Bird's Eye View

Arranged for GIC (Global Interdependence Center) Tokyo Conference

December 3rd, 2012

Bird’s Eye View of Japanese Lost Two Decades

Kozo Koide Chief Economist DIAM Co.,Ltd

The Process of the Birth of Bubble and the Burst of Bubble

Sun, Not Rising 

Japan become No3 economy in the world – Nominal GDP became No3 by the calculation of IMF in 2010.

– Negative GDP deflator since 1994, except 1997 with consumption tax hike.

Billion $

％

< GDP(Current Prices) >

20,000 18,000 16,000 14,000

< GDP Deflator (YoY) >

3.0

China Japan

2.5

US

1.5

2.0

Estimates Start After 2011

1.0

12,000

0.5

10,000

0.0

8,000

▲0.5

6,000

▲1.0

4,000

▲1.5

2,000

▲2.0

1

Source : CAO

DIAM Economic Research

Kozo Koide, Chief Economist DIAM

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

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

Source：IMF

1982

▲2.5

0

DIAM Economic Research

The Process of the Birth of Bubble and the Burst of Bubble

Aging Society w/ Mounting Government Debt 

Aging has accelerated from mid-1990’s with growing government debt – Getting harder to pay down the debt in the future.

＜ Aging Population Ratio ＞

%

< Government Financial Liabilities (Net, % of Nominal GDP ） >

％

60

120

Japan

US

Japan

110

US

100

50

Aging Population Ratio: Age 65 and over / Age 15-64 population

90 80

40

70 60

30

50 40

20

30 20

10 UN estimate from CY2010

10

DIAM Economic Research

2

Source : OECD

Kozo Koide, Chief Economist DIAM

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

2030

2025

2020

2015

2010

2005

2000

1995

1990

1985

1980

1975

1970

1965

1960

1955

1950

Source: UN

1992

0

0

DIAM Economic Research

The Process of the Birth of Bubble and the Burst of Bubble

Extreme & Sudden Appreciation of the Yen Plaza Accord (’85/9) : \/$ was appreciated almost 30% in a year – Effective Exchange Rate rose by 39% \／$

< \/$ Exchange Rate >

300 250

Plaza Accord

200 150 100 50

12.01

10.01

08.01

06.01

DIAM Economic Research

Source:BOJ

3

04.01

02.01

00.01

98.01

96.01

94.01

92.01

90.01

88.01

86.01

84.01

82.01

0 80.01



Kozo Koide, Chief Economist DIAM

The background of prolonged stagnation

Mistake in Macro Prudential Policy Monetary policy : Too late tightening in ’80’s & Too late easing in ’90’s – Delayed tightening : ∵ Black Monday, Accommodative stance vis-à-vis demand of cash, less independent BOJ (“Study of Life Boat Operation” (’89)) – Delayed easing : ∵ Public opinion (mood) to bash real estate bubble, lack of understanding about the impact caused by asset deflation < Monetary Policy >

YOY ％ 25

％ 20

Monetary Base (YoY) - BOJ Note Outstanding (YoY) ODR (RHS) O/N Call Rate (RHS)

20

18

15

16

Credit Control over Three Industries ('90/3 - '91/12)

10 5

14 12

D

B 0

10

▲5

8

▲10

6

A

▲15

4

Got into deflation ▲20

Black Monday

2

E

Failure of LTCB

C

F

G

4

Source:BOJ

(Monetary Base)nsa, before adjusting reserve requirement

Kozo Koide, Chief Economist DIAM

12.10

11.10

10.10

09.10

08.10

07.10

06.10

05.10

04.10

03.10

02.10

01.10

00.10

99.10

98.10

97.10

96.10

95.10

94.10

93.10

92.10

91.10

90.10

89.10

88.10

87.10

86.10

85.10

84.10

0

83.10

▲25

82.10



DIAM Economic Research

The background of prolonged stagnation

Mistake in Macro Prudential Policy 

Let the asset bubble go not much care about excess liquidity – Marshallian k was elevated after Plaza Accord, when general inflation was tamed.

– After the bubble burst, stock & real estate price became inelastic vis-à-vis excess liquidity, due to the balance sheet adjustment.

