1990s Japanese Financial Crisis

Team 5 Ian Barker Ben Exstrom Tiehan Wu

Yen Appreciated Intensively

Plaza Agreement (1985.09.22) -- Depreciate Dollar to Japanese Yen and German Mark.

Appreciate from 220 to 150 in 15 months

Excessive Liquidity
Export suffered losses Loose monetary policy Low interest rate Banks increased lending Foreign investment US capital entered

Speculation- Real Estate Bubble

Excess liquidity moved in Loose loan policy stimulated both construction and purchase

Housing prices in Tokyo increased by 53% during 1987. In 1989 the price of Tokyos Ginza was $1.5 million per square meter

Speculation - Stock Market

Speculating climate Confidence never waivered over last 25 years

Bursting the bubble

switched to restrictive policy Raised interest rates 5 times from 2.5% to 6% Banks recalled loans

Consequences
Housing and stock prices fell by half from 1990-1991 Companies went bankrupt Unemployment increased Large amount of debt Dec 1994, two banks went bankrupt Vicious Cycle - Shrinking lending, reduced consumption, & decreased investment Politically unstable Cabinet changed 6 times in several years starting in 1993.

Financial Rescues
Slow government response Loosen monetary & fiscal policies Beginning in 1993, interest rate returned to 2.5% Decreased taxes Increased government spending Recovery GDP growth rate 0.3% - 3.6% (1993 1996) Public deficit increasing Took 5.6% of GDP during 1996

1997 on the road to recovery?

1995 - Bank of Japan cuts interest rates to 0% Government infused fiscal stimulus packages April 1997 - Fiscal consolidation effort Mounting Public Debt

The Asian Crisis

Regulatory forbearance masked real estate loan problem Japanese FDI in East Asia rapidly withdrawn Japanese bank loans to other Asian countries dropped by 27% Crisis partly due to the withdrawal of funds from Japanese Banks

Stimulus and GDP growth

1995 - Bank of Japan cuts interest rates to near 0% Government infuses fiscal stimulus packages April 1997 - Fiscal consolidation effort Escalating Public Debt

The Aftermath
Capital injected into banking system Renewed stimulus with little in the way of address NPL Shift to a zero interest rate policy Helped stabilize economy and improve outlook

Asian Crisis down .com bubble up

Deteriorating corporate profits Strained banking system Nonperforming Loans

A Comprehensive Strategy
Regulations no longer aloud ignoring NPL China growth helped stabilize the economy Growth Resumed at an average of 2% between 2003 and 2007 Public funds used for write down of the bad debt Public debt keeps growing Aging populace

GDP Growth Rate

Present Day
Since 2006, Japan has felt the effects of the Global Downturn, the 3/11 Tsunami and the Euro Crisis Many things are still similar: Poor GDP performance Political opposition to tax increases, benefits cuts and now to nuclear power

Present Day, Cont.

Political situation has a strong effect on monetary policy Open currency manipulation is considered politically unwise The Euro Crisis

Effective or Not?
Not very effective. Because of various cultural and political pressures, the Japanese government seems to prefer prolonging the pain.

What Now?
In order to support their aging population the will need to raise revenues at some point in the near future. Financial institutions need to continue to recognize bad debts and write down non performing loans. The question is, in a society that requires group consensus, can the political will be developed to make the necessary changes in a timely manner?

Take-Aways
The lost decade(s) were caused by a rapid increase in the value of the Yen and monitary policy that did not balance that increase. The economic and political ramifications included the failing of the longest ruling party, and delayed actions increased cost. Though slow to react, the Japanese government has taken steps to recognize bad debt and maintain the marketable value of the Yen, which will support their export driven economy.