Section 2 / The U.S. Economy Aiming for a Soft Landing

13

Section 2
The U.S. Economy Aiming for a Soft Landing1）
HONDA, Yuzo

1) I would like to thank Koichi Hamada and Karavasilev Yani for their helpful comments in the
preparation of this paper. However, any possible remaining errors are solely my own.

Part Ⅱ
Part ⅢPart Ⅳ

Since March 2020, there has been a rapid spread of the corona virus across theUnited States. As the disease spread, spending and production dropped sharply,
and the U.S. unemployment rate hit a record 14.7% in April 2020. This was thehighest unemployment rate in the U.S. after the Great Depression. To cope withthe situation, the government and the Federal Reserve Board (FRB) immediately implemented bold expansionary fiscal and monetary policies.
Some economists, including professor Lawrence Summers, warned fromthe outset that the expansionary policies by the government and the FRB were
too excessive in scale. In retrospect, they were right. As they correctly worried, the U.S. economy was experiencing high inflation. Unfortunately for thegovernment and the FRB, Russia invaded Ukraine in February 2022. The RussoUkrainian war caused a sharp rise in global natural resource and food prices,which exacerbated inflation in the U.S. In September 2022, the U.S. CPI inflation
rate reached 9.1% year on year.
Faced with high inflation, the FRB took a sharp turn toward tightening
monetary policy in 2022. This time, the FRB tightened monetary policy sharply,
feeling anxious that high inflation might come to stay. As a result, as shownin Figure 1-2-1, the inflation rate peaked in September 2022 and has since
been steadily declining. Nevertheless, as of March 2023, the inflation rate was
5.0%, which is still much higher than the 2% target. Further monetary tightening is necessary. On the other hand, the growth rate of production has alreadydeclined due to the effects of monetary tightening, and the real economy has
now virtually leveled off. If monetary tightening continues, the economy mightfall into recession in the latter half of 2023 or 2024. In addition, in March and
May 2023, three U.S. regional banks went bankrupt due in part to the rapid anddrastic monetary tightening.
In this Section 2, we report the above recent trend of the U.S. economy
aiming for a soft landing from such high inflation, from a macroeconomic

Part Ⅰ

1. Introduction

14

Chapter 1 / Major Issues in the Asia-Pacific Region in 2023–2024
％
8
6

March
5.0

4
2
0
2019

Figure 1-2-1

2020

2021

2022

2023

2024

U.S. CPI Inflation rate

Source: Federal Reserve Bank of New York

perspective and consider its implications for the Japanese economy.
Section 2 is organized as follows. Subsection 2.2 describes the FRB’s policy
shift toward tighter monetary policy after 2022, and Subsection 2.3 examines thecurrent situation of the U.S. real economy in the wake of the FRB’s monetary
tightening. Subsection 2.4 explains the relationship between high inflation andthe risk of recession, one of the current challenges, and Subsection 2.5 considers another current challenge, the relationship between high inflation and thefailure of three regional banks. Subsection 2.6 discusses the impact of the above
U.S. economic movement on the Japanese economy.

2. FRB’s Switch to Contractionary Monetary Policy
As shown in Figure 1-2-1, the U.S. economy was hit by rapid inflation from2021. In order to cope with high inflation, the FRB changed its previous stance ofmonetary easing, and swiftly tightened monetary policy in 2022. This subsection
presents data on this tightening and explains its contents.
(1) Federal Funds Rate
Table 1-2-1 shows the timing at which the policy interest rate has been changed.
The FRB has raised its policy interest rate, the federal funds rate, seven times in
2022 and three times already in 2023. As a result, the federal funds rate rose to
5.00-5.25% on May 5, 2023.
The characteristics of these policy interest rate changes are twofold: The
first is the rapid increase in interest rates in a short period of time, and thesecond is the large size in the range of respective changes. In this short period,

Section 2 / The U.S. Economy Aiming for a Soft Landing

Table 1-2-1

15

Level

0.25%

0.25% to 0.50%

May

0.50%

0.75% to 1.00%

June

0.75%

1.50% to 1.75%

July

0.75%

2.25% to 2.50%

September

0.75%

3.00% to 3.25%

November

0.75%

3.75% to 4.00%

December

0.50%

4.25% to 4.50%

February 2023

0.25%

4.50% to 4.75%

March

0.25%

4.75% to 5.00%

May

0.25%

5.00% to 5.25%

Source: Federal Reserve System

the policy interest rate rose by approximately 5% from 0% at the beginning of2022. The policy interest rate was raised by 0.75%, three times the normal level,in each of the four changes from June through November 2022, and by 0.50%,
twice the normal level, in May and December 2022, as shown in Table 1-2-1. Allof these indicate the FRB’s rapid shift toward monetary tightening.

