asian 2001 05
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Asian Economics
Unique Structural Features
• Japanese Employment System: lifetime employment, seniority system, company unions
• Keiretsu• Corporate finance and banking system
• The dual economy
Unique Structural Features
• Japanese-style management• Japanese democracy: the Liberal Democratic Party
• Social consensus on growth
An economic coming of age
Which Components Did Drive the Demand?• Investment/GNP and Export/GNP in Real Terms
• Real Investment/GNP (solid line) and Real Export/GNP (broken line)• Source: The Japanese Economy, Takatoshi Ito.
The Japanese growth in 50s and 60s was investment-led growth.
Exports had been increasing continuously.
Summary of Analysis from the Data
Japanese post-war growth is by:
On the supplyside: Technological progress.
On the demand side: Investments (later Exports).
We will investigate the causes of growth more closely with historical events.
How did it get so bad?
• Inept public policy• Corruption• Greed• The belief that Japan was somehow “different”
Focus: Three Important Points of the Japanese Govnt's Policies
Infant-Industry Protection Allocation of Foreign Reserves The Ministry of International Trade and
Industry (MITI)
Rapid Growth: 1950-1973: Industrial Policies
• Industrial Policies by the Government• Infant-Industry Protection
The government targeted some specific industries, in paticular, industries with increasing-return technology.
The government protect these ”infant industries” by export subsidies and import restrictions.
Example: Iron and steel industries. Once they get large, the average costs go down.
And, then, they become cost-competitive.
Rapid Growth: 1950-1973: Industrial Policies
• The Government Allocated Foreign Reserves
Firms are prohibited from borrowing money from abroad.
The government assigned foreign currency to firms for the purchase of capital equipment and raw materials.
Instead, government financial agencies lend money.
This policy would prevent the appreciation of Japanese yen, and protect exports.
Role of the MITI
(the Ministry of International Trade and Industry)
Even after domestic funds became abundant, investment plans are coordinated according to MITI's demand projection.
Beyond the Observable Reforms
• Source: Hayashi and Prescott (2008)
When the bubble burst
Bubble (1986-1991) Average GDP growth rate: 5.8% Exchange rate:$1.00 = ¥ 168 (1986)
$1.00 = ¥ 134 (1991)
Real estate price went up Stock price wend up: Change of the Nikkei Stock Index
=> Bubble Economy People buy stock and real estate at high prices because they
believe that other people believe that prices are going to increase =>Self-fulfilling mechanism
year 1986 1987 1988 1989 1990 1991index price (yen) 13136 18820 21217 30243 38712 24069
After Bubble (1992-)
Average GDP growth rate: 1.3% Pretty Low! Exchange rate:$1.00 = ¥ 126 (1992)
$1.00 = ¥ 106 (2008)
Serious recession: ’90s as “Lost Decade” Real estate price went down Stock price went down: Change of the Nikkei Stock Index
Efforts to get out of the recession Zero interest rate policy by the Bank of Japan Aggressive fiscal policy
year 1992 1996 1998 2000 2002index price (yen) 23801 20612 19002 10825 14691
Nikkei Average (Tokyo Stock Exchange)Source: http://brual.files.wordpress.com/2008/09/nikkei-average-historical-graph.png
Japanese Real Estate PricesSource: http://m1.smartmoney.com/tradecraft/images/1107-graphic.gif
Japan's Land Price through Bubble
Firm's Bankruptcies and Total Debts of Bankrupt Firms
Japanese GDP Growth RateSource: http://www.treasury.gov.au/documents/817/images/05_article_4-18.gif
Source: http://www.heritage.org/Research/AsiaandthePacific/images/bg1530cht5.gif
Source: http://bilbo.economicoutlook.net/blog/wp-content/uploads/2009/04/japan_interest_rates.jpg
So what went wrong?
• Government incompetence• Lack of decisive action?• Political failures
Japanese Prime Ministers, 1989-2001
So what went wrong?
• Structural peculiarites of the Japanese economic system
• What about the Japanese people? Should they have spent more and demanded more?
Social fallout of the bubble economy
Aum Shinrikyo and the Kobe earthquake (1995)
• Enjo kosai “compensated dating”• Hikikomori “acute social withdrawal”
• Tokokyohi “school refusal”
Two Theories on the 'Lost Decade'
Caballero, Hoshi and Kashyap (2006) Hayashi and Prescott (2002)
Caballero, Hoshi and Kashyap (2006)
Japan's long recession could be attributed to a problem of Japanese financial system.
In the recession period, Japanese banks misallocated credit by supporting zombie firms.
Zombie firms – Low productivity firms, which should exit the market.
Non-zombie firms – High productivity firms, which should operate or start to operate in the market.
The existence of zombie firms interfered new entries by non-zombie firms.
Caballero, Hoshi and Kashyap (2006) Why banks kept lending to Zombies? Basel capital standards (International standards governing banks' minimum level of
capital) When banks wanted to call in non-performing
loan, they have to write off existing capital. The fear of falling below the capital standards led
many banks to continue to extend credit to insolvent borrowers, gambling that somehow these firms would recover or that the government bail them out.
Caballero, Hoshi and Kashyap (2006)
Hayashi and Prescott (2002) What accounts for Japan's lost decade? Neo-classical growth model:
Y = AKө(hE)1-ө
where A is aggregate TFP (Total Factor Productivity),
K is aggregate capital accumulation,
h is hours of work per employee,
E is aggregate employment.
Which component of Neo-classical growth model cause Japan's slow down over 10 year.
Hayashi and Prescott (2002)
Hayashi and Prescott (2002)
Hayashi and Prescott (2002)
Hayashi and Prescott (2002)
Hayashi and Prescott (2002): Growth Rate of Each Factor
Source: Hayashi and Prescott (2002) What's the cause of the decrease in GNP, then?
Hayashi and Prescott (2002): Model Fit
Hayashi and Prescott (2002) Was the slow down caused by a break down of the
financial system? Hayashi and Prescott's (2002) answer is 'NO.'
