THE ECONOMY OF JAPAN

日本経済

Traditional Japan

2Source: Web Japan & Japanese Consulate General, San Francisco 2

Contemporary Japan

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“Cool Japan”Japanimation“KAWAII”

http://www.youtube.com/watch?v=i12bIqfRXJM

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Looking at Some of the BasicsGeography

• 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-Yokohama-Kawasaki) 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

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Population127,704,000

(2008)

Population Density (per km sq.) 336.1

Population, share of 0-14 years 13.6%

Population, share of 15-64 years 65.3%

Population, share of 65 and over 21.0%

Sex ratio, number of males per 100 female 95.9

Total fertility rate 1.37 (2009)

Death rate (number of deaths per 1000 population

9.54 (2009)

Infant mortality rate (number of deaths per 1000 live births)

2.79 (2009)

Life expectancy at birth (total population) 82.12 (2009)

Life expectancy at birth (male)78.8

(2009)53

Life expectancy at birth (female) 85.62 (2009)

Net migration rate (number of migrants per 1000 population)

0.00Various Social Statistics

(2008 -9)http://www.stat.go.jp/english/data/handbook/c02cont.htm#cha2_1

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Nikkei – Last 5 years

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10

PACIFIC Exchange Rate Service                         

http://fx.sauder.ubc.ca/plot.html

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Japan GDP Growth Rate

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Some Other Interesting Facts

• Japan now has a far higher percentage of single women between the ages of 20 to 40 than the United States--higher than almost anywhere in the world except Scandinavia.

• 80% to 90% of single Japanese women live with their parents, as do about half of the men in their 20s. Most pay little or no rent and do no housework.

• One sociologist estimates that Japan has 10 million "parasite singles"--roughly equal to the entire population of Greece.

Q1. What are the economic factors that affect these facts?

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THE “BUBBLE” ECONOMY

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

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16

Land Prices

Japanese Urban Real Estate Pricesvs Consumer Price Index Inflation

CPI (inflation)

Commercial Real Estate—6 largest cities—

18 years!

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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?

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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

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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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Proportion of Loans to Small Firms

0.3

0.4

0.5

0.6

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

Year21

Proportion of Loans to Real Estate Developers

0.02

0.04

0.06

0.08

0.1

0.12

0.14

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

Year

22

23

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

19

83

/10

/22

19

84

/4/2

2

19

84

/10

/22

19

85

/4/2

2

19

85

/10

/22

19

86

/4/2

2

19

86

/10

/22

19

87

/4/2

2

19

87

/10

/22

19

88

/4/2

2

19

88

/10

/22

19

89

/4/2

2

19

89

/10

/22

19

90

/4/2

2

19

90

/10

/22

19

91

/4/2

2

19

91

/10

/22

19

92

/4/2

2

19

92

/10

/22

19

93

/4/2

2

19

93

/10

/22

19

94

/4/2

2

19

94

/10

/22

19

95

/4/2

2

19

95

/10

/22

19

96

/4/2

2

19

96

/10

/22

19

97

/4/2

2

19

97

/10

/22

19

98

/4/2

2

19

98

/10

/22

19

99

/4/2

2

19

99

/10

/22

20

00

/4/2

2

20

00

/10

/22

BOJ Discount Rate Target Call Rate

Nov 1, 1986following

"Plaza Accord"

Feb 23, 1987

May 31, 1989first anti-"Bubble"

rate hike

Aug 30, 1990

Jul 1, 1991interest rates

kept high for 18months following

the "bubble's" peak

Sept 8, 19950.5%

discount rate!!

Feb 12, 1999"Zero InterestRate Policy"commences

Christmas 1989rate hike

– "bubble" peaks –

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)

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

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Today’s 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

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- 5

0

5

10

81828384858687888990919293949596979899000102030405060708

Percent

Bubble

Real GDP

Nominal GDP

Industrial Production

Shaded areas are recession periods

Production

Inventory

After the bubble, economy looked up in 1996-97, 2000 & 2003-07.

But economy fell again in 2008-09 due to declining global demand.

GDP

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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

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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 (MBMoneyLending)

--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)

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Policy Issues for the Bank of Japan

- 30

- 20

- 10

0

10

20

30

40

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

Monetary base

Money supply (M2)

Bank lending

Percent

0123456789

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

%

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Call rate (interbank short-term interest rate)

Money & bank lending

Bubble Zerointerest

ratepolicy

Excess reserves are built up during zero interest rate periods

0

50

100

150

200

250

300

350

400

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

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0200400600800

100012001400160018002000

1965

1970

1975

1980

1985

1990

1995

2000

2005

USD billion

J apan

China

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

25.00

Jan-80 Jan-83 Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07

Perc

en

t

Yen/USD International Reserves

Monthly Changes in International Reserves(Proxy for F/X intervention)

Source: McKinnon (2007)

Buy Dollar (resist yen appreciation)

Sell Dollar (resist yen depreciation)

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

168%

Debate on Fiscal Stimuli• During the 1990s, large fiscal spending was 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 situation.

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Government debt in % of GDP

Bubble burst

• PM Koizumi (2001-06) set limits on spending (infrastructure, welfare).

• PM Aso (2008-) returned to big fiscal spending to combat recession.

Koizumi Abe Fukuda Aso

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From Recovery to Another 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.

Remaining issues• Agriculture, services, distribution, finance remain uncompetitive.• Long-term problems remain unsolved - fiscal crisis, pension & medical

reforms, aged but vibrant society, new energy…)• Koizumi deregulation & liberalization increased income gaps and created

new poor).

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Politics: The End of the 1955 Regime

• The last three LDP governments (Abe, Fukuda, Aso) have been weak and unpopular.

• The opposition (Democratic Party) is not very popular or effective either.

• In July 2007 election, opposition seized majority in the Upper House--“twisted politics” causes confrontation and slowdown

• In Aug/Sep 2009 election, LDP loses

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LDP dominance based on rural

expenditure and support

Two party politicswith clear policy choice

for voters

?

Recent Prime Ministers of Japan

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April 26, 2001 – September 26, 2006

Junichiro Koizumi

September 26, 2006 – September 26, 2007

Shinzo Abe

September 26, 2007 – September 24, 2008

Yasuo Fukuda

September 24, 2008 – (September 16, 2009)

Taro Aso

(September 16, 2009 –) Yukio Hatoyama

Photos from the Cabinet Office, and the Democratic Party of Japan

New Administration’s view on Japan-US relations

• Japan-US Security Alliance in place since 1951• Mr. Hatoyama assured President Obama that

Japan-US alliance is the foundation of our foreign policy

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copyright: AFP/Kazuhiro Nogi

What do Japanese people think about current US-Japan relations?

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Cabinet Office, Government of Japan

%

Social Issues -Total Fertility Rate

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Population in Japan by age Unit: 10 thousand

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42

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Possible Scenarios of Population Change in Japan

Citizens' Welfare Cost and Tax Burden （％）

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Type of Employment

Statistic Bureau,Ministry of Internal Affairs & Communications

A little Japanese

“Free” + “arubaito” [ger. arbeit]

=Furiitaa or “Freeter”

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Freeter Job Attributes

• Limited or flexible hours• Little Responsibility• Low Paying• Few or no job benefits• No long-term commitment• Undemanding work

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Freeter Negative Impacts on Society

• Workforce with undeveloped potential• Low contributions to taxes, pension system• Increase poverty/homelessness• Lack of independence• Looming labor shortage• Depressed birthrate

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