Asian 2001 05

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  • 1. Asian Economics
  • 2. Unique Structural Features
    Japanese Employment System: lifetime employment, seniority system, company unions
    Keiretsu
    Corporate finance and banking system
    The dual economy
  • 3. Unique Structural Features
    Japanese-style management
    Japanese democracy: the Liberal Democratic Party
    Social consensus on growth
  • 4. An economic coming of age
  • 5. Which Components Did Drive the Demand?
    Investment/GNP and Export/GNP in Real Terms
    Real Investment/GNP (solid line) and Real Export/GNP (broken line)
    Source: The Japanese Economy, Takatoshi Ito.
    • The Japanese growth in 50s and 60s was investment-led growth.
    • 6. Exports had been increasing continuously.
  • Summary of Analysis from the Data
    • Japanese post-war growth is by:
    • 7. On the supplyside: Technological progress.
    • 8. On the demand side: Investments (later Exports).
    • 9. We will investigate the causes of growth more closely with historical events.
  • How did it get so bad?
    Inept public policy
    Corruption
    Greed
    The belief that Japan was somehow “different”
  • 10. Focus: Three Important Points of the Japanese Govnt's Policies
    • Infant-Industry Protection
    • 11. Allocation of Foreign Reserves
    • 12. The Ministry of International Trade and Industry (MITI)
  • Rapid Growth: 1950-1973: Industrial Policies
    Industrial Policies by the Government
    Infant-Industry Protection
    • The government targeted some specific industries, in paticular, industries with increasing-return technology.
    • 13. The government protect these ”infant industries” by export subsidies and import restrictions.
    • 14. Example: Iron and steel industries.
    • 15. Once they get large, the average costs go down. And, then, they become cost-competitive.
  • Rapid Growth: 1950-1973: Industrial Policies
    The Government Allocated Foreign Reserves
    • Firms are prohibited from borrowing money from abroad.
    • 16. The government assigned foreign currency to firms for the purchase of capital equipment and raw materials.
    • 17. Instead, government financial agencies lend money.
    • 18. This policy would prevent the appreciation of Japanese yen, and protect exports.
    Role of the MITI
    (the Ministry of International Trade and Industry)
    • Even after domestic funds became abundant, investment plans are coordinated according to MITI's demand projection.
  • Beyond the Observable Reforms
    Source: Hayashi and Prescott (2008)
  • 19. When the bubble burst
  • 20. Bubble (1986-1991)
    • Average GDP growth rate: 5.8%
    • 21. Exchange rate:
    $1.00 =¥168 (1986)
    $1.00 =¥134 (1991)
    • Real estate price went up
    • 22. Stock price wend up: Change of the Nikkei Stock Index
    • 23. => Bubble Economy
    • 24. People buy stock and real estate at high prices because they believe that other people believe that prices are going to increase
    • 25. =>Self-fulfilling mechanism
  • After Bubble (1992-)
    • Average GDP growth rate: 1.3% Pretty Low!
    • 26. Exchange rate:
    $1.00 =¥126 (1992)
    $1.00 =¥106 (2008)
    • Serious recession: ’90s as “Lost Decade”
    • 27. Real estate price went down
    • 28. Stock price went down: Change of the Nikkei Stock Index
    • 29. Efforts to get out of the recession
    • 30. Zero interest rate policy by the Bank of Japan
    • 31. Aggressive fiscal policy
  • Nikkei Average (Tokyo Stock Exchange)Source: http://brual.files.wordpress.com/2008/09/nikkei-average-historical-graph.png
  • 32. Japanese Real Estate PricesSource: http://m1.smartmoney.com/tradecraft/images/1107-graphic.gif
  • 33. Japan's Land Price through Bubble
  • 34. Firm's Bankruptcies and Total Debts of Bankrupt Firms
  • 35. Japanese GDP Growth RateSource: http://www.treasury.gov.au/documents/817/images/05_article_4-18.gif
  • 36. Source: http://www.heritage.org/Research/AsiaandthePacific/images/bg1530cht5.gif
  • 37. Source: http://bilbo.economicoutlook.net/blog/wp-content/uploads/2009/04/japan_interest_rates.jpg
  • 38. So what went wrong?
    Government incompetence
    Lack of decisive action?
    Political failures
  • 39. Japanese Prime Ministers,
    1989-2001
  • 40. So what went wrong?
    Structural peculiarites of the Japanese economic system
    What about the Japanese people? Should they have spent more and demanded more?
  • 41. Social fallout of the bubble economy
  • 42. Aum Shinrikyo and the Kobe earthquake (1995)
  • 43. Enjo kosai “compensated dating”
    Hikikomori “acute social withdrawal”
    Tokokyohi “school refusal”
  • 44. Two Theories on the 'Lost Decade'
    • Caballero, Hoshi and Kashyap (2006)
    • 45. Hayashi and Prescott (2002)
  • Caballero, Hoshi and Kashyap (2006)
    • Japan's long recession could be attributed to a problem of Japanese financial system.
    • 46. In the recession period, Japanese banks misallocated credit by supporting zombie firms.
    • 47. Zombie firms – Low productivity firms, which should exit the market.
    • 48. Non-zombie firms –High productivity firms, which should operate or start to operate in the market.
    • 49. The existence of zombie firms interfered new entries by non-zombie firms.
  • Caballero, Hoshi and Kashyap (2006)
    • Why banks kept lending to Zombies?
    • 50. Basel capital standards
    (International standards governing banks' minimum level of capital)
    • When banks wanted to call in non-performing loan, they have to write off existing capital.
    • 51. The fear of falling below the capital standards led many banks to continue to extend credit to insolvent borrowers, gambling that somehow these firms would recover or that the government bail them out.
  • Caballero, Hoshi and Kashyap (2006)
  • 52. Hayashi and Prescott (2002)
    • What accounts for Japan's lost decade?
    • 53. Neo-classical growth model:
    Y = AKө(hE)1-ө
    where A is aggregate TFP (Total Factor Productivity),
    K is aggregate capital accumulation,
    h is hours of work per employee,
    E is aggregate employment.
    • Which component of Neo-classical growth model cause Japan's slow down over 10 year.
