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Japan's Financial Crisis

Japan's Financial Crisis: Institutional Rigidity and Reluctant Change

Jennifer A. Amyx
Copyright Date: 2004
Pages: 392
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  • Book Info
    Japan's Financial Crisis
    Book Description:

    At the beginning of the 1990s, a massive speculative asset bubble burst in Japan, leaving the nation's banks with an enormous burden of nonperforming loans. Banking crises have become increasingly common across the globe, but what was distinctive about the Japanese case was the unusually long delay before the government intervened to aggressively address the bad debt problem. The postponed response by Japanese authorities to the nation's banking crisis has had enormous political and economic consequences for Japan as well as for the rest of the world. This book helps us understand the nature of the Japanese government's response while also providing important insights into why Japan seems unable to get its financial system back on track 13 years later.

    The book focuses on the role of policy networks in Japanese finance, showing with nuance and detail how Japan's Finance Ministry was embedded within the political and financial worlds, how that structure was similar to and different from that of its counterparts in other countries, and how the distinctive nature of Japan's institutional arrangements affected the capacity of the government to manage change.

    The book focuses in particular on two intervening variables that bring about a functional shift in the Finance Ministry's policy networks: domestic political change under coalition government and a dramatic rise in information requirements for effective regulation. As a result of change in these variables, networks that once enhanced policymaking capacity in Japanese finance became "paralyzing networks"--with disastrous results.

    eISBN: 978-1-4008-4963-5
    Subjects: Political Science, Finance, History

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. List of Figures
    (pp. ix-x)
  4. List of Tables
    (pp. xi-xii)
  5. Abbreviations
    (pp. xiii-xiv)
  6. A Note on Conventions
    (pp. xv-xvi)
  7. Acknowledgments
    (pp. xvii-xxii)
  8. Introduction
    (pp. 1-10)

    From 1985 to 1990, Japan experienced an asset bubble of unprecedented proportions. The Nikkei Stock Index surged in these five years from below 7,000 to over 39,000, while the price of other assets—and real estate, in particular—multiplied many times over. During this period, the central bank maintained an extremely loose monetary policy, holding interest rates at postwar lows. Japanese banks engaged in a lending frenzy and, in doing so, helped to fuel the surge in asset prices. They extended many loans for purposes of investment in the stock or real estate markets. They extended many more for the...

  9. CHAPTER ONE Networks and State Performance
    (pp. 11-38)

    Networks—the collection of people, organizations, or objects connected to each other in some way—are found everywhere. Sociologists have long emphasized the importance of networks for organizational performance,¹ and in recent years, scholars and practitioners in numerous other disciplines have accorded networks an increasing amount of attention. Interconnectedness has become a critical framework for understanding phenomena in such disparate fields as medicine, physics, marketing, and business strategy.² The field of public policy has been no exception. Numerous political scientists have invoked network metaphors and concepts in their analyses of governance structures and processes.³

    This book concentrates on the role...

  10. Part I: Contours of Japan’s Financial Policy Networks

    • CHAPTER TWO Finance Ministry Ties with the Political Arena
      (pp. 41-60)

      All Japanese government ministries and agencies maintained relational ties with the ruling party and the Diet over the postwar period but none had links as dense and pervasive as the MOF’s. More former MOF officials served in the Diet than did former bureaucrats from other ministries or agencies (Table 2.1). The pervasiveness of these ties to the Diet and LDP reflected the high political stakes all Diet members had in fiscal policies and the belief held by officials in the Finance Ministry that the effective performance of its duties required close cooperation with governing party officials. Officials of the MOF...

    • CHAPTER THREE Finance Ministry Ties with Private and Quasi-governmental Financial Institutions
      (pp. 61-84)

      The MOF’s relations with private and quasi-governmental financial institutions comprised a second hub in its relational network. The All Japan Federation of Bankers’ Associations (Zenginkyoδ) served as one conduit for MOF instruction to banks and represented the industry as a whole on particular issues such as its opposition to the government-backed postal savings system.¹ Yet, the highly compartmentalized nature of the sector meant a significant divergence in interests across the membership on a whole range of other regulatory matters.² The high degree of sector compartmentalization and MOF discretion thus encouraged the development of relational ties between the MOF and individual...

    • CHAPTER FOUR Finance Ministry Ties with Other Government Agencies and the Central Bank
      (pp. 85-104)

      The MOF’s relations with other government agencies and the Bank of Japan served as the third hub in its relational network. The breadth of the ministry’s authority—particularly its holding of the budget—altered conventional bureaucratic political arrangements and made relations between the MOF and other agencies hierarchical in nature and network ties uniquely dense. This density was reflected in the aggregate number of MOF officials seconded to other agencies and in the rank of the posts they occupied. The ministry regularly sent officials to assume top- and mid-ranking posts in the agencies attached to the prime minister’s office, as...

