Japan Brief / FPCJ, No. 0860
　　
September 18, 2008

Japan Braces for a Turbulent Economic Outlook as the U.S. Financial Crisis Deepens

As Lehman Brothers and Merrill Lynch, two of the most prominent houses in the U.S. securities industry, went under or were gobbled up by a banking giant on September 15, Japan’s authorities and regulators made frantic moves to prevent the global credit crisis from battering the domestic financial system and to minimize the impact of Lehman’s bankruptcy on Japanese institutions and investors. Lehman’s Japan unit, Lehman Brothers Japan, filed for rehabilitation procedure under the Civil Rehabilitation Law.

There was growing concern that a recession in the United States, likely to be worsened by the financial crisis, could harm the Japanese economy, already believed to have slid into a recession, as it had significantly depended on exports to the U.S. markets in its years-long recovery. Combined with the immediate concern over the financial crisis, the gloomier economic prospect sent the Tokyo stock market into a nosedive, with the Nikkei stock price index shedding more than 600 points to a three-year-and-two-month low on September 16. (The stock market rebounded on September 17, recouping the previous day’s loss to some extent, on the news of the U.S. Federal Reserve’s decision to make $85 billion available to bail out the crisis-ridden insurance firm American International Group.)

As part of the internationally orchestrated effort to keep credit markets from contraction, the Bank of Japan injected a total of 4.5 trillion yen into the short-term money market in two days of September 16 and 17. The Financial Services Agency, meanwhile, made a quick survey of Japanese financial institutions’ exposure to dealings with Lehman Brothers and its Japan unit. It was reported that as of September 16, major Japanese banks’ credit to the U.S. investment bank reached 320 billion yen, of which 140 billion yen was not covered by collateral and would be unrecoverable. Lehman Brothers Japan’s liabilities totaled 3.4 trillion yen.

In a show of alertness and readiness to cope with any contingency, Prime Minister Yasuo Fukuda summoned cabinet officials concerned and Bank of Japan Governor Masaaki Shirakawa to an emergency meeting on the morning of September 16. Finance Minister Bunmei Ibuki told the press that “the Japanese financial system is safe.” Bank of Japan Governor Shirakawa also stressed on September 17 that “Japan’s financial system is not threatened.”

At a time when Japan is finding itself in a political vacuum of a sort in the wake of Prime Minister Fukuda’s decision to step down, the financial crisis and its fallouts on the broader economy both at home and abroad looks likely to affect the domestic political agenda. The scenario that now prevails anticipates a lower house dissolution not long after the election of new prime minister, with a supplementary budget bill to implement the government’s economic stimulus package announced at the end of August to be discussed later. As the Mainichi Shimbun’s September 18 editorial said, however, such a scenario and the economic package itself may need to be modified.

Media Urge Washington to Take Bolder Steps
Japanese media commentaries recalled the days of severe financial crisis that hit Japan in the late 1990s, drawing a striking similarity to the breathtaking developments in the U.S. financial industry. In the post-bubble financial meltdown, Japan saw in 1997 one of the four largest securities firms, Yamaichi Securities, go bankrupt abruptly, closely following the failure of Hokkaido Takushoku Bank, a major bank. Subsequently, two other major banks also went under and many rescue mergers and bankruptcies took place in the banking and insurance industries.

Major newspapers argued that the financial crisis deepened to such a point due to the authorities’ failure to act soon enough to buttress the financial system. Editorial writers, to whom the U.S. government looked like the dithering Japanese government of a decade ago, urged Washington to get bolder and take more decided action to infuse public money to prevent a downward spiral of the credit crisis. While the Federal Reserve’s bailout of AIG vindicated the argument to some extent, it turned out to be far from calming the fear gripping the U.S. financial industry as the plunge on the New York stock market on September 17 illustrated. (All editorials were dated September 17; in alphabetical order.)

【Stop the chain of crisis first of all】 (Asahi Shimbun)
“While this experience (in Japan) cannot be applied to what’s happening in the United States, it clearly shows that utmost caution must be exercised to prevent the fallout of brokerage failures from spreading to the banking sector. On this point, it was disconcerting to hear U.S. Treasury Secretary Henry Paulson explain how he never once considered a public bailout for Lehman.” “Washington is duty-bound to prepare for such a move in the months ahead.”

【U.S is urged to go all out to prevent chain of crisis】 (Mainichi Shimbun)
“It was in part excusable that the U.S government (which bailed out Fannie Mae and Freddie Mac) did not extend a hand of help to Lehman Brothers”, “However, if a chain of failures or a fear of panic on markets spreads in the future, simply citing the principle of own responsibility won’t do. At the time of deepening crisis of bad loan issue in Japan, the U.S. government demanded Japan mobilize all measures possible to prevent a financial crisis originating from Japan. This is exactly what is being sought of the United States at present.”

【Decisive step sought to prevent ‘U.S.-originated financial crisis’】 (The Nikkei)
“The root of the problem lies in the U.S. authorities’ hesitation to take positive steps until a crisis has drawn near.” “The refusal of bailout this time may work to rid financial institutions of an easy thinking that ‘in the end the government will come to rescue,’ but it also seems that leaving it to the private sector has come to its limit. A system in which the government plays a role in the foreground, such as the establishment of an organization to buy up bad loans, should be considered, instead of postponing the settlement of the problem.”

【U.S. must break the chain of crisis: Make political decision on use of public funds】
(Sankei Shimbun)
“In the background of the financial crisis are falling home prices, which are the root cause of the subprime problem,” “(With no end to the fall of home prices in sight), however much Treasury Secretary Paulson may emphasize that ‘American financial institutions are safe and healthy,’ financial institutions and investors around the world would not believe him. The reality is that doubt is spreading.” “A fundamental measure to reassure the market is to augment the capital bases of financial institutions. We call on the U.S. government to make a bold political decision to infuse public funds into them.”

【U.S. in no-win situation on Lehman failure】(Yomiuri Shimbun)
“Did not the U.S. government have any other options? Some observers have suggested that the government should not have hesitated to inject public funds. The Lehman Brothers' case offered a lesson to be learned on what policies should be taken to handle similar cases in the future”, “The Lehman shock cannot be brushed off as a ‘fire on the other side of the river.’ Rather, it is a ‘tsunami’ of the largest scale. The utmost care should be taken in policy management to prevent the flagging Japanese economy from deteriorating further.”


(Copyright 2008 Foreign Press Center / Japan)