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Lessons from Japan's Banking Crisis, 1991–2005

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Author Info

  • Fujii, Mariko

    (Asian Development Bank Institute)

  • Kawai, Masahiro

    (Asian Development Bank Institute)

Abstract

The Japanese government's response to the financial crisis in the 1990s was late, unprepared and insufficient; it failed to recognize the severity of the crisis, which developed slowly; faced no major domestic or external constraints; and lacked an adequate legal framework for bank resolution. Policy measures adopted after the 1997–1998 systemic crisis, supported by a newly established comprehensive framework for bank resolution, were more decisive. Banking sector problems were eventually resolved by a series of policies implemented from that period, together with an export-led economic recovery. Japan's experience suggests that it is vital for a government not only to recapitalize the banking system but also to provide banks with adequate incentives to dispose of troubled assets from their balance sheets, even if that required the government to mobilize regulatory measures to do so, as was done in Japan in 2002. Economic stagnation can cause new nonperforming loans to emerge rapidly, and deplete bank capital. If the authorities do not address the banking sector problem promptly, then the crisis will prolong and economic recovery will be substantially delayed.

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Bibliographic Info

Paper provided by Asian Development Bank Institute in its series ADBI Working Papers with number 222.

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Length: 23 pages
Date of creation: 29 Jun 2010
Date of revision:
Handle: RePEc:ris:adbiwp:0222

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Keywords: japan banking crisis; 1990s; bank capital; financial regulation;

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Cited by:
  1. Volz, Ulrich, 2012. "Lessons of the European Crisis for Regional Monetary and Financial Integration in East Asia," ADBI Working Papers 347, Asian Development Bank Institute.

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