14THJACQUESPOLAKANNUALRESEARCHCONFERENCENOVEMBER 7–8,2013

Will the U.S and Europe Avoid a Lost Decade?
Lessons from Japan’s Post Crisis Experience
Takeo Hoshi
Stanford University, NBER and Tokyo Center for Economic
Research
Anil K. Kashyap
University of Chicago, Federal Reserve Bank of Chicago, andNBER

Paper presented at the 14th Jacques Polak Annual Research Conference
Hosted by the International Monetary Fund
Washington, DC─November 7–8, 2013
The views expressed in this paper are those of the author(s) only, and the presenceof them, or of links to them, on the IMF website does not imply that the IMF, its
Executive Board, or its management endorses or shares the views expressed in thepaper.

Will the U.S. and Europe Avoid a Lost Decade? Lessons from Japan’s Post Crisis
Experience*

Takeo Hoshi
Stanford University, National Bureau of Economic Research, and Tokyo Center for Economic
Research
Anil K Kashyap
University of Chicago, Federal Reserve Bank of Chicago, and National Bureau of Economic
Research
October 2013

* Prepared for the IMF Annual Research Conference, November 2013. The views expressed arethose of the authors only and should not be attributed to any of the institutions with which they
are affiliated. Kashyap thanks the Initiative on Global Markets at the University of Chicago andNational Science Foundation through a grant administered through the National Bureau of
Economic Research for financial support. We thank Pierre-Olivier Gourinchas, Ayhan Kose, andtwo anonymous reviewers for the comments on earlier versions of the paper. We also thankGiuseppe Bertola, Paola Sabbione, Matt O’Connor and Matt Spick for helpful advice about U.S.
and European Banking data and Charles Starnaud and Nomura research for sharing data on
equity issuance. Huiyu Li and Yingcong Tang provided outstanding research assistance, though
all mistake are ours alone.

ABSTRACTThis paper reexamines Japanese policy choices during its banking crisis in the 1990s and draws
some lessons relevant for the U.S. and Europe in the aftermath of the global financial crisis of
2007-2009. The paper focuses on two aspects of post-crisis economic policy of Japan: the delay
in bank recapitalization and the lack of structural reforms. These two policy shortcomings
retarded Japan’s recovery from the crisis and were responsible for its stagnant post-crisis growth.
The paper also suggests some political economy factors that contributed to the Japanese policies.
In France, Italy, and Spain bank recapitalization has been delayed and the structural reforms havebeen slow. Without drastic changes, they are likely to follow Japan’s path to long economic
stagnation. The situation in Germany looks somewhat better mainly because the structuralreform was already advanced before the crisis. Although the recovery has been slow in the U.S.
as well, the problems are at least different from those faced by Japan then and many European
countries now.

Introduction
It has been five years since the failure of Lehman Brothers and the associated financial market
chaos, but the U.S. and Europe are not yet back to what had looked normal prior to the crisis.
Japan, having had its own major financial crisis starting in 1997, offers a laboratory for studying
the hangover from a crisis.
We show that there are a variety of macroeconomic similarities between the post-2008
developments in the U.S. and Europe and the post 1997 outcomes in Japan. This motivates us to
explore three questions in detail. First, what exactly went wrong in Japan that led to its
notoriously long stagnation after its crisis? While the buildup to the crisis occurred for manyreasons, we argue that once the crisis had begun there were two critical mistakes made by theauthorities. One was failure to rehabilitate the banks. The other was mistaking the nature of
future problems facing the economy. Instead of recognizing that major structural adjustments
were needed, much of the policy response was calibrated under the assumption that Japan faced asimple cyclical problem that could be addressed with indiscriminate fiscal stimulus. We thenexplain how these policies contributed to the slow recovery and long stagnation of the economy.
This analysis leads us to an obvious next question, why were these policy choices madein Japan? In each case there were multiple contributing factors. But several of them arepotentially relevant for other countries. The hesitation in recapitalizing the banks was in part due
to the unpopularity of a previous bank rescue. But it also seems to have been related to areluctance to announce the size of the losses for fear of triggering a panic and over the
reputational consequences of acknowledging past supervisory lapses. These problems were
eventually overcome when a new supervisory structure was put in place and enforced.
The failure to confront the structural problems was no doubt partially due to politicians’
unwillingness to restructure during a period of weak growth. Rationalizing regulations andending subsidies would have inflicted hardship on the beneficiaries of the existing system. We
then explain why the political system had produced and sustained these forms of protection anddescribe some the consequences of these choices.
Finally, we ask whether the same forces that led to counterproductive policies in Japan
have been observed in the U.S. and Europe. The relevance to the U.S. is limited in part because
the U.S. made more progress in dealing with its banking system problems than did Europe orJapan. Europe appears to have many of the same obstacles that prevented banking reform as inJapan. The structural challenges in many European countries are also more similar to theJapanese problems than are the challenges for the U.S. These observations lead us to conclude
that Europe (with a possible exception of Germany) is indeed heading towards a lost decade.
The approach we take in this paper is inspired by similar historical cases studies by
Stanley Fischer. Fischer (1987) aimed “to draw lessons for monetary policy from the recent
historical record.” In that paper Fischer examined the details of monetary policies in the U.S.,1

Japan, Germany, and the U.K. to understand how different monetary policy choices in thesecountries influenced macroeconomic performances. Dornbusch and Fischer (1986) looked at“four successful stabilizations from high inflation -- Germany in 1923, Austria in 1922, in
Poland 1924-27, Italy 1947 -- and two [then] ongoing attempted stabilization in Israel andArgentina, with the aim of identifying general lessons from those episodes.” We follow in thistradition of looking to specific past episodes to inform a current debate.
The remainder of the paper is organized in four sections (plus a brief conclusion). The
first establishes the similarities and differences between Japan, the U.S. and Europe in the wakeof their respective crises. The next section is our case study of the aftermath of the crisis inJapan. We focus on the key decisions made after the banking troubles had surfaced and try tounderstand the consequences of these choices. The third section investigates the reasons behind
the Japanese policy choices. We find that both economic conditions and politics played an
important role. The fourth section looks for analogies between the precipitating factors that led
to the Japanese policy choices and conditions in the U.S. and Europe. We separately look at thebanking conditions and the other potential impediments to growth. The similarities to Europe
seem much stronger than to the U.S. Section 5 ends with a brief conclusion.

1. Post Crisis OutcomesWe start by comparing the economic situation in Japan right after its financial crisis to theconditions after the recent crisis U.S. and Europe. Hoshi and Kashyap (2010) document many
similarities in the evolution of the financial and political aspects of US and Japanese crises andargue that the global financial crisis reached its peak in 2008 and the financial crisis in Japan
reached its peak in 1997. Here we compare a number of macroeconomic indicators around thepeaks.
We are not the first one to point out the similarities of experiences after financial crises
around the world. For example, Reinhart and Rogoff (2009a) document many similarities ofmany financial crises across countries and time, including the ones that we focus on below.
Nonetheless, we find it useful to document the extent to which the most recent global financial
crisis resembles the Japanese crisis, because it allows us to focus on the most relevant lessons
from the Japanese experience. 1
First, many countries that suffered from the global financial crisis experienced sharp
appreciation of real estate prices before the crisis and equally sharp decline after the crisis.
Figure 1 shows house price indices for Japan, the U.S., U.K., Germany, France, Italy and Spainaround the peak of crisis. The peak year of the crisis is denoted as year 0 and the house priceindex in year 0 is normalized to be 100. Japan looks different from the other countries because
1

Schaltegger and Weber (2013) also compare the current Europe to Japan in the 1990s and find many similarities.

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by the time the financial crisis reached its peak, the housing prices had already been declining forseveral years. After the peak of the crisis, however, the Japanese real estate price continued to
decline in a way similar to the other countries.
Second, the financial crisis eroded the capital of financial institutions, and many countries
were slow to force a recapitalization of their financial institutions. Table 1 shows estimates
made by the International Monetary Fund in October 2009 on the estimated undercapitalization
at the end of 2010 for the U.S. and European countries. As comparison, the last column in thetable shows estimates from Hoshi and Kashyap (2010) on the degree of undercapitalization ofJapanese banks as of the end of March 2001. The U.S. banks started to replenish capital muchearlier than their European counterparts. By the end of the second quarter of 2009, the U.Sbanks were expected to raise $500 billion, which exceeds the estimated amount raised in the euroarea, the UK, Denmark, Iceland, Norway, Sweden, and Switzerland combined,. Even in the U.S.
this amount of capital replenishment left the banks weaker than would be desirable to support thelending needed to facilitate a recovery. Instead, both the US and European banks would satisfy
the minimum regulatory capital ratio requirements by partly reducing their risk weighted assets;
one important reason for computing the simple ratio of capital to total assets is that manipulating
the composition of assets in order to exploit differences in risk weights does not disguise thecapital deficit. Japanese banks experienced capital shortage of the similar magnitude after theirfinancial crisis, and we explore that in much greater detail in the next section.
Third, all the countries experienced a sharp decline of real GDP and slow recovery after
the crisis. Figure 2 shows how the real GDP fluctuated around the crisis. Again the peak year of
the crisis is denoted as year 0 and the real GDP (in local currency) in year 0 is normalized to be
100. The figure shows the GDP fell immediately after the onset of the crisis. Although theeconomy rebounded after the initial decline, the growth rate is substantially below the trend prior
to the crisis. One exception to this pattern (and many of the ones in the subsequent figures) is
Germany, which seems to have returned to the pre-crisis trend in a couple of years after thecrisis. In contrast Italy and Spain by the end of 2012 had not even recovered to the pre-crisis
level of GDP.
The second and the third points are related. As many studies including Reinhart andRogoff (2009a) and Jordà, Schularick and Taylor (forthcoming) show, recessions that follow
financial crises are associated with higher output losses. Fischer (2011) explains this succinctly:This is not coincidental, for the collapse of the financial system not only reduces theefficiency of financial intermediation but also has a critical effect on the monetarytransmission mechanism and thus on the ability of the central bank to mitigate the realeffects of the crisis. (Fischer, 2011, p.3)
Fourth, Figure 3 shows that the unemployment rate rose steadily with the onset of thecrisis. Germany is again the exception, where the unemployment rate actually fell. The increase
was especially sharp for Spain and the U.S. Reinhart and Rogoff (2009b) find that after 18
3systemic financial crises, the unemployment rate rose by an average of 7 percentage points. In
all these countries, the employment situation deteriorated most substantially for young workers.
Fifth, fiscal policy was expanded in many countries following the financial crisis. This
contributed to chronic deficits and rising levels of debt. Figure 4 shows the growth in the ratio ofgross debt to GDP ratio for each country. The pattern of rising debt burdens after the crisis isespecially clear for Spain and the U.K, although the growth rate of the government debt observed
here is somewhat less than the historical average for many banking crises that Reinhart andRogoff (2009a) report. According to their study, the government debt on average increases by
86% during the three years after the crisis (Figure 10.10). The increase is less clear for Japanand Italy. For Japan, the increasing trend of the government debt had begun when the economy
first slowed in 1992, so the level was already rising prior to the crisis. Similarly, Italy had highaccumulation of government debt already before the crisis, which may have made it difficult forthem to expand fiscal policy after the crisis. The net debt to GDP ratio, which is not shown here,
exhibits similar patterns.
An important reason for the increasing budget deficit and government debt is theincreased government transfers to the elderly as a result of aging. As Figure 5 shows, the pace of
aging around the crisis was especially fast for Japan. Thus, the demographic challenge thatJapan faced was more serious than the ones for the other countries.
Finally, the recession that followed the crisis resulted in downward price pressures, but
Japan was the only country that fell into deflation. The difference between Japan and the othercountries is likely to be a result of the different responses to the crisis by the central banks. In
Japan interest rates were already very low for several years prior to the crisis so a large reduction
in interest rates was not possible. The other countries aggressively cut interest rates as the crisis
began. The Bank of Japan also barely increased the size of its balance sheet in the wake of theJapanese crisis. In contrast, the Federal Reserve, the Bank of England and the European Central
Bank all expanded their liabilities substantially starting within a year of the crisis.
To summarize, we take 5 lessons from these figures. First, Germany’s experience isvery different than the other countries. For the rest of the paper we will be careful to exempt
Germany from generalizations about European conditions where it is appropriate. As we
describe later, between 2003 and 2007 Germany undertook a number of structural reforms tooverhaul its labor market and to increase competition.
Second, real estate prices in all the countries ran up substantially before the crisis. In theUK, the dip afterwards was temporary and modest, but in the other countries the reversal was
pronounced. Not surprisingly, the banking systems in all countries were weakened. Aside fromthe U.S. there was a large hangover in the financial system that was not cleaned up for several
years.

