Economy of Japan

January 13, 2016

Little bit of history

Japan: the basics

Area
Germany < Japan < California

Population
127 million
life expectancy: 84 (87 for female)
24% are 65 or above

constitutional monarchy
3

Japan in history
Oldest continuous monarchy
feudal rule under shogun (1192 - 1867)
U.S. Commodore Matthew Perry
forced Japan to open to trade (1853)

Meiji Restoration (1868)

centralized government under Emperor
industrialization and trade

Japan in World War II

Invasion and annexation of Northeast
China (Manchuria) (1931-1932)
full-scale aggression in China (1937-1940)
alliance with Nazi and fascists (1940)
Pacific War (1941-1945)
every country and colony in East and
Southeast Asia was invaded

Demilitarization
Purged almost all wartime officers and
politicians
Disbanded almost all militaristic
associations and parties
Prosecuted almost all war criminals
The issue of Yasukuni Shrine

Dismantled almost all war industries

6

The "Peace Clause"

Article 9 in the 1947 constitution:
the Japanese people forever renounce
war as a sovereign right of the nation and
the threat or use of force as means of
settling international disputes
land, sea, and air forces, as well as other
war potential, will never be maintained

Modern Japan

Korean War (1950 - 1953)

Economic turning point for Japan:
war supplies to Korea
industrial resurgence
foreign currency

1945 - 1950 growth rate: 9.4%

1950 - 1955 growth rate: 10.9%
1952 Japans GDP matched prewar high
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Korean War (1950 - 1953)

Political turning point for Japan
U.S. started to regard Japan as a vital link
in the arc of containment against
communism
Demilitarization gave way to reconstituting
a military force
Self-Defense Force

10

U.S. Strategic Change

General peace treaty in San Francisco in
September 1951
China and Soviet Union were excluded
formally ended the Occupation in 1952

U.S.-Japan Mutual Security Treaty

U.S. troops and military base in Japan

11

Japans Economic Growth

12

High Growth of 1955-1962

Large investment in heavy industry
Imports of energy and raw materials
Governments economic goals:
achieve economic self-sufficiency
achieve full employment
improve export competitiveness
keep domestic demand high

13

High Growth of 1963-1973

Governments doubling income plan
Large-scale infrastructure construction

Labor-intensive to capital-intensive
Technological improvement and facility
modernization under government protection

Aggressive export strategy

Businesses compete with foreign counterparts
under government protection
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Jan-05

Jan-03

Jan-01

Jan-99

Jan-97

Jan-95

Jan-93

Jan-91

Jan-89

Jan-87

Jan-85

Jan-83

Jan-81

Jan-79

Jan-77

Jan-75

Jan-73

Jan-71

15

Jan-07

JPY/USD Exchange Rate 1971-2007

360

330

300

270

240

210

180

150

120

90

60

30

Macro Performance:
Japanese Economy has been
slipping away

16

GDP Growth : Stagnation since end 1980s

GDP Growth (%)
8.0

6.0

4.0

2.0

0.0

-2.0

-4.0

-6.0

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Output has been less than Potential

Output gap (% of Potential GDP)
4.0

2.0

0.0

-2.0

-4.0

-6.0

-8.0

18

Unemployment has been slipping as well

Unemployment rate (% of Labor force)
6.0

5.0

4.0

3.0

2.0

1.0

0.0

19

Japans position in the world economy has been slipping

GDP share in World
10.0

9.0

8.0

7.0

6.0

5.0

4.0

20

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Saving - Investment

33
31
29

27
25
23

21
19
17

15

Total investment

Gross national savings

21

22

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

Inflation

-1

-2

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2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

Fiscal Deficit

-1

-3

-5

-7

-9

-11

Debt level has been rising

300.0
250.0
200.0

150.0
100.0
50.0

1980
1981
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
2011
2012
2013
2014
2015

0.0

General government net debt (% of GDP)

General government gross debt (% of GDP)

Net debt is calculated as gross debt minus financial assets corresponding to debt instruments. These
financial assets are: monetary gold and SDRs, currency and deposits, debt securities, loans, insurance,
pension, and standardized guarantee schemes, and other accounts receivable.
Gross debt consists of all liabilities that require payment or payments of interest and/or principal by the
debtor to the creditor at a date or dates in the future. This includes debt liabilities in the form of SDRs,
currency and deposits, debt securities, loans, insurance, pensions and standardized guarantee
schemes, and other accounts payable. Thus, all liabilities are debt, except for equity and investment 24
fund shares and financial derivatives and employee stock options.

CAB has been slipping since Global Financial Crisis

Current account balance (% of GDP)
6.0

5.0

4.0

3.0

2.0

1.0

0.0

-1.0

-2.0

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Genesis of a Crisis

26

More shocks in 1990s

Large and rising government deficit and
public debt (now more than 200% of GDP)
Aging population (median age now at 45)
Banking crises and non-performing loans
Asian financial crisis (1997-1998)
Hollowing out of industry
Natural disasters
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Political Instability: Japans PMs

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Inflating the Bubble

Opportunity fuels real estate bubble in late 1980s
Similar to current US bubble?
Japanese bubble was centered around commercial
real estate
US bubble chiefly involved housing
The Plaza Accord (depreciate USD against and DM)
Affects exports
Econ growth 4.4% (1985), 2.9% (1986)
Bank of Japan (BOJ) responds and cuts discount rate
from 5% to 2.5%
Monetary policy provides air for the bubble

Zenith

Downturn

Ginza district (Tokyo),

prime property values at
USD 139,000 per sq ft
Tokyo Stock Exchange
(Nikkei stock index/Nikkei
225) hits record high
38,957.44 in fourth
quarter 1989

BOJ realizes the bubble

and responds by
tightening monetary
policy, and from 1989 to
1990 discount rates are
increased five times to
cap at 6%
Market collapses shortly
afterward as a result of
lack of investor
confidence

The Wounded Nikkei

The Japanese stock market index
Peaked at 40,000 in 1989
Dropped to below 15,000 in 1992

There were periods in the 1990s when it rose in

anticipation that the market would bounce back, but
the harsh reality is that the Nikkei 225 has been in
steady decline even to this day.

