Japan’s Great Stagnation
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Japan’s Great Stagnation

Forging Ahead, Falling Behind

W. R. Garside

This timely book presents a critical examination of the developmental premises of Japan’s high-growth success and its subsequent drift into recession, stagnation and piecemeal reform. The country, which within a few decades of wartime defeat mounted a serious challenge to American hegemony, appeared incapable of fully adjusting to shifting economic circumstance once the impulses of catch-up growth and the good fortune of an accommodating international environment faded.
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Chapter 7: Banking Crises, Monetary Policy and Deflation, 1997–2000

W. R. Garside


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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