Transcript Title

BAILOUTS PRESENTATION WEEK 8
THE SUCCESS AND FAILURE OF THE
JAPANESE BANK BAILOUT
Mark Bass, Reid Bolton, Robert Dunn & Hadi Nilforoshan
February 26, 2009
Agenda
The Asset Bubble
The Crisis
The Government Response
Lessons Learned
1
Bailouts Seminar Week 8
JAPAN’S ECONOMY BOOMED IN THE 1980’s
2
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HOWEVER THE UNITED STATES PRESSURED JAPAN INTO MODIFYING
ITS EXCHANGE RATE
Plaza Accord signed between
US, Japan, Germany, France
and UK
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THE BANK OF JAPAN STARTED CUTTING INTEREST RATES IN PART TO
SPUR DOMESTIC DEMAND AND IN PART TO BALANCE INTERNATIONAL
EXCHANGE RATES
“The Bank of Japan hopes that this action will contribute to achieving
domestic demand growth promoted by lower interest rates, and help
correct Japan’s external imbalance. The Bank will continue to carefully
watch the development of foreign exchange markets in future monetary
policy management.”
BOJ Official Statement
1986
4
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JAPAN’S MONEY SUPPLY MORE THAN DOUBLED FROM 1980 TO 1990.
5
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BANKS SEEKING HIGHER RETURNS BEGAN LENDING MORE MONEY
FOR REAL ESTATE PURCHASES AND IMPROVEMENTS
Increases in real estate
loans also mirrored the
increasing desperation
of banks close to
insolvency
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REAL ESTATE BUBBLE GROWS SLOWLY FROM 1980 TO 1986 AND THEN
EXPLODES BETWEEN 1987 AND 1990
Land Prices in Japan (1974-2007)
Percent (Indexed to 1974)
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THE LOOSE MONETARY POLICY AND BOOMING REAL ESTATE VALUES
FUELED A MASSIVE INCREASE IN JAPANESE EQUITIES.
NIKKEI 225 1970-2009
Peak in 1989:
Land constituted 50%
of corporate tangible
assets
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GOVERNMENT POLICIES AND AGGRESSIVE BANK BEHAVIOR
COMBINED TO PRODUCE THE ASSET BUBBLE
Deregulation led banks to pursue riskier strategies.
The government deregulated interest on deposits, decreasing bank revenues. Banks began
making riskier loans to small companies backed by property, as well as other speculative realestate based loans. Also, as the government allowed companies greater access to securities
markets, banks sought to compete by making risky real estate loans.
BOJ pursued loose monetary policy for too long and fueled the asset bubble
Loose monetary policy made funding for speculative real estate projects more available. Even as
late as 1987, when the asset bubble was starting to emerge, the Bank of Japan lowered interest
rates to 2.5 percent. The BOJ was using monetary policy to try and reduce the current account
surplus, spur domestic demand, and stabilize the foreign exchange rate. By pursuing so many
goals, the BOJ failed to act decisively to the real estate and equity bubble at home.
Tax Policies Suppressed the Supply of Land and thus Drove up Prices.
Tax rates were low for those holding land, but relatively high for land transactions. When land
prices are expected to rise, those holding land tend to take advantage of the low tax rates and
hold onto land. The high tax rate on sales further squeezed the supply by incentivizing land
holders to delay their sales. These two factors combined to keep supply low and thus boosted
prices higher.
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THE EFFECTIVE MARGINAL TAX RATE ON CORPORATE LAND FURTHER
ENCOURAGED INVESTMENTS IN REAL ESTATE.
Effective Marginal Tax Rate on Land Holdings
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THE GREATEST ASSET BUBBLE IN THE HISTORY OF THE PLANET. . .
A commonly quoted claim in
1989 was that the land under
the Imperial Palace in Tokyo
was worth more than all of
California.
Value of prime property in
Tokyo’s Ginza district in
1989 reached $139,000
per sq foot.
