1

Structural Roots of Japan’s Malaise

Richard Katz

The Oriental Economist Report

Rbkatz@ix.netcom.com

Brookings Institution

April 9, 2002

2

I. How Bad Is It?

3

Private Recovery Never Happened

95

100

105

110

115

90 91 92 93 94 95 96 97 98 99 00 01

Ind

ex

(199

1-Q

1 =

100)

95

100

105

110

115

Private Domestic Demand

Total GDP

4

Five-Year Growth Turning Negative

-1%

0%

1%

2%

3%

4%

5%

6%

74-78

76-80

78-82

80-84

82-86

84-88

86-90

88-82

90-94

92-96

94-98

96-00

98-02

5-y

ear

GD

P g

row

th a

vera

ge

-1%

0%

1%

2%

3%

4%

5%

6%

5

Japan’s Lost Decade vs. Others’

0.0% 0.5% 1.0% 1.5% 2.0% 2.5%

Sw itz.JAPANFinland

Sw edenSpain

GreeceCanadaHolland

ItalyFrance

U.S.UK

BelgiumNorw ay

Ireland

Average per capita GDP growth during worst 11-year period

6

Share of Rich Country GDP Falls

4%

5%

6%

7%

8%

9%

1975 1980 1985 1990 1995 2000* 2005* 2010*

Sh

are

of

Wo

rld

GD

P

Actual Forecast

7

Japan Share of World Exports Down

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1960 1965 1970 1975 1980 1985 1990 1995 2000* 2005* 2010*

% o

f W

orl

d E

xpo

rts

Actual Forecast

8

Slow Income = Slow Spending

80

85

90

95

100

105

90 91 92 93 94 95 96 97 98 99 00 01

Ind

ex,

199

7 =

100

(in

re

al 1

995

yen

)

80

85

90

95

100

105

Employee Compensation

Personal Consumption

9

ZIRP Erodes Household Income

0%

2%

4%

6%

8%

10%

12%

80 84 88 92 96

Sh

are

of

Nat

ion

al In

com

e

0%

2%

4%

6%

8%

10%

12%

Interest payments

Gross Interest Income

Net Interest Income

10

Excess Capacity = Weak Investment

1.8

2.0

2.2

2.4

2.6

2.8

3.0

1976 1980 1984 1988 1992 1996

Cap

ital

:GD

P R

atio

(19

90 y

en)

1.8

2.0

2.2

2.4

2.6

2.8

3.0

1976-90 Trend Line

Gap

Gap = 179 Tril. Yen = 13% of capital stock = 37% of GDP

11

Investment Still Below 1991 Peak

12%

14%

16%

18%

20%

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01

Inve

stm

ent,

% o

f re

al G

DP

12%

14%

16%

18%

20%

12

II. The Causes

13

Lost GDP: ¾ Supply, ¼ Demand

-25%

-20%

-15%

-10%

-5%

0%

5%

1988 1990 1992 1994 1996 1998 2000*

% o

f P

ote

nti

al G

DP

Demand Gap Demographic Gap Supply Gap

The horizontal zero line shows where GDP would be if 1975-90 growth had continued. Grey area shows lost GDP due to demand shortfall. Black area shows lost GDP due to slowdown in potential growth—not counting slowdown in labor force growth which is shown in diagonal stripes.

14

Competition in Efficient Sectors...

0%

5%

10%

15%

20%

25%

30%

35%

40%

73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90

Mar

ket

Sh

are:

Inte

gra

ted

Cir

cuit

s

NEC HItachiToshiba Matsushita ElectronicsMItsubishi Electric FujitsuSharp

15

...But Not in Inefficient

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

77 78 79 80 81 82 83 84 85 86 87 88 89 90

Mar

ket

Sh

are:

Po

lyet

hyl

ene

film

Okura Kogyo Sekisui ChemWada Chem Ind Nakagaw a SeitaikakoTakigaw a kagaku

16

Low Trade Means Low Productivity

Textiles

Chemicals

Metals

Other Mfg.

Machinery

Food

R2 = 0.64

0%

20%

40%

60%

80%

100%

120%

0% 5% 10% 15% 20% 25%

Trade Openess Ratio

Pro

du

ctiv

ity

Rel

ativ

e to

U.S

.

