Asian 2001 05

Asian Economics

Unique Structural Features

• Japanese Employment System: lifetime employment, seniority system, company unions

• Keiretsu• Corporate finance and banking system

• The dual economy

Unique Structural Features

• Japanese-style management• Japanese democracy: the Liberal Democratic Party

• Social consensus on growth

An economic coming of age

Which Components Did Drive the Demand?• Investment/GNP and Export/GNP in Real Terms

• Real Investment/GNP (solid line) and Real Export/GNP (broken line)• Source: The Japanese Economy, Takatoshi Ito.

The Japanese growth in 50s and 60s was investment-led growth.

Exports had been increasing continuously.

Summary of Analysis from the Data

Japanese post-war growth is by:

On the supplyside: Technological progress.

On the demand side: Investments (later Exports).

We will investigate the causes of growth more closely with historical events.

How did it get so bad?

• Inept public policy• Corruption• Greed• The belief that Japan was somehow “different”

Focus: Three Important Points of the Japanese Govnt's Policies

Infant-Industry Protection Allocation of Foreign Reserves The Ministry of International Trade and

Industry (MITI)

Rapid Growth: 1950-1973: Industrial Policies

• Industrial Policies by the Government• Infant-Industry Protection

The government targeted some specific industries, in paticular, industries with increasing-return technology.

The government protect these ”infant industries” by export subsidies and import restrictions.

Example: Iron and steel industries. Once they get large, the average costs go down.

And, then, they become cost-competitive.

Rapid Growth: 1950-1973: Industrial Policies

• The Government Allocated Foreign Reserves

Firms are prohibited from borrowing money from abroad.

The government assigned foreign currency to firms for the purchase of capital equipment and raw materials.

Instead, government financial agencies lend money.

This policy would prevent the appreciation of Japanese yen, and protect exports.

Role of the MITI

(the Ministry of International Trade and Industry)

Even after domestic funds became abundant, investment plans are coordinated according to MITI's demand projection.

Beyond the Observable Reforms

• Source: Hayashi and Prescott (2008)

When the bubble burst

Bubble (1986-1991) Average GDP growth rate: 5.8% Exchange rate:$1.00 = ￥ 168 (1986)

$1.00 = ￥ 134 (1991)

Real estate price went up Stock price wend up: Change of the Nikkei Stock Index

=> Bubble Economy People buy stock and real estate at high prices because they

believe that other people believe that prices are going to increase =>Self-fulfilling mechanism

year 1986 1987 1988 1989 1990 1991index price (yen) 13136 18820 21217 30243 38712 24069

After Bubble (1992-)

Average GDP growth rate: 1.3% Pretty Low! Exchange rate:$1.00 = ￥ 126 (1992)

$1.00 = ￥ 106 (2008)

Serious recession: ’90s as “Lost Decade” Real estate price went down Stock price went down: Change of the Nikkei Stock Index

Efforts to get out of the recession Zero interest rate policy by the Bank of Japan Aggressive fiscal policy

year 1992 1996 1998 2000 2002index price (yen) 23801 20612 19002 10825 14691

Nikkei Average (Tokyo Stock Exchange)Source: http://brual.files.wordpress.com/2008/09/nikkei-average-historical-graph.png

Japanese Real Estate PricesSource: http://m1.smartmoney.com/tradecraft/images/1107-graphic.gif

Japan's Land Price through Bubble

Firm's Bankruptcies and Total Debts of Bankrupt Firms

Japanese GDP Growth RateSource: http://www.treasury.gov.au/documents/817/images/05_article_4-18.gif

Source: http://www.heritage.org/Research/AsiaandthePacific/images/bg1530cht5.gif

Source: http://bilbo.economicoutlook.net/blog/wp-content/uploads/2009/04/japan_interest_rates.jpg

So what went wrong?

• Government incompetence• Lack of decisive action?• Political failures

Japanese Prime Ministers, 1989-2001

So what went wrong?

• Structural peculiarites of the Japanese economic system

• What about the Japanese people? Should they have spent more and demanded more?

Social fallout of the bubble economy

Aum Shinrikyo and the Kobe earthquake (1995)

• Enjo kosai “compensated dating”• Hikikomori “acute social withdrawal”

• Tokokyohi “school refusal”

Two Theories on the 'Lost Decade'

Caballero, Hoshi and Kashyap (2006) Hayashi and Prescott (2002)

Caballero, Hoshi and Kashyap (2006)

Japan's long recession could be attributed to a problem of Japanese financial system.

In the recession period, Japanese banks misallocated credit by supporting zombie firms.

Zombie firms – Low productivity firms, which should exit the market.

Non-zombie firms – High productivity firms, which should operate or start to operate in the market.

The existence of zombie firms interfered new entries by non-zombie firms.

Caballero, Hoshi and Kashyap (2006) Why banks kept lending to Zombies? Basel capital standards (International standards governing banks' minimum level of

capital) When banks wanted to call in non-performing

loan, they have to write off existing capital. The fear of falling below the capital standards led

many banks to continue to extend credit to insolvent borrowers, gambling that somehow these firms would recover or that the government bail them out.

Hayashi and Prescott (2002) What accounts for Japan's lost decade? Neo-classical growth model:

Y = AKө(hE)1-ө

where A is aggregate TFP (Total Factor Productivity),

K is aggregate capital accumulation,

h is hours of work per employee,

E is aggregate employment.

