Japan’s Economic and Financial Stagnation and the Possibility of a Second Lost Decade

Thomas F. Cargill

No 199, EIJS Working Paper Series from The European Institute of Japanese Studies

Abstract: This paper reviews the reasons why Japan has failed to resolve the economic and financial distress that started in 1990 with the collapse of asset prices despite many efforts to stimulate the economy and redesign the financial system. Why has recovery not yet occurred, and is Japan in a second lost decade in terms of economic and financial development? I discuss how restraints embedded in the Japanese financial system account for the slow and incomplete reform process. These include: financial liberalization in Japan was more a response to specific interest groups than an effort at fundamental redesign; perceived absence of moral hazard and regulatory-market dialectic in Japan; economic history’s influence on Japan’s perceived need for institutional redesign; clash between liberalization and Japanese culture; BIS capital-asset requirements; role of government financial intermediation; and, lack of a perceived crisis in Japan. The paper then turns to general or global restraints to reform and focuses on Bank of Japan policy and the adverse effects of deflation. To date, Japan has not shown a willingness to accept the cost of reform and continues to engage in forgiveness and forbearance. Japan need not adopt the western-type of financial system to the same degree as in the United States or England, but it needs to find a way to depart from the system of mutual support and accept a system that allows for bankruptcy to play a more meaningful role in the allocation of resources.

Keywords: Japan; asset prices; non-performing loans; banks; financial liberalization; moral hazard; regulation; financial intermediation; institutional change. (search for similar items in EconPapers)
JEL-codes: E58 G21 G28 N25 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-sea
Date: 2004-09-01
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