Japan’s Long Stagnation, Deflation, and

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 KENJI ARAMAKI

Japan’s
Long Stagnation,
Deflation, and
Abenomics
Mechanisms and Lessons
Japan’s Long Stagnation, Deflation, and Abenomics
 Kenji Aramaki

Japan’s Long
Stagnation, Deflation,
and Abenomics
Mechanisms and Lessons
Kenji Aramaki
Tokyo Woman’s Christian University
Tokyo, Japan
University of Tokyo
Tokyo, Japan

ISBN 978-981-13-2175-7    ISBN 978-981-13-2176-4 (eBook)

https://doi.org/10.1007/978-981-13-2176-4

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 Preface

The objective of this book, which covers the Japanese economy since the
1980s, is to identify the mechanism of formation and collapse of a huge
bubble and the subsequent long economic stagnation and deflation and to
discover challenges that the current Japanese economy faces.
I worked mainly in the field of international finance in the Ministry of
Finance of Japan for about 30 years and then moved to Tokyo University,
where I taught international economics for more than 10 years. The rea-
son why I have written a book on the Japanese economy, which is not
strictly my specialty, is that I have had a strong desire to find out an answer
to my long-held questions, that is, “Why did the Japanese economy fall to
its current situation?” and “Was it inevitable?”
It was 1976, when I started to work, more than 40 years ago. The
Japanese economy at that time was dynamic and filled with increasingly
strengthened confidence. At the height of the euphoria of the bubble of
the late 1980s, I was working as economist at the International Monetary
Fund. Personally, I did not like what was going on with the Japanese
economy at that time, but my confidence in the strength of the Japanese
economy did not change. Even after the collapse of the bubble in the
1990s, I felt that the Japanese economy would be able to return at any
moment to the previous conditions, which had been filled with vitality.
However, the reality did not turn out that way. The Japanese economy
experienced a serious financial crisis in the late 1990s, and deflation set in.
Even after entering the 2000s, low growth continued, and the Japanese
economy lagged behind the growth of the global economy for decades.
Japan held a share that was higher than 9% in the world exports of goods

v
vi PREFACE

and services in the first half of the 1990s, but at present it is less than half
that, at about 4%. China’s nominal GDP, which was 18% of Japan’s nomi-
nal GDP in 1996, is 2.3 times larger than that of Japan, as of 2017.1 No
one at that time expected to see the economy as it is in 2017, and I have
thought that it is the responsibility of our generation to answer “why?”
However, the work to find out an answers presented many difficulties,
as there were limited opportunities to exchange views outside the field of
my expertise, which is international finance. I chose, for the first time, to
examine the issues of the Japanese economy as a topic in a seminar class
that I taught at the Faculty of Arts and Sciences of Tokyo University in the
summer term of 2011, and I started to read extensively the relevant arti-
cles and materials. In 2014, I was awarded the opportunity to conduct
research as a visiting professor at the School of Oriental and African Studies
(SOAS) of London University. There, I gave lectures on the Japanese
economy as a guest lecturer, while conducting research on international
financial crises. Preparatory work for these guest lectures motivated me to
further analyze the Japanese economy. Since the summer of 2015, when I
left SOAS, I have given presentations on the Japanese economy in London,
Berlin, and Zurich at the conferences of the Japan Economy Network
(JEN), which is an international network of researchers on the Japanese
economy that my colleagues at the SOAS, including Dr. Ulrich Voltz,
Prof. Machiko Nissanke, and Dr. Sotoshi Miyamura, and myself organized
in 2015 at a conference, together with the economists in attendance. The
book gradually came into a concrete shape, and it has taken more than
seven years to complete.
The central argument of the book is that, at the center of the anomalies
and difficulties of the Japanese economy over an extended period of time
including formation and collapse of the bubble, the financial crisis, and
deflation, were corporate behaviors that have changed while showing sub-
stantial fluctuations. For example, the biggest negative legacy that the
bubble left with Japan was excess assets (those assets for which sufficient
demand is not expected and, therefore, are necessarily unprofitable) of the
corporate sector. The reason why the economy did not show a strong
growth for a long time after the collapse of the bubble is that, as sales by
companies stopped growing and economic growth decelerated following

1
IMF World Economic Outlook, April 2018. Nominal GDP in terms of home currency of
each country is converted to the dollar using market exchange rate.
 PREFACE vii

