Student ID: 41844939 Kim Evgeniya

THE IMPACT OF THE CURRENT US ECONOMIC CRISIS ON ECONOMIC

STABILITY OF JAPAN.

1. Introduction……………………………………………………………………………..….3

1.1. Background of Global Financial Crisis…………………………………………..…..3

2. Global Financial Crisis and Japan…………………………………………………..……5

2.1. Japan economic situation before the crisis. Briefly……………………………..…..5

2.2. The effect of the crisis on Japan economic stability………………………………...5

2.3. Anti-crisis measures………………………………………………………………….6

3. Conclusion……………………………………………………………………………..…..7

3.1. Results and current situation………………………………………………………...7

3.2. Future forecasts………………………………………………………………………8

4. Bibliography…………………………………………………………….…………..……10

5. Appendix………………………………………………………………………….……...11

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1. INTRODUCTION.

Current financial crisis started in 2007 in the United States and has grown significantly
within one year effecting world economies one by one and reached its global scale in
summer 2008. This became a major topic of discussions and analysis of economists and
politics all over the world during last couple of years. Both developed and developing
countries such as United Kingdom, European Union, India, China, Russia, Japan, Australia
and so on were incurred in the crisis and most of them are still in the recession.
The research provided below is aimed on analysis of the effect of the GFC (Global
Financial Crisis) on economic situation and stability of Japan, the world second biggest
economy, which is still on its way to recovery.
The research starts with a brief explanation of the GFC origin and short background.

1.1. Background of Global Financial Crisis

The origin of current Global Financial Crisis lies in subprime mortgage crisis in United
States of America started in 2007. The whole story began in the late 1990s after collapse of
equity market in United States and bankruptcy of the financial giants such as Dot.com, or
Enron1. This crush made investors to direct their capital flows towards the different market,
and this market was real estate market.
The mass investments into the market and increasing speculation made the prices and
demand for all types of real estate grow fast, what created a “bubble” around this market. At
the same time the large number of low credit worthy borrowers, willing to buy homes for
resale purpose, entered the market and the demand for mortgage loans increased enormously.
US banks realized that this sector was becoming a profitable and expanding market for them
and they started to compete with each other setting low interest rates for mortgage loans and
also for the other types of credit. As a result, this turned into the large number of subprime
loans, where subprime borrowers are categorized as borrowers with the highest level of risk
that they will default their loan repayments2. (David K. Eiteman, 2010)
By 2006 the average price of American house has increased by 124% ("CSI: credit
crunch". Economist.com. 2008. Retrieved 2010-05-19) and by 2008 dropped by more than
20%3 ("Economist-A Helping Hand to Homeowners". Economist.com. 2008-10-23.
Retrieved 2010-05-19) and as a result of the latter American house owners has lost almost $5
trillion at once. The drop of house prices made interest rates for subprime loans to rise in a
moment and therefore low credit worthy borrowers defaulted to pay back their home loans

1 Appendix 1

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with higher interest rates. That led to the collapse of such large investment banks and hedge
funds as Goldman Sachs, Lehman Brothers, Bear Stearns, Morgan Stanley and others.
Together with the growth of real estate market these banks started to invest into home loans
which were basically subprime loans as discussed earlier. But after the bubble burst and
loans got defaulted investors started to require their money back, and apparently they could
not get them as everything was lend out. Furthermore, Lehman Brothers tried to borrow
money in the other world banks but it was rejected everywhere, as everyone doubted its
creditability. The stock prices of Lehman Brothers and other investment banks started to fall
dramatically, and finally the result was the collapse of these financial institutions (Labaton,
Stephen (2008-10-03)."Agency's ’04 Rule Let Banks Pile Up New Debt, and Risk". The New
York Times. Retrieved 2010-05-02). However, all the banks except for Lehman Brothers got
support from the government.
As United States was not the only market of real estate, the failure was followed then by
United Kingdom and Australia, and other European and Asian countries worldwide. The so
called “domino’ effect came into action accompanied with collapsing of loans and securities
at the first stage and funds and institutions at the second through all over the world. In
addition US as the center of the world economy and globalization was the largest consumer
in the world market of both commodities and money. Hence, the economy burst, the shortage
of money in the country turned out to be the other problem and not only for the United States
but for the rest of the world as well. Since then world economic recession started which was
followed by fall in demand for certain commodities, shortage of production, increased prices
for oil, increased unemployment, etc. The main concern of world analysts is whether and
how one or another country will manage to overcome the crisis and how long will it take.
Further the research will demonstrate the effect of the crisis on Japanese economy which
is a good example of stable economic development and growth. The following part of the
essay is based on review of past and current economic situation of Japan and provides an
analysis of country’s recovery process and future forecasts.

