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. The term originally referred to the years from 1991 to 2000,[1] but recently the decade from 2001 to 2010 is often included,[2] so that the whole period of the 1990s to the present is referred to as the Lost Two Decades or the Lost 20 Years (失われた20年, Ushinawareta Nijūnen). Over the period of 1995 to 2007, GDP fell from $5.33 to $4.36 trillion in nominal terms,[3] real wages fell around 5%,[4] while the country experienced a stagnant price level.[5] While there is some debate on the extent and measurement of Japan's setbacks,[6][7] the economic effect of the Lost Decade is well established and Japanese policymakers continue to grapple with its consequence.

Causes[edit]

Japan's strong economic growth in the second half of the 20th century 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 a massive scale. The cozy relationship between Japanese corporations and banking system meant that credit was easy to attain even when the investment lacked quality. As Economist Paul Krugman explained, "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."[8]

Trying to deflate speculation and keep inflation in check, the Bank of Japan sharply raised inter-bank lending rates in late 1989.[9] This sharp policy caused the bursting of the bubble and the Japanese stock market crashed. Equity and asset prices fell leaving overly leveraged Japanese banks and insurance companies with books full of bad debt. The financial institutions were bailed out through capital infusions from the government, loans and cheap credit from the central bank, and the ability to postpone the recognition of losses, ultimately turning them into zombie banks. Yalman Onaran of Bloomberg News writing in Salon stated that the zombie banks were one of the reasons for the following long stagnation.[10] 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.[11]

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. As of 2012, the official interest rate was 0.1%;[12] the interest rate has remained below 1% since 1994.[13]

Effects[edit]

Despite mild economic recovery in the 2000s, conspicuous consumption of the 1980s such as lavish spending on whiskey and cars has not returned to the same pre-crash levels.[14] Difficult times in the 1990s made people frown on ostentatious displays 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 other East Asian countries — especially South Korea. 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.[15] And for the wider Japanese workforce, wages have stagnated. From their peak in 1997, real wages have fallen since around 13%[4] — an unprecedented number among developed nations.

The wider economy of Japan is still recovering from the impact of the 1991 crash and subsequent lost decades. It took 12 years for Japan's GDP to recover to the same levels as 1995, and in the interim Japan's economy shrunk below those of France, Germany, Canada and the UK — even when those nations had weak decades themselves.[16] And as a greater sign of economic malaise, Japan also fell behind in output per capita. In 1991, real output per capita in Japan was 14% higher than Australia's, but in 2011 real output has dropped to 14% below Australia's levels.[16] In the span of 20 years, Japan's economy was overtaken not only in gross output, but labor efficiency, whereas previously it was a global leader in both.

In response to chronic deflation and low growth, Japan has attempted economic stimulus and thereby run a fiscal deficit since 1991.[17] These economic stimuli have had at best nebulous effects on the Japanese economy and have contributed to the huge debt burden on the Japanese government. Expressed as a percentage of the Japan's GDP, at 240% Japan has the highest level of debt of any nation on earth.[17] While Japan's is a special case where the majority of public debt is held in the domestic market and by the Bank of Japan, the sheer size the debt demands large service payments and is a worrying sign of the country's financial health.

Interpretation[edit]

Economist Paul Krugman has argued that Japan's lost decade is an example of a liquidity trap (a situation in which monetary policy is unable to lower nominal interest rates because these are close to zero). 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]

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.[18][19]

Economist Scott Sumner has argued that Japan's monetary policy was too tight during the Lost Decade and thus prolonged the pain felt by the Japanese economy.[20][21][22][23]

Economists Fumio Hayashi and Edward Prescott argue that the anemic performance of the Japanese economy since the early 1990s is mainly due to the low growth rate of aggregate productivity. Their hypothesis stands in direct contrast to popular explanations that are based in terms of an extended credit crunch that emerged in the aftermath of a bursting asset “bubble.” They are led to explore the implications of their hypothesis on the basis of evidence that suggests that despite the ongoing difficulties in the Japanese banking sector, desired capital expenditure was for the most part fully financed. They suggest that Japan’s sluggish investment activity is likely to be better understood in terms of low levels of desired capital expenditure and not in terms of credit constraints that prohibit firms from financing projects with positive net present value (NPV). Monetary or fiscal policies might increase consumption in the short run, but unless productivity growth increases, there is a legitimate fear that such a policy may simply transform Japan from a low-growth/low-inflation economy to a low-growth/high-inflation economy.