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Third, the countries all experienced anemic growth with deteriorating labor market
conditions. As van Wijnbergen and Homar (2013) show, these patterns are common to most
episodes after a financial crisis.
Fourth, after the crises, monetary and fiscal stimulus were deployed everywhere. The
results, however, were mixed. Aside from Japan, these measures were successful in preventing
deflation. But in all the countries (save Germany) unemployment rose and growth fell. While it
is too early to say for sure, it also appears that the trend GDP growth may have even slowed.
Finally, it appears that the banking sectors were slow to heal. The simple figures
presented so far do not allow us to isolate the adverse effects of weak economic conditions, fromthe insufficient actions taken to address the losses that materialized during the crisis. The U.S.
was relatively aggressive in forcing banks to raise additional capital, while Japan and Europe
were less determined. But even in the U.S., a serious capital shortage in the banking sector
remained a couple of years after the crisis.

2. The post-crisis experience in Japan
With the basic comparative facts in hand, we now turn to a detailed case study of the Japaneseexperience. We focus specifically on the policy choices made by the government and the role
they played in delaying recovery. While many factors contributed to Japan’s stagnation, we
argue that there were two fundamental conceptual errors that were responsible for most of the
problems. We then explore the reasons for these mistakes.
2.1 Failing to recapitalize the banks
The first critical error was failing to clean up bank balance sheets and recapitalize thebanks. We wrote about this problem for the first time in 1999 (Hoshi and Kashyap, 1999). It
was already clear then that Japanese banks were seriously undercapitalized even after two roundsof capital injections into large banks using public funds. Our review of the various estimates asof mid-1999 pointed to optimistic official estimates of 3.5 percent of GDP of unrecognized
losses, and contrasted these to estimates from various private sector analysts suggesting
impending loan losses of twice that size. We pointed out at that time the government was
reluctant to address the problem and cited various contemporaneous news accounts documentingthat hesitation.
By the end of 2001, the market also started to worry about the health of large Japanesebanks once again. Ito and Harada (2006) show that the CDS spreads for major Japanese banks
fell right after the public capital injection of 1999 but started to rise again and settled at between
150 to 200 basis points toward the end of 2001. The CDS rates remained elevated until
September 2002 (the end of the sample period for this study).
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Kashyap (2002) reviews a number of estimates of undercapitalization of Japanese banks.
He also conducted a survey of leading Japanese bank analysts and private sector economists
asked them to estimate the difference between the market value of assets and liabilities of theJapanese banks. These responses clustered around 4 percent of GDP (20 trillion yen). Hence tomove the banks from having negative net worth to being adequately capitalized would havetaken about twice that amount. Paul Sheard in his response to the survey emphasized that the
Deposit Insurance Fund had resources that were equal to about 10 percent of GDP, meaning thatthe funding was available. So it was an open secret that even five years after the acute part ofJapan’s banking crisis the banks remained seriously undercapitalized.
There is also a very large literature analyzing the misallocation of bank credit in Japan(see Sekine, Kobayashi, and Saita (2003) for a survey). One very convincing demonstration
comes from Peek and Rosengren (2005) who show that poor performing firms were more likely
than better performing firms to receive additional bank credit. They attribute this tendency tobanks’ desire to avoid loss recognition. They find that this behavior is most pronounced forbanks that are close to the regulatory minimum level of capital. They note that for existing
equity holders rolling over a loan rather than foreclosing is rational because foreclosing on a badloan locks in a loss and requires the bank to find additional equity financing to comply withminimum capital requirements. As we discuss in the next section, the government may also havereason to allow under-performing firms to survive.
Caballero, Hoshi and Kashyap (2008) offer a model and some evidence showing how thisperverse behavior can create slow aggregate growth. They start by showing a rise in lending to
the corporations that appear to be subsidized. This is difficult to prove since there is not standard
data showing all aspects of bilateral loan contracts. So they rely on reported total interest
payment made by firms. Their approach is to assume all firms are able to get funding at themost favorable possible rates on each type of borrowing that is undertaken; For example, if thehighest rated firms are able to borrow at a 0.25 percent interest rate in the corporate bond market,
then Caballero et al. (2008) assume that this rate would be available to all corporate bond issuers.
By making similar assumptions for each category of borrowing, they construct the lowest
possible amount of interest payments that a firm could reasonably be expected to pay. Firms that
paid less than that amount of interest are assumed to be receiving subsidies. The subsidy isalmost certainly coming from banks, since there is no reason to expect arms’ length investors tooffer unusually low credit terms.
They next present a model to analyze macroeconomic outcomes in an environment where
unprofitable firms receive subsidies. In this situation, profitable firms will gain less market sharethan in a normal situation where struggling firms fail and release their workers and customers to
the successful firms. More importantly, the better performing firms have less incentive to invest
and raise employment because any attempt to expand can trigger a higher subsidy to the weak6

firms. Over time the ongoing subsidies and the weak incentives for strong firms to grow createa persistent misallocation of resources that will harm overall productivity growth.
Caballero et al (2008) confirm these predictions by looking at the behavior of normal
firms that do not appear to be receiving subsidized credit. They find that these firms invest lessand add fewer workers when there are relatively more firms receiving subsidized credit in theirindustry. They also find that the regular firms have to have a higher productivity advantage
relative to the subsidized firms to stay in business.
van Wijnbergen and Homar (2013) show that failure to recapitalize banks is genericallyassociated with slower growth after a banking crisis. They study 65 crises since 1980 (including
25 since 2007). They find that among the recessions that occur after a severe banking crisis,
those which are accompanied by major recapitalization is predicted to last 5 quarters, whereas
failing to recapitalize leads to an expected duration of 14 quarters. They do not provide direct
evidence on the mechanism which slows recovery, but speculate that this comes from gambling
behavior by weak banks who continue to roll over credit to distressed firms.
One modest factor that probably contributed to problems in Japan was the ultra-low
interest rate environment. With interest rates so close to zero, the required interest payments formost borrowers by the late 1990s were very low. This makes it easier to disguise a problem loansince many borrowers would easily be able to make the required interest payments and if granted
an extension of the term of the loan could disguise problems indefinitely. If expected inflation
had been higher, so that nominal interest rates might have been higher, then it likely would havebeen more challenging for the banks to disguise their bad loans and weak capital positions.
As Hoshi and Kashyap (2010) show, a turning point regarding the Japanese banking
problems came in September 2002 when Heizo Takenaka was appointed as head of the Financial
Services Agency and imposed a new strategy for dealing with the banking problems. Amongother changes, he insisted that supervisors begin assessing loan quality based on discounted cash
flow analysis, rather than relying purely on whether current interest payments were being made.
He refused to allow banks to count deferred tax assets to count as bank capital in cases where theprofitability of the banks was doubtful (and the hence the likelihood of getting the tax relief was
unlikely). He also insisted that after these more rigorous inspections that banks that had capital
deficits come up with detailed rehabilitation plans to improve their capital positions.
Takenaka’s emphasis on recapitalization was quickly followed by actions backing up hisgoals. By early 2003, the major banks had begun raising new equity (usually via private
placements). During the first half of 2003, the 4 largest banks in Japan raised 1.85 trillion of
new equity (1 trillion yen by Mizuho Holdings, 450 billion yen by Sumitomo Mitsui Financial
Group, and 300 billion yen by Mitsubishi Tokyo Financial Group, and 100 billion yen by UFJ
Financial Groups). By August 2003, the 15 different financial groups (including five of the six
large ones) were issued business improvement orders by the FSA for failing to meet their March
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2003 profit targets. The banks were forced to update their plans for meeting goals each quarter,
meant that some banks faced restrictions on pay and dividend dispersals, and in a few cases led
to the termination of some bank CEOs and senior managers.
2.2 Failure to address structural growth problems
The second critical error made in Japan was the failure to recognize the need forimportant structural reforms to support growth. Instead, too much policymaking was focused onvery short-term issues and many fiscal policy choices were aimed at near-term stimulus (or otherpolitically motivated considerations).
To support this diagnosis, we present three pieces of data. Figure 6 shows the multi-year
growth forecasts made by successive governments since 1992 (along with realized growth).
These forecasts are intended to cover average growth over a budget planning horizon of 5 to 10
years. Each of the forecasts has overshot the growth outcomes. Frankel and Schreger (2013)
compare growth forecasts made by governments in 24 countries with the actual outcomes andfind that this kind of bias is pervasive: averaging 0.28% of GDP at the one-year horizon, 0.93%
of GDP at the two-year horizon, and 1.90% at the three-year horizon.
Frankel and Schreger did not have Japan in their data set, but the Japanese forecasts
during the 1990s and the 2000s look more optimistic than most of the countries in their sample.
Every one of the planning documents missed the average growth rate by an average of more than
1 percent per year over the life of the plan. The misses are not purely due to short-term wishful
thinking, the averages in years 3, 4 and 5 after the forecast were made are about the same.
The one exception to this pattern is the Koizumi government from 2001 to 2006, whose
mantra was “no growth without reforms.” The Koizumi plan included a caveat that the target of
1.5% was achievable only if a broad set of reforms were enacted. In fact, during the 3rd, 4th and5th year of his administration the average growth rate was actually 1.87% per year.
But even the Koizumi agenda was relatively underwhelming in delivering growthoriented reforms. One way to see this is to study the reform proposal that the government put
forward shortly after coming to power. The First Step in Changing Japan, published by
Koizumi government in September 2001, was a “road map for reform” with 35 major initiatives
that the new administration argued was critical to revive the economy. 2 But a careful analysis of
the specific proposals and the later efforts of the government to enact them suggest a poor
record.
To reach this conclusion we looked at the proposals along two dimensions. First, we
asked whether the reform if implemented as proposed would plausibly improve growth. We
sorted the proposals based on whether they contribute to growth via capital, labor, energy or
2

The English version of the document can be found at http://www5.cao.go.jp/keizaishimon/english/pamphlet/0109pamphlet-e.pdf (accessed on September 22, 2013).

8

productivity improvements. We also separated the policies based on whether the mechanism bywhich they relate to growth was direct or indirect. 3 For example, a proposed deregulation thatremoved a hiring restriction would be judged to directly raise growth by increasing the amountof labor. Whereas a policy to improve the quality of child care facilities could indirectly boost
growth if it allowed more people to work instead of staying home to look after the children.
There is also the possibility that a policy, such as combatting soil pollution, would not be
expected to have any effect on growth.
We also made judgments on how much progress was made towards achieving the goals.
We did this by first trying to find progress reports on the different programs. We also looked at
the reform program proposed by the Abe government in June 2013. We compared thesuggestions made by Koizumi administration to those made by Abe administration. If a similarreform proposal was made in both programs, we took it as a de facto admission that the Koizumi
reform had not succeeded in fully addressing the problem.
This analysis suggests that even the Koizumi administration, which was the most reformoriented and stable government since the 1997 crisis, lacked a focus on growth. We reckon that
only 8 of the 35 specific initiatives they proposed would have directly boosted growth. In
contrast, 16 of them might have indirectly supported growth and 11 would have no effect on
growth.
The eight clearly pro-growth policies are listed in Table 2. We are struck by how modest
the effect of many of the proposals would be in boosting potential growth. Most of them were
implemented, but for six of the eight recommendations, that the Abe administration still
advocates further related reforms.
Finally, notice that some of the policies that one might have expected are missing fromthe list. For instance, there was no mention of immigration, no reference to removing licensing
restrictions that often hold back growth, and no attention on barriers to business formation.
Japan still ranks below many other East Asian countries in the World Bank’s Ease of Doing
Business survey.
A second telling piece of evidence was the persistent tendency for the government to beconvinced that the main problems facing the economy were short term and that they would soon
be abating. For example, in February 1999, then Vice Minister of International Finance, Eisuke
Sakakibara, was quoted as saying that the Japanese banking problems “would be over within amatter of weeks.” Perhaps the most notorious example was the decision by the Bank of Japan inAugust 2000 to raise short-term interest rates. At the time of that decision, which was roundly

3

This is obviously subjective. To do this each of us independently ranked the policies and in the vast majority ofcases our assessments agreed. In cases where we did not agree we added a third rating by our research assistant andused her judgment to break the tie.

