The World in Balance Sheet Recession:
What Post-2008 West Can Learn from
Japan 1990-2005
Richard C. Koo
Chief Economist
Nomura Research Institute
Tokyo
August 2012
Exhibit 1. US Housing Prices Are Moving along the Japanese Experience
Futures
(US: Jan. 2000=100, Japan: Dec. 1985=100)
260
US: 10 Cities Composite Home Price Index
240
Composite
Index
Futures
Japan: Tokyo Area Condo Price1
220
200
180
160
140
120
100
80
Japan: Osaka Area Condo Price1
60
40
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
US
Japan
Note: per m 2, 5-month moving average
Sources: Bloomberg, Real Estate Economic Institute, Japan, S&P, S&P/Case-Shiller® Home Price Indices, as of Jul. 26, 2012
1
Exhibit 2. House Prices in Europe also Experienced Bubble
(end of 1995 = 100)
550
514
525
500
Ireland
475
450
Greece
425
Spain
400
Germany
375
342
350
Greece
271
Ireland
262
325
300
275
303
250
Spain
238
225
200
175
150
125
90
Germany
100
100
75
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
Notes: Ireland's f igures bef ore 2005 are existing house prices only. Greece's f igures are f lats' prices in Athens and
Thessaloniki. Germany's latest f igure is estimated f rom the house price index of Europace AG.
Source: Nomura Research Institute, calculated f rom BIS and Europace AG data.
2
Exhibit 3. Drastic Rate Cuts Have Done Little to Revive Employment
or House Prices
(%)
8
Australia
7
UK
6
5
4
EU
3
US
2
Japan
1
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Sources: BOJ, FRB, ECB, BOE and RMB Australia. As of Jul. 26, 2012.
3
Exhibit 4. US Economy Is still a Long Way from Previous Peak
(2007=100, Seasonally adjusted)
(%, Seasonally adjusted, inverted)
103
3.5
4.0
Unemployment Rate
(right scale)
101
4.5
99
5.0
5.5
Last
seen
in 2006
Industrial Production
(left scale)
97
6.0
95
6.5
7.0
93
7.5
91
8.0
Last seen in 1983
8.5
89
9.0
87
9.5
10.0
85
10.5
Last seen in 1997
83
11.0
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
Sources: US Department of Labor, FRB
4
Exhibit 5. Euro-Zone Economy Is still a Long Way from Previous Peak
(Seasonally adjusted, 2005=100)
(%, Seasonally adjusted, inverted)
115
7.0
7.5
Unemployment Rate
(right scale)
110
8.0
105
8.5
9.0
100
Last seen
in 2005
9.5
95
10.0
10.5
90
Industrial Production
(left scale)
85
1998
11.0
Worst on record*
11.5
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
*No data bef ore 1995
Source: Eurostat
5
Exhibit 6. Except in Germany, Industrial Production in Europe
Is still Weak
(2005 = 100, Seasonally Adjusted)
Level last
seen in
120
Spain
115
France
110
2007: Germany
Italy
105
Germany
100
95
1997: France
90
85
1987: Italy
80
1994: Spain
75
70
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
Source: Eurostat
6
Exhibit 7. Japan’s Industrial Production Fell to the Level of 1987
after the Earthquake
(Seasonally adjusted)
(Seasonally adjusted, 2005=100)
1.2
115
forecast
Industrial production (right scale)
110
1.1
105
1.0
100
0.9
95
Last seen in 2002
Last seen
in 2004
0.8
0.7
90
85
Job offers to applicants ratio
(left scale)
Last seen
in 1987
80
0.6
75
Last seen in 1983
0.5
70
Lowest on record
0.4
2000
65
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Note: Forecasts are calculated f rom METI's survey on planned production.
