THE ECONOMY OF JAPAN

日本経済

Traditional Japan

Source: Web Japan & Japanese Consulate General, San Francisco

Contemporary Japan

“Cool Japan”Japanimation“KAWAII”

Looking at Some of the BasicsGeography

• Four main islands: • Hokkaido (N) • Honshu (main island) – Tokyo, Mt. Fuji, Osaka, Hiroshima• Shikoku – Rural • Kyushu (SW) – Fukuoka, Kagoshima, Nagasaki

• Most of the population is in Honshu, between the Kanto (Tokyo-Yokohama-Kawasaki) in the east and the Kansai (Kobe-Osaka-Kyoto) in the west

• Tokyo – Yokohama has almost 25% of the population (over 33 million)

• Close to 80% of the land is mountainous

• Japan is poor in natural resources and flat arable land. it depends on imports, for example, for 99.5% of its petroleum

Population 127,600,000 (2013)

Population growth rate -0.2% annual change (2012)

Population, share of 0-14 years 12.7% (2013)

Population, share of 15-64 years 62.2%(2013)

Population, share of 65 and over 24.2%(2013)

Sex ratio, number of males per 100 female 95.9(2013)

Total fertility rate 1.41 (2013)

Death rate (number of deaths per 1000 population

9.27 (2013)

Infant mortality rate (number of deaths per 1000 live births)

2.13 (2013)

Life expectancy at birth (total population) 82.27 (2012)

Life expectancy at birth (male) 79.5 (2012)

Life expectancy at birth (female) 85.8 (2012)

Various Social Statistics

Japan GDP Growth Rate

Yen/Dollar Exchange Rate

Nikkei – Last 5 years

Japan’s Top 10 Exports - 2013

1. Vehicles excluding trains and streetcars: $148,516,005,000 (20.8% of total exports)2. Machinery: $135,170,603,000 (18.9%)3. Electronic equipment: $108,196,915,000 (15.1%)4. Optical, technical and medical apparatus: $40,098,608,000 (5.6%)5. Iron and steel: $35,354,109,000 (4.9%)6. Organic chemicals: $26,338,964,000 (3.7%)7. Plastics: $25,687,461,000 (3.6%)8. Mineral fuels including oil: $16,620,425,000 (2.3%)9. Ships, boats and other floating structures: $15,559,127,000 (2.2%)10. Articles of iron or steel: $13,464,169,000 (1.9%)

Japan’s Top Import Partners

Below is a list of Japan’s top 15 trade partners that imported the most Japanese shipments by dollar value during 2013. Also shown is each import country’s percentage share of total Japanese exports.

1. United States: $134,503,767,000 (18.8% of total Japanese exports)2. China: $129,155,513,000 (18.1%)3. South Korea: $56,572,287,000 (7.9%)4. Taiwan: $41,644,120,000 (5.8%)5. Hong Kong: $37,374,197,000 (5.2%)6. Thailand: $36,014,945,000 (5%)7. Singapore: $20,976,399,000 (2.9%)8. Germany: $18,941,914,000 (2.6%)9. Indonesia: $17,044,670,000 (2.4%)10. Australia: $16,968,268,000 (2.4%)11. Malaysia: $15,245,915,000 (2.1%)12. Netherlands: $13,915,444,000 (1.9%)13. United Kingdom: $11,189,862,000 (1.6%)14. Russia: $11,003,437,000 (1.5%)15. Viet Nam: $10,529,725,000 (1.5%)

http://www.tradeandexportme.com/2014/04/japan-gcc-relations/

THE “BUBBLE” ECONOMY

Bubble Economy (How “Bubbly” Was It?)1985 -1990

• Asset Price Inflation– Stocks - Nikkei hit high of 38,915 on Dec. 31 1989. Keep in mind it

did not hit 10,000 until after 1985. – Land and Real Estate Prices – Prices more than doubled from 1987 to

1990.– Real Estate inflation more pronounced in larger cites

• Consumer prices not significantly affected• Rapid economic growth

Land Prices

Japanese Urban Real Estate Pricesvs Consumer Price Index Inflation

CPI (inflation)

Commercial Real Estate—6 largest cities—

18 years!

Japanese Foreign Investment Expands

• Matsushita Group (Panasonic) > Universal Studio• Sony Group > Columbia Pictures• Mitsubishi Estate Group ->Rockefeller Center and

Pebble Beach Q. What happened to these investments?

