Reform of the Japanese Banking System

Masahiro Kawai ()

Hi-Stat Discussion Paper Series from Institute of Economic Research, Hitotsubashi University

Abstract: Japan has experienced a decade-long economic stagnation with a distressed banking sector in the 1990s. The absence of a credit culture to rigorously assess and price credit risks of borrowers, aggravated by weak prudential and supervisory frameworks, in the 1980s, the collapse of the asset price bubble in the early 1990s, and the lack of decisive, comprehensive strategy to address the banking sector problem at an early stage were largely responsible for the emergence of banking sector problems. All of these allowed a systemic banking crisis to emerge in 1997-98 and a large output loss during 1998-2002. The crisis ultimately prompted the government to take a more aggressive policy to tackle the problem. Sufficient progress has been made since then on banking sector stabilization, restructuring, and consolidation. The regulatory and supervisory framework has been strengthened in a way consistent with an increasingly market-oriented, globalized environment. As a result, the worst is over in the Japanese banking system, setting the stage for sustained economic recovery. Though bank capital may still be inadequate, safety nets are in place, the credit allocation has been made more rational. Remaining risks are limited to regional and smaller institutions that are vulnerable to weak, local economic conditions and hikes of the long-term interest rate.

Keywords: Asset price bubble; Japan's "lost decade"; systemic banking sector crisis; bank restructuring and consolidation; market-based regulatory and supervisory framework (search for similar items in EconPapers)
JEL-codes: E44 E51 G21 G28 (search for similar items in EconPapers)
Date: 2005-06
New Economics Papers: this item is included in nep-com, nep-fin, nep-his, nep-mac, nep-reg and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Journal Article: Reform of the Japanese banking system (2005)
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