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THE ECONOMY OF
JAPAN
日
本
経
済
1
Traditional Japan
Source: Web Japan & Japanese Consulate General, San Francisco
2
Contemporary Japan
“Cool Japan”
Japanimation
“KAWAII”
3
3
4
5
Looking at Some of the Basics
Geography
•
Four main islands:
• Hokkaido (N)
• Honshu (main island) – Tokyo, Mt. Fuji, Osaka, Hiroshima
• Shikoku – Rural
• Kyushu (SW) – Fukuoka, Kagoshima, Nagasaki
•
Most of the population is in Honshu, between the Kanto (Tokyo-YokohamaKawasaki) in the east and the Kansai (Kobe-Osaka-Kyoto) in the west
•
Tokyo – Yokohama has almost 25% of the population (over 33 million)
•
Close to 80% of the land is mountainous
•
Japan is poor in natural resources and flat arable land. it depends on imports, for
example, for 99.5% of its petroleum
6
Various Social Statistics
Population
Population growth rate
Population, share of 0-14 years
127,600,000 (2013)
-0.2% annual change (2012)
12.7% (2013)
Population, share of 15-64 years
62.2%(2013)
Population, share of 65 and over
24.2%(2013)
Sex ratio, number of males per 100 female
95.9(2013)
Total fertility rate
1.41 (2013)
Death rate (number of deaths per 1000
population
9.27 (2013)
Infant mortality rate (number of deaths per
1000 live births)
2.13 (2013)
Life expectancy at birth (total population)
82.27 (2012)
Life expectancy at birth (male)
79.5 (2012)
Life expectancy at birth (female)
85.8 (2012)
7
Japan GDP Growth Rate
8
-1.0%
-2.0%
-3.0%
2008/ 1- 3.
2006/ 1- 3.
2004/ 1- 3.
2002/ 1- 3.
2000/ 1- 3.
1998/ 1- 3.
12.0%
1996/ 1- 3.
Moving
Average
1994/ 1- 3.
1992/ 1- 3.
1990/ 1- 3.
1988/ 1- 3.
1986/ 1- 3.
1984/ 1- 3.
13.0%
1982/ 1- 3.
14.0%
1980/ 1- 3.
1978/ 1- 3.
1976/ 1- 3.
1974/ 1- 3.
1972/ 1- 3.
1970/ 1- 3.
1968/ 1- 3.
1966/ 1- 3.
1964/ 1- 3.
1962/ 1- 3.
1960/ 1- 3.
1958/ 1- 3.
1956/1-3.
Japanese GDP Growth
(seasonally adjusted, % per annum over previous year)
15.0%
Bubble Bursts: Peak 1991
11.0%
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-4.0%
-5.0%
-6.0%
-7.0%
-8.0%
9
10
Yen/Dollar Exchange Rate
11
Nikkei – Last 5 years
12
13
Japan’s Top 10 Exports - 2013
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Vehicles excluding trains and streetcars:
$148,516,005,000 (20.8% of total exports)
Machinery: $135,170,603,000 (18.9%)
Electronic equipment: $108,196,915,000 (15.1%)
Optical, technical and medical apparatus:
$40,098,608,000 (5.6%)
Iron and steel: $35,354,109,000 (4.9%)
Organic chemicals: $26,338,964,000 (3.7%)
Plastics: $25,687,461,000 (3.6%)
Mineral fuels including oil: $16,620,425,000 (2.3%)
Ships, boats and other floating structures:
$15,559,127,000 (2.2%)
Articles of iron or steel: $13,464,169,000 (1.9%)
14
Japan’s Top Import Partners
Below is a list of Japan’s top 15 trade partners that imported the most
Japanese shipments by dollar value during 2013. Also shown is each import
country’s percentage share of total Japanese exports.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
United States: $134,503,767,000 (18.8% of total Japanese exports)
China: $129,155,513,000 (18.1%)
South Korea: $56,572,287,000 (7.9%)
Taiwan: $41,644,120,000 (5.8%)
Hong Kong: $37,374,197,000 (5.2%)
Thailand: $36,014,945,000 (5%)
Singapore: $20,976,399,000 (2.9%)
Germany: $18,941,914,000 (2.6%)
Indonesia: $17,044,670,000 (2.4%)
Australia: $16,968,268,000 (2.4%)
Malaysia: $15,245,915,000 (2.1%)
Netherlands: $13,915,444,000 (1.9%)
United Kingdom: $11,189,862,000 (1.6%)
Russia: $11,003,437,000 (1.5%)
Viet Nam: $10,529,725,000 (1.5%)
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http://www.tradeandexportme.com/2014/04/japan-gcc-relations/
16
THE
“BUBBLE” ECONOMY
17
Bubble Economy (How “Bubbly” Was It?)
