richard koo foreign press slides (january 2012)

8/2/2019 Richard Koo Foreign Press Slides (January 2012)

1/35

Rebuilding of the European and USEconomy and Japan

Richard C. Koo

Chief EconomistNomura Research Institute

Tokyo

January 2012


2/35

1

Exhibit 1. US Housing Prices Are Moving along the Japanese Experience

40

60

80

100

120

140

160

180

200

220

240

260

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

US: 10 Cities Composite Home Price Index

(US: Jan. 2000=100, Japan: Dec. 1985=100)

Note: per m2, 5-month moving averageSources: Bloomberg, Real Estate Economic Institute, Japan, S&P, S&P/Case-Shiller Home Price Indices, as of Jan. 11, 2012

CompositeIndex

Futures

Japan: Tokyo Area Condo Price1

77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99

Japan: Osaka Area Condo Price1

Futures

US

Japan


3/35

Exhibit 2. US Commercial Real Estate Prices Also Falling to Japanese Levels

2

20

30

40

50

60

70

80

90

100

110

01 02 03 04 05 06 07 08 09 10 11

Down42.0%

from Peak

84 85 86 87 88 89 90 91 92 93 94

(peak = 100)

Note: Peak of US Prices: Oct. 2007, Peak o f Japanese Prices: Sep. 1990.Source: Nomura Research Institute, based on Moody's/Real Estate Analytics and Japan Real Estate Institute

Japan: Commercial Land Price Indexin Six Major Cities

US: Commercial Property Price Index

"Pretend &Extend"

USJapan


4/35

Exhibit 3. Drastic Rate Cuts Have Done Little to Revive Employment

or House Prices

3

0

1

2

3

4

5

6

7

8

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(%)

Sources: BOJ, FRB, ECB, BOE and RMB Australia. As of Jan. 11, 2012.

Australia

EU

US

UK

Japan


5/35

4

Exhibit 4. US Economy Is still a Long Way from Previous Peak

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.083

85

87

89

91

93

95

97

99

101

103

98 99 00 01 02 03 04 05 06 07 08 09 10 11

(%, Seasonally adjusted, inverted)

Unemployment Rate(right scale)

Sources: US Department of Labor, FRB

(2007=100, Seasonally adjusted)

Last seen

in 2005

Unemployment rate:Last seen in 1983

Industrial Production:Last seen in 1997

Industrial Production(left scale)


6/35

5

Exhibit 5. Euro-Zone Economy Is still a Long Way from Previous Peak

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.585

90

95

100

105

110

115

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Sources: Eurostat

(%, Seasonally adjusted, inverted)(Seasonally adjusted, 2005=100)

Industrial Production(left scale)

Unemployment Rate(right scale)

Last seen in 1998

Last seenin 2005


7/35

Exhibit 6. Except in Germany, Industrial Production in Europe

Is still Weak

6

70

75

80

85

90

95

100

105

110

115

120

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Spain

France

Italy

Germany

(2005 = 100, Seasonally Adjusted)

Source: Eurostat

Level lastseen in

2007: Germany

1997: France

1993: Italy

1996: Spain


8/35

Exhibit 7. Drastic Liquidity Injection

Failed to Increase Money Supply (I): US

7

80

100

120

140160

180

200

220

240

260

280300

320

Monetary BaseMoney Supply (M2)

Loans and Leases in Bank Credit

(Aug. 2008 =100, Seasonally Adjusted)

Down25%

0.5

1.0

1.52.0

2.5

3.0

08/1 08/4 08/7 08/10 09/1 09/4 09/7 09/10 10/1 10/4 10/7 10/10 11/1 11/4 11/7 11/10

(%, yoy) Consumer SpendingDeflator (core)

Sources: Board of Governors of the Federal Reserve System, US Department of CommerceNote: Commercial bank loans and leases, adjustments f or discontinuities made by Nomura Research Institute.


