Skip to main content

Regional heterogeneity, the rise of public debt and monetary policy in post-bubble Japan: lessons for the EMU

Abstract

Both Japan and parts of the European Monetary Union have experienced boom and bust in stock and real estate markets, which have been followed by a lasting crisis. The paper analyses the role of a high degree of regional heterogeneity for public debt and monetary policy in the context of crisis. It is shown for Japan that the attempts to maintain regional cohesion via a regional transfer mechanism has contributed to the unprecedented rise in public debt and persistent monetary expansion. Econometric estimations show that in Japan regional redistribution of funds has ensured homogeneous living conditions across Japanese regions pre- and post-crisis. The side condition is monetary expansion. A similar effect could emerge in Europe, if the crisis persists.

This is a preview of subscription content, access via your institution.

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6
Fig. 7
Fig. 8
Fig. 9
Fig. 10

Notes

  1. The boom phases in the southeast Asian countries were accelerated by capital inflows (in form of bank-based lending) from Japan, where the central bank kept interest rates low to facilitate the economic recovery.

  2. The groupings are shown in Table 2 in the Appendix.

  3. Note that all these numbers refer to GDP per capita after redistribution (see section 3.1)

  4. This created concerns that the EMU might be subjected to a higher likelihood of asymmetric shocks.

  5. Note that the numbers in Figure 3 refer to all now 19 EMU member states during the whole observation period.

  6. We assume for parsimony that inflation rates in Japan and euro area are similar and low.

  7. What is characterized as balance sheet recession (Koo 2003).

  8. The regional distribution of these funds was unknown by 2017.

  9. The local allocation tax is financed by a fraction of national taxes on income, liquor, tobacco and corporate profits (Shirai 2004). It is therefore collected in all Japanese prefectures. Because the tax revenues can be assumed to be larger in the rich prefectures, there is a second redistribution effect on the income side of the redistribution mechanism, which is not captured here because regional data on the income side are not available.

  10. For instance, for the public sector “education” the first of the three factors is a variable measuring the number of pupils and teachers, multiplied by a prefecture-invariant unit cost factor for the respective service branch, and multiplied by a modification factor reflecting prefecture-specific conditions like climate and population density (see Aoki 2008). This shows that the allocation of funds is strongly based on structural factors rather than year-over-year growth rates. This reduces the concern of endogeneity bias in the econometric estimations (see section 4.1.).

  11. “In order to promote its overall harmonious development, the Union shall develop and pursue its actions leading to the strengthening of its economic, social and territorial cohesion.” Art. 174 (1) TFEU

  12. The share of EMU member states is 34 billion euros.

  13. Greece (15,5%), Ireland (6,5%), Italy (47,2%), Spain (20,3%), Portugal (10,4%).

  14. A third CBPP has been set up in Oct. 2014.

  15. Note that ELA credits are reflected in TARGET2 balances.

  16. The provisions for quality of collateral are less strict than for the standard ECB monetary policy operations. The Bank of Greece got the permission by the ECB governing council to lend a maximum of 90 billion euros. When in summer 2015 this limit was rejected to be increased, the Greek authorities had to close banks and introduce capital controls (Götz et al. 2015). When in August 2015 the euro group passed a 86 billion euro resecue package, this included 25 billion euros for the recapitalization of Greek banks (what can be seen as an indication for the insolvency of the Greek banking sector).

  17. The ECB announced in March 2016 to expand the program by increasing the monthly purchases from 60 billion euros to 80 billion euros and prolonged the program until September 2018 (see ECB 2015 and ECB 2016a).

  18. In opposite to the „regular“Local Allocation Tax grants, which are supposed to compensate prefectures to assure the deployment of “basic needs” in every Japanese region, National Disbursements are meant to compensate for special events such as natural catastrophes etc. However, National Disbursements are widely a regular redistribution mechanism (see Regional Statistical Database Item Definition; RD1).

  19. Short-term interest rates are a deficient proxy for changes in the monetary policy stance since 1999 because they remain widely unchanged at the zero bound (see Figure 8).

