Tuesday, 19 February 2013

The Lost Decade (Japan)

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The Lost Decade or the Lost 10 Years (失われた10年 Ushinawareta Jūnen?) is the time after the Japanese asset price bubble's collapse within the Japanese economy, which occurred gradually rather than catastrophically. The term originally referred to the years 1991 to 2000,[1] but recently the decade from 2001 to 2010 is also sometimes included,[2] so that the whole period of the 1990s and 2000s is referred to as the Lost Two Decades or the Lost 20 Years (失われた20年, Ushinawareta Nijūnen).



[edit] History

The strong economic growth of the 1980s ended abruptly at the start of the 1990s. In the late 1980s, abnormalities within the Japanese economic system had fueled a speculative asset price bubble of massive scale by Japanese companies, banks and securities companies. The combination of exceptionally high land values and low interest rates briefly resulted in heightened liquidity in the market. It led to massive borrowing and heavy investment mostly in domestic and foreign stocks and securities.
Recognizing that this bubble was unsustainable, the Finance Ministry sharply raised interest rates in late 1989. This sharp policy caused the bursting of the bubble, and the stock market crashed. A debt crisis followed and the Japanese banks and insurances were now loaded with bad debts. The financial institutions were bailed out through capital infusions from the government, loans from the central bank and the ability to postpone the recognition of losses, ultimately turning them into zombie banks. Yalman Onaranof of Salon stated that the zombie banks were one of the reasons for the following stagnation.[3] Additionally Michael Schuman of Time magazine noted that these banks kept injecting new funds into unprofitable "zombie firms" to keep them afloat, arguing that they were too big to fail. However, most of these companies were too debt-ridden to do much more than survive on bail-out funds. Schuman believed that Japan's economy did not begin to recover until this practice had ended.[4]
Eventually, many of these failing firms became unsustainable, and a wave of consolidation took place, resulting in four national banks in Japan. Many Japanese firms were burdened with heavy debts, and it became very difficult to obtain credit. Many borrowers turned to sarakin (loan sharks) for loans. (Even now in 2012, the official interest rate is 0.1%;[5] it has been similarly low for several years.)
The 1990s therefore was the "lost decade" when the economy contracted or grew at a paltry rate. The impact on everyday life was muted, however. Unemployment rates were high, but not at a crisis level. With the traditional Japanese emphasis on frugality and saving, an impact on an average Japanese family was quite limited, whose standard of living did not deteriorate significantly from what it was in the 1980s.[citation needed]
Despite the economic recovery in the 2000s, conspicuous consumption of the 1980s such as lavish spending on whiskey and cars did not return for the most part.[6] Difficult times in the 1990s made people frown on ostentatious display of wealth, while Japanese firms such as Toyota and Sony which had dominated the industry in the 1980s had to fend off strong competition from rival firms based in South Korea, Taiwan, and other countries. Many Japanese companies replaced a large part of their workforce with temporary workers, who had little job security and fewer benefits. As of 2009, these non-traditional employees made up more than a third of the labor force.[7] As of August 2012, the nation's economy has not fully recovered from the 1991 crash.[2]

[edit] Interpretations

Economist Paul Krugman has argued that Japan's lost decade is an example of a liquidity trap (a situation where consumers and firms saved too much overall, thereby causing the economy to slow). He explained how truly massive the asset bubble was in Japan by 1990, with a tripling of land and stock market prices during the prosperous 1980s. Japan's high personal savings rates, driven in part by the demographics of an aging population, enabled Japanese firms to rely heavily on traditional bank loans from supporting banking networks, as opposed to issuing stock or bonds via the capital markets to acquire funds. The cozy relationship of corporations to banks and the implicit guarantee of a taxpayer bailout of bank deposits created a significant moral hazard problem, leading to an atmosphere of crony capitalism and reduced lending standards. He wrote: "Japan's banks lent more, with less regard for quality of the borrower, than anyone else's. In so doing they helped inflate the bubble economy to grotesque proportions." The Bank of Japan began increasing interest rates in 1990 due in part to concerns over the bubble and in 1991 land and stock prices began a steep decline, within a few years reaching 60% below their peak.[8]
In response to the recession, Japanese policymakers tried a series of government economic stimulus programs and bank bailouts. A 2.4% budget surplus in 1991 turned to a deficit of 4.3% by 1996 and 10% by 1998, with the national debt to GDP ratio reaching 100%. In 1998, a $500 billion bank rescue plan was implemented to encourage bank lending and borrowing. The central bank also attempted to increase inflation (which devalues savings over time but can also make debts easier to pay off), to encourage consumer spending. Krugman wrote that by 2003, the Japanese economy began to recover, helped by imports from the U.S. and China that helped Japan achieve a real growth rate of 2%. He wrote the recovery was "provisional" and there was significant risk of a return to a liquidity trap.[8]
Economist Richard Koo wrote that Japan's "Great Recession" that began in 1990 was a "balance sheet recession". It was triggered by a collapse in land and stock prices, which caused Japanese firms to become insolvent, meaning their assets were worth less than their liabilities. Despite zero interest rates and expansion of the money supply to encourage borrowing, Japanese corporations in aggregate opted to pay down their debts from their own business earnings rather than borrow to invest as firms typically do. Corporate investment, a key demand component of GDP, fell enormously (22% of GDP) between 1990 and its peak decline in 2003. Japanese firms overall became net savers after 1998, as opposed to borrowers. Koo argues that it was massive fiscal stimulus (borrowing and spending by the government) that offset this decline and enabled Japan to maintain its level of GDP. In his view, this avoided a U.S. type Great Depression, in which U.S. GDP fell by 46%. He argued that monetary policy was ineffective because there was limited demand for funds while firms paid down their liabilities. In a balance sheet recession, GDP declines by the amount of debt repayment and un-borrowed individual savings, leaving government stimulus spending as the primary remedy.[9][10]
Economist Scott Sumner has argued that Japan's monetary policy was too tight during the Lost Decade.[11][12][13][14]