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criticized by many observers including the representatives from the Ministry of Finance and theEconomic Planning Agency, the Bank of Japan issued a statement stating:“Over the past one year and a half, Japan's economy has substantially improved,
due to such factors as support from macroeconomic policy, recovery of the world
economy, diminishing concerns over the financial system, and technologicalinnovation in the broad information and communications area. At present, Japan's
economy is showing clearer signs of recovery, and this gradual upturn, led mainly
by business fixed investment, is likely to continue. Under such circumstances, thedownward pressure on prices stemming from weak demand has markedly
receded.
Considering these developments, the Bank of Japan feels confident that Japan's
economy has reached the stage where deflationary concern has been dispelled, thecondition for lifting the zero interest rate policy.”
In October 2000, the government announced its plan called "A Policy Package for
New Economic Development toward the Rebirth of Japan". In the preface of the
document, the government wrote 4: “As a result of the swift and large-scale economic
stimulus measures implemented by the Japanese government since 1998, the Japanese
economy has averted the peril of falling into a deflationary spiral and is now gradually
improving, after bottoming-out around the spring of 1999.”
By January 2001, the Ministry of Finance had taken the optimistic view on board.
The January monthly review states 5: “Although the Japanese economy is still in a severe
situation with meager improvements in the household sector, activities on the wholecontinue to rise modestly. The strength is seen mainly in the corporate sector, whereautonomous nature of the recovery has become increasingly evident.” Hence, until thearrival of the Koizumi government in April 2001, there was limited recognition of thestructural challenges facing the Japanese economy.
Finally, consider the view of external observers of the Japanese economy. One
easy way to summarize outside views is to look at estimates of the output gap for Japan
made by the Organization of Economic Cooperation and Development (OECD); the gap
is defined as the difference between their estimate of real GDP and their estimate ofpotential GDP (divided by the estimated potential GDP). While there are many
challenges to estimating potential GDP, especially in a depressed economy like Japan’s,
we think these data do an adequate job of formalizing the impressions of many observersof the Japanese economy. In what follows, we will adopt the common convention ofinterpreting the gap as an indicator of the slack in the economy.

4

Retrieved from http://www5.cao.go.jp/2000/b/1019b-taisaku-e.html on June 24, 2013.
Retrieved from http://www.mof.go.jp/english/pri/publication/mf_review/cy2001/330/330_07.htm on JUne 24,
2013.
5

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These data come from a 2008 OECD project (Tosetto (2008)) that looked at how
estimates of the output gap changed over time. The data presented in Figure 7 show
estimates as of three dates. The series marked with diamonds represent the firstpublished estimate, while the boxed entries show the estimates one year after the original
estimate, and the triangle entries show the estimates as of 2008.
We note several interesting observations about these estimates. First, at the endof 1996 and 1997, the OECD judged that Japanese output was operating above potential,
and the subsequent estimates suggest a larger positive gap than the initial estimate. In
2000, all three of the estimates put the economy at about full employment, so that theestimated gap is essentially zero. But in the two periods on either side of 2000, theeconomy is estimated to have slack and more importantly, the contemporaneous
estimates of slack are bigger than the estimates constructed in 2008. The differences
especially in 2001 and 2002 are substantial, over 1 percentage point. Only in 2003 and2004, once the Koizumi policies were in place do the initial estimates look more
optimistic than the subsequent ones.
This pattern is consistent with the following narrative. From the start of the crisis
until 2002, the economy consistently looked weaker than it was later believed to be. For
policymakers inside Japan this may have led them to think that during this period
standard stimulus policies were necessary and sufficient to put the economy back on thegrowth path. But in fact potential growth was lower than they appreciated. Once theKoizumi government’s reforms were underway, potential growth did start to improve, sothat by 2003 and 2004, the amount of slack actually looks higher now than it did at thetime.
Based on the foregoing evidence, we conclude that part of what went wrong in Japan wasa misdiagnosis of the growth challenges facing the country. There were three important fallouts
from having confused structural problems with a cyclical slowdown.
First, the form of fiscal policy that was pursued was more aimed at short-run stimulus
than at raising long run growth. Much of the spending took the form of public works projects.
Doi and Ihori (2009, Chapter 3) estimate the marginal productivity of public capital in fivecategories (roads, harbors, and airports; railways; postal services, telephone and telegraph;
agriculture- related pubic capital and fishing ports; and flood control and forest conservation)over time. They find that during the 1950s and 1960s, the marginal productivity from all thesekinds of investment was high. But the returns dropped over time and by the early 1990s themarginal productivity had become especially low for the three out of five groups (roads, harbors,
and airports; agriculture-related pubic capital and fishing ports; and flood control and forest
conservation).

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Figure 8 (reprinted from Hoshi and Kashyap (2011)) shows the percentage of public
spending devoted to each category from 1992 to 2003, along with the Doi-Ihori estimate ofinvestment efficiency in 1991. Clearly resources were poured into the areas where productivity
was already low. Total spending on the three categories of infrastructure totaled 213 trillion yen
between 1992 and 2003 and amounted to 89% of the total public investment during this period –and to the extent it was debt financed added about 40 percentage points to the debt to GDP ratio.
If Japan’s problem had purely been due to insufficient aggregate demand perhaps the form ofspending that was undertaken prior to 2003 may not have been critical. But we have seen that growth
outcomes were poor despite this splurge. Hence, the major consequence of this spending was tocontribute to the big run up in debt that was documented in section 1 without raising potential growth. So
by the time Mr. Koizumi’s reforms were begun, the fiscal position of the country was noticeably weaker
than it might otherwise have been.
Coincident with the increased spending by the government during the 1990s was the
beginning of a reduction in investment by the private sector. Figure 9 (taken from Hoshi and
Kashyap (2011) shows the shares of GDP for gross fixed capital formation (the broadest measureof private investment in the economy) and overall government spending. The investment share
has trended down steadily since the early 1990s. Importantly, this is not just due to the reversalof the investment binge during the late 1980s. By 1997, as the crisis was starting, the share ofinvestment was back to the level from the early 1980s, at around 20 percent. Since that time theshare has dropped further toward 15 percent.
In addition, there is a remarkable negative correlation between the government spending
relative to GDP and the share of private investment in GDP. During the “lost decade”, 1993 to
2002, the correlation is -0.81, and over the whole sample it is -0.71. We do not mean to imply
that the government spending increases caused the decline in private investment. There is no
doubt that some of the spending increases were initiated because of weak state of private
spending, including investment. But over the period of 20 years the pure reverse causality
explanation for the correlation becomes less plausible. So it seems likely there was some
crowding out.
A final consequence of the failure to deliver more sustainable growth is that the aging problems
demonstrated in section 1 got worse. The share of the population above 65 was rising steadily, so that a
six year delay meant a drop in the work force of a couple of percent. Even for those people who might
have chosen to stay in the labor force past the normal retirement age, their productivity was probably
lower than when they were younger. So when adjustments began there were fewer workers and more
retirees to support.

12

3. Reasons behind the Japanese Policy Decisions
Our diagnosis of what happened in Japan raises the question of why the policies that turned out
to hinder growth were chosen. Answering this is critical because it can help us understandwhether similar forces that lead to these policy decisions are likely to be present in the U.S. andEurope.
3.1 Paralysis in Banking Reform
We see three factors that led to the delay in confronting the banking problems. The firstwas the public outrage that had come the last time there was a use of public funds to support
troubled financial institutions. In the late 1980s, seven specialty housing finance lenders calledjusen had run into trouble (see Milhaupt and Miller (2000) for details). The Ministry of Finance(MOF) assured the public (on multiple occasions) that no public funds would be used torehabilitate them. But repeated reorganizations, using mostly private money from the banks
which had founded them, failed to rehabilitate them.
So eventually in 1995 it was apparent that they had to be completely restructured – as ofMarch 75% of the loans were non-performing and by September all seven were estimated to be
insolvent. Over the course of the year the government convened negotiations to allocate losses.
Ultimately, the government determined that a ¥6.41 trillion write-off would be needed. The
negotiations that followed resulted in the founding banks taking a loss of ¥3.50 trillion,
agricultural coops that had invested with them writing off ¥0.53 trillion, and other lenders losing¥1.70 trillion. Milhaupt and Miller (2000) report that the government had intended the coops tobear a larger share of the losses, but they refused to contribute more than ¥0.53 trillion. Hence,
to finalize the deal the government agreed to contribute ¥0.68 trillion (which would come from
taxpayers).
The cabinet approved this plan on December 19 and the public and press condemnation
was immediate and strident. The main Japanese financial newspaper, the Nihon Keizai
Shimbun, penned a stinging editorial criticizing the non-transparent process that led to the deal
and accusing the government caving into the Liberal Democratic Party (LDP) politicians known
as the “agricultural policy tribe”.
The deliberations in the Diet over the bill were especially contentious. The bill
eventually passed in June 1996, 137 days after its introduction. In the interim there was threeweek sit-in by opposition parties led by the New Frontier Party (NFP) that blocked the entrance
to the Budget Committee room in the Diet and halted progress on the bill. 6 According to a pollin the Asahi Shimbun in March at the time of the sit-in, approval for the Prime Minster andcabinet had dropped by one-third from January and only 12 percent of the public backed the6House of Councillors, the National Diet of Japan, “Dai 136 Kai Kokkai Gaikan (Overview of the 136th Diet
Session” (http://www.sangiin.go.jp/japanese/gianjoho/old_gaiyo/136/m-136.html)

13rescue. 7 Although the Jusen Bill eventually passed the Diet, the government felt compelled to
ask the banks to contribute more to establish a fund that would be used to cover future additional
losses from closing down the jusen. Given this background it is hardly surprising that there waslittle political appetite for telling the public that a much, much bigger bailout was needed.
A second factor in the delay was the concern by some inside the government thattransparency about the size of the problems could trigger a panic. For example, Masayoshi
Nishimura, who was the Director of the Banking Bureau of the MOF from 1994 to 1996 and thus
was in charge of financial supervision when the jusen problem reached its peak, lists the fear of
triggering a panic as an important reason for delay in disclosing the amount of non-performing
loans at Japanese banks during the 1990s. 8
When the stability of the financial system is in question, disclosure of information thatwould enhance the credibility in normal times instead would add to the anxiety about
financial stability. (Nishimura, 1999, p.118. Our translation)
Finally, the MOF bureaucrats were worried about the reputation of the organization andits perceived culpability for banking problems. As Kamikawa (2005) argues, as the primary
regulator of all the banks, the MOF stood to be blamed if they admitted that there had beensupervisory failures. In addition, the MOF had traditionally been able to deal with failing banks
without spending public funds by asking bigger and healthier banks to absorb them. It would
have been a dramatic shift to eschew this so-called “convoy rescue” approach in favor of using
public funds. 9
The protracted nature of the problems also put the MOF in a difficult position. In theearly 1990s, the successful convoy rescues in the past likely led the MOF to simply assume thatthe non-performing loan issue could be handled without direct taxpayer assistance. But as thedecade progressed there were a series of scandals involving bank examiners at MOF. In themost notorious one, lower-level bank examiners were prosecuted for leaking the dates of on-siteexaminations to a bank in return for the bank’s entertaining them with panty-less waitresses at ashabu shabu restaurant. 10 In addition, many former MOF officials had leadership positions at
the jusen. As the jusen scandal gained attention, the MOF was criticized for tolerating recklesslending.
Hence, by the peak of the banking crisis, the MOF was on the defensive as calls werebeing made to break up the ministry. Ultimately, in July 1998 the examination function of the7

See http://articles.chicagotribune.com/1996-03-14/news/9603140138_1_jusen-prime-minister-ryutaro-hashimotoprotest retrieved June 26, 2013.
8
Nishimura (1999, p.119) also claims that another concern on asking banks to clean up their balance sheets was thepossibility of massive credit crunch.
9
Hoshi (2002) discusses how the convoy rescues worked and how it changed over time.
10
As Tett (2003) describes, extravagant entertainment of bureaucrats and politicians by Japanese businesses had
existed before the 1990s, but the public became much more aware of these practices (especially regarding MOF staff
participation) during these “scandals”. See Tett (2003, Chapter 4) and Mikuni and Murphy (2002, pp.199-201).

