No Time to be Complacent:

What Post-2008 U.S., Europe and China

Can Learn from Japan 1990-2005

Richard C. Koo
Chief Economist
Nomura Research Institute
Tokyo
February 2011
Exhibit 1. US Housing Prices Are Moving along the Japanese Experience
(US: Jan. 2000=100, Japan: Dec. 1985=100) Futures
260

240 US: 10 Cities Composite Home Price Index

220 Japan: Tokyo Area Condo Price1

Composite
Index Futures
200

180

160

140
Japan: Osaka Area Condo Price1
120

100

80

60

40
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 US
77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 Japan
Note: per m 2, 5-month moving average
Sources: Bloomberg, Real Estate Economic Institute, Japan, S&P, S&P/Case-Shiller® Home Price Indices, as of Feb. 1, 2011

1
Exhibit 2. Drastic Rate Cuts Have Done Little to Revive Employment
or House Prices
(%)
8

Australia
7

UK
6

3
EU

US
2
Japan
1

0
2003 2004 2005 2006 2007 2008 2009 2010 2011

Sources: BOJ, FRB, ECB, BOE and RMB Australia. As of Feb. 1, 2011.

2
 Exhibit 3. US Economy Is still a Long Way from Previous Peak
(2007=100, Seasonally adjusted) (%, Seasonally adjusted, inverted)
103 3.5

4.0
101 Unemployment Rate
(right scale) 4.5

99 5.0

Industrial Production 5.5

97
(left scale) 6.0

95 Last seen 6.5

in 2005
7.0
93
7.5

91 8.0

8.5
89
9.0
Unemployment rate:Last seen in 1983
87 9.5

Industrial Production:Last seen in 1998 10.0

85
10.5

83 11.0
98 99 00 01 02 03 04 05 06 07 08 09 10
Sources: US Department of Labor, FRB

3
Exhibit 4. Euro-Zone Economy Is still a Long Way from Previous Peak

(Seasonally adjusted, 2005=100) (%, Seasonally adjusted, inverted)

115 7.0

Unemployment Rate 7.5

110
(right scale)

8.0
105

8.5

100 Last seen

in 2005
9.0

95
9.5

90
Industrial Production Last seen in 1998 10.0
(left scale)

85 10.5
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Sources: Eurostat

4
 Exhibit 5. Except in Germany, Industrial Production in Europe
Is still Weak
(2005 = 100, Seasonally Adjusted)
120
Level Last
Seen in
115 Spain
France
110
Italy 2006: Germany
105
Germany

100

95
1997: France
90
1994: Italy
85 1997: Spain

80

75

70
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: Eurostat

5
Exhibit 6. Japan’s Economy Is still a Long Way from Previous Peak
(Seasonally adjusted) (Seasonally adjusted, 2005=100)
1.2 115

Industrial production (right scale) forecast 110

1.1

105
1.0
100

0.9
95
Last seen in 2003

0.8 90

85
0.7 Job offers to applicants ratio
(left scale)
80
0.6
Last seen in 2002 75

0.5 Last seen in 1983

70

Lowest on record
0.4 65
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Note: Forecasts are calculated f rom METI's survey on planned production.

Sources: Ministry of Economy, Trade and Industry (METI), and Ministry of Health, Labour and Welfare

6
 Exhibit 7. US Demand for Funds Has Finally Stopped Falling
(D.I.)
30

20 housing
IT bubble bubble
collapse small firms collapse
10

-10

large and middle-market firms

-20
businesses increasing demand for funds
compared to 3 months ago
-30
0
-40
businesses decreasing demand for funds
compared to 3 months ago

-50
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Nomura Research Institute, based on FRB, Senior Loan Officer Opinion Survey on Bank Lending Practices.
Note: D.I. are calculated f rom the answers to the question, "Apart from normal seasonal variation, how has demand f or C&I loans
changed over the past three months?"
D.I. = ("Substantially stronger" + "Moderately stronger"×0.5) - ("Moderately weaker"×0.5 + "Substantially weaker")

