The US Economic Crisis: Impact on Northeast Asia, Lessons from Japan Richard Katz The Oriental Economist Report rbkatz@ix.netcom.com www.orientaleconomist.com 2008 Japan Watchers LLC. All rights reserved. Do not reproduce or redistribute without permission. Shorenstein Asia-Pacific Research Center November 19, 2008 1
Impact on Northeast Asia Korea, Japan and China all very vulnerable Decoupling theory is wrong In this decade, Japan, Korea and China have all depended excessively on a rising trade surplus to drive growth Japan and Korea s exports to China hinge on Chinese exports to the US US imports slowing No Obama protectionism 2
Japan 3
Forecast for Two Consecutive Years of Negative Growth 4
Demand Ultra-Dependent On Investment and Trade Surplus 60% Share of GDP 55% Share of GDP Growth 02-I to 07-IV 50% 40% 30% 20% 10% Share of GDP Grow th 16% 36% 4.3% 41% 33% 0% Invest. Trade Surplus Household Consum. 5
Now Capex and Trade Surplus Detracting From Growth 2.0% 1.5% Contribution to GDP Growth 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% Capex Trade Surplus 2008-I 2008-II 2008-III 6
Wage Share of GDP Plunges Compensation % of real GDP, 2-qtr MA 57% 1980-2001 average 56% 55% 54% 53% 52% 51% 50% 49% 48% 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 57% 56% 55% 54% 53% 52% 51% 50% 49% 48% 7
Income is Deficit-Financed Real Disp. Income as % of GDP 74% 73% 72% 71% 70% 69% 68% 67% 66% 65% 64% 63% 62% 61% 60% 59% 58% Total net disposable incom e Private incom e Govt tax cuts and transfer paym ents 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 74% 73% 72% 71% 70% 69% 68% 67% 66% 65% 64% 63% 62% 61% 60% 59% 58% 8
Household Savings Rate Drops Savings rate (% of disposable income) 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 9
Trade Surplus Hit Record % of GDP (before pulling back) Trade Surplus (% of Real GDP) 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Decoupling theory is wrong 11
Nikkei 225 Echoes S&P 500 Nikkei 225 22,000 21,000 20,000 19,000 18,000 17,000 16,000 15,000 14,000 13,000 12,000 11,000 10,000 9,000 Nikkei 225 8,000 S&P 500 7,000 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 1,800 1,700 1,600 1,500 1,400 1,300 1,200 1,100 1,000 900 800 700 S&P 500 12
13 Nikkei Echoes Yen/$ 90 94 98 102 106 110 114 118 122 126 Jan- 05 Apr- 05 Jul- 05 Oct- 05 Jan- 06 Apr- 06 Jul- 06 Oct- 06 Jan- 07 Apr- 07 Jul- 07 Oct- 07 Jan- 08 Apr- 08 Jul- 08 Oct- 08 Yen/$ 7,000 9,000 11,000 13,000 15,000 17,000 19,000 21,000 Nikkei 225 Yen/$ Nikkei 225
This Decade: 70% Correlation Between US and Japanese GDP 6% 5% US (left scale) Japan (right scale) 5% 4% US Yr-on-Yr GDP growth 4% 3% 2% 1% 0% Japanese exports tum ble 3% 2% 1% 0% -1% Japan Yr-on-Yr GDP growth -1% 2000 2001 2002 2003 2004 2005 2006 2007 2008-2% 14
Japanese Global Exports Mirror US Global Imports 20% Japanese exports 15% Yr-on-yr % growth 10% 5% 0% -5% US imports -10% -15% 2000 2001 2002 2003 2004 2005 2006 2007 2008 15
Japanese Exports to China Mirror Chinese Exports to US 50% 40% Yr-on-Yr growth 30% 20% 10% 0% Anti-Japan boycott in China -10% -20% Japan exports to China China exports to US 97 98 99 00 01 02 03 04 05 06 07 08 16
Japanese Exports to Asia Mirror Asian Exports to US 30% 20% Yr-on-Yr growth 10% 0% -10% -20% -30% Asian economic crisis Japan exports to Asia Asia exports to US 97 98 99 00 01 02 03 04 05 06 07 08 17
Japanese Exports to Asia Mirror Chinese Exports to US Yr-on-Yr growth 30% 20% 10% 0% -10% 50% 40% 30% 20% 10% 0% -20% -30% Japan exports to Asia Asia exports to China 97 98 99 00 01 02 03 04 05 06 07 08-10% -20% -30% 18
Capex Mirrors Exports Quarter Earlier 20% 20% 15% 15% Yr-on-Yr growth, Exports 10% 5% 0% -5% 10% 5% 0% -5% -10% Yr-on-Yr growth, Capex -10% -15% Exports (lagged) Capex 95 96 97 98 99 00 01 02 03 04 05 06 07 08-15% -20% 19
Korea 20
