Japan's Economic Policy Conundrums; Southwest Economy, JulyAugust by j73na6ddmd7f

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									    Japan’s Economic Policy                                                                                                       ures have been exhausted. To the extent
                                                                                                                                  that they have been applied, textbook-
                                                                                                                                  type policies have been unable to re-

    Conundrums                                                                                                                    habilitate the ailing economy. The obvi-
                                                                                                                                  ous but difficult and costly solution of
                                                                                                                                  resolving the banking crisis remains to
                                                                                                                                  be accomplished.
                                                                                                                                       The Troubled Financial Industry.



    H          aving languished for more than
               a decade since its bubble burst
               in 1990, Japan’s economy is a
    major world concern. The prolonged
    decline of not only Japanese asset prices
                                                                           Chart 2
                                                                           Japan’s Consumer Price Index
                                                                           Index, 1995 = 100

                                                                           104
                                                                                                                                  Japan’s financial industry ills began with
                                                                                                                                  an asset market bust. In 2002, the land-
                                                                                                                                  price index dropped to 30 percent of its
                                                                                                                                  1990 peak. The result has been the accu-
                                                                                                                                  mulation of bad loans on banks’ balance
                                                                                                                                  sheets. The Japanese Financial Services
    but overall consumer prices as well has                                                                                       Agency, the financial supervisory author-
                                                                           102
    spurred ongoing nonperforming loan                                                                                            ity, recognizes the problem, but struc-
    problems in the financial sector. The                                  100                                                    tural changes have been slow and capi-
    government has sought to combat the                                     98                                                    tal injections insufficient. Merged banks
    economic slowdown with eight fiscal                                                                                           have been reluctant to lay off redundant
                                                                            96
    stimulus packages over the last 10 years,                                                                                     workers. Injected capital has not been
    with little to show for it but the highest                              94                                                    enough to cover the ever-increasing non-
    debt-to-gross domestic product (GDP)                                    92
                                                                                                                                  performing loans. The Japanese govern-
    ratio (140 percent) in the industrialized                                    ’90     ’92     ’94      ’96   ’98   ’00   ’02   ment’s estimate of bad loans within the
    world. Continued monetary easing has                                   SOURCE: Statistics Bureau, Japan.                      financial sector is $266 billion (6 percent
    pushed the overnight interest rate to                                                                                         of GDP). Other estimates are as high as
    zero, but consumers still don’t want to                                                                                       $1.9 trillion (43 percent of GDP).
    borrow and spend.                                                    world forums that the world economy                           Political support for structural reform
         Japan’s economy is the second                                   cannot fly on a single engine. Can Japan’s               is almost nonexistent in Japan. More-
    largest in the world—about half the size                             economy take off and propel the world                    over, because Japan’s capital market is
    of the United States’ and twice Germany’s,                           economy forward as it did until the end                  less developed than that of the United
    which is No. 3. Japan is the world’s                                 of the 1980s?                                            States, alternative funding sources, such
    largest foreign investor; it has maintained                                                                                   as corporate bonds, are not available to
    a trade surplus for the last 50 years. In                            Current Economic Conditions                              absorb shocks to the banking sector.
    2001, Japan owned 6 percent of the out-                              Are Gloomy                                               Commercial bank loans currently total
    standing U.S. Treasury securities (valued                                 Since 1991, Japan’s real GDP has                    about 90 percent of Japan’s GDP, but
    at 3.5 percent of U.S. GDP). Most impor-                             grown only 14 percent, compared with                     only about 40 percent of U.S. GDP. A
    tant, Japan’s problems are big enough to                             the United States’ 44 percent (Chart 1 ).                Resolution Trust Corp.-type solution, such
    slow the global economy.                                             Although Japan’s consumer price index                    as was employed in the United States in
         Then Deputy U.S. Treasury Secretary                             (CPI) has risen 3.7 percent over the same                the 1980s to deal with the savings and
    Lawrence Summers said at several 1999                                period, it has dropped 2.2 percent since                 loan crisis, would be difficult to implement
                                                                         1998 (Chart 2 ). Meanwhile, asset price
      Chart 1                                                            deflation has become much more pro-                        Chart 3
                                                                         nounced. Japan’s major stock market
      Real GDP of Japan                                                  index, the Nikkei, has dropped 79 per-                     Unemployment Rate in
      and the United States                                              cent from its peak in 1989. And in the                     Japan and the United States
      Index, 1991:1 = 100                                                past year, Japan’s unemployment rate                       Percent

