Download Japanese Economy A 2011 Fall

Japanese Economy A
2012 Fall
Seinan Gakuin University
Noriaki EZOE
Professor Ph.D.
Economics Department
Seinan Gakuin University Japan
Mail address: [email protected]
Homepage address: https://w3.seinan-gu.ac.jp/~ezoe/
1
Part Ⅰ
Chapter 5 Lost decades and
Macroeconomic policies
What you will learn in this chapter
1 The bubble economy and its collapse
2 Economics ; review of macroeconomics
AD-AS analysis, Fiscal and Monetary policies
3 The lost decades
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Key Historical Events
year
Domestic events
Overseas events
1985
Yen’s evaluation
Plaza Accord
1987
BOJ historical low bank rate 2.5%
Black Monday
1989
Emperor died. Heisei era begins.
Nikkei stock index 38,130
Fall of Berlin wall
1990
BOJ tight money 6.0%
1991
Bubble burst
1992
Non-LDP government established
1995
Great Kobe earthquake
WTO starts
1997
Big Bank Bankruptcy
Asian financial crisis
1999
BOJ call rate 0%
Euro adopted
2001
Koizumi administration
George W. Bush U.S. president
Gulf war. Soviet Union resolved
9.11 terrorist attack. Iraq war
2007
Privatization of Japan Post
Financial crisis ( subprime problems)
2009
DPJ government starts
Barack Obama U.S. president
2011
3.11 Great east Japan earthquake
China's GDP surpassed Japan's
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Post WW2 Real Growth
14%
12%
10%
8%
Stable growth period
6%
4%
2%
0%
-2%
No growth period
High growth period
Shift from political to
economic agenda
Yen floats
2nd Oil Shock
1st Oil Shock
Bubble collapses
2004
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
1968
1965
1962
1959
1956
1953
-4%
1 The bubble economy and its collapse
1.1 The road to Bubble Economy
Stagflation And Trade Frictions
After oil crisis, world economy experienced a stagflation
(stagnation and inflation)
• The Cause of 1970s Stagflation
Supply shock view
• OPEC’s oil The Cause of 1970s Stagflation
• price hike was the main cause. Aggressive wage hikes also contributed.
• Expansionary fiscal & monetary policy accommodated and softened the blow.
Global monetarist view
• As US lost monetary discipline, the fixed rate regime collapsed in 1971-73 and
USD fell.
• Major central banks expanded money to counter appreciation pressure, causing
global liquidity glut in the early 1970s.
• Oil shock was the result, not the cause, of global inflation.
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Japan regained its competitiveness in the export
market and the export-led economy caused trade
frictions.
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U.S. introduced Reaganomics.
The interest rate was raised to reduce the inflation
Foreign money was flowing into the US.
The US dollar had been appreciating and the Japanese yen
depreciating.
Plaza Accord(1985) : The summit meeting agreed
the Japanese yen appreciated (1$= 242 to 200yen)
Japanese export industries suffered
Recession Began
In order to cope with this, government cut the official
discount rate and expansionary government spending
the yen appreciated capital was back to Japan
the official discount rate was the lowest (2.5%).
These process led to a boom in domestic investment in real estate
and stocks.
Stock and land prices both rose
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1.2 The bubble: The fluctuations of assets prices
• 1986,the prices of assets (ranging from stock
and land to paintings and country club
memberships) doubled and then tripled within
a few years. The Nikkei 225 index, for example,
increased from the 13,000s in December 1985
to the 39,000s in December 1989.
• Similarly, the price index for commercial land
in six metropolitan cities tripled between
March 1986 and March 1990.
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1982
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
2010
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
2010
2011
40000
35000
30000
25000
Nikkei Stock Average
225
20000
15000
10000
5000
0
(1982 = 100)
400
350
300
Urban land price
index
250
200
Source: Japan Real Estate
Institute
150
100
50
0
Three reasons to believe that expectations about
future returns of stock and land assets became more
optimistic (the 1980s)
1 Financial liberalization in Japan created a
boom in the financial services and banking
industry.
2 Economic growth rates rose= expectations of
future economic growth became more
optimistic.
3 BOJ’s monetary policy eased significantly in
1986 and 1987.
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The Heisei Bubble (Economic Boom in late 1980s)
Causes
• Structural—bank deregulation and the loss of large
corporate borrowers in the early 1980s led banks to
over lend to risky borrowers (SMEs, real estate
developers) without proper risk management.
• Monetary—as the yen rose sharply after 1985, the
Bank of Japan injected liquidity to counter it and ease
high-yen caused recession. This led to asset bubbles
without igniting inflation.
Consequences
Excess investment in properties, over-expansion in
capacity, lavish consumption, rise in outward FDI
1.3 The Burst of the Bubble (1990-1995)
– the Bank of Japan changed to a tight-money policy and, in
1990, raised the official discount rate to 6%.
– Banks restricted their financing of property assets.