the burst of the bubble, the excess assets (unprofitable assets) expanded.
Companies could not swiftly dispose of such excess assets, and investment
was depressed for an extended period of time. Furthermore, despite sales
not increasing, wages continued to increase in the early years after the col-
lapse of the bubble, and profits of companies were further depressed by
this factor. Companies’ responses at that time to the problems brought
about by the collapse of the bubble were “passive,” and this passivity led
to a lengthening of the economic stagnation. When the financial crisis
broke out in the late 1990s, under the deteriorating business conditions
and with a sharp aggravation of funding environments, which were
described as not only “new loan curbing” but also as “outstanding loan
withdrawing,” company response shifted at a stroke to a “crisis response.”
Companies forcefully proceeded with wage reduction, replacement of
regular workers with non-regular workers, further restraint of investment,
and strengthening of their net asset position. Around this period, deflation
started with the declining wage level. The Japanese economy slowed fur-
ther, and fundamental changes occurred with the financial crisis.2
Due to such responses by companies, excess assets together with excess
debts and excess employment were removed by the mid-2000s, and the
economy returned to the normal. However, a defensive attitude of compa-
nies that emerged after the financial crisis was maintained, such that restraint
on investment and wages continued (“continued defensiveness” emerged).
The biggest characteristics of the stagnation of the Japanese economy are,
first, that it took as long as 15 years from the collapse of the bubble in the
early 1990s to the elimination of the excesses and, second, that a defensive
attitude on the part of companies continued (it has not been eliminated
even now), even after the problems with the balance sheets of companies,
which lay at the heart of the difficulties, had been rectified.
This book argues that behind the defensive attitude of companies is the
low-growth expectations held by companies. Low-growth expectations
became firmly rooted and settled under the reality of low growth that

2
Companies changed their behavior significantly after the financial crisis. Many Japanese
companies, which once placed a high priority on employment, forcefully pressed ahead with
labor cost reduction through wage cuts and replacement of regular workers by non-regular
workers, while protecting the employment of existing workers (Wakita [2014] described this
as “fortified Japanese companies”). Under such developments, there has emerged serious
social costs, such as very low marriage rates of young non-regular workers (see Chap. 7).
Defensive behaviors of companies are producing negative externalities.
viii PREFACE

extended over a long period of time, from the 1990s (the average growth
rate in 22 years from 1991 to 2012 was 1.0%). The total amount of (nom-
inal) sales of all the profit-making companies in Japan increased by merely
1.9% from fiscal 1990, when the collapse of the bubble started, to fiscal
2016.3 Japanese companies have been living in a world where growth does
not exist for more than a quarter of a century.
Regarding the low-growth expectations formed under such reality, one
view argues that, as the problems with the balance sheets of companies
were resolved, the low-­growth expectation has become not so much a
reflection of economic reality, but rather a result of a habitualized way of
thinking (i.e., a mindset), and therefore, it will change if the mindsets of
companies are changed. In contrast, there is another view that argues that
the low-growth expectations have a rational, most likely structural basis. A
representative point of the latter view stresses the expected shrinkage of
domestic markets due to population decline.
As I explain in the book, I do not think the latter view (one that con-
tends that long-term and structural factors brought about the defensive
attitudes of companies or low-growth performance) applies to the major
part of the two-decade stagnation from the collapse of the bubble to the
beginning of the 2010s (this is the period which we call “the long stagna-
tion period” in the book). More specifically, I do not think that the view
can explain the mechanism of stagnation during the period up to the mid-
2000s, when the corporate sector finally eliminated the aftereffects of the
collapse of the bubble. In particular, although it is highly possible that
expectation of population decline will restrict corporate behaviors in the
future, it is only since the second half of 2000s that the population decline
has become a reality,4 and it was not so long ago, probably only after the
beginning of the 2010s, when the population decline was widely recog-
nized as an important problem by the general public. In this book, it is
argued that the fundamental mechanisms for the major part of the long
stagnation was, one, the lengthening of the process of disposition of excess
assets and, two, the strengthened defensiveness of companies after the
financial crisis. Furthermore, while it is difficult to clearly distinguish the
degree of their influence, factors arising from the defensive mindset (the

3
Ministry of Finance of Japan “Financial Statements Statistics of Corporations by
Industry.”
4
Statistics Bureau, Ministry of Internal Affairs and Communications, “Population
Estimates.”
 PREFACE ix

part of defensiveness that does not seem to have a rational basis) still
remain in the mechanism of low-growth expectations by companies and
low-growth performances since the mid-­2000s to the present.5 Therefore,
attempts to change such mindsets (e.g., governance reform that encour-
ages companies to employ outside directors in their management, promo-
tion of wage increases, and facilitating realization of higher growth than
before through alteration of foreign demand to domestic demand by pro-
moting such activities as tourism and inward foreign investment) are
thought to be effective. However, the mindset of companies cannot
explain the whole process and, particularly for the future, there is no deny-
ing that substantive issues still exist.
The comprehensive policy package that has been implemented by the
Abe administration, known as Abenomics, aims at both encouraging
changes in the mindset and addressing the substantive issues for the future.
The package has brought about some positive outcomes. However, cor-
porate behaviors have not significantly changed in a positive direction, and
the process is only half accomplished. At the same time, concerns are ris-
ing about by-products, including the declining growth contribution of
consumption, accumulation of potential risk in the financial system, and
continued significant deterioration of the fiscal position. This describes the
present condition of the Japanese economy.6
In writing this book, many people have extended their help to me. I
would like to thank the undergraduate students who passionately partici-
pated in my seminar class in the summer of 2011, in which I first started
to examine the Japanese economy intensively, and the undergraduates,
graduates, and alumni of my seminar who participated in “the workshop
on the Japanese economy,” which I held in the Faculty of Arts and Sciences
of Tokyo University. I am also very grateful to Dr. Takashi Omori (ex-
director of the division in charge of writing the “Economic White Paper”
in the Economic Planning Agency of Japan) who read the manuscript and
gave very many fundamental as well as t­echnical comments; Dr. Teru