Which component of Neo-classical growth model cause Japan's slow down over 10 year.

Hayashi and Prescott (2002)

Hayashi and Prescott (2002): Growth Rate of Each Factor

Source: Hayashi and Prescott (2002) What's the cause of the decrease in GNP, then?

Hayashi and Prescott (2002): Model Fit

Hayashi and Prescott (2002) Was the slow down caused by a break down of the

financial system? Hayashi and Prescott's (2002) answer is 'NO.'


• Choose one theory you like, explain why you think your choice is better than the other thoery.


45

World’s 10 Largest Banks

Citigroup U.S.

Mizuho Bank/ Mizuho Corp Bank Japan

HSBC Holdings U.K.

Bank of America U.S.

JP Morgan Chase U.S.

Deutsche Bank Germany

Royal Bank of Scotland Group U.K.

Sumitomo Mitsui Banking Group Japan

HypoVereinsbank Germany

UFJ Bank Ltd. Japan

16-46

• Japan• Keiretsu form of industrial organization

• A group of companies that are controlled through interlocking ownership—companies own stock in each other

• Encourages strong loyalty among the companies, including favoritism in customer-supplier relationships

• Each keiretsu has a main bank that typically owns stock in other members of the keiretsu

16-47

• Japan (Cont.)• Japanese banks may own equity in nonfinancial companies, although this is now limited to 5 percent in any single firm

• Organization of the banking system• City banks—represent a disproportionately large

fraction of the world’s biggest banks • Regional banks• Special-purpose financial institutions—include

long-term credit banks, specialized small business and industrial institutions

16-48

• Japan (Cont.)• Historically corporate debt markets have been suppressed, further enhancing power of banks

• The result is a vast majority of debt financing that comes from the banking system

• Unlike Germany, stock market is quite large, however extensive cross ownership masks high degree of concentration of ownership

• Adopted laws that separate commercial banking from investment banking, however, this separation has been eroded

Central banks’ balance sheets as a percentage of GDP

55

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

-2

-1

0

1

2

3

4

5

6

CPI (ex food, energy) Inflation Rate

EUJapanUSY

OY %

56

○ Postal Service- Total Mail Volume: 24.8 Billion Items (FY2005)

○ Postal Savings- Balance: 1.7 Trillion USD* (FY2005)

- Number of Household Users: Approx. 39.2 Million Households (Rate of Household Users: 77.8%) (Oct.

2005)

- Number of ATMs: 26,297 Units (Mar. 2006)

○ Postal Life Insurance- Total Amount of Funds: 1.0 Trillion USD* (FY2005)

- Number of Household Insurers: Approx. 28 Million Households (Rate of Household Insurers: 56.1%)

(Mar. 2004)

○ Post Office- Number of Post Offices: 24,631 (Including Contracted Post Office: 4,410)

(Mar. 2006) 　

1 Current Status of Postal Services in Japan

*1 USD = 117.47 Yen (March, 2006)

57

1. Global Governance - Global Network and International Norms

　・　 Postal network: a global network of interconnected national networks

　・　 UPU Constitution, Convention or Standards

2. National Governance - Institutional Framework -　・　 Relationship between regulator and operator: identical /

separated

　・　‘ Transition from Public to Private Sector’

3. Governance within Operators - Norms of Behavior - 　 a) internal governance – CSR, Internal control, compliance,

enhanced internal audit, improved efficiency of operations, consumer satisfaction, etc.

　 b) enhanced external audit, acceptance of external executive officers

　 c) provision of services based on user preferences

2 Governance in the Postal Sector

58

1. Enhanced and diversified

user needs

2. Increased competition in

services or operators

3. Development and use of

latest ICT technologies

4. Diversified international

collaboration among

stakeholders

Swift and flexible provisionof diverse services

Increased freedom ofbusiness management

Improved entry intonew businesses

Increased satisfaction of complex user needs

Improved quality of servicethrough better technologies

International regime to reflect different values

3 Market Change and Expected Reform in Governance

59

4 Basic Principles of Privatization of Postal Services in Japan

GovernmentBonds 51.9%

MunicipalBonds 4.2%

Others27.8%

Loans toLocal

Goverment16.1%

EntrustedMoney23.2%

MunicipalBonds 4.3%

GovernmentBonds 62.0%

Others10.5%

Total Assets: 1.7 Trillion USD* (End of FY 2005)

Total Assets: 1.0 Trillion USD* (End of FY 2005)

Fund Management of Postal Savings

Fund Management of Postal Life Insurance

*1 USD = 117.47 Yen

(March, 2006)

・ Vitalize economies through transition from public to private sector・ Reform in line with entire structural reform in Japan・ Consider convenience of consumers・ Utilize Japan Post’s resources (such as the existing network)・ Consider present conditions of employment in Japan Post

60

Transitio

nal

Perio

dP

reparato

ry P

eriod

Promulgation of Laws on Privatization of Postal Services

Privatization (October 2007)

100% Share

Government

Holding Company

Japan Post

Posta

l In

sura

nce

C

om

pany

Posta

l Savin

gs

Bank

Final Privatization (October 2017)

Note: The Government is obliged to hold over one third of the shares of Holding Company

