Current Global Financial Crisis & Implications on IFI: Japan                                          TABLE OF CONTENT    ...
Current Global Financial Crisis & Implications on IFI: Japan                                                  ABSTRACTThro...
Current Global Financial Crisis & Implications on IFI: Japan                              INTRODUCTION AND SCOPE OF THE ST...
Current Global Financial Crisis & Implications on IFI: Japan         Meanwhile, according to Grimes (2009), Japan‟s positi...
Current Global Financial Crisis & Implications on IFI: Japanpressure. While, the final stage of the crisis (September 15, ...
Current Global Financial Crisis & Implications on IFI: Japanweak yen. As the yen appreciated, the cumulative losses were h...
Current Global Financial Crisis & Implications on IFI: Japanconcerns about inflation leading to the sharp reversal in mone...
Current Global Financial Crisis & Implications on IFI: JapanThe Global Financial Crisis in JapanAccording to Nanto (2009),...
Current Global Financial Crisis & Implications on IFI: Japan                          Figure 2.0: Real Japan GDP Growth   ...
Current Global Financial Crisis & Implications on IFI: Japan                                      Chart 1.0: The Lehman Br...
Current Global Financial Crisis & Implications on IFI: Japanstock market and real estate bubbles. During the latter half o...
Current Global Financial Crisis & Implications on IFI: Japanthe stock price declines that eroded the capital base of comme...
Current Global Financial Crisis & Implications on IFI: Japan         Of course it is not the case that Japanese financial ...
Current Global Financial Crisis & Implications on IFI: Japanremained, somehow, the largest and most sophisticated of the f...
Current Global Financial Crisis & Implications on IFI: Japan        While Japanese financial institutions‟ profits recover...
Current Global Financial Crisis & Implications on IFI: Japanthe world may not appreciate it, but a financial crisis in the...
Current Global Financial Crisis & Implications on IFI: Japan        On the other hand, Kwan (1999) stated that the resulti...
Current Global Financial Crisis & Implications on IFI: Japanassets” has been defined as an asset that becomes illiquid whe...
Current Global Financial Crisis & Implications on IFI: Japanindustrialized-country financial markets, a significant slowdo...
Current Global Financial Crisis & Implications on IFI: Japanslump. Such hope is not available for the world as a whole. In...
Current Global Financial Crisis & Implications on IFI: JapanReasons Why Japan’s Financial System Less Exposed to the Marke...
Current Global Financial Crisis & Implications on IFI: JapanHow Japan RecoversThe Global Financial Crisis in Japan recover...
Current Global Financial Crisis & Implications on IFI: Japan                                            DISCUSSION AND FIN...
Current Global Financial Crisis & Implications on IFI: Japanthe Global Financial Crisis is the bursting of the housing bub...
Current Global Financial Crisis & Implications on IFI: Japan        Meanwhile from the Japan‟s financial system and financ...
Current Global Financial Crisis & Implications on IFI: Japan        There are several reasons on why Japan could be affect...
Current Global Financial Crisis & Implications on IFI: Japan                                              CONCLUSIONAs a c...
Current Global Financial Crisis & Implications on IFI: Japan                                              REFFERENCESAslun...
Current Global Financial Crisis & Implications on IFI: JapanIto, T. (2009). “The Impacts of Global Financial Crisis on Jap...
Current Global Financial Crisis & Implications on IFI: JapanMankoff, J. (2010). “The Russian Economic Crisis”. Council Spe...
Current Global Financial Crisis & Implications on IFI: Japan“SESRIC Reports On the Global Financial Crisis. The Eurozone D...
Current Global Financial Crisis & Implications on IFI: Japan        8th April, 2012Warwick, J. M. & Stoeckel, A. (2009). “...
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Maria Sharapova - CI - Current Global Financial Crisis & Its implication on International Financail Institution : The case In Japan

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Maria Sharapova - CI - Current Global Financial Crisis & Its implication on International Financail Institution : The case In Japan

  1. 1. Current Global Financial Crisis & Implications on IFI: Japan TABLE OF CONTENT ITEMS PAGEABSTRACT 2INTRODUCTION & SCOPE OF THE STUDY 3-4OBJECTIVES 4LITERATURE REVIEW: 4-7  The History of Global Financial Crisis 8-12  The Global Financial Crisis in Japan  The Impact of the Global Financial Crisis on Japan‟s: 12-15 (i). Financial Institutions 15-16 (ii). Financial System and Financial Banking (iii). Exportation 16-17 (iv). Economy 17-19 (v). Government Matters: Purchase of toxic assets and direct equity injections 19-20  Reasons Why Japan Could Be Affected By The Global Financial Crisis 20  Reasons Why Japan‟s Financial System Less Exposed to the Market Turmoil 21  Different View on The Crisis Impact On Japan 21  How Japan Recovers 22DISCUSSION AND FINDING 23-26CONCLUSION 27REFERENCES 28-32Major Assignment Page 1
  2. 2. Current Global Financial Crisis & Implications on IFI: Japan ABSTRACTThroughout this assignment, there will be parts that reveal on the current Global Financial Crisis that haveoccurred and how the crisis has impacted on Japan‟s country‟s especially its International FinancialInstitutions (IFI). Global Financial Crisis that has occur in 2008 have not only affected Japan but alsoalmost every countries in the world. In this assignment, there are several causes that lead the crisis tostrike Japan at the moment which are including the downfall of U.S sub-prime mortgage industry, housingbubble bursting as well as the sharp rise in the equity risk premium. Due to the crisis, Japan has facedimplications on numbers of aspects namely are the international financial institutions, financial system andbanking, economy, exportation as well as on its government. On the other hand, reasons on why Japancould 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 administrativeguidance in banking regulation and policy transparency. Even though Japan does affected by the GlobalFinancial 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 greateffect. The objectives of the study in preparing this project topic consisting of three which are toacknowledge on the current Global Financial Crisis that have occurred, to identify the implications ofcurrent Global Financial Crisis upon Japan and to highlight the impact of current Global Financial Crisistowards Japan‟s International Financial Institutions (IFI). At the end of completing this assignment, ourthree main study‟s objectives have been achieved where we have reveal on the Global Financial Crisisbackground, the impact on Japan as well as how the crisis has affect Japan‟s International FinancialInstitutions. In order to complete this assignment, the methodologies that we have used to search forinformation 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 ofGlobal Financial Crisis upon Japan or any other countries regarding with the current crisis, first please getto know the basic about the particular country and followed by the understanding of the crisis history. Inaddition, the most important matter is regarding the understanding of whatever the information that wethrough as it is pointless if we do a summary or citation on the author‟s ideas without knowing the realmeaning behind the ideas nor knowledge. On the other hand, in order to know whether the journals or anyarticles are related to our project topic, key words of our topic can be used to check throughout theinformation (Example: Global Financial Crisis).Major Assignment Page 2
