1. THE ECONOMY OF JAPAN 日本経済日本経済

2. Traditional Japan 2 Source: Web Japan & Japanese Consulate General, San Francisco 2

3. Contemporary Japan 3  “Cool Japan”  Japanimation  “KAWAII”

4. http://www.youtube.com/watch?v=i12bIqfRXJM

6. 6 Looking at Some of the Basics Geography Four main islands: Hokkaido (N) Honshu (main island) – Tokyo, Mt. Fuji, Osaka, Hiroshima Shikoku – Rural Kyushu (SW) – Fukuoka, Kagoshima, Nagasaki Most of the population is in Honshu, between the Kanto (Tokyo-Yokohama- Kawasaki) in the east and the Kansai (Kobe-Osaka-Kyoto) in the west Tokyo – Yokohama has almost 25% of the population (over 33 million) Close to 80% of the land is mountainous Japan is poor in natural resources and flat arable land. it depends on imports, for example, for 99.5% of its petroleum

7. 7 Population 127,704,000 (2008) Population Density (per km sq.) 336.1 Population, share of 0-14 years 13.6% Population, share of 15-64 years 65.3% Population, share of 65 and over 21.0% Sex ratio, number of males per 100 female 95.9 Total fertility rate 1.37 (2009) Death rate (number of deaths per 1000 population 9.54 (2009) Infant mortality rate (number of deaths per 1000 live births)) 2.79 (2009) Life expectancy at birth (total population) 82.12 (2009) Life expectancy at birth (male) 78.8 (2009)53 Life expectancy at birth (female) 85.62 (2009) Net migration rate (number of migrants per 1000 population)) 0.00 Various Social Statistics (2008 -9) http://www.stat.go.jp/english/data/handbook/c02cont.htm#cha2_1

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9. Nikkei – Last 5 years 9

10. 10 PACIFIC Exchange Rate Service http://fx.sauder.ubc.ca/plot.html

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12. Japan GDP Growth Rate 12

13. Some Other Interesting Facts Japan now has a far higher percentage of single women between the ages of 20 to 40 than the United States--higher than almost anywhere in the world except Scandinavia. 80% to 90% of single Japanese women live with their parents, as do about half of the men in their 20s. Most pay little or no rent and do no housework. One sociologist estimates that Japan has 10 million "parasite singles"--roughly equal to the entire population of Greece. Q1. What are the economic factors that affect these facts? 13

14. 14 THE “BUBBLE” ECONOMY

15. Bubble Economy (How “Bubbly” Was It?) 1985 -1990 Asset Price Inflation – Stocks - Nikkei hit high of 38,915 on Dec. 31 1989. Keep in mind it did not hit 10,000 until after 1985. – Land and Real Estate Prices – Prices more than doubled from 1987 to 1990. – Real Estate inflation more pronounced in larger cites Consumer prices not significantly affected Rapid economic growth 15

16. 16 Land Prices

17. Japanese Urban Real Estate Prices vs Consumer Price Index Inflation CPI (inflation) Commercial Real Estate —6 largest cities—  18 years!  17

18. Japanese Foreign Investment Expands Matsushita Group (Panasonic) > Universal Studio Sony Group > Columbia Pictures Mitsubishi Estate Group ->Rockefeller Center and Pebble Beach Q. What happened to these investments? 18

19. Looking at the Causes of the Bubble Background – Strong growth in 1980’s and stronger consumer confidence – Financial Deregulation throughout 1980’s. – End of deficit spending by government – Main-bank relationships – Problem with trade deficits (led to Plaza Accord) – Expansionary monetary policy to counter Plaza Accord – Management poised for strong growth – Reaganomics (high interest rates in US) – Belief that Japan was becoming an economic superpower 19

20. The Low Cost of Borrowing Interest rates were effectively 0% Firms over borrowed Projects that earned a mere 0% were approved Banks over lent Collateral or track records were enough – expectation that asset prices would always rise Asset prices proved unrealistic Projects didn’t earn 0% ex post Banks eventually, however couldn’t collect on their loans 20

21. Proportion of Loans to Small Firms 21

22. Proportion of Loans to Real Estate Developers 22

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24. Money Supply 24

25. 25 Other Causes of the Bubble Malfunctioned “Safety Net” Bank of Japan (BOJ) Ministry of Finance (MOF) “Discretionary Guidance” Inefficient Monitoring of Banking System Some Reinforcing Factors Cross-holding share in Keiretsu system Expansion of real estate companies (Jusen)