5 Process for Privatization

100% Share

Holding Company

Posta

l In

sura

nce

C

om

pany

Posta

l Savin

gs

Bank

Post

Offi

ce

Com

pany

Posta

l Serv

ice

Com

pany

Government

* 　 Holding Company is obliged to dispose of all the shares of two financial companies during the transitional period

* *Incorporated Administrative Agency: Management Organization for Postal Savings and Postal Life Insurance

61

○ 　 When privatized, services will be basically the same as those of pre-privatization

○ Separation based on business function (Postal Service, Savings, Insurance, Post Office, and Holding Co. ）

○ Complete privatization of two financial companies within 10 years (Disposal of all the shares)

○ To balance the degree of freedom in management, with an equalfooting with private companies during the transitional period

Constraints for Providing New Services

Postal Service Company

Subject to Approval(Necessary to hear opinions of the independent

organization)

Obliged to consider other private companies engaged

in the same type of businessesPost Office

Company Subject to Notification

Two Financial Companies

Subject to Approval(Necessary to hear opinions of the independent

organization)

Consider competition with other private financial companies, and the financial condition of the company

6 Characteristics of Privatization

62

○ Post Office Company is obliged to maintain a nationwide post office network

○ Criteria: post offices are to be established:

　 a) to meet the needs of local residents

　 b) more than one in every municipality

　 c) in areas that are easily accessible to local residents considering traffic, geography, and other relevant circumstances

　 * In sparsely populated areas, maintain level of post office network that exists at the time of privatization

7 Maintaining Level of Post Office Network

63

○ Postal Service Company is obliged to provide universal postal service

○ Ensure nationwide financial services at the post offices- Two financial companies are obliged to have stable agency contracts during the transitional period

- After the transitional period, the Social-Regional Contribution Fund can be utilized to maintain necessary financial services

● Holding Company is obliged to accumulate funds from its profit up to one trillion Yen

● To implement Social Contribution Activity and Regional Contribution Activity, profit from the Fund can be provided

Social-Regional Contribution Fund

8 Maintaining Level of Postal Services

64

○ Ensure provision of universal postal service

○ Enable flexible revision of postage rates

○ Enable expansion into international logistics business

○ Domestic parcel post business will be regulated under general cargo distribution rules

9 Postal Service after Privatization

65

○ 　 Postal Privatization in Japan is expected to affect governance in the following ways:

　 a) improve oversight functions by the regulator over the operator

　 b) enable more flexible operations and entry into new business

　 c) enhance the operator’s ability of governance in business management<Anticipated Profit> 　　　　　　　　

　　　 (Unit: Million USD*)

Holding Co.Postal

Service Co.Post

Office Co.

Postal Savings

Bank

Postal Insurance

Co.

FY2008

814 322 729 3,627 653

FY2011

2,508 449 500 4,136 1,636 　 (From “Skeleton Plan for Business Succession Plan of Japan Post”)

(*1USD = 118 Yen (Nov. 2006))

10 Privatization from the Perspective of Governance

ECON 4315: The Japanese Economy

•Lecture 5•Demographics

•Satoshi Tanaka•02/21/2011

Goals• 1. Overview the basic facts of Japanese

population and its future

Goals

• 2. Examine the consequence of aging and a decrease in population

Goals

• 3. Understand the cause of these changes and possible reactions of the government

Fact 1: Total Population Has just hit its historical maximum (128 million) Expect to decrease in the coming decades

Fact 2: Aging

0%

10%

20%

30%

40%

50%

60%

70%

80%

1950 1970 1990 2010 2014 2030 2050

<1515-6465<

One out of 5 persons is older than 65 This ratio is expected to increase In 2050, this ratio will hit 40%!!

Fact 3: Regional Difference

10 100 1000 1000015

20

25

30By Prefecture in 2006

Population Density

Rat

io o

f 65>

Aging develops faster in rural areas In city level, this trend is more evident In some cities, this ratio has already

exceeded 30%

Summary of Facts

• Total population has just hit the historical high is going to decrease for the decades

Aging More than 20% of population is >65 This ratio will increases to 40%

Regional Disparity Aging goes faster in rural areas

Why Japan needs to be worried?

• Question: Why does Japan need to be worried for the following demographic changes?

Population decrease Aging Regional Disparity

Economic Impacts of Population Decrease

Forget about the impacts of aging right now

Focus on population size only When age structure is fixed, what is the

economic impact of population change? Do people in this country become poorer?

Economic Impacts of Population Decrease

Not necessarily Economy size (in GDP) probably shrinks Might lose scale economy at country level

National Defense TV channels etc.. Language-related things (translated books)

GDP per capita is more important for income level

Several countries prosper in spite of its small size E.g., Singapore, Switzerland

Economic Impacts of Aging

Next forget about the population size Focus on the age structure Suppose population do not change but

age structure somehow change What is the economic impacts?


Saving Rates Net saving rates might go down

=>Investment might go down

Demand structure Any business for young generation face a

weak demand (e.g., education, ) Any business for old generation face a strong

demand (e.g., nursing home, day care)


Social Security Pension/Health care

Hard to maintain pay-as-you-go system

Example: Overlapping Generation Model The young produce and save half of their goods for

the pension. The old only consume. If GDP decreases from 100 to 50, ...

