Download Deleveraging and Growth: is the developed world following Japan's long and winding road?

January 10, 2012
Bank of Japan
Deleveraging and Growth: Is the Developed World
Following Japan's Long and Winding Road?
Lecture at the London School of Economics and Political Science
(Co-hosted by the Asia Research Centre and STICERD, LSE)
Masaaki Shirakawa
Governor of the Bank of Japan
Introduction
"It was the best of times, it was the worst of times..."
Thus begins A Tale of Two Cities, by Charles Dickens, the bicentennial of whose birth we
will celebrate next month. While this famous opening sentence of the novel refers to the
year 1775, it also strikes a chord with us in 2012. On the one hand, with all due respect to
the frustration vented by the Occupy protesters, the people of today's developed nations
enjoy a living standard far higher than the harsh realities of Dickensian England. One of
the few luxuries available to young David Copperfield, the alter ego of Dickens, was to take
a plunge in the cold spring water at the old Roman Bath just a few hundred yards from this
hall. On the other hand, it is also true that people feel as if the economy is in the worst
possible shape. Difficult issues in their own right, such as mounting government debts,
aging of the population and challenges brought about by globalization, are exacerbated by
stagnant growth.
These days, when people discuss the grim economic outlook for developed countries, I find
that Japan's experience is often cited. In the past twenty years, Japan's growth rate has
been very low, at 1.0 percent annually in real terms and 0.4 percent in nominal terms (Chart
1). People ask whether their economies are going to experience a lost decade -- or more
recently two lost decades -- like Japan. As the governor of Japan's central bank, I have
mixed feelings when I hear Japan's experience referred to in such a negative context, and I
should also note, for the reasons I explain later, that it is not appropriate to bunch the two
decades together. Nevertheless, I cannot deny that this question also provides much food
for thought for other developed countries.
Therefore, with apologies to two talented
Liverpudlians and a song that they wrote over 40 years ago, I would like to share with you
some of my thoughts today on the theme "Is the Developed World Following Japan's Long
and Winding Road?" It will be my great pleasure if my speech can be of some benefit to
you.
I.
Change in How Japan's Experience is Discussed
To me, the question of whether other developed countries will repeat Japan's experiences is
itself surprising and appears to indicate that a significant intellectual change is under way.
At various international meetings I have attended in the past ten years or so, policy makers
1
and academics often have not seriously discussed the issue of stagnant growth in Japan,
simply dismissing it as "an idiosyncratic failure of Japan's society and its policy makers to
respond to problems in a swift and bold manner."
Even after U.S. housing prices started to
decline in the spring of 2006 this tendency remained. The following is a comment made
by a U.S. official in January 2007.1
"The financial instability that many countries experienced in the 1990s, including Japan,
was caused by bad loans that resulted from declines in commercial property prices and not
declines in home prices. ... Many have learned the wrong lesson from the Japanese
experience. The problem in Japan was not so much the bursting of the bubble but rather
the policies that followed."
What I see behind this comment is a gross underestimation of the extent of the balance
sheet repair -- or deleveraging -- required after a bubble bursts, as well as an overconfidence
in the effectiveness of aggressive policy measures. 2
However, comparing Japan's
experiences in the early 1990s after the bubble burst to what happened in the United States,
the euro area, and the United Kingdom in the past few years, it is my impression that the
similarities far outweigh the differences. What happened in Japan was not unique to
Japan.
The first similarity is economic performance. For example, the paths of real GDP since
the peak of the respective bubbles, 1990 in Japan and 2006 in the United States, are similar
(Chart 2).3 Some may say that the selection of the base year is somewhat arbitrary but the
same conclusion can be drawn if we choose as a starting point the year in which the
1
Mishkin, Frederic S., "The Role of House Prices in Formulating Monetary Policy, " Speech at the
Forecasters Club of New York, January 17, 2007.
2
At the press conference in February 2009, President Obama said, "[I]f you delay acting on an
economy of this severity, then you potentially create a negative spiral that becomes much more
difficult for us to get out of. We saw this happen in Japan in the 1990s, where they did not act
boldly and swiftly enough, and as a consequence they suffered what was called the 'lost decade'
where essentially for the entire '90s they did not see any significant economic growth…"
3
In the case of Japan, stock prices peaked at the end of 1989 and real estate prices, based on
"Published Price of Land", peaked on Jan. 1, 1991. The peak of the U.S. housing prices, based on
"Case-Shiller Index", was the second quarter of 2006.
2
financial crisis occurred, 1997 for Japan and 2008 for the United States (Chart 3).
Comparisons with experiences in the euro area and the United Kingdom also show
similarities, despite some differences in degree (Chart 2 and 3 as cited above). Some
interesting similarities can be also found in other bubble-related variables. For example,
the pace of decline in real estate prices in the U.S. after its bubble burst was almost the
same as in the Japanese case (Chart 4). Despite some differences among countries and
regions, overall developments in long-term interest rates were similar (Chart 5).
Cross-country similarity was also evident in developments in bank lending (Chart 6).
