NOMURA - The World in Balance Sheet Recession

7/30/2019 NOMURA - The World in Balance Sheet Recession

1/23

The World in Balance Sheet Recession:What Post-2008 U.S., Europe and ChinaCan Learn from Japan 1990-2005

Richard C. Koo

Chief EconomistNomura Research Institute

Tokyo

November 2011


2/23

1

Exhibit 1. US Housing Prices Are Moving along the Japanese Experience

40

60

80

100

120

140

160

180

200

220

240

260

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

US: 10 Cities Compo site Home Price Index

(US: Jan. 2000=100, Japan: Dec. 1985=100)

Note: per m2, 5-month moving averageSources: Bloomberg, Real Estate Economic Institute, Japan, S&P, S&P/Case-Shiller Home Price Indices, as of Oct. 28, 2011

CompositeIndex Futures

Japan: Tokyo Area Condo Price1

77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99

Japan: Osaka Area Condo Price1

Futures

US

Japan


3/23

Exhibit 2. Drastic Liquidity Injection

Failed to Increase Money Supply (I): US

2

80

100

120

140160

180

200

220

240

260

280

300

320

Monetary Base

Money Supply (M2)

Loans and Leases in Bank Credit

(Aug. 2008 =100, Seasonally Adjusted)

Down25%

0.5

1.0

1.52.0

2.5

3.0

08/1 08/4 08/7 08/10 09/1 09/4 09/7 09/10 10/1 10/4 10/7 10/10 11/1 11/4 11/7 11/10

(%, yoy) Consumer SpendingDeflator (core)

Sources: Board of Governors of the Federal Reserve System, US Department of CommerceNote: Commercial bank loans and leases, adjustments f or discontinuities made by Nomura Research Institute.


4/23


Failed to Increase Money Supply (II): EU

3

90

100

110

120

130

140

150

Base Money

Money Supply (M3)

Credit to Euro Area Residents

(Aug. 2008 =100, Seasonally Ad justed)

0.6

0.8

1.0

1.2

1.41.6

1.8

2.0

2.2

08/1 08/4 08/7 08/10 09/1 09/4 09/7 09/10 10/1 10/4 10/7 10/10 11/1 11/4 11/7

(%, yoy)

CPI core

Sources: ECB, EurostatNote: Base money's figures are seasonally adjusted by Nomura Research Institute.


5/23


Failed to Increase Money Supply (III): UK

4

70

85

100

115130

145

160

175

190

205

220

235

250265

280

Reserve Balances + Notes & Coin

Money Supply (M4)

Bank Lending (M4)

Aug. 08'

(Aug. 2008 =100, Seasonally Adjusted)

1

0

1

23

4

5

6

07/1 07/4 07/7 07/10 08/1 08/4 08/7 08/10 09/1 09/4 09/7 09/10 10/1 10/4 10/7 10/10 11/1 11/4 11/7

CPI (ex. Indirect Taxes)(%, yoy)

Down17%

Sources: Bank of England, Office for National Statisics, UKNotes: 1. Reserve Balances data are seasonally unadjusted. 2. Money supply and bank lending data exclude intermmediatefinancial institutions.


6/23

Exhibit 5. Drastic Liquidity Injection Failed to

Produce Drastic Increase in Money Supply (IV): Japan

5

60

80

100

120

140

160

180

200

220

240

260

Monetary Base

Money Supply (M2)

Bank Lending

Oct. 97

(Oct. 97 = 100, Seasonally Adjusted)

QuantitativeEasing

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

(y/y, %)CPI Core

Down37%

Note: Bank lending are seasonally adjusted by Nomura Research Institute.Source: Bank of Japan

Earthquake


7/23

Exhibit 6. Japans De-leveraging with Zero Interest Rates

Lasted for 10 Years

6

-6

-4

-2

0

2

4

6

8

10

-15

-10

-5

0

5

10

15

20

25

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Borrowings from Financial Institutions (left scale)

Funds raised in Securities Markets (left scale)

CD 3M rate(right scale)

(% Nominal GDP, 4Q Moving Average) (%)