Part Ⅳ(2) Interest rate on reserves
The FRB controls its policy interest rate, the federal funds rate, to its target
through changes in interest rate on reserves (private banks’ deposit accounts
at the FRB). As shown in Figure 1-2-2, the FRB raised this interest rate on
%
6.00
5.00
4.00
3.00
2.00
1.00

Interest on reserves (July 2021 to May 2023)

Source: Federal Reserve Bank of St. LouisMarch 31, 2023
April 30, 2023

February 28, 2023

October 31, 2022
November 30, 2022
December 31, 2022
January 31, 2023

August 31, 2022

September 30, 2022

May 31, 2022

June 30, 2022
July 31, 2022

March 31, 2022
April 30, 2022

February 28, 2022

October 29, 2021
November 29, 2021
December 29, 2021
January 29, 2022

September 29, 2021

July 29, 2021

August 29, 2021

0.00

Figure 1-2-2

Part Ⅱ

Increase

Part Ⅲ

Month of Change
March 2022

Part Ⅰ

Federal funds rate change: timing and range

16

Chapter 1 / Major Issues in the Asia-Pacific Region in 2023–2024

reserves from 0.15% to 0.4% in March 2022 and then rapidly increased it to 5.15%
in May 2023. This also demonstrates how the FRB has quickly tightened its
monetary policy.
(3) Monetary base
Another measure of monetary policy stance is monetary base (the sum of cash
and private bank deposits at a central bank). As shown in Figure 1-2-3, themonetary base peaked in December 2021 and then began to rapidly decline.
Recognizing clearly the risk of high inflation, the FRB raised its short-term
policy interest rate and stopped quantitative easing (QE) in March 2022, andbegan quantitative tightening (QT) in June 2022. We can also observe this quick
shift to monetary tightening through the shrinkage in the size of the FRB’s balance sheet.
Using Figure 1-2-3, we call your attention to the following four points. First,
the FRB dramatically increased the monetary base after the Lehman Shock in2008. Second, the FRB spent for more than six years from 2008 through 2014
expanding the monetary base to recover from the recession after the Lehman
Shock, whereas it rapidly expanded the monetary base in a very short period oftime from 2020 to 2021 under the current corona virus recession. The same istrue for the case of monetary base contraction. The FRB took the longer periodof time from 2014 through 2019 to gradually reduce the monetary base for thecase of the global recession due to the Lehman Shock, whereas it shrank the
Trillion dollars
7
6
5
4
3
2
1

Monetary Base (January 2005 - March 2023)

Source: Federal Reserve Bank of St. Louis

July 01, 2022

November 01, 2020
September 01, 2021

March 01, 2019
January 01, 2020

July 01, 2017

May 01, 2018

November 01, 2015
September 01, 2016

March 01, 2014
January 01, 2015

May 01, 2013

July 01, 2012

November 01, 2010
September 01, 2011

March 01, 2009
January 01, 2010

July 01, 2007

May 01, 2008

January 01, 2005

Figure 1-2-3

November 01, 2005
September 01, 20060

Section 2 / The U.S. Economy Aiming for a Soft Landing

17

monetary base rapidly in the shorter period from 2021 to 2022 for the case of
the corona pandemic. Third, the magnitude of the monetary base change due
to monetary expansion and contraction (vertical change in Figure 1-2-3) at thistime is as large as that during the deep recession from the 2008 global financial
crisis. Finally, the FRB’s rapid expansion of the monetary base within a shortperiod of time, followed by its rapid contraction immediately afterward, is one of
the main causes of recent financial institution failures.