• Stock prices declined by 60 percent between 1990 and August 1992,
and they continued to decline until the Nikkei index began to
rebound after June 1995.
• Representative land prices in metropolitan areas also declined
by half from 1991 to 1995, and they continued to decline
through early 1996.
Sources of Decline: A combination of policy actions and the selfcorrecting mechanism of the speculative process (deflating the
bubble) were responsible.
After the bubble, the Japanese economy entered a long period of
stagnation.
– This period is called the Lost Decade.
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2 Review of Macroeconomics
• In this section, we discuss the short-run
fluctuation in economic activities = business
cycles in Japan.
• The model of aggregate supply and aggregate
demand provides a framework to analyze
economic fluctuations.
• Then we see how the impact of macro policies
and events varies. In the section 1 ,we briefly
learn the basic concepts of these
macroeconomic theories.
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2-1 the AS–AD model
Aggregate demand curve
AD curve is the relationship between the price
level P and the quantity of goods demanded Y.
The quantity theory: MV = PY
M/P = kY
AD curve is downward sloping (higher P , lower
M/P, lower Y )
shift factors:
changes in expectations, changes in wealth, and the
effect of the size of the existing stock of physical capital.
Policy makers can use fiscal policy and monetary
policy to shift the aggregate demand curve
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The aggregate supply curve
• AS curve : is the relationship between the price level
P and the quantity of goods supplied Y.
The short-run AS curve is upward sloping .
– because nominal wages are sticky in the short run: a
higher aggregate price level leads to higher profit per unit
of output and increased aggregate output in the short run.
– Shift factors : Changes in commodity prices, nominal
wages, and productivity
The long-run AS curve is vertical at potential output.
- In the long run, it does not depend on the price level.
Only depend on the capital, labor and tech.
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Figure The AS–AD Model
Their point of intersection, ESR , is the point of short-run
macroeconomic equilibrium where the quantity of aggregate output
demanded is equal to the quantity of aggregate output supplied.
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2.2 Demand shock and supply shock
• Economic fluctuations occur because of a shift of the
aggregate demand curve (a demand shock) or the
short-run aggregate supply curve (a supply shock).
• A demand shock causes the aggregate price level and
aggregate output to move in the same direction as the
economy moves along the short-run aggregate supply
curve.
• A supply shock causes them to move in opposite
directions as the economy moves along the aggregate
demand curve. A particularly serious is stagflation—
which is caused by a negative supply shock.
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Figure Shifts of Aggregate Demand: Short-Run Effects
A negative demand shock shifts the aggregate demand curve, moving the
aggregate price level and aggregate output in the same direction.
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Figure Shifts of the SRAS Curve
a negative supply shock
Stagflation
positive supply shock
prices
falls
output rises
the combination of inflation and
falling aggregate output
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Figure The Supply Shock of 2007-2008
2007-08 ,the prices of many raw materials began shooting up. The surge in
raw-material prices amounted to a global negative supply shock
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2.3 The government macro policies
• Economy is self-correcting in the long run.
• But, the high cost
inflation, deflation,
•
unemployment.
• Stabilization policy : government policy to reduce
the severity of recessions and rein in excessively
strong expansions
using fiscal or monetary
policy to offset shock
• There can be drawbacks, the budget deficit and
crowding out of private investment
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The Government Budget and Total Spending
 Fiscal policy is the use of taxes, government
transfers, or government purchases of goods and
services to shift the aggregate demand curve.
GDP = C + I + G + X - IM
• Lags in Fiscal Policy
- Realize the recessionary/inflationary gap by collecting
and analyzing economic data →takes time
- Government develops a spending plan→ takes time
- Implementation of the action plan (spending the
money→ takes time
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Figure Expansionary Fiscal Policy Can Close
a Recessionary Gap
Expansionary fiscal
policy increases
aggregate demand.
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Monetary policy
Figure Monetary Policy and Aggregate Demand
 Expansionary monetary policy is monetary policy that
increases aggregate demand.
Contractionary monetary policy is an opposite policy.
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Figure The Short-Run and Long-Run Effects of an
Increase in the Money Supply
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3 The lost decades
3.1 Long recession
As the bubble burst around 1990, the Japanese
economy entered a long period of deflation and
recession.
Growth slowed down and became even negative.
For the first time in the postwar period, prices
declined persistently.
Consumers and producers became extremely
pessimistic.
•
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Expansionary Fiscal Policy in Japan
• At the end of the 1980s Japan’s bubble burst—stock
and land values plunged.
• Japan turned to expansionary fiscal policy in the
early 1990s.
• During the years that followed, Japan relied on largescale government purchases of goods and services,
mainly in the form of construction spending on
infrastructure, to prop up aggregate demand.
• This spending was scaled back after 2000, but at its
peak it was impressive. In 1996 Japan spent about
$300 billion on infrastructure.
