Asia Pacific Business and Policy Response to the Global Economic Crisis - Case Study Example

Name Institution Tutor Date Introduction The financial crisis is an economic occurrence that can be ranked second after the great depression. Just like the great depression, the financial crisis has brought about various implications in many nations of the world. The concept of the financial crisis is widely associated to various contexts in which certain assets or financial institutions experience an unexpected loss in a huge portion of their value (Nanto, p6). Although the financial crisis has been argued as an occurrence that is not very regular, the Asian pacific region is one of the regions of the world that has experienced the financial crisis in various episodes. In the 20th and the 21st centaury the Asian pacific region experienced the Asian Financial Crisis of 1997 and the recent global financial crisis. This particular paper seeks to analyze the experience of two countries; Japan and China in terms of the way in which they were affected by and confronted the two financial crises. The Asian Financial Crisis of 1997 When evaluating the manner in which Japan and China were affected by the Asian Financial Crisis of 1997 various similar aspects can be noted from the two countries. One of the common impacts was the decline in currency against the dollar. Kwan (p6) highlights that the Asian Financial Crisis begun as a currency crisis in Thailand in 1997. The decline of Thai’s currency (Baht) brought about adverse repercussions on currencies of other neighboring countries and Japan and China were also not excluded, based on the fact that the two countries had created strong ties with other Asian countries through investment and trade. The crisis happened at a period when the economy of Japan was deep into a recession essentially after Japan’s participation on Second World War. Consequently, the Japanese yen continued to fall more due to the implications of the crisis. China on other had has a sound economic condition however based on the fact that it was involved in trade and investment with other Asian countries, she also did experience a slight decline in currency in relations to the dollar. Another similar implication of the Asian Financial Crisis of 1997 on both China and Japan was the decline in the demand of exports of both countries. Pont et al (p3) highlight that Japan was a major trading partner to other Asian pacific countries, for instance in 1996 more that 40% of exports from Japan were directed to other Asian countries. However with the emergence of the crisis, the demand for Japanese exports declined by 4.7% in 1998. The decline of demand of was due to the financial strains that other Asian countries were also experiencing as a result of the effects of the crisis. The implication of the reduced demand of Japanese exports is that -manufactures begun to produce less, in addition the level of investment in sectors such as construction reduced. China also experienced a reduction in the demand of its exports. Hai and Zhong(p,4) reveal that the impact of the crisis on Chinese exports were influenced by two key factors. One of the factors was as a result of the currency depreciation of other Asian countries which made Chinese services and goods to be expensive thus lowering the level of demand for the goods/services. The second aspect was due to the fact that there was a relative increase in imports prices therefore consumers in other countries switched to substitute goods instead of buying goods that were from China. One contrasting aspects on the impact of 1997 crisis on Japan and China is in terms of the decline in terms of GDP. China did not experience any decline in its GDP, while Japan recoded a slight decrease. Hsiung (p144) reveals that even at the height of the Asian financial crisis, not all countries in Asia were affected and China is a good example. Hsiung (p144) highlights that in the year 1998 the actual GDP growth recoded by China was a respectable 7.8%. This was basically ironic in the sense that many analysts expected predicted the abrupt eruption of the Asian financial crisis would result to a decline of the Chinese GDP. Japan on the other hand experienced a decline in its GDP by -2%. According to findings of the Japanese Economic Planning Agency the cause of the decline was attributed to decreased spending in corporate capital, decreased investment in housing and less spending by consumers (Pont,et al p2). Pempel, (p10) highlights that China only escaped with minor damages. For instance unlike Japan, the Chinese banks did not experience any sort of handle which would affect their lending capabilities. Japan on the other hand had falling banks which experienced difficulty in terms of lending. According to Amyx (p79) Japanese banks were affected by the bad debts problem. Consequently The Japanese government formulated polices such as bank recapitalization which would assist the banks that were hard hit by the crisis. The Global Financial Crisis of 2008 One of the similarities of the impact of the Global Financial Crisis of 2008 on China and Japan was in terms of decline in exports. Just like the Asian crisis of 1997, the global financial crisis of 2008 also brought about adverse effects of the exports of both countries. A huge number of both Chinese and Japanese export goods consist of durable consumer goods such as electronic equipment’s, cars and machine tools. Kyoji and Tangjun (p1) highlight that the decline in the demand of these particular goods was as a result of what is termed as the principle of acceleration, whereby consumers restrain from buying durable products because of liquidity constrains resulting from the global down turn. Consequently a lot of exports products from China and Japan experienced a decline in terms of demand. Chinese export volumes decreased by 21% by the year 2009(Young, p10). Figure 2.0 below illustrates the changes in exports of the two countries. A decline in GDP growth is another major implication of the 2008 Global financial crisis on China and Japan. China had a fast growing GDP before the crisis however during the third quarterly of the crisis the fast growth experienced an abrupt halt. Yongding (p9) reveals that China’s GDP declined by 9%. The rate of growth in industrial production declined by 8.2 percent while, exports declined 20%. Statistics reveal that the most significant source for the collapse of GDP growth for China in the 3rd quarter of the crisis was associated to the unexpected failure of the export market, which was mainly influenced the deterioration of the financial crisis in the U.S, essentially after the collapse f Lehman brother. Japan also experienced a huge decline in GDP. According to Willem (p1) Japan was one of the countries in Pacific Asia that was hard hit by the crisis. Kyoji and Tangjun, (p1) reveal that; Japan’s GDP decline occurred in the forth