14

MOF was removed from the ministry and assigned to a new agency (Financial Supervisory
Agency). The MOF’s influence over the Bank of Japan was also trimmed. Up until April 1998,
the Bank of Japan had been tightly controlled by the MOF and by convention every othergovernor appointed to the bank was an ex-MOF official. In April 1998, the BOJ was granted
legal independence. Although the scandals and the decline of political power of the MOF were
not the only factors that led to the creation of the FSA and independence of the BOJ, theycertainly played a role.
Even after the supervisory function was moved to the FSA, the MOF initially retained thepower to formulate banking policy, which included decisions over whether and how torecapitalize banks. Eventually this power was also stripped. The first step was in July 2000,
when the policy formulation function was also moved to the FSA and the Financial Supervisory
Agency was renamed the Financial Services Agency (conveniently still referred to as the FSA).
Then in January 2001, the FSA was merged with Financial Reconstruction Commission (which
had been created to implement the injection of public capital into banks starting in March 1999),
and the FSA gained the full power to force banks to write off non-performing loans andrecapitalize. In the fall of 2002, Mr. Takenaka utilized this power to start serious recapitalizationof major banks that was described above.
Kume (2005) raises another possible reason for the reluctance to force the banks to clean
up their balance sheet in the 1990s. He argues the MOF deliberately allowed the banks torebuild their capital gradually in the early 1990s because of the assumption that expansionary
fiscal and monetary policies would help the banks accumulate profits. Thus, according toKume’s hypothesis, the lack of banking reform was also related to the regulator’s judgment thatJapan’s growth problem was primarily cyclical and could be cured by demand stimulus. Hencethe two critical policy decisions we have identified may be connected.
3.2 Lack of structural reforms
Given the weak state of the economy, there was a strong temptation for the various
political parties to try to protect their favored constituents from fully facing all the associatedrisks of a stagnant economy. This was probably the most important reason why the structuralreforms, which usually leads to more economic restructuring and job losses, did not proceed
rapidly in Japan. The tendency for the weak economy to slow down structural reform would not
be unique to Japan, especially if the policy makers believed (as we have shown above) that the
weak state of the economy would not last long.
But the nature of the protection in Japan is especially relevant because most came in theform of market distorting regulation. For instance, instead of providing unemployment benefits
and/or job training for unemployed, Japanese government often encouraged firms to not to fire
workers (at least male regular employees). Under the practice of lifetime employment system, it
was already hard for the firms to lay off workers. On top of that, firms were given subsidies to15

maintain the employment. 11 The banks were also allowed to carry non-performing loans on theirbooks without demanding borrowers restructure anything about their businesses. The
government sometimes used public work projects to support employment. Advancing structuralreform would have dismantled many of these protections. Arguably they could have been
replaced with more efficient forms of support, but doing so would have likely changed the
distribution of which groups were more exposed to economic risks.
So it is important to understand the political factors underlying the politicians’ decisions
on whether and how to change the ways various groups would be protected from major
economic risks. Recent research in political economy focuses on political institutions that shape
the incentives of individual politicians and influences policy outcomes. Estéves-Abe (2008)
studies how Japan came to have the system of social protection that is fragmented (with different
mechanisms applying to different groups delivering different levels of protection) and relies lesson direct government protection and more on “functional equivalents” that disguise directgovernment spending. An important outcome of this approach is that entire industries or
occupational groups are often shielded from market forces. The most important factor in hermodel, which she calls a “structural logic model,” is the electoral system and the nature ofpolitical competition that the system creates.
To put it briefly, the structural logic model claims that the Japanese electoral system(multimember districts and single nontransferable vote) produced strong incentives infavor of highly targeted forms of social protection at specific constituent groups or areas.
Japan thus spent less on comprehensive social welfare programs, because such programs
made it difficult to steer distributive benefits to specific areas and groups. Instead, Japandeveloped social insurance schemes and functional equivalents to social security
programs that allowed occupational and geographical targeting. (Estéves-Abe, 2008,
Introduction)
In a multimember district, more than one candidate wins seats in the parliament. Thus, acandidate does not have to appeal to a large number of unorganized voters to secure the victory.
Relying on the support from a small but well organized group is often sufficient. This makes thestrategy to support a fragmented system of social protection attractive. Moreover, the Liberal
Democratic Party (LDP) in Japan was politically dominant for most of the post-war era and the
LDP almost always placed multiple candidates in a single district to capture more than one seat.
This meant LDP politicians needed to compete among themselves, which gave rise to more
personal based voting rather than policy based voting, amplifying the importance of having
support from well organized groups.
Lynch (2006) also examines social protection provided by government though with adifferent focus and different countries in a series of case studies. She focuses on “age11

The subsidy, which is (ironically) called Subsidy for Employment Adjustment, is given to firms that avoid
redundancies by implementing other measures such as furloughs, dispatching workers to related companies(shukko), or offering internal job training. The policy was originally introduced in 1975 and continues to today.

16

orientation” of social policies, which is measured by how much the government spends to protect
the elderly relative to the government spending for working-age adults and children. Lynch(2006) finds that the countries with elderly oriented social policies have an “occupationalist”
structure of welfare programs, where different programs cover different occupations and thecoverage for people outside the occupational groups is scant. The countries with citizenshipbased welfare programs, which provide social protection for citizens at large, are more youthoriented. She traces the differences to different experiences during the two historical periods:
when these countries introduced the social welfare programs in the late nineteenth to earlytwentieth centuries, and when some countries shifted from the occupationalist systems to thecitizenship-based systems right after World War II. The countries that started out with thecitizenship-based systems stayed citizenship-based and tended to have an orientation that favor
the young.
More interestingly, she argues that the different choices observed among theoccupationalist systems depended on the nature of political competition. The countries where
political competition focuses on providing benefits to favored constituencies (often calledclientelism or particularism) stuck with the occupationalist systems, which provides moreconvenient ways for politicians to allocate more resources to their core support groups.
Thus, Lynch’s discussion also features the nature of political competition as the mostimportant determinant of the social protection policy. In terms of age-orientation, Japan isclassified as one of the most elderly-oriented ones among the countries she studies. Consistent
with Lynch’s hypothesis, the nature of political competition in Japan is described as
particularistic: politicians catered to their core support groups in order to win under MMD(multi-member districts) and SNTV (single non-transferable vote) system.
Though MMD/SNTV system characterized Japan’s electoral system for a long time, theelectoral reform of 1993 has changed the system. Japan’s electoral system since the reform ischaracterized as a mixed system of SMD (single-member districts) and PR (proportional
representation). Thus, the explanations based on political institutions would imply policy
decisions in Japan must have started to change after the electoral reform. Indeed Rosenbluth andThies (2001) claim that they find such an expected change in the resolution of jusen:
We credit, at least in part, the new electoral rules for a policy shift away from the bankcoddling practices of the past. After trying to stick taxpayers with the tax for cleaning up
the jusen mess, the LDP did not get away with it. (Rosenbluth and Thies, 2001, p.35)
Our assessment of the jusen resolution is different from theirs. The final resolution of the jusen,
which relied mostly on (reasonable) contributions from the banks with minimum burden on
agricultural coops and taxpayers, was in line with the traditional logic of convoy rescues. The
new electoral system did not change the policy of the MOF drastically and the government
continued to delay bank restructuring and significant recapitalization until late 2002.
17

But Rosenbluth and Thies (2001) are correct in pointing out the new electoral system
made it difficult for the government to impose unpopular policies on voters. Estévez-Abe (2008,
Chapter 2) explains that SMD means that even a government with parliamentary majority will be
reluctant to impose unpopular policies because the “identifiability” and “accountability” of theruling party is high. In this case, the voters can easily see the ruling party is clearly responsible
for legislating the unpopular policies (high identifiability) and the voters can easily express thedispleasure by voting for the most promising opposition candidate in an SMD (highaccountability). Thus, the introduction of the SMD system in Japan may have ironically made itdifficult to implement the economic reforms that require (at least temporary) increases in tax
burdens, such as bank recapitalization using public funds and introducing a universal safety net
for unemployed workers instead of subsidizing inefficient firms to maintain employment. If
Japan had to choose its social protection policy from scratch under the SMD, a system different
from the fragmented one might be chosen, but SMD seems to increase the cost of changing theexisting system.
Another unpopular policy that the Japanese government has had trouble introducing is the
taxpayer identification numbers (TIN). The TIN has been unpopular not only among the groups
who benefit from the government’s inability to verify their income, such as farmers and the selfemployed, but also because of privacy concerns by other groups whose income are alreadyreported to the tax authority accurately by their employers. The lack of TIN reduces taxability
and makes it difficult to implement a universal system to replace the fragmented system of social
protection.
There are two groups that are especially protected under the current system in Japan andhence have much to lose from many economic reforms: farmers and the elderly. As Lynch(2006) shows, Japanese social policies are very elderly oriented. As Hoshi and Kashyap (2012)
point out, Japan’s agricultural sector is heavily subsidized: in recent years, a widely usedmeasure of the total amount of subsidies that farmers receive (Producer Subsidy Equivalent;PSE) have been roughly equal to the value added of the agricultural sector.
Both groups have been important supporters of the LDP. Although the number of farmers
shrunk over time as Japan industrialized, they continued to have disproportionate political power
because the allocation of seats to electoral districts did not adjust automatically as people moved
from rural to urban areas. This caused the over-representation in rural electoral constituencies
that have relatively more farm votes. The malapportionment in Japanese elections also favoredthe elderly because the proportion of the elderly is also high in rural areas.
Occasional redistricting reduced the malapportionment over time. For example, in the1985 lower house election, the number of voters per seat in the most densely populated
constituency was 5.12 times of that in the least densely populated constituency. The redistrictingthat added 8 seats to most populous districts and subtracted 7 from least populous districts

18

lowering the ratio to 2.92 in the 1986 lower election. After another redistricting in 1993, theratio declined to 2.14 in the 1994 election. (George Mulgan, 2000, pp.330-331, Table 5.6).
Malapportionment still remains and is being contested in the courts. For the most recent
lower house election in December 2012, the number of voters per seat was less than 50% of thatin the most densely populated constituency in 72 out of 300 single member districts. Sixteen
cases were litigated as being in violation of the constitution, and the High Courts ruled that theelection was unconstitutional in all of the sixteen cases. These cases are now being appealed to
the Supreme Court. 12
It seems that the political impediments to reform are slowly eroding. But it also seems
safe to say that some important aspects of both the protections that were left in place after thecrisis and other broad deregulations that have been delayed can be traced to the specific politicalincentives that were in place in the late 1990s and early 2000s.

4. Similarities to the US and Europe
Looking at both the policy choices and the precipitating factors for the choices it seems that there
is an asymmetry between the relevance of the Japanese experience for the U.S. and Europe.
4.1 Banking Issues in Europe
There is an eerie similarity between the policy choices made in the main euro area
countries and those made in Japan.
Regarding banking recapitalization, we argued that Japan dissembled in confronting its
banking problems because of public outrage that made addressing them unpopular, fear from theconsequences of being transparent about the resources needed to address the problems, andconcerns that the regulators (and politicians) would be held accountable for the weak conditionsof the banks. To varying degrees all these considerations seem present in Europe.
As starting point, note that the banks in Europe are still weakly capitalized. Table 1
shows that the euro area was slow to force banks to raise more capital. Importantly the IMF
analysis underlying the Table 1 estimates were completed before the first major problems were
fully apparent in Greece. So the so-called doom loop between the health of peripheral euro areabanks and soundness of the sovereigns had not begun.
Column A of Table 3 shows data collected by Nomura securities on the capital raised in
the four main European countries by the largest banks from the middle of 2007 through the endof 2010. The individual results for the banks included in each country’s total are also shown.
12“Dec. vote invalid; cases go to top court” The Nikkei Weekly April 1, 2013.
http://e.nikkei.com/e/ac/20130401/TNW/Nni20130401FP6VOTES.htm?NS-query=electoral%20vote.