5
See Supplement to Chap. 6, in which the mechanism of stagnation is shown, with a focus
on company behaviors, by flowcharts, respectively, for three periods: “Period of passive
response” immediately after the collapse of the bubble; “Period of crisis response” after the
financial crisis in the latter half of the 1990s; and “Period of continued defensiveness” from
the mid-2000s.
6
While the objective of the book is to identify the mechanism of anomalies and difficulties
of the Japanese economy over the past 30 years from the bubble formation to present, it
briefly touches on measures to deal with current challenges in the Chap. 7.
x PREFACE

Nishikawa (Associate Professor, Yokohama National University) who

offered many beneficial comments; Mr. Masaru Homma (The European
Bank for Reconstruction and Development (EBRD)), Dr. Kunio Mikuriya
(The World Customs Organization (WCO)); and Mr. Takao Tashiro
(Japan Weather News) who gave useful comments on part of the book,
Mr. Mahito Sugaya (Certified Accountant) who gave very insightful com-
ments based on real-world experience; and Dr. Hiroshi Shibuya (Emeritus
Professor, Tokyo University) who commented on the basic theme of the
book. I am also very thankful to Professors Martin Fransman and Matthias
Zachmann of The University of Edinburgh, who first encouraged me to
write a book, after I gave a seminar in Edinburgh in 2015, on the issue of
long stagnation.
I would like to extend my thanks to my colleagues and the administra-
tive staff of the Department of Advanced Social and International Studies,
School of Arts and Sciences, University of Tokyo, to which I belonged
until March 2017. They kindly allowed and supported my sabbatical leave.
As stated before, guest lectures that I gave during the sabbatical leave were
a drive for the analysis in this book. I would like to express my gratitude
to Dr. Machiko Nissanke, Professor Emeritus of SOAS, who accepted me
as a visiting professor at SOAS; to SOAS Senior Lecturer Dr. Ulrich Voltz,
who supported my research on the Japanese economy through formation
and management of JEN that I noted before, and to SOAS Senior Lecturer
Dr. Satoshi Miyamura, who gave advice on the lectures on the Japanese
economy at SOAS. In particular, I am very grateful to Professor Emeritus
Machiko Nissanke, who provided me with a comfortable research envi-
ronment at SOAS and took time to usher a manuscript of the earlier
­version of the book, first drafted based on lecture notes, into publication.
I am also thankful to the Tokyo Woman’s Christian University for the cur-
rent working environment, which they have provided for my research.
I am also very grateful to Ms. Patricia K. Mason, who thoroughly
reviewed the manuscript and offered very insightful and superb editorial
comments that greatly improved the manuscript. While I have worked for
the Ministry of Finance of Japan for about 30 years, I did not become
directly engaged in the issues that were most relevant to the themes of this
book. I would like to make it clear that the entire contents of the book are
based on public information and incorporate my personal thoughts. They
do not represent views of any institution that I belonged to in the past.
Data and their interpretations are mine, and if there are any misunder-
standings or insufficiency, they are solely my responsibility.
 Preface  xi

Last but not least, I would like to thank Professor Frank Rövekamp of
the Ludwigschafen University of Applied Sciences for his detailed and
positive review of the book’s outline, and to Palgrave Macmillan for pub-
lishing the book.
I will be very happy if this book could make some contribution to
reconstruction of the Japanese society and economy and also could offer
any useful lessons to other countries.

Tokyo, Japan Kenji Aramaki

 Contents

1 Introduction: Objectives and Main Arguments of the Book  1

2 Formation of a Bubble and Its Background 33

3 Collapse of the Bubble and the Start of the Long

Stagnation 83

4 The Financial Crisis and Its Impacts, Long Recovery, and

Afterward129

5 Deflation and Monetary Policy189

6 Deflation and the Mechanism of Corporate Behavior221

7 Abenomics and Challenges for the Japanese Economy285

Bibliography341

Index361

xiii
 List of Figures

Fig. 1.1 Total credit to private nonfinancial sector (in percent of

nominal GDP) 6
Fig. 1.2 Total credit to nonfinancial corporations (in percent of
nominal GDP) 7
Fig. 1.3 Total credit to households (in percent of nominal GDP) 7
Fig. 1.4 Total credit to general government (in percent of GDP) 8
Fig. 2.1 Urban land price index: Six largest cities (end March 2000 =
100) October 1954–April 2012 34
Fig. 2.2 Nikkei 225 (monthly average) June 1949–February 2013 35
Fig. 2.3 Actual and theoretical land price (land for business use,
Central Tokyo.1983 = 1) 1971–1991 37
Fig. 2.4 Actual and projected land price (all uses) in Tokyo
metropolitan area 37
Fig. 2.5 Rate of land price increases by area and by type of use in the
Tokyo metropolitan area, 1983–1991 38
Fig. 2.6 Spillovers of land price increases from Tokyo to Osaka and
Nagoya metropolitan areas and to local areas 39
Fig. 2.7 Aggregate floor size of the buildings belonging to the Tokyo
Building Association and average vacancy rate 40
Fig. 2.8 Development in interest-rate-adjusted PER 41
Fig. 2.9 Current account balance: US 1965–1990 43
Fig. 2.10 Current account balance: Japan 1966–1990 44
Fig. 2.11 Real GDP growth contribution by private investment in plant
and equipment (Ip) and net exports (NE) in 1956–1973
(high-speed growth era), 1974–1984 (stable growth era),
and 1985–1990 (bubble era) 45

