What is taught Japan problem

Twenty years ago no one doubted that Japan - The most successful high-income countries in the world. Only a few could have expected what would happen in the next two decades. Today Japan is experiencing a protracted recession. What went wrong? What do the new government in Japan? What are the lessons to be learned from this? What is happening should be viewed in its proper context. The quality of the railway system and the food is among the guests from the UK feel that they came from a very backward country. If that is so evident decline, the majority of people will be quite happy to him. Nevertheless, the country is really going through a recession. In the past two decades the average annual growth rate was 1.1%. According to Angus Meddisona, a historian in the field of economy, gross domestic product per capita in Japan (at purchasing power parity) in 1950 increased from 20% of the U.S. level to a maximum of 85% in 1991 to 2006, he dropped to 72%. In real terms the size of the index of the Tokyo Stock Exchange Nikkei is a quarter of its value two decades ago. Most frightening is that the net and gross public debt rose from 13% and 68% of GDP in 1991 to a projected 115% and 227% in 2010


What happened? Richard Koo of the Nomura Research points to the "deflation balance accounts. According to Mr. Koo, the economy, which heavily indebted residents persist in trying to repay their debts, has three characteristics: it stops the growth of credit and money supply, and not because banks are reluctant to lend, so that business and households refuse to take them, the traditional monetary policy is largely ineffective, but the desire of the private sector to improve their balance sheets makes the state in the last of the borrowers. As a result, all attempts to normalize the financial and monetary policies are in vain until, until you finish adjusting the balance sheets of the private sector. The balance between savings and investment (income and expenditure) in the Japanese economy shows that it is happening. In 1990, all sectors were close to equilibrium. Then the crisis erupts. In the private sector in Japan for a long time arose excess savings. But since the level of private savings is reduced, the main reason is the persistently high percentage of corporate gross savings to GDP and reducing capital investments. The huge surplus of savings of the private sector was in turn absorbed by the outflow of capital and current account deficit.


Mr. Ku argues that critics of the budget deficit misses the essence. Without the deficit country would be plunged into a depression, instead of a long period of weak demand. Alternatively, one could increase the current-account surplus. But that would require a weaker exchange rate. Japan would have to follow the Chinese exchange rate policy. And it certainly would have caused anger the United States. In spite of the arguments that Mr. Koo had a weak side. They do not explain why such huge surpluses of any debt, or why Japan was so vulnerable to shock the world now, when adjusting the balance sheets of the corporate sector for the most part completed. In my opinion, the underlying structural problem is the excessive corporate savings (retained earnings) and the reduction of investment opportunities. As noted by Andrew Smithers of Smithers & Co in London in 1991, the investments of the private sector to non-residential fixed capital amounted to 20% of GDP, almost twice more than in the United States. But after a modest recovery in 2000-ies. they decreased to 13%. A significant decline occurred in corporate undistributed profits. In the 80's. to address the development of these savings to use monetary policy, which lowered borrowing costs to near zero and increased the number of wasteful investment. In 2000-ies. This problem was solved with the help of a boom of exports and investment, mostly due to trade with China.


Then began the global economic crisis, which adversely affected the exports and investment and slowed economic growth. GDP of 8.6% from its maximum value fell to their lowest point, Japan has suffered more than all the other high-income countries among the Big Seven. According to the Organization for Economic Cooperation and Development, Japan, in 2009 alone reduced net exports led to a reduction of the economy by 1.8%. Now the task of Japan is to achieve growth, stimulated by the inside of the country. The most important requirement - significantly reduce the level of corporate savings. Smithers thinks that this will happen naturally because the savings will be spent as depreciation of fixed capital, which itself is a product of excessive investment. I would like to add that if any need to market economy, which controls the corporation, to collect cash from the hands of a sleepy leadership, it needs to look at Japan. The new government is not beholden to Japanese corporations should adopt policies that are at least change their behavior.


Also, it's time to stop deflation. To do this, the Bank of Japan should cooperate with the government to avoid the excessive strengthening of the exchange rate. The recent rise in the yen would evoke a more aggressive monetary action. Due to the significant inflation in Japan - the absolute minimum of 2% - real interest rates would become negative, so that should the country. Meanwhile, the rest of the world should think about whether they have learned the lessons of economic decline in Japan. Experience has shown that land of the rising sun, even a sustained budget deficit, zero interest rates and quantitative easing does not necessarily lead to inflation in the economy, where the bubble burst, suffering from excess capacity and excess balance sheet accounts, such as the United States. It also shows that the process of getting rid of these surpluses is delayed for a long time. Nevertheless, the history of Japan can serve as a model for the economies of a very different type. She said that if the economy with an extremely high level of corporate savings and the relatively high fixed investment is very rapid growth begins to slow down, demand can spiral out of control. This is especially true when part of a mechanism to stimulate demand is intentionally increased lending and bubbles in asset prices. So, who should be the first to learn this vital lesson? China - That's who.