During the crisis, Japan has feels like an island of calm

By Martin Fackler

Sunday, September 21, 2008
TOKYO: Wall Street may be suffering the worst financial storm since the Great Depression, but Japan has felt like an island of Zen-like calm.

The world's second-largest economy after the United States has often seemed to be marching to its own drummer, sometimes to disastrous effect. But rarely has the disconnect been as stark as during the current crisis.

While European and American financial titans have teetered and collapsed, giant Japanese banking groups have stood relatively unscathed. The growing global credit crisis, which threatens companies and consumers elsewhere, has yet to appear here, where the problem for years has been that the nation's banks have too much cash, not too little.

And while the U.S. Federal Reserve seems to be shoring up the entire American financial sector, the last time the Japanese central bank intervened in markets, it did so in dollars instead of yen - to help international markets.

Indeed, television news gives the current upheaval, known here as "Lehman Shock," less coverage than more domestic issues like a tropical storm and a scandal over tainted rice. Even in the race for prime minister, the financial crisis has emerged as just one of a dozen issues, and usually not the top one.


Japan has been affected by the global economic downturn, with its economy contracting in the second quarter from the previous quarter. And its stock market gyrated and declined this week. But in an era dominated by globalization, where seemingly unrelated events can affect the lives of people half a world away, Tokyo has so far floated above the anguish gripping New York and London.

"The financial crisis looks like fire on a distant shore," said Atsushi Nakajima, chief economist at the research arm of Mizuho Financial Group. "Japan has remained very calm and peaceful."

Part of the reason is that Japan has already suffered its agonizing crisis. The 1980s bubble economy collapsed in the 1990s because banks were burdened with real estate-related bad loans, not unlike those that Washington is preparing to take over from banks.

In Japan, it took a "lost decade" to work through those debts. The Japanese became very cautious after the bitter experience of the cleanup, and one result is that they seem to have largely avoided the risky subprime loans that set off the U.S. financial crisis.

According to the International Monetary Fund, subprime-related losses at Japanese financial companies have totaled just $8 billion, out of global subprime-related losses that some say could total $1 trillion.

"Japan learned its lesson in the 1990s," said Akio Makabe, an economics professor at Shinshu University. "It was wise when Wall Street was foolish."

Of course, Wall Street's pains have been felt here. The stock market fell last week in volatile trading, with the benchmark Nikkei 225 index sliding 2.4 percent - largely the result of heavy sales by foreign investors. There are also bigger fears that slowdowns in the United States and China will end up hammering Japan's export-driven manufacturing sector.

There have also been small but telltale signs of rising risk aversion in credit markets. Japanese banks raised short-term interbank lending rates to foreign banks to 0.7 percent, from 0.5 percent, though they still use the lower rate among themselves. That contrasts with New York, where a benchmark interbank lending rate has tripled in recent days to about 3 percent.

Still, its relative detachment makes Japan an oddity in a world where globalization has seemed inevitable. Countries in Europe have also tried to find ways to be part of the global economy while staying apart from it, but to no avail. Other nations, like China, have bet their future on becoming enmeshed in it.

Japan's aloofness has its downside. For example, with its healthy banking system and abundance of capital, Japan would seem in an ideal position to help bail out the shell-shocked global economy, stepping in for the weakened United States and Europe.

Instead, Tokyo has kept a low profile throughout the crisis, other than joining a multinational effort by central banks to pump dollars into the global economy to keep it moving.

When asked during a debate of prime minister candidates Friday whether Japan could assert more leadership during the crisis, the leading candidate, former Foreign Minister Taro Aso, said he was "proud that Japan was not involved in that money game," referring to U.S. mortgage debt.

Economists and bankers say Japan is able to keep itself apart for a very simple reason: it has enough cash to finance its own needs.

The country has a $14 trillion pile of household savings, the product of decades of trade surpluses and frugal lifestyles. This has allowed Japan to finance its immense $8.1 trillion fiscal deficit and still have enough money left over to be the world's largest creditor nation for the last 17 years.

Last year, the country's net overseas assets - the sum of all Japanese investments abroad, minus what foreigners hold in Japan - reached a record ¥250 trillion, or $2.4 trillion.

That means that Japan's domestic economy has been largely insulated from global credit market turmoil because it does not borrow from those markets. At the same time, with so much money flowing out - usually into safer investments like U.S. Treasury bonds - stability in the United States clearly matters.

Still, Japan's corporate coffers are filled with cash from the nation's long economic recovery in the 2000s after the stagnant 1990s.

"Japan is clearly in a different place" from the rest of the world, said John Richards, head of Asia research at the Royal Bank of Scotland. "It doesn't need money."

This blessing has also been a curse to investors, economists say. Japan's wealth shields it from pressures to meet global standards of economic growth or corporate profitability. This is what allowed the nation to accept near zero growth rates in the 1990s and what allows the survival of Japanese corporate practices like valuing employees and clients over shareholders.