19

These banks were picked because they were the ones included in the major stress tests conductedby the regulators in Europe and the U.S. The figure shows that capital raising by these European
banks through 2010 amounted to just under 74 billion euros. Though the universe of the banks
in Table 3 and Table 1 are very different, the capital needs estimated in Table 1 suggest that thisamount is a small number. 13
By May 2010 the problems in Greece became apparent and the European crisis changed
character. Column B in Table 3 shows the amounts of capital raised starting in 2011 through theend of September 2013. 14 Remarkably even though the risks facing the European banks rose
substantially from 2010 onwards, capital raising slowed measurably, as these large banks raised
only 45 billion euros during this period. As indicated in column B, several large banks, including
the largest French bank and the largest Spanish bank raised no additional equity after 2011.
Most discussions of capital adequacy since the crisis have focused on the stress tests
conducted first by the Federal Reserve in 2009 (as part of its Supervisory Capital Assessment
Program) and then repeated subsequently on several occasions by the European Banking
Authority. Virtually all European banks were judged to have enough capital to survive thestress scenarios considered in these tests. Unfortunately these tests are often more of an
accounting exercise than truly forward looking solvency tests. Loosely speaking, these stresstest calculations start from an initial level of bank capital and then subtract losses and add
provisions and profits under a stress scenario over a certain interval to arrive at an ending capital
number. If this terminal capital number is high enough then the bank passes the stress test.
This approach ignores other considerations that come into play if we want to judge
solvency or viability of organization. The obvious omissions include losses beyond the stresstest horizon, potential losses that do not need to be recognized in the accounting statements (suchas those relating to securities that are listed as being held-to-maturity), and funding risks that canwipe out a bank quickly. In addition, in some cases the stress scenario may be too optimistic. So
there is no contradiction if market indicators suggest a bank is distressed while a stress testshows that a bank has sufficient capital.
The remaining columns of Table 3 show some of the measures that fuel our skepticism
about the condition of the European banks. To put the capital increases in perspective, columns
C and D show data on total interest earning assets of the banks, while columns E and F show therisk weighted numbers. Regulatory capital requirements compare capital measure to riskweighted assets and as the table shows the risk-weighting massively shrinks the asset number bywhich the banks are judged. A huge amount of the difference between interest earning assets
13

One critical consideration is that the largest U.K. banks during the same period raised more than 100 billion
pounds. So the Table 1 figures on capital raised in Europe are heavily influenced by the mandated recapitalizationthat was taking place in the U.K.
14
See the sources that are listed at the bottom of the table for a full description of where the different data wereobtained.

20and risk-weighted assets arises because most sovereign debts issued by OECD countries carry azero risk weight. So most of the large European banks operate with leverage ratios (total assets
divided by common equity) in excess of 30.
Column G for the European banks shows estimates from Deutsche Bank Research of
impaired loans. These estimates start from stated impaired loans and then add loans that are 90
days past due and restructured loans to arrive at an estimate of what Deutsche Bank considers to
be a proper measure of impaired loans. In three out of the four countries, the total capital raised
after the crisis is much less than a third of the level of impaired loans. The exception isGermany, where (at least for these two banks) more capital was raised than the level of theimpaired loans.
Columns (H) and (I) in the table show the prices of five year credit default swaps on May
1, 2010 right before the first Greek rescue package and as of the end of September 2013. A
credit default swap pays the owner of the swap whatever is required to make the owner whole
following a default event. So the prices can be inverted to infer an annual probability of default.
For instance, assuming a 60 percent recovery rate in the event of a bankruptcy, a CDS price of
200 implies a 4.4 percent (risk neural) annual probability of failing. It is remarkable that only
one of the Spanish, French and Italian banks had a lower CDS price in September 2013 than in
May 2010. This makes the lack of capital raising since 2011 all the more surprising.
The last column of Table 3 offers another indicator of the market view of the health of
the banks. This column shows the ratio of the market value of equity (as of year-end 2012)
relative to the book value. Every major European has a ratio below 1, with all the Italian andtwo the three French banks having ratios of ½ or less. Thus, market participants do not believethat these banks are adequately capitalized.
Though not shown in the table, the same kind of debate as in Japan about the legitimacy
of counting deferred tax assets as capital has surfaced in Italy and Spain. 15 For prudential
purposes, one important reason for requiring banks to use equity financing is to have some loss
absorbing buffer that protects taxpayers from having to bail out troubled banks. Deferred tax
assets are credits for past losses that can be applied against future taxes. If a bank will truly be
profitable in the future, then the bank can deduct the past losses from the taxable profits and add
the tax saving to its capital base. In this case, deferred tax assets turn into capital that can beused as buffer for unexpected future losses. If bank profits fail to materialize, however, theexemption from future taxes is irrelevant. Thus, the deferred tax assets do not serve as a buffer
because they disappear exactly when such loss absorbing buffer is called upon. Spanish banks
currently have about 50 billion euros of deferred tax assets that are counted as capital, but they
(properly) would not count as core capital under the so-called Basel III banking rules. In 2011,
Italian banks successfully convinced their government to convert deferred tax assets into outright15“Health Check,” The Economist, October 5, 2013.

21

tax credits, which can count as capital even under Basel III. The lesson from Japan is that thesekinds of rescues do not inspire confidence.
There are three common explanations for persistent problems with the capitalization of
the euro area banks. First, there has never been a public backstop made available for banks thatfail to attract private funding. At the time of the 2009 U.S. stress tests some interpreted the key
to their success as having eliminated asymmetric information about asset quality. But anotherinterpretation was that the mandated capital raise combined with the public backstop was thecritical ingredient. The fact that the European banks revealed more balance sheet information
than the U.S. banks but have still not convinced the market of their health suggests that the latter
lesson is the right one to draw.
The absence of a backstop in turn relates to several other factors. Perhaps the mostimportant consideration is the reluctance of the Germany and other relatively strong countries tobe forced into a bailout of banks in weaker countries. But prescriptions of austerity have notbeen popular, either. Thus, the governments in France, Spain, and Italy that were in chargeduring the start of the crisis were voted out. Remarkably Mrs. Merkel’s party gained popularity
in the most recent election. Until a recapitalization occurs, and we see the extent to which state
funds are committed, it is hard to say whether the kind of concern over public backlash, as we
saw in Japan, has prevented the backstop from being offered. Put differently, it is too early to tellwhether the current policies advocated by Germany purely reflect self-interest or represent thehonest view about the best way to proceed.
Nonetheless, the European authorities do appear to be hesitant to admit the size of the
problems facing the banks. One reason is likely their fear of triggering a panic – given theabsence of a backstop to support any large troubled institution. This has led to several
embarrassing situations, such as exempting potential losses on sovereign bonds from thecalculations in the 2010 stress tests and certifying that some weak banks such as the major
Cypriot banks as having passed stress tests, only to see them subsequently require bailouts. So
the concern we saw in Japan about rattling fragile markets seems to be alive and well in Europe.
A third reason why the European stress tests have not been more powerful is that the
mandated capital increases have all been stated in terms of achieving a particular capital ratio.
Hence, shrinking assets has been one way for banks to comply with the results of test. 14 of the
17 European banks reported in Table 3 reduced their risk-weighted assets during 2011 and 2012.
The amount of interest earning assets also fell for 5 of them, but 8 banks increased the interest
earning assets.
The consequence of these choices is that the banks in many European countries, mostimportantly Spain and Italy, remain reluctant to expand their lending to the private sector. This
keeps credit tight and shows up as the unusually high spreads between lending rates and the rate
at which funds can be borrowed from the ECB.
22

The financial system in Europe is dominated by banks, so banking conditions are themost important indicator of credit availability in Italy, Spain, France and Germany. But indicesof financial conditions that look at a broad range of financial variables such as interest rates,
stock and property prices, bond prices tell a similar story. For example, the financial conditionsindex proposed by Angelopoulou, Balfoussia and Gibson (2013) suggests that credit conditionsin the euro area even after 2009 have been quite restrictive. Their analysis also suggests thatconditions in Germany are different than in the peripheral countries.
The reluctance of banks to lend is reinforced by the mechanics of the way that ECB
structured its lender of last resort policies. The ECB allowed banks to participate in repurchaseagreements with it. A repo loan has two elements: the haircut which specifies the discount on thecollateral that is pledged, and an interest rate on the loan amount. As Drechsler, Drechsel,
Marques, and Schnabl (2013) document, the ECB chose to offer lower haircuts on peripheral
sovereign bonds than were being offered in the market. The ECB offset this subsidy by charging
a higher interest rate than prevailing market rates. For example, as Drechsler et al note, as late as
the end of 2011, the ECB haircut on Greek sovereign debt was only 10% while private haircuts
were much higher.
This structure of the facility creates a perverse incentive. For any bank which has
solvency doubts, buying sovereign bonds becomes an attract way to gamble for reclamation.
This temptation arises because if the spreads on sovereign yields widen substantially then thebank will suffer large losses. But in that scenario of this sort, a weak bank is unlikely to survive
anyway. Conversely, if there is no sovereign crisis, so that sovereign spreads narrow the bankmakes a capital gain.
Drechsler et al document that exactly the sort of gambling took place with the ECB
borrowing between August 2007 through December 2011 (when their data ends). Specifically,
the most thinly capitalized banks in Europe loaded up Greek, Irish, Italian, Portuguese andSpanish bonds and then posted them as collateral with the ECB. This can explain the pattern inTable 3 whereby the banks’ interest earning assets grew, but their risk-weighted assets shrunk.
Hence these banks were able to shift downside risk from a sovereign crisis to the ECB. While
this mechanism is very different than the zombie lending problems that plagued Japan, it issimilar in that the banks are gambling for reclamation and this behavior is facilitated by theofficial sector.
It is not obvious that undercapitalization of the European banks is an important factor in
the poor growth that was documented in Figure 2. But there are several indicators that support
this interpretation. First, there has been pervasive private sector commentary about deleveraging
and the risks that creates for the economy. A good example of this kind of analysis is Barclays
Capital Research (2011). They write “The EU Summit endorsed work done by the EBA setting
a 30 June 2012 deadline for banks to reach a 9% Core Tier 1 ratio, after incorporating a mark-tomarket exercise on their holdings of sovereign debt, resulting in a €106bn capital deficit. This23

significantly increases the risk of the bank sector deleveraging.”
The Barclays report then undertakes a provocative exercise to show how powerful thiseffect could be. Specifically, they assess how much banks in each country would have to shrink
to eliminate the capital deficit. This calculation requires only two steps. First, the capital
shortfall is translated into a required change in risk-weighted assets. They assume that the 9%
capital ratio will be a binding constraint. Hence each euro of capital supports 11.111 euros ofrisk weighted assets. Then they suppose that risked weighted assets are 40% of total assets. So
that when risk-weighted assets shrink by one euro, total assets shrink by 2.5 euros. The resulting
calculations are shown in Table 4.
While these are obviously upper-bounds on the importance of this channel and the loan
demand by households and businesses probably also shrunk, the Table 4 numbers are still
shockingly large. For Cyprus, Greece and Portugal the implied adjustments are huge. But the
Spanish and Italian ones are also large, so that even if only some of the actual adjustment was tocome from shrinking assets the implied credit contraction would be important.
A more direct indicator of the consequences for the real economy is available from theEuropean Central Bank’s “The Euro Area Bank Lending Survey.” This quarterly questionnaireasks major banks to comment on various aspects of lending conditions. There are two questions
that seem especially helpful for our purposes. One simply asks the banks whether “Over the past
three months, how have your bank’s credit standards as applied to the approval of loans or credit
lines to enterprises changed?” The banks then are allowed five potential answers: tightened
considerably, tightened somewhat, remained basically unchanged, eased somewhat, eased
considerably.” A second question asks about the role of “your bank’s ability to access market
financing (e.g. money or bond market financing, incl. true-sale securitization)” in contributing to
the change in lending conditions. Again the banks have a five point scale to respond on ranging
from “contributed significantly to tightening” to “contributed significantly to easing”.
The responses by the Spanish and Italian banks to these two questions are graphed in two
panels of figure 10. The individual responses are coded with values of 1.0, 0.5, 0. -0.5 and -1.0
and the graphs here show the sum of the scores across all banks for each quarter. We draw threemain conclusions from the figure. First, for Spain lending standards were consistently tightening
between mid- 2007 and mid-2010. Second, lending standards also became tighter in Italy
beginning in 2008 and still continuing, albeit with a bit of a pause in 2009, into 2013. Third, inboth countries access to market funding was at times a critical contributor to the tightening. In
Italy, this factor was very important in late 2011 and early 2012, while in Spain thisconsideration was most relevant in 2007.
Overall we conclude that there are many similarities between the post-crisis banking
situations in Europe and Japan. In both cases the banks remained undercapitalized well after theacute phase of their crises. This occurred in part because of the authorities’ reluctance to admit
24the size of the problem and because of policies that allowed the banks to avoid sanctions and togamble for reclamation. While this was happening, the banks were not lending in ways thatwould support a recovery.
The one caveat to this conclusion is that the conditions in Germany have been somewhat
different. It is true that the German banks have chosen to reduce their assets rather thanaggressively recapitalize. Also lending conditions were tightened in 2008 and 2009. But lending
standards have eased since then and broader credit conditions in Germany also have improved.
CDS prices also have fallen for Deutsche Bank so that it is now viewed as the least risky bank in
the Table 3 sample (though its price to book ratio was still well below 1).
4.2 Banking Issues in the U.S.
The banking problems that emerged in the U.S. were handled differently than in Japanand Europe and hence appear to have been less relevant for understanding tepid economic
recovery in the U.S. Table 3 shows four important differences between the European and U.S.
conditions.
First, the U.S. banks were much more aggressively recapitalized. In total the U.S. banks
listed in Table 3 raised about twice as much equity (taking account of the exchange rate
differences) as the European ones prior to 2010. About half of what U.S. banks raised came in
the wake of 2009 Supervisory Capital Assessment Program (SCAP).
While the SCAP was also an accounting exercise rather than a solvency assessment, it
differed in two important ways compared to subsequent European tests. First, the SCAP statedthe capital shortages in billions of dollars, rather than as a percentage of bank assets (or risk
weighted assets). This meant that the banks could not shed assets or rearrange the compositionof assets to comply with the mandate.
Second, the U.S. also set up contingency plan for public capital injection in the form ofpreferred shares if a bank could not obtain private funding. The terms of the government
backstop called for a 9% dividend, effectively extracting a penalty rate for any banks that reliedon this method of funding.
Once the results were announced in May 2009 the banks aggressively issued equity andultimately no banks accessed the government backstop. Prices of credit default swaps for thebanks in the U.S. declined in the 90 days after the announcement date compared to before(Greenlaw et al., 2011). The trough of the U.S. stock market also was around the time of theannouncement of the stress tests. Interestingly, the trough in Japanese share prices came in May
2003 when it became clear that Minister Takenaka made it clear that he was determined toconfront the banking problems (Hoshi and Kashyap, 2010). As the data in Table 1 indicates,
one could still argue that the U.S. banks needed more capital, but the initial recapitalization is
likely to have marked a turning point in the U.S. crisis.
25