  3. 3. Current Global Financial Crisis & Implications on IFI: Japan INTRODUCTION AND SCOPE OF THE STUDYA Brief Introduction on JapanJapan 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 highestmountain is the world-famous Mt. Fuji at 12,388 feet), with a chain running through each of the mainislands. Japans population, currently just fewer than 127 million, experienced a phenomenal growth rate formuch of the 20th century as a result of scientific, industrial, and sociological changes, but birth rates havefallen steadily since the 1970s. But nonetheless, in 2005, Japans 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.SDepartment 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 thatexceeds the United States (U.S). Japans industrialized, free-market economy is the third-largest in theworld where its economy is highly efficient and competitive in areas linked to international trade, butunfortunately, Japan‟s productivity is far lower in several protected areas such as agriculture, distribution,and services. Japans reservoir of industrial leadership and technicians, well-educated and industrious workforce, high savings and investment rates, the intensive promotion of industrial development as well as theforeign trade has lead Japan into a mature industrial economy. Japan has few natural resources which bytrading has helps Japan to earn the foreign exchange that needed in order to purchase the raw materialsfor its economy (U.S Department of State, 2012).Major Assignment Page 3
  4. 4. Current Global Financial Crisis & Implications on IFI: Japan Meanwhile, according to Grimes (2009), Japan‟s position in Asia and the world has shiftedconsiderably over the last decade with Japanese economy increasingly become oriented upon the EastAsia. Grimes (2009) added by stating that Japan‟s manufacturing is tie up with the East Asia‟s regionalproduction networks. This is the reason why Tokyo has sought by taking the leadership position in theregional 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 hasbeen 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 increasinglybecome a knowledge-based as well as the post-industrial economy. Moreover, parts of the manufacturingsector of Japan is still remain highly competitive in the world markets, although the Japan‟s manufacturingshare 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 residualcategory which consisting of everything from the restaurant and entertainment to the legal services as wellas 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 FinancialInstitutions (IFI) LITERATURE RIVIEWThe History of Global Financial CrisisAccording 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 HSBCHoldings makes the announcement on its charge for bad debts would be more than $10.5 billion in 2006has came into surprise where the amount was 20% more than the financial analysts‟ expectation. Thesuspicion that subprime loan might be a big problem was disseminated in the financial market on the day ofthe announcement (February 7, 2007). Meanwhile, the next stage of the Global Financial Crisis is onAugust 9, 2007 when the subsidiaries of BNP Paribas announced the liquidation suspension of the assetbecause the fair values of Asset-backed Securities‟ (ABS) assets having difficulty to get under the marketMajor Assignment Page 4
  5. 5. Current Global Financial Crisis & Implications on IFI: Japanpressure. 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 onmortgage 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 $6billion in its assets (New York Times, 2009). Meanwhile, based on Malik, Ullah, Azam & Khan (2009), he stated that the cause of the currentcrisis has started due to the downfall of US sub-prime mortgage industry, the intensity of this collapse wassignificant; “Mark-to-market losses on mortgage-backed securities, collateralized debt obligations, andrelated assets through March 2008 were approximate $945 billion.” He further stated that the crisis is “Thelargest financial loss in history”, as compared to Japan‟s banking crisis in 1990 where Japan only lossabout $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 hasevolved and turn into a full-blown global financial as well as economic crisis. In addition, he added that thecrisis is totally different from any other financial crisis in its breadth, magnitude and its origin (after theobservation). Not only that, Kawai (2009) stated that the sub-prime crisis is global where it affected almostall 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 FinancialInstitutions in Asian countries (including Japan) but is incomparably small if compared with the Westerncountries. But nonetheless, when the US have problem with the subprime loan in the summer 2007, it onlyhas 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 thestock price which has placed a strain on the balance sheet and capital adequacy ratio towards thecommercial banks in summer 2008. Meanwhile, due to Patric (1998), the first cause of the banking crisis resulted when deregulationtook place without the creation of an effective system of prudential regulation and supervision to replace thepostwar system of regulated interest rates, convoys, and constrained competition which provided safety tothe system. Banks had to adjust to the challenges as well as opportunities of an increasingly riskyenvironment, yet their capital bases were small. The low interest rate policy has generated an excessivelyMajor Assignment Page 5
  6. 6. Current Global Financial Crisis & Implications on IFI: Japanweak yen. As the yen appreciated, the cumulative losses were huge, almost on the same order ofmagnitude 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, itis generally manifested in the form of inadequate liquidity as a result of credit crunch in the financialmarkets. As a result of the crisis, a recession is looming across the globe in form of a general, rapid andhigh decline in economic activities of production, distribution and consumption of goods and services. Thisform 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 socialand economic times for countries across the globe. Whereas the developed countries started to suffer fromthe first round and direct effects of the crisis (developing countries are suffering more from the second andindirect effects of the crisis). The possibility of third-round effect in the collapse of the financial sector isforeseen the crisis will continue for a long time. While, based on McKibbin & Stoeckel (2009), they stated the three main reasons that lead toGlobal Financial Crisis which consist of the housing bubble bursting (causing a reallocation of capital and aloss of household wealth and drop in consumption), the sharp rise in the equity risk premium (the riskpremium of equities over bonds) (causing the cost of capital to rise, private investment to fall as well as thedemand 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 onhousehold wealth, spending and defaults on loans held by the financial institutions. From 2000-2006 thehousing price in some areas doubled to subsequently collapse with overall the US index of house price hasfallen by 6.2% in real terms from the 1st quarter 2008 to the same quarter in 2009. While the house price isrising strongly, the credit was supplied liberally to meet the demands as perceptions of risk fell. The risingwealth boosted confidence and spending and the housing bubble was a global phenomenon centeredmainly on the Anglo-Saxon world. The housing bubble was the result of a long period of low interest ratesby the US Federal Reserve. The bursting of the housing bubble is modeled as a surprise fall in theexpected flow of services from housing investment (larger in US, UK and Europe) but still significantthroughout the world (McKibbin & Stoeckel, 2009). Besides the bursting of housing bubble, the rising of equity risk premium also the main of factorsfor Global Financial Crisis to occur (shown in Table 2.0). According to McKibbin & Stoeckel (2009), thesurprise up-swing in commodity prices from 2003 but most noticeable during 2006 and 2007 led toMajor Assignment Page 6
