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

Abstract

The burst of the lapanese financial bubble in the early against developing regions that export primary I 990s has increased the had debts of Japan's financial commodities. Worst hit would be highly indebted institutions. Iapan accots for about 20 prcent of primary commodity exporters. T'hose with foreign aid to developing cointries and fot 10 percent of proportionately more yen-denominated debt stock would their exports, so Japan's econoiimic health is important suffer most as the yen appreciated. for their prospects. Otstubo anid 'Isntsunoi analyze the * Many Asian exporters of low-cost manufactures to sitiation, asecss the badt cteh stock, and simulate the Japan may be relatively unaffected. Iikely effecrs of crises in lapan's financial sctror. They T 'he simulation does not detect contagious effects in conclude-tlhat: tile U.S. financial market. * A irisis that would shiake Up the worldi financial * Damnage could be largely contained once the market Is Linlikely but Japanese auithoritics mnay have to monetary authority steps in to supply short-term restructure severely affected instittitions eveii without a liquidity. Small but persistent increases in tax collection crisis, which could increase fiscal spending or debt stock. from the household sector seem to be a reasonable * Even with a limited Linkrtun, the household sector's OptioIn for financing the bailout. lack of confidence in the finanecial sector woiuldl send the * Coping with such problems would leave the country into a recessionary spiral, rectuiriuig the Japanese economy in a less favorable position for Inonetdry arthorits to intervene with supplies of short-confronting the problems associated with an aging teriii iiqfidit. population. And fiscal pressures may reduce Japanese aid * A i,naniciail crisis in Japan would depress world ro low-income countries. tracde, raise interest rates, andl rLnr the terms of trade his paper-a product of thc In.ernational Economic Analysis and Prospects Division, International Economics Dcpart'Ieni-Is part of a larger effort in the departmcnt to examine chatigitig external links and the impact of external shocks on low and middle-incorme countTies. Copies of the-paper are available free from the World Bank, 1818 H Street NW, Washingtonr, I)C. 204 13. Plt ase contaict lacquielyn Queen, room N4-1 00, telephone 202-47.3-3740, fax 202-522-2 A78, Interner address jqueen(to worldbLink.org. November 1996. (5] pages) Vr ,, 'o,h ,-Res rLr W;orking 1 i,p-S'rils disseminates the findings of wuork in progress to encourage the exchange of ideas about declopmernt issues. A *je-tie of/the sf rie s 1to get the findings out qickly, even ifthe presentations are less than fully polished. The pp, rs t),-ry ile na.i;es (of th,' ii t(hors ,n! d .,ho(ilild be used an. cited accordingly. The findings, interpretations, and conclusions are the authors oun .in zshould not he attributed to the World Bank, its Fxecutii'e Board of Directors, or any of its mne mber countries.