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 PA LG R AV E M AC M I L L A N S T U D I E S I N
BANKING AND FINANCIAL INSTITUTIONS
S E R I E S E D I TO R : P H I L I P M O LY N E U X

Financial Crisis and Bank

Management in Japan
(1997 to 2016)
Building a Stable Banking System

Mitsuhiko Nakano
Palgrave Macmillan Studies in Banking
and Financial Institutions
Series Editor
Philip Molyneux
Bangor University
Bangor, United Kingdom
The Palgrave Macmillan Studies in Banking and Financial Institutions series
is international in orientation and includes studies of banking systems
in particular countries or regions as well as contemporary themes such
as Islamic Banking, Financial Exclusion, Mergers and Acquisitions, Risk
Management, and IT in Banking. The books focus on research and prac-
tice and include up to date and innovative studies that cover issues which
impact banking systems globally.

More information about this series at

http://www.springer.com/series/14678
 Mitsuhiko Nakano

Financial Crisis and

Bank Management
in Japan (1997 to
2016)
Building a Stable Banking System
Mitsuhiko Nakano
Momoyama Gakuin University
(St. Andrew’s University)
Osaka, Japan

Palgrave Macmillan Studies in Banking and Financial Institutions

ISBN 978-1-137-54117-8 ISBN 978-1-137-54118-5 (eBook)
DOI 10.1057/978-1-137-54118-5

Library of Congress Control Number: 2016946992

© The Editor(s) (if applicable) and The Author(s) 2016

The author(s) has/have asserted their right(s) to be identified as the author(s) of this work in accordance
with the Copyright, Designs and Patents Act 1988.
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The registered company address is: The Campus, 4 Crinan Street, London, N1 9XW, United Kingdom
Dedicated to my mother and the memory of my late father.
Mitsuhiko Nakano
“Mitsuhiko Nakano lucidly illustrates what happened in the Japanese
banking market after the financial crisis around 2000 and how Japanese
banks were stripped of both their autonomy and vitality under a regime
of tougher banking regulation. Japan’s case also teaches us an important
lesson: monetary easing policy has limitations as a tool in rescuing banks.”

Dr. Antonio Trujillo-Ponce

Director of the Banking and Entrepeneurial
Finance Research Group (BANEF)
Universidad Pablo de Olavide, Spain
 Preface

Everybody in the Japanese banking industry in the 1980s believed that

‘A gate to a new dream world is set to open.’ Events were to prove that it
was actually a gate to repeated crises and a long, painful and difficult road
for Japanese financiers and policy-makers. The purpose of this book is to
illustrate the struggles of the Japanese economy and to present its effects
on the Japanese banking industry during the past 20 years.
The Japanese financial crisis of the late 1990s brought comprehensive
restructuring to the banking industry and progressed in tandem with
big changes in the economic system and eventually led to the long-term
deflation of the 2000s. The Bank of Japan struggled to halt deflation by
launching a zero-interest-rate policy and a quantitative monetary easing
policy in the early 2000s. Among the advanced economies, Japan became
the first country to step into the realm of unconventional monetary pol-
icy. At the same time, the government started to reduce fiscal spend-
ing because the outstanding balance of government debt had already
become large as a result of successive emergency fiscal plans that had
been launched during the financial crisis. No room was left for additional
spending. In that sense, an escape from deflation was singularly and heav-
ily dependent on monetary policy.
However, deflation did not cease in spite of the monetary easing policy.
The deflation economy severely affected banking businesses. The priority
of large banks at this time was the settlement of non-performing loans
vii
viii Preface