A second big difference between banking conditions in the U.S. and Europe is the scopeof non-performing loan problems. The U.S. data on impaired loans in Table 3 pertain to only
reported non-performing loans (because they come from a different source than the Europeanones). But definitional difference hardly accounts for big gap between U.S. and European
estimates. The U.S. banks have already reduced the non-performing loans to low levels.
The relative health is also evident in the low levels of the CDS prices of the U.S. banks
relative to the European ones. Ratios of the market price of equity relative to book prices tell asimilar story. The U.S. banks look much stronger than their European counterparts. If the stock
prices were extended to through September 2013, the gap would be even larger with more U.S.
banks having price to book ratios that are close to or above 1.
A fourth difference is that U.S. banks have been growing their loans to the private sector.
Most of the individual banks had higher interest earning assets at the end of 2012 than in 2010.
Figure 11 shows data on the answers to three survey questions asked by Federal Reserve as partof its Senior Loan Officer Opinion Survey. The first panel of the figure shows that since 2009
lending conditions have been eased steadily. The second panel shows that since 2010
somewhere between 40 and 60 percent of the banks each quarter had indicated that lending
spreads have shrunk relative to the banks’ cost of funds. The last panel shows the banks havejudged loan demand to be improving since about mid-2010.
One difficulty with both the Fed and ECB surveys is that for most purposes, the absolutelevel of the willingness to extend credit matters much more than how that willingness haschanged. In July 2012 the Fed also asked the banks about the level of lending standards.
Specifically, for seven different types of loans, the bankers were asked how the current lending
standards compare to conditions since 2005. For non-syndicated commercial industrial loans
by domestic banks, about half of the respondents gauged lending conditions to be at about thehistorical norm. The remaining banks were about equally split between saying conditions weretighter or looser than usual. Interestingly, when the Fed first asked these questions in July 2011,
conditions judged to be somewhat tighter, especially by smaller banks and for loans to smaller
borrowers. For instance, more than half of the smaller banks in 2011 reported lending standards
were tighter than the post-2005 average. These answers accord the frequent anecdotal reports
and other indicators that large U.S. firms have not much trouble obtaining credit.
Finally, it is important to recognize that capital market financing in the U.S. is much
more important for businesses than in Europe. According to data from the Securities Industry
and Financial Markets Association (SIFMA), corporate bond issuance for both investment gradebonds and high yield bonds in 2012 broke all-time records, with investment grade issuancetopping $1 trillion for the first time and junk bond issuance topping $300 billion. 16 The SIFMA
data indicate that through August 2013, junk bond issuance is again on a record setting pace and
16

These data are available at http://www.sifma.org/research/statistics.aspx and the figures referenced above wereaccessed on October 7, 2013.

26

investment grade issuance is on track to again exceed $1 trillion. So for all these reasons, U.S.
banks do not seem to be importantly holding back an economic recovery.
4.3

Structural Problems in Europe

Many of the euro area countries also face some of the same structural impediments togrowth as we saw in Japan. Notorious labor market protections that make it hard to fire workers
are common. There are also important regulatory biases that favor incumbent firms and make it
hard to start new businesses. In some of the countries the underground economy saps tax
revenue and has led to highly inefficient tax systems.
Despite these problems being long recognized, with the exception of Germany as
described below, limited progress was made towards addressing these issues in Spain, Italy andFrance before the financial crisis. These three countries, therefore, now face the difficult task ofpushing structural reforms in a recessionary economy.
This is exactly the problem Japan faced. The crisis and economic downturn in Japan
made structural reforms even more difficult than usual because some politically influential
groups that already benefitted from the existing system requested additional protection. Insteadof tackling the structural impediments to growth, the Japanese government often concentrated on
fiscal stimulus to prop up the economy in the short-run, hoping that growth would return andproblems could be handled then.
The structural problems in Europe were widely recognized before the global financial
crisis. For example, the IMF’s staff reports for the annual Article IV consultations that wereconducted in 2003 identified a number of major structural programs and called on the countries
to remedy them.
The report for Italy (International Monetary Fund, 2003d) points out “(w)hile low growthin 2002-03 clearly reflected also cyclical factors, there was broad consensus that structural
weaknesses had played a key role in Italy’s growth malaise over the past decade” (p.7), and goeson to argue:
A high tax burden …, and particularly a high tax wedge on labor, stifled incentives towork and invest, while the incomplete fiscal consolidation process raised concerns about
the future tax burden. …… Labor market distortions remained important, especially in
the South, partly reflecting insufficient regional wage differentiation. …… Insufficientcompetition in product markets remained significant, raising costs for firms that use
inputs from these sectors ……. (International Monetary Fund, 2003d, pp.8-9)
The report for France (International Monetary Fund, 2003b) sounds more positive,
pointing out “the shift in policies toward tempering the rise in labor costs and promoting private
sector employment” (p.3) and “(p)roduct market functioning was being improved gradually
through a variety of initiatives” (p.20), but argues more reforms are necessary.
27

In the labor market, attention should be paid to the cost effectiveness of policies……. Consideration should be given to restoring the phasing-out of
unemployment benefits and introducing experience-rating for employers’
unemployment contributions. Product market functioning stands to be improvedby the initiatives to reduce the administrative and regulatory burden and thestrengthening of governance of state participations.” (International Monetary
Fund, 2003b, p.25)
The report also suggests the “functioning of credit markets should be improved” (p.25).
The report for Spain (International Monetary Fund, 2004) echoes the same themes:
existence of structural problems, some progress in structural reform, and the necessity to do
more.
A series of structural reforms have appreciably improved the workings of labor andproduct markets. Political and institutional constraints have however stood in the way of
two long-advocated measures: reform of the wage-setting system to secure greater wage
differentiation, and of the land supply and zoning process to improve its responsivenessand transparency. In addition, growing regional responsibilities in several areas have
limited the central government’s reach, inter alia complicating the implementation ofcompetition policy ……. (International Monetary Fund, 2004, p.6)
Interestingly, the report for Germany (International Monetary Fund, 2003c) differs fromthose for France, Italy, and Spain because the Schröder government on March 14, 2003 hadannounced its “Agenda 2010” reform package. The first sentence of the concluding statement of
IMF mission to Germany that year was “the added emphasis on structural reforms in thegovernment's policy strategy is entirely right.” In the eventual article IV report, the Fund staff
wrote:
Failure to address structural rigidities has contributed to more than a decade ofunderperformance of Germany’s economy. …… the proposed measures underlying the
new strategy – notably cutbacks in benefits for the jobless, reductions in tax expendituresand subsidies, reforms to health care and pensions, and advancing tax relief – provide theright ingredients to revive growth, strengthen longer-term economic performance and put
public finances on a more sustainable footing. (International Monetary Fund, 2003c,
p.35)
The Agenda 2010 included (i) labor market reform to make it more flexible, (ii) Labor
Office reorganization to make it more efficient, (iii) health care reform to reduce non-wage laborcosts, (iv) reduction of support for the long-term unemployed by merging their unemployment
benefits with welfare benefits, (v) tax cut financed by slashing government subsidies andprivatizing government assets, (vi) local business tax reform to improve local public finance,(vii) elimination of entry barriers in the form of master craftsmen law for many jobs, and (viii)

28

pension reform. 17 According to Freier (2008, p. 29):
The chancellor justified his radical reform policy with the need to make Germany’s social
market economy sustainable: “The alternative is obvious: Either we modernize our social
market economy or we will be modernized by the untamed powers of the markets, whichdisplace the social [dimension]” (Schröder 2003, also SPD 2003, p.6)
Although the reform faced enormous political resistance as expected, the government pushed
through the reform.
The conditions as of 2003 were important because a number of euro area countries wererunning deficits that were larger than the levels permitted under the Stability and Growth Pact
(SGP) that the euro area member states had agreed upon. The SGP mandated that euro area
member countries pledge to maintain deficits below 3 percent of GDP and to manage publicfinances to keep debt below 60% of GDP. Upon identification of an excessive deficit a country
would be given a year to come back in line unless a sharp recession (with growth of less than -2
percent) was underway. The excessive deficit provisions that were a supplement to the SGP heldthat countries in violations of these targets which did not take corrective action would be subject
to fines levied by the European Commission.
In 2002, both Portugal and Germany had broached the 3% deficit limit. Portugal soon
took strong corrective measures, but Germany did not. And in early 2003, France received anearly warning that it was also on path to exceed the limit. This led the European Commission to
begin the process of assessing penalties for the excessive deficits for Germany and France. Bothcountries pledged to reorient budget policies to reduce their deficits in 2003. By November
2003 it was clear that deficits would again exceed 3% in both countries and hence theCommission moved again. The Commission deviated from the precise process mandated
through SGP, and offered both countries an extra year to come into compliance but maderecommendations to the Economic and Financial Affairs Council of the European Union(ECOFIN, the finance ministers of the European Union countries) to require improvements orface sanctions.
In order to levy the penalties, a super majority of the ECOFIN was needed to adopt therecommendation of the Commission. France, Germany, Italy and UK formed a blocking
minority against the recommendation, voting instead to “hold in abeyance the penalties.” So
although a majority of the countries favored the Commission’s position, it failed to pass.
Part of the motivation for Germany’s reluctance to accept the fines was a desire toundertake fiscal stimulus to soften the blow of the Agenda 2010 reforms. The IMF evenrecognized that there was a case for doing so. But the combination of Germany and France
flaunting the budget limits set a horrible precedent for fiscal discipline. Hence when Greece
was discovered in 2004 to have been submitting unreliable fiscal accounts, the scope for
17“A Quick Guide To ‘Agenda 2010’,” Deutsche Welle, October 17, 2003.

29

punishing them was much more limited than would have otherwise been the case. In hindsight,
with the benefit of multiple audits, Greece is now recognized to have exceeded the 3% deficit
threshold in every year since 1998.
Ultimately, Germany did follow through on its Agenda 2010 reforms, but the efforts in
Spain, Italy, and especially France were much less successful. This is confirmed by looking at
measures of labor market protection published by OECD. Figure 12 shows the value of OECD
employment protection index for France, Germany, Italy, and Spain for 1998, 2003, 2008, and2013. Panel A shows the index based on the procedure and cost for dismissing individual or agroup of regular workers. According to this measure, the degree of employment protection ofregular workers hardly changed in the last fifteen years, with a possible exception of Spain,
where we notice a recent decline. For Germany, the protection of regular workers against
dismissals actually increased over time even after the implementation of the Agenda 2010reform.
The effect of the German reform is observed in Panel B of the figure, which shows theOECD employment protection index for temporary workers. Here the cost of dismissing
temporary workers for Germany started at a lower level than the other countries and declined
further. In Italy and France, the value of the index did not changed from 2003 to 2013.
The contrast between Germany and the other three European countries shows up mostclearly in the evolution of unit labor costs after 2003. Figure 13 shows the unit labor costs
calculated by OECD for France, Germany, Italy, and Spain from 2003 to 2012. The 2003 levelis normalized to be 100 in this figure. Importantly, between 2003 and 2007 unit labor costs forGermany declined, while they were increasing in the other three core countries. The gap thatemerged during this time has not closed after the crisis and given the differences in borrowing
costs discussed above, this has created important competitiveness problems for the othercountries.
The latest IMF article IV consultations also support our assessment of the importance ofincomplete reforms in France, Italy and Spain. For instance, the 2013 French report(International Monetary Fund, 2013a) argues that:
The overarching objective of structural policies should be to close the gap
between the cost of labor and productivity and to increase activation of underusedlabor resources. The preferred outcome would be to raise productivity and reduce
the non-wage cost of hiring and doing business by removing rigidities in the labormarket and obstacles to competition in product markets. To the extent that the
wage-productivity gap is too large to be closed by acting on these levers,
however, an adjustment in wages may be necessary. There is also scope togenerate growth by increasing incentives to seek employment and remain in thelabor force. (International Monetary Fund 2013a, page 27).

