10. The Japanese Case: BeforetheCrisis Steadygains in productivitypromotedeconomicgrowth in theyearsbeforethecrisis Japanesegoodswereoftensuperiortoforeignproducts – both in qualityandprice The resulting large tradesurpluseshelpedtheJapaneseeconomygrowevenfaster Simultaneouslysavingswereextremelyhigh due to stringent tariffsandregulation The result was thatmoney was readilyavailableforinvestment ThisinvestmentintocapitalresourcesmeantthatJapaneseproductscouldevenbecomebetterandcheaper Tocounteractthis spiral ofincreasingJapanesecompetitiveness, thePlazaAccordwas established
11. The Japanese Case: BeforetheCrisis The PlazaAccord Agreement in 1985 byconsortiumofthelargesteconomytodevaluethe U.S. dollaragainstJapanese Yen and German Deutschmark Tookplace in New York Plaza Hotel
12. The Japanese Case: Whathappened As a resultofthePlazaAccord, theJapanese Yen appreciatedagainstthe US-Dollar Exports from Japan becamemore expensive andlesscompetitive Imports to Japan becamecheaper ThustheJapanesetradebalanceworsened… Tocounteractadverseeffects on GDP, the Bank of Japan followed a more expansive monetarypolicy Y = C + I + G + NX
13. The Japanese Case: IS-LM Diagram i 2. LM Curve LM Curve‘ i1 1. i2 2. i3 1. 1. IS Curve IS Curve‘ 2. Y Y1 =Y3 Y2
14. The Japanese Case: Effect on Rates As wesawfromthe IS-LM diagram, thecombinationofbotheffectsleadsto a decrease in interestrates
15. The Japanese Case: Effect on Asset Prices The extremelylowinterestratesmeantthatmarketliquidityincreasedsignificantly Someofthismoneywentintospeculation in sharesand real estate
16. The Japanese Case: Effect on Rates Tocounteractthebubble, the Bank of Japan startedtoincreaseinterestrates Thismadespeculationmore expensive
17. The Japanese Case: Effect on Asset Prices Mortgagepaymentsbecamemore expensive New creditfinancedpurchasesof real estateandsharessufferedfromhigherrates, too The assetpricebubblebursted..
18. The Japanese Case: Result The dropdown in assetpriceshadadverseaffects on thefinancialsystem Loans (banks‘ assets) defaultedleavingthebankingsystemwithseverelosses The followingcreditcrunch was underestimatedbythe Bank of Japan andslowed down growth in thefollowingyears The so-called „Lost Decade“ began Severeassetpricebubblesputtheeconomicdevelopmentof a wholeeconomyatrisk!
24. China‘s Economic Development Chinese Trade BalanceChinese export enjoyed a continuous growth after 1980 with the only exception in 2009Four trillion investment plan for two years announced by China government in 2008, about 13% of GDP in 2008
28. Is China following the path of the Japanese Crisis? Both Japan and China followed loose monetary policy & huge fiscal stimulus Japan GDP growth rate 3-4%, compared to Chinese GDP growth close to 10% Japan’s bubble was driven primarily by commercial real estate market, which is not the case in China 50-60% of Japan bank Lending was in real estate market compared to 40% in China Post-liberalization China faced huge shortage of residential property that meets new living standards. State-controlled measures and regulations – second property restrictions, bank reserve requirements 80
32. China GDP growth over the past 10 years is close to 10% p.a. Which partially explains the price trends over the past five to six years within a tolerable range (2-3 fold increase)
33. We see little risk in the foreseeable future that increases in loans to the real estate sector will pose a threat to the financial system but a rapid increase in lending could lead to a rise in bad debt in the future and might curb the Chinese financial system.
34. In Long term – yes, there is a bubble in the Real Estate market
35. Most of the bank lending is finding its way in over-priced real estate as the financial markets are still incomplete in China
