Abstract
Banks changed their behaviours markedly in the early 2000s to reduce their risk exposure and thereby cope with deflation. The Bank of Japan (BOJ) introduced an unconventional monetary policy to reverse the deflationary situation and to inspire economic activity, but banks did not respond to the policy. Instead, they chose to reduce their risk exposure. The reasons for the banks’ passive attitude can be inferred from the following. The first was that the banks hesitated to take risks because of the harsh experience of settling NPLs just a few years before. The second was that the banks were unable to foresee a marked improvement in the Japanese economy in the future. The third one was that they were unable to play a role as a financial intermediary because they lost an interest rate tool for selecting borrowers under the extreme monetary easing environment. When the twin catastrophes of the Lehman Shock and the Great East Japan Earthquake hit the Japanese economy successively, the economy was suddenly thrown again into a deflationary spiral.
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Notes
- 1.
The BOJ, Monthly Report of Recent Economic and Financial Developments (October 2000).
- 2.
Kikuo Iwata (2001, p. 7).
- 3.
Deflation is defined as at least two consecutive years of price decreases in IMF World Economic Outlook (October 1999, p. 106). Deflation was defined by the IMF (April. 2003, p. 6) as ‘a sustained decline in an aggregated measure of prices such as the consumer price index or the GDP deflator’.
- 4.
In the international definition of CPI Core, food and energy prices are excluded from CPI. On the other hand, in the Japanese definition of CPI Core, only perishables are excluded from CPI. The definition of CPI Core in this book follows the international definition.
- 5.
Yoshikawa (2013, p. 104).
- 6.
Kikuo Iwata is one leader of the reflationary school. He has become one of the executive vice governors of BOJ under Abenomics.
- 7.
Kikuo Iwata (2001, p. 124).
- 8.
The annual average growth rate of productivity in Japan in real terms was 0.8 per cent during FY1995–FY2014. The annual average growth rate of multi-factor productivity was 1.6 per cent during 2000–04 and −0.6 per cent per cent during 2005–09. The rates were the third and fourth position respectively among G7 countries (Japan Productivity Center 2015).
- 9.
Prime Minister Abe strongly urged some CEOs of large listed firms to increase salaries of workers in the meeting with the executives of Keidanren in 2014 and 2015. In addition, Minister of Finance Aso expressed in the New Year’s Meeting of Trust Companies Association of Japan in January 2015 that large listed firms retained too many internal reserves. He advised that they spend their money to increase salaries and capital investment.
- 10.
Yoshikawa (2013, pp. 177–178).
- 11.
Wakatabe (2013, p. 82).
- 12.
Ikeo (2013, pp. 39–43) explained that the Japanese economy was forced to change its structure because of the global paradigm shift in the 1990s, in addition to an enlargement of the GDP gap after the collapse of the bubble economy. The structure of the demand side might be adjusted quickly to a new one but it would take a long time for the supply side to be adjusted to the new one.
- 13.
Umeda (2011, pp. 82–84) It was claimed that a collapse of a big department store Sogo Co. Ltd. caused concern in the public about the future economy. In reality, the unemployment rate in the first half of 2000 was around 4.5 per cent, which was higher than the level of 3 per cent in the first half of 1999.
- 14.
In reality land prices in six major urban areas declined by around 8 per cent in 2000 from the prior year.
- 15.
Tatebe (2011, pp. 118–119).
- 16.
The origin of the acronym ‘PKO’ is a United Nations ‘Peacekeeping Operation’.
- 17.
Izanami is the name of a deity in Japanese myth. Izanagi is also the name of a deity and used for the 57-month economic expansion period of November 1965–July 1970.
- 18.
Minutes of the Monetary Policy Meeting in December 2005.
- 19.
Minutes of the Monetary Policy Meeting in November 2005. This attitude was consistent throughout the period of the next governor Shirakawa.
- 20.
Kazumasa Iwata (2010, p. 251) Dr. Kazumasa Iwata was the deputy governor of the BOJ at that time. He explained the reason of his objection: indices of prices, wages, and household consumption were showing no improvement and a rise in interest rate would depress those weak indices.
- 21.
CPI showed a positive percentage change between 0 per cent and 1.0 per cent year on year from May 2006 through December 2006. However, the CPI Core showed a negative percentage change for 26 months from January 2006 through February 2008.
- 22.