1985 -1990
• Asset Price Inflation
– Stocks - Nikkei hit high of 38,915 on Dec. 31 1989. Keep in mind it did
not hit 10,000 until after 1985.
– Land and Real Estate Prices – Prices more than doubled from 1987 to
1990.
– Real Estate inflation more pronounced in larger cites
• Consumer prices not significantly affected
• Rapid economic growth
18
Land Prices
19
Japanese Urban Real Estate Prices
vs Consumer Price Index Inflation

18 years!

Commercial Real Estate
—6 largest cities—
CPI (inflation)
20
Japanese Foreign Investment Expands
• Matsushita Group (Panasonic) > Universal Studio
• Sony Group > Columbia Pictures
• Mitsubishi Estate Group ->Rockefeller Center and
Pebble Beach
Q. What happened to these investments?
21
Looking at the Causes of the Bubble
• Background
– Strong growth in 1980’s and stronger consumer
confidence
– Financial Deregulation throughout 1980’s.
– End of deficit spending by government
– Main-bank relationships
– Problem with trade deficits (led to Plaza Accord)
– Expansionary monetary policy to counter Plaza Accord
– Management poised for strong growth
– Reaganomics (high interest rates in US)
– Belief that Japan was becoming an economic superpower
22
The Low Cost of Borrowing
• Interest rates were effectively 0%
• Firms over borrowed
• Projects that earned a mere 0% were approved
• Banks over lent
• Collateral or track records were enough – expectation that
asset prices would always rise
• Asset prices proved unrealistic
• Projects didn’t earn 0% ex post
• Banks eventually, however couldn’t collect on their loans
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1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
Proportion of Loans to Small Firms
0.6
0.5
0.4
0.3
Year
24
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
Proportion of Loans to Real Estate
Developers
0.14
0.12
0.1
0.08
0.06
0.04
0.02
Year
25
20 00/1 0/22
20 00/4 /22
19 99/1 0/22
19 99/4 /22
May 31, 198 9
firs t an ti-"Bub ble"
rate hike
19 98/1 0/22
19 98/4 /22
19 97/1 0/22
19 97/4 /22
19 96/1 0/22
19 96/4 /22
Christmas 1989
rate hike
– "b ubbl e" pe aks –
19 95/1 0/22
19 95/4 /22
19 94/1 0/22
19 94/4 /22
5.0 0%
19 93/1 0/22
19 93/4 /22
19 92/1 0/22
19 92/4 /22
19 91/1 0/22
19 91/4 /22
19 90/1 0/22
Nov 1, 1986
fol lowing
"Plaza Accord"
19 90/4 /22
19 89/1 0/22
19 89/4 /22
1.0 0%
19 88/1 0/22
19 88/4 /22
19 87/1 0/22
19 87/4 /22
19 86/1 0/22
19 86/4 /22
19 85/1 0/22
19 85/4 /22
19 84/1 0/22
2.0 0%
19 84/4 /22
19 83/1 0/22
BOJ Dis cou nt Rate
Targ et Cal l Rate
6.0 0%
Aug 30, 199 0
Ju l 1, 199 1
interest rate s
ke pt h igh for 1 8
mon ths foll owing
the "bub ble's" p eak
4.0 0%
3.0 0%
Sept 8, 1995
0.5 %
dis cou nt ra te!!
Feb 12, 199 9
"Zero Interest
Rate Policy"
co mmen ces
Feb 23, 198 7
0.0 0%
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Money Supply
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Other Causes of the Bubble
Malfunctioned “Safety Net”
Bank of Japan (BOJ)
Ministry of Finance (MOF)
“Discretionary Guidance”
Inefficient Monitoring of Banking System
Some Reinforcing Factors
Cross-holding share in Keiretsu system
Expansion of real estate companies (Jusen)
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Prolonged Aftermath
• Impacts
– Longest recession in post-war period.