2 In the Past United Sates Government did not allow low credit worthy investors borrow from
the banks even with higher interest rates than the other loans in most of the states.
Moreover, in 1990-2000 the banking system of United States was deregulated and as a
result more financial organizations and institutions could enter the market and even
ordinary commercial banks could get an access into more areas of risk. (Gramm-Leach-Bliley
Financial In the Past United Sates Government did not allow low credit worthy investors
borrow from the banks even with higher interest rates than the other loans in most of the
states. Moreover, in 1990-2000 the banking system of United States was deregulated and as
a result more financial organizations and institutions could enter the market and even
ordinary commercial banks could get an access into more areas of risk. (Gramm-Leach-Bliley
Financial
Services Modernization Act of 1999). So, what had happened can be considered as the
result of banking system deregulation.

3 Appendix 2

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2. THE GLOBAL FINANCIAL CRISIS AND JAPAN.

Japanese economy, the second largest economy in the world after United States, was not
remained untouched by the GFC in spite of its strength and stability. But based on the research
there was only one major reason which made the economy enter the period of recession and it
was not the “financial” part of financial crisis as for other developed countries .

2.1. The economic situation in Japan before the crisis.

Since World War II Japan has shown to the world the highest rates of growth than any other
developing economy ever. But in a recent couple of decades Japan couldn’t demonstrate such a
good performance. The long depression in 1990s, which was the result of collapse of the bubble
economy, was followed by steady, but slow growth. However, the recovery period of Japan can
be clearly seen from 2002 – 2008. The increasing level of employment and production output of
Japanese manufacturers together with growing demand for Japanese goods pushed exports to
grow drastically. In 2007 exports from Japan grew to 10% of the world export and the export of
Foreign Direct Investments reach the highest indicator of $73 billion. (Japan External Trade
Organization web-site, http://www.jetro.go.jp/en/reports/statistics). The main trade partners of
Japan were US – 22.8%, European Union – 14.5 % and China – 14.3% (information portal about
Japan, http://www.japonix.ru/?Ekonomika_Yaponii)

The Gross Domestic Product (GDP) of Japan also started to increase from year 2000. In 2007
the GDP reached its peak of 560,650 billion Japanese Yen (JPY) when in 1999 it was 489,130
billion JPY.4 So during almost a decade Japan enjoyed its stable growth and further economic
development.

2.2. The effect of the crisis on Japan economic stability.

From the second quarter of 2008 all indicators of Japanese Economy started to slow down
and in November 2008 Japan entered into the period of economic recession. As was mentioned
above the main trade partners of Japan were US and Euro Union, the economies of which were
collapsed first. Therefore, the year 2008 was followed by the sharp decrease in demand for the
export from Japan. The exports fall by 35% at once in December 2008 and by 45% in January
2009. Exports to US fall to 53% and to Europe to 47%. (Japan External Trade Organization
web-site, http://www.jetro.go.jp/en/reports/statistics) In this kind of severe situation firms and
manufacturers had to stop their production and decrease their output level. The fall in exports
turned out to be the most significant impact on Japanese economy. The slowdown of the
economy was followed by increasing number of bankrupted firms to 4.2%, growth of
4 Appendix 3

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unemployment to 4%, (Japan bureau of statistics, http://www.stat.go.jp/english/19.htm) deflation

and depreciation of Japanese Yen, decrease in demand and consumption. The production of car
manufacturers, which Japan is famous for, was stopped for the unknown period as car demand
dropped by 69%. Furthermore, the country entered the political crisis as the prime-minister
administration suggested anti-crisis reforms, which left Japanese people dissatisfied.
This economic crisis became the most severe crisis in the entire history of Japan since World
War II as all countries were incurred in it and, hence, what can be worse for the export oriented
economy, where more than 50% of GDP was consisted of production and trade, than no demand.
Considering financial background, Japan is not such a huge player in the financial markets as
US and Europe and it was less involved into the world financial situation. However, large
Japan’s financial institutions and banks also owned shares of collapsed companies, such as
Morgan Stanley and Lehman Brothers. The loss on these investments also contributed to the
overall recession of the economy, but the loss of Japanese economy cannot be compared here to
the loss of US and other big financial players.