xv
xvi List of Figures

Fig. 2.12 General government fiscal balance (GDP ratio): Japan

1965–199047
Fig. 2.13 Yen–dollar exchange rate (monthly average) 1980–1989 52
Fig. 2.14 Official discount rate: Japan 1980–1990 54
Fig. 2.15 Land holdings by all industries (excluding financial and
insurance companies) and their breakdown between
manufacturing and non-manufacturing sectors 58
Fig. 2.16 Physical assets (excluding land) held by all industries
(excluding ­financial and insurance companies) and their
breakdown between manufacturing and non-manufacturing
sectors58
Fig. 2.17 Physical assets (excluding land) held by four major
non-manufacturing industries 59
Fig. 2.18 Savings/investment balance of the government sector and
current account balance (both in GDP ratio): US 62
Fig. 2.19 Consumer Price Index (year-on-year change): US and Japan 63
Fig. 2.20 Real effective exchange rate of the yen (2010 = 100),
1970–199063
Fig. 2.21 Real GDP growth rate: US and Japan, 1980–1985 64
Fig. 2.22 Crude oil prices (Dubai, in dollar per barrel), 1965–1999 65
Fig. 2.23 Real GDP growth rate and share of private investment in
plants and equipment in real GDP 68
Fig. 2.24 Share in real GDP of private investment in plants and
equipment, government expenditure, and net exports: Japan
1965–199068
Fig. 2.25 Share of loans to three real estate-related sectors in total
outstanding loans 70
Fig. 3.1 Real GDP growth rate: Japan 1956–2017 87
Fig. 3.2 Unemployment rate 89
Fig. 3.3 Amount of real GDP: Japan 1955–2015 91
Fig. 3.4 Nominal GDP 92
Fig. 3.5 Output gap (in GDP ratio) 93
Fig. 3.6 Money stock (M2 + CD) (year-on-year change): Japan,
1985–199894
Fig. 3.7 The lending stance of financial institutions (share of “Eased” –
share of “Tight”): Japan 1990–2000 95
Fig. 3.8 Real GDP growth rate and contribution by private
investment: Japan, 1991–2012 98
Fig. 3.9 Cumulated Diffusion Index 99
Fig. 3.10 Quarterly growth rate of real GDP (year-on-year): Japan,
1987Q1–2012Q4100
Fig. 3.11 Unemployment rate 100
 List of Figures  xvii

Fig. 3.12 Cumulated Diffusion Index 104

Fig. 3.13 Quarterly growth rate of real GDP (year-on-year): Japan,
1985Q1–2000Q4105
Fig. 3.14 Growth contribution of major demand components
(three-year moving average): Japan, 1985–2000 106
Fig. 3.15 Share in real GDP of private investment, housing investment,
and government investment 107
Fig. 3.16 Assets, liabilities, and net assets of companies (all industries
excluding financial and insurance companies): FY 1960–2013 108
Fig. 3.17 Total sales of companies (all industries excluding financial and
insurance companies) and their breakdown between
manufacturing and non-­manufacturing sectors 108
Fig. 3.18 Real GDP growth rate and expected growth rate held by
companies for the next three years 110
Fig. 3.19 Growth rate of nominal sales and growth rate of nominal
investment (both in three-year moving average) 110
Fig. 3.20 The exchange rate of the yen to the dollar and real and
nominal effective exchange rate (2010 = 100) 111
Fig. 3.21 Capital gains and losses accruing to land and stocks (in GDP
ratio)113
Fig. 3.22 Outstanding balance of long-term debt of companies (all
industries excluding financial and insurance companies) 114
Fig. 3.23 Expected growth rate and land price 115
Fig. 3.24 Fiscal balance of general government (in GDP ratio) 117
Fig. 3.25 General government deficit (in GDP ratio): Japan, US, the
United Kingdom, Germany, and France 118
Fig. 3.26 Outstanding balance of general government debt (in GDP
ratio)118
Fig. 3.27 Official discount rate 119
Fig. 4.1 Number of failed deposit-taking financial institutions 131
Fig. 4.2 Return on Assets (ROA: operating profits/total assets) 132
Fig. 4.3 Earned profits 132
Fig. 4.4 Operating profits by companies’ capital size 144
Fig. 4.5 Real GDP growth rate and asset price (1980 = 100): Norway 150
Fig. 4.6 Real GDP growth rate and asset price (1980 = 100): Sweden 150
Fig. 4.7 Real GDP growth rate and asset price (1980 = 100): Finland 151
Fig. 4.8 GDP growth rate: Norway, Sweden, and Finland 152
Fig. 4.9 Number of corporate bankruptcies 154
Fig. 4.10 Economic conditions, as judged by companies 155
Fig. 4.11 Lending stance of financial institutions, as judged by
companies, Japan 1990–2000 156
Fig. 4.12 Unemployment rate 156
xviii List of Figures

