Maria Sharapova - CI - Current Global Financial Crisis & Its implication on International Financail...

Current Global Financial Crisis & Implications on IFI: Japan

Major Assignment

TABLE OF CONTENT

ITEMS PAGE ABSTRACT 2

INTRODUCTION & SCOPE OF THE STUDY 3-4

OBJECTIVES 4

LITERATURE REVIEW:

The History of Global Financial Crisis

The Global Financial Crisis in Japan

The Impact of the Global Financial Crisis on Japan‟s:

(i). Financial Institutions

(ii). Financial System and Financial Banking

(iii). Exportation

(iv). Economy

(v). Government Matters: Purchase of toxic assets and direct equity injections

Reasons Why Japan Could Be Affected By The Global Financial Crisis

Reasons Why Japan‟s Financial System Less Exposed to the Market Turmoil

Different View on The Crisis Impact On Japan

How Japan Recovers

4-7

8-12

12-15

15-16

16-17

17-19

19-20

20

21

21

22

DISCUSSION AND FINDING 23-26

CONCLUSION 27

REFERENCES 28-32


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ABSTRACT

Throughout this assignment, there will be parts that reveal on the current Global Financial Crisis that have

occurred and how the crisis has impacted on Japan‟s country‟s especially its International Financial

Institutions (IFI). Global Financial Crisis that has occur in 2008 have not only affected Japan but also

almost every countries in the world. In this assignment, there are several causes that lead the crisis to

strike Japan at the moment which are including the downfall of U.S sub-prime mortgage industry, housing

bubble bursting as well as the sharp rise in the equity risk premium. Due to the crisis, Japan has faced

implications on numbers of aspects namely are the international financial institutions, financial system and

banking, economy, exportation as well as on its government. On the other hand, reasons on why Japan

could be affected by the current crisis are consisting of the weak and unclear disclosure rules on banks,

matters related to the regulators adopted, problem of synch deregulation, heavy reliance on administrative

guidance in banking regulation and policy transparency. Even though Japan does affected by the Global

Financial Crisis, but nonetheless, Japan‟s financial system was less exposed to the market turmoil.

Moreover, although have been affected by the current crisis, Japan was able to recover from the great

effect.

The objectives of the study in preparing this project topic consisting of three which are to

acknowledge on the current Global Financial Crisis that have occurred, to identify the implications of

current Global Financial Crisis upon Japan and to highlight the impact of current Global Financial Crisis

towards Japan‟s International Financial Institutions (IFI). At the end of completing this assignment, our

three main study‟s objectives have been achieved where we have reveal on the Global Financial Crisis

background, the impact on Japan as well as how the crisis has affect Japan‟s International Financial

Institutions. In order to complete this assignment, the methodologies that we have used to search for

information namely are articles, journals, website information as well as the conference knowledge.

Hereby, we would like to recommend to those who will do any research or to find out the impact of

Global Financial Crisis upon Japan or any other countries regarding with the current crisis, first please get

to know the basic about the particular country and followed by the understanding of the crisis history. In

addition, the most important matter is regarding the understanding of whatever the information that we

through as it is pointless if we do a summary or citation on the author‟s ideas without knowing the real

meaning behind the ideas nor knowledge. On the other hand, in order to know whether the journals or any

articles are related to our project topic, key words of our topic can be used to check throughout the

information (Example: Global Financial Crisis).


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INTRODUCTION AND SCOPE OF THE STUDY

A Brief Introduction on Japan

Japan is a country of islands which extends along the eastern or Pacific coast of Asia. In total land area,

Japan is slightly smaller than California (Picture 1.0). About 73% of the country is mountainous (the highest

mountain is the world-famous Mt. Fuji at 12,388 feet), with a chain running through each of the main

islands. Japan's population, currently just fewer than 127 million, experienced a phenomenal growth rate for

much of the 20th century as a result of scientific, industrial, and sociological changes, but birth rates have

fallen steadily since the 1970s. But nonetheless, in 2005, Japan's population has declined for the first time

(2 years earlier than predicted) and stated with the population growth rate of -1.0% in 2010 (U.S

Department of State, 2012).

Picture 1.0: Japan‟s Map

Source: US Department of State

However, the high sanitary and health standards in Japan have produced life expectancy that

exceeds the United States (U.S). Japan's industrialized, free-market economy is the third-largest in the

world where its economy is highly efficient and competitive in areas linked to international trade, but

unfortunately, Japan‟s productivity is far lower in several protected areas such as agriculture, distribution,

and services. Japan's reservoir of industrial leadership and technicians, well-educated and industrious work

force, high savings and investment rates, the intensive promotion of industrial development as well as the

foreign trade has lead Japan into a mature industrial economy. Japan has few natural resources which by

trading has helps Japan to earn the foreign exchange that needed in order to purchase the raw materials

for its economy (U.S Department of State, 2012).


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Meanwhile, according to Grimes (2009), Japan‟s position in Asia and the world has shifted

considerably over the last decade with Japanese economy increasingly become oriented upon the East

Asia. Grimes (2009) added by stating that Japan‟s manufacturing is tie up with the East Asia‟s regional

production networks. This is the reason why Tokyo has sought by taking the leadership position in the

regional initiatives, including U.S, the one that exclude its security patron.

In addition, Japan still has the most productive and advanced economy in Asia even though it has

been overtaken by China in terms of the sheer size (at least on a price-adjusted basis). Not only that,

Japan is well known for its manufacturing sector‟s quality and productivity which lead Japan increasingly

become a knowledge-based as well as the post-industrial economy. Moreover, parts of the manufacturing

sector of Japan is still remain highly competitive in the world markets, although the Japan‟s manufacturing

share of the total production is continue to decline in all the developed economies (Grimes, 2009).

Japan‟s largest part of its employment and economic activity falls in the services, a residual

category which consisting of everything from the restaurant and entertainment to the legal services as well

as finance (Grimes, 2009),

OBJECTIVES OF THE STUDY

(I). To acknowledge on the current Global Financial Crisis that have occurred

(ii). To identify the implications of current global financial crisis upon Japan

(iii). To highlight the impact of current Global Financial Crisis towards Japan‟s International Financial

Institutions (IFI)

LITERATURE RIVIEW

The History of Global Financial Crisis

According to Ito (2009), he has stated three stages of the Global Financial Crisis that have strike the world.

The beginning of the Global Financial Crisis is on February 8, 2007. This crisis began when the HSBC

Holdings makes the announcement on its charge for bad debts would be more than $10.5 billion in 2006

has came into surprise where the amount was 20% more than the financial analysts‟ expectation. The

suspicion that subprime loan might be a big problem was disseminated in the financial market on the day of

the announcement (February 7, 2007). Meanwhile, the next stage of the Global Financial Crisis is on

August 9, 2007 when the subsidiaries of BNP Paribas announced the liquidation suspension of the asset

because the fair values of Asset-backed Securities‟ (ABS) assets having difficulty to get under the market


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pressure. While, the final stage of the crisis (September 15, 2008) is when Lehman Brothers went bankrupt.

Lehman Brother‟s failure was primarily due to the large losses they sustained on the US subprime on

mortgage markets but mortgage delinquencies rose after the US housing price bubble burst in 2006-2007.

In the second fiscal quarter 2008, Lehman reported losses of $2.8 billion and It was forced to sell off $6

billion in its assets (New York Times, 2009).

