Description
The spectacular rise of the Japanese economy and the subsequent fall, The phases of Japan’s crisis 1990-1997, 1997-2000, 2000-2003, long term impact of crisis on Japanese economy, lessons for the current financial crisis, Japanese response to current financial crisis.
Lost Decade of Japan
Points to be discussed
? Economic history of Japan ? The spectacular rise of the Japanese economy and the subsequent fall ? The phases of Japan’s crisis:
? 1990-1997: Crisis outbreak and frail recovery. Sudden increase of interest
rates. Crashing of the share markets and financial system. Emerging of green shoots and roll back of stimulus. ? 1997-2000: Stress and second recovery attempt. The onset of the Asian financial crisis and its effect on the Japanese recovery. ? 2000-2003: Renewed stress and sustained recovery. The dot com bubble burst and the response by Japanese policy makers leading to stability.
? ? ?
Long term impact of crisis on Japanese economy Lessons for the current financial crisis Japanese response to current financial crisis
Economic History
? Japan
? 1868 - Low-income developing country status
? 1897 - Gold-standard, middle-income status
? 1945 - Devastated economy ? 1990 - Second largest economy with well developed
financial and capital markets
? No currency crisis ? Typical of today’s emerging market economies.
? Gradual liberalization—trade to finance, domestic to
external—worked ? High economic growth, av. 10% for about 20 years (just like China now)
Economic History
? Bretton-Woods with capital controls ? Fixed exchange rate (360 yen/USD) ? Slightly higher inflation than US (Balassa-
Samuelson) ? Strict capital controls ? No portfolio investment inward or outward ? Inward FDI resisted (Joint Venture encouraged) ? No government bonds until 1965, remained small ? Strong banking system, underdeveloped capital markets ? High saving, high investment
Economic History
? Exchange rate Regime
? 1971. Managed float. ? Large appreciation 1973. Free float (but heavy intervention)
? Trade Liberalization under GATT ? Domestic Financial Liberalization (1970s-1980s)
? Deposit interest rate, window guidance, branch regulation,
new entry, merger. ? Gradually, bond markets were introduced
? External Financial Liberalization (mid-1970s-mid-1990s)
? Loans, portfolio investment in and out, ? FDI almost no restriction
Late 1980s
High Land Values, low interest rates Credit Easily available & extremely cheap
Yielded Higher Returns
Investment in domestic & foreign stocks & securities
Massive Borrowing by households & firms
1989
Finance Ministry sharply increased interest rates “Zombie firms”, bailed out by the government Bubble terminated abruptly
Crisis in banking sector
Stock Market crashed, Debt crisis
Reasons that led to bubble creation
? Financial deregulation
? Assimilation of riskier assets on banks balance sheet
? ? ? ?
due to competition and liberalization Keiretsu’s culture Quasi-feudalistic institutional structure of Japan Banks lent heavily based on collateral rather than cash flow Doctoring of accounts by banks to keep up with international regulations
The three phases of Japan’s banking crisis
Phase 1-(1990-1997)
? Crisis sparked by collapse of bubbles in its stock and ? ? ? ?
?
real asset markets in early 1990 Initial effect was muted due to the strong economic growth shown by Japan in four decades of post WWII. Japan’s growth falling to an average of 1.5% between 1991-1994. High unemployment. Green shoots started showing up by the middle of the decade in response to policy stimulus . Large number of “Jusen” firms saddled with huge losses from NPL’s.
Japanese GDP Growth Rate Source: http://www.treasury.gov.au/documents/817/images/05_article_4-18.gif
Phase 2: 1997–2000—Systemic Stress and Second Recovery Attempt
? Due to concerns about rising public debt and since the
economy was showing signs of recovery, the Japanese government launched a consolidation effort to bring down its deficit
Phase 2
? Asian crisis stuck due to which the already fragile ? ? ? ?
?
financial system fell apart The real extent of failed property loans became clear. Impact was severe credit crunch and contraction of Japanese economy for two years in a row. Japanese government reacted by re injecting capital into the banking system Shift to Zero interest rate took place. Moderate recovery between 1999 and 2000
Phase 3: 2001–03—Renewed Systemic Stress Followed by Sustained Recovery
? The collapse of the global information technology bubble from March
2000 onwards triggered a third phase of financial and economic stress. ? Unemployment rose to a post war high of 5 ½ %. ? NPL’s peaked at 9 %. ? Public debt rose to almost 125% of GDP
Source: http://bilbo.economicoutlook.net/blog/wpcontent/uploads/2009/04/japan_interest_rates.jpg
What was different about the third phase?