– Impossible to push down real interest rate to be negative under deflation

100 50

▲1 ▲2.0 ▲2 ▲3.0

0

▲3 ▲4.0

5

99.06

98.09

97.12

97.03

96.06

95.09

94.12

94.03

93.06

92.09

91.12

91.03

90.06

89.09

88.12

88.03

87.06

86.09

85.12

85.03

Source : RI of Real Estate Economy, Nikkei, BOJ, CAO

DIAM Economic Research

Source：MIC,BOJ,BLS,FED,Eurostat,ECB

Kozo Koide, Chief Economist DIAM

12.01

▲1.0

11.01

0

10.01

150

Europe

09.01

0.0

08.01

1

US

06.01

200

05.01

1.0

03.01

2

02.01

250

01.01

2.0

00.01

3

99.01

300

98.01

3.0

97.01

4

Got into deflation

96.01

350

400

Japan

90.01

5

4.0

07.01

5.0

95.01

6

94.01

7

04.01

％

93.01

450

*Japan：Unsecured O/N call rate-CPI YoY US：FED Funds Target Rate-CPI YoY Europe：Short Term Repo Rate-CPI YoY Gray Shadow ：US Recession,Pink Shadow ：Japan Recession

92.01

Marshallian k : M2/Nomional GDP (YoY, RHS) Real Estate Price Index (commercial zone, 6 major metropolitan areas) Nikkei225

500

< Japan,US,Europe : Real Policy Rate >

％

<Stock & Real Estate Price, Marshallian k (YoY)>

91.01

85/3=100

DIAM Economic Research

The background of prolonged stagnation

Liquidity Trap 

The size of QE by BOJ has been very large – Assets of BOJ / Nominal GDP has been higher than those of FED & ECB. – Credit multiplier has been staying at very low level.

US

EU

Japan

*Heavy line:4Q average

30 25 20 15 10 5

6

12.09

11.09

10.09

09.09

08.09

07.09

06.09

05.09

04.09

03.09

02.09

01.09

00.09

99.09

98.09

97.09

96.09

0

Source：FED、U.S. Department of Commerce、ECB、Eurostaｔ、BoJ、Cabinet Office

< Credit Multipiler>

YoY (%)

< Asset size of Central Bank in relation to nominal GDP>

35

DIAM Economic Research

45 40 35 30 25 20 15 10 5 0 ▲5 ▲10 ▲15 ▲20 ▲25 ▲30

13.5 13.0 12.5 12.0 11.5 11.0 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0

Monetary Base M2 Credit Multilier(RHS) (Note)M2 : Connected the former data set using MoM change after S.A.

82.04 83.04 84.04 85.04 86.04 87.04 88.04 89.04 90.04 91.04 92.04 93.04 94.04 95.04 96.04 97.04 98.04 99.04 00.04 01.04 02.04 03.04 04.04 05.04 06.04 07.04 08.04 09.04 10.04 11.04 12.04

％

Source:BOJ

Kozo Koide, Chief Economist DIAM

DIAM Economic Research

The juncture with other panelist : Past

“Hated since the Merchant of Venice??”

Injection of public money has been delayed by harsh public opinion – First measurable capital injection was in 1998, when two large banks failed, 4 years after Japan got into deflation.

– Bad debt estimation in ’94 : 12 trillion (largest one) vs. 116 trillion (mine) ＜ Non-performing Loan・Financial Assistance by Government > Others(Lending to Nationalized Banks etc) Purchasing Assets Grants for Deposit Protection Capital Injection NPL based upon Financial Resolution Act:right scale Risk Management Loan (New Guideline by FSA): right scale Risk Management Loan (Old JBA Guideline):right scale

100Myen 240,000

100Myen 600,000

220,000 200,000

500,000

180,000 160,000

400,000

140,000 120,000

300,000

100,000 80,000

200,000

60,000 40,000

100,000

20,000

7

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

0 1993

0 1992



DIAM Economic Research

Source : FSA, DIC

Kozo Koide, Chief Economist DIAM

The juncture with other panelist : Past

Dr. Porter was Wrong? 

The system to harness long-term corporate strategy has changed.

– – – –

Life-time employment & cross-share-holding has faded away Temp staff rate : ’93/1 12% → ’2012/8 24% The share of stock held by domestic banks : ’98/3 15% → ’2012/6 4% Sony vs. Toray, Banks : let zombie arrive or lower agency cost ?

< Regular Worker Employment Index (YoY, contribution) ＞

％

％

3MMA

3.5

＜ Share of Stock-holding : Domestic Banks & Foreigners ＞

30

3.0

Ordinal

Temporary

26.1%

Total

2.5

25

2.0 1.5 20

1.0 0.5

15

0.0 ▲0.5 ▲1.0

10

▲1.5

4.0%

▲2.0

5

Domestic Banks

Office w/more than 5 employees

▲3.0

Source : BOJ

8

Kozo Koide, Chief Economist DIAM

12.09

12.03

11.09

11.03

10.09

10.03

09.09

09.03

08.09

08.03

07.09

07.03

06.09

06.03

05.09

05.03

04.09

04.03

03.09

03.03

02.09

02.03

01.09

01.03

00.09

00.03

99.03

98.09

12.03

11.03

10.03

08.03

07.03

06.03

05.03

04.03

03.03

02.03

01.03

00.03

99.03

98.03

97.03

09.03

DIAM Economic Research

98.03

Source : MoL

96.03

95.03

94.03

Foreigners (Overseas Investors + Foreign Banks in Japan) 0 99.09

▲2.5

© DIAM Economic Research

The juncture with other panelist : Past

Where is Japanese?

