Can the Financial Restraint Hypothesis Explain Japan's Postwar Experience?

Masaharu Hanazaki, 正晴 花崎, マサハル ハナザキ, Akiyoshi Horiuchi, 昭義 堀内 and アキヨシ ホリウチ

No 2001-12, CEI Working Paper Series from Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University

Abstract: While the Japanese banking sector seems to have disciplined borrower firms for inefficient management in the high growth era, its fragility was revealed by the serious non-performing loans since the early 1990s. According to 'the financial restraint hypothesis' advocated by Hellmann, Murdock and Stiglitz (1996), the comprehensive competition-restricting regulation was effective in motivating banks to prudently monitor their client firms by giving the banks excess profit opportunities. The financial deregulation started at the beginning of the 1980s undermined banks' profitability and induced the banks to shirk monitoring. Thus, according to the financial restraint hypothesis, the Japan's bank crisis in the 1990s was a consequence of the financial deregulation in the 1980s. This paper criticizes the financial restraint hypothesis, and proposes the alternative hypothesis that the banking sector was potentially fragile even before the 1980s because the government was unable to penalize inefficiently managed banks in credible ways. The manufacturing firms, which were disciplined by competitive pressures from abroad, reduced their reliance on bank credit in the late 1970s, and non-traded good industries such as real estate became major borrowers of bank credit in the 1980s. This structural change in the bank credit market revealed the potential fragility of the Japanese banking sector. The empirical analyses based on more than 1,600 manufacturing firms supports the alternative hypothesis this paper proposes.

Pages: 42 pages
Date: 2001-09
Note: This paper was presented at the conference on Designing Financial Systems in East Asia and Japan: Toward a Twenty-First Century Paradigm. This two-day conference was co-organized by the International Monetary Fund and the CEI. It was held during September 24-25, 2001 at Hitotsubashi Memorial Hall in Tokyo, Japan. A select group of academics, researchers and policy makers from around the world gathered to examine the timely issue of how the financial systems and corporate governance in East Asia and Japan should be redesigned in order to achieve sustainable economic development. The conference included six sessions with 17 papers. All the presented papers were added to the CEI series of working papers. The series, as well as the contents of the conference, can be reached at http://cei.ier.hit-u.ac.jp., October 2001
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/13960/wp2001-12a.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hit:hitcei:2001-12

Access Statistics for this paper

More papers in CEI Working Paper Series from Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University Contact information at EDIRC.
Bibliographic data for series maintained by Reiko Suzuki ( this e-mail address is bad, please contact ).