The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession by Richard C. Koo
Chapter 1. Japanese recession.
1.1 Structural and banking sector problems cannot explain the duration of the recession.
Often the duration of the recession in Japan is explained by either structural problems, or problems in the banking sector. Both are not true.
Structural problems are usually associated with supply-side problems.. Therefore, the slogan of one of the prime ministers «no recovery without structural reform» implied the Regain-Techersky approach to reforms. Here Ku writes, they say, with the topic of structural reforms, I actually heard everyone's ears, but even before the early 90s, but they are not the main cause of the recession (sort of like his recommendations were part of the United States-Japan Structural Impediments Initiative (1991)).
Structural problems indicate, that the private sector is unable to produce quality goods at competitive prices. An economy with structural problems usually has large trade deficits, high inflation, and high % rates. Typical example (By the way, typical or only?) USA and Britain of the 70s.
Actually, the situation in Japan in the 90s was rather the opposite of the situation in the USA in the 70s. Low rates, deflation, rising yen, trade surplus – in Japan. In the USA, everything is exactly the opposite.. The concept can be described as: adequate offer, but lack of demand – in Japan, and adequate demand but insufficient supply in the USA. In principle, Japanese goods were in great demand everywhere, except for Japan itself. By the way, corporate profits were therefore good (through export).
The second main reason for the depression is called the problems in the banking sector, which for various reasons has become a bottleneck and is unable to saturate the system with money.. If companies are unable to raise money from the bank, then companies go to the open market with the issue of shares and bonds. Consequently, if the problem is the money supply, then the volume of placements should grow. However, nothing like this happened.. (There really is a catch. Poor balance – this is the reason for the high risk premium, which means that it can be simply unprofitable to raise funds by placing debt instruments and even more so shares. Here, a financial accelerator can significantly cloud an already good one., but not the strongest argument).
The same goes for non-resident banks. If there is a demand for money, then foreign banks not experiencing problems should increase their market share. Which also did not happen. (with 1997 years, foreign banks have no problems with opening branches at all, previously required some kind of permission).
In the event of a credit crunch in the United States in the early 90s (LBO, CRE S&L) American companies rushed to the debt market for funds (ie. an example of that, what should have happened to Japanese companies). But the most interesting thing, that Japanese banks were actively involved in the process of lending to American companies, which once again indicates the absence of a narrow neck. Ie. not that, so that everything is fine in the banking sector, but it wasn't the credit crunch that was at the heart of the Japanese recession.
1.2 Bubble collapsed triggered a balance sheet recession.
Japan – this is generally a very interesting country, but there is one phenomenon that is not reflected in theoretical economics. Since the early 90s, the Japanese private sector has been reducing its debt burden at 0x % rates. This phenomenon has not received theoretical attention due to simple logic.. If the company does not use free money, it means that it is not able to find any profitable opportunity and it should be liquidated by returning the money to shareholders. In essence, this is why the company exists, what is better than other organizational forms that multiplies money.
When companies, instead of raising funds for investment, pay off existing debt, then the economy loses demand through two channels:
1) Business does not reinvest profits
2) Business does not attract household savings.
At all, when economic agents stop absorbing savings, then the aggregate demand is directly reduced by the amount of savings also multiplied by the multiplier. Shrinking aggregate demand = shrinking GDP = recession.
As a result of the collapse of land prices (this is really a collapse, this is not for you -30% or even not -50%, -90% – this is almost the same as -100%, plus it's not in momentum, but for now forever) Japanese companies found themselves with «bad balances». Asset value dissolves, and the credit remained on the side of the passive. Wherein, how the business itself generated cash flow, and generates. Ie. you are fine, but a huge hole in the balance sheet, which is actually better to close, since from the point of view of financial analysis you are bankrupt, and who wants to deal with bankruptcy.
New business challenge – pay off debt as soon as possible. Thus, the company from a profit maximizer becomes a debt minimizer..
Here Ku also writes about, that Japanese companies had crazy leverage, as high growth rates turned a blind eye to all risks. Generally after a while, Japan closed its eyes a lot due to high growth rates.
Bubble collapse triggered losses equivalent to 3-year GDP (and here, if it's true, and lies the answer to all the controversy about whether the United States will be the same, as in Japan. Answer – No. For in Japan the losses were incomparably greater than in the USA. It is in the size of the holes in the balance that the whole point is). How much is Ku known, this is the largest los in world history during non-war times. Further it is clear: then, what is good for one is terrible for all at once. When everyone starts to pay off the debt, aggregate demand decreases and a recession sets in.
To understand in practice what happened, below schedule about that, who saves, and who borrows in the Japanese economy. Above zero – saving, below – borrowing. Look at non-financial companies. As a matter of fact, demand from the corporate sector decreased by 20% GDP. And this decline replaced the state (and declining private sector savings).
1.3 Fiscal incentives helped to keep GDP at the same level.
Firstly, Japan's savings rate has dropped significantly, which directly increases the share of consumption in personal income, plus reduces the share of dead savings that do not work because no one takes them out on credit. Just do, lower savings rate – it is a complex phenomenon, here is demography (which by the way is useful and not harmful in this case), and reduced income. But the most important thing – this is a reduction in expectations (apparently the Japanese have that part of the brain that speaks – that's it, you can save even more more, than the one who says – that's it, you can spend more).
Secondly, and this can be seen from the previous graph – the budget went into deficit in response to what then appeared to be a cyclical recession. The irony is, that the state that kept the living standards at the same level is accused of mistakes that allegedly led to such a prolonged recession.
1.4 Debt minimization and monetary policy.
Logically, that in a balance sheet recession, the effect of monetary policy is limited by the fact, that the problem is in the plane of demand for cash. No demand – the price of money does not matter. You can say, that we are not talking about moving along the demand curve, a new demand curve with almost zero price elasticity of demand.
How the process of increasing the money supply from the Central Bank works? We buy bonds from banks, banks lend, funds go to deposits in the same banks, in fact, and further according to the money multiplier. But when there is no demand for credit, then capital injections from the Central Bank simply do not leave the banking system – stuck in excess reserves.
but, deng supply still hasn't diminished, and again thanks to the state. (By the way, it is easy to see the recovery in demand for credit in the mid-90s on the graph.. Ku writes about, that then the idea of cutting off incentives killed recovery. But here's the thing., and that the Asian crisis didn’t undermine exports, didn’t? In general, Ku has a lot of emphasis on internal Japanese processes and complete ignorance of external factors.)
The chapter ends with the idea of, that Germany also had something like a balance sheet recession. Thought is not particularly developed, but there is a schedule. Here, as they say, more questions, than answers about, what the author really wanted to say. To judge you)
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Let me remind you, that this is only the first chapter of eight, which, although it is called «Japanese recession», but still serves only as an introduction. The next chapter is about the characteristics of a balance sheet recession., and I will definitely write it down a little later.