Land Value as Proportion of GDP at Height of Asset Bubble
~1990
~1999
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. . . CREATED BULLISH EXPECTATIONS AND SOME HUBRIS
Rockefeller Plaza—$1.9 Billion,
Abandoned in 1995
Japan
Pebble Beach—Purchased for $841 Million,
Sold for $820 Million in 1999
Everyone Else
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. . . AND THE SPECTRE OF JAPANESE ECONOMIC HEGEMONY!
On the forty-fifth floor of the Nakamoto Tower
in downtown L.A.—the new American
headquarters of the immense Japanese
conglomerate—a grand opening celebration
is in full swing
On the forty-sixth floor, in an empty
conference room, the dead body of a beautiful
woman is discovered.
The investigation begins…and immediately
becomes a headlong chase through a twisting
maze of industrial intrigue…a no holds barred
conflict in which control of a vital American
technology is the fiercely coveted prize—and
the Japanese saying “business is war”
takes on a terrifying reality
Rising Sun was written in 1992, at
the very end of the Japanese
boom
13
Agenda
The Asset Bubble
The Crisis
The Government Response
Lessons Learned
14
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JAPAN’S CENTRAL BANK MIGHT HAVE TRIGGERED THE CRISIS
Bank of Japan Overnight Call Rate
“Popping” of Asset
Bubble”
Six years of slow
descent instead of
rapid easing
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JAPAN’S ASSET BUBBLE BURSTS
Asset Price Deflation 1989-2000
Percent
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THE CRASH WAS QUICK YET LONG LASTING
CHART OF NIKKEI (JAPANESE STOCK MARKET) 1989- 2001
80% Drop in
Nikkei over
ten years
1989 1990
1992
1994
1996
1998
2000
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AND LED TO A DECADE OF LOWERED GDP GROWTH
GDP per capita annual growth rate
Percent
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NUMEROUS ECONOMIC INDICATORS SIGNALLED A DECLINE IN THE
JAPANESE ECONOMY . . .
Percent
Growth in Residential Land Prices
Six Years of
deflation in Japan’s
real estate
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. . . BUT THE BANKS WERE THE HARDEST HIT
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. . . BUT THE BANKS WERE THE HARDEST HIT
Drop in Real Estate Values Hammered Bank Balance Sheets
Japanese Banks had large proportion of their portfolio of loans in real estate
Real estate asset values declined significantly which led to a drastic decline in bank asset
values and the downgrading of banks by international credit rating agencies. Banks had large
number of Non-Performing Loans (NPLs) within their portfolios
Unique Keiretsu System Decreased Bank Willingness to Foreclose on Loans
• System of “Lead Banks” and cross-shareholding between companies and banks made
foreclosure on any loan catastrophic to both the bank and multiple companies connected to
the bank
• Foreclosure also signaled that the bank had failed its responsibility of effective oversight
which could potentially lead to a run by bank investors
• Therefore banks were willing to “roll-over” the loans continually and unlikely to cut off the
companies from credit.
Poor Oversight by Regulators and Internal Auditors Also Made Japanese Banks
Particularly Vulnerable to Downturn
• Lax accounting rules led to under-reporting of NPLs by banks
• Approximately 40% of bad loans were made to mafia due to infiltration by mafia in MoF and
bank officials
• Foreign banks were not hurt by downturn nearly as much as Japanese banks
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THE RISE OF THE “ZOMBIES”
Regulators
Banks
Firms
• Regulators explicitly and
implicitly pressured banks to
extend loans to avoid
bankruptcy
• Want to avoid job losses and
decreases in loans to
businesses
• Banks continue to extend credit to
insolvent debtors despite low
probability of being repaid
• “with a few exceptions, most Japanese
banks still continue to extend new
loans to debt-burdened companies,
often in exchange for only modest
restructuring plans.”
• Firms with negative profitability
continue to operate as “zombie firms”
• Promote deflation and hurt innovation
across economy
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COMMENTATORS RECOGNIZED THE NEED FOR A BANK BAILOUT
IMMEDIATELY
A consensus developed for saving the banks
Exposing the bad loans and
nationalizing some banks
“was a turning point in the
crisis. After that, markets
finally trusted banks again.
Mr. Gomi (Japanese
Financial Services Agency)
It is critical to promptly
restore orderly functioning
of the financial system as
the lifeblood of the
economy.