115

Index, 2010=100
March
112.4

110
105
100
95
90
2019

Figure 1-2-4

2020

2021

2022

Production of the U.S. Economy

Source: Federal Reserve Bank of New YorkPart Ⅱ
Part Ⅳ(1) Production and Expenditures
Expansionary fiscal and monetary policies to cope with the corona pandemic led
to a relatively smooth recovery of production and expenditures in the U.S. economy until the end of 2021. Durable consumption goods such as automobiles,
computers, and electronics increased relatively steadily even in 2022, whenmonetary tightening began. On the other hand, housing investment fell sharply
in both price and quantity due to rising interest rates. As a whole, as shown in
Figure 1-2-4, the upward trend in production has weakened since 2022 androughly remained flat. However, the level of production has already exceeded
the pre-corona pandemic level in 2022.

Part Ⅲ

Subsection 2.3 describes the current state of the U.S. economy following themonetary tightening by the FRB explained in Subsection 2.2.

Part Ⅰ

3. Current Status of the U.S. Economy

2023

2024

18

Chapter 1 / Major Issues in the Asia-Pacific Region in 2023–2024(2) Prices
Prices rose sharply from 2021 due to several factors, including bold expansionary fiscal and monetary policies. In addition to these factors, the global surge innatural resource prices, following Russia’s invasion of Ukraine, further pushed
up domestic prices, and the consumer price inflation rate in June 2022 recorded
9.1% year on year.
Thanks to the contractionary monetary policy by the FRB as well as the
slowdown in global natural resource price surge, inflation has begun to improveand recovered to 5.0% as of March 2023. It is still, however, well above the 2%
target.
When considering future inflation rates, people’s inflation expectation rate
is important. The one-year inflation rate forecast by the University of Michigan’s
consumer survey peaked at 5.4% in March and April 2022 but has been declining
ever since, falling to 3.6% as of March 2023, as the actual inflation rate has been
decelerating. The University of Michigan’s inflation forecast rate is an inflation
rate expected by consumers, while the breakeven inflation rate (BEI) is an inflation rate expected by investors. The BEI inflation rate forecast for the next five
years is slowly declining from over 3.5% to under 2.5%, as the actual inflation rate
has somewhat subsided.
Another factor affecting an inflation rate is the world natural resource
and food prices. The price level of WTI crude oil, one of the leading indicators of energy prices, peaked in March 2022 at US$123.6 per barrel, and it has
decreased since then. Prices have recently remained in the high range of $70$80 per barrel. However, the rate of price increase has been slowing down.
(3) Unemployment Rate
The unemployment rate was 14.7% in April 2020, when the new corona virus
widely spread. Thanks to bold expansionary fiscal and monetary policies, however, the unemployment rate has recovered quite rapidly, and has been relatively
low since 2022. The unemployment rate in April 2023 was 3.4%, and the adverse
effect of monetary policy tightening has not yet appeared.
This is the current situation of the U.S. economy. In summary, althoughproduction is virtually leveling off, the economy as a whole has not as yet deteriorated and the labor market remains tight. Inflation has fallen significantly, but
is still high at 5%.

Section 2 / The U.S. Economy Aiming for a Soft Landing

19

％
7
6

March
5.6

5
4
3
2
1
2019

Figure 1-2-5

2020

2021

2022

2023

2024

Core CPI inflation rate excluding food and energy (year on year)

Source: Federal Reserve Bank of New YorkPart Ⅱ
Part ⅢPart Ⅳ

The U.S. economy is currently facing at least two challenges: The risk ofrecession and the risk of bank failures. This Subsection 2.4 describes the firstchallenge: high inflation and the risk of recession.
The overall CPI inflation rate has fallen to 5.0% as of March 2023. However,the 5.0% level is still too high for people to live with in general and well above
the target of 2.0%. Furthermore, the core CPI inflation rate excluding food andenergy, shown in Figure 1-2-5, remained high at 5.6% as of March 2023. This
indicates that the transient decline in food and energy prices contributed significantly to the fall in the overall CPI inflation rate from 9.1% to 5.0%. All of thesefactors suggest that there still remains a considerable risk that high inflation
might remain into the future.
Both consumption and investment in the real economy were quite strong in
2022, with the exception of housing investment, and the unemployment rate was
low at 3.4% in April 2023. The labor market was also tight, with the 2.6% increaseof an employment rate year on year (Figure 1-2-6).
The high level of overall CPI inflation rate, the persistently higher level ofcore CPI inflation rate, active spending, and the tight labor market suggest theneed for further monetary tightening.
One reason why tightening policy has not been fully effective is that themonetary base, which expanded rapidly and urgently during the outbreak of the
new corona virus, has not been fully shrunk. In the market there still remains
more than 1.5 times the base money in the pre-pandemic period. The glut ofPart Ⅰ