Meanwhile, based on Malik, Ullah, Azam & Khan (2009), he stated that the cause of the current

crisis has started due to the downfall of US sub-prime mortgage industry, the intensity of this collapse was

significant; “Mark-to-market losses on mortgage-backed securities, collateralized debt obligations, and

related assets through March 2008 were approximate $945 billion.” He further stated that the crisis is “The

largest financial loss in history”, as compared to Japan‟s banking crisis in 1990 where Japan only loss

about $780 billion.

Malik, et. al. (2009) statement has been supported by Kawai (2009) where he stated that the sub-

prime crisis is the worst that have occurred since the Great Depression in 1930s, where the crisis has

evolved and turn into a full-blown global financial as well as economic crisis. In addition, he added that the

crisis is totally different from any other financial crisis in its breadth, magnitude and its origin (after the

observation). Not only that, Kawai (2009) stated that the sub-prime crisis is global where it affected almost

all the countries in the world with a devastating impact. Kawai‟s statement has been supported by Okano

(2010) where Okano said that it has proven that the subprime problems direct impact on Financial

Institutions in Asian countries (including Japan) but is incomparably small if compared with the Western

countries.

But nonetheless, when the US have problem with the subprime loan in the summer 2007, it only

has affected Japan financial slightly while the Japan‟s banking sector do not hardly affected directly.

Therefore it has resulted in; the willingness of Japanese to lend was limited because of the declining in the

stock price which has placed a strain on the balance sheet and capital adequacy ratio towards the

commercial banks in summer 2008.

Meanwhile, due to Patric (1998), the first cause of the banking crisis resulted when deregulation

took place without the creation of an effective system of prudential regulation and supervision to replace the

postwar system of regulated interest rates, convoys, and constrained competition which provided safety to

the system. Banks had to adjust to the challenges as well as opportunities of an increasingly risky

environment, yet their capital bases were small. The low interest rate policy has generated an excessively


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weak yen. As the yen appreciated, the cumulative losses were huge, almost on the same order of

magnitude as the financial system‟s domestic bad loan losses.

On the other hand, according to Ngowi (2009), the current global financial and economic crisis

(GFEC) started officially in United States of America (USA) in September 2008 or so. As a financial crisis, it

is generally manifested in the form of inadequate liquidity as a result of credit crunch in the financial

markets. As a result of the crisis, a recession is looming across the globe in form of a general, rapid and

high decline in economic activities of production, distribution and consumption of goods and services. This

form of economic turmoil was last experienced at global level during the Great Depression of the 1930s.

Again, Ngowi (2009) added that the crisis is increasingly resulting into inter alia, uncertain and hard social

and economic times for countries across the globe. Whereas the developed countries started to suffer from

the first round and direct effects of the crisis (developing countries are suffering more from the second and

indirect effects of the crisis). The possibility of third-round effect in the collapse of the financial sector is

foreseen the crisis will continue for a long time.

While, based on McKibbin & Stoeckel (2009), they stated the three main reasons that lead to

Global Financial Crisis which consist of the housing bubble bursting (causing a reallocation of capital and a

loss of household wealth and drop in consumption), the sharp rise in the equity risk premium (the risk

premium of equities over bonds) (causing the cost of capital to rise, private investment to fall as well as the

demand for durable goods also collapse) and a rise of household risk.

For the bursting of the housing bubble is all about the falling house prices has a major effect on

household wealth, spending and defaults on loans held by the financial institutions. From 2000-2006 the

housing price in some areas doubled to subsequently collapse with overall the US index of house price has

fallen by 6.2% in real terms from the 1st quarter 2008 to the same quarter in 2009. While the house price is

rising strongly, the credit was supplied liberally to meet the demands as perceptions of risk fell. The rising

wealth boosted confidence and spending and the housing bubble was a global phenomenon centered

mainly on the Anglo-Saxon world. The housing bubble was the result of a long period of low interest rates

by the US Federal Reserve. The bursting of the housing bubble is modeled as a surprise fall in the

expected flow of services from housing investment (larger in US, UK and Europe) but still significant

throughout the world (McKibbin & Stoeckel, 2009).

Besides the bursting of housing bubble, the rising of equity risk premium also the main of factors

for Global Financial Crisis to occur (shown in Table 2.0). According to McKibbin & Stoeckel (2009), the

surprise up-swing in commodity prices from 2003 but most noticeable during 2006 and 2007 led to


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concerns about inflation leading to the sharp reversal in monetary policy in the US. This tightening in US

policy also implied to lead the monetary policy in economies that pegged to the US dollar. It was the

sharpness of this reversal as much as the fall in US houses prices and the failures of financial regulation

(for example, the mortgage underwriters Fannie Mae and Freddie Mac) that led to the financial problems

for 2008 until 2009.

Table 2.0: Equity Risk Premium

Source: Author’s calculator

Last but not least is the rise in the household risk too was one of the main reasons of Global

Financial Crisis to occur (when the reappraisal of the risk by firms as a result of the crisis also applies to

households). As households view the future as being more risky, so they discount their future earnings and

that affects their savings and spending decisions. The increase in household risk in the US is assumed to

be 3% points in the permanent scenario and returning to zero by year in the temporary scenario as

mentioned earlier (McKibbin & Stoeckel, 2009).

Above all, the Global Financial Crisis‟s epicenter is from the U.S, which is known as the largest and

central economy in the world. Moreover, U.S‟s dollar is taken as the most dominant global home key

currency as well as the world‟s most sophisticated and developed financial system. The ongoing Global

Financial Crisis was triggered by the eruption of the US subprime crisis in the summer of 2007 and the

subsequent liquidity and confidence crisis that has spread on a global scale and peaked in September and

October 2008 (Kawai, 2009).


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The Global Financial Crisis in Japan

According to Nanto (2009), during the 1990s and into the early years of the 21st century, Japan has

experienced a prolonged recessionary economic conditions triggered by the bursting of a bubble in its

equity and real estate markets and an ensuing banking crisis. Although the current Global Financial Crisis

is much more than Japan‟s “Great Recession” writ large, many have turned to Japan‟s experience to either

support or oppose various policies and to improve general understanding of the underlying forces of

financial crises. The global financial and economic crisis is unprecedented in many ways yet not so unique

that the experience of other countries is bereft of lessons to be learned.

While, based on James, Parck, Jha, Jongwanich, Hagiwara & Sumulong (2008), Japan appeared

initially to have fared well in the face of the global financial turmoil. It benefited from its limited exposure to

toxic assets and a relatively healthy financial sector. Its strong current account position has provided Japan

with a cushion against the turbulence (Figure 1.0).

Figure 1.0: Japan Current Account Balance

Source: Ministry of Finance (2008)

Growth of real GDP had been recovering from the prolonged recession in the 1990s at about 2%

per annum since 2004 (Figure 2.0). The deflation that has persisted since 1999 finally turned to inflation in

2006, which ended the quantitative easing monetary policy (Figure 3.0). As inflation has been far from

being a concern, policy rates have been cut following the rate cuts in the US from an already very low 0.5%

to 0.3% in October 2008 . Given the positive though moderate inflation rate, with the already low policy

rate, the real rate is slipping into a negative range in Japan. While its fiscal deficit persists, Japan‟s policy

options remain extremely limited (Figure 4.0).


