The Challenge to Japan’s Economy in
the Global Setting

Toyoharu Takahashi
Professor of Finance, Faculty of Commerce, Chuo University, Tokyo, Japan
Visiting Fellow, Australia-Japan Research Centre, ANU, ACT, Australia

contents• Outlook of world and Japanese economies• Financial Tsunami• Aging society• Japanese fiscal deficit• Strong Japanese Yen• Concluding remarks

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Section1

Outlook of World andJapanese Economy
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Macroeconomic Outlook• Economic Growth• Inflation• Unemployment• Global tradeToyoharu Takahashi (Chuo/ANU)

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Macroeconomic Outlook• Economic Growth• Inflation• Unemployment• Global trade

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Source: OECD Economic Outlook 88 database.

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Source: OECD Economic Outlook 88 database.

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Source: OECD Economic Outlook 87 database.

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Macroeconomic Outlook• Economic Growth• Inflation• Unemployment• Global trade

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Percentage change of CPI from previous year
Source: OECD Economic Outlook 88 database.

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Percentage change of CPI from previous year
Source: OECD Economic Outlook 88 database.

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Source: OECD Economic Outlook 87 database.

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Macroeconomic Outlook• Economic Growth• Inflation• Unemployment• Global trade

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Source: OECD Economic Outlook 87 database.

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Source: OECD Economic Outlook 87 database.

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Macroeconomic Outlook• Economic Growth• Inflation• Unemployment• Global trade

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Source: OECD Economic Outlook 88 database.

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Source: OECD Economic Outlook 88 database.

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Section 2Financial Tsunami---How They Damaged the Japanese Economies---

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Purpose
1. Retest two hypotheses by using the evaluation ofinvestors: a risk premium for bonds issued by suchindustries
2. Check the policy announcement effects by event
studies.
Implication of retest ? (If both hypotheses are correct)•
relief policy should be prescribed with an emphasis in
non-manufacturing industry causing tsunami•the lessons from the Japanese tsunami are notnecessarily applicable to the present Japanese slump by
the US tsunami.
Implication of checking the policy effects ?
It shows us whether the policy is appropriate to an
identified cause of economic slump based on retest.
20ACE102010

Tsunami

津波（Tsu-Nami）＝津harbor +波wave

Earthquake

ACE10

TsunamiEconomic
Impacts(Slump inregional ornationwideeconomy)

Disastrous
Impacts toShips
Buildings
Coast etc

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Financial Tsunami
Damage in
Financial
Industry

Burst ofBubble

Economic
Impacts

Financial
Tsunami(Slump in theJapanese
economy)Damage in
NonFinancial
Industry

ACE10

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The specification of risk change process :NF→FOut→F rSWAP,t   1   11 12  rSWAP,t-1   1   1,t         rEURO,t-1   r   IND, t   2    21  22  rIND, t-1    2 
 2,t F→NFOut→NF 0 h 1,t  1,t  t -1 ~ N  ,   0    h 1,t h 2,t  2,t  h 1,t h 2,t  h 2,t  log h i,t   i0  gz i,t-1    i3 log h i,t -1   i4 log h j,t-1
  i,t -1gz i,t -1    i1
 2    i2 i,t -1
 h i,t -1
h i,t -1


The maximum likelihood estimate ˆ for   ( ,  ,  ,  ,  ) will be assumed to be
asymptotically normal and consistent with a covariance matrix equal to the inverse ofFisher’s information matrix (traditional inference procedures are available).
23ACE102010

Financial Tsunamis hit Japanese
Economy1. Japanese Tsunami– Burst of the bubble in the Japanese Stock andReal estate markets in 1990

2. Asian Tsunami– Asian Financial Crisis in 1997

3. US Tsunami– global financial crisis in 2008

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Japanese Financial Tsunami 1990

Burst of
Stock andReal
EstateBubbleACE10

Damage in
Financial
Industry

Economic
Impacts

Financial
Tsunami(Slump in theJapanese
economy)Damage in
NonFinancial
Industry

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Asian Financial Tsunami 1997

Burst of
Exchange
Rate
BubbleACE10

Damage in
Financial
IndustryEconomic
Impacts

Financial
Tsunami(Slump in theJapaneseeconomy)

Damage in
NonFinancial
Industry

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US Financial Tsunami 2008

Burst ofSubprime
Mortgage
BubbleACE10

Damage in
Financial
Industry

Economic
Impacts

Financial
Tsunami(Slump in theJapanese
economy)Damage in
NonFinancial
Industry

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Effectiveness of Policies• JP tsunami– Most of the banking policies were effective at least for
the financial industry• Asian tsunami– Most of the international policy harmonization wereeffective• US tsunami– No domestic policy was effective– International policy coordination was effective
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Section 5AGING SOCIETY

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Population Aging• Inverse Dependency Ratio– # of working age/ # of non-working age– How many working people is/will besupporting one non-working people– Working age=15 to 64– Non-working age= 0-14 & 65+

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Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2008 Revision,

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Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2008 Revision,Toyoharu Takahashi (Chuo/ANU)

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Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2008 Revision,

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Policies for aging• Child allowance– The DPJ has promised a 26,000yen a monthchild allowance.
– “Women don't need a child allowance, theyneed services,'' she says, especially moreday-care centers open longer hours.

• Reform on pension funds

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Section 3

Japanese Fiscal Deficit andYield on JGB
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Percentage of GDP
Source: OECD Economic Outlook 88 database.

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Source: Nikkei Needs Financial Quest

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41Source: Bank of Japan Flow of Funds Accounts 2010

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Source: Bloomberg

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Section 4

STRONG JAPANESE YEN

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Section 6

Concluding Remarks

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Future of the Japanese Economies• Crisis Scenario• Positive Scenario• Muddle ThroughToyoharu Takahashi (Chuo/ANU)

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Crisis Scenario ⇒ road to bankruptcy• Society aging can’t support social welfaresystem• Lack of political leadership for the tax
increase• Government deficit grow too rapid tofinance• Economic growth remains low level due toan accelerated overseas production
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Positive Scenario⇒ V-shaped recovery• Political accord will be made• Total fiscal reform will accomplished• Domestic demand will increase due to theincrease in confidence of future economicsituation• Productivity will increase

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Muddle Through• Fiscal deficit remains high level• Yield on JGB still low, due to the low
demand for funds in private sector

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THANK YOU!
toyoharu.takahashi@anu.edu.au

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