  • Hayashi and Prescott (2002)
  • 54. Hayashi and Prescott (2002)
  • 55. Hayashi and Prescott (2002)
  • 56. Hayashi and Prescott (2002)
  • 57. Hayashi and Prescott (2002): Growth Rate of Each Factor
    Source: Hayashi and Prescott (2002)
    • What's the cause of the decrease in GNP, then?
  • Hayashi and Prescott (2002): Model Fit
  • 58. Hayashi and Prescott (2002)
    • Was the slow down caused by a break down of the financial system?
    • 59. Hayashi and Prescott's (2002) answer is 'NO.'
  • Hayashi and Prescott (2002)
  • 60. Hayashi and Prescott (2002)
  • 61. Hayashi and Prescott (2002)
  • 62. Two Theories on the 'Lost Decade'
    Choose one theory you like, explain why you think your choice is better than the other thoery.
    • Caballero, Hoshi and Kashyap (2006)
    • 63. Hayashi and Prescott (2002)
  • 64. 45
    World’s 10 Largest Banks
  • 65. 16-46
    Japan
    Keiretsu form of industrial organization
    A group of companies that are controlled through interlocking ownership—companies own stock in each other
    Encourages strong loyalty among the companies, including favoritism in customer-supplier relationships
    Each keiretsu has a main bank that typically owns stock in other members of the keiretsu
  • 66. 16-47
    Japan (Cont.)
    Japanese banks may own equity in nonfinancial companies, although this is now limited to 5 percent in any single firm
    Organization of the banking system
    City banks—represent a disproportionately large fraction of the world’s biggest banks
    Regional banks
    Special-purpose financial institutions—include long-term credit banks, specialized small business and industrial institutions
  • 67. 16-48
    Japan (Cont.)
    Historically corporate debt markets have been suppressed, further enhancing power of banks
    The result is a vast majority of debt financing that comes from the banking system
    Unlike Germany, stock market is quite large, however extensive cross ownership masks high degree of concentration of ownership
    Adopted laws that separate commercial banking from investment banking, however, this separation has been eroded
  • 68.
  • 69.
  • 70.
  • 71. 52
  • 72. 53
  • 73. Central banks’ balance sheets as a percentage of GDP
  • 74. 55
  • 75. 56
    1Current Status of Postal Services in Japan
    ○ Postal Service
    - Total Mail Volume: 24.8 Billion Items (FY2005)
    ○ Postal Savings
    - Balance: 1.7 Trillion USD* (FY2005)
    - Number of Household Users: Approx. 39.2Million Households
    (Rate of Household Users: 77.8%) (Oct. 2005)
    - Number of ATMs: 26,297 Units (Mar. 2006)
    ○ Postal Life Insurance
    - Total Amount of Funds: 1.0 Trillion USD* (FY2005)
    - Number of Household Insurers: Approx. 28 Million Households
    (Rate of Household Insurers: 56.1%) (Mar. 2004)
    ○ Post Office
    - Number of Post Offices: 24,631 (Including Contracted Post Office: 4,410) (Mar. 2006)  
    *1 USD = 117.47 Yen (March, 2006)
  • 76. 57
    2 Governance in the Postal Sector
    1. Global Governance - Global Network and International Norms
     ・ Postal network: a global network of interconnected national networks
     ・ UPU Constitution, Convention or Standards
    2. National Governance - Institutional Framework -
     ・ Relationship between regulator and operator: identical / separated
     ・ ‘Transition from Public to Private Sector’
    3. Governance within Operators - Norms of Behavior -
     a) internal governance – CSR, Internal control, compliance, enhanced internal audit, improved efficiency of operations, consumer satisfaction, etc.
     b) enhanced external audit, acceptance of external executive officers
     c) provision of services based on user preferences
  • 77. 58
    3 Market Change and Expected Reform in Governance
    Swift and flexible provision
    of diverse services
    1. Enhanced and diversified user needs
    2. Increased competition in services or operators
    3. Development and use of latest ICT technologies
    4. Diversified international collaboration among stakeholders
    Increased freedom of
    business management
    Improved entry intonew businesses
    Increased satisfaction of complex user needs
    Improved quality of servicethrough better technologies
    International regime to
    reflect different values
  • 78. 59
    Fund Management of Postal Life Insurance
    Fund Management of Postal Savings
    *1 USD = 117.47 Yen(March, 2006)
    Total Assets: 1.7 Trillion USD* (End of FY 2005)
    Total Assets: 1.0 Trillion USD* (End of FY 2005)
    4 Basic Principles of Privatization of Postal Services in Japan
    ・ Vitalize economies through transition from public to private sector
    ・ Reform in line with entire structural reform in Japan
    ・ Consider convenience of consumers
    ・ Utilize Japan Post’s resources (such as the existing network)
    ・ Consider present conditions of employment in Japan Post
  • 79. 60
    Promulgation of Laws on Privatization of Postal Services
    Government
    Japan Post
    Preparatory Period
    Holding Company
    Government
    Transitional Period
    Holding Company
    Postal Insurance Company
    Postal Savings Bank
    Postal Insurance Company
    Postal Savings Bank
    Incorporated Administrative Agency: Management Organization for Postal Savings and Postal Life Insurance
    *
    *
    Post Office Company
    Postal Service Company
    100% Share
    100% Share
    * Holding Company is obliged to dispose of all the shares of two financial companies during the transitional period
    5Process for Privatization
    Privatization (October 2007)
    Final Privatization (October 2017)
    Note: The Government is obliged to hold over one third of the shares of Holding Company
  • 80. 61
    6 Characteristics of Privatization
    ○ When privatized, services will be basically the same as those of pre-privatization
    ○ Separation based on business function (Postal Service, Savings, Insurance, Post Office, and Holding Co.)