Hayashi and Prescott (2002)
Hayashi and Prescott (2002)
Hayashi and Prescott (2002)
Two Theories on the 'Lost Decade'
• Choose one theory you like, explain why you think your choice is better than the other thoery.
Caballero, Hoshi and Kashyap (2006) Hayashi and Prescott (2002)
45
World’s 10 Largest Banks
Citigroup U.S.
Mizuho Bank/ Mizuho Corp Bank Japan
HSBC Holdings U.K.
Bank of America U.S.
JP Morgan Chase U.S.
Deutsche Bank Germany
Royal Bank of Scotland Group U.K.
Sumitomo Mitsui Banking Group Japan
HypoVereinsbank Germany
UFJ Bank Ltd. Japan
16-46
• Japan• Keiretsu form of industrial organization
• A group of companies that are controlled through interlocking ownership—companies own stock in each other
• Encourages strong loyalty among the companies, including favoritism in customer-supplier relationships
• Each keiretsu has a main bank that typically owns stock in other members of the keiretsu
16-47
• Japan (Cont.)• Japanese banks may own equity in nonfinancial companies, although this is now limited to 5 percent in any single firm
• Organization of the banking system• City banks—represent a disproportionately large
fraction of the world’s biggest banks • Regional banks• Special-purpose financial institutions—include
long-term credit banks, specialized small business and industrial institutions
16-48
• Japan (Cont.)• Historically corporate debt markets have been suppressed, further enhancing power of banks
• The result is a vast majority of debt financing that comes from the banking system
• Unlike Germany, stock market is quite large, however extensive cross ownership masks high degree of concentration of ownership
• Adopted laws that separate commercial banking from investment banking, however, this separation has been eroded
52
53
Central banks’ balance sheets as a percentage of GDP
55
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
-2
-1
0
1
2
3
4
5
6
CPI (ex food, energy) Inflation Rate
EUJapanUSY
OY %
56
○ Postal Service- Total Mail Volume: 24.8 Billion Items (FY2005)
○ Postal Savings- Balance: 1.7 Trillion USD* (FY2005)
- Number of Household Users: Approx. 39.2 Million Households (Rate of Household Users: 77.8%) (Oct.
2005)
- Number of ATMs: 26,297 Units (Mar. 2006)
○ Postal Life Insurance- Total Amount of Funds: 1.0 Trillion USD* (FY2005)
- Number of Household Insurers: Approx. 28 Million Households (Rate of Household Insurers: 56.1%)
(Mar. 2004)
○ Post Office- Number of Post Offices: 24,631 (Including Contracted Post Office: 4,410)
(Mar. 2006)
1 Current Status of Postal Services in Japan
*1 USD = 117.47 Yen (March, 2006)
57
1. Global Governance - Global Network and International Norms
・ Postal network: a global network of interconnected national networks
・ UPU Constitution, Convention or Standards
2. National Governance - Institutional Framework - ・ Relationship between regulator and operator: identical /
separated
・ ‘ Transition from Public to Private Sector’
3. Governance within Operators - Norms of Behavior - a) internal governance – CSR, Internal control, compliance,
enhanced internal audit, improved efficiency of operations, consumer satisfaction, etc.
b) enhanced external audit, acceptance of external executive officers
c) provision of services based on user preferences
2 Governance in the Postal Sector
58
1. Enhanced and diversified
user needs
2. Increased competition in
services or operators
3. Development and use of
latest ICT technologies
4. Diversified international
collaboration among
stakeholders
Swift and flexible provisionof diverse services
Increased freedom ofbusiness management
Improved entry intonew businesses
Increased satisfaction of complex user needs
Improved quality of servicethrough better technologies
International regime to reflect different values
3 Market Change and Expected Reform in Governance
59
4 Basic Principles of Privatization of Postal Services in Japan
GovernmentBonds 51.9%
MunicipalBonds 4.2%
Others27.8%
Loans toLocal
Goverment16.1%
EntrustedMoney23.2%
MunicipalBonds 4.3%
GovernmentBonds 62.0%
Others10.5%
Total Assets: 1.7 Trillion USD* (End of FY 2005)
Total Assets: 1.0 Trillion USD* (End of FY 2005)
Fund Management of Postal Savings
Fund Management of Postal Life Insurance
*1 USD = 117.47 Yen
(March, 2006)
・ Vitalize economies through transition from public to private sector・ Reform in line with entire structural reform in Japan・ Consider convenience of consumers・ Utilize Japan Post’s resources (such as the existing network)・ Consider present conditions of employment in Japan Post
60
Transitio
nal
Perio
dP
reparato
ry P
eriod
Promulgation of Laws on Privatization of Postal Services
Privatization (October 2007)
100% Share
Government
Holding Company
Japan Post
Posta
l In
sura
nce
C
om
pany
Posta
l Savin
gs
Bank
Final Privatization (October 2017)
Note: The Government is obliged to hold over one third of the shares of Holding Company
5 Process for Privatization
100% Share
Holding Company
Posta
l In
sura
nce
C
om
pany
Posta
l Savin
gs
Bank
Post
Offi
ce
Com
pany
Posta
l Serv
ice
Com
pany
Government
* Holding Company is obliged to dispose of all the shares of two financial companies during the transitional period
* *Incorporated Administrative Agency: Management Organization for Postal Savings and Postal Life Insurance
61
○ When privatized, services will be basically the same as those of pre-privatization
○ Separation based on business function (Postal Service, Savings, Insurance, Post Office, and Holding Co. )
○ Complete privatization of two financial companies within 10 years (Disposal of all the shares)
○ To balance the degree of freedom in management, with an equalfooting with private companies during the transitional period
Constraints for Providing New Services
Postal Service Company
Subject to Approval(Necessary to hear opinions of the independent
organization)
Obliged to consider other private companies engaged
in the same type of businessesPost Office
Company Subject to Notification
Two Financial Companies
Subject to Approval(Necessary to hear opinions of the independent
organization)
Consider competition with other private financial companies, and the financial condition of the company
6 Characteristics of Privatization
62
○ Post Office Company is obliged to maintain a nationwide post office network
○ Criteria: post offices are to be established:
a) to meet the needs of local residents
b) more than one in every municipality
c) in areas that are easily accessible to local residents considering traffic, geography, and other relevant circumstances
* In sparsely populated areas, maintain level of post office network that exists at the time of privatization
7 Maintaining Level of Post Office Network
63
○ Postal Service Company is obliged to provide universal postal service
○ Ensure nationwide financial services at the post offices- Two financial companies are obliged to have stable agency contracts during the transitional period
- After the transitional period, the Social-Regional Contribution Fund can be utilized to maintain necessary financial services
● Holding Company is obliged to accumulate funds from its profit up to one trillion Yen
● To implement Social Contribution Activity and Regional Contribution Activity, profit from the Fund can be provided
Social-Regional Contribution Fund
8 Maintaining Level of Postal Services
64
○ Ensure provision of universal postal service
○ Enable flexible revision of postage rates
○ Enable expansion into international logistics business
○ Domestic parcel post business will be regulated under general cargo distribution rules
9 Postal Service after Privatization
65
○ Postal Privatization in Japan is expected to affect governance in the following ways:
a) improve oversight functions by the regulator over the operator
b) enable more flexible operations and entry into new business
c) enhance the operator’s ability of governance in business management<Anticipated Profit>
(Unit: Million USD*)
Holding Co.Postal
Service Co.Post
Office Co.
