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.

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.

Japan consistently running trade deficits

This chart of Japan's trade balance shows consistent deficits roughly since the Fukushima catastrophe.

Since practically all of the country's nuclear power generating capacity has been shut down, the country has been reliant on oil and natural gas imports, which contribute to the negative trade balance.

Given this situation, Japan is likely no longer a net purchaser of US Treasury debt.

IMF warns Japan regarding fiscal policy

A noteworthy development today reported by Reuters is  IMF: Japan must raise sales tax to show fiscal commitment | Reuters

"The International Monetary Fund urged the Japanese government on Tuesday to raise the country's sales tax and reform its welfare system to demonstrate a commitment to fiscal reform."

Japan's parliament is considering a plan to double sales tax rates by 2015.  Similar proposals over the years since the end of the country's boom in the early 1990's have generally been rejected as being likely to harm domestic consumption.  The same issue is still relevant, but the need for more tax revenue is more pressing now.

This fiscal action would be deflationary, at a time when the country is arguably already experiencing deflation.