Finance Minister Hikaru
Matsunaga
Quick and decisive
actions are needed
to restore
confidence.
- Treasury
Secretary Rubin
Although the Electorate was More Concerned About Budgetary Discipline
Japan was slow to
move on bank
bailouts because of
public outrage over
the bailouts.
Japanese voters punished
politicians at the polls who
supported bailouts, particularly
when the early bailouts didn’t stop
the bleeding.
23
Agenda
The Asset Bubble
The Crisis
The Government Response
Lessons Learned
24
Bailouts Seminar Week 8
GOVERNMENT RESPONSE CAN BE GROUPED INTO THREE PHASES
Phase 1: Stabilizing the Economy
1989-1993
• Dramatic Easing of Monetary Policy
• Recognition of Problem without Taking
Significant Actions
Phase 2: Attempts at Recovery
1993-1999
• Large Public Works Campaign
• Focus on Increase in Consumption
• $514 Billion Bailout for Banks
• Lack of Fundamental Change Led to the
“Lost Decade”
Phase 3: Jumpstarting the economy
2000 and onwards
• Massive bailout of banks
•New disclosure requirements for banks
•“No bank too big to fail”
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MAJOR STEPS IN NATIONAL RECOVERY PLAN
Major Steps
1990-1992
1993
• BOJ decreased discount rates
• Discount Rate is kept low,
• Banks write off 4.3 Trillion Yen in nonperforming
• Bank of Japan creates a bridge bank with
•
1995
1996
• Nikkei continues to fall-- loses 60% of its
value, house prices fall 50%. 14,569 firms
with debt equal to +10 Million Yen go
bankrupt.
assets. Government doesn’t take much action.
1994
Resulting Health of Economy
government support which supervises the
takeover of two failing credit cooperatives.
Income Tax Cut
• BOJ provides liquidity and loans to several
failing banks through Hougachou system,
whereby private institutions support banks.
• Economy continues to struggle, as GDP
growth rate is nears zero. Reserves for loan
losses of commercial banks grew by 35%.
• Tokyo Kyowa and Anzen Credit Cooperative
fail, and must be bailed out to prevent runs
on other Japanese Depository Institutions
• A series of bank failures sweep the country,
as private institutions start second guess
participation in funding pricey bank bailouts.
• Deposit Insurance Law amended to remove the
• Gov’t bailouts unable to stop additional bank
payoff cost limit, which capped amount gov’t
could use to support failing banks.
failures, as appreciating Yen further hurts
economy.
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MAJOR STEPS IN NATIONAL RECOVERY PLAN
Major Steps
1997
• BOJ props up NCB and other banks but does not
•
1998
• Legislation introduces $30 Trillion Yen in public
•
1999-2000
funds to fix crisis. 13 Tril. for capital injections and
17 Tril. to cover losses of financial institutions
40 Trillion Yen Fiscal Stimulus Package
passed
• New legislation (FFESL and FRL) greatly
•
•
2001+
bailout Securities Houses. BOJ later forced provide
liquidity for interbank market, replacing SH’s
Consumption tax raised to 5%
increases government ability to supervise
struggling financial institutions, and allows
nationalization of banks.
Capital injection funding doubled, signaling
government commitment to resolving crisis.
29 Trillion Fiscal Stimulus Package
• Safety net of full-scale protection of depositors and
creditors altered.
• Alteration are a system risk exception,
• Decrease in the BOJ’s role
• Takenaka Plan Adopted
Resulting Health of Economy
• Collapse of Securities Houses furthers crisis.
Security house collapse dry up interbank
liquidity, as that was the function of SH’s.
• Markets initially stabilize from cap. injection,
but drop again as amount is too small. LTCB,
Japan’s largest bank fails, and is nationalized
• Increase in funding for capital injections, and
much broader supervisory role slowly helped
soothe economy. Nationalization of
struggling banks removes need for private
support, and allowed gov’t to restructure
failing banks and transfer their bad loans.
• Nikkei slowly rebounds from 2003 onwards.
Japanese banks stabalize.
