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http://ssrn.com/abstract=227555
 
 

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The Japanese Banking Crisis: Where Did it Come from and How Will it End?


Takeo Hoshi


University of California at San Diego; National Bureau of Economic Research (NBER)

Anil K. Kashyap


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

July 1999

NBER Working Paper No. w7250

Abstract:     
We argue that the deregulation leading up to the Big Bang has played a major role in the current banking problems. This deregulation allowed large corporations to quickly switch from depending on banks to relying on capital market financing. We present evidence showing that large Japanese borrowers, particularly manufacturing firms, have already become almost as independent of banks as comparable U.S. firms. The deregulation was much less favorable for savers and consequently they mostly continued turning their money over to the banks. However, banks were also constrained. They were not given authorization to move out of traditional activities into new lines of business. These developments together meant that the banks retained assets and had to search for new borrowers. Their new lending primarily flowed to small businesses and became much more tied to property than in the past. These loans have not fared well during the 1990s. We discuss the size of the current bad loans problem and conclude that it is quite large (on the order of 7% of GDP). Looking ahead, we argue that the Big Bang will correct the aforementioned regulatory imbalances. This will mean that banks will have to fight to retain deposits. More importantly, we expect even more firms to migrate to capital market financing. Using the U.S. borrowing patterns as a guide, we present estimates showing that this impending shift implies a massive contraction in the size of the Japanese banking sector.

Number of Pages in PDF File: 86

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Date posted: June 18, 2000  

Suggested Citation

Hoshi, Takeo and Kashyap, Anil K., The Japanese Banking Crisis: Where Did it Come from and How Will it End? (July 1999). NBER Working Paper No. w7250. Available at SSRN: http://ssrn.com/abstract=227555

Contact Information

Takeo Hoshi (Contact Author)
University of California at San Diego ( email )
9500 Gilman Drive
La Jolla, CA 92093-0519
United States
619-534-5018 (Phone)
619-534-3939 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Anil K. Kashyap
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7260 (Phone)
773 702-0458 (Fax)
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
773-702-7260 (Phone)
773-702-0458 (Fax)
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