Episode 8: The World Trembled! The Lehman Shock and the Nikkei Plunge 😱📉 (2008)
Last time, we talked about the long "Lost Era" after the bubble burst and the fleeting light of the "IT Bubble" that also popped. The Japanese economy was struggling to regain its footing.
Then, a tremendous shockwave emanated from the United States, spreading throughout the world. This was the "Lehman Shock"! It was a financial crisis that embroiled not just Japan but the entire globe, often described as a "once-in-a-century" event.
What was the "Lehman Shock"? (September 15, 2008)
On September 15, 2008, "Lehman Brothers," a massive and renowned American investment bank (a bank that helps companies raise money and handles large-scale investments), suddenly announced its bankruptcy.
"The great Lehman collapsing?!" Financiers worldwide were stunned. This bankruptcy triggered massive turmoil in global financial markets and a stock market crash. This series of events is known as the "Lehman Shock."
Why Did Such a Huge Company Collapse? The Culprit: The "Subprime Mortgage Crisis"
Going back a bit, a housing boom was underway in the U.S. from the early to mid-2000s. Many people bought homes, dreaming of homeownership. But a major problem lurked beneath the surface.
American banks had been aggressively lending out mortgages to people with low creditworthiness (the "subprime segment") with lax screening, believing housing prices would continue to rise (these were "subprime mortgages"). Initially, this worked as long as housing prices went up. But when the housing bubble burst and prices began to fall, many borrowers defaulted on their loans.
Complicating matters further, these subprime mortgages were "securitized" – magically transformed into various complex financial products and packaged, then sold to banks and investors worldwide who bought them eagerly, thinking they were profitable. This packaging often obscured the underlying risks.
A Domino Effect! A Global Financial Crisis 🌍
When the subprime mortgage crisis worsened and Lehman Brothers finally collapsed, confidence in financial institutions worldwide evaporated. "If Lehman suffered such losses, are other banks also in danger?"
Banks became reluctant to lend to each other ("credit crunch"), and the flow of money seized up, paralyzing the global financial system. This was the "Global Financial Crisis." Problems cascaded one after another, like falling dominoes.
Japan Also Hit Hard! Nikkei Plunges Again, Nearly Breaching 7,000 📉
With the global economy in such dire straits, the Japanese economy, heavily reliant on exports, could not escape unscathed. Japanese products like cars and electronics became harder to sell overseas, and many companies suffered.
The Nikkei Stock Average also plummeted. Just over a month after Lehman Brothers collapsed on September 15, 2008, the Nikkei hit a low of 6,994.90 yen on October 28, a new post-bubble low. It fell by as much as 41% from its level before the Lehman Shock.
The exchange rate also fluctuated wildly, with a sharp appreciation of the yen, delivering a double blow to Japanese exporters.
How Did the World Respond? The Rise of the G20
Faced with this global crisis, governments and central banks around the world scrambled to prevent an economic meltdown.
- Monetary Easing Again: Central banks worldwide lowered interest rates and injected massive amounts of money into the markets.
- Fiscal Stimulus: Governments also tried to support their economies by increasing public works spending and cutting taxes.
- International Cooperation - G20: Previously, the G7 (Group of Seven advanced nations) had been the main forum. However, this crisis led to the first G20 (Group of Twenty major and emerging economies, including China and India) leaders' summit, fostering global cooperation to overcome the crisis. Discussions on strengthening financial regulations also progressed.
The Lehman Shock starkly demonstrated the interconnectedness of the global economy and the alarming speed at which problems in one area could spread worldwide.
After this massive turmoil, how would the Japanese economy, and the Nikkei Stock Average, begin to recover? Next, we'll look at a further trial, the Great East Japan Earthquake, and the subsequent Abenomics.