It’s been ten years since Lehman Brothers went bankrupt in September 2008. The surprise exit of the investment bank, as we all know, drove the world economy into a deep recession, which was already feeling the effects of the subprime mortgage crisis.
Japan escaped the financial consequences of the subprime mortgage crisis relatively unscathed. It was due to the fact that Japanese banks did not have a large number of RMBS and CDOs in their portfolios. In this regard, Japan never experienced a financial crisis during this time.
The Japanese economy, on the other hand, was hit by a severe and rapid downturn. In fact, the loss in real GDP was far higher than that of the United States, which was the source of the crisis.
In this month’s essay, I’d like to look back on Japan’s experience during the 2008 financial crisis and explore the factors that contributed to it.
Larger drop in GDP than in the United States
Figure 1 depicts the GDP profile before and after the fall of Lehman Brothers, which we will refer to as the “Lehman shock.” Using 100 as the real GDP in 2008Q1, it can be shown that Japan’s real GDP plummeted considerably more steeply than the US’s, and that it has also been longer to recover to its pre-Lehman shock level.
When we look at Figure 2, which shows the real GDP growth rates of the two countries over the same time, we can observe the disparity in the impact of the Lehman shock. In 2008Q3, 2008Q4, and 2009Q1, real GDP declined by -1.3 percent, -2.3 percent, and -4.9 percent, respectively. The decline in real GDP in each of the three quarters was greater than the decline in real GDP in the United States over the same time period.
Significant fall in exports
Figure 3 examines the contribution of exports to real GDP during the period to determine the cause of the substantial reduction in real GDP. It demonstrates that the reduction in real GDP in 2008Q4 and 2009Q1 is primarily due to a drop in real exports in both quarters.
The following factors are said to have contributed to Japan’s dramatic decline in real exports:
First, the financial crisis in the United States increased household worry about future economic prospects, causing them to delay purchases of non-essential items such as automobiles and electrical equipment. Because these products and their parts were Japan’s principal exports to the US, it resulted in a significant drop in Japanese exports.
Second, the yen has been appreciating since the start of the subprime mortgage crisis, which intensified following the Lehman bankruptcy. In June 2007, the yen/dollar exchange rate was above 124, but it rose to 108 in August 2008, before falling below 90 by December. During this time, such a rise in the value of the dollar deterred exports.
Third, the financial market deadlock that followed the Lehman bankruptcy reduced trade finance availability. The decline in finance hampered international trade.
The drop in Japanese exports during the time, which was part of the Great Trade Collapse, had a significant impact on Japanese industry and workers. Because of the composition of Japanese exports, this was especially true. The items that were impacted were those that were supported by a wide range of sectors that provided intermediate goods. The drop in exporting sectors’ production eventually resulted in a drop in production in those industries as well.
It was especially significant in the case of automakers, whose exports accounted for 17.1% of overall exports in 2007, shortly before the crisis, and 37.0 percent of those were to the United States (Figure 4). The crisis lowered total automobile exports to 48.7% of their value in 2009, a 51.3 percent decrease (Figure 5).
Aside from the substantial drop in exports, the motor vehicle sector had the greatest impact on other industries: according to the input-output chart for Japan, a drop in one unit of production in the motor vehicle producing industry reduces three units of production economy-wide: It had the greatest impact on total production of all Japanese industries.
Reduced motor vehicle exports had a severe impact on the economy as a result of these factors, resulting in a significant drop in real GDP.
In contrast, limited impact on employment
While the Lehman shock had a huge impact on real GDP, it had a relatively small impact on employment. In stark contrast to the United States’ quick growth in unemployment from 5.0 percent at the beginning of 2008 to 10.0 percent at its high (October 2009), Japan’s rise was from 3.9 percent at the beginning of 2008 to barely 5.5 percent at its peak (July 2009). The increase in the rate was significantly different and absolutely opposite of what would be expected based on the impact on real GDP, as shown in Figure 6.
The fundamental reason for the disparity is Japan’s lifetime employment structure. Japanese companies are often hesitant to lay off employees and make every effort to retain them on the payroll.
Simultaneously, following the Lehman shock, the government aided businesses by easing the requirements to qualify for the employment adjustment subsidy program: the program subsidized a portion of the wage that a firm must pay (3/4 for large firms and 9/10 for small and medium-sized firms after March 2009) if the firm keeps workers on the payroll despite the fact that there may be no work to do, by training them or giving them time off.
