Lecture 12 The Bubble Burst and Recession

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Economic Development of JapanNo.12 The Bubble Burst and RecessionP.202

Nikkei Stock Average 225

Urban land price indexSource: Japan Real Estate InstituteP.205GDPAfter the bubble burst, economy looked up in 1996-97, 2000, 2003-07, 2010, 2012.Economy fell hard in 2008-09 due to Lehman Shock, which had greater macroeconomic impact than the earthquake & tsunami.2011-:Euro shock

Industrial Production

MOVIE: GO!!!! TO THE BUBBLE (2007)The Heisei Bubble (Economic Boom in late 1980s)CausesStructuralbank 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.Monetaryas the yen rose sharply after 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 FDIPP.202-203Lost Decade (early 1990s-early 2000s):Why Did the Recession Last So Long?Long adjustment after a large asset bubbleNon-performing loans (late policy response)Japans economic system became obsolete (*maybe)Aging population and associated problems (pension, medical care, dissaving, etc) (*)Snowballing fiscal debt (*)Peoples 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 todayP.206Coping 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 (MBMoneyLending)--Zero interest rate policy (Feb.1999-Aug.2000; Mar.2001-Jul.2006; Dec.2008-)--Inflation targeting? (Not adopted until 2013)--New Dimension of Monetary Expansion (BOJ Kuroda, April 2013-)Policy Issues for the Bank of JapanPP.207-210Call rate (interbank short-term interest rate)Money & bank lendingExcess reserves are built up during zero interest rate periods

BubbleZerointerest ratepolicyZerointerest ratepolicyLehman Shock

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

Yen/USD

International ReservesCredit & Trust BankLong-term Credit BankHokkaido Takushoku BankChuo Trust BankMitsui Trust BankSumitomo Trust BankDaiwa BankSaitama BankKyowa BankYasuda Trust BankIndustrial Bank of JapanFuji BankDaiichi Kangyo BankSumitomo BankTaiyo Kobe BankMitsui BankToyo Trust BankTokai BankSanwa BankJapan Trust BankMitsubishi Trust BankBank of TokyoMitsubishi BankBankruptedBankruptedChuo Mitsui TrustMitsui Sumitomo Trust HoldingsAsahiSaitama KyowaDaiwaRisona HoldingsMizuhoMizuho Asset TrustMizuho Financial GroupTaiyo Kobe MitsuiSakuraMitsui SumitomoMitsui Sumitomo Financial GroupUFJMitsubishi TokyoBank of Tokyo-Mitsubishi UFJAozoraShinseiDebate on Fiscal StimuliSince 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 would only worsen the debt crisis.PM Koizumi (2001-06) set limits on spending (infrastructure, welfare).PP.211-212PM Aso (2008-) and DPJ (2009-12) returned to big spending.Consumption tax will be raised in steps: 5%8%(2014)10%(2015)2nd Abe Govt (2012-) turned to aggressive fiscal policy

Government debt as % of GDPBubble burstShocks & Intermittent Recovery, 2003-2012Main causes of recovery (2003-2007)Strong foreign demand (US, China)Decade-long corporate restructuring effortYen 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 2010Earthquake & tsunami (2011) and Euro Shock (2011-2012)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 2011Economic Impact and IssuesEstimated stock damage from earthquake was 16.9 trillion yen (3.6% of GDP). (In 1995, Kobe earthquakes 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.DPJs 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.

Deterioration of Japanese Politics?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 dominance) to alternating two-party competition was not realized.As of July 2013: Abes popularity & fragmented oppositions are likely to enhance LDPs rule in Upper House election.

Liberal Democratic Party (LDP) 1955-2009(except 1993-96)Democratic Party of Japan (DPJ) 2009-2012Koizumi 2001-2006LDP Abe No.2 2012-