Fig. 4.13 Nominal wages (year-on-year change, three-year moving

average)157
Fig. 4.14 Share of non-regular employees in total number of
employees, excluding executives 158
Fig. 4.15 Number of regular workers 159
Fig. 4.16 Financial surplus/deficit by sector (in percent of GDP) 159
Fig. 4.17 Consumer Price Index (excluding fresh food) (year-on-year
change)160
Fig. 4.18 Cumulated Diffusion Index 162
Fig. 4.19 Production capacity (“excessive”–“insufficient”) 163
Fig. 4.20 Interest-bearing liabilities/cash flow 164
Fig. 4.21 Long-term debt of companies 164
Fig. 4.22 Employment conditions as judged by companies
(“excessive employment”—“insufficient employment”) 165
Fig. 4.23 Cash and deposit holdings by nonfinancial companies 165
Fig. 4.24 Real GDP growth rate of the world and Japan 166
Fig. 4.25 Investment/cash flow 167
Fig. 4.26 Private investment and Foreign Direct Investment 168
Fig. 4.27 Nominal investment by the electric machinery and appliances
sector and the automobiles and parts sector 168
Fig. 4.28 Labor cost/value added 170
Fig. 4.29 Share of public fixed capital formation in real GDP 170
Fig. 4.30 Real GDP growth rate and growth contribution of private
consumption171
Fig. 4.31 Real wage (2015 = 100) 172
Fig. 4.32 Household savings ratio 173
Fig. 4.33 Trade dependence, export, import, and net export (in GDP
ratio)173
Fig. 4.34 Nominal investment, nominal amount of depreciation, and
nominal net investment 174
Fig. 4.35 Current account and goods and services account 175
Fig. 4.36 Yen to dollar nominal exchange rate 176
Fig. 4.37 Overseas investment/domestic investment 177
Fig. 4.38 Total assets of corporations (excluding financial and insurance
companies) and their trend line 181
Fig. 4.39 Share of excess assets in total assets: FY1985~FY2010 181
Fig. 4.40 Additional number of people unemployed and the
unemployment rate resulting from prompt resolution
of excess assets 182
Fig. 4.41 Physical assets (excluding land) of corporations (excluding
financial and insurance companies), their trend lines, and the
ratio of physical assets to sales 183
 List of Figures  xix

Fig. 5.1 The Consumer Price Index (excluding fresh food): Changes
from the previous year 190
Fig. 5.2 The GDP deflator and Consumer Price Index (excluding
fresh food) (year-on-year change) 191
Fig. 5.3 Import penetration 193
Fig. 5.4 Price developments in imports and import-competing
products194
Fig. 5.5 Cumulated changes in GDP deflator from 1990 to 2009 by
sector (%) 194
Fig. 5.6 Price changes from 1990 to 2009 of deregulation-related
products195
Fig. 5.7 Interest rates 200
Fig. 5.8 Stock price: Japan in 1990s and US in the Great Depression 201
Fig. 5.9 Consumer Price Index: Japan in 1990s and US in the Great
Depression201
Fig. 5.10 Taylor rule analysis of US and Japanese interest rates 202
Fig. 5.11 M2 and Consumer Price Index (excluding fresh food)
(year-on-year change) 212
Fig. 5.12 Base money and M2 (year-on-year change) 213
Fig. 5.13 Loans and government bonds held by domestic banks 213
Fig. 6.1 Sales and wages (all industries excluding financial and
insurance companies) 222
Fig. 6.2 Ratio of wages to sales and operating profits 223
Fig. 6.3 Operating profits, non-operational profits, and current profits
(all industries excluding financial and insurance companies) 224
Fig. 6.4 Current profits and changes in wages from previous year 225
Fig. 6.5 Assets and liabilities of companies (all industries excluding
financial and insurance companies) 226
Fig. 6.6 Assets and their breakdown between fixed and liquid assets
(all industries excluding financial and insurance companies) 226
Fig. 6.7 Liquid assets and their components (all industries excluding
financial and insurance companies) 227
Fig. 6.8 Fixed assets and their major components (all industries
excluding financial and insurance companies) 228
Fig. 6.9 Investment securities and Foreign Direct Investment 228
Fig. 6.10 Liabilities and their breakdown between liquid and fixed
liabilities (all industries excluding financial and insurance
companies)230
Fig. 6.11 Liquid liabilities and their major components (all industries
excluding financial and insurance companies) 230
Fig. 6.12 Fixed liabilities and their components (all industries excluding
financial and insurance companies) 231
xx List of Figures

