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The Japanese Banking Crisis: Where Did It Come From and How Will It End?

In: NBER Macroeconomics Annual 1999, Volume 14

  • Takeo Hoshi
  • Anil Kashyap

We argue that the deregulation leading up to the Big Bang has played a major role in the current banking problems. This deregulation allowed large corporations to quickly switch from depending on banks to relying on capital market financing. We present evidence showing that large Japanese borrowers, particularly manufacturing firms, have already become almost as independent of banks as comparable U.S. firms. The deregulation was much less favorable for savers and consequently they mostly continued turning their money over to the banks. However, banks were also constrained. They were not given authorization to move out of traditional activities into new lines of business. These developments together meant that the banks retained assets and had to search for new borrowers. Their new lending primarily flowed to small businesses and became much more tied to property than in the past. These loans have not fared well during the 1990s. We discuss the size of the current bad loans problem and conclude that it is quite large (on the order of 7% of GDP). Looking ahead, we argue that the Big Bang will correct the aforementioned regulatory imbalances. This will mean that banks will have to fight to retain deposits. More importantly, we expect even more firms to migrate to capital market financing. Using the U.S. borrowing patterns as a guide, we present estimates showing that this impending shift implies a massive contraction in the size of the Japanese banking sector.

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This chapter was published in:
  • Ben S. Bernanke & Julio J. Rotemberg, 2000. "NBER Macroeconomics Annual 1999, Volume 14," NBER Books, National Bureau of Economic Research, Inc, number bern00-1.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 11047.
    Handle: RePEc:nbr:nberch:11047
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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    1. Mark Gertler & Simon Gilchrist, 1991. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," NBER Working Papers 3892, National Bureau of Economic Research, Inc.
    2. Joe Peek & Eric S. Rosengren, 1996. "The International Transmission of Financial Shocks: The Case of Japan," Boston College Working Papers in Economics 357, Boston College Department of Economics.
    3. Michael Hutchison & Kathleen McDill, 1999. "Are all banking crises alike? The Japanese experience in international comparison," Pacific Basin Working Paper Series 99-02, Federal Reserve Bank of San Francisco.
    4. Anil K. Kashyap & Raghuram Rajan & Jeremy C. Stein, 1999. "Banks as Liquidity Providers: An Explanation for the Co-Existence of Lending and Deposit-Taking," NBER Working Papers 6962, National Bureau of Economic Research, Inc.
    5. Joe Peek & Eric S. Rosengren, 1997. "Collateral damage: effects of the Japanese real estate collapse on credit availability and real activity in the United States," Working Papers 97-5, Federal Reserve Bank of Boston.
    6. Allen N. Berger & Gregory F. Udell, 1999. "Lines of Credit and Relationship Lending in Small Firm Finance," Macroeconomics 9906006, EconWPA.
    7. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-86, June.
    8. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
    9. Edward J. Lincoln, 1998. "Japan's Financial Problems," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 347-385.
    10. Ogawa, K. & Kitasaka, S.-I., 2000. "Bank Lending in Japan: its Determinants and Macroeconomic Implications," ISER Discussion Paper 0505, Institute of Social and Economic Research, Osaka University.
    11. 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, June.
    12. Jenkinson, T. J., 1990. "Initial public offerings in the United Kingdom, the United States, and Japan," Journal of the Japanese and International Economies, Elsevier, vol. 4(4), pages 428-449, December.
    13. Cai, Jun & Chan, K C & Yamada, Takeshi, 1997. "The Performance of Japanese Mutual Funds," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 237-73.
    14. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
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