Takehiro Sato: Recent developments in economic activity, prices and
monetary policy
Speech by Mr Takehiro Sato, Member of the Policy Board of the Bank of Japan, at a meeting
with business leaders, Gunma. 6 February 2013.
* * *
I. Introduction
At the Monetary Policy Meeting (MPM) held on January 21 and 22, 2013, the Policy Board of
the Bank of Japan decided to take additional steps to provide monetary accommodation
decisively. Specifically, the Bank decided to introduce (1) the "price stability target" set at
2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) and
(2) the "open-ended asset purchasing method" (i.e., to purchase assets without setting any
termination date) under the Asset Purchase Program. The Bank also decided to release a
joint statement with the government (Chart 1).
As was already noted in the statement on monetary policy released on January 22, 2013, I
voted against the 2 percent price stability target. However, since policy decisions are made
by majority vote of the Policy Board members at the MPM, the aforementioned decisions at
the January MPM were made accordingly. In my remarks today, I will reflect on the conduct
of monetary policy in the future, taking note of the measures to achieve the 2 percent "price
stability target" that has just been introduced.
II. Recent conduct of monetary policy
A. From the "price stability goal in the medium to long term" to the "price
stability target"
The "price stability target" - introduced by the Bank as a numerical value - is set at 2 percent
in terms of the year-on-year rate of change in the CPI. This target replaces the "price stability
goal in the medium to long term" introduced by the Bank in February 2012, which the Bank
had judged to be in a positive range of 2 percent or lower in terms of the year-on-year rate of
change in the CPI and 1 percent for the time being.
The major changes to the expressions regarding price stability from February 2012 are as
follows. First, the Bank deleted the phrase "medium to long term"; and second, the Bank
changed its wording from "goal" to "target" The changes reflect a situation in which
awareness of the importance of flexibility in the conduct of inflation-targeting policy has been
increasing.
More specifically, even inflation-targeting countries do not change their monetary policy
stance mechanically in accordance with their target inflation rates (Chart 2). This reflects
lessons learned from bitter experience in the past, when many credit bubbles grew under the
perception that prices had been stabilized, which created a large downswing in economic
activity and prices after the bubbles burst. In addition, especially after the Lehman shock,
many major countries have emphasized flexibility in the conduct of monetary policy by, for
example, publicly articulating the importance of paying due attention to financial system
stability (Chart 3).
Given these developments, the phrase "medium to long term" is no longer necessary and the
difference between a "goal" and a "target" is no longer a substantive issue.
B. Why has the price stability target been set at 2 percent?
As indicated in the statement on monetary policy released on January 22, 2013, the Bank
recognizes that an inflation rate consistent with price stability on a sustainable basis will rise
as efforts made by a wide range of entities toward strengthening the competitiveness and
growth potential of Japan's economy make progress (Chart 4). The 2 percent target looks
rather high, given the current rate of inflation/deflation. However, the Bank decided that it
was appropriate to set the target before confirming the product of the efforts made by a wide
range of entities to strengthen the competitiveness and growth potential of the economy. The
expected inflation rate of households, firms, and financial markets has been formed based on
the past inflation rate that has been consistently lower than in other countries (Chart 5). As
efforts made by the government, the Bank, and the private sector toward strengthening the
growth potential of the economy make progress, the inflation rate will gradually increase and
the expected inflation rate of households, firms, and the markets will likely rise accordingly.
Furthermore, by setting a challenging target of 2 percent, the Bank expects to influence the
expectations of a broad range of economic entities and to promote efforts toward
strengthening the competitiveness and growth potential of the economy, thereby influencing
the expected inflation rate of households, firms, and the markets.
At the same time, should prices overshoot 2 percent, the Bank should be able to anchor the
expected inflation rate by clarifying its target, and this will contribute to the achievement of
price stability on a sustainable basis.
Nevertheless, it is important for the Bank to continue to ensure credibility in its conduct of
monetary policy in order to anchor the year-on-year CPI inflation rate at 2 percent. As the
Governor of the Bank mentioned at his regular press conference after the January MPM, I
dissented from setting the 2 percent price stability target with another Policy Board member,
Mr. Takahide Kiuchi, for the following reasons. First, a 2 percent CPI inflation rate far
exceeds the pace of price growth that is considered to be consistent with price stability on a
sustainable basis. Second, it might impair the credibility of monetary policy to set the target
before the efforts made by a wide variety of entities toward strengthening the growth
potential of the economy achieve progress. However, as I explained at the beginning of my
remarks today, I am in a position to execute the Bank's policy decisions and responsible for
their execution as a member of the Policy Board. The Policy Board members, including
myself, are now facing the challenge of achieving the 2 percent price stability target as well
as raising the credibility of the Bank's goal.
