Richard Koo - Abenomics and the Escape from Balance Sheet Recession
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Transcript of Richard Koo - Abenomics and the Escape from Balance Sheet Recession
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Any authors named on this report are research analysts unless
otherwise indicated.
A Country-by-Country Evaluation
Abenomics and the Escape
from Balance Sheet Recession
May 2013
Richard C. Koo, Chief EconomistNomura Research Institute, [email protected]
Monetary Base as a Percentage of Nominal GDP2
Exhibit 1. BOJ’s Kuroda Is Trying to Double Japan’s already
substantial Monetary Base
0
10
20
30
40
50
60
2006 2007 2008 2009 2010 2011 2012 2013 2014
Japan
Japan: estimate
U.S.
Eurozone
U.K.
(%)
Notes: 1. Estimates are based on the assumption that Japan's nominal GDP will increase by 2.7% a year, which is the GDP growth outlook of the Japanese Government for FY2013.
2. All f igures, including the BOJ's monetary base target for the end of 2013 and 2014, are seasonally adjusted byNomura Research Institute.
Sources: Nomura Research Institute, based on BOJ, Cabinet Of f ice, Japan, FRB, US Department of Commerce, ECB, Eurostat,BOE and ONS data
1, 2
Bank Reserves as Multiples of Required Reserves
Exhibit 2. But in terms of Potential Growth of Money Supply, Kuroda
BOJ Is in the Process of Catching up with the Fed and BOE
0
5
10
15
20
25
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Japan
Japan: estimate
U.S.
Eurozone
U.K.
(x)
Bank reserves ÷ statutory reserves
16.0x
4.9x
3.3x
Notes: 1. Estimates are based on the assumption that required reserves will increase by 3% a year and bank reserves constitute88.8% of f inancial institution's current deposit holdings with the BOJ.
2. The BOE has suspended reserve requirement in March 2009. The post-March 2009 f igures are based on the assumptionthat the original reserve requirement is still applicable.
Sources: Nomura Research Institute, based on BOJ, FRB, ECB and BOE data
11.8x
18.7x
21.6x
9.7x
1
2
Exhibit 3. Drastic Liquidity Injections Resulted in minimal
Increases in Money Supply and Credit (I): US
80 100 120 140 160 180 200 220 240 260 280 300 320 340 360
Monetary Base
Money Supply (M2)
Loans and Leases in Bank Credit
(Aug. 2008 =100, Seasonally Adjusted)
0.5
1.0
1.5
2.0
2.5
3.0
07/1 07/7 08/1 08/7 09/1 09/7 10/1 10/7 11/1 11/7 12/1 12/7 13/1
(%, yoy) Consumer SpendingDeflator (core)
Sources: Board of Governors of the Federal Reserve System, US Department of CommerceNote: Commercial bank loans and leases, adjustments for discontinuities made by Nomura Research Institute.
359
136
99
+1.13%
Exhibit 4. Drastic Liquidity Injections Resulted in minimal
Increases in Money Supply and Credit (II): Eurozone
80
90
100
110
120
130
140
150
160
170
180
190
200
Base Money
Money Supply (M3)
Credit to Euro Area Residents
(Aug. 2008 =100, Seasonally Adjusted)
0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2
07/1 07/7 08/1 08/7 09/1 09/7 10/1 10/7 11/1 11/7 12/1 12/7 13/1
(%, yoy)
CPI core
Sources: ECB, EurostatNote: Base money's figures are seasonally adjusted by Nomura Research Institute.
150
107
101
+1.0%
Exhibit 5. Drastic Liquidity Injections Resulted in minimal
Increases in Money Supply and Credit (III): UK
50
100
150
200
250
300
350
400
450
Reserve Balances + Notes & CoinMoney Supply (M4)Bank Lending (M4)
Aug. 08'
(Aug. 2008 =100, Seasonally Adjusted)1
0123456
07/1 07/7 08/1 08/7 09/1 09/7 10/1 10/7 11/1 11/7 12/1 12/7 13/1
CPI (ex. Indirect Taxes)(%, yoy)
Sources: Bank of England, Of f ice for National Statisics, UKNotes: 1. Reserve Balances data are seasonally unadjusted. 2. Money supply and bank lending data exclude intermmediate f inancial institutions.
