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日本经济分析：金融危机：历史在重演(英文版)

Japan Economics Analyst

Issue No: 08/21 September 29, 2008

GS GLOBAL ECONOMIC WEBSITE

Economic Research from Goldman 360

at https://https://www.wendangku.net/doc/027337480.html,

Important disclosures appear at the back of this document

Tetsufumi Yamakawa

tetsufumi.yamakawa@https://www.wendangku.net/doc/027337480.html,

+44 20 7774 5061

Yuriko Tanaka

yuriko.tanaka@https://www.wendangku.net/doc/027337480.html, +81 3 6437 9964

Chiwoong Lee

chiwoong.lee@https://www.wendangku.net/doc/027337480.html, +81 3 6437 9984

Financial Crisis: History Repeats Itself

Debate is moving forward in the United States on measures to address the financial crisis. There are many similarities between developments so far and Japan’s experience

with nonperforming loan disposal.

Japan disposed of NPLs through three main strategies: (1) a plentiful supply of liquidity, (2) NPL purchases with public funds, and (3)public fund injections into banks. A framework was adopted for using public funds to purchase NPLs that involved the creation of a Japanese version of the RTC. This did not,however, restore confidence in the financial system owing to deep-seated concerns in the market about bank capital shortages.

Monetary policy fell into a classic liquidity

trap as corporate balance sheet restructuring

pressures grew more severe due to declining

asset prices. Fiscal stimulus provided only

temporary impetus to the economy.

There are many differences between what Japan experienced and current conditions in

the US, where balance sheet restructuring

pressures are concentrated in the household

sector while nonfinancials’ balance sheets remain sound. NPL disposal may necessarily have to take a different form in the US, where direct or market-based indirect financing is predominant, than it did in Japan, where indirect financing via banks was predominant.

That said, Japan’s experience suggests that a unified approach to NPL disposal combining expansionary economic policies and public fund injections into banks is required, and that the more quickly NPLs are disposed of, the smaller the ultimate fiscal cost of NPL disposal may be. Even in Japan, which was not quick to dispose of NPLs, the taxpayer burden was less than 15% of available public fund outlays.

Public Fund Outlays for NPL Disposal Totaled ￥47 Trillion Altogether Public Fund Outlays

for NPL Disposal by the RCC 0

4681012141618

929394959697989900010203040506

FY Source: Deposit Insurance Corporation.

Ultimate Taxpayer Burden Far Less than Public Fund Outlays

Public Fund Outlays vs. Money Recouped by RCC Note: See note to Exhibit 15.

Source: Deposit Insurance Corporation.

Goldman Sachs Economic Research Japan Economics Analyst

Issue No: 08/21

September 29, 2008

Weekly Wrap-Up

Real Economy: Exports Fall Back

After picking up to 7.4% yoy growth in July, export volume fell back to a 1.8% decline in August (customs-cleared trade statistics). We do not expect a recovery yet as our Global Leading Indicator (GLI), which has been a good leading indicator for Japanese exports, is still slowing. By region, mild deceleration is underway for exports to Asia, which have a roughly 50% weighting. Europe-bound exports are on the decline, and the US has slackened again after showing signs of stabilizing. We think exports can avoid a sharp downturn predicated on our Asian economic team’s forecast for ex-Japan Asia domestic demand—8.1% growth in 2008 (including 9.8% for China), 7.1% growth in 2009 (8.5%)—even though this represents a slowdown. Nevertheless, we will be watching closely and monitoring downside risks from domestic demand (see Exhibit 1). The August trade balance was a ￥324.0 bn deficit, although it was expected by the market (vs. a July ￥855.1 bn surplus). The underlying pattern was a sharp deceleration to +0.3% for exports (vs. +8.0%) and a 17.3% rise for imports as a result of previous crude oil price increases (vs. +18.2%). The August trade balance is volatile due to relatively low import and export levels but we can still say that the surplus is shrinking.

The last August deficit was in 1982.

Exhibit 1: Exports Weak to US, Europe, Slowing

Mildly to Asia

Japanese Export Volume by Region

-15

-10-50

5101520

Source: MOF.

