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Lessons from the Japanese Experience. 6. 7. 5. 7. The Boom and Bust of Japanese Asset Prices: 1985-1992. The Boom and Bust of Japanese Asset Prices, 1985-1992.
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The Boom and Bust of Japanese Asset Prices, 1985-1992 • The Japanese economy grew at an annual rate of 6% during the 3 decades following 1960. By 1990, the per-capita income of Japan was similar to the high-income countries of Western Europe and North America • In the late 1980s, real estate and stock prices in Japan soared, much like housing prices in the U.S. during 2001-2005
The Boom and Bust of Japanese Asset Prices, 1985-1992 • Like the housing boom in the U.S., Japan’s stock and real estate price boom was followed by a bust in the early 1990s • This price collapse led to a surge in loan defaults, troubles in the banking sector, and a sharp slowdown in the growth of the Japanese economy in the early 1990s • This sluggishness persisted and the 1990s are now known as Japan’s “lost decade”
Japanese Stock Market, 1984-2008 • During the 1980s the Nikkei 225 soared, reaching nearly 39,000 at year-end 1989 • But it fell by 46% during the first 9 months of 1990 and has never recovered
Japanese Stock Market, 1984-2008 • By January 2002, it had fallen below 10,000, approximately ¼ the 1989 level • At year-end 2008 the index stood at 8,860
Change in Real GDP, 1987-2008 • Growth of real GDP in Japan averaged 5% annually during the 1980s, but only 1% during 1992-2001 • Growth during 2002-2008 has remained sluggish
Japanese Unemployment, 1987-2008 • The Japanese unemployment rate is quite low, but there has been an upward trend since 1992
Japanese Fiscal Policy • Japan responded to the downturn with several “stimulus” programs that substantially increased spending on roads, bridges, and other infrastructure • Government spending rose from a little more than 30% of GDP in the early 1990s to nearly 40% in the latter part of the decade • The increased spending was financed with budget deficits
Government Expenditures, 1987-2002 • During the 1990s, government spending expanded, soaring to nearly 40% of GDP during 1999-2002
Japanese Budget Deficits, 1987-2002 • Japan’s increased government spending was financed by borrowing • Japan began running budget deficits in 1993, and they became larger and larger during the decade that followed
Net Debt of Japan, 1987-2008 • Measured as a share of GDP, the net debt of the Japanese Central Government was 14% in 1992, but it rose to 60% in 2000 and 88% in 2008
Net Debt of Japan, 1987-2008 • Japan’s fiscal policy response was highly expansionary – an increase in government spending, larger budget deficits and an increase in debt • But the economy continued to stagnate
Japanese Fiscal Response Summary • Japan’s fiscal policy response was highly expansionary • Government spending as a share of GDP increased • Budget deficits were large • Net government debt soared • But the economy continued to stagnate
Japanese Monetary Policy • In contrast with fiscal policy, Japanese monetary policy was restrictive during the 1990s • The money supply grew slowly and during 1995-2002 deflation was often present
Japanese Monetary Policy, 1987-2002 • The broad measure of the money supply (M2) increased at double-digit rates during the late 1980s • But M2 grew at an average rate of only 2.5% during 1991-2002
Japanese Inflation, 1987-2002 • The general level of prices changed little during the 1990s • Deflation was present during 5 of the 8 years between 1995-2002
The Aging Population of Japan in the 1990s and the United States Today
Aging of the Japanese Population • The share of the population age 65 and over in Japan nearly doubled during 1990-2010
Aging of the U.S. Population • The elderly population in the U.S. during 2010-2030 will grow rapidly, but the growth will be a little slower than was the case in Japan during 1990-2010
Impact of Aging Population • Growth of the elderly population as a share of the total, will tend to reduce productivity and lead to higher taxes for the finance of retirement benefits and health care for the elderly • This slowed economic growth in Japan during the 1990s, and it is likely to do so in the U.S. in the decade ahead
Lessons from the Japanese Experience • Expansionary fiscal policy is unlikely to be very effective in promoting recovery from a severe recession generated by reductions in asset prices and wealth • Restrictive monetary policy will tend to delay and complicate recovery • Growth of the elderly population as a share of the total is likely to place upward pressure on taxes, reduce productivity, and slow long-term growth
Difference Between Policy Response of Japan and U.S. • While there are many similarities between the Japanese economic crisis of 1990 and that of the U.S. in 2008-2009, there is one major difference: monetary policy • If monetary policy exerts a strong impact, the U.S. experience in the decade ahead may differ substantially from that of Japan during the 1990s
Difference Between Policy Response of Japan and U.S. • Even if expansionary monetary policy does lead to a robust recovery, the long and variable lags will make it difficult for the Fed to both promote recovery and then shift back to restraint in a manner that will lead to stability in the decade ahead • We are in the midst of a very interesting “experiment” in macroeconomics
Questions for Thought: 1. What were the underlying factors that caused the Japanese economic crisis of the 1990s? Were they similar to the 2008 U.S. crisis? 2. How did policymakers in Japan respond to the crisis? In what ways have the responses of the U.S. policymakers been similar? In what ways have they been different? 3. What are the important lessons from the Japanese experience for the United States?