    ○ Complete privatization of two financial companies within 10 years (Disposal of all the shares)
    ○ To balance the degree of freedom in management, with an equalfooting with private companies during the transitional period
  • 81. 62
    7 Maintaining Level of Post Office Network
    ○ Post Office Company is obliged to maintain a nationwide post office network
    ○ Criteria: post offices are to be established:
     a) to meet the needs of local residents
     b) more than one in every municipality
     c) in areas that are easily accessible to local residents considering traffic, geography, and other relevant circumstances
     * In sparsely populated areas, maintain level of post office network that exists at the time of privatization
  • 82. 63
    8 Maintaining Level of Postal Services
    ○ Postal Service Company is obliged to provide universal postal service
    ○ Ensure nationwide financial services at the post offices
    - Two financial companies are obliged to have stable agency contracts during the transitional period
    - After the transitional period, the Social-Regional Contribution Fund can be utilized to maintain necessary financial services
    ● Holding Company is obliged to accumulate funds from its profit up to one trillion Yen
    ● To implement Social Contribution Activity and Regional Contribution Activity, profit from the Fund can be provided
    Social-Regional Contribution Fund
  • 83. 64
    9 Postal Service after Privatization
    ○ Ensure provision of universal postal service
    ○ Enable flexible revision of postage rates
    ○ Enable expansion into international logistics business
    ○ Domestic parcel post business will be regulated under general cargo distribution rules
  • 84. 65
    10 Privatization from the Perspective of Governance
    ○ Postal Privatization in Japan is expected to affect governance in the following ways:
     a) improve oversight functions by the regulator over the operator
     b) enable more flexible operations and entry into new business
     c) enhance the operator’s ability of governance in business management
    <Anticipated Profit>             (Unit: Million USD*)
     (From “Skeleton Plan for Business Succession Plan of Japan Post”)
    (*1USD = 118 Yen (Nov. 2006))
  • 85. ECON 4315: The Japanese Economy
    Lecture 5
    Demographics
    Satoshi Tanaka
    02/21/2011
  • 86. Goals
    1. Overview the basic facts of Japanese population and its future
  • 87. Goals
    2. Examine the consequence of aging and a decrease in population
  • 88. Goals
    3. Understand the cause of these changes and possible reactions of the government
  • 89. Fact 1: Total Population
    • Has just hit its historical maximum (128 million)
    • 90. Expect to decrease in the coming decades
  • Fact 2: Aging
    • One out of 5 persons is older than 65
    • 91. This ratio is expected to increase
    • 92. In 2050, this ratio will hit 40%!!
  • Fact 3: Regional Difference
    • Aging develops faster in rural areas
    • 93. In city level, this trend is more evident
    • 94. In some cities, this ratio has already exceeded 30%
  • Summary of Facts
    Total population
    • has just hit the historical high
    • 95. is going to decrease for the decades
    Aging
    • More than 20% of population is >65
    • 96. This ratio will increases to 40%
    Regional Disparity
    • Aging goes faster in rural areas
  • Why Japan needs to be worried?
    Question: Why does Japan need to be worried for the following demographic changes?
    • Population decrease
    • 97. Aging
    • 98. Regional Disparity
  • Economic Impacts of Population Decrease
    • Forget about the impacts of aging right now
    • 99. Focus on population size only
    • 100. When age structure is fixed, what is the economic impact of population change?
    • 101. Do people in this country become poorer?
  • Economic Impacts of Population Decrease
    • Not necessarily
    • 102. Economy size (in GDP) probably shrinks
    • 103. Might lose scale economy at country level
    • 104. National Defense
    • 105. TV channels etc..
    • 106. Language-related things (translated books)
    • 107. GDP per capita is more important for income level
    • 108. Several countries prosper in spite of its small size
    • 109. E.g., Singapore, Switzerland
  • Economic Impacts of Aging
    • Next forget about the population size
    • 110. Focus on the age structure
    • 111. Suppose population do not change but age structure somehow change
    • 112. What is the economic impacts?
  • Economic Impacts of Aging
    • Saving Rates
    • 113. Net saving rates might go down =>Investment might go down
    • 114. Demand structure
    • 115. Any business for young generation face a weak demand (e.g., education, )
    • 116. Any business for old generation face a strong demand (e.g., nursing home, day care)
  • Economic Impacts of Aging
    • Social Security
    • 117. Pension/Health care
    • 118. Hard to maintain pay-as-you-go system
    • 119. Example: Overlapping Generation Model
    • 120. The young produce and save half of their goods for the pension.
    • 121. The old only consume.
    • 122. If GDP decreases from 100 to 50, ...
  • Economic Impacts of Aging in Rural Areas
    • Typical Characteristics
    • 123. High ratio of old people (Could exceed 50%!)
    • 124. Small town/village
    • 125. Far away from large cities
    • 126. No industry that attracts young population
  • Economic Impacts of Aging in Rural Areas
    =>Too old or/and too small to provide fundamental infrastructure that is essential for old people
    • Grocery
    • 127. Compulsive public education
    • 128. Doctor/nursing care
    • 129. Public transportation
  • Why the demographic changes are happening in Japan?
    Question: Why are the following demographic changes are happening in Japan?
    • Population decrease
    • 130. Aging
  • What brought these changes?
    • Population decrease and aging
    • 131. Very few immigration
    • 132. Population # of Birth < # of Death
    • 133. Possible direct cause
    • 134. Longer life expectancy
    => Will bring aging and population increase
    • Low fertility
    => Will bring both aging and population decrease
  • 135. Life Expectancy: Japan vs US
    • Blue solid and broken: Japanese female and Males
    • 136. Red: US
  • Evidence of Fewer Kids
    • Blue: Number of kids per adult
    • 137. Red: Number of old per adult
  • Evidence of Fewer Kids II
    • Measure how many babies a woman bears by her age 40
    • 138. Look by cohort (generation)
    • 139. Women born in 1940 bore 1.63 babies on average by her 30th birthday
  • Why are Japanese having fewer kids?
    • Question: Why do Japanese have fewer kids recently?
    • 140. Question: This is also true for many of the developed countries (Germany, Italy, Korea). Why this is so?
  • Why are Japanese having fewer kids?