C. An inflation rate of 2 percent was very high in japan in the past
What is the implication of the 2 percent inflation rate in Japan? Following the two oil shocks
in the 1970s and 80s, an inflation rate above 2 percent in the Japanese economy was rather
unusual. The times when the inflation rate exceeded 2 percent are generally regarded as
periods when the Japanese economy confronted a difficult situation on the whole (Chart 6).
Excluding the effect of consumption tax hike, the economy did not experience an inflation
rate above 2 percent in the last quarter-century except for the period from April 1990 through
December 1992 - when Japan faced a residual effect from the asset bubble economy in the
late 1980s - and the period from July through September 2008 - just before the Lehman
shock occurred. While the former period was marked by demand-pull inflation, this was due
to the residual effect of the abnormal elevation of asset prices, whose collapse had produced
the financial crisis of the late 1990s. This became a major cause of the protracted stagnation
of the Japanese economy. The latter period was a time of typical cost-push inflation, which
resulted in an outflow of purchasing power due to deterioration in the terms of trade and
lowered the national economic welfare. Therefore, defining and aiming at an inflation rate
that has rarely been achieved in the past two decades as the inflation rate consistent with
price stability on a sustainable basis not only forces a substantial change in the Bank's way
of thinking but also imposes a challenge.
As for the numerical expression for price stability, the Bank had not specified it up until the
mid-2000s. In October 2000, shortly after lifting the zero interest rate policy, the Bank
released a document titled "On Price Stability", in which it concluded that "it is not deemed
appropriate to define price stability by numerical values"1 It was only in March 2006 that the
Bank for the first time began employing a numerical expression for price stability: it indicated
the level of inflation within the range between 0 and 2 percent as a union of ranges of
inflation rates that each member of the Policy Board understood as being consistent with
price stability over the medium to long term - namely, the "understanding of medium- to
longterm price stability"2 It was about six years later that the Bank in February 2012 introduced
"the price stability goal in the medium to long term" - rolling out a specific numerical
expression that could represent the consensus among all the Policy Board members as the
inflation rate judged to be consistent with price stability sustainable over the medium to long
term, instead of presenting the union of ranges of inflation rates of each Policy Board
member.3
In the meantime, the Japanese economy has remained in a mild deflationary situation,
although the degree has varied with time. The major reason why the Bank required time to
formulate a numerical expression for price stability was due to the lack of a decisive measure
to elevate the inflation rate under the constraints of the zero lower-bound on the nominal
policy interest rate. While an inflation-targeting policy is generally assumed to be a
framework for containing a higher inflation rate within the targeted level in overseas
economies, it has long been recognized in Japan as a measure for raising the extremely low
inflation rate to the targeted level. However, monetary policy conduct in a time of deflation is
much more difficult than that under inflation, as expressed by the metaphor of "pushing on a
string".
At a time when Japan faces rising headwinds such as population aging and population
decline, setting the price stability target at 2 percent is rather challenging. A decline in the
total working population at an annual rate of a little less than 1 percent is expected to
continue. This implies that Japan's GDP will drop at an annual rate of a little less than
1 percent, if nothing is done to overcome the headwinds. In such circumstances, in order to
raise the output gap to a level that is consistent with the 2 percent inflation rate, it is
necessary to boost demand by promoting further progress to strengthen the economy's
growth potential. Furthermore, we will have to face the reality of the flattening of the Phillips
curve - the slower responsiveness of prices to the improvement of the output gap - due to
globalization and the progress in IT (Chart 7). Thus, the achievement of the price stability
target becomes increasingly challenging.
D. The need for a recovery in wages
And yet, why has the Japanese economy consistently failed to exit from deflation for more
than a decade? During the early phase of deflation in the late 1990s, this was mainly due to
the substantial fall in asset prices, the subsequent credit crunch caused by the financial
crisis, and the preservation of excess supply caused by the delay of firms with poor
productivity in exiting the market. However, since the Japanese economy has already
overcome problems in its financial system, deflation since the mid-2000s has entered a new
phase. Stagnant wages have become the main factor behind deflation.
