Economic Development of Japan

No.12 The Bubble Burst and Recession

P.202

Nikkei Stock Average 225

Urban land price indexSource: Japan Real Estate Institute

P.205GDP

After the bubble burst, real growth rose in 1996-97, 2000, 2003-07, 2010 & 2012-13.

Economy fell hard in 2008-09 due to Lehman Shock, which had greater macroeconomic impact than the earthquake & tsunami.

Mar. 2011: Tohoku quake & tsunami2011- : Euro shock2013- : Abenomics

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 in 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 (or Lost Two Decades)Why Did Recession Last So Long since Early 1990s?

• 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

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 2010Earthquake & tsunami (2011) and Euro Shock (2011-)• 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 2011Economic 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.

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--Abenomics: “New Dimension of Monetary Expansion” (BOJ

Kuroda, April 2013-)—but is it really new?

Policy Issues for the Bank of JapanPP.207-210

Call rate (interbank short-term interest rate)

Money & bank lending

Excess reserves are built up at commercial banks during zero interest rate periods

Bubble

Zerointerest

ratepolicy

Zerointerest

ratepolicy

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

Percent

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

Credit & Trust BankLong-term Credit BankHokkaido Takushoku BankChuo Trust BankMitsui Trust BankSumitomo Trust BankDaiwa BankSaitama BankKyowa BankYasuda Trust BankIndustrial Bank of JapanFuji BankDaiichi Kangyo BankSumitomo BankTaiyo Kobe BankMitsui BankToyo Trust BankTokai BankSanwa BankJapan Trust BankMitsubishi Trust BankBank of TokyoMitsubishi Bank

Bankrupted

Bankrupted

Chuo Mitsui Trust Mitsui Sumitomo Trust Holdings

AsahiSaitama KyowaDaiwa Risona Holdings

Mizuho

Mizuho Asset TrustMizuho Financial Group

Taiyo Kobe Mitsui SakuraMitsui Sumitomo

Mitsui Sumitomo Financial Group

UFJ

Mitsubishi Tokyo

Bank of Tokyo-Mitsubishi UFJ

AozoraShinsei

Japan’s 3 Mega Banks

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 more fiscal activism would only worsen the debt crisis.

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

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%(2016?)

• 2nd Abe Gov’t (2012-) turned to aggressive fiscal policy.

Bubble burst

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