Export competitiveness in electronics has eroded – High yen boosted hollow-out to Asia, lower the competitive advantage vis-à-vis Asian rivals. But that is not all.

12M.Ma

< The Relative Export Competitiveness Ratio > Visual & Audio

Automobile

1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 ▲0.1 ▲0.2

The coefficient of extent of favor in exports: ▲0.3 （ exports-imports） /（ exports+imports）

Source:MOF

9

11.12

09.12

07.12

05.12

03.12

01.12

99.12

97.12

95.12

93.12

91.12

89.12

87.12

▲0.4

85.12



DIAM Economic Research

Kozo Koide, Chief Economist DIAM

The juncture with other panelist : Future

Japanese Women Want More Babies The neck is day-care system & spending for education – OECD estimate the fertility rate would be risen to 2.0 provided that public support for day-care and spending for education 【 Potential Impact of Various Policy Reforms on Total Fertility Rates 】

%

3.0

Expectate Progress in Fertility Rate by Policy Enhancement Current Level of Birthrate

2.5

0.4

2.0 0.2 0.3

1.5

0.0

0.2

0.5 0.6 0.7 0.8

0.3 0.3 0.4 1.0

0.4 0.6

0.9 1.1

0.7

0.2

1.0 0.5

2.0 1.9 1.7 1.6 1.7 1.7 1.8 1.7 1.5 1.5 1.4 1.4 1.5 1.3 1.2 1.3 1.3 1.2 1.1

Korea

Portugal

US

Netherland

Ireland

DIAM Economic Research

Source: OECD

10

Greece

France

UK

Finland

Japan

Canada

Czech

Italy

Austria

Belgium

Denmark

Sweden

Germany

0.0 Spain



Kozo Koide, Chief Economist DIAM

The juncture with other panelist : Future

Higher Value-added by Small Business Gross value-added ratio is higher in small business w/ upward trend – It is higher than that of large corporations, which has been declining recently. ％

< Gross Value-added Ratio >

23

Large Corporations Small Corporations

22 21 20 19 18 17 16

(Note）Gross Value-added Ratio : Gross value-added / Sales, Gross Value-added : recurrent profit + depreciation + financial cost + labor cost + tax payed

出所：財務省

11

12.06

10.06

08.06

06.06

04.06

02.06

00.06

98.06

96.06

94.06

92.06

90.06

88.06

86.06

84.06

82.06

80.06

78.06

76.06

74.06

72.06

70.06

68.06

66.06

64.06

62.06

15

60.06



DIAM Economic Research Kozo Koide, Chief Economist DIAM

The juncture with other panelist : Future

Country to Welcome Leverage 

Harbinger that Japanese companies has been started to be levered – Financial leverage ratio (large corporations) has turned to be positive for the first time since late 1970’s.

– Bank lending has been growing, although the pace is slow.

％

< Fianacial Leverage Ratio(Large Corporations) YoY >

＜ Bank Lending (YoY) ＞

％

5.0

12

4Q average

３MMA

4.0

10

3.0

8

2.0 6

1.0

4

0.0

2

▲1.0

0

▲2.0 ▲3.0

▲2

▲4.0 ▲4

▲5.0

▲6

▲6.0

(Note): Total Assets / Capital ▲8

Source: MOF

12

DIAM Economic Research

Source : BOJ

Kozo Koide, Chief Economist DIAM

12.01

11.01

10.01

09.01

08.01

07.01

06.01

05.01

04.01

03.01

02.01

01.01

00.01

99.01

98.01

97.01

96.01

95.01

94.01

93.01

12.06

10.06

08.06

06.06

04.06

02.06

00.06

98.06

96.06

94.06

92.06

90.06

88.06

86.06

84.06

82.06

80.06

78.06

76.06

74.06

72.06

70.06

68.06

66.06

64.06

62.06

60.06

▲7.0

DIAM Economic Research

Disclaimer    

 

This documentation was prepared independently by DIAM Co., Ltd. and is not required pursuant to the Financial Instruments and Exchange Law. This documentation is required to be used only by the investor to whom it is distributed.

This documentation is only for the purpose of providing information and is not intended to be used to solicit investments.

This documentation was prepared using data that DIAM Co., Ltd. has judged to be reliable. However, DIAM Co., Ltd. does not guarantee its completeness or accuracy. Additionally, the published data are only indicative of past performance and do not provide a guarantee of future performance.

The contents included in this documentation are only current as of the date this documentation was prepared (November 23th ,2012) and are subject to change without notice.

The intellectual property and all other rights pertaining to the data published in this documentation including benchmark indices shall remain the property of the publisher and licensor.

13

Kozo Koide, Chief Economist DIAM