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No Time to be Complacent:What Post-2008 U.S., Europe and China Can Learn from Japan 1990-2005
Richard C. Koo
Chief Economist
Nomura Research Institute
Tokyo
February 2011
2
Exhibit 1. US Housing Prices Are Moving along the Japanese Experience
40
60
80
100
120
140
160
180
200
220
240
260
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
US: 10 Cities Composite Home Price Index
(US: Jan. 2000=100, Japan: Dec. 1985=100)
Note: per m2, 5-month moving averageSources: Bloomberg, Real Estate Economic Institute, Japan, S&P, S&P/Case-Shiller® Home Price Indices, as of Feb. 1, 2011
Composite Index Futures
Japan: Tokyo Area Condo Price1
77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
Japan: Osaka Area Condo Price1
Futures
US
Japan
Exhibit 2. Drastic Rate Cuts Have Done Little to Revive Employment or House Prices
3
0
1
2
3
4
5
6
7
8
2003 2004 2005 2006 2007 2008 2009 2010 2011
(%)
Sources: BOJ, FRB, ECB, BOE and RMB Australia. As of Feb. 1, 2011.
Australia
EU
US
UK
Japan
4
Exhibit 3. US Economy Is still a Long Way from Previous Peak
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.083
85
87
89
91
93
95
97
99
101
103
98 99 00 01 02 03 04 05 06 07 08 09 10
(%, Seasonally adjusted, inverted)
Unemployment Rate(right scale)
Sources: US Department of Labor, FRB
(2007=100, Seasonally adjusted)
Last seen in 2005
Unemployment rate:Last seen in 1983
Industrial Production:Last seen in 1998
Industrial Production(left scale)
5
Exhibit 4. Euro-Zone Economy Is still a Long Way from Previous Peak
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.585
90
95
100
105
110
115
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Sources: Eurostat
(%, Seasonally adjusted, inverted)(Seasonally adjusted, 2005=100)
Industrial Production(left scale)
Unemployment Rate(right scale)
Last seen in 1998
Last seenin 2005
Exhibit 5. Except in Germany, Industrial Production in EuropeIs still Weak
6
70
75
80
85
90
95
100
105
110
115
120
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Spain
France
Italy
Germany
(2005 = 100, Seasonally Adjusted)
Source: Eurostat
Level Last Seen in
2006: Germany
1997: France
1994: Italy
1997: Spain
Exhibit 6. Japan’s Economy Is still a Long Way from Previous Peak
7
65
70
75
80
85
90
95
100
105
110
115
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Note: Forecasts are calculated f rom METI's survey on planned production.Sources: Ministry of Economy, Trade and Industry (METI), and Ministry of Health, Labour and Welfare
Job offers to applicants ratio(left scale)
(Seasonally adjusted, 2005=100)(Seasonally adjusted)
Industrial production (right scale) forecast
Last seen in 2003
Lowest on record
Last seen in 1983
Last seen in 2002
Exhibit 7. US Demand for Funds Has Finally Stopped Falling
8
-50
-40
-30
-20
-10
0
10
20
30
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
(D.I.)
small firms
housing bubble
collapse
IT bubblecollapse
Source: Nomura Research Institute, based on FRB, Senior Loan Officer Opinion Survey on Bank Lending Practices .Note: D.I. are calculated f rom the answers to the question, "Apart f rom normal seasonal variation, how has demand for C&I loans changed over the past three months?" D.I. = ("Substantially stronger" + "Moderately stronger"× 0.5) - ("Moderately weaker"× 0.5 + "Substantially weaker")
businesses increasing demand for funds compared to 3 months ago
businesses decreasing demand for funds compared to 3 months ago
0
large and middle-market firms
Exhibit 8. Euro Zone Demand for Funds Has Finally Stopped Falling
9
-25
-20
-15
-10
-5
0
5
10
15
2003 2004 2005 2006 2007 2008 2009 2010 2011
(D.I.)
