JIN-482 -- Lehman collapse will test the safety of the Japanese economy

[jin at mailman.japaninc.com]

J at pan Inc Newsletter
The 'JIN' J at pan Inc Newsletter
A weekly opinion piece on social, economic and political trends
in Japan.
Issue No. 481 Wednesday September 10, 2008, Tokyo
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The world watched nervously as things unraveled on Wall Street
and as the banks in Japan again opened their doors after the long
weekend, the fallout hit... hard.

The Nikkei 225 index fell 5 percent to a three-year low following
Wall Street's historic day of trading. Following Lehman Brothers
filing for bankruptcy, it became apparent that six of the top 10
unsecured creditors were Japanese banks. Aozora held the unenviable
position of No. 1 with $463 million in unsecured loans.
The shares of both Mitsubishi UFJ and Mizuho dropped 11 percent
while the Bank of Japan stood up and threw 2.5 trillion yen
($24 billion) of liquidity at the mess.

Meanwhile Prime Minister Fukuda called an emergency meeting with
key ministers. No doubt the Bank of Japan's two-day policy board
meeting, which ends today, was also taken over by talks centered
around the events.
While only the brightest of optimists felt that we had hit rock
bottom before, the weekend's events were quite extraordinary.
Following on from the Freddie Mac and Fannie Mae bailouts, the
fire sale of Merryll Lynch and now the Lehman Brothers disaster,
investors were seen dumping shares and scrambling for bonds. Did
I mention that Lehman Brothers was the biggest bankruptcy in US
history? Or that Fannie Mae and Freddie Mac were the two biggest
financial institutions that the US government has ever bailed out?

The reaction yesterday was predictable but the scale of it all
was something else—shares on Wall Street saw the biggest one-day
decline since September 11. Now, the effects of the fallout will
be the real show as investors get a grip on where the ripples
will go.

And of course there's AIG. If the biggest provider of commercial
insurance in the US collapses it would be the ugliest chapter
yet in the financial crisis. The US government is talking about
issuing an $85 billion loan to ensure that this doesn't happen
and the markets have reacted favorably. Yesterday, Prime
Minister Yasuo Fukuda downplayed the impact of the Lehman
Brothers bankruptcy asking for calm from Japan's financial
sector. Fukuda once again beat the same drum, saying, as quoted
by Kyodo News: "It's important to revive the Japanese
economy" by compiling a supplementary budget under a
comprehensive package of stimulus measures.

The Japanese economy has so far been relatively insulated
against the impact of the problems of the US. Yesterday Finance
Minister Bunmei Ibuki said that he believed the impact of the
Lehmans collapse in Japan would be limited: "Considering the
conditions of each financial institution's self-owned capital,
we do not have to worry about the Japanese financial system,
though those entities have extended loans to Lehman," he told
Kyodo News.

The full impact of the last few days' events are yet to be felt
and it could be sometime before the follow-on effects are fully
realized. The US government seems to be taking an increasingly
interventionist stance in the defense of its economy. While it
drew a line in the sand with Lehman Brothers, it is already
talking of a bailout for AIG. Meanwhile the leaders of the
finance world are drawing more plans to defend themselves—the10
biggest investment banks have already pooled $70 billion of
liquidity in case another one looks like going under.

It's code red on Wall Street and while the effects won't be as
severe in Tokyo, the fallout will still be felt. Fukuda's
bandying about more talk of stimulus packages but that doesn't
mean much because he'll be gone in a week or so. The government
has already, and will continue to step in if things get worse.
Yesterday it was 2.5 trillion yen in a swift move to combat the
Lehman Brothers shockwave.
The question now is "how stable will Japan's economy remain?"
rather than "How volatile will it become?"

Some optimistic analysts have stated that Japan will be one of the
big winners when the global upturn hits. Over the next few months
we'll see how just how safe a bet Japan really is.

Michael Condon
Editor-in-chief

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STAFF
Written by: Michael Condon, Editor-in-Chief, Japan Inc Magazine
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