The US subprime crisis is deeply affecting the world economy through the international financial market. As the second largest economy in the world, Japan is under the spotlight as the world wonders how the Japanese economy is holding up, what its prospects look like and if it is ready to step in as the main replacement engine for the world economy when the US falls into a prolonged economic slump.

It is an undeniable fact that Japan's economy is also hit by the US subprime debacle, but not in the same way or as seriously as other countries and regions are affected. This is mainly because Japan's is considerably different from other capitalist economies in terms of format. The pros and cons of this Japanese format aside, it has in a way served as a "firewall" in the present crisis.

First of all, Japan is still miles behind the US in terms of financial liberalization, with relatively few financial institutions seriously infected by the "subprime virus". Second, Japan was quite late to introduce debt obligations into the security market, which is too small to hurt the country's financial system even if the debt market turns bad. Third, Japan's financial system remains an "indirect" entity in nature despite a decade of reform, or a "market-oriented indirect financial system" at best.