Prices of goods and services are affected by the cost of production. Assuming that the cost
of production consists of personnel expenses and material costs, many of the latter are
determined through cross-border competition. Therefore, their price fluctuations - excluding
volatility due to developments in the foreign exchange markets - should equally affect the
entire global economy, and thus material costs cannot be the main reason why Japan is the
only advanced economy suffering from deflation. The real cause is another factor affecting
the cost of production, namely, wages.
In fact, consumer prices and wages are closely correlated (Chart 8). About half of the
components of the CPI are services in terms of weight, and prices of services are generally
synchronized with wages in the services industry (Chart 8). This industry is labor intensive,
and prices of services are easily affected by developments in wages. Accordingly, in aiming
at the 2 percent price stability target in terms of the year-on-year rate of change in the CPI, it
is vital, above all, to seek a recovery in wages. However, the level of annual nominal
compensation of employees in the "National Accounts" dropped by more than 10 trillion yen
after the Lehman shock and has shown virtually no sign of recovery (Chart 9). In order for a
recovery in wages to occur, it is important that firms maintain their labor share of income
distribution when they achieve an increase in their corporate profits, the source of wages. In
fact, there was an opportunity in Japan for wages to recover in the mid-2000s. This occurred
when the global economy overheated - triggered by growing demand in emerging
economies and supported partly by the credit bubble. At this time, many firms, especially
those in manufacturing, posted record highs in their corporate profits and were expected to
increase their distribution of corporate profits to employees. However, they placed a higher
priority during this period on accumulating internal reserves, and thus the labor share of
income distribution fell (Chart 9). As major labor unions did not strongly oppose this
distribution policy, wages scarcely improved. Currently, given the situation in which firms face
what have been called the "six headwinds",4 the profits enabling firms to boost distribution are
unlikely to rise, even if management wishes to increase the distribution to employees. This is
due partly to the significant decline in the competitiveness of some sectors of manufacturing
and the resultant halt in improvement in corporate profits, the source of wages.
E. Differences in employment adjustment between the United States and Japan
The difference in employment adjustment between the United States and Japan has some
effect on developments in wages. In the United States, when firms decide to adjust their
employment policy, they aggressively reduce the number of employees instead of wages,
which often results in a rapid retreat from unprofitable businesses. As a result, nominal
wages continue to grow at a rate of about 2-4 percent irrespective of the phase of the
economic cycle, and the U.S. economy is unlikely to fall into deflation since excess supply is
unlikely to continue. If we consider the Phillips curve - with the unemployment rate on the
x-axis and the rate of wage inflation on the y-axis - we reach a similar conclusion (Chart 10).
On the other hand, under the employment practice in Japan it is difficult to aggressively
reduce the number of employees while maintaining the nominal wage growth in an economic
recession. On the other hand, Japan's unemployment rate is comparatively stable partly due
to the difference in labor regulations between the two countries, but the sensitivity of wage
inflation to the unemployment rate is rather high. This makes employment adjustment
through dismissal relatively limited even during a recession in Japan, and such employment
adjustment, if any, tends to be executed mostly through wage reduction. Consequently, in
Japan consolidation and reorganization of unprofitable businesses tend to take longer and
the share of labor in income distribution tends to remain at a high level, and this slows the
economy's metabolism and allows excess supply to be preserved easily. In Japan the cost of
employment adjustment is shared widely among workers, and this type of employment
practice may be one of the main factors making it difficult for the economy to exit from
deflation.
Going forward, if we see supply-demand conditions tighten in the labor market with economic
expansion in Japan, can we expect wages to rise in line with the correlation I have
mentioned? It might sound pessimistic, but such may not be the case, as some firms in
Japan have recently begun to lose their competitive edge and profit-making ability. This
might reflect a gradualist approach to the streamlining of industries and unprofitable
businesses, whose expected growth rates have worsened. The current situation in Japan -
where the pricing power of firms has weakened and firms cannot pass on the rise in
purchase prices to selling prices - clearly reflects this decline in Japanese firms'
competitiveness (Chart 11).
At any rate, as the Bank aims at the 2 percent price stability target, greater fundamental
strength of the economy is needed to generate a wage increase of approximately 4 percent.
To this end, a wide range of entities is expected to redouble efforts to strengthen the
competitiveness and growth potential of the economy.
