1. Global Recovery Opportunities and Risks for Asia 23 rd March 2009 Keiichiro Kobayashi Senior Fellow, Research Institute of Economy, Trade and Industry (RIETI)

2. 2 Analysis of the Current Situation  Serious damage to balance sheets of financial institutions and firms due to the asset bubble burst  Vicious circle of the Balance Sheet Trap  Depressed domestic demand in the US;  Decreased Asian exports to US;  Economic Downturn

3. 3 Future Direction – Two Options (1) Expansion of domestic demand in countries other than the US.  Growth led by domestic demand driven by expanded domestic demand in Asia  Increased opportunities from domestic investment in Asia  Stable asset market in Asia are required before the events above can materialize (guaranteed property rights, political stability, minimum government intervention in the markets).

4. 4 Future Direction – Two Options (2) Clean up the impaired balance sheets of banks and firms in the US  Removing bad assets from the financial system is required to stop the vicious circle of the Balance Sheet Trap. (a) A hard landing, i.e., the collapse of multilateral financial institutions will be effective for adjusting balance sheets. (Example: Bank Holiday in March 1933)

5. 5 (b) The government buys bad assets and isolates them from the financial system. - Fair price cannot be set. （ Nobody knows the fair price) (c) If the above is impossible, then banks should be nationalized. - Temporarily nationalize the whole banking system. (Instead of buying bad assets, take over the financial institutions with bad assets) - Isolate bad assets, restore the financial institutions, and then re-privatize them. Future Direction – Two Options

6. 6  Bad assets are spread across the world. (i.e. European banks hold US securities.) - Can country-specific domestic policies accomplish the disposal of bad assets? Constructing an international framework based on coordinated action is required before proceeding with the disposal of bad assets.  Message to G20: Coordinated action rather than for fiscal stimulus is required for the disposal of bad assets. Future Direction – Two Options