– Non-performing Loans
– Major Bank Failure and Merges
• Causes of prolonged slowdown
– Delay in recognizing problems and in responses
– Uncoordinated Actions
• Covered Problems
– Overprotected banks
– Inefficient corporate governance and structure
29
Lasting Dilemmas
• Monetary policy doesn’t work
– Interest rates can’t be pushed below 0%
– But prices are falling ==> real rates are
positive
• Banks (rightly) fear bad assets
– Outstanding loans are shrinking
– Little investment
– “Liquidity Trap”
• Fiscal policy is not working
– Large government deficits
30
Japan’s Lost Decade (early 1990s-early 2000s):
Why Did the Recession Last So Long?
•
•
•
•
Long adjustment after a large asset bubble
Non-performing loans (late policy response)
Japan’s economic system became obsolete (?)
Aging population and associated problems (pension, medical
care, dissaving, etc)
• Snowballing fiscal debt
• People’s lack of confidence in the future
• The China challenge (vs. “return to Japan”)
 Lack of political leadership to propose solutions, convince
people, and implement actions
31
Policy Issues for the Bank of Japan
Non performing loans
--Credit crunch and mini bank runs in 1997-1998
--Slow policy response (1998-2000)—creating special agencies and public
money injection for bank recapitalization
Monetary policy for recovery
--Injecting liquidity by buying up unconventional assets (corporate & bank
bonds, etc): but the monetary transmission mechanism was broken
(MBMoneyLending)
--Zero interest rate policy (Feb.1999-Aug.2000; Mar.2001-Jul.2006;
Dec.2008-)  creating incentive for “yen carry trade”
--Inflation targeting—debated but not adopted
--F/X intervention to prevent yen appreciation (but without aggressive
yen depreciation)
32
Call rate
(interbank shortterm interest
rate)
Bubble
Zero
interest
rate
policy
Bubble
Percent
40
Zero Interest Rate Policy
Money & bank
30
lending
20
10
0
Excess
reserves are -10
built up during
zero interest -20
rate periods
Monetary base
Money supply (M2)
Bank lending
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
-30
33
Current Economic Situation
34
LDP Government of Shinzo Abe
• First Abe Cabinet (Sep.2006-Sep.2007) was unsuccessful.
• Second Abe Cabinet (Dec.2012-) has the following features:
– Active, quick and vigorous (compared with past PMs)
– Politically conservative (critiques say “right wing”)
– Aiming to revise constitution—instilling nationalism, officially approve
military capability
– Diplomatically active (foreign visits, top sales, coping with China & N.
Korea, etc.)
– Economic revival as top national priority (Abenomics)
• High popular support + fragmented oppositions
 LDP won a landslide victory in Upper House election (July 21, 2013) and
gain political free hand
35
Three Arrows of
Abenomics
To revive the economy, three “arrows” are mobilized.
1. Aggressive monetary policy (“New Dimension”)
- New BOJ Governor Haruhiko Kuroda (Mar.2013-)
- Dispel deflation mindset: inflation target of 2% within 2 years
- Monetary expansion with new asset purchases (REIT etc.); doubling
monetary base & gov’t bond holding in 2 years
- Correction of high yen
2. Flexible (=active) fiscal policy
- Revive economy first, consolidate budget later
- Increase infrastructure investment
3. New growth strategy (proposed in steps; cabinet approval June 14, 2013)
- Japanese Economy Revitalization Headquarters (under it: Industrial
Competitiveness Conference)
- 3 roadmaps and 3 plans (12 pillars – 37 items – 56 sub-items)
36
Overview of “Japan Revitalization Strategy”
[Three Prongs or “Arrows”]
The Abe administration will simultaneously implement the policy mix of
the “three arrows” for reviving the Japanese economy: (1) Aggressive
monetary policy; (2) Flexible fiscal policy; and (3) A growth strategy that
encourages private sector investment
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Roadmap to Growth
http://www.kantei.go.jp/foreign/96_abe/documents/2013/1200485_7321.html
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Three Action Plans of “Japan Revitalization Strategy”
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(1) Plan for the Revitalization of Japanese Industry
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(2) Strategic Market Creation Plan
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(3) Strategy of Global Outreach
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Three Positive Cycles
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Supporters of Abenomics
J. Stiglitz—“Depreciating yen to end deflation is the right policy. Just as I
recommended 10 years ago.”