    • From the viewpoint of marriage,
    (Average # of Babies at certain age)
    = (Ratio of Married | age)*(# of Babies | Married,age)
    + (Ratio of Single | age)*(# of Babies | Single,age)
    • Timing of marriage
    • 141. # of babies in wedlock
    • 142. # of babies out of wedlock
  • Timing of Marriage
    • People are getting married later
    • 143. People who stay single for their life are increasing
    • 144. (Ratio of Married|Age) have been decreasing
  • Fraction of Births Out of Wedlock
    • Unlike other developed countries, there are very few births out of wedlock
    • 145. USA: 34%, UK: 38%, France: 44%
    • 146. The change of (# of Babies|Single,age) does not seem to have quantitative impacts
  • # of Births in Wedlock
    • # of births married couples bear have not changed much
    Average # of Births Married Couples Bear During First 15yrs
  • 147. Summary
    • Average # of Babies at certain age
    = (Ratio of Married|age)*(# of Babies|Married,age)
    +(Ratio of Single |age)*(# of Babies|Single,age)
    • Late marriage seems to be responsible for fewer kids
  • Numerical Examples
    • Average # of Babies a Woman gives by age 30=0.59
    Pr(Married|age30, female) = 0.40
    (# of Babies|Married, female, age30) = 1.40
    (# of Babies|Single,age) = 0.05
    0.59 = 0.4* 1.4+ (1-0.4)*0.05
    = 0.56+0.03
  • 148. Numerical Questions about Demographic
    • A=Pr(Married | age30, female) = 0.40
    • 149. B=(# of Babies | Married, female, age30) = 1.40
    • 150. C=(# of Babies | Single,age) = 0.05
    • 151. Q: Suppose government has a two policy options
    • 152. Policy 1: B increases from 1.40 to 1.50
    • 153. Policy 2: C increases from 0.05 to 0.15
    • 154. Which policy is more effective to increase the number of births?
  • What deters people from getting married?
    • Why do many people don't choose marriage recently?
    • 155. This happens not only in Japan.
  • What deters people from getting married?
    • Increase of female workers' income
    • 156. Automation of housekeeping
    • 157. Cohabitation
    • 158. Need to know which socioeconomic groups (income, education, region, occupation) deter their marriage
  • Policy
    • Should and can the government do something to change this trend?
    • 159. Possible policy targets
    • 160. Encourage marriage
    • 161. Encourage married couples to bear more births
    • 162. Encourage single women to bear more births
    • 163. Concerns
    • 164. Marriage itself might not necessarily lead more births
    • 165. Should pay attention to happiness of individuals
  • Current Government Policy
    • Subsidy to daycare, kindergartens, health care etc..
    • 166. Encourage to take parental leave (still hard to take)
    • 167. Direct subsidy to parents
    • 168. Might need to consider apparently unpopular policies (at least among conservative politicians)
    • 169. Immigration
  • Regional Differences
  • 170. Comparison by Latitudes
     
     
    Chicago, Il
    Hokkaido (Northern Island)
    Atlanta, GA
    Tokyo
    Tampa, FL
    Okinawa (Southern Isalands)
    Overview
    • Local Governments
    • 171. 47 prefectures
    • 172. 1,788 municipals (1788 cities, 812 towns, 193 villages)
    • 173. Nature
    • 174. Islands longer in length (N-S) than width (W-E)
    • 175. Despite of small area, weather is significantly different
  •  
     
     
     
    Population
    City
    Rank
    7%
    8,489,653
    Tokyo
    1
    3%
    3,579,628
    Yokohama
    2
    2%
    2,628,811
    Osaka
    3
    2%
    2,215,062
    Nagoya
    4
    1%
    1,880,863
    Sapporo
    5
    1%
    1,525,393
    Kobe
    6
    1%
    1,474,811
    Kyoto
    7
    1%
    1,401,279
    Fukuoka
    8
    1%
    1,327,011
    Kawasaki
    9
    1%
    1,176,314
    Saitama
    10
    Overview
    • Local Governments
    • 176. 47 prefectures
    • 177. 1,788 municipals (1788 cities, 812 towns, 193 villages)
    • 178. Large Cities:
  • Sapporo
    Kyoto
    Kobe
    Fukuoka
    Saitama
    Kawasaki
    Yokohama
    Osaka
    Nagoya
  • 179. Comparison between Prefectures
    • Want to compare prefectures by various perspectives
    • 180. Demographics
    • 181. Industry
    • 182. Income
    • 183. Labor Markets
    • 184. In the following maps, dark color means large value
  • By Population
    • Population is concentrated in the area facing the Pacific Ocean
    • 185. Population of Tokyo accounts for about 10% of the total population
    • 186. This tendency does not change when the density is used
  • By Population Growth
    • Population decrease has started in rural areas
    • 187. Only few metro areas experience a population increase
    • 188. In Akita (lowest), population decreases by 1%
    • 189. In Aichi (highest), population increases by 0.7%
    Akita
    Aichi
  • 190. By Aging (Ratio of People>65)
    • Aging society is more prevalent in less dense areas
    • 191. In Shimane, more than 25% of population are older than age 65
    • 192. Populations in metro areas are relatively young
    • 193. Tokyo: 19%, Osaka: 19%
    Shimane
  • 194. By Per Capita Income
    • People in metro area earn more than those in rural
    • 195. Income of Tokyo is the highest ($45,590)
    • 196. Income of Okinawa is the lowest ($19,870)
    • 197. In terms of Gini coefficients,
  • By Manufacture Industry
    • Manufacture industry is relatively concentrated in the middle of the country
    • 198. Most large companies locate its HQ in Tokyo
    • 199. Toyota locates its HQ in Toyota City in Aichi
    HQ of Toyota
  • 200. Concentration of Business in the Tokyo Metro Area
    • Out of 67 Japanese companies listed in FORTUNE GLOBAL 500, 50 of them (75%) locate their HQs in Tokyo.
    • 201. Only 7 companies locate their HQs in Osaka, 2nd largest city.
    • 202. Out of 162 U.S. companies in the same list, only 22 (13%) of them locate their HQs in NYC.
    • 203. Coca-Cola?
    • 204. Microsoft?
    • 205. Wal-Mart?
    • 206. Target?
  • By Unemployment Rate
    • Okinawa (out of the map) is the highest (12%)
    • 207. Shikoku island and Osaka area are higher
  • Summary of Comparisons
    • Metro areas tend to be richer and younger
    • 208. In rural areas, in addition to aging, population starts to shrink
    • 209. Manufacture industry is more prevalent in the center of Japan
    • 210. Most large companies locate its HQ in Tokyo while Toyota does not
  • GNP per Worker Compared with the U.S.