The second similarity is initial responses from the authorities and economists. When a
bubble is being formed or even soon after it bursts, they underestimate the problem or deny
its very existence. In Japan, after real estate prices started to decline, people talked about a
reversal and subsequent upturn. Even after property prices continued to fall for some time,
society denied the possibility that the decline would lead to a financial crisis or stagnation
of the macro economy. In the case of the bursting of the housing bubble in the United
States and the sovereign debt crisis in Europe, the initial reaction was also underestimation
of the problem. Even at a later stage, when experts agreed on the need for public support
for financial institutions, such measures met with opposition from the general public,
influenced by the lingering effects of the underestimation, which was also seen in the case
of Japan. In particular, injecting public funds into financial institutions was universally
unpopular across countries.
Likewise, the provision of financial support from core
countries to peripheral countries in the euro area is politically unpopular.
The third similarity is the policies adopted by central banks (Chart 7). In developed
countries, short-term interest rates declined to close to zero and central bank balance sheets
expanded enormously. Since the second half of the 1990s, the Bank of Japan successively
introduced various unorthodox policy measures including zero interest rates, a commitment
to maintain zero interest rates, quantitative easing, and the purchase of risk assets, including
stocks held by financial institutions. After the subprime loan problem materialized, the
U.S. Federal Reserve adopted various policy measures that were often described as
innovative, but in fact many of them are essentially similar to measures previously adopted
by the Bank of Japan. This fact demonstrates the unsurprising truth that central banks act
3
similarly when confronting similar problems. If there was any major difference, it was
that the Bank of Japan was a lonely forerunner and had to feel its way forward, making
decisions in the uncharted territory of unorthodox policy.
The fourth similarity is the decline of the effectiveness of monetary policy in an economy
that is deleveraging, or in other words, that needs to address the problem of balance sheet
repair. When it comes to the transmission mechanism of monetary policy, in Japan, lower
interest rates had previously induced an increase in banks' lending to small- and
medium-sized firms. This in turn increased business fixed investment by such firms,
which drove economic recovery.
This mechanism did not work, however, after the
bubble burst. Similarly, in the United States, a decline in long-term government bond
yields has not been fully transmitted to a decline in the effective rates of mortgage loans
because borrowers with low credit scores have not refinanced at lower interest rates. In
Europe -- Spain is a prime example -- bank lending rates have risen due to higher interest
rates for covered bonds, reflecting a deterioration in the quality of real estate collateral.
I have gone through some similarities between the current state of the U.S. and European
economies and Japan's experiences. Needless to say, there are also differences.
The first difference is the fact that Japan never became the epicenter of a global financial
crisis. The most important reason for this is that the Japanese authorities did not allow the
disorderly failure of financial institutions. In this regard, the most challenging time for
Japan was 1997, when the brokerage Yamaichi Securities, with assets of 3.7 trillion yen or
19 billion pounds at that time, collapsed. Yamaichi Securities also had sizeable presence
internationally, especially in the European capital markets. At that time, as was the case
when Lehman Brothers failed, Japan did not have a bankruptcy law that enabled the orderly
resolution of securities companies. Given such circumstances, the Bank of Japan decided
to provide an unlimited amount of liquidity to Yamaichi Securities.
This measure
essentially enabled an orderly resolution by replacing all exposures to the securities
company held by market participants both domestic and overseas with exposures to the
Bank of Japan and so prevented the materialization of systemic risk. This was truly a
tough decision for the Bank of Japan.
It was made without knowing whether the
4
institution was solvent or insolvent, and eventually resulted in some losses. I would say,
however, that the benefit of preventing systemic risk from materializing far exceeded such
costs. As a result, Japan did not experience a sharp and significant plunge in economic
activity like the one that followed the collapse of Lehman Brothers, and negative impact
from financial turmoil in Japan did not spread to the rest of the world (Chart 8).
The second difference is the length of time before the economy was exposed to acute
market pressure after the bubble burst (Chart 9). In the Japanese case, non-performing
assets were mainly loan assets, which were not marked to market. For that reason, it took
more time before unrealized losses were recognized and correspondingly it took longer for
the financial institutions involved to be exposed to acute market pressure. On the other
hand, in the recent cases of the United States and Europe, the problem started in the
securitized products market, which enabled the recognition at a relatively early stage of
losses based on mark-to-market valuation, and therefore market pressures intensified earlier
than in the Japanese case. As a result, a financial crisis materialized at an early stage and
financial system stability measures were introduced in a relatively prompt manner.
Examining these differences further, however, the plunge in output might have been limited
in the case of Japan simply because the scope of the crisis was confined within the country.
Even if financial system measures are introduced at an earlier stage, these measures do not
mark the end of deleveraging that characterizes an economy after a bubble bursts. What
happened in Japan, the United States and Europe was basically the same: the paying down
of excess debt, or deleveraging. For the purpose of considering policy responses after the
bursting of a bubble, I believe that examining similarities and differences in this way shows
that it is more constructive to focus on similarities instead of differences, and then consider
factors peculiar to each country.
II.
Facts about Low Growth in Japan
In order to explain these similarities and differences, I would like to comment on Japan's
economy in a little more detail. Specifically, I will explain some facts about economic
growth in Japan by looking at three different time horizons.