17

More Imports Leads to Higher Productivity Growh

Textiles

MachineryChemicals

Other

Metals

Food R2 = 0.48

0%

1%

2%

3%

4%

5%

6%

0% 1% 2% 3% 4% 5% 6%

Change in Import Ratio, 91-97

Ch

ang

e in

GD

P P

er W

ork

er, 9

1-97

18

Low Consumption From Low Income

57%

59%

61%

63%

65%

67%

78 80 82 84 86 88 90 92 94 96 98 00*

Wag

es, I

nte

rest

, Div

iden

ds

(% o

f G

DP

)

57%

59%

61%

63%

65%

67%

Nominal

Inflation-Adjusted

19

Chronic Excess Business Savings

-6%

-3%

0%

3%

6%

9%

12%

1970 1974 1978 1982 1986 1990 1994 1998

Sav

ing

s o

r B

orr

ow

ing

as

% o

f G

DP

Net Household Savings

Net Corporate Borrowing to Invest

Excess Savings

20

III. Banking Crisis

21

NPLs Keep Rising . . .

0%

4%

8%

12%

16%

Mar-93 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01

% o

f To

tal L

oan

s

Current NPLs

Cumulative NPLs

22

... As Banks Slacken on Disposal

0%

10%

20%

30%

40%

50%

60%

Mar-93 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01

% o

f C

urr

ent

NP

Ls

New Writeoffs Outstanding Reserves

23

Non-Performing Borrowers

% of Total Corporate Debt(Divided According to Firm Profit:Debt Ratio)

4%8%

4%

9%

7%

8%

3%6%7%

14%

6%

24%

<0 <1

<2 <3

<4 <5

<6 <7

<8 <9

<10 >10

Profits as % of Debt

24

Govt Guarantee of Private Loans

0

2

4

6

8

10

12

71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01

25

IV. Fiscal and Monetary

26

Lost Taxes At Heart of Deficit

0

10

20

30

40

50

60

70

80

90

100

90 91 92 93 94 95 96 97 98 99 00 01* 02*

Trill

ion

Yen

0

10

20

30

40

50

60

70

80

90

100

Tax Revenue

Govt. Spending

27

ZIRP Enables Govt to Fund Debt

0

50

100

150

200

250

300

350

400

75 77 79 81 83 85 87 89 91 93 95 97 99 01

Trill

ion

yen

0

5

10

15

20

25

Total Govt Bonds Outstanding (left scale)

Govt Interest Payments (right scale)

28

Koizumi Budget: Asking For Trouble

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

92 93 94 95 96 97 98 99 00 01* 02*

Ch

ang

e in

Bu

dg

et D

efic

it, %

of

GD

P

-2%

-1%

0%

1%

2%

3%

4%

GD

P G

row

th R

ate

GDP

Change in Deficit

Since stimulus operates with a lag, the chart shows how changes in GDP follow from changes in the deficit one year earlier. 1998 shows GDP growth in 1998 and budget change in 1997.

29

BOJ Printing Money; Economy Not Responding

-2%

0%

2%

4%

6%

8%

10%

80-I to 91-I 91-I to 93-I 93-I to 97-I 97-I to 98-IV 98-IV to 01-IV

An

nu

al G

row

th R

ate

Monetary Base Money Supply Real GDP Nominal GDP

30

Deflation Symptom of Weak Demand

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

De

man

d--

Su

pp

ly G

ap (

1-ye

ar la

g)

-3%

-2%

-1%

0%

1%

2%

3%

GD

P D

efl

ato

r

Deflator

Demand-Supply Gap

31

V. Weak Yen No Panacea

32

Shrinking Share of Global Surplus

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99

Su

m o

f T

rad

e S

urp

lus

es

--

$ U

.S. b

illio

n

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

Japan

Other Surplus Countries

33

Shrinking Share of U.S. Deficit

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001*

U.S

. Tra

de

De

fici

t, $

bill

ion

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

Japan

Rest of World

34

Yen and Stocks Move in Tandem

8,000

12,000

16,000

20,000

24,000

1996 1997 1998 1999 2000 2001 2002

Nik

ke

i In

de

x

95

105

115

125

135

145

Ye

n/$

rat

e

Yen/$ rate (right)

Stock index (left)