that had accumulated during the bubble economy, and progress made in
settlement seriously eroded their net wealth. In addition, the banks hesi-
tated to accept additional risks under the strict regulation policy of the
financial authority. Consequently, banks shifted their funds from lending
to investment in Japanese government bonds.
During its early stages, the monetary easing policy helped banks
boost their profits as declining deposit interest rates expanded margins.
However, in its later stages, the policy depressed banking profits through
the considerable decrease of lending yields. This effectively reduced the
ability of the banks to take risks when the international regulation of
capital–asset ratios became tighter than ever. Nevertheless, the economy
recovered gradually and bank lending increased slowly due to the effects
of long-term monetary easing. The Bank of Japan then turned to the
normalization of its monetary policy, although concerns of deflation
persisted.
Just as some tangible improvements were becoming apparent in the
late 2000s, the two disasters of the Lehman Shock in 2008 and the Great
East Japan Earthquake in 2011 buffeted the national economy, sending
the Japanese economy back into deflation. Although direct losses of the
Japanese financial institutions were small, the real economy was severely
impacted by the slowdown in the global economy resulting from the
Lehman Shock. Suddenly, the banks were forced to return to a defensive
stance of behaviour. In addition, the Great East Japan Earthquake further
worsened the psychological mood of Japanese people. Japan was hit three
times by shocking incidents within a span of about 20 years, even though
each incident might be expected to occur no more than once every 100
years. The government and the Bank of Japan implemented every con-
tingency measure to sustain the economy. Particularly, the Bank of Japan
committed further into the comprehensive monetary easing policy, which
included qualitative monetary easing policy. However, the deflationary
economy unfortunately never gave way to a positive outcome.
Abenomics appeared suddenly in 2013 as a policy package comprised
of three arrows or directives aimed at breaking the prevailing deflationary
mindset of the public. The Bank of Japan described the inflation target
clearly and launched quantitative and qualitative easing monetary poli-
cies with greater volume and wider scope than in the past. Stock prices
 Preface ix

rose sharply. The Japanese yen fell as expected. However the inflation tar-
get was not achieved even within three years, in fact exceeding the prom-
ised two years. In addition, the portfolio rebalancing of the banks by
shifting funds from government bonds to lending was not realized either.
Moreover, the new monetary policy worsened bank profits further by
bringing about a greater decrease in lending yields. Eventually, monetary
policy entered the unexplored realm of negative interest rates in response
to the global economic downturn. As a result, banks were compelled to
rebalance their portfolios to assume some risk.
Eventually, Japanese society and economy are expected to encounter
the critical situation of extremely rapid demographic change the likes
of which no other nation has experienced in modern history with the
exception of times of war. The Japanese banking industry will be the first
to cope with this issue. The possibility exists of an expansion of financial
businesses that goes beyond the banking industry. The development of
financial technology will promote that possibility.
In Chap. 1, the processes of the Japanese financial crisis and the bank-
ing crisis are surveyed, including some important shocks that strongly
impacted the management of Japanese banks. In Chap. 2, attendant
changes in the social and economic systems are described, including the
legal and the accounting systems as related to banking business opera-
tions. In Chap. 3, deflation and its causes in the Japanese economy are
elucidated. Then the monetary policy of the Bank of Japan is traced, and
its effect on the banking business is evaluated. Chapter 4 presents an
explanation of Abenomics and its effects on banking businesses. Finally
in Chap. 5, a prognosis, to the greatest extent possible, of the future of
the banking industry in Japan is described, including the development of
other financial business operations.
It is hoped that this book will help readers gain a fuller and deeper
understanding of the Japanese economy and the Japanese banking indus-
try, including its future scope.
 Acknowledgements

In February 2014, I made my first visit to Cass Business School in

London. The surroundings of the school had been completely modern-
ized. They differed greatly from those I remembered at the time I had
studied in London many years ago.
I was given a one-year sabbatical leave by St. Andrew’s University
(Momoyama Gakuin University) and was blessed with a wonder-
ful opportunity to undertake research at Cass Business School of City
University London from September 2014. My supervisor, Dr. Barbara
Casu Lukac, the Director of the Centre for Banking Research at Cass
Business School, kindly advised me to write a book about the Japanese
banking industry and the Japanese economy. Few books have described
the Japanese banking business. Most of those have merely referred to the
financial crisis of the early 2000s.
I used to condemn non-performing loans during the financial crisis in
Japan. Since then I had written a few articles regarding the Japanese bank-
ing industry and banking business based on my experience and research.
This time I reviewed all of them, re-considered the meaning of the long-
term deflationary economy in Japan, analysed the revitalization process
of the Japanese banking industry, and explored the future of the industry.
I would like to thank Dr. Barbara Casu Lukac sincerely for her proposal.
I also appreciate the encouragement of my colleagues at Cass Business
School. I acknowledge the support both of St. Andrew’s University
xi
xii Acknowledgements

