Economic Development of Japan

1
Economic Development of Japan
No.13 The Bubble Burst and Recession
2
P.202
Nikkei Stock Average 225
Urban land price index Source Japan Real Estate
Institute
3
P.205
2010 prel.
GDP
After the bubble, economy looked up in 1996-97,
2000, 2003-07, 2010. Economy fell in 2008-09 due
to global Lehman Shock, which had greater
macroeconomic impact than the earthquake.
Inventory
Industrial Production Base year 2005
Shipment
Production
2010
2009
2008
2011
4
The Heisei Bubble (Economic Boom in late 1980s)
PP.202-203

• Causes
• Structuralbank deregulation and the loss of
  large corporate borrowers in the early 1980s led
  banks to overlend to risky borrowers (SMEs, real
  estate developers) without proper risk
  management.
• Monetaryas the yen rose sharply after 1985, the
  Bank of Japan injected liquidity to counter it
  and ease endaka fukyo (high-yen caused
  recession). This led to asset bubbles without
  igniting inflation.
• Consequences
• Excess investment in properties,
  over-expansion in capacity, lavish consumption,
  rise in outward FDI

5
Japans Lost Decade (early 1990s-early
2000s)Why Did the Recession Last So Long?
P.206

• Long adjustment after a large asset bubble
• Non-performing loans (late policy response)
• Japans economic system became obsolete ()
• Aging population and associated problems
  (pension, medical care, dissaving, etc) ()
• Snowballing fiscal debt ()
• Peoples lack of confidence in the future or
  policy ()
• The China challenge ()
• Lack of political leadership to propose
  solutions, convince people, and implement actions
• () True even today

6
PP.207-210
Policy Issues for the Bank of Japan

• Non performing loans
• --Jusen problem failure of nonbanks specializing
  in real estate loans (1995-96)
• --Bankruptcies of Yamaichi Securities Hokkaido
  Takushoku Bank credit crunch and mini bank runs
  (1997-98)
• --Bank recapitalization public money injection,
  creation of Financial Services Agency (1998-2000)
• Monetary policy for recovery
• --Injecting liquidity by buying up unconventional
  assets (corporate bank bonds, etc) but the
  monetary transmission mechanism was broken
  (MB?Money?Lending)
• --Zero interest rate policy (Feb.1999-Aug.2000
  Mar.2001-Jul.2006 Dec.2008-)
• --Inflation targeting (debated but not adopted)
• --Foreign exchange intervention to prevent yen
  appreciation (but without aggressive yen
  depreciation)

7
Call rate (interbank short-term interest rate)
Bubble
Zerointerest ratepolicy
Money bank lending
Excess reserves are built up during zero interest
rate periods
8
Yen/USD
International Reserves
Monthly Changes in International Reserves(Proxy
for F/X intervention)
Buy Dollar (resist yen appreciation)
Sell Dollar (resist yen depreciation)
Source McKinnon (2007)
9
Credit Trust BankLong-term Credit
BankHokkaido Takushoku BankChuo Trust
BankMitsui Trust BankSumitomo Trust BankDaiwa
BankSaitama BankKyowa BankYasuda Trust
BankIndustrial Bank of JapanFuji BankDaiichi
Kangyo BankSumitomo BankTaiyo Kobe BankMitsui
BankToyo Trust BankTokai BankSanwa BankJapan
Trust BankMitsubishi Trust BankBank of
TokyoMitsubishi Bank
Bankrupted
AozoraShinsei
(Merged)
Bankrupted
Chuo Mitsui Trust
Mitsui Sumitomo Trust Holdings
Daiwa
Risona Holdings
Asahi
Saitama Kyowa
Mizuho Asset Trust
Mizuho Financial Group
Mizuho
Mitsui Sumitomo
Mitsui Sumitomo Financial Group
Taiyo Kobe Mitsui
Sakura
UFJ
Mitsubishi UFJ Financial Group
Mitsubishi Tokyo
10
Debate on Fiscal Stimuli
PP.211-212

• Since the 1990s, large fiscal spending has been
  used to stimulate the economy. But there was no
  strong recovery, while the government debt
  skyrocketed.
• Some argued for even bigger stimuli others said
  that would only worsen the debt crisis.

Government debt in of GDP

• PM Koizumi (2001-06) set limits on spending
  (infrastructure, welfare).
• PM Aso (2008-) and DPJ (2009-) returned to big
  fiscal spending.

Bubble burst
?LDP
DPJ?
Abe
Fukuda
Koizumi
Aso
Hatoyama
Kan
11
Recovery, Global Recession, Recovery

• Main causes of recovery (2003-2007)
• --Strong foreign demand (US, China)
• --Decade-long corporate restructuring effort
• --Yen depreciation (up to 2007)
• ? Recovery was not mainly due to reforms or good
  macro policies
• Global financial crisis (late 2008-2009)
• Traditional industrial exports (cars,
  electronics) which led recovery suddenly lost
  export markets.
• Thanks to strong demand in China and other
  emerging economies, growth picked up in 2010
  (gt2?)
• Remaining issues
• Agriculture, services, distribution, finance
  remain uncompetitive.
• Long-term problems remain unsolved - fiscal
  crisis, pension medical reforms, aged society,
  new energy)
• Koizumi deregulation liberalization increased
  income gaps and created new poors (working poor
  ?Haken Giri).