In her analysis of Japan's gradual path to economic success and then quick reversal, Jennifer Amyx noted that Japanese experts were not unaware of the possible causes of Japan's economic decline. Rather, to return Japan's economy back to the path to economic prosperity, policymakers would have had to adopt policies that would first cause short-term harm to the Japanese people and government.[24] Under this analysis, says Ian Lustick, Japan was stuck on a "local maxima," which it arrived at through gradual increases in its fitness level, set by the economic landscape of the 1970s and 80s. Without an accompanying change in institutional flexibility, Japan was unable to adapt to changing conditions and even though experts may have known which changes needed to be made, they would have been virtually powerless to enact those changes without instituting unpopular policies which would have been harmful in the short-term. Lustick's analysis is rooted in the application of evolutionary theory and natural selection to understanding institutional rigidity in the social sciences.[25]

Dissent[edit]

Financial Journalist Eamonn Fingleton argues there was no lost decade or decades in Japan and the appellation is complete media-created myth perpetuated for the benefit of certain vested interests. In his articles “The Myth of Japan’s Failure”[6] and “The Myth of Japan's Lost Decades'”[26] he demonstrates that when one measures the success of the Japanese economy by standard of living and other types of economic indicators such as the strength of the yen and Japan’s trade surplus, a very different picture of Japan emerges. He states concerning Japan's so-called "lost decades", "… that presentation of Japan is a myth. By many measures, the Japanese economy has done very well during the so-called lost decades, which started with a stock market crash in January 1990. By some of the most important measures, it has done a lot better than the United States."[6]

He argues that there is no such thing as "recovering" from a "crash" if stock prices and asset valuations were artificially high in the first place. The "crash" itself is the recovery, that is, recovering to sensible and rational levels of asset valuation. Specifically stating "In any case the implosion since 1991 [of the stock market and real estate prices] has merely restored some sanity to valuations that had previously become -- very temporarily -- outlandish".[26] In terms of Japan's allegedly slow "growth rate" averaging 1% per year over the past 20 years, he sees this as immaterial as the standard of living in Japan has been unaffected and has in fact improved over the ensuing years. Stating, "Japanese people have enjoyed one of the biggest improvements in living standards of any major First World nation in the interim [of the so-called "lost decades"]."[26] In fact, he alleges that when proper accounting methods are used (i.e., adjusting gross domestic product results on a per-capita basis, and rejecting the "hedonic method" of adjusting for inflation as used by the United States) Japan actually comes out ahead of the United States in terms of economic performance.[6]

According to Fingleton, the motives behind promoting the myth of the "lost decades" are manifold. On the Japanese side, Japanese officials benefit from the myth as it effectively mutes the opposition levied against the country during the 1980s. During that time, manufacturers in the West (most notably the American automobile industry) lamented Japan's economic rise and claimed they were unable to compete fairly with Japanese exports, subsequently directing hostility towards Japan and the Japanese.[citation needed] The myth of the "lost decades" effectively deflects and mutes this economic animosity once levied towards Japan.[6] That criticism is now levied instead against China. On the Western side, the myth of the "lost decades" makes it appear that the American and European economic situation is not as bad as it really is when comparing it to Japan's economic malaise.

Further, from a geo-political perspective promoting the notion of Japan's "decline" may be an attempt to foster fear and insecurity in the Japanese people[citation needed] in order to make them more susceptible to nationalist sentiments (thus keeping Asia divided and thwarting the formation of any regional economic bloc involving China);[citation needed] more accepting of the American military presence in Japan (as a "weak" Japan needs outside help to defend against China and North Korea);[citation needed] and finally more willing to enter into international trade agreements such as the Trans-Pacific Partnership (advocated by the United States) as the "cure" for Japan's so-called economic decline.[citation needed] Specifically, Noah Smith stating, "Increased trade is probably Japan’s best bet in getting out of its current economic doldrums," said Noah Smith, an assistant professor of finance and economics at Stony Brook University. "If Abe can actually push this [Trans-Pacific Partnership] through, this will be his economic legacy, and it will be a positive legacy."[27] However, some believe the Trans-Pacific Partnership will actually destroy Japan economically[citation needed] and seriously undermine Japan's standard of living, especially in terms of health insurance. "A nationwide association of doctors opposes the [Trans-Pacific Partnership] pact, arguing that it will force Japan to open its state-controlled health industry to American-style health insurance, eroding its universal insurance system".[27]

