Economic Stagnation in Japan
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Economic Stagnation in Japan

Exploring the Causes and Remedies of Japanization

Edited by Dongchul Cho, Takatoshi Ito and Andrew Mason

Japan’s dramatic transformation from economic success to economic stagnation offers important policy lessons to advanced countries everywhere that are struggling with stagnation. The term ‘Japanization’ is often used by economists to describe long-term stagnation and deflation. Symptoms include high unemployment, weak economic activity, interest rates near zero, quantitative easing, and population aging. In the global context, what can governments do to mitigate the downward trends experienced by Japan? This judiciously timed book investigates in depth the causes of Japan’s ‘lost decades’ versus the real recovery achieved by the United States, and the lessons that can be learned.
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Chapter 7: Financial market efficiency: a comparative perspective

Mitsuhiro Fukao


Mitsuhiro Fukao examines Japan’s zombie banks since the early 1990s. The causality of these severely undercapitalized banks runs as follows: increasing loan losses from bankrupting borrowers weaken banks’ capital base; undercapitalized banks start to hide losses and provide evergreening loans to loss-making firms; and undercapitalized banks as well as firms continue to operate with deposit taking by zombie banks under forbearance of regulators. The most important factor during Japan’s worst financial crisis (1997–2003) was the loss of confidence in the accounting and auditing system. Unreliable financial statements resulted in a vicious cycle of credit contraction and impeded the functioning of the market economy. Close relationships among bankers, regulators and accountants impeded quick resolution by allowing nonviable banks to hide loan losses. Complex debtor-creditor relationships among related companies make it difficult to ascertain the scale of the bad-loan problem. The most adverse effect is the increased risk of financial crisis.

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