CPI inflation remains high, due chiefly to rising food prices. National core CPI inflation remained over 2%

for the second consecutive month in August, at +2.4% yoy (+2.4% in July). We think CPI inflation peaked out in August, owing partly to crude oil and grain price declines, and began gradually declining thereafter. However, we expect CPI momentum to be sustained and are forecasting a rate of +1.5% at end-FY2008 and +1.2% at end-FY2009 (see Exhibit 2). Our commodity research group has revised its crude

oil price forecast (on September 18). The new forecast still calls for prices to rise, but not nearly as much as the previous forecast. Specifically, it calls for a WTI price of US$115/bbl in three months (vs. US$145.3 previously), US$125/bbl in six months (vs. US$148.1), and US$125/bbl in 12 months (vs. US$147.0). Accordingly, the forecasts for the average crude oil price for 2008-09 were lowered 4.3% to US$112.6/bbl from US$117.7 and 15.6% to US$123/bbl from US$148 respectively. In conjunction with this, we are forecasting slightly lower CPI inflation of +1.6% in 2008 (vs. 1.7% previously) and +1.4% in 2009 (vs. 1.5%), but are still looking for CPI inflation to remain high as higher food prices continue to be passed on to consumers. In fact, food has a 22.7% weighting in the CPI, well above the 3.7% weighting for gasoline and other oil-related products. Monetary Policy (BOJ Watch):

Dollar Fund Supply We expect the September BOJ Tankan survey

(October 1 announcement) to show that business conditions continued to deteriorate owing partly to

Exhibit 2: CPI Inflation to Remain High for Now

CPI Inflation

-0.8

-0.4

0.00.40.81.21.62.0

2.4

Source: MIC, Goldman Sachs Economic Research.

Goldman Sachs Economic Research Japan Economics Analyst

Issue No: 08/21 3

September 29, 2008

financial market turmoil—the stock market decline and credit contraction 1.

We are forecasting that the business conditions diffusion index (DI) for large companies in the manufacturing sector will fall into negative territory for the first time since June 2003, to a reading of -1 (vs. +5 in June) and the DI for large nonmanufacturers will show a further deterioration to +2 (vs. +10). We estimate that the DIs for smaller companies, which are more susceptible to the impact of the credit contraction, will remain stalled with readings of -18 for manufacturers (vs. -10) and -30 (vs. -20) for nonmanufacturers, due chiefly to weakness in construction and real estate. We expect large companies to lower their FY2008 capex plans to +1.8% (from +2.4% in the June survey) and small companies to lower theirs to -23.4% (from -20.2%) owing in part to further weakness in land investment (see Exhibit 3).

The market has factored in monetary easing to some extent but we see little likelihood that the BOJ will cut rates of its own accord when the policy rate is too low for a cut to produce much benefit. The preconditions we see for easing are either increased risk of prolonged recessionary conditions in Japan due to a collapse in demand overseas, particularly China, or abrupt tightening in financial conditions as a result of yen

In the September Reuters Tankan survey, which precedes the BOJ Tankan, the manufacturing sector business conditions DI showed a slight improvement, but the survey was conducted from August 27 to September 12, so it does not reflect the impact of the present financial crisis.

appreciation and equity decline. Otherwise, we think the BOJ would probably participate in rate cuts coordinated by the Fed, or the ECB, with the aim of alleviating funding pressure in the money market regardless of benefits for the real economy.

The BOJ’s first dollar auction as part of the joint measures announced by major central banks fell short of expectations, with insufficient bidding for the planned US$30 bn supply. Foreign banks were active bidders but Japanese banks are comparatively cash rich and were not enthusiastic. Going forward, we assume high latent demand for dollar funds led by foreign banks.

