Is The"Japan Problem"Real? How Problems in Japan's Financial Sector Could Affect Developing Regions

58 Pages Posted: 20 Apr 2016  

Gary Clyde Hufbauer

Peter G. Peterson Institute for International Economics; Institute for International Economics

Barbara R Kotschwar

Organization of American States

John S. Wilson

World Bank - Development Research Group (DECRG)

Multiple version iconThere are 2 versions of this paper

Date Written: November 30, 1996

Abstract

The burst of the Japanese financial bubble in the early 1990s has increased the bad debts of Japan's financial institutions. Japan accounts for about 20 percent of foreign aid to developing countries and for 10 percent of their exports, so Japan's economic health is important. The authors analyze the situation, assess the bad debt stock, and simulate the likely effects of crises in Japan's financial sector. They conclude that: a) a crisis that would shake up the world financial market is unlikely but Japanese authorities may have to restructure severely affected institutions, which could increase fiscal spending or debt stock; b) even with a limited bank run, the household sector's lack of confidence would send the country into a recessionary spiral, requiring the monetary authority to intervene with short term liquidity supplies; c) a financial crisis would depress world trade, raise interest rates, and turn the terms of trade against developing regions that export primary commodities; d) many Asian exporters of low-cost manufactures to Japan may be relatively unaffected; e) the simulation does not detect contagious effects in the US financial market; f) damage could be contained once the monetary authority steps in to supply short-tern liquidity; g) coping with such problems would leave the Japanese economy in a less favorable position for confronting their aging population problem and fiscal pressures may reduce Japanese aid to low income countries.

Keywords: Environmental Economics & Policies, Economic Theory & Research, Banks & Banking Reform, Payment Systems & Infrastructure, Financial Intermediation, International Terrorism & Counterterrorism

Suggested Citation

Hufbauer, Gary Clyde and Kotschwar, Barbara R and Wilson, John S., Is The"Japan Problem"Real? How Problems in Japan's Financial Sector Could Affect Developing Regions (November 30, 1996). World Bank Policy Research Working Paper No. 1682. Available at SSRN: https://ssrn.com/abstract=632645

Gary Clyde Hufbauer

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036-1903
United States

Barbara R Kotschwar

Organization of American States

1889 F St. NW
Washington, DC 20006
United States
202-458-3605 (Phone)

John S. Wilson (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

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