Postal Savings
Bank
Postal Insurance
Co.
FY2008
814 322 729 3,627 653
FY2011
2,508 449 500 4,136 1,636 (From “Skeleton Plan for Business Succession Plan of Japan Post”)
(*1USD = 118 Yen (Nov. 2006))
10 Privatization from the Perspective of Governance
ECON 4315: The Japanese Economy
•Lecture 5•Demographics
•Satoshi Tanaka•02/21/2011
Goals• 1. Overview the basic facts of Japanese
population and its future
Goals
• 2. Examine the consequence of aging and a decrease in population
Goals
• 3. Understand the cause of these changes and possible reactions of the government
Fact 1: Total Population Has just hit its historical maximum (128 million) Expect to decrease in the coming decades
Fact 2: Aging
0%
10%
20%
30%
40%
50%
60%
70%
80%
1950 1970 1990 2010 2014 2030 2050
<1515-6465<
One out of 5 persons is older than 65 This ratio is expected to increase In 2050, this ratio will hit 40%!!
Fact 3: Regional Difference
10 100 1000 1000015
20
25
30By Prefecture in 2006
Population Density
Rat
io o
f 65>
Aging develops faster in rural areas In city level, this trend is more evident In some cities, this ratio has already
exceeded 30%
Summary of Facts
• Total population has just hit the historical high is going to decrease for the decades
Aging More than 20% of population is >65 This ratio will increases to 40%
Regional Disparity Aging goes faster in rural areas
Why Japan needs to be worried?
• Question: Why does Japan need to be worried for the following demographic changes?
Population decrease Aging Regional Disparity
Economic Impacts of Population Decrease
Forget about the impacts of aging right now
Focus on population size only When age structure is fixed, what is the
economic impact of population change? Do people in this country become poorer?
Economic Impacts of Population Decrease
Not necessarily Economy size (in GDP) probably shrinks Might lose scale economy at country level
National Defense TV channels etc.. Language-related things (translated books)
GDP per capita is more important for income level
Several countries prosper in spite of its small size E.g., Singapore, Switzerland
Economic Impacts of Aging
Next forget about the population size Focus on the age structure Suppose population do not change but
age structure somehow change What is the economic impacts?
Economic Impacts of Aging
Saving Rates Net saving rates might go down
=>Investment might go down
Demand structure Any business for young generation face a
weak demand (e.g., education, ) Any business for old generation face a strong
demand (e.g., nursing home, day care)
Economic Impacts of Aging
Social Security Pension/Health care
Hard to maintain pay-as-you-go system
Example: Overlapping Generation Model The young produce and save half of their goods for
the pension. The old only consume. If GDP decreases from 100 to 50, ...
Economic Impacts of Aging in Rural Areas
Typical Characteristics High ratio of old people (Could exceed 50%!) Small town/village Far away from large cities No industry that attracts young population
Economic Impacts of Aging in Rural Areas
• =>Too old or/and too small to provide fundamental infrastructure that is essential for old people
Grocery Compulsive public education Doctor/nursing care Public transportation
Why the demographic changes are happening in Japan?
• Question: Why are the following demographic changes are happening in Japan?
Population decrease Aging
What brought these changes?
Population decrease and aging Very few immigration Population # of Birth < # of
Death Possible direct cause
Longer life expectancy=> Will bring aging and population increase
Low fertility=> Will bring both aging and population decrease
Life Expectancy: Japan vs US
19551958
19611964
19671970
19731976
19791982
19851988
19911994
19972000
20032006
60
65
70
75
80
85
90
Life Expectency
Column BColumn C
Column O
Blue solid and broken: Japanese female and Males
Red: US
Evidence of Fewer Kids
19501960
19701980
19902000
20102012
20142020
20302040
2050
0.0
0.2
0.4
0.6
0.8
1.0# of Kids per # of Working Age Population
Column IColumn J
Blue: Number of kids per adult Red: Number of old per adult
Evidence of Fewer Kids II
1935196519701975
1940197019751980
1945197519801985
1950198019851990
1955198519901995
1960199019952000
1965199520002005
1970200020052010
1975200520102015
0.5
1.0
1.5
2.0
2.5
Row 2Row 3Row 4
Birth YearAge 30Age 35Age 40
# of Babies
Measure how many babies a woman bears by her age 40
Look by cohort (generation) Women born in 1940 bore 1.63 babies on average by
her 30th birthday
Why are Japanese having fewer kids?
Question: Why do Japanese have fewer kids recently?
Question: This is also true for many of the developed countries (Germany, Italy, Korea). Why this is so?
Why are Japanese having fewer kids?
