Public Lecture PPT (6.29.2012)
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1
Noda’s Mistaken PrioritiesJapan is not the next Greece
Richard Katz
The Oriental Economist Report
© 2012 [email protected] www.orientaleconomist.com
Temple University In Japan
June 29, 2012
2
Why Japan Is Not Greece
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
-80% -60% -40% -20% 0% 20% 40% 60% 80% 100% 120% 140%
Net govt debt, % of GDP, 2010
Cu
rren
t ac
cou
nt,
% o
f G
DP
, 200
5-10
ave
rag
e
GreecePortugal
Spain
Ireland
Japan
Italy
Belgium
USA
FranceUK
Germany
Austria
Holland
3
Income, Not Trade,Drives CA Surplus
-4-2
024
68
1012
141618
202224
2628
85 87 89 91 93 95 97 99 01 03 05 07 09 11
Bal
ance
of
pay
men
ts (
tril.
yen
)
-20%
0%
20%
40%
60%
80%
100%
120%
140%
Trade balance (left) Int'l Income (left) Income % of Curr. Account (right)
Even if trade deficit, no CA deficit for perhaps a decade, then net assets to draw upon
4
Why Japan Isn’t Greece (cont.)
-125%
-100%
-75%
-50%
-25%
0%
25%
50%
75%
-80% -60% -40% -20% 0% 20% 40% 60% 80% 100% 120% 140%
Net Govt Debt, % of GDP, 2010
Net
Int'
l Ass
ets,
% o
f G
DP
. 200
9 o
r 20
10 JapanBelgium
Greece
PortugalIreland
Spain
ItalyFranceUK US
GermanyHolland
5
Low Growth Expands Deficit;Better Growth Lowers It
Primary deficit is deficit aside from debt service
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
84 86 88 90 92 94 96 98 00 02 04 06 08 10
Pri
mar
y b
ud
get
bal
ance
, % o
f G
DP
Decrease during 2002-07 recovery, then explosion in 2009-09 recession
1997-2001 recession and stagnation
6
Interest Payments Still Low Despite Debt Explosion
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
120%
130%
140%
150%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
% o
f G
DP
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
Net Governnment Debt (left scale)
Net Interest Payments (right scale)
7
Slack Demand For Credit Keeps Interest Rates Down
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
2.2%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
10-y
ear
JGB
yie
ld
Panic due to irrational fear of run on banks
8
Consumer Spending Flat Because Household Income Flat
40
45
50
55
60
65
70
75
80
85
90
95
100
105
110
115
1980 1984 1988 1992 1996 2000 2004 2008
Inco
me
and
Co
nsu
mp
tio
n (
real
, 199
7=10
0)
40
45
50
55
60
65
70
75
80
85
90
95
100
105
110
115
Real Disposable Income
Real Consumption
9
Tax Shifts IncomeFrom Households to Firms
-10,000
-8,000
-6,000
-4,000
-2,000
0
2,000
4,000
6,000
8,000
10,000
12,000
Total Corporate Income Other Consumption
Ch
an
ge in
an
nu
al ta
xe, 1988-2
012 (
Bil. Y
en
)
Corporate tax down mainly due to tax cuts; 2011 profits up 3% from 1988, up 11% at big firms that pay most of corp. taxes
10
Gov’t Borrowing Makes Up for Reduced Private Borrowing
0%
25%
50%
75%
100%
125%
150%
175%
200%
225%
250%
275%
300%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Deb
t as
% o
f G
DP
0%
25%
50%
75%
100%
125%
150%
175%
200%
225%
250%
275%
300%
Government net debt
Households
Non-Financial Corps.