       150                                                               has reached its highest level in almost a                   10

       140
                                                                         half century (Chart 3 ). It should surprise
                                                                                                                                      8
                                                   United States
                                                                         no one to discover that low investment                                     United States
       130                                                               and consumption growth has character-                        6
       120                                                               ized this entire period.
                                                                              The Japanese economy has been                           4
       110
                                                   Japan                 injured not only by its prolonged slow-                                             Japan
                                                                                                                                      2
       100                                                               down but, paradoxically, also by some
        90
                                                                         of the Japanese government’s unsuccess-                      0
             ’91    ’93     ’95      ’97     ’99       ’01         ’03   ful but costly attempts at fiscal stimulus.                      ’91     ’93      ’95       ’97     ’99     ’01      ’03

      SOURCES: Cabinet Office, Japan; Bureau of Economic Analysis.       Financial intermediaries are not lending.                   SOURCES: Statistics Bureau, Japan; Bureau of Labor Statistics.
                                                                         Conventional macroeconomic policy meas-

                                                         FEDERAL RESERVE BANK OF DALLAS SOUTHWEST ECONOMY JULY/AUGUST 2003
6
in Japan. The entire Japanese banking                                 Table 1
sector is in trouble, whereas the savings
and loan crisis affected only 5 percent of                             Productivity Gap and Comparative Price Level,
American depository institutions.                                      Japan – United States, 1990
     Conventional Macroeconomic Meas-                                                                                          GDP per hour worked                               Comparative price level
ures Have Unexpected Limits. The Bank                                  Sector                                              Japan/United States (percent)                           United States = 100
of Japan has dropped short-term nominal                                Agriculture                                                         13.8                                               378.7
interest rates virtually to zero (Chart 4 ).                           Mining                                                              67.4                                               116.1
                                                                       Manufacturing                                                       91.2                                               108.3
With the lower bound of a zero nominal
                                                                       Construction                                                        65.0                                               172.1
interest rate, lowering short-term interest                            Electricity, gas and water                                          41.3                                               314.2
rates is no longer a viable policy goal to                             Transportation and communication                                    32.1                                               229.9
boost the economy. Quantitative easing                                 Wholesale and retail trade                                          65.2                                               144.3
                                                                       Finance, insurance and real estate                                  60.3                                               211.4
has not worked so far because increas-                                 Service and government                                              90.5                                               114.0
ing base money has not significantly
increased broad measures of money                                      Total economy                                                       66.0                                               146.2
such as M2+CD. The Japanese financial                                  SOURCE: Dirk Pilat (1993), “The Sectoral Productivity Performance of Japan and the U.S., 1885–1990,” Review of Income and Wealth 39
                                                                               (December): 357–75.
intermediaries are unable to facilitate the
money multiplier effect because they are
not increasing their lending.
     Japan’s gross government debt of                               have a very difficult time boosting its econ-                             and subsidized, the less productive and
140 percent of GDP is the highest among                             omy much by depreciating its currency.                                    more expensive they become (Table 1 ).
the industrialized countries (Chart 5 ).                            Worse, it would be difficult to persuade                                       The second camp believes that de-
The ever-increasing debt led credit rating                          Japan’s neighbors, especially South Korea,                                flation itself is the source of the problem.
companies to rank Japan’s sovereign                                 to accept a depreciation of the yen against                               Because they expect future deflation,