5
Economic Growth in Japan: Long-Term, Medium-Term, and Short-Term
First, examining the long-term growth trend, Japan is known as a country which once
recorded surprisingly high growth rates, just like China has done in recent years. The peak
period of Japan's high-growth era was the 15 years from 1956 to 1970, during which real
GDP grew at 9.7 percent annually (Chart 10). Incidentally, this growth rate is exactly the
same as that recorded by China in the period starting in the early 1990s. However, the
good times inevitably come to an end, sooner or later, for any country enjoying such high
growth. This is because some of the conditions that support high growth, especially the
labor supply from rural areas to cities and the high rate of increase in labor force, will
eventually reach their peak.4
Second is the medium-term time horizon. Although Japan's high-growth period ended in
the 1970s, its rate of economic growth continued to be much higher than in other developed
countries. Since the 1990s, however, Japan has ceased to be a high-growth economy, even
in a relative sense. In the past twenty years, Japan's growth rate has been very low, at 1.0
percent annually in real terms and 0.4 percent in nominal terms. That is why the past
twenty years are sometimes called "Japan's two lost decades" (Chart 1 as cited above).5
Third is very short-term growth developments.
Japan's economic activity plunged after
the tragic earthquake and tsunami on March 11 last year, but recovery proceeded at a
higher-than-expected pace thanks to the efforts made by companies, individuals, and the
public sector. Although Japan's economy is not immune to a slowdown in the global
economy, compared to the United States and Europe, the stability of Japan's financial
system and financial markets is notable, as evidenced by the risk spreads observed in
funding markets and corporate bond markets (Chart 11).
4
For Japan's high growth period including a comparison with the current state of the Chinese
economy, see Masaaki Shirakawa, "The Transition from High Growth to Stable Growth: Japan's
Experience and Implications for Emerging Economies," Remarks at the Bank of Finland 200th
Anniversary Conference in Helsinki, May 5, 2011.
http://www.boj.or.jp/en/announcements/press/koen_2011/ko110506a.htm
5
For Japan's experience after the bubble burst, see Masaaki Shirakawa, "Way Out of Economic and
Financial Crisis: Lessons and Policy Actions," Speech at Japan Society in New York, April 23, 2009.
http://www.boj.or.jp/en/announcements/press/koen_2009/ko0904c.htm
6
Reasons for Low Growth over Medium Term
Of the three time horizons that I have just explained, hereafter I will focus on medium-term
economic developments.
Although I have used the phrase "the two lost decades," the
causes of low growth in Japan in the 1990s and 2000s were different and it is somewhat
misleading to discuss the two periods together. In the 1990s, low growth was mainly
brought about by the deleveraging associated with the unprecedented bursting of the bubble.
In the 2000s and thereafter, the major causes of low growth in Japan have been rapid
population aging and population decline.
Regarding the impact of the bursting of the bubble in the first half of the two periods in
question, I do not have much to add to what I have already explained. If I can point out
one difference, the rise in the unemployment rate in Japan was relatively limited (Chart 12).
Japan's unemployment rate peaked at 5.4 percent, significantly lower than the double digit
figures reached in the United States and major European countries. This is attributable to
the fact that wage levels were adjusted in a reasonably flexible manner, reflecting society's
preference to prioritize employment.
That people's jobs were preserved was a positive in
terms of social stability. At the same time, it also had a negative consequence. Wage
levels were adjusted but not sufficiently for the magnitude of the shock to the economy, and
a situation arose in which effectively unemployed people retained their jobs at companies.
This delayed the necessary reallocation of resources to respond to demand and cost changes
after the bubble burst. The decline in wage levels also contributed to deflation through a
decline in the prices of services which are labor intensive. In fact, a significant portion of
the inflation differential between Japan and the United States reflects changes in service
prices rather than goods prices.
As for the second of the two lost decades, low growth was mainly attributable to
demographics, or more specifically, a rapid aging of the population. Japan's real GDP
growth rate has declined and growth has been subdued compared to other developed
countries. However, comparing the average real GDP growth rate per capita over the past
ten years, Japan's growth rate is almost the same as other developed countries. Moreover,
Japan is highest in terms of real GDP growth rate per working-age population (Chart 13).
As indicated by these figures, the most significant challenge confronting Japan is how to
7
adjust to a rapid demographic change that is unprecedented in developed countries (Chart
14).
To a significant extent, the decline in growth rates and deterioration in fiscal
conditions are attributable to a failure to adjust to the rapid change in demographics.
Although forecasts by economists almost always involve a large margin of error,
demographic trends are one of the few economic variables that can be projected with
relatively high accuracy. The implications of population aging and decline are also very
profound, as they contribute to a decline in growth potential, a deterioration in the fiscal
balance, and a fall in housing prices. Given that other developed countries will face the
same problems despite some differences in timing and magnitude, the economic effects of
demographics deserve further study.
III. Is the Developed World Following Japan's Long and Winding Road?
Now I would like to focus on the key question which I posed at the start of my speech. Is
the developed world following Japan's long and winding road? Of course, this is not the
kind of question that can be answered with a simple yes or no. Policy measures are shaped
by not only economic factors but also the response of society and the political world.