  11. Part II: Evolution of Network-based Regulation

    • CHAPTER FIVE Institutional “Fit” for Rapid Growth
      (pp. 107-127)

      From the 1950s to the early 1970s, the Japanese financial system provided a relatively stable, reliable, and safe means of payment, encouraged and facilitated real savings, and mobilized and allocated this savings relatively efficiently and effectively to finance investment. In this period of 10 percent average annual real GNP growth, high levels of private business savings and investment, and low incidence of corporate bankruptcy, banks were not merely important, they were key players, providing 60–80 percent of total business financing needs. Furthermore, the sector’s prosperity translated both into a wellspring of tax revenue, bolstering government finances, and into large...

    • CHAPTER SIX Slowed Growth, Institutional Rigidity, and Reforms Postponed
      (pp. 128-146)

      Critical elements supporting the sound functioning of Japan’s system of financial regulation in the high-growth period came apart in the 1970s and 1980s, as significant changes in the macroeconomic environment placed strains on the banking system and altered the incentives for banks to engage in prudent lending behavior. Most salient among these developments were the surge in oil prices and the shift from a fixed to floating exchange rate. The focus of the Japanese economy moved away from capital-intensive industries, resulting in a dwindling customer base for banks and heightened costs to banks of monitoring borrowers. At the same time,...

    • CHAPTER SEVEN Network-managed Forbearance After the “Bubble” Bursts
      (pp. 147-162)

      The inflation of the speculative asset bubble came to a screeching halt in 1990–91 when tightened monetary policy and lending restrictions induced a plunge of unanticipated magnitude in asset values. The repercussions for the banking sector were huge. The balance sheets of all Japanese banks—from the smallest cooperative-type deposit-taking institutions to the largest commercial banks—were crippled with massive amounts of nonperforming loans.²

      Typically, a capital injection into banks crippled by bad loans restores capital ratios and thereby substantially reduces the degree of systemic risk triggered by bank collapse. A capital injection also tends to improve market confidence...

    • CHAPTER EIGHT Policy Paralysis amid Deepening Crisis
      (pp. 163-194)

      From a comparative perspective, the Japanese government’s initial regulatory forbearance toward banks following the bursting of the nation’s asset bubble fell into the realm of normalcy. Governments often delay as long as two to three years before mustering the political will to allocate public funds to strengthen their banking sectors. And, examples of more protracted delay—such as the five years taken by U.S. authorities before addressing that nation’s Savings and Loan crisis—also exist. As Japan’s nonperforming loan problem dragged on into the latter half of the 1990s, however, the distinctiveness of the Japanese case became increasingly evident. Only...

  12. Part III: Institutional Change and System Transition

    • CHAPTER NINE A New Regulatory and Policymaking Paradigm
      (pp. 197-227)

      With the collapse of several major financial institutions in November 1997, the severity of the nonperforming loan problem was no longer open to question. The whole country’s attention was now focused on the financial crisis. As the situation in the financial sector and wider economy continued to deteriorate into 1998, the pressures bearing down upon the Japanese financial system were so strong that some degree of change in the system for dealing with ailing banks was inevitable. The question was whether the government would execute a “soft” landing in the banking sector through an indiscriminate bail-out of the banks or...

    • CHAPTER TEN Why Can’t Japan Get Back on Track?
      (pp. 228-255)

      In 2003, indicators of financial system recovery were difficult to find in Japan. By most conventional measures of financial soundness, Japanese banks and the banking system were in worse shape early in this year than in any of the thirteen years following the collapse of the nation’s speculative asset bubble. Amounts of nonperforming loans held by the banks far exceeded amounts recorded in 1998.¹ In April 2003, the Nikkei Stock Index plummeted to its lowest level since November 1982, driven downward largely by a dramatic and persistent decline in the value of bank shares.² Japanese banks moreover recorded their fifth...

    • CHAPTER ELEVEN Conclusion
      (pp. 256-262)

      One of the clearest findings emerging from cross-national studies of banking crises is the strong positive relationship between quick action in dealing with banking sector problems and better economic performance.¹ A rapid response tends to contain problems and minimize costs. The postponed response by Japanese authorities to the bad debt problem in the banking sector in the 1990s led what might have been relatively small costs of clean-up in economic terms to become staggering costs. This delay and the policies pursued in lieu of tackling bad debt problems also contributed to Japan’s abysmal economic performance over the 1990s and in...

  13. Appendices
    (pp. 263-292)
  14. Notes
    (pp. 293-340)
  15. Bibliography
    (pp. 341-360)
  16. Index
    (pp. 361-366)