Rising and setting suns - Japan's lessons for Germany, China and South Korea

39 Pages·2014·1.34 MB·English

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Cover story
Rising and setting suns—
Japan’s lessons for Germany,
China and South Korea
It is fashionable to say Germany
is heading down the path of post-
bubble Japan. But what if the
Japan to worry about is not the
deflationary 1990s but the previous
decade when golf club memberships
swapped hands for millions of
dollars? And just as there is a risk
investors fail to apply the lessons of
a rising sun to Germany, there is a
danger that Japan’s post-bubble era
is ignored by China and South Korea.
Page 21
Konzept
Innovation is one of the core
values of Deutsche Bank. It helps
us find sustainable solutions for
our stakeholders and evolve our
thinking about the future. This
new magazine from Deutsche Editorial The world of economics and that extreme inequality hinders growth, but we
finance arguably faces more do not know the level at which the negative
unresolved questions and effects kick in. Finance and bankers are lightning
Bank Research represents such unmet challenges than at rods in this debate, as we show in this issue.
any time in the last hundred Hence Konzept aims to stimulate but is
years. As part of Deutsche deliberately not dogmatic. We let others preach,
innovation. It is a new way of Bank’s continuous effort to push the frontiers for example, that structural reforms are essential
of research I asked our best and brightest around the world even though the impact from
talent to break with consensus and write about reforms takes time (and time we may not have).
delivering our best ideas to clients topics that help us understand what lies ahead. Just look at the historical examples of misery
This is the first issue of what I hope you will find imposed in the name of sound economics.
to be a fascinating as well as fun and easy-to- Winston Churchill taking the UK back onto the
and the wider world. The format
digest magazine. gold standard at an over-valued exchange rate in
Our motivation is the difficulty in 1925 was a huge mistake. Likewise, policies post
deciphering modern market economies. Indeed the Plaza (or Louvre) agreements in the 1980s
is as accessible as the content is
my own beloved profession failed to anticipate probably set Japan on its way to the lost decade.
most of the big market dislocations over my That academic researchers have
working life, from the Latin American debt found it hard to provide useful insights into the
original. I look forward to reading
crisis in 1980s through to the eurozone’s recent dynamics of modern economies has created an
travails. Konzept does not have a crystal ball exciting opportunity for others to take up the
Konzept regularly. either, but by pushing contributors to gaze challenge. And much of the best thinking on
beyond their core disciplines we hope to deliver the crucially important issues of the day is now
fresh insights and ideas. found within global hedge funds and investment
Then again, we must acknowledge the banks. Indeed it makes sense that the unceasing
impossibility of ever satisfactorily explaining the demand for economic and financial analysis
dynamics of major macro economic variables. is met by commercial groups. Every day we
But many of us involved in this magazine have appreciate first-hand the importance of investors
toiled for decades in the vineyards of political making big calls, of institutions setting their
economy and financial markets experiencing strategies and of policy makers implementing
what works and what does not. Sometimes it is correct macro and regulatory policies.
just a gut feeling – but it is hard to articulate this Finally I would like to extend my
experience into predictive power. Hence macro special thanks to Guy Ashton for his outstanding
economics becomes an exercise in persuasion. leadership of this initiative to draw out the best
For example we know that quadrupling from Deutsche Bank Research. I hope you find
the supply of money or gold, such as during Konzept essential reading.
the Iberian plundering of the Inca Empire,
raises prices. But we do not know how long David Folkerts-Landau
this takes. Likewise our cover story compares Group Chief Economist
the lessons of Japan to Germany, China and Member of the Group Executive Committee
South Korea – but appreciates that outcomes
and timings may be very different. We also
know that deficit spending helps when there
Anshu Jain is insufficient demand, but we never know the
appetite of investors to hold more sovereign
Co-Chief Executive Officer debt – a topic of relevance in Europe today and To send feedback, or to contact any of the
authors, please get in touch via your usual
Deutsche Bank one we reference in our piece about the bond Deutsche Bank representative, or write to
conundrum. Similarly we can intuitively sense the team at [email protected].