Sources: Bank of Japan, Cabinet Off ice, Japan

Debt-financed

bubble(4 years)

Balance sheet

recession(16 years)

Funds Raised by Non-Financial Corporate Sector


8/23

Exhibit 7. Japans GDP Grew in spite of Massive Loss of Wealth and

Private Sector De-leveraging

7

down87%

0

100

200

300

400

500

600

700

800

200

250

300

350

400

450

500

550

600

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

(Tril.yen, Seasonally Adjusted)

Real GDP(Left Scale)

Land Price Index in Six Major Cities(Commercial, Right Scale)

(Mar. 2000=100)

Sources: Cabinet Office, Japan Real Estate Institute

Nominal GDP(Left Scale)

Likely GDP Pathw/o Government Action

Last seen in 1973

Cumulative90-05 GDP

Supported byGovernment

Action:~ 2000 trillion

CumulativeLoss of

Wealth onShares andReal Estate

~ 1500 trillion


9/23

Exhibit 8. Japanese Government Borrowed and Spent

the Unborrowed Savings of the Private Sector to Sustain GDP

8

overalldeficit460

trillion

20

30

40

50

60

70

80

90

100

110

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Source: Ministry of Finance, JapanNote: FY 2011 includes 2nd supplementary budget.

Government spending

Tax revenue

Bubble Collapse

(Tril. yen)

cumulativecyclicaldeficit

90-05315 trillion


10/23

Exhibit 9. Premature Fiscal Reforms in 1997 and 2001 Weakened

Economy, Reduced Tax Revenue and IncreasedDeficit

9

0

10

20

30

40

50

60

70

0

10

20

30

40

50

60

70

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Tax Revenue

Budget Deficit

Hashimotofiscal

reform

Koizumifiscal

reform

(Yen tril.) (Yen tril.)

(FY)

GlobalFinancial

Crisis

*

Obuchi-Morifiscal

stimulus

Source: Ministry of Finance, Japan*: estimated by MOF

unnecessary

increase indeficit:

103.3 tril.


11/23

Exhibit 10. Monetary Easing No Substitute for Fiscal Stimulus (I):

Japans Money Supply Has Been Kept Up by Government Borrowings

Credit

Extended to

the Private

Sector

601.6 tril.

Credit

Extended to the

Public Sector247.2 tril.

(+106.8)

Foreign assets

(net)

74.1 tril.

(+41.4)

Foreign Assets

(net)

32.7 tril.

Credit Extended

to the Public

Sector

140.4 tril.

Money Supply

(M2+CD)

621.5 tril.

Credit

Extended to

the Private

Sector

501.8 tril.

(-99.8)

Other Liabilities

(net)

78.7 tril.

(-74.5)

Other Liabilities

(net)

153.2 tril.

Money Supply

(M2+CD)

744.4 tril.

(+122.9)

Balance Sheets of Banks in Japan

December 2007

Total Assets 823.1 tril. (+48.4)Total Assets 774.7 tril.

December 1998Assets

Assets

Liabilities

Liabilities

Source: Bank of Japan "Monetary Survey"

10


12/23

Exhibit 11. Monetary Easing No Substitute for Fiscal Stimulus (II): Post-1933 US

Money Supply Growth Made Possible by Government Borrowings

Credit

Extended to

the Private

Sector

$29.63 bil.

Deposits

$32.18 bil.

Credit

Extended to

the Public

Sector

$5.45 bil.

Other Assets

$8.02 bil.

Reserves

$2.36 bil.

Capital

$6.35 bil.

Other

Liabilities

$6.93 bil.

June 1929Assets Liabilities

Total Assets $45.46 bil. Total Assets $33.04 bil. (-12.42) Total Assets $46.53 bil. (+13.49)

Credit

Extended

to the

Private

Sector

$15.71 bil.

(-0.09)Credit

Extended to

the PrivateSector

$15.80 bil.

(-13.83)



Deposits

$23.36 bil.(-8.82)

Deposits

$34.10 bil.

(+10.74)

Credit

Extended

to the

Public

Sector

$8.63 bil.

(+3.18)

Credit

Extended

to the

Public

Sector

$16.30 bil.