30

In January 2103 France announced some first steps to try to address these issues. The main
tangible sign so far is an agreement by many unions to move towards a system that the IMF
summarizes as trading off “more flexibility in adjusting working conditions at the enterpriselevel for enhanced security and training opportunities for employees.” But the government has
not settled on a strategy for product market reform.
The Spanish article IV 2013 report contains very similar suggestions. Specifically:
Despite reforms, labor market rigidities continue to force the adjustment onto
employment. The reform needs to go further: increasing firms’ internal flexibility,
reducing duality, and enhancing employment opportunities for the unemployed. A
social agreement could bring forward the employment gains from structuralreforms. (International Monetary Fund, 2013a, page 1).
Finally, the Italian article IV 2013 report also harps on these same themes. In
particular, the Fund’s opening assessment of the situation in Italy is:
The euro area crisis hit Italy hard, but the origins of Italy’s low growth pre-datethe crisis and stem from its stagnant productivity, difficult business environment,
and an over-leveraged public sector. In the absence of deeper structural reforms,
medium-term growth is projected to remain low. (International Monetary Fund2013c, page 1).
The IMF staff note that Italy ranks 30th out of the 31 OECD countries in the WorldBank’s Ease of Doing Business survey and suggest numerous reforms. Among the many
recommendations are calls to simplify standard wage contracts, decentralize wage setting
to tie wages more to firm-level conditions than to national conditions, and to reduce thelabor tax wedge.
To summarize, France, Italy and Spain face a very difficult set of challenges. They
continue to need major structural reforms, most of which had been identified well before thecrisis, to improve their medium term growth prospects. But, their debt levels have risen
substantially since 2003 and in the wake of the financial crisis growth has been low and deficits
have been large. So implementing these reforms now is more difficult than when Germany did it
and the room to use fiscal stimulus to soften the blow of any displacements is limited, too.
As if this was not bad enough, the public frustration with the crisis and recession has
weakened the political leaders in most European countries. So the ability of governments,
especially in Italy and Spain, to commit and follow through with multi-year promises isquestionable. In Japan, we noted that the political stability that came with Mr. Koizumi was animportant turning point. Unfortunately as of this writing it looks like only Germany has a leader
that has a sufficient mandate to implement difficult programs.
4.4 Structural Problems in the U.S.
31

Unlike Japan and many European countries, structural problems of the U.S. economy
seem to have been less serious. Employment protection is low in the U.S. and the labor market
shows high mobility. The regulatory advantage for incumbent firms is smaller than in Europe orJapan and starting new business is relatively easy.
Unlike the reports for Article IV consultation for European Countries in 2003, the one for
the U.S. did not point out any structural impediments to economic growth. Although the U.S.
economy had not fully recovered from the recession that had started in 2001, International
Monetary Fund (2003a) declared “the longer-term growth potential of the U.S. economy
remained strong.” (p.9) The only type of structural problems identified related to public finance.
The report raises concerns on sustainability of fiscal condition at both Federal and State levels
and calls for structural reforms of Social Security System, Medicare and Medicaid. It also points
out that rise in pension and health care costs depress profits for corporations. But, there is no
mention of structural problems in labor and product markets that are found in the reports for
European countries.
Another way to see that the growth challenge was less serious for the U.S. is to look at
the changes in the trend growth rates. Figure 14 shows how the trend growth rate changed as thetrend level of GDP per capita grew over time for the U.S., Japan, France, Germany, Italy, Spain,
and the UK. We estimate the trend real GDP per capita by applying a Hodrick-Prescott filter
with very large smoothing parameter (400). Then, we plot the rate of change of the trend at eachyear against the level of the trend for the year. The figure covers 40 years from 1971 to 2011.
The figure shows that the growth rate of an economy falls as it becomes larger. At thesame time, the paths for the U.S. and the U.K. are very different from the paths taken by theother economies. Even when GDP per capita reached $30,000 and eventually $40,000, the U.S.
and the U.K. seem to grow at rates higher than the other countries. Other economies, such as
Italy and Japan, showed extremely high growth rate when their GDP per capita was low but
drastically slowed down as they grew. Similar tendencies are observed for France and Spain.
Germany is an interesting case. Until recently, Germany’s path looked very similar to the other
European countries and Japan, but Germany seems to have broken away and has been growing at
a higher rate.
In the years leading up to the financial crisis, U.S. growth was fueled by a consumption
boom that was coincident with rapid house price increases and rising debt levels. In a broad
sense, the U.S. economy before the crisis was similar to the Japanese or Spanish economies. In
Japan, the speculative investment boom in the late 1980s masked the structural problems that had
already lowered the potential growth rate. Similarly, the housing boom allowed the Spanish
economy to continue growing in the 2000s without drastic structural reforms. In both cases, thecrisis revealed the importance of structural problems. The recovery from the crisis has been slow
in the U.S. as well. But, if our contention that unmet structural reforms and banking problems
are not responsible for sluggish U.S. growth, what is?
32

Bailey and Bosworth (2013) offer a clear and concise summary of the facts concerning
the slow recovery of the U.S. economy. They point out that there are three noteworthy
differences between this recovery and previous U.S. post-war recoveries. First, residential andnonresidential construction has been unusually weak. Second, state and local expenditure isdepressed, whereas this has not been the case in past recessions. Third, businesses have not usedretained earnings to finance as much business investment as usual. They also take issue with anearlier analysis by Stock and Watson (2012) that points to the slow growth of the labor force as adriving factor in the slow recovery.
We do not have a satisfactory account for all of these observations, but we find thefollowing account promising. First, the U.S. was in fact growing above trend prior to the crisis.
Figure 15 shows OECD estimates of the U.S. output gap as was estimated in 2008 and as of2013. The OECD data suggest that the boom years in the middle of the decade were in fact
unsustainable. Hence part of the reason why the recovery is underwhelming is because it isunrealistic to expect to return to the trend that appeared to be in place prior to the crisis. At thislevel, our story for the U.S. is similar to those for Japan and Spain: high growth leading up to thecrisis was not sustainable.
However, the mechanism that made the pre-crisis growth fueled by the housing boom
unsustainable in the U.S. was different. As Charles, Hurst and Notowidigdo (2013) point out,
one consequence of the protracted construction boom in the first half of the last decade is that it(temporarily) created jobs for low-skilled workers. As Charles et al. note, these kinds of workers
had found employment in manufacturing a long time ago, but manufacturing opportunities forlow-skilled workers had been declining for many years: 1.8 million manufacturing jobs
disappeared between 1980 and the late 1990s. Between 2000 and 2007, manufacturing jobs
contracted by 3.5 million.
Charles et al. hypothesize that the housing boom masked the importance of the decline in
manufacturing employment. They find evidence in favor of this hypothesis by looking acrosscities and comparing local manufacturing employment, construction employment and house
price movements. They estimate that about one third of the increase in non-employment after
the crisis, i.e. the drop in participation, reflects the unmasking of the secular decline in
manufacturing.
Hence, we see that some of the labor force collapse that Stock and Watson (2012) focus
upon is connected to the housing market boom and its crash. This observation also suggests thatthe sluggish post-crisis construction activity may have been inevitable. The above trend growth
fueled by housing boom that increased the revenues for state and local governments may have
led them to over-estimate the soundness of their financial positions, although it is hard toquantify.

33

The other factor that seems to have played a role in depressing activity in the U.S. isheightened uncertainty about economic policy. Baker, Bloom and Davis (2013) construct
several indices of economic policy uncertainty. They report various pieces of evidence that“policy uncertainty rose to unusually high levels from the 2007-2009 recession onwards and they[the pieces of evidence] point to tax, spending, and regulatory policy as the main contributors.”
Baker et al find a strong statistical association between economic policy uncertainty andemployment and investment outcomes. Their estimates on the magnitudes of these effects showthat policy uncertainty is quantitatively important, though they note that establishing that this is acausal effect is very challenging. Thus, their research provides one potential explanation of why
businesses might be holding on to cash and not investing.
We recognize that our story is incomplete and that the magnitudes associated with thevarious parts of it are uncertain. We do not deny that some of the weakness in consumption in
the U.S. is related to the real estate market collapse and the desire for households to reduce theirdebts, either. This mechanism has probably been operative in Japan and some parts of Europe.
But we introduce our account to suggest that there is a plausible description of the slow recovery
in the U.S. that was not driven by the factors that were central to the narrative for Japan andEurope.

5. Conclusions
Fischer’s (1987) case study of monetary policy experiences in the 1970s paints a picture of Japanas a success story. The Bank of Japan was more successful than other central banks inestablishing its inflation fighting credibility:
After a sharp change in money growth and a deep recession in 1974, the Bank of Japan
succeeded in gradually reducing both money growth and inflation over the succeeding
decade, with an interruption from the second oil shock. The short sharp shock worked
for the Bank of Japan. But it did not work for the Bundesbank. After bringing down
inflation in 1973-74, the Bundesbank faced generally rising inflation until the second oilshock and then was only able to reduce inflation by creating and maintaining highunemployment. Similarly, both the Fed and the Bank of England had to create massive
recessions in the early eighties to get the inflation rate down, despite their successes at
reducing inflation in the first oil shock. (Fischer 1987, p.38)
Two decades later we argue that Japan was again a trail blazer, but unfortunately in the opposite
way. Faced with a huge financial crisis Japan had to navigate many challenges that otheradvanced economies had not confronted since the Great Depression. This time even though the
Bank of Japan cut the policy interest rate all the way down to zero, it could not stop the deflation.
Partially learning from Japan’s episode, the Fed, the Bank of England, and later the ECB not
only cut the interest rate more aggressively than the BOJ did initially but also expanded theirbalance sheets very quickly, and avoided deflation.
34

The focus of our case study is two policies that could have allowed Japan to recoverfaster from its banking crisis and restore growth: bank recapitalization and structural reforms.
Unfortunately, France, Italy, and Spain seem to be following Japan’s lead. They are in denial
about the magnitude of the banking problem and the need to recapitalize their banks. Like Japan
necessary structural reforms prior to the crisis were delayed and now these will have to be
implemented in an environment that is both economically and politically more fragile. Germany
looks somewhat better because some serious structural reforms started before the crisis. The
U.S. looks better because the banks were forced to recapitalize relatively more quickly and theeconomy did not face the type of structural problems that Japan and Europe exhibited. But thishardly means that the U.S. economy is free from problems. Indeed, on an absolute scale the U.S.
recovery has been tepid despite expansionary macroeconomic policies (at least in the traditional
sense). This suggests that the U.S. economy also has problems, but they are just different fromthose in Japan and in Europe.

35References
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37

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39

Table 1. Capital Shortage of Banks after the Crisis
Unit: billions of dollars
UnitedStates (exGSEs)

Euro
Area

UnitedKingdom

Other
Japan
Mature (March,
Europe1 2001)

1,030

820

400

200

962

500

220

160

50

753

130

310

120

110

754

Total writedown (actual from end2008: Q4 to end-2009:Q2, and forecasted
from end-2009:Q2 to end-2010:Q4)(except for Japan)
Total capital raised to end-2009:Q2(except for Japan)

Capital Needs to reach 4 percent
Tangible Common Equity / Total
Assets at end-2010:Q4(except for Japan)

Sources: International Monetary Fund (2009). Global Financial Stability Report. October 2009, Table 1.3
except for Japanese estimates which are described in the notes.

Notes:
1) Other Mature Europe includes Denmark, Iceland, Norway, Sweden, and Switzerland.
For Japan, the average exchange rate of March 2001 (121.5 yen per dollar) is used to convert the yen figures into
dollars.
2) The total writedown for the Japanese banks is from April 1997 to March 2001, and the number was calculated
from the table “Loss of Bad Loans Disposal of All Banks” in “The Status of Risk Management Loans held by All
Banks in Japan (as of the end of March 2001)” (http://www.fsa.go.jp/news/newse/e20010802-1a.html) on the
Financial Services Agency web site.
3) The change in the official core capital from March 1997 to March 2001 for Japanese banks.
4) Taken from Hoshi and Kashyap (2010), Table 1.

