Japan's lost two decades:Lessons to Today's Euro Crisis?

March, 2012YOSHII, Masahiko

President, EUIJ-KansaiGraduate School of Economics,

Kobe University, Japanyoshii@econ.kobe-u.ac.jp

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What have been discussed?

• How to solve debt problems• Recovery

– Demand Side: fiscal and/or monetary policies– Supply Side: raising productivities, structural

reform

• Influences of the lost (two) decade(s)– Japanese economic system– fast aging in Japan

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Bubble Era: 1987-1991

• Land Price• Stock Exchange Market• Capital Gain/Loss

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Why the Bubble happened?

• low interest rates and excess liquidity after the Plaza Accord in 1985

• financial liberalization (CD, warrant bonds…)

• expectation of Tokyo to become the financial center in Asia

• band wagon effects

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Plaza Accord

Land PriceH C H C H C

1980 9.9 6.7 18.0 11.2 13.3 9.21985 1.8 3.0 2.0 8.6 2.7 5.01987 9.2 15.0 57.1 76.1 5.7 19.91988 7.4 8.0 24.1 15.8 26.9 36.41989 6.8 7.5 2.7 1.9 37.3 36.11990 13.2 13.4 11.0 5.6 48.2 39.71991 2.7 3.4 -1.0 -0.3 -15.3 -8.91992 -3.8 -4.9 -12.7 -12.5 -22.8 -23.11993 -3.6 -7.7 -12.3 -20.5 -12.1 -21.41994 -1.2 -6.7 -5.0 -18.0 -3.5 -16.71995 -0.9 -6.9 -3.3 -16.9 -3.0 -16.41996 -1.3 -6.9 -5.0 -16.3 -3.9 -13.11997 -0.7 -5.1 -2.9 -10.6 -1.5 -7.81998 -1.4 -5.2 -4.4 -8.4 -2.7 -7.31999 -2.7 -6.6 -7.3 -10.3 -6.2 -10.62000 -2.9 -6.3 -6.7 -9.0 -6.5 -11.32001 -3.3 -6.6 -5.8 -7.6 -7.5 -11.0

Japan Tokyo Osaka

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Stock Exchange Market

Average number ofstock selling / buingper day (mil units)

Average amount ofstock selling / buing

per day (bil yen)

NikkeiAverage

(yen)

1985 415 267.4 12,5651988 1,021 1,024.70 27,0381989 877 1,308.50 34,0581990 484 716.7 29,4371992 265 238.4 18,108

2001 811 812375 10,542

2012 9,777(02 Mar)

Tokyo Stock Market (1st part)

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peak: 38,915 yen (12/1989)

Capital Gain/Loss

tril.yenstock land total% to GDP

1985 33.8 75.5 109.3 341986 121.4 253.2 374.5 111.51987 76 415.5 491.5 140.21988 177.5 166.7 344.2 92.11989 193.6 313.6 507.2 127.11990 -306.7 235.7 -71 -16.61991 -4.8 -191.7 -196.6 -43.21992 -178.0 -228.9 -406.9 -86.91993 40.5 -133.2 -92.7 -19.8

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After the Feast

• too much production capacities adjustment of investments

• balance sheet adjustment

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Asset price fall

• Asset prices began to fall in 1991• Balance sheet problem

– phase 1: non-manufacturing sectors– phase 2: financial sector

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balance sheet problem: phase 1

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Balance sheet problem: phase 2

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bad loanstril. yen

• why resolving the bad loan problems was so delayed?– underestimation of seriousness of recession (dream of high economic growth was kept)– definition of bad loans by the government was

gradually widened– who share the burdens of bad loans

• management, shareholders, depositors, financial institutions, state

• it took almost 10 years to settle who share the loss of bankrupted financial institutions

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Nov. 1997Yamaichi Security and Hokkaido-Takushoku-Bank declared to be bankrupted

• Japanese Government injected capital to financial institutions in 2002

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How the bad loan problems changed behaviors?

• banking behavior– decrease of lending– roles as main banks lowered

• enterprise behavior– curtails of investment and employment

• household behavior– curtails of purchase of durable goods

• Vicious circle of recession21

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Stimuli to recover

• Active Fiscal Policy• Relaxation of Monetary Policy ↓• What to do next? -fast aging society -fiscal problem -environment

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Fiscal Policy

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76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

expenditure

tax revenue

construction gov bond

deficit gov bond

government debt

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66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

construction gov bond

deficit gov bond

Why fiscal measures were ineffective?• Fiscal measures

– mismanagement• delay of fiscal stimuli in the beginning of the 1990s• raising consumption tax rate in 1997• budget expansion since the end of the 1990s

– main targets• construction works• public investments to rural area

– expenditure driven by aging

• decrease of tax revenue in the 1990s = first cause of gov debt problems

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Monetary Policy

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official discount rate

• Overnight Call Rate Target– 2/1999 - 0.15% （ zero interest rate policy ）– 11/8/2000 - 0.25% （ temporary lift)– 28/2/2001 - 0.15% （ reintroduction ）– 14/7/2006 - 0.25% （ re-lift ）– 21/2/2007 - 0.5%– 31/10/2008 - 0.3%– 19/12/2008 - 0.1%– 5/10/2010 - 0.0 ～ 0.1%

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Monetary Base Balance

ChinaJapanUSUKEuro AreaSouth Korea

Why monetary policies were ineffective?

• monetary policy remained to control high land prices even after the burst of bubble

• De facto zero interest rate policy started in the end of the 1990s, but modest

• De jure zero interest rate policy started in 1999, but was lifted when the recovery was still weak

• Quantitative easing was practiced, but the monetary base was not enough enlarged

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Restructuring of the JP economy

• Public sector restructuring– From Public to Private

• corporatization of remaining public corporations (highway, post)

– From the Center to Regions• decentralization of decision making power and financial

resources

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No Reform,No Growth

• Labor market reform

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Competitiveness

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Structural reform was also not enough

• Japan Post and Japan Highway were corporatized, but not privatized

• Japan’s competitiveness is not recovered• Japan’s corporate governance reforms were

not enough

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It’s not A Sony

Decline of population

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2,679

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2,679

1,070

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Problems of the aging society

• decline of labor population• decline of saving ratios

– new investment– management of government debt problems

• increase of pension and health care burdens

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How to activate Japanese Economy?

• redesign of Japanese economic system– to make Japan more open– to make Japan more innovative & creative– …

• sustainability of Japanese society– to reform pension and health care systems– to reform budgetary system– …

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Koizumi, Jun’ichiro4/2001-9/2006

Abe, Shinzo9/2006-9/2007

Fukuda, Yasuo9/2007-9/2008

Aso, Taro9/2008-9/2009

LiberalDemocraticParty

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Noda, Yoshihiko9/2011-

Kan, Naoto6/2010-9/2011

Hatoyama, Yukio9/2009-6/2010

Democratic Party of Japan

Summary• delay of recognition• stimulus package was too little, too late• monetary policy has been timid• active fiscal policies during the 1990s and 2000s

caused a serious sovereign debt problem • state bonds expanded to 200% of GDP• Japanese governments have been too weak to

implement structural policies• Japan needs to change its system, but to where?

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Data by Thomson Reuters

Announcement

• EUIJ-Kansai (Young Fellow Scheme) invites one researcher from the EU member countries in the FY 2012 (April 2012 – March 2013), to stay in Kobe / Osaka for 1-2 week(s) , to advance your research, and to be familiar with Japan.

• I hope you to raise your hands!

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Thank you for your attention!yoshii@econ.kobe-u.ac.jp