(+7.67)

OtherAssets

$6.37 bil.

(-1.65)

Other

Assets

$8.91 bil.

(+2.54)

Reserves

$2.24 bil.

(-0.12)

Reserves

$5.61 bil.

(+3.37)

Other

Liabilities

$4.84 bil.

(-2.09)

Other

Liabilities

$7.19 bil.

(+2.35)

Capital

$4.84 bil.

(-1.51)

Capital

$5.24 bil.

(+0.40)

(= Money Supply)

Source: Board of Governors of the Federal Reserve System (1976) Banking and Monetary Statistics 1914-1941 pp.72-79

Balance Sheets of All Member Banks

11


13/23

Exhibit 12. US in Balance Sheet Recession: US Private Sector

Increased Savings Massively after the Bubble

12

Shift from4Q 2006 in

private sector:9.30% of GDP

Corporate: 1.40%Households:

8.22%


public sector:5.80% of GDP

-12

-10

-8

-6

-4

-2

0

2

4

6

8

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

HousingBubble

IT Bubble

(Financial Surplus)

(Financial Deficit)

(as a ratio to nominal GDP, %, quarterly)

Rest of the World

Households

GeneralGovernment

Corporate Sector(Non-Financial Sector +Financial Sector)

Financial Surplus or Deficit by Sector

Note: For the latest figures, 4 quarter averages ending with 2Q/11' are used.Sources: FRB, US Department o f Commerce


14/23

Exhibit 13. UK in Balance Sheet Recession: UK Private Sector


13


private sector:8.23% of GDPCorporate: 2.19%

Households: 6.04%



-12

-9

-6

-3

0

3

6

9

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Note: For the latest figures, 4 quarter averages ending with 2Q/11' are used.Source: Off ice for National Statistics, UK

(as a ratio to nominal GDP, %)

(Financial Surplus)

(Financial Deficit)

Rest of the World

Households

GeneralGovernment

Corporate Sector(Non-Financial Sector +

Financial Sector)



15/23

0

1

2

3

4

5

6

2007 2008 2009 2010 2011

EnglandUS

Sweden

Switzerland

Japan

(%)

*Note: Excluding Eurozone. As of Oct. 28, 2011.Source: Bloomberg

3%

1.3%

Exhibit 14. Global Bond Yields* Nearing Japanese Levels

14

JapaneseBond Yield

in 1997


16/23

Exhibit 15. Euro-Zone Bond Yields Are Diverging Sharply

15

0

2

4

6

8

10

12

14

16

18

20

22

24

26

2007 2008 2009 2010 2011

Greece

Ireland

Portugal

Spain

Italy

France

Germany

(%)

Note: As o f Oct. 28, 2011.Source: Bloomberg


17/23

Exhibit 16. Euro-zone in Balance Sheet Recession: Euro-zone Private Sector


16

-8

-6

-4

-2

0

2

4

6

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Rest of the World


Households

(Financial Surplus)

(Financial Deficit)

Corporate Sector(Non-Financial Sector + Financial Sector)

GeneralGovernment

Note: For the latest figures, 4 quarter averages ending with 1Q/11' are used.Source: ECB



private sector:4.09% of GDP

Corporate: 2.62%Households: 1.47%




18/23

Exhibit 17. Spain in Balance Sheet Recession: Spanish Private Sector


17


private sector:17.95% of GDPCorporate: 12.54%Households: 5.41%



-12

-9

-6

-3

0

3

6

9

12

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Note: For the latest figures, 4 quarter averages ending with 2Q/11' are used.Source: Banco de Espaa


(Financial Surplus)

(Financial Deficit)

Rest of the World

Corporate Sector(Non-Financial Sector + Financial Sector)General

Government

Households



19/23

Exhibit 18. Ireland in Balance Sheet Recession: Irish Private Sector


18

-15

-10

-5

0

5

10

15

2002 2003 2004 2005 2006 2007 2008 2009

Sources: Eurostat, Central Statistics Off ice, Ireland



Corporate Sector(Non-Financial Sector + Financial Sector)

(Financial Surplus)

Rest of the World

Households

GeneralGovernment

(Financial Deficit)