quarter of the year 2008 by 12.6%. The decline was basically double that of the U.S which 6.3% was. Analysts attribute the decline in Japanese GDP to a steep decrease in the external demand. Japanese net exports declined by 11.8%. One of the differences that existed in terms of the impacts of the recent global financial crisis on Japan and China was linked poor performance of the banking system. Symonds (p1) reveals that Japan was one of the Asian countries that experienced challenges within the banking system as a result of the implication of the global financial crisis. Japan experienced a decline in terms of share value which further opened up cracks on the banking system. In general many Japanese banks were hard hit by the crisis. There balance sheets recorded huge amounts of bad debts; furthermore their performance was deteriorating as crisis continued. China on the other hand did not experience an immense impact on its banking system. Young (p11) highlights that the major implication of the 2008 financial crisis on China were majorly external essentially in terms of decline in exports as discussed earlier. Confronting the Asian Financial Crisis of 1997 and the 2008 Global Financial Crisis In order to confront the impacts of the Asian Financial Crisis of 1997, both Japan and China adopted similar approaches. One of the approaches is through the adoption policy and regulations that would work towards reducing the impacts of the crisis. In 1998 the Japanese government passed the bank recapitalization bill that was aimed at pushing the economy to the right direction. The objective of the bill was to assist banks that were failing by putting them in order. This was undertaken by ensuring that Japanese banks that had capital bases that were replenished would restore their capability in terms of giving funds to corporate borrowers, who would then work towards raising share and asset prices(Pont,et al p2). China also adopted policy response in order to deal with the impact of declining demand of its exports. Hai (5) highlights that China adopted a number of policy responses in order to counter the export problem. Some of the policy responses include reduction of export barriers, abolishment of quota’s for export for 26 products and also reforms were speeded on state owned trading. Also in order confront the recent 2008 global financial crisis both China and Japan also utilized the policy approach. In order to deal with the decline of economic growth as a result of the crisis, the Chinese government in November 2008 adopted a 4 trillion stimulus package (Yongding, p11). The package was 14% f the 2008 Chinese GDP. The Chinese government also put into consideration the possibility of reducing taxes which included business tax and VAT. The Japanese government also adopted various policy approaches in order to deal with the 2008 financial crisis. Although Japan practices its own brand of capitalism, there was however need for her to adopt policy measures that were also embraced by other nations (Pauly,p959).The Japanese government also adopted a stimulus package, whereby in 2008 September the government gave a sum of $29.3 billion in order to stimulate the financial system(Goodhart,p355). Differences also existed in the manner in which the two countries confronted the crisis. One of the differences arose in dealing with the problem of currency decline against the dollar, which occurred during the Asian Financial Crisis of 1997. Kwan (p6) highlights that in to counter or confront the problem of the decline of the Chinese Yuan against the dollar, the Chinese government was devoted to not devalue the Yuan. This particular approach therefore greatly increased the bargaining power and the credibility of the Chinese Yuan within the international market. Consequently the Chinese Yuan gained stability against the U.S dollar as compared to the Japanese yen. Japan on the other hand dealt with the problem of currency decline through reducing the cost of financing the yen and also decreasing Japanese export prices in terms of dollars. These approaches did not bring about positive results but rather the yen become weaker (Kwan p8). The Figure 1.0 below gives an illustration of the difference between the Japanese yen and the Chinese Yuan which begun to gain stability during the crisis. In the recent 2008 financial crisis, the approaches adopted d by China and Japan in order to counter the crisis also differed. Based on the fact that Japan was also once again hit hard by the global financial crisis after the experience in the 1998, Asian crisis, the measure policy adopted by Japan deferred form those adopted by China. Sheard (p1) highlights that Japan adopted policy responses that were mostly centered on the financial and fiscal system. The policy’s included zero interest rate policy, risk asset purchases and quantitative easing. China on the other hand focused its policy approach more on expanding its exports such as tax reduction. Conclusion The discussion above has presented various differences that exist in the impacts of the 1997 Asian financial crisis and the recent global financial crisis, on Japan and China. The areas of similarity in terms of the impacts of the 1997 Asian financial crisis included decline in demand for exports and also a decline in the currencies of the countries against the dollar. The similarity of the impacts of the recent financial crisis ware based on reduced exports and also a decline in GDP. The paper also notes that the common approach of countering both crises was through the use of policy. Difference also existed in the manner in which the two countries countered the crisis this were based on policy differences which were basically influenced by the nature of impacts. What is evident from the above discussion is that Japan was immensely affected by both crises as opposed to China. Works Cited Amyx Jennifer. Japan's Financial Crisis: Institutional Rigidity and Reluctant Change Princeton University Press. 2004:p79. Goodhart, C.A.E. The regulatory response to the financial crisis . Journal of Financial Stability. 4, ( 4), 2008,: p 351–358. Hai, Wen and Zhong, K. The Impact of the Asian Economic Crisis on China’s foreign trade. China center for Economic Research. .1999: p 4. Hsiung James. Twenty-First Century World Order and the Asia Pacific: Value Change, Exigencies, and Power Realignment. Palgrave Macmillan, 2001:p1144-145. Kwan, C.H. The Yen , the Yuan, and the Asian Currency Crisis ,changing fortune between Japan and China . Asia/Pacific Research Center, 1998: p3-25. Kyoji Fukao and Tangjun Yuan. Why is Japan so heavily affected by the global economic crisis? An analysis based on the Asian international input-output tables.2009:p1. Nanto Dick. Global Financial Crisis: Foreign and Trade Policy .DIANE Publishing. 2009:p6. Pont , Beatriz , Liu, Lan, Garcia Francisco. 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