Before the global financial crisis that rocked the entire globe, Japan had put in place a very robust financial system that according to economic experts was to insulate Japan from the pangs of global financial collapse. However, despite this, Japan was hardly hit by the global financial crisis significantly shrinking its economy (Zheng, 46). In the year 2007 before the peak of the economic recession lead economists pointed out that Japan was immune, the impacts of the US subprime loan problem, owing to the fact that Japan had limited exposure to “toxic” assets. In fact, the Japanese banking sector was minimally affected directly .The limited value of write-downs and the small cost of support from the public sector was a testament to the fact that the banking sector in Japan was safe. Due to the poor decisions made, Michael Lewis asked that: “What are the odds that people will make smart decisions about money if they don’t need to make smart decisions—if they can get rich making stupid decisions?” (Davis, 14)
When the United States and majority of European economies were going down in the first phase of the year 2008, Japan’s real economy was not affected materially. Despite the increased commodity and energy prices, Japan’s GDP still maintained a positive index through the second quarter and the third quarter. However, with the fourth quarter, Japan’s economy registered a sharp decline with its exports dropping by twelve percent. Regardless of the kind of immunity that Japan showed within the first quarters of the year, the economic decline it faced starting from the fourth quarter was the largest and most severe among the major developed countries in Asia, Europe and North America.
Therefore, the question that begs is how Japan’s economy failed so terribly despite its robust financial system. Following the US, subprime loan crises, Japan’s stock prices started to decline. This decline in stock prices started imposing pressure or strain on capital adequacy and balance sheet ratios that significantly compromised the bank’s lending capacities. According to statics provided by the bank of Japan, loans on equipment fell by 9% in the 3rd quarter of the year, reaching 10 % within the fourth quarter .Japan’s major industries are manufacturing, and manufactured goods constitute a large chunk of the county’s exports. With the reduced lending capacities of banks, there was a strain on the manufacturing sector which led to a decreased scale of production and subsequently the export volumes of the country. Chris Williamson, Markit Chief Economist argued that: "With output growing at the slowest pace since the recovery began, the manufacturing sector may have even acted as a slight drag on the economy in the 3rd quartier." (Kawai &Takagi, 28).
Another aspect that led to the decline of Japan’s economy during the year 2008 was the economic decline in Europe and the United States. Japan’s exports are majorly constituted of highly income elastic consumer durables, capital goods and industrial supplies. The economic recession in these two regions deflated the consumer’s income and by that way reducing their purchasing power. Japan was not alone on this as other economies that manufactured similar goods suffered even greater impacts. Consumer durables constituted less than 15 % percent of Japan’s exports and capital goods constituted about 40% of Japan’s total exports. This decline in exports of these classes of goods enormously affected the overall export earnings of Japan.
For the last two decades, Japan’s economy has undergone various modifications and changes .Earlier on; Japan had high levels of non-tradable goods. However, in pursuit of globalization of the economy, Japan began to major in tradable goods. Increased scale of tradable goods threw Japan into the global economic mesh. As such, a decline in economy in any country would automatically lead to decreased export earnings. This shift is another reason why its financial system could not insulate the economy against global recession. The global interdependence that is created by engagement in tradable goods does not allow its financial system to stand immune to the global economic crisis (Kawai &Takagi, 48).
According to Kawai and Takagi (56), the devastating effects of this economic recession left Japan as the third largest economy after the United States and China. Before the economic recession, Japan was the second largest economy after the United States. In a bid to improve its economy Japan is engaging a myriad of economic policies including balancing non-tradable goods and tradable goods and increasing its economic integration within the Asian region and the entire globe.
In the United States, the financial turmoil was first felt in the mortgage lending markets. Indications of the emerging problems started to reveal themselves in early 2007 when the Federal Home Loan Mortgage Corporation made an announcement that it was suspending all its high risk mortgage purchases. Another leading Mortgage firm, the New Century Financial Corporation which was renowned for lending mortgages to riskier customers officially filed for bankruptcy.