Fig. 6.13 Net assets and their components (all industries excluding
financial and insurance companies) 232
Fig. 6.14 Earned surplus and its components 233
Fig. 6.15 Capital/assets ratio 233
Fig. 6.16 Number of manufacturing companies by capital size (all
industries excluding financial and insurance companies) 234
Fig. 6.17 Ratio of physical assets (excluding land) to sales 240
Fig. 6.18 Estimated excess physical assets, investment, and depreciation
(all industries excluding financial and insurance companies) 241
Fig. 6.19 Real gross private investment 242
Fig. 6.20 Cash flow, private investment, and private investment/
cash flow 243
Fig. 6.21 Dividends received from abroad and their share in non-
operational revenue 245
Fig. 6.22 Expected growth rate held by companies 246
Fig. 6.23 Ratio of current profits to sales (%) 246
Fig. 6.24 Ratio of outstanding Foreign Direct Investment (all sectors)
to physical assets (excluding land) (all industries excluding
financial and insurance companies) 247
Fig. 6.25 Overseas production ratio (manufacturing) 248
Fig. 6.26 Private investment, outward Foreign Direct Investment,
and cash flow 248
Fig. 6.27 Monthly nominal cash earnings per worker (in establishments
with five employees or more, year-on-year change) 250
Fig. 6.28 Monthly real cash earnings per worker (in establishments
with five employees or more [2015 = 100]) 251
Fig. 6.29 Real wages and labor productivity (1990 = 100) 252
Fig. 6.30 Labor income share 253
Fig. 6.31 Monthly cash earnings per worker for normal workers
and for part-­time workers (2015 = 100) 254
Fig. 6.32 Ratio of wages of non-regular workers to those of regular
workers255
Fig. 6.33 Compensation of employees/net national income
(at factor price) 256
Fig. 6.34 Labor cost/value added 256
Fig. 6.35 Value added and ratio of wage increase, dividends, and
increase in net assets to value added 258
Fig. 6.36 Annual average wage (1991 = 100) 259
Fig. 6.37 Hourly earnings (manufacturing) (1990 = 100) 259
Fig. 6.38 Annual rate of increase in CPI (excluding food, energy) 260
Fig. 6.39 Export price index (yen base) (2015 = 100) 260
Fig. 6.40 Developments in terms of trade (output deflator and input
deflator): manufacturing (2005 = 100) 262
 List of Figures  xxi

Fig. 6.41 Developments in terms of trade (output deflator and input

deflator): electric machinery (2005 = 100) 262
Fig. 6.42 Share of G5 and China in world exports 263
Fig. 6.43 Employment income 264
Fig. 6.44 Net interest received by households 264
Fig. 6.45 Employment income + net interest received by household 265
Fig. 6.46 Ratio of nominal household consumption to household
income (including personal business income) 266
Fig. 6.47 Export price, import price, and terms of trade (2015 = 100) 266
Fig. 6.48 GDP gap and changes of monthly cash earnings per worker
from previous year 275
Fig. 6.49 Nominal wage and Consumer Price Index (excluding fresh
food) (changes from previous year) 276
Fig. 6.50 Real GDP growth and population growth (Japan) 277
Fig. 6.51 Real GDP growth and population growth (France) 278
Fig. 6.52 Real GDP growth and population growth (US) 278
Fig. 6.53 Real GDP growth and population growth (United Kingdom) 279
Fig. 6.54 Real GDP growth and population growth (Germany) 279
Fig. 6.55 Nominal GDP and population 280
Fig. 7.1 Developments in the stock and foreign exchange market: Five
subperiods under Abenomics 295
Fig. 7.2 Trading amounts by investor type in Tokyo, 1st section 297
Fig. 7.3 Accumulated change of Nikkei 225 (October 31, 2012 = 100) 298
Fig. 7.4 Accumulated change of yen = dollar exchange rate
(October 31, 2012 = 0) 299
Fig. 7.5 Yen = dollar exchange rate and real GDP growth rate 299
Fig. 7.6 Nikkei 225 and real GDP growth rate 300
Fig. 7.7 Real growth rate and growth contribution by demand
components: Preceding period (2010Q1–2012Q4) and
Abenomics period (2013Q1–2018Q1) 301
Fig. 7.8 Interest rate on government bonds by maturity 302
Fig. 7.9 Interest rate on government bonds, lending rate, and
outstanding balance of bank lending 303
Fig. 7.10 Real private investment 304
Fig. 7.11 Real private consumption 305
Fig. 7.12 Real exports, real imports, and real net exports 305
Fig. 7.13 Real government expenditure 306
Fig. 7.14 Consumer Price Index (excluding fresh food) (year-on-year
change)307
Fig. 7.15 Expected inflation rate held by private sector economists
(average)308
Fig. 7.16 Expected inflation rate held by companies (all industries) 308
xxii List of Figures

Fig. 7.17 Consumer Price Index (excluding fresh food) (year-on-year

change, excluding effects of consumption tax increase),
yen–dollar rate, and crude oil price 309
Fig. 7.18 Consumer Price Index (excluding fresh food, oil products and
other special factors), yen–dollar exchange rate, and crude oil
price310
Fig. 7.19 Yen–dollar exchange rate, and current profits 311
Fig. 7.20 Nikkei 225 and current profits 312
Fig. 7.21 Current profits, investment, cash, and deposits 312
Fig. 7.22 Labor income share 313
Fig. 7.23 Unemployment rate 314
Fig. 7.24 Ratio of jobs offers to job seekers 314
Fig. 7.25 Hourly wages for regular and non-regular workers (year-on-
year change) 315
Fig. 7.26 Real GDP growth rate and expected growth rate held by
companies317
Fig. 7.27 Population of Japan and its future estimates 319
Fig. 7.28 Five-year real GDP growth rate 321
Fig. 7.29 Five-year growth rate of real GDP per capita 321
Fig. 7.30 Five-year growth rate of real GDP per working-age
population (15–64) 322
Fig. 7.31 GDP gap 323
Fig. 7.32 Potential growth rate 324
Fig. 7.33 Growth contribution by demand components 325
Fig. 7.34 Annual issuance of government bonds: FY 1965–2017 327
Fig. 7.35 Share in outstanding government bonds and FILP bonds
held by major holders 328
Fig. 7.36 Share of respondents for each age group who listed
deterioration in fiscal, employment, or economic
conditions as the cause of their concern for the future 330
 List of Tables

