Japan’s Lost Decade : Lessons for Asian Economies PDF
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ADB Institute Series on Development Economics Naoyuki Yoshino Farhad Taghizadeh-Hesary Editors Japan’s Lost Decade Lessons for Asian Economies ADB Institute Series on Development Economics Serieseditor NaoyukiYoshino,Tokyo,Japan Asia and the Pacific has been advancing in many aspects of its development, but the potential for growth is vast. The Asian Development Bank Institute Series on DevelopmentEconomicsaimstoidentifyandproposesolutionsusingamultidisci- plinaryapproachtoimportantdevelopmentissuesfacingeconomiesintheAsiaand Pacificregion.Througheditedvolumesandmonographs,theseriesshowcasesthe researchoutputoftheAsianDevelopmentBankInstituteaswellasitscollaboration withotherleadingthinktanksandinstitutionsworldwide. Thecurrentfocusoftheseriesisinfrastructuredevelopment;financialinclusion, regulation, and education; housing policy; central and local government relations; macroeconomic policy; and governance. The series also examines the major bottlenecks to greater stability and integration in Asia and the Pacific, while addressingtimelyissuesincludingtrendsinmicrofinance,fiscalpolicystability,and ways of tackling income inequality. The publications in the series are relevant for scholars, policymakers, and students of economics, and provide recommendations for economic policy enhancement and a greater understanding of the implications offurthercapacitybuildinganddevelopmentreforminAsiaandthePacific. Moreinformationaboutthisseriesathttp://www.springer.com/series/13512 Naoyuki Yoshino • Farhad Taghizadeh-Hesary Editors Japan’s Lost Decade Lessons for Asian Economies 123 Editors NaoyukiYoshino FarhadTaghizadeh-Hesary AsianDevelopmentBankInstitute(ADBI) KeioUniversity Tokyo,Japan Tokyo,Japan KeioUniversity Tokyo,Japan TheviewsinthispublicationdonotnecessarilyreflecttheviewsandpoliciesoftheAsianDevelopment BankInstitute(ADBI),itsAdvisoryCouncil,ADB’sBoardorGovernors,orthegovernmentsofADB members. ADBI does not guarantee the accuracy of the data included in this publication and accepts no responsibilityforanyconsequenceoftheiruse.ADBIusesproperADBmembernamesandabbreviations throughout and any variation or inaccuracy, including in citations and references, should be read as referringtothecorrectname. Bymakinganydesignationoforreferencetoaparticularterritoryorgeographicarea,orbyusingthe term“recognize,”“country,”orothergeographicalnamesinthispublication,ADBIdoesnotintendto makeanyjudgmentsastothelegalorotherstatusofanyterritoryorarea. Users are restricted from reselling, redistributing, or creating derivative works without the express, writtenconsentofADBI. AsianDevelopmentBankInstitute KasumigasekiBuilding8F 3-2-5,Kasumigaseki,Chiyoda-ku Tokyo100-6008,Japan www.adbi.org ADBrecognizes“China”asthePeople’sRepublicofChina. Note:Inthispublication,“$”referstoUSdollars. ISSN2363-9032 ISSN2363-9040 (electronic) ADBInstituteSeriesonDevelopmentEconomics ISBN978-981-10-5019-0 ISBN978-981-10-5021-3 (eBook) DOI10.1007/978-981-10-5021-3 LibraryofCongressControlNumber:2017954305 ©AsianDevelopmentBankInstitute2017 Thisworkissubjecttocopyright.AllrightsarereservedbythePublisher,whetherthewholeorpartof thematerialisconcerned,specificallytherightsoftranslation,reprinting,reuseofillustrations,recitation, broadcasting,reproductiononmicrofilmsorinanyotherphysicalway,andtransmissionorinformation storageandretrieval,electronicadaptation,computersoftware,orbysimilarordissimilarmethodology nowknownorhereafterdeveloped. Theuseofgeneraldescriptivenames,registerednames,trademarks,servicemarks,etc.inthispublication doesnotimply,evenintheabsenceofaspecificstatement,thatsuchnamesareexemptfromtherelevant protectivelawsandregulationsandthereforefreeforgeneraluse. Thepublisher,theauthorsandtheeditorsaresafetoassumethattheadviceandinformationinthisbook