Economic Impacts of Aging in Rural Areas

Typical Characteristics High ratio of old people (Could exceed 50%!) Small town/village Far away from large cities No industry that attracts young population

Economic Impacts of Aging in Rural Areas

• =>Too old or/and too small to provide fundamental infrastructure that is essential for old people

Grocery Compulsive public education Doctor/nursing care Public transportation

Why the demographic changes are happening in Japan?

• Question: Why are the following demographic changes are happening in Japan?

Population decrease Aging

What brought these changes?

Population decrease and aging Very few immigration Population # of Birth < # of

Death Possible direct cause

Longer life expectancy=> Will bring aging and population increase

Low fertility=> Will bring both aging and population decrease

Life Expectancy: Japan vs US

19551958

19611964

19671970

19731976

19791982

19851988

19911994

19972000

20032006

60

65

70

75

80

85

90

Life Expectency

Column BColumn C

Column O

Blue solid and broken: Japanese female and Males

Red: US

Evidence of Fewer Kids

19501960

19701980

19902000

20102012

20142020

20302040

2050

0.0

0.2

0.4

0.6

0.8

1.0# of Kids per # of Working Age Population

Column IColumn J

Blue: Number of kids per adult Red: Number of old per adult

Evidence of Fewer Kids II

1935196519701975

1940197019751980

1945197519801985

1950198019851990

1955198519901995

1960199019952000

1965199520002005

1970200020052010

1975200520102015

0.5

1.0

1.5

2.0

2.5

Row 2Row 3Row 4

Birth YearAge 30Age 35Age 40

# of Babies

Measure how many babies a woman bears by her age 40

Look by cohort (generation) Women born in 1940 bore 1.63 babies on average by

her 30th birthday

Why are Japanese having fewer kids?

Question: Why do Japanese have fewer kids recently?

Question: This is also true for many of the developed countries (Germany, Italy, Korea). Why this is so?

Why are Japanese having fewer kids?

From the viewpoint of marriage, (Average # of Babies at certain age)= (Ratio of Married | age)*(# of Babies |

Married,age) + (Ratio of Single | age)*(# of Babies |

Single,age)

Timing of marriage # of babies in wedlock # of babies out of wedlock

Timing of Marriage

Ratio of S ingle by Age (Male )

0%

10%

20%

30%

40%

50%

60%

70%

80%

1950 1960 1970 1980 1990 2000

Ratio of S ingle by Age (Fe m ale )

0%

10%

20%

30%

40%

50%

60%

70%

80%

1950 1960 1970 1980 1990 2000

Age 25-29

Age 30-34

Age 35-39

People are getting married later People who stay single for their life are

increasing (Ratio of Married|Age) have been decreasing

Fraction of Births Out of Wedlock

Unlike other developed countries, there are very few births out of wedlock

USA: 34%, UK: 38%, France: 44% The change of (# of Babies|Single,age) does not

seem to have quantitative impactsFraction of Births Out of Wedlock

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003

# of Births in Wedlock

# of births married couples bear have not changed much

Average # of Births Married Couples Bear During First 15yrs

Summary

Average # of Babies at certain age= (Ratio of Married|age)*(# of Babies|

Married,age) +(Ratio of Single |age)*(# of Babies|

Single,age)

Late marriage seems to be responsible for fewer kids

Numerical Examples

Average # of Babies a Woman gives by age 30=0.59

Pr(Married|age30, female) = 0.40

(# of Babies|Married, female, age30) = 1.40

(# of Babies|Single,age) = 0.05

0.59 = 0.4* 1.4+ (1-0.4)*0.05

= 0.56+0.03

Numerical Questions about Demographic

A=Pr(Married | age30, female) = 0.40 B=(# of Babies | Married, female, age30) = 1.40 C=(# of Babies | Single,age) = 0.05

Q: Suppose government has a two policy options Policy 1: B increases from 1.40 to 1.50 Policy 2: C increases from 0.05 to 0.15

Which policy is more effective to increase the number of births?

What deters people from getting married?

Why do many people don't choose marriage recently? This happens not only in Japan.

What deters people from getting married?

Increase of female workers' income Automation of housekeeping Cohabitation Need to know which socioeconomic

groups (income, education, region, occupation) deter their marriage

Policy

Should and can the government do something to change this trend?

Possible policy targets Encourage marriage Encourage married couples to bear more

births Encourage single women to bear more births

Concerns Marriage itself might not necessarily lead

more births Should pay attention to happiness of

individuals

Current Government Policy

Subsidy to daycare, kindergartens, health care etc..

Encourage to take parental leave (still hard to take)

Direct subsidy to parents

Might need to consider apparently unpopular policies (at least among conservative politicians)

Immigration

Regional Differences

Overview• Local Governments

– 47 prefectures– 1,788 municipals (1788 cities, 812 towns, 193

villages)• Nature

– Islands longer in length (N-S) than width (W-E) Despite of small area, weather is significantly

different

Tampa, FLOkinawa (Southern Isalands)

Atlanta, GATokyo

Chicago, IlHokkaido (Northern Island)

Comparison by Latitudes

Overview• Local Governments

– 47 prefectures– 1,788 municipals (1788 cities, 812 towns, 193 villages)

• Large Cities:

