Publisher: Princeton Univ International Economics
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Japan is only one of many industrialized economies to suffer a financial crisis in the last fifteen years, but it has suffered the most from its crisis - as measured in lost output and investment opportunities, and in the direct costs of clean-up. Comparing the response of Japanese policy in the 1990s to that of U.S. monetary and financial policy to the American Savings and Loan Crisis of the late 1980s sheds light on the reasons for this outcome. This volume was created by bringing together several leading academics from the United States and Japan - plus former senior policymakers from both countries - to discuss the challenges to Japanese financial and monetary policy in the 1990s. The papers address in turn both the monetary and financial aspects of the crisis, and the discussants bring together broad themes across the two countries' experiences. As the papers in this Special Report demonstrate, while the Japanese government's policy response to its banking crisis in the 1990s was slow in comparison to that of the United States government a decade earlier, the underlying dynamics were similar. A combination of mismanaged partial deregulation and regulatory forebearance gave rise to the crisis and allowed it to deepen, and only the closure of some banks and injection of new capital into others began the resolution. The Bank of Japan's monetary policy from the late 1980s onwards, however, was increasingly out of step with U.S. or other developed country norms. In particular, the Bank of Japan's limited response to deflation after being granted independence in 1998 stands out as a dangerous and unusual stance.
During the Japanese banking crisis of the 1990s, the Bank of Japan (BoJ) extensively exercised its lender of last resort (LOLR) function. Three main lessons emerge from this experience.Full publication: "http://ssrn.com/abstract=2504682" target="_blank" Re-Thinking the Lender of Last Resort.
Regarding the causality of Japanese banking crisis, two views are popular: (i) slow and undirected financial deregulations in the 1980s caused trouble for the banks in adjusting with the new environment, and (ii) banks shifted their business in SME market and real estate businesses aggressively in the era of protracted monetary easing in the mid 1980s, that finally contributed to banking failures after the curbed down of asset prices. Instead of these two views, our analysis shows that the continuous declining trend of banks profitability (e.g., ROA or ROE) from 1970 was a warning signal for banking crisis, which was just accelerated by the bubble burst. Without the monetary shock during the bubble period in the late 1980s, it would take some more time to reach the crisis situation. The paper also highlights some potential causes of declining trend of banks profitability. For analysis, Kaplan-Meire's Product-Limit method is applied to estimate the survival functions and cause-specific hazard rates for the Japanese banks, along with Cox's Proportional Hazards Model is used to find the significance of regression coefficients. Again, the accelerated failure time model has been fitted to see whether the bubble accelerated the failure of banks. Moreover, cointegration test and Granger causality test have been performed to identify the long-term causality of banks' declining profitability. The issue is not only important for the Japanese economy, but also instructive for other big Asian economies.
For a large part of the past decade, Japan has witnessed a steady deterioration in the health of its banking system. This paper examines what went wrong and why it has taken so long for the system to recover. While the paper traces the roots of the crisis to accelerated deregulation and deepening of capital markets without an appropriate adjustment in the regulatory framework, it identifies weak corporate governance and regulatory forbearance as the two factors behind what might have been an unnecessary prolongation of the distress of the financial system.