the world in balance sheet recession: what postwhat post...
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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)