RIETI Report August 2014

Financial Crisis and Economic Policy

The recent history of Japan's economy since the 1980s has witnessed a string of financial crises, and various policies have been enacted in response to address the situations. In the August issue of the RIETI Report, we present the BBL Summary "Financial Crisis and Economic Policy" with guest speaker Nobuhiro Kiyotaki, Professor of Economics, Princeton University, where he takes a look back on these events, beginning with the credit expansion and asset inflation in the 1980s.

Professor Kiyotaki continues through the ensuing bubble burst with the recession from 1992 onward, where problems such as the non-performing loan issue and the slip into deflation overwhelmed the economy. Following this period, he reviews the structural reform experienced during Prime Minister Junichiro Koizumi's term, in which progress was made on the non-performing loan problem, leading to recovery in Japan's banking sector, as well as the reduced fiscal spending which coincided with a recovery in private-sector investment. Professor Kiyotaki addresses the current state of Abenomics, but stresses that, in order for it to succeed, it is important to have a long-term vision, fiscal reconstruction, and policies enacted that will benefit Japan's future. Finally, in the Q&A session, Professor Kiyotaki takes on audience inquiries on a variety of topics related to the Japanese economy and provides his insightful suggestions.

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Financial Crisis and Economic Policy

KIYOTAKI Nobuhiro Professor of Economics, Princeton University

Recession from 1992 onward

After hitting an all-time high above 38,900 yen in December 1989, the Nikkei index plunged to 14,000 yen in July 1992 and then dipped below 8,000 yen in April 2003. Meanwhile, the index of urban land prices peaked at 148 in 1991 and dropped to 100 in 2000 and 54 in 2012.

As a result, non-performing loans increased. But both the government and banks did not act quickly, leaving losses on non-performing loans unrecognized and the problem of capital inadequacy unaddressed. For one thing, the tax system at the time was not in favor of immediate loss recognition. At the same time, however, they might have thought optimistically that the situation would reverse in due time. In the meantime, the government implemented traditional expansionary monetary and fiscal policies repeatedly. By doing so, the government ended up helping declining industries and regions.

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