Japans Balance Sheet Recession

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Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam

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Characters

Japanes Japanes e e Industri Banks es Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam

Japanese Househo ld

Japanese Governme nt 22

USA Governme nt

I want to improve my GDP, So let us not allow Yen to appreciate

Good Idea! I will make more money from my exports.

Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam

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Hey Japan! You cant undervalue your currency and dump your products in my market! Let your currency appreciate!

Hi USA! You are my biggest buyer! So Ill do what you ask me to do, though I dont like it.

Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam

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Hey Government! I am losing lot of money in the exchange rate due to Yens appreciation!

Dont worry! I will ask banks to lend money at low interest rates, people will borrow and spend it to buy your products! You can make money from domestic markets.

Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam

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Banks are giving money at such a low interest!

Its right time to borrow and invest in stocks/property!

Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam

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Stock/ Property Prices

Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam

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Hey I need a new office; the property rates are rising rapidly! I should get my new office before the prices are too high! Good decision! That building is just 7 Million Yens!

Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam

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Hey Banker! I decided to expand, I plan to buy a new office for 7 Million Yen.

Oh thats a good decision! Property prices are rising very high! Luckily for you interest rates are so low, I will sanction you a loan for 7 Million Yen.
Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam 99

Stock/Proper ty price

Yen Value

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Hey Central bank! Prices are rising beyond control We got to stop the inflation before it goes totally out of control.

Let us increase the interest and control flow of money!

Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam

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The new interest rates are too high!

I cant afford to invest or buy any more!

Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam

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Stock/Property Price

Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam

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Property prices are crashing! Your 7 Million Yen -new office building is worth 1 Million Yen only now! Thats really bad! I have to assess my situation now!

Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam

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Hey Banker! Property values are crashing, How bad is my situation?

Yeah your building is only worth 1 Million Yen now. But you got to repay all the 7Million Yen you took as loan for the building!

Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam

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Balance Sheet

ASS ET
Office : 7 Million Yen Office : 1 Million Yen

Notes Payable to Bank: 7 Million Yen

LIABILI TY

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Hey your Assets are lesser than your Liability! You are Technically Bankrupt!

Yeah, I am not going to let any one know about this! I will repay my Liabilities silently before any one knows about it.

Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam

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Balance Sheet

ASS ET
Office : 1 Million Yen

Notes Payable to Bank: 7 Million Yen Notes Payable to Bank: 6 Million Yen
Notes Payable to Bank: 5 Million Yen

LIABILI TY

Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam

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Hey you still have lot of debt to repay!

Yeah, I am going to down size and cut cost!

Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam

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Hey lot of people are losing jobs!

Yes! The situation doesnt look good. I am going to save as much as possible.

Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam

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Bank

Deposi ts

Lendi ng

High Household savings Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam

Low Industry borrowing 2121

Hey Industries, we are lending at interest rate close to 0%, Please borrow money from us!

No Thanks!

Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam

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Hey Interest rates are close to 0%, shouldnt we invest in domestic productivity and make people buy our products?

We still have lot of debt to repay! Also mood of people is not good, they are not buying any more! So we are not investing for some time to come. Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam 2323

Ideal Money Flow 100 20

Househol Yen d income Spendin g: 80 Yen
Income to Someone else

Downward 100 Spiral 20 Yen Yen

Househol d income Spending: 80 Yen
Income to Someone else

Savings in Bank

Savings Yen in Bank

80+20=100 Yen

Industry borrowi ng Investment to produce: 20 Yen

Only 80 Yen in circulation

80 Yen

No Industry borrowin g

All 100 Yen are in circulation

80 Househol Yen
d income

20+16=36 Savings Yen

in Bank No Industry borrowin g

Spending: 64 Yen
Income to Someone else

Only 64 Yen in circulation Money gets stagnated in the Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam banks 2424

64 Yen

Hey Government! Money supply is decreasing in downward spiral! We have to stop this before a disaster! If Industries are not borrowing, We will borrow ! I will issue Govt. bonds, you buy it with your un lendable money Thats great! Money supply will increase and I will also earn interest from the Govt.! Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam

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I have borrowed lot of money, so I will build roads, bridges and other welfare projects, so that you can get a job! Thank you Govt.! I will try to earn as much as possible and save it!

Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam

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Bank

Deposi ts

Lendi ng

Government borrowing Money Supply back in control Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam 2727 High Household savings

Few years later.

Hey your exports are doing good for the past few years!

Yeah, thanks to my exports, I have repaid all my debts. Now, I will start investing in assets!

Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam

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Industries have paid of their debts and started investing in assets. But still they are not borrowing! They are investing with their own savings! Lets wait, I will borrow from you till Industries are confident enough to borrow.

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One fine day.

We cannot keep on investing with our savings!

True, we are doing good. We are confident of repaying debts, lets start borrowing money for our investments!

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Soon
I have saved more than enough!

Me too! Lets start buying stuff, its long time since I spent well.

5/17/12 Palaniappan Vairam Palaniappan Vairam Sarathy, MBA, Asian

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Finally people have started buying and industry has started borrowing. My work is over now, I am not going to borrow any more! Yeah thats good news, but you have to repay all the money you have borrowed from me!

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I thought it was all over! Now I have to figure out how to repay the money!

Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam

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Reference and Further Study

5/17/12

Palaniappan Vairam

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Thank you!

Palaniappan Vairam Sarathy MBA Cohort 7 Asian Institute of Management Makati, Philippines
Palaniappan Vairam Sarathy, MBA, Asian 5/17/12 Palaniappan Vairam 3535