(Momoyama Gakuin University) and of Cass Business School. I also

appreciate useful advice from my colleague, Dr. Junsuke Matsuo and
Professor Zafar Moghbel, and the editorial suggestions of Ms. Alexandra
Morton of Palgrave Macmillan. Finally I should like to thank my wife
Rie, who has tenderly supported me on every occasion.
 Contents

1 Financial Crisis and Banking Crisis in Japan: 1997–2003 1

1.1 Introduction 1
1.2 Outline of the Banking Structure in Japan 2
1.3 The Bubble Economy and Its Collapse 4
1.3.1 The Three Causes of the Bubble Economy 4
1.3.2 Bank Behaviour 8
1.3.3 Collapse of the Bubble Economy 12
1.4 Financial Crisis 13
1.4.1 The Shinkumi Crisis 13
1.4.2 The Jusen Crisis 16
1.4.3 Successive Collapses During Bloody November 18
1.4.4 Collapse of the Two Long-Term Credit Banks 20
1.5 Restructuring of City Banks 22
1.5.1 Injections of Public Funds Three Times 22
1.5.2 The Shinsei Shock 23
1.5.3 Births of Megabank Groups 24
1.5.4 The Zenecon Crisis 24
1.5.5 The Resona Shock 25
1.5.6 The UFJ Crisis 27
1.6 Conclusion 28
References 32

xiii
xiv Contents

2 Change in Banking Supervision Policy and

Their Effects on Bank Behaviour: 2002–05 33
2.1 Introduction 33
2.2 Change of Banking Supervision Policy 33
2.2.1 Change of Banking Supervision Authority 33
2.2.2 The Financial Big Bang in Japan 36
2.2.3 Programme for Financial Revival 38
2.3 Bank Behaviour and Loss of Autonomy 41
2.3.1 Dissolution of the Mutual Shareholding System 41
2.3.2 Disposal of NPLs 42
2.3.3 Collection of NPLs 45
2.3.4 Revitalization of Failed Firms 46
2.3.5 The Second of the Basel Accords 47
2.3.6 Change of Bank Behaviour and Loss
of Autonomy 48
2.4 Structural Reforms in Economic and Social
Systems in Japan 53
2.4.1 Excessive Surpluses in the Three Economic
Elements 53
2.4.2 Backbone Design for Economic System Reforms 54
2.4.3 Acts of Insolvency and the Accounting System 57
2.4.4 Employment System 59
2.5 Conclusion 62
2.5.1 [Column] The Issue of the 30 Failed Firms 64
2.5.2 [Column] The Saiken Hoki Method 64
References 66

3 The Lehman Shock and Its Influence

on Banking Supervision Policy: 2008–13 67
3.1 Introduction 67
3.2 Deflation in the 2000s 68
3.2.1 Definition of Deflation 68
3.2.2 Trend of Deflation 68
3.2.3 Dispute of Aggregated Prices 71
3.2.4 Wage Deflation 72
 Contents xv

3.3 Monetary Policy of the BOJ 76

3.3.1 Monetary Policy After the Collapse of the Bubble
Economy 76
3.3.2 Effects of the BOJ Policy 83
3.4 The Lehman Shock and the Great East Japan Earthquake 88
3.4.1 The Lehman Shock 88
3.4.2 The Great East Japan Earthquake 94
3.5 Portfolio of the Banks 96
3.5.1 Small Rebalance of an Asset Portfolio 96
3.5.2 Decline of Interest Margin 98
3.6 Conclusion 103
References 104