There was an unprecedented fall in house prices and the number of foreclosures increased dramatically. This led credit rating agencies to start downgrading their risk evaluations of financial instruments that were asset backed. A lot of securities that were mortgage backed received downgrades. This represented a severe dislocation of various financial markets.
The impact of the recession on the banks was translated into the financial markets which once again started to become very volatile. Strong traders such as the Dow Jones started witnessing tumultuous daily shifts and in fact recorded it witnessed its hugest single point drop on September 29th 2008. With these trends, it was clear that global recession had set in.
There are several factors that have been credited with the stimulation of the economic recession. As mentioned earlier, the main cause was the US housing market. The house prices in the United States had been rising dramatically from 1998 up to 2005, where the prices had doubled by that time. This rate of house prices increases was even faster than that of average wages. House price increase was reflection of the increasing demand for houses that was happening in spite of a accompanying high supply. According to Cheung et al (34), “The increased demand in housing is attributable to several factors that include; low rates of interests, property speculation and support for the subprime market.”
The financial industry was also partly to bale for the recession. Problems from the housing bubble inadvertently multiplied exponentially due to the ways in which they were repackaged and then distributed to the financial markets. These financial instruments aggravated the negative effects of the housing crisis which led to further deterioration of the economy. In addition, there were no regulatory mechanisms to ensure that the crisis was being managed and in fact, many were of the opinion that it was a minor economic downturn that would shortly come to pass.
However, when the authorities realized that it was fully fledged economic recession, several policy responses were put up immediately.
The United States Federal reserve was the key actor in the management of financial problems. The first thing that the board’s reserve did was to lower interest rates to 2%. It then embarked on a global campaign calling for other economic powers to reduce the interest rates especially the European Union (Cheung et al, 34). Through lowering the credit cost for institutions, it was hoped that the banking system which had felt the effects of the recession would become more solid.
The other policy response that was initiated by the United States was legislation. Here, the Housing and Economic Recovery Act was passed in July 2008 and was aimed at alleviating the housing crisis. The program guaranteed about 3oo billion dollars worth of subprime mortgages if lenders essentially agreed to write down most of the principal loan balances to ninety percent of their current value. The government would in return receive a significant proportion (half) of the subsequent appreciate of the house prices (Zheng, 46).
The United States Treasury had been very slow in directly responding to the crisis and it at first only tends to offer support to several agencies. However when things got worse, it was forced to intervene directly. It formed a body known as HOPE NOW which was comprised of lenders, investors and mortgage advisors to support and inform homeowners. Buy the end of August 2008, the body was claiming to have prevented the fore-closure of 2.3m.
As the prospect of a fully fledged financial and economic downturn started to become more and more real, the general response of the federal government was aimed at ensuring liquidity in the capital markets, stimulation of demand in the current economic and the protection of mortgage owners from immediate fore-closure.
When the crisis hit its peak towards the end of 2008, several other responses came into being. These included the passing of the Troubled Asset Recovery Program and Economic the Stabilization Act of 2008 stated that the government invested 700 billion dollars in the purchase of illiquid assets and the venture was aimed a reduces losses accrued in financial institutions as well as unfreezing the credit markets. The other policy response was the empowering of the Federal Reserve of the Treasury where it’s capacity to bail out financial institutions and firms was increased.
The US Treasury also instituted several other schemes that were meant to increase economic stability, for instance the Treasury Guarantee program. After the crash of the stock market in 2008, the Treasury and the Congress became players in an evolutionary response package that involved capital injections, federal conservatorships, credit easing, capital injections, coverage schemes, liquescency measures and housing market regulations.
These interventions surely but slowly eventually led to a decrease in the economic crisis and the financial institutions started becoming solid once again and the economic started rising steadily. An economist at ING, Martin Van Vliet, claimed that, "Today's PMI figures confirm that the Eurozone economy as a whole remains stuck in recession, despite the tentative signs of steadiness in Germany.” (Marshall, 78).
