kiyohiko g nishimura : how to detect and respond to property bubbles – challenges for policy - makers remarks by mr kiyohiko g nishimura, deputy governor of the bank of japan, at the reserve bank of australia - bis research conference “ property markets and financial stability ”, sydney, 21 august 2012. * * * let me begin by commending the impressive achievements of this bis project, as exemplified by the presentations yesterday and this morning. in this regard, i am sure you will join me in applauding the efforts of frank packer and his accomplished colleagues at bis asia & pacific. in spite of this impressive progress, however, i still think that we are only at the starting line : many problems remain to be solved before this project can provide guidelines for policy - making. learned academics may be experts in “ explaining ” the causes and effects of past events that have shaken the world. to put it metaphorically, failures in the last war are always scrutinized thoroughly, and their lessons are presented. in contrast, we policy makers should be looking forward into the future. we should not be fighting the last war when things are changing rapidly, no matter how well we may have learned the lessons of the last war. the two main questions from the policy maker ’ s point of view are : how can we detect malign property bubbles? and, how should we respond to them? 1. how to detect malign bubbles let me start with the first question : how can we detect malign bubbles? here we should be aware that not all property bubbles lead to financial crises, and not all financial crises are preceded by property bubbles. international panel studies have shown that two - thirds of 46 systemic banking crises were preceded by house price boom - bust patterns, while 35 out of 51 house price - bust episodes were followed by a crisis. 1 so there are both malign bubbles and benign ones. then, what leads to a malign bubble? looking back at past experience of malign bubbles, we find another factor which has not been touched upon by the presentations so far : the demographic transition from a “ population dividend ” to the “ burden of an ageing population. ” let us look at the charts comparing the japanese property bubble of the 1990s, the us house price bubble of the 2000s, and the possible chinese property bubble. in these three charts, i juxtapose, first, the ratio of working - age population to the rest ( the

rest of the world would be limited. this picture has now changed. in the us, the slowdown in growth has been more pronounced than expected by most observers when the first signs of a turnaround emerged last autumn. industrial output has declined over the last 10 months and business investment has shrunk by almost 14 per cent, annualised, in the second quarter. moreover, the impact on europe and the emerging economies in asia has been substantially greater than expected. the shift in perceptions of the outlook is reflected in the estimates from consensus forecasts. since the beginning of the year, growth forecasts have been revised downwards by 2 percentage points in japan, 1½ percentage points in germany and 1 percentage point in the us. not since 1974 has gdp growth been below 2½ per cent in all three countries. growth among our trading partners has been revised downwards by 1 percentage point to a little less than 2 per cent, which is the lowest rate recorded since 1993. growth forecasts for 2002 have also been adjusted downwards somewhat, but growth is still expected to pick up next year. however, there is substantial uncertainty associated with these forecasts. the forecasts are to a large extent based on the assumption that household consumption will continue to fuel growth in domestic demand, as has been the case in the us and europe so far this year. this is expected because of the solid financial situation of the household sector in most industrial countries after many years of rising employment and real wage growth. another important factor is that productivity growth in the us is expected to secure sound profit trends over the longer term, with the decline in corporate investment turning up slightly next year. although business and industry have been sheltered so far from the slowdown in the world economy, the norwegian economy may gradually be more strongly affected. slow growth in the world economy may lead to lower demand for norwegian produced goods and curb the pressures in the norwegian economy. in addition, slower growth in the world economy may push down imported price inflation, which may imply that price inflation will be lower than we have projected. our forecasts provide an indication of the scenario we consider to be the most likely, given that key variables such as interest rates, the exchange rate, public demand, wage formation and oil prices are in line with our assumptions. if these variables deviate from our assumptions, the real economy and nominal developments may also show a different path. the norwegian economy is balancing on a tightrope. it will not take much to throw the economy off balance