Table 2.1 Major economic and political developments in the 1970s and
1980s42
Table 2.2 Average growth contribution of private investment in plant
and equipment and net exports: 1956–1973 (high-speed
growth period), 1974–1984 (stable growth period), and
1985–1990 (bubble period) (%) 45
Table 2.3 Major trade disputes between Japan and US 45
Table 2.4 Major cases of export restraint 49
Table 2.5 BOJ’s explanation of monetary policy changes in the late 1980s 56
Table 2.6 Factor analysis of Japan’s current account surplus (estimate)
(in 100 million US dollars) 65
Table 2.7 GDP growth rate and private investment (year-on-year
change, period average): 1956–1973, 1974–1984,
1985–1990 (%) 66
Table 2.8 Developments in real estate-related loans by banks
(%, trillion yen) 70
Table 2.9 Dependence of manufacturing companies on borrowing
from financial institutions (%) 71
Table 3.1 Five periods of the Japanese economy since the high-speed
growth era 88
Table 3.2 Comparison of real GDP growth rate: Japan and other
advanced countries, 1980–2012 88
Table 3.3 Contribution to real GDP growth by major demand
components97
Table 3.4 Economic cycles during the long stagnation period 98

xxiii
xxiv List of Tables

Table 3.5 Contribution to GDP growth by major demand components

(bubble period and four subperiods in the long stagnation
periods)102
Table 3.6 Economic stimulus packages after the burst of the bubble
(trillions of yen) 116
Table 3.7 Chronology of relevant events 122
Table 4.1 Outstanding non-performing loans (NPLs) and NPL ratio 135
Table 7.1 Five periods in relation to developments in stock price and
the yen rate under Abenomics 296
 CHAPTER 1

Introduction: Objectives and Main

Arguments of the Book

1   Objectives and Main Arguments of the Book

This book examines the experience of the Japanese economy over last
30 years, from the 1980s, a time filled with a series of difficulties not
observed in advanced countries in recent years, including the formation
and collapse of a huge bubble, a two-decade-long economic stagnation,
and chronic deflation, with an aim of identifying the mechanisms and
drawing lessons for future economic policy management.
The Japanese economy grew to be the second largest economy next to
the United States through the period of rapid growth from the 1950s to
the early 1970s, and its per capita income rose to among the highest levels
in the world. Even after the end of the era of rapid growth, the Japanese
economy overcame shocks arising from the collapse of the Bretton Woods
fixed exchange rate system and the shift to the floating exchange rate, as
well as two oil crises in the 1970s, and continued to be an object of envy
with its very low unemployment rate and solid economic growth. Its
financial presence grew larger still under continued high economic perfor-
mance, and it even began to be regarded as an economic threat to other
countries in the 1980s. However, the Japanese economy formed a huge
bubble in the latter half of the 1980s, and after the bubble’s collapse at the
beginning of the 1990s, it suffered from a long period of economic stag-
nation and deflation. Japan’s nominal GDP, after hitting a peak of 534.1
trillion yen in 1997, stopped ­growing altogether and was 545.1 trillion

© The Author(s) 2018 1

K. Aramaki, Japan’s Long Stagnation, Deflation, and Abenomics,
https://doi.org/10.1007/978-981-13-2176-4_1
2 K. ARAMAKI

yen in 2017, only greater by mere 11.0 trillion yen (2.1%) 20 years later,
after its peak in 1997.1
Why did such a long stagnation, which nobody could have imagined,
occur? Although there have been extensive arguments, there is no definite
consensus on the mechanism of the stagnation, and therefore, views still
diverge on the lessons to be drawn. As briefly described later in this chap-
ter, while the US economy recovered relatively speedily from the Global
Financial Crisis (GFC) that struck in 2008, the European economies con-
tinued to show weaknesses in their recovery, and worries about a fall into
deflation were not entirely dismissed until rather recently. Furthermore,
the Chinese economy, which had been growing rapidly for several decades,
started to decelerate and while the situation has stabilized, concerns over
the future course of its economy have not been eliminated entirely. Did
these economies face the risk of falling into long stagnation and deflation
(or low inflation) that the Japanese economy experienced? If there was
such a risk, at least at certain point in time after the crisis, what was the
mechanism of such a risk? Assuming that these economies have successfully
emerged from such a risk, what worked? If the economies did not success-
fully avoid the risk, what are the remaining problems? In order to answer
such questions, it helps to have an understanding of the mechanism of
long stagnation and deflation experienced by the Japanese economy.
While attempting to explore the mechanism of the bubble, stagnation,
and deflation in Japan from the 1980s throughout this book, we seek
answers to the following concrete key questions:

• Why was the bubble formed? What could have been done to prevent it?
• How did the bubble collapse? What impacts did the collapse of the
bubble have on the economy?
• Why did the financial crisis break out in the late 1990s, as much as
seven years after the collapse of the bubble? Why were the
­non-­performing loan (NPL) problems that underlay the crisis not
resolved sooner?

