11

JapanJapan’’s Lost Decade: s Lost Decade: From Crisis to RecoveryFrom Crisis to Recovery

IstanbulIstanbul

October 6, 2009October 6, 2009

James GordonJames GordonSenior AdvisorSenior Advisor

Asia and Pacific DepartmentAsia and Pacific Department International Monetary FundInternational Monetary Fund

22

We revisit JapanWe revisit Japan’’s s ““lost decadelost decade””

for for potential insights about the global outlookpotential insights about the global outlook

My presentation looks back and discusses:My presentation looks back and discusses:1.1.

Three recovery attempts during JapanThree recovery attempts during Japan’’s crisis:s crisis:

1997 1997 ––

recovery derailed by Asia Crisis.recovery derailed by Asia Crisis.

2000 2000 ––

recovery foundered againrecovery foundered again

2003 2003 ––

recovery sustainedrecovery sustained

2.2.

What was different about the third episode?What was different about the third episode?

Next presentation will discuss implications Next presentation will discuss implications of Japanof Japan’’s experience for current global s experience for current global outlook and policies.outlook and policies.

33

JapanJapan’’s crisis spanned a dozen years with s crisis spanned a dozen years with three phases of downturn and recoverythree phases of downturn and recovery……

-8

-6

-4

-2

0

2

4

6

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Phase 1: Crisis outbreak and fragile recovery followed by withdrawal of fiscal stimulus.

Phase 2: Renewed stress and 2nd recovery attempt followed by monetary tightening.

Phase 3: Renewed stress followed by sustained recovery as private demand supported by financial and corporate restructuring, and export boom to China

Asian crisis Dot-com crash

Phases in Japan's Banking Crisis(Real GDP growth; in percent)

Source: Haver Analytics.

44

Production and labor market indicators tell the same tale Production and labor market indicators tell the same tale of two incipient pickups followed by a sustained of two incipient pickups followed by a sustained

recoveryrecovery

80

90

100

110

1990

M1

1992

M4

1994

M7

1996

M10

1999

M1

2001

M4

2003

M7

2005

M10

1

3

5

7Industrial production (1990=100)

Unemployment rate (RHS)

Phase 1 Phase 2 Phase 3

Source: Haver Analytics.

Japan: Industrial Production and Unemployment

55

What did the What did the ““Heat mapsHeat maps””

show about the show about the recovery at the time?recovery at the time?

Before (Mar 97) After (Sept 97) Before (Jun 00) After (Dec 00) Before (Jun 03) After (Dec 03)Trade-related

Inventories 2 -1 -2 -1 -1 -1Industrial production 2 -1 1 2 1 -1Exports 1 -1 1 -1 2 2

FinancialTed Spread -1 1 -1 -1 -1 -1Financial stress index -1 -1 -1 -1 1 -1Asset prices -2 -1 -1 -2 1 1Private credit -1 -1 -1 -1 -1 -1

Private Domestic DemandConsumer confidence -1 -2 1 -2 1 -1Retail sales 2 -2 -1 -1 -1 -1

Unemployment rate -1 -2 -1 -2 -1 -1

Aggregate weekly hours worked -1 -1 2 2 1Business confidence 1 -2 -1 -2 1 -2

Building permits/housing starts -2 1 -1 2 1 1

The Three Phases of the Lost Decade: Recovery Heatmaps

Japan: First Recovery attempt Japan: Second Recovery

attempt Japan: Sustainable Recovery

Green Shoot The indicator is improving for at least 2 consecutive months.

Recovery The indicator is improving for at least 4 consecutive months.

Stabilizing The indicator has improved for one month only, or still deteriorating but at a slower pace than before.Deteriorating The indicator is deteriorating, and at a faster pace than before.

66

Episode 1: signs of recovery allowed fiscalEpisode 1: signs of recovery allowed fiscal stimulus to be withdrawn stimulus to be withdrawn ----

then Asian crisis struck.then Asian crisis struck.