arebelievedtobetrueandaccurateatthedateofpublication.Neitherthepublishernortheauthorsor theeditorsgiveawarranty,expressorimplied,withrespecttothematerialcontainedhereinorforany errorsoromissionsthatmayhavebeenmade.Thepublisherremainsneutralwithregardtojurisdictional claimsinpublishedmapsandinstitutionalaffiliations. Printedonacid-freepaper ThisSpringerimprintispublishedbySpringerNature TheregisteredcompanyisSpringerNatureSingaporePteLtd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore Thisworkisdedicatedtothegentlesoulof SirAlanArthurWalters(17June1926-3 January2009), whowasmyPhDthesis supervisoratJohnsHopkinsUniversity,USA (1979). NaoyukiYoshino ThisworkisdedicatedtoProfessorNaoyuki Yoshino,myPhDthesissupervisoratKeio University,Tokyo,Japan(2015)whotaught meJapaneseeconomicpolicyandtomy parents,mywifeFarnaz,andmybrother Farzad,fortheirsupportandimportantroles inmylife. FarhadTaghizadeh-Hesary Summary This book analyzes the causes of Japan’s long-term economic recession which started following the real estate and stock market bubble burst of the 1990s and providesremediesforthisrecessionthatcouldbeusefulforotherAsianeconomies. Japanhassufferedfromsluggisheconomicgrowthandrecessionsincethe1990s, a period dubbed Japan’s “Lost Decade.” The People’s Republic of China, the Republic of Korea, Thailand, and many other Asian countries may face similar problemsinthefutureandareconcernedbyJapan’slong-termrecession. ThisbookaddresseswhyJapan’seconomyhasstagnatedsincetheburstingofits economicbubble.Theempiricalanalysisofthisbookchallengesthebeliefsofsome economists,suchasPaulKrugman(NobelPrizelaureateineconomicsciences),that theJapaneseeconomyisinaliquiditytrap. This book argues that Japan’s economic stagnation stems from a vertical investment–saving curve rather than a liquidity trap and that monetary policy is ineffective for escalating its economic growth. The impact of fiscal policy has declineddrastically,andtheJapaneseeconomyfacesstructuralproblemsratherthan atemporarydownturn. Thesestructuralproblemshavemanycauses:anagingdemographic(afrequently overlookedproblem),localgovernments’overrelianceontransfersfromthecentral government, high costs of energy due to a nondiversified energy basket as a result of the Fukushima nuclear disaster and nuclear plant shutdowns, and Basel capital requirements that have made Japanese banks reluctant to lend money to start-up businesses and small and medium-sized enterprises. This latter issue has discouraged Japanese innovation and technological progress. This book addresses all these issues empirically and theoretically and provides several remedies for Japan’slong-lastingrecession,whichcanalsoprovideusefullessonsforotherAsian economies. vii Preface and Introductory Remarks In the early 1990s, Japan’s real estate and stock market bubble burst and the economy went into a tailspin. Since then, Japan has suffered from sluggish economic growth. During this period, referred to as Japan’s “Lost Decade,” the country’s economic growth rate has been the lowest among the world ’s major developedcountries.From1995to2002,forexample,Japan’sannualaveragereal gross domestic product (GDP) growth rate was only 1.2%, lower than that of all theotherG7countries(i.e.,Canadaat3.4%,theUnitedStatesat3.2%,theUnited Kingdom at 2.7%, France at 2.3%, Italy at 1.8%, and Germany at 1.4%), lower than the eurozone average (2.2%), less than half that of all of the other larger OrganisationforEconomicCo-operationandDevelopment(OECD)countries(the Republic of Korea at 5.3%, Australia at 3.8%, Spain at 3.3%, the Netherlands at 2.9%,andMexicoat2.6%),andlowerthantheOECD-wideaverage(2.7%).1 Studying the causes of and remedies for Japan’s long-lasting recession and low growth is crucial for other Asian countries, to prevent similar situations from occurring. Nobel laureate Paul Krugman has argued that the reason for Japan’s recession is that the country is currently in a liquidity trap, a situation in which monetary policy is ineffective in lowering interest rates. However, our empirical results in Chaps. 