  20. An alternative dummy (rich) is compiled for all prefectures having an income per capita higher than the median prefecture in 1990 (i.e. the year, when the crisis started). The results remain qualitatively unchanged.

References

  • Abad J, Löffler A, Schnabl G, Zemanek H (2013) Fiscal divergence, current account and TARGET2 Imbalances in the EMU. Intereconomics: Rev Eur Econ Policy, Springer 48(1):51–58

    Article  Google Scholar 

  • Aoki I (2008) Decentralization and intergovernmental finance in Japan. PRI Discussion Paper Series 8A:4

    Google Scholar 

  • Arghyrou MG, Kontonikas A (2012) The EMU sovereign-debt crisis: fundamentals, expectations and contagion. J Int Financial Markets, Inst Money 22(4):658–677

    Article  Google Scholar 

  • Bayoumi T, Collyns C (2000) Post-bubble blues: how Japan responded to asset price Collaps. International Monetary Fund, Washington DC

  • Belke A, Haskamp U, Schnabl G, Zemanek H (2015) Beyond Balassa and Samuelson: Real convergence, capital flows, and competitiveness in Greece. Forthcoming as CESifo Working Paper

  • Bernanke B (2002) “Remarks by Governor Ben S. Bernanke at the Conference to Honor Milton Friedman.” University of Chicago, Illinois

  • Burda MC, Hunt J (2011) What explains the German labor market miracle in the great recession?. NBER Working Paper, 17187. Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution 42(1):273–335. https://doi.org/10.3386/w17187

  • Caballero RJ, Hoshi T, Kashyab AK (2008) Zombie lending and depressed restructuring in Japan. Am Econ Rev 98(5):1943–1977

    Article  Google Scholar 

  • Cargill TF (2001) Monetary policy, deflation, and economic history, lessons for the Bank of Japan, Monetary and Economic Studies – Special Edition, 2001

  • Christodoulakis N (2009) Ten years of EMU: convergence, divergence and new policy priorities, Hellenic Observatory Papers on Greece and Southeast Europe, 22

  • De Grauwe P (2010) Crisis in the eurozone and how to deal with it. CEPS Policy Brief 204. Available at: https://ssrn.com/abstract=1604453

  • Doi T (2010) Poverty Traps with Local Allocation Tax Grants in Japan, Keio/Kyoto Global Coe Discussion Paper Series, DP2010–002

  • ECB (2015): https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.html, as of September 2015

  • ECB (2016a): https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.html as of April 2016

  • ECB (2016b): https://www.ecb.europa.eu/explainers/tell-me-more/html/anfa_qa.de.html, as of April 2016

  • European Commission (2015): http://www.europarl.europa.eu/news/en/news-room/content/20150622IPR69218/html/Juncker-Plan-Parlament-billigt-Investitionsplan-zur-Konjunkturbelebung; as of August 22nd 2015

  • Funabashi Y (1989) Managing the dollar: from the Plaza to the Louvre. Institute for International Economics, Washington DC

  • Gabrisch H, Staehr K (2014) The euro plus pact: cost competitiveness and external capital flows in the EU countries, ECB Working Paper, 1650

  • Götz MR, Haselmann R, Krahnen JP, Steffen S (2015) Did emergency liquidity assistance (ELA) oft he ECB delay the bankruptcy of Greek banks? Sustainable Architecture for Finance in Europe Policy Letter 46

  • Hashiba H, Kameda K, Sugimura T, Takasaki K (1998) Analysis of landuse change in periphery of Tokyo during last twenty years using the same seasonal landsat data. Adv Space Res 22(5):681–684

    Article  Google Scholar 

  • Hayashi F, Prescott EC (2002) The 1990s in Japan: a lost decade. Rev Econ Dyn 5:206–235

    Article  Google Scholar 

  • Hodson D (2013) The eurozone in 2012, whatever it takes to preserve the euro? J Common Mark Stud 51:183–200

  • Hoshi T, Kashyap A (1999) The Japanese banking crisis: Where did it come from and how will it end?. NBER Working Paper, 7250. https://doi.org/10.3386/w7250