Looking at the Causes of the Bubble

• Background– Strong growth in 1980’s and stronger consumer

confidence– Financial Deregulation throughout 1980’s.– End of deficit spending by government – Main-bank relationships– Problem with trade deficits (led to Plaza Accord)– Expansionary monetary policy to counter Plaza Accord– Management poised for strong growth– Reaganomics (high interest rates in US)– Belief that Japan was becoming an economic superpower

The Low Cost of Borrowing• Interest rates were effectively 0%• Firms over borrowed

• Projects that earned a mere 0% were approved

• Banks over lent• Collateral or track records were enough – expectation that

asset prices would always rise

• Asset prices proved unrealistic• Projects didn’t earn 0% ex post • Banks eventually, however couldn’t collect on their loans

Proportion of Loans to Small Firms

Proportion of Loans to Real Estate Developers

BOJ Discount Rate Target Call Rate

Nov 1, 1986following

"Plaza Accord"

Feb 23, 1987

May 31, 1989first anti-"Bubble"

rate hike

Aug 30, 1990

Jul 1, 1991interest rates

kept high for 18months following

the "bubble's" peak

Sept 8, 19950.5%

discount rate!!

Feb 12, 1999"Zero InterestRate Policy"commences

Christmas 1989rate hike

– "bubble" peaks –

Money Supply

Other Causes of the Bubble

Malfunctioned “Safety Net”Bank of Japan (BOJ)Ministry of Finance (MOF)“Discretionary Guidance”

Inefficient Monitoring of Banking System

Some Reinforcing Factors

Cross-holding share in Keiretsu system

Expansion of real estate companies (Jusen)

Prolonged Aftermath• Impacts

– Longest recession in post-war period.– Non-performing Loans– Major Bank Failure and Merges

• Causes of prolonged slowdown

– Delay in recognizing problems and in responses– Uncoordinated Actions

• Covered Problems– Overprotected banks– Inefficient corporate governance and structure

Lasting Dilemmas

• Monetary policy doesn’t work– Interest rates can’t be pushed below 0%– But prices are falling ==> real rates are positive

• Banks (rightly) fear bad assets– Outstanding loans are shrinking– Little investment – “Liquidity Trap”

• Fiscal policy is not working– Large government deficits

Japan’s Lost Decade (early 1990s-early 2000s):

Why Did the Recession Last So Long?

• Long adjustment after a large asset bubble• Non-performing loans (late policy response)• Japan’s economic system became obsolete (?)• Aging population and associated problems (pension,

medical care, dissaving, etc)• Snowballing fiscal debt• People’s lack of confidence in the future• The China challenge (vs. “return to Japan”) Lack of political leadership to propose solutions, convince

people, and implement actions

Non performing loans--Credit crunch and mini bank runs in 1997-1998--Slow policy response (1998-2000)—creating special agencies and public

money injection for bank recapitalization

Monetary policy for recovery--Injecting liquidity by buying up unconventional assets (corporate &

bank bonds, etc): but the monetary transmission mechanism was broken (MBMoneyLending)

--Zero interest rate policy (Feb.1999-Aug.2000; Mar.2001-Jul.2006; Dec.2008-) creating incentive for “yen carry trade”

--Inflation targeting—debated but not adopted--F/X intervention to prevent yen appreciation (but without aggressive

yen depreciation)

Policy Issues for the Bank of Japan

Monetary base

Money supply (M2)

Bank lending

Percent

Call rate (interbank short-term interest rate)

Money & bank lending

Bubble

Zerointerest

ratepolicy

Excess reserves are built up during zero interest rate periods

Bubble

Zero Interest Rate Policy

Current Economic Situation

LDP Government of Shinzo Abe • First Abe Cabinet (Sep.2006-Sep.2007) was unsuccessful.• Second Abe Cabinet (Dec.2012-) has the following features:

– Active, quick and vigorous (compared with past PMs)– Politically conservative (critiques say “right wing”)– Aiming to revise constitution—instilling nationalism, officially approve

military capability– Diplomatically active (foreign visits, top sales, coping with China & N.