4. The Primary Challenge Facing the U.S. Economy: HighInflation and Risk of Recession

20

Chapter 1 / Major Issues in the Asia-Pacific Region in 2023–2024
％
10
5

April
2.6

0
-5
-10
-15
2019

Figure 1-2-6

2020

2021

2022

2023

2024

Employment Growth (year on year)

Source: Federal Reserve Bank of New Yorkbase money in the market is one of the reasons why the core inflation rate hasremained high, and thus, QT should continue.
However, as we move into 2023, the effects of monetary tightening to dateare actually eroding the strength of expenditures in the economy. If monetary
policy continues to be tightened further, production and expenditures mightturn downward, and the economy might face the risk of entering recession. We
are now in the difficult situation in which we must decide whether to continue
tightening monetary policy or to return to a neutral monetary policy stance.
As for an outlook, although the inflation rate has fallen to 5%, that level is still
too high, and the FRB is likely to continue tightening for the present. As a result,
there is certainly some risk that the U.S. economy might fall into a recession
in late 2023 or in 2024, but even if a recession should occur, it is unlikely to be
major if other conditions remain the same.

5. Second Challenge: High Inflation and Financial System
Stabilization
In Subsection 2.4, we discussed the relationship between high inflation and therisk of recession. In March 2023, a rapid shift to monetary tightening by the FRB
resulted in another serious problem: The failure of some U.S. regional banks.
(1) Liquidity and Bank Run
There are at least two possible reasons for a bank failure: First, as in a manufacturing business firm, the bank might go bankrupt if it is inefficient in its
operation. Second, the bank also might fail if it runs short of liquidity. (Liquidity

Section 2 / The U.S. Economy Aiming for a Soft Landing

21

Table 1-2-2

U.S. Regional Bank Failures

bankruptcy dateBank Name

March 10, 2023

Silicon Valley Bank failed.

March 12, 2023

Signature Bank failed.

May 1, 2023

First Republic Bank failed.

Part Ⅱ
Part ⅢPart Ⅳ(2) Failure of Three Regional Banks
In just over a year from the beginning of 2022 to the present, the FRB raised
the policy interest rate by 5%, converted QE to QT, and rapidly reduced themonetary base. This shift to tighter monetary policy caused bond prices to fall
sharply and brought about unexpectedly large capital losses for regional banks,
comprising one of the reasons for the failures of the three regional banks at thetime. As shown in Table 1-2-2, Silicon Valley Bank and Signature Bank failed in
March 2023, and First Republic Bank failed in May.
One of the differences between the recent U.S. regional bank failures andthe traditional bank runs described above is the speed of people to withdraw
their deposits. In past bank runs, it took many days for depositors to wait in line
and gradually withdraw their deposits, but in the case of the Silicon Valley Bank
failure, for example, newspapers reported that about a quarter of the deposits
were withdrawn in one day.
Information on whether a bank holds a large amount of bonds that incur
capital losses is available on the Internet. This kind of information is spread via
social networking sites (SNS) and the Internet, and instantly affects the stock
price of the bank in question. A decline in a stock price increases the risk offailure, not only because of a lack of liquidity, but also because of unsound andinefficient management. As a result, the depositors of the bank in question willrush to withdraw their deposits through Internet banking and other means. The

Part Ⅰis a measure of each asset, i.e., how easily the asset can be converted into cashwithout loss. By definition, cash is the most liquid asset and real estate such as
land is the least liquid asset.) Whatever the reason, even if it is merely a rumor
or a lie, if it causes people to rush to a bank to withdraw their deposits, that alone
can cause the bank to fail. In fact, this has happened many times in the past. In
the United States, during the Great Depression in the early 1930s, people lined
up in front of banks to withdraw their deposits. During the chaos, the U.S. financial authorities were forced to simultaneously close and terminate all banking
businesses in the U.S. In Japan, the financial panics in 1927, when bank runs
occurred frequently, are well known.