4 The Launch of Abenomics and Its Effects

on the Banking Business 107
4.1 Introduction 107
4.2 Launch of Abenomics 108
4.2.1 Economic Situation of Pre-Abenomics 108
4.2.2 Three Arrows 110
4.2.3 Theoretical Background 116
4.2.4 Arguments 118
4.3 Effects of the New Monetary Policy 119
4.3.1 Financial Markets 119
4.3.2 The Second Bazooka 121
4.3.3 Banking Business 123
4.4 Three-Year Results of Abenomics 129
4.4.1 Macro Economy 129
4.4.2 Defects of Abenomics 133
4.4.3 QQE with a Negative Interest Rate 135
4.5 Conclusion 138
4.5.1 [Column] Political Background of
Prime Minister Abe 139
References 140
xvi Contents

5 The Future of Banking Management in Japan 141

5.1 Introduction 141
5.2 Funds Flow and Its Future 142
5.2.1 Funds Flow 142
5.2.2 Outstanding Balance of Financial Assets 144
5.3 Structural Issues of the Japanese Economy 146
5.3.1 Population Decline 146
5.3.2 Deterioration of the Local and
Peripheral Economies 149
5.4 Development of the Financial Industry 152
5.4.1 Capital Markets 152
5.4.2 Shadow Banking System 154
5.4.3 Retail Financial Business 155
5.4.4 Crowdfunding 157
5.5 The Japanese Banking Business of the Future 159
5.5.1 Banking Business in the Future 159
5.5.2 Megabanks 160
5.5.3 Regional Banks 167
5.5.4 Small Financial Institutions 170
5.6 Conclusion 171
References 175

6 Conclusion 177

Index 181
 Frequently Used Abbreviations

BOJ The Bank of Japan

BTMU The Bank of Tokyo-Mitsubishi UFJ, Ltd.
CGCs Credit Guarantee Companies
Chogin Nippon Choki Shin’yo Ginko (The Long-Term Credit Bank of
Japan, Limited)
CY Calendar Year
DBJ Development Bank of Japan Inc.
DIC Deposit Insurance Corporation of Japan
FSA Financial Service Agency
FSB Financial Stability Board
FY Fiscal Year: from April to March in the next calendar year
GHQ General Headquarters, the Supreme Commander for the Allied
Powers
IMF International Monetary Fund
IRC Industrial Revitalization Corporation of Japan
JBA Japanese Bankers Association
JBIC Japan Bank for International Cooperation
JFC Japan Finance Corporation
LDP Liberal Democratic Party
MHBK Mizuho Bank, Ltd.
MHFG Mizuho Financial Group, Inc.
MOF Ministry of Finance
MOHLW Ministry of Health, Labour and Welfare

xvii
xviii Frequently Used Abbreviations

MUFG Mitsubishi UFJ Financial Group, Inc.

MUTB Mitsubishi UFJ Trust and Banking Corporation
Nissaigin Nippon Saiken Shin’yo Ginko (The Nippon Credit Bank,
Limited.)
QE Quantitative Monetary Easing Policy
QQE Quantitative and Qualitative Monetary Easing Policy
RCC Resolution and Collection Corporation
RWA Risk Weighted Asset
SMBC Sumitomo Mitsui Banking Corporation
SMEs Small and Medium-sized Enterprises
SMFG Sumitomo Mitsui Financial Group
UFJB UFJ Bank Limited
UFJHD UFJ Holdings, Inc.
ZIRP Zero Interest Rate Policy
 List of Figures