2.3. Anti-crisis measures taken by the government of Japan.

The Government of Japan trying to fight the recession took action and provided an anti-crisis
policy to soften the impact of the crisis. The Central Bank of Japan reduced its interest rates to
0.3% from 0.5%. (Bank of Japan web-site, “The Bank of Japan's Policy Measures in the Current
Financial Crisis”, http://www.boj.or.jp/en/type/exp/seisaku_cfc/index.htm) However the
previous rate was also low. The Government in order to support businesses issued tax
compensation for the amount of $118 billion and Bank of Japan reserved $275 billion for
supporting credit system. The huge amount of government’s transfer payments was directed also
to its population and also small business, particularly, in the construction industry. The amount
was approximately $5 trillion yen. (Speech of prime-minister of Japan Taro Aso, “Overcoming
the current crisis”, November 2008,
http://www.kantei.go.jp/foreign/asospeech/2008/11/15naigai_e.html)

In December 2008 according to official statistical data the situation in the country turned out
to be much worse than it was forecasted in November. ( Japan bureau of statistics,
http://www.stat.go.jp/english/data/chouki/index.htm) The Minister of Finance of Japan in order
to support small and medium sized businesses, who was effected by the crisis most of all,
decided to open special funds, where the firms could get credits and loans. Moreover,
Government responds by issuing a package of anti-crisis reforms with total amount of $216
billion, which actually equals to 3.6% of the country’s total GDP.( Speech of prime-minister of
Japan Taro Aso, “Overcoming the current crisis”, November 2008,

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<http://www.kantei.go.jp/foreign/asospeech/2008/11/081115tarosproposal.pdf>) But this amount

is planned to support the economy for the following 3 years.

Moreover, the Government of Japan already started to provide some financial aid and
support to other Asian countries, for example South Korea.

3. CONCLUSION.

3.1. Results and current situation.

Based on the research above it is obvious that the economy of Japan was weakened
drastically after bubble economy collapse in 90s. The only thing which helped the economy to
recover was the demand for its export. Japan’s sustain growth and development after recession
was entirely based on trade with its trade partners and production of world demanded goods,
such as automobiles & industrial machinery, electronics, and so on. That was the main reason of
such a big impact of financial crisis on Japan, but not the involvedness into the world financial
affairs.

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Currently the economic situation of Japan started to recover step by step. The exports started to
grow again slowly together with the recovery of other economies such as France, Germany,
Hong Kong and especially China. Moreover, Government’s financial support and reforms helped
to improve financial situation inside the country, though economy still faces deflation process.
Firms suffered from the crisis took necessary measures to overcome their losses, such us cutting
expenses, firing the staff and reducing the production, so they could reach their break-even point
again. Moreover, the number of foreign investments from Japan started to grow and has been
assessed that around $400 billion EUR is reserved by public corporations for this
purpose(Japan's economy leaves recession (BBC news web-site. Retrieved on 20/05/2010,
<http://news.bbc.co.uk/2/hi/business/8204075.stm>) The reason might be that Japanese business
are trying to transfer their profits abroad, as they believe it would be a safe investment.

It was very difficult period for Japanese economy as it had just recovered from one
depression and the other one came up. All its financial forces were already spent to bring their
economy back to growth and then Japan had to find another way out. But it also contributed a lot
to their experience of overcoming these severe times and maybe helped to stand against financial
crisis as well.

3.2. Future Forecasts.

Analyzing the above text, the Japanese approach to its economy development and stability
can be criticized based on the economic situation during financial crisis. Japan relied too much
on the rest of world and continuously growing demand from other countries. After the decade of
the recession at the end of 1990s Japan concentrated all its affords only on producing and selling
abroad, however through the years 2000 – 2008 Japan had a chance to improve and recover its
financial base and provide reforms in banking sector, and strengthen their economy inside the
country. If they could manage to do this, current crisis would not be so harmful to their
economy. Japan should introduce the concept of "Fair Chance & Fair competition" into its
economy, especially into banking industry, For example, there were 11 large banks in Japan
before 1997. Due to the collapse of bubble economy in Japan, a lot of banks were collapsed and
as a result they were formed into current 3 large banks: Bank of Tokyo Mitsubishi UFJ, Mizuho
Bank, Sumitomo Mitsui Bank. Banking industry is protected by lots of regulations set up by the
government. So foreign banking can't do business and cannot compete with Japanese Banks well.
On the other hand, Japanese Banking industry is not strengthened by foreign banking.
Government should introduce and allow "competition" into the economy. Otherwise Japan
cannot survive in global marker in the future.

