Rebuilding of the European and US Economy and Japan. Richard C. Koo Chief Economist Nomura Research Institute Tokyo January 2012

Transcription

1 Rebuilding of the European and US Economy and Japan Richard C. Koo Chief Economist Nomura Research Institute Tokyo January 212

2 Exhibit 1. US Housing Prices Are Moving along the Japanese Experience (US: Jan. 2=1, Japan: Dec. 1985=1) US: 1 Cities Composite Home Price Index Japan: Tokyo Area Condo Price 1 Futures Composite Index Futures Japan: Osaka Area Condo Price US Japan Note: per m 2, 5-month moving average Sources: Bloomberg, Real Estate Economic Institute, Japan, S&P, S&P/Case-Shiller Home Price Indices, as of Jan. 11, 212 1

3 Exhibit 2. US Commercial Real Estate Prices Also Falling to Japanese Levels 11 (peak = 1) 1 US: Commercial Property Price Index Down 42.% from Peak Japan: Commercial Land Price Index in Six Major Cities "Pretend & Extend" US Japan Note: Peak of US Prices: Oct. 27, Peak of Japanese Prices: Sep Source: Nomura Research Institute, based on Moody's/Real Estate Analytics and Japan Real Estate Institute 2

4 Exhibit 3. Drastic Rate Cuts Have Done Little to Revive Employment or House Prices 8 (%) 7 Australia 6 UK EU US Japan Sources: BOJ, FRB, ECB, BOE and RMB Australia. As of Jan. 11,

5 Exhibit 4. US Economy Is still a Long Way from Previous Peak 13 (27=1, Seasonally adjusted) (%, Seasonally adjusted, inverted) Unemployment Rate (right scale) Industrial Production (left scale) Last seen in Unemployment rate: Last seen in Industrial Production:Last seen in Sources: US Department of Labor, FRB 4

6 Exhibit 5. Euro-Zone Economy Is still a Long Way from Previous Peak 115 (Seasonally adjusted, 25=1) (%, Seasonally adjusted, inverted) Unemployment Rate (right scale) Last seen in Industrial Production (left scale) Last seen in Sources: Eurostat 5

7 Exhibit 6. Except in Germany, Industrial Production in Europe Is still Weak (25 = 1, Seasonally Adjusted) Spain France Italy Germany Level last seen in 27: Germany : France 1993: Italy 1996: Spain Source: Eurostat 6

8 Monetary Base Exhibit 7. Drastic Liquidity Injection Failed to Increase Money Supply (I): US (Aug. 28 =1, Seasonally Adjusted) Money Supply (M2) Loans and Leases in Bank Credit (%, yoy) Consumer Spending Deflator (core) 8/1 8/4 8/7 8/1 9/1 9/4 9/7 9/1 1/1 1/4 1/7 1/1 11/1 11/4 11/7 11/1 Down 25% Sources: Board of Governors of the Federal Reserve System, US Department of Commerce Note: Commercial bank loans and leases, adjustments for discontinuities made by Nomura Research Institute. 7

9 Exhibit 8. Drastic Liquidity Injection Failed to Increase Money Supply (II): EU (Aug. 28 =1, Seasonally Adjusted) Base Money Money Supply (M3) Credit to Euro Area Residents (%, yoy) CPI core 8/1 8/4 8/7 8/1 9/1 9/4 9/7 9/1 1/1 1/4 1/7 1/1 11/1 11/4 11/7 11/1 Sources: ECB, Eurostat Note: Base money's figures are seasonally adjusted by Nomura Research Institute. 8

10 Exhibit 9. Drastic Liquidity Injection Failed to Increase Money Supply (III): UK (Aug. 28 =1, Seasonally Adjusted) 1 Reserve Balances + Notes & Coin Money Supply (M4) Bank Lending (M4) Aug. 8' Down 17% 6 (%, yoy) 5 CPI (ex. Indirect Taxes) /1 7/7 8/1 8/7 9/1 9/7 1/1 1/7 11/1 11/7 Sources: Bank of England, Office for National Statisics, UK Notes: 1. Reserve Balances data are seasonally unadjusted. 2. Money supply and bank lending data exclude intermmediate financial institutions. 9