40

Table 2. Directly Growth Enhancing Reforms Suggested by the Koizumi Administration in
2001
PolicyExtend the maximum period for middle-aged and senior
workers under the temporary employment system from 1
to 3 years; Deregulate employment agency system
Study use of optical fiber by the private sector for
highway and river management; Facilitate laying of
optical fibers for apartments
Enhance financial support for entrepreneurs: Create
1,000 ventures from universities in 3 years; Stock option
reform to improve access to finance by businessventures; Enhance Fair Trade Commission andstrengthen Securities Exchange SurveillanceCommission.

Progress
Done, butwith some
exceptions
Done

Allow the private sector to establish care houses, andmake use of PFI to enable facilities to be built by the
public sector and operated by the private sector; Develop
a variety of business models for private-sector-operated“Secure Homes” giving the elderly access to high-quality
care services
Put 50,000 adults with occupational experience into theclassroom in three years to boost education in subjects
such as IT and English; Promote adult vocational
education at technical colleges and universities; Study
measures to boost scholarship schemes and assist selfhelp efforts by undergraduates and adult members ofsociety; Introduce an IT literacy program to improve thegeneral public’s information literacy and raise the IT
teaching skills of teachers
Provide vocational training for middle-aged and senior
white collar workers who left their previous jobs, andunemployed people; Create employment according tolocal needs
Improve online job search service (“Job-net”) and career
counseling service; Create employment in service
industries

Done

Makes more efficient use ofcapital and labor. But the Abeadministration has continued toseek further reforms in thisarea.

Partially
achieved

Would boost human capital.
Abe administration also seeks
to boost IT skills.

Done

Improves human capital. But
Abe administration has
essentially the same proposal.

Tried

Flesh out structural reform of rice cultivation based on acomplete overhaul of the production and distribution
system; Rationalize the production and distribution ofvegetables and to respond to the revolution in
consumption patterns; Study measures for stabilizing
business incomes in the agriculture, forestry and fisherysectors; Work out details of structural reform inagriculture

Done

Improves allocation of labor.
The Abe administration istrying to expand the use ofprivate agencies
Improves TFP. The Abeadministration has a number of
proposals to increase andimprove rice production.

Partially done

Comments
Boosts labor supply

Could improve capital
accumulation and TFP. Fiber
optic usage was increased.
Could have helped capitalformation. Abe administration
has similar plans.

41

Table 3: Selected Banking Indicators for Major French, German, Italian, Spanish and U.S. BanksCountry(banks)France (€)
BNP Paribas
Credit Agricole
Societe Generale
Germany (€)
Commerzbank
Deutsche Bank
Italy (€)
Banca Monte
Banco Popolare
Intesa Sanpaolo
UniCredit
Unione di Banche Italiane
Spain (€)
Banco de Sabadell
Banco Popular Espanol
Banco Santander
Bankinter
BBVA
BFA Bankia
La Caixa
Europe Total (€)
U.S. ($)
Bank of America
BB&T
Capital One
Citigroup
Fifth Third Bank
JPMorgan Chase
KeyCorpPNC Financial Services
Regions Financial Corporation
State Street Corporation
SunTrust Banks
Bank of New York Mellon
US Bancorp
Wells Fargo(A)
CapitalRaised7/2007 to
12/2010
20.6
4.3
5.9
10.4
13.5
1.1
12.4
15.5
6.1
1.0
0.3
7.0
1.1
24.4
0.7
1.2
14.2
0.5
7.0
0.0
0.8
74.0
171.9
51.2
2.7
2.5
39.7
2.1
18.2
2.7
4.4
2.1
5.1
1.9
2.1
2.8
34.4

(B)
CapitalRaised1/2011 to
9/2013
1.3
0.8
0.0
0.5
16.5
13.5
3.0
18.0
2.5
2.0
5.0
7.5
1.0
9.0
2.0
2.8
0.0
0.6
0.0
3.1
0.6
44.7
11.1
0.0
0.0
6.3
0.3
1.9
0.0
0.6
0.0
0.9
0.0
1.1
0.0
0.0
0.0

(C)
Interest
Earning
Assets
12/20102,294.7
781.0
1,028.3
485.4
1,711.5
717.7
993.8
1,672.1
184.2
112.6
535.2
724.5
115.6
2,373.7
88.5
123.3
1,120.1
51.4
504.7
249.6
236.1
8,052.0
7,921.8
1,897.6
135.3
175.7
1,753.6
98.9
1,677.5
78.4
224.7
117.5
126.3
147.2
172.8
252.0
1,064.2(D)Interest
Earning
Assets
12/20122,344.5
774.1
1,046.6
523.8
1,838.7596.9
1,241.8
1,684.7
172.1
115.6
548.1
734.0
114.9
2,637.4
153.3
151.2
1,168.1
56.1
582.4
220.5
306.0
8,505.3
8,274.3
1,770.0
153.4
255.1
1,676.3
101.6
1,842.4
71.8
248.6
107.8
167.6
153.5
250.5
306.3
1,169.5(E)
Risk
Weighted
Assets
12/20101,307.8
601.3
371.7
334.8
613.7
267.5
346.2
1,085.5
109.2
94.9
332.2
454.9
94.3
1,441.1
60.5
93.9
604.9
31.0
313.3
174.1
163.3
4,448.0
5,873.5
1,455.9
126.2
127.1
977.6
100.6
1,175.0
77.9
216.3
95.0
60.2
132.8
101.3
247.6
980.0

(F)
Risk
Weighted
Assets
12/20121,169.2
552.0
293.1
324.1
541.7
208.1
333.6
950.3
92.8
55.1
298.6
427.1
76.6
1,351.5
75.3
88.8
557.0
25.4
329.0
104.3
171.6
4,012.7
6,032.9
1,206.0
136.4
223.5
971.3
109.7
1,270.4
79.7
260.8
92.8
71.9
134.5
111.2
287.6
1,077.1(G)
Impaired
Loans

86.6
43.2
18.7
24.7
28.8
19.2
9.6
189.9
40.2
20.4
28.4
88.3
12.6
165.5
10.3
14.0
41.0
2.0
58.3
19.8
20.2
470.8
165.5
37.5
2.7
2.5
38.3
3.0
24.6
0.8
4.6
4.6
0.2
4.0
0.3
5.1
37.3

(H)
CDS Price
5/1/2010(I)
CDS Price
9/30/2013(J)
Price/BookR
atio 12/2012

97.18
135.00120.83126.10157.50151.22

0.70
0.40
0.50

103.66127.50160.84109.510.30
0.63

118.52151.51102.98118.02119.75605.00517.76284.69308.98260.00

0.40
0.30
0.40
0.30
0.30

290.00311.10145.30263.77160.00n.a.
190.00315.00380.00224.56270.00236.55395.00185.00

0.66
0.50
0.80
0.55
0.90
-0.13*
0.51

140.5032.92
111.40170.62280.0883.16
426.37
63.01
n.a.
n.a.
211.15
n.a.
56.65
81.83

107.86n.a.
88.04
101.75
n.a.
93.38
n.a.
68.00
n.a.
n.a.
n.a.
n.a.
50.00
63.43

0.57
1.07
0.83
0.64
1.01
0.86
0.78
0.87
0.67
1.06
0.75
0.85
1.74
1.24

42

Sources: Data in columns A and B were supplied by Nomura Securities Equity Research. Data for Columns C, D, E and F of French, German, Italian and Spanish banks are basedon Running the Numbers: The Question Bank published by Deutsche Bank on Sept 19, 2013; that report does not contain information for Deutsche Bank, Banco de Sabadell,Banco Popular Espanol, Bankinter, BFA Bankia and La Caixa, so those numbers are excerpted from or calculated based on their annual reports. The data in column G for the
French, German, Italian and Spanish banks are based on European Banks Strategy published by Deutsche Bank on Sept 3, 2013; this report also does not cover Deustche Bank,
Banco Santander, Banco de Sabadell, Banco Popular Espanol, Bankinter, BFA Bankia and La Caixa, so those data pertain to the non-performing loans numbers that are shown intheir respective annual reports. Data for the U.S. institutions in columns C, D, E, F and G are all from SNL Financial database. Data in columns H and I for the French, German,
Italian, Spanish and major U.S. banks (Bank of America, Capital One, Citigroup and JPMorgan Chase) are the mid quotes of 5-year CDS from Bloomberg; the remaining CDS
quotes are from Markit.com. Column J data are from Bloomberg and Running the Numbers: The Question Bank.
Note: * BFA Bankia received a government bailout and hence reported negative book equity.

43

Table 4. Barclay’s 2011 Deleveraging Calculation

44

Figure 1. Real Estate Prices around the Crisis

Figure 2. Real GDP around the Crisis

45

Figure 3. Unemployment Rate around the Crisis

Figure 4. Gross Government Debt to GDP Ratio around the Crisis

46

Figure 5. Aging Trend around the Crisis

Figure 6. Government Growth Forecasts
600,000
580,000

540,000
520,000
500,000
480,000
460,000

Actual Rea lGDP
Obuchi1999

Miyazawa1992
Koizumi2001

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

440,000
1991

Billion Yen

560,000

Murayama1995
Abe200747

Figure 7. OECD Estimates of Japan’s Output Gap as of Different Dates
4
2
0
-2
-4
-6
2004Q4

2003Q4

2002Q4

2001Q4

2000Q4

1999Q4

1998Q4

1997Q4

1996Q4

Initial output gap estimate
Output gap 1 year after initial estimate
Output gap as estimated in 2008

Figure 8. Public Investment Share and Marginal Productivity
1.2

Marginal Productivity in 1991
(estimates in Doi and Ihori 2009)

Postal service, telephone and telegraph
1.0

Railways
0.8

0.6

Agriculture-related public capitals and fishing ports
0.4

Erosions of flood control and conservation of forests

0.2

Roads, harbors and airports
0.0
0%

10%

20%

30%

40%

50%

60%

Share of public investment, 1992-2003

48

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

Figure 9. Government Expenditure and Private Investment (ratios to GDP)

0.3

0.25

0.2

0.15

0.1

G/Y
I/Y

49

Figure 10. Access to Funding in Italy and Spain
Diffusion Indices of Credit Standards in Italy and Spain
Spain

Italy

0.6
0.5
0.4
0.3
0.2
0.1
0
-0.1
Dec-12

Jun-13

Dec-12

Jun-13Jun-12

Dec-11

Jun-11

Dec-10Jun-10

Dec-09Jun-09Dec-08Jun-08Dec-07

Jun-07

Dec-06

Jun-06

Dec-05

Jun-05

Dec-04

Jun-04

Dec-03Jun-03

Dec-02-0.2

Diffusion Indices of the Contribution of Access to Funding on Credit
Standards in Italy and Spain
Spain

0.6

Italy

0.5
0.4
0.3
0.2
0.1
0
-0.1
Jun-12

Dec-11

Jun-11

Dec-10Jun-10

Dec-09Jun-09Dec-08Jun-08Dec-07

Jun-07

Dec-06

Jun-06

Dec-05

Jun-05

Dec-04

Jun-04

Dec-03Jun-03

Dec-02-0.2

50

Figure 11.

51

Figure 12. OECD Employment Protection Indices
Panel A: Regular Workers
3.5
3
2.5
1998

2

2003

1.5

2008

1

2013

0.5
0
FranceGermany

Italy

Spain

USA

Japan

Panel B: Temporary Workers
4
3.5
3
2.5

1998

2

2003
2008

1.5

2013

1
0.5
0
FranceGermany

Italy

Spain

USA

Japan

52

Figure 13. Unit Labor Costs for France, Germany, Italy and Spain

130
125
120
115
110
105
100
95
90
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
FranceGermany

Italy

Spain

Figure 14. Trend GDP per capita, 1971-2011 (USD, PPP adjusted.)
Trend Growth Rate
5%

4%

3%

USA
UK
Japan
Italy
Germany
France
Spain

2%

1%

0%

-1%
$10,000$20,000$30,000$40,000
Trend GDP per capita (PPP adjusted)

53

Figure 15. OECD Estimates of U.S. Output GapsOECD Estimates of U.S. Output Gaps
4
3
2
1
0
-1
-2
-3
-4
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

-5

Estimated in 2008

Estimated in 201354