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Figure 2.0: Real Japan GDP Growth

Source: Economic and Social Research Institution (2008)

Figure 3.0: Japan‟s inflation

Source: CEIC Data Company Ltd. (2008)

Figure 4.0: Japan‟s Interest Rate

Source From: CEIC Data Company Ltd. (2008)


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Chart 1.0: The Lehman Brother‟s

Source From: Federal Reserve Board

In addition, the Federal Reserve has cut the interest rates between in year 2001 and 2004. The low

interest rates were due to fears of deflation and led to a boom in US housing, low interest rates were not

just the result of the Fed‟s actions. US bond yields were also low because of low world rates with Japanese

bond yields at a little over 1 per cent and short term interest rates at zero. There was also an international

aspect to low US interest rates with Japan and Europe only recovering very slowly from the 2000-2001

downturns an in turn placing pressure on the US to keep interest rates low. In Japan, there were fears of

re-emergent deflation (James, et. al. 2008).

Meanwhile, based on McKibbin & Stoeckel (2009), durable manufacturing in Japan would be hit

harder by the risk reappraisal given the collapse of their durable exports (dominated by cars - as a result of

the combination of the global downturn and the appreciation of the Yen that resulted from the collapse in

commodity prices and improvement in their terms of trade). Moreover, the authors added that Japan had

their housing bubble a decade earlier than did the US, so over the last few years they never experienced a

property bubble as in America. So the shock of Global Financial Crisis to their economy from the bursting of

the housing bubble would be less than for the US.

On the other hand, Nanto (2009) stated that among the major industrialized economies of the

world, Japan‟s lost decade of the 1990‟s also called Japan‟s Great Recession, when it encountered a

period of prolonged stagnation caused by the bursting of speculative bubbles and prolonged banking crisis,

is often cited as relevant for policymakers today. The drop in prices on Japan‟s equity markets combined

with a sharp decline in land prices generated losses of about ¥1,500 trillion ($14 trillion) or roughly three

times Japan‟s gross domestic product at the time. Like the current US financial crisis, Japan‟s began with


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stock market and real estate bubbles. During the latter half of the 1980s, Japan‟s mone tary authorities

flooded the market with liquidity (money) in order to enable business to cope with the rising value of the

yen. The bursting of this economic bubble caused the value of collateral underlying many banks loans to

drop below the value of their loan principal. Also, commercial real estate ventures, especially office

buildings, became unprofitable as rents fell. Unlike the situation in the US under the current global

economic crisis, Japanese financial institutions tended not to bundle and repackage their loans as

collateralized debt obligations or rely as extensively on derivatives and credit default swaps (Nanto, 2009).

Due to Hakone (2010), recalling the bubble in Japan in the latter half 1980s, this International

Financial Institutions crisis sparked by the 2007 subprime loan problem and the recent difficulties faced by

Greece and the euro. Regarding institutional changes constituting remote causes of the crisis of Japan,

financial deregulation facilitated corporate fund rising through bond issuance and banks had a turn to real

estate financing as a new business, that induced excessive lending an eventually to building up of the

bubble. If the issue was counterparty risk then a direct focus on the quality and transparency of the bank‟s

balance sheets would be appropriate, either by requiring more transparency, dealing directly with

increasing number of mortgage defaults as housing prices fell or looking for ways to bring more capital into

the banks and other financial institutions. The Global Financial Crisis began in the United States with a

burst housing bubble and questionable mortgage-backed assets is spreading throughout Europe„s banking

sector, frightening away investors and making governments eager to rescue institutions. Recession is now

inevitable for Western economies which increasing the danger to markets that supply the world„s

consumers with manufactured. East Asia has a lot share of wealthy export-based economies, but towering

above them all is Japan, the second-biggest economy in the world. Japan, with a gross domestic product

(GDP) of about $4.4 trillion, is particularly vulnerable to the Global Financial Crisis (Tan, et. al, 2009).

However, Japan‟s start faced a financial crisis when the Bank in Japan affected by the failure of

Lehman Brothers. This is because the Hokkaido Takushoku were marked by the bank of Japan‟s as

“quantitative easing” monetary after interest rates reached the zero bounds, in a similar to the Federal

Reserve‟s balance sheet expansion in 2008 and 2009 (Glick & Spiegel, 2010). This idea was supported by

Kawai & Tagaki (2009) and Shirakawa (2009) whereby the collapse of Lehman Brothers in September

2008 further depressed the conditions of stock market and aggravated the strains on Japanese commercial

banks.

Overall, Japan has been hardly hit by the Global Financial Crisis of 2008-2009. The severe

collapse of industrial production that followed was no doubt attributable to a confluence of factors, including


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the stock price declines that eroded the capital base of commercial banks and thus limited their willingness

to lend as well as the lagged impact of the sharp rise in oil and other commodity prices in the summer of

2008. Japan was particularly vulnerable because of the structural changes that had taken place over the

past decade in its trade and industrial structures. As a result of these structural changes, Japanese output

became much more responsive to output shocks in the advanced markets of the US and Western Europe.

(Kawai & Takagi, 2009).

The Impact of the Global Financial Crisis on Japan’s

(i). Financial Institutions

According to Kono (2009), Japanese financial institutions have collectively lost around 3.2 trillion yen (over

30 billion dollars). The Japan‟s financial system itself is still in a less severe condition compared to US and

Europe. In terms of losses incurred and exposures to securitized products, the direct impact of the global

financial market turmoil has been relatively small. Kono (2009) also stated that, the real economy has now

fallen into negative growth and share prices have declined, strongly affecting the balance sheets and

profitability of Japanese financial institutions. While, according to Malik, et. al. (2009), Japan‟s banking

crisis in 1990 about $780 billion, losses stemming from the Asian crisis of 1997-1998 approx $420 billion

and the $380 billion savings and loan crisis of US itself in 1986-1995.

The Japanese financial institutions have been significantly affected by the current Global Financial

Crisis. The impact has spread over to the area of retail banking through deteriorating the business

performance of small and medium sized firms and sluggish sales of mutual funds. From this particular

research by Yamaguchi (2009), the implication of the Global Financial Crisis for financial institutions is low

profitability of financial institutions. While the Japanese financial institutions‟ profits recovered significantly

after the middle of the 2000s, it was mainly attributable to the reversals in loans-loss provisions.

Meanwhile, based on Yamaguchi (2009), Japan‟s low profit is resulted from the low interest

income. Looking at the interest rate margins on loans (i.e., the interest rate on lending minus the interest

rate on deposits), which is one component of interest income, for the past 20 years, the margin has been

five to six percent on average for U.S. banks, while it has remained at slightly below two percent for

Japanese financial institutions. The main reason behind such low interest rate margins of Japanese

financial institutions is attributable to the fact that many financial institutions have basically been

consistently in the interest rate competition as they compete with each other in the relatively homogenous

commercial banking business with an aim to obtain a long-term stable transaction relationship.


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Of course it is not the case that Japanese financial institutions themselves have not been doing

anything to cope with such low profitability. Signs of expansion in the investment banking business,

including M&A business, have also been continuing in Japan. Small business loans were once actively

promoted. However, since credit costs increased significantly, many banks have recently been forced to

downsize or withdraw from the small business loan operations. As for household asset management, the

expansion of over-the counter sales of mutual funds and insurance has been pursued. Moreover, at the

major banks, the efforts to bring consumer credit companies, credit card companies, and consumer finance

companies under the banks‟ umbrella were temporarily intensified. However, the profits from those affiliated

companies have been sluggish, partly due to the changes in the environment they are in. After all, the fruits

of pursuing new businesses have not been sufficient so far, and, at present, the new businesses have not

contributed in a significant way to improving the profitability of financial institutions (Yamaguchi, 2009).