11 Exhibit 1. Drastic Liquidity Injection Failed to Produce Drastic Increase in Money Supply (IV): Japan 35 3 (199/1Q = 1, Seasonally Adjusted) Monetary Base Money Supply (M2) Quantitative Easing Earthquake 25 Bank Lending 199/1Q 2 15 Textbook Economics (Monetary Policy Effective) Balance Sheet Recession (Monetary Policy NOT Effective) Down 41% (y/y, %) CPI Core Note: Bank lending are seasonally adjusted by Nomura Research Institute. Source: Bank of Japan 1

12 Exhibit 11. Japan s De-leveraging with Zero Interest Rates Lasted for 1 Years Funds Raised by Non-Financial Corporate Sector (% Nominal GDP, 4Q Moving Average) (%) 25 2 CD 3M rate (right scale) Borrowings from Financial Institutions (left scale) Funds raised in Securities Markets (left scale) Debt-financed bubble (4 years) Balance sheet recession (16 years) Sources: Bank of Japan, Cabinet Office, Japan 11

13 Exhibit 12. Japan s GDP Grew in spite of Massive Loss of Wealth and Private Sector De-leveraging 14 (Sep. 199=1) (Sep.199=1, Seasonally Adjusted) Real GDP (Right Scale) Nominal GDP (Right Scale) Likely GDP Path w/o Government Action 1 85 Cumulative 9-5 GDP Supported by Government Action: ~ 2 trillion Last seen in Land Price Index in Six Major Cities (Commercial, Left Scale) down 87% Cumulative Loss of Wealth on Shares and Real Estate ~ 15 trillion Sources: Cabinet Of f ice, Japan Real Estate Institute 12

14 Exhibit 13. Japanese Government Borrowed and Spent the Unborrowed Savings of the Private Sector to Sustain GDP 11 (Tril. yen) 1 Government spending Bubble Collapse Tax revenue cumulative cyclical deficit trillion overall deficit 46 trillion Source: Ministry of Finance, Japan Note: FY 211 includes 4th supplementary budget and FY212 is initial budget. 13

15 Exhibit 14. Premature Fiscal Reforms in 1997 and 21 Weakened Economy, Reduced Tax Revenue and Increased Deficit 8 (Yen tril.) (Yen tril.) Tax Revenue Budget Deficit Hashimoto fiscal reform Obuchi-Mori fiscal stimulus Koizumi fiscal reform Earthquake Global Financial Crisis * 5 unnecessary increase in 4 deficit: 13.3 tril (FY) Source: Ministry of Finance, Japan Notes: Latest f igures(*) are estimated by MOF. From FY211, f igures includes reconstruction taxes and bonds. 14

16 Exhibit 15. US in Balance Sheet Recession: US Private Sector Increased Savings Massively after the Bubble Financial Surplus or Deficit by Sector (as a ratio to nominal GDP, %, quarterly) Households (Financial Surplus) Rest of the World Shift from 4Q 26 in private sector: 9.13% of GDP Corporate: 1.32% Households: 7.81% Corporate Sector (Non-Financial Sector + Financial Sector) General Government -1 IT Bubble Housing Bubble (Financial Deficit) Shift from 4Q 26 in public sector: 7.15% of GDP Note: For the latest figures, 4 quarter averages ending with 3Q/11' are used. Sources: FRB, US Department of Commerce 15

17 Exhibit 16. UK in Balance Sheet Recession: UK Private Sector Increased Savings Massively after the Bubble Financial Surplus or Deficit by Sector 9 (as a ratio to nominal GDP, %) Households (Financial Surplus) 6 3 Rest of the World Shift from 1Q 27 in private sector: 6.77% of GDP Corporate:.88% Households: 5.9% General Government Corporate Sector (Non-Financial Sector + Financial Sector) Shift from 1Q 27 in public sector: 6.45% of GDP -12 (Financial Deficit) Note: For the latest figures, 4 quarter averages ending with 3Q/11' are used. Source: Of f ice f or National Statistics, UK 16

18 Exhibit 17. Global Bond Yields * Nearing Japanese Levels (%) England US Sweden Switzerland Japan Japanese Bond Yield in %.9% *Note: Excluding Eurozone. As of Jan. 12, 212. Source: Bloomberg 17

19 Exhibit 18. Euro-zone in Balance Sheet Recession: Euro-zone Private Sector Increased Savings Massively after the Bubble (as a ratio to nominal GDP, %) Rest of the World Financial Surplus or Deficit by Sector (Financial Surplus) Households Shift from 3Q 28 in private sector: 4.28% of GDP Corporate: 2.81% Households: 1.47% Corporate Sector (Non-Financial Sector + Financial Sector) General Government Shift from 3Q 28 in public sector: 3.99% of GDP (Financial Deficit) Note: For the latest figures, 4 quarter averages ending with 2Q/11' are used. Source: ECB 18