9/35


Failed to Increase Money Supply (II): EU

8

90

100

110

120

130

140

150

Base Money

Money Supply (M3)

Credit to Euro Area Residents


0.6

0.8

1.0

1.2

1.41.6

1.8

2.0

2.2

08/1 08/4 08/7 08/10 09/1 09/4 09/7 09/10 10/1 10/4 10/7 10/10 11/1 11/4 11/7 11/10

(%, yoy)

CPI core

Sources: ECB, EurostatNote: Base money's figures are seasonally adjusted by Nomura Research Institute.


10/35


Failed to Increase Money Supply (III): UK

9

70

100

130

160

190

220

250

280

310

Reserve Balances + Notes & Coin

Money Supply (M4)

Bank Lending (M4)

Aug. 08'


1

0

1

23

4

5

6

07/1 07/7 08/1 08/7 09/1 09/7 10/1 10/7 11/1 11/7

CPI (ex. Indirect Taxes)(%, yoy)

Down17%

Sources: Bank of England, Office for National Statisics, UKNotes: 1. Reserve Balances data are seasonally unadjusted. 2. Money supply and bank lending data exclude intermmediatefinancial institutions.


11/35

Exhibit 10. Drastic Liquidity Injection Failed to

Produce Drastic Increase in Money Supply (IV): Japan

10

50

100

150

200

250

300

350

Monetary Base

Money Supply (M2)

Bank Lending

1990/1Q

(1990/1Q = 100, Seasonally Adjusted) Quantitative

Easing

TextbookEconomics

(Monetary PolicyEffective)

Balance SheetRecession

(Monetary Po licyNOT Effective)

-3

-2

-1

0

12

3

4

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

(y/y, %) CPICore

Down41%

Note: Bank lending are seasonally adjusted by Nomura Research Institute.Source: Bank of Japan

Earthquake


12/35

Exhibit 11. Japans De-leveraging with Zero Interest Rates

Lasted for 10 Years

11

-6

-4

-2

0

2

4

6

8

10

-15

-10

-5

0

5

10

15

20

25

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Borrowings from Financial Institutions (left scale)

Funds raised in Securities Markets (left scale)

CD 3M rate(right scale)

(% Nominal GDP, 4Q Moving Average) (%)

Sources: Bank of Japan, Cabinet Off ice, Japan

Debt-financed

bubble(4 years)

Balance sheet

recession(16 years)

Funds Raised by Non-Financial Corporate Sector


13/35

Exhibit 12. Japans GDP Grew in spite of Massive Loss of Wealth

and Private Sector De-leveraging

12

down87%

25

40

55

70

85

100

115

130

0

20

40

60

80

100

120

140

8081828384858687888990919293949596979899000102030405060708091011

(Sep.1990=100, Seasonally Adjusted)

Real GDP(Right Scale)

Land Price Index in Six Major Cities(Commercial, Left Scale)

(Sep. 1990=100)

Sources: Cabinet Office, Japan Real Estate Institute

Nominal GDP (Right Scale)

Likely GDP Pathw/o Government Action

Last seen in 1973

Cumulative90-05 GDP

Supported byGovernment

Action:~ 2000 trillion

CumulativeLoss of

Wealth onShares andReal Estate

~ 1500 trillion


14/35

Exhibit 13. Japanese Government Borrowed and Spent

the Unborrowed Savings of the Private Sector to Sustain GDP

13

overalldeficit460

trillion

20

30

40

50

60

70

80

90

100

110

80 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 07 08 09 10 11 12

Source: Ministry of Finance, JapanNote: FY 2011 includes 4th supplementary budget and FY2012 is initial budget.

Government spending

Tax revenueBubble Collapse

(Tril. yen)

cumulativecyclical

deficit90-05315 trillion


15/35

Exhibit 14. Premature Fiscal Reforms in 1997 and 2001 Weakened

Economy, Reduced Tax Revenue and IncreasedDeficit

14

0

10

20

30

40

50

60

70

80

0

10

20

30

40

50

60

70

80

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Tax Revenue

Budget Deficit

Hashimotofiscal

reformKoizumi

fiscalreform

(Yen tril.) (Yen tril.)

