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Deleveraging and Monetary Policy: Japan since the 1990s and the United States since 2007

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  • Kazuo Ueda

    (Faculty of Ecocnomics, University of Tokyo)

Abstract

Both Japan in the late 1980s and the U.S. in the mid-2000s experienced an unsustainable boom in real estate prices along with high stock market valuations, and when the bubble burst, many households and financial institutions found themselves in dire straits. One major lesson from this experience is that deleveraging attempts by individual economic agents in the aftermath of large financial imbalances can generate significant negative macroeconomic externalities. In Japan's case, a negative feedback loop developed among falling asset prices, financial instability, and stagnant economic activity. This negative feedback loop has sometimes been called "Japanization." Japan's deleveraging became serious because the negative feedback loop was not contained in its early stage of development. The Japanese government did not act promptly to recapitalize banks that were suffering from the erosion of their capital buffer due to their large holdings of stocks. As a result, Japan's banks only slowly recognized bad loans, while stopping lending to promising new projects. Slow, but protracted asset sales resulted in a long period of asse t price declines. Nonfinancial companies perceived the deterioration of their balance sheets as permanent and cut spending drastically. As Japan's economy stagnated, the total amount of bad loans turned out to be much larger than initially estimated. In contrast to Japan, U.S. policy authorities responded to the financial crisis since 2007 more quickly. Surely, they learned from Japan's experience. It is also important to recognize, however, that the market-based nature of the U.S. financial system, as compared to a Japanese financial sector. This paper also shows that a rapid response by a central bank in a situation of financial crisis and economic stagnation can be a better choice than allowing a process of Japanization to drag on for years. In a weak economy, interest rates are already very low and the zero lower bound on interest rates limits a central bank's ability to stimulate the economy further. Moreover , nonconventional monetary policy measures work by reducing risk premiums and spreads between long-term and short-term interest rates. However, when a long period of economic stagnation occurs, these spreads have a tendency to decline to low levels, which then limits the effectiveness of such measures.

Suggested Citation

  • Kazuo Ueda, 2011. "Deleveraging and Monetary Policy: Japan since the 1990s and the United States since 2007," CIRJE F-Series CIRJE-F-828, CIRJE, Faculty of Economics, University of Tokyo.
  • Handle: RePEc:tky:fseres:2011cf828
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    Cited by:

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    4. Miyakoshi, Tatsuyoshi & Shimada, Junji & Li, Kui-Wai, 2017. "The dynamic effects of quantitative easing on stock price: Evidence from Asian emerging markets, 2001–2016," International Review of Economics & Finance, Elsevier, vol. 49(C), pages 548-567.
    5. Nelson, Benjamin & Tanaka, Misa, 2014. "Dealing with a banking crisis: what lessons can be learned from Japan’s experience?," Bank of England Quarterly Bulletin, Bank of England, vol. 54(1), pages 36-48.
    6. Kazuo Ueda, 2013. "The Response of Asset Prices to Abenomics: Is It a Case of Self-Fulfilling Expectations?," CIRJE F-Series CIRJE-F-885, CIRJE, Faculty of Economics, University of Tokyo.
    7. Gunther Schnabl, 2015. "Monetary Policy and Structural Decline: Lessons from Japan for the European Crisis," Asian Economic Papers, MIT Press, vol. 14(1), pages 124-150, Winter/Sp.
    8. McKinnon, Ronald & Liu, Zhao, 2013. "Hot Money Flows, Commodity Price Cycles, and Financial Repression in the US and the People’s Republic of China: The Consequences of Near Zero US Interest Rates," Working Papers on Regional Economic Integration 107, Asian Development Bank.
    9. Masahiro Kawai & Peter Morgan, 2013. "Banking Crises and “Japanization†: Origins and Implications," Macroeconomics Working Papers 23509, East Asian Bureau of Economic Research.
    10. Óscar Arce & Ricardo Gimeno & Sergio Mayordomo, 2017. "Making room for the needy: the credit-reallocation effects of the ECB’s corporate QE," Working Papers 1743, Banco de España;Working Papers Homepage.
    11. Jianpo Xue & Chong K. Yip, 2019. "Balanced‐budget rules and aggregate instability: The role of consumption taxes in a monetary economy," Pacific Economic Review, Wiley Blackwell, vol. 24(3), pages 403-415, August.
    12. Gunther Schnabl, 2017. "Exchange Rate Regime, Financial Market Bubbles and Long-term Growth in China: Lessons from Japan," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 25(1), pages 32-57, January.
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    15. Daisuke Ikeda & Shangshang Li & Sophocles Mavroeidis & Francesco Zanetti, 2020. "Testing the Effectiveness of Unconventional Monetary Policy in Japan and the United States," IMES Discussion Paper Series 20-E-10, Institute for Monetary and Economic Studies, Bank of Japan.
    16. Antonio Torrero Mañas, 2014. "España, una recesión de balance," Working Papers 10/14, Instituto Universitario de Análisis Económico y Social.
    17. Kazuo Ueda, 2013. "Response of Asset Prices to Monetary Policy under Abenomics," Asian Economic Policy Review, Japan Center for Economic Research, vol. 8(2), pages 252-269, December.
    18. Fernández-Amador, Octavio, 2016. "Finance-augmented business cycles: A robustness check," Papers 1038, World Trade Institute.
    19. Gunther Schnabl, 2019. "China's Overinvestment and International Trade Conflicts," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 27(5), pages 37-62, September.
    20. Sun, Lixin, 2016. "Corporate Deleveraging and Macroeconomic Policies: Evidence from China," MPRA Paper 69140, University Library of Munich, Germany.
    21. Khoo, Joye & Durand, Robert B., 2017. "Japanese corporate leverage during the Lost Decades," Pacific-Basin Finance Journal, Elsevier, vol. 46(PA), pages 94-108.
    22. Ronald McKinnon, 2013. "Hot Money Flows, Commodity Price Cycles and Financial Repression in the USA and China: The Consequences of Near-zero US Interest Rates," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 21(4), pages 1-13, July.
    23. Wang, Ling, 2020. "Unconventional monetary policy and stock repurchases: Firm-level evidence from a comparison between the United States and Japan," Research in International Business and Finance, Elsevier, vol. 51(C).
    24. Kawai, Masahiro & Morgan, Peter, 2013. "Banking Crises and “Japanization”: Origins and Implications," ADBI Working Papers 430, Asian Development Bank Institute.
    25. Gunther Schnabl, 2013. "The Macroeconomic Policy Challenges of Balance Sheet Recession: Lessons from Japan for the European Crisis," CESifo Working Paper Series 4249, CESifo.

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    More about this item

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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