Lessons from Japan’s Banking Crisis, 1991-2005

23 Pages Posted: 12 Jul 2010

See all articles by Mariko Fujii

Mariko Fujii

University of Tokyo - Research Center for Advanced Science and Technology (RCAST)

Masahiro Kawai

Asian Development Bank Institute

Date Written: June 29, 2010

Abstract

The Japanese government’s response to the financial crisis in the 1990s was late, unprepared and insufficient; it failed to recognize the severity of the crisis, which developed slowly; faced no major domestic or external constraints; and lacked an adequate legal framework for bank resolution. Policy measures adopted after the 1997–1998 systemic crisis, supported by a newly established comprehensive framework for bank resolution, were more decisive. Banking sector problems were eventually resolved by a series of policies implemented from that period, together with an export-led economic recovery. Japan’s experience suggests that it is vital for a government not only to recapitalize the banking system but also to provide banks with adequate incentives to dispose of troubled assets from their balance sheets, even if that required the government to mobilize regulatory measures to do so, as was done in Japan in 2002. Economic stagnation can cause new nonperforming loans to emerge rapidly, and deplete bank capital. If the authorities do not address the banking sector problem promptly, then the crisis will prolong and economic recovery will be substantially delayed.

Keywords: Japan banking crisis, 1990s, bank capital, financial regulation

JEL Classification: G01, G21, G28

Suggested Citation

Fujii, Mariko and Kawai, Masahiro, Lessons from Japan’s Banking Crisis, 1991-2005 (June 29, 2010). ADBI Working Paper No. 222. Available at SSRN: https://ssrn.com/abstract=1638784 or http://dx.doi.org/10.2139/ssrn.1638784

Mariko Fujii (Contact Author)

University of Tokyo - Research Center for Advanced Science and Technology (RCAST) ( email )

4-6-1 Komaba Megro-ku
Tokyo, 153-8904
Japan

Masahiro Kawai

Asian Development Bank Institute ( email )

Kasumigaseki Building 8F 3-2-5
Kasumigaseki Chiyoda-ku
Tokyo, 100-6008
Japan

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