    Source: Hayashi and Prescott (2008)
  • 211. Tokyo Earthquake
    •     One of the most destructive  earthquake in history , struck the Tokyo area in 1923.
    • 212.     The earthquake and the widespread fires it caused resulted the deaths of over 100,000 people and damaged more than 650,000 building.
    • 213.     As many as 45 percent of surviving workers lost their jobs because so many business were destroyed.
      
     
      
     
  • 214. Ultranationalism
    •     Economic disaster fed the dicontent of the leading military officials and extreme nationalist, or ultranationalist.
    • 215. western industrial powers, they pointed out, had long ago grabbed huge empires.
    • 216.  Japanese nationalist were further outraged by racial policies in the United States, Canada, and Australia that shut out Japanese immigrants.
  • Economic downturn during 1930-32
    1. Hamaguchi, finance minister Junnosuke Inoue, and foreign minister Kijuro Shidehara) deliberately adopted a deflationary policy in order to eliminate weak banks and firms and to prepare the nation for the return to the prewar gold parity (fixed exchange rate with real appreciation)
     Externally, Black Thursday
  • 217. Military and right-wing movements emerged
  • 218. "Shidehara Diplomacy" which to them seemed too soft on China. Their primary goal was to "defend Japanese interests in Manchuria and Mongolia [more precisely, eastern part of "Inner" Mongolia]).
  • 219. Parties
  • 220. Political Map in the early 1950s
    Conservative Forces
    Liberal Party (Yoshida Shigeru) led the peace treaty and the US-Japan Security Treaty.
    Democratic Party (Hatoyama Ichiro) objected the “subordinate independence.”
    Progressive Forces
    Socialist Party (Left faction) sought a revolutionary transformation of capitalism at home and opposed to the partial peace treaty. .
    Socialist Party (Right faction) sought partial reform of capitalism and accepted the partial peace treaty.
    Communist Party lost popular confidence since they took violent actions suggested by Stalin
  • 221. 1955
    The two conservative parties merged to found the Liberal Democratic Party (LDP).
    LDP would remain in power in the following 38 years.
    Business Leaders financially supported.
    The bureaucrats offered policy expertise and manpower to the party. Leading midcareer bureaucrats left their posts to run for political office under the LDP banner.
    The two factions of the Socialist Party reunited
  • 222. Economic Policy Debate
    Arisawa Hiromi (Economist U of Tokyo) and Tsuru Shigeto
    Japan should develop natural resources (coal and hydroelectric powers)
    minimize interdependence, fearing foreign conflicts that might endanger oil supplies.
    Nakayama Ichiro
    only sustainable choice was to join the global economy, by importing raw materials and exporting manufactured goods
  • 223. Yoshida VS Hatoyama
    The followers of Yoshida Shigeru followed the American lead in containing the communist bloc.
    Hatoyama and his allies sought independence from US. They succeeded in normalizing relations with Soviet Union in 1956 without Peace Treaty.
  • 224. Yoshida Doctrine
    Japan must focus on economic growth
    Japan must avoid international conflict
    Yoshida Shigeru
    Rely on US for security
    Follow US lead in international relations
    Focus all energy on economic development
  • 225. Japan: Neo-mercantilism
    Yoshida Doctrine details:
    Focus on Growth
    Grow through export, export, export
    Protect domestic industry
    Focus on market share and growth, not consumer satisfaction
  • 226. Japan’s Economic Model
    Export-led Growth
    Protect domestic firms at first
    Demand that they export
    Provide government assistance to direct investment and to support export
    Brilliantly successful for Japan (& later Korea, Taiwan, Singapore, Hong Kong, & now China)
    Standard (not Japanese) 1940s development model
    Import Substitution
    Protect domestic industries, produce for domestic market
    Import only raw materials and capital goods
    Fails miserably: leads to debt and weak domestic industries that never “grow up”
  • 227. Bureaucracy’s role in economic planning
    Administrative Guidance
    Control of import licenses
    Control of capital allocation
    Encourage collaborative R&D
    Amakudari (descent from heaven)
    Chalmers Johnson’s Classic Study of bureaucracy in Japanese economic development
  • 228. MITI (Ministry of International Trade and Industry)
    Founded 1949
    Responsible for
    Deciding on the structure of industries and their distribution activities
    Guiding the development of industries and their distribution activities
    Co-ordination of Japan's foreign trade and commercial ties
    Managing specific areas such as raw materials
  • 229. LDP
    The LPD has a central position between the bureaucracy and business
    Its uninterrupted tenure of office for the past decades was a necessary guarantee of the government-industry relationship in Japan (Reading 1992)
    It assumes a central position between the bureaucracy and business, co-ordinating their interests and playing their referee
  • 230. Business (zaikai)
    The business world is represented by a
    number of organizations
    The most important ones are the
    keidanren (Federation of Economic Organization),
    nikkeiren (Federation of Employers` Association),
    keizai-doyukai (Committee for Economic Development)
    the Japan Chamber of Commerce and Industry
  • 231. Formal and informal consultation among the three players
    The bureaucracy maintains good access to the communication networks by practicing amakudari (descending from heaven), which removes retired bureaucrats from MITI etc into the LPD or into corporations to benefit from their bonds
    Strong interdependence with a clear mission
    Cooperation is not always harmonious and the centre of many scandals
  • 232. Zaibatsu
  • 233. Keiretsu
    The biggest keiretsus :
    Mitsubishi,
    Mitsui,
    Sumitomo,
    Fuji,
    Dai-Ichi Kangyo (DKB)
    Sanwa
  • 234. DKB
    Asahi Mutual Life Insurance (DKB)
    The Dai-ichi Mutual Life Insurance Company (DKB)
    Daiichi Sankyo
    Dentsu (DKB)
    Fujitsu (Furukawa)
    Hitachi (Hitachi)
    Ishikawajima-Harima Heavy Industries (IHI)
    Isuzu (IHI)
    ITOCHU (DKB)
    JFE Holdings (Kawasaki)
    Kawasaki Heavy Industries (Kawasaki)
    Kao (DKB)
    K Line (Kawasaki)
    Kobe Steel (Suzuki)
    Meiji Seika (DKB)
    Mizuho (Mizuho Financial Group)
    Seibu Department Stores (DKB)
    Sojitz (Suzuki)
    Sompo Japan Insurance (DKB)
    Taiheiyo Cement (Asano)
    Tokyo Dome (DKB)
    The Tokyo Electric Power Company (DKB)
    Tokyo FM (DKB)
    Yokohama Rubber Company (Furukawa)
  • 235. Structure
  • 236. Horizontal keiretsu (kinyû keiretsu)
    Affiliated `brother and sister` companies spanning different industries
  • 237. Vertical Integration
  • 238. Interlocking Shareholdings
    A typical Japanese firm has about 70 per cent of its shares held by other companies
    The shares are held by a large number of firms in relatively small fractional parcels
    Firm has some kind of transactional relationship with these corporate shareholders (banking, insurance, lending, supply of inputs, purchase of outputs)
    Firm holds shares in many of the these firms: the sharefoldings are reciprocal
    Firms hold each other`s shares as “stable shareholders“ (antei kabunushi) (Sheard 1994)
  • 239. Advantages
    Takeover is impossible
    Companies also have other strong relationships with each other, they are trading with each other
  • 240. Disadvantages
    Inflexibility
    Criticism among companies is not
    possible either
    Also prevents access to the market for many foreign companies in Japan
  • 241. Characteristics
    Close long-term relationship between
    banks and firms in the same group.