From the viewpoint of marriage, (Average # of Babies at certain age)= (Ratio of Married | age)*(# of Babies |
Married,age) + (Ratio of Single | age)*(# of Babies |
Single,age)
Timing of marriage # of babies in wedlock # of babies out of wedlock
Timing of Marriage
Ratio of S ingle by Age (Male )
0%
10%
20%
30%
40%
50%
60%
70%
80%
1950 1960 1970 1980 1990 2000
Ratio of S ingle by Age (Fe m ale )
0%
10%
20%
30%
40%
50%
60%
70%
80%
1950 1960 1970 1980 1990 2000
Age 25-29
Age 30-34
Age 35-39
People are getting married later People who stay single for their life are
increasing (Ratio of Married|Age) have been decreasing
Fraction of Births Out of Wedlock
Unlike other developed countries, there are very few births out of wedlock
USA: 34%, UK: 38%, France: 44% The change of (# of Babies|Single,age) does not
seem to have quantitative impactsFraction of Births Out of Wedlock
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003
# of Births in Wedlock
# of births married couples bear have not changed much
Average # of Births Married Couples Bear During First 15yrs
Summary
Average # of Babies at certain age= (Ratio of Married|age)*(# of Babies|
Married,age) +(Ratio of Single |age)*(# of Babies|
Single,age)
Late marriage seems to be responsible for fewer kids
Numerical Examples
Average # of Babies a Woman gives by age 30=0.59
Pr(Married|age30, female) = 0.40
(# of Babies|Married, female, age30) = 1.40
(# of Babies|Single,age) = 0.05
0.59 = 0.4* 1.4+ (1-0.4)*0.05
= 0.56+0.03
Numerical Questions about Demographic
A=Pr(Married | age30, female) = 0.40 B=(# of Babies | Married, female, age30) = 1.40 C=(# of Babies | Single,age) = 0.05
Q: Suppose government has a two policy options Policy 1: B increases from 1.40 to 1.50 Policy 2: C increases from 0.05 to 0.15
Which policy is more effective to increase the number of births?
What deters people from getting married?
Why do many people don't choose marriage recently? This happens not only in Japan.
What deters people from getting married?
Increase of female workers' income Automation of housekeeping Cohabitation Need to know which socioeconomic
groups (income, education, region, occupation) deter their marriage
Policy
Should and can the government do something to change this trend?
Possible policy targets Encourage marriage Encourage married couples to bear more
births Encourage single women to bear more births
Concerns Marriage itself might not necessarily lead
more births Should pay attention to happiness of
individuals
Current Government Policy
Subsidy to daycare, kindergartens, health care etc..
Encourage to take parental leave (still hard to take)
Direct subsidy to parents
Might need to consider apparently unpopular policies (at least among conservative politicians)
Immigration
Regional Differences
Overview• Local Governments
– 47 prefectures– 1,788 municipals (1788 cities, 812 towns, 193
villages)• Nature
– Islands longer in length (N-S) than width (W-E) Despite of small area, weather is significantly
different
Tampa, FLOkinawa (Southern Isalands)
Atlanta, GATokyo
Chicago, IlHokkaido (Northern Island)
Comparison by Latitudes
Overview• Local Governments
– 47 prefectures– 1,788 municipals (1788 cities, 812 towns, 193 villages)
• Large Cities:
1%1,176,314Saitama10
1%1,327,011Kawasaki9
1%1,401,279Fukuoka8
1%1,474,811Kyoto7
1%1,525,393Kobe6
1%1,880,863Sapporo5
2%2,215,062Nagoya4
2%2,628,811Osaka3
3%3,579,628Yokohama2
7%8,489,653Tokyo1
PopulationCityRank
Kobe
KawasakiYokohamaNagoya
Osaka
Kyoto
Saitama
Fukuoka
Sapporo
Comparison between Prefectures
Want to compare prefectures by various perspectives
Demographics Industry Income Labor Markets
In the following maps, dark color means large value
By Population
• Population is concentrated in the area facing the Pacific Ocean
• Population of Tokyo accounts for about 10% of the total population
• This tendency does not change when the density is used
By Population Growth
• Population decrease has started in rural areas
• Only few metro areas experience a population increase
• In Akita (lowest), population decreases by 1%
• In Aichi (highest), population increases by 0.7%
Aichi
Akita
By Aging (Ratio of People>65)
• Aging society is more prevalent in less dense areas
• In Shimane, more than 25% of population are older than age 65
• Populations in metro areas are relatively young
• Tokyo: 19%, Osaka: 19%
Shimane
By Per Capita Income
• People in metro area earn more than those in rural
• Income of Tokyo is the highest ($45,590)
• Income of Okinawa is the lowest ($19,870)
• In terms of Gini coefficients,
By Manufacture Industry
• Manufacture industry is relatively concentrated in the middle of the country
• Most large companies locate its HQ in Tokyo
• Toyota locates its HQ in Toyota City in Aichi
HQ of Toyota
Concentration of Business in the Tokyo Metro Area Out of 67 Japanese companies listed in
FORTUNE GLOBAL 500, 50 of them (75%) locate their HQs in Tokyo.
Only 7 companies locate their HQs in Osaka, 2nd largest city.
Out of 162 U.S. companies in the same list, only 22 (13%) of them locate their HQs in NYC.
Coca-Cola? Microsoft? Wal-Mart? Target?
By Unemployment Rate
• Okinawa (out of the map) is the highest (12%)
• Shikoku island and Osaka area are higher
Summary of Comparisons
Metro areas tend to be richer and younger In rural areas, in addition to aging, population
starts to shrink Manufacture industry is more prevalent in the
center of Japan Most large companies locate its HQ in Tokyo
while Toyota does not
GNP per Worker Compared with the U.S.
• Source: Hayashi and Prescott (2008)
Tokyo Earthquake• One of the most
destructive earthquake in history , struck the Tokyo area in 1923.
• The earthquake and the widespread fires it caused resulted the deaths of over 100,000 people and damaged more than 650,000 building.
• As many as 45 percent of surviving workers lost their jobs because so many business were destroyed.
Ultranationalism
• Economic disaster fed the dicontent of the leading military officials and extreme nationalist, or ultranationalist.
• western industrial powers, they pointed out, had long ago grabbed huge empires.
