Economic Development of Japan No 12 The Bubble

Economic Development of Japan No. 12 The Bubble Burst and Recession

P. 202 Nikkei Stock Average 225 Urban land price index Source: Japan Real Estate Institute

GDP P. 205 After the bubble burst, real growth rose in 1996 -97, 2000, 2003 -07, 2010 & 2012 -13. Economy fell hard in 2008 -09 due to Lehman Shock, which had greater macroeconomic impact than the earthquake & tsunami. Mar. 2011: Tohoku quake & tsunami 2011 - : Euro shock 2013 - : Abenomics

PP. 202 -203 Heisei Bubble (Economic Boom in late 1980 s) Causes • Structural—bank deregulation and the loss of large corporate borrowers in the early 1980 s led banks to overlend to risky borrowers (SMEs, real estate developers) without proper risk management. • Monetary—as the yen rose sharply in 1985, the Bank of Japan injected liquidity to counter it and ease endaka fukyo (high-yen caused recession). This led to asset bubbles without igniting inflation. Consequences Excess investment in properties, over-expansion in capacity, lavish consumption, rise in outward FDI

P. 206 Two Lost Decades (or More) Why Did Recession Last So Long since Early 1990 s? • • Long adjustment after a large asset bubble Non-performing loans (late policy response) Japan’s economic system became obsolete (*maybe) Aging population and associated problems (pension, medical care, dissaving, etc) (*) • Snowballing fiscal debt (*) • People’s lack of confidence in the future or policy (*) • Rise of China & other emerging economies (*) Lack of political leadership to propose solutions, convince people, and implement actions (*) True even today

Shocks & Intermittent Recovery, 2003 -2012 Main causes of recovery (2003 -2007) – Strong foreign demand (US, China) – Decade-long corporate restructuring effort – Yen depreciation (up to 2007) Lehman Shock and global recession (late 2008 -2009) – Traditional industrial exports (cars, electronics) which were leading recovery suddenly lost export markets. – Thanks to strong demand in China and other emerging economies, growth picked up in 2010 Earthquake & tsunami (2011) and Euro Shock (2011 -) • Production fell temporarily in 2011 due to supply chain disruption and depressed psychology, but recovered soon due to the start of vigorous reconstruction investment. • Recovery was fragile due to global recession (slowdown of emerging economies), yen appreciation, power shortage, etc.

Earthquake & Nuclear Disaster in 2011 Economic Impact and Issues • Estimated stock damage from earthquake was 16. 9 trillion yen (3. 6% of GDP). (In 1995, Kobe earthquake’s damage was 9. 9 trillion yen or 2. 0% of GDP) • Earthquake recovery budget is 19 trillion yen (over 5 years, 4. 0% of GDP) to 23 trillion yen (ultimately, 4. 9% of GDP). This does not include costs related to nuclear disaster. (In 1995, Kobe earthquake recovery budget was 3 trillion yen or 0. 6% of GDP). • Debate over funding: tax increase, debt issue or cutting spending incl. professors’ salaries and education budget (small saving? ) But fiscal problem is mainly caused by social welfare explosion and not by earthquake. • DPJ’s handling of reconstruction plan, radiation problem, power shortage & future energy policy was random and inconsistent. • Growth impact of earthquake is almost neutral: supply disruption is offset by private & public investment for recovery.

Policy Issues for the Bank of Japan PP. 207 -210 Coping with non-performing loans – taking 10 years --Jusen problem: failure of nonbanks specializing in real estate loans (1995 -96) --Bankruptcies of Yamaichi Securities & Hokkaido Takushoku Bank: credit crunch and mini bank runs (1997 -98) --Bank recapitalization: public money injection, creation of Financial Services Agency (1998 -2000) Monetary policy for recovery – unsuccessful? --Injecting liquidity by buying up unconventional assets (corporate & bank bonds, etc): but the monetary transmission mechanism was broken (MB Money Lending) --Zero interest rate policy (Feb. 1999 -Aug. 2000; Mar. 2001 Jul. 2006; Dec. 2008 -) --Inflation targeting not adopted until 2013 --Abenomics: “New Dimension of Monetary Expansion” (BOJ Kuroda, April 2013 -)—but is it really new?

Call rate (interbank shortterm interest rate) Money & bank lending Excess reserves are built up at commercial banks during zero interest rate periods Bubble Zero interest rate policy Zero/negative interest rate policy Lehman Shock

Yen/USD International Reserves Japan: Monthly Changes in International Reserves (Proxy for F/X intervention) Buy Dollar (resist yen appreciation) Sell Dollar (resist yen depreciation) Source: Mc. Kinnon (2007)

Bankrupted Credit & Trust Bank Long-term Credit Bankrupted Hokkaido Takushoku Bank Chuo Trust Bank Chuo Mitsui Trust Bank Sumitomo Trust Bank Daiwa Saitama Bank Saitama Kyowa Asahi Kyowa Bank Mizuho Asset Trust Yasuda Trust Bank Industrial Bank of Japan Mizuho Fuji Bank Daiichi Kangyo Bank Sumitomo Bank Mitsui Taiyo Kobe Bank Sumitomo Taiyo Kobe Mitsui Sakura Mitsui Bank Toyo Trust Bank Tokai Bank UFJ Sanwa Bank Japan Trust Bank Mitsubishi Trust Bank Tokyo Bank of Tokyo Mitsubishi Bank Aozora Shinsei Mitsui Sumitomo Trust Holdings Risona Holdings Mizuho Financial Group Mitsui Sumitomo Financial Group Bank of Tokyo. Mitsubishi UFJ Japan’s 3 Mega Banks

Debate on Fiscal Stimuli PP. 211 -212 • Since the 1990 s, large fiscal spending has been used to stimulate the economy. But there was no strong and sustained recovery, while the government debt skyrocketed. • Seeing this, some argued for even bigger stimuli; others said that more fiscal activism would only worsen the debt crisis. • PM Koizumi (2001 -06) set limits on spending (infrastructure, welfare), with small results. Central Government Debt Outstanding in % of GDP • PM Aso (2008 -) and DPJ (2009 -12) returned to big spending. 199% • Consumption tax will be Bubble burst raised in steps: 5% 8%(2014) 10%(2019? ) • 2 nd Abe Gov’t (2012 -) turned to aggressive fiscal policy.