Japan

An analysis of the Lost Years: 1992 financial shock

Greg Elgin & Jason McClain

Government Structure

Parliamentary form of government established by a constitution, in 1947 post WWII.

3 Independent branches1. The Diet (legislative)

2. The Cabinet (executive)

3. The Courts (judicial)

Government StructureThe Diet Comprised of

The House of Representatives (Lower, 480 seats)

The House of Councilors (Upper, 242 seats)

It is the highest power

Members elect a Prime Minister from among themselves

Prime Minister Head of Government 

Appoints Cabinet Ministers and Judges.

Forms national budgets and tax policies to be approved by the Diet.

Government Budget (Deficit)

During the recession the deficit widened, partially due to multiple rounds of stimulus spending.

Seeking to reduce their overall deficit, Japan has been increasing tax revenue.

Current budget drafts call for no decrease in government spending

Recent data has shown Japan is gaining control of it’s deficit. 2012: -9.2% of GDP

2013: -7.6% OF GDP

Government Spending

Roughly 54% of government expenditures go towards Social security payments

Servicing debt brought on by government bond issuances Bonds offset the large budget deficit

Other Notable Spending Education

Public works

National defense

Taxes

Taxes in Japan are paid on income, property and consumption on the national, prefectural and municipal levels

Most common taxes used include: Income Tax

Enterprise Tax

Corporate Tax

Property Tax

Consumption Tax

Vehicle Related Tax

Liquor, Tobacco and Gasoline Taxes

Bank of Japan & Ministry of Finance

➢ Bank of Japan is responsible for Japan's monetary policy.

➢ Governor of Bank of Japan is appointed by Prime Minister to a 5 year term.

➢ Monetary policy pre-1991 was primarily conducted by using “window guidance” credit controls. These credit controls were credit growth quotas that the BoJ's Business Department imposed on commercial banks.

➢ “window guidance” allowed asset bubbles to occur.

➢ China's current primary monetary policy is directly modeled off “window guidance”.

Bank of Japan & Ministry of Finance

➢ Toshihiko Fukui was the head of the BoJ's Business Department during the “Bubble Years” (1968-1989). He then became deputy governor of the BoJ in 1989. Then he was appointed as governor in 2003. He resigned in 2008.

➢ Some people hold him responsible for Japan's financial crisis.

➢ Ministry of Finance (MoF) used to be the most powerful agency in Japanese Gov.

➢ MoF slowly started loosing power to BoJ and other agencies.

➢ Now they are like the US Treasury.

Causes of the Banking Crisis: Bursting of the Bubble

Background info leading up to crisis Japan pursued expansionary fiscal and monetary policies to

counter fears of recession brought about by the sharp appreciation of the yen.

Ever rising prices of stocks and land—led to asset price bubbles.

Stock and land prices peaked in December 1989 and March 1991, respectively.

3 Main Causes of Bank Crisis

1. Bank loans were overextended particularly in risky areas.

2. Banks were allowed to hold common stock on their balance sheet and had accumulated sizable unrealized capital gains.

3. The economic slowdown and price deflation in the 1990s also led to the growing levels of NPLs. The MOF estimated the value of NPL's to be JPY12.3 trillion (1991-1992).

Lost Years (1991–1997)

➢ The first post-war bank failure occurred in 1991. (Toho Sogo Bank)

➢ Credit rating agencies started to downgrade Japanese banks.

➢ By 1992 most banks had a higher marginal cost of funding than corporations.

➢ The Bankers Association established the Corporate Credit Purchase Company (CCPC) in 1993-1994 to purchase toxic bank assets.

Lost Years (1991–1997)

➢ In 1995 two credit co-ops in Tokyo failed.

➢ The Bank of Japan founded Tokyo Kyodo Bank to take over the failed co-ops assets and liabilities.

➢ Seven Jusen (non-bank mortgage lenders) declared bankruptcy in 1996.

➢ Japan used public funds to bail-out Jusen (JPY680 billion)

Lost Years (1991–1997)

➢ Economic growth started picking back up in 1995-1997.

➢ It appeared that Japan finally recovered from the asset bubble crash.

➢ Asian currency crisis occurs.

➢ Sends Japan back into crisis.

Lost Years (1991–1997)

➢ Foreign direct investment (in current USD) in 1992 was $2,759,977,744

➢ In 1993 it was $118,698,480

Decisive Policy Action (1997–2001)

➢ In 1997, JPY30 trillion of public funds sent to the Deposit Insurance Corporation of Japan (DICJ).

➢ JPY13 trillion to bolster bank balance sheets.

➢ JPY17 trillion to strengthen the deposit insurance system.

➢ By 1998 they actually used JPY60 trillion of public funds for DICJ.

➢ Also in 1998 JPY1.8 trillion were injected to the 21 major banks to help them meet capital requirements.

➢ Japan temporarily nationalized two banks the Long-Term Credit Bank of Japan and Nippon Credit Bank.

➢ In 1999 JPY7.5 trillion more of public funds were injected into 15 banks (1.8 trillion was not enough to recapitalize banks).

Recovery Phase (2002–2005)

Program for Financial Revival (PFR), was introduced in October 2002.

PFR tried to accelerate loan restructuring with three-pronged strategy:

Reduce bank equity equal to Tier-1 capital by 2006.

Use new strategies to reclassify NPL's.

Remove 50% of banks new NPL's in one year and 80% within two years.

Japanese government established an asset management company the Industrial Revitalization Corporation of Japan (IRCJ) in 2003.

IRCJ tried to promote reform of the economy by helping large firms survive.

BoJ purchased JPY2 trillion worth of toxic bank assets between 2002 and 2004 (Q.E.).

Government announced that problems with NPL's were over in 2005.

Costs of Resolving the Banking CrisisBanks lost JPY96 trillion between (fiscal years) 1992 and 2004.

The DICJ injected JPY47.1 trillion into the banking system.

Opportunity cost of the crisis and the following “Lost Years” are huge. Estimated as 18% of GDP

References

➢ http://web-japan.org/kidsweb/explore/government/➢ http://

www.economywatch.com/world_economy/japan/structure-of-economy.html

➢ http://www.imf.org/external/pubs/ft/wp/2000/wp0007.pdf➢ http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG/countries

?page=1&display=default➢ http://www.adbi.org/files/2010.06.29.wp222.ljbc.tab.3.pdf➢ http://www.dic.go.jp/english/e_katsudo/index.html➢ https://www.boj.or.jp/en/about/index.htm/