F. What the central bank can do
What kind of contribution can the Bank make from the monetary policy side, in order to
achieve the 2 percent price stability target? A well-balanced price hike should materialize in a
situation where general prices rise in tandem with wages, as the result of a rising level of
total economic activity and subsequent improvement in the output gap. Furthermore, such a
price hike must be sustainable. Although the Bank has announced that price stability can be
achieved through the efforts by a wide range of entities to strengthen the competitiveness
and growth potential of the economy, both the government and the Bank have also been
working to address the issue. At the same time, it is difficult to think that the 2 percent price
stability target will be achieved merely by enhancing ongoing policy initiatives, and therefore
both the government and the Bank must tackle this issue with much greater vigor.
Generally speaking, when an economy faces a deflation trap with the constraints of the zero
lower-bound on the nominal policy interest rate, the plausible channels for economic
stimulation and achieving a price recovery are (1) the channel through foreign exchange
rates and (2) the channel through asset prices.
In terms of the former, the Bank decided at the December MPM to increase the purchases of
treasury discount bills (T-Bills) and Japanese government bonds (JGBs). The Bank
considers that a stronger indirect influence on foreign exchange rates will be achieved from a
further decline in interest rates - narrowing or reversing the interest rate differentials between
Japan and other countries - while continuing with the payment of interest on excess reserve
balances at 0.10 percent. The Bank's decision at the January MPM to take additional steps
to provide monetary accommodation by introducing the open-ended purchasing scheme will
further strengthen this influence.
Regarding this latter policy initiative, the Bank formally launched the Loan Support Program
at the December MPM to vigorously support the increase in private bank lending in terms of
fund provisioning. This policy initiative relies on the efforts of private banks to boost lending,
and what the Bank can do is to support these efforts by the private sector. In a situation
where demand for funds has been weak for a long period of time and there is no bottleneck
in the availability of funds at private banks, it has been widely observed that the effects of
such a policy will be limited. Nevertheless, if such an increase in bank lending promotes real
economic activity and transactions in the asset markets, some positive impact can be
expected on general prices through an increase in asset prices. In particular, once upward
momentum starts accumulating in the economy, the effects of the policy initiative are likely to
be more pronounced. In addition, if private-sector lending promotes cross-border capital
expenditures or mergers and acquisitions by firms and banks, this will indirectly induce
depreciation of the yen. At any rate, I would like to emphasize the importance of exerting
indirect influence on the foreign exchange markets and asset markets mainly by facilitating a
further decline in interest rates.
G. Policy measures indirectly influencing foreign exchange rates under the zero
interest rate
During the quantitative easing period from March 2001 through March 2006, the effects of
monetary easing were likely to appear through depreciation of the yen, since Japan was the
only country that had adopted a zero interest rate policy (Chart 12). From the time of the
Lehman shock up to the present, however, the Bank's efforts have had limited effectiveness,
given that interest rate differentials between Japan and other advanced countries have
narrowed in a situation where central banks in these countries have started to adopt the zero
interest rate policy as well. Nevertheless, I believe that the interest rate channel might work
in this situation, albeit to a limited extent. For example, the 3-month T-Bill rate, which had
been consistently higher than that in the United States, marked a recent low of
0.093 percent, edging close to the rate in the United States, reflecting the Bank's large-scale
purchasing of T-Bills as part of the Asset Purchase Program even though the Bank
maintained the interest on excess reserves at 0.10 percent. A favorable tailwind is also
apparent in signs of change in U.S. monetary policy. For example, in December 2012 the
Federal Open Market Committee (FOMC) discussed decreasing the size of its asset
purchase or suspending it in the course of 2013. Against the background of such
developments, the Bank is closely monitoring the extent to which both short and long-term
interest rates may decline further while continuing to employ the Asset Purchase Program.
Meanwhile, steadily increasing the amount outstanding of the Asset Purchase Program is no
easy task. If the asset purchases under the Asset Purchase Program are conducted
smoothly as planned, the amount outstanding of the program is expected to surpass
100 trillion yen from the current 65 trillion yen by the end of 2013 (charts 13 and 14). The
provision of such a large amount of funds is unprecedented for the Bank, and there is a risk
that it will be unable to increase the amount outstanding of the Asset Purchase Program
smoothly if private banks grow reluctant to boost excess reserves at the Bank to avoid
balance-sheet expansion due to their financial strategy or other reasons such as corporate
governance. It is probably the case that, in increasing the amount outstanding of the Asset
Purchase Program, whether private banks submit bids for the Bank's asset purchases
depends greatly on interest rate levels. Some events might be beyond the scope of
expectations in an unprecedented situation, but the Bank aims to steadily increase the
amount outstanding of the Asset Purchase Program by adjusting the program in a flexible
manner.
