Post on 31-Dec-2015
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Foundation for Foundation for BubbleBubble
Japanese industries devastated by WWIIJapanese industries devastated by WWII Post WWII policies & tariffs encourage Post WWII policies & tariffs encourage
savings by the populationsavings by the population Results: Results:
Trade surplusTrade surplus Yen ( ¥ ) appreciatesYen ( ¥ ) appreciates Domestic companies find it easy to obtain Domestic companies find it easy to obtain
moneymoney Japanese products cost less to manufactureJapanese products cost less to manufacture
Inflating the Inflating the BubbleBubble
Opportunity fuels real estate bubble Opportunity fuels real estate bubble in late 1980sin late 1980s
Similar to current US bubble?Similar to current US bubble? Japanese bubble was centered around Japanese bubble was centered around
commercial real estatecommercial real estate US bubble chiefly involved housingUS bubble chiefly involved housing
Recipe for Recipe for DisasterDisaster
The Plaza Accord (depreciate USD The Plaza Accord (depreciate USD against ¥ and DM)against ¥ and DM) Affects exportsAffects exports Econ growth 4.4% (1985), 2.9% (1986)Econ growth 4.4% (1985), 2.9% (1986)
Bank of Japan (BOJ) responds and Bank of Japan (BOJ) responds and cuts discount rate from 5% to 2.5%cuts discount rate from 5% to 2.5%
Monetary policy provides air for the Monetary policy provides air for the bubblebubble
ZenithZenith
Ginza district (Tokyo), prime Ginza district (Tokyo), prime property values at USD 139,000 per property values at USD 139,000 per sq ftsq ft
Tokyo Stock Exchange (Nikkei stock Tokyo Stock Exchange (Nikkei stock index/Nikkei 225) hits record high index/Nikkei 225) hits record high ¥¥38,957.44 in fourth quarter 198938,957.44 in fourth quarter 1989
DownturnDownturn
BOJ realizes the bubble and responds BOJ realizes the bubble and responds by tightening monetary policy, and by tightening monetary policy, and from 1989 to 1990 discount rates are from 1989 to 1990 discount rates are increased five times to cap at 6%increased five times to cap at 6%
Market collapses shortly afterward as Market collapses shortly afterward as a result of lack of investor confidencea result of lack of investor confidence
The Wounded The Wounded NikkeiNikkei
The Japanese stock market indexThe Japanese stock market index Peaked at ¥40,000 in 1989Peaked at ¥40,000 in 1989 Dropped to below ¥15,000 in 1992Dropped to below ¥15,000 in 1992
There were periods in the 1990s when it rose There were periods in the 1990s when it rose in anticipation that the market would bounce in anticipation that the market would bounce back, but the harsh reality is that the Nikkei back, but the harsh reality is that the Nikkei 225 has been in steady decline even to this day.225 has been in steady decline even to this day.
Real estateReal estate From 1991 – 1998 property lost 80% of its From 1991 – 1998 property lost 80% of its
valuevalue
Bank ProblemsBank Problems The banking system was heavily regulated, thus The banking system was heavily regulated, thus
considered institutionally stableconsidered institutionally stable In 1985 the deregulation of interest rates on In 1985 the deregulation of interest rates on
deposits began. Prior to that bank were not deposits began. Prior to that bank were not allowed to pay interest on depositsallowed to pay interest on deposits People invested in the stock market & foreign People invested in the stock market & foreign
investmentsinvestments Deposit Insurance Corporation, which played a Deposit Insurance Corporation, which played a
supervisory role in the economy was mishandledsupervisory role in the economy was mishandled Confidence/naiveness turned into a liability Confidence/naiveness turned into a liability
upon market collapseupon market collapse
The HangoverThe Hangover
Real GDP (RGDP) would flounder Real GDP (RGDP) would flounder throughout the 1990sthroughout the 1990s
1990 - ¥1990 - ¥428,826 billion (USD 1 trillion)428,826 billion (USD 1 trillion) 2000 - ¥2000 - ¥469,480 billion (USD 4.66 trillion) 469,480 billion (USD 4.66 trillion)
Unemployment Unemployment Rose from 2.1 % in 1991 to 4.7 % by year end Rose from 2.1 % in 1991 to 4.7 % by year end
20002000 When comparing unemployment to other When comparing unemployment to other
countries it may seem low, however, 4.7 % is countries it may seem low, however, 4.7 % is unheard of in Japanunheard of in Japan
Decade earlier unemployment never passed 2.8 %Decade earlier unemployment never passed 2.8 %
The Lost DecadeThe Lost Decade
Time period where economic Time period where economic growth stoppedgrowth stopped
Lack of favorable results from fiscal & Lack of favorable results from fiscal & monetary policies (to be discussed next)monetary policies (to be discussed next)
Japanese cultural habits of saving and Japanese cultural habits of saving and frugality didn’t help the situationfrugality didn’t help the situation
Situation persisted until 2003Situation persisted until 2003
Liquidity Trap?Liquidity Trap?
