Japan’s Role In Asian Financial Crisis 199717 March, 2011, 20:17. Posted by Zarathustra
Tags: Asian Financial Crisis, Earthquake, Japan
Even though Japan is no longer the dominant economic power in Asia as it was 2 decades ago, I think it is a good time to look at the history and to see exactly what role Japan played in Asian Financial Crisis 1997, which was not immediately obvious to most people.
Andrew Sheng, the former Deputy Chief of the Hong Kong Monetary Authority in the time of Asian Financial Crisis, wrote the following in his wonderful book on Asian Financial Crisis, From Asian to Global Financial Crisis, explaining the often-ignored role that Japan had in the events leading up the the Asian Financial Crisis 1997.
After the Plaza Accord in 1985, Japanese yen appreciated. To counter the effect of rising yen, Japan…
“… shift production to countries that not only welcomes Japanese FDI but also had cheap land and labour… By the late 1980s, Japan had become the single largest source of FDI for the fast-growing emerging Asian economies. This trend was particularly clear when another surge of Japanese FDI into Asia took place between 1993 and 1997, with Japanese FDI rising nearly twofold from US$6.5 billion to US$ 11.1 billion during this period…
… Japanese official aid and markets loans, in the forms of soft loans, export credits and yen-denominated debt, also increased markedly during this period to 1997… Japanese trade with Asia grew in tandem with the increase in overseas investment flows…
- pp 51-53
Japanese banks are also pouring money to the rest of Asia
“… banks followed their manufacturing customers into non-Japan Asia in earnest… From 1985 to 1997 Japanese banks supplied over 40 percent of the total outstanding international bank lending to Asia in general… The massive expansion in Japanese bank lending, in both yen and foreign currency, created huge capital flows globally.”
- pp 60-61
And things started falling apart in the mid-1990s
“… In 1995 two events shook Japanese confidence – on 17 January the earthquake stuck Kobe, and on 19 April the yen appreciated to ¥80 to the U.S. dollar and thereafter began to depreciate…
… The 1995 Daiwa banking scandal in New York [and] the decline of the yen against the U.S. dollar between 1996 and 1997… gave a devastating effect on Japanese banks… the net effect [was the] reducing ability of Japanese banks to meet the minimum 8 percent BIS capital adequacy ratio…
… Consequently, by mid-1995… Japanese bankers… reduce[d] their commitments in other Asian economies… between June 1995 and Jun 1997… Japanese banks loans to Asia in general dropped by about 27 percent from its June 1995 peak… With the surprise devaluation of the Thai baht… Japanese accelerated their withdrawal from Asia…”
- pp 63-65
In short, Asian Financial Crisis in 1997 was at least partly related to the withdrawal of funds from Japanese banks and other institutions.
Of course, the economic power of Japan these days is no longer comparable to those days before the Asian Financial Crisis, but Japanese investments into other Asian economies are still very huge even today. Net outward FDI to Asia in 2009 was 57% above the level of 1997, and outward FDI stock in 2009 was more than double of the level in 1997 (Source: JETRO).
The possibility of an outright financial crisis because of an earthquake might be slim, but Japanese funds outflow from other Asian economies back to Japan after the earthquake is not a good news for Asia ex. Japan, even though the impact isn’t catastrophic for countries other than Japan.