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Chapter 1 / Major Issues in the Asia-Pacific Region in 2023–2024

massive outflow of deposits further erodes the bank’s credibility, and financial
instability will increase dramatically. For these reasons, banks now are likely tofail in a much shorter period of time than in the past. One of the characteristicsof this series of bank failures is that they occurred within a very short period oftime once the banks’ issues had surfaced.
(3) Bank Term Funding Program (BTFP) and Federal Deposit Insurance Corporation (FDIC)
When the three regional banks failed, the two immediate actions taken by the
U.S. financial authorities were (1) to create the Bank Term Funding Program(BTFP) and (2) to fully protect the deposits of the banks. These two measures
induced depositors not to panic and minimized turbulence in the financial
system. So how do these two measures work?
When deposit outflows occur, they may spread not only to the bank inquestion but also to other similar banks. If these deposit outflows are left uncontrolled, confidence in the financial system as a whole could be lost. Hence, the
FRB must play the role of “lender of last resort” as a central bank and provide
ample liquidity to the financial market. It is essential to prevent banks fromfailing by lending them the funds they need so that they do not run short ofreserves (cash held by private banks and/or their deposits at the central bank)when deposit outflows occur. BTFP is the FRB’s measure to secure the funds atthe congress, which allows the FRB to make emergency loans as needed.
The second countermeasure was an immediate decision by the financial
authorities to protect all deposits in the failed banks so that depositors would
not suffer losses. In so doing, they prevented bank runs or a ‘domino-toppling’
expansion of bank failures.
The FDIC was established in the United States in 1933 as a countermeasure to the frequent bank failures that occurred from the 1920s through theGreat Depression. Thanks to the FDIC, it was expected that deposits would beprotected in the event of a bank failure. The existence of this system aimed toprevent people from running to banks to withdraw their funds.
However, there is a cap of $250,000 (approximately equals to JPY 33 million)on the amount of settlement deposits that can be protected under this system,and deposits exceeding this limit are not protected. The financial authorities,
fearing a further spread of financial instability, have immediately decided toprotect all of the bank’s deposits, including those not covered by FDIC deposit
insurance, to pacify the situation. As a result, the number of failed banks is currently limited to three as shown in Table 1-2-2.

(5) Are High Inflation Control and Financial Stability Policies Compatible?
If bank failures were left uncontrolled, deposits would flow out of the banking
sector, and the amount of bank loans would decline. The reduction in credit
would lead to a reduction in spending in the private sector. To avoid this, the
FRB should inject ample funds through the BTFP into the private sector to makeup for the shortfall of needed funds.
The latest slight upturn in the monetary base balance in Figure 1-2-3 canbe attributed to the FRB’s emergency additional supply of liquidity to cope withthe failure of two regional banks in March.
When people withdraw their bank deposits all at once, as was the case withthe three regional bank failures, the monetary base flows out from the financial
sector to the nonfinancial sector. If left uncontrolled, the money multiplier will
decrease (i.e., the economy’s overall loans and deposits will decline), resulting
in a large reduction in the money supply (a part of which are deposits). If themonetary base flows out from the financial sector, and if the central bank does
not modify the amount of the monetary base, it is equivalent to reducing themoney supply to the economy as a whole, thus tightening monetary policy. The
monetary policy stance becomes neutral only when the central bank supplies
additional monetary base equal to the amount of funds flowing from financial

