The World in Balance Sheet Recession:What Post 2008 U S Europe and ChinaWhat Post-2008 U.S., Europe and China Can Learn from Japan 1990-2005

Richard C. KooChief EconomistChief Economist

Nomura Research InstituteTokyo

April 2011

Exhibit 1. US Housing Prices Are Moving along the Japanese Experience

220

240

260

US: 10 Cities Composite Home Price Index

(US: Jan. 2000=100, Japan: Dec. 1985=100)

Japan: Tokyo Area Condo Price1

Futures

160

180

200

220 Composite Index Futures

Japan: Tokyo Area Condo Price

80

100

120

140Japan: Osaka Area Condo Price1

40

60

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 1477 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99

USJapan

2

Note: per m2, 5-month moving averageSources: Bloomberg, Real Estate Economic Institute, Japan, S&P, S&P/Case-Shiller® Home Price Indices, as of Mar. 11, 2011

Exhibit 2. Drastic Rate Cuts Have Done Little to Revive Employment or House Prices

7

8(%)

Australia

5

6UK

2

3

4

EU

US

0

1

2003 2004 2005 2006 2007 2008 2009 2010 2011

Japan

3

2003 2004 2005 2006 2007 2008 2009 2010 2011

Sources: BOJ, FRB, ECB, BOE and RMB Australia. As of Mar.14, 2011.

Exhibit 3. Drastic Liquidity Injection Failed to Increase Money Supply: (I) USy pp y ( )

220

240

260

280 Monetary BaseMoney Supply (M2)Loans and Leases in Bank Credit

(Aug. 2008 =100, Seasonally Adjusted)

140

160

180

200

Down 21%

80

100

120 21%

2.53.0 (%, yoy) Consumer Spending

Deflator (core)

0.5 1.0 1.5 2.0 2.5

08/1 08/4 08/7 08/10 09/1 09/4 09/7 09/10 10/1 10/4 10/7 10/10 11/1

Deflator (core)

4

Sources: Board of Governors of the Federal Reserve System, US Department of CommerceNote: Commercial bank loans and leases, adjustmentsfor discontinuities made by Nomura Research Institute.

Exhibit 4. Drastic Liquidity Injection Failed to Increase Money Supply: (II) EUy pp y ( )

140

150

Base Money

Money Supply (M3)

Credit to Euro Area Residents

(Aug. 2008 =100, Seasonally Adjusted)

110

120

130

90

100

2.0 2.2 (%, yoy)

CPI core

0.6 0.8 1.0 1.2 1.4 1.6 1.8

08/1 08/4 08/7 08/10 09/1 09/4 09/7 09/10 10/1 10/4 10/7 10/10 11/1

5

08/1 08/4 08/7 08/10 09/1 09/4 09/7 09/10 10/1 10/4 10/7 10/10 11/1

Sources: ECB, EurostatNote: Base money's figures are seasonally adjusted by Nomura Research Institute.

Exhibit 5. Drastic Liquidity Injection Failed to Increase Money Supply: (III) UKy pp y ( )

220 235 250 265 280

Reserve Balances + Notes & CoinMoney Supply (M4)Bank Lending (M4)

(Aug. 2008 =100, Seasonally Adjusted)1

115130 145 160 175 190 205

Aug. 08'

Down 16%

70 85

100 115

456

CPI (ex. Indirect Taxes)(%, yoy)

01234

07/1 07/4 07/7 07/10 08/1 08/4 08/7 08/10 09/1 09/4 09/7 09/10 10/1 10/4 10/7 10/10 11/1Sources: Bank of England Office for National Statisics UK

6

Sources: Bank of England, Office for National Statisics, UKNotes: 1. Reserve Balances data are seasonally unadjusted. 2. Money supply and bank lending data exclude intermmediate financial institutions.

Exhibit 6. Drastic Rate Cuts and Liquidity Injections Have Done Little to Revive EmploymentHave Done Little to Revive Employment

3.5

4.0

4 5

7.0

7 5

(%, Seasonally adjusted, inverted)

US (right scale)

(%, Seasonally adjusted, inverted)Unemployment Rate in US and EU

4.5

5.0

5.5

6.0

6.5

7.5

8.0

8.5

( g )

7.0

7.5

8.0

8.5

9.0

9.5

US: Last seen in 19839.0

9.5

10.0

10.5

11 0

10.0

10.5

11 0

EU: Last Seen in 1998EU (left scale)

7

11.011.0 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Sources: US Department of Labor, Eurostat

Exhibit 7. Japan’s De-leveraging with Zero Interest Rates Lasted for 10 Years

8

10

20

25

CD 3M rate (right scale)

(% Nominal GDP, 4Q Moving Average) (%)

Funds Raised by Non-Financial Corporate Sector

4

6

8

10

15

20

Borrowings from Financial Institutions (left scale)

Funds raised in Securities Markets (left scale)

(right scale)

0

2

0

5

-6

-4

-2

-15

-10

-5 Debt-financedbubble

(4 years)

Balance sheetrecession(16 years)

8

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10Sources: Bank of Japan, Cabinet Of f ice, Japan