(FY)

GlobalFinancial

Crisis

*

Obuchi-Morifiscal

stimulus

Earthquake

Source: Ministry of Finance, JapanNotes: Latest f igures(*) are estimated by MOF. From FY2011, f igures includes reconstruction taxes and bonds.

unnecessary

increase indeficit:103.3 tril.


16/35

Exhibit 15. US in Balance Sheet Recession: US Private Sector

Increased Savings Massively after the Bubble

15

Shift from4Q 2006 in

private sector:9.13% of GDP

Corporate: 1.32%Households:

7.81%


public sector:7.15% of GDP

-12

-10

-8

-6

-4

-2

0

2

4

6

8

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

HousingBubble

IT Bubble

(Financial Surplus)

(Financial Deficit)

(as a ratio to nominal GDP, %, quarterly)

Rest of the World

Households

GeneralGovernment

Corporate Sector(Non-Financial Sector +Financial Sector)

Financial Surplus or Deficit by Sector

Note: For the latest figures, 4 quarter averages ending with 3Q/11' are used.Sources: FRB, US Department o f Commerce


17/35

Exhibit 16. UK in Balance Sheet Recession: UK Private Sector


16


private sector:6.77% of GDPCorporate: 0.88%

Households: 5.90%


public sector:

6.45% of GDP

-12

-9

-6

-3

0

3

6

9

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Note: For the latest figures, 4 quarter averages ending with 3Q/11' are used.Source: Off ice for National Statistics, UK

(as a ratio to nominal GDP, %)

(Financial Surplus)

(Financial Deficit)

Rest of the World

Households

GeneralGovernment

Corporate Sector(Non-Financial Sector +

Financial Sector)



18/35

0

1

2

3

4

5

6

2007 2008 2009 2010 2011 2012

England

US

Sweden

Switzerland

Japan

(%)

*Note: Excluding Eurozone. As of Jan. 12, 2012.Source: Bloomberg

3%

0.9%

Exhibit 17. Global Bond Yields* Nearing Japanese Levels

17

JapaneseBond Yield

in 1997


19/35

Exhibit 18. Euro-zone in Balance Sheet Recession: Euro-zone Private Sector


18

-8

-6

-4

-2

0

2

4

6

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Rest of the World


Households

(Financial Surplus)

(Financial Deficit)

Corporate Sector(Non-Financial Sector + Financial Sector)

General

Government

Note: For the latest figures, 4 quarter averages ending with 2Q/11' are used.Source: ECB




Corporate: 2.81%Households: 1.47%




20/35

Exhibit 19. Euro-Zone Bond Yields Are Diverging Sharply

19

0

5

10

15

20

25

30

35

40

2007 2008 2009 2010 2011 2012

Greece

Ireland

Portugal

Spain

Italy

France

Germany

(%)

Note: As of Jan. 12, 2012.Source: Bloomberg


21/35

Exhibit 20. Spain in Balance Sheet Recession: Spanish Private Sector


20


private sector:17.95% of GDPCorporate: 12.54%Households: 5.41%



-12

-9

-6

-3

0

3

6

9

12

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Note: For the latest figures, 4 quarter averages ending with 2Q/11' are used.Source: Banco de Espaa


(Financial Surplus)

(Financial Deficit)

Rest of the World

Corporate Sector(Non-Financial Sector + Financial Sector)General

Government

Households



22/35

Exhibit 21. Ireland in Balance Sheet Recession: Irish Private Sector


21

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

20

2002 2003 2004 2005 2006 2007 2008 2009 2010

Sources: Eurostat, Central Statistics Of fice, Ireland




(Financial Surplus)

Rest of the World

HouseholdsGeneral

Government

(Financial Deficit)

