There is an old joke among

economists that states:

A Re c e s s i o n i s w h e n yo u r n e i g h b o u r l o s e s h i s j o b .
A d e p re s s i o n i s w h e n yo u l o s e yo u r j o b .
 Presentation On Recession In
Japan & United States

• Guided By:
Prof. Sujata Jhamb

Submitted By:
Gaurav Surana
Anshul Aggarwal
Anuj Karwa
Rahul Goyal
Rahul Rathi
 Outline
• Business Cycle
• What causes to recession?
• History Of Recessions
• How Fiscal & Monetary policy affect economy?
• US Recession
• Macro Economic Measures and its impact in USA
• Japanese Bubble
• Macro Economic Measures and its impact in
Japan
• Comparison
• Japanese Mystery
 Business Cycle
• The business cycle is the periodic but irregular up-and-down
movements in economic activity, measured by fluctuations in real
GDP and other macroeconomic variables
• A business cycle is identified as a sequence of four phases:
– Contraction (A slowdown in the pace of economic activity)
– Trough (The lower turning point of a business cycle, where a
contraction turns into an expansion)
– Expansion (A speedup in the pace of economic activity)
– Peak (The upper turning of a business cycle)

• A recession occurs if a contraction is severe enough... A deep trough

is called a slump or a depression.
 Recession
A recession is a significant
decline in activity spread
across the economy, lasting
more than a few months,
visible in industrial production,
employment, real income, and
wholesale-retail trade. A
recession begins just after the
economy reaches a peak of
activity and ends as the
economy reaches its trough
 What is Recession ?
• A recession is a contraction phase of the business cycle.
• The official agency in charge of declaring that the economy is in a
state of recession is the National Bureau of Economic Research
(NBER).
They define recession as a "significant decline in economic activity
lasting more than a few months“, which is normally visible in real
GDP, real income, employment, industrial production, and wholesale-
retail sales.
• For this reason, the official designation of recession may not come
until after we are in a recession for six months or even longer
• Some economists also suggest that a recession occurs when the
natural growth rate in GDP is less than the average of 2%. Typically, a
normal economic recession lasts for approximately 1 year.
Contraction Period
 What Causes Recession ?

• An economy which grows over a period of time tends to

slow down the growth as a part of the normal economic
cycle.
• An economy typically expands for 6-10 years and tends to
go into a recession for about six months to 2 years.
• A recession normally takes place when consumers lose
confidence in the growth of the economy and spend less.
• This leads to a decreased demand for goods and services,
which in turn leads to a decrease in production, lay-offs
and a sharp rise in unemployment.
• Investors spend less as they fear stocks values will fall and
thus stock markets fall on negative sentiment.
 History of Recession
Name Date Durati Causes
on

Panic of 1907– 1 year A run on knickerbocker Trust Company deposits on October

1907 1908 22,1907 set events in motion that would lead to a severe
monetary contraction.

Severe Hyperinflation in Europe took place over production in

Post World 1918– 3 North America. It was a brief but very sharp recession and was
War I caused by the end of wartime production, along with an influx
1921 years
Recession of labor from returning troops. This in turn caused high
unemployment.

Stock markets crashed worldwide, and a banking collapse took

Great 1929– 10 place in the United States. This sparked a global downturn,
Depression 1939 years including a second, more minor recession in the United States,
the Recession of 1937.

After a post-Korean War inflationary period, more funds were

Recession of 1953– transferred into national security. The Federal Reserve changed
1 year
1953 1954 monetary policy to be more restrictive in 1952 due to fears of
further inflation.
 History of Recession
Monetary policy was tightened during the two years preceding
1957, followed by an easing of policy at the end of 1957. The
Recession 1957–
of 1957 1958 1 year budget balance resulted in a change in budget surplus of 0.8%
of GDP in 1957 to a budget deficit of 0.6% of GDP in 1958, and
then to 2.6% of GDP in 1959.

A quadrupling of oil prices by OPEC coupled with high

1973 oil 1973– 2
crisis 1975 years government spending due to the Vietnam War led to stagflation
in the United States.

The Iranian Revolution sharply increased the price of oil around

the world in 1979, causing the 1979 energy crisis. This was
caused by the new regime in power in Iran, which exported oil
at inconsistent intervals and at a lower volume, forcing prices to
Early 1980s 1980– 2
recession 1982 years go up. Tight monetary policy in the United States to control
inflation led to another recession. The changes were made
largely because of inflation that was carried over from the
previous decade due to the 1973 oil crisis and the 1979 energy
crisis.
 History of Recession
Early 1990s 1990– Industrial production and manufacturing-trade sales
1 year
recession 1991 decreased in early 1991.