The second implication by Yamaguchi (2009), is Japanese financial institutions‟ profits are subject

to the fluctuations in credit costs and stock prices. In particular, as operating profits from the core business

have been remaining low, a significant increase in credit costs and losses on stocks might immediately

bring periodical income into the red. In fact, the sum of credit costs and losses on stocks related to stocks

reached a level more than that of operating profits from the core business. While the level of credit costs

fairly declined, reflecting the completion of the disposal of impaired assets, it started to rise again in fiscal

2008 due to the economic downturn. In addition, the outstanding balance of financial institution‟s strategic

cross-shareholding was reduced almost by half during the disposal process of impaired assets in the early

2000s for the major banks, and remains almost unchanged since then. That suggest that the practice of

cross-shareholding between financial institutions and firms remains and at the same time, the current

outstanding amount of shareholding is still a factor in including large swings in financial institution profits.

While, according to Malik, et. al (2009), the banking industry has badly been hit due to mortgage

backed by subprime mortgages fallen in value. Because of the bad debts, financial institutions were

reluctant to lend money and thus firm especially construction industry output faced contractions in credit

lines.

On the other hand, based on Grimes (2009), during 2008, the Japanese economy was still in the

condition of long but tepid recovery that began in 2002. The important part is related to the non-performing

loans of the financial sector in its consolidation, recapitalization as well as the large-scale disposal. The

result of the non-performing loans has resulted bank credit and the financial markets to unfreeze and

resumed their basic function in of capital allocation in the private sector. With parts of the problems


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remained, somehow, the largest and most sophisticated of the financial institutions were not really

profitable or competitive if compared with their foreign counterparts. Meanwhile, facing the difficulties with

incorporate the new business models as well as to apply information technology does delayed the Tokyo‟s

development as an international financial market center too. But, fortunately, at the same time, due to the

Japanese financial institutions conservatism, it has kept them from the heavily exposure of toxic assets (like

subprime collateralized mortgage obligations) (Grimes, 2009).

In addition, even though there is much-improved health shown from the Japanese financial

institutions, but the growth was remained in a weak condition although it was at the recovery height.

Meanwhile, the government spending (the GDP‟s growth component) remained in a large figure, though it

was declining, when the Japanese government was struggling to reduce its deficit in order to cope with its

massive current debt and the future liabilities. Not only that, from the consumer spending prospective, it has

shown a very weak growth since the real wages has fall in every year despite the improvement of business

profitability. Thus, the major engines for Japanese economic growth (as it recovered from the lost decade)

were from the growth of its net exports as well as the business investment growth – which resulted to

Japan directly or indirectly dependent on its exports. That was the reason why the Japan‟s economic

growth was highly dependent on the growth of the country‟s major exports markets (especially in the U.S

and China) (Grimes, 2009).

Japanese financial institutions faced the current Global Financial Crisis without being able to

change substantially the existing management characteristics. As a result, the first-round effects of the

crisis, namely the losses stemming from investments in U.S. securitized products and originate-to-

distribute-type operations in the U.S. and European financial markets, has remained relatively limited

(Kono, 2009).

The second-round effects brought about by the current financial crisis, namely, the losses

stemming from the economic downturn and the fall in stock prices have by no means been limited. Net

income of Japanese financial institutions in fiscal 2008 made an about-turn to mark net losses of about two

trillion yen from net profits of about two trillion yen in fiscal 2007, due mainly to the increase in credit costs

and losses related to stocks. In that regard, the aforementioned characteristics of Japanese financial

institution management seem to have rather worked in an adverse way to the deterioration in business

performance. In other words, the current crisis has highlighted the basic challenges inherent in Japanese

financial institution management (Kono, 2009).


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While Japanese financial institutions‟ profits recovered significantly after the middle of the 2000s, it

was mainly attributable to the reversals in loan-loss provisions, thanks to the progress in the disposal of

impaired assets and economic recovery. For example, the sum of net income of Japanese financial

institutions for the past 20 years is in the red. While the sum includes significant losses stemming from the

disposal of impaired assets after the burst of the bubble, the net income of Japanese financial institutions

remains quite low even if those losses are excluded (Kono, 2009)..

According to the analysis of the lending market in Japan, many financial institutions tend to enter

the regions that have a large lending market, thereby intensifying competition.

(ii). Financial System and Financial Banking

According to Sato (2009), When the Global Financial Crisis occurred; Japan was not immune from the

crisis where shown from its financial system which was severely affected due to the financial markets high

volatility. Not only that, Sato (2009) added that the sharp declining of the shares prices held by the banks

were the reason for the Japan‟s financial system badly affected as well. On the other hand, the banks‟

profitability in increasing its credit costs (although on a limited scale) was impacted by the real economy

deterioration.

But nonetheless, Japan‟s financial system was remained sound if compared to those in U.S and

Europe. The statement is true as the fact stated that Japan‟s financial banking sector losses that have

occurred resulted from the complex securitized products have been limited; as of 2009 (end-June) where

the cumulative realized losses only about 25 billion US dollars (since April 2007) while the valuation losses

are about 5 billion dollars. Even though the amount was in billion US dollars, but those figures were one

digit smaller compared with the American and European financial sectors. Sato (2009) stated that the

Japan‟s financial sector towards the exposure was not clear with significantly smaller toxic assets (this

implies that there will be a limited future additional losses from these assets).

The Global Financial Crisis has brought home an important point: the United States is still a major

center of the financial world. Regional financial crises (such as the Asian financial crisis, Japan‟s banking

crisis, or the Latin American debt crisis) can occur without seriously infecting the rest of the global financial

system. But when the U.S. financial system stumbles, it may bring major parts of the rest of the world down

with it. The reason is that the United States is the main guarantor of the international financial system, the

provider of dollars widely used as currency reserves and as an international medium of exchange, and a

contributor to much of the financial capital that sloshes around the world seeking higher yields. The rest of


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the world may not appreciate it, but a financial crisis in the United States often takes on a global hue

(Nicholas, 1999).

(iii). Exportation

Due to Okano (2010), Japan is focusing on the emerging countries as in line with its export oriented

industries. On top of that, Japan‟s manufacturing sector has been affected and suffered from the

decreasing of the exportation aspect. The decreasing of export caused by the Global Financial Crisis has

been supported by Kawai (2009) where he stated that the ongoing crisis has given a deep impact upon

both the region of Asia-Pacific, especially on the exports.

Meanwhile, in the beginning of 2008, there is a significantly decrease of Japan‟s exportation to all

regions which in turn lead to a huge reduction in the manufacturing production. Although the huge decrease

in exports to both U.S and Europe make Japan‟s economy suffered, nonetheless, the magnitude impact on

the financial markets were unimportant compared with the time where Japan was strike by the post-bubble

era (Okano, 2010). Thus, from the impact of decreasing in export, the Asian Development Bank (ADB) has

expected that the region aggregate growth will face a fall to 3.3% in 2009 from the remarkable growth in

2007 (9.8%). In addition, the ADB has suggested one ways to help the region to rebalance its growth - is by

moving away from its high dependence on the exports to more advanced economies (Kawai, 2009).