Figure 7 demonstrates that both the number of covered workers and the overall amount of subsidies paid to enterprises began to rise in early 2009, peaking in August (in the case of number of workers) or September (in the case of total subsidies) (in the case of subsidies paid). It should have aided in keeping the unemployment rate in Japan low throughout this time.
Overcoming the vulnerability
The 2008 Lehman Brothers bankruptcy exposed Japan’s economy’s vulnerability to foreign shocks. The fundamental reason for this was the weakening of domestic demand, particularly individual consumption.
However, it was bolstered by a unique feature of the Japanese industrial system, in which the automobile industry holds a significant stake. On the one hand, exports had a significant impact on the production of motor vehicles, while on the other hand, the manufacture of motor vehicles had a significant impact on the production of other industries.
The experience shows that stronger domestic demand and a more diverse industrial structure are required to be more resilient to external shocks. The lack of progress over the last ten years shows that we still have a long way to go on these fronts.
How did the global financial crisis effect Japan?
The global recession has resulted in a significant weakening of Japan’s real economy due to a sharp drop in foreign demand. In the first quarter of 2009, Japan’s GDP grew at a negative rate of 12.4% on an annualized basis, and is expected to expand at a negative rate of 5.4% in 2009.
What triggered the economic catastrophe in Japan?
- Japan’s “Lost Decade” was a period from around 1991 to 2001 when the country’s formerly booming economy slowed significantly.
- The Bank of Japan (BOJ) raised interest rates to temper the real estate market, which contributed to the economic slump.
- While a credit crunch was brewing, the BOJ’s policies produced a liquidity trap.
- Using public funds to rebuild bank balance sheets and preventing deflation and inflation from producing stagnation are among the lessons learned from Japan’s “Lost Decade.”
In 2009, what happened to Japan’s economy?
On an annualized basis, real GDP decreased a further 12.4% in the first quarter of 2009 compared to the previous quarter, the greatest drop ever. On top of the drop in exports, this was attributed to a drop in domestic capital investment and consumption. The crisis’ repercussions had spread to domestic demand.
What triggered the stock market fall in Japan?
In late 1989, the Bank of Japan hiked inter-bank lending rates substantially in order to deflate speculation and keep inflation in check. The bubble popped, and the Japanese stock market plummeted as a result of this harsh policies. As equity and asset values dropped, overly-leveraged Japanese banks and insurance companies were left with a mountain of bad debt on their books. The government bailed out the financial institutions through capital infusions, loans and cheap credit from the central bank, and the authority to postpone loss recognition, thus turning them into zombie banks. In an article for Salon, Bloomberg News’ Yalman Onaran said that zombie banks were one of the causes of the subsequent extended stagnation. Furthermore, according to Time magazine’s Michael Schuman, these banks maintained pumping money into unprofitable “zombie corporations” to keep them afloat, claiming that they were too big to fail. Most of these businesses, though, were too in debt to do much more than survive on bailout funding. Schuman argued that until this practice was stopped, Japan’s economy would not begin to revive.
Many of these faltering businesses eventually became unsustainable, culminating in a wave of consolidation that resulted in four national banks in Japan. Many Japanese companies were saddled with massive debts, making finance extremely difficult to come by. Many borrowers sought loans from sarakin (loan sharks). The official interest rate was 0.1 percent in 2012, and it has been below 1 percent since 1994.
Who was the hardest hit by the financial crisis of 2008?
The crisis had an impact on all countries in some form, but some countries were hit more than others. A picture of financial devastation emerges as currency depreciation, stock market declines, and government bond spreads rise. These three indicators, considered combined, convey the impact of the crisis since they show financial weakness. Ukraine, Argentina, and Jamaica are the countries most hit by the crisis, according to the Carnegie Endowment for International Peace’s International Economics Bulletin. Ireland, Russia, Mexico, Hungary, and the Baltic nations are among the other countries that have been severely affected. China, Japan, Brazil, India, Iran, Peru, and Australia, on the other hand, are “among the least affected.”
What were Japan’s responses to the Great Depression?
