JAPAN, THE GLOBAL ECONOMIC CRISIS IN 2008 AND AFTERWARDS: HARD TIMES, STIMULUS AND SLIGHT RECOVERY

JAPAN AND THE GLOBAL ECONOMIC CRISIS IN 2008 AND 2009

The global financial crisis in 2008 and 2009 hit Japan hard as it did with all major industrialized countries. The Tokyo stock market crashed as did major stock markets all over the world.. The Nikkei and Topix indexes recorded record one day falls, declines over four percent in one day on several occasions, and dropped below important markers.

The global financial crisis in began in the United States with trouble in the housing market as people became unable to pay back their subprime loans in the summer of 2007 and peaked with collapse of Lehman Brothers security firm in September 2008. Many saw similarities between the U.S. crisis and the breakdown of the Japanese economy after the collapse of bubble market in the early 1990s.

The euro and the U.S. dollar went into a free fall against the yen, with the dollar dropping and staying well below the 100 yen mark and the euro drop from around ¥160 to below ¥125 in a couple of weeks. The yen began 2008 at 109 to the dollar. It fell to 95 to the dollar in March after the collapse of Bear Stearns and crashed again to 87 after the Lehman Brothers collapse. The yen rose 38 to the Euro in 2008.

The government and the Bank of Japan hold $74.5 billion in debt issued by Fannie Mae and Freddie Mac, two of the largest housing loan providers in the United States. Claims by Japanese banks and security firms against Lehman Brothers totaled in the billions of dollars.

The Japanese economy shrunk 3.3 percent in fiscal 2008 (between April 2008 and March 2009) The trade deficit hit ¥223 billion in November 2008 and reached a record ¥952.6 billion in January 2009. In February 2009, the IMF said that Japan was in “deep recession.” GDP declined 12.1 percent in the October to December quarter in 2008, the biggest contraction in Japan since 1974 when it was in the midst of oil crisis, and crashed 14.2 percent in the January to March 2009 quarter, the steepest fall on record. Despite some growth at the end of the year overall the economy shrunk by 5.4 percent in 2009. Unemployment rate rose to a high of 5.7 percent in August 2009.

Good Websites and Sources on Economics: Ministry of Economy, Trade and Industry meti.go.jp/english ; Ministry of Finance of Japan mof.go.jp/english ; Japan Economy News and Blog japaneconomynews.com ; Japan Economy Watch japanjapan.blogspot.com ; Japan Center for Economic Research jcer.or.jp/eng ; Japan Inc. Economic and Business News japaninc.com ; Google E-Book: Japan in the 21st Century, Environment, Economy and Society (2005) books.google.com/books

Stock Market Fall in Economic Crisis in 2008

The Nikkei stood at 15,307 at the end of 2007 and fell to 6,448 in 2008, a fall of 42.1 percent, the biggest ever percentage fall in a single year and worse than other stock markets around the globe. The Dow Jones fell 36 percent; the London FTSE, 33.1 percent.

The Nikkei lost early half its value in10 months, plunging from above almost 16,000 in December 2007 to below 8,000 in October 2008, when at one point it hit 7,162.90, it lowest point in 26 years. Topix fell from above 1,500 to below 750 in the same period, hitting 746.46 it lowest point in 24 years. Overall the Nikkei suffered a record 42 percent decline in 2008 and reached another 26-year low when it fell to 7,086 in March 2009.

The main cause of the dramatic drop was the exodus of foreign investment which had accounted for 60 percent of the trading volume on Japan’s stock market in recent years. Hedge funds were behind some of the stock falls as they sold off stock after the Lehman Brothers collapse to accumulate cash. Pension funds and financial institutions were also engaged in large scale sell offs. Shocked by the plummeting prices the Japanese government introduced bans on some types of short selling.

The decline of blue-chip companies like Toyota and Sony was most striking. In the past they had survived domestic slowdowns with string overseas sales but this time those overseas sales dried up.

Results of Economic Crisis in Japan in 2008

Exports plunged almost 50 percent in February 2009 as demand for Japanese cars and electronics plunged. It was the biggest decline since the government began keeping records of such things in 1980. Exports dropped a record 16.4 percent for the year and Japan trade balanced plunged to a deficit of $7.25 billion in fiscal 2008.

The global slowdown decreased demand for Japanese products and the high value of the yen made these products more expensive than they were before, decreasing demand further. Consumer spending and exports---both cornerstones of the Japanese economy---declined. Certain regions and sectors’such as those associated with the automobile industry---were particularly hard hit.

