Political Impediments to Far-reaching Banking Reforms in Japan: Implications for Asia

Abstract

Ever since the collapse of a speculative asset bubble in 1991, Japanese banks have been burdened with enormous amounts of non-performing loans. The failure of Ministry of Finance (MOF) officials to tackle the problem aggressively had grave repercussions as macroeconomic policy mistakes sank the economy into prolonged recession and exacerbated the magnitude of bad bank loans. A full-blown financial crisis hit in 1997, following the collapse of the nation's tenth-largest bank and fourth-largest securities firm, and continued into late 1998. At the beginning of 1999, the amount of non-performing loans held by Japanese banks neared a trillion dollars. This chapter argues that the financial crises in Japan and greater Asia were related in many ways. Japan's response to the Asian crisis was negatively affected by the incapacity of policy-makers to resolve the nation's own financial system woes in the years between the collapse of the bubble economy and the onset of the regional crisis in 1997. More specifically, the simultaneous presence of a financial system crisis in Japan meant that the Japanese government's proactive role in assembling aid and funding packages for the region was not matched by a similarly positive role by Japan's private sector. Japanese banks, corporations and consumers were reluctant – or simply incapable – to serve as major catalysts for regional recovery. Further, Japan's domestic policy choices for its own financial crisis have affected capital flows and investment patterns in Asia.

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