Korea, etc.)– Economic revival as top national priority (Abenomics)

• High popular support + fragmented oppositions LDP won a landslide victory in Upper House election (July 21, 2013) and gain political free hand

Three Arrows of Abenomics

To revive the economy, three “arrows” are mobilized. 1. Aggressive monetary policy (“New Dimension”)

- New BOJ Governor Haruhiko Kuroda (Mar.2013-)- Dispel deflation mindset: inflation target of 2% within 2 years- Monetary expansion with new asset purchases (REIT etc.); doubling

monetary base & gov’t bond holding in 2 years- Correction of high yen

2. Flexible (=active) fiscal policy- Revive economy first, consolidate budget later- Increase infrastructure investment

3. New growth strategy (proposed in steps; cabinet approval June 14, 2013)- Japanese Economy Revitalization Headquarters (under it: Industrial

Competitiveness Conference)- 3 roadmaps and 3 plans (12 pillars – 37 items – 56 sub-items)

Overview of “Japan Revitalization Strategy”[Three Prongs or “Arrows”]

The Abe administration will simultaneously implement the policy mix of the “three arrows” for reviving the Japanese economy: (1) Aggressive monetary policy; (2) Flexible fiscal policy; and (3) A growth strategy that encourages private sector investment

Roadmap to Growth

http://www.kantei.go.jp/foreign/96_abe/documents/2013/1200485_7321.html

Three Action Plans of “Japan Revitalization Strategy”

(1) Plan for the Revitalization of Japanese Industry

(2) Strategic Market Creation Plan

(3) Strategy of Global Outreach

Three Positive Cycles

Supporters of Abenomics

J. Stiglitz—“Depreciating yen to end deflation is the right policy. Just as I recommended 10 years ago.”

Paul Krugman—“I evaluate Abenomics highly; no other country could do this policy mix.”

IMF Managing Director Lagarde—”Inflation target of 2% is desirable as long as central bank independence is secured.”

Fed Chairman Bernanke—“I support it as a policy to end deflation.”Prof. Heizo Takenaka (Keio Univ.)— “Abenomics is 100% right.”Prof. Koichi Hamada (Abe’s advisor)— “Don’t worry about recent stock

market drops—they are just corrections of excess optimism. The real economy is improving.”

Prof. Takatoshi Ito (Tokyo Univ.)— “BOJ economists think QE is ineffective. But many researchers and officials support QE as a tool to change inflation expectation.

Critiques of Abenomics

George Soros (investment guru)—”Japan’s monetary policy is bold but very risky; it may trigger a collapsing yen.”

Prof. Kunio Okina (Kyoto Univ.)— “If deflation mind is dispelled but fiscal discipline is not secured, monetization of fiscal deficit will generate a serious dilemma between financial stability and price stability.”

Kazuo Ueda (Tokyo Univ.)—Monetary expansion increased interest & yen volatility. If long-term interest rates rise, expected positive impact on real economy will not happen.

Ryutaro Kono (BNP Paribas)— “The monetary transmission mechanism is broken. Under such circumstances, monetary expansion may destabilize asset prices, raise long-term interest rates, and put BOJ in a macro policy dilemma.”

Nikkei Newspaper commentary—“The growth strategy lists only easy measures; bold reforms in such key areas as medical service, agriculture, corporate tax rates, etc. are not clarified.”

Growth Strategy Formulation in Abenomics

• Broad visions are given (three arrows, three plans, etc.)• However, concrete growth measures were presented too quickly

without deep consultation with stakeholders. They are just a collection of various ideas proposed by committee members and officials in charge.

Visions – (targets) – (policy areas) – actions• Because consensus building and stakeholder involvement are

skipped, proposed measures are too many, too vague, and unlikely to be supported or implemented by businesses and key ministries.

• By taking sufficient time to interact with all stakeholders, they will feel attached to and responsible for agreed policies. This psychological effect is important; hasty announcement of policy measures will not have this advantage.

Future of Manufacturing SMEs• Competitive SMEs have been a driver of Japanese growth, but they

now face many structural challenges.– Long-term domestic recession– Deflation (price cut pressure)– High yen (recently largely corrected)– High corporate tax of about 40%– Rises of China, Korea & Taiwan in electronics & cars– Aging of SME owners & lack of next generation engineers– Power shortage– Delayed participation in TPP, FTAs, EPAs, etc.

• The number of Japanese SMEs is declining sharply in every region and sector. The Lehman Shock (2008) further accelerated this trend.