Exhibit 8. Japan’s GDP Grew in spite of Massive Loss of Wealth and Private Sector De-leveragingg g

700

800

550

600(Tril.yen, Seasonally Adjusted)

Real GDP

(Mar. 2000=100)

Nominal GDP(Left Scale)

500

600

450

500(Left Scale)

Likely GDP Path

Cumulative 90-05 GDP

Supported by Government

Action: ~ ¥2000 trillion

down200

300

400

300

350

400Likely GDP Path

w/o Government Action ¥2000 trillion

Cumulativedown87%

0

100

200

250

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Land Price Index in Six Major Cities(Commercial, Right Scale)

Last seen in 1973Cumulative

Loss of Wealth on Shares and Real Estate

~ ¥1500 trillion

9

Sources: Cabinet Of f ice, Japan Real Estate Institute

Exhibit 9. Japanese Government Borrowed and Spent the Unborrowed Savings of the Private Sector to Sustain GDPg

100

110

Government spending

(Tril. yen)

70

80

90

cumulativecyclical deficit 90-05

overall deficit ¥460

trillion40

50

60¥315 trillion

20

30

40

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Tax revenueBubble Collapse

10

Source: Ministry of Finance, JapanNote: FY 2010 includes supplementary budget. FY2011 are initial budget.

Exhibit 10. Premature Fiscal Reforms in 1997 and 2001 Weakened Economy, Reduced Tax Revenue and Increased Deficity,

60

70

60

70Tax RevenueBudget Deficit

Hashimotofiscal

reform

Koizumifiscal

reform

(Yen tril.) (Yen tril.)

Global Financial

CrisisObuchi-Mori

fiscalstimulus

40

50

40

50

*unnecessaryincrease in

deficit:

20

30

20

30

deficit:¥103.3 tril.

0

10

0

10

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

11

(FY)Source: Ministry of Finance, Japan*: estimated by MOF

Exhibit 11. Spanish Private Sector Financial Surpluses Increased more than Government Deficit

12

Financial Surplus or Deficit by Sector

(Financial Surplus)

(as a ratio to nominal GDP, %)

4

8Rest of the World

HouseholdsShift from 2007

in private sector:16.93% of GDPCorporate: 11.45%Households: 5.48%

-4

0

C t S t Shift from 2007

-12

-8

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

(Financial Deficit)

General GovernmentCorporate Sector

(Non-Financial Sector +Financial Sector)

Shift from 2007 in public sector:11.32% of GDP

12

Sources: Banco de España and National Statistics Institute (INE),Spain, and EurostatNote: For 2010 figures, 4 quarter averages ending with Q3/'10 are used.

Exhibit 12. Irish Private Sector Financial Surpluses Increased more than Government Deficit

15(as a ratio to nominal GDP, %)

Financial Surplus or Deficit by Sector

Corporate Sector(N Fi i l S t Fi i l S t )

(Financial Surplus)

5

10(Non-Financial Sector + Financial Sector)

Rest of the WorldShift from 2006

in private sector:21.55% of GDPCorporate: 7.29%

Households: 14.26%

-5

0

General Government

Shift from 2006 in public sector:16 78% of GDP

-15

-10 Households

(Financial Deficit)

16.78% of GDP

13

2002 2003 2004 2005 2006 2007 2008 2009

Sources: Eurostat, Central Statistics Of f ice, Ireland

Exhibit 13. Summary of Private Savings and Government Deficits

20

25

Increases in Private Savings

Increases in Government Deficits

(indicated as % of GDP)

10

15 3

0

5

Spain Ireland Portugal France UK US Japan Italy Greece

Notes: 1. Measured f rom the recent trough in private sector savings: Spain (2007), Ireland (2006), Portugal (2008), France (2008), UK (2007), Japan (2008), US (2006), Italy (2008), Greece (2008).2. Changes in private savings include debt repayments.3. A range of 13% to 8% exists for the US private savings data because of problems with its Flow of Funds statistics since 2008. Economic and market indicators suggest that the 13% f igure (shown) is closer to the truth than the 8% f igure.4 G i NOT i b l h t i I l d d f i l

14

4. Greece is NOT in balance sheet recession. Included for comparison purposes only.Source: Nomura Resarch Institute, f rom respective countries' f low of funds data

Exhibit 14. Even with Strong Yen, Japan Is Running ever larger Trade Surpluses with Taiwan, Korea and Chinap ,

Japan’s Trade Balances with Korea, Taiwan and China

300

400(¥ bil. Seasonally adjusted, 3 months moving average)

(Surplus)

100

200

300

-100

0

-400

-300

-200

KoreaTaiwanChina (including Hong Kong)China (excluding Hong Kong) (Deficit)

15

40091 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Source: Nomura Research Institute, based on Ministry of Finance, Japan, Trade StatisticsNote: Seasonal adjustments by Nomura Research Institute.

Exhibit 15. The transition of Chinese Economy

SA

wages

L

B

CChina in the

future(normalization

of domestic demand phase)Owner's profit

(i)

D3D

H K

D2D1Worker's

income (ii)

G

EF I J M

China until now

number of workers

16

Source: Nomura Research Institute

(capital-accumulation phase)