20 Exhibit 19. Euro-Zone Bond Yields Are Diverging Sharply 4 (%) Greece Ireland Portugal Spain Italy France Germany Note: As of Jan. 12, 212. Source: Bloomberg 19

21 Exhibit 2. Spain in Balance Sheet Recession: Spanish Private Sector Increased Savings Massively after the Bubble (as a ratio to nominal GDP, %) Households Financial Surplus or Deficit by Sector (Financial Surplus) Rest of the World Shift from 3Q 27 in private sector: 17.95% of GDP Corporate: 12.54% Households: 5.41% General Government Corporate Sector (Non-Financial Sector + Financial Sector) (Financial Deficit) Shift from 3Q 27 in public sector: 11.93% of GDP Note: For the latest figures, 4 quarter averages ending with 2Q/11' are used. Source: Banco de España 2

22 Exhibit 21. Ireland in Balance Sheet Recession: Irish Private Sector Increased Savings Massively after the Bubble Financial Surplus or Deficit by Sector (as a ratio to nominal GDP, %) (Financial Surplus) Corporate Sector (Non-Financial Sector + Financial Sector) Rest of the World Shift from 27 in private sector: 29.6% of GDP Corporate: 14.99% Households: 14.61% Households General Government Shift from 27 in public sector: 31.2% of GDP (Financial Deficit) Sources: Eurostat, Central Statistics Of f ice, Ireland 21

23 Exhibit 22. Portugal in Balance Sheet Recession: Portuguese Private Sector Increased Savings Massively after the Bubble Financial Surplus or Deficit by Sector 12 (as a ratio to nominal GDP, %) (Financial Surplus) Households Rest of the World Shift from 2Q 28 in private sector: 8.65% of GDP Corporate: 4.7% Households: 3.95% General Government Corporate Sector (Non-Financial Sector + Financial Sector) (Financial Deficit) Shift from 2Q 28 in public sector: 6.21% of GDP Note: For the latest f igures, 4 quarter averages ending with 2Q/11' are used. Source: Banco de Portugal 22

24 Exhibit 23. Balance Sheet Correction in France Was Minimal (as a ratio to nominal GDP, %) Households Financial Surplus or Deficit by Sector (Financial Surplus) Rest of the World Shift from 26 private sector: 3.43% of GDP Corporate: 2.85% Households:.57% General Government Corporate Sector (Non-Financial Sector + Financial Sector) (Financial Deficit) Shift from 26 public sector: 4.71% of GDP Sources: ECB, Eurostat 23

25 Exhibit 24. Balance Sheet Correction in Italy Was Minimal Financial Surplus or Deficit by Sector 12 1 (as a ratio to nominal GDP, %, quarterly) (Financial Surplus) Households Rest of the World Shift from 3Q 28 in private sector: 3.49% of GDP Corporate: 4.53% Households: -1.4% General Government (Financial Deficit) Corporate Sector (Non-Financial Sector + Financial Sector) Shift from 3Q 28 in public sector: 1.9% of GDP Note: For the latest f igures, 4 quarter averages ending with 2Q/11' are used. Sources: Banca d'italia, Eurostat 24

26 Exhibit 25. Balance Sheet Correction in Greece Was Minimal Financial Surplus or Deficit by Sector (as a ratio to nominal GDP, %, quarterly) Households (Financial Surplus) Rest of the World Shift from 2Q 28 in private sector: 1.18% of GDP Corporate: 4.27% Households: -3.9% Corporate Sector (Non-Financial Sector + Financial Sector) (Financial Deficit) General Government Shift from 3Q 28 in public sector: 1.82% of GDP Note: For the latest figures, 4 quarter averages ending with 2Q/11' are used. Sources: Bank of Greece, Eurostat 25

27 Exhibit 26. ECB Facing Balance Sheet Recession Can Supply Large Amounts of Liquidity without Igniting Inflation 35 (Aug. 28 = 1, seasonally adjusted) Monetary Base (=Liquidity) Money Supply Eurozone US UK Eurozone US UK Aug. 28 US-like monetary easing would allow ECB to supply 1.3 tril. worth of additional liquidity Notes: 1. UK's reserve balances data are seasonally unadjusted. 2. UK's money supply and bank lending data exclude intermmediate financial 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. 26