26. Prolonged Aftermath Impacts – Longest recession in post-war period. – Non-performing Loans – Major Bank Failure and Merges Causes of prolonged slowdown – Delay in recognizing problems and in responses – Uncoordinated Actions Covered Problems – Overprotected banks – Inefficient corporate governance and structure 26

27. Today’s Dilemmas Monetary policy doesn’t work – Interest rates can’t be pushed below 0% – But prices are falling ==> real rates are positive Banks (rightly) fear bad assets – Outstanding loans are shrinking – Little investment – “Liquidity Trap” Fiscal policy is not working – Large government deficits 27

28. Industrial Production Shaded areas are recession periods Production Inventory After the bubble, economy looked up in 1996-97, 2000 & 2003-07. But economy fell again in 2008-09 due to declining global demand. GDP 28

29. Japan’s Lost Decade (early 1990s-early 2000s): Why Did the Recession Last So Long? Long adjustment after a large asset bubble Non-performing loans (late policy response) Japan’s economic system became obsolete (?) Aging population and associated problems (pension, medical care, dissaving, etc) Snowballing fiscal debt People’s lack of confidence in the future The China challenge (vs. “return to Japan”)  Lack of political leadership to propose solutions, convince people, and implement actions 29

30. Non performing loans --Credit crunch and mini bank runs in 1997-1998 --Slow policy response (1998-2000)—creating special agencies and public money injection for bank recapitalization 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-)  creating incentive for “yen carry trade” --Inflation targeting—debated but not adopted --F/X intervention to prevent yen appreciation (but without aggressive yen depreciation) 30 Policy Issues for the Bank of Japan

31. 31 Call rate (interbank short- term interest rate) Money & bank lending Bubble Zero interest rate policy Excess reserves are built up during zero interest rate periods

32. 32 Yen/USD International Reserves Monthly Changes in International Reserves (Proxy for F/X intervention) Source: McKinnon (2007) Buy Dollar (resist yen appreciation) Sell Dollar (resist yen depreciation)

33. Debate on Fiscal Stimuli During the 1990s, large fiscal spending was 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 situation. 33 Government debt in % of GDP Bubble burst PM Koizumi (2001-06) set limits on spending (infrastructure, welfare). PM Aso (2008-) returned to big fiscal spending to combat recession. Koizumi AbeFukuda Aso

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35. From Recovery to Another Recession? 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. Remaining issues Agriculture, services, distribution, finance remain uncompetitive. Long-term problems remain unsolved - fiscal crisis, pension & medical reforms, aged but vibrant society, new energy…) Koizumi deregulation & liberalization increased income gaps and created new poor). 35

36. Politics: The End of the 1955 Regime The last three LDP governments (Abe, Fukuda, Aso) have been weak and unpopular. The opposition (Democratic Party) is not very popular or effective either. In July 2007 election, opposition seized majority in the Upper House--“twisted politics” causes confrontation and slowdown In Aug/Sep 2009 election, LDP loses 36 LDP dominance based on rural expenditure and support Two party politics with clear policy choice for voters ?

37. Recent Prime Ministers of Japan 37 April 26, 2001 – September 26, 2006 Junichiro Koizumi September 26, 2006 – September 26, 2007 Shinzo Abe September 26, 2007 – September 24, 2008 Yasuo Fukuda September 24, 2008 – (September 16, 2009) Taro Aso (September 16, 2009 –)Yukio Hatoyama Photos from the Cabinet Office, and the Democratic Party of Japan

38. New Administration’s view on Japan-US relations Japan-US Security Alliance in place since 1951 Mr. Hatoyama assured President Obama that Japan-US alliance is the foundation of our foreign policy 38 copyright: AFP/Kazuhiro Nogi

39. What do Japanese people think about current US-Japan relations? 39 Cabinet Office, Government of Japan %

40. Social Issues -Total Fertility Rate 40

41. Population in Japan by age Unit: 10 thousand 41

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43. 43 Possible Scenarios of Population Change in Japan

44. Citizens' Welfare Cost and Tax Burden （％） 44

45. 45 Type of Employment Statistic Bureau, Ministry of Internal Affairs & Communications

46. A little Japanese “Free” + “arubaito” [ger. arbeit] =Furiitaa or “Freeter” 46

47. Freeter Job Attributes Limited or flexible hours Little Responsibility Low Paying Few or no job benefits No long-term commitment Undemanding work 47

48. Freeter Negative Impacts on Society Workforce with undeveloped potential Low contributions to taxes, pension system Increase poverty/homelessness Lack of independence Looming labor shortage Depressed birthrate 48