Konzept
Features
Germany—lessons
from a rising sun 21
China and South Korea—
lessons from a setting sun 30
The contours of
CoCo land 38
Articles Cyber insecurity 46
06 US capex—don’t be depressed
08 Love in a tropical climate
12 Ready for the robot revolution
The big debate—
14 Age does not weary them
16 The bond conundrum—
secular stagnation 54
ECB’s high grade squeeze
18 On your Marx—bankers vs politicians
Financiers in literature—
Columns
68 Book review—The Birth of Korean Cool written down 60
69 Ideas lab—secrets of investment success
70 Conference spy—oil and gas
71 Banking at the box office
6 Konzept Konzept 7
US capex—
don’t be depressed
Commentators are fond of blaming corporate But what is missing in both company and The second reason companies are seemingly
America for skimping on capital expenditure national accounts is the fact that companies spending less is because they are investing
despite record levels of cash and profits. are meeting their capex needs by spending differently. There has been a steady shift in
Greedy executives prefer to spend shareholders’ relatively less. Firstly, what they are investing the composition of non-residential investment
funds on pursuits to boost share prices such in is getting cheaper. The prices for most non- away from what is defined in the national
as buybacks rather than investing for the long residential investment categories have been accounts as structures (mainly buildings) to
term – or so the accusations go. Others point falling relative to broader measures of inflation computers, software, and intellectual property.
the finger more directly and argue that a lack since the mid-1990s. While the general price Consequently, real non-residential investment
of spending is responsible for America’s soggy level has risen by 45 per cent since 1995, excluding structures is now at a record high
post-crisis economic recovery. But the critics industrial-related prices have gone up only relative to GDP.
are wrong for two simple reasons: companies by 40 per cent and transportation prices by Again, relative levels of inflation
are investing in different classes of assets 25 per cent. have distorted the picture. It looks bad that
compared to the past, and the prices of those Meanwhile, equipment prices (including structures-related investment has fallen in real
assets have been getting relatively cheap. technology and computer-related investment) terms from 6.2 per cent of GDP to 2.7 per cent
Adjust for pricing and mix, and capex levels have actually fallen by a fifth over the past two since the early 1980s. But over the same period
are near record highs. decades. Indeed, real (as opposed to nominal) intellectual property investment rose from
So how is it that most people conclude non-residential investment as a proportion of one to four per cent of GDP. More important,
that capital expenditure is at low levels? Well, GDP is near an all time high of 13 per cent. This however, is that the structures category has
for a start the aggregate accounts of America’s is in line with the crazy dot.com years and with experienced significant inflation since 1995 with
largest non-financial companies are quite clear 2008 levels when rising commodity and oil prices rising 230 per cent. It is hardly surprising
that capex as a percentage of earnings before prices drove a surge in natural resources-related that companies have been substituting it with
interest, tax, depreciation and amortisation capital expenditure. cheaper and presumably more productive
has been declining steadily over the past 30 capex. Companies are required to expense
years. During the 1990s spending by listed some of this new capex under US accounting
corporates ran at around 40 to 45 per cent of rules, which further depresses capex as
ebitda. Following the dot.com bust in 2000 reported in company financials.
this dropped to about 35 per cent. But the So corporate America’s capital
45% Rise in the general
percentage has been even lower than that since expenditure story is really a positive one. But
price level since 1995
the financial crisis. Indeed, excluding the energy that is very different from saying that private
sector, which has been investing heavily in the investment overall – which includes both
shale oil boom, capex to ebitda has recently residential and non-residential investment –
been running below 30 per cent. is not depressed. Far from it.
Published accounting data, however, The truth is that most of the shortfall
provide little by way of additional detail to in investment these days is due to low
further analyse this troubling trend. So it makes residential investment, not capex. As a
40% Industrial-related prices
sense to look at the big picture investment percentage of GDP, residential investment is
have gone up only by 40%
trends in the national economic accounts nearly two percentage points below the long-
produced by the US Bureau of Economic term average of about five per cent. Indeed if
Analysis. The best proxy for corporate capex in the housing sector were to return to normal
the national accounts is nominal non-residential tomorrow, America’s economy could soon
investment. And this is indeed depressed as a be humming along at four per cent or more –
percentage of gross domestic product. From instead of the 2.5 per cent currently. Hence
the early 1980s to 2008, investment to GDP any improvement in investment and GDP
The structures category
was mostly in the 13 to 14 per cent range. 230% has experienced significant growth will need to come from the residential
Then following the financial crisis it sank to inflation since 1995 with sector primarily. Anyone looking to corporate
less than 11 per cent of nominal GDP and has prices rising 230 per cent capex to help lead the next surge may find
John Tierney
since struggled back to about 13 per cent. they have a long wait.
