Financial Crisis in Japan ( Macro Economics Project)

LAHORE BUSINESS SCHOOL

ACKNOWLEDGEMENT

First and foremost, we are grateful to ‘ALLAH ALMIGHTY’, most beneficent and the most merciful who made us able to complete our given final project successfully.

We would also like to pay tribute to the benefactor of humanity ‘HOLYPROPHET’ (P.B.U.H) who gave us complete knowledge on every aspect and field of life.

In short of words, to express our modest gratitude and recognition on cuddly and loveable ‘PARENTS’ who at each and every moment prays for our success. We are also deeply thankful to our ‘TEACHER’ to have taught us from childhood to still especially ‘MAM MEHAR AWAIS who taught us MACRO ECONOMIS.

Thank you all, without you this would have not been possible.

FINANCIAL CRISIS IN JAPAN


ABSTARCT

In this report we describe recent financial crisis to Japan and compare current monetary

policy reactions by the bank of Japan with action taken during the 1990s and with current policy

reactions by other major central banks. First, we review the recent literature on the origins

propagation mechanisms of financial crisis. The, we ask how the financial crisis was hits Japan

and describe the policy responses by bank of Japan. We proceed and ask what lessons have been

learned by other central banks from the financial crisis of the 1990s.



INTRODUCTON

The Global financial crisis occur whole over the world but we choose Japan for this project because Japan has a strong economy and its cover their crisis more quickly rather than other countries. We experienced both the current global financial crisis and Japan’s last banking crisis in Japan.

JAPAN ECONOMY:

The economy of Japan a free market economy is the third largest in the world. The Japanese currency is the Yen. Japan's main export goods are cars, electronic devices and computers Japan has a surplus in its export/import balance. The most important import goods are raw materials such as oil, foodstuffs and wood. Manufacturing, construction, distribution, real estate, services, and communication are Japan's major industries today. Agriculture makes up only about two percent of the GNP.

CURRENT ECONOMIC SITUATION OF JAPAN:

GDP: $5.391 trillion Official exchange rate: $4.338 trillion Real growth rate: 3%. Per capita GDP: $34,200. Natural resources: Fish and few mineral

resources. Agriculture: Products--rice, vegetables, fruit, milk, meat, fish. Industry: Types--machinery and equipment, steel and non-ferrous metals, textiles, autos,

chemicals, electrical and electronic equipment, ships, and processed foods.

DATA SOURCES AND COLLECTION:We collect data for financial crisis in Japan through Articles, web sources and magazines journals and research papers.

ARTICALES:

Japan's New Economic Challenge Author: Sheila A. Smith, Senior Fellow for Japan StudiesNovember 25, 2008

Japan sure victim of global financial crisiswww.chinaview.cnBy Xinhua Writer Qi Wei


http://www.cfr.org/experts/japan-asia-northeast-asia/sheila-a-smith/b12373

http://www.japan-guide.com/e/e2196.html

http://en.wikipedia.org/wiki/Japan


JAPAN ECONOMY HITS BY FINANCIAL CRISIS:

Japan recently experienced the second major financial crisis of the last two decades. While the

first crisis of the 1990s was entirely homemade and had effect that were largely confined to

Japan, the recent crisis originated outside Japan mainly in the US and the UK and was

transmitted not only to Japan but to all other major economies worldwide. The bank of Japan and

other Japanese’s government agencies, such as the financial agency started to react to the

financial crisis in September 2008 taking in to the account

experiences made during the first financial crisis. Compared with

measures taken in other countries. The policy reaction taken in

Japan was rather modest quantitively and temporary. This modest

reaction may not only be due to the fact that Japan was hitless

hard by the current crisis but also because authorities learned

from experiences made during the 1990s.

In this report we describe the propagation of the current financial crisis to Japan, analyze the

policy actions taken by bank of Japan and compare them with policy reactions.

SPECIAL FOCUS FOR THE FOLLOWING THREE REASONS:

First, already during the first financial crisis, bank of Japan to act as a lender of last resort

and to provide financial assistance to single financial system. Differences between policy

reactions then now help us to understand what kind of financial assistance is appropriate

during a financial crisis to regain financial stability.

Second all major central banks have significantly reduced policy interest rates and have

almost shifted towards a zero interest rate policy and a policy of

quantitative or qualitative easing. The monetary policy measures

taken by bank of Japan.

