1. Japan's lost two decades: Lessons to Today's Euro Crisis? March, 2012 YOSHII, Masahiko President, EUIJ-Kansai Graduate School of Economics, Kobe University, Japan yoshii@econ.kobe-u.ac.jp 1

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4. What have been discussed? How to solve debt problems Recovery – Demand Side: fiscal and/or monetary policies – Supply Side: raising productivities, structural reform Influences of the lost (two) decade(s) – Japanese economic system – fast aging in Japan 4

5. Bubble Era: 1987-1991 Land Price Stock Exchange Market Capital Gain/Loss 5

6. Why the Bubble happened? low interest rates and excess liquidity after the Plaza Accord in 1985 financial liberalization (CD, warrant bonds…) expectation of Tokyo to become the financial center in Asia band wagon effects 6

7. 7 Plaza Accord

8. Land Price 8

9. Stock Exchange Market 9 peak: 38,915 yen (12/1989)

10. Capital Gain/Loss 10

11. After the Feast too much production capacities adjustment of investments balance sheet adjustment 11

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14. Asset price fall Asset prices began to fall in 1991 Balance sheet problem – phase 1: non-manufacturing sectors – phase 2: financial sector 14

15. balance sheet problem: phase 1 15

16. Balance sheet problem: phase 2 16 bad loans tril. yen

17. why resolving the bad loan problems was so delayed? – underestimation of seriousness of recession (dream of high economic growth was kept) – definition of bad loans by the government was gradually widened – who share the burdens of bad loans management, shareholders, depositors, financial institutions, state it took almost 10 years to settle who share the loss of bankrupted financial institutions 17

18. 18 Nov. 1997 Yamaichi Security and Hokkaido-Takushoku-Bank declared to be bankrupted

19. Japanese Government injected capital to financial institutions in 2002 19

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21. How the bad loan problems changed behaviors? banking behavior – decrease of lending – roles as main banks lowered enterprise behavior – curtails of investment and employment household behavior – curtails of purchase of durable goods Vicious circle of recession 21

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24. Stimuli to recover Active Fiscal Policy Relaxation of Monetary Policy What to do next? -fast aging society -fiscal problem -environment 24

25. Fiscal Policy 25 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 expenditure tax revenue construction gov bond deficit gov bond

26. government debt 26 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 construction gov bond deficit gov bond

27. Why fiscal measures were ineffective? Fiscal measures – mismanagement delay of fiscal stimuli in the beginning of the 1990s raising consumption tax rate in 1997 budget expansion since the end of the 1990s – main targets construction works public investments to rural area – expenditure driven by aging decrease of tax revenue in the 1990s = first cause of gov debt problems 27

28. Monetary Policy 28 official discount rate

29. Overnight Call Rate Target – 2/1999 - 0.15% zero interest rate policy – 11/8/2000 - 0.25% temporary lift) – 28/2/2001 - 0.15% reintroduction – 14/7/2006 - 0.25% re-lift – 21/2/2007 - 0.5% – 31/10/2008 - 0.3% – 19/12/2008 - 0.1% – 5/10/2010 - 0.0 0.1% 29

30. 30 Monetary Base Balance China Japan US UK Euro Area South Korea

31. Why monetary policies were ineffective? monetary policy remained to control high land prices even after the burst of bubble De facto zero interest rate policy started in the end of the 1990s, but modest De jure zero interest rate policy started in 1999, but was lifted when the recovery was still weak Quantitative easing was practiced, but the monetary base was not enough enlarged 31

32. Restructuring of the JP economy Public sector restructuring – From Public to Private corporatization of remaining public corporations (highway, post) – From the Center to Regions decentralization of decision making power and financial resources 32 No Reform, No Growth

33. Labor market reform 33

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36. Competitiveness 15

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38. Structural reform was also not enough Japan Post and Japan Highway were corporatized, but not privatized Japans competitiveness is not recovered Japans corporate governance reforms were not enough 38 Its not A Sony

39. Decline of population 39

40. 2,679 40 2,679 1,070

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43. Problems of the aging society decline of labor population decline of saving ratios – new investment – management of government debt problems increase of pension and health care burdens 43

44. How to activate Japanese Economy? redesign of Japanese economic system – to make Japan more open – to make Japan more innovative & creative – … sustainability of Japanese society – to reform pension and health care systems – to reform budgetary system – … 44

45. 45 Koizumi, Junichiro 4/2001-9/2006 Abe, Shinzo 9/2006-9/2007 Fukuda, Yasuo 9/2007-9/2008 Aso, Taro 9/2008-9/2009 Liberal Democratic Party

46. 46 Noda, Yoshihiko 9/2011- Kan, Naoto 6/2010-9/2011 Hatoyama, Yukio 9/2009-6/2010 Democratic Party of Japan

47. Summary delay of recognition stimulus package was too little, too late monetary policy has been timid active fiscal policies during the 1990s and 2000s caused a serious sovereign debt problem state bonds expanded to 200% of GDP Japanese governments have been too weak to implement structural policies Japan needs to change its system, but to where? 47

48. 48 Data by Thomson Reuters

49. Announcement EUIJ-Kansai (Young Fellow Scheme) invites one researcher from the EU member countries in the FY 2012 (April 2012 – March 2013), to stay in Kobe / Osaka for 1-2 week(s), to advance your research, and to be familiar with Japan. I hope you to raise your hands! 49

50. 50 Thank you for your attention! yoshii@econ.kobe-u.ac.jp