  7. 7. Current Global Financial Crisis & Implications on IFI: Japanconcerns about inflation leading to the sharp reversal in monetary policy in the US. This tightening in USpolicy also implied to lead the monetary policy in economies that pegged to the US dollar. It was thesharpness 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 problemsfor 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 GlobalFinancial Crisis to occur (when the reappraisal of the risk by firms as a result of the crisis also applies tohouseholds). As households view the future as being more risky, so they discount their future earnings andthat affects their savings and spending decisions. The increase in household risk in the US is assumed tobe 3% points in the permanent scenario and returning to zero by year in the temporary scenario asmentioned earlier (McKibbin & Stoeckel, 2009). Above all, the Global Financial Crisis‟s epicenter is from the U.S, which is known as the largest andcentral economy in the world. Moreover, U.S‟s dollar is taken as the most dominant global home keycurrency as well as the world‟s most sophisticated and developed financial system. The ongoing GlobalFinancial Crisis was triggered by the eruption of the US subprime crisis in the summer of 2007 and thesubsequent liquidity and confidence crisis that has spread on a global scale and peaked in September andOctober 2008 (Kawai, 2009).Major Assignment Page 7
  8. 8. Current Global Financial Crisis & Implications on IFI: JapanThe Global Financial Crisis in JapanAccording to Nanto (2009), during the 1990s and into the early years of the 21st century, Japan hasexperienced a prolonged recessionary economic conditions triggered by the bursting of a bubble in itsequity and real estate markets and an ensuing banking crisis. Although the current Global Financial Crisisis much more than Japan‟s “Great Recession” writ large, many have turned to Japan‟s experience to eithersupport or oppose various policies and to improve general understanding of the underlying forces offinancial crises. The global financial and economic crisis is unprecedented in many ways yet not so uniquethat the experience of other countries is bereft of lessons to be learned. While, based on James, Parck, Jha, Jongwanich, Hagiwara & Sumulong (2008), Japan appearedinitially to have fared well in the face of the global financial turmoil. It benefited from its limited exposure totoxic assets and a relatively healthy financial sector. Its strong current account position has provided Japanwith 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 in2006, which ended the quantitative easing monetary policy (Figure 3.0). As inflation has been far frombeing 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 policyrate, the real rate is slipping into a negative range in Japan. While its fiscal deficit persists, Japan‟s policyoptions remain extremely limited (Figure 4.0).Major Assignment Page 8
  9. 9. Current Global Financial Crisis & Implications on IFI: Japan 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)Major Assignment Page 9
  10. 10. Current Global Financial Crisis & Implications on IFI: Japan 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 lowinterest rates were due to fears of deflation and led to a boom in US housing, low interest rates were notjust the result of the Fed‟s actions. US bond yields were also low because of low world rates with Japanesebond yields at a little over 1 per cent and short term interest rates at zero. There was also an internationalaspect to low US interest rates with Japan and Europe only recovering very slowly from the 2000-2001downturns an in turn placing pressure on the US to keep interest rates low. In Japan, there were fears ofre-emergent deflation (James, et. al. 2008). Meanwhile, based on McKibbin & Stoeckel (2009), durable manufacturing in Japan would be hitharder by the risk reappraisal given the collapse of their durable exports (dominated by cars - as a result ofthe combination of the global downturn and the appreciation of the Yen that resulted from the collapse incommodity prices and improvement in their terms of trade). Moreover, the authors added that Japan hadtheir housing bubble a decade earlier than did the US, so over the last few years they never experienced aproperty bubble as in America. So the shock of Global Financial Crisis to their economy from the bursting ofthe housing bubble would be less than for the US. On the other hand, Nanto (2009) stated that among the major industrialized economies of theworld, Japan‟s lost decade of the 1990‟s also called Japan‟s Great Recession, when it encountered aperiod 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 combinedwith a sharp decline in land prices generated losses of about ¥1,500 trillion ($14 trillion) or roughly threetimes Japan‟s gross domestic product at the time. Like the current US financial crisis, Japan‟s began withMajor Assignment Page 10
  11. 11. Current Global Financial Crisis & Implications on IFI: Japanstock market and real estate bubbles. During the latter half of the 1980s, Japan‟s monetary authoritiesflooded the market with liquidity (money) in order to enable business to cope with the rising value of theyen. The bursting of this economic bubble caused the value of collateral underlying many banks loans todrop below the value of their loan principal. Also, commercial real estate ventures, especially officebuildings, became unprofitable as rents fell. Unlike the situation in the US under the current globaleconomic crisis, Japanese financial institutions tended not to bundle and repackage their loans ascollateralized 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 InternationalFinancial Institutions crisis sparked by the 2007 subprime loan problem and the recent difficulties faced byGreece 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 realestate financing as a new business, that induced excessive lending an eventually to building up of thebubble. If the issue was counterparty risk then a direct focus on the quality and transparency of the bank‟sbalance sheets would be appropriate, either by requiring more transparency, dealing directly withincreasing number of mortgage defaults as housing prices fell or looking for ways to bring more capital intothe banks and other financial institutions. The Global Financial Crisis began in the United States with aburst housing bubble and questionable mortgage-backed assets is spreading throughout Europe„s bankingsector, frightening away investors and making governments eager to rescue institutions. Recession is nowinevitable for Western economies which increasing the danger to markets that supply the world„sconsumers with manufactured. East Asia has a lot share of wealthy export-based economies, but toweringabove 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 ofLehman 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 FederalReserve‟s balance sheet expansion in 2008 and 2009 (Glick & Spiegel, 2010). This idea was supported byKawai & Tagaki (2009) and Shirakawa (2009) whereby the collapse of Lehman Brothers in September2008 further depressed the conditions of stock market and aggravated the strains on Japanese commercialbanks. Overall, Japan has been hardly hit by the Global Financial Crisis of 2008-2009. The severecollapse of industrial production that followed was no doubt attributable to a confluence of factors, includingMajor Assignment Page 11
  12. 12. Current Global Financial Crisis & Implications on IFI: Japanthe stock price declines that eroded the capital base of commercial banks and thus limited their willingnessto lend as well as the lagged impact of the sharp rise in oil and other commodity prices in the summer of2008. Japan was particularly vulnerable because of the structural changes that had taken place over thepast decade in its trade and industrial structures. As a result of these structural changes, Japanese outputbecame 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 InstitutionsAccording to Kono (2009), Japanese financial institutions have collectively lost around 3.2 trillion yen (over30 billion dollars). The Japan‟s financial system itself is still in a less severe condition compared to US andEurope. In terms of losses incurred and exposures to securitized products, the direct impact of the globalfinancial market turmoil has been relatively small. Kono (2009) also stated that, the real economy has nowfallen into negative growth and share prices have declined, strongly affecting the balance sheets andprofitability of Japanese financial institutions. While, according to Malik, et. al. (2009), Japan‟s bankingcrisis in 1990 about $780 billion, losses stemming from the Asian crisis of 1997-1998 approx $420 billionand 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 FinancialCrisis. The impact has spread over to the area of retail banking through deteriorating the businessperformance of small and medium sized firms and sluggish sales of mutual funds. From this particularresearch by Yamaguchi (2009), the implication of the Global Financial Crisis for financial institutions is lowprofitability of financial institutions. While the Japanese financial institutions‟ profits recovered significantlyafter 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 interestincome. Looking at the interest rate margins on loans (i.e., the interest rate on lending minus the interestrate on deposits), which is one component of interest income, for the past 20 years, the margin has beenfive to six percent on average for U.S. banks, while it has remained at slightly below two percent forJapanese financial institutions. The main reason behind such low interest rate margins of Japanesefinancial institutions is attributable to the fact that many financial institutions have basically beenconsistently in the interest rate competition as they compete with each other in the relatively homogenouscommercial banking business with an aim to obtain a long-term stable transaction relationship.Major Assignment Page 12
