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Japan's lost two decades:Lessons to Today's Euro Crisis?Lessons to Today s Euro Crisis?

March, 2012YOSHII, Masahiko

P id EUIJ K iPresident, EUIJ‐KansaiGraduate School of Economics, 

Kobe University, Japanyoshii@econ.kobe‐u.ac.jp

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6

8

10

520

540tril. yen %

-4

-2

0

2

4

6

440

460

480

500

2

-8

-6

400

420

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

nominal GDP(tril. yen)

nominal GDP growth real GDP growth

2

3

What have been discussed?

• How to solve debt problems

• Recovery

– Demand Side: fiscal and/or monetary policies

– Supply Side: raising productivities, structural reform

• Influences of the lost (two) decade(s)

J i t– Japanese economic system

– fast aging in Japan

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3

Bubble Era: 1987‐1991

• Land Price

• Stock Exchange Market

• Capital Gain/Loss

5

Why the Bubble happened?

• low interest rates and excess liquidity after the Pl A d i 1985Plaza Accord in 1985

• financial liberalization (CD, warrant bonds…)

• expectation of Tokyo to become the financial center in Asia

• band wagon effects• band wagon effects

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4

Plaza Accord

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Land Price

H C H C H C1980 9.9 6.7 18.0 11.2 13.3 9.21985 1 8 3 0 2 0 8 6 2 7 5 0

Japan Tokyo Osaka

1985 1.8 3.0 2.0 8.6 2.7 5.01987 9.2 15.0 57.1 76.1 5.7 19.91988 7.4 8.0 24.1 15.8 26.9 36.41989 6.8 7.5 2.7 1.9 37.3 36.11990 13.2 13.4 11.0 5.6 48.2 39.71991 2.7 3.4 -1.0 -0.3 -15.3 -8.91992 -3.8 -4.9 -12.7 -12.5 -22.8 -23.11993 -3.6 -7.7 -12.3 -20.5 -12.1 -21.41994 -1.2 -6.7 -5.0 -18.0 -3.5 -16.71995 -0.9 -6.9 -3.3 -16.9 -3.0 -16.41996 -1.3 -6.9 -5.0 -16.3 -3.9 -13.11997 -0.7 -5.1 -2.9 -10.6 -1.5 -7.81998 -1.4 -5.2 -4.4 -8.4 -2.7 -7.31999 -2.7 -6.6 -7.3 -10.3 -6.2 -10.62000 -2.9 -6.3 -6.7 -9.0 -6.5 -11.32001 -3.3 -6.6 -5.8 -7.6 -7.5 -11.0 8

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Stock Exchange Market

Average number of Average amount of Nikkei

Tokyo Stock Market (1st part)Average number ofstock selling / buingper day (mil units)

Average amount ofstock selling / buing

per day (bil yen)

NikkeiAverage

(yen)

1985 415 267.4 12,5651988 1,021 1,024.70 27,0381989 877 1,308.50 34,0581990 484 716.7 29,4371992 265 238.4 18,108

2001 811 812375 10,5422001 811 812375 10,542

2012 9,777(02 Mar)

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peak: 38,915 yen (12/1989)

Capital Gain/Loss

tril.yenstock land total% to GDPstock land total% to GDP

1985 33.8 75.5 109.3 341986 121.4 253.2 374.5 111.51987 76 415.5 491.5 140.21988 177.5 166.7 344.2 92.11989 193.6 313.6 507.2 127.11990 -306.7 235.7 -71 -16.61990 306.7 235.7 71 16.61991 -4.8 -191.7 -196.6 -43.21992 -178.0 -228.9 -406.9 -86.91993 40.5 -133.2 -92.7 -19.8

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6

After the Feast

• too much production capacities

adjustment of investments

• balance sheet adjustment

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110.0

120.0

operating rate

70 0

80.0

90.0

100.0

12

60.0

70.0

manufacturing steel automobile

7

15

20

25

-5

0

5

10

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

13

-20

-15

-10

house investment private equipment investment

Asset price fall

• Asset prices began to fall in 1991

• Balance sheet problem

– phase 1: non‐manufacturing sectors

– phase 2: financial sector

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8

balance sheet problem: phase 1

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Balance sheet problem: phase 2

bad loanstril. yen

16

9

• why resolving the bad loan problems was so delayed?delayed?– underestimation of seriousness of recession

(dream of high economic growth was kept)

– definition of bad loans by the government was gradually widened

who share the burdens of bad loans– who share the burdens of bad loans• management, shareholders, depositors, financial institutions, state

• it took almost 10 years to settle who share the loss of bankrupted financial institutions

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Nov. 1997Yamaichi Security and Hokkaido Takushoku BankYamaichi Security and Hokkaido-Takushoku-Bank declared to be bankrupted

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10

• Japanese Government injected capital to financial i tit ti i 2002institutions in 2002

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20

11

How the bad loan problems changedbehaviors? 