8 Konzept Konzept 9
Love in a
tropical climate
There has been a big change in the way Big meantime the WHO has determined that the and capacity. The pair’s dedicated research
Pharma has behaved over the last decade current Ebola outbreak is an “extraordinary and development spend substantially exceeds
or so. GlaxoSmithKline, Sanofi, Novartis and event” so it is ethical to offer unregistered that of their peers. Novartis deserves particular
others have dramatically increased the help drugs and vaccines, despite unproven clinical credit for its central role in the supply of anti-
they provide, largely for free, to some of the profiles. The tragedy is that for many other malarial drugs in Africa and its Novartis Malaria
world’s poorest people in some of the world’s tropical diseases effective treatment is available Initiative access program. Meanwhile, Bayer
poorest nations. In the past, aid in combating but inadequate healthcare access and poverty and Roche have lower levels of investment
tropical disease from Big Pharma involved prevent the most vulnerable from benefiting. but play key roles in the provision of drugs for
simply handing over bulk supplies of relatively Big Pharma’s activities in this area sleeping sickness and HIV/Aids respectively.
basic, usually off-patent drugs. Nowadays, by look philanthropic. But is this the only In the short term the most engaged
contrast, some of the leading pharmaceutical motivation? The industry is also making a companies may benefit from attracting the
companies are going a lot further. They are strategic long-term investment in building interest of investors looking for socially
donating newly developed products, improving brand, goodwill and distribution infrastructure responsible enterprises. The full payoff,
access to their medicines and vaccines through with the countries, governments and customers however, may take years, even decades, to
heavily discounted or even zero pricing, waiving of tomorrow. The tropics (comprising 144 materialise. But those companies that lead
patent rights to allow local manufacture, nations and territories) produce around a fifth the way with this apparently philanthropic
collaborating in research, and investing in the of the world’s gross domestic product and investment surely stand to reap significant
healthcare infrastructure of affected countries. are currently home to more than 40 per cent rewards. They will know and understand
Revenues are minimal and are far outweighed of the world’s population, reaching 50 per local culture, they will have built relationships
by the costs. GlaxoSmithKline, for example, cent by 2050. While many of those blighted with local authorities and they will have a
donated drugs last year with a wholesale value by tropical diseases are citizens of the world’s stake in the healthcare infrastructure they
of over £500m and spent in the region of £100m poorest nations today, economic development are developing. Curiously, the companies
on research into tropical disease. in the coming decades is likely to mean these themselves are not making much of their
The catalyst for change was the countries will constitute the pharmaceutical socially responsible credentials, or explaining
World Health Organisation. In 2010 it industry’s customers of the future. the longer term payoff story to their investors.
published a report on neglected tropical To this end many pharmaceutical But it seems that this investment is a whole
diseases setting out specific targets for the companies routinely provide services and lot smarter than it appears at first sight.
eradication of certain diseases and some skills that extend well beyond the basic
degree of control of the remainder. The report provision of medicines, such as training
led to the landmark London Declaration in doctors and nurses, participating in health
2012 in which the pharmaceutical industry, education campaigns, improving supply
governmental and non-governmental chain logistics (a major issue for distant rural
organisations, notably the Gates Foundation – communities), researching and developing new
a major driving force – and the WHO all joined medicines and vaccines on a not-for-profit basis
forces to tackle these diseases. and foregoing or pooling intellectual property
There is undeniably a moral and protection so that local manufacturers can
humanitarian imperative to relieve the burden produce critically needed drugs.
of tropical diseases. The WHO estimates that GlaxoSmithKline, Sanofi and Novartis
1.2bn people annually are at high risk of malaria have shown outstanding commitment to
(mainly in sub-Saharan Africa) while 1.4bn are tropical diseases. GlaxoSmithKline and Sanofi
affected by the neglected tropical diseases. in particular have highly pro-active, industry-
The latter include dengue fever, which is fast leading approaches as well as a broad range of
Mark Clark, becoming the most prevalent threat. This year relevant drugs and vaccines (they jointly lead
has also seen a devastating and unprecedented in the supply of vaccines for the developing
Tim Race, outbreak of Ebola virus infection in Africa. world). Each has dedicated market access units If you are interested in more details, please go
to gmr.db.com or contact us for our in-depth
Richard Parkes Concerted international efforts are underway for the poorest nations and multiple support report “Tropical diseases; social responsibility,
to develop a treatment or vaccine for it. In the programs to improve health education, training neglected market”.
