explaining Japan Lost Decade and possibility of the same problem faced by USA & EZ

1. Japan’s
lost decade
Indra PRATAMA
Qiong QI
Qianqian SHI

2. The Beginning: Asset Bubble
The Japanese stock price index began to rise in the early 1980s and continued to
rise to more than five times the 1980 level. Then, from 1990 it started a long
period of decline.
The Japanese land price also rose throughout the 1980s and peaked in 1991. The
average land price more than doubled. The turning point for the land price came
one year later than the stock market, in 1991. (source: www.grisp.ac.jp)

3. The Cause (I) : Monetary Easing &
Deregulation
Bank deregulation - As competition began, the banks rushed to find new borrowers and
projects in SMEs and land & property investment. They lacked the ability to correctly
evaluate these new borrowers and projects. When the economy was booming, they
over-lent. When the bubble ended, these loans became a huge mountain of bad debt.
Monetary Easing - In 1985 there was a sharp yen appreciation, and the Bank of Japan
lowered short-term interest rates and eased money in response. The Bank of Japan's
policy reaction function is such that traditionally, Japan's monetary policy responds
positively (becomes expansionary) to (i) yen appreciation and (ii) domestic recession.
(source: www.grisp.ac.jp)

4. The Cause (II) : Monetary Easing &
Deregulation
USD/JPY
(left scale)
BOJ Rate
(right scale)
source: Bank of Japan

5. The Results…
source : www.tradingeconomics.com

6. The Results…
Long Term Deflation
source : www.tradingeconomics.com

7. What’s Next (I): Liquidity Injection
Failed….
source: Bank of Japan, Nomura

8. What’s Next (II): Deleveraging…
Funds Raised by Non-Financial Corporate Sector
source: Bank of Japan, Cabinet Office Japan, Nomura

9. What’s Next (III): Inconsistency in Fiscal
Policy
source: Ministry of Finance Japan, Nomura

10. What’s Next (III): Delayed in Monetary
Policy Adjustment
BOJ rate ECB rate FED rate
Source: http://moneyunleashed.com/prime_rates

11. What’s Next (V): Increasing Government
Spending….
source: Ministry of Finance Japan, Nomura

12. Japan’s GDP Grew in spite of Massive
Loss of Wealth & Private Sect
Deleveraging
source: Cabinet Office Japan, Real Estate Institute Japan, Nomura

13. Deficit

14. Appreciation of Japanese yen

15. Measures by Central Bank of Japan
 Stabilize the price
 Provide market liquidity by lower the interest rate
 Money supply
 Quantitative easing from 2001

16. Lost decade
 Recession (1991-1993)
 Temporary recovery (1994-1996)
 Deep recession (1997-1999)

17. Money supply

18. Measures by Central Bank of Japan
 Quantitative easing from 2001
Stabilize land price
Average growth rate around 2% per year
Deflation has moderated but not disappeared

19. Long-term Government bond
 Household’s saving are vast
 Most bonds are in the hands of domestic investors

20. Unemployment rate

21. Solutions
 Stability
and efficiency in all business
operations
 Learning in action
 Enhancement of communication channels
 Issues and action plans

22. Key lessons
 Act quickly
 Spending is not the answer
 Don’t rack up debt
 Counteract demography

23. Comparison
 JAPAN VS. USA
 JAPAN VS. EU

24. Analogies
Banking crisis
Spreading to
Financial
Markets
Deflation
RISK?
Deleveraging
Real estate
In
Bubble
Private sector

25. Divergences 1
Weak dollar
Dollar nominal and real effective exchange rates, Jan 2002-Apr 2011 (Jan 2002 = 100)
JPY Real Effective Exchange Rates (1970-) (2005 ＝ 100 )
Source: VOX, BOJ

26. Divergences 2
Better demographics
Sources: Source: UN Medium Variant Projections, World Population Prospects: The 2008 RevisionSource: UN Medium Variant Projections, World Population Prospects: The 2008 Revision

27. Divergences 3
Faster deleveraging

28. Divergences 4
Quick reaction from FED

29. Analogies
Banking crisis
Tighter Balance
Europe’s
Bank Sheets
Regulation Lost decade? Recession
Budget
Consolidation

30. Divergences 1
Depreciation of EURO

31. Divergences 2
A not-so-severe decline in wealth

32. Divergences 3
Quick reaction to the crisis

33. Divergences 4
Sovereign debt crisis

34. Other Divergences
 Fiscal integration
 Outside help/pressure

35. Conclusion
Lessons learned?

36. Bibliography
• Toward a Eurozone’s lost decade? Analogies and differences to Japan 1991-2003 ECONOMIC RESEARCH NATIXIS
• Is a Japan-Style “Lost Decade” Ahead for the US? Posted by Sharon Fay on Aug 23, 2012 in AllianceBernstein, Americas,
• Why America Isn’t Headed for a ‘Lost Decade’ By PATRICK SMITH, The Fiscal Times, October 6, 2011

37. Resources
 http://www.tradingeconomics.com
 http://www.boj.or.jp/en/
 http://www.aei.org/