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

1. Japan's lost two decades:Lessons to Today's Euro Crisis? March, 2012 YOSHII, Masahiko President, EUIJ-Kansai Graduate School of Economics, Kobe University, Japan yoshii@econ.kobe-u.ac.jp

4. 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

5. Bubble Era: 1987-1991 • Land Price • Stock Exchange Market • Capital Gain/Loss

6. 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

7. Plaza Accord

8. Land Price

9. Stock Exchange Market peak: 38,915 yen (12/1989)

10. Capital Gain/Loss

11. After the Feast • too much production capacities  adjustment of investments • balance sheet adjustment

14. Asset price fall • Asset prices began to fall in 1991 • Balance sheet problem • phase 1: non-manufacturing sectors • phase 2: financial sector

15. balance sheet problem: phase 1

16. Balance sheet problem: phase 2 tril. yen bad loans

17. 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

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

19. Japanese Government injected capital to financial institutions in 2002

21. How the bad loan problems changedbehaviors? • 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 recession

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

25. Fiscal Policy expenditure deficit gov bond tax revenue construction gov bond 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

26. government debt construction gov bond deficit gov bond 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

27. 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

28. Monetary Policy official discount rate

29. 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%

30. Monetary Base Balance China Japan US UK Euro Area South Korea

31. 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

32. 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 No Reform, No Growth

33. Labor market reform

36. Competitiveness

38. 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 It’s not A Sony

39. Decline of population

40. 2,679 1,070

43. Problems of the aging society • decline of labor population • decline of saving ratios • new investment • management of government debt problems • increaseofpensionandhealthcareburdens

44. 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 • …

45. Liberal Democratic Party Koizumi, Jun’ichiro 4/2001-9/2006 Abe, Shinzo 9/2006-9/2007 Fukuda, Yasuo 9/2007-9/2008 Aso, Taro 9/2008-9/2009

46. Democratic Party of Japan Hatoyama, Yukio 9/2009-6/2010 Kan, Naoto 6/2010-9/2011 Noda, Yoshihiko 9/2011-

47. 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?

48. Data by Thomson Reuters

49. 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!

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