Every country has its own unique complexity, both in social and political terms, of which
outside observers have only a limited knowledge. Therefore, instead of providing a direct
answer to the question, I would like to list three factors that define the length of time
necessary for adjustment.
The first factor is the size of excess debt accumulated before a crisis. And if we simply
look at rough estimates of excess debt, it appears that a lengthy period of adjustment is
inevitably required. The scale of the global credit bubble formed toward the middle of the
2000s was indeed gigantic.
The second factor is growth potential. In the end, whether the amount of debt assumed by
an economy is excessive or not can be judged by considering it in proportion to the
economy's size. For two economies with the same amount of debt, the one with higher
growth potential can lighten the burden of excess debt faster. Having said that, growth
potential is not fixed and can change as a result of policy measures and the response of the
society after a bubble bursts. In that sense, avoiding collateral damage from the bursting
8
of a bubble becomes extremely important.
Collateral damage could materialize in various ways.
For example, in a low-growth
economy that is in the process of deleveraging, social stress tends to intensify and is more
likely to result in a rise in protectionism and excessive government intervention. When
lending to non-viable firms continues for political or social reasons, the resultant decline in
productivity growth will lower growth potential.
Furthermore, monetary policy can also distort economic incentives. Low interest rates and
abundant liquidity are necessary but if they continue for a long time, they may lower
productivity by keeping inefficient firms alive.
Necessary adjustment will also be delayed
if low interest rates discourage the government from making efforts to restore fiscal
balance.
Population decline will also prolong the adjustment of excess debt by lowering growth
potential. Although these are common problems for the developed world, the decline in
population growth and aging of the population profile are most serious in Japan. The rate
of population growth is lower in Japan than in the United States, the euro area, and the
United Kingdom. More importantly, the fast pace of decline in the population growth rate
has been placing burden on Japan's economy and society.
Also, compared to Japan, the
contribution to population growth from immigration is significant in the United States and
many European countries. However, this contribution from immigration could diminish if
the stagnation of economic activity is prolonged (Charts 15 and 16).
The third factor is the growth rate of the global economy. Since the early 2000s, Japan's
economy gradually overcame the post-bubble effects of deleveraging. However, Japan
was also greatly helped by the high growth in the global economy at that time, growth that
was almost unprecedented in the past several decades (Chart 17 and 18). In retrospect,
during that period, the global economy was in the very process of creating a global credit
bubble and also led by strong performance of emerging economies. Given that growth
rates in developed countries are currently restrained by post-bubble deleveraging effects, it
is now of prime importance that emerging economies continue growing without causing
9
inflation or bubbles of their own.
Of these three factors that define the length of time needed for deleveraging, the first one -the initial size of excess debt -- is a given once a bubble bursts, but we can still influence
the remaining two factors: the growth potential of individual economies and growth
momentum in the global economy as a whole. After the bubble burst, the priority is to
maintain the stability of the financial system. At the same time, it is also important to
adapt the economy to a new environment and resist to pressures that would lead to collateral
damage. This requires strong will and determination.
IV. The Role of Central Banks
Given the limited time remaining, I would like to wind up my remarks by briefly explaining
my thoughts on the role of central banks in this difficult period.
In addition to the aforementioned four similarities, there is another similarity between Japan,
the United States and European countries after the bursting of their respective bubbles.
That is, opinions are sharply divided with regard to the roles central banks should play. In
the United States, criticism of aggressive central bank measures seems to prevail, as
evidenced by negative reactions by politicians to the QE2 measures. In other developed
countries, however, central banks apparently face rising expectations and demands to deal
with the situation against a background of sluggish growth. The recent discussion about
the responses to the sovereign debt crisis in Europe confirms this point. Maintaining price
stability and financial system stability are important goals of central banks, but central
banks are not able to solve all problems, especially in an economy characterized by zero
interest rates and deleveraging. Central bank governors including myself have made this
point clear recently.6
6
I would like to concur with the assessment of my respected colleague,
See the following comments.
Bernanke, Ben S., Testimony at the Joint Economic Committee, U.S. Congress, October 4, 2011:
"Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by
the U.S. economy."
Draghi, Mario, Interview with the Financial Times, December 14, 2011: "Monetary policy cannot do
everything."
10
Sir Mervyn, who said that "There's a limit to what monetary policy can hope to achieve."7
What can be accomplished by central banks? Or, what are central banks expected to
accomplish? Conversely, what cannot be accomplished by central banks? Looking back
at the process of how bubbles form and burst, and the financial crises that ensue, I would
like to make the following four points.
My first point concerns the role of central banks in providing liquidity to banks as "a lender
of last resort," which is extremely important in maintaining financial system stability. If
there is a sharp financial contraction, it becomes more likely that the economy will
experience an abrupt and significant downturn in a short period of time. Given the current
circumstances where the European sovereign debt crisis has been worsening, this lesson is
particularly important to all of us.
At the same time, we need to bear in mind that
providing liquidity as "a lender of last resort" is, in essence, a policy to "buy time." It is
essential that the necessary structural reforms take place while time is being bought, as the
time that we can buy becomes progressively more expensive.