  13. 13. Current Global Financial Crisis & Implications on IFI: Japan Of course it is not the case that Japanese financial institutions themselves have not been doinganything 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 activelypromoted. However, since credit costs increased significantly, many banks have recently been forced todownsize or withdraw from the small business loan operations. As for household asset management, theexpansion of over-the counter sales of mutual funds and insurance has been pursued. Moreover, at themajor banks, the efforts to bring consumer credit companies, credit card companies, and consumer financecompanies under the banks‟ umbrella were temporarily intensified. However, the profits from those affiliatedcompanies have been sluggish, partly due to the changes in the environment they are in. After all, the fruitsof pursuing new businesses have not been sufficient so far, and, at present, the new businesses have notcontributed 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 subjectto the fluctuations in credit costs and stock prices. In particular, as operating profits from the core businesshave been remaining low, a significant increase in credit costs and losses on stocks might immediatelybring periodical income into the red. In fact, the sum of credit costs and losses on stocks related to stocksreached a level more than that of operating profits from the core business. While the level of credit costsfairly declined, reflecting the completion of the disposal of impaired assets, it started to rise again in fiscal2008 due to the economic downturn. In addition, the outstanding balance of financial institution‟s strategiccross-shareholding was reduced almost by half during the disposal process of impaired assets in the early2000s for the major banks, and remains almost unchanged since then. That suggest that the practice ofcross-shareholding between financial institutions and firms remains and at the same time, the currentoutstanding 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 mortgagebacked by subprime mortgages fallen in value. Because of the bad debts, financial institutions werereluctant to lend money and thus firm especially construction industry output faced contractions in creditlines. On the other hand, based on Grimes (2009), during 2008, the Japanese economy was still in thecondition of long but tepid recovery that began in 2002. The important part is related to the non-performingloans of the financial sector in its consolidation, recapitalization as well as the large-scale disposal. Theresult of the non-performing loans has resulted bank credit and the financial markets to unfreeze andresumed their basic function in of capital allocation in the private sector. With parts of the problemsMajor Assignment Page 13
  14. 14. Current Global Financial Crisis & Implications on IFI: Japanremained, somehow, the largest and most sophisticated of the financial institutions were not reallyprofitable or competitive if compared with their foreign counterparts. Meanwhile, facing the difficulties withincorporate the new business models as well as to apply information technology does delayed the Tokyo‟sdevelopment as an international financial market center too. But, fortunately, at the same time, due to theJapanese financial institutions conservatism, it has kept them from the heavily exposure of toxic assets (likesubprime collateralized mortgage obligations) (Grimes, 2009). In addition, even though there is much-improved health shown from the Japanese financialinstitutions, 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 itwas declining, when the Japanese government was struggling to reduce its deficit in order to cope with itsmassive current debt and the future liabilities. Not only that, from the consumer spending prospective, it hasshown a very weak growth since the real wages has fall in every year despite the improvement of businessprofitability. 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 toJapan directly or indirectly dependent on its exports. That was the reason why the Japan‟s economicgrowth was highly dependent on the growth of the country‟s major exports markets (especially in the U.Sand China) (Grimes, 2009). Japanese financial institutions faced the current Global Financial Crisis without being able tochange substantially the existing management characteristics. As a result, the first-round effects of thecrisis, 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 lossesstemming from the economic downturn and the fall in stock prices have by no means been limited. Netincome of Japanese financial institutions in fiscal 2008 made an about-turn to mark net losses of about twotrillion yen from net profits of about two trillion yen in fiscal 2007, due mainly to the increase in credit costsand losses related to stocks. In that regard, the aforementioned characteristics of Japanese financialinstitution management seem to have rather worked in an adverse way to the deterioration in businessperformance. In other words, the current crisis has highlighted the basic challenges inherent in Japanesefinancial institution management (Kono, 2009).Major Assignment Page 14
  15. 15. Current Global Financial Crisis & Implications on IFI: Japan While Japanese financial institutions‟ profits recovered significantly after the middle of the 2000s, itwas mainly attributable to the reversals in loan-loss provisions, thanks to the progress in the disposal ofimpaired assets and economic recovery. For example, the sum of net income of Japanese financialinstitutions for the past 20 years is in the red. While the sum includes significant losses stemming from thedisposal of impaired assets after the burst of the bubble, the net income of Japanese financial institutionsremains 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 enterthe regions that have a large lending market, thereby intensifying competition.(ii). Financial System and Financial BankingAccording to Sato (2009), When the Global Financial Crisis occurred; Japan was not immune from thecrisis where shown from its financial system which was severely affected due to the financial markets highvolatility. Not only that, Sato (2009) added that the sharp declining of the shares prices held by the bankswere 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 economydeterioration. But nonetheless, Japan‟s financial system was remained sound if compared to those in U.S andEurope. The statement is true as the fact stated that Japan‟s financial banking sector losses that haveoccurred resulted from the complex securitized products have been limited; as of 2009 (end-June) wherethe cumulative realized losses only about 25 billion US dollars (since April 2007) while the valuation lossesare about 5 billion dollars. Even though the amount was in billion US dollars, but those figures were onedigit smaller compared with the American and European financial sectors. Sato (2009) stated that theJapan‟s financial sector towards the exposure was not clear with significantly smaller toxic assets (thisimplies 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 majorcenter of the financial world. Regional financial crises (such as the Asian financial crisis, Japan‟s bankingcrisis, or the Latin American debt crisis) can occur without seriously infecting the rest of the global financialsystem. But when the U.S. financial system stumbles, it may bring major parts of the rest of the world downwith it. The reason is that the United States is the main guarantor of the international financial system, theprovider of dollars widely used as currency reserves and as an international medium of exchange, and acontributor to much of the financial capital that sloshes around the world seeking higher yields. The rest ofMajor Assignment Page 15
