The Rise of Deferred Tax Assets in Japan: The Case of the Major Japanese Banks

Abstract

This paper describes the role that accounting for deferred taxes has played in the ongoing financial crisis among the major Japanese banks, as dramatized most vividly by the recent collapse of Resona Bank. I argue that deferred tax accounting: (1) has been used by the Japanese Government, including bank regulators, to help give the major banks collectively the appearance of financial well-being in spite of their economic difficulties, and (2) that managers of these banks have used deferred tax accounting to bolster their banks' regulatory capital levels when their economic circumstances deteriorate. I present evidence that is generally consistent with these arguments, supporting economists' views that accounting has played a role in helping the Japanese Government to postpone the politically difficult task of reforming the major banks.

Keywords: Japanese banks, Earnings management, Deferred taxes, Regulatory Capital, BIS Rules

JEL Classification: E50, G21, M41, M43, M44, M47