Welcome to a special edition of BlackSummit’s weekly newsletter, Geopolitics & the Day After. This week, we commemorate the 15th anniversary of the Great Financial Crisis, a seismic event that reshaped both the geoeconomic and geopolitical landscape. We begin by revisiting the origins and aftermath of the crisis, reflecting on the lessons learned. Next, we turn our focus to China’s current economic stance, examining its strategies and challenges in today’s complex environment. We then shift to Japan, exploring its economic recovery and political landscape. Finally, we conclude with an analysis of emerging threats on the horizon, highlighting the new risks that could shape the Day After.

Echoes of 2008?

The Forgotten History of the Financial Crisis

Adam Tooze, Foreign Affairs

Bonds Signal Largest Rate Cuts Since ’08 Crisis. What It Means for the Stock Market. 

Karishma Vanjani, Barron’s

Fed Backpedals on Plan to Increase Big Bank Capital 

Alexander Saeedy, Wall Street Journal

Fifteen years after the Great Financial Crisis of 2007-2008, the global financial landscape reveals a complex legacy of both enduring challenges and evolving dynamics. Adam Tooze’s article, “The Forgotten History of the Financial Crisis: What the World Should Have Learned in 2008,” highlights how the crisis, which he argues rivaled even the Great Depression in its scale and speed, reshaped the global economy. Tooze critiques common misconceptions about the crisis, arguing that the depth of European banks’ involvement and their vulnerability due to dollar reliance were significant yet overlooked aspects. He highlights the crucial role of the U.S. Federal Reserve in stabilizing the global financial system through extensive liquidity provisions, though this intervention exposed the hierarchical nature of global finance. Despite expectations that the U.S. dollar would decline in importance, it has instead grown more central, while European finance has retreated and emerging markets have become more integrated into the U.S.-dominated system. The ongoing challenge is whether the U.S. could replicate its 2008 response in future crises amidst a shifting global landscape.

That challenge, and its response, is being played out presently. The financial world is again on edge, as indicated by recent bond market signals suggesting the most significant shift in U.S. monetary policy since the 2008 crisis. The stark negative differential between two-year Treasury yields and the effective federal funds rate reflects market expectations of aggressive rate cuts by the Federal Reserve. This situation echoes past crises, with similar yield spreads preceding the dot-com bubble burst and the onset of the Great Financial Crisis. Despite abundant liquidity, concerns persist about whether the Fed’s anticipated actions could lead to negative repercussions for the stock market. Additionally, the Federal Reserve’s recent decision to scale back proposed increases in big bank capital requirements, following intense industry pushback, highlights ongoing debates about financial regulation and stability. These developments underscore the persistent volatility and evolving challenges in global finance, echoing Tooze’s cautionary perspective on the forgotten lessons of the 2008 crisis and the uncertain future of financial stability.

China’s Struggles Reshape the Global Landscape

China’s economic activity falters as challenges mount 

Joe Leahy, The Financial Times

Western Firms That Flocked to China Are Now Pulling Back

Yoko Kubota, Wall Street Journal

China out in the cold for foreign investors 

Katie Martin, The Financial Times

The global financial crisis of 2008 accelerated the shift of economic power towards emerging markets, with China emerging as a key beneficiary of this transition. During the same time, China’s rapid industrialization, urbanization, and export-led growth became pillars of the global economy. However, by 2024, cracks in this narrative have begun to show, as China’s economic activity faltered in the face of mounting internal and external challenges. In August, industrial output grew at a tepid 4.5% year-on-year, the slowest since March, down from 5.1% in July and missing Bloomberg’s forecast of 4.7%. Retail sales, a key indicator of domestic consumption, rose by a mere 2.1%, far below the expectations of 2.6%, making it the second-slowest month of the year. These numbers come against the backdrop of a prolonged property slump, with real estate investment dropping 10.2% year-on-year and the sales area of new commercial housing plummeting by 18%. The broader slowdown in fixed asset investment, which grew only 3.4% from January to August, adds to the bleak picture, reinforcing concerns that Beijing may need to resort to more aggressive stimulus measures to meet its 5% GDP growth target for the year.

Internationally, the slowdown in China’s economy is reshaping global investment flows and business strategies. Western companies that once flocked to China for its cheap labor and booming consumer market are now pulling back. The American Chamber of Commerce in Shanghai reported that the percentage of U.S. businesses considering China their top investment destination has fallen to its lowest level in 25 years. Companies like Walmart and IBM are scaling back or divesting from Chinese ventures, while automakers like Honda have cut production due to declining sales, with Honda’s unit sales in China falling by 32% in the second quarter of 2024 compared to the same period in 2023. The housing market slump and sluggish domestic demand have not only weakened consumer confidence but also heightened geopolitical and trade tensions. China’s real exports surged 14% over the past year, raising concerns about potential retaliatory tariffs from trade partners. Foreign investors are also growing increasingly wary, with the CSI 300 index down 7% in 2024 and analysts like Barclays downgrading European luxury brands heavily reliant on Chinese consumers. While China remains too large to ignore, the long-term outlook depends on Beijing’s ability to rekindle domestic demand and restore investor confidence amid an increasingly complex global environment.

