financial crisis in japan – 4 phases
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Latest Developments of The World Economy Daisuke Kotegawa Research Director, Canon Institute for Global Studies June 18, 2013 National Research University Higher School of Economics. Financial Crisis in Japan – 4 phases. The financial crisis in Japan can be divided into 4 phases. - PowerPoint PPT PresentationTRANSCRIPT
Latest Developments of The World Economy
Daisuke KotegawaResearch Director, Canon Institute for Global Studies
June 18, 2013
National Research UniversityHigher School of Economics
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The financial crisis in Japan can be divided into 4 phases
Financial Crisis in Japan – 4 phases
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15,000
20,000
25,000
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40,000
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7Stock Price and GDP Growth Rate in JapanYen (%)
Nikkei 225 Index(left scale)
Real GDP Growth Rate(Shadow, right scale)
Lost Decade
Phase1 (1992-93)
Phase2 (1995)
Phase3 (1997-1999)
Phase4 (2001-2002)
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Financial Crisis in Japan – Phase 3 (1997-1998)1. What happened?
On November 4, due to the bankruptcy of Sanyo Securities, the first default of financial debt in the short-term money market occurred, rendering the money
market dysfunctional
Scandals among bureaucrats in Ministry of Finance - cozy relationships between traditional bureaucracy and banks
November 3, Sanyo Securities (7th largest) went bankruptNovember15, Hokkaido-Takushoku Bank went bankrupt
November 24, Yamaichi Securities (4th largest) announced its liquidation (Nov.24)November 26, Tokuyo-City Bank went bankrupt
The resulting credit crunch caused by the banks had a negative impact on the economy. GDP recorded negative growth (-0.1%) in 1997, first time since WWII.
The stormy Financial System Parliament – debated a lot of important financial system related laws
Consecutive bankruptcies of the financial institutions, including large banks and securities in a short time (so called “Black November” in 1997)
I was the director in charge in MOF
Bear Sterns (7th largest)Lehman Bros.(4th largest)
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• Top executives of four major entities which either collapsed or nationalized (i.e. Hokkaido-Takushoku, Yamaichi, Long Term Credit Bank and Nippon Credit Bank) were arrested for the allegations of illegal conducts, including window dressing settlement of their BS.
• After several years of court proceedings, those of LTCB were found innocent by the Supreme Court. Those of NCB are under review by the Supreme Court. Others served time in jail.
Arrest of top executives—Necessary sacrifice?
BRICs:1/3% the world (2008:1/2)
Recently: about 3%of the world
Japan
of which:1/3 EU
China:25% of the world
1980s: about 10% of the world
of which:50% USAAdvanced countries:1/3
Contribution to world economic growth (2001 -2006 )
Overview of Global Economy
How this gapcan be filled?
Total :25% of world growth
1980s: USA and EU:about 35% of the world
Not recover until 2014
Not recover until 2018
Emerging countries:1/3 BRIC s other than China: about10%of the world
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Set of Measures
1. The measures to protect financial sector from further adverse developments in the ongoing crisis, ( Safety Net )i.e., the package of three measures,
recapitalizations, the disposal of non-performing loans. guarantees on inter-bank lending and
2. The implementation of these measures. This includes actual injection of public money and the disposal of non-performing loans.
3. The measures to be taken to avoid a vicious cycle between problems in financial sector and those of real economy. (Fiscal Stimulus)
4. The lessons learned from the ongoing crisis and the measures to be taken in order to avoid the repetition of the crisis in the future. This include, among other things,
strengthening transparency and accountability enhancing sound regulation promoting integrity in financial markets reinforcing international cooperation, and reforming international financial institutions.
5. The architecture of future global financial systems.
Established among advanced countries
Work-in Process
Not yet completed
Work-in Process
Done
Urgent
Necessary
Not Urgent
Not Urgent
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• In the financial crisis in Japan, US urged
a hard landing with three principles; No bail-out of banks, To maintain short-selling scheme, and Observe mark-to-market accounting.
• All of these principles were breached in the ongoing crisis
US vs Japan
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Corporate
Household
Net Export
Asset
Balance Sheet Adjustment
Government
Repayments
RepaymentsOver-borrowing
GNP GNP
GNP Shrinks without Stimulus
Liability LiabilityAsset
Over-borrowing
With stimulus GNP not shrink
How long attack from market continue?
Effectively Insolvent
Excess Liquidity
Investment banks western countries
Deficit countries
Short salesCDS
Short-term high
return
Escape from
insolvency
IMF,EU
Fiscal austerity
Vicious Circle
Recovery of housing prices has been delayed
Keys to recovery are disposal of non performing loans of financial institutions and recovery of real economy
Current stability of financial system is pretentious thanks to relaxation of accounting rules
Are the improvement in unemployment rate and favorable consumption figures good sign to recovery?
Job creation by fiscal stimulus is essential
Country of key currency does not have to worry about trade deficit
US economy
No !!
Those who gave up job search
Part-timer
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UK, USA vs Continental Europe
Introduction of financial transaction tax
1. Expansion of ESFS to 2 Trillion Euro
By way of regular tax revenue
difficult
Europe - What is happening under the table since last fall?
Adverse effect on the City and Wall Street
Concentration of risk on ECB
Consequent additions of equities by ECB member countries
2. Purchase of Government bonds by ECB
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Spain - NPLs of bank, Debt ratio of government
Injection of capital to banks in Spain by ECB
Injection of capital to banks in Japan(1998,1999)
Needs 100 billion
About 93 billion
GNP of Japan=4 times of GNP Spain
Greece - Debt ratio of government
Italy - Debt ratio of government
Relaxation of Loan condition by IMF & EU
Government bonds can be sold in the market?
Issues in European economy
September 12Constitutional Court of Germany
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Reinstatement of Glass Steagal Act
Subscription for Europe
Biggest Issue in presidential election
Socialist parties in Germany & France
JPMorgan Problem = loss of US$ 2billion
2. Offense
LIBOR manipulation Victims – Local communities of US
Money Laundering HSBC, Standard Chartered
Part of UK & Sandy Weil
Destroy Investment banks
LoansInvestments
Deposits
Other Liab
Equity
Essence of Banking
Liabilities
Asset
100 50
10
100 - 10 =90
Credit Creation
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Problem of Cyprus Scheme I
When a bank fails, shareholders first take loss, then creditors. Depositors are always asked to take loss last .
Banks can creates credits based upon depositors’ confidence
Investment banks gamble and lose money
In order to maintain confidence, governments usually put priority on protecting deposits by way of deposits insurance
Banks operates by deposits (=other people’s money)
In the financial crisis in Japan, all amount of deposits were protected. Ceiling on the deposits eligible for protection was put only after crisis was over
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Problem of Cyprus Scheme II
Deposits in US and UK banks would not be protected.
Lack of protection on deposits over certain amount in Cyprus triggered capital flight from Spain
There is a joint paper by the FDIC and the Bank of England in December 2012
Capital flight from endangered European countries to USA.
Dutch finance minister said “Cyprus scheme will be a template”
Title II of Dodd-Frank Act Losses of any financial company placed into receivership will not be borne by
taxpayers, but by common (depositors) and ----other unsecured creditors
Is this a right move? No!