
22
» Growth in GDP and Employment Would Benefit Japan’s RMBS
and ABS
24

SOVEREIGN
2 ABENOMICS: CROSS-SECTOR IMPACT 27 AUGUST 2013
Prospects of Success for Abenomics Constrained by
Japan’s Fundamental Macroeconomic Challenges
Raising Japan’s potential growth rate, generating inflation expectations and
encouraging bank lending will be challenging in an economy that has stagnated for
more than two decades
“Abenomics” - the popular colloquialism referring to the Japan Revitalization Strategy of the government led by
Prime Minister Shinzo Abe - aims to push the economy into a new era of growth and rejuvenation.
» The first two ‘arrows’ of the Revitalization Strategy - aggressive monetary easing and fiscal stimulus -
have provided a temporary boost. But achieving durable growth over the longer term hinges on the
success of structural reforms to boost the economy’s potential growth rate.
- Generating robust GDP growth would be overall credit positive for Japan’s issuers; however, the
prospects for success are constrained by the country’s fundamental macroeconomic challenges.
- Raising Japan’s potential growth rate, ratcheting up investment, generating inflation expectations
and encouraging bank lending will be challenging in an economy that has experienced two decades
of anemic growth and more than a decade of deflation.
- Senior government officials fear that the scheduled consumption tax increase - a key element of
reforming Japan’s fiscal situation - will repeat the 1997 experience, wherein a rise contributed to
the economy contracting the following year.
- Maintaining a weak yen will be difficult in an environment where Japan’s safe-haven currency
status often leads to exchange rate appreciation at times of global economic uncertainty.
- Durable asset price appreciation would be a significant deviation from Japan’s seemingly relentless
decline in asset prices over the past two decades.
» If growth remains elusive, the government’s stimulatory policies risk aggravating the credit challenges
already posed by the low growth/low return environment. Incomplete progress on fiscal and structural
reforms would weigh on confidence and undermine the success of the new policy framework,
ultimately causing growth to eventually fall below the pre-Abenomics baseline.
Thomas J. Byrne
Senior Vice President - Manager
+65.6398.8308
thomas.byrne@moodys.com
Matthew Robinson
Director of Sovereign Research
+44.20.7772.5635
matt.robinson@moodys.com
Bart Oosterveld
Managing Director - Sovereign Risk
+1.212.553.7914
bart.oosterveld@moodys.com

SOVEREIGN
EXHIBIT 1
Macroeconomic Challenges to Ending to Japan’s Economic Stagnation
Robust GDP
growth Ending deflation
Increasing
productivity
Proceeding with
consumption tax
increase
Higher interest
rates
Increased bank
lending JPY depreciation
Asset price
appreciation
Japan has
recorded a mere
0.2% average
for annual
growth since
1991.
Chronic
deflation has
persisted ever
since the asset
bubble burst in
the early 1990s.
A declining labor
force and aging
demographics
continue to
pressure Japan’s
potential
growth rate.
The economy
went into
recession the
last time the
consumption
tax was raised
(to 5% from 3%
in 1997).
Implies mark-
to-market losses
for banks’ JGB
holdings,
increased debt
servicing costs
for governments
and
corporations,
and higher
default rates on
loan-backed
securities.
Companies are
cash rich and
households are
reluctant to
borrow. Bank
lending remains
25% below its
1997 peak, with
new loans
contracting in 11
of the past 16
years.
Despite recent
depreciation,
the yen remains
20% stronger
on a trade-
weighted basis
when compared
to 2007.
Residential
property prices
have declined
30% below their
early-1990s
peak, while
commercial land
values are 60%
lower.
Initial measures have provided only a temporary fillip
Two of the three pillars of Abenomics were implemented earlier this year: the government’s announcement
of a JPY10.3 trillion (2% of GDP) supplementary budget stimulus program in January1
and the Bank of
Japan (BOJ) enacting aggressive monetary easing in April.2
Monetary easing in particular had immediate, credit positive effects across most sectors. The weakening of
the yen has boosted export competitiveness and the increase inyen-denominated foreign-sourced earnings
has boosted corporate profits. Japanese stock prices have risen, albeit with considerable volatility in recent
months,3
and business and consumer confidence has firmed.
However, after initial and sometimes strong gains in a variety of asset classes, financial market enthusiasm
seems to have cooled, and businesses have become more circumspect in their assessments of the prospects
for Abenomics. Second-quarter GDP results undershot expectations,4
with private, non-residential
investment contracting for a sixth consecutive quarter and housing investment decreasing for the first time
in five quarters despite the promise of further stimulus and growth-enhancing structural reforms.
Stimulating private investment is the key to sustained growth
Permanently ending Japan’s two-decade-long period of economic stagnation through generating sustained
growth - and accordingly, defining the success of Abenomics - is contingent on stimulating private capital
formation. During the past 20 years, Japan’s economy has generally only grown when companies have
expanded their capital expenditure, increased workforces and raised wages.
There are nascent signs that spending by private corporations is firming: machinery orders from Japanese
manufacturers rose through the first half of the year - a precursor to capital expenditure. Yet this trend has
so far not translated into higher employment and wages, which will be necessary for the growth
improvement to become self-sustaining.
1
See Japan’s New Policy Stance Provides Temporary Fillip for Economy, 1 February 2013
2
See Japan’s Monetary Easing, 8 April 2013
3
See Japan’s Abenomics: Three-Part Solution Meets a 7% Market Hesitation (Capital Markets Research), 28 May 2013
4
See Weaker Growth in Japan Jeopardizes Economic Revitalization, 15 August 2013

SOVEREIGN
Without an improvement in private capital investment, the government’s willingness to expand its deficit
and attempt to inflate the economy into a recovery will be of limited effect, and will instead merely add to
the government’s already very high debt stock. The Cabinet Office recently announced that the central
government’s debt alone had breached the JPY1 quadrillion mark in June, more than 200% of GDP, by far
the highest among industrialized economies.
Structural and efficiency reforms pivotal in determining success of Abenomics in
generating growth
It is the third element of the Revitalization Strategy - targeting industrial restructuring and regulatory
reform to increase productivity and generate efficiencies to complement and eventually supplant the
monetary stimulus already in place and fiscal easing taken - which will determine the success or otherwise in
stimulating private investment and generating sustainable long-term growth.
On this front, the government’s plans remain largely nebulous: a work in progress, as Abe and his Cabinet
continue to formulate details. The government has outlined a broad growth and fiscal strategy, but specific
measures and a concrete timetable remain outstanding.
Some supply-side measures that have been identified include:
[1] Entering the Trans-Pacific Partnership (TPP), a free trade agreement among 12 countries and including
the US, Canada and Australia, would expand Japan’s international trade and boost its GDP by about
JPY3.2 trillion (or 0.66%) annually5
[2] Corporate tax breaks aimed at encouraging spending and spurring investment (although as currently
envisaged these would be selective and temporary, and thus would not provide a long-term boost)
[3] Electrical power market liberalization aimed at spurring growth through fostering competition and
reducing energy costs, though full implementation is not scheduled until 2018.
By their very nature, the full benefits from measures aimed at boosting the supply side of the economic-
growth equation would only accrue several years on.
Abenomics success would be credit positive for Japan’s issuers, but prospects
constrained by fundamental macroeconomic challenges
Success in generating robust GDP growth would be generally credit positive for Japan’s issuers. An end to
deflation, increased labor productivity, a favorable exchange rate, and increased bank lending would be
conducive to government revenues, corporate profitability, employment, the health of the banking system,
and the performance of structured finance securities.
Some sectors are more exposed to others in terms of unintended or unavoidable consequences of higher
growth and inflation (such as a likely modest increase in market interest rates), but we would expect the
challenges posed by increased debt-servicing costs to be offset by growth-induced benefits.
However, the prospects for success of the Abenomics plan are constrained by fundamental macroeconomic
challenges:
5
See Japan’s Official Participation in Trans-Pacific Partnership Talks Is Credit Positive, 29 July 2013

