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The Age of Balance Sheet Recessions:

What Post-2008 U.S., Europe and China


Can Learn from Japan 1990-2005

Richard C. Koo
Chief Economist
Nomura Research Institute
Tokyo
March 2009
Exhibit 1. US Economy Is Deteriorating Rapidly
(%, Seasonally adjusted) (%, Seasonally adjusted, inverted)
86 3.5

4.0
84
Unemployment Rate
(right scale) 4.5
82
5.0

80
5.5

78 6.0

6.5
76

7.0
74
7.5
Capacity Utilization
72
(left Scale) 8.0

70 8.5
98 99 00 01 02 03 04 05 06 07 08 09
Sources: US Department of Labor, FRB

1
Exhibit 2. EU Economic Sentiments Are Worsening

(Seasonally adjusted)
120

115
Euro Area Economic Sentiment
110

105

100

95

90

85

80 Ifo Business Climate

75

70

65
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Ifo Business Survey, European Commission

2
Exhibit 3. Exports and House Prices Are Falling in China
(y/y%) ($ bil., Seasonally Adjusted)
25 140

20 House price in Shenzhen (left scale)


120
15

10 100

5
80
0

-5 60

-10
40
-15
China's exports ($ bil., right scale)
-20 20
03 04 05 06 07 08 09
Note: Seasonal adjustment by Nomura Research Institute.
Sources: Nomura Research Institute, based on National Bureau of Statistics of China, National Development and Reform Commission
(NDRC), People’s Republic of China, and Bloomberg.

3
Exhibit 4. Japan’s Industrial Production and Employments
Are also Weakening
(Seasonally adjusted) (Seasonally adjusted, 2005=100)
1.2 115

Industrial production (right scale) forecast 110


1.1

105
1.0
100

0.9
95

0.8 90

85
0.7

80
Job offers to applicants ratio (left scale)
0.6
75

0.5
70

0.4 65
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Note: The forecasts are calculated from METI's survey on planned production.
Sources: Ministry of Economy, Trade and Industry (METI), and Ministry of Health, Labour and Welfare

4
Exhibit 5. Low Interest Rates Have Failed to Revive Economies or
Asset Prices
(%)
8

Australia
7

UK
6

EU
3

US
2
Japan

0
2003 2004 2005 2006 2007 2008 2009

Sources: BOJ, FRB, ECB, BOE and RMB Australia. As of Mar. 18, 2009.

5
Exhibit 6. Features of Balance Sheet Recession

z A balance sheet recession emerges after the bursting of a


nationwide asset price bubble that leaves a large number of
private-sector balance sheets with more liabilities than assets.
z In order to repair their balance sheets, private sector moves away
from profit maximization to debt minimization.
z With the private sector de-leveraging, even at zero interest rates,
newly generated savings and debt repayments enter the banking
system but cannot leave the system due to the lack of borrowers.
The sum of savings and debt repayments end up becoming the
leakage to the income stream.
z The deflationary gap created by the above leakage will continue to
push the economy toward a contractionary equilibrium until the
private sector is too impoverished to save any money
(=depression).
z In this type of recession, the economy will not enter self-
sustaining growth until private sector balance sheets are repaired.

6
Exhibit 7. US Demand for Funds Is Falling Sharply
(D.I.)
30

housing
20 IT bubble
small firms bubble
collapse collapse
10

-10

large and middle-market firms


-20

-30 stronger demand for funds

-40
weaker demand for funds

-50
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Nomura Research Institute, based on FRB, Senior Loan Officer Opinion Survey on Bank Lending Practices .
Note: D.I. are calculated from the answers to the question, "Apart from normal seasonal variation, how has demand for C&I loans changed
over the past three months?"
D.I. = ("Substantially stronger" + "Moderately stronger"×0.5) - ("Moderately weaker"×0.5 + "Substantially weaker")