1%1,176,314Saitama10

1%1,327,011Kawasaki9

1%1,401,279Fukuoka8

1%1,474,811Kyoto7

1%1,525,393Kobe6

1%1,880,863Sapporo5

2%2,215,062Nagoya4

2%2,628,811Osaka3

3%3,579,628Yokohama2

7%8,489,653Tokyo1

PopulationCityRank

Kobe

KawasakiYokohamaNagoya

Osaka

Kyoto

Saitama

Fukuoka

Sapporo

Comparison between Prefectures

Want to compare prefectures by various perspectives

Demographics Industry Income Labor Markets

In the following maps, dark color means large value

By Population

• Population is concentrated in the area facing the Pacific Ocean

• Population of Tokyo accounts for about 10% of the total population

• This tendency does not change when the density is used

By Population Growth

• Population decrease has started in rural areas

• Only few metro areas experience a population increase

• In Akita (lowest), population decreases by 1%

• In Aichi (highest), population increases by 0.7%

Aichi

Akita

By Aging (Ratio of People>65)

• Aging society is more prevalent in less dense areas

• In Shimane, more than 25% of population are older than age 65

• Populations in metro areas are relatively young

• Tokyo: 19%, Osaka: 19%

Shimane

By Per Capita Income

• People in metro area earn more than those in rural

• Income of Tokyo is the highest ($45,590)

• Income of Okinawa is the lowest ($19,870)

• In terms of Gini coefficients,

By Manufacture Industry

• Manufacture industry is relatively concentrated in the middle of the country

• Most large companies locate its HQ in Tokyo

• Toyota locates its HQ in Toyota City in Aichi

HQ of Toyota

Concentration of Business in the Tokyo Metro Area Out of 67 Japanese companies listed in

FORTUNE GLOBAL 500, 50 of them (75%) locate their HQs in Tokyo.

Only 7 companies locate their HQs in Osaka, 2nd largest city.

Out of 162 U.S. companies in the same list, only 22 (13%) of them locate their HQs in NYC.

Coca-Cola? Microsoft? Wal-Mart? Target?

By Unemployment Rate

• Okinawa (out of the map) is the highest (12%)

• Shikoku island and Osaka area are higher

Summary of Comparisons

Metro areas tend to be richer and younger In rural areas, in addition to aging, population

starts to shrink Manufacture industry is more prevalent in the

center of Japan Most large companies locate its HQ in Tokyo

while Toyota does not

GNP per Worker Compared with the U.S.

• Source: Hayashi and Prescott (2008)

Tokyo Earthquake• One of the most

destructive earthquake in history , struck the Tokyo area in 1923.

• The earthquake and the widespread fires it caused resulted the deaths of over 100,000 people and damaged more than 650,000 building.

• As many as 45 percent of surviving workers lost their jobs because so many business were destroyed.

Ultranationalism

• Economic disaster fed the dicontent of the leading military officials and extreme nationalist, or ultranationalist.

• western industrial powers, they pointed out, had long ago grabbed huge empires.

• Japanese nationalist were further outraged by racial policies in the United States, Canada, and Australia that shut out Japanese immigrants.

• Economic downturn during 1930-32• 1. Hamaguchi, finance minister Junnosuke Inoue,

and foreign minister Kijuro Shidehara) deliberately adopted a deflationary policy in order to eliminate weak banks and firms and to prepare the nation for the return to the prewar gold parity (fixed exchange rate with real appreciation)

• Externally, Black Thursday

• Military and right-wing movements emerged

• "Shidehara Diplomacy" which to them seemed too soft on China. Their primary goal was to "defend Japanese interests in Manchuria and Mongolia [more precisely, eastern part of "Inner" Mongolia]).

Parties

Minsei Seiyukai

Main supportersIntellectuals, urban workers Big businesses, rural landlords

Economic policy

Small government, free market principle, eliminate inefficient units through macroeconomic austerity

Big government, fiscal activism, public investment for industry and rural development

Foreign policy

Cooperate with US, oppose military invasion of China (protect Japanese interests through diplomacy)

Supporting military expansion, cooperate with military, if necessary, to undermine Minsei Party

Finance minister & economic policy in the 1930s

<Junnosuke Inoue, until Dec. 1931>Intentionally generate deflationReturn to prewar gold parity

<Korekiyo Takahashi, Dec. 1931-Feb. 1936>End gold parity and depreciate yenFiscal expansion (later, tight budget)Easy money

Political Map in the early 1950s

• Conservative Forces• Liberal Party (Yoshida Shigeru) led the peace treaty and

the US-Japan Security Treaty.• Democratic Party (Hatoyama Ichiro) objected the

“subordinate independence.”

• Progressive Forces• Socialist Party (Left faction) sought a revolutionary

transformation of capitalism at home and opposed to the partial peace treaty. .

• Socialist Party (Right faction) sought partial reform of capitalism and accepted the partial peace treaty.

• Communist Party lost popular confidence since they took violent actions suggested by Stalin

1955• The two conservative parties merged to found the

Liberal Democratic Party (LDP).• LDP would remain in power in the following 38

years. • Business Leaders financially supported.• The bureaucrats offered policy expertise and manpower to

the party. Leading midcareer bureaucrats left their posts to run for political office under the LDP banner.

• The two factions of the Socialist Party reunited

Economic Policy Debate• Arisawa Hiromi (Economist U of Tokyo) and Tsuru

Shigeto • Japan should develop natural resources (coal and

hydroelectric powers) • minimize interdependence, fearing foreign conflicts that

might endanger oil supplies.