Finally some other major central banks her monitory policy

framework introduced a deposit facility which did not exist in

Japan during the first financial crisis.

LITRATURE REVIEW



As we explained before that the economy of the Japan a free market economy is the

third largest in the world and its main exports goods cars, electronic devices and computers.

These exports shows the strong economy of the Japan and now we select those articles for the

literature review which directly elaborate the main causes of Global Financial

Crisis in Japan.

This literature review offers so far only few analyses of the impact of the current

world financial crisis on Japan and of the policy action by bank of Japan who

provides a short overview over policy reactions by bank of Japan.

In this report we compare the policy reaction in Japan during the current

crisis with policy reactions taken in Japan and with the policy actions

recently in the member countries.

Our aim to find how strongly Japan was hit from the financial crisis and

weather Japanese authorities reacted differently to the current crisis than

during the 1990s or then authorities in other countries can be traced back

to experiences made during the first financial crisis and what lessons have

been learned from the experiences made during the 1990s.

We find out that Japanese banks were hardly involved in the production

and distribution of subprime related products and show how the financial crisis was hits to Japan

through capital outflows.

We argue that Japanese authorities reacted differently to the actual financial

crisis than other central banks not because Japan was hitless badly by the

crisis but because Japan learned from experiences made during the first

financial crisis.



WHY FINANCIAL CRISIS OCCER IN JAPAN:

Understanding Japan’s financial crisis is critically important to us all as the world is currently

mired in the global financial crisis. Somehow we need to bring to an end these never-ending

financial crises which are simply tearing our world apart.

The starting point in

understanding Japan’s banking crisis is the country’s post war banking culture. The government

was fully motivated to push rapid economic reconstruction and development. It believed that

banks should be key to financing that development. It thought that relying on stock and equity

markets could be risky, as the government might have different priorities from individual

investors.



GLOBAL ECONOMIC CRISIS HITS JAPANESE BANKS:

Japan's stock market has been hit by extraordinary volatility, hitting a

26-year low, before recovering its losses the government stepped in to

announce a series of emergency measures. Despite claims that Japan was

well positioned to weather the crisis, the world's third largest economy is

rapidly being dragged into the financial and economic maelstrom

sweeping the globe.

Japan is heavily dependent on exports, particularly to the US and Europe, where the economies

are slowing rapidly. In 2007, export earnings accounted for two thirds of Japan's economic

growth. Falling exports have already led to a second quarter contraction in the economy and

many analysts are predicting worse to come.

A major factor hitting Japanese exports is the strength of the yen

against all major currencies including the US dollar. The yen hit

90.89 to the US dollar its highest value since August 1995. In the

past three months, it has appreciated by 19 percent against the

dollar, 32 percent against the euro and 33 percent against the

British pound.

Now, amid global investor panic and uncertainties, investors are

getting out of riskier countries, particularly the so-called emerging economies and looking for

safe havens. As a result, the carry trade is "unwinding". As money floods back into the yen, it

drives the currency higher. This in turn encourages investors to avoid even higher payments by

paying off their yen debts, causing the yen to rise even further.

The steadily rising yen has been one of the indicators prompting a selloff of Japanese shares,

particularly of the major exporters. The collapse of share values has opened up the first cracks in

Japan's banking system, which previously appeared to be rock solid. Over the past two decades,

Japan's major banks have purged their balance sheets of huge quantities of bad debt. They also

had little exposure to the US subprime cr



WHY WAS JAPAN HIT SO HARD BY THE GLOBAL FINANCIAL CRISIS?

Japan was hit by the global financial crisis even though its relatively resilient financial system

initially limited the direct impact. The severe collapse of industrial production that followed was

no doubt attributable to a confluence of factors, but the paper highlights

the impact that came from the contractionary effect of global

deleveraging on the real economy. In this environment, Japan was

particularly vulnerable because of the structural changes that had taken

place over the past decade in its trade and industrial structures. Vector

auto regression analysis confirms that, as a result of these structural

changes, Japanese output became much more responsive to output shocks in the advanced

markets of the United States and Western Europe.

