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Structural Disposal and Cyclical Adjustment: Non-performing Loans, Structural Transition, and Regulatory Reform in Japan, 1997-2011

  • KAWASHIMA, Toshiki


    (Institute of Social Science, The University of Tokyo)

Japan experienced falling asset prices, implemented financial market reforms, and was forced to reduce non-performing loans from the late 1990s to the mid-2000s. As the market reform prompted the corporate sector to replace bank borrowing with bond flotation and hence the banking business shrank, a rapid reduction of non-performing loans required a massive write-off of standing loans. We examine whether it was appropriate for the regulatory authority to guide the banking sector to aggressively write off nonperforming loans in the early 2000s or to wait for cyclical recovery, along with the structural reform. We show that non-performing loans could have been cyclically reduced only by a further extension of mortgage loans, since the deregulated corporate sector scaled back its reliance on banking. Although a further deregulation of mortgage markets might have enable cyclical reduction in non-performing loans, structural non-performing loan disposal is justifiable if another housing market bubble was to be avoided.

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Paper provided by Institute of Social Science, The University of Tokyo in its series ISS Discussion Paper Series (series F) with number f167.

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Length: 35 pages
Date of creation: 11 Feb 2014
Date of revision: 27 Apr 2014
Handle: RePEc:itk:issdps:f167
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  1. Mathias Hoffmann & Toshihiro Okubo, 2013. "'By a Silken Thread': Regional Banking Integration and Pathways to Financial Development in Japan's Great Recession," CESifo Working Paper Series 4090, CESifo Group Munich.
  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.
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  4. Kano, Masaji & Uchida, Hirofumi & Udell, Gregory F. & Watanabe, Wako, 2011. "Information verifiability, bank organization, bank competition and bank-borrower relationships," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 935-954, April.
  5. Uchida, Hirofumi & Satake, Mitsuhiko, 2009. "Market discipline and bank efficiency," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(5), pages 792-802, December.
  6. Dimitrios P. Louzis & Aggelos T. Vouldis & Vasilios L. Metaxas, 2010. "Macroeconomic and bank-specific determinants of non-performing loans in Greece: a comparative study of mortgage, business and consumer loan portfolios," Working Papers 118, Bank of Greece.
  7. Koetter, Michael & Wedow, Michael, 2010. "Finance and growth in a bank-based economy: Is it quantity or quality that matters?," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1529-1545, December.
  8. Masami Imai & Seitaro Takarabe, 2011. "Bank Integration and Transmission of Financial Shocks: Evidence from Japan," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 155-83, January.
  9. Honda, Etsuro, 2003. "Financial deregulation in Japan," Japan and the World Economy, Elsevier, vol. 15(1), pages 135-140, January.
  10. Millet-Reyes, Benedicte, 2000. "The deregulation of capital markets in France," Journal of Multinational Financial Management, Elsevier, vol. 10(2), pages 109-132, June.
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