My second point concerns the conduct of monetary policy after a bubble bursts. Monetary
easing can affect the economy either through bringing forward future demand or bringing in
overseas demand. In the former case, available future demand gradually decreases as
monetary easing is prolonged. In the latter case, when economic growth in developed
countries is generally weak, monetary easing in individual countries aiming at bringing in
overseas demand may increasingly lead to a zero-sum game, which is not desirable for the
sustainable growth of the global economy as a whole. Such diminishing returns, however,
do not release responsible central banks from the need to act. That is why, at the present
time when short-term interest rates in major economies have declined to almost zero,
central banks, including the Bank of Japan, have been making efforts to generate monetary
easing effects by implementing various unorthodox measures to lower long-term interest
rates and credit spreads. While central banks are buying time with these measures, it is
still essential to pursue the necessary structural reforms.
7
This comment was made at the press conference on November 16, 2011 after presenting the
Inflation Report.
11
My third point concerns the paradox of success in the conduct of monetary policy. The
goal of monetary policy is to achieve sustainable growth with price stability. This is a
well-established principle that is shared in Japan, the United Kingdom and globally,
regardless of whether an inflation targeting framework is adopted. The more successful
the conduct of monetary policy is, however, the more stable prices become and the less
volatility is seen in economic activity and financial markets.
When the expectation
prevails that a stable economic and financial environment will continue for a long period of
time, it is likely to encourage leverage and maturity mismatches between the assets and
liabilities of financial institutions. The greater the leverage and maturity mismatches are,
the more exposed the economy is to a possible unwinding triggered by a given event, so the
more fragile it becomes. The bursting of bubbles is the materialization of such fragility.
Before the global financial crisis, there was a debate over how to deal with bubbles, with
one camp stressing ex-ante prevention and another emphasizing the importance of ex-post
measures to resolve the situation in the aftermath. Following the global financial crisis,
however, all now appear to agree that the cost of a bubble bursting is unbearably enormous.
Most past bubbles were formed while economies enjoyed low inflation rates. Focusing
obsessively on the short-term stability of the consumer price index as a way to ensure
economic stability will actually have the opposite effect of increasing instability. Needless
to say, bubbles are not caused by low interest rates alone. However, when the expectation
prevails that low interest rates will continue for a long period of time, it is likely to
encourage leverage and maturity mismatching between the assets and liabilities of financial
institutions. In that sense, I believe that in the conduct of monetary policy central banks
also need to be attentive to the accumulation of financial imbalances.
My final point concerns the regulatory and supervisory framework. Looking back at how
bubbles are formed, the bottom line is that it comes down to aggressive activity by both
borrowers and lenders. Financial institutions' activities are influenced not only by the
expectation that a stable environment will continue but also by incentives created by the
regulatory and supervisory framework.
As for the background to such aggressive
activities by financial institutions, almost without exception regulation and supervision did
not prevent them from getting involved in risky lending, which was, in retrospect, an
attempt to improve their low profitability. This was the case in the Japanese bubble period
12
and European financial institutions did the same thing during the formation of the global
credit bubble in the middle of the 2000s. Central banks and the regulatory and supervisory
authorities in individual jurisdictions are currently working to reform the regulatory and
supervisory frameworks.
One important issue in this regard is how to find the right
balance between two important tasks: restraining excessive risk taking and securing the
profitability of financial institutions.
Closing Words
The recent financial crisis has certainly left not one, as the Beatles song said, but many a
pool of tears. As a result, if I may return to the Dickens quote, it feels for many of us like
the worst of times. It may be a bit of a stretch to say that we are in the best of times, but it
is too early to despair. Our economies have the resources, not only money but also the
intellectual and institutional capabilities, to resolve the issues we face. If we can adapt the
economy to a new environment and resist pressures that would lead to collateral damage,
even after the bursting of the bubble, we should still be able to find a path leading to
renewed growth. What we need is the determination and will. Ultimately, if we have this
determination and will, we can shorten the long and winding road.
Thank you for your attention.
13
Deleveraging and Growth: Is the Developed World Deleveraging
and Growth: Is the Developed World
Following Japan's Long and Winding Road?
January 10,
10 2012
Lecture at the London School of Economics and Political Science
(Co-hosted by the Asia Research Centre and STICERD, LSE)
Masaaki Shirakawa
Governor of the Bank of Japan
Chart 1
J
Japan's
' R
Reall E
Economic
i Growth
G
hR
Rate iin a Long-Term
L
T
Horizon
H i
14
y/y % chg.
10 4%
10.4%
12
1960s
Real GDP growth rate
10
8
5.2%
1970s
7.7%
6
1950s
4
2
4.4%
1980s
0
1 5%
1.5%
0.6%
1990s
-2
2000s
-4
-6
-8
56
60
64
68
72
76
80
84
88
92
96
00
04
08
Notes: 1. Data up to 1980 are based on the 68SNA (System of National Accounts), while those from 1981 are based on the 93SNA.
2. Data for the 1950s is the average of the year-on-year rates from 1956 to 1959.
Source: Cabinet Office.
