By:

A Balasubramanian ( FI 903)
A Bhavani ( FI 905 )
S Srinivas Reddy ( FI 926 )
Suneesh Sudhakaran ( FI 928 )
International Trade
&
Finance
Economic Crisis Of Japan
Index
1. 1. Introduction Introduction
2. 2. Heisei Bubble Concept Heisei Bubble Concept
3. 3. Chronology Of Events Chronology Of Events
4. 4. Fiscal Fiscal Stimulus Stimulus
5. 5. Bank Crisis Bank Crisis
6. 6. Recovery , Global Recession & Recovery Recovery , Global Recession & Recovery
7. 7. The Lost The Lost Decade Decade
8. 8. Earthquake & Nuclear Disaster Earthquake & Nuclear Disaster Economical Economical
Impacts Impacts
Introduction
Annual Growth Rate Over the Years - Japan
The Bubble caused during Economic Boom in late 1980s The Bubble caused during Economic Boom in late 1980s
Causes
Structuralbank deregulation and the loss of large corporate
borrowers in the early 1980s led banks to over lend to risky
borrowers (SMEs, real estate developers) without proper risk
management.
Monetaryas the yen rose sharply after 1985, the Bank of Japan
injected liquidity to counter it and ease endaka fukyo (high-yen
caused recession). This led to asset bubbles without igniting
inflation.
Consequences
Excess investment in properties, over-expansion in capacity,
lavish consumption, rise in outward FDI
Heisei Bubble
Japan: crisis of the 1990s Japan: crisis of the 1990s
At the end of the 1980s real estate prices rose by three times,
producing a real estate bubble. This uncovered one of the unspoken
factors of the Japanese economic miracle, i.e. the power of big
speculators, with ties to the criminal world as well as top politicians.
Japans Central Bank responded first by raising interest rates and this
determined a steep fall of house prices in 1991. This was not, however,
accompanied by economic recovery, rather it was followed by a
creeping recession.
In the next stage, interest rates were lowered, down to zero, in order
to jump start the economy. The State launched big public
expenditure programs, borrowing large quantities of money.
Chronology of events
The economy did not react as hoped. Japans economy was
based on a low rate of private consumption. GDP growth rates
remained low, below the economys growth potential. In other
words Japan had fallen into a deflationary trap.
Japans economic problems were compounded by the fact that its
banking sector became heavily indebted.
Stagnation also meant a rise in unemployment, which reached 5%
of the work force. Investment and consumption both were flat or
negative.
Reflationary policies proved too weak.
Reforming the economy proved difficult, because of over
regulation and structural rigidities.
Chronology of events
Japanese society resisted steps towards liberalization. The
Japanese social model was called into question, but reforming it
was slow and painful.
Two mistakes in economic policy (Krugman):
o Government did not act consistently. In 1997 after a few years of slow
recovery, fears were raised about the rise in public debt due to
government deficits and projected pension costs. As a result taxes were
raised, growth was throttled and the country plunged again in
recession.
o Politicians failed to address the real weakness which lay in the banking
system. Banks had suffered from the fall in real estate stock and,
following that, they had exposed themselves by lending to the State.
Protracted recession compounded the problem.
Chronology of events
Recapitalization of the banks was carried out in 1998, with a State
injection of $ 500 bn.
Chronology of events
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Fiscal Stimulus Fiscal Stimulus
Since the 1990s, large fiscal spending has been 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 debt crisis.
PM Koizumi (2001-06) set
limits on spending
(infrastructure, welfare).
PM Aso (2008-) and DPJ
(2009-) returned to big
fiscal spending.
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Government debt in % of GDP
Bubble burst
Postwar Financial System
Bank-based system with underdeveloped stock and bond market.