The collapse of the dot-com bubble, the September 11th

Early 2000s 2001– 2
attacks, and accounting scandals contributed to a relatively
recession 2003 years mild contraction in the North American economy.

2008 2008– – The Subprime mortgage crisis.

 Recession Or Not ?

• According to numbers published by Bureau of

Economic Analysis in May 2008, the GDP growth of
the previous two quarters was positive. As one
common definition of a recession is negative
economic growth for at least two consecutive fiscal
quarters, some analysts suggest this indicates that
the U.S. economy was not in a recession at the time
• However this estimate has been disputed by some
analysts who argue that if inflation is taken into
account, the GDP growth was negative for the past
two quarters, making it a technical recession
 Causes Of US Recession

• The general consensus is that a recession is primarily caused by the

actions taken to control the money supply in the economy and fall in
aggregate demand which is not supplemented by price adjustments
• The Federal Reserve is responsible for maintaining an ideal balance
between money supply, interest rates, and inflation
• When the Fed loses balance in this equation, the economy can spiral
out of control, forcing it to correct itself
• Relaxed policies in lending practices making it easy to borrow
money.The economic activity became unsustainable resulting in the
economy coming to a near halt
• Recession can also be caused by factors like :
Supply Shock - Natural Disasters, Sharp change in exchange rates,
War
Demand Shock – Energy price changes
 How Fiscal & Monetary Policy Affect the
Economy
• Monetary Policy : Expansionary Monetary policy
helps lower interest rates, boosting investment
spending and interest sensitive consumer
spending.It also lowers the international exchange
value of currency which also boosts exports and
imports
• Fiscal Policy : Expansion of budget deficit also
boosts aggregate spending. Undertaken through
higher govt. spending, tax cuts etc.
U S Recession
 Stagflation Recession – 1970’s
• Primarily remembered for simultaneous rise in both inflation and
unemployment rate.
Reasons :
 Rise in oil prices from $2.6/barrel to $11/barrel which lead to rise in
inflation.
 To counter this Fed Reserve increased fund rates from 5% to 10%.
 Also, it was preceded by poor performance of the 1970’s.
Measures :
 To counter recession expansionary Monetary and fiscal policy was adopted.
 Fund rate cuts from as high as 13% to 5.25% was also implemented.
 Huge tax rebate, individual income tax credits and deductions, reduced
corporate tax.
 Tax cuts and others lowered revenues by 1.4% of GDP in 1975.
Stagflation Recession – 1970’s
 Recession – 1980’s
• It was one of the deepest & longest recession of the post war
period
Reasons :
 In attempt to reduce the inflation which was 11.1% Fed Reserve
decided to increase fund rate from 10.5% to 17.5 and finally to as
high as 19%.
 Secondly, due to Iranian revolution oil prices rose from $13/barrel
to $37/barrel
Measures :
 A tight monetary policy was accompanied by expansionary
 Fiscal policy to boost on public confidence – Reduction in
marginal tax rates and individual saving incentives.
 Followed by a bit correction in oil prices and real interest rates
Recession – 1980’s
 Dot Com Collapse
• Different of all recession till now which had unexpected
reasons.
Reasons :
 Dot com bubble
 Terrorist attack – resulting in undermined public confidence
which leads fall in spending and thus fall in aggregate demand
 GDP which grew at average 4% in mid 90’s fall to 1.1% in 2001
 Unemployment Rate rose from 3.9% to 5.8%
Measures :
 Fed Rate Cut from 6.5% to 1.75%
 Fiscal expansions were also used like tax cuts and fiscal
stimulus which was equal to around 1% of GDP
 Crisis In The US

