Challenges to Japanese Compliance with the Basel Capital Accord: Domestic Politics and International Banking Standards

Ever since Japan adopted the Basel capital adequacy standards, questions have been raised about the extent of its compliance. This article explains the political dynamics that have led to deviation from those standards in Japan. Scholars have posited various models of compliance--from mechanisms operating at the international level (for example, international institutions, the power of major countries, and market discipline) to domestic mechanisms such as the single-seat constituency system, which is presumed to create a political base supporting prudential regulation. By empirically examining the level of Japanese conformity with the Basel standards, however, this article demonstrates that mechanisms expected to foster compliance were not operating in the 1990s. Rather, amid the financial disorder created by the dysfunction of various domestic institutions, the postponement of efforts to resolve the nonperforming loan (NPL) problem not only hindered substantive compliance with the Basel Standards, but also led to further noncompliance by inviting the intervention of politicians, who tend to regard prudential regulation as a lesser priority, into the policymaking process for bank regulation.