Part Ⅱ
Part Ⅲ(4) FDIC System and Moral Hazard of Banks
Since the financial authorities have decided to protect deposits exceeding theamount protected by FDIC insurance, why do they not protect the entire amountof deposits without setting a ceiling on deposits from the outset?
If there were no ceiling on the amount of deposits to be protected, depositors
would lose their incentive to choose a bank with which to deposit their money,
since the full amount of their deposits would be protected anyway, regardlessof which bank they chose. In other words, for depositors, all banks would beequal. If this were to happen, there would now be an incentive for banks to takerisks (this behavior is called “moral hazard”). Since there is generally a trade-off
between risk and return, banks will tend to take higher risks in search of higher
returns. This is because depositors are generally indifferent to their choice ofbanks and will not leave their own banks, even if said banks take riskier behavior. It is not desirable for banks to take riskier behavior, since banks have thepublic mission of playing a key role in the settlement system. For these reasons,institutional protection of the full amount of deposits is considered difficult. Yet
despite these difficulties, the FDIC system is expected to be improved in some
way based on the experience currently being acquired.

Part Ⅰ

23

Part Ⅳ

Section 2 / The U.S. Economy Aiming for a Soft Landing

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Chapter 1 / Major Issues in the Asia-Pacific Region in 2023–2024

sector to nonfinancial sector. It is important to understand that deposit outflows,
if left uncontrolled, are equivalent to tightening monetary policy. Therefore, thelatest increase in the monetary base in Figure 1-2-3 cannot be immediatelyinterpreted as an easing of monetary policy. It is more likely that the necessary
monetary base is injected simply to compensate for the shortfall of funds.
Here is one obvious question. The increase in the monetary base to stabilize the financial system, as shown in Figure 1-2-3, will work as monetaryeasing, which might conflict with the contractionary monetary policy currently
employed to control high inflation. Will the FRB give priority to the financial
system stabilization policy and ease the monetary tightening policy?
In fact, the FRB could manage to pursue both high inflation control andfinancial system stabilization policies simultaneously by adopting the following
approach. Since the effects of monetary policy are broadly economy-wide, general monetary policy measures should be allocated to controlling high inflation.
On the other hand, pinpoint policy measures, such as the BTFP, should be allocated to specific purposes to fully protect the deposits of failed banks and tostabilize the financial system. In this way, the two measures could be consistent
with each other, and the FRB could deal with the two challenges simultaneously.
If bank failures should continue to occur frequently in the future, this approach
would not work, in which case another approach would be needed. But at least
the above approach has successfully dealt with the current issues to date.
The U.S. economy is currently aiming for a soft landing from high inflation,
and although it faces the two risks described here and in the previous subsection, overall the real economy is generally on a steady recovery path. However,
the monetary base stock is still quite high, so it may take some time for inflation rate to reach the 2% target. The risk of future bank failures also needs due
attention.

6. Impact on the Japanese Economy
Subsection 2.6 briefly describes the impact of the movement in the U.S. economy on the Japanese economy.
(1) JPY depreciation due to the interest rate differentials
The BOJ has set its short-term policy rate at minus 0.1% since January 2016 andhas supported its 10-year long-term interest rate at near 0% since September
2016. On the other hand, the FRB has raised the policy market interest rate byroughly 5% with its tightening monetary policy since early 2022. Long-term interest rates have risen accordingly. The interest rate differential between Japan and(2) The Impact of the FRB’s Monetary Tightening on Japan’s Regional Bank Management
The tightening of U.S. monetary policy from 2022 has already begun adversely
affecting the management of Japanese banks. Rising interest rates in the U.S.
have caused a significant deterioration in the “net gains/losses on other securities” account through valuation losses on foreign and domestic bonds andequities held by Japanese banks. In particular, “gains on other securities” ofregional banks, facing a severe business environment, have been rapidly declining since the end of March 2021, and many individual regional banks havealready recorded net losses.
If the Japanese and/or U.S. monetary authorities raise interest rates in
the future, the valuation losses will increase further and have a greater negative impact on bank management. We need to continue closely monitoring thePart Ⅱ
Part Ⅲthe U.S. has widened significantly, and the yen-dollar exchange rate has swung
sharply toward a depreciation of the yen against the U.S. dollar. In 2022, the yen
depreciated against the dollar to a 150-yen-per-dollar level at one point, but was
subsequently bought back. The yen-dollar exchange rate at the end of 2021 was
115 yen per dollar, while it was 132 yen per dollar at the end of 2022, implyingthat the yen weakened against the dollar by about 15% during the year of 2022.
The global surge in natural resource and food prices, coupled with thedepreciation of the JPY, caused the prices of imports into Japan to soar, andhigh inflation became a problem in Japan as well. High inflation is particularly
problematic for people whose incomes are fixed at nominal values, as it directly
affects their livelihoods and reduces their spending.
However, the depreciation of the JPY also alters the conditions of competition for domestic firms with foreign firms, with domestic products becoming
cheaper than foreign products. When the JPY depreciates, Japan’s trade balanceand production are negatively affected at first by the depreciation. Within six
months to two years, however, the effects will be reversed, and positive effects
for the Japanese economy will expand and dominate. (In macroeconomics, thisreversal effect is called the “J-curve effect.” For details, see Honda (2022).)The Japanese economy had been experiencing a gradual depreciation of theyen since 2021, but the sharp monetary tightening in the U.S. from the beginning of 2022 led to its rapid depreciation. As a result, the first adverse part of
the J-curve effect appeared in 2022, and the trade deficit of the Japanese economy in 2022 was extremely large. However, the subsequent positive aspects of
the J-curve effect are expected to appear and favorably impact Japan’s current
account balance and production in the future.