    Banks “rescue” affiliated firms.
    Banks place insiders on firms’ board (interlocking directorates - parson).
    Banks hold some shares.
  • 242. Keiretsu Finance
    “Main bank” is a dominant lender for its affiliated firms.
    Avoid free-rider problem and duplication of monitoring and screening efforts.
    Long-term relationship makes shirking costly to
    borrowers.
    • Keiretsu firms have easier access to external
    funds.
    • Empirical Evidence
    • Keiretsu firms rely less on internal funds
  • 243. Adverse Loan Selection
    Good firm and bad firm
  • 244. Conflicts of Interest
    Debt holders face fixed payout.
    Equity holders hold residual claim.
    When firms are close to insolvent,
    Equity holders have nothing to lose from taking excessive risk.
    Debt holders do not reap the benefits of risk taking.
    Debt holders prefer conservative investment
    strategy.
    Liability mix might be important to firm value.
  • 245. Banks
    To (partially) solve adverse selection, screening is
    important.
    To (partially) solve moral hazard, monitoring is important.
    Banks might be in a better positive to do both.
    Banks observe cash flow closely (provided that borrowers’ profit and loss enter into their deposits.
    Banks solve “free rider problem” and duplication of monitoring efforts in case of borrowers’ financial distress.
    Banks must have incentive to do this, though.
    Government bailout or deposit insurance partly reduce this incentive.
  • 246. Japanese Business Model
    Post “Ford” industrial model
    Dr. W. Edwards Deming:
    Focus primarily on QUALITY
    Use statistical analysis to measure and improve quality
    Dr. W. Edwards Deming
    Empower shop floor workers to control and guarantee quality
    First presented ideas to US Automakers but was rejected
    Took his ideas to Japanese industrial leaders and they adopted them, leading them to become the world’s leaders in QUALITY
  • 247. There was another major political protests in Kyushu: The Mitsui Corporation’s MiikeCoal Mine in 1960.
    Since then the conservative government deemphasized the drive for constitutional revision and confrontation with unions.
    The result was a new politics of high growth of the economy.
    Prime Minister Hayatolaunched the “Income Doubling Plan” to commit economi growth to double GNP by 1970.
  • 248. Environmental Protests
    Chemical pollution-related diseases appeared in 1950s.
    Mercury poisoning struck and killed residents in southern Japan (Minamata-
    Kumamoto) and northern Japan (Niigata).
    Other notable protests:
    Air pollution (Mie)
    Cadmium (Jinzu River-Toyama)
  • 249. Environment and Kunetz Curve
    Part 1
    Part 2
    Part 3
    Part 4
  • 250. Postwar Business Cycles in Japan
    Postwar business cycles in Japan. One complete cycle consists of a period of expansion and a period of contraction.
  • 251. Postwar-1973: Balance of Trade Constraint
    Most Japan's economic fluctuation were triggered by fluctuations in the international balance of payments.
    • The Bretton Woods Regime (1945)
    • 252. 1 dollar = 360 yen
    • 253. Mechanism
    • 254. Japan's foreign reserves were relatively scarce.
    • 255. Japan had to keep the balance of trade (EX - IM) positive.
    • 256. In boom, IM rose faster than EX.
    • 257. The Gov'nt raised interest rates and cut expenditure.
    • 258. Boom ended and contraction started.
  • Postwar Business Cycles in Japan
    Postwar business cycles in Japan. One complete cycle consists of a period of expansion and a period of contraction.
    Source: The Japanese Economy, Takatoshi Ito
  • 259. Postwar-1973: Balance of Trade Constraint
    Most Japan's economic fluctuation were triggered by fluctuations in the international balance of payments.
    • The Bretton Woods Regime (1945)
    • 260. 1 dollar = 360 yen
    • 261. Mechanism
    • 262. Japan's foreign reserves were relatively scarce.
    • 263. Japan had to keep the balance of trade (EX - IM) positive.
    • 264. In boom, IM rose faster than EX.
    • 265. The Gov'nt raised interest rates and cut expenditure.
    • 266. Boom ended and contraction started.
  • 1973 - 1980s: Aggregate Supply Shock
    • Floating Exchange Rate (1973)
    • 267. Two Oil Crisis (1973, 1979)
    The first oil crisis:
    • A sharp decrease in productivity due to high oil price.
    • 268. A delay in the restraining of demand => wild inflation.
    • 269. One of worst postwar recession.
    The second oil crisis:
    • Monetary policies were conducted carefully.
    • 270. Recession was long but not as acute as the 1st one.
    • 271. Business cycles are caused by aggregate supply shocks rather after 1973.