[edit] Legacy

On February 9, 2009, in warning of the dire consequences facing the United States economy after its housing bubble, U.S. President Barack Obama cited the "lost decade" as a prospect the American economy faced.[15] In 2010, Federal Reserve Bank of St. Louis President James Bullard warned that the United States was in danger of becoming "enmeshed in a Japanese-style deflationary outcome within the next several years."[16]

[edit] See also

[edit] References

  1. ^ http://fhayashi.fc2web.com/Prescott1/Postscript_2003/hayashi-prescott.pdf
  2. ^ a b Leika Kihara (August 17, 2012). "Japan eyes end to decades long deflation". Reuters. http://www.reuters.com/article/2012/08/17/japan-economy-estimate-idUSL4E8JH1TC20120817. Retrieved September 7, 2012.
  3. ^ Onaranof, Yalman (2011-11-25). "Kill the zombie banks!". Salon Media Groupn. http://www.salon.com/2011/11/25/kill_the_zombie_banks/. Retrieved 2013-01-16.
  4. ^ Schuman, Michael (2008-12-19). "Why Detroit Is Not Too Big to Fail". Time Inc.. http://www.time.com/time/business/article/0,8599,1867847,00.html. Retrieved 2008-12-23.
  5. ^ Ohno, Kenichi. "Economic Development of Japan". National Graduate Institute for Policy Studies. http://www.grips.ac.jp/teacher/oono/hp/lecture_J/lec13.htm. Retrieved 3 April 2011.
  6. ^ New York Times
  7. ^ Tabuchi, Hiroko (2009-02-22). "When Consumers Cut Back: An Object Lesson From Japan". The New York Times. http://www.nytimes.com/2009/02/22/business/worldbusiness/22japan.html?fta=y. Retrieved 2010-05-11.
  8. ^ a b Krugman, Paul (2009). The Return of Depression Economics and the Crisis of 2008. W.W. Norton Company Limited. ISBN 978-0-393-07101-6.
  9. ^ Koo, Richard (2009). The Holy Grail of Macroeconomics-Lessons from Japan's Great Recession. John Wiley & Sons (Asia) Pte. Ltd.. ISBN 978-0-470-82494-8.
  10. ^ Presentation by Richard Koo-The Age of Balance Sheet Recessions-April 2010
  11. ^ Sumner, Scott. "Why Japan's QE didn't "work"". The Money Illusion. http://www.themoneyillusion.com/?p=9404. Retrieved 6/3/2011.
  12. ^ Sumner, Scott. "More evidence that the BOJ is not trying to create inflation". The Money Illusion. http://www.themoneyillusion.com/?p=8091. Retrieved 6/3/2011.
  13. ^ Sumner, Scott. "Rooseveltian Resolve". The Money Illusion. http://www.themoneyillusion.com/?p=3587.
  14. ^ Sumner, Scott. "The other money illusion". The Money Illusion. http://www.themoneyillusion.com/?p=6937. Retrieved 6/3/2011.
  15. ^ Meckler, Laura; Weisman, Jonathan (2009-02-10). "Obama Warns of 'Lost Decade'". The Wall Street Journal. http://online.wsj.com/article/SB123419281562063867.html?mod=djemalertNEWS.
  16. ^ The Seven Faces of 'The Peril'"

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