SOVEREIGN
» Achieving the Japan Revitalisation Strategy targets of annual average real GDP growth of 2% and
nominal growth of 3% over the next decade would be no small feat for an economy that has recorded a
mere 0.2% average annual nominal growth rate since the bubble burst in 1991. Although our 2013
forecast is for real GDP to expand by 2%, we see growth ebbing in 2014 (forecast of between 1% and
2%)6
owing to a dissipation of the initial effects of monetary easing and exchange rate depreciation, the
ongoing weakness in external demand from Europe and China, and the dampening effects on domestic
demand of the planned raising of the consumption tax.
» Although productivity growth in Japan has been comparable to that in other countries, the decline in
the labor force due to aging demographics continues to pressure the country’s potential growth rate.
The IMF estimates that this rate has fallen to less than 1%,7
underscoring the challenge the
government will face in raising labour productivity growth to the targeted 2% per year.
» Similarly, generating expectations regarding future inflation will not be easy, given that chronic, albeit
mild, deflation has persisted since the late 1990s. Deflation pressures corporate margins and amplifies
government debt reduction challenges by increasing the real value of debt outstanding.
» Senior government officials and advisers to the prime minister are debating the merits of delaying the
scheduled consumption tax increase out of concern that it may extinguish the nascent recovery in
economic growth. The economy contracted in the year following the last consumption tax increase (to
5% from 3% in 1997), and which also coincided with the onset of chronic deflation. Various unique
domestic and external were also at play at the time - Japan’s first post-war financial crisis and the Asian
financial crisis. Therefore, the present does show some strong differences from the past. Japan’s
economy is fundamentally sounder now than in 1997, the Asia Pacific overall is healthier, Japan’s
private sector has deleveraged, and the country’s financial sector has undergone a restructuring and is
no longer in crisis. Nevertheless, containing the upward debt trajectory is contingent on the
consumption tax increase; the government’s commitment to halve the 2010 fiscal deficit by 2015 and
its capacity to finance social welfare expenditure over the longer term are predicated on the revenues
expected from the consumption tax increases scheduled for April 2014 and October 2015.
» While a normalization in interest rates would be positive for banks’ loan-deposit spreads and resolve
insurers’ twin problems of negative spreads and heightened reinvestment risk, higher rates also imply
mark-to-market losses for banks’ JGB holdings, increased debt-servicing costs for governments and
corporations, and higher default rates on loans backing structured securities’ loan pools. If Abenomics
can boost and build a foundation for sustainable growth, we would expect yields on JGBs to move
towards where they settled during the final years of the Koizumi administration (2001-2006), when
real GDP growth peaked at 2.5% in 2006 and inflation moved, but barely, into positive territory on an
annual average basis. During 2006 and 2007, the average yield on 10-year JGBs was around 1.7%,
compared to the current level of around 0.8%.
» Encouraging bank lending will be difficult. Large corporations are cash rich and households are
reluctant to borrow; banks are reluctant to lend in a low rate/deflationary environment that constrains
their ability to appropriately price credit risk. Annual growth in credit to the private sector has averaged
virtually zero over the past decade: bank lending remains 25% below its 1997 peak, with new loans
contracting in 11 of the past 16 years.
» Keeping the yen weak will be difficult in an environment where Japan’s safe-haven currency status
often leads to currency appreciation at times of global economic uncertainty. While the yen has
depreciated 20% against the US dollar since Abe’s election in December 2012, the currency had
appreciated nearly 35% in the four years to mid-2011.
6
See Update to Global Macro Outlook 2013-14: Loss of Momentum, 13 May 2013
7
See Japan: Selected Issues (IMF Country Report No. 12/209), August 2012

SOVEREIGN
» Durable asset price appreciation would be a significant deviation from Japan’s seemingly relentless
decline in asset prices: residential property prices remain almost 30% below their early-1990s peak,
while commercial land values are 60% down from their peak two decades ago.
In the absence of growth, Japan’s credit challenges will be amplified
If growth remains elusive, the government’s stimulatory policies risk becoming self-defeating, aggravating
the numerous credit challenges already facing Japan’s national, regional and local governments, corporations
and financial institutions.
In its recent Article IV report8
estimating the potential effects of Abenomics on growth, inflation and debt,
the International Monetary Fund’s (IMF) simulations illustrate that the government’s 2% inflation target
and higher growth will only be achieved in a speedy and sustained manner under a full package of structural
reforms aimed at raising labor supply, deregulating protected domestic sectors, creating new growth sectors
(e.g. energy, environment, health care services), establishing a more growth-supporting financial sector, and
integrating further with Asia.9
In contrast, the IMF posits that incomplete progress on fiscal and structural reforms would weigh on
confidence and undermine the success of the new policy framework. The IMF study concludes: in the
absence of ambitious structural reforms, the requisite medium-term fiscal adjustment necessary to remedy
government finances and a rising risk premium (given the need to tap foreign investors as financing
requirements remain high amid declining private savings) will cause growth to eventually fall below the pre-
Abenomics baseline. This development would compound credit challenges already posed by the low
growth/low return environment.
EXHIBIT 2
IMF Scenario Analysis Shows Incomplete Abenomics Strategy Undermining Growth in the Medium
Term
Source: International Monetary Fund
This scenario underscores the potential downside risks associated with the Japan Revitalization Strategy in
8
See Japan: 2013 Article IV Consultation (IMF Country Report No. 13/253), 5 August 2013 (page 9)
9
See Japan: Selected Issues (IMF Country Report No. 12/209), August 2012

SOVEREIGN
the absence of a return to sustainable growth. The government’s willingness to expand its deficit and
attempt to inflate the economy into a recovery will be of limited effect in the absence of an improvement in
private capital investment, instead merely adding to the government’s already very high debt stock.
Similarly, regional and local government finances would remain strained under their existing heavy debt
burden in the absence of growth.
Meanwhile, if the government’s own rising debt burden erodes confidence in the JGB market, this would
threaten the stability of the banking and insurance sectors, impede bank lending to the detriment of
corporate investment and structured finance loan rollovers, and potentially lead to a financial crisis.

