Japan in the 90's: From Paradigmatic to Pathetic

1. Japan in the 90’s: From Paradigmatic to Pathetic • Classical interpretation as slow A growth • Possible reasons for slower growth of A in the 1990’s • Keynesian interpretation of export reliance and financial crisis as expenditure slow down then Liquidity Trap. • Why hasn’t Fiscal Policy worked? • Why hasn’t Monetary Policy worked?

2. Japan: GDP stagnation The Economist/ Free exchange blog 23 Aug 2010 http://www.economist.com/blogs/freeexchange/2010/08/growth_3

3. GDP Growth Source: W. McKibbon, ‘Macroeconomic Policy in Japan’ 10/16/01

4. Classical and/or Keynesian Causes? Source: W. McKibbon, ‘Macroeconomic Policy in Japan’ 10/16/01

5. The 1990s in Japan: A Lost DecadeFumio Hayashi and Edward C. PrescottReview of Economic Dynamics vol 5, 2002 “We find that the problem is not a breakdown of the financial system, as corporations large and small were able to find financing for investments. There is no evidence of profitable investment opportunities not being exploited due to lack of access to capital markets. The problem then and today is a low productivity growth rate. Growth theory, treating TFP as exogenous, accounts well for the Japanese lost decade of growth. We think that research effort should be focused on what policy changes will allow productivity to again grow rapidly.” From the Abstract

6. H&P: Standard TFP Growth Calc. typo this is 1983

7. H&P: Standard TFP Growth Calc.

8. Account for falling work week

9. H&P: Production Function

10. H&P: 3 growth factors

11. Algebra

12. H&P: supply side factors

13. H&P: K/Y or x

14. H&P: why K/Y stagnated

15. H&P: Role of G

16. Classical Conclusion What on earth could have suddenly stopped productivity growth? Not an oil shock over 90’s—low oil prices. Why low productivity in Japan when US was strong over 90’s? Could it have been the Keynesian causality at work? (Low growth of output causing low productivity. Famous reticence to fire etc..) Low output in turn explained by bursting of financial bubble and asset deflation. Or could the ‘Mercantilist’ policies that once brought prosperity have turned counter productive?

17. Classical Impediments To Growth • Hayashi and Prescott do not tell us why growth from the supply side was so low. Other researchers point to • Gov. misallocation of capital via FILP and Bank loans • 68% of FILP or 9% GDP loss as of 2001 • Difficulty of moving labor between sectors • Women and the labor force, hard for highly educated women to reenter after childbirth • Protection of retail sector causing associated activities • (such as food processing) to have low productivity. • Hence high US 1990’s productivity did not show up.

18. FRBSF Economic Letter 2006-03 • The Japan Post, is a government-owned corporation that uses 25,000 post offices to collect government-guaranteed savings deposits and to sell life insurance. The funds in turn are passed to the government by buying either Japanese government bonds or the debt of government agencies that fund infrastructure projects like bridges and housing. The PSS is big—it holds about ¥330 trillion in assets, which is roughly 65% of Japan's GDP.

19. Employment-Productivity vs. US William Lewis, The Power of Productivity, U. Chicago 2004

20. Mikumi and Murphy Akio Mikuni and J. Taggart Murphy Japan’s Policy Trap, Brookings Institution, 2002 Japan has a long history of allocating credit by gov. decree, rather than managing total bank lending via reserves and Open Market Operations. Hence the banks bad loans are as much the gov’s fault making them politically difficult to solve. They constitute a failure of the political elite. Also banks become reluctant to lend because the gov. guarantees they had previously taken for granted have been compromised. Can support a classical interpretation and/or the view that a Keynesian reflation may have to be a monetized fiscal stimulus- a gov. stimulus that makes an end run around commercial banks.

21. Zombie firms soaked up capital in 90’s and lowered productivity. Zombie firms: unprofitable and reliant on Gov credit subsidies http://papers.nber.org.ezproxy2.lib.depaul.edu/papers/w12129

22. Share of Zombie firms in credit

23. Japan Austrian View http://super-economy.blogspot.com/2010/05/paul-krugman-wrote-in-nyt-that-we-are.html In non-population adjusted figures, Japan's real GDP grew by 26% in total these years [1990-2007], the lowest in the OECD. In comparison the figures are 63% for the U.S and 44% for the EU.15. But during this period the U.S saw its potential labor force (the number of people between 15-65) increase by 23% and the EU.15 by 11%, while Japan had a decrease of 4%. Between 1990-2007, GDP per working age adult increased by 31.8% in the United States, by 29.6% in EU.15 and by 31.0% in Japan. The figures are nearly identical! Japan has simply not been growing slower than other advanced countries once we adjust for demographic change.

