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http://www.hse.ru/en/news/guests/87464457.html. Latest Developments of The World Economy Daisuke Kotegawa Research Director, Canon Institute for Global Studies June 18, 2013 National Research University Higher School of Economics. Financial Crisis in Japan – 4 phases.

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  1. http://www.hse.ru/en/news/guests/87464457.html Latest Developments of The World EconomyDaisuke KotegawaResearch Director, Canon Institute for Global StudiesJune 18, 2013National Research UniversityHigher School of Economics

  2. Financial Crisis in Japan – 4 phases • The financial crisis in Japan can be divided into 4 phases Phase3 (1997-1999) Phase1 (1992-93) Phase2 (1995) Phase4 (2001-2002) 2 Lost Decade

  3. Financial Crisis in Japan – Phase 3 (1997-1998) 1. What happened? • Consecutive bankruptcies of the financial institutions, including large banks and securities in a short time (so called “Black November” in 1997) November 3, Sanyo Securities (7th largest) went bankruptNovember15, Hokkaido-Takushoku Bank went bankruptNovember 24, Yamaichi Securities (4th largest) announced its liquidation (Nov.24)November 26, Tokuyo-City Bank went bankrupt I was the director in charge in MOF • On November 4, due to the bankruptcy of Sanyo Securities, the first default of financial debt in the short-term money market occurred, rendering the money market dysfunctional Bear Sterns (7th largest) Lehman Bros.(4th largest) • The resulting credit crunch caused by the banks had a negative impact on the economy. GDP recorded negative growth (-0.1%) in 1997, first time since WWII. • Scandals among bureaucrats in Ministry of Finance - cozy relationships between traditional bureaucracy and banks • The stormy Financial System Parliament – debated a lot of important financial system related laws 3

  4. Arrest of top executives—Necessary sacrifice? • Top executives of four major entities which either collapsed or nationalized (i.e. Hokkaido-Takushoku, Yamaichi, Long Term Credit Bank and Nippon Credit Bank) were arrested for the allegations of illegal conducts, including window dressing settlement of their BS. • After several years of court proceedings, those of LTCB were found innocent by the Supreme Court. Those of NCB are under review by the Supreme Court. Others served time in jail.

  5. Overview of Global Economy Contribution to world economic growth (2001 -2006 ) Not recover until 2014 Advanced countries:1/3 of which:50% USA How this gap can be filled? Total :25% of world growth of which:1/3 EU BRICs:1/3% the world (2008:1/2) Not recover until 2018 China:25% of the world Emerging countries:1/3 BRICｓother than China: about10%of the world Japan 1980s: about 10% of the world 1980s: USA and EU: about 35% of the world Recently: about 3%of the world

  6. Set of Measures Established among advanced countries 1. The measures to protect financial sector from further adverse developments in the ongoing crisis, ( Safety Net) • i.e., the package of three measures, • recapitalizations, • the disposal of non-performing loans. • guarantees on inter-bank lending and 2. The implementation of these measures. This includes actual injection of public money and the disposal of non-performing loans. 3. The measures to be taken to avoid a vicious cycle between problems in financial sector and those of real economy. (Fiscal Stimulus) 4. The lessons learned from the ongoing crisis and the measures to be taken in order to avoid the repetition of the crisis in the future. This include, among other things, • strengthening transparency and accountability • enhancing sound regulation • promoting integrity in financial markets • reinforcing international cooperation, and • reforming international financial institutions. 5. The architecture of future global financial systems. Done Urgent Not yet completed Necessary Work-in Process Work-in Process Not Urgent Not Urgent 6

  7. US vs Japan • In the financial crisis in Japan, US urged a hard landing with three principles; • No bail-out of banks, • To maintain short-selling scheme, and • Observe mark-to-market accounting. • All of these principles were breached in the ongoing crisis

  8. Balance Sheet Adjustment Net Export Household GNP GNP Corporate Government Asset Liability Asset Liability Repayments Repayments Over-borrowing Over-borrowing GNP Shrinks without Stimulus With stimulus GNP not shrink 8 8

  9. How long attack from market continue? Investment banks western countries Excess Liquidity Escape from insolvency Effectively Insolvent Short sales ＣＤＳ Vicious Circle Fiscal austerity Short-term high return Deficit countries ＩＭＦ，ＥＵ

  10. US economy Current stability of financial system is pretentious thanks to relaxation of accounting rules Recovery of housing prices has been delayed Keys to recovery are disposal of non performing loans of financial institutions and recovery of real economy No！！ Are the improvement in unemployment rate and favorable consumption figures good sign to recovery? Those who gave up job search Job creation by fiscal stimulus is essential Part-timer Country of key currency does not have to worry about trade deficit

  11. Europe - What is happening under the table since last fall? difficult By way of regular tax revenue １．Expansion of ＥＳＦＳ to 2 Trillion Euro Adverse effect on the City and Wall Street Introduction of financial transaction tax ２．Purchase of Government bonds by ECB Concentration of risk on ECB UK, USA vs Continental Europe Consequent additions of equities by ECB member countries

  12. Issues in European economy Greece - Debt ratio of government September 12 Constitutional Court of Germany Relaxation of Loan condition by IMF& EU Spain - NPLs of bank, Debt ratio of government Injection of capital to banks in Spain by ＥＣＢ Needs 100 billion Injection of capital to banks in Japan(1998,1999) About 93 billion GNP of Japan=4 times of GNP Spain Italy - Debt ratio of government Government bonds can be sold in the market?

  13. Subscription for Europe 2. Offense Reinstatement of Glass Steagal Act Destroy Investment banks JPMorgan Problem＝loss of US$ 2billion Biggest Issue in presidential election Socialist parties in Germany & France Part of UK & Sandy Weil LIBOR manipulation Victims – Local communities of US Money Laundering HSBC, Standard Chartered

  14. Essence of Banking Asset Liabilities 100－10＝90 Loans Investments Deposits Credit Creation 100 50 Other Liab Equity 10

  15. Problem of Cyprus Scheme I Banks can create credits based upon depositors’ confidence Banks operate by deposits (=other people’s money) Investment banks gamble and lose money In order to maintain confidence, governments usually put priority on protecting deposits by way of deposits insurance When a bank fails, shareholders first take loss, then creditors. Depositors are always asked to take loss last . In the financial crisis in Japan, all amount of deposits were protected. Ceiling on the deposits eligible for protection was put only after crisis was over

  16. Problem of Cyprus Scheme II Lack of protection on deposits over certain amount in Cyprus triggered capital flight from Spain Dutch finance minister said “Cyprus scheme will be a template” Capital flight from endangered European countries to USA. No! Is this a right move? Title II of Dodd-Frank Act Losses of any financial company placed into receivership will not be borne by taxpayers, but by common (depositors) and ----other unsecured creditors There is a joint paper by the FDIC and the Bank of England in December 2012 Deposits in US and UK banks would not be protected.

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