Part Ⅰ

25

Part Ⅳ

Section 2 / The U.S. Economy Aiming for a Soft Landing

26

Chapter 1 / Major Issues in the Asia-Pacific Region in 2023–2024

figures in the “gains/losses on other securities” account.
(3) U.S. economy
The impact of the U.S. economy on the Japanese economy would be quite different, depending on whether or not the U.S. economy succeeds in a soft landing.
In terms of total trade values in exports and imports, China is Japan’s No.1 trading partner with the U.S. No.2. In terms of export value alone, however, the U.S.
was the No.1 export partner and China was No.2 in April 2023. Therefore, boomor recession in the U.S. economy has a significant impact on Japan’s exports.
As discussed in Subsection 2.3, while the U.S. economy has generally performed well as a whole, the contractionary monetary policy after 2022 mightcause the U.S. economy to fall into recession in the second half of 2023 or in
2024. Although the possibility is slight, if the U.S. economy were to fall into a
serious recession, Japan’s trade and current accounts would incur commensurate damage, leading to a major blow for the Japanese economy.
(4) Risk of U.S. financial system instability
Another concern for the Japanese economy is the collapse of the three U.S.
regional banks. If no other banks go bankrupt, there will no problems. However,the FRB is still in the process of tightening monetary policy. Raising interest
rates by the FRB could worsen the banks’ balance sheets through capital losses
from bond possession. If more and more banks should fail, the U.S. financial
industry could fall into turmoil and also seriously impact the Japanese economy.
In that case, the impact would be on both real and financial sectors in theJapanese economy. If the financial turmoil were transmitted to the real sector in
the U.S. economy, Japanese firms’ exports to the U.S. as well as local productionin the U.S. would decline. This would have a direct effect on the real sector in
the Japanese economy. If the U.S. real economy should fall into recession, the
FRB would ease its monetary policy significantly, inducing JPY appreciation.
Looking back, the global recession of 2008 began with the bursting of
the real estate bubble in the United States in mid-2006. The resulting turmoil
remained within the financial industry for about two years. When the Lehman
Brothers went bankrupt in September 2008, the turmoil quickly spread to thereal economy. As soon as the U.S. economy fell into recession, the FRB dealt
with it by boldly easing monetary policy, while the Bank of Japan was late andits intervention was minimal. This difference in monetary policy between the
FRB and the Bank of Japan led to the extreme appreciation of the JPY, which
in turn brought about a disastrous impact on the Japanese economy. Recalling
this bitter experience, we cannot take our eyes off the developments in the U.S.

Section 2 / The U.S. Economy Aiming for a Soft Landing

27

financial industry.

Part ⅣPart ⅢPart Ⅱ

Part Ⅰ

References
Yuzo Honda (2022), “JPY depreciation and Japanese firms: Positive effects expand with time lag” (Japanese title: Enyasu to Nihon Kigyo: Zikansa Tomonai
Purasu Koka Kakudai), Nihon Keizai Shimbun, Morning Edition, Keizai Kyoshitsu, September 13.