Balance Sheet Recession Research - On Postwar Japanese Economic Re-reviewed

The process of deleveraging within the global economic crisis triggered by the U.S. subprimemortgage crisis in2007is a process of repairing the balance sheet, which is a new theory researchhot spot.This paper proposes theoretic analysis framework of Balance Sheet Approach (BSA)systematically for the first time, and reviews related theories and literatures systematically. Withreviewing postwar Japan's economy completely and systematically, the paper analyzes Japan'sstagnation economy using concept of 'Balance Sheet Recession', defines 'liquidity trap' fromangle of borrower, and discusses the cause of deflation in Japan from the different angle oftraditional views of Milton Friedman and Irving Fisher. The paper also analyzes the non-financialsector (corporations and households), the private financial sector (mainly banks), and thegovernment sector (including the central bank) deeply. Meanwhile, the paper examines theinfluence of balance sheet recession on Japan's economy, trying to find the internal reason ofJapan trapped into so called 'lost ten years' and economy recovered slowly.The paper argues the survival of 'lost ten years' of Japan was not the true picture, but madethe well accomplishment of repairing the corporate sector and banking sector balance sheets withkeeping the whole amount of GDP level stable. In this sense, Japan was quite successful. Havedone well the study of Japan, is quite essential to researching the relative issue of China withsimilar mechanism. As is well-known to all, China will be the indisputable focus of the world inthe future.This paper is divided into seven chapters and each chapter content shows you as follows:The first chapter of the paper expounds the theoretic analysis framework of Balance SheetApproach (BSA) from the aspects of birth background, development, concept, main aims, analysisframework and main characters. The main aims of Balance Sheet Approach (BSA) includematurity mismatch risk, currency mismatch risk, capital structure mismatches, and solvency risk.Expound on analysis framework includes sectorization, classification and valuation of financialinstruments, risk conduction between sectors, and levels of complexity. At last, the paper reviewsthe literatures on Balance Sheet Approach (BSA) systematically.The second chapter reviews the postwar Japan's economy in1945-1990briefly from theangle of fiscal and monetary policy, dividing this period into three stages as reconstruction years(1945~1955), high-growth period (1955~1971), stable growth period (1972~1990).The third chapter reviews the postwar Japan's economy from1991to now briefly from theangle of fiscal and monetary policy, dividing this period into two stages as long stagnation period (1991~2001) and low recovery period (2002to now).The fourth chapter discusses the balance sheet recession on Japan's non-financial sector(corporations and households) detailedly. With analyzing the mismatch risk of Japan's thenon-financial sector, the paper expounds the phenomenon of liabilities minimum in corporationsector under the situation of asset prices collapse.The fifth chapter discusses the balance sheet recession on Japan's private financial sector(mainly banks) on the basis of the analysis of the fourth chapter. With analyzing the mismatch riskof Japan's private financial sector, this chapter concerns with Japan's NPL (non-performing loan)problem, that is, the reflection of asset prices collapse on the balance sheet of Japan's privatefinancial sector. This chapter also discusses the status of dealing with the NPL of Japan's privatefinancial sector, and the impact of the New Basel Capital Accord on Japan's private financialsector.The sixth chapter discusses the balance sheet recession on Japan's government sector(including the central bank) on the basis of the analysis of the fourth and fifth chapters. Withanalyzing the mismatch risk of Japan's government sector, this chapter mainly discusses theeffectiveness of monetary policy from the angle of borrowers. After that, the chapter expounds the'liquidity trap' from angle of borrower. At last, this chapter discusses the total demand analysisduring the period of the balance sheet recession, and long-term topic that Japan government facedto.The seventh chapter, the last chapter of the paper, discusses the recovery condition of Japan'seconomy under the situation of balance sheet recession. At first, this chapter evaluates thedeflation and policy effect in the period of the balance sheet recession, and then argues the Japan'sfinancial deficits. The chapter also proposes the essential condition of Japan's economyconquering the balance sheet recession. At last, the chapter discusses the sustainability of deficitfinancing in Japan.