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Japan's Bubble, Deflation, and Long-term Stagnation

Japan's Bubble, Deflation, and Long-term Stagnation

Koichi Hamada
Anil K Kashyap
David E. Weinstein
foreword by Kazumasa Iwata
Copyright Date: 2011
Published by: MIT Press
Pages: 440
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  • Book Info
    Japan's Bubble, Deflation, and Long-term Stagnation
    Book Description:

    Japan's economic bubble burst in the early 1990s, and the country entered its famous "lost decade"--a period of stagnation and economic disruption that persisted until 2003. The current declines in global equity and real estate markets have eerie parallels to Japan's economic woes of the 1990s. If we are to avoid repeating Japan's experience on a global scale, we must understand what happened, why it happened, and the effectiveness (or ineffectiveness) of Japan's policy choices. In this volume, prominent economists--Japan specialists and others--bring state-of-the-art models and analytic tools to bear on these questions. The essays generate new facts and new findings about Japan's lost decade. As much of the research shows, the slowdown can be broken down into two phases: a typical recession, followed by a breakdown in the economy likely due to insufficient restructuring, which is not well described by conventional models. The contributors offer forceful arguments showing that Japan's experience, and the unconventional--sometimes unsuccessful--measures adopted by Japan's government and central bank, offer valuable lessons for our post-boom world.ContributorsKenn Ariga, Robert Barsky, Diego Comin, Robert Dekle, Kyoji Fukao, Koichi Hamada, Takeo Hoshi, Ryo Kambayashi, Anil K Kashyap, Takao Kato, Satoshi Koibuchi, Philip R. Lane, John Muellbauer, Kiko Murata, Maurice Obstfeld, Ryosuke Okazawa, Joe Peek, Ulrike Schaede, David E. Weinstein

    eISBN: 978-0-262-28946-7
    Subjects: Economics, Finance

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Foreword
    (pp. vii-viii)
    Kazumasa Iwata

    After Japan’s economic bubble burst in the early 1990s, the country struggled through the long dark tunnel of what has come to be known as the “lost decade.” Japan subsequently enjoyed its longest expansion, albeit with moderate growth, from 2002 to 2007 under the circumstance of a global boom led by US consumption and the robust growth of the emerging economies, notably China.

    Japan entered recession in the autumn of 2007, ahead of other countries. The slowdown of the global economy triggered by the financial turmoil in mid-2007 initially seemed mild. But the global recession turned out to be the...

  4. Preface
    (pp. ix-xii)
    Koichi Hamada, Anil K Kashyap and David E. Weinstein
  5. Contributors
    (pp. xiii-xiv)
  6. 1 Introduction
    (pp. 1-16)
    Koichi Hamada, Anil K Kashyap and David E. Weinstein

    The declines in global equity and real estate markets that began the late 2000s have eerie parallels to what happened in Japan in the 1990s. If we are to avoid following its path to more than a decade of stagnation, we must understand what happened, and the what and why of policy successes and failures. The problems faced by the Japanese economy are neatly summarized in figure 1.1 which shows the evolution of the log of real purchasing price parity adjusted per capita GDP in Japan and the United States from the 1980 through 2008.

    In 1980, Japanese per capita...

  7. 2 The Japanese Asset Price Bubble: A Heterogeneous Approach
    (pp. 17-50)
    Robert Barsky

    Between January 1985 and December 1989 the real value of the Nikkei 225 stock price index tripled. By the middle of 1992, the index in real terms was less than 20% above its January 1985 level. Land prices behaved similarly. An index of land prices in Japan’s six largest cities almost tripled in real terms between 1985 and 1990. Land prices fell more gradually than did stock prices, but by 1995 the real land price was no more than 45% higher than its 1985 value. Without making any presumption as to the cause (or the “rationality”) of this dramatic asset...

  8. 3 Time of Troubles: The Yen and Japan’s Economy, 1985–2008
    (pp. 51-104)
    Maurice Obstfeld

    In the late 1980s Japan’s economy embarked on a period of rapid escalation in the prices of shares and real estate. This bubble economy was followed by a collapse in asset values, a reduced pace of real economic growth, banking problems, and deflation. Two decades after the demise of the bubble economy, the prognosis for Japanese growth is again bleak amid a turbulent global economic outlook. Japan’s experience carries lessons for those hoping to understand and contain the 2007–09 financial crisis.

    Some observers blame Japan’s stagnation on the failure of its monetary policy to react promptly and aggressively enough,...

  9. 4 The Japan-US Exchange Rate, Productivity, and the Competitiveness of Japanese Industries
    (pp. 105-128)
    Robert Dekle, Kyoji Fukao and Murat Ungor

    In September 1985, representatives of the United States, Japan, Germany, the United Kingdom, and France met at the Plaza Hotel in New York to engineer a depreciation of the dollar to help eliminate the continuing trade deficits of the US. The yen-dollar exchange rate, about 250 before the Plaza Accord, approached 180 by February 1986 (figure 4.1).