SOVEREIGN
Higher Growth Essential To Reduce Japan's Large
Government Debt Burden
Spurring growth, ending deflation would support the sovereign’s credit profile,
however a tipping point looms if growth remains elusive
Generating growth is an essential element of a credible long-term fiscal adjustment policy, a necessary (but not
sufficient) condition for reducing Japan’s (Aa3 stable) heavy level of government indebtedness. Long-term
government debt exceeds 200% of GDP and annual debt-refinancing needs are the highest among mature
economies.
Spurring growth, ending deflation would support the sovereign’s credit profile
Ending Japan’s economic stagnation of two decades is contingent on stimulating private capital formation.
During the past 20 years, the economy has only grown and the budget deficit only declined when global
conditions were buoyant and companies responded by expanding capital expenditure, increasing workforces,
raising wages, and paying more taxes.
The lacklustre outlook for the global economy over the next two or three years exerts pressure on the
government to devise a stronger domestic policy response to spur sustainable economic growth. Achieving
the revitalization strategy’s objectives of annual average real GDP growth of 2% and nominal growth of 3%
over the next decade would be credit positive, given that it would increase government revenues and
improve key credit metrics. Currency weakness, increased bank lending and higher productivity would also
be conducive to growth, employment and company profitability, as well as increasing corporate, personal
and consumption tax revenues.
Tax reform and containment of social security expenditure would further reduce the government’s budget
deficit and enhance its debt-servicing capacity.
Ending deflation and achieving stronger nominal GDP growth would also help reduce the government’s
large gross financing requirements and relieve the burden on fiscal austerity, helping in turn to free up
savings for more productive private sector investment. A revived economy and smaller fiscal deficit would
stabilize and eventually reverse the current upward trajectory in debt through simultaneous improvements
in the numerator and denominator of the country’s debt-to-GDP ratio.
Thomas J. Byrne
+65.6398.8308
thomas.byrne@moodys.com
Matthew Robinson
+44.20.7772.5635
matt.robinson@moodys.com
Bart Oosterveld
+1.212.553.7914
bart.oosterveld@moodys.com

SOVEREIGN
EXHIBIT 1
Sovereign Credit Implications of an End to Japan’s Economic Stagnation
Sovereign
Robust GDP
growth
Ending
deflation
Increasing
productivity
Proceeding with
consumption
tax increase
Higher interest
rates
Increased bank
Asset price
appreciation
Positive
Increased tax
revenues;
improves
debt-GDP
denominator
Positive
Diminishes
real value of
debt
outstanding
Positive
Conducive to
growth,
corporate
profitability
and
employment,
improving tax
revenues/
reducing social
welfare
expenditure
Positive
Increased
revenue,
broadening/
securing
revenue base
Negative
Higher debt-
servicing costs,
but likely to be
offset by
increased
revenues
Positive
Conducive to
growth
Positive
Supports
export-oriented
manufacturers,
conducive to
growth and
profitability,
thereby
improving tax
revenues
Potentially
negative
Potential for
stimulatory
policy to merely
generate
destabilizing
asset price
bubble
credit positive
credit negative
Growth would also provide sufficient headroom for the government to proceed with reforming Japan’s sales
tax system, thereby further improving government revenues. The consumption tax is currently scheduled to
increase to 8% in April 2014 from 5% currently, and ultimately to 10% in October 2015, although this is
predicated on favorable growth conditions, which were not explicitly defined. Recently, senior government
officials and advisers to the prime minister have debated the merits of the government delaying this
schedule out of concern that a tax increase at this time would extinguish the nascent recovery in economic
growth.
Government finances are under increasing strain from social welfare expenditure due to Japan’s declining
and aging population. Curbing social welfare expenditure has not so far been part of the policy debate,
amplifying the urgency of boosting revenues through stronger economic growth or through tax reform, or
both.
Rising interest rates accompanying sustainable growth would increase government debt-servicing costs.
However, the rise in tax revenues related to improving economic growth rates, especially from corporations,
would offset the rise in debt-servicing costs associated with increasing Japanese Government Bond (JGB)
yields. Currency weakness has no impact on debt-servicing costs, given that Japan has no outstanding
foreign currency denominated debt.
A tipping point looms if growth remains elusive
In contrast, if the revitalization strategy does not generate sustainable growth, the government’s stimulatory
policies risk aggravating Japan’s existing credit challenges. Without an improvement in private capital
investment, the government’s willingness to expand its deficit and attempt to inflate the economy into a
recovery will be of limited effect, instead merely adding to the government’s already very high debt stock.

SOVEREIGN
EXHIBIT 2
Rising Debt Trajectory: Japan’s Increase in Government Debt Relative to Other G-7 Countries
Source: Moody’s
In the event of a third decade of economic stagnation, the government’s debt would continue to rise
through 2020 by as much as 30 percentage points of GDP from its already elevated ratio in excess of 200%
of GDP for long-term debt and 245% for total debt.10
Its gross deficit and debt-refinancing needs are the
highest among mature economies, and they will increase to more than 59% of GDP, according to the
International Monetary Fund’s projections for 2013; or 35% according to Japan’s own Ministry of Finance
(which excludes short-term debt financed by foreign exchange special accounts).
These levels are far higher than even the most indebted governments globally and could eventually
overwhelm the exceptional home bias of the JGB market. The government is currently able to fund its
deficit at low cost because of the strong appetite for JGBs of Japanese financial institutions, including banks
and insurers backed by huge deposit bases.
At some point, these investors may demand a premium for funding Japan’s growing debt. This could
happen if Abenomics does not generate sustainable growth, leaving government finances even more
strained. Such a development could threaten to undermine sovereign creditworthiness and erode confidence
in the JGB market, potentially destabilizing the financial system, including banks and insurance companies,
the largest holders of JGBs.
Moreover, if the level of government debt exceeds gross national savings - a risk that could develop over the
next five years - the process of re-intermediating Japan’s massive savings into JGBs could become difficult,
generating so far non-existent rollover risk. And if Abenomics does not spur private investment, the
liquidity generated by the government’s and BOJ’s stimulatory policies will threaten to manifest itself in
asset bubbles domestically and abroad, with negative consequences for systemic stability.
10
Based on the Cabinet Office’s previous growth strategy long-term scenario analyzes.
0
50
100
150
200
250
300
2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F
%ofGDP
Japan G-7 ex-Japan