  16. 16. Current Global Financial Crisis & Implications on IFI: Japanthe world may not appreciate it, but a financial crisis in the United States often takes on a global hue(Nicholas, 1999).(iii). ExportationDue to Okano (2010), Japan is focusing on the emerging countries as in line with its export orientedindustries. On top of that, Japan‟s manufacturing sector has been affected and suffered from thedecreasing of the exportation aspect. The decreasing of export caused by the Global Financial Crisis hasbeen supported by Kawai (2009) where he stated that the ongoing crisis has given a deep impact uponboth 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 allregions which in turn lead to a huge reduction in the manufacturing production. Although the huge decreasein exports to both U.S and Europe make Japan‟s economy suffered, nonetheless, the magnitude impact onthe financial markets were unimportant compared with the time where Japan was strike by the post-bubbleera (Okano, 2010). Thus, from the impact of decreasing in export, the Asian Development Bank (ADB) hasexpected that the region aggregate growth will face a fall to 3.3% in 2009 from the remarkable growth in2007 (9.8%). In addition, the ADB has suggested one ways to help the region to rebalance its growth - is bymoving 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 havingdouble-digit declining in their exports (Shown in Article 1.0). He added by stated that the biggest fall (over40% year-on-year in December and January) were Taipei and China while large decline can be seen inJapan, Singapore, Indonesia, Thailand, Malaysia and Hong Kong. Not only that, there is a slowingdomestic 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 mediaMajor Assignment Page 16
  17. 17. Current Global Financial Crisis & Implications on IFI: Japan On the other hand, Kwan (1999) stated that the resulting slowdown of the foreign direct investmenthas 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 isweak because of the need to meet the Bank for International Installment (BIS) capital adequacyrequirement. 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 theU.S. economy has significantly reduced external demand for Japanese manufactured goods, the crisis haswiped 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 negativeinfluence 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 toemerging Asia (constituting over 40% of total exports) were adversely and severely affected by the financialcrisis. In particular, the export of industrial supplies and capital goods declined along with the softening ofinvestment demand throughout the world. (Kawai & Takagi, 2009).(iv). EconomyAccording to Grimes (2009), the Global Financial Crisis has worsened the Japan‟s major challenges. Notonly that, the crisis has erupted Japan when it was in the midst of a long but tepid recovery from thedomestic economic stagnation (even longer period). Due to the weak U.S economy, the external demandfor Japanese manufactured goods has significantly reducing. On top of that, the Global Financial Crisis toohas wiped out many of those meager gains of Japan from the manufacturing goods (Grimes, 2009). Inaddition, because of the crisis, it has demonstrated the limits not only upon the global financial architecturebut 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), GlobalFinancial Crisis has given a great impact upon the finance aspect (Grimes, 2009). In addition, the impact ofthe current crisis has strike Japan after the collapse of its nation real estate and stock market bubble (inearly 1990s). But, nevertheless, the experience that Japan has faced in the early 1990s has helpedJapan‟s advantage in dealing with the current crisis, where banks as well as the financial institutions werewell-capitalized and not badly extended into the “toxic assets” when the crisis occur (Grimes, 2009). “ToxicMajor Assignment Page 17
  18. 18. Current Global Financial Crisis & Implications on IFI: Japanassets” 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 authoradded 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 governmentpolicy‟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 significantlycomplicated due to the Japan‟s won sustained period of the economic stagnation as well as the financialchallenge. According to the World Economic Outlook (IMF, 2009a) the forecast of economic contraction forJapan 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 realimpact of the Global FInancial Crisis (Kawai & Takagi, 2009). Moreover, the reluctance of Ministry of Finance (MOF) to move more rapidly in the 1990‟s toimpose a system of prudential regulation was probably because it did not understand fully the implicationsof deregulation. After all, deregulation undermined the old convoy system, and made traditional MOFmodes of action now seem counterproductive. MOF persisted nonetheless in attempting to defend aninefficient, uncompetitive, and outmoded system (Patric, 1998). In contrast to the negative implication forJapan; the Global Financial Crisis may turn hurt the Japanese economics, putting downward pressure onthe Japanese yen. The crisis also occurred at a time when the Japanese economy is in deepest recessionsince the end of the Second World War (Kwan, 1999). Nevertheless once U.S. and most of Europe declare into recession in early 2008 Japan economybegin effected significantly. Japan harmfully affected by the negative term of trade shock in 2008 through asharp increase in energy and other commodity price. On the other hand faced the difficulties Japan‟s stillcan maintain their positive growth in real GDP and private fixed investment. This happen because theexports 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 exportsfor Japanese shown the value is decline thereafter whereby the export in January 2009 shown the exportsis ¥ 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 otherMajor Assignment Page 18
  19. 19. Current Global Financial Crisis & Implications on IFI: Japanindustrialized-country financial markets, a significant slowdown in economic growth has taken place in theUS, 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, whichbegan from the US subprime mortgage disaster with the help of the governments of major countries whichare coming up with measures such as provision of liquidity and bailout packages for distressed banks, thefear that has gripped financial markets shows little signs of abating. Major stock exchanges are disorderlywhile a series of indicators that determine investors‟ risk aversion are posting all-time highs. The recentfinancial crisis has been rushed across the public-private boundary, which has hit the private firms and thefinancial statements has forced the new heavy demands on the public sectors finances. The crisis hassurged across national borders within the developed world, and now there are some reasons which hasalarmed that the crisis will swamp other developing countries, affecting the significant economic progress ofrecent years. (Lin, 2008). However, Severino (2008) have argued that the spillover effects of the USsubprime mortgage crisis on the Asian financial and real economic activity have been and will be relativelylimited, 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 theoutbreak 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 commercialbanks and, as a result, limited their willingness to lend by the summer of 2008. The Lehman Brothers shockin September 2008 further depressed the stock market and aggravated the strains on Japanesecommercial 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 thelagged impact of the negative terms of trade shock (arising from the sharp rise in oil and other commodityprices until the summer of 2008), may to some extent explain the sluggishness of industrial activity in somesectors starting from the summer of 2008. (Kawai & Takagi, 2009).(v). Government Matters: Purchase of toxic assets and direct equity injectionsEconomists worry about the moral hazard implications of these actions by the government especially thepurchases of toxic assets or the direct equity injections. These actions signal a willingness of thegovernment to step in and provide liquidity and capital when large financial institutions find themselves introuble. In the 1990s, Japan could hope that demand from the rest of the world would help to mitigate itsMajor Assignment Page 19
