Banking Crisis in Japan

The Japanese banks played a major role in the economic development of Japan during the post-war period between 1945 and 1973. They financed start-up companies and actively funded their expansion. They were prime financiers since there were restrictions on other options of financing such as equities and bonds. But this changed in the 1970s when reforms in the financial sector took place. These reforms eased the restrictions on bond and equity issuance. Financial markets were deregulated and this allowed the major Japanese companies to reduce their dependence on banks. They were able to substitute cheap bond financing for expensive bank credit. This reduced the role of banks as prime financiers. To overcome this situation, banks reorganised their portfolios and started lending to riskier segments like consumer lending and the real-estate industry. This resulted in an asset price bubble, which finally burst in 1989 resulting in huge non-performing loans for Japanese banks. This case enables the reader to understand the effects of reckless lending and how the continued presence of non-performing loans in the banking sector had a deleterious effect on the Japanese economy.