1
In real terms, the average real growth rate since the collapse of the bubble until today has
been 1.2%, which is about half of the average growth rate of the advanced countries (2.2%)
(or, just one-third of the average growth rate of the world economy [3.6%]) over the period.
If the Japanese economy had grown at the average rate of growth of advanced countries
(2.2%), then the real GDP would have been 1.3 times as big as the actual size (if it had grown
at the world average rate, it would have been 2 times as large). (Calculated using the IMF
“World Economic Outlook April 2108 database”).
 INTRODUCTION: OBJECTIVES AND MAIN ARGUMENTS OF THE BOOK 3

• What impacts did the financial crisis have on the economy?

• Why did the vulnerability of the Japanese economy remain, even
after the negative legacy of the formation and collapse of the bubble2
and the shock of the financial crisis had been overcome by the mid-­
2000s? What are the fundamental problems the Japanese economy
currently has?
• Will Abenomics be able to solve the fundamental problems of the
Japanese economy?

The ultimate objective is to understand the mechanism of long stagnation

and deflation and draw lessons for the future in Japan and for other econo-
mies through exploration of the answers to these questions.
The major characteristics of this book include the following:

• First, to capture the real cause of the anomalies and difficulties of the
Japanese economy, we have taken an approach, based mainly on a
­thorough examination of data and facts. Since the early 2010s when we
started examining the long stagnation of the Japanese economy, we did
not espouse any theory or views in advance, but aimed to first study and
analyze extensive arguments, data, and facts. This book draws on such
work and tries to present a view that can most coherently explain what
the data and facts indicate. This book has tried to comprehensively
describe and understand the three-­decade-­long period of anomalies
and difficulties of the Japanese economy, thereby offering a new per-
spective on the problem and contributing to the economic literature.
• Second, we present a view that it is appropriate to analyze the Japanese
economy over 30 years by dividing the whole period into subperiods.
The basic divisions are three: the bubble period from the mid-1980s to
the beginning of the 1990s; the long stagnation period of more than
20 years from the beginning of the 1990s to the early 2010s; and the
period of Abenomics from 2013. However, what is unique to this
study is that the analysis of the long stagnation period is conducted by
further dividing this period of more than 20 years into four subperiods.
This view arose from the observation that the changes in the Japanese
economy emerged suddenly after the collapse of the bubble, and the
changes developed into a long-term phenomenon. In other words, the
­mechanism of stagnation is thought to have changed from one of an

2
The negative legacy, as is explained in the book, refers mainly to the hangover of excessive
assets and debt in the corporate sector.
4 K. ARAMAKI

abrupt nature to the one with a perpetual or structural nature through

the long process of stagnation. The mechanism of stagnation must
have changed over time. As is explained in this book, the turning point
occurred with the financial crisis in the late 1990s. Specifically, the peri-
ods of study are divided as: Period I, from the period when the bubble
burst at the beginning of the 1990s to just before the financial crisis in
the latter half of 1990s; Period II, from the financial crisis to the early
2000s when the longest economic expansion since the Second World
War started; Period III, from the first half of the 2000s to just before
the GFC erupted in 2008; and Period IV, from the GFC to just before
the start of the Abenomics.
• Third, we place a significant focus on the analysis of company behav-
iors. This focus also emerged from the data-centered approach. The
Japanese economy underwent very substantial changes with the col-
lapse of the bubble and also with the financial crisis. These changes
include, for example, substantial restraint of private investment after
the collapse of the bubble and the decline of nominal wages and
consumer prices after the financial crisis. Most of these changes are
related to corporate behaviors, and therefore, the analysis of these
behaviors has become a very important element of this book. We
examine how corporate behaviors evolved over these respective sub-
periods, including in the bubble period, after the collapse of the
bubble, and after the financial crisis, based not only on macroeco-
nomic data but also on the combined balance sheet data of all the
profit-making companies in Japan.

The analyses of company behaviors are mainly conducted in Chap. 6,

and these analyses suggest that corporate behaviors greatly changed in the
process of long stagnation. Corporate behaviors during Period I after the
burst of the bubble and before the financial crisis may be described as a
“passive response,” in which expansion of excessive asset holding and
assumption of excessive debt, as well as a surge in labor costs developed.
In the period from the financial crisis to the first half of the 2000s (a
period broadly corresponding to Period II), companies tried to rapidly
remove excessive assets and debt and cut labor costs in response to the
financial crisis. Corporate behavior in this period is thus described as “cri-
sis response.” The elimination of excessive assets, debt, and employment
was completed by the mid-2000s, that is, 15 years after the collapse of the
bubble. However, restraints on private investment and on wages by
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