Reform of Economic Policy

in Japan

Week 2: Structural change of

the world economy since the 1990s

HIROKO OTA

1
 Outline
1. Structural change of
the world economy in the 1990s
2. Japan’s economy in the 1990s
3. Factors behind financial crisis in 2008
4. Japan’s economy today
2
Concurrent synchronization and
multipolarization of the world economy

World Developed countries Emerging countries

(source) White paper on International Economy and Trade 2008 3

 Big
Bigchange
changesataround
around 1990
1990
1989 Fall of the Berlin Wall
1990 German reunification
1991 Collapse of the Soviet Union
1992 Establishment of EU (the Maastricht Treaty)

1991 India: Economic structural reforms

1992 China: “South Tour Speeches” by Deng Xiaoping

around 1990～ IT- Revolution

⇒ worldwide supply-chain-management
4
 Integration of the world economy
1. Acceleration of cross-border movement
of goods, workers, capital etc.
- increase of world trade
- increase of foreign direct investment

2. Competition to attract investment

- low corporate tax rates, deregulation etc.
- improvement of airports, ports, etc.

3. Increase of regional trade agreements

5
100 for 1980 Change in world trade
９０年代以降、大きく伸びた世界の貿易総額
2500
日本と世界の貿易総額指数の推移（1980=100）

2000 Developing
Asia

1500

World
1000 U.S.
EU

500 Japan

0
1982

1985

1988

1995

1998

2001

2004

2011
1980
1981

1983
1984

1986
1987

1989
1990
1991
1992
1993
1994

1996
1997

1999
2000

2002
2003

2005
2006
2007
2008
2009
2010

2012
2013
6
Source: UNCTAD Stat.-Exports and imports of goods and services,annual,1980-2013
 FDI of the world
trillion dollar billion dollar

300 Accumulative total 25000

(left scale)
250
20000

200
15000
150 Flow
(right scale)
10000
100

5000
50

0 0
1980 1985 1990 1995 2000 2005 2010 2015
(Source)UNCTAD Stat. Foreign Direct Investment
 Competition to attract investment 7
 Competition among economic systems
 Number of Free Trade Agreements
(years)

Total 296 (Dec.2017)

(number of agreements)

Source: JETRO 8
 Rapid spread of FTAs in Asia

9
Source: “Asian Free Trade Agreements; Trends, Prospects and Challenges “ Asian Development Bank Institute , Mar. 2013.
 Globalization since the 1990s
completely different from globalization until the 1980s

１．Effects on much wider area and larger population

２．Higher speed of change

- decline in cost of moving information, goods, people , and
capital by the development of ICT and aviation network
- instant diffusion of cutting edge technologies and knowledge

３．Close, deep economic global ties over wide areas

- international standardization of institutional systems such as
accounting, regulations, taxation, etc.
- world scale investment through information sharing

10
Comparison of the size of population
and per capita GDP
Time of takeoff Per capita
for growth Population GDP
Western 100 100
Europe
US 1850 16 100

Japan 1950 27 40

China 2000 323 18

India 2000 258 10

11
 Background of global imbalance
% （名目ＧＤＰ比、％）
of nominal GDP 新興アジア
Emerging Asia
40 日本
Japan % of nominal GDP
（名目ＧＤＰ比、％）

50
貯蓄
savings
40
30
30

20
投資
investment 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
20
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
% of nominal GDP
（名目ＧＤＰ比、％）
50 中東
Middle East
40

30
excess investment excess savings
20

10

0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

（名目ＧＤＰ比、％）
% of nominal GDP
ＥＵ （名目ＧＤＰ比、％）
30
% of nominal GDP
U.S.
アメリカ
30

20
20

10 10
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
12
(notes) IMF“World economic outlook database” 06～ ＩＭＦ forecast
What happened
in the1990s
in Japan ?