SUB-SOVEREIGN
Return to Growth Would Benefit Japan’s Heavily
Indebted Regional and Local Governments
Since Japan’s regional and local governments’ (RLGs) debt burdens are amongst the highest of local governments
globally, success in stimulating growth would translate into increased own-source revenues and central government
transfers, alleviating pressure on local government budgets. In the absence of growth however, RLGs finances
would remain strained under their existing heavy debt burden.
Growth, increased revenues would benefit Japan’s regional and local governments
With the main revenue sources for Japan’s prefectures coming from corporate and personal income taxes,
higher growth rates would ease pressures on these regional and local governments’ financial performance.
Currency weakness, increased bank lending and improving productivity would also be conducive to growth,
enhancing RLGs revenue generation capacity. An end to deflation and stronger nominal GDP growth
would also diminish the real value of RLGs debt outstanding, improving debt-service capacity. Meanwhile,
proceeding with the proposed hikes in the consumption tax in 2014 and 2015 would boost RLGs’ income,
given the central government’s commitment to sharing a portion of the increase with them (1.2 percentage
points).
In addition, to the extent that the central government’s own-tax intake rises at a faster pace than inflation,
the current pressures on local allocation tax (LAT) revenue-sharing transfers - a primary source of RLGs’
operating income - should ease. In recent years, LAT transfers have been increasingly replaced by the
RLGs’ issuance of government-supported rinzai-sai debt. To the extent that the central government can
directly cash fund LAT transfers, it will curb this source of indebtedness. Similarly, as increased local taxes
help to build operating surpluses, reliance on both rinzai-sai and other debt may slow.
Rising interest rates accompanying sustainable growth would increase RLGs debt servicing costs. However,
the rise in tax revenues associated with improving economic growth rates and transfers from the central
government would offset the rise in debt-servicing costs.
EXHIBIT 1
RLGs Credit Implications of an End to Japan’s Economic Stagnation
RLGs
Robust GDP
Increasing
productivity
Proceeding with
consumption tax
increase
Higher interest
rates
Increased bank
Positive
Increased tax
revenues; reduces
pressures on LAT
revenue-sharing
transfers
Positive
Diminishes real
value of debt
outstanding
Positive
Conducive to
growth, corporate
profitability and
employment,
improving tax
revenues
Positive
Given central
govt.
commitment to
share 1.2pp with
RLGs
Negative
Higher debt-
servicing costs,
but likely offset
by increased
revenues
Positive
Conducive to
growth and
revenue
generation
Positive
Conducive to
growth and
revenue
generation
credit positive
credit negative
Yuka Tamba
Vice President - Senior Analyst
+81.3.5408.4216
yuka.tamba@moodys.com
Debra Roane
Vice President - Senior Credit Officer
+612.9270.8145
debra.roane@moodys.com

SUB-SOVEREIGN
In the absence of growth, RLGs finances strained under heavy debt burden
In contrast, if growth remains elusive, a third decade of economic stagnation would leave the finances of
local governments strained. Revenues that the RLGs generate themselves have been declining since the
global financial crisis, and would continue their downward slide. The recent reliance on issuance of
government-supported rinzai-sai debt along with other borrowing has led to RLGs debt burdens rising to a
high 41% of GDP, amongst the highest of local governments globally. Meanwhile, the need to increase
welfare, health, and nursing services will continue as the population ages, further reducing the RLGs’
financial flexibility.
EXHIBIT 2
Japan’s RLGs Debt Burden Amongst the Highest of Local Governments Globally
Net Direct and Indirect Debt/Total Revenue in 2011
Source: Moody’s
270%
205%
157%
102%
79%
59%
0%
50%
100%
150%
200%
250%
300%
Prefectures Moody's
rates
Quebec, Province of Baden-Wuerttemberg,
Land of
Madrid, Comunidad
Autonoma de
Lazio, Region of New SouthWales
(State of) Australia

INSURANCE
Japanese Insurers Would Benefit From Growth,
Normalization in Domestic Interest Rates
The credit profiles of insurers would be supported by gradual increases in interest
rates, accompanying the rise in economic growth, but would be negatively impacted if
government debt continues to climb.
Japan’s life insurers would be among the biggest beneficiaries of a more normal interest environment if Abenomics
is successful in ending deflation and achieving stronger nominal GDP growth. However, if growth remains
elusive, Japan’s insurers would continue to face the persistent credit challenges associated with a low interest
rate/low return environment.
Life insurers among the biggest beneficiaries of a more normal interest rate
environment
Ending deflation and achieving stronger nominal GDP growth would cause an increase in the risk-free rate
which would, in turn, be credit positive for Japan’s domestic insurance sector. Insurers, in particular life
insurers, have been one of the major losers from Japan’s extended period of low interest rates. Accordingly,
life insurers will be among the biggest beneficiaries of a more normal interest rate environment.
Market expectations of sustainable average real GDP growth of 2% - 3% and positive inflation will cause a
steepening of the yield curve. A steeper yield curve will help resolve the twin problems of negative spreads
and heightened reinvestment risk that are characteristics of the life industry in a low interest rate
environment.
Higher investment returns are essential to resolve the problem of negative spreads. Life insurers
typically earn a margin, or spread, between their investment results and their average payouts to
policyholders. In Japan, for many life insurers, this spread is currently negative because investment
returns are lower than the guaranteed rate of returns to policyholders.
EXHIBIT 1
Negative Spread Has Been Narrowing, But Still Exists
Source: Company disclosures
Average is simple average ( – adding up the negative spread of the eight insurers and divided by eight)
Further, if returns on long duration assets rise, then the pace at which life insurers accumulate long duration
assets should increase. This trend would help reduce duration mismatch, that is the difference between the
-3.00%
-2.50%
-2.00%
-1.50%
-1.00%
-0.50%
0.00%
-0.70%
-0.60%
-0.50%
-0.40%
-0.30%
-0.20%
-0.10%
0.00%
0.10%
0.20%
0.30%
2009/3 2010/3 2011/3 2012/3 2013/3
Nippon Dai-ichi Meiji Yasuda Sumitomo Fukoku
Taiyo Sony Average Mitsui(Right axis)
Kenji Kawada
+81.3.5408.4056
kenji.kawada@moodys.com
Graeme Knowd
Associate Managing Director
+81.3.5408.4149
graeme.knowd@moodys.com

INSURANCE
average term of life insurance policies and the term of insurers’ investments. Given that life insurers must
invest in long-term assets to match the long duration of their liabilities, their investment returns will rise as
the yield curve steepens.
Among the likely effects of a successful implementation of Abenomics, increased economic growth and a
return to inflation would have the most lasting credit-positive effects on the insurance sector. Even so, the
difficult transition from a deflationary to an inflationary environment will challenge the asset/liability
management capabilities of all insurers, and not all will rise to the challenge equally.
Although a steeper yield curve is a long-term positive for the insurance sector, a steepening would initially
reduce the value of the insurance sector’s JGB portfolios, an unavoidable consequence of a successful shift to
stronger economic growth and inflation.
Higher long-term rates would cause mark-to-market losses on those JGBs reported as available for sale.
Unrealized losses negatively impact accounting capital, although insurers can mitigate unrealized losses by
increasing their portions of policy reserve-matching bonds and by reducing their available-for-sale bonds.
An increase in JGB yields also has a positive impact on economic value and economic capital because of the
duration mismatch between assets and liabilities. The reason is that a higher risk-free rate (which reflects
JGB yields) would lead to higher discount rates for insurance liabilities, which would in turn diminish their
present (or economic) value.
Credit positive effects on the insurance sector from BOJ monetary easing
Although the prospects for the success of Abenomics remain uncertain, monetary easing by the BOJ has
already had several credit-positive effects on the insurance sector. The most direct effect has come from
rising asset prices, particularly domestic equities, a trend which benefits the large investment portfolios of
insurers.
Meanwhile, the weakening yen has increased the attractiveness of assets denominated in other currencies. In
general, higher asset prices are a positive for insurers, which have been starved of investment opportunities
under deflation. However, they will need to manage asset allocation and associated risks carefully. The rise
in the value of domestic equities and investments denominated in currencies other than yen has also had a
positive effect on capital.

