J.P. Morgan on Japan
(New Year Edition)
The Collapse of the "Safe Asset" Bubble
Japan Equity Strategy
Hajime KitanoAC
(81-3) 6736-8655
hajime.x.kitano@jpmorgan.com
JPMorgan Securities Japan Co., Ltd.
See page 77 for analyst certification and important disclosures, including non-US analyst disclosures.
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TOPIX vs. S&P 500
800
900
1,000
1,100
1,200
1,300
1,400
1,500
Jul Aug Sep Oct Nov Dec Jan
800
900
1,000
1,100
1,200
1,300
1,400
1,500
TOPIX (LHS) S&P500(RHS)
Source: Datastream.
• We think a recognized phenomenon in financial markets and in the real
economy following the collapse of Lehman Brothers in 2008 is the formation,
rather than the bursting, of bubbles. The type of bubble we are referring to here
is movement diverging from an equilibrium point (overshoots or undershoots),
rather than the major bubbles lasting several years such as the Japanese real
estate bubble in the 1980s and the IT bubble in the US in the 1990s.
According to Andrei Shleifer in his work, The Economics of Financial Bubbles
(unofficial translation; published by Toyo Keizai), among market players there
are arbitrageurs who bet that these divergences will correct and noise traders that
bet on a further divergence. When a bubble collapses, arbitrageurs reap the gains
and noise traders do poorly. Conversely, when bubbles are forming, arbitrageurs
suffer and noise traders enjoy a run of good luck.
For the second half of 2008, the noise traders were proven right and the
arbitrageurs wrong. This is the combination we see when a bubble is forming.

Table of Contents
The Collapse of the "Safe Asset" Bubble...............................3
Macroeconomics ......................................................................6
Derivatives: 2009 Outlook......................................................16
Sector: Industrial & Consumer Electronics .........................18
Sector: Electronic Components............................................20
Sector: Precision Instruments ..............................................24
Sector: Chemicals ..................................................................26
Sector: General Trading Companies ....................................28
Sector: Petroleum...................................................................29
Sector: Automobiles ..............................................................32
Sector: Auto Parts ..................................................................36
Sector: Retail (Large Stores, Specialty Retailers) ...............38
Sector: Banking......................................................................40
Sector: Nonbanks...................................................................42
Sector: Brokerages ................................................................43
Sector: Insurance ...................................................................44
Sector: Real Estate, Housing, Construction ........................46
Sector: J-REITs.......................................................................48
Sector: Games........................................................................50
Sector: Media..........................................................................52
Sector: Telecommunications ................................................54
Sector: Healthcare and Pharmaceuticals .............................56
Sector: Food and Beverage...................................................58
Sector: Small-Mid Caps .........................................................60

The Collapse of the "Safe Asset" Bubble
What Signs Should We Watch for Which Indicate the
Economy Has Bottomed?
We think a recognized phenomenon in financial markets and in the real economy
following the collapse of Lehman Brothers in 2008 is the formation, rather than the
bursting, of bubbles. The type of bubble we are referring to here is movement
diverging from an equilibrium point (overshoots or undershoots), rather than the
major bubbles lasting several years such as the Japanese real estate bubble in the
1980s and the IT bubble in the US in the 1990s.
According to Andrei Shleifer in his work, The Economics of Financial Bubbles
(unofficial translation; published by Toyo Keizai), among market players there are
arbitrageurs who bet that these divergences will correct and noise traders that bet on
a further divergence. When a bubble collapses, arbitrageurs reap the gains and noise
traders do poorly. Conversely, when bubbles are forming, arbitrageurs suffer and
noise traders enjoy a run of good luck.
As we wrote in our December 9, 2008 note, Some Can Resist a Bubble, Others
Cannot, the Japanese December QSS report shows that survey respondents were
noise traders, while the US institutional investor respondents in Barrons’ Big Money
Poll were arbitrageurs. The former were responsible for the QSS report showing the
strongest net overweighting of defensives since the survey began. The latter
increased bullishness on corporate bonds ahead of the October 2008 survey from the
April survey. This is because the credit spread widened further. For the second half
of 2008, the noise traders were proven right and the arbitrageurs wrong. This is the
combination we see when a bubble is forming.
We think the same applies on the real economy front. Figure 1 shows US retail sales
trends (YoY comparison). The average rate of increase since 1970 is 6.7%. It is said
that Americans were able to spend more than they earned due to the housing bubble,
but ahead of 2007 when house prices peaked, there was no sudden above-average
increase in retail sales. Looking at the downside, even during recessions, retail sales
only ever momentarily fell into negative territory, and the nearly 10% decline we are
seeing now is exceptional. If we call divergence from the average a bubble, we could
be seeing a bubble-like collapse in consumption now.