7
Exhibit 8. Euro Zone Demand for Funds Has Finally Stopped Falling
(D.I.)
15

small and medium

10 sized firms

-5
large sized firms
-10
business increasing demand for funds
compared to 3 months ago
-15
0
-20
business decreasing demand for funds
compared to 3 months ago
-25
2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Nomura Research Institute, based on ECB, The Euro Area Bank Lending Survey.
Note: D.I. are calculated f rom the answers to the question, "Over the past three months, how has the demand f or loans or credit
lines to enterprises changed at your bank, apart f rom normal seasonal f luctuations?"
D.I. = ("Increased considerably" + "Increased somewhat"×0.5) - ("Decreased somewhat"×0.5 + "Decreased considerably")

8
 Exhibit 9. Japan’s De-leveraging with Zero Interest Rates
Lasted for 10 Years
Funds Raised by Non-Financial Corporate Sector
(% Nominal GDP, 4Q Moving Average) (%)
25 10
CD 3M rate
20 (right scale) 8

Borrowings from Financial Institutions (left scale)

15 6
Funds raised in Securities Markets (left scale)

10 4

5 2

0 0

-5 Debt-financed Balance sheet -2

bubble recession
(4 years) (16 years)
-10 -4

-15 -6
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
Sources: Bank of Japan, Cabinet Of f ice, Japan

9
 Exhibit 10. Japan’s GDP Grew in spite of Massive Loss of Wealth
and Private Sector De-leveraging
(Tril.yen, Seasonally Adjusted) (Mar. 2000=100)
600
Nominal GDP 800
550 (Left Scale)
Real GDP 700
(Left Scale)
500 Cumulative
600 90-05 GDP
Supported by
450
500
Government
Action:
Likely GDP Path ~ ¥2000 trillion
400
w/o Government Action 400

350
300

300 200
down Cumulative
Last seen in 1973 Loss of
87%
250 Wealth on
100
Land Price Index in Six Major Cities Shares and
(Commercial, Right Scale) Real Estate
200 0 ~ ¥1500 trillion
80 81 82 83 84 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

Sources: Cabinet Of f ice, Japan Real Estate Institute

10
 Exhibit 11. Japanese Government Borrowed and Spent the Excess
Savings of the Private Sector to Sustain GDP
(Tril. yen)
110

Government spending
100

90

80 cumulative
cyclical
deficit
70
90-05
¥315 trillion
60
overall
50 deficit
¥460
trillion
40
Bubble Collapse
30 Tax revenue

20
80 81 82 83 84 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
Source: Ministry of Finance, Japan
Note: FY 2010 includes supplementary budget. FY2011 are initial budget.

11
Exhibit 12. Premature Fiscal Reforms in 1997 and 2001 Weakened
Economy, Reduced Tax Revenue and Increased Deficit
(Yen tril.) (Yen tril.)
70 70
Tax Revenue Hashimoto Koizumi Global
fiscal Obuchi-Mori Financial
Budget Deficit fiscal fiscal
reform reform Crisis
60 stimulus 60

50 50
*
unnecessary
40 40 increase in
deficit:
¥103.3 tril.
30 30

20 20

10 10

0 0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
(FY)
Source: Ministry of Finance, Japan
*: estimated by MOF

12
 Exhibit 13. Spanish Private Sector Financial Surpluses
Increased more than Government Deficit
Financial Surplus or Deficit by Sector
(as a ratio to nominal GDP, %)
12
(Financial Surplus)

8 Households
Rest of the World Shift from 2007
in private sector:
4
16.93% of GDP
Corporate: 11.45%
Households: 5.48%

-4
Shift from 2007
Corporate Sector
in public sector:
(Non-Financial Sector +
-8 General Government 11.32% of GDP
Financial Sector)

(Financial Deficit)
-12
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Sources: Banco de España and National Statistics Institute (INE),Spain, and Eurostat
Note: For 2010' figures, 4 quarter averages ending with 3Q/10' are used.

