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The effectiveness of bank recapitalization policies in Japan

  • Montgomery, Heather
  • Shimizutani, Satoshi

This study examines the effectiveness of bank recapitalization policies in Japan. Based on a reading of the "business revitalization plan" submitted by banks requesting government funds, we identify four primary goals for the capital injection plan in Japan: (1) to increase the bank capital ratios; (2) to increase write-offs of non-performing loans; (3) to increase lending, in particular to small and medium enterprises, in order to avoid a "credit crunch"; (4) to encourage restructuring. Using a panel of individual bank data, we empirically estimate the effectiveness of the Japanese government policy of public fund injection in achieving the first three of these stated goals. Our empirical analysis reveals that, in general, the capital injections into the large internationally active banks were more effective than those into the smaller domestic banks in Japan. In addition, the second round capital injection, administered in 1998, was more effective than the first round, administered in 1997. The first capital injection in 1997 mostly served as a stop-gap measure to help the large international banks clear the 8% capital adequacy ratio (BIS ratio) required under the Basel Accord and did not make much contribution to the other policy objectives. The second round of capital injections in 1998 were more effective, boosting capital adequacy ratios for the domestic as well as international banks and supporting other policy objectives as well by stimulating banks to write off bad loans and increase domestic lending, in particular to small and medium enterprises.

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Article provided by Elsevier in its journal Japan and the World Economy.

Volume (Year): 21 (2009)
Issue (Month): 1 (January)
Pages: 1-25

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Handle: RePEc:eee:japwor:v:21:y:2009:i:1:p:1-25
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505557

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  1. Montgomery, Heather, 2005. "The effect of the Basel Accord on bank portfolios in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 19(1), pages 24-36, March.
  2. Motonishi, Taizo & Yoshikawa, Hiroshi, 1999. "Causes of the Long Stagnation of Japan during the 1990s: Financial or Real?," Journal of the Japanese and International Economies, Elsevier, vol. 13(3), pages 181-200, September.
  3. Hiroshi Nakaso, 1999. "Recent banking sector reforms in Japan," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 1-7.
  4. Peek, Joe & Rosengren, Eric S, 1997. "The International Transmission of Financial Shocks: The Case of Japan," American Economic Review, American Economic Association, vol. 87(4), pages 495-505, September.
  5. Wako Watanabe, 2007. "Prudential Regulation and the "Credit Crunch": Evidence from Japan," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 639-665, 03.
  6. Joe Peek & Eric S. Rosengren, 2005. "Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan," American Economic Review, American Economic Association, vol. 95(4), pages 1144-1166, September.
  7. Ito, Takatoshi & Harada, Kimie, 2004. "Credit Derivatives Premium as a New Japan Premium," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(5), pages 965-68, October.
  8. Sekine, Toshitaka & Kobayashi, Keiichiro & Saita, Yumi, 2003. "Forbearance Lending: The Case of Japanese Firms," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(2), pages 69-92, August.
  9. Miyajima, Hideaki & Yafeh, Yishay, 2007. "Japan's banking crisis: An event-study perspective," Journal of Banking & Finance, Elsevier, vol. 31(9), pages 2866-2885, September.
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