Uncertainty, financial fragility and monitoring: Will Basle-type pragmatism resolve the Japanese banking crisis?

Yasushi Suzuki

Review of Political Economy, 2005, vol. 17, issue 1, 45-61

Abstract: This paper argues that the naive adoption of an Anglo-American approach to the management of credit risk as the prescription for Japan's prolonged financial slump would amount to a very risky strategy. The neoclassical arguments for the adoption of Basle-type pragmatism and the adoption of Anglo-American financial norms neglect the important question of how to manage Japanese lenders' uncertainty, which affects their assessment of credit risk. We point out that an ill-planned transition without mechanisms for diversifying risk and uncertainty has encouraged herd behavior in lending. We also argue that Japan's traditional rent-based mode of financial intermediation and monitoring performed important functions, including the incubation of new enterprises, and should have been retained in alternative form rather than abandoned.

Date: 2005
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DOI: 10.1080/0953825042000313807

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