13
 Exhibit 14. Irish Private Sector Financial Surpluses
Increased more than Government Deficit
Financial Surplus or Deficit by Sector
(as a ratio to nominal GDP, %)
15
Corporate Sector
(Financial Surplus)
(Non-Financial Sector + Financial Sector)
10 Shift from 2006
Rest of the World in private sector:
21.55% of GDP
5 Corporate: 7.29%
Households: 14.26%

General Shift from 2006

-5 Government in public sector:
16.78% of GDP

-10
Households

(Financial Deficit)
-15
2002 2003 2004 2005 2006 2007 2008 2009

Sources: Eurostat, Central Statistics Off ice, Ireland

14
 Exhibit 15. Portuguese Private Sector Financial Surpluses
Increased more than Government Deficit
Financial Surplus or Deficit by Sector
(as a ratio to nominal GDP, %)
12
(Financial Surplus)
9 Rest of the World
Shift from 2008
in private sector:
6 Households 8.60% of GDP
Corporate: 6.45%
Households: 2.15%
3

0
General Government
-3 Shift from 2008
in public sector:
6.38% of GDP
-6

-9 Corporate Sector
(Non-Financial Sector +
Financial Sector) (Financial Deficit)
-12
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Sources: Banco de Portugal, Instituto Nacional de Estatística, Portugal, and Eurostat
Note: For 2010' figures, 4 quarter averages ending with 3Q/10' are used.

15
 Exhibit 16. UK Private Sector Financial Surpluses
Increased more than Government Deficit
Financial Surplus or Deficit by Sector
(as a ratio to nominal GDP, %)
10
Shift from 2006
Households (Financial Surplus)
8 Corporate Sector in private sector:
(Non-Financial Sector + 10.55% of GDP
Financial Sector)
6 Corporate: 5.11%
Rest of the World Households: 5.44%
4

-2 Shift from 2006

in public sector:
-4
7.84% of GDP
-6

-8
General Government
-10
(Financial Deficit)
-12
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: Of f ice f or National Statistics, UK
Note: For 2010' f igures, 4 quarter averages ending with 3Q/10' are used.

16
 Exhibit 17. In Italy, Increase in Private Savings Is Not Enough to
Cover Deterioration in Government Deficit
Financial Surplus or Deficit by Sector
(as a ratio to nominal GDP, %)
12
(Financial Surplus)
10
Households
8 Shift from 2008
in private sector:
6 0.87% of GDP
Corporate: 4.35%
4 Rest of the World Households: -3.48%

-2

-4 Shift from 2008

in public sector:
-6 1.68% of GDP
Corporate Sector
-8 General (Non-Financial Sector +
Government (Financial Deficit) Financial Sector)
-10
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Sources: Banca d'Italia, Eurostat
Note: For 2010' f igures, 4 quarter averages ending with 3Q/10' are used.

17
 Exhibit 18. In Greece, Increase in Private Savings Is Not Enough to
Cover Deterioration in Government Deficit
Financial Surplus or Deficit by Sector
(as a ratio to nominal GDP, %)
16
Rest of the
(Financial Surplus)
World
12

Households Shift from 2008

8 in private sector:
2.34% of GDP
Corporate: -2.94%
4 Households: 5.28%

0
General
Government
-4
Shift from 2008
-8 in public sector:
4.82% of GDP

-12 Corporate Sector

(Non-Financial Sector +
Financial Sector) (Financial Deficit)
-16
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Sources: Bank of Greece, Eurostat
Note: For 2010' figures, 4 quarter averages ending with 2Q/10' are used.

18
 Exhibit 19. US Flow of Funds Data after 2008 Are Useless…
Financial Surplus or Deficit by Sector
(as a ratio to nominal GDP, %)
8
Households (Financial Surplus) Numbers
6 do not
Rest of the World
add up
4 at all

-2

-4 Shift from 2006

in public sector:
-6 Housing
Corporate Sector Bubble
8.50% of GDP
(Non-Financial Sector +
-8 Financial Sector)
General Government
-10 IT Bubble
(Financial Deficit)
-12
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

Sources: FRB, US Department of Commerce

Note: 2010's f igures are f or f rom the 1st to 3rd quarters only.

19
 Exhibit 20. … Because of Massive Discrepancy Between Two
Definitions of “Private Sector”
(as a ratio to nominal GDP, %)
10

"Private Sector" as a residual after

8 Government and Foreign Sectors

6 13.29%
of GDP
4

8.28%
0 of GDP

-2

-4 "Private Sector" as obtained by

adding Corporate, Households and
Financial Sectors
-6

-8
75 76 77 78 79 80 81 82 83 84 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
Sources: FRB, US Department of Commerce
Note: 2010's figures are for f rom the 1st to 3rd quarters only.

