Japan Financial Crisis

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Japan Financial Crisis

• By Sander Chau
• Winslow Han

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Postwar Financial System

• Bank-based system with underdeveloped stock and
  bond market.
• Stable system no threat of new entry
• Safe but inefficient system
• Postwar system could not last forever
• Banks grew too large but restricted by many
  restrictions

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4 Basic Causes of Bank Difficulties

• Failure to create prudential regulatory system
• Macroeconomic mismanagement
• Effects of Globalization
• High rate of financial innovation

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Prudential Regulatory System

• Deregulation of the system took place without
  creating a effective system
• Generates competition
• Profit no longer guaranteed

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5 Macroeconomic Policy Mistakes

• Interest Rates were at postwar lows
• Not easing monetary and fiscal policies in the
  early 90s
• Relying excessively on easy monetary policies in
  the mid 90s
• Fiscal Stimulus through supplementary budgets in
  the mid 90s, too little too late.
• Wrong optimistic forecast for 97

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Effects of Globalization

• Economic and financial policies subject to
  foreign pressures
• Worlds largest creditor nation Japanese
  financial institutions engaged in foreign lending
  and portfolio investment
• Flourishing of a free global capital market
• Big Bang deregulation creates competition in
  Japan home market from foreign financial
  institutions

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Financial Technology Innovation

• Wide range of new financial derivatives
• Mostly American and some European players
• Japanese banks unable to learn
• The most capable Japanese are hired away by
  foreign firms

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Banking Sector Problems

• Mergers and failures have left Japan with 7 major
  banks
• Low profitability for more than 10 yrs
• Banks depend too heavily on revenue from lending
• Government sponsored financial institutions
• Evergreening

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Comparison to US Banks

• Interest Margin of Japanese banks 1.2 compared
  to 3.3 to 3.5 of assets
• Other Revenue 38 revenue from lending
  operations compared to US 73 of lending revenue

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Government Sponsored Institutions

• Japan Post post office and largest
  deposit-taking institution in the world
• Heavily subsidized
• 9 times the branches of all city banks
• Same rate on deposits, explicit government
  guarantee, no maintenance fee, lower rate on
  lending, no prepayment penalties
• Strong government resistance to address this
  problem and no public recognition of the losses
  that these government institutions have made with
  explicit subsidies

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Table 1 An Overview of the Japanese Financial
System
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Bank Problem Example

• 1.1 trillion yen of public funds injected into
  Asahi and Daiwa Banks
• March 2003 Asahi and Daiwa Banks merge into
  Resona Bank (5th largest)
• Resona granted another 1.96 trillion yen
• September 2003 Resona records loss of 1.76
  trillion yen for period between Mar-Sept 03 (90
  capital provided, disappears)
• Regulators principal aim to avoid large bank
  failures
• Little attention to future viability of
  recapitalized banks
• Regulators did not systematically force other
  banks to reassess their risk ratings
• Gives little incentive for Banks to restructure

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Book Value and Adjusted Capital in the Japanese
Banking Sector
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Conclusion

• Cumulative loan losses by banks since 1990 is
  91.5 trillion yen (18 of current Japanese GDP)
• Tax payer burden very likely at least 100
  trillion yen (20 of GDP)
• Solutions
• Banks must shrink in size
• Find alternative means of income other than
  lending
• Recapitalization and restructuring
• Reining in of Government sponsored financial
  institutions

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