While high Dollar inflows first drive growth and production, the capital inflows tend to hurt banking profitability when governments try to "mop up" excessive liquidity and sterilize Dollar inflows in exchange for low-yielding government bonds. China's banks, for example, are already getting a raw deal on their Dollar assets because the government forces them to accept low-yielding, negative real interest government bonds in exchange. When recession strikes, these banks will become even more unwilling to provide credit to their ailing (export industry) customers. Unfortunately, even if the Dollar gets stronger, as is often the case during a global crisis, falling domestic currencies might easily deepen a looming crisis of confidence - as they did during the Asian crisis." (Schulz, 2008) The housing boom in the U.S. drove production throughout the world and as well resulted in the longest period of expansion in Japan, which developed against the odds of a domestically flat or shrinking economy. Less obviously, the boom also resulted in an extraordinarily strong Euro that gained on concerns about U.S. stability. Investors favored the Euro despite strong concerns about its intrinsic vulnerability that is rooted in the lack of unified or integrated financial policy..." (Schulz, 2008)

The work of Fukao (2008) entitled: "The U.S. Sparked Financial Crisis and the Japanese Financial System" states that the impact of "...worldwide financial market turmoil and tumbling stock prices is clearly influencing Japanese financial institutions as well. A review of the condition of the Japanese banking industry shows that, while the gross profit of all banks nationwide followed a slow recovery through fiscal year 2005 (April 2005 - March 2006) as the domestic economy expanded, it declined for two consecutive years in FY2006 and FY2007. After the Bank of Japan altered its guidelines for market operations in FY2006, the effect of the higher lending rate began became apparent from FY2007, leading to some improvement in the yield on invested funds. However, with the impact of falling stock prices since last year and the full implementation of the Financial Instruments and Exchange Law in September of 2007, over-the-counter sales of risk products such as investment trusts froze up on the whole, and net income on fees and commissions eroded. Banks had been allocating more and more personnel until then with the economic expansion, but when the business cycle turned down, bank profits fell. " (Fukao, 2008)

While the major banks have practically completed all of their bad loan disposals there has been slower improvement in regional banks therefore should the deterioration of the economy continue "it is possible that bad loans will begin increasing again." (Fukao, 2008) Fukao states: "The breakdown of confidence in the financial system has not been limited to the United States. It has spread to Europe, where governments have stepped in to inject capital or provide financing support to several financial institutions. Underlying the global deterioration in the cash flows of financial institutions has been the fact that no one knows which banks are sitting on losses and to what extent, and this in turn has sparked fear and wariness, choking off the supply of funds." The following chart shows the 'estimated trend in capital adequacy ratios of Japanese banks' which has been adapted from the work of Fukao (2008).

Estimated Trend in Capital Adequacy Ratios of Japanese Banks

Source: Fukao (2008)

Fukao (2008) additionally...

Regional banks have gradually improved their finances both in terms of bad debt ratios and capital adequacy, but they have struggled in the face of narrowing net interest margins and deteriorating expense ratios. A look at each individually, however, reveals a widening gap between those banks that have been able to boost earnings and make steady progress in disposing of bad debts with the expanding economy over the past few years, and those which have not."
According to Luci (2009) the United Nations should "...address the global financial crisis....[and] build an international financial architecture to address the global financial crisis, gripping the rich economies, including those of the United States, Japan, and the European Union." (Luci, 2009) at least this is the opinion of Dr. Walden Bello, senior analyst at the Bangkok-based research institute Focus on the Global south and who is also the national president of the Freedom from Debt Coalition and professor of the University of the Philippines, said the UN is the "only legitimate forum," not the G. 20 countries to create such mechanism to mitigate the impact of the economic slowdown." (Luci, 2009) Luci reports that there is a debate set in April between Bello and "...Gert-Jan Koopman, Director General for Economic and Financial Affairs of the European Commission, on the issue on March 17 at the Residence Palace in Brussels." (Luci, 2009) the G-20 countries will meet in Brussels and according to Bello "The proper forum must be the United Nations. The process must be more inclusive. It is not appropriate that an informal group takes precedence in creating a new financial architecture for the world to meet the current crisis. We cannot keep on relying on some global institutions, particularly those that were part of the problem, to solve the problems of the global economy..." (Luci, 2009)

SUMMARY & CONCLUSION

Because of the highly interactive, integrated financial and economic environment which is globalized in nature there certainly is no way whatsoever for a country as large as the United States to enter in such a financial crisis such as it is presently in the midst of without other countries with trade and monetary alliances to go unaffected by that crisis. There is however, ways to mitigate such risk and this is likely to be the focus of much discussion and debate in coming months and years.

Bibliography

Harris, Daniel (2008) U.S. Financial Crisis a Boon for Japanese Banks. Seeking Alpha. 24 Sept 2008. Online available at http://seekingalpha.com/article/97137-u-s-financial-crisis-a-boon-for-japanese-banks

Nakata, Hiroko (2008) U.S. financial crisis puts brakes on Japan carmakers. The Japan Times 28 Oct 2008. Online available at http://search.japantimes.co.jp/cgi-bin/nb20081028a3.html

Schulz, Martin (2008) the Globalization of Boom and Gloom: The U.S. Financial Crisis and its Impact on Europe, Japan and Asia Fujitsu Research Institute. 10 Oct 2008. Online available at http://jp.fujitsu.com/group/fri/en/column/message/200810/2008-10-10.html

Fukao, Mitsuhiro (2008) the U.S. Sparked Financial Crisis and the Japanese Financial System. Kikkei net Interactive. www.nni.nikkei.co.jp/FR/JCER/jcer_op_200811.html14Nov2008

Luci, Charissa M. (2009) UN Should Address Global Financial Crisis says Expert. 13 Mar 2008. Manilla Bulletin Publishing Corporation. Online available at http://www.mb.com.ph/node/198873