Market-specific and Currency-specific Risk during the Global Financial Crisis: Evidence from the Interbank Markets in Tokyo and London

This paper explores how international money markets reflected credit and liquidity risks during the global financial crisis. After matching the currency denomination, we investigate how the Tokyo Interbank Offered Rate (TIBOR) was synchronized with the London Interbank Offered Rate (LIBOR) denominated in the US dollar and the Japanese yen. Regardless of the currency denomination, TIBOR was highly synchronized with LIBOR in tranquil periods. However, the interbank rates showed substantial deviations in turbulent periods. We find remarkable asymmetric responses in reflecting market-specific and currency-specific risks during the crisis. The regression results suggest that counter-party credit risk increased the difference across the markets, while liquidity risk caused the difference across the currency denominations. They also support the view that a shortage of US dollar as liquidity distorted the international money markets during the crisis. We find that coordinated central bank liquidity provisions were useful in reducing liquidity risk in the US dollar transactions. But their effectiveness was asymmetric across the markets.

"Post-crisis Exchange Rate Regimes in East Asia"

More than five years after the onset of the Asian crisis, the characteristics of the exchange rate regimes of East Asian economies remain a topic of considerable discussion. The purpose of this paper is to investigate what affected the values of three ASEAN currencies, the Malaysia ringgit, the Singapore dollar, and the Thai baht after the crisis. The particular interest in our analysis is to explore why the East Asian currencies, which temporarily reduced correlations with the U.S. dollar after the crisis, had a tendency to revert back to de facto pegs against the U.S. dollar in the late 1990s. Based on high-frequency day-to-day observations, we examine how and when these three ASEAN currencies changed their correlations with the U.S. dollar and the Japanese yen in the post-crisis period. Before September 1st 1998, these currencies increased correlations with the Japanese yen in the post-crisis period. In particular, the increased correlations were larger than theoretical correlations based on the trade weights. The increase in correlations with the Japanese yen was, however, temporary. After Malaysia adopted the fixed exchange rate, both the Singapore dollar and the Thai baht increased correlations with the U.S. dollar drastically and began reverting back to de facto pegs against the U.S. dollar. A part of the change was attributable to asymmetric responses to the yen-dollar exchange rate. The change was, however, explained quite well by the strong linkage among the ASEAN countries. This implies that a regime switch in Malaysia had an enormously large impact on the exchange rates of the other ASEAN countries in the post-crisis period.

"Knightian Uncertainty and Poverty Trap in a Model of Economic Growth"

This paper explores how Knightian uncertainty affects dynamic properties in a model of economic growth. The decision-making theory in the analysis is that of expected utility under a non-additive probability measure, that is, the Choquet expected utility model of preference. We apply this decision theory to an overlapping-generations model where producers face uncertainty in their technologies. When the producer has aversion to uncertainty, the firm's profit function may not be differentiable. The firm's decision to invest and hire labor therefore becomes rigid for some measurable rage of real interest rate. In the dynamic equilibrium, the existence of the firm level rigidity causes discontinuity in the wage function, which makes multiple equilibria more likely outcome under log utility and Cobb-Douglass production functions. We show that even if aversion to uncertainty is small, "poverty trap" can arise for a wide range of parameter values.

The Role of Long-term Loans for Economic Development: Empirical Evidence in Japan, Korea, and Taiwan

The purpose of this paper is to investigate whether long-term funds had a positive impact on investment in Japan, Korea, and Taiwan. When there exists a possibility of a liquidity shortage, the firm's investment decision tends to be conservative. Thus, to the extent that the long-term debt makes the liquidity shortage less likely outcome, long-tern loans can have a positive impact on investment. In the first part of this paper, we estimate Tobin's Q type investment functions of Japanese firms for two different sample periods. In 1972-84, we find that the long-term loan ratio had an additional positive effect on investment. However, in 1985-96, we cannot find that a higher ratio of long-term loans increased the Japanese firm's investment. The result indicates that the size of long-term loans had a great influence on the firm's investment only at the early stage of the financial market development in Japan. In the second part of this paper, we estimate investment functions of Korean and Taiwanese firms in the late 1990s. In the late 1990s, Korea experienced a serious crisis, while the decline of Taiwanese economy was relatively moderate. We, however, find that the long-term debt ratio had a significantly positive impact on the investment in both countries. The result indicates that long-term funds might have mitigated the decline of investment regardless of the magnitude of the crisis.Long-term Loans, Economic Growth, Tobin's Q