• Nakayama Ichiro • only sustainable choice was to join the global economy,

by importing raw materials and exporting manufactured goods

Yoshida VS Hatoyama• The followers of Yoshida

Shigeru followed the American lead in containing the communist bloc.

• Hatoyama and his allies sought independence from US. They succeeded in normalizing relations with Soviet Union in 1956 without Peace Treaty.

Yoshida Doctrine

• Japan must focus on economic growth

• Japan must avoid international conflict

• Rely on US for security• Follow US lead in international relations• Focus all energy on economic development

Yoshida Shigeru

Japan: Neo-mercantilismYoshida Doctrine details:• Focus on Growth

• Grow through export, export, export• Protect domestic industry• Focus on market share and growth, not consumer

satisfaction

Japan’s Economic ModelExport-led Growth• Protect domestic firms at first• Demand that they export• Provide government assistance to direct

investment and to support export• Brilliantly successful for Japan (& later Korea, Taiwan,

Singapore, Hong Kong, & now China)

Standard (not Japanese) 1940s development model• Import Substitution

• Protect domestic industries, produce for domestic market• Import only raw materials and capital goods• Fails miserably: leads to debt and weak domestic

industries that never “grow up”

Bureaucracy’s role in economic planning

• Administrative Guidance• Control of import licenses• Control of capital allocation• Encourage collaborative R&D• Amakudari (descent from

heaven)

Chalmers Johnson’s Classic Study of bureaucracy in

Japanese economic development

MITI (Ministry of International Trade and Industry)• Founded 1949• Responsible for

• Deciding on the structure of industries and their distribution activities

• Guiding the development of industries and their distribution activities

• Co-ordination of Japan's foreign trade and commercial ties• Managing specific areas such as raw materials

LDP• The LPD has a central position between the

bureaucracy and business• Its uninterrupted tenure of office for the past decades was

a necessary guarantee of the government-industry relationship in Japan (Reading 1992)

• It assumes a central position between the bureaucracy and business, co-ordinating their interests and playing their referee

Business (zaikai)• The business world is represented by a number of organizations• The most important ones are the

• keidanren (Federation of Economic Organization), • nikkeiren (Federation of Employers` Association), • keizai-doyukai (Committee for Economic Development)• the Japan Chamber of Commerce and Industry

• Formal and informal consultation among the three players

• The bureaucracy maintains good access to the communication networks by practicing amakudari (descending from heaven), which removes retired bureaucrats from MITI etc into the LPD or into corporations to benefit from their bonds

• Strong interdependence with a clear mission• Cooperation is not always harmonious and the

centre of many scandals

Zaibatsu

Keiretsu

• The biggest keiretsus :• Mitsubishi,• Mitsui, • Sumitomo, • Fuji, • Dai-Ichi Kangyo (DKB)• Sanwa

DKB

• Asahi Mutual Life Insurance (DKB)

• The Dai-ichi Mutual Life Insurance Company (DKB)

• Daiichi Sankyo• Dentsu (DKB)• Fujitsu (Furukawa)• Hitachi (Hitachi)• Ishikawajima-Harima Heavy

Industries (IHI)• Isuzu (IHI)• ITOCHU (DKB)• JFE Holdings (Kawasaki)• Kawasaki Heavy Industries

(Kawasaki)• Kao (DKB)

• K Line (Kawasaki)• Kobe Steel (Suzuki)• Meiji Seika (DKB)• Mizuho (Mizuho Financial

Group)• Seibu Department Stores

(DKB)• Sojitz (Suzuki)• Sompo Japan Insurance

(DKB)• Taiheiyo Cement (Asano)• Tokyo Dome (DKB)• The Tokyo Electric Power

Company (DKB)• Tokyo FM (DKB)• Yokohama Rubber Company

(Furukawa)

Structure

Horizontal keiretsu (kinyû keiretsu)• Affiliated `brother and sister` companies spanning

different industries

Vertical Integration

Interlocking Shareholdings

• A typical Japanese firm has about 70 per cent of its shares held by other companies

• The shares are held by a large number of firms in relatively small fractional parcels

• Firm has some kind of transactional relationship with these corporate shareholders (banking, insurance, lending, supply of inputs, purchase of outputs)

• Firm holds shares in many of the these firms: the sharefoldings are reciprocal

• Firms hold each other`s shares as “stable shareholders“ (antei kabunushi) (Sheard 1994)

Advantages• Takeover is impossible• Companies also have other strong relationships

with each other, they are trading with each other

Disadvantages• Inflexibility• Criticism among companies is not• possible either• Also prevents access to the market for many

foreign companies in Japan

Characteristics• Close long-term relationship between• banks and firms in the same group.• Banks “rescue” affiliated firms.• Banks place insiders on firms’ board (interlocking

directorates - parson).• Banks hold some shares.

Keiretsu Finance• “Main bank” is a dominant lender for its

affiliated firms.• Avoid free-rider problem and duplication of

monitoring and screening efforts.• Long-term relationship makes shirking costly

to• borrowers.• • Keiretsu firms have easier access to external• funds.• • Empirical Evidence• • Keiretsu firms rely less on internal funds

Adverse Loan Selection• Good firm and bad firm

Conflicts of Interest

• Debt holders face fixed payout.• Equity holders hold residual claim.• When firms are close to insolvent,• Equity holders have nothing to lose from

taking excessive risk.• Debt holders do not reap the benefits of risk

taking.• Debt holders prefer conservative investment• strategy.• Liability mix might be important to firm value.