Chart 2
Real GDP
After the Collapse of the Bubble Economy: Comparison with Japan's Experience
Euro Area
U it d States
United
St t
1990=100
84 86 88 90 92 94 96 98 00 02 04 06 08 10
1990=100
84 86 88 90 92 94 96 98 00 02 04 06 08 10
United Kingdom
1990=100
84 86 88 90 92 94 96 98 00 02 04 06 08 10
130
130
130
120
120
120
110
110
110
100
100
100
90
90
90
US (lower scale)
80
Euro area ((lower scale))
80
Japan (upper scale)
Japan (upper scale)
70
UK (lower scale)
80
70
00 02 04 06 08 10
2006=100
Japan (upper scale)
70
00 02 04 06 08 10
2006=100
00 02 04 06 08 10
2006=100
Sources: ONS; Eurostat; BEA; Cabinet Office.
Chart 3
Real GDP
After the Financial Crisis: Comparison with Japan's Experience
United States
1997=100
89 91 93 95 97 99 01 03 05 07 09 11
Euro Area
United Kingdom
1997=100
89 91 93 95 97 99 01 03 05 07 09 11
1997=100
89 91 93 95 97 99 01 03 05 07 09 11
115
115
115
110
110
110
105
105
105
100
100
100
95
95
95
90
90
90
Euro area (lower scale)
US (lower scale)
85
85
Japan (upper scale)
Japan (upper scale)
80
80
00 02 04 06 08 10
2008=100
Sources: ONS; Eurostat; BEA; Cabinet Office.
UK (lower scale)
85
Japan (upper scale)
80
00 02 04 06 08 10
2008=100
00 02 04 06 08 10
2008=100
Chart 4
Real-Estate Prices
After the Collapse of the Bubble Economy: Comparison with Japan's Experience
United States
Spain
1990=100
United Kingdom
1990=100
1990=100
84 86 88 90 92 94 96 98 00 02 04 06 08 10
84 86 88 90 92 94 96 98 00 02 04 06 08 10
120
120
US (lower scale)
110
84 86 88 90 92 94 96 98 00 02 04 06 08 10
120
Spain (lower scale)
110
Japan (upper scale)
Japan (upper scale)
Japan (upper scale)
100
100
100
90
90
90
80
80
80
70
70
70
60
60
60
50
50
50
40
40
40
00 02 04 06 08 10
00 02 04 06 08 10
00 02 04 06 08 10
2006=100
UK (lower scale)
110
2006=100
2006=100
Note: Figures for Japan are treated as those in the previous year (e.g. Jan 1, 20112010).
Sources: Haver; Ministry of Land, Infrastructure, Transport and Tourism.
Chart 5
Long-Term Interest Rates
After the Collapse of the Bubble Economy: Comparison with Japan's Experience
G
Germany
U i dS
United
States
8
84 86 88 90 92 94 96 98 00 02 04 06 08 10
%
US (lower scale)
7
Japan (upper scale)
8
7
84 86 88 90 92 94 96 98 00 02 04 06 08 10
%
U it d Kingdom
United
Ki d
8
Germany (lower scale)
Japan (upper scale)
Japan (upper scale)
6
5
5
5
4
4
4
3
3
3
2
2
2
1
1
1
0
0
00 02 04 06 08 10 12
UK (lower scale)
7
6
6
84 86 88 90 92 94 96 98 00 02 04 06 08 10
%
0
00 02 04 06 08 10 12
Note: Figures are annual averages. Figures for 2012 are the averages of daily data up to Jan 9, 2012.
Sources: IMF; Bloomberg.
00 02 04 06 08 10 12
Chart 6
Bank Loan
After the Collapse of the Bubble Economy: Comparison with Japan's Experience
U it d Kingdom
United
Ki d
United
i d States
S
Euro Area
A
1990=100
84 86 88 90 92 94 96 98 00 02 04 06 08 10
1990=100
84 86 88 90 92 94 96 98 00 02 04 06 08 10
1990=100
84 86 88 90 92 94 96 98 00 02 04 06 08 10
130
130
130
120
120
120
110
110
110
100
100
100
90
90
90
80
80
80
70
70
US (lower scale)
60
70
Euro area (lower scale)
60
Japan (upper scale)
Japan (upper scale)
50
Japan (upper scale)
50
00 02 04 06 08 10
2006=100
UK (l
(lower scale)
l )
60
50
00 02 04 06 08 10
2006=100
00 02 04 06 08 10
2006=100
Note: Figures show loans to domestic households and non-financial corporations.
Sources: Haver; CEIC; FDIC; Bank of Japan.
Chart 7
The Bank of Japan has introduced various unorthodox policy measures since the
second half of the 1990s, ahead of other central banks.