Business and consumer confidence reached its lowest level in 34 years.Unemployment reached 4.4 percent in December 2008 and 4.8 percent in March 2009 and 5.2 percent in May 2009. The May ratio of jobs to job seekers of 9.44 was the lowest since data for that figure started being collected in 1963.

The good points to the strong yen and dropping prices for oil, food stuffs and resources---cheaper goods, lower prices for food, gasoline and raw materials---were outweighed by the sudden drop of demand caused the poor condition of the global economy and worries about the future.

There were worries that Japan would return to the era of stagnation and deflation. Small exporters were hit particularly hard. Some of them saw their orders decline by 40 percent. With nothing better to do employees spent much of their time cleaning sweeping the floors and cleaning machines.

Those Hit by Economic crisis in 2008 and 2009

Small factories were particularly hard hit. Some saddled with large loans for factory real estate and machines and large payroll saw their order shrink to near zero. Some owners had to dip into to family savings for weddings and college education to come up with cash. Some took out yet more loans and cut back on food expenses. Other went bankrupt,

Exporters were also hit hard. Yasuo Yamamoto of Mizuho Research Institute told the New York Times, “Japan has taken a disproportionate hit in the economic downturn. Japan’s exports are concentrated in the very sectors that had been hit the most in the economic crisis, like cars and electronics.”

People began lining up outside job centers in the wee hours of the morning. Shrines known for bringing business prosperity were filled with men in suits. Students feeling the pinch cut back on food. Thousands of graduates had job offers taken back. Applications for welfare shot up, particularly from mon regular workers.

Effects of the Economic Crisis in 2008 on Temporary Workers

Many of those who lost their jobs were nonregular, temporary or part time workers who were let go aid off after their contracts were finished or even before then. In some cases these workers lived in company dormitories and were told to leave when their jobs were terminated. Some ended up on the streets as they had little saving and unemployment insurance didn’t provide them with enough to get pay for new housing.

Some temporary workers were told to clear of their dormitory on the day they were notified they were laid off. One construction workers told the Los Angeles Times he slept in a subway and camped out ay Denny’s and finally pitched a tent in a Tokyo park after he was suddenly laid off.

A January 2009 survey counted 124,800 nonregular workers who lost their jobs, with only 10 percent of them able to find new jobs. Homeless shelters filled up with young people. Some women that lost their jobs lost their homes and were forces to sleep in all-night restaurants and Internet cafes.

A tent village made up of so-called “employment refugees” was set up in park in central Tokyo. Many of those there were temporary workers who lost housing with their jobs. A 49-year-old man in the villager told Kyodo, “I felt relief staying here as I had no food and housing, but I’m at a loss now and don’t know what to do next.” In Osaka, a 49-year-old temporary worker starved to death. The man was found dead in his apartment about a month after he died by apartment manner trying to collect overdue rent.

Labor lawyer Kenji Utsunomiya told the Los Angeles Times, “Suddenly workers were caught with no savings, nothing their pockets, because companies treated them as mere objects they could get rid of at their whim. People believed the government would take care of them. Now they know that’s not true.”

People saved money by making their own bento lunches at home and staying at home more. Game consoles, cooking appliances, gardening kits, and substandard goods with minor damage and strange shapes sold well. The bars and clubs in Ginza reported sharp drops in the numbers of customers and had lay off workers. Some struggled to stay afloat.

Response to Economic Crisis in Japan in 2008

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Prime Minister Taro Aso
The Bank of Japan injected trillions of yen into the money market to prevent disruptions in interbank borrowing and to make money available for investment. At one point it injected ¥1 trillion a day for a string of more than 30 days to facilitate interbank borrowing. The Bank of Japan also offered ¥1 trillion in loans to banks to encourage them to lend money and increased its purchase of government bonds by nearly 30 percent to pump more money into the economy.

Unlike during the recession in 1990s, companies were quick to lay of workers, idle factories and cut inventories. That is why the growth figures dropped so dramatically in late 2008 and early 2009 but the recovered quickly.

Firms cut production at the fastest pace in 55 years. They laid off workers, scraped plans for new factories, froze large capital spending projects, closed down some existing plants, temporarily shut down others to avoid overproduction, withdrew from the sponsorships of sports, and canceled bonuses and compensation for executives and board members.

There were concerns about protectionism. Some Americans blamed Japanese car makers for the troubles of American car manufacturers. In a series of radio commercials one Ford dealer in Georgia called the Japanese “rice-ready, not ready” and said, “On them Japanese cars, even when they’re brand new, how come they don’t smell like a new car?”