? More aggressive approach coupled with positive ? ? ? ?
?
?
stimulus growth from China. Private demand was greater Revitalized banking system and cleaning up of bad assets Healthier corporate system. Favourable global conditions Rising employment Credit markets easing
Measures taken during the decade years
? Traditional monetary policy measures
? Fiscal stimulus
? Re capitalization of banks ? Mergers and acquisitions of failed banks
? Buying up of unhealthy assets from banks
? Easing up of norms to free up liquidity ? Setting up of institutional authority called FSA that
was authorized to supervise and regulate the banking system.
Traditional Monetary Policy
? Control on short-run interest rates: BOJ intervenes the
inter-bank market to supply or absorb liquidity.
? Open-Market Operations on midterm or long-term
securities such as national bonds (treasury bills in US).
? These policies are effective if the nominal interest rate
is sufficiently above zero.
Non-Traditional Monetary Policies
? With zero interest rate, the inter-bank market loses its
adequate function, and money is stored in cash.
? BOJ was forced to make operations with longer
maturities such as national bonds.
? BOJ took the quantitative ease policy to mandate
banks not to hold too much liquidity.
Intervention into FOREX
? The MOF, coordinated with BOJ, took a drastic
intervention into the foreign exchange market to purchase US dollars to keep the value of Yen low.
? Some leading economists like John Taylor (deputy
director of US Finance Department) acknowledge that this decisive intervention into FOREX was the main demand-side factor for Japan’s recovery.
The Recovery with/without structural reforms
? Japan has almost fully recovered from the lost decade,
while a few evidences of the structural reforms being completed. ? The bad loan problem has been almost solved: The rising demand for banks’ customer firm has dramatically improved the banks’ balance sheet. ? Most of the Zombie firms have revived.
Long term impact on Japanese economy
? Japan's GDP grew at an annual average of 1.1%, with
negative growth rates in the late 1990s ? Rising public debt.It reached a peak of almost 175 % of the GDP in 2006 ? Japanese companies were in retrenchment mode,young people experienced “Hiring Ice Age.” ? Japanese people age 25 to 34 belong to the “lost”or “suffering generation.” –3.3 million of them work as temps or contract employees, up from 1.5 million 10 years ago.
Lessons learnt
? Authorities underestimated the nature and seriousness of the banking
problem at first. Most thought the financial problems would resolve themselves through economic growth and by keeping central bank interest rates low in order to increase bank margins and profitability. ? There was a slow recognition of the extent of non-performing loans and the carrying of “zombie” firms that technically were bankrupt but were kept alive by banks. This delayed resolution of the problem. ? Transparency and an updating of definitions and reporting requirements with respect to non-performing loans was important in realizing the true extent of the
Lessons learnt
? When Japan announced an early financial rescue package, it placed
stringent conditions on the assistance that banks were unwilling to accept. The net result was that the banks ignored the package and tried to bolster their balance sheets by not lending. ? The bursting of the real estate bubble in Japan caused more difficulty for banks than the bursting of the bubble in stocks because the decline in real estate values affected the value of collateral on much bank lending. ? Japan is considered to have acted too slowly with respect to monetary policy, fiscal policy, and the resolution of problems in the banking sector. Once the economy began to recover, fiscal policy is thought to have tightened too soon.
Lessons Learnt
? There appeared to be a lack of domestic or external constraints and of ?
?
? ?
political leadership that would have urged authorities to take more decisive action earlier The Japanese government injected capital into financial institutions in several ways depending on the situation. In most cases, the DICJ could use its discretion in determining the nature of the assistance. Troubled assets were bought at a steep discount from their face value from sound financial institutions (to inject capital) and disposed of without unduly disturbing markets—usually within three years. Government holdings of corporate shares have generated dividend income and capital gains for the DICJ. Since there are fewer banks in Japan, the authorities could focus recovery efforts on several large banks and fewer than 200 smaller financial institutions (there are about 8,500 banks in the United States) which facilitated information gathering and coordination.
