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Volume CXXXII, Number 10 |
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Banking nightmare
TIMOTHY J. RIEMER
COLUMNIST
The 90s were an unusually prosperous time for the US. With the invention of the internet many people believed that the economy had been transformed. Firms in the late 90s saw unheard-of profits, especially in the technology sector. However, while everything was all warm and fuzzy here in the U.S, across the Pacific Ocean, the Japanese economy was facing one of its worst declines ever, nearly a polar opposite of the U.S. economy. As the U.S. economy began to grow with unprecedented speed during the late 90s, the Japanese economy was faltering almost as quickly. Japan's economy has suffered from severe deflation and resulting stagnation for over a decade now. During the 90s, almost nobody cared about the state of the Japanese economy. The U.S. economy was simply doing too well to garner concern from the U.S. public.
Now, as the Japanese economy is gearing for yet another round of economic difficulties, maybe we should be more concerned. During the difficult times that the U.S. economy has faced recently, the Japanese economy has been relatively stable. The Japanese economy is expected to shrink by only five percent in 2002, compared to 1.9% in 2001. The situation, however, could be getting significantly worse. The Japanese banking industry is readying itself for another financial crisis. One of the biggest banks in Japan, UFJ Holdings Inc., saw its stock value drop an unprecedented sixty-eight percent since the beginning of October. Mizuho Holdings Inc., another Japanese megabank, has seen its stock value drop fifty-nine percent since the beginning of October.
The U.S. economy, though, may not be able to survive this round of hit to the Japanese financial system. A strong argument could be made that the U.S. is helping to keep the global economy afloat. If the faltering Japanese economy weighs too heavily on the U.S. economy, in its present state, it might not be able to hold on. The U.S. economy does seem to finally be stabilizing and gearing up for a recovery, but a shock from the destabilization of the Japanese economy could cause the U.S. economy to follow suit.
With the global economy becoming increasingly connected through improved technology, this is becoming a valid concern. The Japanese government, through the Japanese central bank, the Bank of Japan, has stepped in the past when two major lenders failed. The steps taken by the central bank, however, have failed to spark the Japanese economy. The staggering deflation that has plagued the Japanese economy for a decade now has been unaffected by actions taken by the Bank of Japan.
The relative ineffectiveness of the Bank of Japan should be a concern in the U.S. economy since Japanese economic troubles could knock the U.S economy of its feet. If the U.S. economy does go back into another recession the Federal Reserve Bank might not be able to help. Interest rates in the U.S. are now at forty-one year lows and have been remarkably low for over a year now, yet we have failed to see any true recovery in the U.S. economy. This leads me to believe that monetary policy has lost its charisma in the markets. However, the U.S. economy and the global economy is beleaguered by a lack in investor confidence. The effectiveness in monetary policy is contingent on investment, and if investors fail to take action then the policy will be ineffective. Fortunately, the Fed has been closely studying the actions taken by the Bank of Japan and learning from their mistakes. Hopefully they have learned well.
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