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Japans Lost Decade 1992-2002
Transcript of Japans Lost Decade 1992-2002
How It Originated?
1) Financial liberalization and Deregulation in the 1980s allowed small financial institutions to venture into new areas.
2) Japan’s booming post-War export economy and strict fiscal policies that were meant to encourage household savings resulted in a cash surplus in the country’s banking system that eventually led to more lenient lending.
3) The country’s healthy TRADE surpluses and the Plaza Accord in 1985, which sought to weaken the U.S. dollar against the Yen and German Deutsche Mark, caused the Yen currency to appreciate against other currencies, which in turn made foreign capital investments relatively inexpensive for Japanese companies.
The Plaza Accord or Plaza Agreement was an agreement between the governments of France, West Germany, Japan, the United States, and the United Kingdom, to depreciate the U.S. dollar in relation to the Japanese yen and German Deutschmark by intervening in currency market.
Overconfidence and the Bank of Japan’s loose monetary policy in the mid-to-late 1980s led to aggressive speculation in domestic stocks and real estate, pushing the prices of these assets to previously unimaginable levels.
From 1985 to 1989, Japan’s Nikkei stock index tripled to 39,000 and accounted for more than one third of the world’s stock market capitalization (Economist, 2011)
Japans Lost Decade
Many Japanese corporations practiced a corporate invention known as
or “financial engineering,” in which speculative profits and capital gains were reported as income on corporate financial statements.
-practicing firms obtained low-interest loans and used them to purchase stocks and real estate, which surged and helped the firms to report blowout earnings as long as asset prices continued to rise.
It was estimated that an incredible 40-50% of Japanese corporate earnings were derived from zaitech.
The deregulation of capital markets allowed large firms to increasingly shift away from banks to domestic and euro bond markets for funding
Banks channeled their loans towards those firms which had limited access to domestic and international capital markets.
Bank loans were overextended particularly in risky areas. Their loan portfolios were concentrated in property-related businesses such as construction, real estate, and nonbank financial services.
Most of these loans were collateralize by land whose value was thought to be increasing for the lifetime.
By 1989, Japanese officials became increasingly concerned with the country’s growing asset bubbles and the Bank of Japan decided to tighten its monetary policy.
After which the Nikkei stock bubble popped and plunged by nearly 50% from approximately 39,000 to 20,000 during the year 1990, hitting 15,000 by 1992.
Japan’s imploding stock bubble also popped the country’s real estate bubble, creating zaitech-in-reverse and throwing the country into a deep financial crisis and halting the three-decade old “Economic Miracle” in its tracks.
How It Affected Japan’s Bank
There was the collapse of Japan’s traditional banking sector
MOF (Ministry of Finance) encouraged stronger, healthier banks to absorb insolvent institutions—called the
Later it became increasingly difficult to pursue the “hogacho”style resolution because even relatively strong banks were experiencing the substantial deterioration in their balance sheets.
The weakened financial and capital positions made commercial banks to downsize their business operations, both domestically and internationally as part of their defensive strategy.
The BOJ reduced the discount rate nine times between 1991 and 1995 and eventually adopted a zero interest rate policy (February 1999). From the zero interest rate policy, the BOJ moved to “quantitative easing” (March 2001) to inject a monetary base into the banking system. Despite this M2 did not increase.
Regulatory forbearance and The convoy problem was the “community banking
mentality” under which banks tended to view clients as a part of their community made commercial banks to continue their lending to firms that were already in default in their repayments (zombie companies) that resulted in even more non-performing loans being generated.
JAPAN’S BANKING SYSTEM: FROM THE BUBBLE AND CRISIS TO RECONSTRUCTION Masahiro Kawai Institute of Social Science University of Tokyo, Japan
Restructuring of The Banks
The government injected public resources to recapitalize 21 commercial banks, including all city banks, for a total amount of 1.82trillion yen.
There was Organizational restructuring, including mergers, subsidiaries, alliances with partners both in and outside the banking industry.
The authorities had long avoided to recognize the full extent of bank NPLs. However, the 1990s-2012 crisis led the authorities to assess the solvency and soundness of the capital bases of the individual banks.
The government established asset management companies, the Resolution and Collection Corporation (RCC) and the Industrial Revitalization Corporation of Japan (IRCJ). They are playing a role to promote corporate restructuring and to accelerate the disposal of NPLs by purchasing such loans from banks
Similarities Between Japan and US Crises!
Financial crises in both countries were preceded by high economic growth and low inflation for an extended period of time.
Both Japan and the US took time to recognize the collapse of the economic bubbles and to appreciate its substantive implications for the broader economy.
Liquidity strains have been a prime catalyst for many of the past financial crises.
Failure of large financial institutions— Yamaichi and two long-term credit banks in Japan, and Lehman Brothers and other highly leveraged institutions in the US.
Even when financial stability was in jeopardy, decisive measures such as public capital injections did not come until the market disruptions reached a critical point in our two countries.
Similarities on monetary policy front.
Differences between Japan and US crisis!
The japanese govt failed to tackle the problem in 1990s in a prompt and decisive manner because the crisis was slow to develop, its severity was underestimated, growth expectations were too optimistic, no major domestic and external pressure existed, and a legal framework for resolving distressed banks was lacking.
A financial crisis damages the real economy, and the worsening of the real economy can also create new NPLs and may eventually deplete bank capital. Essentially, deterioration of the real economy can lead to another round of financial crisis, which can further damage the real economy.
If the authorities do not address the banking sector problem promptly, then the crisis may prolong, and a full-fledged economic recovery will be significantly delayed. This could result in a “lost decade” for the economy.
Government needs to induce banks to remove NPLs from their balance sheets. To do so may require the government to devise new, adequate incentives to banks—or to resort to regulatory measures, as was done in Japan in 2002—so that banks dispose of NPLs. Otherwise it would be difficult to restore healthy flows of credit to households and firms.
ADBI Working Paper Series , Lessons from Japan’s Banking Crisis, 1991–2005 by Mariko Fuji(Professor at the university of Tokyo) and Masahiro Kawai (Dean of Asian development Bank institute).
JAPAN’S BANKING SYSTEM: FROM THE BUBBLE AND CRISIS TO RECONSTRUCTION Masahiro Kawai Institute of Social Science University of Tokyo, Japan.
Nakaso, H. 2001. The Financial Crisis in Japan during the 1990s: How the Bank of Japan Responded and the Lessons Learnt. BIS Papers, No. 6 (October).Basel, Switzerland: Bank for International Settlements.
Way Out of Economic and Financial Crisis: Lessons and Policy Actions April 23, 2009 By Masaaki Shirakawa Governor of the Bank of Japan.