Fig. 1.1 Trends in urban land price index 5

Fig. 1.2 Japanese yen to US dollar exchange rate: 1973–95 6
Fig. 1.3 Trend in the overnight call rate 7
Fig. 1.4 Trends in stock price and trading volume 13
Fig. 2.1 Disposal of the NPLs 43
Fig. 2.2 Trends in outstanding balance of corporate lending of all banks 49
Fig. 2.3 Trends in diffusion index of business conditions by size of firm 50
Fig. 3.1 Trends in CPI and GDP deflatorx 69
Fig. 3.2 Aggregate average of salaries in private business entities 73
Fig. 3.3 GDP growth rate trend 81
Fig. 3.4 Trend of money stock (M2) and nominal GDP 85
Fig. 3.5 Outstanding balance of bank lending by month 88
Fig. 3.6 Changes of balance sheet items of all banks 97
Fig. 3.7 Trend of lending yields 99
Fig. 3.8 Trend of margins 100
Fig. 3.9 Business performance of Toyota Motor Corporation 100
Fig. 4.1 Trends of unemployment rate by month 109
Fig. 4.2 Trends of the yen–dollar exchange rate and the
Nikkei Stock Average 109
Fig. 4.3 Roles of the three policy measures in Abenomics 117
Fig. 4.4 Yields of newly issued 10-year JGBs 120
Fig. 4.5 Trends in monthly percentage change of CPI less fresh food 130
Fig. 4.6 Trends of dividend payments 131

xix
xx List of Figures

Fig. 4.7 Trends of labour shares of national income 133

Fig. 5.1 Trends of current account of international trade balance 143
Fig. 5.2 Trends of net saving status by economic sector 144
Fig. 5.3 Trends in regional GDP in real terms 150
Fig. 5.4 Trends of shadow banking in Japan 155
Fig. 5.5 Business diagram of the Japanese banks in the future 159
 List of Tables

Table 1.1 Outline of the Japanese banking industry (trillion yen) 2

Table 1.2 Financial investment activities of business entities
in the bubble economy 11
Table 1.3 Brief history of the financial crisis in Japan 14
Table 2.1 Core contents of the Financial Big Bang in Japan
and dates of implementation 37
Table 2.2 Basic policies of the ‘programme for the financial revival’ 39
Table 2.3 Business performance of Sumitomo Mitsui
Banking Corporation (trillion yen) 45
Table 2.4 Evaluation of relationship banking by SMEs 52
Table 2.5 Financial services that SMEs and financial institutions
consider important 52
Table 2.6 Changes of employees in the banking industry
(end of March, thousand people) 55
Table 3.1 Price changes of consumer goods by product
(Index: year of CY2010 = 100, %) 70
Table 3.2 Changes of salaries by number of employees
(thousand yen, %) 74
Table 3.3 Monetary operations of the BOJ: 1995–2007 77
Table 3.4 Outstanding balance of base money and money
stock on average (end of April, trillion yen) 86
Table 3.5 Emergency operations in financial markets at the
time of the Lehman Shock 90

xxi
xxii List of Tables

Table 3.6 Monetary operations of the BOJ: 2008–2011 90

Table 3.7 Emergency financial support to private firms after
the Lehman Shock 91
Table 3.8 Examples of ‘Fund-Provision Measures to
Support Strengthening of Foundations for Economic
Growth’ (billion yen) 92
Table 3.9 Profit and loss accounts of all banks (trillion yen) 101
Table 4.1 Quantitative and qualitative easing policy by the BOJ 111
Table 4.2 Outstanding balance of JGBs and reserves of banks
(at the end of March, trillion yen) 123
Table 4.3 Yield of all banks, the city banks and the regional banks (%) 125
Table 4.4 Profit and loss accounts of the city banks (billion yen) 126
Table 4.5 Outstanding balance of overseas lending of the
three megabank groups (end of March, trillion yen, %) 127
Table 5.1 Outstanding balance of financial assets and liabilities
by economic sector (end of March 2015, trillion yen) 145
Table 5.2 Changes of deposits and lending-to-deposit ratios
(end of March, trillion yen, %) 151
Table 5.3 Net profit structure of MUFG and SMFG (billion yen) 161
Table 5.4 Recent acquisitions of overseas businesses by the
megabank groups 163
Table 5.5 Consolidated positions on counterparties by Group
of Five as a reporting country (end of September
2015, billion US dollars, %) 165
Table 5.6 Capital ratios of megabank groups (end of March, %) 165
Table 5.7 Recent business and management integrations
of regional banks 168
Table 5.8 Cross−border claims in selected Asian nations by
Group of Five as a reporting country (amount
outstanding, billions US dollars) 174
 1
Financial Crisis and Banking Crisis
in Japan: 1997–2003

