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Reform of the Japanese Banking System

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  • Masahiro Kawai

Abstract

Japan has experienced a decade-long economic stagnation with a distressed banking sector in the 1990s. The absence of a credit culture to rigorously assess and price credit risks of borrowers, aggravated by weak prudential and supervisory frameworks, in the 1980s, the collapse of the asset price bubble in the early 1990s, and the lack of decisive, comprehensive strategy to address the banking sector problem at an early stage were largely responsible for the emergence of banking sector problems. All of these allowed a systemic banking crisis to emerge in 1997-98 and a large output loss during 1998-2002. The crisis ultimately prompted the government to take a more aggressive policy to tackle the problem. Sufficient progress has been made since then on banking sector stabilization, restructuring, and consolidation. The regulatory and supervisory framework has been strengthened in a way consistent with an increasingly market-oriented, globalized environment. As a result, the worst is over in the Japanese banking system, setting the stage for sustained economic recovery. Though bank capital may still be inadequate, safety nets are in place, the credit allocation has been made more rational. Remaining risks are limited to regional and smaller institutions that are vulnerable to weak, local economic conditions and hikes of the long-term interest rate.

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Bibliographic Info

Paper provided by Institute of Economic Research, Hitotsubashi University in its series Hi-Stat Discussion Paper Series with number d05-102.

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Date of creation: Jun 2005
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Handle: RePEc:hst:hstdps:d05-102

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Keywords: Asset price bubble; Japan's "lost decade"; systemic banking sector crisis; bank restructuring and consolidation; market-based regulatory and supervisory framework;

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References

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  1. David C. Smith, 2003. "Loans to Japanese borrowers," International Finance Discussion Papers 769, Board of Governors of the Federal Reserve System (U.S.).
  2. Smith, David C., 2003. "Loans to Japanese borrowers," Journal of the Japanese and International Economies, Elsevier, vol. 17(3), pages 283-304, September.
  3. Brewer, Elijah III & Genay, Hesna & Hunter, William Curt & Kaufman, George G., 2003. "The value of banking relationships during a financial crisis: Evidence from failures of Japanese banks," Journal of the Japanese and International Economies, Elsevier, vol. 17(3), pages 233-262, September.
  4. Masahiro Kawai, 2001. "Bank and Corporate Restructuring in Crisis-Affected East Asia: From Systemic Collapse to Reconstruction," Asia Pacific Economic Papers 317, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University.
  5. Takeo Hoshi & Anil Kashyap, 2000. "The Japanese Banking Crisis: Where Did It Come From and How Will It End?," NBER Chapters, in: NBER Macroeconomics Annual 1999, Volume 14, pages 129-212 National Bureau of Economic Research, Inc.
  6. Thomas F. Cargill & Michael M. Hutchison & Takatoshi Ito, 2001. "Financial Policy and Central Banking in Japan," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262032856.
  7. Thomas F. Cargill & Michael M. Hutchison & Takatoshi Ito, 1997. "The Political Economy of Japanese Monetary Policy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262032473.
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Cited by:
  1. Kawai, Masahiro & Schmiegelow, Henrik, 2013. "Financial Crisis as a Catalyst of Legal Reforms: The Case of Asia," ADBI Working Papers 446, Asian Development Bank Institute.
  2. Paul Welfens, 2010. "Transatlantic banking crisis: analysis, rating, policy issues," International Economics and Economic Policy, Springer, vol. 7(1), pages 3-48, May.
  3. Masahiro Kawai & Mariko Fujii, 2010. "Lessons from Japan’s Banking Crisis," Working Papers id:2992, eSocialSciences.
  4. Masahiro Kawai & Peter Morgan, 2013. "Banking Crises and “Japanization†: Origins and Implications," Macroeconomics Working Papers 23509, East Asian Bureau of Economic Research.
  5. Kawai, Masahiro & Morgan, Peter, 2013. "Banking Crises and “Japanization”: Origins and Implications," ADBI Working Papers 430, Asian Development Bank Institute.
  6. Ralf Bebenroth & Diemo Dietrich & Uwe Vollmer, 2009. "Bank regulation and supervision in bank-dominated financial systems: a comparison between Japan and Germany," European Journal of Law and Economics, Springer, vol. 27(2), pages 177-209, April.
  7. Dow, Sandra & McGuire, Jean, 2009. "Propping and tunneling: Empirical evidence from Japanese keiretsu," Journal of Banking & Finance, Elsevier, vol. 33(10), pages 1817-1828, October.

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