small and mediumsized firms
Source: Nomura Research Institute, based on ECB, The Euro Area Bank Lending Survey.Note: D.I. are calculated f rom the answers to the question, "Over the past three months, how has the demand for loans or credit lines to enterprises changed at your bank, apart f rom normal seasonal f luctuations?" D.I. = ("Increased considerably" + "Increased somewhat"×0.5) - ("Decreased somewhat"×0.5 + "Decreased considerably")
business increasing demand for funds compared to 3 months ago
business decreasing demand for funds compared to 3 months ago
0
large sized firms
Exhibit 9. Japan’s De-leveraging with Zero Interest Rates Lasted for 10 Years
10
-6
-4
-2
0
2
4
6
8
10
-15
-10
-5
0
5
10
15
20
25
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Borrowings from Financial Institutions (left scale)
Funds raised in Securities Markets (left scale)
CD 3M rate (right scale)
(% Nominal GDP, 4Q Moving Average) (%)
Sources: Bank of Japan, Cabinet Of f ice, Japan
Debt-financedbubble
(4 years)
Balance sheetrecession(16 years)
Funds Raised by Non-Financial Corporate Sector
Exhibit 10. Japan’s GDP Grew in spite of Massive Loss of Wealth and Private Sector De-leveraging
11
down87%
0
100
200
300
400
500
600
700
800
200
250
300
350
400
450
500
550
600
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
(Tril.yen, Seasonally Adjusted)
Real GDP(Left Scale)
Land Price Index in Six Major Cities(Commercial, Right Scale)
(Mar. 2000=100)
Sources: Cabinet Of f ice, Japan Real Estate Institute
Nominal GDP(Left Scale)
Likely GDP Path w/o Government Action
Last seen in 1973
Cumulative 90-05 GDP
Supported by Government
Action: ~ ¥2000 trillion
Cumulative Loss of
Wealth on Shares and Real Estate
~ ¥1500 trillion
Exhibit 11. Japanese Government Borrowed and Spent the Excess Savings of the Private Sector to Sustain GDP
12
overall deficit ¥460
trillion
20
30
40
50
60
70
80
90
100
110
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Source: Ministry of Finance, JapanNote: FY 2010 includes supplementary budget. FY2011 are initial budget.
Government spending
Tax revenueBubble Collapse
(Tril. yen)
cumulativecyclical deficit 90-05
¥315 trillion
Exhibit 12. Premature Fiscal Reforms in 1997 and 2001 Weakened Economy, Reduced Tax Revenue and Increased Deficit
13
0
10
20
30
40
50
60
70
0
10
20
30
40
50
60
70
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Tax RevenueBudget Deficit
Hashimotofiscal
reform
Koizumifiscal
reform
(Yen tril.) (Yen tril.)
(FY)
Global Financial
Crisis
*
Obuchi-Morifiscal
stimulus
Source: Ministry of Finance, Japan*: estimated by MOF
unnecessaryincrease in
deficit:¥103.3 tril.
Exhibit 13. Spanish Private Sector Financial Surpluses Increased more than Government Deficit
14
-12
-8
-4
0
4
8
12
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Financial Surplus or Deficit by Sector
(Financial Surplus)
(Financial Deficit)
General Government
Corporate Sector(Non-Financial Sector +
Financial Sector)
Rest of the WorldHouseholds
(as a ratio to nominal GDP, %)
Shift from 2007 in private sector:16.93% of GDPCorporate: 11.45%Households: 5.48%
Shift from 2007 in public sector:11.32% of GDP
Sources: Banco de España and National Statistics Institute (INE),Spain, and EurostatNote: For 2010' figures, 4 quarter averages ending with 3Q/10' are used.
Exhibit 14. Irish Private Sector Financial Surpluses Increased more than Government Deficit
15
-15
-10
-5
0
5
10
15
2002 2003 2004 2005 2006 2007 2008 2009
Sources: Eurostat, Central Statistics Of f ice, Ireland
(as a ratio to nominal GDP, %)
Financial Surplus or Deficit by Sector
Corporate Sector(Non-Financial Sector + Financial Sector)
(Financial Surplus)
Rest of the World
Households
General Government
(Financial Deficit)
Shift from 2006 in private sector:21.55% of GDPCorporate: 7.29%
Households: 14.26%
Shift from 2006 in public sector:16.78% of GDP
Exhibit 15. Portuguese Private Sector Financial Surpluses Increased more than Government Deficit
16
-12
-9
-6
-3
0
3
6
9
12
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Sources: Banco de Portugal, Instituto Nacional de Estatística, Portugal, and EurostatNote: For 2010' f igures, 4 quarter averages ending with 3Q/10' are used.