Sources: Ministry of Economy, Trade and Industry (METI), and Ministry of Health, Labour and Welf are
7
Exhibit 8. Drastic Liquidity Injection
Failed to Increase Money Supply (I): US
340
320
300
280
260
240
220
200
180
160
140
120
100
80
3.0
2.5
(Aug. 2008 =100, Seasonally Adjusted)
Monetary Base
Money Supply (M2)
Loans and Leases in Bank Credit
311
Down
25%
129
96
(%, yoy)
Consumer Spending
Deflator (core)
2.0
+1.82%
1.5
1.0
0.5
08/1 08/4 08/7 08/10 09/1 09/4 09/7 09/10 10/1 10/4 10/7 10/10 11/1 11/4 11/7 11/10 12/1 12/4
Sources: Board of Governors of the Federal Reserve System, US Department of Commerce
Note: Commercial bank loans and leases, adjustments for discontinuities made by Nomura Research Institute.
8
Exhibit 9. Drastic Liquidity Injection
Failed to Increase Money Supply (II): EU
200
(Aug. 2008 =100, Seasonally Adjusted)
190
Base Money
180
Money Supply (M3)
170
Credit to Euro Area Residents
194
160
150
140
130
120
110
108
100
104
90
2.2
2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
(%, yoy)
CPI core
+1.6%
08/1 08/4 08/7 08/10 09/1 09/4 09/7 09/10 10/1 10/4 10/7 10/10 11/1 11/4 11/7 11/10 12/1 12/4 12/7
Sources: ECB, Eurostat
Note: Base money's figures are seasonally adjusted by Nomura Research Institute.
9
Exhibit 10. Drastic Liquidity Injection
Failed to Increase Money Supply (III): UK
370
369
(Aug. 2008 =100, Seasonally Adjusted)
1
340
Reserve Balances + Notes & Coin
Money Supply (M4)
Bank Lending (M4)
310
280
250
220
Aug. 08'
190
160
Down
19%
130
106
85
100
70
6
5
4
3
2
1
0
(%, yoy)
CPI (ex. Indirect Taxes)
+2.4%
07/1
07/7
08/1
08/7
09/1
09/7
10/1
10/7
11/1
11/7
12/1
Sources: Bank of England, Office for National Statisics, UK
Notes: 1. Reserve Balances data are seasonally unadjusted. 2. Money supply and bank lending data exclude
intermmediate financial institutions.
10
Exhibit 11. Drastic Liquidity Injection Failed to
Produce Drastic Increase in Money Supply (IV): Japan
350
(1990/1Q = 100, Seasonally Adjusted)
Quantitative
Easing
Earthquake
329
Monetary Base
300
Money Supply (M2)
Bank Lending
250
1990/1Q
200
150
Textbook
Economics
Balance Sheet
Recession
(Monetary Policy
Ef f ective)
(Monetary Policy
NOT Ef f ective)
175
Down
41%
102
100
50
4
3
2
1
0
-1
-2
-3
(y/y, %)
CPI Core
(ex. fresh food)
-0.2%
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Note: Bank lending are seasonally adjusted by Nomura Research Institute.
Source: Bank of Japan
11
Exhibit 12. Japan’s De-leveraging with Zero Interest Rates
Lasted for 10 Years
Funds Raised by Non-Financial Corporate Sector
(% Nominal GDP, 4Q Moving Average)
(%)
25
10
CD 3M rate
(right scale)
20
8
Borrowings from Financial Institutions (left scale)
15
6
Funds raised in Securities Markets (left scale)
10
4
5
2
0
0
-5
Debt-financed
bubble
(4 years)
Balance sheet
recession
(16 years)
-10
-2
-4
-15
-6
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Sources: Bank of Japan, Cabinet Of f ice, Japan
12
Exhibit 13. Japan’s GDP Grew in spite of Massive Loss of Wealth
and Private Sector De-leveraging
(Sep. 1990=100)
(Sep.1990=100, Seasonally Adjusted)
140
130
Nominal GDP (Right Scale)
120
Real GDP
(Right Scale)
115
100
Cumulative
90-05 GDP
Supported by
Government
Action:
~ ¥2000 trillion
100
Likely GDP Path
w/o Government Action
80
85
60
70
40
55
Last seen in 1973
20
40
Land Price Index in Six Major Cities
(Commercial, Left Scale)
0
25
down
87%
Cumulative
Loss of
Wealth on
Shares and
Real Estate
~ ¥1500 trillion
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Sources: Cabinet Of f ice, Japan Real Estate Institute
13
Exhibit 14. Japanese Government Borrowed and Spent
the Unborrowed Savings of the Private Sector to Sustain GDP
(Tril. yen)
110
Government spending
100
90
cumulative
cyclical
deficit
90-05
¥315 trillion
80
70
60
overall
deficit
¥460
trillion
50
40
Bubble Collapse
30
Tax revenue
20
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: Ministry of Finance, Japan
Note: FY 2011 includes 4th supplementary budget and FY2012 is initial budget.