27
DBI-SDA006-20070110- Third EC council
1 PHASE 1: THE GOVERNMENT TOOK ONLY A FEW IMMEDIATE
ACTIONS THAT DID NOT APPEAR TO IMPROVE THE SITUATION
What they did
The Impact
•Increase in Discount Rate
•Economic Boom Turn into Bust
•Nikkei Begins its Descent
•Reduction in Credit
Available for Property
Purchases
•Housing Prices Fairly Steady
•Inability to Stop Future Economic Troubles
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DROP IN INTEREST RATE DID NOT SPUR CONSUMPTION
Automobile Purchases
1980-2000
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DBI-SDA006-20070110- Third EC council
2 PHASE 2: THE GOVERNMENT’S LACK OF AMBITIOUS REFORM LED
TO A “LOST DECADE” FOR THE JAPANESE ECONOMY
What They Did
The Impact
•100 trillion Yen in Fiscal
•Early On: Drop in Interest
Stimulus Programs
oPublic Works
oDirect Checks
•Interest Rate + Devaluing
•$514 Billion Bailout Fund
Rate Doesn’t Change
Consumption
Yen Can’t Reverse Damage
Created for Banks
•Interest Rates Lowered to Zero
•Direct Government Lending
through FILP Program
•FILP and Credit to
Businesses Somewhat
` Effective
oDebt = 200% of GDP
oBanks Able to Lend
oPork barrel Politics
•Purchasing Commercial Paper
•20 Trillion Yen Credit Guarantee
for Businesses
•“Zombie Banks” Cannot
Undo Damage
oStemming the Tide
oTax cuts helped but then
reversed
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PHASE 3: TAKENAKA CRACKS SOME SKULLS
"Big banks have their merits…They
enjoy economies of scale. . . . But
we do not hold the idea that they
are too big to fail.
October 8, 2002
Heizo Takenaka
Minister of Finance
2001-2005
The maximum benefits of
recapitalization can only be
achieved under strict asset
valuation standards. It is
necessary to ensure that
banks thoroughly and
properly disclose their NPLs
under the stringent
supervision of the relevant
regulatory authorities
DBI-SDA006-20070110- Third EC council
3 PHASE 3: THE LONGER TERM CHANGES APPEAR TO HAVE HAD
SOME POSITIVE IMPROVEMENTS
What they Did
•Capital Injections in 15
Banks
oProfitability Plans
oIntervention Option
•Altering the Safety Net
oP&A Method
oSystemic Risk
Exception
oDecreasing BOJ’s
Involvement
• Stricter Disclosure
Requirements for Banks
oNew Accounting
Mechanisms
The Impact
•Basic Measures of Early 1990’s + New
Step of Post 1999 Take Effect
•Better Operation of Banks
Takenaka Plan
Implemented
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Agenda
The Asset Bubble
The Crisis
The Government Response
Lessons Learned
Learned
Lessons
33
Bailouts Seminar Week 8
THERE ARE LESSONS THAT WE CAN LEARN FROM THE JAPANESE
BAILOUT
Description
1A. Fiscal and Monetary
Stimulus In Isolation
Will Not Help
1B. Confront the
Banking Problem
Quickly
2.
