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point

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Global Challenges: The Lessons of Japan

Stephen S. Roach Senior Fellow Yale Jackson Institute for Global Affairs

October 2013

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Conceptual Framework: Forensic Macro

§  Japan as the Template

§  Policy Blunders or Structural Malaise?

§  Bubbles, Imbalances, and “Zombies”

§  The Hangover: Debt, Deflation and Lost Decades

§  Exit Strategies: A Way Out?

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Japan United States Europe China Model Developmental state Invisible hand State-directed Market-based

Capitalism Socialism Mandate Lifetime employment Full employment Union of peace and Growth vs stability

prosperity Policy blunder Yen suppression and Condone bubbles Flawed currency union Anti-consumer

the Plaza Accord Clean not lean Regulatory blunder Evergreen bank Mortgage abuses No banking union State-directed bank

lending (MITI) Lax bank oversight No fiscal union lending (NDRC) No political union

False prosperity Equity and Property Property and Credit Convergence Export bubble

bubbles bubbles bubble Economic distortion Zombie corporates Zombie consumers Zombie PIIGS Zombie SOEs?

Zombie LGFVs?

Made in Japan?

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Japanese Real GDP Growth (Averages over designated intervals)

Source: T. Ito and International Monetary Fund WEO database

0  

1  

2  

3  

4  

5  

6  

7  

8  

1946-­‐90   1991-­‐2013  

7.25%

1.0%

The Rise and Fall of Modern Japan

Abenomics: Japan’s Phoenix? Three Arrows §  Monetary: QE on steroids §  Fiscal: Public works §  Structural reforms

Three Foils §  QE traction and deflation §  Fiscal quagmire §  Yen, equities, and complacency

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1974-79 1980-85 1986-90 1991-95 1996-00 2001-05 GDP Growth 3.9 4.2 5.2 1.6 1.2 1.3 Labor 0.9 0.9 0.7 -0.1 -0.1 -0.1 Capital 1.7 2.0 2.5 1.9 1.3 0.9 TFP 1.3 1.2 1.9 -0.2 0.0 0.4

(Average annual % changes over designated 5 year intervals)

1974 to 1990 TFP average: 1.5%

1991 to 2005 TFP average: 0.01%

Source: KLEMS database

Decomposition of Japanese Economic Growth

Pre-Bubble Post-Bubble

Japan’s Structural Imperative

Abe’s “Third Arrow” Agenda Agriculture Education Medical Care Tax System Energy Gov. Reform Employment Electoral System Immigration

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US Consumption Binge… …Was Not Supported by Income Effects

But Driven by Wealth and Credit Bubbles

100

110

120

130

140

0 4 8 12 16 20 24 28 32 36 40 44 48 52 56 60 64 68 72 76 80 84 88 92 96 100

months after trough

Average of Past 4 CyclesCurrent Cycle

Index=100 at Business Cycle Troughs

103-month shortfall:$1626.3 billion or 15.9% of real disposable personal

income

Real Private Compensation

-9

-6

-3

0

3

6

9

12

15

18

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10-4

-2

0

2

4

6

8

10House Price Index (left)

Net equity extraction as a % disposable income (right)

% YoY 4Q MA

Growth American Style

54

56

58

60

62

64

66

68

70

1970 1975 1980 1985 1990 1995 2000 2005 2010

Personal Consumption As a share of GDP

1970-99 average: 64.6%

Last plotting: 2013-Q2: 68.7%

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Deleveraging

Rebuilding Saving

Source: Federal Reserve flow-of-funds and U.S. Department of Commerce, BEA

Household Sector Debt Outstanding (% of Disposable Personal Income)

Personal Saving Rate (% of Disposable Personal Income)

Lingering Headwinds of U.S. Balance Sheet Repair

America’s Zombie Consumers (US real consumption: Average annualized growth) §  The Balance Sheet Recession 2008-I to 2009-II: -1.8%