14
Exhibit 15. Premature Fiscal Reforms in 1997 and 2001 Weakened
Economy, Reduced Tax Revenue and Increased Deficit
(Yen tril.)
(Yen tril.)
80
70
60
80
Tax Revenue
Budget Deficit
Hashimoto
fiscal
Obuchi-Mori
reform
fiscal
stimulus
Earthquake
Koizumi
fiscal
reform
70
Global
Financial
Crisis
60
50
50
*
40
unnecessary
increase in
deficit:
40
¥103.3 tril.
30
30
20
20
10
10
0
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
(FY)
Source: Ministry of Finance, Japan
Notes: Latest f igures(*) are estimated by MOF. From FY2011, f igures includes reconstruction taxes and bonds.
15
Exhibit 16. US in Balance Sheet Recession: US Private Sector
Increased Savings Massively after the Bubble
Financial Surplus or Deficit by Sector
(as a ratio to nominal GDP, %, quarterly)
10
Households
8
(Financial Surplus)
Rest of the World
Private
Sector
Savings:
7.33%
of GDP
6
4
2
0
-2
-4
-6
-8
-10
General
Government
Corporate Sector
(Non-Financial Sector +
Financial Sector)
IT Bubble
(Financial Deficit)
Housing
Bubble
-12
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Note: For the latest f igures, 4 quarter averages ending with 1Q/12' are used.
Sources: FRB, US Department of Commerce
16
Exhibit 17. UK in Balance Sheet Recession: UK Private Sector
Increased Savings Massively after the Bubble
Financial Surplus or Deficit by Sector
(as a ratio to nominal GDP, %)
9
Households
6
(Financial Surplus)
Rest of the World
3
Private
Sector
Savings:
7.54%
of GDP
0
-3
-6
-9
General
Government
Corporate Sector
(Non-Financial Sector +
Financial Sector)
(Financial Deficit)
-12
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Note: For the latest f igures, 4 quarter averages ending with 1Q/12' are used.
Source: Of f ice f or National Statistics, UK
17
Exhibit 18. Global Bond Yields* Nearing Japanese Levels
(%)
6
UK
US
Sweden
Switzerland
Japan
5
4
bond yield
first seen
in Japan
in 1998
3
3%
2
0.7%
1
0
2007
2008
2009
2010
2011
2012
*Note: Excluding Eurozone. As of Jul 26, 2012.
Source: Bloomberg
18
Exhibit 19. Euro-Zone Bond Yields Are Diverging Sharply
(%)
40
35
Greece
Ireland
30
Portugal
Spain
25
Italy
France
20
Germany
15
10
5
0
2007
2008
2009
2010
2011
2012
Note: As of Jul 26, 2012.
Source: Bloomberg
19
Exhibit 20. Euro-zone in Balance Sheet Recession: Euro-zone Private Sector
Increased Savings Massively after the Bubble
Financial Surplus or Deficit by Sector
(as a ratio to nominal GDP, %)
6
(Financial Surplus)
Households
4
Private
Sector
Savings:
3.77%
of GDP
Rest of the World
2
0
-2
-4
General
Government
-6
Corporate Sector
(Non-Financial Sector + Financial Sector)
(Financial Deficit)
-8
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Note: For the latest f igures, 4 quarter averages ending with 4Q/11' are used.
