Interview With Richard Koo Chief Economist, Nomura Research Institute
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· t 28 BARRO Interview with Richard Ko o Chief Economist, Nomura Research Institute A Japa nese ·Rx f or t h e Weby Leslie P. Norton WIDESPREAD attention for his theories on why Japan's economy has struggled for so long. In particular, his view of that nation's "balance-sheet recession" has been extensively studied by policymakers in the developed world. Though many economists fear that Japan's enormous debt is unsustainable, the nation's economy hasn't col- lapsed. Still, the economic malaise has punished investors in Japanese stocks, which topped out in 1989, and some investors fear that the same stagnation could afflict equities in the North America and Europe, too. "The most interesting question in macroeconomics today is why Japan developed the way it did over the past 20 years," says Gifford Combs, a portfolio manager at Dalton Investments. "What nobody in the West wants to utter aloud is that western economies, and most especially the U.S., could follow the same trajectory as Japan, essentially a recovery that almost feels worse than the disease." Koo is well-equipped to answer questions about Japan and the West, having served as an economist for the Federal Reserve Bank of New York in the past and as chief economist of Nomura Research Institute now. To learn his views, read on. Barron's: You're visiting Washington a lo t these days. Koo: I' m explaining to ' the Americans that the disease you've got, is the disease we got 15 years earlier. Most Americans are flabbergasted by the fact that the Federal Reserve has lowered interest rates to zero, flooded the market with liquidity-and the economy is still going absolutely nowhere. Unemployment is still increasing, people are still retre nching, deleveraging. When the central bank brings rates down to zero, a lot of things are supposed to happen, but there's nothing happening. But that's what we experienced in Japan. The Bank of Japan brought the r ate s dow n to zero, did massive quantitative easing, with no res ult whatsoe ver. This happens b e c ~ u s e of a balance-sheet recession . What is that? This happens because the private-sector comp anies ar e no longe r maximizing p rofits; they are minimizing debt. They are minimizing debt because all the assets they bought with borrowed money col- lapsed in value, but the debt is still on their books, so their balan ce sheets a re all under water. I f your balance sheet is under wate r, you have to repair it. So everybody is in balance-sheet-repair mode. This type of recession isn't in any eco- nomic textbook yet, and there's no name for it. I call it the balance -sheet recession . It took us [in Japan] a decade to figure out. People said, ''Ab, just run the printing presses, ah, structural reform, ah, just privatize the post office, this and that, and everything will. be fine." Nothing worked. This is pneumonia, not the common cold. When people a re min imiz ing debt because of their balance-sheet problems, mone tary policy is largely useless. I f your balance sheet is under water, in negative equity, you are not going to borrow money at any interest rate, and no one will lend you money, either. In an ordinary, garden-variety recession, as we learned in school, the private sec tor uses mon ey more efficien tly, and a budget deficit is considered bad. But whe n the privat e sector is completely absen t and payin g down debt a t zero interes t rates, and the government doesn't borrow this money, what happens? Even a child would understand the whole thing could collapse. The only way the government can turn this economy around is to do the opposite of the private sector-borrow the money the private sector saved and spend it, which means fiscal stimulus. That's what saved Japan from entering a Great Depression. Refresh ou r memory.