Shift from 2006in private sector:21.55% of GDPCorporate: 7.29%

Households: 14.26%

Shift from 2006in public sector:16.78% of GDP


20/23

Exhibit 19. Exit Problem (II): German Private Sector Refused to

Borrow Money after 1999-2000 Telecom Bubble

19

-10

-8

-6

-4

-2

0

2

4

6

8

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

(Financial Surplus)

(Financial Deficit)


GeneralGovernment

Households

Sources: Deutsche Bundesbank, Federal Statistical Office GermanyNote: The assumption of Treuhand agency's debt by the Redemption Fund fo r Inherited Liabilities in 1995 is adjusted.

Rest of the World


Telecom Bubble

Corporate Sector(Non-Financial Sector +Financial Sector)

Shift from 2000to 2005

in private sector:12.06% of GDPCorporate: 9.26%

Households: 2.80%

Shift from 2000to 2005

in public sector:4.62% of GDP


21/23

Exhibit 20. Recovery from Lehman Shock Is NOT Recovery from

Balance Sheet Recession

20

Source: Nomura Research Institute

?

Lehman Shock

Actual GDPPath

Current Location

Likely GDP Pathwithout Lehman Shock

Weaker Demand

from Private SectorDe-leveraging

Stronger Demandfrom Government's

Fiscal Stimulus

(A)

(B)

Economic weaknessfrom private-sector

de-leveraging

Economic weaknessfrom policy mistakeon Lehman

BubbleBurst


22/23

Source: Richard Koo, The Holy Grail of Macroeconomics: Lessons from Japans Great Recession, John Wiley & Sons, Singapore, April 2008 p.160.

(1) Monetary policy is tightened, leading the bubble to collapse.

(5) Private sector phobia towards borrowing gradually disappears,and it takes a more bullish stance towards fund raising.

(8) With the economy healthy,the private sector regains its vigour,

and confidence returns.

(9) Overconfident private sector triggers a bubble.

(7) Monetary policy becomes the main economictool, while deficit reduction becomes the top

fiscal priority.

(6) Private sector fund demand recovers,and monetary policy starts working again.

Fiscal policy begins to crowd out private investment.

(4) Eventually private sector finishes its debt repayments,ending the balance sheet recession.

But it still has a phobia about borrowing which keepsinterest rates low, and the economy less than fully vibrant.

Economy prone to mini-bubbles.

(3) With everybody paying down debt,monetary policy stops working.

Fiscal policy becomes the main economic toolto maintain demand.

(2) Collapse in asset prices leaves private sectorwith excess liabilities,

forcing it into debt minimization mode.The economy falls into a balance sheet recession.

BubbleYin (=Balance Sheet Recession) Yang (=Textbook Economy)

Exhibit 21. Multi-Decade Cycle of Bubbles and Balance Sheet Recessions

US

Spain

UK

21

Entrance

Problem

ExitProblem

Japan

Germany


23/23

Yang

= Profit maximization

Yin

= Debt minimization

Textbook economy Balance sheet recession

Assets > Liabilities Assets < Liabilities

Greatest good for greatest number Depression if left unattended

Effective Ineffective (liquidity trap)

Counterproductive (crowding-out) Effective

Inflationary Deflationary

Normal Very low

Virtue Vice (paradox of thrift)

a) LocalizedQuick NPL disposal

Pursue accountability

Normal NPL disposal

Pursue accountability

b) SystemicSlow NPL disposal

Fat spread

Slow NPL disposal

Capital injection by government

Source: Richard Koo, The Holy Grail of Macroeconomics: Lessons from Japans Great Recession,

John Wiley & Sons, Singapore, 2008

1) Phenomenon

2) Private sector financial condition

3) Outcome

9) Remedy for

Banking Crisis

4) Monetary policy

5) Fiscal policy

6) Prices

7) Interest rates

8) Savings

Behavioral principle

Exhibit 22. Euro-Zone Banks Need Low-Cost Unconditional Capital

Injection to Avoid Credit Crunch

22

Contrast Between Yin and Yang Phases of Cycle

Documents

NOMURA - The World in Balance Sheet Recession