Financial Crises and the Central Bank: Lessons from Japan during the 1920s

Masato Shizume

No 1611, Working Papers from Waseda University, Faculty of Political Science and Economics

Abstract: A series of financial crises following a boom during World War I marked the turning point for the emergence of prudential policy in Japan. An economic backlash after the war created mounting bad loans. After the Great Kanto Earthquake in 1923, the Bank of Japan (BOJ) introduced a special treatment facility for the devastated area. The BOJ hoped to rescue solvent but illiquid financial institutions, but the facility was abused by banks that were already in financial distress, paving the way toward a financial crisis. Banking panic spread nationwide in the spring of 1927. In 1928, the authorities introduced new arrangements for prudential policy with mergers and acquisitions, new types of regulations, and dual inspection by the Ministry of Finance and the BOJ. These arrangements restored financial stability while imposing a new constraint on monetary policy.

Pages: 20 pages
Date: 2016-11
New Economics Papers: this item is included in nep-his, nep-hpe and nep-mon
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Chapter: Financial Crises and the Central Bank: Lessons from Japan During the 1920s (2018)
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