Evolution ofOutward Manufacturing FDI

• 1960s-70s: initial FDI, some causing friction with workers and host countries in Southeast Asia.

• 1980s-: Trade friction with US & EU prompted car and electronics makers to produce in market countries instead of exporting from Japan.

• Mid 80s & 90s: a sharp yen appreciation and opening of China pushed many large Japanese firms abroad, and some of their SME part suppliers also followed.

• 2000s-: relocation of production sites due to accelerated integration (WTO, FTAs…)

• 2008-: Lehman Shock & harder competition force large firms to go abroad more and procure parts globally. SME suppliers in Japan have lost regular customers.

• Now: Long-term production networks in Aichi (Toyota), Suwa (Epson) and other industrial cities are disintegrating. Manufacturing SMEs have to find new customers & markets.

Japanese Manufacturing SMEs:Features and Issues

• Japanese SMEs have high technology and skills, but other capabilities (strategy, marketing, IT, networking, English..) are lacking—unlike Taiwanese or German top SMEs.

• Many SMEs are considering to invest abroad for survival: popular destinations are Thailand, Vietnam & Indonesia.

• From 2010, METI began to promote SMEs’ outward FDI. National & regional support networks have been created. Local govt’s, JICA, JETRO, HIDA, SMRJ, etc. are mobilized.

• Our APIR research report (for Osaka/Kansai):– A clear vision for Japan’s future monozukuri is needed– Classify SMEs: not all SMEs need to go abroad for survival or expansion– FDI should be a means to equip Japanese SMEs with all-round capabilities as

well as to enhance host-country industries– Government can support outgoing SMEs through information, matching and

negotiation/cooperation with host countries– The risk of “hollowing-out”?—more data & discussion needed

ASEAN and Japanese SMEs• Many Southeast Asian countries want to invite Japanese manufacturing

SMEs (Thailand, Indonesia, Malaysia, Vietnam…)• The Abe government also supports SMEs’ export & FDI (in addition to

TPP/FTAs, infrastructure export, “Cool Japan”).• Our APIR research:

– Pick a few countries (Thailand & Vietnam) and help them improve industrial capabilities and learn Japan’s core skills and technology with intensive bilateral cooperation.

– Japanese monozukuri (manufacturing) should be globalized—it should also be practiced and developed outside Japan and by non-Japanese people (Japan faces aging and lack of technology inheritors).

Japan: Slow-Growth Trap IEven before the March 2011 crisis, the Japanese economy had been

experiencing difficulties:• Investment activity had fallen by more than 15% since late 2008

about 1.5 times more than in other advanced regions• Private consumption had also declined at a faster pace than in

comparable countries.• In addition to sluggish domestic demand, slow recovery in Japan

primarily the result of unfavorable external conditions:• Yen appreciated by in 2011- 2012 – largest appreciation

among advanced economies – safe haven, unwinding of Yen carry trade-low interest rates in other advanced countries

• Strong yen creating generational friction with strong opposition by the elderly to revaluation

• Export demand from main trading partners grew by about 1% compared with 2-5% for Asia’s NIE – due to Japan’s lower export share with China and developing Asia. Now recovering.

• Japan’s exports oriented toward high end consumer products.

Japan’s Slow Growth Trap • The pattern of hollowing out will have profound implications for the

future structure of the economy:• Overseas production will displace production inside Japan on a

larger scale and at a higher speed• As firms of all sizes move production overseas, domestic

manufacturing will shrink at a faster pace squeezing employment and accelerating the shift in the economy toward services

• While contributing some to job creation it will make enhancing the global competitiveness of service industries more urgent – currently most service industries have very low productivity compared to manufacturing

Japan’s Slow Growth Trap• The hollowing out may be restrained if Japan is able to expand a

cohort of strong, technologically advanced domestic manufacturers with internationally recognizable brands and positioning themselves within global technological chains.

• These need not be limited to sectors that now lead the globalization of Japanese manufacturing – autos or electronics

• A greater contribution may come from industries such as food production, fashion goods, interior goods, and cosmetics.

• Compounding Japan’s problems is the long term-demographic and fiscal patterns likely to drag on the economy

Japan: Debt Levels

Japan: Budget Compositon

Social Issues -Total Fertility Rate

Possible Scenarios of Population Change in Japan

Japan: Consequences of an Aging Population

THE ECONOMY OF JAPAN

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