Shift from 2007in private sector:29.60% of GDPCorporate: 14.99%

Households: 14.61%

Shift from 2007in public sector:31.20% of GDP


23/35

Exhibit 22. Portugal in Balance Sheet Recession: Portuguese Private

Sector Increased Savings Massively after the Bubble

22

-12

-9

-6

-3

0

3

6

9

12

99 00 01 02 03 04 05 06 07 08 09 10 11

Note: For the latest figures, 4 quarter averages ending with 2Q/11' are used.Source: Banco de Portugal

Rest of the World

(Financial Surplus)

Households


(Financial Deficit)

General Government





Households: 3.95%


public sector:

6.21% of GDP


24/35

Exhibit 23. Balance Sheet Correction in France Was Minimal

23

-8

-6

-4

-2

0

2

4

6

8

10

99 00 01 02 03 04 05 06 07 08 09 10

Sources: ECB, Eurostat



Rest of the WorldHouseholds

GeneralGovernment


(Financial Surplus)

(Financial Deficit)

Shift from 2006private sector:3.43% of GDPCorporate: 2.85%

Households: 0.57%

Shift from 2006public sector:4.71% of GDP


25/35

Exhibit 24. Balance Sheet Correction in Italy Was Minimal

24

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

GeneralGovernment


Financial Sector)

Households

Rest of the World


(Financial Surplus)

(Financial Deficit)

Note: For the latest figures, 4 quarter averages ending with 2Q/11' are used.Sources: Banca d 'Italia, Eurostat




Households: -1.04%




26/35

Exhibit 25. Balance Sheet Correction in Greece Was Minimal

25

-20

-15

-10

-5

0

5

10

15

20

25

01 02 03 04 05 06 07 08 09 10 11


(Financial Surplus)

(Financial Deficit)

Rest of the World

Households

GeneralGovernment


Financial Sector)

Note: For the latest figures, 4 quarter averages ending with 2Q/11' are used.Sources: Bank of Greece, Eurostat




Households: -3.09%




27/35

Exhibit 26. ECB Facing Balance Sheet Recession Can Supply Large

Amounts of Liquidity without Igniting Inflation

26

75

100

125

150

175

200

225

250

275

300

325

350

2007 2008 2009 2010 2011

Eurozone

US

UK

Eurozone

US

UK

Monetary Base(=Liquidity)

Money Supply

(Aug. 2008 = 100, seasonally adjusted)

Aug. 2008

Notes: 1. UK's reserve balances data are seasonally unadjusted.2. UK's money supply and bank lending data exclude intermmediate f inancial institutions.3. Base money's f igures of Eurozone are seasonally adjusted by Nomura Research Institute.

Source: Nomura Research Institute, based on FRB, ECB and Bank of England data.

US-likemonetary

easingwould allow

ECB tosupply 1.3tril. worth ofadditionalliquidity.


28/35

Exhibit 27. European Banks Are Already on Credit-Crunch Mode

27

-20

-10

0

10

20

30

40

50

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(D.I.)

more banks tightning credit standardscompared to 3 months ago

more banks easing credit standardscompared to 3 months ago

large sized firms

small and medium-sized firms

Source: Nomura Research Institute, based on ECB, The Euro Area Bank Lending Survey.Note: D.I. are calculated f rom the answers to the question, "Over the past three months, how have your bank's credit standards asapplied to the approval of loans or credit lines to enterprises changed?"

D.I. = ("Tightened considerably" + "Tightened somewhat" 0.5) - ("Eased somewhat"0.5 + "Eased considerably")

0

Lending Attitudes of Euro-zone Banks

?


29/35

Exhibit 28. Sustaining Fiscal Stimulus in Democracy

during Peacetime Is Difficult

28

Authoritarian Democracies

No opposition "Bond market might rebel"

(if any, quickly suppressed) "Big Government is BAD Government"

"Wasteful spending"

"Monetary Policy should work better""Aging Population"

"Should not use grand-children's credit card"

"Structual Reform is what is needed"

"Republicans, Tea Party types

and Blue Dog Democrats (U.S.)"

"Need to beg Chinese to buy more Treasuries (U.S.)".

.

.