The BOJ’s Tankan of December 2007 showed that the diffusion index of SMEs of non-manufacturing industries had been constantly negative during 2003–08, although those of the large firms and the middle-sized firms turned out to be positive.
- 23.
For example, Ichiue and Nishiguchi (2013) used micro data from 2006 to 2013 under the extremely low interest rates environment and analysed the relationship between inflation expectation and household spending in Japan. They concluded ‘higher inflation expectations tend to result in greater current household spending at the ZLB’ and ‘our results are fairly robust to a variety of specifications.’
- 24.
Fukushima (2007, pp. 1–4) The lost profits of interest receipts of households were an estimated 331 trillion yen for 14 years. The reduction of the interest burden was estimated as 82 trillion yen. The benefit of interest payment was estimated at 428 trillion yen for the non-financial corporate sector. The lost profits of interest receipts were estimated as 164 trillion yen.
- 25.
According to the information from SMBC, the portion of spread-based loan repriced within one year was about 50 per cent. The portion of the prime-rate-based loan was about 25 per cent in FY2014.
- 26.
Okina (2011, p. 199).
- 27.
Ugai (2006) comprehensively analysed effects of QE policy by dividing them into the portfolio rebalancing effect and the signalling effect for expectations regarding the future path of short-term interest rates.
- 28.
The reason for the increase of bank notes at that time was assumed to be that households kept their money in cash at home because they were worried about frequent banking failures.
- 29.
For example, the outstanding balance of cash and deposit of the non-financial corporate sector was 186 trillion yen at the end of 2005, which was nearly half of the lending of all banks.
- 30.
Ikeo (2013, pp. 182–183).
- 31.
The original plan was that the Fukui’s successor would be a former Administrative Vice-Minister of the MOF. However, the plan was rejected at the House of Councillors where the opposition parties occupied the majority of the House. They denied that the influence of the government on monetary policy would have been greater if the original plan had been accepted. Then Shirakawa, who had been elected as a deputy governor a few weeks prior in March 2008, was promoted suddenly to become the BOJ governor.
- 32.
Subprime Loan Crisis-related losses of the major financial institutions up to December 2007 were the following in US dollar terms at the exchange rate of 110 yen to the dollar: Mizuho FG 3.6 billion, Nomura Holdings 1.3, Sumitomo Mitsui FG 0.9, Mitsubishi UFJ FG 0.9, Citi Group 30.0, Merrill Lynch 25.0, and UBS 17.0.
- 33.
The duration of the grace period for the revitalization of SMEs with a highly feasible plan was extended from three years to five years with the longest limit of 10 years. Those restructured loans were excluded from the criterion of ‘Special attention’ credit. Sato (2010, pp. 244–245).
- 34.
Ikeo (2013, pp. 218–222) Regarding appreciation of the Japanese yen, the BOJ was blamed because they provided far less additional supply of base money after the Lehman Shock than those by FRB and ECB. However, the BOJ argued that it had already supplied more base money in terms of GDP ratio in advance than those in the US and Euro area. Ikeo denied a direct linkage between the base money and the foreign exchange rate as a groundless popular belief and insisted that the crucial factor of the foreign exchange rate was not the base money provided by a central bank but an aggregated capital flow in the middle-term.
- 35.
The economic loss was 1.7 times the 9.6 trillion yen of the Great Hanshin Awaji Earthquake in January 1995.
- 36.
The firm claimed compensation of the expense to the government based on the Act on Compensation for Nuclear Damage. However, the government denied the claim. Instead the government set up a special loan scheme to the firm. It borrowed almost 5 trillion yen from the government at the end of 2015. In addition the government had already purchased the preferred stock of the firm with one trillion yen of the firm.
- 37.
No public rescue scheme had existed in Japan for a private loss originating from a natural disaster. In the Great Hanshin Awaji Earthquake, many people were forced to bear a double loan debt.
- 38.
The BOJ (2015) reported that the decline of the lending yield of the regional banks continued even in the interest rate rise period from FY 2005 to FY 2007.
- 39.
Nikkei newspaper (20 February 2009). They demanded 1000 yen in 2006, 1500 yen both in 2007 and 2008, respectively, but all firm responses were only 1000 yen.
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Nakano, M. (2016). The Lehman Shock and Its Influence on Banking Supervision Policy: 2008–13. In: Financial Crisis and Bank Management in Japan (1997 to 2016). Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-137-54118-5_3
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