Japan Economic Recovery from the lost Decade: Presented by: Cicik Yuniarsih, Gek Hsien Tang & Yosamartha Towards Stability or Volatility
AGENDA The Lost Decade Has Japan recovered? Policy Proposals
Japan s Economy: Three Phase of Economic Growth Real GDP (Trillions Yen) 6000 5000 4000 3000 2000 1000 0 Average GDP growth 3.9% Equity price rose > 5 X JLPI* increased > 3 X Japan s Real GDP and GDP growth from 1981 to 2006 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 High Grow th Decade Lost Decade Recovery and Sustainability? Real GDP GDP Growth? 8 6 4 2 0-2 -4 GDP Growth (%) Average GDP growth 0.9% *Japan Land Price Index
The Lost Decade: Initial Phase Japan s Exchange Rate and Current Account 100.0 350 CA (billions of US $) 80.0 60.0 40.0 20.0 - (20.0) 197919801981198219831984198519861987198819891990 Current Acc. Y/$ 300 250 200 150 100 50 0 Yen Japan / US Dollar Bursting the bubble Appreciation of Japanese Yen Sharp drop in the current account to 49% Aggressive monetary policy during the boosting economic growth made the economy overheated
The Lost Decade: Collapse of The Bubble Japan s Indexes of Consumer Prices, Stock Prices and Commercial Land Prices (1980=100) 540 440 340 240 140 40 80 82 84 86 88 90 92 94 96 98 00 02 04 06 Consumer Prices Stock Prices (Nikkei 225) Japan Comm. Land Stock price plummeted to almost 60% Land Index dropped by 36% Banking system lost credibility Negative Investment Growth (-16%)
Ineffective Monetary & Fiscal Policy Monetary policy expansion (MS ) Permanent increase in money supply S DD1 DD2 Output Growth Liquidity Trap No Exp.Inflation AA3 Massive Fiscal policy Y1Y2 AA1 Increased Government Spending Tax Cut AA2 Output Small Economy Effect
Has Japan Recovered? Japan s Macroeconomic Indicator
Has Japan Recovered? Average 1980-1990 1991-2000 2001-2007 Growth GDP 3.9 1.3 1.5 CA (Billions USD) 42.2 106.9 140.8 Inflation 2.6 0.8-0.27 Exchange Rate 195.0 115.1 116.5 Interest Rate 4.7 1.4 0.2 Positive GDP growth : +, 1.53% Exchange rate, interest rate and inflation : relatively stable CA Inflation expectation Negative Interest rate 0% Deflation (on average) Consumer & business confidence (mixed) Mixed Recovery
Improving Current Account Yen Depreciation (1.2%) Japan s goods relatively less expensive more export & less import CA improved (32%) GDP improved CA improve majority from Net Factor Payment Income from FDI or Portofolio? equity or debt?
Int l Investment Position *In Billions USD High saving country Gap wider since lost decade
Int l Investment Position Asset 1600 Liabilities Japanese asset, mostly in portfolio (debt) Gov t bond return diff = 3.5% on average 1200 800 Foreign asset in Japan, since 2004 mostly in portfolio (equity) 400 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
GDP Composition & Share Driven by: Government exp Private consumption Export
Policy Proposal Propose a mild monetary expansion policy Increase/Sustain output through expanding money supply Offset to a mild extent the larger appreciation of yen which may hurt economic recovery
Monetary Policy How is today s situation different from the Lost Decade? Liquidity Trap Liquidity trap is less apparent (interest rate at 0.75% today Confidence Levels by Japanese businesses and Japanese consumers But this confidence is eroding because of US subprime crisis
Monetary Policy Expectations of inflation (global inflation wave) Bring forward consumption to avoid rising prices in future, boost AD. Policy reforms carried out during Lost Decade taking effect More flexible labor market More stringent regulatory controls over Japanese banks Privatization of government companies ie Postal Service
Constraints A monetary contraction would be a worse off policy proposal as it would worsen yen s appreciation and reduce output levels But a mild expansionary monetary policy has limitations If consumer and business optimism erodes due to US subprime uncertainty Yen s movements is counter balanced by external factors i.e. a larger depreciation of US dollar Unstable political situation (saga over the appointment of Chief of BOJ)
Fiscal Policy Little room for fiscal expansionary policy Large government debt and budget deficit Deficit at 29.7 trillion yen (148% of GDP) Narrowing due to increased tax revenue But ageing population -> higher social spending Japan s MOF intent is to reduce this fiscal deficit Demand for Japanese exports in emerging markets has grown (i.e. China s growing appetite)
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