28 Exhibit 27. European Banks Are Already on Credit-Crunch Mode 5 4 (D.I.) more banks tightning credit standards compared to 3 months ago Lending Attitudes of Euro-zone Banks large sized firms 3 2 more banks easing credit standards compared to 3 months ago? 1-1 small and medium-sized firms Source: Nomura Research Institute, based on ECB, The Euro Area Bank Lending Survey. Note: D.I. are calculated from the answers to the question, "Over the past three months, how have your bank's credit standards as applied to the approval of loans or credit lines to enterprises changed?" D.I. = ("Tightened considerably" + "Tightened somewhat".5) - ("Eased somewhat".5 + "Eased considerably") 27

29 Exhibit 28. Sustaining Fiscal Stimulus in Democracy during Peacetime Is Difficult Authoritarian No opposition (if any, quickly suppressed) Democracies "Bond market might rebel" "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.)"... 28

30 Exhibit 29. Exit Problem (I): Japanese Corporates Increased Savings Again After Lehman Financial Surplus or Deficit by Sector (as a ratio to nominal GDP, %) Rest of the World (Financial Surplus) Households Shift from 1Q 29 in private sector: 6.39% of GDP Corporate: 4.94% Households: 1.45% Corporate Sector (Non-Financial Sector + Financial Sector) (Financial Deficit) General Government Balance Sheet Recession Note: For the latest f igures, 4 quarter averages ending with 3Q/11' are used. Sources: Bank of Japan, Flow of Funds Accounts, and Government of Japan, Cabinet Office, National Accounts Shift from 1Q 29 in public sector: 5.78% of GDP Global Financial Crisis 29

31 Exhibit 3. Exit Problem (II): German Private Sector Refused to Borrow Money after Telecom Bubble Financial Surplus or Deficit by Sector (as a ratio to nominal GDP, %) Households (Financial Surplus) Telecom Bubble Shift from 2 to 25 in private sector: 12.6% of GDP Corporate: 9.26% Households: 2.8% -2 Rest of the World Corporate Sector (Non-Financial Sector + Financial Sector) General Government Balance Sheet Recession (Financial Deficit) Shift from 2 to 25 in public sector: 4.62% of GDP Sources: Deutsche Bundesbank, Federal Statistical Of f ice Germany Note: The assumption of Treuhand agency's debt by the Redemption Fund f or Inherited Liabilities in 1995 is adjusted. 3

32 Exhibit 31. Exit Problem (III): U.S. Took 3 Years to Normalize Interest Rate after 1929 Because of Private Sector Aversion to Debt (%) US government bond yields Prime BA, 9days US government bond yields average (4.9%, June 1959) Prime BA, 9days average (4.13%, September 1959) 6 Oct '29 NY Stock Market Crash Dec '41 Pearl Harbor Attack Jun '5 Korean War 5 '33~ New Deal Source: FRB, Banking and Monetary Statistics Vol.1, pp and , Vol.2, pp and

33 Exhibit 32. Recovery from Lehman Shock Is NOT Recovery from Balance Sheet Recession Bubble Burst Lehman Shock Likely GDP Path without Lehman Shock Economic weakness from private-sector de-leveraging (A) Weaker Demand from Private Sector De-leveraging? Economic weakness from policy mistake on Lehman (B) Actual GDP Path Current Location Stronger Demand from Government's Fiscal Stimulus Source: Nomura Research Institute 32

34 Exhibit 33. Before the Earthquake, Japan Was Running Increasingly Larger Trade Surpluses even with Strong Yen Japan s Trade Balances with Korea, Taiwan and China ( bil. Seasonally adjusted, 3 months moving average) Korea (Surplus) Taiwan China (including Hong Kong) China (excluding Hong Kong) Earthquake -3 (Deficit) Source: Nomura Research Institute, based on Ministry of Finance, Japan, Trade Statistics Note: Seasonal adjustments by Nomura Research Institute. 33

35 Exhibit 34. Industrial Production Fell to the Level of 1987 after the Earthquake (Seasonally adjusted) Industrial production (right scale) (Seasonally adjusted, 25=1) forecast Last seen in Job offers to applicants ratio (left scale) Last seen in 23 Last seen in Last seen in 1983 Lowest on record Note: Forecasts are calculated f rom METI's survey on planned production. Sources: Ministry of Economy, Trade and Industry (METI), and Ministry of Health, Labour and Welf are 34