§  Anemic Recovery 2009-III to 2013:2 +2.2%

§  22-Quarter Average 2008-I to 2013-II: +1.1% ****************************************** §  Pre-crisis trend 1996 to 2007: +3.6%

0

2

4

6

8

10

12

14

16

18

1970-99 average: 9.3%

1970 1975 1980 1985 1990 1995 2000 2005 2010

0

20

40

60

80

100

120

140

1970-99 average: 40.3%

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Growth European Style

Sources: European Central Bank and International Monetary Fund

0

5

10

15

20

25

30

35

Germany Greece Ireland France Italy Spain

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

European Long-term Interest Rates (Yields on 10-year notes) %

90

100

110

120

130

140

150

160

90

100

110

120

130

140

150

160

France Germany

Real GDP in Local Currencies (Index:1999=100)

Ireland Greece Spain

Portugal Italy

High Flying PIIGS Sluggish Core

1999 00 01 02 03 04 05 06 07 08 1999 00 01 02 03 04 05 06 07 08

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Developing Asia’s Growth Bonanza

Source: IMF World Economic Outlook data base (April 2013)

-6

-4

-2

0

2

4

6

8

10

12

14

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

World Advanced economies Developing Asia

Real GDP Growth Disparities %

2000-13 Average DA Gap Developing Asia 8.2% --- Adv. Economies 1.8% 6.4 pts World 3.7% 4.5 pts

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Global Rebalancing Imperatives

Source: IMF World Economic Outlook database (April 2013)

Investment Shares of GDP

10

15

20

25

30

35

40

45

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Major advanced G7 Developing Asia

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Export-Led Developing Asia

15

25

35

45

55

65

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

ExportsConsumption

as % of GDP

Source: IMF, national data sources

GDP Shares: Developing Asia

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0

100

200

300

400

500

600

700

800

900

0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48

Japan NIEsASEAN-4 ChinaIndia

Index, period 0=100

Years after growth takeoff

Shares of World Trade Indexed at “Takeoff”

Source: International Monetary Fund

The Asian Trade Model

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Source: IMF World Economic Outlook (April 2013 WEO database)

Global Contrasts China Stands Alone

0

10

20

30

40

50

60

0

10

20

30

40

50

60

China

Developing Asia Emerging Market and Developing Economies

Advanced Economies

United States

% %

Gross Saving Rates (Share of GDP)

Gross Saving Rates (Share of GDP)

Global Saving Disparities

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China’s Growth Leaders China’s Growth Laggard

Source: National Bureau of Statistics of China

“Unstable, unbalanced, uncoordinated, and unsustainable.” — Premier Wen Jiabao, March 16, 2007

20

25

30

35

40

45

50

55

Personal Consumption Share of GDP

Export Share of GDP

Fixed Investment Share of GDP

0

5

10

15

20

25

30

35

40

45

50 % %

China’s Unbalanced Growth Model

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Source: Eswar Prasad, “Rebalancing Growth in Asia,” Finance and Development, December 2009: IMF, WBMS, BP, CRU, Morgan Stanley Research.

Labor-Saving Resource-Intensive

Average GDP and Employment Growth: 2000-2008

0

3

6

9

12

China India Indonesia Korea Thailand

% Change

GDP Growth Employment Growth

0

10

20

30

40

50

60

As % of World GDP

Crude Oil Aluminum Steel Products

Iron Ore Coal Cement

Percent

China's Share of World Total: 2008

China’s Internal Imbalances

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MECHANISM GOAL

JOBS  BLUEPRINT  FOR  LARGE-­‐SCALE  

SERVICES  INDUSTRIES    

 WAGES  SUPPORT  TO  RURAL  

HOUSEHOLD  INCOMES    

 LABOR  ABSORPTION  

   HARMONIOUS  SOCIETY      

REDUCE  PRECAUTIONARY  SAVING  

 