Stated from Kawai (2009), due to the global financial crisis, most countries in the region are having

double-digit declining in their exports (Shown in Article 1.0). He added by stated that the biggest fall (over

40% year-on-year in December and January) were Taipei and China while large decline can be seen in

Japan, Singapore, Indonesia, Thailand, Malaysia and Hong Kong. Not only that, there is a slowing

domestic demand in several countries which including Japan, Korea as well as Singapore. On top of that,

Japan is facing with year-on-year declines due to the fastest deterioration in the private capital investment

(Kawai, 2009).

Article 1.0: Selected impacts of the crisis on selected countries

Source: Collected by the author from various media


Major Assignment

On the other hand, Kwan (1999) stated that the resulting slowdown of the foreign direct investment

has the effect of depressing the Asian economics not only on the demand side but also on the supply side.

In addition to foreign investment, Japanese bank lending to Asia also tends to decrease when the yen is

weak because of the need to meet the Bank for International Installment (BIS) capital adequacy

requirement. A depreciation of the yen against dollar, by reducing Japanese export prices in dollar terms,

makes Japanese exports less expensive relative to those of the Asian countries.

While, based on Tellis, Marble, & Tanner (2009) and Glick &Spiegel (2010) the weakness of the

U.S. economy has significantly reduced external demand for Japanese manufactured goods, the crisis has

wiped out many of those meager gains.

Over 90% of Japanese exports consist of highly income-elastic industrial supplies, capital goods,

and consumer durables. Hence a collapse of the US and European markets exerted a severe negative

influence on Japanese exports. In Japan, both the export of consumer durables to the advanced markets

(accounting for less than 15% of total exports) and the export of industrial supplies and capital goods to

emerging Asia (constituting over 40% of total exports) were adversely and severely affected by the financial

crisis. In particular, the export of industrial supplies and capital goods declined along with the softening of

investment demand throughout the world. (Kawai & Takagi, 2009).

(iv). Economy

According to Grimes (2009), the Global Financial Crisis has worsened the Japan‟s major challenges. Not

only that, the crisis has erupted Japan when it was in the midst of a long but tepid recovery from the

domestic economic stagnation (even longer period). Due to the weak U.S economy, the external demand

for Japanese manufactured goods has significantly reducing. On top of that, the Global Financial Crisis too

has wiped out many of those meager gains of Japan from the manufacturing goods (Grimes, 2009). In

addition, because of the crisis, it has demonstrated the limits not only upon the global financial architecture

but as well as the Japan‟s regional architecture which the country has been trying to establish.

From both Japan‟s domestic and international point of view (which is the most important), Global

Financial Crisis has given a great impact upon the finance aspect (Grimes, 2009). In addition, the impact of

the current crisis has strike Japan after the collapse of its nation real estate and stock market bubble (in

early 1990s). But, nevertheless, the experience that Japan has faced in the early 1990s has helped

Japan‟s advantage in dealing with the current crisis, where banks as well as the financial institutions were

well-capitalized and not badly extended into the “toxic assets” when the crisis occur (Grimes, 2009). “Toxic


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assets” has been defined as an asset that becomes illiquid when its secondary market disappears

(http://www.investopedia.com/terms/t/toxic-assets.asp#axzz1rtVvoj8E). From the same source, the author

added that the toxic assets are often guaranteed to lose money which lead the assets cannot be sold.

On top of that, the same experience from the previous 1990s crisis has shaped Japan government

policy‟s responses, which become exponentially more proactive within 1990s or early 2000s (Grimes,

2009). However, at the same moment, Tokyo‟s effort in dealing with the crisis has become significantly

complicated due to the Japan‟s won sustained period of the economic stagnation as well as the financial

challenge.

According to the World Economic Outlook (IMF, 2009a) the forecast of economic contraction for

Japan in 2009 is -6.2% to surpass the projected constraction for the United Stated (US) it is 2.8%.

However, Japan surpassed by Singapore (-10.0%) and Taipei,China (-7.5%) in the severity of the real

impact of the Global FInancial Crisis (Kawai & Takagi, 2009).

Moreover, the reluctance of Ministry of Finance (MOF) to move more rapidly in the 1990‟s to

impose a system of prudential regulation was probably because it did not understand fully the implications

of deregulation. After all, deregulation undermined the old convoy system, and made traditional MOF

modes of action now seem counterproductive. MOF persisted nonetheless in attempting to defend an

inefficient, uncompetitive, and outmoded system (Patric, 1998). In contrast to the negative implication for

Japan; the Global Financial Crisis may turn hurt the Japanese economics, putting downward pressure on

the Japanese yen. The crisis also occurred at a time when the Japanese economy is in deepest recession

since the end of the Second World War (Kwan, 1999).

Nevertheless once U.S. and most of Europe declare into recession in early 2008 Japan economy

begin effected significantly. Japan harmfully affected by the negative term of trade shock in 2008 through a

sharp increase in energy and other commodity price. On the other hand faced the difficulties Japan‟s still

can maintain their positive growth in real GDP and private fixed investment. This happen because the

exports growth steady. Japanese faced are severe economic construction when the export falls in 12.5%

year by year. Parallel in the midst of the industrial production the construction harshly decline by 15.0%,

34.0% and 27.65 year by year in the fourth quarter of 2008 and the first and second quarter of 2009,

respectively (Kawai & Takagi, 2009). While the value of the exports in billion yen. The value of the exports

for Japanese shown the value is decline thereafter whereby the export in January 2009 shown the exports

is ¥ 3,480 billion it less than 50% of the previous year ¥ 7,360 billion in September 2008 (Kawai & Takagi,

2009). With the spread of the US subprime mortgage crisis to the rest of the US financial system and other

http://www.investopedia.com/terms/t/toxic-assets.asp#axzz1rtVvoj8E


Major Assignment

industrialized-country financial markets, a significant slowdown in economic growth has taken place in the

US, Europe, and Japan. The crisis has moved from the financial sector to the real economy (Malik, et. al.

2009).

According to Malik, et. al. (2009) anxieties have strengthen over the Global Financial Crisis, which

began from the US subprime mortgage disaster with the help of the governments of major countries which

are coming up with measures such as provision of liquidity and bailout packages for distressed banks, the

fear that has gripped financial markets shows little signs of abating. Major stock exchanges are disorderly

while a series of indicators that determine investors‟ risk aversion are posting all-time highs. The recent

financial crisis has been rushed across the public-private boundary, which has hit the private firms and the

financial statements has forced the new heavy demands on the public sector's finances. The crisis has

surged across national borders within the developed world, and now there are some reasons which has

alarmed that the crisis will swamp other developing countries, affecting the significant economic progress of

recent years. (Lin, 2008). However, Severino (2008) have argued that the spillover effects of the US

subprime mortgage crisis on the Asian financial and real economic activity have been and will be relatively

limited, and that the growth prospects of Asian economies will remain robust.

Moreover, Japanese stock prices reached a recent peak in the summer of 2007 and, with the

outbreak of the US subprime loan crisis, began a gradual but substantial decline through the fall of 2008.

The decline in stock prices placed a strain on the balance sheet and capital adequacy ratios of commercial

banks and, as a result, limited their willingness to lend by the summer of 2008. The Lehman Brothers shock

in September 2008 further depressed the stock market and aggravated the strains on Japanese

commercial banks. Bank of Japan data indicate that new loans for equipment funds declined by 9% (year-

on-year) in the third quarter of 2008, followed by a 10% decline in the fourth quarter. This, coupled with the

lagged impact of the negative terms of trade shock (arising from the sharp rise in oil and other commodity

prices until the summer of 2008), may to some extent explain the sluggishness of industrial activity in some

sectors starting from the summer of 2008. (Kawai & Takagi, 2009).