1 and 8 of this book indicate that the problems in the Japanese economystemfromothersources.Theoreticalandempiricalresultsinthisbookwill show that stagnation of the Japanese economy comes from a vertical investment– saving curve rather than a liquidity trap. This means problems are arising from structuralchallengesratherthanfromatemporarydownturn. There are several reasons for this long-term stagnation since the 1990s, which will be discussed in this book. One of these is Japanese companies’ increased investmentoverseasandreducedinvestmentinJapan.Becausetheagingpopulation creates diminished future demand, companies have become wary of increasing investment, despite very low interest rates. In addition, the aging population has 1HoriokaCY(2006),ThecausesofJapan’s“LostDecade”:Theroleofhouseholdconsumption. NBERWorkingPaperSeriesNo12142.NationalBureauofEconomicResearch,Cambridge,MA ix x PrefaceandIntroductoryRemarks increased social welfare expenses. Japan has the highest life expectancy in the world,buttheretirementageisstillaround60yearsold,resultinginadiminishing working population as the number of elderly and retired people rises and the population of the younger generation shrinks. Typically, elderly people consume less than younger generations, so this has added to the problem of reduced domestic consumption. Other factors include the high level of transfers from the central government to local governments, which reduced the productivity of local governmentsbecauseoftheirrelianceoncentralgovernmentmoney,andtheBasel capitalrequirements,whichmadeJapanesebanksreluctanttolendmoneytostart- up businesses and small and medium-sized enterprises and discouraged Japanese innovationandtechnologicalprogress. ManyoftheseissuesarealsopredictableforthefutureofotherAsiancountries. Hence, it is crucial for countries like the People’s Republic of China (PRC), Indonesia, Thailand, and others to look at the causes of Japan’s long-lasting economicrecessionandthepossibleremediesmentionedinthisbook. Chapter 1 acts as a summary of this book. This chapter addresses, both theoreticallyandempirically,whyJapan’seconomyhasstagnatedsincethebursting of its economic bubble. It argues that Japan’s economic stagnation stems from a vertical investment–saving curve rather than a liquidity trap. The impact of fiscal policyhasdeclineddrastically,andtheJapaneseeconomyfacesstructuralproblems, not a temporary downturn. The chapter provides both causes and remedies for Japan’slong-lastingrecession,whichareexpandeduponinthesubsequentchapters. Chapter 2 talks about the changes in economic effect of infrastructure and financing methods in Japan. The marginal productivity of public capital was high during the high-growth period (1955–1969) of Japan but declined from 1970 onward. It is likely that the misallocation of public capital also contributed to a lower rate of return from private capital, since public investments did not remove the “infrastructure bottlenecks” that lower the rate of return from private investment.Thischapteranalyzestheeconomiceffectofinfrastructure,focusingon the productivity effect of public investment, and discusses how to promote private sectorinvestmentininfrastructurethroughenhancingtherateofreturntoinvestors by utilizing part of spillover effects from the infrastructure. Private investors have found it difficult to obtain adequate rates of return. This chapter proposes one remedy: that the incremental tax revenues along the highway or railway should contributeacertainfractionoftaxrevenues(say30%)toinvestorsininfrastructure. Todoso,theincrementaltaxrevenuesalongtheinfrastructureinvestmentmustbe computed. This chapter empirically estimates spillover effects by the use of both macroeconomicandmicroeconomicdata. Chapter 