INSURANCE
EXHIBIT 2
Life Insurers: Credit Implications of an End to Japan’s Economic Stagnation
Insurance
Robust GDP
growth
Nom GDP >3%
Real GDP > 2%
Ending deflation
Inflation > 2%
Improved labor
productivity
Productivity
growth > 2%
Consumption
tax increase
proceeds
Higher interest
rates (JGBs,
bank rates)
Increased bank
Asset price
appreciation
Positive
Healthier
corporate and
retail balance
sheets, and
therefore
increasing
opportunities
for premium
growth.
Positive
Emergence of
inflation,
leading to an
environment
where
investment
assets increase
in value.
No impact Negative
Consumers
may cut back
on discretionary
insurance or
chose cheaper
polices.
Negative
Losses emerge
on carry.
No impact Positive
Interest income
earned abroad
translates into
a greater
amount of yen,
and therefore
supporting
profitability.
Positive
Increases in
unrealized
gains.
Positive
Better
investment
returns, and
therefore
reducing
negative
spread.
credit positive
credit negative
In the absence of growth, pressure on insurers’ creditworthiness would persist
In contrast, if the revitalization strategy does not generate sustainable growth, a third decade of economic
stagnation would see the current credit challenges faced by the insurance sector persist. Negative spreads
and heightened reinvestment risk are characteristics of the life insurance industry in a low interest rate, low
return environment.
Worse still, if the government’s rising debt burden erodes confidence in the JGB market, the consequences
would be negative for insurers. Currently, private sector savings are largely recycled via the banking and
insurance sectors into the JGB market.
Any loss of confidence -- that saw a reluctance by the private sector to hold its savings in the domestic
financial sector -- would make it difficult for insurers and banks to keep funding the government deficit.
Under this scenario, stock prices are also likely to decline, potentially causing losses on insurers’ equity
portfolios. Such a scenario, which is not our central expectation but a plausible downside risk, would
destabilize both the JGB market and the banking and insurance sectors, potentially leading to a financial
crisis.

BANKING
Japan’s Banks Would Benefit From Sustainable Growth
and an End to Deflation
Sustainable growth, an end to deflation and an improved corporate lending environment would be credit positive
for Japan’s banks. However, if growth remains elusive, Japan’s banks would continue to face the persistent credit
challenges associated with intense competition and depressed deposit-loan spreads in a deflationary environment.
Banks Would Benefit from Sustainable Economic Growth and an End to Deflation
Ending deflation and achieving sustainable nominal GDP growth would be credit positive for Japan’s
domestic banking sector. One of the keys to revitalizing growth is increased private sector capital formation,
which in turn should invigorate financial intermediation between savers and borrowers, the core function of
the banking sector. The result would be an increase in lending.
Loan demand would be further strengthened by a return to inflation which increases the incentives for
investors to finance fixed capital formation through greater borrowings rather than cash on hand. In
mature economies, such as Japan, loan growth and nominal GDP growth are approximately equal over
multi-year periods. Another positive impact of revitalized growth would be that it would create profit
opportunities for companies, improving the financial health and credit profiles of the banks’ corporate
clients.
EXHIBIT 1
Loan Growth in Japan Tracks Nominal Japanese GDP Growth
Source: Bank of Japan, Cabinet Office
Among the likely effects of a successful implementation of Abenomics, increased economic growth and a
return to inflation would have the most lasting credit-positive effects on the banking sector. The positive
effects would include the aforementioned increase in loan growth and higher earnings from widening
deposit-loan spreads. Such spreads are currently depressed by the deflationary environment and intense
competition among banks for creditworthy customers.
In contrast, these positive effects would be offset by the likely steepening of the yield curve. A steeper yield
curve would reduce the value of the banks’ JGB portfolios, leading to mark-to-market losses, an unavoidable
consequence of a successful shift to sustainable economic growth and inflation. However, although mark-to-
market losses generate accounting losses, under an improved economic scenario, the risk associated with
JGBs will decline and revenue streams from their holdings of JGBs will not change. Under such a scenario,
banks face a choice of either realizing their losses and investing in higher yielding JGBs, thereby improving
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
Loan growth Nominal GDP growth
Graeme Knowd
Associate Managing DirectorAnalyst
+81.3.5408.4149
graeme.knowd@moodys.com
Tetsuya Yamamoto
+81.3.5408.4053
tetsuya.yamamoto@moodys.com

BANKING
future returns; or of holding onto their portfolios to maturity, thereby enjoying the associated carry, and at
the same time reporting unrealized losses and lower investment returns.
In our view, the longer-term benefits of a return to growth in the banking sector would outweigh the short-
term credit-negative effect of mark-to-market losses. For most banks, a gradual rise in rates associated with
market expectations that Abenomics will succeed would be manageable, although institutions less skilled at
interest rate risk management (which would likely and primarily include smaller institutions) could see large
unrealized losses during the transition.
Although the prospects for the success of Abenomics remain uncertain, monetary easing by the Bank of
Japan (BOJ) has already had several credit-positive effects on the banking sector. The most direct effect has
come from rising asset prices, particularly domestic equities. Share prices are currently mostly higher than
the value at which the banks acquired their portfolios, leading to unrealized gains.
Domestic banks hold large equity portfolios, which result from the practice of Japanese banks purchasing
the equity of some of their largest corporate clients as a sign of support and as part of the accepted nature of
bank-client relationships in Japan. Over the last decade and more, such holdings have suffered huge losses,
becoming a burden for the banks. The current buoyant stock market provides an ideal opportunity for the
banks to make progress towards their stated goals of reducing their equity exposures and at the same time
realize profits on some of their equity holdings, which would in turn improve their capital positions. The
overall result would be a reduction in their risk exposure.
EXHIBIT 2
Banks: Credit Implications of an End to Japan’s Economic Stagnation
Robust GDP
growth
Nom GDP >3%
Real GDP > 2%
Ending deflation
Inflation > 2%
Improved labour
productivity
Productivity
growth > 2%
Consumption tax
increase
proceeds
Higher interest
rates (JGBs, bank
rates)
Increased bank
Asset price
appreciation
Banks Positive
Increases in loan
growth as loans
generally grow
in line with
nominal GDP
and financially
stronger
borrowers.
Negative
Reduces real
value of JGB
portfolios.
No impact Negative
Increases the
banks costs, and
potentially
reduces demand
for mortgages
and other large
ticket items that
might be funded
by borrowings,
leading to lower
profitability.
Positive
Interest spreads
should improve
as rates on
interest-earning
assets increase,
leading to
greater
profitability.
Positive
Improved loan
growth =
greater
profitability.
Positive
Interest income
earned abroad
translates into a
greater amount
of yen,
therefore
supporting
profitability.
Positive
Unrealized gains
on equity,
making it easier
to sell equity
holdings, and
include in CET1
under Basel III
rules.
Positive
Inflation,
coupled with
sustainable
growth, can
encourage
borrowing, as
inflation helps
erode the value
of debt, leading
to greater
profitability.
Negative
Large mark-to-
market losses
on JGBs.
credit positive
credit negative

BANKING
A challenging environment for banks persists if growth remains elusive
In contrast, if the revitalization strategy does not generate sustainable growth, a third decade of economic
stagnation would see the current credit challenges faced by the banking sector persist. Depressed deposit-
loan spreads due to the deflationary environment and intense competition among banks for creditworthy
customers will continue to weigh on loan growth and earnings.
Worse still, if the government’s rising debt burden erodes confidence in the JGB market, the consequences
would be negative for banks. Currently, private sector savings are largely invested in domestic bank deposits,
which the banks, in turn, invest into the JGB market.
Any loss of confidence -- that saw a reluctance by the private sector to hold its savings in the banking sector
-- would make it difficult for banks to keep funding the government deficit. Such a scenario, which is not
our central expectation but a plausible downside risk, would destabilize both the JGB market and the
banking sector, potentially leading to a financial crisis.