13
 Trend of economic growth rate (real) in Japan
(%)

14
12.4
12
12 11.7 1111
12
11.2 FY1956-73 Ave.9.1%
10.4

10 9.5
9.1

8.1
8.2
8
FY1991-2017 Ave. 1.0%
7.5 6.3 6.16.4 6.2

6 6.8 6.6 5.4

5.1
6.2 4.8
5 5.1 4.5
4 3.9
4 3.5 4.6 3.3 3.3
2.9
3.8 2.5 2.6
2 2 1.9
FY1974-90 Ave. 4.2% 3.1 2.3
2 2.6 1.5 1.41.2 1.3
0.7 0.9 0.8 0.9
1.9 1.7
0.7 0
-0.4
0 0.5

-0.5 -0.5 -0.5

-0.9
-2 -2.2

-3.4
-4
1956
1957
1958
1959
1961
1962
1963
1964
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
1960

1965

（注）年度ベース 平均は各年度数値の単純平均 （資料）内閣府「国民経済計算」

14
 （％）
Rapid aging in Japan
40.0

35.0 【aging ratio】

the share of people aged 65 and over
30.0 Japan
Germany

25.0 France
UK
US
20.0
China
Korea
15.0
（unit：％）

1970 1980 1990 2000 2010 2020 2030 2040 2050

10.0 Japan 7.0 9.0 11.9 17.2 22.7 28.4 30.3 33.8 35.6
Germany 13.6 15.6 15.0 16.3 20.8 23.1 28.2 31.8 32.7
France 12.9 14.0 14.1 16.0 16.8 20.3 23.2 25.4 25.5
5.0 UK 13.0 14.9 15.7 15.8 16.6 18.9 21.7 24.0 24.7
US 9.8 11.3 12.5 12.4 13.1 16.6 20.1 21.2 21.4
China 4.0 5.2 5.9 7.0 8.4 11.7 16.2 22.1 23.9
0.0 Korea 3.3 3.9 5.0 7.3 11.1 15.5 23.4 30.5 34.9
1970 1980 1990 2000 2010 2020 2030 2040 2050
Source：United Nations World Population Prospects ,the 2012 Revision
15
Economic situation in the 1990s in Japan
～ the lost decade ～

 Decline of potential growth (4%→1%)

 Deflation caused by non-performing loans

 Decline of tax revenue due to recession

 Rapid aging of the population

16
Trend of per capita GDP (real)

US

Japan
Average of OECD

17
Source: 2015 Economic and Fiscal Policy White Paper
Decomposition of GDP (real) into three factors
図２－10 実質 GDP 成長率の要因分解

（％）
5.0
TFP
全要素生産性
4.0
GDP growth rate
実質GDP
3.0

Labor
労働
2.0
Capital
資本
1.0

0.0

-1.0
1980s
1980年代 1990s
1990年代

（備考）
TFP: Total Factor Productivity (total output not caused by input of labor and capital)
内閣府「国民経済計算」technology innovation,
、 worker’s knowledge
「民間企業資本ストック」 etc.
、経済産業省「鉱工業指
数」等により作成。 Source) the Cabinet Office
18
 Trend of potential growth rate
(％)
Potential growth rate: the growth rate on the virtual achieved when
6.0 three elements, “capital”, “labor”, and “productivity” is used in full

4.9
5.0

4.0

3.0

2.0
1.1
1.0

0.0

-1.0
19
1980 85 90 95 2000
20 05 10 15 17
80 00
19
Source: Cabinet Office
 Contribution factors decomposition
of potential growth rates
5.0

Labor input
4.0 Potential growth rate
July-Sep. 2018 1.0%
Capital input
3.0

2.0
Potential growth rates
TFP
（Productivity)
1.0 0.8%

0.4%
0.0

Abenomics
-1.0
1986/12～ 1993/11～ 1999/２～ 2002/２～ 2009/４～ 2012/12～
1991/２ 1997/５ 2000/11 2008/２ 2012/３

【Economic recovery period】 20

Source: Cabinet Office
 To overcome the negative legacy
of a bubble economy
 Disposal of non-performing loans to restore
confidence in the banking sector
 Injection of capital to undercapitalized bank
buying up troubled assets and remove
them from the balance sheet of banks
(injection of public funds into banks)