7
Exhibit 8. US Housing Price Futures Moving Closer
to the Japanese Experience

(US: Jan. 2000=100, Japan: Dec. 1985=100) Futures


260
Composite Index Futures
240 US: 10 Cities Composite Home Price Index
(as of Sep. 19, 2007)

220 Japan: Tokyo Area Condo Price


2
(per m , 5 months moving average)
200

180

160
Japan: Osaka Area Condo Price
140 2
(per m , 5 months moving average)
120
Composite Index Futures
(as of Mar. 18, 2009)
100

80 A fall in actual prices to the bottom for


future prices would bring house prices
60 back to level of Dec. 2002
40
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 US
77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 Japan
Sources: Bloomberg, Real Estate Economic Institute, Japan, S&P "S&P/Case-Shiller® Home Price Indices", as of Mar. 18, 2009.

8
Exhibit 9. House Prices and Rents Diverged substantially during
Housing Bubble

(91/1Q=100, Seasonally Adjusted)


250

200 21%
House prices
?

150

100
Rents

50 A 21% decline would bring house


prices back to level of 2003 Q4

0
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Note: Seasonal adjustment by Nomura Research Institute.
Source: Nomura Research Institute, based on Office of Federal Housing Enterprise Oversight (OFHEO) house price
index and US Department of Labor CPI.

9
Exhibit 10. Americans Spent $1.5trn that Should Have Been Saved
Savings shortfall = $1,544bn

($bn, seasonally adjusted) (%)


120 6
Saving rate (right scale)
100 5

80 4
Amount needed to lift savings
to 4%* (left scale) 4.5
60 3 years at
this rate
40 2

20 Actual savings (left scale) 1

0 0

-20 -1

-40 -2
95 96 97 98 99 00 01 02 03 04 05 06 07 08
Note: Average savings rate for US households in1997-98.
Source: Nomura Research Institute, based on US Department of Commerce data.

10
Exhibit 11. Japan’s GDP Grew even after Massive Loss of Wealth
and Private Sector Rushing to Pay Down Debt

(Mar. 2000=100) (Tril.yen, Seasonally Adjusted)


600
800 Nominal GDP
(Right Scale) 550
700
500
600 Real GDP
(Right Scale)
450
500

400
400
Land Price Index in Six Major Cities
(Commercial, Right Scale) 350 down
300
87%
Last seen
200 300
in 1973

100 250

0 200
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Sources: Cabinet Office, Japan Real Estate Institute

11
Exhibit 12. Cumulative Capital Losses on Shares and Land since
1990 Reached $15 Trillion or 3 Years Worth of Japan’s GDP
(Tril. yen)
400
(Capital Gain)
Land Shares

-400

Equivalent
¥1,500 to $45
trillion trillion loss
-800 in the US

-1200

Land and Shares


Combined
(Capital Loss)
-1600
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

Source: Cabinet Office, Japan "National Accounts"

12
Exhibit 13. Balance Sheet Problems Forced Japanese Businesses to
Pay Down Debt even with Zero Interest Rates
Funds Raised by Non-Financial Corporate Sector
(% Nominal GDP, 4Q Moving Average) (%)
25 10
CD 3M rate
(right scale)
20 8

Borrowings from Financial Institutions (left scale)


15 6
Funds raised in Securities Markets (left scale)

10 4

5 2

0 0

-5 -2

-10 -4
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Sources: Bank of Japan, Cabinet Office, Japan

13
Exhibit 14. Japanese Government Borrowed and Spent the Excess
Savings of the Private Sector to Sustain GDP
(Tril. yen)
100

Government Spending
90

80
total
additional
70
deficit 90-05
¥315 trillion
60

50

40
Tax revenue
Bubble Collapse
30

20
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: Ministry of Finance, Japan
Note: FY 2008 includes supplementary budget, and FY 2009 is just initial budget.