rating as low as those of Greece and                                the dollar. Such a depreciation would                                     Japanese consumers do not consume.
Botswana. As a result, the government of                            be ineffective because Korea and China                                    The process is self-fulfilling. Various cre-
Japan has become much more cautious                                 would more than likely respond with de-                                   ative macroeconomic policy measures
in applying stimuli.                                                valuations of their currencies. The Finance                               to cure price declines have been recom-
     Nor does the government view                                   Ministry’s intention, however, is to main-                                mended, including direct monetization
manipulating the exchange rate as a real                            tain a trade surplus through foreign ex-                                  of Japanese government bonds by the
option. Despite what many Americans                                 change-rate policy as a way to stabilize                                  central bank (Ben Bernanke), inflation
believe, Japan is not much of a trading                             markets for Japanese government bonds.                                    targeting (Lars Svensson) and relentless
country. Of the 171 countries for which                                                                                                       depreciation of the Japanese currency
the World Bank records data, only Myan-                             Competing Views on                                                        (Allan Meltzer).
mar trades less than Japan as a share of                            Japan’s Economic Woes                                                          The third camp comprises classical
GDP. According to Haruhiko Kuroda,                                       Many economists have volunteered                                     Keynesians who believe that only fiscal
former vice minister of international affairs                       solutions to Japan’s economic problems.                                   expansion could stop deflationary spirals
of the Ministry of Finance, with an export/                         With their differing views on the source                                  (Richard Koo). This argument lost ground
GDP ratio below 10 percent, Japan would                             and cure of Japanese deflation, they fall                                 as the eight fiscal stimulus packages piled
                                                                    into one of three camps. The first holds
                                                                    that—rather than a source of economic
                                                                    slowdown—deflation is the consequence                                         Chart 5
  Chart 4
                                                                    of the structural problem of resource                                          General Government
  Short-Term Interest Rate in                                       allocation, which intensified after the                                        Gross Financial Liabilities
  Japan and the United States                                       bubble burst. CPI deflation has been                                           Percentage of GDP
  Percent                                                           minimal compared with asset price defla-                                       160
   12                                                               tion, which cannot be halted by macro-                                                                                                 Japan
                                                                    economic policies. Some, such as Fumio                                         140
   10
                                                                    Hayashi and Edward Prescott, believe that                                      120
                                                                                                                                                                                                             Italy
    8                                                               structural reform in the financial sector
                                                                                                                                                   100
    6
                                   Federal funds rate               to restore productivity growth should be                                                                                              Canada
                                                                    the first priority, and monetary easing may                                     80
    4
                                                                    be secondary at best. In 1990, Japanese                                         60
    2                                                               industrial productivity was 34 percent                                                 Euro area                                United States
              Japanese call rate                                                                                                                    40
    0
                                                                    lower than that of the United States be-                                             ’85   ’87   ’89   ’91    ’93   ’95   ’97   ’99    ’01     ’03
        ’89    ’91     ’93     ’95      ’97     ’99     ’01   ’03   cause of inefficient resource allocation.                                      SOURCE: Organisation for Economic Cooperation and Develop-
   SOURCES: Bank of Japan; Federal Reserve Board.                   That percentage is probably even greater                                               ment, Economic Outlook 70 (2000).