The financial crisis provided an opportunity for Japanese banks and investment houses to snap up assets and stakes in major Wall Street firms at fire-sale prices and improve their positions and stature abroad. Nomura Securities became the world’s largest independent investment bank after it picked up key Lehman Brothers assets in Asia, the Middle East and Europe at fire sale prices after Lehman collapsed in autumn 2008.

In December 2009, the Bank of Japan said it was going to inject ¥10 trillion (about $115 billion) into the economy.

Stimulus Coupons and the Government Response to Economic Crisis in 2008

The Japanese government launched a $568 billion stimulus package that included public works projects, tax cuts and programs to address global warming and boost health and child care. Among the elements were subsidy of ¥250,000 for people who replaced gas-guzzling vehicles with fuel-efficient ones.

The package was projected to raise real growth by two percent and create between 400,000 and 500,000 jobs. The first wave of benefits included 1) ¥1 trillion in housing subsidies and other support for temporary workers who had been discharged from their accommodation and 2) ¥12 trillion in loans and grants to banks to encourage them to lend money and relieve the credit crunch.

Japan launched a total of three stimulus packages that totaled about 5 percent of GDP (about the same size as the U.S. stimulus package) that according to the World Bank was “well-calibrated.” The government provided aid through the state-backed Development Bank of Japan to troubled companies like Elpida Memory and Japan Airlines. The total budge reached a record $100 billion. Because there was not nearly enough tax revenue to cover this, more than a third of the costs was covered by government bonds.

More than ¥2 trillion was given out to citizens to stimulate spending among consumers. Each resident of Japan was given ¥12,000 in coupons, with an additional ¥8,000 given to those under 18 and over 65. There was some discussion of whether the relatively well-off should be excluded but in the end everyone was included.

When asked how they would spend the money 28 percent of those asked in one survey said they blow would blow it on a nice meal out; 22 percent said they would spend it on living expenses and 22 percent said they would spend it on travel.

There was a lot of resistance to the stimulus package because it was seen as a waste of money that worsened an already bad debt situation and put on a burden on young people coming of age in the future. There was a lot of resistance to the money given to citizens. Many saw it as an effort to win brownie points for the ruling party on the eve of an election

The stimulus packages seemed like overkill to many. Takayoshi Igarashi, a professor of politics at Hosei University told the Washington Post, “Our infrastructure is impeccable. More public works would be a surplus to real need. It would not stimulate anything but the construction industry.”

Recovery from Economic Crisis in Japan in 2008

While Japan suffered in 2008 and 2009, posting negative growth of 5.4 percent for 2009, it was one of the first and fastest to recover, with positive growth figures at the end of 2009 and predicted growth of 1.7 percent for 2010.

According to the IMF credit for a quick recovery went to a “well-calibrated response” that included three stimulus packages that totaled 5 percent of GDP and the fact that Japanese businesses “did a pretty through cleaning of the house” that included cutting costs, trimming workforces and idling factories. In early April 2009, the Nikkei rose above 9,000. It rose that high earlier but was unable to syay that high due to uncertainty over the economy and dropped again. In mid June 2009, the Nikkei rose above 10,000 on the belief that crisis had bottomed out.

In the second quarter of 2009, the economy grew 3.7 percent, with a big boost coming from increased exports and some help coming from the government’s stimulus package. It was welcome news after the 11.7 percent contraction in the first quarter and it showed that the worst was over and Japan was on track for a healthy recovery.

GDP expanded by 4.8 percent in the third quarter, 2009. By this time Japanese companies were posting positive earnings and better than expected sales and profits and fund managers were buying Japanese stocks. The trade surplus had risen for the six months in a row with robust demand from China “driving Japan’s growth.” Forth quarter GDP was 4.6 percent in an annual base in the October-December 2009 quarter. The figure was seen as a sign that recession was ending and the recovery was for real. In fiscal 2009- 2010, Japan posted its first trade surplus (of ¥5.23 trillion) in two years.

Return of Deflation

In mid November 2009, The government announced that economy was in deflation for the first time in three years. Prices at grocery stores dropped as they battled for customers. Department stores dropped their prices because they couldn’t get customers to buy anything otherwise. Property values of houses were falling. Perhaps most worrisome of all was the fact that wages were falling, a sign that a deflationary spiral---in which people are afraid to spend money because they worry they will earn less in the future, fueling more deflation---was setting in.

In late November 2009, the yen rose to its highest value against the dollar in 14 years when it hit ¥84.82 to the dollar with strong buying of the yen as a safe haven on the news of severe debt problems in Dubai. The last time the yen was that strong was in July 1995.

