Thursday, October 16, 2008

Japan's Crisis began with a Low MPK

Japan's banking crisis began no earlier than 1993, because Japanese banks were making profits prior to that, and were taking losses 1993 through at least 2001 (Kashyap, 2002, Table 1).

I am still double-checking this, but it seems to me that non-financial capital was already in sorry shape by then. The attached graph shows non-financial sector net operating surplus per dollar of capital in the non-financial sector (seasonally adjusted by taking residuals from a regression on quarter dummies). It reached its lowest in 1993 and 1994.

In the U.S., by comparison, banks began taking significant losses in 2007. The non-financial sector was quite profitable then, and continues to be. The high U.S. marginal product of capital not only raises the growth rate forecast from which to subtract any adverse impact of liquidity crisis, but also reduces the expected magnitude of that impact.

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