Banks• To (partially) solve adverse selection, screening is• important.• To (partially) solve moral hazard, monitoring is important.• Banks might be in a better positive to do both.• Banks observe cash flow closely (provided that

borrowers’ profit and loss enter into their deposits.• Banks solve “free rider problem” and duplication of

monitoring efforts in case of borrowers’ financial distress.• Banks must have incentive to do this, though.• Government bailout or deposit insurance partly reduce

this incentive.

Japanese Business Model

Post “Ford” industrial model• Dr. W. Edwards Deming:

• Focus primarily on QUALITY• Use statistical analysis to measure and improve quality

• Empower shop floor workers to control and guarantee quality

• First presented ideas to US Automakers but was rejected

• Took his ideas to Japanese industrial leaders and they adopted them, leading them to become the world’s leaders in QUALITY

Dr. W. Edwards Deming

• There was another major political protests in Kyushu: The Mitsui Corporation’s Miike Coal Mine in 1960.

• Since then the conservative government deemphasized the drive for constitutional revision and confrontation with unions.

• The result was a new politics of high growth of the economy.

• Prime Minister Hayato launched the “Income Doubling Plan” to commit economi growth to double GNP by 1970.

Environmental Protests• Chemical pollution-

related diseases appeared in 1950s.

• Mercury poisoning struck and killed residents in southern Japan (Minamata-

• Kumamoto) and northern Japan (Niigata).

• Other notable protests:• Air pollution (Mie)• Cadmium (Jinzu River-

Toyama)

Environment and Kunetz Curve

• Part 1• Part 2• Part 3• Part 4

http://www.youtube.com/watch?v=VIIzHw3wkPg

http://www.youtube.com/watch?v=wrjkGYLkfvQ

http://www.youtube.com/watch?v=VXoDtPuB3Qo

http://www.youtube.com/watch?v=gabNPbo6rGk

Postwar Business Cycles in Japan

• Postwar business cycles in Japan. One complete cycle consists of a period of expansion and a period of contraction.

Expansion RecessionTrough Length Average Peak Length Average(month) (months) growth month (months) grwoth- - - Jun, 1951 4

Oct, 1951 27 13.5% Jan, 1954 10 -3.7%Nov, 1954 31 10.1% Jun, 1957 12 5.0%Jun, 1958 42 14.0% Dec, 1961 10 3.7%Oct, 1962 24 13.3% Oct, 1964 12 4.1%Oct, 1965 57 14.4% Jul, 1970 17 3.9%Dec, 1971 23 7.5% Nov, 1973 16 -1.5%Mar, 1975 22 5.9% Jan, 1977 9 4.2%Oct, 1977 28 5.6% Feb, 1980 36 3.2%Feb, 1983 38 6.3% Jun, 1985 17 4.2%Nov, 1986 46 (as of August 1990)

Postwar-1973: Balance of Trade Constraint

• Most Japan's economic fluctuation were triggered by fluctuations in the international balance of payments.

The Bretton Woods Regime (1945) 1 dollar = 360 yen

Mechanism Japan's foreign reserves were relatively scarce. Japan had to keep the balance of trade (EX - IM)

positive. In boom, IM rose faster than EX. The Gov'nt raised interest rates and cut

expenditure. Boom ended and contraction started.

Postwar Business Cycles in Japan

• Postwar business cycles in Japan. One complete cycle consists of a period of expansion and a period of contraction.

• Source: The Japanese Economy, Takatoshi Ito

Expansion RecessionTrough Length Average Peak Length Average(month) (months) growth month (months) grwoth- - - Jun, 1951 4

Oct, 1951 27 13.5% Jan, 1954 10 -3.7%Nov, 1954 31 10.1% Jun, 1957 12 5.0%Jun, 1958 42 14.0% Dec, 1961 10 3.7%Oct, 1962 24 13.3% Oct, 1964 12 4.1%Oct, 1965 57 14.4% Jul, 1970 17 3.9%Dec, 1971 23 7.5% Nov, 1973 16 -1.5%Mar, 1975 22 5.9% Jan, 1977 9 4.2%Oct, 1977 28 5.6% Feb, 1980 36 3.2%Feb, 1983 38 6.3% Jun, 1985 17 4.2%Nov, 1986 46 (as of August 1990)

Postwar-1973: Balance of Trade Constraint

• Most Japan's economic fluctuation were triggered by fluctuations in the international balance of payments.

The Bretton Woods Regime (1945) 1 dollar = 360 yen

Mechanism Japan's foreign reserves were relatively scarce. Japan had to keep the balance of trade (EX - IM)

positive. In boom, IM rose faster than EX. The Gov'nt raised interest rates and cut

expenditure. Boom ended and contraction started.

1973 - 1980s: Aggregate Supply Shock

Floating Exchange Rate (1973) Two Oil Crisis (1973, 1979)The first oil crisis:

A sharp decrease in productivity due to high oil price. A delay in the restraining of demand => wild

inflation. One of worst postwar recession.

The second oil crisis:

Monetary policies were conducted carefully. Recession was long but not as acute as the 1st one.

Business cycles are caused by aggregate supply shocks rather after 1973.