Fiscal Policy/Political Developments: Appraisal of Aso-nomics

After his expected comfortable victory in the Liberal Democratic Party (LDP) presidential election, new prime minister Taro Aso has formed his Cabinet. He is now generally expected to dissolve the lower house for a general election in the current extraordinary Diet session (began September 24), following passage of a FY2008 supplementary budget containing a flat-sum tax cut for low income brackets. Election timing will hinge on the supplementary budget debate in the Diet but a date around November 9 seems likely. It seems touch and go whether the coalition including New Komeito can maintain a majority. If the Democratic Party of Japan were to run the LDP close, the current split Diet increases the likelihood of a shakeout in Japanese politics.

While Koizumi, Abe, and Fukuda pursued fiscal contraction and emphasized structural reform including fiscal reforms, Aso wants to shift to an expansionary fiscal course, giving priority to economic growth. Aso does not deny the importance of structural reform. It is simply lower in his priorities since deregulation and fiscal reforms that could entail near-term deflationary pressure are predicated on the economy’s return to cruising speed. We expect the target for achievement of primary balance (fiscal equilibrium excluding debt service) to be pushed back from FY2011 to FY2014 (see Exhibit 4).

Exhibit 3: Further Deterioration in Business Conditions DI

September BOJ Tankan Survey

Source: Goldman Sachs Economic Research.

Goldman Sachs Economic Research Japan Economics Analyst

Issue No: 08/21 4

September 29, 2008

Exhibit 4: Schedule Pushed Back for Achievement of Primary Balance

Primary Balance Trends

-7

-6-5-4-3-2-101200

(% of GDP)

Source: MOF, Cabinet Office, Goldman Sachs Economic

Research Group estimates.

However, it is unclear how much change Aso can effect. Certainly, Finance Minister and State Minister for Financial Services Shoichi Nakagawa has spoken in favor of economic stimulus from fiscal expansion but Kaoru Yosano, who retained the economic and fiscal policy portfolio, wants to prioritize fiscal restructuring and maintain the target for balancing the budget. Aso himself has rejected deficit-financing bond issuance, saying special account surpluses will be used to finance fiscal measures, but we do not know yet whether this is feasible.

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Goldman Sachs Economic Research Japan Economics Analyst

Issue No: 08/21

September 29, 2008

Financial Crisis: History Repeats Itself

Introduction

Debate is moving forward in the United States on measures, including the use of public funds, to address an unprecedented financial crisis. There are many similarities between developments so far and Japan’s experience with nonperforming loan (NPL) disposal in the 10-plus years after the collapse of the bubble.

Japan disposed of NPLs through a combination of three main strategies arrived at through a process of repeated trial and error: (1) a plentiful supply of liquidity by the BOJ, (2) NPL purchases with public funds, and (3) public fund injections into banks with insufficient capital. A framework was adopted for using public funds to purchase NPLs, an idea currently being debated in the US Congress, which involved the creation in 1998 of the Resolution and Collection Corporation (a Japanese version of the RTC).

This did not, however, restore confidence in the financial system owing to lingering, deep-seated concerns in the market about bank capital shortages and a credit contraction. The stock market and interest rates did not experience a sustained rally until banks incurred large losses accompanying sizable NPL disposal for the accounting year ending March 2003, followed by a public fund injection into Resona Bank in June 2003.

In the meantime, monetary policy fell into a classic liquidity trap and grew ineffective as corporate balance sheet restructuring pressures grew more severe due to declining real estate and other asset prices. Fiscal stimulus in the form of a series of economic stimulus packages provided only temporary impetus to the economy, while general government debt rapidly accumulated.

There are many differences, of course, between current conditions in the United States and what Japan experienced. In the United States, balance sheet restructuring pressures are concentrated in the household sector, and nonfinancial companies’ balance sheets are still sound. In addition, the US real policy interest rate is poised to decline to near zero amid an inflationary environment. Also, NPL disposal must necessarily take a different form in the United States, where direct or market-based indirect financing is predominant, than it did in Japan, where indirect financing via banks is predominant.

That said, Japan’s experience strongly suggests that a unified approach to NPL disposal combining expansionary macroeconomic policies and public fund injections into banks experiencing capital shortages is required, and that the more quickly NPLs are disposed of, the smaller the ultimate (fiscal) cost of NPL disposal may be. Even in Japan, which took more than 10 years to dispose of NPLs, the taxpayer burden was less than 15% of initially planned public fund outlays.

