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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
P.205
GDP
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 1980s)
Causes
• Structural—bank deregulation and the loss of large
corporate borrowers in the early 1980s 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
Lost Decade (or Lost Two Decades)
Why Did Recession Last So Long since Early 1990s?
•
•
•
•
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.2001Jul.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)
Bubble
Zero
interest
rate
policy
Zero
interest
rate
policy
Lehman
Shock
Money &
bank
lending
Excess reserves
are built up at
commercial banks
during zero
interest rate
periods
Yen/USD
Japan: Monthly Changes in International Reserves
(Proxy for F/X intervention)
25.00
20.00
15.00
Buy Dollar (resist
yen appreciation)
Percent
10.00
5.00
0.00
Jan-80
-5.00
-10.00
Jan-83
Jan-86
Jan-89
Jan-92
Jan-95
Jan-98
Jan-01
Jan-04
Jan-07
Sell Dollar (resist
yen depreciation)
-15.00
Source: McKinnon (2007)
Bankrupted
Credit & Trust Bank
Long-term Credit Bank
Bankrupted
Hokkaido Takushoku Bank
Chuo Trust Bank
Chuo Mitsui Trust
Mitsui Trust Bank
Sumitomo Trust Bank
Daiwa 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
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 TokyoMitsubishi UFJ
Japan’s
3 Mega Banks
Debate on Fiscal Stimuli
PP.211-212
• Since the 1990s, 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.
• PM Aso (2008-) and DPJ
(2009-12) returned to big
spending.
• Consumption tax will be
Bubble burst
raised in steps:
5%8%(2014)10%(2016?)
• 2nd Abe Gov’t (2012-) turned
to aggressive fiscal policy.
MOVIE: GO!!!! TO THE BUBBLE (2007)
Deterioration of Japanese Politics?
Liberal Democratic Party
(LDP) 1955-2009
Koizumi
2001-2006
(except 1993-96)
Democratic Party of
Japan (DPJ) 2009-2012
LDP Abe No.2
2012-
• Between Koizumi and Abe2, there were six PMs in 6 years.
• LDP (Abe, Fukuda, Aso: 2006-09) was unpopular leading to the
change of government to DPJ in Aug.2009.
• DPJ (Hatoyama, Kan, Noda: 2009-2012) proved even worse than
LDP; random policies and amateur politics.
• A shift from “1955 Regime” (LDP’s political dominance) to
alternating two-party competition was not realized.
• Abe2: win popularity with Abenomics, then push defense-related
conservative agenda (Article 9 of Constitution, SDF, Okinawa)