⇒recovery of intermediation function of banks

21
 Deposit Insurance System
 Protecting depositors at the time of bankruptcy
Funding
DICJ Government
(Deposit Insurance Bank of Japan
corporation of Japan) Financial Institutions
Insurance
(return of deposit) Insurance premium

Deposit
Depositors Banks

 DICJ: ①assets management of failed banks,

②resolution and collection of non-performing loans,
③capital injection to banks, etc.
 Disruption processing: 8 banks, 4 credit unions
 Public fund injection: 12.4 trillion yen 22
Gap of tax revenues and expenditures (Japan)
(trillion yen)

Total expenditure

Total revenue

Construction bond issues

Special financing bond issues

23
(Source) Ministry of Finance “Japan’s Fiscal Condition” (December 2017)
Major expenditure items in the general account
(Trillion yen)

E: National Debt
Service

D: Others
• Education & Science
• National Defense, etc.

C: Public Works
Related Expenditures

B :Local Allocation
Tax Grants, etc.

A: 1.2
B:1.8
A: 0.2
C:1.4
B:0.3
D:3.5 A: Social Security
C:0.3
D:0.9
E:0.3 related Expenditure
E:0.03

FY1960 FY1970 FY1980 FY1990 FY2000 FY2016

（Note)FY1960-2000:Settlement. FY2016 Draft budget

24
Source: Ministry of Finance
Mismanagement of economic policies (1990s)

1. Creating demand by public works

instead disposal of bad loans
necessary 3T s (timely, targeted, temporary)

2. Bad cooperation between fiscal policy

and monetary policy

3. Disregard of macro economic situation

in making budgets
austerity at the initial budget and large stimulus
packages at the supplementary budget
25
 Supplementary budget
 Formulation during a fiscal year
 Address fiscal needs created by unpredictable
expenditures, such as for natural disasters,
economic crisis, etc.

 In the 1990s, in Japan, supplementary budgets

became common place.
 As the revenue source of supplementary budgets,
construction bonds were issued.

26
Factors behind mismanagement
of economic policies
1. Lack of understanding about the
seriousness of bad loan problem

2. Belief that land prices would continue to

go up in Japan

3.Political factors
- Strong connection between the construction
industry and the LDP
27
 The ratio of public works to GDP

Source： Ministry of Finance “Japanese Public Finance Fact Sheet “ 2014 28

 Negative legacy of “lost decade”
1. Lagging in economic structural
reform accommodating big changes
- globalization since around1990
- decline of the population

2. Huge government bonds

3. The government-dependant economy

- dependence on public works
- weak local economy
29
 (%)
General government gross debt
250 (% of GDP)
Japan
233.1%

200

64.1%
Italy 160.3%
150
France 121.6%
UK 115.3%
U.S. 114.2%
100 Canada 99.8%

Germany 75.2%

50

0
30
(Source) OECD “Economic Outlook No99" (June 2016)
 Weaknesses of Japan’s economy

1. Lagging in globalization

2. Low productivity in the service sector

3. Inflexible labor market

Failure to adapt to big changes

in the economic structure since the 1990s
31
World economy
in 2002～2007

32
 Home price index（real)
米国の住宅価格（実質）の推移
（1990 Q1＝100）
200

180
S&P Case Shiller home price index
160 （10 main cities）

140

120
FHFA house price index
100

80

60
1975 80 85 90 95 2000 05 （年）
（備考）1．アメリカ商務省、連邦住宅金融庁（ＦＨＦＡ）、Standard & Poor’sより作成。
2．ＰＣＥデフレータ（2000年＝100）により実質化。
3．主要10都市とは、ボストン、シカゴ、デンバー、ラスベガス、ロサンゼルス、
マイアミ、ニューヨークシティ、サンディエゴ、サンフランシスコ、ワシントンをいう。

33
source: Cabinet office “World Economic Trends 2007” (second half on the year)
 Current account surplus
（billion dollar）
600
Middle East / North Africa ASEAN5
400
Japan

200

-200
UK
-400 EU

-600

-800 US

-1000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

※ASEAN 5: Indonesia, Malaysia, Philippines, Thailand, Viet Nam

Source: IMF World Economic Outlook Database October 2018 Edition
34
 Sub-prime mortgage
 For low-income earners of uncertain
creditworthiness
 Low interest rates at the beginning, and high
interest rates a few years later
 Rise in house prices
⇒ rises of residential collateral value
⇒ refinance to a lower interest rate of the loan year

