Japan’s Bubble and America’s bubble:
some implications for China
July 2010
Kazuo Ueda
Professor of Economics
The University of Tokyo
The current episode resembles Japan in the 1990s
• The world during 2007-2010 resembles Japan in the 1990s-the early 2000s.
– Property and other asset price bubbles and their collapse with serious
effects on the financial system.
– The bubbles turned on too easy macroeconomic environment and
regulatory failure to reign in excessive speculation.
– After the burst of the bubble, monetary policy rates were lowered
aggressively from fairly high levels, reaching eventually near zero
levels.
• Central banks in 2007-09 acted more rapidly than in Japan in the early to
mid 1990s.
– Policies to address financial system problems were also adopted more
quickly in the current episode.
• In Japan, it was possible to hide bad loan problems for a while due to the
bank centered nature of the financial system unlike in the current case.
• If the world fails to avoid deflation or a near zero inflation rate, however,
it may look like Japan 1999-2006 for years to come.
• The world is also following Japan with regard to the heavy burden on fiscal
authorities.
2
Land Prices: Japan, US, & China
120
100
J:Urban Land Prices
Case-Shiller
C:70 cities
60
40
20
Bloomberg, CEIC
2000
0
1990
C:2011
US:2005
1980
Peak=100
80
3
Commodity Building Selling Price
400
350
300
2000=100
250
Beijing
Shanghai
Nationwide
200
150
100
50
0
1994
CEIC (NBS)
1996
1998
2000
2002
2004
2006
2008
4
Property Price: Beijing
300
250
2006/1=100
200
150
100
50
0
2006
2007
2008
CEIC (Economic Research Institute of China)
2009
2010
5
Property prices in the three countries
120
US:2006
100
China
:2009
80
J:Urban Land Prices
60
Case-Shiller
China:Commodity Bldg Selling Price
40
20
0
1980
Bloomberg, CEIC
1990
2000
6
Stock Prices
160
140
120
Peak=100
100
Japan
80
US
China
60
40
20
0
Bloomberg
7
160
140
120
100
Japan
80
US
China
60
40
20
year 4
year 1
year -2
year -5
0
8
Growth of Total Domestic Credit by Banks
40
35
30
YOY %
25
Japan
20
US
China
15
10
5
0
9
Easy monetary policy was the major cause of the bubble.
Short Rates during the Bubble: Japan
9
8
7
6
5
J-Taylor
J-actual
4
3
2
1
0
1985
1986
1987
1988
1989
10
Policy rate during the bubble: The U.S.
6
5
4
3
US-Taylor
US-actual
2
1
0
11
The gap has been very large in China since 2004 except for early 2009.
But RRR and WG?
China (potential=8%)
25
20
15
China-Taylor
China-actual
10
5
0
12
Yen & Japan's Monetary Policy
10
40
Yen
Appreciation
9
30
8
20
7
%
5
0
4
% YOY
10
6
Official DR
Yen Apprec.
-10
3
-20
2
The Bubble Period
1
0
-30
-40
Datastream
13
Forex Intervention & Base Money Growth
4000
3500
3000
Change YOY
2500
2000
Δ(HM)
Δ(Forex)
1500
1000
500
0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
-500
Datastream
14
Japan feared the deflationary effects of stronger currency and eased monetary
policy. China has resisted the pressure for appreciation.
Nominal effective Exchange Rate:Japan(1964-2010) & China(19942010)
140
120
100
80
Japan
China
60
40
May 2010
for China
20
0
BIS
15
BIS
Apr-10
Jan-09
Oct-07
Jul-06
Apr-05
Jan-04
Oct-02
Jul-01
Apr-00
Jan-99
Oct-97
Jul-96
Apr-95
Jan-94
Oct-92
Jul-91
Apr-90
80
Jan-89
Oct-87
Jul-86
Apr-85
Jan-84
Oct-82
Jul-81
Apr-80
Jan-79
Oct-77
Jul-76
Apr-75
Jan-74
Oct-72
Jul-71
Apr-70
Jan-69
Oct-67
Jul-66
Apr-65
Jan-64
But in real effective terms, the picture is not that different
between the two countries.
Real Effective Exchange Rate: Japan & China
180
160
140
120
100
May 2010 for
China
Japan
China
60
40
20
0
16
The Standard Deviation of the Real Effective Exchange Rate: 1963-2010
30
25
20
15
10
5
0
BIS
17
Fear of deflation led the Fed to adopt ultra
easy policy in 2003-04
• a substantial fall in inflation at this stage has the potential to interfere with
the ongoing U.S. recovery, and that in conceivable--though remote-circumstances, a serious deflation could do significant economic harm.
Thus, avoiding a further substantial fall in inflation should be a priority of
monetary policy. (B. Bernanke, July 2003)
• "the Committee believes that policy accommodation can be maintained
for a considerable period." …. Today inflation is at the lower end of the
range consistent with optimum economic performance, and soft labor
markets and excess capacity create a further downward risk to inflation.