1.1 Introduction
The banking crisis from the late 1990s in Japan remains the most memo-
rable incident in Japanese financial history. It was commensurate with the
Showa Kin’yu Kyoko, the Showa financial crisis in the 1930s, following the
global Great Depression that began in 1929. The banking crisis led to a
restructuring of the banking industry, which had not changed for 50 years
after World War II. In this chapter, first the banking crisis that occurred
mainly during 2000–04 is specifically examined. Secondly, causes, bank
behaviours, political reactions including monetary policy, and the results
are reviewed. In this book, the financial crisis is defined as a financial
turmoil that includes all financial institutions from the early 1990s to
the mid-2000s. The banking crisis is defined particularly as bank failures
during 1998–2004. In that sense, the banking crisis is included in the
financial crisis in terms of both substance and period.

© The Author(s) 2016 1

M. Nakano, Financial Crisis and Bank Management in Japan (1997 to
2016), DOI 10.1057/978-1-137-54118-5_1
2 Financial Crisis and Bank Management in Japan (1997 to 2016)

1.2 Outline of the Banking Structure in Japan

The banking structure in Japan is a hierarchical one similar to those in
other nations. It was established during the Meiji period (1868–1912).
The banks in Japan are classified fundamentally by their origin and busi-
ness area. The city banks are in the top tier. The regional banks are in
the second one. The second regional banks are in the third tier. Finally,
the cooperative financial institutions are in the fourth tier. Their num-
bers and the deposits controlled by organizations of each classification are
presented in Table 1.1. In the late 1980s city banks numbered 13, reduc-
ing to 11 by April 1996 because of mergers. These have agglomerated
into five in the four financial groups after the restructuring that occurred
at the beginning of the 2000s. The regional banks numbered 64 in the
1980s, the same as in 2015. The second regional banks1 numbered 68 in
the late 1980s; there were 41 in 2015. The cooperative financial insti-
tutions mainly consist of entities in four categories: the Shin’yo Kinko

Table 1.1 Outline of the Japanese banking industry (trillion yen)

Mar. 1991a Mar. 2015
Category Numberb Deposit Numberb Deposit
Domestic banking account 147 513.9 110 717.1
City banks 12 227.7 5 327.0
Regional banks 64 155.0 64 252.9
Second regional banks 68 59.0 41 64.8
Long-term credit banks 3 55.9 0 0
Shinkin 451 82.6 267 132.0
Shinkumi 407 22.4 154 19.2
Norinchukin banks 1 25.2 1 56.8
Agricultural cooperatives 3574 56.1 679 93.7
Japan Post Bank 1 136.2 1 177.2
Source: Japanese Bankers Association Kin’yu
Note:
a
FY1990 ended in March 1991 was the peak year of the bubble economy in
Japan
b
The number of each financial institution

1
The second regional banks used to be classified as the Sogo Bank, a regionally cooperative financial
institution. They were legitimated to be converted to an ordinary bank in 1989 onwards. But they
are still classified separately from the regional banks because of their origin.
 1 Financial Crisis and Banking Crisis in Japan: 1997–2003 3