14
Exhibit 15. With Government Borrowing and Spending the Increase in
Private Sector Savings*, Large Deficit Does Not Mean Higher Interest Rates
(% of GDP) (%)
180 9
Balance Sheet Recession
160 8
Japanese Government Debt as Percentage of GDP (left scale)

140 7
Yields on 10year JGB (right scale)

120 6

100 5

80 4

60 3

40 2

20 1

0 0
83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
* Household savings plus corporate debt repayment
Sources: Cabinet Office, Japan, Japan Bond Trading Co., Japan Securities Dealers Association

15
Exhibit 16. Japanese Companies Made Huge Progress in Reducing
Debt Overhang
(Yen tril., Seasonally Adjusted) (as a ratio to nominal GDP, %)
450 90

400 Credit Extended by the Banks to 85/4Q


Corporate Sector
350 as a Ratio to Nominal GDP
(Right Scale) 80
300

250
70
200

150 Credit Extended by the Banks


to Corporate Sector
(Left Scale) 60
100
last seen
in 1956
50

0 50
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Sources : Bank of Japan, "Loans and Discounts Outstanding by Sector" "Loans to Individuals", Cabinet Office, Japan "National Accounts"
Notes: 1. 'Credit Extened by the Banks to Corporation' is extended to 1970 by NRI after adjustment for discontinuities in statistics in 1993
and again in 1975.
    2. As a percentage of nominal GDP. For GDP statistics before 1979, 68 SNA is used.

16
Exhibit 17. Japanese Corporate Leverage Came Down Sharply

(Times)
7

6 Japan

3
US

0
76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Sources: Ministry of Finance, Japan, US Depertment of Commerce

17
Exhibit 18. Premature Fiscal Reforms in 1997 and 2001 Weakened
Economy, Reduced Tax Revenue and Increased Deficit

(Yen tril.) (Yen tril.)


70 70
Hashimoto Koizumi (initial budget)*
Tax Revenue Obuchi-Mori
fiscal fiscal
Budget Deficit reform fiscal reform (with supplemental budget)*
60 stimulus 60

50 50

40 40
unnecessary
deficit:
30 30 ¥97.6 tril.

20 20

10 10

0 0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: Ministry of Finance, Japan (FY)
*: estimated by MOF

18
Exhibit 19. Four Kinds of Banking Crises and Their Remedies

Yang Yin
Normal demand for Weak or non-existent
funds demand for funds

(I) (III)
Localized Quick NPL disposal Normal NPL disposal
Banking Pursue accountability Pursue accountability
Crisis
(II) (IV)
Systemic Slow NPL disposal Slow NPL disposal
Fat spread Capital injection

Type (I): 1989 S&L crisis

Type (II): 1982 Latin America debt crisis, nationwide credit crunch in the US between 1991
and 1993, and the Nordic banking crisis in the early 1990s

Type (III): Japan prior to 1995 (for example, problems at two credit cooperatives)

Type (IV): Japan since 1996, Taiwan since 2000, the US Great Depression of the 1930s, and
US and UK subprime crisis since 2007
Source: Richard Koo, The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession, John Wiley & Sons, Singapore, 2008

19
Exhibit 20. Two Capital Injections Ended the Credit Crunch in Japan

Bankers' Willingness to Lend as Seen by the Borrowers,


and the Actual Credit Extended by the Banks
('Accommodative' minus 'Restrictive', %points ) (Y/Y% )
60 33
Bubble Burst Large Enterprises Global
30
40 Miyazawa Proposal (Left Scale) Financial
Crisis 27

20 24

Accommodative 21
0
18

Credit 15
-20 Restrictive
Crunch 12
-40 Small Enterprises 9
"Takenaka Shock"
(Left Scale)
1st Capital Injection (rushed NPL disposal)
6
-60 (¥1.8 tril.)
2nd Capital Injection
3
(¥7.5 tril.)
-80 0

-3
-100
Credit Extended by the Banks
-6
(right scale)
-120 -9
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
(Shaded areas indicate periods of BOJ monetary tightening )
Sources : "Tankan", "Loans and Discounts Outstanding by Sector", BOJ