• Japanese nationalist were further outraged by racial policies in the United States, Canada, and Australia that shut out Japanese immigrants.
• Economic downturn during 1930-32• 1. Hamaguchi, finance minister Junnosuke Inoue,
and foreign minister Kijuro Shidehara) deliberately adopted a deflationary policy in order to eliminate weak banks and firms and to prepare the nation for the return to the prewar gold parity (fixed exchange rate with real appreciation)
• Externally, Black Thursday
• Military and right-wing movements emerged
• "Shidehara Diplomacy" which to them seemed too soft on China. Their primary goal was to "defend Japanese interests in Manchuria and Mongolia [more precisely, eastern part of "Inner" Mongolia]).
Parties
Minsei Seiyukai
Main supportersIntellectuals, urban workers Big businesses, rural landlords
Economic policy
Small government, free market principle, eliminate inefficient units through macroeconomic austerity
Big government, fiscal activism, public investment for industry and rural development
Foreign policy
Cooperate with US, oppose military invasion of China (protect Japanese interests through diplomacy)
Supporting military expansion, cooperate with military, if necessary, to undermine Minsei Party
Finance minister & economic policy in the 1930s
<Junnosuke Inoue, until Dec. 1931>Intentionally generate deflationReturn to prewar gold parity
<Korekiyo Takahashi, Dec. 1931-Feb. 1936>End gold parity and depreciate yenFiscal expansion (later, tight budget)Easy money
Political Map in the early 1950s
• Conservative Forces• Liberal Party (Yoshida Shigeru) led the peace treaty and
the US-Japan Security Treaty.• Democratic Party (Hatoyama Ichiro) objected the
“subordinate independence.”
• Progressive Forces• Socialist Party (Left faction) sought a revolutionary
transformation of capitalism at home and opposed to the partial peace treaty. .
• Socialist Party (Right faction) sought partial reform of capitalism and accepted the partial peace treaty.
• Communist Party lost popular confidence since they took violent actions suggested by Stalin
1955• The two conservative parties merged to found the
Liberal Democratic Party (LDP).• LDP would remain in power in the following 38
years. • Business Leaders financially supported.• The bureaucrats offered policy expertise and manpower to
the party. Leading midcareer bureaucrats left their posts to run for political office under the LDP banner.
• The two factions of the Socialist Party reunited
Economic Policy Debate• Arisawa Hiromi (Economist U of Tokyo) and Tsuru
Shigeto • Japan should develop natural resources (coal and
hydroelectric powers) • minimize interdependence, fearing foreign conflicts that
might endanger oil supplies.
• Nakayama Ichiro • only sustainable choice was to join the global economy,
by importing raw materials and exporting manufactured goods
Yoshida VS Hatoyama• The followers of Yoshida
Shigeru followed the American lead in containing the communist bloc.
• Hatoyama and his allies sought independence from US. They succeeded in normalizing relations with Soviet Union in 1956 without Peace Treaty.
Yoshida Doctrine
• Japan must focus on economic growth
• Japan must avoid international conflict
• Rely on US for security• Follow US lead in international relations• Focus all energy on economic development
Yoshida Shigeru
Japan: Neo-mercantilismYoshida Doctrine details:• Focus on Growth
• Grow through export, export, export• Protect domestic industry• Focus on market share and growth, not consumer
satisfaction
Japan’s Economic ModelExport-led Growth• Protect domestic firms at first• Demand that they export• Provide government assistance to direct
investment and to support export• Brilliantly successful for Japan (& later Korea, Taiwan,
Singapore, Hong Kong, & now China)
Standard (not Japanese) 1940s development model• Import Substitution
• Protect domestic industries, produce for domestic market• Import only raw materials and capital goods• Fails miserably: leads to debt and weak domestic
industries that never “grow up”
Bureaucracy’s role in economic planning
• Administrative Guidance• Control of import licenses• Control of capital allocation• Encourage collaborative R&D• Amakudari (descent from
heaven)
Chalmers Johnson’s Classic Study of bureaucracy in
Japanese economic development
MITI (Ministry of International Trade and Industry)• Founded 1949• Responsible for
• Deciding on the structure of industries and their distribution activities
• Guiding the development of industries and their distribution activities
• Co-ordination of Japan's foreign trade and commercial ties• Managing specific areas such as raw materials
LDP• The LPD has a central position between the
bureaucracy and business• Its uninterrupted tenure of office for the past decades was
a necessary guarantee of the government-industry relationship in Japan (Reading 1992)
• It assumes a central position between the bureaucracy and business, co-ordinating their interests and playing their referee
Business (zaikai)• The business world is represented by a number of organizations• The most important ones are the
• keidanren (Federation of Economic Organization), • nikkeiren (Federation of Employers` Association), • keizai-doyukai (Committee for Economic Development)• the Japan Chamber of Commerce and Industry
• Formal and informal consultation among the three players
• The bureaucracy maintains good access to the communication networks by practicing amakudari (descending from heaven), which removes retired bureaucrats from MITI etc into the LPD or into corporations to benefit from their bonds
• Strong interdependence with a clear mission• Cooperation is not always harmonious and the
centre of many scandals
Zaibatsu
Keiretsu
• The biggest keiretsus :• Mitsubishi,• Mitsui, • Sumitomo, • Fuji, • Dai-Ichi Kangyo (DKB)• Sanwa
DKB
• Asahi Mutual Life Insurance (DKB)
• The Dai-ichi Mutual Life Insurance Company (DKB)
• Daiichi Sankyo• Dentsu (DKB)• Fujitsu (Furukawa)• Hitachi (Hitachi)• Ishikawajima-Harima Heavy
Industries (IHI)• Isuzu (IHI)• ITOCHU (DKB)• JFE Holdings (Kawasaki)• Kawasaki Heavy Industries
(Kawasaki)• Kao (DKB)
• K Line (Kawasaki)• Kobe Steel (Suzuki)• Meiji Seika (DKB)• Mizuho (Mizuho Financial
Group)• Seibu Department Stores
(DKB)• Sojitz (Suzuki)• Sompo Japan Insurance
(DKB)• Taiheiyo Cement (Asano)• Tokyo Dome (DKB)• The Tokyo Electric Power
Company (DKB)• Tokyo FM (DKB)• Yokohama Rubber Company
(Furukawa)
Structure
Horizontal keiretsu (kinyû keiretsu)• Affiliated `brother and sister` companies spanning
different industries
Vertical Integration
Interlocking Shareholdings
• A typical Japanese firm has about 70 per cent of its shares held by other companies
• The shares are held by a large number of firms in relatively small fractional parcels
• Firm has some kind of transactional relationship with these corporate shareholders (banking, insurance, lending, supply of inputs, purchase of outputs)
• Firm holds shares in many of the these firms: the sharefoldings are reciprocal
• Firms hold each other`s shares as “stable shareholders“ (antei kabunushi) (Sheard 1994)
Advantages• Takeover is impossible• Companies also have other strong relationships
with each other, they are trading with each other
Disadvantages• Inflexibility• Criticism among companies is not• possible either• Also prevents access to the market for many
foreign companies in Japan
Characteristics• Close long-term relationship between• banks and firms in the same group.• Banks “rescue” affiliated firms.• Banks place insiders on firms’ board (interlocking
directorates - parson).• Banks hold some shares.
