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The Realities and Relevance of
Japans Great Recession
Neither Rannor RashomonAdam S. Posen
LSE STICERD Lecture
May 24, 2010
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Japanese growth- far from flat
-10
-8
-6
-4
-2
0
2
4
6
8
10
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
% change oyaOfficial Recession Periods (a)
(a) Defined as two consecutive quarters of declining output
Source: Thompson DataStream
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Japanese Real GDP Growth1991 Q1:1999 Q2
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
1991 1992 1993 1994 1995 1996 1997 1998 1999
Private consumption
Private Investment
Public Investment
Public Consumption
Net Exports
GDP
Percent
Source: Cabinet Office Japan
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Public Investment
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
2000 2001 2002 2003 2004 2005 2006 2007 2008
Private consumption
Private Investment
Public ConsumptionNet Exports
GDP
Percent
Japanese Real GDP Growth 2000 Q1:2008 Q2Sustained and sustainable growth
Source: Cabinet Office Japan
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Unlike the early 1990s:
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
1991 1992 1993 1994 1995 1996 1997 1998 1999
Public Investment
Public Consumption
Total
Percent
Source: Cabinet Office Japan
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2000 Q1 2008 Q2
No public spending binge in Japan
-1.2
-1.0-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
2000 2001 2002 2003 2004 2005 2006 2007 2008
Public Consumption
Public Investment
Total
Percent
Source: Cabinet Office Japan
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0
100
200
300
400
500
600
1999 2001 2003 2005 2007 2009
0
12
3
4
5
6
7
8
9
10Major Banks (LHS) Regional Banks (LHS)
Topix Bank (RHS)
NPLs as % total portfolio Index
Source: Financial Services Agency Japan, Thompson Datastream
Even Japanese Banks respond to
incentives
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Japanese TFP: far from poor
-5
-4
-3
-2
-1
0
1
2
3
4
2002 2003 2004 2005 2006 2007 2008
Germany UK
US
Japan
France
% change oya
Source: Thompson DataStream
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Average TFP and GDP per worker
2002: Q2-2008:Q2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Japan France Germany UK US
GDP per worker
TFP
% Average
Source: Thompson DataStream
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0
2
4
6
8
10
12
1989 1990 1991 1992 1993 1994 1995
Percent
Call rate"Normal" BOJ response
Fed counterfactual
15
The BoJs response to Japansrecession
Source: Harrigan and Kuttner (2004)
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Japanese inflation experience1992:2008 Q2
-4
-3-2
-1
0
12
3
4
5
6
7
1992 1994 1996 1998 2000 2002 2004 2006 2008
CPI
GDP deflator
Per cent
QEP period
Domestic Corporate
Goods Price Index
Source: Bank of Japan
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It is not clear that QE feeds into broad
money with banking sector problems
-30
-20
-10
0
10
20
30
40
-24 -18 -12 -6 0 6 12 18 24 30 36 42 48 54 60 66 72
-150
-100
-50
0
50
100
150
200% change oya
UK narrow
(LHS)
Japan narrow (RHS)
Japan broad (RHS)
Months from start of QE
UK broad
(RHS) (a)
% change oya
(a) Excluding intermediate OFCs
Source: Bank of Japan and Bank of England
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An independent central bank can
affect expectations
0
1
2
3
4
5
6
7
8
9
10
1991 1993 1995 1997 1999 2001 2003 2005 2007
US 10Y Bond
JGB-10Y
Money Rate
Deflation scares
%
Source: Thompson DataStream and Bank calculations
Adapted from Kuttner and Posen (2003)
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Chinas Importance as an export
market has risen
0
10
20
30
40
50
60
1998 2000 2002 2004 2006 2008
% Total Japanese Exports
Asia
Asia-ex mainland China
US
Mainland China
Note: Asia includes Oceania, Hong Kong and Macau
Source: IMF Direction of Trade Statistics
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0
10
20
30
40
50
60
70
1998 2000 2002 2004 2006 2008
% Total UK Exports
European Union 27
Euro Area 16
US
European Union ex Euro Area 16
Source: IMF Direction of Trade Statistics
For the UK, the Euro Area remains
dominant
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Canada France Germany Italy Japan UK US Average
Stock Market Capitalisation(a)
1.74 1.12 0.65 0.51 1.02 1.37 1.48 1.13Private Sector Bond Market
Capitalisation(b)
0.31 0.57 0.36 0.60 0.38 0.16 1.30 0.53
Short term Private Sector
Securities(c)
0.11 0.22 0.21 0.01 0.07 0.16 0.26 0.15
Banking Sector
Capitalisation(d)
1.41 1.21 1.20 1.27 1.51 1.90 0.69 1.31Banking Sector
Concentration(e)
0.57 0.55 0.74 0.40 0.54 0.72 0.35 0.55
Banks per Million Persons(f)
2.95 7.90 22.60 12.49 6.66 8.50 31.70 13.26
22
Structure of G7 Financial Markets
(a) As ratio of GDP. Data as of end 2008, Source: World Bank Financial Structure Dataset
(b) As ratio of GDP. Data as of end 2008, Source: World Bank Financial Structure Dataset
(c) As ratio of GDP. Data as of end 2008, Source: Bank Calculations and BIS
(d) Deposit money bank assets as ratio of GDP. Data as of end 2008, Source World Bank Financial Dataset
(e) Assets of three largest banks as share of assets of all commercial banks. Data as end of 2008, Source: World Bank Financial
Structure Dataset
(f) Source: Bankscope, IMF and Bank Calculations
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The Japanese private sector maintainedlarge surpluses
-15
-10
-5
0
5
10
15
1992 1995 1998 2001 2004 2007
Corporates Government (a)
External Households
Per cent of nominal GDP
(a) Including public non financial corporations
Based on annual financial year data through 1998 Source: BoJ
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The UK corporate sector has recentlybuilt up an unusually large surplus
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
1988 1992 1996 2000 2004 2008
Per cent of nominal GDP
Japan
UK
Japanese data based on annual financial year data through 1998
Source: BoJ and BoE
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-30
-25
-20
-15
-10
-5
0
1992 1995 1998 2001 2004 2007
Per Cent of nominal GDP
Source: OECD BoP Statistics
U.K.
Japan
While some of the UK surpluses mayfeed into FDI outflowsJapanese
corporates appeared to sit on them
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