• The United States entered 2008 during a housing market correction, a

subprime mortgage crisis and a declining dollar value
• In February, 63,000 jobs were lost, a 5-year record.
• In September, 159,000 jobs were lost, bringing the monthly average
to 84,000 per month from January to September of 2008
• On September 5, 2008, the United States Department of Labor issued
a report that its unemployment rate rose to 6.1%, the highest in five
years
• The defaults on sub-prime mortgages (homeloan defaults) have led
to a major crisis in the US
 Crisis in the US
• Sub-prime is a high risk debt offered to people with poor credit
worthiness or unstable incomes. Major banks have landed in trouble
after people could not pay back loans
• The housing market soared on the back of easy availability of loans
• The realty sector boomed but could not sustain the momentum for
long, and it collapsed under the gargantuan weight of crippling loan
defaults
• Foreclosures spread like wildfire putting the US economy on shaky
ground. This, coupled with rising oil prices at $100 a barrel, slowed
down the growth of the economy
 Liquidity Crisis
• In early July, depositors at the Los Angeles offices of IndyMac Bank
frantically lined up in the street to withdraw their money.
• On July 11, IndyMac - the largest mortgage lender in the US – was seized
by federal regulators.
• The mortgage lender succumbed to the pressures of tighter credit,
tumbling home prices and rising foreclosures
• During the weekend of September13–14, Lehman Brothers declared
bankruptcy after failing to find a buyer
• Bank of America agreed to purchase Merrill Lynch, the insurance
company AIG sought a bridge loan from the Federal Reserve
• And a consortium of 10 banks created an emergency fund of at least $70
billion to deal with the effects of Lehman's closure
 Liquidity Crisis
• The biggest bank failure in history occurred on September 25 when JP
Morgan Chase agreed to purchase the banking assets of Washington Mutual
• The year 2008 as of September 17 has seen 81 public corporations file for
bankruptcy in the United States, already higher than the 78 in 2007
• Lehman Brothers being the largest bankruptcy in U.S. history also makes
2008 a record year in terms of assets with Lehman's $691 billion in assets all
past annual totals
• The year also saw the ninth biggest bankruptcy with the failure of IndyMac
Bank
• On September 29, Citigroup beat out Wells Fargo to acquire the ailing
Wachovia's assets will pay $1 a share, or about $2.2 billion
• In addition, the FDIC said that the agency would absorb the company‘s
losses above $42 billion; in exchange they would receive $12 billion in
preferred stock and warrants from Citigroup in return for assuming that risk
 Measures to Tackle
Recession

• Tax cuts are the first step that a government fighting recessionary trends or a
full-fledged recession proposes to do. Fed Reserve has Fund rates from 6% to
1% now.
• The government also hikes its spending to create more jobs and boost the
manufacturing and services sectors and to prop up the economy.
• The government also takes steps to help the private sector come out of the
crisis
• In the current case, the Bush government has proposed a bailout, of the cost of
the Treasury of $700 billion U.S. dollars
• Other Fiscal policy measures and stimulus proposed.
Japanese Recession
 The Japanese Story
• The robust growth that Japan had experienced since the end of World War
II came to an end when Japan`s bubble economy collapsed at the beginning
of the 1990s
• In 1989 the Bank of Japan changed to a tight-money policy
• 1990 the Ministry of Finance requested banks restrict their financing of
property assets
• New land taxation laws (landholding tax)
• Financial institutions suffered from nonperforming loans
• Companies` three excesses:
– Excess capital investment
– Excess employment
– Excessive debt
• Deflationary spiral and higher unemployment
• This period is often called the “Lost Decade“
 The Lost Decade
1991 – 1995:
• Asset deflation
• Reversed wealth effect : “Vicious cycle”
1995 – 1996:
• Yen Appreciation
• Massive fiscal expansion
1997 – 1999:
• Fiscal contraction
• Banking crisis
1999 – onwards:
• Deflation, Liquidity trap
• Social security system crisis
Vicious Cycle
 The Slump
Output Growth, Unemployment, and Inflation, Japan 1990-2001

Year Output Growth Rate (%) Unemployment Rate (%) Inflation Rate (%)
1990 5.3 2.1 2.4
1991 3.1 2.1 3.0
1992 0.9 2.2 1.7
1993 0.4 2.5 0.6
1994 1.0 2.9 0.1
1995 1.6 3.1 0.4
1996 3.5 3.4 0.8
1997 1.8 3.4 0.4
1998 1.1 3.4 0.1
1999 0.8 4.1 1.4
2000 1.5 4.7 1.6
2001 0.7 5.0 1.6
Japan Price Level
 The Rise and Fall of the Nikkei
• There are two reasons for the increase in a stock
price:
1. A change in the fundamental value of the stock price,
which depends on the expected present value of
future dividends.
2. A speculative bubble: Investors buy at a higher price
simply because they expect the price to go even
higher in the future.
 The Rise and Fall of the Nikkei

Stock Prices and

Dividends, Japan,
1980-2001
The increase in
stock prices in the
1980s and the
subsequent
decrease have not
been associated
with a parallel
movement in
dividends.
 The Rise and Fall of the Nikkei
• The fact that dividends remained flat while stock
prices increased strongly suggests that a large
bubble existed in the Nikkei.
• The rapid fall in stock prices had a major impact on
spending—consumption was less affected, but
investment collapsed.
 The Rise and Fall of the Nikkei
GDP, Consumption, and Investment Growth, Japan,
1988-1993