Real estate
From 1991 1998 property lost 80% of its value

Nikkei 225

Bank Problems
The banking system was heavily regulated, thus
considered institutionally stable
In 1985 the deregulation of interest rates on
deposits began. Prior to that bank were not allowed
to pay interest on deposits
People invested in the stock market & foreign
investments
Deposit Insurance Corporation, which played a
supervisory role in the economy was mishandled
Confidence/naiveness turned into a liability upon
market collapse

The Hangover
Real GDP (RGDP) floundered throughout
the 1990s
1990 - 428,826 billion (USD 1 trillion)
2000 - 469,480 billion (USD 4.66 trillion)

Unemployment
Rose from 2.1 % in 1991 to 4.7 % by year end
2000
When comparing unemployment to other countries
it may seem low, however, 4.7 % is unheard of in
Japan
Decade earlier unemployment never passed 2.8 %

The Lost Decade

Time period where economic growth
stopped
Lack of favorable results from fiscal & monetary
policies (to be discussed next)
Japanese cultural habits of saving and frugality
didnt help the situation
Situation persisted until 2003

Liquidity Trap?
Between 1994 and 2000 the government tried to
revive the economy through fiscal policy
1994 - six spending programs totaling 66 trillion and
cut income tax rates
1998 Q1 additional tax cuts, this time 2 trillion
Q2 - fiscal stimulus package worth more than 16.7
trillion
Q4 yet another fiscal stimulus package worth 23.9
trillion
1999 the government trys throwing 18 trillion at
the problem with recession recovery
Finally, October 2000, Japan announced yet another
fiscal stimulus package of 11 trillion yen

Results: Total govt debt exceeds 100% of GDP

Bubble burst

38

Japan's Top Trade Partners (Total Volume, in trillion yen)

USA

Mainland China

Hong Kong

30

25

20

15

10

0
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

39

Basics of
Abenomics

40

Basics of Abenomics

Abe's Keynesian-inspired plan, dubbed "Abenomics," takes a three-pronged

approach to reflate the economy through
monetary,
fiscal, and
structural policies.
It includes a hefty stimulus package worth 20.2 trillion yen ($210 billion), of
which 10.3 trillion ($116 billion) would come in government spending with a
focus on infrastructure.
However, over the past two decades, the Japanese government has spent
trillions of dollars in various bids to lift its economy out of a severe downturn
catalyzed by the bursting of a real estate bubble in the late 1980s.
During those years Japan accumulated the largest public debt in the
developed worldaround 180 percent of its $5.5 trillion economyyet failed
to generate an effective recovery.
While there isn't much that's technically new about Abenomics, the sheer
breadth and comprehensiveness of its mandates make it somewhat
remarkable.

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Three Arrows of Abenomics

1. Arrow I:
Aggressive monetary easing has continued as planned.
Asset purchases under the BoJs Quantitative and
Qualitative Monetary Easing (QQE) program are being
executed at the planned pace

TheBoJs balance sheet grew to 52 percent of GDP by endMay 2014.

2. Arrow II:
Fiscal policy has shifted from stimulus to revenue policy.
After adopting two stimulus packages in early 2013 and
2014, discussions have turned to tax reform.
With a higher consumption tax rate of 8 percent in place,
attention has shifted to the next planned increase, to 10
percent, in October 2015.
3. Arrow III: Gradual albeit limited progress on structural reforms.

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Inflation and Inflation Expectations are Rising

CPI Inflation
% oya

Source: Ministry of International Affairs & Communication

45

Inflation Expectations
%, 1-month moving average

Source: Bloomberg

Labor Reforms Key for Abenomics Success

Base Wage Growth Remains Weak
percent, oya

Source: Ministry of Health, Labor and Welfare

46

Gender Gap in Prime-Age

Labor Force Participation (Male Female)

percent, 2012

Source: OECD

Fiscal and Structural Challenges Remain

Net Government Debt in Advanced Economies
% of GDP

Source: IMF

47

Potential Growth
% y/y

Source: BoJ, IIF

Abenomics: Two Views

Abe is right about one thing: Japan needs to get out of its no-growth
and deflationary trap. But the policies that he favours are not the
way to do it Feldstein (2013)
High Debt & low interest rate favors Japan
Abenomics will raise interest rates and make the debt burden
unbearable
Abenomics can only help the countrys recovery. Abe is doing what
many economists (including me) have been calling for in the US and
Europe: a comprehensive program entailing monetary, fiscal, and
structural policies. Abe likens this approach to holding three arrows
taken alone, each can be bent; taken together, none can.
Joseph Stiglitz (2014)

48

Recent Trends: Expected Modest Recovery in 2015 has been belied

49

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Japans Economy: OECD Assessment in end of 2015

The economic expansion was derailed in Japan 2015 by a sharp slowdown

in demand from China and other Asian countries and sluggish private
consumption.
Output growth is projected to pick up from around per cent in 2015 to 1%
in 2016, as rising real wages support consumer spending.
However, with the consumption tax hike in 2017, growth is likely to slow to
per cent.
Headline consumer price inflation, which has fallen close to zero with the
decline in oil prices, is projected to reach 1 per cent by end-2017.
The governments target of a primary surplus by FY 2020 remains a priority
to put gross public debt, which has risen to 230% of GDP, on a downward
trend.

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