   FINANCIAL  SECURITY  SAFETY  NET  IMPERATIVES    

China’s Pro-Consumption Rebalancing

The 12th FIVE-YEAR PLAN

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A Lagging Chinese Services Sector Labor Intensity: Jobs per RMB Million GDP

0%

20%

40%

60%

80%

100%

China Korea India Taiwan Japan USTargeted in

Targeted in the 12th Five-Year PlanManufacturing and Construction (Secondary) Services (Tertiary)

The Potential in Chinese Services

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Ratio of Urban to Rural Income

Urban Share of Chinese Population

Source: UN, OECD

%

Projected urban population growth: 2030: 316 million (OECD)

1.5

1.7

1.9

2.1

2.3

2.5

2.7

2.9

3.1

3.3

3.5

1980 1985 1990 1995 2000 2005 2010 0

10

20

30

40

50

60

1950 1960 1970 1980 1990 2000 2010

2012: 52.6%

2015 UN Projection

Income Leverage of Urbanization

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0

2

4

6

8

10

12

14

1990

2000

2010Relative  to  US

Relative  to  J apan

China:  Capital  Stock per  capita, relative to  US  and  JapanIn  percent

Source: Penn World Tables and International Monetary Fund

0

50000

100000

150000

200000

250000

300000

350000

Japan  

Australia  

Germ

any  

United  States  225000  

France  

Singapore  

United  Kingdo

m  

Korea  

Mexico  

Malaysia

 Brazil  

South  Africa  

Russia  

China  

Indo

nesia

 Ph

ilipp

ines  

Vietnam  

India  

Capital Stock per Worker $USD

Chinese Capital Stock Per Capita Relative to the U.S. and Japan

1990 2000 2010

%

Urbanization Drives Investment

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0  

5  

10  

15  

20  

25  

30  

35  

40  

1978   1983   1988   1993   1998   2003   2008  

%

Source: International Monetary Fund, National Bureau of Statistics (China), National Social Security Fund (China), Xinhua News Service, BBVA Research

Chinese Household Saving Rates Retirement Assets 2010-11: RMB 2669 Bil

Rural Urban 300

1500 869

National Social Security Fund (2011) Local Govt Social Security Funds (2010) Private Pensions (2010)

(USD $435 Bil or $569 per worker)

China’s Safety Net Conundrum

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First 1953-57 Stalinist Central Plan Second 1958-62 Great Leap Forward Third 1966-70 Agricultural Push Fourth 1971-75 Cultural Revolution Fifth 1976-80 Post-Mao (Reforms and Opening Up) Sixth 1981-85 Readjustment and Recovery Seventh 1986-90 Socialism with Chinese Characteristics Eighth 1991-95 Technical development Ninth 1996-00 SOE Reforms Tenth 2001-05 Strategic Restructuring Eleventh 2006-10 Rebalancing Alert Twelfth 2011-15 Pro-Consumption

5-year Plan Dates Key Feature

China’s Strategic Advantage

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%

Codependency and Rebalancing Imperatives

Personal Consumption Share of GDP

Source: U.S. Department of Commerce and National Bureau of Statistics (China)

20

30

40

50

60

70

80

1978

19

79

1980

19

81

1982

19

83

1984

19

85

1986

19

87

1988

19

89

1990

19

91

1992

19

93

1994

19

95

1996

19

97

1998

19

99

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

United States

China

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Current Account Disparities (as % of World GDP)

Source: International Monetary Fund (October 2012 WEO database)

Forecast

Total Imbalances 1.2% 2.0% 3.2% 3.2% 3.8% 5.6% 5.1% 3.8% 3.4% 3.0% 2.8% (as % of World GDP)

%

Surpluses

Deficits

Global Imbalances and the Lessons of Japan

-3

-2

-1

0

1

2

3

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

ROW

CHN+EMA

OCADC

DEU+JPN

OIL

United States

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New Book

Yale University Press January 2014