Keiretsu Finance• “Main bank” is a dominant lender for its
affiliated firms.• Avoid free-rider problem and duplication of
monitoring and screening efforts.• Long-term relationship makes shirking costly
to• borrowers.• • Keiretsu firms have easier access to external• funds.• • Empirical Evidence• • Keiretsu firms rely less on internal funds
Adverse Loan Selection• Good firm and bad firm
Conflicts of Interest
• Debt holders face fixed payout.• Equity holders hold residual claim.• When firms are close to insolvent,• Equity holders have nothing to lose from
taking excessive risk.• Debt holders do not reap the benefits of risk
taking.• Debt holders prefer conservative investment• strategy.• Liability mix might be important to firm value.
Banks• To (partially) solve adverse selection, screening is• important.• To (partially) solve moral hazard, monitoring is important.• Banks might be in a better positive to do both.• Banks observe cash flow closely (provided that
borrowers’ profit and loss enter into their deposits.• Banks solve “free rider problem” and duplication of
monitoring efforts in case of borrowers’ financial distress.• Banks must have incentive to do this, though.• Government bailout or deposit insurance partly reduce
this incentive.
Japanese Business Model
Post “Ford” industrial model• Dr. W. Edwards Deming:
• Focus primarily on QUALITY• Use statistical analysis to measure and improve quality
• Empower shop floor workers to control and guarantee quality
• First presented ideas to US Automakers but was rejected
• Took his ideas to Japanese industrial leaders and they adopted them, leading them to become the world’s leaders in QUALITY
Dr. W. Edwards Deming
• There was another major political protests in Kyushu: The Mitsui Corporation’s Miike Coal Mine in 1960.
• Since then the conservative government deemphasized the drive for constitutional revision and confrontation with unions.
• The result was a new politics of high growth of the economy.
• Prime Minister Hayato launched the “Income Doubling Plan” to commit economi growth to double GNP by 1970.
Environmental Protests• Chemical pollution-
related diseases appeared in 1950s.
• Mercury poisoning struck and killed residents in southern Japan (Minamata-
• Kumamoto) and northern Japan (Niigata).
• Other notable protests:• Air pollution (Mie)• Cadmium (Jinzu River-
Toyama)
Environment and Kunetz Curve
• Part 1• Part 2• Part 3• Part 4
Postwar Business Cycles in Japan
• Postwar business cycles in Japan. One complete cycle consists of a period of expansion and a period of contraction.
Expansion RecessionTrough Length Average Peak Length Average(month) (months) growth month (months) grwoth- - - Jun, 1951 4
Oct, 1951 27 13.5% Jan, 1954 10 -3.7%Nov, 1954 31 10.1% Jun, 1957 12 5.0%Jun, 1958 42 14.0% Dec, 1961 10 3.7%Oct, 1962 24 13.3% Oct, 1964 12 4.1%Oct, 1965 57 14.4% Jul, 1970 17 3.9%Dec, 1971 23 7.5% Nov, 1973 16 -1.5%Mar, 1975 22 5.9% Jan, 1977 9 4.2%Oct, 1977 28 5.6% Feb, 1980 36 3.2%Feb, 1983 38 6.3% Jun, 1985 17 4.2%Nov, 1986 46 (as of August 1990)
Postwar-1973: Balance of Trade Constraint
• Most Japan's economic fluctuation were triggered by fluctuations in the international balance of payments.
The Bretton Woods Regime (1945) 1 dollar = 360 yen
Mechanism Japan's foreign reserves were relatively scarce. Japan had to keep the balance of trade (EX - IM)
positive. In boom, IM rose faster than EX. The Gov'nt raised interest rates and cut
expenditure. Boom ended and contraction started.
Postwar Business Cycles in Japan
• Postwar business cycles in Japan. One complete cycle consists of a period of expansion and a period of contraction.
• Source: The Japanese Economy, Takatoshi Ito
Expansion RecessionTrough Length Average Peak Length Average(month) (months) growth month (months) grwoth- - - Jun, 1951 4
Oct, 1951 27 13.5% Jan, 1954 10 -3.7%Nov, 1954 31 10.1% Jun, 1957 12 5.0%Jun, 1958 42 14.0% Dec, 1961 10 3.7%Oct, 1962 24 13.3% Oct, 1964 12 4.1%Oct, 1965 57 14.4% Jul, 1970 17 3.9%Dec, 1971 23 7.5% Nov, 1973 16 -1.5%Mar, 1975 22 5.9% Jan, 1977 9 4.2%Oct, 1977 28 5.6% Feb, 1980 36 3.2%Feb, 1983 38 6.3% Jun, 1985 17 4.2%Nov, 1986 46 (as of August 1990)
Postwar-1973: Balance of Trade Constraint
• Most Japan's economic fluctuation were triggered by fluctuations in the international balance of payments.
