Economic Development of Japan

No.12 The Bubble Burst and Recession

P.202

0

5000

10000

15000

20000

25000

30000

35000

40000

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Nikkei Stock

Average 225

0

50

100

150

200

250

300

350

400

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

(1982 = 100)

Urban land

price indexSource: Japan Real

Estate Institute

P.205GDP

After the bubble

burst, economy

looked up in 1996-

97, 2000, 2003-07,

2010, 2012.

Economy fell hard

in 2008-09 due to

Lehman Shock,

which had greater

macroeconomic

impact than the

earthquake &

tsunami.

2011-:Euro shock

-10

-5

0

5

10

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

Percent

Bubble

Nominal GDP

Real GDP

Industrial Production

MOVIE: GO!!!! TO THE BUBBLE (2007)

The Heisei Bubble (Economic Boom in late 1980s)

Causes

• Structural—bank deregulation and the loss of large

corporate borrowers in the early 1980s led banks to

overlend to risky borrowers (SMEs, real estate

developers) without proper risk management.

• Monetary—as the yen rose sharply after 1985, the

Bank of Japan injected liquidity to counter it and ease

endaka fukyo (high-yen caused recession). This led to

asset bubbles without igniting inflation.

Consequences

Excess investment in properties, over-expansion in

capacity, lavish consumption, rise in outward FDI

PP.202-203

Lost Decade (early 1990s-early 2000s):

Why Did the Recession Last So Long?

• Long adjustment after a large asset bubble

• Non-performing loans (late policy response)

• Japan’s economic system became obsolete (*maybe)

• Aging population and associated problems (pension, medical care, dissaving, etc) (*)

• Snowballing fiscal debt (*)

• People’s lack of confidence in the future or policy (*)

• Rise of China & other emerging economies (*)

Lack of political leadership to propose solutions, convince people, and implement actions

(*) True even today

P.206

Coping with non-performing loans – taking 10 years--Jusen problem: failure of nonbanks specializing in real estate

loans (1995-96)

--Bankruptcies of Yamaichi Securities & Hokkaido Takushoku Bank: credit crunch and mini bank runs (1997-98)

--Bank recapitalization: public money injection, creation of Financial Services Agency (1998-2000)

Monetary policy for recovery – unsuccessful--Injecting liquidity by buying up unconventional assets

(corporate & bank bonds, etc): but the monetary transmission mechanism was broken (MBMoneyLending)

--Zero interest rate policy (Feb.1999-Aug.2000; Mar.2001-Jul.2006; Dec.2008-)

--Inflation targeting? (Not adopted until 2013)

--New Dimension of Monetary Expansion (BOJ Kuroda, April 2013-)

Policy Issues for the Bank of JapanPP.207-210

Call rate(interbank short-

term interest rate)

Money &

bank

lending

Excess reserves

are built up

during zero

interest rate

periods

-30

-20

-10

0

10

20

30

40

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Monetary base

Money supply (M2+CD)

Bank lending

Percent

0

1

2

3

4

5

6

7

8

9

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

%

Bubble Zero

interest

rate

policy

Zero

interest

rate

policy

Lehman

Shock

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

25.00

Jan-80 Jan-83 Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07

Per

cent

Source: McKinnon (2007)

Buy Dollar (resist

yen appreciation)

Sell Dollar (resist

yen depreciation)

Japan: Monthly Changes in International Reserves(Proxy for F/X intervention)