Ignore Deficits in
the Short/Medium
Term
• Discount Rate was close to zero throughout the 1990s and 2000’s
• Focus on “hard” infrastructure led to wasteful spending
• Many projects built according to political needs, not where most useful
• Half-measures and frequent changes diminish confidence in the
restructuring
• Japan’s Finance Ministry did not force banks to write down their debts
for several years even after realizing many banks were insolvent
• Government needs “bad cops” to discipline the banking system
• Concerns about deficits and coming retirement of baby boomers led to
diminished fiscal expansion
• Government ended tax cuts after only a year of mild growth, sending
GDP back to zero
• Tax cuts are necessary to incent growth but only in the right places
34
34
LESSON #1A: FISCAL AND MONETARY STIMULUS WILL NOT FIX THE
PROBLEM
GDP Growth vs. Stimulus Measures
Discount
Rate
Discount Rate
GDP Growth %
10
Negative Growth
Despite Zero
Discount Rate
Massive Stimulus Bills
Passed by Congress only
had temporary Effect
5
0
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LESSON #1A: FISCAL AND MONETARY STIMULUS WILL NOT FIX THE
PROBLEM
Vast Majority of
Japanese Public
Works Spending was
on Infrastructure
Marine Bridge, Hamada Japan
Built using stimulus
money, it became known
as the “bridge to
nowhere”
36
LESSON #1B: CONFRONT THE BANKING PROBLEM QUICKLY
Japanese Bank Officials Ignored Banking Troubles For Seven Years
Money Supply vs Bank Credit 1994-1997
Indexed to 1994 dollars
130
120
Monetary base
110
M2
Bank Credit
100
90
1994
1992
1994-1995
Public recognition
of problems in
Jusen (S+L)
corporations
1996
1997
Several
major bank
closures
1998
1997
FSA created
to help offload
toxic loans
First round of
gov’t capital
injections
Credit
Cooperatives
Shut Down
Asset
Bubble
Pops
1990
1995
1999
Second round
of gov’t capital
injections
(4x larger)
2000
Bank failures and
nationalizations
begin to improve
industry health
2001
2003+
Takenaka
becomes FSA
head and
institutes new
accounting rules
37
LESSON #1B: CONFRONT THE BANKING PROBLEM QUICKLY (cont.)
Bank Credit Ratings 1980-1999
(Top 7 Banks)
A
A/B
B
Government Delayed
Major Actions While
Watching Major Banks
Deteriorate
B/C
C
C/D
D
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Lesson #1B: CONFRONT THE BANKING PROBLEM QUICKLY
We question whether the authorities in the U.S. and
Europe have sufficiently examined the management and
financial health of recipient banks in deciding how to
allocate the public funds
Shimizutani Satoshi
Faculty Fellow
Research Institute, Economy
Shimbun Newspaper
11/28/2008
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Bailouts Seminar Week 8
Lesson #2: IGNORE DEFICITS IN THE SHORT TERM
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Bailouts Seminar Week 8
Lesson #2: IGNORE DEFICITS IN THE SHORT TERM
Percent
Initial Tax
Cuts
Taxes
Increased
41
ITS BAAAACK (REDUX?)
THE LIQUIDITY TRAP-that
awkward condition in which
monetary policy loses its grip
because the nominal interest
rate is essentially zero, in which
the quantity of money becomes
irrelevant
The problem is one of credibility.
The Bank of Japan must create a
credible belief that inflation will
be 4% over 15 years
• During the 1990s, many
economists stated that the Central
Bank could fix the situation by
creating high inflationary
expectations.
• However, Japanese officials did
not follow through
• Should the United States attempt
these same solutions?
42
Bailouts Seminar Week 8
ARE WE GOING DOWN THE SAME PATH?
Phase 1: Stabilizing the Economy
1989-1993
2007-2008
United States
Policy?
• Dramatic Easing of Monetary Policy
• Recognition of Problem without Taking
Significant Actions
Phase 2: Attempts at Recovery
1993-1999
• Large Public Works Campaign
• Focus on Increase in Consumption
• $514 Billion Bailout for Banks
• Lack of Fundamental Change Led to the
“Lost Decade”
Phase 3: Jumpstarting the economy
2000 and onwards
Current US
Policy?
• Massive bailout of banks
•New disclosure requirements for banks
•“No bank too big to fail”
US Policy
2010?
43
CONCLUSION: ARE WE MAKING THE SAME MISTAKES?
FOR DISCUSSION
Wait and See?
?
?
Treasury Secretary Willing to Get Tough with Banks and Force Disclosure?
Public Works Projects Targeted at High Multiplier Spending?
Good Choices
•We have made
some of the same
mistakes
•And tried some of
Early Stimulus Package
the same
solutions
Disregarding Deficits in the Short Term
•Are we acting
Federal Reserve Acting as Lender of Last Resort
quickly enough?
•Are we acting
decisively
enough?
Mistakes
•Are there
Not Requiring Banks to Disclose their NPLs (yet)
Exhausting Monetary Policy Options Early in Crisis
Incremental Injections of Capital Into Banking System instead of “Shock and Awe”
characteristics of
US that make
comparisons
inappropriate?