Japan recovered quickly after the Great Depression of the 1930s. Takahashi Korekiyo, a seasoned finance minister, orchestrated the recovery by combining expansionary fiscal, exchange rate, and monetary policies.
What is Japan’s most pressing economic problem?
- The Japanese economy has been in a state of stagnation since 1990, and COVID-19 has exacerbated the problem.
- The recovery from the COVID-19 epidemic in Japan is still incomplete, and maintaining it will be crucial.
- Japan’s reliance on China as a platform for its manufacturing investments has been underlined by supply chain concerns, growing labor costs, and political issues.
- Japan’s social security system is under strain due to a low birthrate and an aging population, as well as labor shortages.
What are Japan’s key issues?
Everyone is aware that Japan is in a state of emergency. The most pressing issues it faces – a deteriorating economy, an elderly people, a declining birthrate, radiation, and an unpopular and weak government pose an enormous challenge and maybe an existential threat. A tangle of minor worries and anxieties, of which Shukan Josei (March 13) enumerates 10, is less fateful but closer to home.
Some of these, such as one-third of single women living in poverty and an increase in the number of children in need of protection from child abuse, are far from insignificant. Others, such as the rise in bicycle accidents and habitat devastation, appear to be worthy of being put on the back burner at first glance, but on second thought…
Take, for example, fauna that is destructive. Deer, wild boar, monkeys, and other mindless critters do an estimated 20 billion yen in damage to crops, national parks, and people in the form of personal injury each year monkeys in particular. Shukan Josei claims that deer gnawing tree bark has transformed half of Japan’s national parkland into desolation, while pigs ravage rice paddies. If only the Japanese could develop a taste for game the way the Europeans have! The marauders would then be hunted in greater numbers by hunters, and a sustainable equilibrium would be restored. Despite the fact that the Japanese have become meat eaters, they still favor domestic livestock.
The problem with bicycles, which are convenient, environmentally beneficial, and provide wonderful exercise, is that anyone may ride one; no license is required, and there is no mandated teaching on road regulations, which many riders appear to be unaware of. Furthermore, because few people consider bicycles to be dangerous, they are not treated with the respect they deserve. Pedestrians are involved in many accidents Shukan Josei does not say how many and they can be fatal. Cyclists bear the brunt of the criticism, which isn’t really fair. According to the magazine, Japan is far behind other countries in developing exclusive bicycle lanes, particularly in Holland and Scandinavia.
The escalating child abuse numbers do have a silver lining. At least some of the increase can be ascribed to neighbors reporting issues, implying increased awareness and possibly increased neighborly care. Of course, this is of little consolation to the children who have been harmed. Much of the blame is placed on stress and solitude. Child-rearing used to be a community obligation, but communities are nearly dead; or it used to be the responsibility of the entire extended family, but extended families are nearly extinct as well. Furthermore, according to Shukan Josei, public children’s facilities are understaffed and shabby, whereas older people’ homes receive more attention.
Why is it that one-third of single women are poor? For one thing, the majority of working women (12 million) are part-time jobs with little pay and few benefits. Inheritance laws, for example, are slanted in favor of men. The impact on children is severe because many single women are also single mothers. “Japan provides very weak protection to its young population in comparison to other developed countries,” a lawyer tells the magazine.
Poverty among women is also a factor in the lowering birth rate. In Japan, 340,000 abortions are performed each year, the most of which are assumed on mothers who cannot afford to have children.
When did the bubble in Japan burst?
From 1986 to 1991, Japan experienced an economic bubble in which real estate and stock market prices skyrocketed. This pricing bubble broke in early 1992, causing Japan’s economy to stagnate. A rapid acceleration of asset prices and overheated economic activity, as well as an uncontrolled money supply and credit expansion, defined the bubble. More particularly, at the time, excessive monetary easing policies was linked to overconfidence and speculation in asset and stock values. The Japanese government began, sustained, and worsened the Japanese asset price bubble by enacting economic policies that promoted asset marketability, simplified credit access, and encouraged speculation.
How did the financial crisis of 2008 spread to other nations?
Banks and financial investors all across the world identified American mortgage-backed securities as a profitable investment after 2000. Our basic hypothesis is that the financial crisis that started in the United States was triggered by this exposure to these goods, and that this is how the problem spread to the rest of the world.