A Japanese Perspective on the U.S. Financial Crisis By Vivien Ng, MBA '09
The Center on Japanese Economy and Business (CJEB) and the Weatherhead East Asian Institute (WEAI) of Columbia University held a brown bag lecture titled "Financial Crisis: Impact on Japan and Lessons from Japan" on December 4 featuring Shijuro Ogata, former Deputy Governor of International Relations at the Bank of Japan.
The initial direct impact of the U.S. financial fallout on Japan has been rather limited, due to Japanese banks having reduced their international operations and exposure, Mr. Ogata said. The indirect impact, however, is "not so small" and particularly in three aspects: the slowdown of Japan’s export markets, the yen’s sharp appreciation, and lower Japanese stock prices owing to slumping stock markets globally. All these have led to weakened confidence for future economic growth, Mr. Ogata said, adding that the IMF forecasts that the Japanese economy will contract by 0.2 percent in 2009. A strong proponent of fiscal stimulus, Mr. Ogata said it is necessary to increase personal consumption and demand in Japan. He said he is in favor of tax credits and tax reductions rather than indiscriminate government spending on public works projects. Japan’s countryside, he said, is well-developed and infrastructure in Japan is in good shape.
Mr. Ogata said the United States can draw two lessons from Japan’s financial crisis in the 1990s. First, policy makers need to coordinate macroeconomic policies prudently. In Japan’s case, interest rates were kept low to prevent deflation, but fiscal policy was contractionary. The second lesson to be learned from Japan is that speedy crisis management is key, Mr. Ogata said. American action has been "generally much quicker" than that of the Japanese, who took more than seven years to fully implement an injection of funds into the banks.
Mr. Ogata also noted two major differences between the United States and Japan as far as the nature of the financial crisis that occurred in each country. One is the amount of government control over the financial sector. In the United States, less control over the financial system resulted in an assumption that private players would self-regulate. In Japan, there was much more control of the financial sector, leading to expectations that the government would protect all banks, both big and small. This, in turn, resulted in excess lending and negligence in risk assessment. The second difference Mr. Ogata noted is that in Japan, nonperforming loans were concentrated on the balance sheets of the leading banks, while in the United States, securitization resulted in these assets being spread among many players, ultimately affecting investors all over the world. The Japanese crisis, therefore, ended up being concentrated in the Japanese banking system, while the U.S. crisis is one that is affecting global markets. The implications of this, according to Mr. Ogata, are that while Americans gradually reduce their spending, other parts of the world like China and Japan have to make more effort to pursue domestic demand-led growth to reduce global imbalances.