Japan Economic Recovery from the Lost Decade: Towards Stability Or Volatility

Japan Economic Recovery from the lost Decade: Towards Stability or Volatility

Presented by: Cicik Yuniarsih, Gek Hsien Tang & Yosamartha AGENDA

The Lost Decade Has Japan recovered? Policy Proposals Japan’s Economy: Three Phase of Economic Growth

Average GDP growth 3.9% Equity price rose > 5 X 6000 JLPI* increased > 3 X 8 Japan’s Real GDP and GDP growth from 1981 to 2006 5000 6

4000 4

3000 2

2000 0

1000 -2 GDP Growt h (%) Real GDP (TrillionsReal GDP Yen) 0 -4 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 High Grow th Decade Lost Decade Recovery and Sustainability? Real GDP GDP Growth ?

Average GDP growth 0.9%

*Japan Land Price Index The Lost Decade: Initial Phase

Japan’s Exchange Rate and Current Account 350 100.0 300 80.0 r 250 60.0 200 40.0 150 20.0 100 CA (billionsCA $) of US - 50 JapanYen / Dolla US 1979198019811982198319841985198619 87198819891990 (20.0) 0 Current Acc. Y/$

Bursting the bubble ¾ Appreciation of Japanese Yen ¾ Sharp drop in the current account to 49% ¾ Aggressive monetary policy during the boosting economic growth made the economy overheated The Lost Decade: Collapse of The Bubble

540 Japan’s Indexes of Consumer Prices, Stock Prices and Commercial Land Prices (1980=100) 440

340

240

140 80 82 84 86 88 90 92 94 96 98 00 02 04 06 40

Consumer Prices Stock Prices (Nikkei 225) Japan Comm. Land

¾ Stock price plummeted to almost 60% ¾ Land Index dropped by 36% ¾ Banking system lost credibility ¾ Negative Investment Growth (-16%) Ineffective Monetary & Fiscal Policy

Monetary policy expansion (MSÏ) Output Liquidity Trap Permanent increase in money supply Growth No Exp.Inflation S DDDD1 2

AA3

AA1 AA2 Output Y1Y2 Small Massive Increased Government Spending Economy Fiscal policy Tax Cut Effect Has Japan Recovered?

Japan’s Macroeconomic Indicator Has Japan Recovered? Average 1980-1990 1991-2000 2001-2007 Growth GDP 3.9 1.3 1.5 CA (Billions USD) 42.2 106.9 140.8 Inflation 2.6 0.8 -0.27 Exchange Rate 195.0 115.1 116.5 Interest Rate 4.7 1.4 0.2 Positive Negative • GDP growth : + , 1.53% • Interest rate ≈ 0% • Exchange rate, interest rate • Deflation (on average) and inflation : relatively stable • Consumer & business • CA confidence (mixed) • Inflation expectation

Mixed Recovery Improving Current Account

CA Yen Japan’s goods more export improved GDP Depreciation relatively less & (32%) improved (1.2%) expensive less import

• CA improve majority from Net Factor Payment • Income from FDI or Portofolio ? equity or debt? Int’l Investment Position

*In Billions USD

•High saving country •Gap wider since lost decade Int’l Investment Position

Asset

1600 Liabilities

Japanese asset, mostly in portfolio 1200 (debt) Gov’t bond return diff = 3.5% on 800 average

Foreign asset in Japan, since 400 2004 mostly in portfolio (equity)

2006 2004

2002 2000

1998 1996

1994 1992

1990 1988

1986 1984

1982 1980 GDP Composition & Share

Driven by: • Government exp • Private consumption •Export Policy Proposal • Propose a mild monetary expansion policy – Increase/Sustain output through expanding money supply – Offset to a mild extent the larger appreciation of yen which may hurt economic recovery Monetary Policy • How is today’s situation different from the Lost Decade? – Liquidity Trap • Liquidity trap is less apparent (interest rate at 0.75% today – Confidence Levels • by Japanese businesses and Japanese consumers • But this confidence is eroding because of US subprime crisis Monetary Policy

– Expectations of inflation (global inflation wave) • Bring forward consumption to avoid rising prices in future, boost AD. – Policy reforms carried out during Lost Decade taking effect • More flexible labor market • More stringent regulatory controls over Japanese banks • Privatization of government companies ie Postal Service Constraints

• A monetary contraction would be a worse off policy proposal as it would worsen yen’s appreciation and reduce output levels • But a mild expansionary monetary policy has limitations – If consumer and business optimism erodes due to US subprime uncertainty – Yen’s movements is counter balanced by external factors i.e. a larger depreciation of US dollar – Unstable political situation (saga over the appointment of Chief of BOJ) Fiscal Policy • Little room for fiscal expansionary policy • Large government debt and budget deficit – Deficit at 29.7 trillion yen (148% of GDP) – Narrowing due to increased tax revenue – But ageing population -> higher social spending – Japan’s MOF intent is to reduce this fiscal deficit – Demand for Japanese exports in emerging markets has grown (i.e. China’s growing appetite) Thank you