                                                                    today. The more industries are regulated

                                                        FEDERAL RESERVE BANK OF DALLAS SOUTHWEST ECONOMY JULY/AUGUST 2003
                                                                                                                                                                                                                         7
    up government debt without producing            Chart 6                                             pay lip service to reforms to appease
    the accelerated demand that was sup-                                                                foreigners—who do not vote—and do-
    posed to accompany them.                        Labor’s Share of Japan’s GDP                        mestic academicians—who vote but do
          Of the three explanations for Japan’s     Percent                                             not make campaign contributions.
    deflation, the Bank of Japan supports the        90                                                       The Political Structure Does Not Help.
    first, or structural argument. It proposes       85
                                                                                                        Rural areas in Japan are overrepresented
    that the Ministry of Finance and the                                                                in the government. Agriculture and small
    Financial Services Agency reform the             80                                                 local businesses depend heavily on gov-
    banking sector so that banks can lend to         75                                                 ernment expenditures. Government cap-
    more active borrowers instead of simply                                                             ital formation in Japan is about 8 percent
                                                     70
    rolling over dead loans. But the reforms                                                            of GDP—three times higher than in the
    would mean not only the admission of             65                                                 United States. As with labor reforms,
    heretofore unconfessed dead loans, but           60
                                                                                                        attempts by politicians to cut back on
    the admission of heretofore unconfessed               ’69 ’72 ’75 ’78 ’81 ’84 ’87 ’90 ’93 ’96 ’99   government spending for agriculture and
    dead banks. The Bank of Japan accord-            SOURCE: Cabinet Office, Japan.                     local small business—with their dispro-
    ingly urges the injection of public money.                                                          portionately strong lobbies—is difficult
    But the bank resolution might still entail                                                          politically despite the long-term benefits.
    massive job cuts and an economic slow-                                                                    Under these circumstances, the Diet
    down in the short run, and these possi-       example, the Ministry of Finance deter-               has been pushing the administration for
    bilities make government officials nervous.   mines intervention in the foreign-exchange            an additional tax cut. A permanent tax
          An opposing view, backed by the         market but is not attentive to the counter-           cut may help the economy through in-
    Ministry of Finance, is that the Bank of      balancing act of buying back intervened               creased investment and consumption. But
    Japan’s untimely monetary policy was a        currency, or sterilization, that is under the         with a financial market that is more than
    primary source of the problem. In this        central bank’s control.                               fretful about the current 140 percent debt-
    view, the solution is for the Bank of Japan        Why Economic Reform Gets Little                  to-GDP ratio, a tax cut would only be
    to inject more money before beginning         Support. After a decade of sluggish eco-              transitory. So far, the principal charm of a
    the painful restructuring of the previously   nomic growth, Japanese leaders have                   tax cut is said to be that it would not harm
    unadmitted dead banks.                        become less confident about their system.             anyone in the short run. Accordingly, tax
          Understanding Japan’s unprecedented     Leaders now appear to be more open to                 cuts’ ability to stimulate is impaired be-
    economic circumstances is not an easy         foreign opinions, although up to now                  cause their persistence is not credible.
    task. Without a consensus on the causes       they have had difficulty acting on them.                    Nevertheless, out of the 80 trillion
    of current economic conditions, Japanese           Even though Japan is in the midst of             yen the government spends annually, 30
    policymakers struggle to agree how to         an economic slump, a visit can be very                trillion is financed by new government
    handle the economic problems. How-            misleading for foreigners, who are hard-              bonds (Chart 8 ).
    ever, finding the solution to the ailing      pressed to find evidence of the economic
    Japanese economy would not automati-          doldrums. Tokyo’s bustling subcenters                 Will Japan Have an Acute
    cally guarantee recovery. Whether the         and packed restaurants and bars belie                 Financial Crisis?
    first camp or the second is right, the        the sluggish economy. In actuality, the                   The evidence suggests that Japan
    solution will require the coordination of     lost decade has not severely affected the             cannot reverse the direction of its econ-
    policies between the central bank and         average Japanese citizen. Real GDP con-
    the Ministry of Finance. Whatever policy      tinued to grow, albeit not nearly at the
    they implement will entail high risk and      U.S. rate (see Chart 1). Japan’s unemploy-              Chart 7
    suffering for some people. Political sup-     ment rate of 5.4 percent is lower than the              Profit /Sales Ratio in
    port is the prerequisite. These practical     United States’. Labor’s share of GDP has                Manufacturing Sector
    conflicts have so far been difficult for      increased almost 10 percent since 1991                  Percent
    Japan to resolve.                             (Chart 6 ), while the share due to physi-                7
          Because of system rigidity in Japan,    cal capital has correspondingly fallen.                                                                  United States
                                                                                                           6
    there was no real policy coordination              Under continuing deflation, the
                                                  rigidity of nominal wages and obstacles                  5
    between the Ministry of Finance and the
    central bank until last year. Officials of    to laying off workers have increased real                4

    both institutions were discouraged from       labor income and squeezed firms’ profits                 3                               West Germany
    commenting on the other’s policy. There       (Chart 7 ). Labor has little political incen-            2
    was almost no communication between           tive to back drastic reforms. Diet mem-
                                                                                                           1
    them even on a personal level. Since the      bers might have difficulty in the next                                         Japan
                                                                                                           0
    revision of the Bank of Japan Act in          election if they support a reform agenda                     ’60   ’64   ’68   ’72     ’76   ’80   ’84   ’88   ’92   ’96   ’00
    1998, it has become difficult for outsiders   that would reduce the premium the                        SOURCES: Ministry of Finance, Japan; Bundesbank, Germany;
    (the Ministry of Finance and politicians)     nation is willing to pay for job security. It                     Census Bureau.