12
Politics The End of the 1955 Regime?
?
LDP dominance based on rural expenditure and
support
Two party politicswith clear policy choicefor
voters

• The last three Liberal Democratic Party (LDP)
  governments were weak and unpopular (Abe, Fukuda,
  Aso).
• In July 2007 election, opposition seized majority
  in the Upper House--twisted politics causes
  confrontation and slowdown
• In Aug. 2009 election, the Democratic Party of
  Japan (DPJ) took over the Lower Houseend of the
  1995 Regime?
• In July 2010, DPJ lost the Upper House weak
  leadership, political mishandlings? Twisted
  politics again.
• Weak leadership continues popular discontent
  with random measures over tax, growth, earthquake
  relief and nuclear power.

13
Earthquake and Nuclear Disaster in
2011Immediate impact and issues

• Earthquake relief budget is expected about 10-20
  trillion yen or 2-4 of GDP (excl. atomic power
  related costs). In 1995, the Kobe earthquake cost
  3 trillion yen.
• Debate over funding tax increase, debt issue or
  cutting unnecessary spending (small saving?). But
  fiscal problem is caused not mainly by earthquake
  but by social welfare explosion.
• Growth impact of earthquake may be neutral
  output loss offset by private public investment
  for recovery. Supply chain disruption is ending
  and sharp recovery is visible.
• Government (PM Kan)s handling of reconstruction
  plan, radiation problem, power shortage future
  energy policy is random and inconsistent.
  Businesses fear loss of competitiveness and
  domestic production base due to political risk.

14
Crisis Management Learning from International
Best Practices
Headquarters
TF1
TF2
TF3
TF4
TF5
TF6
Victim support
Transport logistics
Relief funds volunteers
Nuclear accident
Power shortage
Long-term reconstruction plan

• Emergency management headquarters (headed by PM)
  and taskforces should be established within a few
  days.
• HQ should have daily meetings to hear reports and
  give orders to TFs. PM should be the hub of
  coordination and dissemination of information and
  policy directions.
• TFs should be made up of officials experts.
  Relevant ministry should be the secretariat.
  Unresolved problems and multi-sectoral issues
  should be taken up to the HQ meeting.
• Workload should shift from TF1-5 (immediate
  problems) to TF6 (reconstruction plan) over time.
  Recovery reconstruction vision must be declared
  within one month followed by detailed roadmaps
  and action plans within 3-6 months.

15
MOVIE GO!!!! TO THE BUBBLE (2007)
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The Concept of MonozukuriJapanese Style
Skill-based Manufacturing

• Monozukuri means making things in native
  Japanese.
• Pursuit of high quality and customer satisfaction
  as the primary goal with pride and dedication
  profits or balance sheets a secondary
  consideration.
• Features long-term relationship and skill
  knowledge building within companies and among
  companies.
• Strong demand for 5S, QCD, kaizen, quality
  control (QCC TQM), and other efforts for
  constant improvement.

17
Business Architectures
Performance
Takahiro Fujimoto (Tokyo Univ)
Time
Time
18
Basic Classifications of Product-Process
Architecture
Modular architecture one-to-one correspondence
between functional and structural
elements Integral architecture many-to-many
correspondence between the functional and
structural elements
Computing
PC
Projection
Projector
Printing
Printer
PC System
Body
Handling
Suspension
Ride
Engine
Fuel Efficiency
Automobile
Open architecture mix and match of component
designs across firm Closed architecture mix and
match only within a firm
C Takahiro Fujimoto, University of Tokyo
19
Three Basic Types of Product Architecture
(1) Closed-integral , (2) Closed-modular, (3)
Open-modular
Closed-Integral
Open-Modular
C Takahiro Fujimoto, University of Tokyo
20
Predictions on Architecture-based Comparative
Advantage Japanese firms -- integration
capability More competitive in products with
closed-integral architecture. based on
integration-based manufacturing
capability Chinese firms mobilization
capability More competitive in labor-intensive
products with open-modular (or quasi-open)
architecture Korean (large) firms
concentration capability More competitive in
capital-intensive products with modular
architecture (moving toward integral?) ASEAN
firms labor-retaining capability?? More
competitive in labor-intensive products with
closed-integral architecture? U.S. firms
conceptualization capability More competitive in
knowledge-intensive products with open-modular
architecture European firms expression
capability More competitive in closed-integral
products based on brand-design-marketing
capability --- What about Vietnam??
C Takahiro Fujimoto, University of Tokyo
21
Architectural Geopolitics A Prediction in the
Pacific Region
Integral Axis
Japan
Korea
Taiwan
US
Modular Axis
China (south)
Vietnam?
C Takahiro Fujimoto, University of Tokyo
22
Prof. Fujimoto at Vietnams Ministry of Industry,
Jun.11, 2007

Japan 2005
Vietnam 2005
Male
Female Male
Female
Source US Census Bureau, International Database.
Unit million