  20. 20. Current Global Financial Crisis & Implications on IFI: Japanslump. Such hope is not available for the world as a whole. In fact, declines in export demand from the restof the world will likely be an important drag on GDP growth (Jones, 2008). The implication of this weakbalance sheet was a high risk financial crisis with mounting asymmetric information problems ifmacroeconomic environmental turned difficult. That there was drying up the supply as well as a collapse inthe demands for loans (Nicholas, 1999).Reasons Why Japan Could Be Affected By The Global Financial CrisisAccording to Ulrike (1996), Japan is one of the countries that are most productive and advance economy inAsia 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 crisiscontinued in 2008 due to the decreasing of U.S. mortgage and resulted in the bottomed out of Japanesebank‟s capital and profitability. There have are several reason Japan faced this problem primarily Japan‟sdelaying 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 estateprice affect the financial institutions. Besides that, Japanese have are imperfection in accounting anddisclosure standards. This imperfection affects the lag in showing the incurred losses of financialinstitutions on the accounting and disclosure front. More to the point, the delaying for recognizing thedeclining in real estate and the imperfection in accounting and disclosure standard the authorities could notresolve the problem in financial institution in a timely manner. This current Global Financial Crisis has highlighted the five areas of major structural problems andpolicy weakness that have lead Japan be affected by the Global Financial Crisis. First of all are the weakand unclear disclosure rules that have been allowed on the banks, large as well as small alike, to hide ordisguise losses and shady deals. Second is the regulators adopted a wait in see attitude in the hope thatthe 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 synchderegulation. In 1979, MOF initiated interest rate deregulation very slowly and carefully, in an attempt not toundermine the banking hierarchy. Next, related to this is the heavy reliance on administrative guidance inbanking regulation. In the period of rapid growth, when all interest rates were regulated, the financialauthorities had to rely on administrative guidance because the price mechanism did not work. The lastly isa result of all of the above, there is little policy transparency, and solutions to problems tend to be collusivebased on the quid pro quo logic of administrative guidance (Ulrike, 1996).Major Assignment Page 20
  21. 21. Current Global Financial Crisis & Implications on IFI: JapanReasons Why Japan’s Financial System Less Exposed to the Market TurmoilBased on Sato (2009), he has listed three reasons on why the Japan‟s financial system was less exposedto 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 soundnessrather than to enhance the profitability (in the last several years) due to the historical coincidence. Japan‟sfinancial 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 ofrisk management by the financial firms in the same period when the firms improve on their financialsoundness. Thus, the financial firms of Japan became more cautious than it was before in the matter of thefinancial products investment with the uncertainty on their underlying assets or associated risks. Not onlythat, the practices also contributed by the Basel II framework (early implementation) in Japan (Sato, 2009).Different View on the Crisis Impact on JapanAccording to Sato (2009), there are different views as to how the effects of the current financial stress inJapan compare with the country‟s last crisis in the 1990s. Some argue that the magnitude of the last crisiswas 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 declinedsharply. Repercussion of the financial crisis of the late 1990s, Global FInancial Crisis start improved thereforemany country merge with market economies in Asia and other place to strengthen their economic andfinancial fundamentals. These improved of Global FInancial Crisis bolstered by fiscal and foreign debtpositions, accumulated foreign exchange reserves, and reformed their banking sectors. When the secondGlobal FInancial Crisis happen in summer of 2007 Asian is are best place to avoid from the crisis. This isbecause most financial institutions in Asia do not expose with troubled market. In addition, most financialinstitution in the region were not heavily exposed to distressed market for structured credit products andother asset-backed securities Glick & Spiegel, (2010).Major Assignment Page 21
  22. 22. Current Global Financial Crisis & Implications on IFI: JapanHow Japan RecoversThe Global Financial Crisis in Japan recover by recover the cost that such a strategy entails the smallerbanks also had to extend loans with higher risk. All of this happened while the stock price and real estatemarket "bubble" was well under way. MOF requested the large city banks to provide Hyogo with very lowinterest rate loans. Nevertheless, after the Kobe earthquake of January 1995, the bank was too short offunds to compete with the larger banks for reconstruction loans. Worse, the local governments withdrew amajor portion of their deposits to fund reconstruction projects. On August 31, Hyogo Bank was restructuredand it remained in business, but all operations were transferred to a new bank called Midori Bank onJanuary 26, 1996. No change occurred for the customers in daily banking matters, and a run on depositswas averted (Ulrike, 1996). During Japan recover, the first was the mistaken belief in the early-mid 1990‟s that the economywould rebound quickly from what was perceived to be little more than a cyclical downturn, and again themistaken belief in late 1996 that recovery was so firmly entrenched that the fiscal priority could immediatelyreturn to budget deficit reduction. Second, as a consequence, MOF initially decided and the banks readilyagreed to simply wait out the bad loan problems until economic growth was restored. It was not until 1995that banks seriously started disclosing and writing off bad loans. Third, the economy continued to grow onlyvery slowly, averaging about 1% annually since 1991 have more ordinary loans became doubtful, and moredoubtful loans became bad. Businesses could not generate cash flows for interest payments much lessloan repayments (Patric, 1998). The recovery in Japanese export since 1996 on the back of the yen‟s depreciation has contrastedsharply with the slowdown in Asian export. On the positive side, a weaker yen reduces import prices inAsian 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. Contemporariesrealized that economic recovery needed not only policies to rise spending, which in large economy could beprovided by domestic demand. The banking crisis in Japanese policy for recovery has lacked keycomponents. The recovery from the Global Financial Crisis plainly entails a substantial increase inaggregate demand, for which devaluation may be helpful and which macroeconomic policy must address(Nicholas, 1999).Major Assignment Page 22
