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No. 25 — July 3, 1998

 

Feature Article

JAPAN'S BANKS AND THE BAD-LOAN PROBLEM: THE NIGHTMARE CONTINUES by Douglas Ostrom

Summary

By the early 1990s, foreign analysts had begun to pay increased attention to the nonperforming-loan problems of Japanese financial institutions. Americans, for whom the savings and loan crisis was a recent memory, were especially interested. The consensus of overseas experts was that Japan might avoid a similar nightmare if it implemented appropriate policies or got lucky in terms of economic growth.

As the decade nears an end, Japan neither has put in place the recommended banking policies nor experienced the kind of economic spurt that would have enabled it to grow out of its predicament. Despite years of high-profile actions, the banking system's bad-loan problem arguably is worse today than ever before. The economic crisis engulfing Japan's Asian neighbors since last summer gives special urgency to finding a solution.

The issue, as it has been from the beginning, is money. The United States and other nations that have tackled financial-sector crises spent billions of dollars either up front to protect depositors when banks were closed or to recapitalize institutions in danger of failure. At some time or another, experts have recommended one or both of these options to Japanese policymakers. They appeared to embrace the strategies initially, only to back off later. One reason was that most plans involved foreclosing on bad loans made to powerful business interests.

Policymakers in Tokyo no longer expect Japan to grow its way out of trouble, and they never counted on good luck. Whether they are willing to spend the amount required and alienate powerful groups remains to be seen.

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Weekly Review

EPA, TANKAN CONFIRM JAPAN IS IN A RECESSION by Douglas Ostrom

Pessimism in Japan has become so pervasive that any forecast — no matter how gloomy — is seen as too rosy. When a prediction actually pans out, it is regarded as a pleasant surprise. The Tokyo stock market demonstrated that reality when it staged a modest rally after learning June 29 that the latest tankan, the Bank of Japan's quarterly survey of business confidence, indicated that business conditions, although dismal, were within the expected range. The tankan results came on the heels of an equally unsurprising announcement from the Economic Planning Agency that Japan is, in fact, in a recession.

 

NEW FINANCIAL WATCHDOG FACES UPHILL BATTLE by Jon Choy

Tokyo took what it hopes is a big step toward restoring public confidence in Japan's financial institutions and markets with its June 22 inauguration of the Financial Supervisory Agency. The organization concentrates financial inspection responsibilities that previously were distributed among at least four different ministries.

 

NUCLEAR TESTS, ASIAN CONTAGION MAY THREATEN REGIONAL STABILITY, JDA SAYS by Barbara Wanner

With the United States and other allies laying part of the blame for the economic crisis in East Asia on Japan's apparent inability to clean up its banking mess and jump-start the economy, probably the last thing that the cabinet of Prime Minister Ryutaro Hashimoto wanted to hear was that the stability of the entire region now may be at risk. But that, indeed, was the Japan Defense Agency's assessment in its 1998 white paper, released June 23.

 

JAPAN STAYS TOP FOREIGN AID DONOR; CAPITAL FLOWS TO DEVELOPING COUNTRIES FALL by Eric Altbach

Japan remained the largest provider of official development assistance in 1997, a year marked by the onset of an economic crisis in East Asia and an overall decline in both aid and private capital flows to developing countries. The Organization for Economic Cooperation and Development, the compiler of the development finance data, calculated that Japan's dollar-denominated ODA expanded 9.6 percent from 1996's level (see Table). This gain occurred despite a mere 2.1 percent increase in allocations for foreign aid in the FY 1997 budget due to Prime Minister Ryutaro Hashimoto's efforts to promote fiscal austerity.

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