  • Ishi H (2001) The Japanese tax system. Oxford University Press, New York

    Book  Google Scholar 

  • Kanaya A, Woo D (2000) The Japanese banking crisis of the 1990s: sources and lessons, IMF Working Paper, 00/7

  • Koo R (2003) Balance sheet recession: Japan’s struggle with uncharted economics and its global implications. Wiley and Sons, Hoboken

  • Krishnamurthy A, Nagel S, Vissing-Jorgensen A (2014) ECB policies involving government bond purchases: impacts and channels, Mimeo

  • Krugman (2010) How much of the world is in a liquidity trap?http://krugman.blogs.nytimes.com/2010/03/17/how-much-of-the-world-is-in-a-liquidity-trap/?_r=0 as of June 23rd 2015

  • Lane P (2015) The European Souvereign debt crisis. J Econ Perspect 26(3):49–68

    Article  Google Scholar 

  • Mayr J (2008) The financial crisis in Japan – are there similarities to the current situation. CESifo Forum, Ifo Inst Econ Res 9(4):64–68

    Google Scholar 

  • McKinnon R, Ohno K (1997) Dollar and yen: resolving the economic conflict between the United States and Japan. MIT Press Books, Cambridge

  • Mochida N (2001) Taxes and transfers in Japan’s local public finances, World Bank Institute, 37171

  • Powell B (2002) Explaining Japan’s recession. Q J Austrian Econ 5(22):35–50

    Article  Google Scholar 

  • Schaltegger C, Weder M (2013) Will Europe face a lost decade? A comparison with Japan’s economics crisis, Center for Research in Economics, Management and the Arts Working Paper Series, 2013-03

  • Schnabl G (2015) Monetary policy and structural decline: lessons from Japan for the European crisis. Asian Econ Pap 14(1):124–150

    Article  Google Scholar 

  • Schnabl G, Wollmershäuser T (2013) Fiscal divergence and current account imbalances in Europe, CESifo Working Paper Series, 1408

  • Shibamoto M, Tachibana M (2013) The effect of unconventional monetary policy on the macro economy: evidence from Japan's quantitative easing policy period. Kobe University RIEB Discussion Paper Series 12

  • Shirai S (2004) The role of local allocation tax and reform agenda in Japan – implication to developing countries. Policy and Governance Working Paper Series, 32

  • Sinn H-W (2014) Stellungnahme des ifo Instituts und von Prof. Hans-Werner Sinn zur heutigen Erklärung des Bundesverfassungsgerichts zum OMT-Programm der EZB, München 07.02.2014

  • Sinn H-W, Wollmershäuser T (2012) Target loans, current account balances and capital flows: the ECB’s rescue facility. Int Tax Public Financ 19(4):468–508

    Article  Google Scholar 

  • Vollmer U, Bebenroth R (2012) The financial crisis in Japan: causes and policy reactions by the Bank of Japan. Eur J Comp Econ 9:155–181

    Google Scholar 

  • Woo D (2003) In search of “capital crunch”: supply factors behind the credit slowdown in Japan. J Money, Credit, Bank 35:6

    Article  Google Scholar 

  • Yoshino N, Mizoguchi T (2011) Government debt issues in comparison between Japan and Greece: the fiscal policy rule is urgently needed to establish, Monetary Monthly Report

Download references

Acknowledgements

We thank Taiki Murai for the outstanding research assistance and the participants of the 2015 EEFS Conference for useful comments

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Raphael Fischer.

Appendix

Appendix

Table 2 Quintile groups in the EMU and Japan
Table 3 Data description
Table 4 Descriptive Statistics
Table 5 Unit root test results
Table 6 Wald test results for joint-significance

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Fischer, R., Schnabl, G. Regional heterogeneity, the rise of public debt and monetary policy in post-bubble Japan: lessons for the EMU. Int Econ Econ Policy 15, 405–428 (2018). https://doi.org/10.1007/s10368-017-0402-6

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10368-017-0402-6

Keywords

  • Japan
  • EMU
  • Crisis
  • Regional redistribution
  • Monetary policy
  • Public debt

JEL classifications

  • H2
  • H5
  • H7