Diary of a Financier

More Richard Koo on the Balance Sheet Recession

In Economics on Mon 11 Apr 2011 at 18:15
  • Richard Koo released a new presentation about balance sheet recessions, Japan’s Lost Decade & modern US.
  • He uses Japan’s failed attempts at fiscal consolidation (1997 & 2001) as warnings to US policymakers.

Richard Koo is the Nomura economist who keeps harping on the modern American situation, dubbing it a “balance sheet recession” a la Japan.

In his most recent presentation, Mr. Koo suggests that in both 1997 and 2001, Japan’s attempted Fiscal Reforms were actually counterproductive in stabilizing their federal budget deficit:

Japanese Fiscal Reforms (1998 & 2001)- Counterproductive economic outcomes.

In both instances—the Hashimoto Reforms & the Koizumi Reforms—the fiscal tightening subsequently exacerbated the federal deficit.

Starting with the 1998 Hashimoto Fiscal Reforms, I’d be remiss to not mention the overarching Asian Crisis that presented a timely headwind.  Regardless, here’s the retrospective analysis of the fiscally conservative program from Hashimoto himself:

Former Japanese prime minister Ryutaro Hashimoto has admitted that a previous underestimation of the severity of Japan’s economic problems has pushed the country towards further economic deterioration…

“When I was appointed prime minister, the information we were given by the top management of the financial organization in Japan, particularly the information on the quantity and volume of non-performing loans, was undervalued,” Hashimoto told CNN…

Hashimoto pioneered the increase of consumption tax from 3% to 5% during his term, which also cost him popularity among his colleagues and constituents and is the underlying reason many analysts say he lost the leadership.

Referring back to the Nomura chart above, note that Hashimoto’s increase in the consumption tax was met by a bout with increasing fiscal deficits and decreasing tax revenues!

Hashimoto’s successor, Junichiro Koizume, landed in the Prime Minister’s position in 2001. He promised, ‘a period of painful restructurings to improve the future,’ including an attack upon bad debt at commercial banks and privatizing Japan Post.  Again, 2001 brought headwinds from the Tech Bubble Burst, but nevertheless the Japanese fiscal consolidation reared increasing fiscal deficits and decreasing tax revenues.

This makes me think of 1936-37 Great Depression America, at which time the US thought it was out of the woods and pursued public sector fiscal consolidation that coincided with continued household deleveraging.  What worse is policymakers didn’t even provide the accompaniment of monetary support.  I can’t repeat that enough, especially with Americans asking US policymakers to take their foot off the gas and immediately repair the deficit.

–Romeo (hattip Business Insider)

  1. […] can’t emphasize enough the need for fiscal stimulus from the public sector to offset household deleveraging.  At very least, […]


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