Source: ECB
20
Exhibit 21. Spain in Balance Sheet Recession: Spanish Private Sector
Increased Savings Massively after the Bubble
Financial Surplus or Deficit by Sector
(as a ratio to nominal GDP, %)
12
(Financial Surplus)
Households
9
Rest of the World
6
Private
Sector
Savings:
5.55%
of GDP
3
0
-3
-6
Corporate Sector
-9
(Non-Financial Sector + Financial Sector)
General
Government
(Financial Deficit)
-12
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
Note: For the latest f igures, 4 quarter averages ending with 1Q/12' are used.
Source: Banco de España
21
Exhibit 22. Ireland in Balance Sheet Recession: Irish Private Sector
Increased Savings Massively after the Bubble
Financial Surplus or Deficit by Sector
(as a ratio to nominal GDP, %, quarterly)
20
(Financial Surplus)
Corporate Sector
(Non-Financial Sector +
Financial Sector)
15
Rest of the World
10
Private
Sector
Savings:
7.66%
of GDP
5
0
-5
-10
-15
-20
Households
General
Government
-25
(Financial Deficit)
-30
03
04
05
06
07
08
09
10
11
Note: For the latest f igures, 4 quarter averages ending with 4Q/11' are used.
Sources: The Central Bank of Ireland and Central Statistics Of f ice, Ireland
22
Exhibit 23. Portugal in Balance Sheet Recession: Portuguese Private
Sector Increased Savings Massively after the Bubble
Financial Surplus or Deficit by Sector
(as a ratio to nominal GDP, %)
12
(Financial Surplus)
Rest of the World
9
Households
6
Private
Sector
Savings:
4.03%
of GDP
3
0
General Government
-3
-6
Corporate Sector
-9
(Non-Financial Sector + Financial Sector)
(Financial Deficit)
-12
99
00
01
02
03
04
05
06
07
08
09
10
11
12
Note: For the latest f igures, 4 quarter averages ending with 1Q/12' are used.
Source: Banco de Portugal
23
Exhibit 24. Two Structural Deficiencies of Eurozone
(1)
(2)
Maastricht Treaty and Fiscal
Compact Never Considered
the Risk of Balance Sheet
Recessions
Procyclical and Destabilizing
Capital Flows between Gov.
Bond Markets of Member
Countries
Result
Countries Are Forced into
Deflationary Spirals
because They Are
Prohibited by the Treaty and
Prevented by the Market
from Using Fiscal Stimulus
to Fight Balance Sheet
Recessions
Excessively Low Gov. Bond
Yields during Bubbles
Excessively High Gov. Bond
Yields during Balance Sheet
Recessions
24
Exhibit 25. German Private Sector Refused to Borrow Money after
1999-2000 Telecom Bubble
Financial Surplus or Deficit by Sector
(as a ratio to nominal GDP, %)
8
Households
6
(Financial Surplus)
Shift from 2000
to 2005
in private sector:
12.06% of GDP
Telecom Bubble
4
Corporate: 9.26%
Households: 2.80%
2
0
Rest of the World
-2
-4
-6
-8
Shift from 2000
to 2005
in public sector:
4.62% of GDP
General
Government
Corporate Sector
(Non-Financial Sector +
Financial Sector)
Balance Sheet
Recession
(Financial Deficit)
-10
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
Sources: Deutsche Bundesbank, Federal Statistical Of f ice Germany
Note: The assumption of Treuhand agency's debt by the Redemption Fund f or Inherited Liabilities in 1995 is adjusted.
25
Exhibit 26. Source of “Competitiveness Problem”:
Divergence of Eurozone Money Supply Growth
(1999 Q1=100, Seasonally adjusted)
300
250
Eurozone ex. Germany
Lehman Shock
Germany
Greece
200
Paths will cross
in Jun. 2021
150
100
Already crossed
for Greece
50
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23
Notes: Growth in M3. Figures f or Germany and Greece seasonally adjusted by Nomura Research Institute. Path of money
supply growth was estimated as 2,167.852 + 9.79354 x trend f or Germany and 7,126.945 + 11.01537 x trend f or other
countries, based on trend f or January 2010 through May 2012.