    to influence central bank policies. For       has been argued that politicians only

                                     FEDERAL RESERVE BANK OF DALLAS SOUTHWEST ECONOMY JULY/AUGUST 2003
8
  Chart 8                                                                  Chart 9                                                                           capital flight. The government and the
                                                                                                                                                             central bank own the majority, 56 percent
  Japan’s General Account Tax                                               General Government                                                               of the total, while commercial banks
  Revenues, Total Expenditures                                              Net Financial Liabilities                                                        own 32 percent. Under current corporate
  and Government Bond Issues                                                Percentage of GDP                                                                governance, the managers of Japanese
  Yen (in trillions)                                                        120                                                                              commercial banks do not feel respon-
   100
                                                                            100                                                              Italy
                                                                                                                                                             sible to their shareholders. Japanese
                                         Total expenditure
                                                                                                                               Canada                        bankers would follow instructions from
    80                                                                       80                                                                              the Ministry of Finance. Unless economic
    60                                                                       60                                                                              conditions deteriorate drastically and the
                                                       Tax revenue
                                                                                                                                                             government is paralyzed, it is hard to
                                                                             40
    40                                                                                                    Euro area                         United           imagine any major private agency selling
                                                                                                                                            States
                                                                             20
                                                                                                                            Japan
                                                                                                                                                             its government bonds.
    20
                                           Government bond issue                 0
                                                                                                                                                                  For these reasons, there appears to be
     0
                                                                                     ’85   ’87    ’89   ’91    ’93    ’95    ’97     ’99   ’01   ’03         no momentum for drastic reforms or any
         ’83   ’85     ’87   ’89   ’91   ’93   ’95   ’97     ’99   ’01      SOURCE: Organisation for Economic Cooperation and Develop-                       indication of a potential financial crisis in
                                                                                    ment, Economic Outlook 70 (2000).
   SOURCE: Ministry of Finance, Japan.                                                                                                                       Japan. Japan’s economy may be sluggish
                                                                                                                                                             for quite some time, but it will not implode.

omy immediately. Does this mean that a                                   as well as the immediate cost of financial                                          Is There Hope for
financial crisis is imminent?                                            market disruption, default is not a plau-                                           Japan’s Economy?
     Fearing it would lead to turmoil in                                 sible policy option.                                                                     The speed of change in Japan is
the banking sector, Japan has delayed for                                     • The size of Japan’s net government                                           slow by U.S. standards, but there are
two more years the elimination of blanket                                debt is just half its gross debt. While gross                                       some signs that Japan’s economy is gain-
insurance on time deposits. Although this                                government debt is 140 percent of GDP,                                              ing strength. For one thing, frozen labor
antireformist action may be suboptimal in                                net government debt is about 70 percent                                             markets are beginning to thaw. Large
the long run, it does eliminate the possi-                               of GDP—lower than that of some Euro-                                                Japanese companies have been very
bility of bank runs in the short run. Fur-                               pean countries. As long as Japan contin-                                            reluctant to lay off their “permanent”
ther stock price declines would not be                                   ues to maintain its trade surplus, the                                              employees. For example, Fujitsu, a lead-
deadly for the banks that own stocks as                                  pressures that could result in a sovereign                                          ing technology equipment company, has
part of their portfolios because the Bank                                default are probably no higher than for                                             not laid off a single domestic employee
of Japan buys the stocks directly from                                   countries like Belgium and Italy (Chart 9 ).                                        in its entire history. Japanese companies
the banks. The recent nationalization of                                      • As of March 2002, foreign owner-                                             have been slow to acknowledge the need
Risona Bank signaled to depositors that                                  ship of Japanese government bonds is less                                           for quicker labor adjustments and have
their money is safe. A banking crisis trig-                              than 5 percent of the total (Chart 10 ),                                            relied on attrition and job relocation for
gered by bank runs is a remote possibility                               not enough for foreigners alone to trigger                                          the reductions efficiency and profitability
in Japan.
     Some analysts worry that Japan’s
growing sovereign debt may cause cur-                                      Chart 10
rency-market instability. They argue that
under the current political system, there                                   Ownership of Japanese Government Bonds
is no clear vision to reduce the level of                                   Percent