Hatoyama Government and the Economic crisis in 2008 and 2009

The Hatoyama government said it would reduce corporate tax rates for small and mid-size businesses, raise the minimum wage by a significant amount, reform the employment insurance system, and provide a system of guaranteed income to farming households. In a policy speech in January 2010, Hatoyama the goal of his economic policy was to help promote human welfare and “protect people’s lives.”

In December 2009, the Hatoyama government announced a ¥7.2 billion stimulus that included funding to local government to make up for a decline of tax grants from the central government, support for financial sectors and subsidies in the environmental sector that included a continuation of the eco-points program launched by the Aso government and providing money to homeowners for energy-savings measures.

In 2010, Japan is expected to be surpassed by China as the world’s No. 2 economy. This is not all that significant when you consider that China’s population is ten times larger than that of Japan and thus on a per capita basis the Chinese economy is only on tenth as large as the Japanese economy. Overall China’s growth is good news for Japan as it means there is a huge market for Japan just offshore.

Continued Economic Troubles in 2010

In 2010, Japan continues to be troubled by deflation, high public debts, weak domestic demand softening exports and a strong yen. Growth for the January-March 2010 quarter was 1.2 percent. Growth for the April-June 2010 quarter was only 0.1 percent due to cooling exports and flat domestic growth taking hold as stimulus measures introduced to perk up the economy were wearing off. The sluggish show was enough to drop Japan the world’s No.3 economy behind China and Japan’s GDP for the quarter was $129 trillion compared to $1.34 trillion for China.

In May 2010, share prices fell during the Greek economic crisis. The Bank of Japan injected ¥2 trillion to stabilize markets. In August 2010, the Nikkei sunk to a nine-month low and 10-year Japanese government bonds yields fell below one percent over concerns of a sluggish economy at home and abroad and worries about the impact of the strong yen.

Economic Policy Under Naoto Kan

The Naoto Kan government that came into power in June 2010 said it was it was going make the economy a No. 1 priority, focus on cutting public debts, and boost domestic demand and attract foreign investors. Kan He said it was time for Japan to act “before it becomes like Greece.” he promoted his “third way” which emphasized a need to fund promising fields such as nursing care, medical services and the environment and tourism, as opposed to the “first way” which emphasized infrastructure projects such as road as dams and the “second way” Koizumi structural reforms.

In December 2010, Prime Minister Naoto Kan proposed major tax reforms for fiscal 2011 that included: 1) cutting the corporate income tax from 40 percent to 35 percent; 2) introducing an environmental tax in October 2011; 3) lowering the corporate tax rate for small businesses from 18 percent to 15 percent; 4) limiting deductions from taxable incomes of salaried workers with relatively high incomes and corporate executives.

The Kan government also: 1) issued orders to accelerate the study of whether or not to impose a consumption tax was needed; 2) advised that child allowances be raised to ¥ 20,000 per month from ¥13,000 for children under three years old; 3) called for studies of ways to improve farm productivity and competitiveness in global markets; and 4) asked that regional government be given more discretion on how they use state funds.

The Economist reported in February 2010: Kan’s efforts to reduce taxes and attract foreign investment---marks a remarkable maturation for the DPJ, which strode into office 16 months ago clutching a sheaf of anti-business policies such as reversing the privatization of the post office...creating a three-year debt moratorium for small firms and introducing unwieldy targets for carbon-emission reduction.”

More Stimulus Measures and Spending in 2010

In March 2010, in attempt to stimulate the economy, the Japanese government pushed a record 92.3 trillion yen ($1 trillion) budget through Parliament aimed at stimulating growth in the long-stagnant economy. The Japanese economy grew at a healthy clip of 1.2 percent in the first quarter of 2010 but some economists worried about runaway government spending. Japan at that time was already saddled with a public debt twice the size of its economy.

In late August 2010, Japan promised a host of measures in a bid to ignite its faltering economy and temper a punishingly strong yen. Kan proposed new stimulus steps, while the Bank of Japan, under pressure from the government, further eased its already easy monetary policy.

In September 2010 the government approved a $1.1 billion stimulus package that among other things continued the eco points system for buying energy-efficient appliances and provided funds of build overseas factories to ease the impact of the yen’s rise and provide subsidies for environmentally-friendly and energy-saving sectors, providing employment support for new college graduates and the jobless.

In September 2010 the government proposed a $6 billion stimulus package that focused on five areas: job creation, economic growth, social welfare, revitalizing regional economies and deregulation and including $1.3 billion for child care support and other social welfare programs and $350 million for job creation,.