CORPORATES
Economic Growth Would Boost Japan’s Corporate
Earnings but Immediate Effects Varied
If the economic revitalization plan is effective, the country’s non-financial companies should see their earnings and
cash flow increase amid renewed GDP growth. However, if economic stagnation continues, smaller and less
diversified companies by product and geographic markets will continue to be hardest hit.
Long-Term Economic Growth Hinges on Corporate Investment in Japan
The key to long-term economic growth, the core objective of Abenomics, is a revitalization of the domestic
economy. For this to occur, corporates must see the benefits of investing domestically, which hinges on the
government’s ability to push through with structural reform.
Structural issues that may increase Japanese corporates’ willingness to invest domestically include a
reduction in energy costs, which are heightened by the nuclear issues and the current yen weakness,
increased labor market flexibility and reform of the corporate tax system.
Immediate Prospects for Corporates Show Considerable Differences on a Sector Basis
However, for now, in the aftermath of the Abe administration’s implementation of some of its more
immediate measures, the benefits for each of corporate sector vary, considerably in some cases.
For example, the weakness in the yen – a by-product of recent policies – has given a near-term fillip to
exporters, but for energy companies has boosted their costs. And while the hotel and domestic tourism
sector stands to benefit from more international tourists, who seek to take advantage of the weaker yen,
those companies focused mainly on the domestic market could face higher import-related costs or pressure
from the government’s plan to raise the consumption tax.
The impact of both increased interest rates and debt-servicing costs – two other expected effects of
Abenomics – will be another, although modest, credit-negative development for all Japanese companies.
Rated companies in Japan are typically large and financially healthy with average debt maturity profiles of
several years and substantial cash balances. Accordingly, the full impact of increased interest rates will be felt
over time rather than immediately.
Most rated companies also have good access to low-cost funding and the cushion of high EBIT to interest
ratios. Companies with shorter average debt maturities would, however, face more stress if interest rates rise
quickly and the capital markets become less liquid. These companies are typically relatively small and
unrated.
Exporters and Corporates With Overseas Operations Benefit from the Weak Yen
Many Moody’s-rated Japanese corporates are exporters and/or have significant businesses abroad and
benefit directly from the weakening in the yen, which is a result of the Revitalization Strategy. The current
softness in the currency is making Japanese products less expensive abroad, boosting profits for exporters
such as automotive and consumer electronics companies.
However, the magnitude of such a benefit varies by company, and depends on several factors, including the
percentage of profits or losses generated by their offshore subsidiaries, their percentage of exports from
Japan and their percentage of debt denominated in foreign currencies.
Mariko Semetko
Assistant Vice President - Analyst
+81.3.5408.4209
mariko.semetko@moodys.com
Kazusada Hirose
+81.3.5408.4175
kazusada.hirose@moodys.com
Richard Bittenbender
+81.3.5408.4025
richard.bittenbender@moodys.com

CORPORATES
So far, the automotive and consumer electronics sectors have gained the most from Abenomics but, as
indicated, to varying degrees. And these gains are primarily because of the weak yen. For example, within
the automotive sector, Toyota Motor Corporation (Aa3 stable), with its larger Japanese export base, has
benefitted proportionately more than Nissan Motor Co., Ltd. (A3 stable) and Honda Motor Co., Ltd. (A1
stable), which have smaller domestic export levels. Toyota, Honda and Nissan see foreign exchange as a
significant operating-profit contributor in the 2013 fiscal year, which ends in March 2014. For example,
Honda projects that its fiscal 2013 net increase in operating profit will be JPY235 billion year-over-year, of
which JPY248 billion will be from foreign exchange gains.
Meanwhile, the shipping, steel and chemicals sectors face difficult regional and global operating
environments, including overcapacity. For example, in the shipping sector, in the cases of Nippon Yusen
Kabushiki Kaisha (Baa2 negative) and Mitsui O.S.K. Lines, Ltd. (Baa3 negative), industry-wide
overcapacity will offset the benefits from the weak yen and cost efficiencies.11
And the steel industry, which
includes Nippon Steel & Sumitomo Metal Corporation (A3 negative) and JFE Holdings, Inc. (Baa1
negative), also continues to struggle with regional and global overcapacity.12
We expect Asian steelmakers’
profits, as measured by EBITDA per tonne, will remain at a historically low level during the next 12
months, given persistent overcapacity.
Domestic-Focused Companies Will Need Sustained Domestic Growth
The prospects for companies deriving most of their earnings from domestic consumers will remain
overwhelmingly dependent on GDP expansion reaching the government’s targets of 3% nominal growth
and 2% real growth. And while growth has shown some recovery in the last few months, the key question is
sustainability.
Rated companies directly affected by the state of the economy include utilities Okinawa Electric Power
Company, Incorporated (Aa3 stable) and Tokyo Gas Co., Ltd. (Aa3 stable) and passenger railroads Central
Japan Railway Company (Aa3 stable) and East Japan Railway Company (Aa2 stable). And the utilities
continue to struggle with higher imported energy costs following the weaker yen.
Moreover, the consumption-tax increase scheduled to take effect in April 2014 will prove credit negative
because it is expected to depress consumer spending, at least temporarily and, as a result, corporate earnings.
The impact of the tax rise should be limited if the economy is, as the government intends, expanding. But
the effect on consumer spending and related corporates could prove substantial if the hike takes effect in the
absence of economic growth.
A summary of the credit implications of a successful Abenomics policy on the corporate sector in Japan may
be found below. See exhibit 1.
11
Please see Global Shipping Industry: Sustained Oversupply Keeps Outlook Negative, 13 June 2013
12
Please see Asian Steel Industry: Destocking, Weak Demand and Excess Supply Depress Steel Manufacturers’ Profits, 7 August
2013