20
Exhibit 21. Percentage of House Purchases that May Lead
to “Return the Key”
For Houses Bought before January 2009
(millions)
50

45
88.0% (1)
40 82.9% (1)

35
70.4% (1)
30

25

20 46.3% (2)
(2)
41.1%
15

28.7% (2)
10

0
At Present (Mar. 2009) Home Prices Lowest Price in Futures Market 40% below the Peak
[-30.2%] (Nov. 2010) [-37.3%]

Source: Nomura Research Institute estimates from the data of US Department of Commerce, National Association of Realtors,
S&P "S&P/Case-Shiller® Home Price Indices", and Bloomberg (as of Mar. 18, 2009).
Notes: (1) Maximum share of underwater mortgages assuming that the total number of mortgages is 53 million.
(2) As (1), but with a 10% downpayment.

21
Exhibit 22. Summary of US Policy Options
Based on Japan’s Experience
• Government spending more effective than tax cuts
Economic Stimulus • Must be fast acting and seamless for the duration of recession
Fiscal
Policy • Effective in ending debilitating credit crunch
Capital Injection • Politically unpopular but sooner and bigger the better

Monetary Monetary easing


Policy largely ineffective
except

Benefit: • Help financial institutions deleverage


• May help unclog some markets if the Fed's presence is
viewed as permanent
Credit Easing
(Asset Purchases) Risk: May saddle Fed's balance sheet with distressed assets and
lead to a serious loss of trust in the Fed and the dollar

Liquidity Injection Keeps financial institutions operating

Benefit: Exports encouraged, Imports discouraged

Weaker Dollar Risks: • May trigger foreign capital outflow leading to higher
interest rates
• Accelerate imported inflation
Source: Nomura Research Institute

22
Exhibit 23. US Trade Deficit Is Still Enormous
($ mil., SA)
50000

40000 Japan's trade surplus


China's trade balance
30000

20000

10000

-10000

-20000

-30000
US trade deficit with Japan US trade deficit with China
-40000
US Running
-50000 US trade deficit
Federal
(Census Basis)
-60000 Budget
Surpluses
-70000

-80000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Sources: US Department of Commerce, US Department of Treasury, Ministry of Finance Japan


National Bureau of Statistics of China
These data are seasonally adjusted by Nomura Research Institute.

23
Exhibit 24. Monetary Aggregates Behave Totally Differently
under Balance Sheet Recession

Quantitative
(1990/1Q=100, Seasonally adjusted) Easing
300
High-powered Money (Average Balance)
Money Supply (M2+CD, Average Balance)
250
Credit Extended to the Private Sector

Textbook Balance Sheet


200
Economics Recession Down
(monetary policy (monetary policy 37%
effective) NOT effective)
150

100

1990/1Q
50

0
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Note: Private sector borrowings seasonally adjusted by Nomura, adjustments made for discontinuities in line with BOJ's
"Monetary Survey"
Source: Bank of Japan

24
Exhibit 25. Japan’s Money Supply Has Been Kept Up by
Government Borrowings (I)
(Y/Y%)
16

14 Credit Extended to Others (Mostly Government)

12 Credit Extended to the Private Sector Quantitative


Easing
10 Money Supply (M2+CD)

-2

-4

-6
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Sources: Bank of Japan "Monetary Survey", "Changes in Money Stock (M2+CD), and Credit Statistics"
Notes: "Credit extended to others"= (1) public sector + (2) foreign assets (net) + (3) others.
(1) Public Sector = credit to the government (net) + credit to regional public sector bodies + credit to public corporations
(3) Others= (money + quasi-money + CD) - (foreign assets (net) + domestic credit).
Therefore, increase or decrease in "Credit extended to others" will include impact of increase/decrease in public sector debt,
increase/decrease in bank debentures issued by private sector banks and deposits of financial institutions, and errors in data.

