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Friday, December 28, 2012

A retrospective look at Japan's banking crisis

I recently stumbled across a research paper by Richard Koo titled "Japan's disposal of bad loans: failure or success?"

The thesis of this analysis is that Japanese monetary/fiscal authorities handled their post bubble banking crisis relatively well compared to how the US has handled its banking crisis which began in 2008.  The paper contains a lot of good data so it is worth the time even if you disagree with Koo's conclusions.

However, it looks like Koo is defining "success" as a fourteen year recessionary period.

The problem I have with this Koo analysis is with its conclusion is that Japanese monetary/fiscal authorities did mostly the right things.  The paper shows that the Japanese equivalent of the FDIC's Deposit Insurance Fund was in a negative balance from 1996 to 2008. This implies that it could still be in a negative balance now.  If your deposit insurance fund is negative, that's not "success".


In Japan much of the banks' bad loans were simply shifted into government debt.


Koo posits the concept that the US is handling its banking crisis differently when in fact the US is doing the same things that Japan has done.



Wednesday, December 26, 2012

Japan breaking new ground in monetary policy

In his essay Missing The Big Japan Story - Tim Duy's Fed Watch, Professor Duy provides an in depth analysis of the implications of likely changes upcoming to that country's monetary policy.

He states that

"something much more significant is afoot - the possibility of explicit cooperation, albeit perhaps forced cooperation, between fiscal and monetary authorities.  The loss of the Bank of Japan's independence to force the direct monetization of deficit spending is the real story."

and that the result of this is that

"Japan might very well be heading toward the end-game of permanent zero interest rate policy:  Explicit monetizing of deficit spending.  That is the real story here - it goes far beyond just inflation targeting."

The result of this monetization would be government created demand for products and services.  Of course, to be beneficial in the long run, such government spending should be directed toward technological progress instead of simply funneling money to vested interests.