Reasonable Growth and Positive Signs in 2010

The Japanese economy expanded by an annualized real 4.5 percent in the July-September 2010 period due mainly to the pump-priming measures, with consumer spending. Sales for things like energy-efficient refrigerators, air conditioners and flat-screen televisions rose with he introduction of an eco-point system but fell when the number of eco-points awarded was halved.

Though Japan’s economy contracted 1.3 percent in the fourth quarter, it expanded 3.9 percent over all in 2010 compared with a year earlier, signaling a recovery from a punishing recession in the wake of the global economic crisis. Growth in fiscal 2010-2011 (from April 2010 to April 2011) was 3.1 percent. Unemployment was around 5 percent.

Japan’s economy for 2010 was valued at $5.47 trillion. Exports were up 24 percent, the first rise in three years. Exports and factory output are helped by strong demand from China and other emerging economies in Asia. In November 2010, the Nikkei closed above 10,000 for the first time in five months, powered by strong performance of Japanese banks, slight weakening of the yen, and strong exports.

In the October-December quarter, private consumption in Japan fell 0.7 compared with the previous quarter, dragged lower by the expiration in September of generous government benefits for fuel-efficient cars. A tax increase on tobacco in October also hurt cigarette sales. Net exports were hurt by a surge in the yen to 15-year highs, which has made Japan’s exports less competitive. Capital investment rose 0.9 percent from the previous quarter, falling short of the 1.5 percent pace seen in July to September.

Growth in fiscal 2011-2012 is predicted to be 1.5 percent. “While weakness will remain for the time being, the Japanese economy is expected to pick up on improvements in overseas economies and effects of government policy steps,” Kaoru Yosano, Japan’s economy minister said.

China Replaced Japan in 2010 as No. 2 Economy

In the April-June quarter of 2010, China surpassed Japan as the world’s second largest economy behind the United States as it chalked up $1.337 trillion of GDP in that period compared to $1.288 trillion for Japan according to Japanese government statistics. For Japan, the statistic reflected a decline in economic and political power. Japan has stood as the No. 2 economy behind the United States for 42 years. In the 1980s, its rapid growth even led to talk of the Japanese economy’s overtaking that of the United States by 2010.

China’s No.2 status was formalized when data for all of 2010 came in. Japan’s nominal GDP---the total value of goods and services without accounting for inflation--- for 2010 amounted to $5.47 trillion, according to Japanese Cabinet Office. That compared with to a $5.88 trillion economy for China. The latest numbers were further evidence of China’s rapid ascent as an economic superpower. Just five years before, China’s gross domestic product was around $2.3 trillion, about half Japan’s.

Japan’s Chief Cabinet Secretary Yukio Edano said, “We are not engaging in economic activity to vie for ranking but to enhance people’s lives. From that point of view, we welcome China’s economic advancement as a neighboring country....the important thing is to incorporate such vitality” to make Japan’s economy grow. Senior Mitsui executive, Osamu Koyama, told Roger Chen of the New York Times: “We’ve been telling people for years we were No. 2, ever since we overtook Germany, and it hasn’t given us much benefit. “

According to the New York Times, “While Japan’s economy is now mature and its population quickly aging, China is in the throes of urbanization and industrialization. Still, China’s per-capita income is about $3,600, less than one-tenth that of the United States or Japan... Japan’s economy, however, has benefited from China’s rapid growth, initially as businesses shifted production there to take advantage of lower costs, and as local incomes rose, by tapping an increasingly lucrative market for Japanese goods.”

An editorial in The Strait Times read: “The Japanese can still hold their heads high. No amount of moaning at being overtaken by China would negate the fact that theirs remains a model rich nation others want to emulate, and that it is probably among the most civilized of societies. The latter category counts in evaluating human progress. The societal coarsening that has blighted China with the onset of sudden riches is a serious deficiency that can only get worse. And the Japanese economy remains innovative in spotting trends. Its brands are so strong Toyota has not lost the confidence of overseas car buyers despite a spate of production flaws. Japan has lots more to offer and its people need not think of the country as being in rapid decline.”

Image Sources: 1) Shugin House of Representatives site 2) Wikipedia 3) China Labor Watch 4) Kantei, Office of Prime Minister 5) Tokyo Stock Market 6) markun.cs.shinshu-u.ac.

Text Sources: New York Times, Washington Post, Los Angeles Times, Daily Yomiuri, Times of London, Japan National Tourist Organization (JNTO), National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.

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© 2009 Jeffrey Hays

Last updated October 2011

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