30/35

Exhibit 29. Exit Problem (I): Japanese Corporates

Increased Savings Again After Lehman

29



Corporate: 4.94%Households: 1.45%



-18

-15

-12

-9

-6

-3

0

3

6

9

12

15

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 07 08 09 10 11

(Financial Deficit)

(Financial Surplus)


Households

Rest ofthe World


Financial Sector)

General Government


Note: For the latest figures, 4 quarter averages ending with 3Q/11' are used.Sources: Bank of Japan, Flow of Funds Accounts, and Government of Japan, Cabinet Of fice, NationalAccounts

Balance Sheet Recession GlobalFinancial

Crisis


31/35

Exhibit 30. Exit Problem (II): German Private Sector Refused to

Borrow Money after 1999-2000 Telecom Bubble

30

-10

-8

-6

-4

-2

0

2

4

6

8

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Balance Sheet

Recession

(Financial Surplus)

(Financial Deficit)


GeneralGovernment

Households

Sources: Deutsche Bundesbank, Federal Statistical Office GermanyNote: The assumption of Treuhand agency's debt by the Redemption Fund for Inherited Liabilit ies in 1995 is adjusted.

Rest of the World


Telecom Bubble

Corporate Sector

(Non-Financial Sector +Financial Sector)

Shift from 2000to 2005

in private sector:12.06% of GDPCorporate: 9.26%

Households: 2.80%

Shift from 2000to 2005

in public sector:4.62% of GDP


32/35

Exhibit 31. Exit Problem (III): U.S. Took 30 Years to Normalize

Interest Rate after 1929 Because of Private Sector Aversion to Debt

0

1

2

3

4

5

6

7

8

9

1920 212223 242526 272829 30313233 3435 363738 394041 424344 454647 484950 515253 545556 575859 60

US government bond yieldsPrime BA, 90daysUS government bond yields 1920-29 average (4.09%, June 1959)Prime BA, 90days 1920-29 average (4.13%, September 1959)

Oct '29 NY Stock

Market CrashJun '50 Korean

War

Dec '41 Pearl

Harbor Attack

(%)

'33

New Deal

Source: FRB, Banking and Monetary Statistics 1914-1970 Vol.1, pp.450-451 and 468-471, Vol.2, pp.674-676 and 720-727

31


33/35

Exhibit 32. Recovery from Lehman Shock Is NOT Recovery from

Balance Sheet Recession

32

Source: Nomura Research Institute

?

Lehman Shock

Actual GDPPath

Current Location

Likely GDP Pathwithout Lehman Shock

Weaker Demand

from Private SectorDe-leveraging

Stronger Demandfrom Government's

Fiscal Stimulus

(A)

(B)

Economic weaknessfrom private-sector

de-leveraging

Economic weaknessfrom policy mistakeon Lehman

BubbleBurst


34/35

-400

-300

-200

-100

0

100

200

300

400

500

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Korea

Taiwan

China (including Hong Kong)

China (excluding Hong Kong)

( bil. Seasonally adjusted, 3 months moving average)

Source: Nomura Research Institute, based on Ministry of Finance, Japan, Trade StatisticsNote: Seasonal adjustments by Nomura Research Institute.

(Surplus)

(Deficit)

Earthquake

Exhibit 33. Before the Earthquake, Japan Was Running Increasingly

Larger Trade Surpluses even with Strong Yen

33

Japans Trade Balances with Korea, Taiwan and China


35/35

Exhibit 34. Industrial Production Fell to the Level of 1987

after the Earthquake

65

70

75

80

85

90

95

100

105

110

115

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Note: Forecasts are calculated from METI's survey on planned p roduction.Sources: Ministry of Economy, Trade and Industry (METI), and Ministry o f Health, Labour and Welfare

Job offers to applicants ratio(left scale)

(Seasonally adjusted, 2005=100)(Seasonally adjusted)

Industrial production (right scale)

Last seenin 1987

Lowest on record

Last seen in 1983

Last seenin 2003

forecast

Last seen in 2002

richard koo foreign press slides (january 2012)

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