Between 1994 and 2000 the government tried Between 1994 and 2000 the government tried to revive the economy through fiscal policyto revive the economy through fiscal policy
1994 - six spending programs totaling 1994 - six spending programs totaling ¥¥ 66 trillion 66 trillion and cut income tax ratesand cut income tax rates
1998 Q1 – additional tax cuts, this time 1998 Q1 – additional tax cuts, this time ¥¥ 2 trillion 2 trillion Q2 - fiscal stimulus package worth more than Q2 - fiscal stimulus package worth more than ¥ ¥ 16.7 16.7
trillion trillion Q4 – yet another fiscal stimulus package worth Q4 – yet another fiscal stimulus package worth ¥¥
23.9 trillion 23.9 trillion 1999 – the government trys throwing 1999 – the government trys throwing ¥¥ 18 trillion at 18 trillion at
the problem with recession recoverythe problem with recession recovery Finally, October 2000, Japan announced yet another Finally, October 2000, Japan announced yet another
fiscal stimulus package of 11 trillion yenfiscal stimulus package of 11 trillion yen
Results: Total gov’t debt exceeds 100% of GDPResults: Total gov’t debt exceeds 100% of GDP
Next BatterNext Batter
With deflation having gripped the With deflation having gripped the Japanese economy in the early 1990s, Japanese economy in the early 1990s, in addition to the aforementioned in addition to the aforementioned fiscal policy, monetary options were fiscal policy, monetary options were exercised.exercised.
2001 – Central Bank attempts to use 2001 – Central Bank attempts to use its muscle and stop deflation by its muscle and stop deflation by reducing interest ratesreducing interest rates Interest rates are pushed down to near zero Interest rates are pushed down to near zero
for a substantial period of time with no for a substantial period of time with no favorable resultsfavorable results
2009 Japan still has low interest rates and the 2009 Japan still has low interest rates and the Nikkei continues to dropNikkei continues to drop
This DecadeThis Decade
After years of give-and-take GDP growth, 2003 After years of give-and-take GDP growth, 2003 appeared to be the turn around pointappeared to be the turn around point
Junichiro KoizumiJunichiro Koizumi Privatize government agenciesPrivatize government agencies Cut wasteful programsCut wasteful programs Control country’s budgetsControl country’s budgets Develop a plan to get Japan out from the mountain of Develop a plan to get Japan out from the mountain of
debtdebt
Results:Results: Japan saw consecutive growth for first time since 1997Japan saw consecutive growth for first time since 1997 Ultimately situation still worsened but at a slower rate.Ultimately situation still worsened but at a slower rate.
Recent TimesRecent Times Hard won gains, wiped outHard won gains, wiped out
Rise in commodities hurt economy (07-08)Rise in commodities hurt economy (07-08)
Global recession has slowed world-wide Global recession has slowed world-wide demand for goodsdemand for goods
The Bank of Japan suffered a net loss of ¥12.1 The Bank of Japan suffered a net loss of ¥12.1 billion since September, a departure from the billion since September, a departure from the ¥456.4 billion in gains made a year earlier, ¥456.4 billion in gains made a year earlier, culprit to blame were foreign exchange culprit to blame were foreign exchange losses caused by the yen's appreciation and a losses caused by the yen's appreciation and a decline in dividends on shares purchased by decline in dividends on shares purchased by the BOJ from major banksthe BOJ from major banks
Statement of Statement of Monetary Policy Monetary Policy
Nov 20, 2009 release – Boring!!!Nov 20, 2009 release – Boring!!! October 30, 2009
overnight call rate to remain at around 0.1 %
temporary measures, such as purchase of CP and corporate bonds
temporary special funds-supplying operations to facilitate corporate financing
Expansion in the range of corporate debt and asset-backed commercial paper eligible as collateral
complementary deposit facility to provide ample funds sufficient to meet liquidity demand in financial markets.