435
11086
+2.9%
Exhibit 6. Drastic Liquidity Injections Resulted in minimal
Increases in Money Supply and Credit (IV): Japan
50
100
150
200
250
300
350
400
Monetary Base
Money Supply (M2)
Bank Lending
QuantitativeEasing
(1990/1Q = 100, Seasonally Adjusted)
Bubble Burst
-3-2-101234
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
(y/y, %)
CPI Core(ex. fresh food)
Note: Figures of bank lending and BOJ's targets are seasonally adjusted by Nomura Research Institute.Source: Bank of Japan
Earthquake
380
180
-0.5%
104
US House Prices Have Been Following the Japanese Experience
Exhibit 7. Cause of Breakdown in Monetary Transmission:
Bursting of Debt-Financed Bubbles
40
60
80
100
120
140
160
180
200
220
240
260
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
US: 10 Cities Composite Home Price Index
(US: Jan. 2000=100, Japan: Dec. 1985=100)
Note: per m2, 5-month moving averageSources: Bloomberg, Real Estate Economic Institute, Japan, S&P, S&P/Case-Shiller® Home Price Indices, as of Apr. 29, 2013
Composite Index
FuturesJapan: Tokyo Area Condo Price1
77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
Japan: Osaka Area Condo Price1
Japan falls of f its f iscal clif f(Apr. 1997)
USJapan
Futures
Exhibit 8. Europe also Experienced House Price Bubbles,
except Germany
75
100
125
150
175
200
225
250
275
300
325
350
375
400
425
450
475
500
525
550
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Ireland
Greece
Spain
Germany
(end of 1995 = 100)
Notes: Ireland's f igures before 2005 are existing house prices only. Greece's f igures are f lats' prices in Athens and Thessaloniki.
Sources: Nomura Research Institute, calculated f rom BIS data.
90
303
342
514
an origin of Eurozone crisis
Ireland259
Greece241
Spain221
Germany103
Exhibit 9. Japan’s De-leveraging with Zero Interest Rates
Lasted for 10 Years
-6
-4
-2
0
2
4
6
8
10
-15
-10
-5
0
5
10
15
20
25
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Borrowings from Financial Institutions (left scale)
Funds raised in Securities Markets (left scale)
CD 3M rate (right scale)
(% Nominal GDP, 4Q Moving Average) (%)
Sources: Bank of Japan, Cabinet Off ice, Japan
Debt-financedbubble
(4 years)
Balance sheetrecession(16 years)
Funds Raised by Non-Financial Corporate Sector
Exhibit 10. Japan’s GDP Grew despite major Loss of Wealth and
Private Sector De-leveraging
down87%
25
40
55
70
85
100
115
130
0
20
40
60
80
100
120
140
80 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 07 08 09 10 11 12
(Sep.1990=100, Seasonally Adjusted)
Real GDP(Right Scale)
Land Price Index in Six Major Cities(Commercial, Left Scale)
(Sep. 1990=100)
Sources: Cabinet Off ice, Japan Real Estate Institute
Nominal GDP (Right Scale)
Likely GDP Path w/o Government Action
Last seen in 1973
Cumulative 90-05 GDP
Supported by Government
Action: ~ ¥2000 trillion
Cumulative Loss of
Wealth on Shares and Real Estate
~ ¥1500 trillion
Exhibit 11. Japanese Government Borrowed and Spent
Unborrowed Savings of Private Sector to Sustain GDP
overall deficit ¥460
trillion
20
30
40
50
60
70
80
90
100
110
80 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 07 08 09 10 11 12 13
Source: Ministry of Finance, JapanNote: FY2013 is initial budget and FY2012 is supplementary budget.
Government spending
Tax revenueBubble Collapse
(Tril. yen)
(FY)
cumulativecyclical deficit 90-05
¥315 trillion
Exhibit 12. Japan’s Money Supply Has Been Kept Up by
Government Borrowings
CreditExtended tothe Private
Sector¥601.6 tril.
CreditExtended to the
Public Sector¥247.2 tril.
(+106.8)
Foreign assets
(net)
¥74.1 tril.(+41.4)
Foreign Assets(net)
¥32.7 tril.
Credit Extendedto the Public
Sector¥140.4 tril.
Money Supply(M2+CD)
¥621.5 tril.
CreditExtended tothe Private
Sector¥501.8 tril.
(-99.8)
Other Liabilities
(net)
¥78.7 tril.(-74.5)
Other Liabilities(net)
¥153.2 tril.
Money Supply
(M2+CD)
¥744.4 tril.(+122.9)
Balance Sheets of Banks in Japan
December 2007
Total Assets ¥823.1 tril. (+48.4)Total Assets ¥774.7 tril.
December 1998Assets
Assets
Liabilities
Liabilities
Source: Bank of Japan "Monetary Survey"
Money Supply Is Kept Up by Government Borrowings (II)
Balance Sheets of All Member Banks
Exhibit 13. Post-1933 US Money Supply Growth Made Possible by
NEW DEAL Borrowings
CreditExtended tothe Private
Sector$29.63 bil.