CORPORATES
EXHIBIT 1
Corporate Credit Implications of an End to Japan’s Economic Stagnation
Corporates
Robust GDP
growth
Nom GDP >3%
Real GDP > 2%
Ending
deflation
Inflation > 2%
Improved labor
productivity
Productivity
growth > 2%
Consumption
tax increase
proceeds
Higher interest
rates (JGBs,
bank rates)
Increased bank
lending
JPY
depreciation
Asset price
appreciation
Positive
Boosts
companies’
earnings and
cash flows,
particularly for
exporters and
those
companies
with large and
profitable
offshore
subsidiaries;
somewhat
negative for
importers.
Positive
If it leads to
wage rises,
which would
then lead to
higher
demand.
Positive
Reduces
relative input
costs and
helps export
competitivene
ss.
Negative
Depresses
consumer
spending,
although the
effect will be
limited if the
economy is
expanding.
Negative
Increases
debt-servicing
costs, but
likely to be
offset by sales
growth and
pricing power.
No impact
Japanese
corporates
already have
good access to
bank lending.
Increased
lending would
improve
liquidity and is
conducive to
growth, but
would also
potentially
raise leverage.
Positive
Boosts export
competitivene
ss, tourism
and level of
foreign-
currency
revenue.
Positive
Facilitates
equity
raisings; may
have indirect
benefits for
balance-sheet
leverage as
the
denominator
of debt to
capitalization
will rise more
than the
numerator;
eases access
to bank credit.
credit positive
credit negative
Continued Economic Stagnation Would Hurt Smaller and Less Diversified Companies
Most
If the revitalization strategy does not generate sustainable growth, a third decade of economic stagnation
would prolong the credit challenges facing Japanese companies.
Overall, the financial health of all rated corporates in Japan depends on the strength of the domestic
economy, regardless of the scale of their overseas operations and dependence on overseas markets. Toyota,
for example, made 26% of its sales in Japan in the fiscal year which ended in March 2013. At the same
time, the effects of continued economic stagnation would be varied throughout the corporate sector.
Moody’s-rated Japanese corporates are typically larger and more diversified by product and geographic
markets than generally smaller and unrated companies, and would therefore be more insulated from the
effects of continued tepid growth. So, in the absence of domestic growth, companies without a global
presence would be most negatively affected. In such an environment, they would need to renew their cost
cutting.

STRUCTURED FINANCE CMBS/REIT
Higher Property Prices, Increased Bank Lending Would
Benefit Japan’s Commercial Real Estate Structured
Finance Sectors
If Japan’s Revitalisation Strategy were to succeed in generating growth, commercial mortgage backed
securities (CMBS) and Japanese real estate investment trusts (J-REITs) would benefit from higher property
prices and increased bank lending. Those backed by hotels would also benefit from a depreciated yen.
However, in the absence of growth, default rates would rise.
CMBS would benefit from higher property prices and a weaker currency
Higher property prices would facilitate the refinancing of CMBS loans to pay back investors and improve
recovery rates for defaulted loans.13
Although normalized interest rates higher than today’s rates would be a
negative for refinancings, refinancing risk for the underlying loans of CMBS deals would be unlikely to
increase substantially from current levels because of higher property prices.14
In addition, a weakening JPY, associated with monetary easing, would lead to an increase in the numbers of
overseas visitors to Japan, which would be credit positive for CMBS backed by hotels: As demand rose,
hotels would be able to raise room rates above the inflation rate.15
Hotels in Tokyo, Kyoto and Osaka
would be the biggest beneficiaries because of their popularity with tourists and, in the case of Tokyo and
Osaka, business travelers.
J-REITs would also benefit from higher property prices and increased bank lending
Higher property prices would also make J-REITs more attractive to equity investors, allowing the property
trusts to expand their portfolios by tapping the equity markets to fund purchases. J-REITs sponsored by
major developers, such as those with strong pipelines of newly built properties, would benefit the most
because of their ability to purchase new buildings below market prices from sponsors. Exhibit 1 maps out
the specific impact of the different aspects of Abenomics on CMBS and J-REITs.
13
See Japan Real Estate Sector Outlook Stable, 4 July 2013.
14
See Japanese RMBS, ABS and CMBS: 2013 Outlook, 15 January 2013.
15
See Lower JPY and Rise in Overseas Tourists Are Credit Positive for J-CMBS Backed by Hotels, 29 May 2013.
Takahiro Okubo
+81.3.5408.4167
takahiro.okubo@moodys.com
Yusuke Seki
+81.3.5408.4279
yusuke.seki@moodys.com
Kei Kitayama
Managing Director - Asia Pacific
Structured Finance
+81.3.5408.4161
kei.kitayama@moodys.com
Arthur Karabatsos
+612.9270.8160
arthur.karabatsos@moodys.com

STRUCTURED FINANCE CMBS/REIT
EXHIBIT 1
CMBS/J-REITs: Credit Implications of an End to Japan’s Economic Stagnation
Robust GDP
Increasing
productivity
Consumption tax
increase
Higher interest
rates
Increased bank
Asset price
appreciation
CMBS
and
J-REITs
Positive
Demand for
commercial
property would
rise, and prices
and rents would
therefore rise.
Positive
Inflation
expectations
would fuel
property price
increases.
Positive
Increase in
productivity
would help
increase
demand for
commercial
property.
Marginally
Negative
A rise in the
consumption
tax would
reduce
disposable
income and
dampen
demand for
goods and
services, and
thus weaken
demand for
commercial
property.
Marginally
Negative
CMBS
borrowers
would find
refinancing their
loans more
difficult, which
higher property
prices would
mitigate.
The J-REIT
sector has
historically
relied heavily on
bank funding.
Positive
CMBS
borrowers
would find
refinancing
easier.
The J-REIT
sector has
historically
relied heavily on
bank funding.
Positive
A weakening
JPY would fuel
tourism and
benefit CMBS
and J-REITS
with hotel
properties.
Positive
Higher asset
prices would
support
refinancing and
recovery rates.
credit positive
credit negative
Source: Moody’s Investors Service
In the absence of growth, CMBS and J-REIT securities will continue to face challenges
will perpetuate challenges for the CMBS and J-REITS markets. Both the CMBS and J-REIT markets still
rely heavily on bank funding, and if the real estate market remains lackluster, bank lenders will remain
reluctant to refinance loans in those markets. As a result, loans with relatively high loan-to-value (LTV)
ratios will continue to default, and losses on CMBS junior notes with initial ratings of A or lower will
continue to increase.
Any erosion in the Japanese government bond (JGB) market resulting from the government’s rising debt
burden would negatively affect CMBS and J-REITs. Because the sector still relies heavily on bank funding,
any decline in bank lending resulting from mark-to-market losses on JGBs because of a rise in interest rates
above normalized rates would lead to even higher default rates on loans in the CMBS J-REIT markets.16
This scenario is not our central expectation but remains a downside risk.
16
See Debt Maturities and Tenors Differentiate the Credit Profiles of J-REITs, 31 July 2013.