25
Exhibit 26. Japan’s Money Supply Has Been Kept Up by
Government Borrowings (II)
Balance Sheets of Banks in Japan
December 1998 December 2007
Assets Liabilities
Assets Liabilities

Credit
Extended to
the Private
Credit Sector
Extended to Money Supply Money Supply
¥501.8 tril.
the Private (M2+CD) (M2+CD)
(-99.8)
Sector ¥621.5 tril. ¥744.4 tril.
¥601.6 tril. (+122.9)

Credit
Extended to the
Credit Extended
to the Public Public Sector
Sector ¥247.2 tril.
¥140.4 tril. (+106.8)
Other Liabilities
(net) Foreign assets
Foreign Assets Other Liabilities
¥153.2 tril. (net)
(net) (net)
¥74.1 tril.
¥32.7 tril. ¥78.7 tril.
(+41.4)
(-74.5)
Total Assets ¥774.7 tril. Total Assets ¥823.1 tril. (+48.4)

Source: Bank of Japan "Monetary Survey"

26
Exhibit 27. US Money Supply Growth after 1933 Was also Made
Possible by Government Borrowings
Balance Sheets of All Member Banks
June 1929 June 1936
Assets Liabilities Assets Liabilities

Credit
Extended
to the
Deposits Private
Credit
$32.18 bil. June 1933 Sector Deposits
Extended to Assets Liabilities $34.10 bil.
the Private $15.71 bil.
Credit (+10.74)
Sector (-0.09)
Extended to Deposits
(= Money Supply)
$29.63 bil. the Private $23.36 bil.
Sector (-8.82) Credit
$15.80 bil. Extended
(-13.83) to the
Public
Credit Sector
Extended $16.30 bil.
Credit to the (+7.67)
Extended to Public
the Public Sector
Other Other
Sector $8.63 bil. Other Other
Liabilities Assets
$5.45 bil. (+3.18) Liabilities Liabilities
$6.93 bil. $8.91 bil.
$4.84 bil. $7.19 bil.
Other (+2.54)
(-2.09) (+2.35)
Other Assets Assets
$8.02 bil. $6.37 bil.
(-1.65) Reserves Capital
Capital
$5.61 bil.
Capital Reserves $4.84 bil. $5.24 bil.
Reserves $6.35 bil. $2.24 bil. (+3.37)
(-1.51) (+0.40)
$2.36 bil. (-0.12)
Total Assets $45.46 bil. Total Assets $33.04 bil. (-12.42) Total Assets $46.53 bil. (+13.49)

Source: Board of Governors of the Federal Reserve System (1976) Banking and Monetary Statistics 1914-1941 pp.72-79

27
Exhibit 28. New Deal policies doubled fiscal expenditures
without increasing the budget deficit

($ mn, June) (%)


14000 28
New Deal policies
12000 24
Unemployment rate Expenditures (left scale)
(right scale)
10000 20

8000 16

6000 12

4000 8

2000 Revenue (left scale) 4

0 0

Budget deficit as % of GNP


-2000 -4
(right scale)

-4000 -8
23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41

Source: Board of Governors of the Federal Reserve System (1976), Vol. 1, p. 513; US Bureau of the Census (1975), p. 229.

28
Exhibit 29. German fiscal stimulus reduced unemployment dramatically

(DM bn) (
%)
35 35
Nazis come to
Government
30 power 30
expenditure
(left scale)
25 25

20 Unemployment rate 20
(right scale)
15 15
Government
Fiscal deficit as %
10 revenue 10
of GDP
(right scale) (left scale)
5 5

0 0
N.A. N.A.
-5 -5

-10 -10
1930 1931 1932 1933 1934 1935 1936 1937 1938

Source: Mitchell (1975), p. 170; Flora et al. (1987), p. 350; Deutsche Bundesbank (1976).