The Chinese economy has gained a lot of influence on the global economy in the last decade. Its integration into the World Trade Organization was the hall mark of its rise as one of the largest economies in the world. Its control over exports and imports both processed and manufacturing can be attributed to the growing industrial activity within its economy. The need for manufacturing materials for its industries meant there was increased import activity during the period when it experienced the highest economy growth in the period 2000 to 2006. Similarly, due to its cheap processed products, many countries shifted their trade relations more towards China than their traditional trading partners. The cheap processed products were entirely due to the highly competitive industrial environment among Chinese factories coupled with the availability of relatively cheap labor compared to other large economies.
China’s export-to-GDP ratio was recorded at 0.20 in 2000 while its import-to-GDP ratio was recorded at less than 0.20 within the same period. By 2006-07, the export-to-GDP ratio was at 0.36 while the import-to-GDP ratio was said to be at around 0.36. Between 2000 and 2007, the growth rate was operating at double digits reaching its peak in 2007 where it was recorded at 13%. The agricultural sector though not forming the largest part of the Chinese GDP contributed a stable value of between 35% over this period before the recession. By the year 2004 however, the agricultural sector began losing its comparative advantage due to land scarcity and competition for land, labor and other resources from other non-agricultural sectors of the Chinese economy (Marshall, 25).
According to International Food Policy Research Institute, (2010), towards 2007-08, the Chinese economy began experiencing slowed growth rate. In 2009, the GDP growth rate declined to 6.8% from 10% in the previous years. In the first quarter of 2009, the rate fell to 6.1%. This was entirely due to the reduced demand for processed products from major importers of Chinese industrial products which subsequently reduced the factory production rate. This situation was further hardened by the rising cost of exported fuel that serves as the major source of energy for industrial activity. The fuel prices on the global market could not achieve stability and this further compromised any measures that were being set to handle the declining growth rate amid a global calamity (Zheng, 34).
The industrial sector of the Chinese economy was the hardest hit. The agricultural sector on the other hand seemed more resistant to the effects of global crisis. This could be attributed to the fact that the agricultural sector is self sustaining and in terms of both supply and demand from within the Chinese economy. It does not depend so much on either exported products or imported trade. The large Chinese population serves enough labor and market for its products. “But after stagnant growth in the late 1990s and early 2000s, China's agricultural sector managed to grow more than 5 percent between 2004 and 2006 and approximately 4 percent in 2007. In 2008, agriculture continued to grow rapidly at 5.5 percent. Moreover, the slowdown in agricultural growth in the first two quarters of 2009 was modest and did not significantly deviate from its recent trend.” (Elliott, 67). This trend in the agricultural sector offered the Chinese economy a better platform to recover as compared to other world economies which were hit by the crisis on all sectors.
The industrial sector on the other hand declined from 14.5% in 2007 to 9.3% in 2008. In the first and second quarters of the 2009 financial year, the industrial growth further declined to 5.3% and 6.6% respectively. The effects were felt by the industries which were now operating at profit loss. Workers layoffs began mostly affecting the low skill workers. More than 20 million workers returned back to their rural hometowns after they lost their jobs (Elliott, 34). This further worsened the crisis as the economy became more overstretched to sustain the population. Williams said that: “We are now approaching the one-year anniversary of this index dropping below 50 and a recovery is still not in sight.” (Scott, 45)
Works Cited
Cheung, Yin-Wong, and Jakob. Haan. The Evolving Role of China in the Global Economy. Cambridge, Mass: MIT Press, 2013. Print.
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International Food Policy Research Institute (2010). ‘Country-level impact of global recession and China’s stimulus package’ [online]. Available at: <http://www.ifpri.org/publication/country-level-impact-global-recession-and-china-s-stimulus-package?print> [Accessed 2 October 2013].
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Scott, Hal S. The Global Financial Crisis. New York: Foundation Press, 2009. Print.
Zheng, Yongnian, and Sarah Y. Tong. China and the Global Economic Crisis. Singapore: World Scientific, 2010. Print.
