The Big Cleanse: The Japanese Response To The Financial Crisis Of 1990'S Seen From A Nordic Perspective

As Japan and the Nordic countries entered the final decade of the 20th century, they experienced an abrupt end to a near decade-long rapid surge in asset prices. An era of economic optimism was transformed into recession and a difficult cleaning-up process of the financial sector started. Although different in volume, the banking crises of Japan and the Nordic countries show close similarities in character and timing. Also the institutional setting was similar, where extensive regulations was the order of the day. However, the Japanese response to the crisis was slow. Not until April 1998 did a liberalization package of the Japanese financial markets, called "Tokyo Big Bang", came into force. By that time, the Swedish and the Finnish financial crises were by and large solved and a new industrial structure had emerged, replacing the old one. Drawing from the Swedish and the Finnish experiences, a successful solution to the Japanese financial crisis necessitates radical measures by wiping away the whole stock of bad loans and raise efficiency on the financial markets and within financial firms. This might imply even more thorough restructuring than it was originally intended from the Japanese side. What factors made the restructuring of the Swedish and the Finnish financial markets faster than the Japanese one? Given the reforms so far, can Japan resolve its problems in the financial sector in reasonable time and eventually catch up with European and North American financial markets? The conclusions are that it is too late for Japan to simply emulate the Nordic model. Rather, reforms encompassing the whole Japanese economy are necessary in order to win back the confidence of the Japanese people. In this paper, the Japanese financial reforms will be compared to the Swedish and the Finnish experiences, focusing on the evolution of the banking crises and the government response to these crises. Furthermore, the subsequent changes in the industrial structure and regulatory institutions are also addressed. Finally, the usefulness of implementing a Nordic style banking sector restructuring in Japan is discussed.