Download ST_07_13th

Lessons from the
Japanese Experience
Full Length Text — Part: 6 Special Topic: 7
Macro Only Text — Part: 5 Special Topic: 7
To Accompany “Economics: Private and Public Choice 13th ed.”
James Gwartney, Richard Stroup, Russell Sobel, & David Macpherson
Slides authored and animated by:
Joseph Connors, James Gwartney, & Charles Skipton
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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
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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”
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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
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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
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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
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Japanese Unemployment, 1987-2008
• The Japanese unemployment rate is quite low, but there has
been an upward trend since 1992
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Japanese Policy Responses
During the 1990s
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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
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Government Expenditures, 1987-2002
• During the 1990s, government spending expanded, soaring to
nearly 40% of GDP during 1999-2002
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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
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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
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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
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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
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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
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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 19912002
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Japanese Inflation, 1987-2002
• The general level of prices changed little during the 1990s
• Deflation was present during 5 of the 8 years between 19952002
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The Aging Population of
Japan in the 1990s and
the United States Today
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Aging of the Japanese Population
• The share of the population age 65 and over in Japan nearly
doubled during 1990-2010
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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
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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
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Lessons From the
Japanese Experience
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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
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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
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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
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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?
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End
Special Topic 7
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