Deposits$32.18 bil.
CreditExtended tothe Public
Sector$5.45 bil.
Other Assets$8.02 bil.
Reserves$2.36 bil.
Capital$6.35 bil.
OtherLiabilities$6.93 bil.
June 1929 Assets Liabilities
Total Assets $45.46 bil. Total Assets $33.04 bil. (-12.42) Total Assets $46.53 bil. (+13.49)
CreditExtended
to thePrivateSector
$15.71 bil.(-0.09)Credit
Extended tothe Private
Sector$15.80 bil.
(-13.83)
June 1936 Assets Liabilities
June 1933 Assets Liabilities
Deposits$23.36 bil.
(-8.82)
Deposits$34.10 bil.(+10.74)
CreditExtended
to thePublicSector
$8.63 bil.(+3.18)
CreditExtended
to thePublicSector
$16.30 bil.(+7.67)
OtherAssets
$6.37 bil.(-1.65)
OtherAssets
$8.91 bil.(+2.54)
Reserves$2.24 bil.
(-0.12)
Reserves$5.61 bil.(+3.37)
OtherLiabilities$4.84 bil.
(-2.09)
OtherLiabilities$7.19 bil.(+2.35)
Capital$4.84 bil.
(-1.51)
Capital$5.24 bil.(+0.40)
(= Money Supply)
Source: Board of Governors of the Federal Reserve System (1976) Banking and Monetary Statistics 1914-1941 pp.72-79
Exhibit 14. Challenge of Abenomics: Get Businesses to Borrow Money
-18
-15
-12
-9
-6
-3
0
3
6
9
12
15
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 07 08 09 10 11 12
(Financial Deficit)
(Financial Surplus)
(as a ratio to nominal GDP, %)
Households
Rest of the World
Corporate Sector(Non-Financial Sector +
Financial Sector)
General Government
Financial Surplus or Deficit by Sector
Balance Sheet Recession Global Financial
Crisis
PrivateSector
Savings:8.76% of GDP
1991-2003 shift = 22% of GDP
Note: All entries are four-quarter moving averages. For the latest f igures, four-quarter averages ending with 4Q/'12 are used.Sources: Bank of Japan, Flow of Funds Accounts, and Government of Japan, Cabinet Of f ice, National Accounts
Exhibit 15. Japan’s Fall from its Fiscal Cliff in 1997 and 2001 Weakened
Economy, Reduced Tax Revenue and Increased Deficit
0
10
20
30
40
50
60
70
80
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Tax Revenue
Budget Deficit
Hashimotofiscal
reform
Koizumifiscal
reform
(Yen tril.) (Yen tril.)
(FY)
Global Financial
Crisis
*
Obuchi-Morifiscal
stimulus
Earthquake
"Abenomics"
Source: Ministry of Finance, JapanNotes: Latest f igures(*) are estimated by MOF. From FY2011, f igures includes reconstruction taxes and bonds.
unnecessaryincrease in
deficit:¥103.3 tril.
Exhibit 16. Factor for a Weaker Yen: Japan’s Non-Energy Related
Trade Surplus Is Shrinking
-3500
-3000
-2500
-2000
-1500
-1000
-500
0
500
1000
1500
2000
2500
3000
3500
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Energy-related trade balance
Non-energy-related trade balance
Overall trade balence
Earthquake
LehmanShock
(Billion Yen, Seasonally adjusted)
Note: Seasonal adjustments by Nomura Research InstituteSource: Nomura Research Institute, based on the data of Ministry of Finance, Japan
Exhibit 17. US in Balance Sheet Recession: US Private Sector
Increased Savings significantly after the Bubble
PrivateSector
Savings:6.95% of GDP
-15
-10
-5
0
5
10
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Housing Bubble
IT Bubble
(Financial Surplus)
(Financial Deficit)
(as a ratio to nominal GDP, %, quarterly)
Rest of the World
Households
General Government
Corporate Sector(Non-Financial Sector +
Financial Sector)
Financial Surplus or Deficit by Sector
