Japan’s lost decade

Indra PRATAMA Qiong QI

Qianqian SHI

The Beginning: Asset Bubble

The Japanese stock price index began to rise in the early 1980s and continued to rise to more than five times the 1980 level. Then, from 1990 it started a long period of decline.

The Japanese land price also rose throughout the 1980s and peaked in 1991. The average land price more than doubled. The turning point for the land price came one year later than the stock market, in 1991. (source: www.grisp.ac.jp)

The Cause (I) : Monetary Easing & Deregulation

Bank deregulation - As competition began, the banks rushed to find new borrowers and projects in SMEs and land & property investment. They lacked the ability to correctly evaluate these new borrowers and projects. When the economy was booming, they over-lent. When the bubble ended, these loans became a huge mountain of bad debt. Monetary Easing - In 1985 there was a sharp yen appreciation, and the Bank of Japan lowered short-term interest rates and eased money in response. The Bank of Japan's policy reaction function is such that traditionally, Japan's monetary policy responds positively (becomes expansionary) to (i) yen appreciation and (ii) domestic recession.(source: www.grisp.ac.jp)

The Cause (II) : Monetary Easing & Deregulation

USD/JPY(left scale)

BOJ Rate(right scale)

source: Bank of Japan

The Results…

source : www.tradingeconomics.com

The Results…

source : www.tradingeconomics.com

Long Term Deflation

What’s Next (I): Liquidity Injection Failed….

source: Bank of Japan, Nomura

What’s Next (II): Deleveraging…Funds Raised by Non-Financial Corporate Sector

source: Bank of Japan, Cabinet Office Japan, Nomura

What’s Next (III): Inconsistency in Fiscal Policy

source: Ministry of Finance Japan, Nomura

What’s Next (III): Delayed in Monetary Policy Adjustment

Source: http://moneyunleashed.com/prime_rates

BOJ rate ECB rate FED rate

What’s Next (V): Increasing Government Spending….

source: Ministry of Finance Japan, Nomura

Japan’s GDP Grew in spite of Massive Loss of Wealth & Private Sect

Deleveraging

source: Cabinet Office Japan, Real Estate Institute Japan, Nomura

Deficit

Appreciation of Japanese yen

Measures by Central Bank of Japan

Stabilize the price Provide market liquidity by lower the interest rate Money supply Quantitative easing from 2001

Lost decade

Recession (1991-1993) Temporary recovery (1994-1996) Deep recession (1997-1999)

Money supply

Measures by Central Bank of Japan Quantitative easing from 2001 Stabilize land price

Average growth rate around 2% per year

Deflation has moderated but not disappeared

Long-term Government bond

Household’s saving are vast Most bonds are in the hands of domestic investors

Unemployment rate

Solutions

Stability and efficiency in all business operations

Learning in action Enhancement of communication channels Issues and action plans

Key lessons Act quickly Spending is not the answer Don’t rack up debt Counteract demography

Comparison

JAPAN VS. USA JAPAN VS. EU

Analogies

Real estate Bubble

DeleveragingIn

Private sector

Banking crisis Spreading to

FinancialMarkets

DeflationRISK?

Divergences 1 Weak dollar

Source: VOX, BOJ

JPY Real Effective Exchange Rates (1970-) (2005 ＝ 100 )

Dollar nominal and real effective exchange rates, Jan 2002-Apr 2011 (Jan 2002 = 100)

Divergences 2 Better demographics

Sources: Source: UN Medium Variant Projections, World Population Prospects: The 2008 RevisionSource: UN Medium Variant Projections, World Population Prospects: The 2008 Revision

Divergences 3 Faster deleveraging

Divergences 4 Quick reaction from FED

Analogies

Tighter Bank

Regulation

Budget Consolidation

Balance Sheets

Recession

Banking crisis

Europe’sLost decade?

Divergences 1Depreciation of EURO

Divergences 2A not-so-severe decline in wealth

Divergences 3Quick reaction to the crisis

Divergences 4Sovereign debt crisis

Other Divergences

Fiscal integration

Outside help/pressure

Conclusion

Lessons learned?

Bibliography• Toward a Eurozone’s lost decade? Analogies and differences to Japan 1991-2003 ECONOMIC RESEARCH NATIXIS• Is a Japan-Style “Lost Decade” Ahead for the US? Posted by Sharon Fay on Aug 23, 2012 in AllianceBernstein, Americas, • Why America Isn’t Headed for a ‘Lost Decade’ By PATRICK SMITH, The Fiscal Times, October 6, 2011

Resources

http://www.tradingeconomics.com http://www.boj.or.jp/en/ http://www.aei.org/