Furthermore, currently Japan continues its “export-oriented” policy and obviously China may
become Japan’s main trade partner. The rates of growth of Chinese economy already left

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Japanese indicators far behind and keep on growing every day. Now China represents a big
demand for Japanese manufacturers, but government of Japan should also think about other
sectors of the economy rather exporting.

From now on it’s difficult to forecast the future of Japanese economy, but the scenario
maybe much more pessimistic, than it was forecasted before the crisis. Now Japan faces many
problems and changes, such as new government adaptation 5, collapse of Airline Company, Japan
Airlines6, high level of unemployment, and the most serious problem is a big Government
debt. . The Government of Japan has a large outstanding debt which exceeds 100% of total
country’s GDP. This can turn out into a serious problem in the next or next-next decade,
especially if we take into account that now the population of Japan is reducing and aging
population is increasing. Young population now pays a huge amount of taxes which can reach to
60% of the year income. These taxes are therefore directed to support retirement of current old
population and those who will be retired in the near 10-20 years, so it will be gone for general
consumption. So, who will repay this debt? Japanese Government should seriously think about
the future of its country if it still wants to be number two economy.

4. REFFERENCES
1) David K. Eiteman, Arthur I. Stonehill, Micahel H. Moffett, 2010. “Multinational
Business Finance”, 12th edn, global edition.
2) <http://www.imf.org/external/pubs/ft/weo/2009/01/pdf/text.pdf>. “World Economic
Outlook: Crisis and Recovery, April 2009"
3) <http://www.economist.com/specialreports/displaystory.cfm?story_id=9972489> “CSI:
credit crunch". The Economist. 2008.
4) <"Agency's ’04 Rule Let Banks Pile Up New Debt, and Risk"> The New York Times.

5) <http://www5.cao.go.jp/keizai3/2007/0807wp-keizai/1syo-hyoshi.pdf> Annual Report

on the Japanese Economy and Public Finance 2007, p. 5-6

6) <http://www.jetro.go.jp/en/reports/white_paper/2008.pdf> Japan External Trade

Organization (JETRO), report 2008

5 Previously Japan was ruled by leaders of only one political party – Liberal Democratic Party
- for more than 50 years (since 1955). Now the administration is changed totally and it
makes the situation inside the country more severe as after 50 years of one political system
the experience and knowledge of LDP could be applied during the crisis.

6 Japan AirLines – one of the air company of Japan, which provides international services.
The company made a big international debt by purchasing aircrafts on credit and couldn’t
repay it back. JAL – is the symbol of the country for Japanese people, it was a serious
problem for them, when American air company tried to purchase JAL. Now JAL is supported
by Japanese Government.

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7) <http://www.jetro.go.jp/en/reports/statistics> Japan External Trade Organization

(JETRO), Japanese Trade and Investment Staticstics

8) < http://www5.cao.go.jp/keizai3/2007/0807wp-keizai/1syo-hyoshi.pdf> Annual Report

on the Japanese Economy and Public Finance 2007, p. 6

9) <http://www.rbcdaily.ru/2008/12/10/world/394086> RosBusiness Consulting,

information portal

10) <www5.cao.go.jp/keizai3/getsurei-e/2008nov.html> Monthly Economic Report,

November 2008.

11) <http://www.kantei.go.jp/foreign/asospeech/2008/11/081115tarosproposal.pdf>,
<http://www.kantei.go.jp/foreign/asospeech/2008/11/15naigai_e.html>, speech of prime-
minister of Japan about economic situation during his visit to US

12) <http://news.bbc.co.uk/2/hi/business/8204075.stm>, “Japan's economy leaves recession”

13) < http://www.casaasia.es/pdf/302051753351107449615840.pdf> Business Management

and Practices in Japan. Osaka, July 2003.

14) <http://www.boj.or.jp/en/type/exp/seisaku_cfc/index.htm> Anti-crisis policy, Official

web-site of Bank of Japan.

15) <http://www.stat.go.jp/english/19.htm> Statistics of Japan

1. APPENDIX 1

Enron's bankruptcy
Wasted energy
Lessons must be learnt from America's
largest corporate bankruptcy
Dec 6th 2001 | From The Economist print edition
THE end was not unexpected, but it was still
spectacular. On December 2nd Enron, once America's
seventh-biggest company, filed for Chapter 11

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bankruptcy. Only days earlier, its bonds had been downgraded to junk and Dynegy, a smaller
energy-trading rival, had pulled out of a planned takeover. Enron is the largest company ever to
go bankrupt.