11
Budget Deficit, Trade Surplus Replace Private Demand Shortfall
-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
% o
f G
DP
-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
Budget deficit Trade surplus Private demand gap
CY
12
GDP Still 2.3% Below Peak; Forecast: 6 Years To Regain Peak
1995 Kobe earthquake barely registered in GDP tables; electricity makes the difference
-10%
-9%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
0 1 2 3 4 5 6
Years from pre-recession peak
Cu
mu
lati
ve G
DP
ch
an
ge
From Jan-Mar 1997From Jan-Mar 2008JCER forecast
Tsunami
Jan-March 2012
13
Joblessness Seen In Reduced Hours, Not Unemployment Rate
-11%
-10%
-9%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Ch
an
ge f
rom
2000 (
3-m
o M
A)
Jobs Hours
14
All Growth From Productivity…
50556065707580859095
100105110115120125130
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
1990
=100
50556065707580859095100105110115120125130
Work Hours
GDP
Productivity
Productivity = GDP per workhour
15
…But Productivity Anemic 1.4%;GDP Just 0.9%, Per Capita Just 0.7%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Year-
on
-year
gro
wth
(2-q
tr M
A)
-8%
-6%
-4%
-2%
0%
2%
4%
6%
GDPProductivity (GDP per hour)
Average productivity growth 1991-2011: 1.4%
No current structural reform policies to accelerate productivity, such as farm reform, competition policy, labor market, or TPP
16
Anemic Per Worker GDP Will Mean Lousy Per Capita GDP
-0.9%
0.3%
0.9%
-1.3%
-0.2%-0.4%
-1.6%
-1.4%
-1.2%
-1.0%
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
2011-15 2016-20
An
nu
al %
declin
e
20-64Total populationPer capita GDP
Per capita GDP growth assumes productivity growth remains at 1.4% and no change in workhours per working age person; actual growth should be higher in the process of economy getting back to full capacity
17
Low Growth Worsens Deflation;Better Growth Fights It
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Ou
tpu
t g
ap
-4.0%
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
Def
lati
on
(d
om
esti
c d
eman
d)
Output gap (left)
Deflation, domestic demand (right)
Correlation = 79%
Output gap is gap between actual GDP and what GDP would be at full employment and full capacity-utilization; better growth would eliminate gap
18
2011 Cut In Electricity Per GDP
1.60
1.62
1.64
1.66
1.68
1.70
1.72
1.74
1.76
1.78
1.80
1.82
1.84
1.86
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Kw
H p
er Y
1,00
0 G
DP
2001-2010 average
19
Nukes Down; Oil, LNG Way up
22
03
-20-20
-10
0
10
20
30
40
50
60
70
80
90
Total Thermal Nuclear Hydro
Ele
ctri
city
, b
il. K
wH
Feb. 2011 Feb. 2012 Change
20
Electricity Demand Down Because GDP Still Down From 2007 Peak
-9%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1 2
Ch
an
ge f
rom
2007 t
o 2
011
Total KwH
Decline
Due to GDP fall
Due to less
KwH per GDP
21
And Because Mfg. Still Down 12%
64
68
72
76
80
84
88
92
96
100
104
00 01 02 03 04 05 06 07 08 09 10 11 12
Indu
stria
l Pro
duct
ion
Inde
x, 2
007-
IV =
100
64
68
72
76
80
84
88
92
96
100
104
22
Unhealthy Dependence on Trade Surplus to Drive Growth
34%
5%
16%
55%
29%
40%
-10%
0%
10%
20%
30%
40%
50%
60%
Trade Surplus Investment Household Consum.
Sh
are
of
GD
P G
row
th 0
2-I
to
07-I
V
Share of GDP
Share of GDP Growth
23
Trade Surplus Still Pivot For Growth
Net Exports
Net Exports
Rest of GDP
Rest of GDP
-10%-9%
-8%-7%-6%
-5%-4%-3%
-2%-1%
0%1%2%
3%4%5%
6%7%
08-I to 09-I 09-I to 12-I
Co
ntr
ibu
tio
n t
o c
han
ge
in G
DP
(%
)
45% of drop
35% of recovery
24
Real Yen Below 25-Year Average
50556065707580859095
100105110115120125130135140145
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
(19
86-2
012=
100)
50556065707580859095100105110115120125130135140145
Real (price=adjusted) yen rate
Nominal rate
25
Easy Money Alone Can’t Cure Deflation
0
50
100
150
200
250
300
350
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
Ind
ex (
1990
=100
)
0
50
100
150
200
250
300
350Nominal GDP
M2+CDs ex-base
Monetary base
Overnight rate dropped from 2.3% in Jan. 1995 to 0.5% in Sept.
26
Alternatives on Tax• Use fiscal and monetary stimulus to restore full
demand• Combine this with new law to raise taxes once
economy hits certain benchmarks, e.g. narrowing of output gap (which will also fight deflation); that will reassure bond markets
• Why tax consumption when structural defect is chronically anemic consumption due to low consumer income?
• Better taxes that would raise revenue and GDP growth: Taxpayer ID, Rezone fake farmland, Change real estate taxes, Change land usage laws
27
Structural Reform Agenda• Energy policy• More domestic and int’l competition, including
imports and inward FDI• Easier for new companies to challenge
incumbents (cf. current problems in electronics)• Improve productivity in backward sectors of dual
economy by raising to global benchmarks• Real labor market flexibility, not wage austerity via
irregulars• Raise household share of national income• Real social safety net making Japan safe for
creative destruction