Term Paper on "Japan's Banking Crisis"

Term Paper 21 pages (5738 words) Sources: 1+

[EXCERPT] . . . .

Japan's Banking Crisis

Rubber Rules

Origins

Same Story... Different Setting

Relating Reasons

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Accepting Responsibility

Sewing Up the Wounds

Rubber Rules

Money changes all the iron rules into rubber bands."

Kapuscinsk)

Japan's current, positive financial movements are touted to symbolic of the strength of the recovery and the end of a long and painful period.

In the article, "Japan's Back! After Its Lost Decade, Japan's Economy is Set on a Recovery Path," sources report the Japanese economy has revived and emerged from the banking crisis beginning in the early 1990s. The Japanese economy, headed for its longest expansion in the postwar period, at this point, lasting more than four years. "In 2005, Japan grew by almost 3% and, over the course of the year, was the fastest-growing of the Group of Seven economies (on a fourth-quarter on fourth-quarter basis)." ("Japan's Back!...") Exports initially stimulated the recovery, however, buoyant domestic private spending, consumer and investor, have led the latest phase.

During 1996, 10 years ago, the time of Japan's deep, extended postwar recession, private spending and economic activity countered structural problems in the banking and corporate sectors. Consequently, after the land and equity price bubbles burst in the early 1990s, high nonperforming loans and a declining value of banks' equity portfolios persisted. Following bank credit constraints voided businesses; and individuals' confidence. Additionally, debt, capacity, and labor burdened the corporate sector during the bubble period: period. (Ibid)

These imbalances, in turn, adversely influenced investment demand and household income, negatively impacting consumer spending. Due to the gradual approach to dealing with the problems, falling demand, along with declining prices, coupled with high nonperforming loans, erupted and began to repeatedly cycle and insured that Japan's banking crisis continued. (Ibid)

II: Origins

Same Story... Different Setting

Of course it's the same old story. Truth usually is the same old story."

Thatcher) mob psychology fed by Japanese investors and bankers' complacency and euphoria, as well as, their failure to apply basic risk management principles in evaluating investment alternatives, is blamed to be part of the reason for Japan's banking crisis, which began in the 1990s. The "same old story,' of trying to solidify concrete causes to the truth of the roots of Japan's financial challenges has also been attributed to include regulators failure to take preventive measures to curb the mania and "Specifically," they state, "Japan's speculative mania and the banking crisis were caused by a combination of the following factors:

The hyperliquidity created after the 1985 Plaza Accord, which provided the funds for speculation.

Deregulation of the banking industry, which intensified competition and provided the incentive for speculation. "The introduction of jusen, which provided the vehicle of speculation.

The lack of investment opportunities in the real sector of the economy, which prompted the nation's large corporations to shift their investments from productive to speculative activities.

The failure of investors and banks to apply the principles of risk management in evaluating investment alternatives.

The failure of the MOF and the BOJ to diagnose the bubble and take preemptive action to burst it earlier rather than later." (Arayama and Mourdoukoutas 78)

Other economic observers attribute Japan's prolonged crisis to insufficient deficit spending; noting that as Japan's government deficit is structural, and not cyclical, that economic stagnation, instead of the government's deliberate action to stimulate the economy is the cause. Still another group of observers contend that Japan's prolonged crisis evolved from the "lack of a sense of crisis," consequently attributing "to four taboos of the country's financial system:

1) Taxpayers are prepared to bail out banks; 2) Foreigners should not be kept out of the industry; 3) Certain banks are too big to fail; 4) Banks should preserve lifetime employment for their regular employees at any cost." (Ibid 5-6)

Prior to Japan's banking Crisis, between 1945 and 1973 during the post-war period, restrictions on other options of financing positioned Japanese banks to become prime financiers. As dependence on banks begin to decrease in the 1970s, when financial markets were deregulated and restrictions on the issuance of equities and bonds were somewhat, numerous major Japanese corporations shifted their interests to less expensive financing of bonds and equity. ("Banking Crisis... "1) In the late 1970s, when the secondary market for government bonds opened, the Japanese obtained opportunities to channel savings into lucrative bond markets, additionally decreasing banks profit potential. By the mid-1980s, due to the continuing increase of financial options for businesses,."...banks began to lose pre-eminence they once had experienced." (Ibid) As Japanese banking rules remained primarily the same, bankers continued to implement traditional tactics of advancing loans while receiving deposits.