Japan’s Economic and Political Crossroads

Japan Inc.’s 25 trillion yen opportunity: Cashing in on real estate 

Mitsuru Obe, Nikkei

Japan’s ruling LDP begins prime minister race: 5 things to know 

Koya Jibiki, Nikkei

Japan’s next prime minister: Old guard, young blood or first woman?

Koya Jibiki, Nikkei

In recent years, Japanese corporations have begun to embrace an “asset-light” approach, reflecting a significant shift in their attitude toward real estate. Traditionally, Japanese companies clung to valuable property holdings as a financial buffer, but the evolving economic landscape and pressure from global investors are driving a transformation. Companies are now leveraging their real estate assets to fuel growth in digital and other emerging sectors. This trend is exemplified by Seibu Holdings, which, struggling with post-COVID losses, has decided to sell high-value properties like the Tokyo Garden Terrace Kioicho—a 36-story complex with a market value expected to exceed 300 billion yen. The value of unrealized real estate profits across Japanese companies has surged to an estimated 25 trillion yen ($175 billion), highlighting the vast potential in this sector. The increased focus on efficiency and profitability is pushing companies to offload non-core assets, as evidenced by the record 3.6 trillion yen in cross-held shares sold in the fiscal year ending March 2024. This shift not only reflects a strategic response to economic pressures but also aligns with broader market trends, including heightened foreign interest and investments from global giants like Blackstone and Bain Capital. As Tokyo, Osaka, and Nagoya experience significant rises in land prices—63% over the past decade—the landscape for Japanese corporate real estate is transforming, presenting substantial opportunities for capitalizing on previously underutilized assets.

On the political front, the Liberal Democratic Party (LDP) presidential election will take place on September 27, where members of Japan’s broad conservative party will choose from a record nine candidates to lead the party for the next three years. The winner is expected to become Japan’s next prime minister. This election is particularly significant following a period of political turbulence marked by a series of scandals and the resignation of Prime Minister Fumio Kishida, who opted not to seek re-election amid widespread public disillusionment. The LDP, which has dominated Japanese politics for 65 of its nearly 70 years of existence, faces the daunting task of regaining public trust ahead of a general election expected by late 2025. The party has historically seen frequent changes in leadership during crises, notably during the Great Financial Crisis when Japan had three different prime ministers within a span of roughly two years— Shinzo Abe (2006-2007), Yasuo Fukada (2007-2008), and Taro Aso (2008-2009). Among the contenders, former Environment Minister 43-year-old Shinjiro Koizumi (23% support) and former LDP Secretary-General Shigeru Ishiba (18% support) are frontrunners based on a recent opinion poll, with Koizumi favored for his fresh perspective and Ishiba for his experience and strong defense policies. The new leader will need to navigate Japan’s complex domestic issues, including economic stagnation, an aging population, and labor market rigidity, while also addressing regional security challenges posed by China, North Korea, and Russia. The outcome of this election will not only shape Japan’s domestic policies but also influence its diplomatic and security stance in Asia, as the new prime minister is expected to continue deepening alliances with the U.S. and other regional partners.

New Threats on the Horizon

More storms are brewing in the South China Sea 

The Economist

Europe’s Populist Surge Isn’t Only About Immigration, It Is About Fading Trust 

Bertrand Benoit, Wall Street Journal

A New Trilemma Haunts the World Economy 

Dani Rodrik, Project Syndicate

The Great Financial Crisis of 2007-2008 has left a legacy of global instability that has manifested in various troubling developments. In the South China Sea, tensions have intensified since the 2016 international tribunal ruling deemed China’s expansive territorial claims illegal. Despite this, China has continued to strengthen its presence, increasingly emboldened against the Western world order post-financial crisis, leading to increased confrontations with Southeast Asian nations. Recent incidents, such as the June 17, 2024, altercation where Chinese coastguards used axes against Philippine sailors near Second Thomas Shoal and a recent ramming of a Philippine coastguard cutter by a Chinese vessel, underscore the growing volatility. The Philippines, under President Ferdinand Marcos, has adopted a more assertive stance, including expanding US military access to its bases. This strategic pivot is met with both support and caution, as the risk of unintended escalation remains high. The US faces a delicate balance between supporting its ally and avoiding broader conflict, especially given Marcos’s provocative statements about potential acts of war and mixed responses from American officials.

Simultaneously, the economic and political fallout from the Great Financial Crisis has exacerbated pre-existing global dilemmas. In Europe, rising populism reflects widespread disillusionment with traditional political structures, driven by crises such as migration, inflation, and the ongoing war in Ukraine. For instance, Germany’s far-right Alternative for Germany (AfD) achieved significant electoral success, and France’s far-right National Rally made notable gains in a fragmented parliament. This political fragmentation is indicative of broader governance issues, with voter trust in institutions eroding— 54% of Germans distrust all political parties. These issues are compounded by economic stagnation and inadequate responses to crises, worsened by high public debt and political fragmentation. Adding to this complexity is Dani Rodrik’s global trilemma: the challenge of addressing climate change, strengthening the middle class in advanced economies, and reducing global poverty simultaneously. Post-2008 economic policies, often prioritizing financial stability and domestic growth, have sometimes strained global equity pursuits. For instance, U.S. climate policies, while crucial for environmental goals, have inadvertently hindered economic opportunities in poorer nations, suggesting the need for innovative policies that balance national and global priorities.