What the U.S., Europe and China can learn from Japan
Speech by Richard C. Koo at the SIX Swiss Exchange in Zürich
On March 2, 2011, the Swiss-Japanese Chamber of Commerce and the Japanese Chamber of Commerce and Industry of Zürich invited to a seminar with Richard C. Koo held at the SIX Swiss Exchange in Zürich.
Richard C. Koo is the Chief Economist of Nomura Research Institute, with responsibilities to provide independent economic and market analysis to Nomura, the leading financial group of Japan, and its clients. In addition to conducting financial market research, Mr. Koo has advised several Japanese prime ministers on how best to deal with Japan’s economic and banking problems.
In front of a full audience, Mr. Koo presented his theory, the idea of yin and yang business cycles where the conventional world of profit maximization is the yang and the world of balance sheet recession, where companies are minimizing debt, is the yin.
Koo’s thesis is that some recessions are special (they’re „balance sheet recessions“) and are marked by some fundamental behavioral changes because people go into „balance sheet repair mode“ for a while. These changes in motivation and behavior, can make it seem as though certain laws of economics are temporarily suspended. For instance, monetary policy does not have its normal effect (e.g. even with rates at zero people could be unwilling to borrow). Fiscal policy can have an impact by spending wealth based on promises of repayment by future generations. He contends this it worked in Japan, and the stagnation that resulted was a good thing; otherwise the country would have seen some years of falling GDP and painful readjustments. Koo terms a balance-sheet recession as the „Yin“ phase of an economy, and says it is marked by a drive to strengthen one’s balance sheet even allowing possible profit opportunities to slip by (with „Yang“ being the typical profit-maximization phase of an economy). He says: „in this phase, monetary policy is ineffective, because firms are all rushing to pay down debt, and private sector demand for funds is essentially non existent.“
In his speech at the SIX Swiss Exchange in Zürich, Mr. Koo criticized the fiscal policy of many European countries, in particular England, as well as the government of Japan under its actual minister of finance, Yoshihiko Noda, for not taking enough measures of fiscal stimulus.