24. Keynesian View of the Collapse IS shifts left due to falling investment: stock prices land prices investment consumer confidence LM shifts left Corporate Solvency Bank Lending all collapse IS r IS’ LM’ LM Y

25. USA Real Exchange Rate

26. ’85 Real Exchange Rate Hike+Spikes

27. The Bursting of the Bubble: A Result ofInternational Policy Coordination The emergence and bursting of the bubble in the Japanese asset market was neither a result of financial reform nor of financial deregulation. It was the international policy coordination carried out in the Latter half of the 1980s that led to these events. Because of coordinated cuts in interest rates decided upon in the Louvre Accord of February 1987, Japan’s ODR was cut to 2.5 percent, an historical low. FINANCIAL REFORM IN JAPAN AND GLOBAL ECONOMIC STABILITY Yoshio Suzuki, Cato Journal v13 http://www.cato.org/pubs/journal/cj13n3/cj13n3-7.pdf

28. External Demand Peaks ‘85

29. Japanese land prices

30. DAVID E. SANGER, "Japan's Bad Debt Is Now Estimated Near $1 Trillion," New York Times, July 30, 1998 Japan’s Bad Debts “If Japanese taxpayers spend upwards of $500 billion to rescue their banks -- and that may prove to be conservative – it will exceed 12 percent of the country's GNP.”

31. I in Japan http://www.haver.com/COMMENT/030910x.htm

32. Total I (pub+priv gross I) 1990 Note: 1985-90 Boom time for Investment

33. Fiscal Balance The fiscal balance moved from a surplus of close to 3 percent of GDP in 1991 to a deficit that is estimated to have exceeded 8 percent of GDP in 2000, and public sector debt has now risen to over 130 percent of GDP. So why hasn’t Fiscal Policy worked?

34. Milton Friedman recently wrote, “[D]oes fiscal stimulus stimulate? Japan’s experience in the ‘90s is dramatic evidence to the contrary. Japan resorted repeatedly to large doses of fiscal stimulus in the form of extra government spending. … The result: stagnation at best, depression at worst, for most of the past decade.” Cited in Posen

35. Fiscal Indicators Source: W. McKibbon, ‘Macroeconomic Policy in Japan’ 10/16/01

36. More Fiscal Balance http://www.macro-dev.com/japeco.php#public

37. Impact of Fiscal Deficit In the context of 1) falling nominal interest rates 2) deflation holding real interest rates above zero. 3) Falling Exchange Rate Fiscal policy should not cause crowding out of investment or trade. So why didn’t (from a Keynesian perspective) Fiscal Policy work? Either we had Ricardian Equivalence (which a Keynesian finds unlikely) or Fiscal Policy Has Not Really Been Expansionary.

38. Exchange Rate Source: W. McKibbon, ‘Macroeconomic Policy in Japan’ 10/16/01

39. Official Structural/Cyclical Balance

40. Low Gov. Multipliers Low gov. multipliers: Spending Mult. (1995) 2.13, (2001) 1.10 Three years after an increase in Government I. Tax Mult. (1995) 1.26, (2001) 0.05 But Official Model equations not available and comprehensive Fiscal data not available on quarterly basis.

41. Posen: They didn’t try active fiscal policy Japan's lost decade Sep 26th 2002 From The Economist print edition

42. Posen Tax and Spending Shocks

43. GDP Impact

44. Posen 2010 http://www.bankofengland.co.uk/publications/speeches/2010/speech434.pdf

45. G vs GDP gap: G up does push Y up(But Posen would reject the GDP gap as calculated here.) Y shown as implausibly 3% > full employment Y http://www.macro-dev.com/japeco.php#public

46. Did Japan Really Try M policy? NO Falling Y causes less Md Also Bank Problems Reduce money Multiplier and Money Growth FRBSF Economic Letter 96-23; August 9, 1996 New Measures of Japanese Monetary Policy http://www.frbsf.org/econrsrch/wklyltr/el96-23.html

47. Growth of Liquidity

48. The Taylor Rule shows high i

49. The Taylor Rule shows low M

50. Why wasn’t M policy aggressive? • 1989 newly independent central bank carved out of ministry of finance. It wan’t to establish anti-inflation credibility and policy independence. • Loose M policy had been blamed for land and stock price bubble of 1980’s.