$1.00 = ￥ 134 (1991)







$1.00 = ￥ 106 (2008)




Theories of Business Cycles

• Question: How can we explain the Lost Decade in Japan?• Old Keynesian Demand shocks cause recessions. Price and wage are sluggish. So, monetary policy must be done correctly. IS curve: Y = C(Y) + I(r) + G LM curve: M/P = L + k*Y – c*rY: Aggregate income, C: Consumption, I: Investment

G: Government expenditure, M: Money supply, P: Price,

r: Real interest rate

Fiscal policy and monetary policy increase GDP??


• Recent Agreements ”Real disturbances are an important source of economic

fluctuations; the hypothesis that business fluctuations can largely be attributed to exogenous random variations in monetary policy has few if any remaining adherents.”

Michael Woodford (2008)

Doubt on the effect of government spending: 'Multiplier effect' is not so big. Increase government's debts, which consumers have to

pay by tax in future. Monetary policy for stabilization by controlling people's

expectations.


Y = AKө(hE)1-ө






Summary

Business cycles in the prewar period was relatively large, and the balance of trade often triggered recessions.

After WWII, business cycles became relatively stable, and recession were mainly due to aggregate supply shocks.

Through 1990s, Japan experienced severe recession started with the burst of the bubble.

Caballero, Hoshi and Kashyap (2006) attributed the cause of the long recession to a problem in financial markets.

Hayashi and Prescott (2002) explained the slow down by negative productivity shocks.

1973 - 1980s: Aggregate Supply Shock

Floating Exchange Rate (1973) Two Oil Crisis (1973, 1979)The first oil crisis:

A sharp decrease in productivity due to high oil price. A delay in the restraining of demand => wild

inflation. One of worst postwar recession.

The second oil crisis:

Monetary policies were conducted carefully. Recession was long but not as acute as the 1st one.

Business cycles are caused by aggregate supply shocks rather after 1973.


$1.00 = ￥ 134 (1991)







$1.00 = ￥ 106 (2008)





• Question: How can we explain the Lost Decade in Japan?• Old Keynesian Demand shocks cause recessions. Price and wage are sluggish. So, monetary policy must be done correctly. IS curve: Y = C(Y) + I(r) + G LM curve: M/P = L + k*Y – c*rY: Aggregate income, C: Consumption, I: Investment

G: Government expenditure, M: Money supply, P: Price,

r: Real interest rate

Fiscal policy and monetary policy increase GDP??


• Recent Agreements ”Real disturbances are an important source of economic

fluctuations; the hypothesis that business fluctuations can largely be attributed to exogenous random variations in monetary policy has few if any remaining adherents.”

Michael Woodford (2008)

Doubt on the effect of government spending: 'Multiplier effect' is not so big. Increase government's debts, which consumers have to

pay by tax in future. Monetary policy for stabilization by controlling people's

expectations.


Y = AKө(hE)1-ө






Summary

Business cycles in the prewar period was relatively large, and the balance of trade often triggered recessions.

After WWII, business cycles became relatively stable, and recession were mainly due to aggregate supply shocks.

Through 1990s, Japan experienced severe recession started with the burst of the bubble.

Caballero, Hoshi and Kashyap (2006) attributed the cause of the long recession to a problem in financial markets.

Hayashi and Prescott (2002) explained the slow down by negative productivity shocks.

Definitions of GDP and GNP GDP (or GNP):

The market value of all final goods and services produced within a country in a given period of time.

Plus income earned by its citizens abroad, minus income earned by foreigners in the country.

- Is Satoshi's salary at U included in Japanese GNP? GDP?

- Auto parts to make a Toyota car?

Analyzing Source of Economic Growth

GNP = Aggregate Supply= Aggregate Demand in the long-run. (AS = AD)

Growth of GNP = Growth of AS = Growth of AD. AS : Ys = F(A, K, L), A: Technology, K: Capital, L: Labor. AD : Yd = C + I + G + (EX – IM)C: Consumption, I: Investment,

G: Government's expenditure, EX: Exports, IM: Imports.

Which components of AS and AD did contribute to the Japanese growth?

Which Components Did Drive the Supply?

AS : Ys = F(A, K, L), A: Technology, K: Capital, L: Labor. Which components did contribute to the growth of AS?

Decomposition of Growth in Japan and US

Source: Denison and Chung 1976a, pp.98-99

Country Japan U.S.Period 1953-1971 1948-1969Average Growth Rate 8.81% 4.00%Contribution by FactorLabor 1.85 1.30Capital 2.10 0.79Technological Progress 4.86 1.91

Which Components Did Drive the Supply?

• Decomposition of the Growth in Japan of the 60s and 70s

• Source: Shinohara, 1986, p.17.

Country Japan JapanPeriod 1960-1970 1970-1980Average Growth Rate 10.62% 4.84%Contribution by FactorLabor 1.59 1.01Capital 3.40 1.29Technological Progress 5.53 2.54

Which Components Did Drive the Demand?• Investment/GNP and Export/GNP in Real Terms

• Real Investment/GNP (solid line) and Real Export/GNP (broken line)• Source: The Japanese Economy, Takatoshi Ito.

The Japanese growth in 50s and 60s was investment-led growth.

Exports had been increasing continuously.

Asian 2001 05

Education

Transcript of Asian 2001 05