    The yen continued to appreciate, reaching 120 in early 1988. There was another spurt of appreciation in early 1995, with the yen briefly below 90. Subsequently, the yen weakened to 130, although it was mostly in the 110–120 range during the decade...

  10. 5 International Financial Integration and Japanese Economic Performance
    (pp. 129-174)
    Philip R. Lane

    This chapter assesses the impact of international financial integration on the Japanese economy in the wake of the major liberalization of the capital account that occurred in 1980. In many respects, the evolution of Japan’s role in the international financial system has mirrored developments in its domestic economy. During the 1980s there was rapid growth in Japanese international asset trade at the same time as the domestic equity and real estate markets went into overdrive. The subsequent bursting of the domestic bubble saw a marked retreat from international financial markets. However, the improvement in domestic economic performance in the early...

  11. 6 Consumption, Land Prices, and the Monetary Transmission Mechanism in Japan
    (pp. 175-216)
    John Muellbauer and Keiko Murata

    The dotcom stock market bubble collapse of 2001–03 and the global financial crisis of 2008–09 have focused attention on the lessons of Japan’s lost decade. One of the widely accepted key lessons is the need for rapid refinancing of the banking system. However, there are widespread worries that the monetary transmission mechanism in the United States and other industrial economies might be as weak as it appears to be in Japan, with the result that these economies, too, might experience a lost decade.

    This chapter explains why monetary transmission via Japan’s household sector is sharply different from that...

  12. 7 The Japanese Employment System after the Bubble Burst: New Evidence
    (pp. 217-262)
    Ryo Kambayashi and Takao Kato

    In the 1980s the Japanese employment system became a source of wonder for many corporations around the world and a popular subject of research for scholars in industrial relations, human resource management, and labor economics. There is indeed some evidence that the system helped Japanese firms enhance productivity (Jones and Kato 1995, Ohkusa and Ohtake 1997, and Kato and Morishima 2002.) However, during Japan’s Great Recession (called the lost decade by others) following the bubble, popular rhetoric shifted and became less positive about the system. In particular, the practice called lifetime employment, often considered a foundation of the system, has...

  13. 8 Labor Immobility in Japan: Its Causes and Consequences
    (pp. 263-308)
    Kenn Ariga and Ryosuke Okazawa

    The economic stagnation that followed the early 1990s bursting of Japan’s bubble significantly affected the labor market, and thus the lives of millions of Japanese workers. This chapter looks at the causes and effects of various impacts on the labor market. In particular, an apparent rigidity of core employment, a rapid increase of non-core employment, a drifting Beveridge Curve, and stagnant productivity have shaped the landscape of Japan’s labor market during the almost two decades since the bubble burst. This chapter offers an interpretation of these key facts based on a model of competitive search. Our model analysis highlights the...

  14. 9 The Changing Role of Main Banks in Aiding Distressed Firms in Japan
    (pp. 309-342)
    Joe Peek

    It is well established that bank lending to zombie (non-viable) firms during the 1990s was detrimental to the Japanese economy. However, bank lending to distressed but economically viable firms may have beneficial effects.

    An important factor in the ability of troubled firms to survive and return to health is, presumably, their ability and willingness to restructure operations. Insofar as increased bank credit provides a necessary cushion that allows distressed firms the opportunity to overcome temporary liquidity problems or restructure their operations, one might expect firms receiving increased bank loans to be more likely to improve their subsequent performance, especially to...

  15. 10 Corporate Restructuring in Japan during the Lost Decade
    (pp. 343-374)
    Takeo Hoshi, Satoshi Koibuchi and Ulrike Schaede

    This chapter looks at the effects of financial deregulation, the banking crisis, and corporate reforms on the incidence and processes of corporate restructuring in Japan.

    During Japan’s period of rapid growth from the 1950s into the 1970s, an institutionalized mechanism of corporate restructuring developed, led by the distressed company’s main bank. In the typical rescue event, the main bank, being a large shareholder and usually the largest lender, intervened by dispatching executives and restructuring debt (often with the help of other lenders) so that the company could recover and resume debt repayment. Most bail-outs were informal; courts were rarely involved....

  16. 11 An Exploration of the Japanese Slowdown during the 1990s
    (pp. 375-398)
    Diego Comin

    Two striking aspects of the Japanese stagnation of the 1990s are its severity and, especially, its persistence. Over the 1983–91 period, total factor productivity (TFP) grew at a more-than-respectable 2.4% annual rate. It fell to an average of 0.2% for 1991–2000. We know from Cogley and Nason (1995) that persistence in real business cycles models comes from the persistence of the shocks. However, none of the shocks that have hit the Japanese economy have persisted for a decade. This implies that a successful account of Japanese stagnation requires a model where the propagation mechanisms generate a significant amount...

  17. Index
    (pp. 399-420)