-2

-1

0

1

2

3

1990

1991

1992

1993

1994

1995

1996

1997

1998

-4

-2

0

2

4

6

Fiscal stimulus (percent of GDP) 1/Real GDP growth (RHS)

Consumption tax hike + Asian crisis

Sources: Ministry of Finance; Cabinet Office; and IMF staff estimates.1Defined as the change in structural balance

Fiscal Stimulus and Growth

77

Episode 2: economy on the mend again, but reversal Episode 2: economy on the mend again, but reversal after global IT crash after global IT crash ––

policy stimulus reintroducedpolicy stimulus reintroduced

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

Jan-

99

Aug-

99

Mar

-00

Oct

-00

May

-01

Dec

-01

60

80

100

120

140

160

180Target rateNikkei 225 (1985=100), RHS

Japan: Policy Rate and Stock Market Index

Source: Haver Analytics.

88

Episode 3: only at third attempt in midEpisode 3: only at third attempt in mid--2003 did 2003 did lasting recovery take hold, led by domestic demandlasting recovery take hold, led by domestic demand

-3

-2

-1

0

1

2

3

4

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

-3

-2

-1

0

1

2

3

4

Net exports of goods and servicesInventoriesPublic demandPrivate domestic demand

Real GDP growth

Japan: Contributions to GDP Growth

Source: Haver Analytics; and IMF staff calculations

99

What was different about Episode 3?What was different about Episode 3?

External shock was positiveExternal shock was positive

Progress with financial sector reformsProgress with financial sector reforms

Progress with repairing corporate Progress with repairing corporate sector balance sheetssector balance sheets

1010

External environment very favorable External environment very favorable for exports, especially to Chinafor exports, especially to China

Export Value Growth (y/y percent change)

-10

-5

0

5

10

15

1995 1997 1999 2001 2003 2005

Contribution from China

Series1

1111

Financial sector: more aggressive approach Financial sector: more aggressive approach to reducing NPLs and recapitalizing banks.to reducing NPLs and recapitalizing banks.

4.5

5.5

6.5

7.5

8.5

2000

2001

2002

2003

2004

2005

2006

-6

-4

-2

0

2

4

6Tier 1 ratio (major banks)

Credit growth (year-on-year percent change, RHS)

Bank Capital and Lending(In percent)

Sources: Haver Analytics; and Bank of Japan.

0

10,000

20,000

30,000

40,000

50,000

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Risk Management Loans

Non-Performing Loans(In billions of yen)

Source: Financial Services Agency of Japan.

1212

Corporate sector: progress with deleveraging Corporate sector: progress with deleveraging helped to lift investment.helped to lift investment.

200

225

250

275

300

325

Mar

-90

Dec

-91

Sep-

93

Jun-

95

Mar

-97

Dec

-98

Sep-

00

Jun-

02

Mar

-04

Dec

-05

Sep-

07

10

12

14

16

18

20

22Corporate Debt-to-Equity Ratio (in percent)Private fixed investment (percent of GDP, RHS)

Japan: Corporate Leverage and Investment

Source: CEIC Data Company Ltd.

1313

Note on Exit Note on Exit ----

Monetary Policy: Monetary Policy: BoJ able to smoothly unwind its balance sheetBoJ able to smoothly unwind its balance sheet

T-bills

Other assets

0

40

80

120

160

200

2001

2002

2003

2004

2005

2006

2007

2008

Sources: Haver Analytics; and Bank of Japan.

Bank of Japan Assets(In trillions of yen)

2009

Long-term government bonds

Funds-supplying operations

1414

Note on Exit Note on Exit ----

Fiscal Policy: hampered by protractedFiscal Policy: hampered by protracted downturn, delay in framing mediumdownturn, delay in framing medium--term strategy.term strategy.

0

25

50

75

100

125

150

175

200

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Gross debt Net debt

Public Debt(In percent of GDP)

Source: Cabinet Office; and IMF staff calculations.

1515

How Does the Great Recession How Does the Great Recession Compare with the Lost Decade?Compare with the Lost Decade?

Potential Implications Potential Implications for the Global Outlookfor the Global Outlook

IstanbulIstanbul

October 6, 2009October 6, 2009

Anoop SinghAnoop SinghDirector Director

Asia and Pacific DepartmentAsia and Pacific Department International Monetary FundInternational Monetary Fund

1616

We will place JapanWe will place Japan’’s experiences in the s experiences in the current global contextcurrent global context

1.1.

What can JapanWhat can Japan’’s experiences tell us s experiences tell us about the likely durability of the global about the likely durability of the global recovery?recovery?

2.2.

What do they imply about the What do they imply about the appropriate policy stance?appropriate policy stance?

