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Why was Japan Hit So Hard by the Global Financial Crisis?

Author

Listed:
  • Kawai, Masahiro

    (Asian Development Bank Institute)

  • Takagi, Shinji

    (Asian Development Bank Institute)

Abstract

Japan was hit hard 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 autoregression 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. 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.

Suggested Citation

  • Kawai, Masahiro & Takagi, Shinji, 2009. "Why was Japan Hit So Hard by the Global Financial Crisis?," ADBI Working Papers 153, Asian Development Bank Institute.
  • Handle: RePEc:ris:adbiwp:0153
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    References listed on IDEAS

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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "The Aftermath of Financial Crises," American Economic Review, American Economic Association, pages 466-472.
    2. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters,in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
    3. Aguiar, Mark & Gopinath, Gita, 2007. "Emerging Market Business Cycles: The Cycle is the Trend," Scholarly Articles 11988098, Harvard University Department of Economics.
    4. Sunghyun Henry Kim & M. Ayhan Kose & Michael G. Plummer, 2003. "Dynamics of Business Cycles in Asia: Differences and Similarities," Review of Development Economics, Wiley Blackwell, vol. 7(3), pages 462-477, August.
    5. Mark Aguiar & Gita Gopinath, 2007. "Emerging Market Business Cycles: The Cycle Is the Trend," Journal of Political Economy, University of Chicago Press, vol. 115, pages 69-102.
    6. Hong, Kiseok & Lee, Jong-Wha & Tang, Hsiao Chink, 2010. "Crises in Asia: Historical perspectives and implications," Journal of Asian Economics, Elsevier, vol. 21(3), pages 265-279, June.
    7. Subir Lall & Roberto Cardarelli & Selim Elekdag, 2009. "Financial Stress, Downturns, and Recoveries," IMF Working Papers 09/100, International Monetary Fund.
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    Citations

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    Cited by:

    1. Masahiro Kawai & Shujiro Urata, 2010. "Changing Commercial Policy in Japan During 1985–2010," Trade Working Papers 23056, East Asian Bureau of Economic Research.
    2. Morita, Hiroshi, 2014. "External shocks and Japanese business cycles: Evidence from a sign-restricted VAR model," Japan and the World Economy, Elsevier, vol. 30(C), pages 59-74.
    3. Wandelt, Sebastian & Sun, Xiaoqian, 2015. "Evolution of the international air transportation country network from 2002 to 2013," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 82(C), pages 55-78.
    4. repec:eee:empfin:v:42:y:2017:i:c:p:66-89 is not listed on IDEAS
    5. Dungey, Mardi & Gajurel, Dinesh, 2014. "Equity market contagion during the global financial crisis: Evidence from the world's eight largest economies," Economic Systems, Elsevier, vol. 38(2), pages 161-177.
    6. Silvia Palasca & Elisabeta Jaba, 2014. "Leading and Lagging Indicators Of the Economic Crisis," Romanian Statistical Review, Romanian Statistical Review, vol. 62(3), pages 31-47, September.

    More about this item

    Keywords

    japan; trade; global financial crisis; gfc japan;

    JEL classification:

    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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