Note: All entries are four-quarter moving averages. For the latest f igures, four-quarter averages ending with 4Q/'12 are used.Sources: FRB, US Department of Commerce
Exhibit 18. US Households Are Paying down Debt at Zero-Interest Rates
-20
-15
-10
-5
0
5
10
15-15
-10
-5
0
5
10
15
20
00 01 02 03 04 05 06 07 08 09 10 11 12
(as a ratio to nominal GDP, %, seasonally adjusted) (as a ratio to nominal GDP, %, inverted, seasonally adjusted)
Financial Assets
Financial Liabilities right scale
left scaleFinancial
Surplus/Deficitleft scale
Notes: Latest f igures are for 2012 Q4.Sources: Nomura Research Institute, based on f low of funds data f rom FRB and US Department of Commerce
Exhibit 19. US Non-Financial Corporates Are Accumulating
Financial Assets at Zero-Interest Rates
-20
-15
-10
-5
0
5
10
15
20-20
-15
-10
-5
0
5
10
15
20
00 01 02 03 04 05 06 07 08 09 10 11 12
(as a ratio to nominal GDP, %, seasonally adjusted) (as a ratio to nominal GDP, %, inverted, seasonally adjusted)
Financial Assets
Financial Liabilities right scaleleft scale
Financial Surplus/Deficit
left scale
Notes: Latest f igures are for 2012 Q4.Sources: Nomura Research Institute, based on f low of funds data f rom FRB and US Department of Commerce
Exhibit 20. Europe in Balance Sheet Recession: European Private
Sectors Increasing Savings despite record-low Interest Rates
-20
-15
-10
-5
0
5
10
15
20
25
30
03 04 05 06 07 08 09 10 11 12
UK
Spain
Ireland
Portugal
Italy
(as a ratio to nominal GDP, %)
(Financial Surplus)
(Financial Deficit)
* Private Sector = Household Sector + Non-Financial Corporate Sector + Financial SectorNote: All entries are four-quarter moving averages. For the latest f igures, four-quarter averages ending with 4Q/'12 (only Ireland and Italy,
3Q/'12) are used.Sources: Flow of funds data f rom Off ice for National Statistics, UK, Banco de España, National Statistics Institute, Spain, The Central
Bank of Ireland, Central Statistics Off ice Ireland, Banco de Portugal, Banca d'Italia and Italian National Institute of Statistics
Private Sector Savings as %
of GDP
Ireland: 8.58%Spain: 10.39%
Portugal: 7.25%
UK: 3.31%
Italy: 4.39%
Exhibit 21. Peripheral Eurozone Bond Yields Diverged
significantly from the Global Trend
0
2
4
6
8
10
12
14
16
18
20
2007 2008 2009 2010 2011 2012 2013
Japan
UK
US
Spain
Portugal
Italy
(%)
Note: As of Apr. 29, 2013.Source: Bloomberg
3%
Eurozone crisis
1.1%
Exhibit 22. German Private Sector Refused to Borrow Money
after the Dotcom Bubble
-10
-8
-6
-4
-2
0
2
4
6
8
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Balance Sheet Recession
(Financial Surplus)
(Financial Deficit)
(as a ratio to nominal GDP, %, yearly)
General Government
Households
Sources: Deutsche Bundesbank, Federal Statistical Of f ice GermanyNote: The assumption of Treuhand agency's debt by the Redemption Fund for Inherited Liabilities in 1995 is adjusted.
Rest of the World
Financial Surplus or Deficit by Sector
Dotcom Bubble
Corporate Sector(Non-Financial Sector +
Financial Sector)
German Private Sector Savings
9.8% of GDP
Exhibit 23. ECB’s Drastic Rate Cuts to 2% in 2003 Failed to Revive
the German Economy
0
1
2
3
4
5
6
7
8
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
(%)
Sources: BOJ, FRB, ECB, BOE and RMB Australia. As of Apr. 30, 2013.