Paul Krugman—“I evaluate Abenomics highly; no other country could do this
policy mix.”
IMF Managing Director Lagarde—”Inflation target of 2% is desirable as long as
central bank independence is secured.”
Fed Chairman Bernanke—“I support it as a policy to end deflation.”
Prof. Heizo Takenaka (Keio Univ.)— “Abenomics is 100% right.”
Prof. Koichi Hamada (Abe’s advisor)— “Don’t worry about recent stock market
drops—they are just corrections of excess optimism. The real economy is
improving.”
Prof. Takatoshi Ito (Tokyo Univ.)— “BOJ economists think QE is ineffective. But
many researchers and officials support QE as a tool to change inflation
expectation.
44
Critiques of Abenomics
George Soros (investment guru)—”Japan’s monetary policy is bold but very
risky; it may trigger a collapsing yen.”
Prof. Kunio Okina (Kyoto Univ.)— “If deflation mind is dispelled but fiscal
discipline is not secured, monetization of fiscal deficit will generate a
serious dilemma between financial stability and price stability.”
Kazuo Ueda (Tokyo Univ.)—Monetary expansion increased interest & yen
volatility. If long-term interest rates rise, expected positive impact on real
economy will not happen.
Ryutaro Kono (BNP Paribas)— “The monetary transmission mechanism is
broken. Under such circumstances, monetary expansion may destabilize
asset prices, raise long-term interest rates, and put BOJ in a macro policy
dilemma.”
Nikkei Newspaper commentary—“The growth strategy lists only easy
measures; bold reforms in such key areas as medical service, agriculture,
corporate tax rates, etc. are not clarified.”
45
Growth Strategy Formulation in
Abenomics
• Broad visions are given (three arrows, three plans, etc.)
• However, concrete growth measures were presented too
quickly without deep consultation with stakeholders. They are
just a collection of various ideas proposed by committee
members and officials in charge.
Visions – (targets) – (policy areas) – actions
• Because consensus building and stakeholder involvement are
skipped, proposed measures are too many, too vague, and
unlikely to be supported or implemented by businesses and
key ministries.
• By taking sufficient time to interact with all stakeholders, they
will feel attached to and responsible for agreed policies. This
psychological effect is important; hasty announcement of
policy measures will not have this advantage.
46
Future of Manufacturing SMEs
• Competitive SMEs have been a driver of Japanese growth, but
they now face many structural challenges.
– Long-term domestic recession
– Deflation (price cut pressure)
– High yen (recently largely corrected)
– High corporate tax of about 40%
– Rises of China, Korea & Taiwan in electronics & cars
– Aging of SME owners & lack of next generation engineers
– Power shortage
– Delayed participation in TPP, FTAs, EPAs, etc.
• The number of Japanese SMEs is declining sharply in every
region and sector. The Lehman Shock (2008) further
accelerated this trend.
47
Evolution of
Outward Manufacturing FDI
• 1960s-70s: initial FDI, some causing friction with workers and host
countries in Southeast Asia.
• 1980s-: Trade friction with US & EU prompted car and electronics makers
to produce in market countries instead of exporting from Japan.
• Mid 80s & 90s: a sharp yen appreciation and opening of China pushed
many large Japanese firms abroad, and some of their SME part suppliers
also followed.
• 2000s-: relocation of production sites due to accelerated integration
(WTO, FTAs…)
• 2008-: Lehman Shock & harder competition force large firms to go
abroad more and procure parts globally. SME suppliers in Japan have lost
regular customers.
• Now: Long-term production networks in Aichi (Toyota), Suwa (Epson)
and other industrial cities are disintegrating. Manufacturing SMEs have
to find new customers & markets.
48
Japanese Manufacturing SMEs:
Features and Issues
• Japanese SMEs have high technology and skills, but other capabilities
(strategy, marketing, IT, networking, English..) are lacking—unlike
Taiwanese or German top SMEs.
• Many SMEs are considering to invest abroad for survival: popular
destinations are Thailand, Vietnam & Indonesia.
