1 structural roots of japan’s malaise richard katz the oriental economist report...
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1
Structural Roots of Japan’s Malaise
Richard Katz
The Oriental Economist Report
Brookings Institution
April 9, 2002
2
I. How Bad Is It?
3
Private Recovery Never Happened
95
100
105
110
115
90 91 92 93 94 95 96 97 98 99 00 01
Ind
ex
(199
1-Q
1 =
100)
95
100
105
110
115
Private Domestic Demand
Total GDP
4
Five-Year Growth Turning Negative
-1%
0%
1%
2%
3%
4%
5%
6%
74-78
76-80
78-82
80-84
82-86
84-88
86-90
88-82
90-94
92-96
94-98
96-00
98-02
5-y
ear
GD
P g
row
th a
vera
ge
-1%
0%
1%
2%
3%
4%
5%
6%
5
Japan’s Lost Decade vs. Others’
0.0% 0.5% 1.0% 1.5% 2.0% 2.5%
Sw itz.JAPANFinland
Sw edenSpain
GreeceCanadaHolland
ItalyFrance
U.S.UK
BelgiumNorw ay
Ireland
Average per capita GDP growth during worst 11-year period
6
Share of Rich Country GDP Falls
4%
5%
6%
7%
8%
9%
1975 1980 1985 1990 1995 2000* 2005* 2010*
Sh
are
of
Wo
rld
GD
P
Actual Forecast
7
Japan Share of World Exports Down
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
1960 1965 1970 1975 1980 1985 1990 1995 2000* 2005* 2010*
% o
f W
orl
d E
xpo
rts
Actual Forecast
8
Slow Income = Slow Spending
80
85
90
95
100
105
90 91 92 93 94 95 96 97 98 99 00 01
Ind
ex,
199
7 =
100
(in
re
al 1
995
yen
)
80
85
90
95
100
105
Employee Compensation
Personal Consumption
9
ZIRP Erodes Household Income
0%
2%
4%
6%
8%
10%
12%
80 84 88 92 96
Sh
are
of
Nat
ion
al In
com
e
0%
2%
4%
6%
8%
10%
12%
Interest payments
Gross Interest Income
Net Interest Income
10
Excess Capacity = Weak Investment
1.8
2.0
2.2
2.4
2.6
2.8
3.0
1976 1980 1984 1988 1992 1996
Cap
ital
:GD
P R
atio
(19
90 y
en)
1.8
2.0
2.2
2.4
2.6
2.8
3.0
1976-90 Trend Line
Gap
Gap = 179 Tril. Yen = 13% of capital stock = 37% of GDP
11
Investment Still Below 1991 Peak
12%
14%
16%
18%
20%
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01
Inve
stm
ent,
% o
f re
al G
DP
12%
14%
16%
18%
20%
12
II. The Causes
13
Lost GDP: ¾ Supply, ¼ Demand
-25%
-20%
-15%
-10%
-5%
0%
5%
1988 1990 1992 1994 1996 1998 2000*
% o
f P
ote
nti
al G
DP
Demand Gap Demographic Gap Supply Gap
The horizontal zero line shows where GDP would be if 1975-90 growth had continued. Grey area shows lost GDP due to demand shortfall. Black area shows lost GDP due to slowdown in potential growth—not counting slowdown in labor force growth which is shown in diagonal stripes.
14
Competition in Efficient Sectors...
0%
5%
10%
15%
20%
25%
30%
35%
40%
73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90
Mar
ket
Sh
are:
Inte
gra
ted
Cir
cuit
s
NEC HItachiToshiba Matsushita ElectronicsMItsubishi Electric FujitsuSharp
15
...But Not in Inefficient
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
77 78 79 80 81 82 83 84 85 86 87 88 89 90
Mar
ket
Sh
are:
Po
lyet
hyl
ene
film
Okura Kogyo Sekisui ChemWada Chem Ind Nakagaw a SeitaikakoTakigaw a kagaku
16
Low Trade Means Low Productivity
Textiles
Chemicals
Metals
Other Mfg.
Machinery
Food
R2 = 0.64
0%
20%
40%
60%
80%
100%
120%
0% 5% 10% 15% 20% 25%
Trade Openess Ratio
Pro
du
ctiv
ity
Rel
ativ
e to
U.S
.