Thank you
doc_869884979.pptx
The spectacular rise of the Japanese economy and the subsequent fall, The phases of Japan’s crisis 1990-1997, 1997-2000, 2000-2003, long term impact of crisis on Japanese economy, lessons for the current financial crisis, Japanese response to current financial crisis.
Lost Decade of Japan
Points to be discussed
? Economic history of Japan ? The spectacular rise of the Japanese economy and the subsequent fall ? The phases of Japan’s crisis:
? 1990-1997: Crisis outbreak and frail recovery. Sudden increase of interest
rates. Crashing of the share markets and financial system. Emerging of green shoots and roll back of stimulus. ? 1997-2000: Stress and second recovery attempt. The onset of the Asian financial crisis and its effect on the Japanese recovery. ? 2000-2003: Renewed stress and sustained recovery. The dot com bubble burst and the response by Japanese policy makers leading to stability.
? ? ?
Long term impact of crisis on Japanese economy Lessons for the current financial crisis Japanese response to current financial crisis
Economic History
? Japan
? 1868 - Low-income developing country status
? 1897 - Gold-standard, middle-income status
? 1945 - Devastated economy ? 1990 - Second largest economy with well developed
financial and capital markets
? No currency crisis ? Typical of today’s emerging market economies.
? Gradual liberalization—trade to finance, domestic to
external—worked ? High economic growth, av. 10% for about 20 years (just like China now)
Economic History
? Bretton-Woods with capital controls ? Fixed exchange rate (360 yen/USD) ? Slightly higher inflation than US (Balassa-
Samuelson) ? Strict capital controls ? No portfolio investment inward or outward ? Inward FDI resisted (Joint Venture encouraged) ? No government bonds until 1965, remained small ? Strong banking system, underdeveloped capital markets ? High saving, high investment
Economic History
? Exchange rate Regime
? 1971. Managed float. ? Large appreciation 1973. Free float (but heavy intervention)
? Trade Liberalization under GATT ? Domestic Financial Liberalization (1970s-1980s)
? Deposit interest rate, window guidance, branch regulation,
new entry, merger. ? Gradually, bond markets were introduced
? External Financial Liberalization (mid-1970s-mid-1990s)
? Loans, portfolio investment in and out, ? FDI almost no restriction
Late 1980s
High Land Values, low interest rates Credit Easily available & extremely cheap
Yielded Higher Returns
Investment in domestic & foreign stocks & securities
Massive Borrowing by households & firms
1989
Finance Ministry sharply increased interest rates “Zombie firms”, bailed out by the government Bubble terminated abruptly
Crisis in banking sector
Stock Market crashed, Debt crisis
Reasons that led to bubble creation
? Financial deregulation
? Assimilation of riskier assets on banks balance sheet
? ? ? ?
due to competition and liberalization Keiretsu’s culture Quasi-feudalistic institutional structure of Japan Banks lent heavily based on collateral rather than cash flow Doctoring of accounts by banks to keep up with international regulations
The three phases of Japan’s banking crisis
Phase 1-(1990-1997)
? Crisis sparked by collapse of bubbles in its stock and ? ? ? ?
?
real asset markets in early 1990 Initial effect was muted due to the strong economic growth shown by Japan in four decades of post WWII. Japan’s growth falling to an average of 1.5% between 1991-1994. High unemployment. Green shoots started showing up by the middle of the decade in response to policy stimulus . Large number of “Jusen” firms saddled with huge losses from NPL’s.
Japanese GDP Growth Rate Source: http://www.treasury.gov.au/documents/817/images/05_article_4-18.gif
Phase 2: 1997–2000—Systemic Stress and Second Recovery Attempt
? Due to concerns about rising public debt and since the
economy was showing signs of recovery, the Japanese government launched a consolidation effort to bring down its deficit
Phase 2
? Asian crisis stuck due to which the already fragile ? ? ? ?
?
financial system fell apart The real extent of failed property loans became clear. Impact was severe credit crunch and contraction of Japanese economy for two years in a row. Japanese government reacted by re injecting capital into the banking system Shift to Zero interest rate took place. Moderate recovery between 1999 and 2000
Phase 3: 2001–03—Renewed Systemic Stress Followed by Sustained Recovery
? The collapse of the global information technology bubble from March
2000 onwards triggered a third phase of financial and economic stress. ? Unemployment rose to a post war high of 5 ½ %. ? NPL’s peaked at 9 %. ? Public debt rose to almost 125% of GDP
Source: http://bilbo.economicoutlook.net/blog/wpcontent/uploads/2009/04/japan_interest_rates.jpg
What was different about the third phase?
