Question 1:
You are the Chief Economist of Nomura Research Institute,
the research division of Nomura Securities, the leading securities
house in Japan. You are a trained economist, a visiting professor
of Waseda University and recipient of the Abramson Award by the
National Association of Business Economics. In the past you
worked with the U.S. Federal Reserve where you dealt with syndicated
loans to Latin America and were a Doctoral Fellow of the Federal
Reserve Bank of New York. I know from the book that you also are
a U.S. citizen and the son of Chinese immigrants. Obviously you
are a man who knows Asia, international business and finance and the
World. You also are the author of many other books. Why did
you decide to write this book and what are you hoping that its
publishing will achieve?
Answer First, there are just too much
misunderstanding outside Japan as to the real driver of recession in
the country. I also found that once I explain the concept of balance
sheet recession, most people are surprisingly willing to listen. They
must have felt that the conventional "structural reform or
bust"arguments are not sufficiently convincing to explain what has
happened to Japan.
After all, those structural problems had been around for a long time,
but they did not keep the Japanese economy from becoming
the second largest economy in the world. Second, as for the
banking crisis, so much of the key information on this issue has never
been
reported in the English press, resulting in a massive perception gap
between the policy makers in Japan and those making noise abroad.
Third,
I noticed that after the collapse of the IT bubble and the corporate
accounting mess, the US economy is beginning to display the symptoms
of a balance sheet recession. As a US citizen, I wanted to warn my
people
that this disease is different from the usual recessions and that
proper care should be put in place quickly. In particular, I did not
want them to waste time relying on monetary policy when the only
effective
cure available is fiscal stimulus.
Question 2:
In your new book Balance Sheet Recession which has just been published
by J. Wiley & Sons, you state that “the root cause of Japans
economic weakness during the last decade has had more to do with
Company balance sheet problems than with Japan’s overall lack of
structural reform.” Exactly what is a balance sheet recession,
are they common and is the
fact that Japan is currently in the midst on one recognized by the
current
Japanese government?
Answer:
Balance sheet recessions are highly uncommon and happen following
the bursting of a nation-wide asset price bubble. Balance sheet
recessions are as rare as a nation-wide asset price bubble which
happens perhaps once every two generations. This type of recession is
unlike other recessions in that the inventory cycle is not the key
driver. The key driver in this recession is the corporate effort to
repair their balance sheets by postponing investments and instead,
paying down debt. When a large number of companies move away from the
usual goal of profit maximization to debt minimization all at
the same time in their effort to regain their financial health, the
balance sheet recession starts.
Although a large number of policy makers in Japan are becoming
aware of the concept of balance sheet recession (largely because of
my frequent TV appearances with key policy makers), it is still an
extremely new concept in the economics profession not just in Japan
but in the world. The current Koizumi government, unfortunately, does
not understand the concept or the proper remedy. In spite of many
one-to-one
nationally televised debates I have had with Minister Takenaka, he
refuses
to understand it either. And that is why the Japanese economy is going
nowhere.
Question 3:
In your book at page 7 you show a chart (Exhibit
1.2 Falling
asset prices forced companies to move away from profit maximization to
debt minimization). Could
you explain what this chart demonstrates and how it relates to a
balance
sheet recession and the points you were making above?
Answer: I just
noticed while trying to answer your question that a horizontal
line at zero mentioned in page 6 is missing from 1.2. I guess I have
to get back to the publisher for this horrible mistake. (It
is corrected on the graphic above.) The point of this chart
is
that households in Japan really did not change their behavior since the
beginning of 1990, supplying 5 to 8 percent of the GDP equivalent of
savings to the economy each year. But the corporate sector did change
its behavior, from a net taker of funds to a net supplier funds to the
economy. This shift resulted in a loss of aggregate demand equivalent
to 14 percent of GDP.
Question 4:
In the next chapter, you show another
graphic (Exhibition
2.4
Net wealth ratio of Japanese companies) and note that Japan has experienced a greater
loss of wealth than the loss experienced by the U.S. in the Great
Depression. I don’t think this point is common knowledge or if it
is, it isn't commonly discussed. Could you clarify this point and
also explain how Japan’s economic performance since the late 1980s
should be viewed in light of
this?
Answer: Exhibit
2.4 does not show that the wealth lost in Japan during the last
decade is more than the wealth lost in the US during the depression. It
only shows that the corporate asset and liability position improved
dramatically during the bubble and deteriorated equally quickly
afterward.
Secondly, because the Japanese economy managed to muddle through
in spite of such horrendous loss of wealth, most people are not aware
of how much wealth was actually lost in the country. It is for this
reason
that the current recession is called the "bankers' and managers'
recession",
since only
those two groups of people are aware of the actual state of the balance
sheets in the country, the true driver of this recession. It is
truly miraculous that the economy managed to stay afloat for so
long in spite of so much losses in national wealth. It is for this
reason
that I believe Japan's fiscal policy during the last ten years has been
one of the most successful fiscal stimuluses in history.
Question 5:
The current Japanese government has
followed a policy called “quantitative easing”. Why specifically
do you feel that this policy and monetary policy in general will be
ineffective in helping the economy to begin to truly grow again?
Answer:
Monetary policy is ineffective because nobody is borrowing money. There
has to be borrowers out there, either pubic or private, who are willing
to borrow money for the money supply to increase. With the corporate
sector now a net supplier of funds to the economy to the tune of 20
trillion yen a year, all the high-powered money supplied by the Bank of
Japan
(BOJ) through quantitative easing is stuck within the banking system.