Consumption Share Falling 64% 62% 60% Consumption % of real GDP 58% 56% 54% 52% 50% 48% 46% 44% 42% 40% 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 21
Culprit Is Low Personal Income Household disposable income % of real GDP 85% 80% 75% 70% 65% 60% 55% 50% 45% 40% US $ 2005 nom inal w on 85% 80% 75% 70% 65% 60% 55% 50% 45% 40% 35% 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 35% The constant dollar measure of disposable income shows a drastic decline, but the nominal won measure also shows a big decline. 22
Excess Reliance on Trade Surplus 12% 9% Asian financial crisis Trade surplus as % of real GDP 6% 3% 0% -3% -6% -9% -12% 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 23
Unbalanced Growth % of GDP and of GDP growth, 2002-07 60% 50% 40% 30% 20% 10% 0% % of GDP % of Grow th Consum ption Capex Gov't Trade Surplus Black column shows the percentage of GDP; grey chart shows the % of GDP growth during 2002-07 24
Korean Exports to China Hinge on Chinese Exports to US 70% 60% 50% 40% 30% 20% 10% 0% -10% ROK exports to China -20% China exports to US -30% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 50% correlation between ROK exports to China and Chinese exports to US in 1994-2008; rises to 72% correlation in 2000-2008 25
Much Looser Link Between ROK Exports to China and China s GDP 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% ROK exports to China China GDP 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Smaller 32% correlation between ROK exports to China and Chinese GDP; falling to negligible 7% correlation in 2000-2008 14% 13% 12% 11% 10% 9% 8% 7% 6% 26
China 27
Consumption Drops as % of GDP (due to drop in household income as % of GDP) Figure 2. Household consumption as percent of GDP, 1978-2006 Percent 55 50 45 40 35 30 1978 1979 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 Source: National Bureau of Statistics of China, China Statistical Yearbook 2007. 28
One of Lowest Consumption Rates (despite rapid rise in absolute terms) 120% 100% Consumption % of GDP 80% 60% 40% 20% China 0% $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 Per capita GDP 29
Make up Demand Shortfall Via Capex 60% Investment % of GDP 50% 40% 30% 20% China 10% 0% $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 Per capita GDP 30
Make up Demand Shortfall Via Trade Surplus Figure 4. Net exports of goods and services, 1992-2007F US$ Billion 350 Percent 10 300 8 250 200 150 100 50 Percent of GDP (RHS) Goods and Services Balance (LHS) 6 4 2 0 0-2 -50-4 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007F Source: National Bureau of Statistics of China, China Statistical Yearbook 2007; Author's Calculations. 31
Renminbi Rises 22% vs. $ Index vis a vis $, July 21, 2005 = 100 124 122 120 118 116 114 112 110 108 106 104 102 100 Broad index of currencies vs. dollar RMB 124 122 120 118 116 114 112 110 108 106 104 102 100 98 98 96 J-05 O-05 J-06 A-06 J-06 O-06 J-07 A-07 J-07 O-07 J-08 A-08 J-08 O-08 96 32
US Locomotive Hits Brake Japan, Korea, China can only run trade surplus of $100 billion or $200 billion or $300 billion if rest of the world combined runs equal deficit For most of this decade rest of the world has mostly meant USA Not anymore 33
US Imports Slowing 16% US Real Import growth year-on-year 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% 2000 2001 2002 2003 2004 2005 2006 2007 2008 34
US Trade Deficit Down 45% $700 US Goods and Services Trade Deficit ($ bil.) $600 $500 $400 $300 $200 $100 $0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 35
Lessons for America From Japan Do Too Much Rather Than Too Little Move Too Soon Rather Than Too Late 36
America Is Not Japan: Three Differences Cause of the crisis Size of the crisis Response of Policymakers 37
Causes Japan: Deep-Seated Structural Flaws US: Policy Mistakes Driven By Ideology and Interests plus post-lehman/aig Investor Panic Better Parallel is not Japan s Lost Decade But Asia 1997-98 (in causes, not severity) 38
