The Analysis of Japanese Banking Crisis of the 1990s

The analysis of Japanese Banking Crisis of the 1990s

Introduction

The Japanese banking crisis occurred due to the lack of policies that provided good asset financing and lending to the Japanese customers. The country followed by a chronological occurrence of events led up to the system collapse of the industry in the early 90’s and created a depression. This article will talk about the history, prior economic conditions, possible causes of this crisis, the lessons learnt from this crash will also be discussed in this paper.

History of the Crisis

Before the occurrence of the crisis, Japan experienced a strong economic growth in the mid-20th century. The introduction of loans from western countries like USA after the war led to a growth of industry leading to exponential profitability of the banking sector. The country had a system installed to monitor the banking system through the utilization of capital levels pricing acts to monitor how much the financial sector had in asset financing. This structure allowed the government to control the growth of the economy as well as monitor whether the banks were functioning in an ethical manner in the giving of loans to the public. This lead to the Japanese high growth era from the 1950’s to the 1970’s as the government steered both the savers and borrowers in the banking system creating a secure financial market. Another action that created this booming growth was the presence of a banking system that only had few banks that were easy to be monitored in the country promoting accountability.

Deregulation. With the coming of the 1980’s, the Japanese government introduced deregulatory practices for the banking industry. The government took away the measures it had introduced to regulate the banking sector after examining the perceived stability of the sector from its constant growth rate. These restrictions were geared mainly to the large corporations on financing options (Hoshi & Kashyap 18). These corporations had become accustomed to depending on their local banks for financing options but decided that foreign investment was a better option as they could access more funding and diversify into foreign markets. This created independence in the corporations with their complete independence being finalized by the early 90’s. The banking sector begun to fluctuate, leading to the increase of the products prices in the market. This then led to the fall in the prices of bank shares as the market continued to struggle without investors. Interest rates were driven up by the government in order for the recoupment of funds to prevent losses

High Financial Segmentation. The history of the banking crisis also observes the desire of the Japanese banking industry in mirroring the American one. The economy of Japan is smaller in relative comparison with the American one. Since the American occupation of Japan however, the regulation of the banking sector has become mirror like. The Securities and Exchange Act was passed by the government in order to mimic the banking system with the law allowing for the separation of investment and commercial banking (Cowling & Tomlinson 374). Within the Japanese banking system, further segmentation occurred with the separation of banks into credit banks, city banks, trust banks and regional banks. Deregulation allowed these banks to conduct the exchange of securities without government interference affecting the borrowers in the system. Deregulation also lifted the requirements for listing in the stock market and commissions were eventually abolished leading to a change in the foreign investments act as the country allowed for foreign investors to use their banks to invest without any barriers that affected them before.