Legacy[edit]

After the Great Recession from 2007-2009, Western governments and commentators have referenced the Lost Decade as a distinct economic possibility for stagnating developed nations. 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.[28] And 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."[29]

More than 25 years after the initial market crash, Japan is still feeling the effects of Lost Decade. However, several Japanese policymaker have attempted reforms to address the malaise in the Japanese economy. Recently, after Shinzo Abe was elected as Japanese prime minister in December 2012, Abe introduced a reform program known as Abenomics which addresses many of the issues raised by Japan's Lost Decade. His "three arrows" of reform intend to address Japan's chronically low inflation, decreasing worker productivity relative to other developed nations, and demographic issues raised by an aging population.[30] Investor response to the announced reform has been strong, and the Nikkei 225 has rallied to 16,000 from a low of around 9,000 in 2008. Abenomics seems to be taking its effect as initial economic indicators return to healthy levels — inflation is expected to meet the 2% target rate as set by the Bank of Japan.[31]

See also[edit]

References[edit]

  1. ^ http://fhayashi.fc2web.com/Prescott1/Postscript_2003/hayashi-prescott.pdf
  2. ^ Leika Kihara (August 17, 2012). "Japan eyes end to decades long deflation". Reuters. Retrieved September 7, 2012. 
  3. ^ "Japanese GDP, nominal". 
  4. ^ a b "Waging a New War". March 9, 2013. 
  5. ^ "Inflation Japan - CPI inflation". 
  6. ^ a b c d e Fingleton, Eamonn (January 6, 2012). "The Myth of Japan’s Failure". The New York Times. 
  7. ^ Fingleton, Eamonn (January 12, 2012). "Video interview on BBC News with Eamonn Fingleton". BBC News, 5 min. 26 sec. 
  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. ^ "Japan Raised Interest Rates". Reuters via The New York Times. December 25, 1989. 
  10. ^ Onaran, Yalman (2011-11-25). "Kill the zombie banks!". Salon Media Groupn. Retrieved 2013-01-16. 
  11. ^ Schuman, Michael (2008-12-19). "Why Detroit Is Not Too Big to Fail". Time Inc. Retrieved 2008-12-23. 
  12. ^ Ohno, Kenichi. "Economic Development of Japan". National Graduate Institute for Policy Studies. Retrieved 3 April 2011. 
  13. ^ "Bank of Japan Interest Rates". 
  14. ^ New York Times
  15. ^ Tabuchi, Hiroko (2009-02-22). "When Consumers Cut Back: An Object Lesson From Japan". The New York Times. Retrieved 2010-05-11. 
  16. ^ a b "The Japanese Tragedy". The Economist Blog. 
  17. ^ a b "Don't Mention the Debt". May 4, 2013. 
  18. ^ 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. 
  19. ^ Presentation by Richard Koo-The Age of Balance Sheet Recessions-April 2010
  20. ^ Sumner, Scott. "Why Japan's QE didn't "work"". The Money Illusion. Retrieved 6/3/2011. 
  21. ^ Sumner, Scott. "More evidence that the BOJ is not trying to create inflation". The Money Illusion. Retrieved 6/3/2011. 
  22. ^ Sumner, Scott. "Rooseveltian Resolve". The Money Illusion. 
  23. ^ Sumner, Scott. "The other money illusion". The Money Illusion. Retrieved 6/3/2011. 
  24. ^ Amyx, Jennifer (2004). Japan's Financial Crisis: Institutional Rigidity and Reluctant Change. Princeton University Press. pp. 17–18. 
  25. ^ Lustick, Ian (2011). "Institutional Rigidity". Cliodynamics 2 (2). 
  26. ^ a b c Fingleton, Eamonn (February 26, 2011). "The Myth of Japan's Lost Decades'". The Atlantic. 
  27. ^ a b Tabuchi, Hiroko (March 15, 2013). "Japan Moves to Enter Talks on Pacific Trade". The New York Times. 
  28. ^ Meckler, Laura; Weisman, Jonathan (2009-02-10). "Obama Warns of 'Lost Decade'". The Wall Street Journal. 
  29. ^ The Seven Faces of 'The Peril'"
  30. ^ "The third arrow". June 28, 2014. 
  31. ^ "Inflation in Japan rises to 30-year high". June 27, 2014.