NPL Disposal: Japan’s Experience

Debate is moving forward in the United States on measures, including the use of public funds, to address an unprecedented financial crisis. There are many similarities between what has happened so far, triggered by the subprime loan crisis that began last year, and Japan’s experience with NPL disposal amid a deflationary environment in the 10-plus years after the collapse of the bubble in the early 1990s. We have reported on Japan’s experience several times in the past, but now we take a fresh look back at Japan’s NPL disposal process with an eye towards gauging the implications for how the United States will deal with this financial crisis (see Exhibit 5).

The two main elements of Japan’s strategy for dealing with its financial crisis, which we discuss in more detail below, were (1) NPL disposal measures that comprised supplying liquidity mainly by the BOJ, purchasing nonperforming assets with public funds, and injecting public capital into banks; and (2) expansionary macroeconomic policies—monetary easing and fiscal expansion—designed to alleviate deflationary pressures in the meantime. It is difficult to say that the two worked together very

Exhibit 5: Marked Similarities in Post-Bubble Home Price Trends in Japan and US

Home Price Trends

65707580859095100105

Goldman Sachs Economic Research Japan Economics Analyst

Issue No: 08/21

September 29, 2008

successfully—at least not until the financial crisis grew more severe in 1998 (see Exhibit 10 for a summary of major events in the NPL disposal process).

NPL Disposal:

Three-Pronged Attack – Liquidity Supply, NPL Purchases, Public Fund Injections

The NPL disposal measures that Japan ultimately arrived at through a process of repeated trial and error consisted of three main elements: (1) a plentiful supply of liquidity by the BOJ, (2) NPL purchases with public funds, and (3) public fund injections into banks with insufficient capital.

(1) After concerns about the financial crisis grew more serious in FY1997, the BOJ adopted a series of liquidity supply measures in rapid succession. Specifically, it expanded its means of liquidity supply, beginning with the resumption of commercial paper operations, extended special BOJ loans (in November 1997), and adopted a provisional lending facility (in November 1998) to provide financial assistance to companies. In addition, it eased collateral requirements (in December 2001) by adding asset-backed securities and asset-backed commercial paper

to the list of eligible collateral for fund infusions.

These measures were designed to complement its zero

interest rate policy (adopted in February 1999) and

quantitative easing policy (March 2001). During this period, the BOJ’s balance sheet (asset composition)

changed significantly as it diversified the means of liquidity supply, something that is now happening at the US Federal Reserve (see Exhibit 6).

Exhibit 6: BOJ’s Asset Composition Changed Significantly as it Diversified Liquidity Supply

Changes in BOJ Balance Sheet: Assets

020406080100120140160180

(￥ tn)

JGB custody operations, Gensaki operations, and BOJ stock purchase operations. Source: BOJ.

Despite these measures, fund procurement costs in the interbank market grew unstable during the 1998-99 financial system crisis and later fluctuated violently, with large swings in the spread between short-term market interest rates and the policy interest rate, until the BOJ adopted the quantitative easing policy (see Exhibit 7).

(2) The road to NPL purchases was a tortuous one. The Cooperative Credit Purchasing Company (CCPC), established in January 1993, had only a limited real impact and gained little market approval because there was no direct involvement of public funds. The CCPC instead relied on investments from the private sector for its financing, meaning it was unable to completely separate NPLs from banks (see Exhibit 8).

Exhibit 7: Fund Procurement Costs Remained Stable Fund Procurement Costs -1.5

-1

-0.5

00.511.5

2959799010305070

2040608010012014008/9

Source: BOJ.

Exhibit 8: Public Fund Outlays for NPL Disposal

Totaled ￥47 Trillion Altogether

Public Fund Outlays for NPL Disposal by the RCC

6810121416

18929394959697989900010203040506

Source: Deposit Insurance Corporation.