  23. 23. Current Global Financial Crisis & Implications on IFI: Japan DISCUSSION AND FINDINGJapan is a well-known country where is located as one of the Asia countries. According to the U.SDepartment of State (2012), Japan‟s is slightly smaller than California (as shown in the picture 1) where itspopulation currently stated fewer than 127 million. Even though Japan has experienced with the muchphenomenal growth rate in the 20th century, nonetheless, the country‟s birth rates have fallen steadily since1970s and resulted in population growth rate of -1.0% in 2005. On the other hand, Japan is acknowledgewith its highly efficient and competitive economy within the international trade areas although it‟sproductivity is far lower in several protected areas. On top of that, Japan‟s has turn into a mature industrialeconomy due to its country‟s reservoir of industrial leadership and technicians as well as numbers of otheraspects. Not only that, Japan do owned the natural resources which can be used to trade in order to earnthe foreign exchange (U.S Department of State, 2012). Meanwhile, due to another author, Japan hasshifted its position from Asia into the East Asia in the last decade resulted from its economy orientedtowards the East Asia (Grimes, 2009). He added by stating that Japan‟s is tie up with the East Asia‟sregional 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 hasbeen taken by China. Grimes (2009) added that, Japan‟s manufacturing share remains highly competitivewithin 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 bynumbers 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‟ subsidiaries on theasset liquidation suspension] and the final stage (September 15, 2008) [Bankruptcy of the LehmanBrothers‟]. On the other hand, according to Malik, et. al. (2009), the reason for the crisis to occur was is dueto the downfall of U.S subprime mortgage industry. This statement is supported by Kawai (2009) as heagreed 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 Asiancountries financial institutions (Okano, 2010). While, based on Patric (1998), the banking crisis has resultedwhen deregulation happened without any creation of the effective system upon prudential regulation andsupervision for the safety of the system. Meanwhile, Ngowi (2009) stated that the current Global Financialand 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 forMajor Assignment Page 23
  24. 24. Current Global Financial Crisis & Implications on IFI: Japanthe Global Financial Crisis is the bursting of the housing bubble, equity risk premium‟s sharp rise as well asthe 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 recessionaryeconomic conditions by the bubble bursting in 1990s (21 st century) and the crisis has known as the Japan‟slost 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 GlobalFinancial Crisis, Japan durable manufacturing expected to be hit by the risk appraisal which will lead to thecollapsed of their durable exports (Mckibbin & Stoeckel, 2009). However, when the Lehman Brother‟s wentbankrupt, Japan‟s bank started to face with the financial crisis. Not only that, because of the GlobalFinancial Crisis, Japan has been hardly hit and resulted in their industrial production to collapse includingdeclining 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 FinancialInstitutions (IFI), financial system and financial banking, exportation, economy as well as in Japan‟sgovernment 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 sameauthor added that the direct impact of the crisis on Japan is relatively small but still the real economy ofJapan has fallen into negative growth and its share prices have declined. Meanwhile, according toYamaguchi (2009), the crisis impact has spread over on Japan‟s retail banking and resulted in the businessperformance to deteriorate and sluggish sales of the mutual funds. Not only that, the author too has saidJapan‟s financial institutions have been affected and only gain the low profitability. The profits of Japan‟sfinancial 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 financialinstitutions reluctant in lending their money afraid of the bad debts. This non-performing loan has beensupported by Grimes (2009) as he stated that the bank credits and financial markets in Japan have tounfreeze and resumed their basic function (to allocate capital in the private sector). On top of that, Japan‟sfinancial institutions have faced with the losses stemming from U.S investments, economic downturn aswell as the fall of the stock prices (Kono, 2009).Major Assignment Page 24
  25. 25. Current Global Financial Crisis & Implications on IFI: Japan Meanwhile from the Japan‟s financial system and financial banking aspect, it have severelyaffected due to the highly volatility of financial markets (Sato, 2009). Not only that, Sato (2009) added thatthe 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 aboveall, Japan‟s financial system was remained sound compared to U.S and Europe where the Japan‟s financialbanking sector losses have been limited. Next is the crisis implication on Japan‟s exportation. Based on Okano (2010), as Japan is focusingon the export oriented industries, the country‟s manufacturing sector has been affected and suffered fromthe decrease of exportation aspect. Okano (2010) added that Japan‟s manufacturing production has a hugereduction 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 largedecline. In addition, there is a slowing domestic demand in Japan as well. Another authors supportedKawai‟s statement where the external demand of Japan‟s manufactured goods has been reduced becauseof the U.S economy weakness (Tellis, et. al, 2009). Meanwhile, according to Kawai & Takagi (2009), thecollapsed 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 tepidrecovery from the domestic economic stagnation. Not only that, resulted from the crisis, it has limits on theglobal financial architecture including the Japan‟s regional architecture when the country just trying toestablish. Nevertheless, Japan‟s experience of previous crisis has helped the country in dealing with thecurrent crisis where both bank and financial institutions were well-capitalized and not badly extended intothe “toxic assets” (Grimes, 2009). Japan‟s economy begin to be affected when U.S and most Europedeclare into recession (2008), but nonetheless, Japan still can maintain its positive growth in both real GDPas well as the private fixed investment (Kawai & Takagi, 2009). Meanwhile, Malik, et. al. (2009) statedJapan having a slowdown in its economic growth when U.S subprime mortgage crisis has been spread tothe 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 2007and fall in 2008. Last but not lest is the impact of the crisis upon Japan‟s government. Japan‟s government hasstepped in when the financial institutions were in trouble and provide liquidity and capital needs (chasingaway the purchase of toxic assets or the direct equity injections) (Nicholas, 1999).Major Assignment Page 25
  26. 26. Current Global Financial Crisis & Implications on IFI: Japan There are several reasons on why Japan could be affected by the current crisis which consisting ofdelaying in recognizing the severity of the nonperforming assets massive impact towards the economy, aswell as Japan‟s imperfection in its accounting and disclosure standards (Ulrike, 1996). Not only the tworeasons have been stated by the author, indeed, he has added on five areas of major structural problemsand policy weakness of Japan that lead the country to be affected. First is the weak and unclear disclosurerules allowed on banks (to hide or distinguish losses and shady deals), the wait and see attitude that haveadopted by regulators (hoping the market would recover and bad loans would heal themselves), next is thesynch deregulation (the slow and carefully interest rate deregulation initiated by MOF), heavy reliance onadministrative guidance in banking regulation (as the price mechanism did not work) and lastly is theJapan‟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 themarket turmoil. Sato (2009) has listed three reasons which are Japan‟s financial firms were not stronglyinnovation-oriented, the firms have given priority to improve their financial soundness rather than enhancingthe profitability as well as because of risk management improvement by the firms. Sato (2009) added bystating that there are different views on how the current financial stress has impacted Japan if compared tothe 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 loanswith a higher risk. Meanwhile, based on Patric (1998), during the recovery period, there are threeconsequences that Japan needed to cope with. Firstly was the mistaken belief on the economy wouldrebound quickly in early-mid 1990‟s as well as in 1996 where the second mistaken belief on the recoverywas 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 untilthe economic growth was restored. Thirdly is where Japan‟s economy continued to grow only very slow. Ontop of that, due to another author (Kwan, 1999), Japanese recovery on the yen‟s depreciation hascontrasted sharply with Asian export slowdown (weaker yen reduce import prices as well as reducing theburden of Japan‟s debt repayment to Asian countries). In addition, Nicholas (1999) stated that Japan‟srecovery 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 Page 26