outstanding Japanese government bonds.                                      50

If markets fear the government may de-
fault, capital flight may trigger a currency                                               40.3
                                                                            40
crisis. Aside from the possible retaliatory
                                                                                                                                   32.2
exchange-rate depreciations by other
                                                                            30
countries, it is hard to see why devalua-
tion would be problematic in any case,
but the sudden unavailability of credit is                                  20
another matter.                                                                                               15.5

     Capital flight from Japan in the near
                                                                            10
future is unlikely for three reasons:                                                                                                                            4.8
     • Japanese government debts are                                                                                                                   1.8                    2.0         2.6
                                                                                                                                                                                                    0.6
domestic currency-denominated. It is                                         0
                                                                                      Government        Bank of Japan         Domestic             Trust       Foreign      Security   Household   Others
always possible for the government to                                                                                          banks             companies    institutes   companies

monetize the debt. Considering the long-                                    SOURCE: Bank of Japan.

term damage to the country’s reputation

                                                             FEDERAL RESERVE BANK OF DALLAS SOUTHWEST ECONOMY JULY/AUGUST 2003
                                                                                                                                                                                                            9
       Chart 11                                                            collapse if the deposit guarantee was lifted                             of finance until last year. He will work to
                                                                           while equity prices were falling. These con-                             increase the Bank of Japan’s direct pur-
        Temporary Worker/ Total                                            cerns appear to have resolved, at least for                              chase of Japanese government bonds.
        Employment Ratio and                                               now, the longstanding conflict over which                                     Recent changes in labor market con-
        Labor Productivity in Japan                                        of the three causative arguments is be-                                  ditions, productivity growth and more
        Percent                                                  Percent   lieved correct. The top priority has become                              coordination between the Bank of Japan
        30                                                           10    monetary easing, with efforts at financial-                              and the Ministry of Finance are all posi-
        28
                                                                     8
                                                                           sector restructuring and reform to come                                  tive signs that Japan will be able to de-
        26
                                                                           later. With this basic conflict settled, it is                           liver more decisive policy actions to boost
        24
                                                                     6     possible that policy changes may come                                    the nation’s economy and, one can hope,
                     Ratio
        22
        20                                                           4     faster and with more coordination.                                       do it at a faster pace.
        18                                  Labor productivity                  The appointment of new top manage-                                                             —Jahyeong Koo
                                                                     2
        16                                                                 ment at the Bank of Japan raises hopes
        14                                                                                                                                          Koo is an economist in the Research Depart-
                                                                     0     that policy coordination will be acceler-
        12
                                                                           ated. The view of the new governor,                                      ment of the Federal Reserve Bank of Dallas.
        10                                                           –2
             ’90     ’92      ’94     ’96        ’98     ’00               Toshihiko Fukui, on deflation is not fun-
        SOURCES: Ministry of Health, Labor and Welfare, Japan;             damentally different from that of his pre-                               Note
                 Japan Productivity Center.                                                                                                           This research has greatly benefited from Koo’s three-month stay in
                                                                           decessor, Masaru Hayami, but he is con-
                                                                                                                                                      2002 as a visiting scholar at the Policy Research Institute, Ministry of
                                                                           sidered better able to work with the                                       Finance of Japan. Koo appreciates the hospitality he received from the
                                                                           Ministry of Finance. The deputy governor,                                  staff members of the ministry. The views in this article do not reflect
     require. Recently there has been one                                  Toshiro Muto, was Japan’s vice minister                                    the official view of the institute.
     positive sign: Japanese companies are
     increasing their hiring of temporary em-