Source: Nomura Research Institute, based on ECB, Deutsche Bundesbank and Bank of Greece
26
Exhibit 27. Divergence of Eurozone Labor Costs
(2000 = 100)
160
150
Germany
Spain: 154.4
Ireland
Ireland: 151.4
Greece
Spain
France: 144.0
France
140
Italy: 139.5
Italy
Portugal
Portugal: 133.3
130
Greece: 129.8*
Germany: 122.7
120
110
100
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Note: Greek f igure f or 2011 represents average through 2011 Q3.
Source: Eurostat
27
Exhibit 28. Post IT-Bubble Germany Recovered by Increasing
Exports to Eurozone
German Balance of Trade
(€mn, seasonally adjusted)
12000
Eurozone
10000
8000
6000
US
4000
2000
0
-2000
-4000
Asia
-6000
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
Source: Deutsche Bundesbank
28
Exhibit 29. ECB Facing Balance Sheet Recession Can Supply Large
Amounts of Liquidity without Igniting Inflation
(Aug. 2008 = 100, seasonally adjusted)
400
Eurozone
375
Monetary Base
(=Liquidity)
350
US
US-like
monetary
easing would
allow ECB to
supply
€ 960.3 bil.
worth of
additional
liquidity.
UK
325
Eurozone
300
Money Supply
US
275
UK
250
225
200
Aug. 2008
175
150
125
100
75
2007
2008
2009
2010
2011
2012
Notes: 1. UK's reserve balances data are seasonally unadjusted.
2. UK's money supply and bank lending data exclude intermmediate f inancial institutions.
3. Base money's f igures of Eurozone are seasonally adjusted by Nomura Research Institute.
Source: Nomura Research Institute, based on FRB, ECB and Bank of England data.
29
Exhibit 30. Balance Sheet Correction in France Was Minimal
Financial Surplus or Deficit by Sector
(as a ratio to nominal GDP, %)
8
(Financial Surplus)
Households
6
4
Private
Sector
Savings:
2.12%
of GDP
2
0
-2
-4
-6
Rest of the World
Corporate Sector
-8
General
Government
(Non-Financial Sector + Financial Sector)
(Financial Deficit)
-10
00
01
02
03
04
05
06
07
08
09
10
11
Note: For the latest f igures, 4 quarter averages ending with 4Q/11' are used.
Sources: ECB and Eurostat
30
Exhibit 31. Balance Sheet Correction in Italy Was Minimal
Financial Surplus or Deficit by Sector
(as a ratio to nominal GDP, %, quarterly)
12
(Financial Surplus)
10
Households
8
6
4
Rest of the World
2
Private
Sector
Savings:
-1.16%
of GDP
0
-2
-4
-6
-8
Corporate Sector
(Non-Financial Sector +
Financial Sector)
General
Government
-10
(Financial Deficit)
-12
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
Note: For the latest f igures, 4 quarter averages ending with 4Q/11' are used.
Sources: Banca d'Italia, Eurostat
31
Exhibit 32. Greek Private Sector Is Drawing Down Savings to Survive
Financial Surplus or Deficit by Sector
25
(as a ratio to nominal GDP, %, quarterly)
(Financial Surplus)
20
Rest of the World
Households
15
10
5
Private
Sector
Savings:
-7.04%
of GDP
0
-5
-10
Corporate Sector
-15
(Non-Financial Sector +
Financial Sector)
(Financial Deficit)
General
Government
05
08
-20
01
02
03
04
06
07
09
10
11
Note: For the latest f igures, 4 quarter averages ending with 2Q/11' are used.