BOJ
FRB
ECB
BOE
1
12/2008
05/2009
03/2009
1
08/2011
―
―
―
03/2009
Extremely low interest rates
02/1999
Commitment to maintain
extremely low interest rates
04/1999
Quantitative/Credit easing
03/2001
11/2008
06/2003
11/2008
ABS
Purchases
P
h
off
risk assets
2
―
―
―
06/2009
ABCP
06/2003
09/2008
3
CP
12/2008
4
Corporate bonds
01/2009
10/2008
―
―
01/2009
―
01/2009
ETFs
10/2010
―
―
―
J-REITs
10/2010
―
―
―
Stocks held by
financial institutions
10/2002
―
―
―
Subordinated loans to banks
03/2009
―
―
―
Agency debt
Agency MBS
―
11/2008
―
―
Covered bonds
―
―
05/2009
―
Notes: 1. The time at which the Bank of Japan
p first introduced its zero interest rate ppolicyy and made its commitment to maintain zero interest rates.
2. Introduction of TALF (Term Asset-Backed Securities Loan Facility), which provides non-recourse loans against collateral, mainly ABS, effectively
purchases ABS.
3. Introduction of AMLF (ABCP Money Market Mutual Fund Liquidity Facility), which provides U.S. depository institutions and bank holding companies with
non-recourse loans against ABCP as collateral, effectively purchases ABCP.
4. Introduction of CPFF (Commercial Paper Funding Facility), which provides SPVs with loans against collateral, mainly CP, effectively purchases CP.
Chart 8
Financial turmoil in Japan did not trigger a global financial crisis.
R l GDP following
Real
f ll i the
th Financial
Fi
i l Turmoil
T
il in
i Japan
J
R l GDP ffollowing
Real
ll i th
the F
Failure
il
off Lehman
L h
Brothers
B th
140
97/Q4=100
1106
98/Q1 - 98/Q2
(cumulative)
120
Japan
110
100
▲2.4%
US
1 9%
1.9%
Euro area
1.0%
UK
1.7%
1
08/Q3
97/Q4
130
08/Q3=100
0 9
0.9
0 9
0.9
102
0.8
0.8
0.7
0.7
98
0.6
0.6
0.5
0.5
94
0.4
90
0.4
08/Q4 - 09/Q1
(cumulative)
0.3
80
90
0.2
0
2
70
0.1
0 86
60
88
91
94
97
00
03
06
09
▲6.8%
US
▲4 0%
▲4.0%
Euro area
▲3.9%
UK
▲3.8%
05
0.3
0.2
0.1
0
06
07
08
09
10
11
135
136
137
138
139
140
141
142
143
144
145
146
147
148
149
150
151
152
153
154
155
156
157
158
159
160
161
162
163
164
165
85
04
Japan
59
64
69
74
79
84
89
94
99
104
109
114
119
124
129
134
139
144
149
154
159
164
Sources: Cabinet Office; BEA; Eurostat; ONS.
Chart 9
Time Length from the Collapse of the Bubble Economy
until the Occurrence of the Financial Crisis
first interest-rate cut
stock price peaked land price peaked
official
discountt rate
di
t
reduced to
0.5%
zero interest
rate policy
failures of large
financial
instituitons
commitment
to maintain
zero interest
rate
QE
JP
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
peak of
business cycle
failure of
first interest-rate cut Lehman Brothers
house price peaked
stock price
peaked QE1
maturity
extension
program
QE2
US
2006 2007 2008 2009 2010 2011
Note: The land price of Japan in this chart is based on "Published Price of Land".
Chart 10
J
Japan's
' Hi
High-Growth
hG
th E
Era: Comparison
C
i
with
ith China
Chi
16
Japan
y/y % chg.
16
Real GDP growth rate
14
China
y/y % chg.
14
Average growth rate for 1956-70: 9.7%
12
12
10
10
8
8
6
6
4
4
Real GDP growth rate
2
2
Average growth rate for 1990-2005: 9.8%
0
0
-2
1955
60
65
70
75
-2
19 90
80
20 00
95
05
10
Sources: Cabinet Office; National Bureau of Statistics of China.
Chart 11
The stability of Japan's financial system and financial markets is notable
comparedd to
t the
th United
U it d States
St t andd Europe.
E
Degree of Strain in
Funding Markets
4
Financial Institutions'
Lending Attitude
Spreads on Corporate Bonds
%
6
%
40
The failure of Lehman
Brothers
The failure of Lehman
Brothers
5
4
The failure of Lehman
Brothers
20
Japan
US
Euro area
UK
3
% points
0
-20
Easing
3
2
-40
2
0
08
09
10
11
12
Tightening
60
-60
1
1
-80
0
-100
08
09
10
11
12
08
09
Notes: 1. The degree of strain in funding markets is 3-month Libor minus 3-month overnight index swap (OIS) rates.
2. The spreads on corporate bonds (rated AA) are corporate bond yields minus government bond yields.
3 Financial
3.
i
i l institutions'
i i i ' lending
l di attitude
i d is
i the
h average off the
h DIs for
f large,
l
medium-sized,
di
i d andd small
ll firms
fi
for
f Japan,
large and medium-sized firms for the United States, large firms for the euro area, and firms of all sizes for the United Kingdom.
Sources: Bloomberg; Japan Securities Dealers Association; Bank of Japan; FRB; ECB; BOE.