(Financial Surplus)
(Financial Deficit)
Financial Surplus or Deficit by Sector
(as a ratio to nominal GDP, %)
Corporate Sector(Non-Financial Sector +
Financial Sector)
Rest of the World
General Government
Households
Shift from 2008 in private sector:
8.60% of GDPCorporate: 6.45%
Households: 2.15%
Shift from 2008 in public sector:
6.38% of GDP
Exhibit 16. UK Private Sector Financial Surpluses Increased more than Government Deficit
17
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Financial Surplus or Deficit by Sector(as a ratio to nominal GDP, %)
(Financial Deficit)
Corporate Sector(Non-Financial Sector +
Financial Sector)
(Financial Surplus)
General Government
Rest of the World
Households
Source: Of f ice for National Statistics, UKNote: For 2010' f igures, 4 quarter averages ending with 3Q/10' are used.
Shift from 2006in private sector:10.55% of GDPCorporate: 5.11%
Households: 5.44%
Shift from 2006 in public sector:
7.84% of GDP
Exhibit 17. In Italy, Increase in Private Savings Is Not Enough to Cover Deterioration in Government Deficit
18
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Sources: Banca d'Italia, EurostatNote: For 2010' f igures, 4 quarter averages ending with 3Q/10' are used.
(Financial Surplus)
(Financial Deficit)
Corporate Sector(Non-Financial Sector +
Financial Sector)General
Government
Rest of the World
(as a ratio to nominal GDP, %)
Financial Surplus or Deficit by Sector
Households
Shift from 2008 in private sector:
0.87% of GDPCorporate: 4.35%
Households: -3.48%
Shift from 2008 in public sector:
1.68% of GDP
Exhibit 18. In Greece, Increase in Private Savings Is Not Enough to Cover Deterioration in Government Deficit
19
-16
-12
-8
-4
0
4
8
12
16
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Sources: Bank of Greece, EurostatNote: For 2010' figures, 4 quarter averages ending with 2Q/10' are used.
Financial Surplus or Deficit by Sector
(Financial Surplus)
(Financial Deficit)
Corporate Sector(Non-Financial Sector +
Financial Sector)
General Government
Households
Rest of the World
(as a ratio to nominal GDP, %)
Shift from 2008 in private sector:
2.34% of GDPCorporate: -2.94%
Households: 5.28%
Shift from 2008 in public sector:
4.82% of GDP
Exhibit 19. US Flow of Funds Data after 2008 Are Useless…
20
-12
-10
-8
-6
-4
-2
0
2
4
6
8
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Households
General Government
Rest of the World
(as a ratio to nominal GDP, %)
Sources: FRB, US Department of CommerceNote: 2010's f igures are for f rom the 1st to 3rd quarters only.
(Financial Surplus)
(Financial Deficit)
Financial Surplus or Deficit by Sector
IT Bubble
Housing BubbleCorporate Sector
(Non-Financial Sector +Financial Sector)
Numbers do not add up
at all
Shift from 2006in public sector:
8.50% of GDP
Exhibit 20. … Because of Massive Discrepancy Between Two Definitions of “Private Sector”
21
8.28% of GDP
13.29% of GDP
-8
-6
-4
-2
0
2
4
6
8
10
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
(as a ratio to nominal GDP, %)
"Private Sector" as a residual after Government and Foreign Sectors
"Private Sector" as obtained by adding Corporate, Households and
Financial Sectors
Sources: FRB, US Department of CommerceNote: 2010's f igures are for f rom the 1st to 3rd quarters only.