17
More Imports Leads to Higher Productivity Growh
Textiles
MachineryChemicals
Other
Metals
Food R2 = 0.48
0%
1%
2%
3%
4%
5%
6%
0% 1% 2% 3% 4% 5% 6%
Change in Import Ratio, 91-97
Ch
ang
e in
GD
P P
er W
ork
er, 9
1-97
18
Low Consumption From Low Income
57%
59%
61%
63%
65%
67%
78 80 82 84 86 88 90 92 94 96 98 00*
Wag
es, I
nte
rest
, Div
iden
ds
(% o
f G
DP
)
57%
59%
61%
63%
65%
67%
Nominal
Inflation-Adjusted
19
Chronic Excess Business Savings
-6%
-3%
0%
3%
6%
9%
12%
1970 1974 1978 1982 1986 1990 1994 1998
Sav
ing
s o
r B
orr
ow
ing
as
% o
f G
DP
Net Household Savings
Net Corporate Borrowing to Invest
Excess Savings
20
III. Banking Crisis
21
NPLs Keep Rising . . .
0%
4%
8%
12%
16%
Mar-93 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01
% o
f To
tal L
oan
s
Current NPLs
Cumulative NPLs
22
... As Banks Slacken on Disposal
0%
10%
20%
30%
40%
50%
60%
Mar-93 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01
% o
f C
urr
ent
NP
Ls
New Writeoffs Outstanding Reserves
23
Non-Performing Borrowers
% of Total Corporate Debt(Divided According to Firm Profit:Debt Ratio)
4%8%
4%
9%
7%
8%
3%6%7%
14%
6%
24%
<0 <1
<2 <3
<4 <5
<6 <7
<8 <9
<10 >10
Profits as % of Debt
24
Govt Guarantee of Private Loans
0
2
4
6
8
10
12
71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01
25
IV. Fiscal and Monetary
26
Lost Taxes At Heart of Deficit
0
10
20
30
40
50
60
70
80
90
100
90 91 92 93 94 95 96 97 98 99 00 01* 02*
Trill
ion
Yen
0
10
20
30
40
50
60
70
80
90
100
Tax Revenue
Govt. Spending
27
ZIRP Enables Govt to Fund Debt
0
50
100
150
200
250
300
350
400
75 77 79 81 83 85 87 89 91 93 95 97 99 01
Trill
ion
yen
0
5
10
15
20
25
Total Govt Bonds Outstanding (left scale)
Govt Interest Payments (right scale)
28
Koizumi Budget: Asking For Trouble
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
92 93 94 95 96 97 98 99 00 01* 02*
Ch
ang
e in
Bu
dg
et D
efic
it, %
of
GD
P
-2%
-1%
0%
1%
2%
3%
4%
GD
P G
row
th R
ate
GDP
Change in Deficit
Since stimulus operates with a lag, the chart shows how changes in GDP follow from changes in the deficit one year earlier. 1998 shows GDP growth in 1998 and budget change in 1997.
29
BOJ Printing Money; Economy Not Responding
-2%
0%
2%
4%
6%
8%
10%
80-I to 91-I 91-I to 93-I 93-I to 97-I 97-I to 98-IV 98-IV to 01-IV
An
nu
al G
row
th R
ate
Monetary Base Money Supply Real GDP Nominal GDP
30
Deflation Symptom of Weak Demand
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
De
man
d--
Su
pp
ly G
ap (
1-ye
ar la
g)
-3%
-2%
-1%
0%
1%
2%
3%
GD
P D
efl
ato
r
Deflator
Demand-Supply Gap
31
V. Weak Yen No Panacea
32
Shrinking Share of Global Surplus
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
Su
m o
f T
rad
e S
urp
lus
es
--
$ U
.S. b
illio
n
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
Japan
Other Surplus Countries
33
Shrinking Share of U.S. Deficit
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001*
U.S
. Tra
de
De
fici
t, $
bill
ion
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
Japan
Rest of World
34
Yen and Stocks Move in Tandem
8,000
12,000
16,000
20,000
24,000
1996 1997 1998 1999 2000 2001 2002
Nik
ke
i In
de
x
95
105
115
125
135
145
Ye
n/$
rat
e
Yen/$ rate (right)
Stock index (left)