(Shinkin), the Shin’yo Kumiai (Shinkumi),2 the Rodo Kinko (Rokin),3 and
the Nogyo Kyodo Kumiai (Nokyo),4 and others. The cooperative financial
institutions have been aggregated since the early half of the 1990s.5
In addition to the private financial institutions, a few financial institu-
tions exist under the control of the government. Japan Post Bank Co. Ltd.
(Japan Post Bank) which used to be part of the public agency, the Japan
Post, is undergoing privatization. Japan Finance Corporation (JFC) is
an institution wholly owned by the government and providing financial
support to small and medium-sized enterprises (SMEs) and individuals.
Development Bank of Japan Inc. (DBJ) is in charge of supporting indus-
tries financially based on the industrial policies of the government. Japan
Bank for International Cooperation (JBIC) is responsible for supporting
government policies in terms of internationally financial support, mainly
to enterprises.
In terms of the deposit amount, it is readily apparent that the city
banks are much larger than regional banks. For example, the deposit size
of the city banks, on average at present is 20 times that of the regional
banks. The average size of Shinkin is much smaller than that of the
regional banks, reflecting their inherent histories.
Business functions of the financial institutions have been similar in
terms of financial intermediaries, but the sizes of clients and scope of
operations in addition to business areas have differed depending on
their place in the financial hierarchy. The three megabanks have some
background as a financial centre of a particular business concern such
as the Mitsui Group, the Mitsubishi Group, the Sumitomo Group, and
the Fuyo Group.6 The business areas of the megabanks extend not only

2
Shinkin, Shinkumi, and other cooperative financial institutions are not included in banks legally
but are included in banks in terms of banking business.
3
Rodo Kinko is a cooperative financial institution specifically for employees. There are 13 institu-
tions in regional districts.
4
Nogyo Kyodo Kumiai is a cooperative institution specifically for farmers. There are more than 2000
all over Japan.
5
The number of Shinkin decreased by nearly 180 from about 450 to around 270 mainly because
of mergers during the financial crisis. However the number of Shinkumi decreased dramatically
mainly because of resolutions noted in Sect. 1.3.1.
6
These business groups had grown in the Meiji Era after 1868 and formed Zaibatsu, a big business
concern, under a respective holding company until the end of World War II. They were resolved by
4 Financial Crisis and Bank Management in Japan (1997 to 2016)

throughout Japan but also all over the world. Their clients vary from
individuals to large listed firms including transnational firms. However,
the regional banks and the cooperative financial institutions originated as
local financial institutions operating in one particular district. Therefore
their clients are fundamentally limited to individuals and business enti-
ties in each district.

1.3 The Bubble Economy and Its Collapse

1.3.1 The Three Causes of the Bubble Economy

The Japanese economy was highly boosted and rapidly growing in the late
1980s. It was known as ‘the bubble economy’. The causes had originated
in the 1970s during the two oil shocks. In the 1970s, demands for fixed
investment of private firms in Japan decreased markedly and the annual
Gross Domestic Product (GDP) growth rate in real terms declined from
about 10 per cent in the 1960s and the early 1970s to less than half that.
Then large firms had surplus funds for undefined uses. However, the gov-
ernment adopted an expansionary fiscal policy to inspire the economy.
The bond market became larger and larger through large issues of Japanese
Government Bonds (JGBs). As a result, high demand for financial invest-
ments was amplified. The result resembled the disintermediation phenom-
enon prevailing in the US financial market in the early 1970s.
The US government under the presidency of Ronald Reagan strongly
requested in the early 1980s that Japanese financial markets be deregu-
lated and opened up to foreign financial institutions and investors. Under
these circumstances, multinational firms and other large firms switched
their funding sources from commercial banks to capital markets. As a
result, the large banks rushed to expand mortgage loans responding to
the sharp rise in real estate prices. The movement of land prices in Japan
is shown in Fig. 1.1. Banks were trying to win a competition under

General Headquarters, the Supreme Commander for the Allied Powers (GHQ), from 1945 to
1952. But they were reorganized around the year 1960 to be a business combination group with
the same origin.
 1 Financial Crisis and Banking Crisis in Japan: 1997–2003 5