The Bretton Woods Regime (1945) 1 dollar = 360 yen
Mechanism Japan's foreign reserves were relatively scarce. Japan had to keep the balance of trade (EX - IM)
positive. In boom, IM rose faster than EX. The Gov'nt raised interest rates and cut
expenditure. Boom ended and contraction started.
1973 - 1980s: Aggregate Supply Shock
Floating Exchange Rate (1973) Two Oil Crisis (1973, 1979)The first oil crisis:
A sharp decrease in productivity due to high oil price. A delay in the restraining of demand => wild
inflation. One of worst postwar recession.
The second oil crisis:
Monetary policies were conducted carefully. Recession was long but not as acute as the 1st one.
Business cycles are caused by aggregate supply shocks rather after 1973.
Bubble (1986-1991) Average GDP growth rate: 5.8% Exchange rate:$1.00 = ¥ 168 (1986)
$1.00 = ¥ 134 (1991)
Real estate price went up Stock price wend up: Change of the Nikkei Stock Index
=> Bubble Economy People buy stock and real estate at high prices because they
believe that other people believe that prices are going to increase =>Self-fulfilling mechanism
year 1986 1987 1988 1989 1990 1991index price (yen) 13136 18820 21217 30243 38712 24069
After Bubble (1992-)
Average GDP growth rate: 1.3% Pretty Low! Exchange rate:$1.00 = ¥ 126 (1992)
$1.00 = ¥ 106 (2008)
Serious recession: ’90s as “Lost Decade” Real estate price went down Stock price went down: Change of the Nikkei Stock Index
Efforts to get out of the recession Zero interest rate policy by the Bank of Japan Aggressive fiscal policy
year 1992 1996 1998 2000 2002index price (yen) 23801 20612 19002 10825 14691
Japan's Land Price through Bubble
Firm's Bankruptcies and Total Debts of Bankrupt Firms
Theories of Business Cycles
• Question: How can we explain the Lost Decade in Japan?• Old Keynesian Demand shocks cause recessions. Price and wage are sluggish. So, monetary policy must be done correctly. IS curve: Y = C(Y) + I(r) + G LM curve: M/P = L + k*Y – c*rY: Aggregate income, C: Consumption, I: Investment
G: Government expenditure, M: Money supply, P: Price,
r: Real interest rate
Fiscal policy and monetary policy increase GDP??
Theories of Business Cycles
• Recent Agreements ”Real disturbances are an important source of economic
fluctuations; the hypothesis that business fluctuations can largely be attributed to exogenous random variations in monetary policy has few if any remaining adherents.”
Michael Woodford (2008)
Doubt on the effect of government spending: 'Multiplier effect' is not so big. Increase government's debts, which consumers have to
pay by tax in future. Monetary policy for stabilization by controlling people's
expectations.
Two Theories on the 'Lost Decade'
Caballero, Hoshi and Kashyap (2006) Hayashi and Prescott (2002)
Caballero, Hoshi and Kashyap (2006)
Japan's long recession could be attributed to a problem of Japanese financial system.
In the recession period, Japanese banks misallocated credit by supporting zombie firms.
Zombie firms – Low productivity firms, which should exit the market.
Non-zombie firms – High productivity firms, which should operate or start to operate in the market.
The existence of zombie firms interfered new entries by non-zombie firms.
Caballero, Hoshi and Kashyap (2006) Why banks kept lending to Zombies? Basel capital standards (International standards governing banks' minimum level of
capital) When banks wanted to call in non-performing
loan, they have to write off existing capital. The fear of falling below the capital standards led
many banks to continue to extend credit to insolvent borrowers, gambling that somehow these firms would recover or that the government bail them out.
Caballero, Hoshi and Kashyap (2006)
Hayashi and Prescott (2002) What accounts for Japan's lost decade? Neo-classical growth model:
Y = AKө(hE)1-ө
where A is aggregate TFP (Total Factor Productivity),
K is aggregate capital accumulation,
h is hours of work per employee,
E is aggregate employment.
Which component of Neo-classical growth model cause Japan's slow down over 10 year.
Hayashi and Prescott (2002)
Hayashi and Prescott (2002)
Hayashi and Prescott (2002)
Hayashi and Prescott (2002)
Hayashi and Prescott (2002): Growth Rate of Each Factor
Source: Hayashi and Prescott (2002) What's the cause of the decrease in GNP, then?
Hayashi and Prescott (2002): Model Fit
Hayashi and Prescott (2002) Was the slow down caused by a break down of the
financial system? Hayashi and Prescott's (2002) answer is 'NO.'
Hayashi and Prescott (2002)
Hayashi and Prescott (2002)
Hayashi and Prescott (2002)
Two Theories on the 'Lost Decade'
• Choose one theory you like, explain why you think your choice is better than the other thoery.
Caballero, Hoshi and Kashyap (2006) Hayashi and Prescott (2002)
Summary
Business cycles in the prewar period was relatively large, and the balance of trade often triggered recessions.
After WWII, business cycles became relatively stable, and recession were mainly due to aggregate supply shocks.
Through 1990s, Japan experienced severe recession started with the burst of the bubble.
Caballero, Hoshi and Kashyap (2006) attributed the cause of the long recession to a problem in financial markets.
Hayashi and Prescott (2002) explained the slow down by negative productivity shocks.
1973 - 1980s: Aggregate Supply Shock
Floating Exchange Rate (1973) Two Oil Crisis (1973, 1979)The first oil crisis:
A sharp decrease in productivity due to high oil price. A delay in the restraining of demand => wild
inflation. One of worst postwar recession.
The second oil crisis:
Monetary policies were conducted carefully. Recession was long but not as acute as the 1st one.
Business cycles are caused by aggregate supply shocks rather after 1973.