3 discusses Japan’s high level of government debt and the optimal fiscal policy rule for achieving fiscal sustainability. Japan’s debt to GDP ratio is the highest among OECD countries. This chapter firstly answers the question of whether the Japanese government debt is sustainable. Next, while the Domar condition and Bohn’s condition are often used in the literature to check whether a government’s debt situation is in a dangerous zone, this chapter shows that the Domarconditionisobtainedonlyfromthegovernmentbudgetconstraint(namely, PrefaceandIntroductoryRemarks xi the supply of government bonds) and does not take into account the demand for government bonds. A simple comparison of the interest rate and the growth rate of an economy using the Domar condition is not adequate to check the stability of a government’s budget deficit. Both the interest rate and the growth rate of the economy are determined endogenously in the model. Thirdly, this chapter shows thatBohn’sconditionsatisfiesthestabilityofthegovernmentbudgetinthelongrun by imposing constraints on the primary balance. However, Bohn’s condition does notachieveeconomicstability—eveniftheconditionissatisfied,therecoveryofthe economymaynotbeachieved.Thischapterproposesanewconditionthatsatisfies both the stability of the government budget and the recovery of the economy. The chapterwillshedlightontheseissuesboththeoreticallyandempirically. Chapter4talksaboutmacroeconomicvolatilityunderthehighaccumulationof government debt in Japan. This chapter applies Bayesian estimation to an open- economydynamicstochasticgeneralequilibrium(DSGE)modelofJapantoassess the effects of expanding government debt on interest rates, real exchange-rate dynamics,andrealsectorperformance.Theauthorsfindthattheemergenceofeven asmallriskpremiumongovernmentdebtwilltriggerconsiderableinstabilityinthe realandnominalvariables.Thechaptershowsthataswitchtoanexchange-raterule formonetarypolicywouldconsiderablymoderatetheinstabilityinducedbyarising riskpremium. Chapter 5 sheds light on Japan’s postwar monetary policies and discusses whether they were developed according to Taylor rules or something else. This chapter investigates postwar Japanese monetary policies through the lens of the TaylorequationandtheassociatedTaylorrule.Authorsbreakfrompreviousstudies inextendingtheinvestigationbacktotheearlypostwarperiodandbyexaminingthe stabilityoftheTaylorspecificationinvarioussubperiods.Ingeneral,theyfindlittle supportfortheTaylorequationintheJapancase.Apossibleexceptionistheperiod from1980to1997,butthiswasduringthe“bubbleeconomy”andsubsequent“Lost Decade.” Chapter 6 discusses the energy sector, especially Japan’s oil consumption, by an empirical analysis. After the earthquake and tsunami that hit Japan’s eastern coastinMarch2011(oftenreferredtoastheGreatEastJapanEarthquake)caused a nuclear disaster and shutdown of all the country’s nuclear power plants, energy, especially oil and gas, became a more interesting topic as Japan substituted fossil fuels for nuclear power. This chapter sheds light on the impact of crude oil price volatilityontheresidential,transport,industrial,commercial,andnonenergysectors in Japan, the world’s third-largest crude oil consumer. The chapter’s empirical results indicate that some economic sectors, such as the residential sector, did not have significant sensitivity to sharp oil price fluctuations, while others, like the commercial, industrial, and transport sectors, were strongly sensitive to such fluctuations.Moreover,thefindingsshowthatmostsectors’sensitivitytooilprice volatilitydeclinedaftertheFukushimadisasterin2011,whichledtotheshutdown ofnuclearpowerplantsinJapanandincreasedrelianceonoilimports. Chapter 7 analyzes the three arrows of “Abenomics.” Abenomics refers to the economic policies advocated by Prime Minister Shinzo Abe, who became
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