  • Bubble (1986-1991)
    • Average GDP growth rate: 5.8%
    • 272. Exchange rate:
    $1.00 =¥168 (1986)
    $1.00 =¥134 (1991)
    • Real estate price went up
    • 273. Stock price wend up: Change of the Nikkei Stock Index
    • 274. => Bubble Economy
    • 275. People buy stock and real estate at high prices because they believe that other people believe that prices are going to increase
    • 276. =>Self-fulfilling mechanism
  • After Bubble (1992-)
    • Average GDP growth rate: 1.3% Pretty Low!
    • 277. Exchange rate:
    $1.00 =¥126 (1992)
    $1.00 =¥106 (2008)
    • Serious recession: ’90s as “Lost Decade”
    • 278. Real estate price went down
    • 279. Stock price went down: Change of the Nikkei Stock Index
    • 280. Efforts to get out of the recession
    • 281. Zero interest rate policy by the Bank of Japan
    • 282. Aggressive fiscal policy
  • Japan's Land Price through Bubble
  • 283. Firm's Bankruptcies and Total Debts of Bankrupt Firms
  • 284. Theories of Business Cycles
    Question: How can we explain the Lost Decade in Japan?
    Old Keynesian
    • Demand shocks cause recessions.
    • 285. Price and wage are sluggish.
    • 286. So, monetary policy must be done correctly.
    • 287. IS curve: Y = C(Y) + I(r) + G
    • 288. LM curve: M/P = L + k*Y – c*r
    Y: Aggregate income, C: Consumption, I: Investment
    G: Government expenditure, M: Money supply, P: Price,
    r: Real interest rate
    • Fiscal policy and monetary policy increase GDP??
  • Theories of Business Cycles
    Recent Agreements
    • ”Real disturbances are an important source of economic fluctuations; the hypothesis that business fluctuations can largely be attributed to exogenous random variations in monetary policy has few if any remaining adherents.”
    Michael Woodford (2008)
    • Doubt on the effect of government spending:
    • 289. 'Multiplier effect' is not so big.
    • 290. Increase government's debts, which consumers have to pay by tax in future.
    • 291. Monetary policy for stabilization by controlling people's expectations.
  • Two Theories on the 'Lost Decade'
    • Caballero, Hoshi and Kashyap (2006)
    • 292. Hayashi and Prescott (2002)
  • Caballero, Hoshi and Kashyap (2006)
    • Japan's long recession could be attributed to a problem of Japanese financial system.
    • 293. In the recession period, Japanese banks misallocated credit by supporting zombie firms.
    • 294. Zombie firms – Low productivity firms, which should exit the market.
    • 295. Non-zombie firms –High productivity firms, which should operate or start to operate in the market.
    • 296. The existence of zombie firms interfered new entries by non-zombie firms.
  • Caballero, Hoshi and Kashyap (2006)
    • Why banks kept lending to Zombies?
    • 297. Basel capital standards
    (International standards governing banks' minimum level of capital)
    • When banks wanted to call in non-performing loan, they have to write off existing capital.
    • 298. The fear of falling below the capital standards led many banks to continue to extend credit to insolvent borrowers, gambling that somehow these firms would recover or that the government bail them out.
  • Caballero, Hoshi and Kashyap (2006)
  • 299. Hayashi and Prescott (2002)
    • What accounts for Japan's lost decade?
    • 300. Neo-classical growth model:
    Y = AKө(hE)1-ө
    where A is aggregate TFP (Total Factor Productivity),
    K is aggregate capital accumulation,
    h is hours of work per employee,
    E is aggregate employment.
    • Which component of Neo-classical growth model cause Japan's slow down over 10 year.
  • Hayashi and Prescott (2002)
  • 301. Hayashi and Prescott (2002)
  • 302. Hayashi and Prescott (2002)
  • 303. Hayashi and Prescott (2002)
  • 304. Hayashi and Prescott (2002): Growth Rate of Each Factor
    Source: Hayashi and Prescott (2002)
    • What's the cause of the decrease in GNP, then?
  • Hayashi and Prescott (2002): Model Fit
  • 305. Hayashi and Prescott (2002)
    • Was the slow down caused by a break down of the financial system?
    • 306. Hayashi and Prescott's (2002) answer is 'NO.'
  • Hayashi and Prescott (2002)
  • 307. Hayashi and Prescott (2002)
  • 308. Hayashi and Prescott (2002)
  • 309. Two Theories on the 'Lost Decade'
    Choose one theory you like, explain why you think your choice is better than the other thoery.
    • Caballero, Hoshi and Kashyap (2006)
    • 310. Hayashi and Prescott (2002)
  • Summary
    • Business cycles in the prewar period was relatively large, and the balance of trade often triggered recessions.
    • 311. After WWII, business cycles became relatively stable, and recession were mainly due to aggregate supply shocks.
    • 312. Through 1990s, Japan experienced severe recession started with the burst of the bubble.
    • 313. Caballero, Hoshi and Kashyap (2006) attributed the cause of the long recession to a problem in financial markets.
    • 314. Hayashi and Prescott (2002) explained the slow down by negative productivity shocks.
  • 1973 - 1980s: Aggregate Supply Shock
    • Floating Exchange Rate (1973)
    • 315. Two Oil Crisis (1973, 1979)
    The first oil crisis:
    • A sharp decrease in productivity due to high oil price.
    • 316. A delay in the restraining of demand => wild inflation.
    • 317. One of worst postwar recession.
    The second oil crisis:
    • Monetary policies were conducted carefully.
    • 318. Recession was long but not as acute as the 1st one.
    • 319. Business cycles are caused by aggregate supply shocks rather after 1973.
  • Bubble (1986-1991)
    • Average GDP growth rate: 5.8%
    • 320. Exchange rate:
    $1.00 =¥168 (1986)
    $1.00 =¥134 (1991)
    • Real estate price went up
    • 321. Stock price wend up: Change of the Nikkei Stock Index
    • 322. => Bubble Economy
    • 323. People buy stock and real estate at high prices because they believe that other people believe that prices are going to increase
    • 324. =>Self-fulfilling mechanism
  • After Bubble (1992-)
    • Average GDP growth rate: 1.3% Pretty Low!