29
Exhibit 30. Debt Rejection Syndrome Can Last a Long Time:
US Interest Rates Took 30 Years to Return to Their 1920s Level
(%)
9
US government bond yields
8 Prime BA, 90days
US government bond yields 1920-29 average (4.09%, June 1959)
Prime BA, 90days 1920-29 average (4.13%, September 1959)
7
Oct '29 NY Stock Dec '41 Pearl Jun '50 Korean
6 Market Crash Harbor Attack War

'33~
5 New Deal

0
19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60

Source: FRB, Banking and Monetary Statistics 1914-1970 Vol.1, pp.450-451 and 468-471, Vol.2, pp.674-676 and 720-727

30
Exhibit 31. The Anatomy of Balance Sheet Recession and Its Cure
Private Sector Bought Assets Original Money Flow The Problem
Private Sector Savings
with Borrowed Funds
The Solution

Fall in Asset Prices


Vicious Cycle

Balance Sheet Problems Develop Repair Balance Sheets Government Procures


Funds at Low Rates due to
the Lack of Private Sector
Borrowers
Allow Private Sector to
Private Sector Moves away from Profit Maximization to Debt Minimization Pay down Debt

Breaking the
Vicious Cycle
Keep Aggregate
Private Sector Paying Down Debt Fall in Aggregate Demand
Demand from Falling

No Demand for Funds Weaker Economy and Deflation Fiscal Stimulus

Central Bank Panics and More Defaults Further Fall in Asset Prices
Dramatically Eases Monetary
Policy

More Non-Performing Loans at Banks


Government Borrowings Help
Maintain Money Supply in the Absence
Nothing Happens because Private Sector Is Minimizing Debt "Liquidity Trap" of Private Sector Borrowers

Source: Richard Koo, Balance Sheet Recession: Japan's Struggle with Uncharted Economics and its Global Implications , John Wiley & Sons, Singapore 2003

31
Exhibit 32. Yin Yang Cycle of Bubbles and Balance Sheet Recessions

China Yin (=Shadow) Bubble Yang (=Light)

(1) Monetary policy is tightened, leading the bubble to collapse. (9) Overconfident private sector triggers a bubble.

US (2) Collapse in asset prices leaves private sector


(8) With the economy healthy,
with excess liabilities,
the private sector regains its vigour,
Spain forcing it into debt minimization mode.
and confidence returns.
India
The economy falls into a balance sheet recession.
UK
(3) With everybody paying down debt,
monetary policy stops working. (7) Monetary policy becomes the main
Fiscal policy becomes the main economic tool economic tool, while deficit reduction
to maintain demand. becomes the top fiscal priority.

(4) Eventually private sector finishes its debt repayments,


ending the balance sheet recession. (6) Private sector fund demand recovers,
But it still has a phobia about borrowing which keeps and monetary policy starts working again.
Germany Fiscal policy begins to crowd out private investment.
interest rates low, and the economy less than fully vibrant.
Economy prone to mini-bubbles.
Japan

(5) Private sector phobia towards borrowing gradually disappears,


and it takes a more bullish stance towards fund raising.

Source: Richard Koo, The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession , John Wiley & Sons, Singapore, April 2008 p.160.

32
Exhibit 33. Contrast Between Yin and Yang Phases of a Cycle

Yang Yin
1) Phenomenon Textbook economy Balance sheet recession

2) Fundamental driver Adam Smith's "invisible hand" Fallacy of composition

3) Corporate financial condition Assets > Liabilities Assets < Liabilities


4) Behavioral principle Profit maximization Debt minimization
5) Outcome Greatest good for greatest number Depression if left unattended
6) Monetary policy Effective Ineffective (liquidity trap)

7) Fiscal policy Counterproductive (crowding-out) Effective


8) Prices Inflation Deflation
9) Interest rates Normal Very low
10) Savings Virtue Vice (paradox of thrift)
Quick NPL disposal Normal NPL disposal
a) Localized
11) Remedy for Pursue accountability Pursue accountability
Banking Crisis Slow NPL disposal Slow NPL disposal
b) Systemic
Fat spread Capital injection

Source: Richard Koo, The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession ,
John Wiley & Sons, Singapore, 2008

33