Goldman Sachs Economic Research Japan Economics Analyst

Issue No: 08/21

September 29, 2008

Subsequently, the government established the Resolution and Collection Corporation (a Japanese version of the RTC, which was established in the US during the S&L crisis) in April 1999, following the passage of Financial Stabilization Law in October 1998, as the financial crisis grew more widespread and the government finally began using public funds to buy NPLs. The markets initially welcomed this move, but it was not sufficient to eliminate concerns about capital shortages at banks despite a simultaneous, massive infusion of public capital. Annual public fund injections via the RCC—money given to banks, NPL purchases, and public capital injections—reached ￥15.7 trillion at their peak, and the aggregate total reached ￥46.6 trillion, equivalent to 48% of the ￥96.5 trillion in total NPL write-offs.

(3) Injections of public capital into banks began in March 1998 with 21 banks (followed by a large injection in March 1999), including many financially sound banks, and ultimately ended in June 2003 with a massive capital infusion into Resona Bank, a symbolic event in the NPL disposal process. Prior to this event, major banks stepped up NPL disposal and posted sizable losses in the fiscal year that ended in March 2003, while some banks raised significant capital by themselves to make up the losses. In addition to these efforts by banks themselves, the Industrial Revitalization Corporation (IRC) was set up in April 2003 in order to help clean up problem balance sheets at companies with excessive debt. This series of efforts by banks and the government triggered a full-scale rally in stocks and interest rates after June 2003 (see Exhibit 9).

Japan’s experience strongly suggests that a three-pronged approach comprising plentiful liquidity supply, NPL purchases with public funds, and public capital injections into banks is essential for NPL disposal.

Macroeconomic Policy Implementation: Monetary Easing + Fiscal Expansion

NPL disposal exerts some degree of deflationary pressures on the real economy through credit contraction. This is clear from the tendency in countries that have been through the NPL disposal process—not only Japan, but also the United States (during the savings and loan crisis) and Scandinavian countries—for growth to decline sharply as NPL disposal proceeds. To mitigate the deflationary pressures caused by NPL disposal and credit contraction it is important to adopt expansionary policies on the macroeconomic policy side. In Japan’s case, however, it is difficult to say that the government effectively implemented accommodative economic policies, at least not in the early stages of the NPL disposal process (see Exhibit 11).

Exhibit 9: Public Capital Injections Triggered Full-Scale Stock Market and Interest Rate Rebound

NPL Disposal and Financial Market Trends

5000

100001500020000250003000035000400004500090

0.0

1.02.0

3.04.05.06.07.08.09.0

Source: Goldman Sachs Economic Research.

Goldman Sachs Economic Research

Japan Economics Analyst

Issue No: 08/21

September 29, 2008

E x h i b i t 10: T h r e e -P r o n g e d P o l i c y A p p r o a c h t o N P L D i s p o s a l E s s e n t i a l

M a j o r E v e n t s i n N P L D i s p o s a l

Goldman Sachs Economic Research Japan Economics Analyst

Issue No: 08/219September 29, 2008

Goldman Sachs Economic Research Japan Economics Analyst

Issue No: 08/21 10

September 29, 2008

Exhibit 11: NPL Disposal Increases Deflationary Pressures on the Real Economy

Real GDP Growth Amid NPL Disposal

-4-202468-20

-16

-12

-8

-4

048

US (S&L)

Scandinavian countries

(quarters)

Note: “0” on x-axis corresponds to the beginning of financial

crisis in each country. US: 91Q4 Japan: 98Q3

Scandinavian countries Norway: 89Q1, Sweden: 92Q1, Finland: 91Q1.

Source: Cabinet Office, US Department of Commerce, Datastream.

On the monetary policy side, the BOJ began using the overnight call rate in place of the official discount rate as its policy interest rate (this new monetary regime was adopted in March 1995). Then, it rapidly lowered the policy interest rate and ultimately adopted a zero interest rate policy in February 1999 and a quantitative easing policy in March 2001. There are irrefutable signs, however, that monetary easing was always a step behind rapidly increasing deflationary pressures. Ultimately, the real policy interest rate remained high—because of the limitation that nominal interest rates cannot fall into negative territory—and the effectiveness of monetary policy diminished significantly. The round of rapid yen appreciation that began in August 1998 increased deflationary pressures as NPL disposal went into full swing (see Exhibit 12).

