Nomura’s Richard Koo has been banging on about the similarities between Japan’s balance sheet recession and the current financial malaise for a long while.
His main point has always been that the financial system won’t recover unless corporates and households complete their deleveraging journey.
Let’s start with Japan’s corporate sector. Up until the Japan’s bubble collapsed in 1990, the country’s corporate sector was growing at rapid pace with liabilities growing faster than assets. Or as he puts it “businesses were borrowing large sums of money to purchase financial assets and real assets.”
After the bubble burst, that growth in financial liabilities slowed sharply, even turning negative in 1997 — indicating that corporates had actually started to pay down debt. This deleveraging continued until 2004, even though interest rates were at zero, indicating “just how desperate corporates were to repair their balance sheets”.
The paying down of debt only stopped in 2005. But instead of taking on new liabilties they moved to restore the pool of financial assets that had been depleted during the difficult years.
A similar story can be observed in Japan’s household sector, despite the fact that financial asset growth far outpaced the growth of financial liabilities.
Financial asset growth in Japanese households greatly exceeded the growth in financial liabilities through the first half of the 1990s, reflecting a history of high savings rates. But growth in financial assets (savings) fell steadily after the bubble burst and had dipped nearly to zero by 2003. This was attributable more to sluggish incomes than to aging demographics, in my view. It was during this period that employment and wage adjustments began and “restructuring” became a buzzword, pushing many households into a tight financial corner. Financial assets did not resume growing until 2004, when improvements in the job market enabled households to start saving again.
Growth in financial assets slumped again as the global financial crisis depressed incomes, but picked up sharply last year following the March earthquake and tsunami. The disaster—and the subsequent problems at the nuclear plants—fueled widespread concerns about the future, prompting people to cut consumption and increase savings.
Growth in household financial liabilities fell sharply after the bubble burst, and from 1998 onward households not only stopped borrowing money but in most years were paying down existing debt.
So how does this story compare to India?
In a balance sheet recession, consumer spending is put on the backburner in favor of saving and paying down debt.India can learn a lot not just from the Japanese model, but from other Asian model. The fact is, 25-30 years down the line, when your demographics is right up there, there will be many options for investment in India. India is already entering its demographic peak. That being said, there is a huge need for serious reforms on the supply side to get the growth momentum going.
When asked if emerging markets could face Japan like stagflation, Richard Koo in an interview with The Economic Times, India, earlier in 2012 said that emerging economies are in very different world. Unless you have a massive bubble, housing bubble and bubble burst, balance sheet recession would not be your concern. The balance sheet recession happens only after a major nationwide asset price bubble financed with debt burst and even if in India people are worried about something like that or in Brazil people are worrying something like that, I do not think balance sheet recession is going to be a concern.
His main point has always been that the financial system won’t recover unless corporates and households complete their deleveraging journey.
Let’s start with Japan’s corporate sector. Up until the Japan’s bubble collapsed in 1990, the country’s corporate sector was growing at rapid pace with liabilities growing faster than assets. Or as he puts it “businesses were borrowing large sums of money to purchase financial assets and real assets.”
After the bubble burst, that growth in financial liabilities slowed sharply, even turning negative in 1997 — indicating that corporates had actually started to pay down debt. This deleveraging continued until 2004, even though interest rates were at zero, indicating “just how desperate corporates were to repair their balance sheets”.
The paying down of debt only stopped in 2005. But instead of taking on new liabilties they moved to restore the pool of financial assets that had been depleted during the difficult years.
A similar story can be observed in Japan’s household sector, despite the fact that financial asset growth far outpaced the growth of financial liabilities.
Financial asset growth in Japanese households greatly exceeded the growth in financial liabilities through the first half of the 1990s, reflecting a history of high savings rates. But growth in financial assets (savings) fell steadily after the bubble burst and had dipped nearly to zero by 2003. This was attributable more to sluggish incomes than to aging demographics, in my view. It was during this period that employment and wage adjustments began and “restructuring” became a buzzword, pushing many households into a tight financial corner. Financial assets did not resume growing until 2004, when improvements in the job market enabled households to start saving again.
Growth in financial assets slumped again as the global financial crisis depressed incomes, but picked up sharply last year following the March earthquake and tsunami. The disaster—and the subsequent problems at the nuclear plants—fueled widespread concerns about the future, prompting people to cut consumption and increase savings.
Growth in household financial liabilities fell sharply after the bubble burst, and from 1998 onward households not only stopped borrowing money but in most years were paying down existing debt.
So how does this story compare to India?
In a balance sheet recession, consumer spending is put on the backburner in favor of saving and paying down debt.India can learn a lot not just from the Japanese model, but from other Asian model. The fact is, 25-30 years down the line, when your demographics is right up there, there will be many options for investment in India. India is already entering its demographic peak. That being said, there is a huge need for serious reforms on the supply side to get the growth momentum going.
When asked if emerging markets could face Japan like stagflation, Richard Koo in an interview with The Economic Times, India, earlier in 2012 said that emerging economies are in very different world. Unless you have a massive bubble, housing bubble and bubble burst, balance sheet recession would not be your concern. The balance sheet recession happens only after a major nationwide asset price bubble financed with debt burst and even if in India people are worried about something like that or in Brazil people are worrying something like that, I do not think balance sheet recession is going to be a concern.
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