Chapter 7: Banking Crises, Monetary Policy and Deflation, 1997–2000
JOBNAME: Garside PAGE: 1 SESS: 7 OUTPUT: Wed Jun 27 12:09:56 2012 7. Banking crises, monetary policy and deﬂation, 1997–2000 In the half-decade leading up to 1997, the Japanese authorities’ responses to ﬁnancial distress, low growth and laggard demand had been limited, uncoordinated and essentially ad hoc.1 As we have noted, there had been some timely shifts in policy stance, as witnessed, for example, by the shift in political relations with the MOF during the mid-1990s and by the government’s willingness for a while to embrace a deepening ﬁscal deﬁcit in the face of falling corporate investment. Until 1997, though, few in authority fundamentally questioned the capacity of the bureaucratic, business and political nexus to ride out the consequences of an albeit prolonged but bounded cyclical downturn. The Crisis in Banking, 1997 What changed matters was the emergence of a systemic banking crisis in late 1997. Until then the funds and the resolve needed to deal adequately with weakened ﬁnancial institutions had simply not been in place. Banks had been allowed to understate the value of their bad loans (until 1995, only major banks disclosed the actual ﬁgures) and had even continued to pay dividends when it was clear that retained earnings were needed to strengthen their capital base. Capital requirement rules, normally an important regulatory instrument, had been leniently applied by the supervisory authorities, which had tended to intervene only when distressed banks had already become insolvent. Loan-classiﬁcation rules were lax compared with...
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