On the fiscal policy side, the government increased fiscal spending by ￥173 trillion (equivalent to 64.5% of GDP), including ￥83 trillion in real fiscal stimulus (16.5% of GDP) and other measures, beginning with a comprehensive economic stimulus package in August 1992. As noted above, however, fiscal expansion centered on public works projects provided only temporary economic stimulus because as banks disposed of their NPLs, balance sheet restructuring pressures increased in the nonfinancial corporate sector (see Exhibit 13).

Exhibit 12: Real Policy Interest Rate Remained High Amid Deflationary Environment

Policy Interest Rate

-2-1.5-1-0.500.511.522.595

010305

0709

Note: ZIRP = zero interest rate policy; QE = quantitative easing. Source: BOJ, MIC.

Exhibit 13:

Fiscal Expansion During NPL Disposal Provided Only Temporary Economic Stimulus

Real GDP Growth: Contribution by Demand-Side Item

-3-2-1012345671990

1993

1996

1999

2002

2005

2007

Source: Cabinet Office.

In addition, the general government debt balance (long-term debt relative to GDP) rapidly shot up to 150% at end-FY2007 all the way from 62.6% at end-FY1992 and remained high after that. The macroeconomic policies that normally would offset the deflationary pressures of NPL disposal ultimately had limited impact in part because the policies—monetary easing, in particular—were not implemented soon enough.

Japan vs. US: Focus in Japan on Disposal of Excessive Nonfinancial Corporate Sector Debt

On the surface there are many similarities in NPL disposal in Japan and the United States, excluding of course the difference in speed—the United States is

Goldman Sachs Economic Research Japan Economics Analyst

Issue No: 08/21

September 29, 2008

trying to do in a little over one year what it took more than 10 years to do in Japan. Differences exist, however, between conditions in Japan then and those in the United States now.

First, balance sheet restructuring pressures in the United States are concentrated in the household sector, while in Japan the focus point was the disposal of excessive debt in the nonfinancial corporate sector. In the United States, household sector debt (relative to GDP) has been sharply rising since 2000, to 100.2% at end-2007 from 69.2% at end-1999, while nonfinancial sector debt remains stable at a low level of 45.6%, virtually unchanged from 45.5%, suggesting that balance sheets remain sound at companies outside the financial sector. In Japan, by contrast, the debt ratio in the nonfinancial corporate sector rose sharply during the bubble years (end-1980: 90.4%; end-1990: 128.7%) and declined sharply once the bubble collapsed.

Second, the real policy interest rate in the United States has already fallen to near zero amid an inflationary environment, in contrast to Japan, where it remained high owing to deflation. The BOJ’s slowness in easing monetary policy caused the real policy interest rate to remain high, and this led to a vicious cycle with monetary policy falling into a liquidity trap. Based on Japan’s experience, the Fed aggressively eased monetary policy at an early juncture, causing real interest rates to decline sharply, and heading into 2009 the Fed may gain greater monetary policy latitude as the inflation rate declines.

Third, from a slightly different perspective, US and Japanese credit markets are structured very differently, so it is only natural that NPL disposal should take a different form in the two countries. In Japan, bank loans and other indirect financing accounted for nearly 60% of credit at the time, meaning risk was concentrated in the banking sector and resulting in public capital infusions into banks with insufficient capital ultimately being made the core element of NPL disposal. In the United States, by contrast, direct financing and market-based indirect financing via securitization account for a very large percentage of credit, so the impact is not limited to banks but is much broader. To that extent, it is undeniably more complicated to choose public capital injections as an option in the United States (see Exhibit 14).

Exhibit 14: Credit Markets Structured Very Differently in Japan and US

Credit Market Structure: Japan vs. US

100

US June 2008

Japan March 1999

Note: Credit market instruments excluding government treasury

securities. Source: BOJ, FRB.