The structural changes had two components. First, over 90% of Japan's exports consisted of

highly income-elastic industrial supplies, capital goods, and consumer durables. Though

emerging Asia is Japan's largest export market, its imports from Japan largely consist of

intermediate goods used in the production of final goods destined for the US and Western

Europe. Second, Japan's trade dependence had increased since the early 2000s, as evidenced by a

rising export to gross domestic product ratio and a declining share for the non-tradable sector.

Though increasing trade openness is a natural part of

economic globalization and regional integration, the

manner in which this process had played out made

Japan particularly vulnerable to a negative demand

shock coming from outside.



RESPONSE AGAINST FINANCIAL CRISIS:

To make Japan more resilient to external shocks,

policymakers could promote the export of finished goods to

emerging Asia by establishing a region-wide free trade

arrangement.

To promote domestic demand, the social protection system

needs to be strengthened so as to reduce households'

uncertainty for the future; a more liberal immigration policy should help invigorate private

investment in an aging society. To facilitate a better allocation of resources, further deregulatory

measures in the more regulated non-tradable goods sector are

called for; a substantial lifting of restrictions in agriculture,

especially regarding the corporatization of production, would be

especially helpful. With little available fiscal space, these measures

will help create a climate in which private investment can flourish,

driven by final domestic demand.



FINDINGS

After the investigation of this report we just find that the policy measures taken by Bank of Japan

and other central banks during the recent financial crisis different from the reactions by Japanese

authorities in the 1990s. during the first financial crisis, the Japanese’s interbank market almost

collapsed when a securities house which acted as a borrower in the

interbank market. Though the amount of the default was relatively

small, lender banks preferred placing their money with the bank of

Japan to lending in the interbank market for fear of being caught by

another default. The consequence was that major financial

institutions field almost on a weekly basis until bank of Japan

studded in an injected massive liquidity into the market.

All central banks reacted immediately after the collapse of the interbank markets might result in

effect and financial system instability. Providing immediate financial assistance to banks was

probably the first major lesson learned by Japanese authorities from the financial crisis of the

1990s.



SUGGESTIONS/RECOMMENDATIONS

As we group members analyze the financial crisis of Japan that its have strong economy and

have large industry like motor vehicle industry and strong banking sector. Japan recovers their

recession area but at the end we suggest and recommend that first of all

It will be suggested below that the main need to focus on Japan is that the economic model it

originated remains to most outside observers,

It has been the basis for rapid growth and development

In East Asia was a significant factor in the emergence of the financial imbalances that

contributed to the global financial crisis.

Remains as an obstacle to the international diversification of demand that will be vital if

global economic growth is to be maintained in the post global financial crisis

environment.

A special fiscal package should be announced by the Central Government directed at

increasing public expenditure in ways which increases the income and consumption of

the working people, especially the vulnerable sections, and ensure broad-based growth.

The Government has to undertake massive public investment directed at sectors which

are employment intensive and capable of creating employment demand for those likely to

lose jobs in the export-oriented sectors.



CONCLUSION

The global financial crisis is already causing a considerable slowdown in most developed

Country like Japan. Governments around the world are trying to contain the crisis, but many

suggest the worst is not yet over. Stock markets are down more than 40% from their recent

highs. Investment banks have collapsed, rescue packages are drawn and interest rates have been

cut around the world with Japan cutting theirs to all time low of 0.25% and 0.1% respectively in

what looks like a coordinated response. With a recession already in place in most developed

country Japan and other developing countries should try and come up with policies that will

minimize the spread of this crisis to their economy.



REFRENCESS

WEBSITES:

www.google.comwww.wikipdia.comwww.gstor.orgwww.stateinfo.blogwww.economywatch.com

ARTICALS:

Japan's New Economic Challenge Author: Sheila A. Smith, Senior Fellow for Japan StudiesNovember 25, 2008

Japan sure victim of global financial crisiswww.chinaview.cnBy Xinhua Writer Qi Wei

‘The Implication of Global Financial Crisis on International Marketing’ Abubakar, M. (2008)


http://www.cfr.org/experts/japan-asia-northeast-asia/sheila-a-smith/b12373

http://www.economywatch.com/

http://www.stateinfo.blog/

http://www.gstor.org/

http://www.wikipdia.com/

http://www.google.com/

Financial Crisis in Japan ( Macro Economics Project)

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Transcript of Financial Crisis in Japan ( Macro Economics Project)