Consequently, as financial markets' deregulation significantly decreased the need for bank financing, Japanese bankers shifted their banks' lending priorities to more risky clients, primarily individuals and the commercial real-estate industry. The high economic growth and near zero inflation during this time (mid-1980s) which raised asset prices to extraordinary levels, coupled with extreme competition, prompted Japanese aggressively loan money in attempts to secure market shares. Collateral for loans, primarily overvalued real estate, created "the Asset Price Bubble." (Ibid) As Japanese banks and corporations ventured outside Japan during the late 1980s, particularly to Europe, East Asia, and the U.S., Japanese banks' unprofitable lending patterns continued. In 1989, however, when Nikkei 225 reached a peak of 38915 and collapsed, the banking bubble burst. The sharp decline of real-estate prices which ensued radically reduced collaterals' values. To attempt to counter the banks' huge non-performing loans, the Japanese government introduced the big-bang reform, which aimed to remedy the financial system's problems and create a stable financial environment. Right after the stock marked crash, however, the economic slump, which began right at the dawn of 1990, stagnated what the Japanese had hoped would be the beginning of a recovery process. (Ibid)

Ding the Japanese banking crisis, banks remained bound to old rules prohibiting them from securitizing their loans or entering into new business practices, such as fee generating activities. Even as late as 1998, banks could not offer loan commitments to collect fees. Consequently, banks continued to depend on generating revenue through traditional means such as making loans. (Ibid) Along with their normal lax accounting practices, Japanese banks employed little or no provisions for losses. This eliminated any safeguards to counter potential non-performing assets. And proved to hasten their downward financial spiral. When the Gulf War erupted in 1990, hopes that the Japanese stock exchange would be revived dissipated. As no immediate, potential remedies by governmental or financial institutions to counter this crisis were initiated, further financial chaos erupted. (Ibid 2)

III: Relating Reasons

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Trouble brings trouble upon trouble."

Sophocles)

During September 1998, in Sapporo, Japan, with a population of 1.7 million, fallout from Japan's banking crisis was noted. A factory in Ryoichi Hirata which manufactures custom kitchens, 60 workers were furloughed, while machinery remained idle. Business was reported to be dead at the Therme International resort hotel where swimming pools had been drained. Restaurant business was down more than 50%. Most construction work had ceased, while housing construction fell 14% during July 1998.

Department stores were without customers. New cars sales skidded to a halt. Approximately 100 companies went bankrupt each month. (Zielenziger) Japan reportedly once promised lifetime jobs to citizens, however, as Japan's gross domestic product fell at an annual rate of 3.3% during the second quarter 0f 1998, with unemployment reported as 4.7%, the Japanese government said Friday things would worsen. (Zielenziger)

Bad Loans and Crippled Banks

None of Sapporo's 20 leading city banks went under until November of 1997 as Japan's quasi-socialist financial system none of Sapporo's 20 leading city banks had ever gone under as the nation's powerful Finance Ministry effectively guaranteed them. However, the Hokkaido Takushoku Bank, the island's oldest and most prestigious financial institution, declared bankruptcy with debts exceeding $6.4 billion, when a potential partner did not follow through with planned merger. (Zielenziger)

Business is Business

During 1998, Zielenziger recommended that in order to secure long-term recovery Japan must:

Permit its bad banks to die,

Force the sale of distressed office buildings and hotels

Tolerate short-term financial pain

If not, Zielenziger stressed, Japan may not work out from under a barrage of bad loans, at that time, deemed to exceed $1 trillion. Japan, however, was reportedly unprepared is to endure the pain of free-market capitalism. In Japan, personal relationships constituted the collateral for loans; many companies' financial records of were confidential; accounting standards were insubstantial; paternal banks determined (unsuccessfully) to insure troubled customers stayed in business. One prime example: "Hokkaido Takushoku not able to say 'no' to companies that should have quit business a long time ago," said Iwao Takamuki, executive vice president of North Pacific Bank. "North Pacific cannot be as kind." (Zielenziger) Takamuki's second-tier bank, due to government pressure, acquired the Hokkaido Takushoku "good assets." Consequently, Takamuki had to decide which of the nearly 9,000 troubled companies Hokkaido Takushoku had tried to prop up would receive new loans, and which companies would lose operating funds. Takamuki had to replace personal… READ MORE

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