  27. 27. Current Global Financial Crisis & Implications on IFI: Japan CONCLUSIONAs a conclusion, the Global Financial Crisis that has occur in 2008 have not only affected Japan but alsoalmost every countries in the world. There are several causes that lead the crisis to strike at the momentwhich are including the downfall of U.S sub-prime mortgage industry, housing bubble bursting as well asthe sharp rise in the equity risk premium. Due to the crisis, Japan has faced implications on numbers ofaspects 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 arethe weak and unclear disclosure rules on banks, matters related to the regulators adopted, problem ofsynch deregulation, heavy reliance on administrative guidance in banking regulation and policytransparency. Even though Japan does affected by the Global Financial Crisis, but nonetheless, Japan‟sfinancial system was less exposed to the market turmoil. Although have been affected by the crisis, Japanwas able to recover from the impact. Throughout this assignment, our group members have faced with some limitations which related tothe sources, timing and understanding of the information. Journals that we were looking for (that reallysuitable and can help us to complete this assignment) are hardly to find as some of it were not containingthe information that we seek for. Not only that, we were having limitation in the timing aspect as we weredoing this assignment during the mid-semester break where the holiday mood is in the air and caused wekeep on delaying to complete our part. Last but not lest is our understanding on the journals that we havegone through. We were having trouble to understand some of the authors ideas due to their complicatedstatement 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 ofGlobal Financial Crisis upon Japan or any other countries regarding with the current crisis, first please getto know the basic about the particular country and followed by the understanding of the crisis history. Inaddition, the most important matter is regarding the understanding of whatever the information that we gothrough as it is pointless if we do a summary or citation on the author‟s ideas without knowing the realmeaning behind the ideas nor knowledge. On the other hand, in order to know whether the journals or anyarticles are related to our project topic, key words of our topic can be used to check throughout theinformation (Example: Global Financial Crisis).Major Assignment Page 27
  28. 28. Current Global Financial Crisis & Implications on IFI: Japan REFFERENCESAslund, 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 ActionChossudovsky, 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 ReportHakone. (2010). “Response to the Global Financial Crisis and Future Policy Challenges”. Harvard Law School and the International House of JapanHolroyd, C., & Momani, B. (2010). “Japan‟s rescue of the IMF”, pp.1-33.Major Assignment Page 28
  29. 29. Current Global Financial Crisis & Implications on IFI: JapanIto, 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 StudiesKono. M. (2009). “The Global Financial Crisis and Regulatory Response”. Challenges for the future of financial services liberalization, pp.7-30Kwan, C. H. (1999). “The yen, the yuan, and the asian currency crisis-changing fortune between Japan and China”. Nomura research institute, pp.37-54Lin, Y. (2008). “The Impact of the Financial Crisis on Developing Countries”. Retrieved on Feb 12, 2009, from crisistalk.worldbank.org/files/Oct_31_JustinLin_KDI_remarks.pdfMalik, N. I., Ullah, S., Azam, K., & Khan, A. (2009). “The Impact of Recent Global Financial Crisis on the Financial Institution in the Developing Countries”. Global Perspectives International Review of Business Research Papers, 5, pp.85-95Major Assignment Page 29
  30. 30. Current Global Financial Crisis & Implications on IFI: JapanMankoff, J. (2010). “The Russian Economic Crisis”. Council Special Report, (53), pp.4-9“Ministry for Economic Development (Macroeconomic Forecast)”. Ministry of Finance Reports, Retrieved from http://www1.minfin.ru/en/nationalwealthfund/ on 8th March 2012Mishkin, F. S. (2006). “The next great globalization. How disadvantaged nations can harness their financial systems to get rich”. Princeton: Princeton University PressNanto, D., K. (2009). “The Global Financial Crisis: Lessons from Japan‟s Lost Decade of the 1990s”. Congressional Research Service.Ngowi, H., P. (2009). “The Current Global Financial and Economic Crisis and its Impact on Africa”. The World Economic Crisis: Challenges to the African Public Administration SystemNicholas. (1999). “Implication of financial crisis for East Asian trend growth”. London School of Economics, pp.110-131Patric, H. (1998). “The causes of Japans financial crisis”. Center of Japanese Economy and Business, pp.1-22.Rutland, P. (2008). “The Impact of the Global Financial Crisis on Russia”. Russian Analytical Digest,pp..3-8Russian Government‟s Anti-Crisis Programme (2009). Government Anti-Crisis Program. Retrieved from at: http://premier.gov.ru/eng/anticrisis/1.html on 8th March 2012Sato, D. T. (2009). “Global FInancial Crisis – Japan‟s experience and policy response”. Asia Economic Policy Conference Organized by The Federal Reserve Bank of San Francisco Santa Barbara, CA, United StatesMajor Assignment Page 30
  31. 31. Current Global Financial Crisis & Implications on IFI: Japan“SESRIC Reports On the Global Financial Crisis. The Eurozone Debt Crisis: A Second Wave of the Global Crisis?”. (2011). Statistical Economic and Social Research and Training Centre for Islamic Countries (SESRIC), pp.10-15Severino, R. C. (2008). “Global Financial Crisis Implications for ASEAN”. ASEAN Studies Centre, 49Shirakawa, M. (2009). “Coping with Financial Crisis – Japan‟s Experiences and Current Global FInancial Crisis”. Bank of International SettlementsStiglitz, J. (2008). “Let‟s throw away the rule book; Bretton Woods II must establish economic doctrines that work in emerging economies as well as in capitalism‟s heartland”. The Guardian, October 22, 2008. The Daily News, Friday November 28th, 2008.Stiglitz, J. (2008b). “A crisis of confidence”, The Guardian, October 22, 2008. The Daily News, Friday November 28th, 2008.Sutela, P. (2010). “Russia‟s Response to the Global Financial Crisis”. Carnegie Endowment For International Peace, pp.3-5Tang, H, L. Lin, L, H. Chen, H, H. Su. C, H. Hsiao S, T. ( 2009). “Does Japanese Government Increase Its Role in Financial Crisis?”, pp.1-18Tellis, A. J., Marble, A., & Tanner, T. (2009). "Economic Meltdown and Geopolitical Stability". The National Bureau of Asian ResearchUlrike, S. (1996). “The 1995 financial crisis in Japan”. Berkeley Roundtable on the International Economy, UC Berkeley, pp.1-38.U.S Department of State Diplomacy in Action, “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 onMajor Assignment Page 31
  32. 32. Current Global Financial Crisis & Implications on IFI: Japan 8th April, 2012Warwick, J. M. & Stoeckel, A. (2009). “The Global Financial Crisis: Causes and Consequences”. Working Papers in International EconomicsWinkler, A. (1995). “Russia‟s Changing Financial System”. The Monetary Situation in Early Summer 1995. IPC Working Paper, (6), pp. 1- 17Yamaguchi, H. (2009). “Challenges for Japanese Financial Institutions after the Financial Crisis”. Paper presented at the Retail Finance Strategy Conference (Tokyo, 2009). pp.4-5.Major Assignment Page 32

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