How Can We Effectively Resolve the Financial Crisis: Empirical Evidence on the Bank Rehabilitation Plan of the Japanese Government

Abstract:     
When the Japanese economy experienced a serious financial crisis in the late 1990s, the government attempted to promptly resolve this crisis by injecting public funds into bank capital, requiring these banks to compose and implement a rehabilitation plan. This paper empirically investigates whether this plan (the Business Revitalization Plan) worked effectively, emphasizing the inconsistency between strengthening the soundness of the banking industry (preventing bank failures) and expanding credit supply (improving macroeconomy). We present empirical evidence on this inconsistency and argue that the government failed to promptly resolve the serious financial crisis in Japan due to this reason.

Keywords: Financial crisis, Credit rationing, Credit crunch, Non-performing loans, Capital/asset ratio

JEL Classification: G21

Accepted Paper Series