Disentangling the resultant mess (and lawsuits) will keep legions of lawyers employed for years
to come. The company's opaque accounting makes it hard even now to understand why it got
into trouble, and whether the cause was bad luck or worse (see our special report). The close
links between Enron's chairman, Kenneth Lay, and George Bush will keep the affair in the
political limelight. And Enron's staff, whose retirement fund was, at the company's urging,
mostly invested in Enron shares that they, unlike the company's bosses, were then unable to sell,
deserve public sympathy. But if America's capital markets are to stay the cynosure of the world,
some quick lessons need to be drawn.
The most important concern auditing. Enron has restated its profits for the past five years,
chopping $600m off its earlier numbers. The company's auditor was Andersen, now a target of
many lawsuits. Last year Enron paid Andersen a fat audit fee of $25m; it also paid the firm $27m
for consulting services. In June Andersen paid $7m to settle a case brought by the Securities and
Exchange Commission (SEC) over its audit of Waste Management, another company that had to
restate its profits; in that case, the audit fee was $48m, and consulting income was $31m.
Accounting firms insist that there is no conflict of interest in consulting for audit clients. But
every fresh scandal increases public scepticism. After Enron, the SEC should do what its former
chairman, Arthur Levitt, has long urged: ban accounting firms from doing consulting work for
their audit clients.
Accounting rules also need updating. One reason why investors did not understand Enron's
books is that the company shifted many debts into off-balance-sheet vehicles. In most countries,
such debts are consolidated into the main accounts. That ought to happen in America as well.
Similarly, the SEC should tighten its disclosure requirements for all publicly quoted companies.
And it should discourage the practice of investing staff retirement funds in company shares.
Next come lessons for Wall Street, particularly investment banks and credit-rating agencies. Just
as in the dotcom bubble, Wall Street's highly paid equity analysts have done lamentably. Right
up to last week, such reputable firms as UBS Warburg, Goldman Sachs and Lehman had buy or
hold recommendations on Enron. Once again, the suspicion is of a conflict of interest: equity
recommendations are motivated by a desire to win corporate-finance work or to protect big
borrowers. Luckily, the past two years have taught investors to treat equity research sceptically
—a lesson Enron will reinforce.
The rating agencies are harder to deal with. Financial markets increasingly depend on them. The
new Basel accords on bank capital may even give rating agencies a bigger role in determining
how much capital banks set against loans. Yet there is good reason to suspect that the rating
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agencies succumbed to pressure, from Enron and its banks, not to downgrade the company's
debt, because that was sure to tip it into bankruptcy. The agencies need to re-establish their
independence if their credibility is not to go the same way as the analysts'.

Last are regulatory lessons. There is a risk of turning any bankruptcy into an excuse for massive
new regulation. Some have argued that energy is too important to be left to markets of the sort
that Enron pioneered; or that, since it was engaged in financial speculation, Enron should have
been regulated like a bank. Neither conclusion is justified. Energy deregulation has brought huge
benefits in lower prices and more secure supplies: energy trading will continue to grow
regardless of Enron's collapse. Nor would it be wise to subject all companies with financial arms
to stifling bank regulation. Enron's energy exchange was, however, explicitly exempted from
oversight by financial regulators: that should be changed.

In the end, the best lessons of all will come from the mere fact of Enron's bankruptcy. Investors
and bankers may learn not to trust companies that report mysteriously spectacular profit growth;
auditors will be warier of bosses' pressure to sign dodgy accounts; rating agencies and regulators
may be more nervous about companies that do not come clean about all their activities. In the
drama of capitalism, bankruptcy plays an essential part—until the next boom.

APPENDIX 2

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Appendix 3

http://ecodb.net/country/JP/imf_gdp.html#index01

Japan 's GDP Trends

Changes in real GDP

20 years in Japan (+2010 forecast year) changes in real GDP (currency: Yen).

Ye
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
ar

GD
P
(bil 445,1 460,0 464,5 465,7 470,8 479,7 492,3 500,0 489,8 489,1 503,1
lio 70.99 87.31 59.25 09.45 56.50 16.40 67.90 66.40 20.70 30.00 19.80
n)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

504,04 505,36 512,51 526,57 536,76 547,70 560,65 553,96 525,17 535,13
7.50 9.40 3.00 7.70 2.20 9.30 0.80 0.70 0.70 0.09