H. Is a substantial increase in risky asset purchases a viable option?
On the other hand, it has been argued that the Bank should substantially increase its
purchase of risky assets. In line with its comprehensive monetary easing in October 2010,
the Bank has been purchasing risky assets such as corporate bonds and CP and - with
government approval - exchange-traded funds (ETFs) and Japan real estate investment
trusts (J-REITs). Among major central banks, the Bank is the only central bank that
purchases such risky assets for its own account. However, the Bank's intention in this
operation is not to employ large-scale intervention in the asset markets but to work as a
catalyst for the financial markets. Some argue that it is a viable option for the Bank to
increase such purchases substantially by intervening in the markets on a large scale.
I consider the efficacy of this sort of policy initiative to be doubtful, as it contains the risk of
eroding the Bank's capital base. If the prices of risky assets held by the Bank declined and
the Bank incurred a loss, this would result in a reduction in its payments to the national
treasury. If the size of the risky assets was sufficiently large compared with the size of the
Bank's net capital, the Bank might fall into capital deficiency. The first outcome, reduction of
payments to the national treasury, would be equivalent to an increase in fiscal spending, and
because of this risk the Bank must obtain authorization from the government based on Article
43 of the Bank of Japan Act in order to purchase ETFs and J-REITs. The second outcome,
capital deficiency, could lead to a larger issue, affecting the credibility of the Bank and the
yen as well as the autonomy of monetary policy, if the Bank asked the government for
recapitalization or compensation for its loss. Given these issues, whether the Bank should
substantially increase risky asset purchase from the current limit is a matter that involves not
only the Bank but also the government. It might therefore be effective to set ex ante policy
rules for loss sharing, in order to prevent purchases of risky assets from influencing the
autonomy of the Bank's monetary policy.
I. Are foreign bond purchases a viable option?
At a press conference in July 2012 after becoming a Policy Board member, I remarked that
foreign bond purchases might be an option for the Bank but a number of conditions must be
met. For example, the Bank of Japan Act stipulates that the Bank may buy or sell foreign
exchange solely as an agent of the government (Article 40); therefore, the Bank cannot make
any subjective policy decisions to secure the stability of the yen (Chart 15). Can the Bank
then purchase foreign bonds if it receives government authorization pursuant to Article 43 of
the Bank of Japan Act - as in cases of ETF and J-REIT purchases? As stipulated in Article
40 of the Bank of Japan Act, the Bank is not allowed to buy or sell foreign exchange for the
purpose of intervening in the yen market. Therefore, regardless of Article 43, it is natural to
consider that the Bank cannot purchase foreign bonds for such a purpose. In that case, what
about purchases by the Bank of a fixed amount of foreign bonds on a regular basis as part of
money market operations? This too risks contravening Article 40, if the purpose of such
purchases is considered to manipulate the foreign exchange markets.
Because of the legal restriction I have mentioned, the Liberal Democratic Party (LDP) made
an election pledge in December 2012 that it would establish a joint fund by the public and
private sectors to purchase foreign bonds. The net impact on the economy would be
basically the same whether the government or the Bank bought foreign bonds, and therefore
I think that the Bank itself need not assume the dominant role in conducting such purchases.
However, it might pose a problem in terms of currency diplomacy; therefore, close
coordination with foreign currency authorities is indispensable in order to achieve consensus.
J. Economic welfare would not improve if a price hike is simply driven by the
yen's depreciation
Even if the yen depreciates against the U.S. dollar by 10 percent, I estimate that the rise in
Japan's CPI would be far short of 1 percent, even if the accumulation of its effect for several
years is taken into account. Therefore, if the core CPI - now around 0 percent - is to be
raised to 2 percent solely through depreciation of the yen, a substantial depreciation is
needed, and this does not seem practical. Many uncertainties remain if such a substantial
depreciation of the yen is to take place through the conduct of interest rate policy. Even if it
were possible, it might raise a number of issues in terms of currency diplomacy.
