Which country had experienced the worst economic performance since 2008? It is widely understood that the collapse of Lehman Brothers in September of 2008 triggered the global financial crisis. Therefore, one would naturally think that the United States is the worst.
In fact, just after the Lehman shock occurred, many people in the world believed so. For example, Kaoru Yosano, the Japanese minister in charge of the economic management at that time, indicated that the influence on the Japanese economy would be small and “the Japanese economy has been stung by a bee.” However, it soon became obvious that he had misjudged the impact that the economic slowdown in the United States would have on the world economy.
In reality, the US economy in the third quarter of 2008 did show negative growth. However, the US economy for a whole year of 2008 actually grew positively by 0.4 per cent. Even though this figure indicated a drop of 1.7 per cent as compared with the previous year, it did not represent negative growth. Out of all of the major countries, the only country to show negative growth for 2008 was Japan, which recorded negative growth of -0.7 per cent. Especially in the fourth quarter (from October to December), Japan’s real economic growth showed huge negative growth of -10.2 per cent at an annualised rate.
Bad sub-prime loans
It is natural that the US economy declined as it was the epicentre of the shock. US financial institutions fell on economic hard times due to bad loans, and liquidity in US financial markets dramatically decreased. To the contrary, Japan’s economic stagnation was not due to the swelling financial crisis, because Japanese financial institutions held relatively few credit obligations of Lehman Brothers or bad sub-prime loans. Japan’s slump was due to the fact that exports decreased across the board.
Japanese exports to the United States fell by 27 per cent in FY2008 as compared with the previous year. As mentioned above, the US economic growth only fell by 1.7 per cent; however, this decrease manifested in a concentrated drop of demand for Japanese products. Automobiles are the biggest product exported from Japan to the United States. In the United States, it is normal to borrow money in order to purchase an automobile.
These automobile loans were often financed through securitisation. In addition, in the United States, equity in the home is used as collateral to obtain a loan for purchasing goods. Therefore, as home values ceased to increase and as the securitisation market stopped functioning, there was a huge impact on automobile sales. Thus, the financial problem directly hit the vehicle sales in the US. For instance, North American automobile sales for Japan’s largest automaker, Toyota, fell to 2.21 million units in FY 2008, which represented a decrease of 25 per cent as compared with the previous year.
Regrettably, Japan’s automakers, which had concentrically produced high class luxury cars for US markets, was unable to leverage growth in newly emerging countries such as China. A shift to the production of high class luxury cars inside Japan was reasonable because it was necessary to produce goods with a high added value in order to cover the high cost of labour in Japan.
Newly emerging countries
Up until the Lehman Brothers shock, sustained by the “excess” consumption demand in the United States, the luxury line of vehicles was successful, and sufficient profit was obtained. For example, Toyota Motors obtained unprecedentedly large profits of 1.7 trillion yen in net earnings in FY2007. The results of sales in North America and Europe were good up until the Lehman shock, and Japan’s “excess adaptation” to abnormal US high demands took place.
Therefore, the product line up for newly emerging countries became insufficient. Then, the shock came. Markets for high-priced automobiles have disappeared. They are too expensive to be sold in the newly emerging countries. The damage was great, but I believe that it is a problem that the Japanese firm can respond to, because of their high management flexibility. Actually, many Japanese enterprises are already beginning to develop product lines that are aimed at newly emerging markets. In recent news coverage, the amount of foreign sales of listed companies in Japan has become greater for the Asian region than for North America.
Instead, the real problem is posed to a country of Japan. Labour costs in Japan are much greater than in other Asian countries. The recent appreciation of the yen will also promote the hollowing out of Japanese industrial structure. Manufacturing in Japan will become impossible. Business can easily cross national borders. However, because citizens cannot follow, there is a possibility of falling into the jobless growth.
While the US, facing the hollowing out of manufacturing, had chosen IT and financial businesses, what will Japan choose? After failure of focusing on producing luxury goods, there is no answer to this. It may take some time in order to be able to declare not “chaos”, but “solution” from Japan.
* The writer can be reached at
yamori@soec.nagoya-u.ac.jp
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