The Japanese Lesson: Final Taxpayer Burden Far Less than Public Capital Outlays

Despite these differences, the United States (and potentially Europe) can learn much from the more than 10-year-long NPL disposal process in Japan after the bubble’s collapse there. First, NPL disposal requires a unified approach involving measures such as NPL purchases with public funds and public capital infusions combined with expansionary monetary and fiscal policies. Japan’s experience strongly suggests that NPL disposal measures consisting largely of fiscal expansion and other economic measures may provide short-term economic stimulus, but merely exacerbate the problem over the intermediate/long term.

Second, the faster NPLs are disposed of the more effective this is. In Japan, the BOJ’s hesitation to aggressively ease monetary policy caused monetary policy to lose effectiveness and led to a vicious cycle of NPL disposal producing more severe asset price declines, with this in turn making the NPL problem more severe. NPL disposal in Japan and other countries shows that the more NPL disposal is delayed the greater the final fiscal cost tends to be.

Even in Japan, however, where NPL disposal was not quick by any means, the government ultimately recouped over half of the public funds it used. The Japanese government used ￥46.8 trillion, or 67%, of the ￥70 trillion in public funds it was prepared to use, and so far the taxpayer burden is ￥10.4 trillion, or less than 15% of the initially planned total (of the remaining ￥11.7 trillion, ￥6.8 trillion has been

Goldman Sachs Economic Research Japan Economics Analyst collected from banks). In addition, of the ￥46.8 trillion

used, the government has recouped 80%-90% of the

funds (excluding funds transfer) used for NPL

purchases (￥9.6 billion, or 98.2%, of ￥9.8 billion) and

capital injections into banks (￥10.2 trillion, or 82.2%,

of ￥12.4 trillion), and the recoup rate is expected to

continue rising (see Exhibit 15).

The US$700 billion figure for public fund outlays

being bandied about in the United States, which is

equivalent to ￥70 trillion, represents the maximum

outlay. Even the example provided by Japan, which

was very slow to dispose of NPLs, suggests that the

ultimate fiscal cost will end up being far less than

projected, as pointed out by our US Economic

Research Group.

Third, it is self-evident that NPL disposal depends on

an economic and asset price recovery. Public fund

outlays and other NPL disposal measures merely

provide some impetus—they alone do not solve the

problem.

Exhibit 15: Ultimate Taxpayer Burden Far Less

than Public Fund Outlays

Public Fund Outlays vs. Money Recouped by RCC

Note: Figures in parentheses show recoup rate. Public fund

scheme was set at ￥70 tn. Loss comes to ￥22.1 tn (as of

March 2008), out of which ￥10.4 tn is already realized as

taxpayer loss. Deposit insurance will make up for the

remaining losses, out of which ￥6.8 tn has already been

collected as deposit insurance premium from financial

institutions.

Source: Deposit Insurance Corporation.

Tetsufumi Yamakawa

Yuriko Tanaka

We thank our Japan Bank analyst Toyoki Sameshima

and Chief US Economist Jan Hatzius for their

valuable advise on this article.

Issue No: 08/2112September 29, 2008

Goldman Sachs Economic Research Japan Economics Analyst

Reference 1: Distressed Debt Purchases and Capital Injections by the RCC

Debate is progressing in the United States on the means for buying up distressed debt from financial institutions and the pricing. The expected format may be slightly different from that used in Japan, where direct purchases were used exclusively, not auctions. Also, brokers and insurers were excluded from the Japanese scheme, which was confined to deposit-taking institutions such as banks, credit corporations, and credit federations. The primary buyers of distressed assets were the Deposit Insurance Corporation and the Resolution and Collection Corporation (RCC).

Q1: What means did the RCC use to buy distressed debt?

A1: The RCC bought directly from eligible financial institutions. There was no market mechanism such as auctions and basically the financial institutions were not coerced into sales of specific assets.

Q2: How was the debt priced?

A2: Prices were decided by the steering committee and an appraisal committee made up of lawyers, accountants, and real estate appraisers. Purchase prices averaged approximately 10% of the principal.