     ployees. The number of temporary work-
     ers as a percentage of total employees
                                                                                   Does the U.S. Economy Follow the Japanese Path?
     jumped from 20 percent in 1994 to 27                                           There are concerns that the current U.S economy may be following Japan’s trail of the 1990s. The
     percent in 2001 (Chart 11 ). Higher labor                                patterns of the Nikkei 225 and the Nasdaq indices before and after their booms and busts are strikingly
                                                                              similar (see chart below). Lingering possibilities of deflation and low interest rates intensify the worry.
     market flexibility increases labor produc-                               However, the U.S. economy is different from Japan’s in several ways.
     tivity and enables companies to have                                           • The shock of the stock market bust is smaller in the United States. Only the technology-intensive
     higher profits.                                                          Nasdaq has had a decline in Japan’s league. Broader market measures, such as the Dow Jones Industrial
          In addition, attempts at policy coordi-                             Average and the Standard & Poor’s 500, have not declined as much.
     nation have surfaced. Last fall, when the                                      • A protracted slide in real estate prices has been a hallmark of the Japanese stagnation, but real
                                                                              estate deflation is not part of the U.S. picture and doesn’t look as if it will be. Some economists credit the
     Japanese stock market showed significant                                 Federal Reserve for lowering interest rates more aggressively than the Bank of Japan.
     weakness, the Bank of Japan reversed its                                       • U.S. productivity picked up quickly after its asset price bust. In Japan, productivity growth had
     previous stance and decided to rescue                                    been sluggish for a decade. It may be because the U.S. labor market is more flexible. It took two years for
     the banks by directly purchasing their                                   the U.S. unemployment rate to increase 2 percentage points, whereas it took seven years for Japan to
     equity holdings. Previously, the Bank of                                 make the same adjustment after its bust.
                                                                                    • The United States has diversified sources of corporate funding, whereas Japanese companies rely
     Japan had insisted that financial-sector                                 mostly on banking. A shock to the banking sector does not influence the rest of the U.S. economy as
     reform was needed before further mone-                                   much as it does in Japan.
     tary easing could take place. Now, the
     Bank of Japan acts like a guardian for                                   Boom and Bust of the U.S. and Japanese Stock Markets
     Japanese commercial banks, which have                                    Index                                                                                                                                   Index
     a significant portion of their assets in                                 5,000                                                                                                                               50,000

     corporate equities.                                                      4,500                                                                                                                               45,000

          Further, Prime Minister Junichiro                                   4,000                                                                                                                               40,000
     Koizumi fired the minister overseeing the                                3,500                                                                                                                               35,000
     Financial Services Agency, who had been                                  3,000                                                                                                                               30,000
     reluctant to use public money to recapi-                                 2,500                                                                                                                               25,000
                                                                                                                                                                               Nikkei 225
     talize the ailing banking system. Koizumi                                2,000                                                                                                                               20,000
     appointed reformist Heizo Takenaka to
                                                                              1,500                                                                                                                               15,000
     the position. And, as mentioned earlier,
                                                                              1,000                Nasdaq                                                                                                         10,000
     the government has postponed the elim-
                                                                                500                                                                                                                               5,000
     ination of blanket time-deposit guarantees
     for two years.                                                               0                                                                                                                               0
                                                                                      –5   –4    –3     –2    –1     0      1     2      3       4    5      6     7      8      9      10     11     12     13
          A flurry of policy actions like these is                                                                                       Years from peak
     rare in Japanese politics. It appears that the                           NOTE: Shaded area represents peaks of the U.S. and Japanese stock markets, March 2000 and December 1989, respectively.
     Bank of Japan has been deeply concerned                                  SOURCES: Tokyo Stock Exchange; Nasdaq.
     that the commercial banking sector would

                                                           FEDERAL RESERVE BANK OF DALLAS SOUTHWEST ECONOMY JULY/AUGUST 2003
10

								
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