Question 6:
Adam Smith in his writings on capitalism
argued
that the “invisible hand” will work to bring prosperity and growth by
businesses seeking profit maximization. Was Adam Smith wrong and
why isn’t the invisible hand working for Japan at this time?
Answer: He was
right, but Japanese businesses are not meeting his fundamental
assumption that they maximize profits. Instead they are minimizing
debt. Such a world is not covered by Adam Smith or by the economics
profession
for that matter, and that is why we need an entirely new macro economic
theory (balance sheet recession) for such occasions
Question 7:
Also in your book in Chapter 9 you
discuss the real challenges facing Asian economies. You discuss
about the Asian Financial Crisis and its aftermath and note that
balance
sheet recessions are not only a problem in Japan. Many observers
have pointed the finger at structural issues, crony capitalism, foreign
exploitation of exchange rates, weak banking regulation or greed as
causing
the crisis. Do you agree or disagree and if so why or why not?
Answer: There is no
smoke where there is no fire. All the structural issues mentioned in
your question certainly contributed to the severity of the crisis.
However, they are not the key driver of the Asian currency crisis. This
is because if the lenders of funds did their homework, they would have
noticed all of those factors and would have priced them into their
lending to the region. If the international lenders did that, it is
highly unlikely that there would be a bubble in the Asian asset markets
in the first place. It takes two to tango, and in this case, the
lack of due diligence on
the part of international investors was more to blame for the crisis
because due diligence by the bankers could have and should have
prepared
them for these factors which had been around for decades prior to the
crisis.
Question 8:
In 1999 and thereafter many parts of
Southeast Asia regained their competitiveness. Is this likely to
continue and how does China as a competitor play into the
equation? Also are there things that you would advise the
countries of Southeast Asia to focus on to improve their competitive
position vis-à-vis China?
Answer: China
poses a very serious challenge to the economies of S.E. Asia
for all the reasons mentioned in the book. In addition, what the
Chinese challenge indicates is that relying on foreign capital for
economic development is viable only if the country is the lowest cost
producer. Once that distinction is lost to somebody else, inflow of
foreign capital could fall off rapidly. In other words, reliance on
foreign capital for growth is an easy-come easy-go process. For
long-term sustained growth, countries in South East Asia must cultivate
and nurture their own technological and other strengths (such as their
possessing a strong legal framework). Such an effort to create and
nurture a domestic value-added base, however, may run counter in the
short run to the principles of market opening and free flow of goods
and services.
Question 9:
Based on your study of Balance Sheet
Recessions and the current situation in Japan, you also note that
Japan’s situation may have lessons for the U.S. Could you discuss
what these lessons are and whether you feel that the lessons have been
noted and are being acted upon?
Answer: The
key lesson is that the US should not wait hoping that monetary
policy easing will turn the economy around. If the US has contracted
this disease called balance sheet recession, it will have to mobilize
its fiscal policies in a timely and pro-active fashion in order to keep
the damage from the recession to an absolute minimum.( I know that
former White House Advisor on Economic Policy Larry Lindsey was fully
aware of the danger of a balance sheet recession.) Now that he
is gone, I am not sure whether the new economic team in Washington
understands
the danger of balance sheet recession.
Question 10:
The U.S. stock market has been weak of
late even in spite of positive news with the completion of the War in
Iraq. President Bush’s tax cut seems to be in some trouble in
Congress. The U.S. budget has gone back into deficit largely to
fund the War on Terrorism and the War on Iraq. How do you see the
U.S. economy progressing over the next year and is a Balance Sheet
Recession, Double Dip Recession or even a Depression a possibility and
if so why or why not?
Answer: The
US is likely to muddle through just like the Japanese economy muddled
through during the last ten years. This is because the large
deficit brought about by the war and the automatic stabilizer actually
represents an important fiscal stimulus needed to keep the economy
going in this
type of recession. However, not realizing that this recession
is fundamentally different from the usual recession, the US policy
makers
are not likely to apply the fiscal stimulus in a consistent and
pro-active
fashion. This will deprive the US from entering a virtuous cycle until
policy makers realize that this recession is fundamentally different
from
the rest and react accordingly.
Question 11:
In the last Chapter of your book you
talk about the real challenges facing Japan – among these you include
inefficient use of land, the need to make Japan more attractive for
companies to invest, the need to change Japanese public perceptions
about saving, the need to improve housing, etc. Could you speak
about some of
these points and how progress in solving these issues would help to
improve
Japan’s overall financial outlook?
Answer: As I
indicated in the book, increasing investment opportunities by changing
people's life styles and relaxing land use laws in Japan will help
bridge the huge gap between investment and savings inside the country.
That,
in turn, will reduce the need for fiscal stimulus to keep the economy
going. However, as I indicated in the book, changing people's savings
behavior is an extremely difficult task. Thus, this must be viewed as
a medium-term objective. The progress in this front, however, is
pitifully
slow because most people do not realize the need for change from a
macro-economic
perspective. In other words, most people still do not realize that the
real problem in Japan is the fact that the household sector is saving
but the companies are not borrowing even at zero interest rates.
Question 12:
In summary, are you optimistic about
Japan and the World economy say over the next three to five years and
if so why or why not? Also, if not, what actions by the current
government or by other actors could help to improve the
situation?
Answer: Given that
most people have never even heard of a balance sheet recession, even
within the economics profession, I am not that optimistic in the
short-run. However, as more and more people begin to realize that such
a type of recession can actually happen and that they are actually
in the middle of it, I am confident that they will take the kind of
actions suggested in this book to rid themselves of the disease. That
is the whole purpose of writing this book in English in the first place.
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