Discounted cash flow (DCF) was used initially for pricing purchases from healthy banks, although the amount was small. The pricing method was changed to market price in January 2002, when the RCC was permitted to participate in private sector auctions.

Q3: Did prices that were much lower than principal result in bank capital impairment? And did this lead to public fund injections?

A3: Such capital impairment did not become an issue as far as distressed debt was primarily bought from failing financial institutions (taking it off the balance sheet to lighten the burden of the successor bank).

Healthy banks basically tackled NPLs by themselves and attendant capital impairment was addressed by raising capital or applying for funds from the RCC. RCC purchases from healthy banks amounted to only ￥353.3 bn (￥4 tn principal, purchase price averaged 8.8% of principal), compared to those from failed banks, ￥9.4 tn.

Q4: What criteria did the RCC use for funding decisions?

A4: The RCC decided case by case. Bankruptcy proceedings were applied for financial institutions deemed incapable of continuing and funding was provided when bankruptcy was expected to cause socioeconomic disruption (Resona Bank, which was dealt with under the Deposit Insurance Law). Prompt corrective action was the tenet for funding healthy banks, the RCC basically responding to requests from such banks.

Q5: What formula was used for public funding? Did shareholders suffer dilution or other effects from preference shares?

A5: Public capital infusion mainly took the form of preferred share underwriting and subordinated bonds/loans. Purchase of common stock was confined to cases of extreme capital impairment and excessively small capital. The total amount of preferred stocks underwriting amounted to ￥9.3 tn, which accounted for 75% of total capital injection by public funds.

Issue No: 08/2113September 29, 2008

Goldman Sachs Economic Research Japan Economics Analyst Reference 2: Distressed Asset Purchases and Capital Injection Scheme by the RCC

Source: DIC, Goldman Sachs Economic Research.

Issue No: 08/2114September 29, 2008

Goldman Sachs Economic Research Japan Economics Analyst Upcoming Releases

August Industrial Production/September-October Plans (√√√): Production has turned down as a result of export slowdown. We forecast -3.2% yoy for August (July +1.3%), a larger decline than the company plans released with the July statistics (-2.9%). We also expect July-September to mark the third consecutive quarterly decline. Although initial production plans have been subject to substantial downward revisions due to unexpectedly weak orders and shipments, we see little risk of a production slump since inventory remains low and exports to Asia, which have a roughly 50% export weighting, are sustaining growth.

August Labor Market (√√): A mild job correction continues. We forecast that unemployment will inch up to 4.1% in August (July 4.0%) and the job offers/applicants ratio will deteriorate to 0.88X (0.89X). We expect gradual worsening in conditions to continue due to the structural factor of recession and the trend of labor shortages stemming from baby boomer retirement.

September BOJ Tankan (√√√): Business conditions have deteriorated further, exacerbated by the credit squeeze spawned by financial turbulence. We forecast that the large manufacturer business condition DI will fall to -1 (June +5), its first negative reading since the June 2003 survey, and the large nonmanufacturer DI will fall to +2 (+10). Smaller companies are more vulnerable to the credit squeeze and we forecast -30 (-20) and -18 (-10) led by sectors such as construction and real estate. We see downward revisions as inevitable for FY2008 capex plans, in part due to weakening land investment. Our forecast is +1.8% yoy for large corporates (June +2.4%) and -23.4% for smaller companies (-20.2%).

Note: The importance of the economic indicator in terms of its impact on the market is indicated by “very high:√√√”, “high: √√”. Issue No: 08/2115September 29, 2008

Goldman Sachs Economic Research Japan Economics Analyst Key Data

Main Economic Forecasts

* Show s actual figures

Interest Rate Forecast

* Show s actual figures. Note: Yield in BE Y basis.

Recent Economic Indicators

(a) Private-sector orders, excluding electric power and shipping. (b) Customs cleared. (c) Balance of payments, seasonally adjusted.

(d) Period average.

Issue No: 08/2116September 29, 2008

Goldman Sachs Economic Research Japan Economics Analyst Economic Calendar

Issue No: 08/2117September 29, 2008

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Issue No: 08/2118September 29, 2008