20
 Exhibit 21. Japanese Corporate Financial Surplus Is Growing Again
Financial Surplus or Deficit by Sector
(as a ratio to nominal GDP, %)
15
(Financial Surplus) Households
12
Shift from 2008
in private sector:
9 7.49% of GDP
Corporate: 7.80%
6 Rest of Households: -0.31%
the World
3

-3
Shift from 2008
-6
in public sector:
-9 6.37% of GDP
Corporate Sector General Government
-12 (Non-Financial Sector + Global
Financial Sector) Balance Sheet Recession Financial
-15
Crisis
(Financial Deficit)
-18
80 81 82 83 84 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
(FY)
Sources: Bank of Japan, Flow of Funds Accounts, and Government of Japan, Cabinet Of f ice, National Accounts
Note: For 2010' f igures, 4 quarter averages ending with 3Q/10' are used.

21
 Exhibit 22. Summary of Private Savings and Government Deficits
(indicated as % of GDP)
25

Increases in Private Savings

20
Increases in Government Deficits

15 3

10

0
Spain Ireland Portugal UK US Japan Italy Greece
Notes: 1. Measured from the recent trough in private sector savings: Spain (2007), Ireland (2006), Portugal (2008), Italy
(2008), UK (2007), Japan (2008), US (2006), Greece (2008).
2. Changes in private savings include debt repayments.
3. A range of 13% to 8% exists for the US private savings data because of problems with its Flow of Funds statistics since
2008. Economic and market indicators suggest that the 13% f igure (shown) is closer to the truth than the 8% f igure.
4. Greece is NOT in balance sheet recession. Included f or comparison purposes only.
Source: Nomura Resarch Institute, from respective countries' flow of f unds data

22
 Exhibit 23. Sustaining Fiscal Stimulus in Democracy
during Peacetime Is Difficult

Authoritarian Democracies
NONE "Bond market might rebel"
(if any, quickly suppressed) "Big Government is BAD Government"
"Wasteful spending"
"Monetary Policy should work better"
"Aging Population"
"Should not use grand-children's credit card"
"Structual Reform is what is needed"
"Republicans, Tea Party types
and Blue Dog Democrats (U.S.)"
"Need to beg Chinese to buy more Treasuries (U.S.)"

...
23
 Exhibit 24. Recovery from Lehman Shock Is NOT Recovery from
Balance Sheet Recession

Bubble Lehman Shock

Likely GDP Path
Burst without Lehman Shock

Weaker Demand
from Private Sector
Economic weakness De-leveraging
from private-sector (A)
de-leveraging
?

Economic weakness
from policy mistake (B)
on Lehman Stronger Demand
Actual Path from Government's
Current Location Fiscal Stimulus

Source: Nomura Research Institute

24
 Exhibit 25. The Exit Problem: Debt Rejection Syndrome
It Took U.S. 30 Years to Normalize Interest Rate after 1929
(%)
9
US government bond yields
8 Prime BA, 90days
US government bond yields 1920-29 average (4.09%, June 1959)
Prime BA, 90days 1920-29 average (4.13%, September 1959)
7
Oct '29 NY Stock Dec '41 Pearl Jun '50 Korean
6 Market Crash Harbor Attack War

'33～
5 New Deal

0
19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60

Source: FRB, Banking and Monetary Statistics 1914-1970 Vol.1, pp.450-451 and 468-471, Vol.2, pp.674-676 and 720-727

25
 Exhibit 26. Even with Strong Yen, Japan Is Running ever larger
Trade Surpluses with Taiwan, Korea and China
Japan’s Trade Balances with Korea, Taiwan and China
(¥ bil. Seasonally adjusted, 3 months moving average)
400

300

200

100

-100

-200
Korea
Taiwan
-300 China (including Hong Kong)
China (excluding Hong Kong)
-400
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: Nomura Research Institute, based on Ministry of Finance, Japan, Trade Statistics
Note: Seasonal adjustments by Nomura Research Institute.

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