600

500
(end of Mar. 2000=100)
400

300

200

100

0
1984 1988 1992 1996 2000 2004
for commercial for residential for all uses

Fig. 1.1 Trends in urban land price index. Note: Figures are based on ‘six
large city areas’ (Source: Japan Real Estate Institute ‘urban land price index’)

inexperienced financial deregulation. The financial authority itself

inspired them to take risks and mutually compete.
So many discussions have taken place about the causes of the Japanese
bubble economy of the late 1980s. The situation can be summarized as
follows, in comparison with the Subprime Loan Crisis in the USA and
the banking crisis in Europe. The first cause was government economic
policy. The Japanese government needed to inspire the domestic econ-
omy to increase imports because the trade surplus against the USA had
become an important political issue in both countries. The G5 countries
had already agreed to an alignment of the foreign exchange rates against
the US dollar at the Plaza Hotel in September 1985: the so-called Plaza
Accord. The Japanese government intervened in the foreign exchange
market by selling the dollar in the market. The Japanese yen to US dol-
lar exchange rate increased by 34.1 per cent from 237.10 yen at the end
of August 1985 to 156.05 yen at the end of August 1986, as shown in
Fig. 1.2. According to this appreciation, the purchasing power of the
Japanese yen had been greatly increased.7 To prevent the further rise of
the yen, the government intervened in the foreign exchange market by

7
Nishimura (1999, pp. 50–56) stated that the impact of the yen’s appreciation after the Plaza
Accord on Japan was so huge and it bubbled the Japanese economy.
6 Financial Crisis and Bank Management in Japan (1997 to 2016)

(yen)
0

50

100

150

200

250

300

350
1973 1977 1981 1985 1989 1993

Fig. 1.2 Japanese yen to US dollar exchange rate: 1973–95. Note: Figures are
based on a monthly average (Source: The Bank of Japan)

buying a huge amount of US dollars by selling Japanese yen. However,

the Bank of Japan (BOJ), the central bank of Japan, did not adopt a
sterilization policy. As a result, a huge amount of yen remained in the
money market. The liquidity held by the banks increased considerably
and led to the funding of speculative investments. However, the govern-
ment tax revenues increased along with asset inflation in terms of a fixed
property tax and a tax on income from real estate transfers. This func-
tioned as an incentive for the government to continue with the existing
conditions.
The second cause was the easing of monetary policy adopted by the
BOJ. It decreased the Official Discount Rate (ODR) in February 1987 to
2.50 per cent, which was the lowest record in monetary policy history after
World War II. Accordingly the overnight call rate declined from around
eight per cent to around three per cent sharply in 1987 (Fig. 1.3). Before
the decrease of the rate there had been an overflow of money in financial
markets, as noted above. The BOJ had not adopted a sterilization policy
to absorb the money. The first priority for the BOJ was the recovery of the
domestic economy, which had been damaged severely by the appreciation of
the yen in 1985. A low interest rate for lending with the overflowed money
set a sufficient condition for the bubble economy with asset inflation.
 1 Financial Crisis and Banking Crisis in Japan: 1997–2003 7

(%)
14

12

10

0
1976 1980 1984 1988 1992 1996 2000 2004

Fig. 1.3 Trend in the overnight call rate. Note: Figures are at the end of each
month (Source: The Bank of Japan)

The third cause was the deregulation of financial markets by the

Ministry of Finance (MOF). The Japanese government was compelled to
deregulate the financial regime by strong pressure from the US Reagan
administration. Both the liberalization of deposit interest rates and the
openness of financial markets to foreign institutions were crucial points
of the deregulation policy. In the Yen Dollar Committee, the direction
of the Japanese financial industry was decided.8 The Japanese govern-
ment determined an implementation of the financial deregulation plan
which would start in the last half of the 1980s and end in the last half of
the 1990s. Then they urged city banks to improve management ability
through competition in a deregulated market. That strategy completely
overlapped the bubble economy period and the period of collapse. It was
readily apparent that the policy severely affected the behaviour of the
Japanese banks, which had been the main players in financial markets.
To these three causes, one particular external cause should be added.
The main objective of the US government, which forced the Japanese

8
Ohta (1991, pp. 79–81) described the details of discussions in the Committee. He illustrated the
attitude of the US representative in the Committee with a phrase ‘The Second Black Ship has
come’! The Black Ship was the US foreign delegation in the 1850s which forced the Japanese
Tokugawa jurisdiction of Samurai to open the nation.
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In the contents, Live Crablets eaten by the Chinese, corrected from 129 to 329.
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