10 Konzept Konzept 11
12 Konzept Konzept 13
Ready for the
robots. Japan holds more patents in this space
than any other country and has a competitive
robot revolution edge in the key areas of advanced sensors and
small motors. Companies such as Sony and
Panasonic may have lost their crowns to Apple
and Samsung years ago but in robots Japan
rules like it is the 1980s all over again.
Domestic production by industrial
robots has shot up over the past two years
after grinding higher for the preceding three
decades. It will accelerate further as relaxed
safety regulations allow for broader workplace
Smartphones have transformed our lives in adoption and improvements make robots robots are being rolled out to do everything
the past decade and already feel old-hat. capable of performing a wider range of jobs. from assisting in the cleanup of Fukushima to
Soon, though, you may not be able to turn Fanuc, the country’s biggest company in this helping the elderly and aiding in the provision
around without bumping into a human- industry, is developing new sensitive robots of nursing care. Already Cyberdyne rents out
sized robot. Manufacturers are finally hitting that can work safely with their human Hybrid Assistive Limb suits to assist people with
a sweet spot where robotics technology colleagues. Kawada’s Nextage robot comes walking difficulties and in 2016 Panasonic will
is sufficiently advanced and cheap to be on wheels so it can be moved around easily, start selling a $9,000 competitor with sensors
adopted en masse. The robot age will demand increasing its versatility dramatically. Nextage that detect when wearers are attempting to
huge social adjustments as well as creating has a head with 3D vision, a torso and two stand or sit up, easing the load on their upper
tremendous investment opportunities. arms which enable it to pick up soft sheets and body or knees. And others are working on more
Japan is the vanguard. The country’s transparent objects. Mitsubishi Electric has flexible ‘power suits’ that incorporate artificial
focus on incremental efficiency gains sold 10,000 units of a model that handles small muscle fibres into clothing.
and higher-end manufacturing, driven by components in home appliance assembly lines. Meanwhile the other end of the
its shortage of cheap labour and hitherto Of course other countries do not spectrum has been staked out by billionaire
relentlessly appreciating currency, have made want to be left behind. The South Korean entrepreneur Masayoshi Son, founder and chief
it the world’s biggest market for industrial government, for example, has stumped up more executive of SoftBank. In June he introduced
than a billion dollars to support the country’s Pepper to the world – a child-size friendly
robot industry which at the moment is heavily android featuring cloud-based emotional
orientated towards shipbuilding and auto intelligence. Each machine learns from the
manufacturing. Medical equipment producer experiences of its clones. He follows Honda’s
Curexo now sells Robodoc, which performs long line of experimental Asimo humanoids
orthopaedic surgeries, while the Samsung and Sony’s Aibo dogs. Pepper is already on
Group has developed a machine-gun-toting and duty meeting customers and gathering data
grenade-launching sentry robot. The SGR-A1 at Softbank’s flagship Omotesando store.
has been tested along the demilitarised zone Sales to the general public are due to begin
on the North Korean border. next year – first in Japan and then in the US,
China, faced with its own demographic priced around $2,000.
issues, is also catching up fast. Mainland sales While many countries are scrambling
of industrial robots numbered around 4,500 to establish their own robotic ambitions
in 2005 but are projected to hit 340,000 in Japan seems to have a distinct advantage for
2015 – putting the country on a par with Japan now: its naturally open and positive social
in absolute terms. There is still a long way to attitude towards such technologies. You can
go, however. A ratio of 23 robots to 10,000 experience it at the wild robot restaurant
industrial workers still leaves China with only a in Shinjuku, famously fitted out at cost of
tenth of Japan’s penetration. $135m. Or at Tokyo’s Miraikan museum, which
Nor will Japan stand still. Prime features disturbingly realistic woman and child
Minister Abe, who chairs a committee on the (Otonaroid and Kodomoroid) robots that have
Realisation of a Robot Revolution, recently said silicon skin and artificial muscles, as well as
he aims to double the size of the market for a minimalist Telenoid doll that facilitates
industrial robots to $11bn per year by 2020. surrogate communication.