Sources: Bank of Greece, Eurostat
32
Exhibit 33. Greek Corporates Are Both Drawing Down Savings and
Reducing Debt
(as a percentage of nominal GDP)
(as a percentage of nominal GDP, inverted)
15
-15
left scale
Financial Assets
10
-10
5
-5
0
0
-5
5
-10
10
Financial Liabilities right scale
-15
15
00
01
02
03
04
05
06
07
08
09
10
11
Sources: Bank of Greece, Eurostat
33
Exhibit 34. Greek Households Are Both Drawing Down Savings and
Reducing Debt
(as a percentage of nominal GDP, inverted)
(as a percentage of nominal GDP)
20
-20
left scale
Financial Assets
15
-15
10
-10
5
-5
0
0
-5
5
-10
10
Financial Liabilities right scale
-15
15
00
01
02
03
04
05
06
07
08
09
10
11
Sources: Bank of Greece, Eurostat
34
Exhibit 35. Japanese Corporates Increased Savings again after Lehman
Financial Surplus or Deficit by Sector
(as a ratio to nominal GDP, %)
15
(Financial Surplus)
12
Households
9
6
Private
Sector
Savings:
10.1%
of GDP
Rest of
the World
3
0
-3
1991-2003 shift
= 22% of GDP
-6
-9
Corporate Sector
-12
-15
(Non-Financial Sector +
Financial Sector)
General Government
Balance Sheet Recession
(Financial Deficit)
-18
Global
Financial
Crisis
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Note: For the latest f igures, 4 quarter averages ending with 1Q/12' are used.
Sources: Bank of Japan, Flow of Funds Accounts, and Government of Japan, Cabinet Of f ice, National
Accounts
35
Exhibit 36. Australian Household Savings Are Large while
Corporate Borrowings Are Modest
Financial Surplus or Deficit by Sector
8
(Financial Surplus)
Households
Rest of the World
6
4
Private
Sector
Savings:
1.75%
of GDP
2
0
-2
-4
-6
Corporate Sector
-8
(Non-Financial Sector
+ Financial Sector)
General
Government
(Financial Deficit)
-10
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
Note: For the latest f igures, 4 quarter averages ending with 1Q/12' are used.
Source: Australian Bureau of Statistics
36
Exhibit 37. U.S. Took 30 Years to Normalize Interest Rate after 1929
because of Private Sector Aversion to Debt
(%)
9
8
US government bond yields
Prime BA, 90days
US government bond yields 1920-29 average (4.09%, June 1959)
Prime BA, 90days 1920-29 average (4.13%, September 1959)
7
6
5
Oct '29 NY Stock
Market Crash
Dec '41 Pearl
Harbor Attack
Jun '50 Korean
War
'33～
New Deal
4
3
2
1
0
19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
Source: FRB, Banking and Monetary Statistics 1914-1970 Vol.1, pp.450-451 and 468-471, Vol.2, pp.674-676 and 720-727
37
Exhibit 38. Monetary Easing No Substitute for Fiscal Stimulus (I):
Japan’s Money Supply Has Been Kept Up by Government Borrowings
Balance Sheets of Banks in Japan
December 2007
December 1998
Assets
Assets
Credit
Extended to
the Private
Sector
Credit
Extended to
the Private
Sector
Money Supply
(M2+CD)
¥501.8 tril.
(-99.8)
¥621.5 tril.
Credit
Extended to the
Public Sector
Credit Extended
to the Public
Sector
Foreign Assets
(net)
Money Supply
(M2+CD)
¥744.4 tril.
(+122.9)
¥601.6 tril.
¥140.4 tril.
Liabilities
Liabilities
Other Liabilities
(net)
¥153.2 tril.
¥247.2 tril.
(+106.8)
Foreign assets
(net)
Other Liabilities
(net)
¥74.1 tril.
(+41.4)
¥32.7 tril.
Total Assets ¥774.7 tril.
Total Assets ¥823.1 tril. (+48.4)
¥78.7 tril.
(-74.5)
Source: Bank of Japan "Monetary Survey"
38
Exhibit 39. Monetary Easing No Substitute for Fiscal Stimulus (II): Post-1933 US
Money Supply Growth Made Possible by Government Borrowings
Balance Sheets of All Member Banks
June 1936
June 1929
Assets
Credit
Extended to
the Private
Sector
$29.63 bil.
Assets
Liabilities
Deposits
$32.18 bil.
June 1933
Assets
Credit
Extended to
the Private
Sector
$15.80 bil.
(-13.83)
Credit
Extended
to the
Public
Sector
Other
$8.63 bil.
Liabilities
(+3.18)
$6.93 bil.
Other
Assets
$6.37 bil.
(-1.65)
Capital Reserves
$6.35 bil. $2.24 bil.
Credit
Extended to
the Public
Sector
$5.45 bil.