Decline in house prices

⇒ soaring of delinquencies and loan default

35
 Loans of sub-prime mortgage

(1 billion dollar)

Share of sub-prime mortgage

in private mortgage new loans

Sub-prime
mortgage
new
loans
(right scale)

Securitized
loan

36
source: Cabinet office “World Economic Trends 2007” (second half on the year)
 Factors behind financial crisis in 2008
１．Monetary easing in developed countries

２．Financing surplus in emerging countries

（global imbalance of money)

３．Stable interest rates and exchange rates

with the worldwide boom

４．Development of financial engineering

- leading role of financial sectors with loose regulation
( investment banks, hedge funds, and so on)
37
Japan’s economy
today

38
 Abenomics
- “three-arrow” economic booster plan -

First arrow: bold monetary easing policy

( setting of the inflation target)
Second arrow: flexible fiscal policy
( a large stimulus package)
⇒ stop deflation and the appreciation of the yen

Third arrow: a growth strategy

⇒ encourage private sector investment
39
 Exchange rate of yen
(against US dollar, euro and Chinese yuan)
yen / dollar , euro, yuan monthly average from 2000

against against
yuan dollar

against
euro

yen appreciation

yen depreciation

40
Source： 社会実情データ図録( Figures of the World’s Current Conditions)
 Trend of Japan’s GDP
（％）
8

Recovery Recession Recovery

6

4 Real GDP Jan.-Sep. 2018

0.9% (nominal, real)

-2

-4

Nominal GDP
-6

-8
2002 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

source: Cabinet Office

41
 Business confidence in the world
PMI (Purchasing Managers’ Index)
（point）
60
Developed countries
①
②
③
55

50

Improvement
Emerging countries
45

40 Financial crisis worsening

（年）
35

（備考）１．民間調査会社マークイットより作成。２．景況感は、企業の購買担当者に対する調査を基に算出される指数
42
Source ： Cabinet Office（Dec. 2017)
 Economic outlook of global ＧＤＰ (real)
(%)

OECD (2018/11) IMF (2019/1)

2018 2019 2020 2018 2019 2020
World 3.7 3.5 3.5 3.7 3.5 3.6
Japan 0.9 1.0 0.7 0.9 1.1 0.5
US 2.9 2.7 2.1 2.9 2.5 1.8
Euro area 1.9 1.8 1.6 1.8 1.6 1.7
UK 1.3 1.4 1.2 1.4 1.5 1.6
China 6.6 6.3 6.0 6.6 6.2 6.2
India 7.5 7.3 7.4 7.3 7.5 7.7
Dynamic Asian Economies (note 1) ASEAN5（note2）
Emerging
Asia 4.2 4.1 3.7 5.2 5.1 5.2
Note 1： Dynamic Asian Economies･･･Chinese Taipei, Hong Kong, Malaysia, the Philippines, Singapore, Thailand, Vietnam
Note 2： ASEAN5・・・Indonesia, Malaysia, the Philippines, Thailand, Vietnam

Japan: Cabinet Projection FY2018 0.9% FY2019 1.3％ 43

 Big changes after financial crisis
Slowing growth in the US and China
⇒ excess supply capacity of goods
Declining expected growth in emerging countries
⇒ declining crude oil prices
+ development of shale oil
Bold monetary easing in developed countries
⇒ excess money supply

 “Excess”of economic resources

(Inversion of successful globalization)
 No engine of global economy
44
Important issues for the growth strategy
1. Addressing globalization
- development of FTA, RCEP
(Regional Comprehensive Economic Partnership;
ASEAN10, Japan, Korea, China, NZ , Australia, and India )

2. Increasing productivity, stimulating innovation

- bold deregulations

3. Increasing advantages of business base

- decrease of business costs (reduction of corporate tax rate,
reform of electricity market, etc.)

4. Reform of labor market

- flexibility of labor market and security of employees
- increase of child-care services
45