Furthermore, a hike in import prices and deterioration in the terms of trade would cause an
outflow of purchasing power. Thus, even if the inflation rate rose, it would be largely
superficial and gross domestic income (GDI) as well as gross national income (GNI) would
decrease; as a result, people would not feel that the economy had overcome deflation (Chart
16). In sum, although the impact of developments in exchange rates on prices is substantial,
pursuing a high price stability target of 2 percent solely through the exchange rate channel is
not a balanced option. What should be aimed for is a rise in prices that accompanies an
increase in income.
However, it should be noted as well that underestimating the economic-stimulus effects of
the ongoing depreciation of the yen on the asset markets is to take an unbalanced view. The
asset markets, especially domestic stock markets, have underperformed compared to
overseas markets due to the effects of the overappreciation of the yen, which has
appreciated by about 40 percent in terms of the nominal effective exchange rate since the
Lehman shock. Recently, however, in the process of correction of the yen's overappreciation,
the valuation of domestic stock prices has been revised, and the asset markets have become
buoyant after a long period of inactivity. As I mentioned earlier, the recovery in asset prices
could lead to an improvement in the output gap and in turn a rise in prices, by strengthening
the risk tolerance of firms and households and then raising the level of total economic
activity. Therefore, I would like to continue to draw attention to the channel in which monetary
policy indirectly exerts influence on foreign exchange rates.
III. Recent economic activity and prices
A. Outlook for the global economy
According to the latest global economic outlook released by the International Monetary Fund
(IMF) in January 2013, the global economy is expected to grow moderately at 3.5 percent
and 4.1 percent in 2013 and 2014, respectively, and these growth rates are almost the same
as or slightly above the average of the past three decades of 3.4 percent (Chart 17). In the
recent past, this outlook had been revised downward mainly due to the worsening of the
European debt problem and the deceleration of the Chinese economy. However, the global
economy has not become subject to a considerable downward revision since summer 2012,
because (1) the U.S. economy remained comparatively albeit modestly firm, (2) the tail risk
receded substantially in Europe thanks to a variety of policy developments, and (3) the
Chinese economy bottomed out. It is still uncertain, however, whether the global economy
will return to its 4 percent growth path, which is above the average of the past three decades,
in line with the IMF's outlook. While there are many reasons for the uncertainty, the main one
is that the global economy is still in the phase of balance-sheet adjustment following the
bursting of credit bubbles that expanded in the late 2000s, and therefore the adjustments in
both the public and private sectors are likely to dampen economic performance as a whole.
B. Balance-sheet adjustment is still on track
If we review the long-term developments in the private-sector debt of major economies (as a
percentage of nominal GDP), we can see that the debt's expansion and subsequent
adjustment are synchronized on a global basis. Very roughly, we can observe credit cycles
with ten years of expansion followed by ten years of adjustment (Chart 18-1). In the 1980s,
the credit cycle was in an expansion mode with a few exceptions, and the 1990s were a
period of adjustment followed by expansion again in the 2000s. Because of the global
financial crisis following the Lehman shock in 2008, the expansion of private-sector debt has
come to an end, and we are now in an adjustment phase on a global basis. As evident from
developments in the U.S. household sector, the adjustment of excess capital stock is only
halfway complete.
Meanwhile, regarding the total of private- and public-sector debt, the degree of fluctuation is
smaller, and a major phase of deleveraging has not been observed except for Canada in the
1990s (Chart 18-2). This probably reflects the fact that when the private sector deleverages,
public-sector debt expands.
Looking at the long-term developments in total debt, which includes both private- and
publicsector debt - with the latter on a net basis - we find that (1) the debt ratio rose in many
countries in the 1980s; (2) it stabilized in the 1990s as a whole; and (3) it rose in the 2000s
led by Spain, the United States, and the United Kingdom, followed by Japan from around
2005. In addition, it should be pointed out that Japan does not stand out from the other
countries if we look at the level of the public-sector debt on a net basis, unlike the case on a
gross basis.
The fact that debt in the private and public sectors tends to have a negative correlation, and
that the total debt is downwardly sticky has an implication for the relation between the debt
and economic growth. In countries such as Japan, the United States, the United Kingdom,
and Spain, the debt overhang in households, firms, and/or the government seems to be at a
threshold point at which the debt will exert a severe restriction on