STRUCTURED FINANCE RMBS/ABS
Growth in GDP and Employment Would Benefit Japan’s
RMBS and ABS
The performance of residential mortgage-backed securities (RMBS) and consumer loan asset-backed
securities (ABS) would benefit if Abenomics were to succeed in generating employment growth and higher
incomes. In the absence of growth, however, weaker employment and salaries would translate into higher
default rates.
RMBS would benefit from growth in property prices and employment
The impact of a growing Japanese economy on RMBS would be credit positive because of rising property
prices and employment prospects. The negative effects of rising interest rates on RMBS deals would be
modest for deals with existing floating-rate mortgages.
Property price increases, fuelled by inflationary expectations, would improve recovery rates on defaulted
loans. Government measures to evaluate or certify the durability, earthquake-resistance and energy use of
existing homes and to encourage the construction of homes with longer life spans would also support
recovery rates.17
Higher GDP growth, greater productivity and a depreciating yen would result in rises in employment as
well as salaries and, therefore, strengthen obligors’ ability to make repayments. Government initiatives to
transition the workforce to growth industries aim to lower unemployment and strengthen obligors’ ability
to pay down their mortgages. The decline in the unemployment rate to 3.9% in June 2013 is due partly to
the creation of new jobs resulting from the current mix of economic policies.
Normalization of interest rates, which would be likely in a strong growth environment, would not affect the
50% of existing deals backed by fixed-rate mortgages; however, higher rates would be credit negative for
new and existing deals backed by floating-rate mortgages, because obligors’ debt-service coverage would
decline, which would increase the probability of default.18
Nonetheless, the impact of higher interest rates
on existing floating-rate mortgages would be modest: The increased interest would accrue on a much
smaller loan balance as a result of amortization, causing the absolute increase in monthly payments to be
lower than for new mortgages. The deals we rate have been amortizing for 8.3 years on average, with an
average remaining principal amount of about 70% of the initial loan balance.
A consumption tax increase, which the government is currently contemplating, would be a credit negative
for RMBS performance because the tax would reduce disposable income and therefore debt-service coverage,
although the benefits associated with higher growth, employment and salaries would offset this risk.
Economic growth and employment gains would benefit some ABS more than others
Consumer loan ABS would similarly benefit from employment gains and rises in wages. However, credit
card ABS would not benefit as much, because consumer loan ABS contain the highest proportion of loans
17
See New Government Measures on Used Homes Is Credit Positive for Japanese RMBS Deals with Predominantly Refinanced
Loans, 26 June 2013.
18
See Abenomics Is Credit Negative for New Mortgages; Existing Mortgages Less Affected, 31 July 2013.
Atsushi Karikomi
+81.3.5408.4185
atsushi.karikomi@moodys.com
Shinichiro Kan
+81.3.5408.4263
shinichiro.kan@moodys.com
Hiroyuki Kato
+81.3.5408.4261
hiroyuki.kato@moodys.com
Yusuke Seki
+81.3.5408.4152
yusuke.seki@moodys.com
Kei Kitayama
Managing Director - Asia Pacific
Structured Finance
+81.3.5408.4161
kei.kitayama@moodys.com
Arthur Karabatsos
+612.9270.8160
arthur.karabatsos@moodys.com

to obligors without permanent full-time jobs. Government policies to raise hourly rates for these “irregular”
workers would benefit these obligors.19
Any negative effects would be small. Normalization of interest rates on the performance of existing ABS
would be unlikely to have a negative impact because the underlying assets in ABS all have fixed interest
rates. Additionally, growth, employment and salaries would likely offset the effect of a reduction in
discretionary income resulting from consumption tax changes.
Exhibit 1 maps out the specific impact of the different aspects of Abenomics on RMBS and ABS.
EXHIBIT 1
RMBS/ABS: Credit Implications of an End to Japan’s Economic Stagnation
Robust GDP
Increasing
productivity
Consumption tax
increase
Higher interest
rates
Increased bank
Asset price
appreciation
RMBS Positive
Robust GDP
growth would
lead to
improved
employment
prospects and
increased
salaries.
Negative
Higher interest
rates following
the end of
deflation would
result in higher
defaults,
especially on
floating-rate
mortgages.
Positive
Increasing
productivity
would lead to
improved
employment
prospects and
increased
salaries.
Marginally
Negative
Consumption
tax increase
would reduce
disposable
income and
therefore debt-
service
coverage.
Negative
For new loans,
debt-service
coverage would
decline, leading
to higher
default rates.
Positive
Increased
lending would
spur property
price growth.
Positive
RMBS would
benefit from
improved
employment
prospects and
increased
salaries as a
result of JPY
depreciation.
Positive
Higher asset
prices would
support
refinancing and
recovery rates.
Less negative
For existing
deals, the
increased
interest would
accrue on a
much smaller
loan balance.
ABS Positive
Improved
employment
prospects and
increased
salaries led by
GDP growth
would
strengthen
obligors’
repayment
ability.
Neutral
For existing
deals.
Positive
Improved
employment
prospects and
increased
salaries
together with
increasing
productivity
would
strengthen
obligors’
repayment
ability.
Marginally
Negative
Consumption
tax increases
would reduce
obligors’ debt-
service
coverage
because the
cost of goods
they purchase
would increase
and disposable
income would
decline.
Neutral
For existing
deals, obligor’s
repayment
obligations
would not
change because
loans bear a
fixed interest
rate.
Neutral Positive
Improved
employment
prospects and
increased
salaries as a
result of JPY
depreciation
would
strengthen
obligors’
repayment
ability.
Neutral
Negative
Obligors’
repayments
would be higher
in future deals
because of
increases in
both the cost of
goods and
interest rates.
credit positive
credit negative
Source: Moody’s Investors Service
19
See Government’s Strategy to Support Job Transitions for Irregular Workers Is Credit Positive for Consumer Loan ABS, 10 July
2013.

Lack of growth will have a negative impact on both RMBS and consumer loan ABS
will increase the credit challenges for RMBS and ABS transactions, leading to higher default rates in an
environment of lackluster employment and minimal salary growth. Exhibits 2 and 3 show that RMBS
annualized default rates and ABS annualized default rates are currently at all-time lows.
EXHIBIT 2
Japanese RMBS Default Rate Indexes - Annualized
Source: Moody's, servicer/issuer reports
EXHIBIT 3
Japanese ABS Default Rate Indexes - Annualized
Source: Moody's, servicer/issuer reports
Furthermore, erosion of confidence in the Japanese government bond (JGB) market would be negative for
RMBS and ABS. This scenario is not our central expectation but a plausible downside risk: Both the JGB
market and the banking sector would destabilize, leading to interest rates above the normalized rate, which
would lower debt-service coverage in borrowers and result in an increase in delinquencies and defaults.
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
Jan-01
Aug-01
Mar-02
Oct-02
May-03
Dec-03
Jul-04
Feb-05
Sep-05
Apr-06
Nov-06
Jun-07
Jan-08
Aug-08
Mar-09
Oct-09
May-10
Dec-10
Jul-11
Feb-12
Sep-12
Apr-13
%ofOutstandingBalance
Annualized Defaults
0%
5%
10%
15%
20%
25%
Jan-01
Aug-01
Mar-02
Oct-02
May-03
Dec-03
Jul-04
Feb-05
Sep-05
Apr-06
Nov-06
Jun-07
Jan-08
Aug-08
Mar-09
Oct-09
May-10
Dec-10
Jul-11
Feb-12
Sep-12
Apr-13
%ofOutstandingBalance
Auto Loan Installment Sales Loan Card Shopping Loan
Card Cashing & Card Loan Consumer Finance Loan

MOODYS.COM
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CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. (“MIS”) AND ITS AFFILIATES ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF
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