1. 1 Structural Roots of Japan’s Malaise Richard Katz The Oriental Economist Report Rbkatz@ix.netcom.com Brookings Institution April 9, 2002

2. 2 I. How Bad Is It?

3. 3 Private Recovery Never Happened

4. 4 Five-Year Growth Turning Negative

5. 5 Japan’s Lost Decade vs. Others’

6. 6 Share of Rich Country GDP Falls

7. 7 Japan Share of World Exports Down

8. 8 Slow Income = Slow Spending

9. 9 ZIRP Erodes Household Income

10. 10 Excess Capacity = Weak Investment

11. 11 Investment Still Below 1991 Peak

12. 12 II. The Causes

13. 13 Lost GDP: ¾ Supply, ¼ Demand The horizontal zero line shows where GDP would be if 1975-90 growth had continued. Grey area shows lost GDP due to demand shortfall. Black area shows lost GDP due to slowdown in potential growth—not counting slowdown in labor force growth which is shown in diagonal stripes.

14. 14 Competition in Efficient Sectors...

15. 15...But Not in Inefficient

16. 16 Low Trade Means Low Productivity

17. 17 More Imports Leads to Higher Productivity Growh

18. 18 Low Consumption From Low Income

19. 19 Chronic Excess Business Savings

20. 20 III. Banking Crisis

21. 21 NPLs Keep Rising...

22. 22... As Banks Slacken on Disposal

23. 23 Non-Performing Borrowers

24. 24 Govt Guarantee of Private Loans

25. 25 IV. Fiscal and Monetary

26. 26 Lost Taxes At Heart of Deficit

27. 27 ZIRP Enables Govt to Fund Debt

28. 28 Koizumi Budget: Asking For Trouble Since stimulus operates with a lag, the chart shows how changes in GDP follow from changes in the deficit one year earlier. 1998 shows GDP growth in 1998 and budget change in 1997.

29. 29 BOJ Printing Money; Economy Not Responding

30. 30 Deflation Symptom of Weak Demand

31. 31 V. Weak Yen No Panacea

32. 32 Shrinking Share of Global Surplus

33. 33 Shrinking Share of U.S. Deficit

34. 34 Yen and Stocks Move in Tandem