10
11
Chart 12
Unemployment
p y
Rate
After the Collapse of the Bubble Economy: Comparison with Japan's Experience
United States
11
Euro Area
84 86 88 90 92 94 96 98 00 02 04 06 08 10
%
US
(lower scale)
Japan
(upper scale)
10
9
11
United Kingdom
g
84 86 88 90 92 94 96 98 00 02 04 06 08 10
%
Euro area
(lower scale)
10
Japan
(upper scale)
9
11
9
8
8
7
7
7
6
6
6
5
5
5
4
4
4
3
3
3
2
2
00 02 04 06 08 10
U
UK
(lower scale)
Japan
(upper scale)
10
8
2
84 86 88 90 92 94 96 98 00 02 04 06 08 10
%
00 02 04 06 08 10
00 02 04 06 08 10
Sources: ONS; Eurostat; BLS; Ministry of Internal Affairs and Communications.
Chart 13
Japan's Growth Rate
----- The lowest in terms of real GDP growth rate, the highest in terms of real GDP growth rate per
working-age person.
Reall GDP G
R
Growth
hR
Rate
per Capita
Real GDP Growth Rate
2.0
avg. growth rate between 2000-10, %
2.0
Reall GDP Growthh Rate per
Working-Age Person
avg. growth rate between 2000-10, %
2.0
1.6
1.6
1.6
1.2
1.2
1.2
0.8
08
0.8
08
0.8
0.4
0.4
0.4
0.0
0.0
0.0
JP
US
UK
Euro
area
Sources: World Bank; Haver.
DE
FR
avg. growth rate between 2000-10, %
JP
US
UK
Euro
area
DE
FR
JP
US
UK
Euro
area
DE
FR
Chart 14
Japan has been facing a rapid demographic change.
change
40
ratio of population aged 65 or above to population aged 15-64, %
35
30
Japan
US
UK
Italy
France
Germany
25
20
15
10
5
0
50
55
60
65
70
75
80
85
90
95
00
05
10
Source: United Nations.
Chart 15
P l ti Growth
Population
G
th Rate
R t
Japan
1.5
avg., y/y % chg.
Net migration
United States
1.5
United Kingdom
avg., y/y % chg.
avg., y/y % chg.
1.5
Total population
1.0
0.5
0.5
0.5
0.0
0.0
0.0
-0.5
-0.5
-0.5
Source: World Bank.
19 61～65
66～70
6
71～75
7
76～80
7
81～85
8
86～90
8
91～95
9
96～00
9
20 01～05
06～10
0
1.0
19
961～65
66～70
71～75
76～80
81～85
86～90
91～95
96～00
20
001～05
06～10
1.0
19 61～65
66～70
71～75
76～80
81～85
86～90
91～95
96～00
20 01～05
06～10
Natural change
Chart 16
Population Growth Rate (Cont.)
Euro Area
1.5
Germany
avg., y/y % chg.
Net migration
1.5
France
avg., y/y % chg.
1.5
avg., y/y % chg.
Total population
1.0
0.5
0.5
0.5
0.0
0.0
0.0
-0.5
-0.5
-0.5
19961～65
66～70
71～75
76～80
81～85
86～90
91～95
96～00
20001～05
06～10
1.0
1 961～65
66～70
71～75
76～80
81～85
86～90
91～95
96～00
22001～05
06～10
1.0
19961～65
66～70
71～75
76～80
81～85
86～90
91～95
96～00
20001～05
06～10
Natural change
Source: World Bank.
Chart 17
Since the early 2000s, Japan's economy gradually overcame the post-bubble
effects of deleveraging.
deleveraging
Production Capacity DI2,3
40
DI ("excessive" - "insufficient"), % points
Ratio of Debt to Nominal GDP1
140
30
130
20
120
110
"Excessive"
Excessive 10
100
0
"Insufficient"-10
-20
%
90
Large enterprises
Small and medium
medium-sized
sized enterprises
85 87 89 91 93 95 97 99 01 03 05 07 09 11
80
70
85 87 89 91 93 95 97 99 01 03 05 07 09
Employment Conditions DI2,3
40
30
20
Excessive 10
"Excessive"
0
-10
"Insufficient" -20
-30
-40
-50
-60
DI ("excessive" - "insufficient"), % points
Large enterprises
Small and medium-sized enterprises
85 87 89 91 93 95 97 99 01 03 05 07 09 11
Notes: 1. Debt is the sum of loans and securities (other than equities) in
private non-financial corporations.
2 P
2.
Production
d i capacity
i DI shows
h
"TANKAN P
Production
d i Capacity
C
i
DI (Manufacturing)." Employment conditions DI shows
"TANKAN Employment Conditions DI (All Industries)."
3. The "TANKAN" has been revised from the March 2004 survey.
Figures up to the December 2003 survey are based on the
previous data sets
sets. Figures from the December 2003 survey are
on the new basis.
Sources: Cabinet Office; Bank of Japan.
Chart 18
Japan's economic recovery since 2002 was supported by the high
growth of the global economy.
6
y/y % chg.
4
2
0
Net exports
Domestic
demand
2
-2
Japan, Real GDP growth rate
-4
World Real GDP growth rate
World,
-6
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Sources: Cabinet Office; IMF.