Stable system no threat of new entry
Safe but inefficient system
Postwar system could not last forever
Banks grew too large but restricted by many restrictions
Basic Causes of Bank Problem
Failure to create prudential regulatory system
o Deregulation of the system took place without creating a effective
system
o Generates competition
o Profit no longer guaranteed
Banking Crisis Banking Crisis
Macroeconomic mismanagement
o Interest Rates were at postwar lows
o Not easing monetary and fiscal policies in the early 90s
o Relying excessively on easy monetary policies in the mid 90s
o Fiscal Stimulus through supplementary budgets in the mid 90s, too little too
late.
o Wrong optimistic forecast for 97
Effects of Globalization
o Economic and financial policies subject to foreign pressures
o Worlds largest creditor nation: Japanese financial institutions engaged in
foreign lending and portfolio investment
o Flourishing of a free global capital market
o Big Bang deregulation creates competition in Japan home market from
foreign financial institutions
Banking Crisis Banking Crisis
High rate of financial innovation
o Wide range of new financial derivatives
o Mostly American and some European players
o Japanese banks unable to learn
o The most capable Japanese are hired away by foreign firms
Banking Crisis Banking Crisis
Banking sector Problems
Mergers and failures have left Japan with 7 major banks
Low profitability for more than 10 yrs
Banks depend too heavily on revenue from lending
Government sponsored financial institutions
o Heavily subsidized ; Excessive Branches
o no maintenance fee, lower rate on lending, no prepayment penalties
o Strong government resistance to address this problem and no public
recognition of the losses that these government institutions have made with
explicit subsidies
Banking Crisis Banking Crisis
Banking Problem 1 Example
1.1 trillion yen of public funds injected into Asahi and Daiwa Banks
March 2003: Asahi and Daiwa Banks merge into Resona Bank (5th largest)
Resona granted another 1.96 trillion yen
September 2003: Resona records loss of 1.76 trillion yen for period between Mar-
Sept 03 (90% capital provided, disappears)
Regulators principal aim to avoid large bank failures
Little attention to future viability of recapitalized banks
Regulators did not systematically force other banks to reassess their risk ratings
Gives little incentive for Banks to restructure
Cumulative loan losses by banks since 1990 is 91.5 trillion yen
(18% of current Japanese GDP)
Tax payer burden very likely at least 100 trillion yen (20% of GDP)
Recovery, Global Recession, Recovery, Global Recession,
Recovery Recovery
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.
Thanks to strong demand in China and other emerging
economies, growth picked up in 2010 (>2%?)
Recovery, Global Recession, Recovery, Global Recession,
Recovery Recovery
Remaining issues
o Agriculture, services, distribution, finance remain
uncompetitive.
o Long-term problems remain unsolved - fiscal crisis,
pension & medical reforms, aged society, new
energy)
o Koizumi deregulation & liberalization increased
income gaps and created new poors (working
poor Haken Giri).
Japans Lost Decade Japans Lost Decade
( (early 1990s early 1990s- -early 2000s early 2000s) )
Reasons for long lasted Recession:
Long adjustment after a large asset bubble
Non-performing loans (late policy response)
Japans economic system became obsolete (*)
Aging population and associated problems (pension, medical
care, dissaving, etc) (*)
Snowballing fiscal debt (*)
Peoples lack of confidence in the future or policy (*)
The China challenge (*)
Lack of political leadership to propose solutions,
convince people, and implement actions
(*) True even today
Earthquake and Nuclear Disaster in Earthquake and Nuclear Disaster in
2011 2011
Immediate impact and issues Immediate impact and issues
Earthquake relief budget is expected about 10-20 trillion yen or 2-
4% of GDP (excl. atomic power related costs). In 1995, the Kobe
earthquake cost 3 trillion yen.
Debate over funding: tax increase, debt issue or cutting
unnecessary spending (small saving?). But fiscal problem is
caused not mainly by earthquake but by social welfare explosion.
Growth impact of earthquake may be neutral: output loss offset
by private & public investment for recovery. Supply chain
disruption is ending and sharp recovery is visible.
Businesses fear loss of competitiveness and domestic production
base due to political risk.
Thank You Thank You