(v). Government Matters: Purchase of toxic assets and direct equity injections

Economists worry about the moral hazard implications of these actions by the government especially the

purchases of toxic assets or the direct equity injections. These actions signal a willingness of the

government to step in and provide liquidity and capital when large financial institutions find themselves in

trouble. In the 1990s, Japan could hope that demand from the rest of the world would help to mitigate its


Major Assignment

slump. Such hope is not available for the world as a whole. In fact, declines in export demand from the rest

of the world will likely be an important drag on GDP growth (Jones, 2008). The implication of this weak

balance sheet was a high risk financial crisis with mounting asymmetric information problems if

macroeconomic environmental turned difficult. That there was drying up the supply as well as a collapse in

the demands for loans (Nicholas, 1999).

Reasons Why Japan Could Be Affected By The Global Financial Crisis

According to Ulrike (1996), Japan is one of the countries that are most productive and advance economy in

Asia because it is the country that is famous with the quality and productivity of its manufacturing sector.

For the first Global FInancial Crisis that have occurred, Japan still can defeat it. But, unfortunelty, the crisis

continued in 2008 due to the decreasing of U.S. mortgage and resulted in the bottomed out of Japanese

bank‟s capital and profitability. There have are several reason Japan faced this problem primarily Japan‟s

delaying in recognizing the severity of the impact of massive nonperforming assets on the economy.

Whereby Japan‟s start recognize this problem few years after the burst of the bubble decline in real estate

price affect the financial institutions. Besides that, Japanese have are imperfection in accounting and

disclosure standards. This imperfection affects the lag in showing the incurred losses of financial

institutions on the accounting and disclosure front. More to the point, the delaying for recognizing the

declining in real estate and the imperfection in accounting and disclosure standard the authorities could not

resolve the problem in financial institution in a timely manner.

This current Global Financial Crisis has highlighted the five areas of major structural problems and

policy weakness that have lead Japan be affected by the Global Financial Crisis. First of all are the weak

and unclear disclosure rules that have been allowed on the banks, large as well as small alike, to hide or

disguise losses and shady deals. Second is the regulators adopted a wait in see attitude in the hope that

the market would recover and bad loans would heal themselves. When the market did not recover by 1994,

it became clear that this had been a policy mistake. Third is, there was a problem of out of synch

deregulation. In 1979, MOF initiated interest rate deregulation very slowly and carefully, in an attempt not to

undermine the banking hierarchy. Next, related to this is the heavy reliance on administrative guidance in

banking regulation. In the period of rapid growth, when all interest rates were regulated, the financial

authorities had to rely on administrative guidance because the price mechanism did not work. The lastly is

a result of all of the above, there is little policy transparency, and solutions to problems tend to be collusive

based on the quid pro quo logic of administrative guidance (Ulrike, 1996).


Major Assignment

Reasons Why Japan’s Financial System Less Exposed to the Market Turmoil

Based on Sato (2009), he has listed three reasons on why the Japan‟s financial system was less exposed

to the market turmoil as well as less severely affected when the Global Financial Crisis occurs. First of all,

Japan‟s financial firms were not severely influenced because they were not strongly innovation-oriented.

While, the next reason is that the financial firms have given priority in improving their financial soundness

rather than to enhance the profitability (in the last several years) due to the his torical coincidence. Japan‟s

financial firms were at its final stage in resolving their non-performing loan problems when the “originate-to-

distribute” business model became widespread. Meanwhile, the final reason is related with the improving of

risk management by the financial firms in the same period when the firms improve on their financial

soundness.

Thus, the financial firms of Japan became more cautious than it was before in the matter of the

financial products investment with the uncertainty on their underlying assets or associated risks. Not only

that, the practices also contributed by the Basel II framework (early implementation) in Japan (Sato, 2009).

Different View on the Crisis Impact on Japan

According to Sato (2009), there are different views as to how the effects of the current financial stress in

Japan compare with the country‟s last crisis in the 1990s. Some argue that the magnitude of the last crisis

was larger, as many financial firms failed and the economy remained sluggish over an extended period.

However, others say that the current crisis is more severe as Japan‟s GDP and share prices have declined

sharply.

Repercussion of the financial crisis of the late 1990s, Global FInancial Crisis start improved therefore

many country merge with market economies in Asia and other place to strengthen their economic and

financial fundamentals. These improved of Global FInancial Crisis bolstered by fiscal and foreign debt

positions, accumulated foreign exchange reserves, and reformed their banking sectors. When the second

Global FInancial Crisis happen in summer of 2007 Asian is are best place to avoid from the crisis. This is

because most financial institutions in Asia do not expose with troubled market. In addition, most financial

institution in the region were not heavily exposed to distressed market for structured credit products and

other asset-backed securities Glick & Spiegel, (2010).


Major Assignment

How Japan Recovers

The Global Financial Crisis in Japan recover by recover the cost that such a strategy entails the smaller

banks also had to extend loans with higher risk. All of this happened while the stock price and real estate

market "bubble" was well under way. MOF requested the large city banks to provide Hyogo with very low

interest rate loans. Nevertheless, after the Kobe earthquake of January 1995, the bank was too short of

funds to compete with the larger banks for reconstruction loans. Worse, the local governments withdrew a

major portion of their deposits to fund reconstruction projects. On August 31, Hyogo Bank was restructured

and it remained in business, but all operations were transferred to a new bank called Midori Bank on

January 26, 1996. No change occurred for the customers in daily banking matters, and a run on deposits

was averted (Ulrike, 1996).

During Japan recover, the first was the mistaken belief in the early-mid 1990‟s that the economy

would rebound quickly from what was perceived to be little more than a cyclical downturn, and again the

mistaken belief in late 1996 that recovery was so firmly entrenched that the fiscal priority could immediately

return to budget deficit reduction. Second, as a consequence, MOF initially decided and the banks readily

agreed to simply wait out the bad loan problems until economic growth was restored. It was not until 1995

that banks seriously started disclosing and writing off bad loans. Third, the economy continued to grow only

very slowly, averaging about 1% annually since 1991 have more ordinary loans became doubtful, and more

doubtful loans became bad. Businesses could not generate cash flows for interest payments much less

loan repayments (Patric, 1998).

The recovery in Japanese export since 1996 on the back of the yen‟s depreciation has contrasted

sharply with the slowdown in Asian export. On the positive side, a weaker yen reduces import prices in

Asian countries as they are heavily dependent on Japan as a source of capital and intermediate goods.

Finally, a depreciation of the yen reduces the burden of debt repayment for Asian countries (Kwan, 1999).

The time to recovery in Japan Global Financial Crisis also related to trend in GDP. Contemporaries

realized that economic recovery needed not only policies to rise spending, which in large economy could be

provided by domestic demand. The banking crisis in Japanese policy for recovery has lacked key

components. The recovery from the Global Financial Crisis plainly entails a substantial increase in

aggregate demand, for which devaluation may be helpful and which macroeconomic policy must address

(Nicholas, 1999).