Bubble (1986-1991) Average GDP growth rate: 5.8% Exchange rate:$1.00 = ¥ 168 (1986)
$1.00 = ¥ 134 (1991)
Real estate price went up Stock price wend up: Change of the Nikkei Stock Index
=> Bubble Economy People buy stock and real estate at high prices because they
believe that other people believe that prices are going to increase =>Self-fulfilling mechanism
year 1986 1987 1988 1989 1990 1991index price (yen) 13136 18820 21217 30243 38712 24069
After Bubble (1992-)
Average GDP growth rate: 1.3% Pretty Low! Exchange rate:$1.00 = ¥ 126 (1992)
$1.00 = ¥ 106 (2008)
Serious recession: ’90s as “Lost Decade” Real estate price went down Stock price went down: Change of the Nikkei Stock Index
Efforts to get out of the recession Zero interest rate policy by the Bank of Japan Aggressive fiscal policy
year 1992 1996 1998 2000 2002index price (yen) 23801 20612 19002 10825 14691
Japan's Land Price through Bubble
Firm's Bankruptcies and Total Debts of Bankrupt Firms
Theories of Business Cycles
• Question: How can we explain the Lost Decade in Japan?• Old Keynesian Demand shocks cause recessions. Price and wage are sluggish. So, monetary policy must be done correctly. IS curve: Y = C(Y) + I(r) + G LM curve: M/P = L + k*Y – c*rY: Aggregate income, C: Consumption, I: Investment
G: Government expenditure, M: Money supply, P: Price,
r: Real interest rate
Fiscal policy and monetary policy increase GDP??
Theories of Business Cycles
• Recent Agreements ”Real disturbances are an important source of economic
fluctuations; the hypothesis that business fluctuations can largely be attributed to exogenous random variations in monetary policy has few if any remaining adherents.”
Michael Woodford (2008)
Doubt on the effect of government spending: 'Multiplier effect' is not so big. Increase government's debts, which consumers have to
pay by tax in future. Monetary policy for stabilization by controlling people's
expectations.
Two Theories on the 'Lost Decade'
Caballero, Hoshi and Kashyap (2006) Hayashi and Prescott (2002)
Caballero, Hoshi and Kashyap (2006)
Japan's long recession could be attributed to a problem of Japanese financial system.
In the recession period, Japanese banks misallocated credit by supporting zombie firms.
Zombie firms – Low productivity firms, which should exit the market.
Non-zombie firms – High productivity firms, which should operate or start to operate in the market.
The existence of zombie firms interfered new entries by non-zombie firms.
Caballero, Hoshi and Kashyap (2006) Why banks kept lending to Zombies? Basel capital standards (International standards governing banks' minimum level of
capital) When banks wanted to call in non-performing
loan, they have to write off existing capital. The fear of falling below the capital standards led
many banks to continue to extend credit to insolvent borrowers, gambling that somehow these firms would recover or that the government bail them out.
Caballero, Hoshi and Kashyap (2006)
Hayashi and Prescott (2002) What accounts for Japan's lost decade? Neo-classical growth model:
Y = AKө(hE)1-ө
where A is aggregate TFP (Total Factor Productivity),
K is aggregate capital accumulation,
h is hours of work per employee,
E is aggregate employment.
Which component of Neo-classical growth model cause Japan's slow down over 10 year.
Hayashi and Prescott (2002)
Hayashi and Prescott (2002)
Hayashi and Prescott (2002)
Hayashi and Prescott (2002)
Hayashi and Prescott (2002): Growth Rate of Each Factor
Source: Hayashi and Prescott (2002) What's the cause of the decrease in GNP, then?
Hayashi and Prescott (2002): Model Fit
Hayashi and Prescott (2002) Was the slow down caused by a break down of the
financial system? Hayashi and Prescott's (2002) answer is 'NO.'
Hayashi and Prescott (2002)
Hayashi and Prescott (2002)
Hayashi and Prescott (2002)
Two Theories on the 'Lost Decade'
• Choose one theory you like, explain why you think your choice is better than the other thoery.
Caballero, Hoshi and Kashyap (2006) Hayashi and Prescott (2002)
Summary
Business cycles in the prewar period was relatively large, and the balance of trade often triggered recessions.
After WWII, business cycles became relatively stable, and recession were mainly due to aggregate supply shocks.
Through 1990s, Japan experienced severe recession started with the burst of the bubble.
Caballero, Hoshi and Kashyap (2006) attributed the cause of the long recession to a problem in financial markets.
Hayashi and Prescott (2002) explained the slow down by negative productivity shocks.
Definitions of GDP and GNP GDP (or GNP):
The market value of all final goods and services produced within a country in a given period of time.
Plus income earned by its citizens abroad, minus income earned by foreigners in the country.
- Is Satoshi's salary at U included in Japanese GNP? GDP?
- Auto parts to make a Toyota car?
Analyzing Source of Economic Growth
GNP = Aggregate Supply= Aggregate Demand in the long-run. (AS = AD)
Growth of GNP = Growth of AS = Growth of AD. AS : Ys = F(A, K, L), A: Technology, K: Capital, L: Labor. AD : Yd = C + I + G + (EX – IM)C: Consumption, I: Investment,
G: Government's expenditure, EX: Exports, IM: Imports.
Which components of AS and AD did contribute to the Japanese growth?
Which Components Did Drive the Supply?
AS : Ys = F(A, K, L), A: Technology, K: Capital, L: Labor. Which components did contribute to the growth of AS?
Decomposition of Growth in Japan and US
Source: Denison and Chung 1976a, pp.98-99
Country Japan U.S.Period 1953-1971 1948-1969Average Growth Rate 8.81% 4.00%Contribution by FactorLabor 1.85 1.30Capital 2.10 0.79Technological Progress 4.86 1.91
Which Components Did Drive the Supply?
• Decomposition of the Growth in Japan of the 60s and 70s
• Source: Shinohara, 1986, p.17.
Country Japan JapanPeriod 1960-1970 1970-1980Average Growth Rate 10.62% 4.84%Contribution by FactorLabor 1.59 1.01Capital 3.40 1.29Technological Progress 5.53 2.54
Which Components Did Drive the Demand?• Investment/GNP and Export/GNP in Real Terms
• Real Investment/GNP (solid line) and Real Export/GNP (broken line)• Source: The Japanese Economy, Takatoshi Ito.
The Japanese growth in 50s and 60s was investment-led growth.
Exports had been increasing continuously.