Download Japan`s Way Out The world Financial Crisis from a Japanese

Latest Developments of The World
Economy
Daisuke Kotegawa
Research Director, Canon Institute for Global Studies
June 18, 2013
National Research University
Higher School of Economics
Financial Crisis in Japan – 4 phases
 The financial crisis in Japan can be divided into 4 phases
(%)
Stock Price and GDP Growth Rate in Japan
Yen
45,000
7
Real GDP Growth Rate
(Shadow, right scale)
40,000
6
35,000
5
30,000
4
Phase3
(1997-1999)
25,000
Nikkei 225 Index
(left scale)
20,000
3
2
15,000
1
10,000
0
Phase1 Phase2
(1992-93) (1995)
5,000
Phase4
(2001-2002)
-1
0
-2
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
Lost Decade
01
02
03
04
05
06
07
08
2
Financial Crisis in Japan – Phase 3 (1997-1998)
1. What happened?
 Consecutive bankruptcies of the financial institutions, including large banks and
securities in a short time (so called “Black November” in 1997)
November 3, Sanyo Securities (7th largest) went bankrupt
November15, Hokkaido-Takushoku Bank went bankrupt
November 24, Yamaichi Securities (4th largest) announced its liquidation (Nov.24)
November 26, Tokuyo-City Bank went bankrupt
I was the
director
 On November 4, due to the bankruptcy of Sanyo Securities, the first default of
in chargefinancial
in MOFdebt in the short-term money market occurred, rendering the money
market dysfunctional
th largest)
Bear
Sterns (7
The resulting credit crunch caused by the banks had
a negative
impact
on the
th
Bros.(4
largest)
economy. GDP recorded negative growth (-0.1%) inLehman
1997, first
time since
WWII.
Scandals among bureaucrats in Ministry of Finance - cozy relationships
between traditional bureaucracy and banks
The stormy Financial System Parliament – debated a lot of
important financial system related laws
3
Arrest of top executives—Necessary sacrifice?
• Top executives of four major entities which
either collapsed or nationalized (i.e. HokkaidoTakushoku, Yamaichi, Long Term Credit Bank and
Nippon Credit Bank) were arrested for the
allegations of illegal conducts, including window
dressing settlement of their BS.
• After several years of court proceedings, those
of LTCB were found innocent by the Supreme
Court. Those of NCB are under review by the
Supreme Court. Others served time in jail.
4
Overview of Global Economy
Contribution to world economic growth (2001 -2006 )
Advanced countries:1/3 of which:50% USA
of which:1/3 EU
BRICs:1/3% the world (2008:1/2)
Not recover until 2014
Total :25%
of world
growth
How this gap
can be filled?
Not recover until 2018
China:25% of the world
Emerging countries:1/3
Japan
BRICｓother than China: about10%of the world
1980s: about 10% of the world
Recently: about 3%of the world
1980s: USA and EU:
about 35% of the world
Set of Measures
1. The measures to protect financial sector from further adverse developments in the ongoing crisis,
( Safety Net )
Established among advanced countries
i.e., the package of three measures,

recapitalizations,
 the disposal of non-performing loans.
 guarantees on inter-bank lending and
Done
2. The implementation of these measures. This includes actual injection of public money and the
disposal of non-performing loans.
Urgent
Not yet completed
3. The measures to be taken to avoid a vicious cycle between problems in financial sector and those
of real economy. (Fiscal Stimulus)
Necessary
Work-in Process
4. The lessons learned from the ongoing crisis and the measures to be taken in order to
repetition of the crisis in the future. This include, among other things,





strengthening transparency and accountability
enhancing sound regulation
promoting integrity in financial markets
reinforcing international cooperation, and
reforming international financial institutions.
avoid the
Work-in Process
Not Urgent
5. The architecture of future global financial systems.
Not Urgent
6
US vs Japan
• In the financial crisis in Japan, US urged
a hard landing with three principles;
 No bail-out of banks,
 To maintain short-selling scheme, and
 Observe mark-to-market accounting.
• All of these principles were breached in
the ongoing crisis
7
Net Export
Household
Balance Sheet Adjustment
GNP
GNP
Corporate
Government
Asset
Liability
Asset
Liability
Repayments
Repayments
Over-borrowing
Over-borrowing
GNP Shrinks without
Stimulus
With stimulus GNP not shrink
8
How long attack from market continue?
Investment banks
western countries
Escape
Effectively
from
Insolvent
insolvency
Excess Liquidity
Short
sales
ＣＤＳ
Fiscal
austerity
Shortterm high
return
Deficit
countries
Vicious
Circle
ＩＭＦ，ＥＵ
US economy
Current stability of financial system is pretentious
thanks to relaxation of accounting rules
Recovery of housing prices has been delayed
Keys to recovery are disposal of non performing loans of
financial institutions and recovery of real economy
No！！
Are the improvement in unemployment rate and
favorable consumption figures good sign to recovery?
Those who gave up job search
Job creation by fiscal stimulus is essential
Part-timer
Country of key currency does not have to worry about trade deficit
Europe - What is happening under the table since last fall?
１．Expansion of ＥＳＦＳ
to 2 Trillion Euro
Adverse effect on
the City and Wall Street
２．Purchase of Government
bonds by ECB
UK, USA vs
Continental Europe
By way
of regular
difficult
tax revenue
Introduction of
financial transaction tax
Concentration of
risk on ECB
Consequent additions of equities
by ECB member countries
11
Issues in European economy
Greece - Debt ratio of government
September 12
Constitutional Court of Germany
Relaxation of Loan condition by IMF & EU
Spain - NPLs of bank, Debt ratio of government
Injection of capital to banks in Spain by ＥＣＢ
Needs 100 billion
Injection of capital to banks in Japan(1998,1999)
About 93 billion
GNP of Japan=4 times of GNP Spain
Italy - Debt ratio of government
Government bonds can be sold in the market?
12
Subscription for Europe
2. Offense
Reinstatement of Glass Steagal Act
Destroy Investment banks
JPMorgan Problem＝loss of US$ 2billion
Biggest Issue in presidential election
Socialist parties in
Germany & France
LIBOR manipulation
Money Laundering
Part of UK & Sandy Weil
Victims – Local communities of US
HSBC, Standard Chartered
13
Essence of Banking
Asset
Liabilitie
s
100－10＝90
Credit Creation
Deposits
100
Loans
Investments
50
Other
Liab
Equity
10
Problem of Cyprus Scheme I
Banks can creates credits based upon depositors’ confidence
Banks operates by deposits (=other people’s money)
Investment banks gamble and lose money
In order to maintain confidence, governments usually
put priority on protecting deposits by way of deposits insurance
When a bank fails, shareholders first take loss, then creditors.
Depositors are always asked to take loss last .
In the financial crisis in Japan, all amount of deposits were protected.
Ceiling on the deposits eligible for protection was put only after crisis was over
15
Problem of Cyprus Scheme II
Lack of protection on deposits over certain amount in Cyprus
triggered capital flight from Spain
Dutch finance minister said “Cyprus scheme will be a template”
Capital flight from endangered European countries to USA.
Is this a right move?
No!
Title II of Dodd-Frank Act
Losses of any financial company placed into receivership will not be borne by
taxpayers, but by common (depositors) and ----other unsecured creditors
There is a joint paper by the FDIC and the Bank of England in December 2012
Deposits in US and UK banks would not be protected.
16