Other Assets
$8.02 bil.
Reserves
$2.36 bil.
Credit
Extended
to the
Private
Sector
$15.71 bil.
(-0.09)
Liabilities
Deposits
$23.36 bil.
(-8.82)
Credit
Extended
to the
Public
Sector
$16.30 bil.
(+7.67)
Liabilities
Deposits
$34.10 bil.
(+10.74)
(= Money Supply)
Other
Other
Assets
Liabilities
$8.91 bil.
$4.84 bil.
(+2.54)
(-2.09)
Other
Liabilities
$7.19 bil.
(+2.35)
Reserves
Capital
$5.61 bil.
$4.84 bil.
(+3.37)
(-1.51)
$5.24 bil.
(+0.40)
Capital
(-0.12)
Total Assets $45.46 bil.
Total Assets $33.04 bil. (-12.42)
Total Assets $46.53 bil. (+13.49)
Source: Board of Governors of the Federal Reserve System (1976) Banking and Monetary Statistics 1914-1941 pp.72-79
39
Exhibit 40. Industrialization of Chinese (or any Agrarian) Economy
wages
A
S
Fast growth
Stable prices
Widening
income
inequality
Strong
investment
B
Capital's
profit
Labor supply
curve
Industrialization
Inflation
L
C
Labor demand
curve
(i)
Investment
H
G
China Today
D1
Weak
consumption
D2
(ii)
Consumption E
F
I
China until now
(capital-accumulation phase)
J
Narrowing
income
inequality
D3
K
D
Worker's
income
Slower growth
Slower
investment
Stronger
consumption
M
number of
workers
China in the future
(normalization of domestic
demand phase)
Source: Nomura Research Institute
40
Exhibit 41. Yin Yang Cycle of Bubbles and Balance Sheet Recessions
Yin (=Shadow)
(1) Monetary policy is tightened, leading the bubble to collapse.
US
Spain
UK
Yang (=Light)
Bubble
(9) Overconfident private sector triggers a bubble.
(2) Collapse in asset prices leaves private sector
with excess liabilities,
forcing it into debt minimization mode.
The economy falls into a balance sheet recession.
(8) With the economy healthy,
the private sector regains its vigour,
and confidence returns.
(3) With everybody paying down debt,
monetary policy stops working.
Fiscal policy becomes the main economic tool
to maintain demand.
(7) Monetary policy becomes the main
economic tool, while deficit reduction
becomes the top fiscal priority.
(4) Eventually private sector finishes its debt repayments,
ending the balance sheet recession.
But it still has a phobia about borrowing which keeps
interest rates low, and the economy less than fully vibrant.
Economy prone to mini-bubbles.
(6) Private sector fund demand recovers,
and monetary policy starts working again.
Fiscal policy begins to crowd out private investment.
Japan
Germany
(5) Private sector phobia towards borrowing gradually disappears,
and it takes a more bullish stance towards fund raising.
Source: Richard Koo, The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession , John Wiley & Sons, Singapore, April 2008 p.160.
41
Exhibit 42. Contrast Between Yin and Yang Phases of Cycle
Yang
Yin
1) Phenomenon
Textbook economy
Balance sheet recession
2) Fundamental driver
Adam Smith's "invisible hand"
Fallacy of composition
3) Corporate financial condition
Assets > Liabilities
Assets < Liabilities
4) Behavioral principle
Profit maximization
Debt minimization
5) Outcome
Greatest good for greatest number
Depression if left unattended
6) Monetary policy
Effective
Ineffective (liquidity trap)
7) Fiscal policy
Counterproductive (crowding-out)
Effective
8) Prices
Inflationary
Deflationary
9) Interest rates
Normal
Very low
10) Savings
Virtue
Vice (paradox of thrift)
a) Localized
Quick NPL disposal
Pursue accountability
Normal NPL disposal
Pursue accountability
b) Systemic
Slow NPL disposal
Fat spread
Slow NPL disposal
Gov. capital injection
11) Remedy for
Banking Crisis
Source: Richard Koo, The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession ,
John Wiley & Sons, Singapore, 2008
42