Yen/USD

0

500

1000

1500

2000

2500

3000

3500

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

USD billion

Japan

China

International Reserves

Credit & Trust Bank

Long-term Credit Bank

Hokkaido Takushoku Bank

Chuo Trust Bank

Mitsui Trust Bank

Sumitomo Trust Bank

Daiwa Bank

Saitama Bank

Kyowa Bank

Yasuda Trust Bank

Industrial Bank of Japan

Fuji Bank

Daiichi Kangyo Bank

Sumitomo Bank

Taiyo Kobe Bank

Mitsui Bank

Toyo Trust Bank

Tokai Bank

Sanwa Bank

Japan Trust Bank

Mitsubishi Trust Bank

Bank of Tokyo

Mitsubishi Bank

Bankrupted

Bankrupted

Chuo Mitsui Trust Mitsui Sumitomo

Trust Holdings

AsahiSaitama KyowaDaiwa Risona Holdings

Mizuho

Mizuho Asset TrustMizuho

Financial Group

Taiyo Kobe Mitsui Sakura

Mitsui

Sumitomo

Mitsui

Sumitomo

Financial Group

UFJ

Mitsubishi

Tokyo

Bank of Tokyo-

Mitsubishi

UFJ

Aozora

Shinsei

Debate on Fiscal Stimuli

• Since the 1990s, large fiscal spending has been used to stimulate the economy. But there was no strong and sustained recovery, while the government debt skyrocketed.

• Seeing this, some argued for even bigger stimuli; others said that would only worsen the debt crisis.

• PM Koizumi (2001-06) set limits on spending (infrastructure, welfare).

PP.211-212

• PM Aso (2008-) and DPJ

(2009-12) returned to big

spending.

• Consumption tax will be

raised in steps: 5%8%(2014)10%(2015)

• 2nd Abe Gov’t (2012-) turned

to aggressive fiscal policy 0%

50%

100%

150%

200%

250%

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

210 %

Government debt as % of GDP

Bubble burst

Shocks & Intermittent Recovery, 2003-2012

Main causes of recovery (2003-2007)

– Strong foreign demand (US, China)

– Decade-long corporate restructuring effort

– Yen depreciation (up to 2007)

Lehman Shock and global recession (late 2008-2009)

– Traditional industrial exports (cars, electronics) which were leading recovery suddenly lost export markets.

– Thanks to strong demand in China and other emerging economies, growth picked up in 2010

Earthquake & tsunami (2011) and Euro Shock (2011-2012)

• Production fell temporarily in 2011 due to supply chain disruption and depressed psychology, but recovered soon due to the start of vigorous reconstruction investment.

• Recovery was fragile due to global recession (slowdown of emerging economies), yen appreciation, power shortage, etc.

Earthquake & Nuclear Disaster in 2011

Economic Impact and Issues

• Estimated stock damage from earthquake was 16.9 trillion yen (3.6% of GDP). (In 1995, Kobe earthquake’s damage was 9.9 trillion yen or 2.0% of GDP)

• Earthquake recovery budget is 19 trillion yen (over 5 years, 4.0% of GDP) to 23 trillion yen (ultimately, 4.9% of GDP). This does not include costs related to nuclear disaster. (In 1995, Kobe earthquake recovery budget was 3 trillion yen or 0.6% of GDP).

• Debate over funding: tax increase, debt issue or cutting spending incl. professors’ salaries and education budget (small saving?) But fiscal problem is mainly caused by social welfare explosion and not by earthquake.

• DPJ’s handling of reconstruction plan, radiation problem, power shortage & future energy policy was random and inconsistent.

• Growth impact of earthquake is almost neutral: supply disruption is offset by private & public investment for recovery.

Deterioration of Japanese Politics?

• Between Koizumi and Abe2, there were six PMs in 6 years.

• LDP (Abe, Fukuda, Aso: 2006-09) was unpopular leading to

the change of government to DPJ in Aug.2009.

• DPJ (Hatoyama, Kan, Noda: 2009-2012) proved even worse

than LDP; random policies and amateur politics.

• A shift from “1955 Regime” (LDP dominance) to alternating

two-party competition was not realized.

• As of July 2013: Abe’s popularity & fragmented oppositions

are likely to enhance LDP’s rule in Upper House election.

Liberal Democratic Party

(LDP) 1955-2009(except 1993-96)

Democratic Party of

Japan (DPJ) 2009-2012Koizumi

2001-2006 LDP Abe No.2 2012-