Major Assignment

DISCUSSION AND FINDING

Japan is a well-known country where is located as one of the Asia countries. According to the U.S

Department of State (2012), Japan‟s is slightly smaller than California (as shown in the picture 1) where its

population currently stated fewer than 127 million. Even though Japan has experienced with the much

phenomenal growth rate in the 20th century, nonetheless, the country‟s birth rates have fallen steadily since

1970s and resulted in population growth rate of -1.0% in 2005. On the other hand, Japan is acknowledge

with its highly efficient and competitive economy within the international trade areas although it‟s

productivity is far lower in several protected areas. On top of that, Japan‟s has turn into a mature industrial

economy due to its country‟s reservoir of industrial leadership and technicians as well as numbers of other

aspects. Not only that, Japan do owned the natural resources which can be used to trade in order to earn

the foreign exchange (U.S Department of State, 2012). Meanwhile, due to another author, Japan has

shifted its position from Asia into the East Asia in the last decade resulted from its economy oriented

towards the East Asia (Grimes, 2009). He added by stating that Japan‟s is tie up with the East Asia‟s

regional production networks on their country‟s manufacturing (well known on its quality and productivity).

Overall, Japan is still the most productive and advanced economy in Asia even though its sheer size has

been taken by China. Grimes (2009) added that, Japan‟s manufacturing share remains highly competitive

within the world markets although there is total decline in its production among the developed economies.

About the history of the Global Financial Crisis, there are different views and reasons stated by

numbers of authors. Based on Ito (2009), there are three stages of the crisis which are the beginning

(February 8, 2007) [Announcement from HSBC Holdings on the charge for bad debts which is more 20%

than expected], the second stage (August 9, 2007) [Announcement from BNP Paribas‟ subsidiar ies on the

asset liquidation suspension] and the final stage (September 15, 2008) [Bankruptcy of the Lehman

Brothers‟]. On the other hand, according to Malik, et. al. (2009), the reason for the crisis to occur was is due

to the downfall of U.S subprime mortgage industry. This statement is supported by Kawai (2009) as he

agreed that the subprime crisis is the worst crisis that has happened since the Great Depression (1930s).

Not only that, due to another author, he stated that the subprime problems have a direct impact on Asian

countries financial institutions (Okano, 2010). While, based on Patric (1998), the banking crisis has resulted

when deregulation happened without any creation of the effective system upon prudential regulation and

supervision for the safety of the system. Meanwhile, Ngowi (2009) stated that the current Global Financial

and Economic Crisis (GFEC) have officially started in September 2008 in U.S of America (USA)

{inadequate liquidity from financial markets credit crunch]. On the other hand, another reasons stated for


Major Assignment

the Global Financial Crisis is the bursting of the housing bubble, equity risk premium‟s sharp rise as well as

the risk of the household risk due to the reappraisal of firms risk (Mckibbin & Stoeckel, 2009). Above all,

U.S is the epicenter of the crisis to occur as it is the largest and central economy of the world.

During the Global Financial Crisis, Japan has already faced with a prolonged recessionary

economic conditions by the bubble bursting in 1990s (21st century) and the crisis has known as the Japan‟s

lost decade (Japan‟s Great Recession 2) (Nanto, 2009). That is why when the housing bubble burst out,

Japan have less shock compared with U.S as Japan has faced it a decade earlier. During the 1990s crisis,

Japan experienced with both the prolonged stagnation as well as the banking crisis. Upon the Global

Financial Crisis, Japan durable manufacturing expected to be hit by the risk appraisal which will lead to the

collapsed of their durable exports (Mckibbin & Stoeckel, 2009). However, when the Lehman Brother‟s went

bankrupt, Japan‟s bank started to face with the financial crisis. Not only that, because of the Global

Financial Crisis, Japan has been hardly hit and resulted in their industrial production to collapse including

declining in their stock price (does Japan has limited their lending willingness).

Due to the crisis, it has impacted Japan in several aspects such as the International Financial

Institutions (IFI), financial system and financial banking, exportation, economy as well as in Japan‟s

government matter. First of all, Japan‟s IFI has been said lost around 3.2 trillion yen (over 30 billion dollars)

but Japan is still in a less severe condition if compared to both U.S and Europe (Kono, 2009). The same

author added that the direct impact of the crisis on Japan is relatively small but still the real economy of

Japan has fallen into negative growth and its share prices have declined. Meanwhile, according to

Yamaguchi (2009), the crisis impact has spread over on Japan‟s retail banking and resulted in the business

performance to deteriorate and sluggish sales of the mutual funds. Not only that, the author too has said

Japan‟s financial institutions have been affected and only gain the low profitability. The profits of Japan‟s

financial institutions are subject to the fluctuations of the credit costs and stock prices (Yamaguchi, 2009).

While, based on Malik, et. al (2009), due to the subprime mortgage, the crisis has drives Japan‟s financial

institutions reluctant in lending their money afraid of the bad debts. This non-performing loan has been

supported by Grimes (2009) as he stated that the bank credits and financial markets in Japan have to

unfreeze and resumed their basic function (to allocate capital in the private sector). On top of that, Japan‟s

financial institutions have faced with the losses stemming from U.S investments, economic downturn as

well as the fall of the stock prices (Kono, 2009).


Major Assignment

Meanwhile from the Japan‟s financial system and financial banking aspect, it have severely

affected due to the highly volatility of financial markets (Sato, 2009). Not only that, Sato (2009) added that

the system was badly affected because of the sharp decline in the shares prices. Thus, the Japan‟s banks‟

profitability in increasing its credit costs was impacted by the deterioration of the real economy. But above

all, Japan‟s financial system was remained sound compared to U.S and Europe where the Japan‟s financial

banking sector losses have been limited.

Next is the crisis implication on Japan‟s exportation. Based on Okano (2010), as Japan is focusing

on the export oriented industries, the country‟s manufacturing sector has been affected and suffered from

the decrease of exportation aspect. Okano (2010) added that Japan‟s manufacturing production has a huge

reduction due to the significantly decrease of Japan‟s exportation to all regions. This is supported by Kawai

(2009) where most countries having a double-digit declining in their exports with Japan shown a large

decline. In addition, there is a slowing domestic demand in Japan as well. Another authors supported

Kawai‟s statement where the external demand of Japan‟s manufactured goods has been reduced because

of the U.S economy weakness (Tellis, et. al, 2009). Meanwhile, according to Kawai & Takagi (2009), the

collapsed of U.S and European markets have gave a severe negative impact on Japan‟s exports.

The Global Financial Crisis has strike Japan when the country was in the midst of a long but tepid

recovery from the domestic economic stagnation. Not only that, resulted from the crisis, it has limits on the

global financial architecture including the Japan‟s regional architecture when the country just trying to

establish. Nevertheless, Japan‟s experience of previous crisis has helped the country in dealing with the

current crisis where both bank and financial institutions were well-capitalized and not badly extended into

the “toxic assets” (Grimes, 2009). Japan‟s economy begin to be affected when U.S and most Europe

declare into recession (2008), but nonetheless, Japan still can maintain its positive growth in both real GDP

as well as the private fixed investment (Kawai & Takagi, 2009). Meanwhile, Malik, et. al. (2009) stated

Japan having a slowdown in its economic growth when U.S subprime mortgage crisis has been spread to

the U.S financial system and where the has moved from the financial sector to the real economy Moreover,

with the outbreak of U.S subprime loan crisis, Japanese stock prices has reached a recent peak in 2007

and fall in 2008.

Last but not lest is the impact of the crisis upon Japan‟s government. Japan‟s government has

stepped in when the financial institutions were in trouble and provide liquidity and capital needs (chasing

away the purchase of toxic assets or the direct equity injections) (Nicholas, 1999).