This is not just a production-side story, though. Indeed, by the time the 2020 Tokyo
The market for service robots is projected to Olympics roll around, spectators stand a good
rise twenty-fold to the same size as the market chance of being guided by a female droid
for industrial robots over the same period. named Aiko Chihira developed by Toshiba.
This is about much more than The robot revolution is well under way.
automated vacuum cleaners – cute as they
James Malcolm
are. At one end of the spectrum exoskeletal
14 Konzept Konzept 15
Age
does not
weary them
The rapid greying of the world’s population over their younger counterparts.2 Older workers, return to university and completely change
is the subject of many newspaper columns it seems, are more than able to leverage their professions. Meanwhile, younger people need
and scholarly articles. Readers are left with skills and experience in the labour market. to recognise that they will have to work a lot
images of countries weighed down by retirees, Another study by Dr Burtless shows harder to keep up with their grandparents.
underfunded pension plans and medical that education is a key factor that influences
systems on the verge of collapsing under the the labour market participation rates of workers
exponential increase of ageing invalids kept in the 62 to 74 year old age group. Two-
alive by expensive drugs. While economies thirds of older American men with doctoral
may well be hurt by a lack of younger workers, or professional degrees were still working
and health systems will indeed come under compared to just one-third of high school
In Japan, the proportion of
strain in ageing societies, recent studies graduates. For women the proportion was 40% over-60s is due to rise from
highlight the need to radically change our half versus one-quarter.3 a third of the population to
mental image of senior citizens. While older workers are holding their 40 per cent by 2040.
It is true that ageing is already quite own in white collar roles, one may be tempted
advanced in a number of developed countries. to think that younger workers have a big
In Japan, for example, the proportion of over advantage in physically demanding blue collar
60s is due to rise from a third of the population jobs. The Japanese fishing industry for one
to 40 per cent by 2040. The ratio will be similar displays a contradictory trend. According to
Over a third of Japanese
for Germany by then, too. Developing countries government statistics, over a third of Japanese
13% fishermen are over 65
are generally younger but some are ageing fast fishermen are over 65 while 13 per cent are even
while 13 per cent are
enough to catch up soon with the developed over 75. In contrast, 15 to 24 year olds make even over 75
world. Estimates for 25 years from now show up only three per cent of fishermen. Not only
the over 60s accounting for 30 and 40 per cent have older workers used skill and machinery to
of the Chinese and South Korean population stay in business, younger workers seem to be
respectively – higher than the US in both cases. daunted by the physical rigours of the work.4
But people are living longer because The unwillingness of younger workers to take
they are healthier. This implies they can remain up this physically demanding job is causing
socially and economically active for much serious worries about the future of the fishing
longer. Indeed, it appears that today’s senior industry in Japan.
citizens can give the young a run for their So it is wrong for governments, policy
money. A survey of 20 developed countries makers and companies to view ageing societies
by Gary Burtless and Barry Bosworth of The as full of unproductive retirees and medical
Brookings Institution found that despite the invalids. Senior citizens are increasingly both
crisis, workforce participation rates of 60 to 64 willing and capable of participating formally in
year olds rose on average by 1.5 percentage the workforce. And this is before accounting
points a year between 2007 and 2012.1 This for their significant contributions in voluntary
was accompanied by a significant increase in community service and other activities.
participation by those in their late 60s and early Hence societies will need to change in
70s. Moreover the rise in participation rates many ways to accommodate these trends. For
appears to be accelerating. instance, rather than build ever more retirement 1 I mpact of the Great Recession on Retirement Trends
in Industrialized Countries, Brookings, by Gary
Why is this happening? Are older homes, urban design will have to adapt to the
Burtless & Barry Bosworth, November 2013.
workers somehow clinging to jobs by accepting needs of senior citizens who wish to continue 2 I s an Aging Workforce Less Productive?, The
lower pay? Far from it. The 2011 data from the to work. Similarly, the education system has Brookings Institute, by Gary Burtless, June 2013.
