At the end of June, Richard Koo, Chief Economist at the Nomura Research Institute delivered a speech, reviewing the root causes of Japan's recession on its balance sheet and providing analysis and recommendations on China's current economic situation.

This speech sparked heated discussions in the economic research community. According to incomplete statistics from National Business Daily (NBD), as of July 12, more than 10 articles have been written by China's top domestic economists, financial scholars, financial journalists, and columnists, engaging in debates with Richard Koo from various perspectives.

Michael Pettis, professor of finance at Peking University's Guanghua School of Management, said to NBD that Richard Koo's proposal is wrong because it assumes that government debt can be sustained indefinitely. China should carefully study Japan's experience and draw the right conclusions.


"Most economists only think about the asset side of the economy, such as how to manage resources. Richard Koo's focuses on the debt side and its relationship with the asset side, which is something that few economists do. This is a major contribution to economic research." Michael Pettis told NBD.

"However, as the 1986 Maekawa Report pointed out, Japan's problem is too much bad investment, insufficient household income and consumption, and the need for rebalancing." The Maekawa Report is named after Maekawa Haruo, the then-governor of the Bank of Japan, and is an important strategic document that guides Japan's economic transformation.

In fact, there are many studies on Japan's long-term economic stagnation. Some economists believe that the balance sheet recession theory only sees the surface, or even finds the wrong cause.

Pettis believes that the problem with Japan's economy is that in the 1980s, it invested heavily in infrastructure projects with low economic value in order to pursue high growth. This model eventually reached its limits, and Japan was forced to face the debt problem. "In the 1990s, in order to maintain the economy, Japan, which already had a good infrastructure, built more projects. In Koo's view, Japan's approach solved the problem and avoided a crisis."

Pettis futher noted that Richard Kooeven believes that the Japanese government should raise more debt, as if it does not have to solve the debt problem, and can let it grow forever. "However, debt and overvalued assets must eventually be written off. So I think that the sharp rise in Japan's government debt has prevented Japan from a crisis, which is correct for Koo, but it has also led to Japan's economy falling into a long period of stagnation, because it is impossible to grow without solving the debt problem."

Pettis believes that the Great Depression was the most severe economic crisis in history, which caused the U.S. GDP to decline by 30% in three years. But ten years later, the U.S. economy recovered its global share and continued to grow rapidly. By contrast, Japan's GDP accounted for 17% of the global total in 1991, but it shrank to 7% in 30 years. "If the crisis had happened, Japan's economy might be in a better position today," Pettis said.

in Pettis view, Richard Koo's point is basically that China should take the same measures as Japan did that year, which is wrong. "I think it is very important for China to carefully and correctly study Japan, because we do not want China to repeat the mistakes that Japan made."

Editor: Billy