GDP Consumption Investment

Year (%) (%) (%)

1988 6.5 5.1 15.5

1989 5.3 4.7 15.0

1990 5.3 4.4 11.5

1991 3.1 2.1 4.4

1992 0.9 2.2 7.3

1993 0.4 2.5 11.6

 The Failure of Monetary
and Fiscal Policy
• Monetary policy was used, but it was used too late, and
when it was used, it faced the twin problems of the
liquidity trap and deflation.
• The Bank of Japan (BoJ) cut the nominal interest rate, but it
did so slowly, and the cumulative effect of low growth was
such that inflation had turned to deflation. As a result, the
real interest rate was higher than the nominal interest rate.
 The Failure of Monetary
and Fiscal Policy

The Nominal Interest

Rate and the Real
Interest Rate in
Japan, 1990-2001

Japan is now in a
liquidity trap: The
nominal interest rate
is close to zero.
Deflation implies
that even at a zero
nominal interest
rate, the real interest
rate is positive.
 The Failure of Monetary
and Fiscal Policy
• Fiscal policy was used as well. Taxes decreased at
the start of the slump, and there was a steady
increase in government spending throughout the
decade.
• Fiscal policy helped, but it was not enough to
increase spending and output.
 The Failure of Monetary
and Fiscal Policy

Government revenues
and spending in Japan,
1990-2001
Fiscal policy limited
the decline, but did not
lead to a recovery. In
the absence of
increased government
spending, output
would have declined
even more.
 Why Didn’t Macro Policy work
• Tax Cuts
 No one to give tax cuts:
60% of the total tax payers were not paying taxes
after series of tax cuts
-- To high minimum taxable income
• Monetary Policy
Not effective especially in late 90’s
-- “Liquidity Trap”
-- Banking Crisis in 1997-98
 What Comes Next?
• Policy recommendations for the Japanese economy
include:
– Create inflation: More inflation is good because the real
interest rate would decrease, thereby stimulating
spending and output.
– Clean up the banking system: Too many bad firms
continue to be financed by the banks, thereby
preventing the good firms from obtaining financing at
reasonable terms.
 Comparison

Japan US
House prices House prices
nationwide nationwide
rose by 51% rose by 90%

Commercial Commercial
property property
average prices average prices
rose by (80%) rose by (90%)
 Comparison
• Japan also had a stock market bubble, which burst a year earlier
than that in property. This hurt banks, because they counted part
of their equity holdings in other firms as capital. But its impact on
households was modest, because only 30% of the population held
shares, compared with over half of Americans
• The Bank of Japan (BoJ) began to lower interest rates in July 1991,
soon after property prices began to decline. The discount rate was
cut from 6% to 1.75% by the end of 1993. Two years after American
house prices started to slide, the Fed funds rate has fallen from
5.25% to 2%
• Japan also gave its economy a big fiscal boost. Similar to America’s
budget boost this year
• But deflation also emerged in 1995, pushing up real interest rates
and increasing the real burden of debt
GDP Growth Rates
 Comparison
• America’s inflation rate of above 5% is an
advantage. Not only are real interest rates negative,
but inflation is also helping to bring the housing
market back to fair value with a smaller fall in prices
than otherwise
• But in another way America is more exposed than
Japan was. When its bubble burst in 1991, Japan’s
households saved 15% of their income. By 2001
saving had fallen to 5%, which helped to prop up
consumer spending. America’s saving rate of close
to zero leaves no such cushion.
 Comparison
• America is spreading the costs of its housing bust
across other countries. Foreigners hold a large slice
of American mortgage-backed securities. Sovereign-
wealth funds have provided new capital for
American banks. And America’s booming exports
have helped to support its economy, thanks to the
cheap dollar. In contrast, the yen’s sharp
appreciation after Japan’s bubble burst hurt exports
at the same time as domestic demand was being
squeezed.
 Japanese Mystery !!!
• Monetary and fiscal relief were necessary but not sufficient to revive Japan’s
economy
• The missing ingredient was a clean-up of the banking system. Japanese
banks hid their bad loans beneath opaque corporate structures, and
curtailed new lending to profitable businesses. A vicious circle developed,
whereby banks bad loans depressed growth which then created more bad
loans.
• In Japan it took a long while before the political will was there to use
taxpayers’ money to plug the banking system
• The Expenditure by the Japanese govt. in public works, regional
infrastructure projects, was of little help because relatively little of the
money spent reached those who have been made unemployed.
• And the massive outlay means government borrowing has reached 180% of
GDP, higher than any other industrialised country.
Bad Loans Are Bad !
Questions ???