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Advanced economy heat maps resemble Advanced economy heat maps resemble somewhat Japansomewhat Japan’’s two early recovery attemptss two early recovery attempts……

Japan: F irst

R ecov ery attempt (M arch 1 9 9 7 )

Japan: S econd

R ecovery attempt

(June 2 0 0 0 )

Japan: S usta inable

R ecovery (June 2 0 0 3 )

US (June 2 0 0 9 )

Euro Area (June 2 0 0 9 )

UK (June 2 0 0 9 )

Trade-re latedInventories 2 -2 -1 2 0Industria l production 2 1 1 0 -2 0Exports 1 1 2 1 0 1

F inancia lT ed Spread -1 -1 -1 1 0 2F inancia l s tress index -1 -1 1 1 0 0Asset prices -2 -1 1 0 -2 0Priv ate credit -1 -1 -1 0 -2 -2

P r ivate Domestic DemandConsum er confidence -1 1 1 0 1 1Reta il sa les 2 -1 -1 0 0 1Unem ploym ent ra te 1 -1 2 0 -2 0Aggregate weekly hours worked -1 0 2 -2 -2Bus iness confidence 1 -1 1 0 1 -2Building perm its /hous ing s tarts -2 -1 1 1 0

R ecov ery Heatmaps: Japan Then, Advanced Economies N ow

Green Shoot T he indica tor is im prov ing for a t least 2 consecutiv e m onths .

Recovery T he indica tor is im prov ing for a t least 4 consecutiv e m onths .

Stabiliz ing T he indica tor has im proved for one m onth only , or s till deteriora ting but a t a s lower pace than before .Deteriora ting T he indica tor is deteriora ting, and a t a faster pace than before .

1818

In Emerging Asia, aggressive stimulus and inventory In Emerging Asia, aggressive stimulus and inventory adjustment helping offset weak external demandadjustment helping offset weak external demand

Japan: First Recovery attempt (March 1997)

Japan: Second

Recovery attempt

(June 2000)

Japan: Sustainable Recovery

(June 2003)

Export-Oriented Asia

(excld. Japan,

June 2009)

China (June 2009)

India (June 2009)

Trade-relatedInventories 2 -2 -1 1 -1 1Industrial production 2 1 1 2 -1 2Exports 1 1 2 2 1 1

FinancialTed Spread -1 -1 -1 -1 -1 2Financial stress index -1 -1 1 1 0Stockmarket -2 -1 1 2 1 2Private credit -1 -1 -1 -1 2 -1

Private Domestic DemandConsumer confidence -1 1 1 2 1 -1Retail sales 2 -1 -1 -1 2 1Business confidence 1 -1 1 -1 1 -1Building permits/housing starts -2 -1 1 -1

-1

Recovery Heatmaps: Japan Then, Emerging Asia Now

Green Shoot The indicator is improving for at least 2 consecutive months.

Recovery The indicator is improving for at least 4 consecutive months.

Stabilizing The indicator has improved for one month only, or still deteriorating but at a slower pace than before.

Deteriorating The indicator is deteriorating, and at a faster pace than before.

1919

Potential Implications of JapanPotential Implications of Japan’’s Experiences s Experiences for the Global Outlookfor the Global Outlook

““Green shootsGreen shoots””

do not do not guarantee a recovery.guarantee a recovery.

Financial fragilities can Financial fragilities can magnify effects of magnify effects of adverse shocks on the adverse shocks on the economy. economy.

Weak global environment could limit prospects Weak global environment could limit prospects for an exportfor an export--led recovery.led recovery.

Déjà vu? Stockmarket Indices1/

0

10

20

30

40

50

60

70

80

90

100

1 2 3 4 5 6 7 8 9 10 11 12 13

FTSE All World Index (Oct 2007=100)Nikkei 225 (Dec 1989=100)

Source: Haver Analytics.1/ Peak=100.

2020

Potential Implications of JapanPotential Implications of Japan’’s Experience s Experience for Policiesfor Policies

Policy stimulus should be maintained for now, but Policy stimulus should be maintained for now, but no panaceano panacea

Underlying financial problems need to be Underlying financial problems need to be addressed for a durable recovery to take hold. addressed for a durable recovery to take hold.

Clear exit plans can help reinforce confidence.Clear exit plans can help reinforce confidence.

––

Role for developing cooperative and coordinated exit Role for developing cooperative and coordinated exit strategies.strategies.