• banking behavior

– decrease of lending

– roles as main banks lowered

• enterprise behavior

– curtails of investment and employment

h h ld b h i• household behavior

– curtails of purchase of durable goods

• Vicious circle of recession21

6

8

10

520

540tril. yen %

-4

-2

0

2

4

6

440

460

480

500

22

-8

-6

400

420

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

nominal GDP(tril. yen)

nominal GDP growth real GDP growth

12

3

4

-1

0

1

2

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

23

-3

-2

1

GDP deflator CPI

Stimuli to recover

• Active Fiscal Policy

• Relaxation of Monetary Policy

↓

• What to do next?

‐fast aging society

‐fiscal problem

‐environment

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13

Fiscal Policy

expenditure

tax revenue deficit gov bond

25

76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

construction gov bond

government debt

construction gov bond

26

66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

deficit gov bond

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Why fiscal measures were ineffective?

• Fiscal measures

– mismanagementmismanagement

• delay of fiscal stimuli in the beginning of the 1990s

• raising consumption tax rate in 1997

• budget expansion since the end of the 1990s

– main targets

• construction worksconstruction works

• public investments to rural area

– expenditure driven by aging

• decrease of tax revenue in the 1990s = first cause of gov debt problems 27

Monetary Policy

official discount rate

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15

• Overnight Call Rate Target

（ ）– 2/1999 ‐ 0.15%（zero interest rate policy）

– 11/8/2000 ‐ 0.25%（temporary lift)

– 28/2/2001 ‐ 0.15%（reintroduction）

– 14/7/2006 ‐ 0.25%（re‐lift）

– 21/2/2007 ‐ 0.5%21/2/2007 0.5%

– 31/10/2008 ‐ 0.3%

– 19/12/2008 ‐ 0.1%

– 5/10/2010 ‐ 0.0～0.1%

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Monetary Base Balance

ChinaJapanUSUKEuro AreaSouth Korea

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Why monetary policies were ineffective?

• monetary policy remained to control high land i ft th b t f b bblprices even after the burst of bubble

• De facto zero interest rate policy started in the end of the 1990s, but modest

• De jure zero interest rate policy started in 1999, but was lifted when the recovery was still weakbut was lifted when the recovery was still weak

• Quantitative easing was practiced, but the monetary base was not enough enlarged 

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Restructuring of the JP economy

• Public sector restructuring

– From Public to Private

• corporatization of remaining public corporations (highway, post)

– From the Center to Regions

• decentralization of decision making power and financial resourcesresources

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No Reform,No Growth

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• Labor market reform

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13

18

14

Competitiveness

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19

16

Structural reform was also not enough

• Japan Post and Japan Highway were corporatized, b t t i ti dbut not privatized

• Japan’s competitiveness is not recovered

• Japan’s corporate governance reforms were not enough

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It’s not A Sony

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Decline of population

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2,000

2,500

3,000

2,092

2,679

2,679

500

1,000

1,500

,

1.606

1,070

40

0

newly born

21

70

80

90

100

30

40

50

60

70

75-

65-74

20-64

0-19

41

0

10

20

1920

1930

1940

1947

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2006

2007

2008

2009

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

20

22

Problems of the aging society

• decline of labor population

• decline of saving ratios

– new investment

– management of government debt problems

• increase of pension and health care burdens

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How to activate Japanese Economy?

• redesign of Japanese economic system

– to make Japan more open

– to make Japan more innovative & creative

– …

• sustainability of Japanese society

– to reform pension and health care systems– to reform pension and health care systems

– to reform budgetary system

– … 

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23

Liberal

Koizumi, Jun’ichiro4/2001-9/2006

DemocraticParty

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Abe, Shinzo9/2006-9/2007

Fukuda, Yasuo9/2007-9/2008

Aso, Taro9/2008-9/2009

Democratic Party of Japan

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Noda, Yoshihiko9/2011-

Kan, Naoto6/2010-9/2011

Hatoyama, Yukio9/2009-6/2010

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Summary

• delay of recognition

ti l k t littl t l t• stimulus package was too little, too late

• monetary policy has been timid

• active fiscal policies during the 1990s and 2000s caused a serious sovereign debt problem  

• state bonds expanded to 200% of GDP• state bonds expanded to 200% of GDP

• Japanese governments have been too weak to implement structural policies

• Japan needs to change its system, but to where?47

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Data by Thomson Reuters

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Announcement

• EUIJ‐Kansai (Young Fellow Scheme) invites one h f th EU b t i i thresearcher from the EU member countries in the 

FY 2012 (April 2012 – March 2013), to stay in Kobe / Osaka for 1‐2 week(s) , to advance your research, and to be familiar with Japan.

• I hope you to raise your hands!p y y

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Thank you for your attention!yoshii@econ.kobe-u.ac.jp