3 C an educational attainment explain the rise in
US shows that men aged between 60 and 74 to become friendlier to older students wanting labour force participation at older ages?, Centre
enjoyed a 22 per cent premium in hourly pay to upgrade their skills. Given that people will for Retirement Research, Boston College, by Gary
over those aged between 25 and 59. Similarly, routinely work into their 70s, it will probably Burtless, September 2013.
Sanjeev Sanyal 4 P opulation of Fishermen Hit by Earthquake, Aging,
older women enjoyed a premium of 10 per cent be common for workers in their 40s or 50s to Japan Real Time, by Jun Hongo, September 2014.
16 Konzept Konzept 17
The bond conundrum—
ECB’s high
grade squeeze
While everyone rightly or wrongly seems to peripheral countries’ bonds instead.
be waiting for the European Central Bank to What is more, if volumes are light
start buying government bonds as a form then price signals are likely to be distorted by
of quantitative easing, there is an important insufficient supply. This has implications for
question to ask: who is the ECB going to economic analysis. For instance, Japanese rates
buy them from? were never affected by tight supply dynamics,
Take triple-A rated debt for example. so likening them to current low eurozone
Foreign exchange reserve managers at the triple-A yields would be misleading.

world’s central banks are unlikely to offer their t m Meanwhile for the ECB the implication
holdings for sale to the ECB in any size. The h is twofold. First, large scale government bond

reason is that when eurozone interest rates purchases need to be designed to take into
were cut to negative levels back in June the gdo account the limited availability of the highest
rate was also applied to cash held at the ECB r ltinr rated bonds to buy. Second, current market
bThy ecseen btraanl kbsa nwkisll fnrootm w oauntts tido es ethlle s eaufer,o lziqounied., oeueaf linevflealtsio mn arya taelsre aardey c boerr edliastteodrt ewdi.t hA ns obmreiankael vyeienld
euro-denominated assets to the ECB in return fraw s levels, the famously low five year-five year
foourt coafs ehu wroisth i sn neogta tainve o ipnttieorne sats. Ait nwdo suwldi tlcikheinlyg s aefrdsd foof rQwEa rtdh arant teo m thaey uonwdee rmlyoinreg tcoh eaxnpgeec itna ttihoen s
negate the purpose of accumulating foreign iy e n outlook for inflation. So the decline in market-
exchange reserves in the first place – that is, h d n implied inflation expectations – cited by the
the relevant country’s domestic currency e d o ECB as a reason to engage in asset purchases –
would appreciate. tha nobs. may actually be due to expectations of QE.
managemSiemnitl amrlayn, dfuanteds m aaren augnelirkse lwy ittoh bpea sasbivlee allTo ub e Bgoovthe rinmmpelincta tbioonnsd ss uwgigll ebset tmhoatr eb udyiffiincgu lt –
or willing to sell their assets (however rated) ri and perhaps less warranted – than many in
ealiltohcear.t iBoenisn go fo tbhleigire bde tnoc mhmatacrhk ,t hthee cyo huanvtery t o f r.ntgeetr the market think.
hold on to the underlying securities. oa nnkin
So it is important to know how much e iiosu
of the triple-A rated sector in the eurozone is t de
freely tradeable. This requires a comprehensive ncl zio
picture of bond ownership. And the reality ebor
is that less than 40 per cent of the eurozone ois c rt c
triple-A market appears to be freely tradeable fuh
– that is, not held by sticky investors such as piro l
iacpnteed nrce tecx nfe ottnrrrtaa tclih nkbe eJa Aranspmk aasen.n rdT.i c hfaiosnr e cmxo marerpkseaetrr evasen wdm iaatlhnm a5og0se tpr s9e 0r nd ors t foon A eeigera
is clear. TThheey e anrde palominots ot ff oarllc tehdis i nfotor ian vdeesfatourlst estostie-wph
position of being underweight triple-A eurozone e i r
bonds and overweight riskier bonds from e mslei
p r
peripheral countries. The lack of availability v
Alexander Düring oufn dcoerrew beiognhdt sp aots riteioasno. nAanbdl ein pvreicsetosr fso prcuet sc tahsihs Thnalporiovpe Itfo y gomu ra.dreb .icnotemre osrt ecdo nint amcto ures dfoert aoiulsr, ipnl-edaespet hg o
that cannot go into core country bonds into i t report “The Bund Conundrum”.