? More aggressive approach coupled with positive ? ? ? ?
?
?
stimulus growth from China. Private demand was greater Revitalized banking system and cleaning up of bad assets Healthier corporate system. Favourable global conditions Rising employment Credit markets easing
Measures taken during the decade years
? Traditional monetary policy measures
? Fiscal stimulus
? Re capitalization of banks ? Mergers and acquisitions of failed banks
? Buying up of unhealthy assets from banks
? Easing up of norms to free up liquidity ? Setting up of institutional authority called FSA that
was authorized to supervise and regulate the banking system.
Traditional Monetary Policy
? Control on short-run interest rates: BOJ intervenes the
inter-bank market to supply or absorb liquidity.
? Open-Market Operations on midterm or long-term
securities such as national bonds (treasury bills in US).
? These policies are effective if the nominal interest rate
is sufficiently above zero.
Non-Traditional Monetary Policies
? With zero interest rate, the inter-bank market loses its
adequate function, and money is stored in cash.
? BOJ was forced to make operations with longer
maturities such as national bonds.
? BOJ took the quantitative ease policy to mandate
banks not to hold too much liquidity.
Intervention into FOREX
? The MOF, coordinated with BOJ, took a drastic
intervention into the foreign exchange market to purchase US dollars to keep the value of Yen low.
? Some leading economists like John Taylor (deputy
director of US Finance Department) acknowledge that this decisive intervention into FOREX was the main demand-side factor for Japan’s recovery.
The Recovery with/without structural reforms
? Japan has almost fully recovered from the lost decade,
while a few evidences of the structural reforms being completed. ? The bad loan problem has been almost solved: The rising demand for banks’ customer firm has dramatically improved the banks’ balance sheet. ? Most of the Zombie firms have revived.
Long term impact on Japanese economy
? Japan's GDP grew at an annual average of 1.1%, with
negative growth rates in the late 1990s ? Rising public debt.It reached a peak of almost 175 % of the GDP in 2006 ? Japanese companies were in retrenchment mode,young people experienced “Hiring Ice Age.” ? Japanese people age 25 to 34 belong to the “lost”or “suffering generation.” –3.3 million of them work as temps or contract employees, up from 1.5 million 10 years ago.
Lessons learnt
? Authorities underestimated the nature and seriousness of the banking
problem at first. Most thought the financial problems would resolve themselves through economic growth and by keeping central bank interest rates low in order to increase bank margins and profitability. ? There was a slow recognition of the extent of non-performing loans and the carrying of “zombie” firms that technically were bankrupt but were kept alive by banks. This delayed resolution of the problem. ? Transparency and an updating of definitions and reporting requirements with respect to non-performing loans was important in realizing the true extent of the
Lessons learnt
? When Japan announced an early financial rescue package, it placed
stringent conditions on the assistance that banks were unwilling to accept. The net result was that the banks ignored the package and tried to bolster their balance sheets by not lending. ? The bursting of the real estate bubble in Japan caused more difficulty for banks than the bursting of the bubble in stocks because the decline in real estate values affected the value of collateral on much bank lending. ? Japan is considered to have acted too slowly with respect to monetary policy, fiscal policy, and the resolution of problems in the banking sector. Once the economy began to recover, fiscal policy is thought to have tightened too soon.
Lessons Learnt
? There appeared to be a lack of domestic or external constraints and of ?
?
? ?
political leadership that would have urged authorities to take more decisive action earlier The Japanese government injected capital into financial institutions in several ways depending on the situation. In most cases, the DICJ could use its discretion in determining the nature of the assistance. Troubled assets were bought at a steep discount from their face value from sound financial institutions (to inject capital) and disposed of without unduly disturbing markets—usually within three years. Government holdings of corporate shares have generated dividend income and capital gains for the DICJ. Since there are fewer banks in Japan, the authorities could focus recovery efforts on several large banks and fewer than 200 smaller financial institutions (there are about 8,500 banks in the United States) which facilitated information gathering and coordination.
Thank you
doc_869884979.pptx