Japan Economic Recovery from the lost Decade:

Towards Stability or VolatilityPresented by:

Cicik Yuniarsih, Gek Hsien Tang & Yosamartha

The Lost DecadeHas Japan recovered?Policy Proposals

AGENDA

0

1000

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6000

81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

High Grow th Decade Lost Decade Recovery andSustainability?

Rea

l GDP (T

rillio

ns Y

en)

-4

-2

0

2

4

6

8

GDP G

rowth

(%)

Real GDP GDP Growth

Japan’s Economy:Three Phase of Economic Growth

Equity price rose > 5 XAverage GDP growth 3.9%

JLPI* increased > 3 X

?Average GDP growth 0.9%

*Japan Land Price Index

Japan’s Real GDP and GDP growth from 1981 to 2006

(20.0)

-

20.0

40.0

60.0

80.0

100.0

197919801981198219831984198519861987198819891990

CA

(billi

ons

of U

S $)

0

50

100

150

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350

Yen

Japa

n / U

S D

olla

r

Current Acc. Y/$

The Lost Decade:Initial Phase

Bursting the bubbleAppreciation of Japanese YenSharp drop in the current account to 49%Aggressive monetary policy during the boosting economic growth made the economy overheated

Japan’s Exchange Rate and Current Account

40

140

240

340

440

540

80 82 84 86 88 90 92 94 96 98 00 02 04 06Consumer Prices Stock Prices (Nikkei 225) Japan Comm. Land

The Lost Decade:Collapse of The Bubble

Stock price plummeted to almost 60% Land Index dropped by 36%Banking system lost credibilityNegative Investment Growth (-16%)

Japan’s Indexes of Consumer Prices, Stock Prices and Commercial Land Prices (1980=100)

Ineffective Monetary & Fiscal Policy

Monetary policy expansion (MS ) Liquidity Trap

Permanent increase in money supply No Exp.Inflation

Increased Government Spending Small Economy

EffectTax Cut

AA3

Y1

AA2

DD1DD2

Y2

S

Output

OutputGrowth

AA1

Massive Fiscal policy

Has Japan Recovered?

Japan’s Macroeconomic Indicator

Has Japan Recovered?

Positive• GDP growth : + , 1.53%• Exchange rate, interest rate

and inflation : relatively stable• CA• Inflation expectation

Negative• Interest rate ≈ 0%• Deflation (on average)• Consumer & business

confidence (mixed)

Mixed Recovery

Average 1980-1990 1991-2000 2001-2007

Growth GDP 3.9 1.3 1.5

CA (Billions USD) 42.2 106.9 140.8

Inflation 2.6 0.8 -0.27

Exchange Rate 195.0 115.1 116.5

Interest Rate 4.7 1.4 0.2

Improving Current AccountYen

Depreciation(1.2%)

Japan’s goods relatively less

expensive

more export &

less import

CA improved

(32%)GDP

improved

• CA improve majority from Net Factor Payment• Income from FDI or Portofolio ? equity or debt?

*In Billions USD

•High saving country•Gap wider since lost decade

Int’l Investment Position

Int’l Investment Position

0

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1600

1980

1982

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2006

Asset

Japanese asset, mostly in portfolio (debt)Gov’t bond return diff = 3.5% on average

Foreign asset in Japan, since 2004 mostly in portfolio (equity)

Liabilities

GDP Composition & Share

Driven by:• Government exp• Private consumption • Export

Policy Proposal

• Propose a mild monetary expansion policy– Increase/Sustain output through

expanding money supply– Offset to a mild extent the larger

appreciation of yen which may hurt economic recovery

Monetary Policy• How is today’s situation different from the Lost

Decade?– Liquidity Trap

• Liquidity trap is less apparent (interest rate at 0.75% today

– Confidence Levels• by Japanese businesses and Japanese

consumers• But this confidence is eroding because of US

subprime crisis

Monetary Policy – Expectations of inflation (global inflation wave)

• Bring forward consumption to avoid rising prices in future, boost AD.

– Policy reforms carried out during Lost Decade taking effect

• More flexible labor market• More stringent regulatory controls over Japanese

banks• Privatization of government companies ie Postal

Service

Constraints

• A monetary contraction would be a worse off policy proposal as it would worsen yen’s appreciation and reduce output levels

• But a mild expansionary monetary policy has limitations– If consumer and business optimism erodes due to US

subprime uncertainty– Yen’s movements is counter balanced by external

factors i.e. a larger depreciation of US dollar– Unstable political situation (saga over the

appointment of Chief of BOJ)

Fiscal Policy

• Little room for fiscal expansionary policy• Large government debt and budget deficit

– Deficit at 29.7 trillion yen (148% of GDP)– Narrowing due to increased tax revenue– But ageing population -> higher social spending– Japan’s MOF intent is to reduce this fiscal deficit– Demand for Japanese exports in emerging markets has grown

(i.e. China’s growing appetite)

Thank you