Major Assignment

There are several reasons on why Japan could be affected by the current crisis which consisting of

delaying in recognizing the severity of the nonperforming assets massive impact towards the economy, as

well as Japan‟s imperfection in its accounting and disclosure standards (Ulrike, 1996). Not only the two

reasons have been stated by the author, indeed, he has added on five areas of major structural problems

and policy weakness of Japan that lead the country to be affected. First is the weak and unclear disclosure

rules allowed on banks (to hide or distinguish losses and shady deals), the wait and see attitude that have

adopted by regulators (hoping the market would recover and bad loans would heal themselves), next is the

synch deregulation (the slow and carefully interest rate deregulation initiated by MOF), heavy reliance on

administrative guidance in banking regulation (as the price mechanism did not work) and lastly is the

Japan‟s little policy transparency (related with the problems solutions) (Ulrike, 1996).

On the other hand, there too are reasons on why Japan‟s financial system is less exposed to the

market turmoil. Sato (2009) has listed three reasons which are Japan‟s financial firms were not strongly

innovation-oriented, the firms have given priority to improve their financial soundness rather than enhancing

the profitability as well as because of risk management improvement by the firms. Sato (2009) added by

stating that there are different views on how the current financial stress has impacted Japan if compared to

the country‟s last crisis (1990s).

Lastly is the finding on how Japan has recovers from the current crisis. According to Ulrike (1996),

Japan has recovered on the cost of the strategy where the smaller banks too needed extending their loans

with a higher risk. Meanwhile, based on Patric (1998), during the recovery period, there are three

consequences that Japan needed to cope with. Firstly was the mistaken belief on the economy would

rebound quickly in early-mid 1990‟s as well as in 1996 where the second mistaken belief on the recovery

was so firmly entrenched that the fiscal priority could return to budget deficit reduction immediately.

Second, Japan‟s MOF has decided (with banks agreement) to simply wait out the bad loan problems until

the economic growth was restored. Thirdly is where Japan‟s economy continued to grow only very slow. On

top of that, due to another author (Kwan, 1999), Japanese recovery on the yen‟s depreciation has

contrasted sharply with Asian export slowdown (weaker yen reduce import prices as well as reducing the

burden of Japan‟s debt repayment to Asian countries). In addition, Nicholas (1999) stated that Japan‟s

recovery also related to the GDP‟s trend where aggregate demand entails a substantial increase

(devaluation may be helpful and which macroeconomic policy must address).


Major Assignment

CONCLUSION

As a conclusion, the Global Financial Crisis that has occur in 2008 have not only affected Japan but also

almost every countries in the world. There are several causes that lead the crisis to strike at the moment

which are including the downfall of U.S sub-prime mortgage industry, housing bubble bursting as well as

the sharp rise in the equity risk premium. Due to the crisis, Japan has faced implications on numbers of

aspects namely are the international financial institutions, financial system and banking, economy,

exportation as well as on its government. Reasons why Japan could be affected by the current crisis are

the weak and unclear disclosure rules on banks, matters related to the regulators adopted, problem of

synch deregulation, heavy reliance on administrative guidance in banking regulation and policy

transparency. Even though Japan does affected by the Global Financial Crisis, but nonetheless, Japan‟s

financial system was less exposed to the market turmoil. Although have been affected by the crisis, Japan

was able to recover from the impact.

Throughout this assignment, our group members have faced with some limitations which related to

the sources, timing and understanding of the information. Journals that we were looking for (that really

suitable and can help us to complete this assignment) are hardly to find as some of it were not containing

the information that we seek for. Not only that, we were having limitation in the timing aspect as we were

doing this assignment during the mid-semester break where the holiday mood is in the air and caused we

keep on delaying to complete our part. Last but not lest is our understanding on the journals that we have

gone through. We were having trouble to understand some of the authors ideas due to their complicated

statement structure as well as some high standard of English word.

Hereby, we would like to recommend to those who will do any research or to find out the impact of

Global Financial Crisis upon Japan or any other countries regarding with the current crisis, first please get

to know the basic about the particular country and followed by the understanding of the crisis history. In

addition, the most important matter is regarding the understanding of whatever the information that we go

through as it is pointless if we do a summary or citation on the author‟s ideas without knowing the real

meaning behind the ideas nor knowledge. On the other hand, in order to know whether the journals or any

articles are related to our project topic, key words of our topic can be used to check throughout the

information (Example: Global Financial Crisis).


Major Assignment

REFFERENCES

Aslund, A., Guriev, S., & Kuchins, A. C. (2010). “Russia After the Global Economic Crisis”. Peterson

Institute for International Economics, pp. 288.

Banyte, J., & Rasyte. V. (2009). “Global Financial Crisis Reasons, Effects and Solution”. Globalization: Quo

Vadis?, pp.20-30

“Bureau of East Asian and Pacific Affairs”., at: http://www.state.gov/r/pa/ei/bgn/4142.htm, Accessed on 7th

April, 2012, re-visited on 8th April, 2012, U.S Department of State Diplomacy in Action

Chossudovsky, M. (1998). “A Marshall Plan for Creditors and Speculators: The G7 “Solution” To The

Global Financial Crisis”.

Fujii, M., & Kawai, M. (2010). “Lessons from Japan‟s Banking Crisis 1991–2005”. 222(23)

Gaddy, G. C., & Ickes, W. B. (2010). “Russia After The Global Financial Crisis”. Eurasian Geography and

Economics, (3), pp. 281-311.

Glick, R., & Spiegel, M. M. (2010). “Asia and the Global FInancial Crisis:Conference Summary”. Federal

Reserve Bank of San Francisco’s Economic Letter .

Gurvich, E., Lebedinskaya, E., Simachev, Y. & Yakovlev, A. (2010). “Managing the Crisis. A Comparative

Assessment of Economic Governance in 14 Economies”. Russia Country Report

Hakone. (2010). “Response to the Global Financial Crisis and Future Policy Challenges”. Harvard Law

School and the International House of Japan

Holroyd, C., & Momani, B. (2010). “Japan‟s rescue of the IMF”, pp.1-33.

http://www.state.gov/r/pa/ei/bgn/4142.htm


Major Assignment

Ito, T. (2009). “The Impacts of Global Financial Crisis on Japanese Financial Market: Analysis of Interest

Rate Swap Spreads”, pp.1-19.

James, W., D. Park, S. Jha, J. Jongwanich, A. Terada-Hagiwara, and L. Sumulong. 2008. The US Financial

Crisis, Global Turmoil, and Developing Asia: Is the Era of High Growth at an End? ADB Economics

Working Paper Series No.139.

Jones, C. I. (2008). “The Global Financial Crisis of 2007-20??”. AQ supplement to macroeconomics , pp.1-

45.

Kawai, M., & Takagi, S. (2009). “Why was Japan hit so hard by the Global Financial Crisis?”. ADBI Working

Paper Series , 153, pp.1-19.

Konno, Y. (2009). “Comparing Russia‟s financial Crises of 2008–2009 with 1998: From Balance Sheets of

the CBR, Banking Sector, and Enterprises.”. American Association for the Advancement of Slavic

Studies

Kono. M. (2009). “The Global Financial Crisis and Regulatory Response”. Challenges for the future of

financial services liberalization, pp.7-30

Kwan, C. H. (1999). “The yen, the yuan, and the asian currency crisis-changing fortune between Japan and

China”. Nomura research institute, pp.37-54

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Major Assignment

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Major Assignment

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Major Assignment

8th April, 2012

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