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Ohno PP.211-212
Debate on Fiscal Stimuli
• Since the 1990s, large fiscal spending has been used to stimulate
the economy. But there was no strong recovery, while the
government debt skyrocketed.
• Some argued for even bigger stimuli; others said that would only
worsen the debt crisis.
Government debt in % of GDP
200%
180%
• PM Koizumi (2001-06) set limits
on spending (infrastructure,
welfare).
• PM Aso (2008-) and DPJ (2009-)
returned to big fiscal spending.
160%
140%
183%
120%
Bubble burst
100%
80%
60%
40%
20%
LDP
Koizumi
Abe
Fukuda
Aso
DPJ
Hatoyama
Kan
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
0%
Figure The public debt :Global Comparison
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Problems Posed by Rising Government Debt
• Public debt may crowd out investment spending,
which reduces long-run economic growth.
• And in extreme cases, rising debt may lead to
government default, resulting in economic and
financial turmoil.
• Can’t a government that has trouble borrowing
just print money to pay its bills?
• Yes, it can, but this leads to another problem:
inflation.
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Monetary policy issues
• Bad loans Issue
The most serious consequences brought by the collapse
of bubbles was Nonperforming loans (NPLs) in banks.
• Financial institutions ended up with very large levels of
non-performing loans as a result of the collapse in
share prices and land values.
Asset-price deflation
• During the bubble, banks lent out vast money to companies
taking land and stock as collateral. After the bubble , many
companies were unable to repay their loans.
• Because of the drop in value of this land and stock, banks were
unable to recover their loans. Thus, banks ended up with huge
amounts of non-performing loans on their books.
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Policy Issues for the Bank of Japan
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 : The Bank of Japan lowered
the official interest rate
(Feb.1999-Aug.2000; Mar.2001-Jul.2006;
Dec.2008-)
--Inflation targeting
(debated but not adopted)
--Foreign exchange intervention to prevent yen
appreciation
(but without aggressive yen depreciation)
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Money & bank
lending
Excess reserves
are built up
during zero
interest rate
periods
-10
-20
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
2010
2011
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
2010
2011
Call rate
(interbank shortterm interest
rate)
%
10
9
8
7
6
5
4
3
2
1
0
Bubble
Zero
interest
rate
policy
Percent
40
30
20
10
0
Monetary base
Money supply (M2)
Bank lending
-30
Why Did the Recession Last So Long?
After the bubble, the Japanese economy entered a long period of
stagnation. The 1990s is sometimes called the Lost Decade for Japan.
1 Long adjustment after a large asset bubble
-Stock adjustment meant removing excessive debts and
writing off nonperforming loans.
2 Non-performing loans (late policy response)
3 Japan’s economic system became obsolete
4 Aging population and associated problems (pension,
medical care, dissaving, etc.)
5 Snowballing fiscal debt
6 People’s lack of confidence in the future or policy
7 The China challenge
8 The political leadership
Government lacks in the political leadership--political
instability
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End of Lost Decade
• The government of J.Koizumi (2001- 2006) had tried to push
“reforms” forward.
These include privatization of post offices, putting a stop to
highway construction, pension reform, local government reform,
and bank reform. Non-performing loans : 43.2 trillion yen (2002)
were major causes of the prolonged stagnation .
Koizumi Cabinet (2001) forced banks dispose of their nonperforming loans. By 2004, the total bad loans had fallen to 26.6
trillion yen.
Finally ,the Japanese economy began to show signs of recovery
and began to emerge from its long period of stagnation.
Koizumi reform was sufficient to revitalize ? – no.
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Recovery, Global Recession
Main causes of recovery (2003-2007)
--Strong foreign demand (US, China)
--Decade-long corporate restructuring effort
--Yen depreciation (up to 2007)
 Recovery was not mainly due to reforms or good
macro policies
Global financial crisis (late 2008-2009)
• Traditional industrial exports (cars, electronics)
which led recovery suddenly lost export markets.
• Thanks to strong demand in China and other
emerging economies, growth picked up in 2010
(>2%?)
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Remaining issues
• Agriculture, services, distribution, finance
remain uncompetitive.
• Long-term problems remain unsolved - fiscal
crisis, pension & medical reforms, aged society,
new energy…)
• Koizumi deregulation & liberalization increased
income gaps and created new poors (“working
poor”).
• Earthquake and Nuclear Disaster in 2011
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References
Thomas F. Cargill, Michael M. Hutchison and Takatoshi Ito
[1997], The Political Economy of Japanese Monetary Policy,
The MIT Press.
Dadid Flath [2005], The Japanese Economy, Oxford University
Press. Takatoshi Ito[1992], The Japanese Economy, MIT Press.
Paul Krugman and R. Wells [2009], Economics, 2th edition,
Worth Publishers.
Gregory N. Mankew [2007], Macroeconomics, 6th edition,
Worth Publishers.
Kenichi Ohno[2006], The Economic Development of
Japan, GRIPS Development Forum.
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