As a result, I believe that increased economic growth may not elicit the
same response from the Fed that it has sometimes elicited in the past. (B.
Bernanke, September 2003)
18
This time is different psychology
• Japan
– Japan as # 1.
– 17 of the 25 world’s
largest financial
institutions were
Japanese as of 1989.
• US
– The U.S. economy has
conquered the business
cycle. (R. Dornbusch, R.
Lucas.)
– The U.S. economy has
become very flexible and
resilient. (A. Greenspan.)
19
Distorted Incentives leading up to the Bubble:
regulatory failure
• Japan
– Deregulation in the bond
market.
– But banks were not allowed
to move into securities
businesses, unlike in the US.
– Banks increased property
related lending.
• Also, through Jusen.
– Neither banks nor regulators
were equipped with risk
management techniques to
look at the entire bank loan
portfolios.
• US
– BIS capital regulation, financial
innovation and some deregulation
encouraged the formation of the
shadow banking system, which was
not policed well by regulators.
– BIS regulation on security trading was
effectively eased in 1996.
– The SEC policy change toward
investment banks in2004.
– SEC policy toward rating agencies.
– Derivatives.
– Government’s housing policy.
– Compensation.
20
Ueda(2000)
21
Total assets by sector/household financial assets
40
35
30
25
commercial bank
private pension fund
20
mutual funds
other nonbanks
15
10
5
0
1965
1975
1985
1995
2007
22
Changes in total assets: 2007-2009
25
20
15
10
5
0
commercial bank
private pension fund
mutual funds
other nonbanks
-5
-10
-15
-20
23
24
25
50 % of super seniors were held directly or indirectly by banks, but in ways
to lower BIS capital charges.
AAA ABS 保有割合
35
30
25
％
20
15
10
5
0
Banks
Conduits
SIVs
Hedge Funds
MMF
Credit Funds
Others
26
The BOJ & Fed’s monetary policies
after the burst of the bubble
• Stock and land prices plummeted,
the economy went into a
recession and bad loans
increased.
• The O/N rate was lowered slowly
to 0.5% by mid 1995.
– Financial instability
manifested itself very slowly.
• Started unconventional policies in
the fall of 1998.
• Prices plummeted in capital
markets and stresses developed
in the entire financial system.
• The O/N rate was lowered to
0.25% by December 2008, faster
than the Taylor rule indicated.
– Financial system deteriorated
very rapidly.
– May have learned from
Japan’s experience.
• Unconventional policies started in
the fall of 2008.
27
Policy Rates
9
8
7
6
5
Call Rate
FF Rate
4
3
Nontraditional
moves
Strategy 1,2
2
1
Non-traditional moves
Strategy 1,2
Strategy 3
10 yrs
9 yrs
8 yrs
7 yrs
6 yrs
5 yrs
4 yrs
3 yrs
2 yrs
1 yr
start
0
28
Monetary policy options during an
economic/financial crisis
• Lowering the policy rate aggressively.
• Non-traditional moves:
– (Strategy 1) Expectations management
– (Strategy 2) Purchases of non-traditional assets
– (Strategy 3) Quantitative easing
29
The BOJ’s Non-Traditional Operations during
1998-2006
Strategy 1
Zero rate until deflationary concerns disappear
(April 1999- August 2000)
“zero rate” until CPI inflation becomes stably
positive (March 2001-March 2006)
Strategy 2
CP repo
Unusually long-dated fund supplying operations
Purchases of equities from banks
Purchases of ABCP/ABS
Strategy 3
Target for private banks’ current account balances
at the BOJ (March 2001-March 2006)
30
Examples of Non-Traditional Policies
during 2007-2009
Strategy “The O/N rate can be expected to remain the same until
2010QII.” (Bank of Canada)
1
“economic conditions are likely to warrant low levels of the
FFrate.” (FRB)
Strategy
2
Purchases of nontraditional assets: corporate bonds
(BOJ,BOE), CP & equity (BOJ), covered bonds (ECB),
Agency Bonds, MBS, Treasury Bonds (FRB)
Fixed rate full allotment fund supply (ECB, BOJ)
Swap between government securities and other non-liquid
collateral (FRB, BOE)
US dollar repo (most central banks)
Strategy
3
BOE’s asset purchase Facility
The BOE hopes to see easing effects through expansion of the
money supply
Non-sterilization of strategy 2 (most central banks)
31
RGDP Growth Rates
10
8
6
% YOY
4
2
JPN
US
0
-2
-4
-6
32
Core CPI Inflation
3.5
3
2.5
1.5
Japan
US
1
0.5
10
9
8
7
6
5
4
3
2
1
0
0
% YOY
2
-0.5
-1
# of years
33
The Fed was more aggressive than the Taylor rule.
Overnight Rates: Comparison with the Taylor Rule
9
8
7
6
J-actual
5
US-actual
4
J-Taylor
US-Taylor
3
2
1
0
start
1 yr
2 yrs
3 yrs
4 yrs
5 yrs
Capital injection into banks also
came faster in the U.S.