"The Rise of China and Sustained Recovery of Japan"

After prolonged recessions, the Japanese economy had recovered from the crisis in the first half of the 2000s and has recorded sustained growth in the last several years. Tremendous structural changes during and after the financial crisis were one of the main driving forces for the recovery. However, dramatic increases in exports were another. In particular, increases of Japanese exports to China were substantial in the 2000s and supported the recovery of the Japanese economy from its demand side. The purpose of this paper is to examine the role of the exports to China for the recovery in the 2000s. The dependence of the Japanese export sectors on the Chinese economy has risen in the past ten years. China is now almost surpassing the United States as destination of Japanese exports. Vector autoregressions (VARs) show that the Japanese production was caused by exports to the United States until the mid-1990s but was caused by exports to China after the late 1990s. However, the effects on the production were highly different across firms. The increased exports to China were beneficial for the recovery of manufacturing industries with advanced technology. Their impacts were, in contrast, insignificant for the recovery of labor-intensive small firms and non-manufacturing firms. Consequently, the sustained growth in the last several years was accompanied by widening inequalities across firms.

"Market-specific and Currency-specific Risk during the Global Financial Crisis: Evidence from the Interbank Markets in Tokyo and London"

This paper explores how international money markets reflected credit and liquidity risks during the global financial crisis. After matching the currency denomination, we investigate how the Tokyo Interbank Offered Rate (TIBOR) was synchronized with the London Interbank Offered Rate (LIBOR) denominated in the US dollar and the Japanese yen. Regardless of the currency denomination, TIBOR was highly synchronized with LIBOR in tranquil periods. However, the interbank rates showed substantial deviations in turbulent periods. We find remarkable asymmetric responses in reflecting market-specific and currency-specific risks during the crisis. The regression results suggest that counter-party credit risk increased the difference across the markets, while liquidity risk caused the difference across the currency denominations. They also support the view that a shortage of US dollar as liquidity distorted the international money markets during the crisis. We find that coordinated central bank liquidity provisions were useful in reducing liquidity risk in the US dollar transactions. But their effectiveness was asymmetric across the markets.

"Why Did "Zombie" Firms Recover in Japan?"

The Japanese economy experienced prolonged recessions during the 1990s. Previous studies suggest that evergreen lending to troubled firms known as "zombie firms" distorted market discipline in terms of stabilizing the Japanese economy and caused significant delays in the economy's recovery. However, the eventual bankruptcy of zombies was rare. In fact, a majority of the "zombie" firms substantially recovered during the first half of the 2000s. The purpose of this paper is to investigate why zombie firms recovered in Japan. We first extend the method of Caballero, Hoshi, and Kashyap (2008) and identify zombies from among the listed firms. Subsequently, we investigate the nature of corporate restructuring that was effective in reviving zombie firms. Our multinomial logistic regressions suggest that reducing the employee strength of zombie firms and selling its fixed assets were beneficial in facilitating their recovery. However, corporate restructuring without accounting transparency or by discouraging incentives for managers was ineffective. In addition, corporate restructuring lacked effectiveness in the absence of favorable macroeconomic environment as well as substantial external financial support.

Why Did ?Zombie? Firms Recover in Japan?

The Japanese economy experienced prolonged recessions during the 1990s. Previous studies suggest that evergreen lending to troubled firms known as ?zombie firms? distorted market discipline in terms of stabilizing the Japanese economy and caused significant delays in the economy?s recovery. However, the eventual bankruptcy of zombies was rare. In fact, a majority of the ?zombie? firms substantially recovered during the first half of the 2000s. The purpose of this paper is to investigate why zombie firms recovered in Japan. We first extend the method of Caballero, Hoshi, and Kashyap (2008) and identify zombies from among the listed firms. Subsequently, we investigate the nature of corporate restructuring that was effective in reviving zombie firms. Our multinomial logistic regressions suggest that reducing the employee strength of zombie firms and selling its fixed assets were beneficial in facilitating their recovery. However, corporate restructuring without accounting transparency or by discouraging incentives for managers was ineffective. In addition, corporate restructuring lacked effectiveness in the absence of favorable macroeconomic environment as well as substantial external financial support.