Australia
Eurozone
US
UK
Japan
Exhibit 24. German Households Stopped Borrowing altogether
after the Dotcom bubble
-12
-10
-8
-6
-4
-2
0
2
4
6
8-8
-6
-4
-2
0
2
4
6
8
10
12
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
right scale
left scale left scaleFinancial Assets Financial Surplus/Deficit
Financial Liabilities
(as a ratio to nominal GDP, %, seasonally adjusted)
Note: Seasonal adjustments by Nomura Research Institute. Latest f igures are for 2012 Q3.Sources: Nomura Research Institute, based on f low of funds data f rom Bundesbank and Eurostat
(as a ratio to nominal GDP, %, inverted, seasonally adjusted)
Collapse of the Dotcom
Bubble
Exhibit 25. Spanish Households Increased Borrowings after the Dotcom
Bubble in Response to ECB’s record-low Interest Rates
-16
-12
-8
-4
0
4
8
12
16-16
-12
-8
-4
0
4
8
12
16
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Notes: Seasonal adjustments by Nomura Research Institute. Latest f igures are for 2012 Q4.Sources: Nomura Research Institute, based on f low of funds data f rom Banco de España and National Statistics Institute, Spain
right scale
left scale left scaleFinancial Assets Financial Surplus/Deficit
Financial Liabilities
(as a ratio to nominal GDP, %, seasonally adjusted) (as a ratio to nominal GDP, %, inverted, seasonally adjusted)
Collapse of theDotcom Bubble
Exhibit 26. Portuguese Households Continued to Borrow Money
after the Dotcom Bubble
-20
-15
-10
-5
0
5
10
15
20-20
-15
-10
-5
0
5
10
15
20
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
right scale
left scaleleft scale
Financial Assets Financial Surplus/Deficit
Financial Liabilities
(as a ratio to nominal GDP, %, seasonally adjusted)
Notes: Seasonal adjustments by Nomura Research Institute. Latest f igures are for 2012 Q4.Source: Nomura Research Institute, based on f low of funds data f rom Banco de Portugal
(as a ratio to nominal GDP, %, inverted seasonally adjusted)
Collapse of theDotcom Bubble
Exhibit 27. Irish Households Increased Borrowings after the Dotcom
Bubble in Response to ECB’s record-low Interest Rates
-20
-15
-10
-5
0
5
10
15
20
25-25
-20
-15
-10
-5
0
5
10
15
20
02 03 04 05 06 07 08 09 10 11 12
right scale
left scale left scaleFinancial Assets Financial Surplus/Deficit
Financial Liabilities
(as a ratio to nominal GDP, %, seasonally adjusted) (as a ratio to nominal GDP, %, inverted, seasonally adjusted)
Notes: Seasonal adjustments by Nomura Research Institute. Latest f igures are for 2012 Q3.Sources: Nomura Research Institute, based on f low of funds data f rom Central Bank of Ireland and Central Statistics Of f ice, Ireland
Collapse of theDotcom Bubble
Exhibit 28. German-Eurozone (ex. Germany) Competitiveness Gap
Has Macro (50.2%) and Micro (49.8%) Factors
90
100
110
120
130
140
150
160
170
180
190
200
210
220
230
00 01 02 03 04 05 06 07 08 09 10 11 12
Eurozone ULC (ex. Germany) based on German M3 Growth*
Eurozone ULC (ex. Germany)
129.9
German ULCGerman M3
115.2
156.0
100.6
(1Q 2000 = 100, Seasonally Adjusted)
50.2%: Macro-Monetary Effect
49.8%: German Labor Reform Effect
(ULC = Unit Labor Cost)
Eurozone M3 (ex. Germany)
217.0
MonetarySource of
Competitiveness Gap
Note: * Parameters obtained f rom the regression result on Eurozone ULC (ex. Germany) on Eurozone M3 (ex. Germany),log(Eurozone ULC (ex.Germany)) = 3.155506 + log(Eurozone M3 (ex.Germany)) x 0.318227, applied to German M3data indexed to 1Q 2000 = 100.
Sources: Nomura Research Institute, based on ECB, Eurostat and Deutsche Bundesbank data
Exhibit 29. Germany Recovered from Post-Dotcom Balance Sheet
Recession by Exporting to other Eurozone Countries
-6000
-4000
-2000
0
2000
4000
6000
8000
10000
12000
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Source: Deutsche Bundesbank
(€mn, seasonally adjusted)
Eurozone
Asia
US
German Balance of Trade
driven by Eurozone housing bubble
driven by weaker Euro
Exhibit 30. Two Structural Deficiencies of Eurozone
Maastricht Treaty restricted fiscal stimulus needed to fight
balance sheet recessions
Procyclical and destabilizing capital flows between gov. bond markets of member
countries
Excessively low gov. bond yields during bubbles
Excessively high gov. bond yields during balance sheet
recessions
Unable to use fiscal stimulus, those economies suffering
from balance sheet recessions fall into
deflationary spirals, while excessive easing by the ECB
end up creating bubbles elsewhere
(1) (2)
Exhibit 31. Industrialization of Chinese (or any Agrarian) Economy
Source: Nomura Research Institute
L
S
D3
A
B
C
D
EF I J M
H K
D2
D1
China in the future(normalization of domestic
demand phase)
China until now(capital-accumulation phase)
Worker'sincome
Capital'sprofit
wages
number of workers
(i)
(ii)
G
Investment
Consumption
Labor supply curve
Labor demand curve
Industrialization
China Today
Fast growth
Stable prices
Wideningincome
inequality
Strong investment
Weak consumption
Slower growth
Higher Inflation
Narrowing income
inequality
Slower investment
Stronger consumption