Stock Market Bust 10% 0% S&P 500 10% 0% Stock index, % change from peak -10% -20% -30% -40% -50% -60% -70% Nikkei 225-10% -20% -30% -40% -50% -60% -70% -80% -80% -90% -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Years from the peak Japan since end of 1980s bubble; US since end of dot.com bubble. Data through Nov. 18-90% 39
Stocks Gyrate More Wildly Than GDP Annual Changes 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% -35% -40% 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 S&P GDP 40
Japan real estate bubble dwarfs America's Real Estate Index, cumulative price change 500% 450% 400% 350% 300% 250% 200% 150% 100% 50% 0% -50% Japan commercial land in six big cities US house prices in 20 big cities Estimate and forecast -10-8 -6-4 -2 0 2 4 6 8 10 12 14 16 Years before and after peak 41
The Debt Load of Corporations 18 16 Japan USA Debt to Operating Profits Ratio 14 12 10 8 6 4 2 0 1986 1990 1994 1998 2002 2006 42
Job Losses Less Than in 2001 Recession % change in jobs since pre-recession peak 0.0% -0.5% -1.0% -1.5% -2.0% -2.5% -3.0% -3.5% -4.0% November forecast by 55 economists Nov. 2007 onw ard forecast May 1990 onw ard March 2001 onw ard Aug. 1981 onw ard 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Months from employment peak 43
No Credit Crunch Pre-Lehman (just normal recession deceleration) 18% Quarterly Growth in Debt (inflation-adjusted) 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 44
Strong Bank Balance Sheets 12% 11% Ratio of Net Worth to Assets 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 45
NPLs Like Typical Recession Delinquency rate (one month past due) 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% All loans Mortgages on single-fam ily hom es 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 46
Banks Are Still Lending 20% 18% Year-on-year growth (4-week MA) 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% real estate non-real estate -6% Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Data through Nov. 5 47
Mortgage Foreclosures Mostly Subprime (2008-II) % of Outstanding % of Total foreclosure Loans Foreclosures rate Prime Fixed 65% 19% 0.7% Prime ARM 15% 23% 3.5% Subprime Fixed 6% 11% 4.5% Subprime ARM 6% 39% 17.1% FHA & VA 8% 7% 2.2% Total foreclosure rate: 2.47% ARM = Adjustable rate mortgage FHA & VA = loans financed by Federal Housing Authority and Veterans Agency 48
Household Wealth Still Strong 7.0 6.5 1956-2008 average Ratio of net worth to income 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008-1H Data for end of period; data through June 2008 49
Corporate Net Worth Strong 1.4 Ratio of net worth to financial liabilities 1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 2002 2003 2004 2005 2006 2007 2008-1H 50
Post-Lehman Panic in Commercial Paper Total CP outstanding ($ mil.) 2,300,000 2,200,000 2,100,000 2,000,000 1,900,000 1,800,000 1,700,000 1,600,000 1,500,000 1,400,000 Lehman collapse 1,300,000 J-07 A-07 J-07 O-07 J-08 A-08 J-08 O-08 51
Post-Lehman Panic in Bond Market 10% Baa bond Aaa bond 10-year Treasury 9% 8% Interest Rate Spread 7% 6% 5% 4% 3% Lehm an bankruptcy 2% J-00 J-01 J-02 J-03 J-04 J-05 J-06 J-07 J-08 52
Policy Response Japan: Years of Cover-up, Denial, Support of Zombies, Mismanaged Macroeconomic Policy US: Fiscal and monetary stimulus, rapid write-down of assets, allowing big institutions to fail, government bailout, correcting deregulatory excess, new efforts when some efforts prove insufficient or ineffective 53
Outcome? Depends on Policy: Republicans Like Feldstein and Democrats Like Summers Urging Big Fiscal Stimulus (2% of GDP for 2-3 years) and Some Kind of Mortgage Refinance to stop foreclosure-price cycle Probably recession not quite as bad as 1980-82 when US suffered zero growth for three years and unemployment hit 11% 54