    • 325. Exchange rate:
    $1.00 =¥126 (1992)
    $1.00 =¥106 (2008)
    • Serious recession: ’90s as “Lost Decade”
    • 326. Real estate price went down
    • 327. Stock price went down: Change of the Nikkei Stock Index
    • 328. Efforts to get out of the recession
    • 329. Zero interest rate policy by the Bank of Japan
    • 330. Aggressive fiscal policy
  • Japan's Land Price through Bubble
  • 331. Firm's Bankruptcies and Total Debts of Bankrupt Firms
  • 332. Theories of Business Cycles
    Question: How can we explain the Lost Decade in Japan?
    Old Keynesian
    • Demand shocks cause recessions.
    • 333. Price and wage are sluggish.
    • 334. So, monetary policy must be done correctly.
    • 335. IS curve: Y = C(Y) + I(r) + G
    • 336. LM curve: M/P = L + k*Y – c*r
    Y: Aggregate income, C: Consumption, I: Investment
    G: Government expenditure, M: Money supply, P: Price,
    r: Real interest rate
    • Fiscal policy and monetary policy increase GDP??
  • Theories of Business Cycles
    Recent Agreements
    • ”Real disturbances are an important source of economic fluctuations; the hypothesis that business fluctuations can largely be attributed to exogenous random variations in monetary policy has few if any remaining adherents.”
    Michael Woodford (2008)
    • Doubt on the effect of government spending:
    • 337. 'Multiplier effect' is not so big.
    • 338. Increase government's debts, which consumers have to pay by tax in future.
    • 339. Monetary policy for stabilization by controlling people's expectations.
  • Two Theories on the 'Lost Decade'
    • Caballero, Hoshi and Kashyap (2006)
    • 340. Hayashi and Prescott (2002)
  • Caballero, Hoshi and Kashyap (2006)
    • Japan's long recession could be attributed to a problem of Japanese financial system.
    • 341. In the recession period, Japanese banks misallocated credit by supporting zombie firms.
    • 342. Zombie firms – Low productivity firms, which should exit the market.
    • 343. Non-zombie firms –High productivity firms, which should operate or start to operate in the market.
    • 344. The existence of zombie firms interfered new entries by non-zombie firms.
  • Caballero, Hoshi and Kashyap (2006)
    • Why banks kept lending to Zombies?
    • 345. Basel capital standards
    (International standards governing banks' minimum level of capital)
    • When banks wanted to call in non-performing loan, they have to write off existing capital.
    • 346. The fear of falling below the capital standards led many banks to continue to extend credit to insolvent borrowers, gambling that somehow these firms would recover or that the government bail them out.
  • Caballero, Hoshi and Kashyap (2006)
  • 347. Hayashi and Prescott (2002)
    • What accounts for Japan's lost decade?
    • 348. Neo-classical growth model:
    Y = AKө(hE)1-ө
    where A is aggregate TFP (Total Factor Productivity),
    K is aggregate capital accumulation,
    h is hours of work per employee,
    E is aggregate employment.
    • Which component of Neo-classical growth model cause Japan's slow down over 10 year.
  • Hayashi and Prescott (2002)
  • 349. Hayashi and Prescott (2002)
  • 350. Hayashi and Prescott (2002)
  • 351. Hayashi and Prescott (2002)
  • 352. Hayashi and Prescott (2002): Growth Rate of Each Factor
    Source: Hayashi and Prescott (2002)
    • What's the cause of the decrease in GNP, then?
  • Hayashi and Prescott (2002): Model Fit
  • 353. Hayashi and Prescott (2002)
    • Was the slow down caused by a break down of the financial system?
    • 354. Hayashi and Prescott's (2002) answer is 'NO.'
  • Hayashi and Prescott (2002)
  • 355. Hayashi and Prescott (2002)
  • 356. Hayashi and Prescott (2002)
  • 357. Two Theories on the 'Lost Decade'
    Choose one theory you like, explain why you think your choice is better than the other thoery.
    • Caballero, Hoshi and Kashyap (2006)
    • 358. Hayashi and Prescott (2002)
  • Summary
    • Business cycles in the prewar period was relatively large, and the balance of trade often triggered recessions.
    • 359. After WWII, business cycles became relatively stable, and recession were mainly due to aggregate supply shocks.
    • 360. Through 1990s, Japan experienced severe recession started with the burst of the bubble.
    • 361. Caballero, Hoshi and Kashyap (2006) attributed the cause of the long recession to a problem in financial markets.
    • 362. Hayashi and Prescott (2002) explained the slow down by negative productivity shocks.
  • Definitions of GDP and GNP
    • GDP (or GNP):
    • 363. The market value of all final goods and services produced within a country in a given period of time.
    • 364. Plus income earned by its citizens abroad, minus income earned by foreigners in the country.
    • 365. - Is Satoshi's salary at U included in Japanese GNP? GDP?
    • 366. - Auto parts to make a Toyota car?
  • Analyzing Source of Economic Growth
    • GNP = Aggregate Supply
    = Aggregate Demand in the long-run. (AS = AD)
    • Growth of GNP = Growth of AS = Growth of AD.
    • 367. AS : Ys = F(A, K, L), A: Technology, K: Capital, L: Labor.
    • 368. AD : Yd = C + I + G + (EX – IM)
    C: Consumption, I: Investment,
    G: Government's expenditure, EX: Exports, IM: Imports.
    • Which components of AS and AD did contribute to the Japanese growth?
  • Which Components Did Drive the Supply?
    • AS : Ys = F(A, K, L), A: Technology, K: Capital, L: Labor.
    • 369. Which components did contribute to the growth of AS?
    Decomposition of Growth in Japan and US
    Source: Denison and Chung 1976a, pp.98-99
  • 370. Which Components Did Drive the Supply?
    Decomposition of the Growth in Japan of the 60s and 70s
    Source: Shinohara, 1986, p.17.
  • 371. Which Components Did Drive the Demand?
    Investment/GNP and Export/GNP in Real Terms
    Real Investment/GNP (solid line) and Real Export/GNP (broken line)
    Source: The Japanese Economy, Takatoshi Ito.
    • The Japanese growth in 50s and 60s was investment-led growth.
    • 372. Exports had been increasing continuously.