• Japan 1994-2005
– Total cost of bad loan
resolution = 113 trillion
yen, of which
• Banks bore 93.6 trillion
• Deposit Insurance, 8.3
• Government
10.4
– Capital injection= 12.4
trillion (1998-2006)
• The U.S. 2007– Estimate of total cost = 1
trillion dollars (IMF,
GFSR)
– Capital injection =0.2
trillion (2008-09)
• Other financial assistance
under TARP = 0.25
• Of which 9.2 trillion has
been recovered
35
Bank Loan Growth Rates
15
Lehman’s bankruptcy
10
Capital injection
(US)
5
% YOY
Bankruptcy of Sanyo,
Yamaichi
JPN
US
0
-5
Capital injection
(JPN)
-10
# of years
36
But in a sense the U.S. did not learn from
Japan’s mistake
• Forbearance lending in the
absence of M-to-M accounting
(1991-96).
• Capital injection to Tokyo-Kyoudo
Bank (1994).
• The bankruptcy of Sanyo
securities & a resultant crisis in
the financial system (1997-98) .
– Contagion through the money market
& the stock market.
• Government’s capital injection,
protection of all bank debt & the
BOJ’s ZIRP stabilize the system
(1999).
• M-to-M leads to sharp fall in
asset prices across the financial
system (2007-).
• De facto capital injection to the
Bear Stearns bailout scheme
(March 2008).
• The bankruptcy of Lehman
Brothers and a resultant crisis in
the financial system (Sept. 2008).
– Contagion through the money and
capital markets & through MMF and
the repo market.
• TARP, protection of senior bank
debt & the Fed’s credit easing,
but financial stresses remain.
(2008-09).
37
19
97
/1
0/
19
16
97
/1
0/
19
20
97
/1
0/
19
24
97
/1
0/
28
19
97
/1
1/
19
1
97
/1
1/
19
5
97
/1
1/
19
9
97
/1
1/
19
13
97
/1
1/
19
17
97
/1
1/
19
21
97
/1
1/
19
25
97
/1
1/
29
19
97
/1
2/
19
3
97
/1
2/
19
7
97
/1
2/
19
11
97
/1
2/
19
15
97
/1
2/
19
19
97
/1
2/
23
%
Money Market Rates in Tokyo
1.2
1
Tokuyo City Bankruptcy
0.8
0.4
Yamaichi Bankuruptcy
0.6
TIBOR3M
CALLRO/N
Sanyo
Bankruptcy
Hokkaido
Takushoku
Bankruptcy
0.2
0
Financial Market Report, BOJ, March 2009
39
MMMFとレポ市場
400
200
0
2001
2002
2003
-200
2004
2005
2006
2007
2008
2009
FF & Repo
of which MMMF
-400
-600
-800
Flow of Funds, FRB
40
ABCP1月物ーFFR
6
5
4
3
2
1
2010
2009
2008
2007
0
-1
Bloomberg
41
LIBORーOIS spread（3M）
LIBOR-OIS(3Month)
3
2.5
2
1.5
1
0.5
0
2007年1月
Bloomberg
2007年7月
2008年1月
2008年7月
2009年1月
2009年7月
2010年1月
42
Lessons
• Ultra easy--say, easier than the Taylor rule--monetary policy sometimes
generates major financial imbalances.
– In both Japan and China the ultra easy monetary policy came from the fear of
deflationary effects of stronger currency.
• Financial imbalances are exacerbated when financial regulation does not
catch up with financial innovation or when pace of deregulation is uneven
across sectors.
• Bubbles lead to systemic events if financial intermediaries are at the heart
of their formation.
• People learn from others’ mistakes, but not always.
• The world is not out of the woods yet.
– Large budget deficits and buildup of government debt
– Disinflation is continuing.
43
Leverage Ratio By Sector: Japan
30
25
20
Household
Non-Financial
Financial
General Gov.
15
10
5
National Accounts, the Cabinet Office
20
03
20
05
19
99
20
01
19
95
19
97
19
91
19
93
19
87
19
89
19
83
19
85
19
79
19
81
19
77
19
73
19
75
19
69
19
71
0
44
Growth of Nominal Government Spending on Goods & Services
10
8
6
4
2
0
1991
1993
1995
1997
1999
2001
2003
2005
2007
-2
45
10YR JGB Rate
9
8
7
6
5
4
3
2
1
0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
46
Japan’s net national debt/GDP quickly rose from zero to 100%.
Japanese (Central+Local) Government Debt/ GDP
250.0
200.0
150.0
Gross Financial Debt
100.0
Net Financial Debt
Total(Real & Fin.) net debt
50.0
0.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
-50.0
Cabinet Office
47
CPI (ex food, energy) Inflation Rate
6
5
4
YOY %
3
EU
Japan
US
2
1
0
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
-1
-2
48
LIBOR (3 month) – Core CPI Inflation
日米の短期実質金利（3ヶ月物）
7
6
5
4
3
％
US
Japan
2
1
0
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
-1
-2
49