Lost Decade in Japan Lost Decade (失われた10年, Ushinawareta Jūnen) After Japanese asset price bubble’s collapse 1991~ 2000 Joohee Kang Dongwha Shin Jordan Kerneis Youna Chang

Contents “Lost of Decade in Japan” Background Causes Consequences Responses & Lesson

1980s The strong economic growth Japan had the world's second largest gross national product (GNP)

Since the end of Cold War 1989 Economic Bubble The strong economic growth of 1980s ended. Abnormalities had fuelled a massive wave of speculation by companies, banks, and securities companies.

1990s ~ High land values and low interest rate -> credit ↑ -> interest rate ↓ -> massive borrowing -> raised interest rates -> terminated the bubble -> massive crash in stock market -> debt crisis -> crisis in banking sector ->…

(continued) 1990s ~ -> many banks had to be bailed out by the gvrn. -> wave of consolidation -> Japanese firms were burdened with massive debts, -> difficult to obtain credit -> official interest rate : 0% -> credit is still difficult to obtain -> LOST DECADE

The Bubble and Burst GENERAL OVERVIEW : Japanese “bubble economy” Source : Bank of Japan As can be seen from figure 1 1989 the highest real GDP growth rate of 6.4 percent. And then the data clearly shows a sudden drop in GDP growth rates after 1991 from 5.6 percent to 2.4 percent the following year and 0.5 percent the year after, leading to -0.7 percent in 1999. So it shows bubble economy in Japan.

The Bubble and Burst Source: Bank of Japan And second figure shows that urban real estate prices in Japan’s six largest cities tripled.

The Bubble and Burst Source: Bank of Japan Also Nikkei average index of stock prices tripled in value from 1985 to the end of 1989. At the peak of the bubble the Japanese society believe the land price in Japan only soar but 1991 figures tells a different story.

Major causes of the bubble burst Financial deregulation The acquirement of differing financing options for corporations. Lessening dependency on banks for funding. Source: Bank of Japan One of key factors of bubble is financial deregulation. Financial deregulation prompted the acquirement of differing financing options for corporations, lessening their dependency on banks for funding. In the 1980s the Japanese banks shifted their main target of credit supply from manufacturing to non-traded-goods industries like real estate and finance etc. So in this table shares of bank credit to the manufacturing sector fell from 49.7 percent to 14.9 percent between 1960 and 1995. Contrary the real estate, finance, construction and other service sectors increased their shares largely since 1980.

Major causes of the bubble burst B. Asset price Deflation The Bank of Japan’s discount rate Monetary Policy Source: Bank of Japan The bank of Japan’s official discount rate was halved to 2.5 percent between the end of 1985 and early 1987 and remained for two years, despite the enormous growth of assets. MOF believe these price levels would eventually decline. But total bank assets declined dramatically so the government monetary policy was tightened sharply from May of 1989. the official discount rate being raised to 6 percent by August 1990 from its peak at the end of 1989.

Major causes of the bubble burst C. Non-performing loans : A non-performing loan is a loan that is in default or close to being in default. Eg. Loans to industries with land as their collateral became non-performing. Loans directly for stock market activity became non-performing. Loans for real estate development became non-performing. So it leads to the bad-loan problem of Japanese banks.

Major causes of the bubble burst D. Investment public investment Private fixed investment Source: Bank of Japan The collapse of the asset price bubble was followed by a sharp decline in domestic demand. Especially investment by small medium sized firms had been particularly affected.

Consequences on Japan Institutions and individuals large losses Bankrupt of companies and institutions Many loans were unpaid Repatriation of foreign investements No more confidence on the japanese market Volatility of the financial market

Consequence on Japan Loss of confidence from the investor and households Loss of credibility in the economic system Unemployement (cf : graph 1) Bad loans repercution on banks ( cf : graph 2)

Graph 1

Graph 2

To sum up the consequence • Inefficient allocation of resources • Delay of economic restructuring due to speculative investment • Economic recession • Bad loans & credit crunch • Low consumer confidence

Responses of Japan Government & Bank of Japan BOJ boosted discount rate(1990) Cut first discount rate(1991) Did additional rate cut – 1.75% (1993) Pursued large stimulus packages(1992-93)

Responses of Japan Government & Bank of Japan Another two major fiscal stimulus packages (1994, 1995) Sharp interest rate reduction(1995)-0.5% Sizeable public work programs Ignored deflation Raised consumption tax rate

Lesson of Japan’s Lost Decade Confront the problems by drop in the real estate markets Reform financial system -Transparency -Accountability -Globalization Do not allow Deflation

Lesson of Japan’s Lost Decade Avoid raising Taxes More consideration of debtor’s credit risk Allocate resources efficiently Independence of National Bank

Conclusion on Lost Decade Boom Collapse of bubble Long Depression