• From 2010, METI began to promote SMEs’ outward FDI. National &
regional support networks have been created. Local govt’s, JICA, JETRO,
HIDA, SMRJ, etc. are mobilized.
• Our APIR research report (for Osaka/Kansai):
– A clear vision for Japan’s future monozukuri is needed
– Classify SMEs: not all SMEs need to go abroad for survival or expansion
– FDI should be a means to equip Japanese SMEs with all-round capabilities as
well as to enhance host-country industries
– Government can support outgoing SMEs through information, matching and
negotiation/cooperation with host countries
– The risk of “hollowing-out”?—more data & discussion needed
49
ASEAN and Japanese SMEs
• Many Southeast Asian countries want to invite Japanese manufacturing
SMEs (Thailand, Indonesia, Malaysia, Vietnam…)
• The Abe government also supports SMEs’ export & FDI (in addition to
TPP/FTAs, infrastructure export, “Cool Japan”).
• Our APIR research:
– Pick a few countries (Thailand & Vietnam) and help them improve
industrial capabilities and learn Japan’s core skills and technology
with intensive bilateral cooperation.
– Japanese monozukuri (manufacturing) should be globalized—it should
also be practiced and developed outside Japan and by non-Japanese
people (Japan faces aging and lack of technology inheritors).
50
Japan: Slow-Growth Trap I
Even before the March 2011 crisis, the Japanese economy had been
experiencing difficulties:
• Investment activity had fallen by more than 15% since late 2008 about
1.5 times more than in other advanced regions
• Private consumption had also declined at a faster pace than in
comparable countries.
• In addition to sluggish domestic demand, slow recovery in Japan
primarily the result of unfavorable external conditions:
• Yen appreciated by in 2011- 2012 – largest appreciation among
advanced economies – safe haven, unwinding of Yen carry tradelow interest rates in other advanced countries
• Strong yen creating generational friction with strong opposition by
the elderly to revaluation
• Export demand from main trading partners grew by about 1%
compared with 2-5% for Asia’s NIE – due to Japan’s lower export
share with China and developing Asia. Now recovering.
• Japan’s exports oriented toward high end consumer products.
51
52
53
Japan’s Slow Growth Trap
•
The pattern of hollowing out will have profound implications for the future
structure of the economy:
• Overseas production will displace production inside Japan on a larger
scale and at a higher speed
• As firms of all sizes move production overseas, domestic manufacturing
will shrink at a faster pace squeezing employment and accelerating the
shift in the economy toward services
• While contributing some to job creation it will make enhancing the global
competitiveness of service industries more urgent – currently most
service industries have very low productivity compared to manufacturing
54
Japan’s Slow Growth Trap
•
•
The hollowing out may be restrained if Japan is able to expand a cohort of
strong, technologically advanced domestic manufacturers with
internationally recognizable brands and positioning themselves within
global technological chains.
• These need not be limited to sectors that now lead the globalization of
Japanese manufacturing – autos or electronics
• A greater contribution may come from industries such as food
production, fashion goods, interior goods, and cosmetics.
Compounding Japan’s problems is the long term-demographic and fiscal
patterns likely to drag on the economy
55
56
56
Japan: Debt Levels
57
Japan: Budget Compositon
58
Social Issues -Total Fertility Rate
59
Japan's Population Age Structure (2010)
1,000 people
500
450
400
350
300
250
200
150
100
50
0
85 〜
50
100
150
200
250
300
350
400
450
500
85 〜
80 〜 84
80 〜 84
75 〜 79
75 〜 79
70 〜 74
70 〜 74
65 〜 69
65 〜 69
Born 1945-49
60 〜 64
60 〜 64
55 〜 59
55 〜 59
50 〜 54
50 〜 54
45 〜 49
45 〜 49
40 〜 44
40 〜 44
35 〜 39
35 〜 39
Born 1970-74
30 〜 34
30 〜 34
25 〜 29
25 〜 29
20 〜 24
20 〜 24
15 〜 19
15 〜 19
10 〜 14
10 〜 14
Born 1995-99
５〜９
０〜4
５〜９
０〜4
Female
Male
60
61
61
Possible Scenarios of Population Change in Japan
62
Japan: Consequences of an Aging Population
63
64