Exhibit 21. Japanese Corporate Financial Surplus Is Growing Again
22
-18
-15
-12
-9
-6
-3
0
3
6
9
12
15
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
(Financial Deficit)
(Financial Surplus)
(FY)
(as a ratio to nominal GDP, %)
Households
Rest of the World
Corporate Sector(Non-Financial Sector +
Financial Sector)
General Government
Financial Surplus or Deficit by Sector
Sources: Bank of Japan, Flow of Funds Accounts, and Government of Japan, Cabinet Of f ice, National AccountsNote: For 2010' f igures, 4 quarter averages ending with 3Q/10' are used.
Balance Sheet RecessionGlobal
FinancialCrisis
Shift from 2008 in public sector:
6.37% of GDP
Shift from 2008in private sector:
7.49% of GDPCorporate: 7.80%
Households: -0.31%
Exhibit 22. Summary of Private Savings and Government Deficits
23
0
5
10
15
20
25
Spain Ireland Portugal UK US Japan Italy Greece
Increases in Private Savings
Increases in Government Deficits
(indicated as % of GDP)
3
Notes: 1. Measured f rom the recent trough in private sector savings: Spain (2007), Ireland (2006), Portugal (2008), Italy (2008), UK (2007), Japan (2008), US (2006), Greece (2008).2. Changes in private savings include debt repayments.3. A range of 13% to 8% exists for the US private savings data because of problems with its Flow of Funds statistics since 2008. Economic and market indicators suggest that the 13% f igure (shown) is closer to the truth than the 8% f igure.4. Greece is NOT in balance sheet recession. Included for comparison purposes only.Source: Nomura Resarch Institute, f rom respective countries' f low of funds data
Exhibit 23. Sustaining Fiscal Stimulus in Democracy during Peacetime Is Difficult
24
Authoritarian Democracies
NONE "Bond market might rebel"
(if any, quickly suppressed) "Big Government is BAD Government"
"Wasteful spending"
"Monetary Policy should work better"
"Aging Population"
"Should not use grand-children's credit card"
"Structual Reform is what is needed"
"Republicans, Tea Party typesand Blue Dog Democrats (U.S.)"
"Need to beg Chinese to buy more Treasuries (U.S.)"...
Exhibit 24. Recovery from Lehman Shock Is NOT Recovery from Balance Sheet Recession
25
Source: Nomura Research Institute
?
Lehman Shock
Actual PathCurrent Location
Likely GDP Pathwithout Lehman Shock
Weaker Demand from Private Sector
De-leveraging
Stronger Demand from Government's
Fiscal Stimulus
(A)
(B)
Economic weakness from private-sector
de-leveraging
Economic weakness from policy mistake
on Lehman
BubbleBurst
Exhibit 25. The Exit Problem: Debt Rejection Syndrome It Took U.S. 30 Years to Normalize Interest Rate after 1929
0
1
2
3
4
5
6
7
8
9
1920 21 2223 24 2526 27 2829 30 3132 33 3435 36 3738 39 4041 42 4344 45 4647 48 4950 51 5253 54 5556 57 5859 60
US government bond yieldsPrime BA, 90daysUS government bond yields 1920-29 average (4.09%, June 1959)Prime BA, 90days 1920-29 average (4.13%, September 1959)
Oct '29 NY StockMarket Crash
Jun '50 Korean War
Dec '41 PearlHarbor Attack
(%)
'33~New Deal
Source: FRB, Banking and Monetary Statistics 1914-1970 Vol.1, pp.450-451 and 468-471, Vol.2, pp.674-676 and 720-727
26
Exhibit 26. Even with Strong Yen, Japan Is Running ever larger Trade Surpluses with Taiwan, Korea and China
27
Japan’s Trade Balances with Korea, Taiwan and China
-400
-300
-200
-100
0
100
200
300
400
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Korea
Taiwan
China (including Hong Kong)
China (excluding Hong Kong)
(¥ bil. Seasonally adjusted, 3 months moving average)
Source: Nomura Research Institute, based on Ministry of Finance, Japan, Trade StatisticsNote: Seasonal adjustments by Nomura Research Institute.
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29
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