In fact, Japanese banks avoided big problems with bad subprime debt because they are still recovering from Japan’s own financial crisis in the 1990s and Japanese financial institutions even managed to buy $56bn worth of overseas assets. So, if is not the solvency of the Japanese banks that is the problem, what was behind the recent selling panic?
Indeed, we can’t forget that Japanese economy is export driven and its domestic consumption is relatively small. Japanese companies depend on foreign demand and with a global recession on their doors, they are likely to have smaller profits going forward. In addition, exports may be hurt by the recent strength in the Japanese yen. In fact, the Japanese currency went up more than six percent this week in response to lower demand for higher-yielding assets funded in Japan’s record low interest rates.