Abstract
In this chapter, we cover three periods that follow Period I (1991–1997): Period II (1998–2002: financial crisis and its impacts), Period III (2003–2007: long recovery), and Period IV (2008–2012: GFC and after). The focus is on the financial crisis that began in late 1997 and its impacts on the Japanese economy. The subsequent two periods will be examined more briefly.
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Notes
- 1.
Description in this chapter owes much to Nakaso (2001).
- 2.
In this case, disposition of assets does not necessarily mean demolition or destruction of the assets concerned. Typically, disposition of assets is conducted in such a way that the assets are sold at a price lower than the acquisition cost, entailing losses, and these losses are shared by relevant parties. It may be possible for the assets to become profitable, as the acquisition costs are low for the acquirer. Through the sale of assets at a lower price, the combined amount of assets of the corporate sector will decline.
- 3.
A report by the Deposit Insurance Corporation (DIC) (2005), which analyzed causes of the failures of 180 financial institutions to which DIC extended financial assistance, concluded that, for 165 (91.7%) of the total 180 failures, the NPL problem was listed among the causes of the failure (multiple listing). Out of these 165, 83 (46.1%) listed concentration of credit to real estate-related sector, 49 (27.2%) listed other factors including economic stagnation, and 47 (26.1%) listed concentration of credit to sectors other than the real estate-related sector as causes of failure.
- 4.
As the definition of NPL was gradually expanded, there is an issue whether a rigorous time-sequential comparison is possible.
- 5.
The amount of NPL and the resultant losses arising from the resolution of NPL tend to increase with the lapse of time if economic stagnation continues. This is because economic stagnation typically means sales stagnation, and therefore, revenue and profit stagnation of borrowing companies.
- 6.
The outstanding balance of NPLs is that of “risk-monitoring assets.” There are three concepts of NPLs: “risk-monitoring assets,” “disclosed assets under the Financial Recovery Act,” and “NPLs under self-assessment.” “Risk-monitoring assets” is a concept prescribed by the Banking Act and covers a longer period of time than data under the other two concepts do. It started to be disclosed from the year ending March 1993 and at that time covered only those loans to failed borrowers [①] and past due loans (loans for which unpaid interest is not recorded as revenue for six months or longer) [②]. Past due loans were disclosed only by major banks. From the year ending March 1996, disclosure under this concept was extended to cover loans for which interest was reduced or waived [③] and loans to those borrowers for which such support as debt waiver had been extended [④]. Furthermore, from the year ending March 1998 (for regional banks from the year ending September 1998), the aforementioned Type ② loans were extended to cover loans past due three months or longer [⑤], and a new type, “loans for which lending conditions had been eased” [⑥] was introduced to include, but was broader than loan types ③ and ④ (the term “risk-monitoring assets” began to be used from this point in time) (Watanabe 2001; Nakagawa 1996). The second concept, “disclosed assets under the Financial Recovery Act,” was introduced by the Financial Recovery Act, enacted in October 1998. The act imposed a disclosure obligation under which major banks were required to disclose credit to legally bankrupt or de facto bankrupt borrowers (Type ①), credit in danger (Type ②), credit that needs to be monitored (Type ③), and normal credit (Type ④). It was implemented for major banks from the year ending March 1999, and for regional banks, from the year ending September 1999. The third concept, “NPLs under self-assessment” was made necessary by the Early Corrective Measures implemented from April 1998, under which, if the capital–asset ratio of an individual financial institution (to be calculated based on the self-assessment of loan quality) was lower than the prescribed level (8% for international criterion banks, and 4% for domestic criterion banks), authorities ordered the financial institutions to take corrective measures such as the strengthening of capital base. In the self-assessment, borrowers are classified into five categories: “failed,” “in danger of failing,” “risk of failure,” “to be monitored,” and “normal.” Furthermore, respective assets are classified into four groups, from Class I (normal credit) to Class IV (credit impossible to recover or of no worth), depending on the degree of risk of recovery. Financial institutions were not required to disclose the amount of NPLs under the self-assessment and only the aggregate amount by type of financial institution and by classification of NPLs from Class I (normal credit) to Class IV (credit impossible to recover or of no worth) were disclosed by the authorities (Watanabe (2001)).
- 7.
The NPL ratio is the ratio of “disclosed assets under the Financial Recovery Act” (credit to legally bankrupt or de facto bankrupt borrowers [①], credit in danger [②], and credit that needs to be monitored [③]) to the total credit. The basic concept of both the risk-monitoring assets and the disclosed assets under the Financial Recovery Act is same as is shown by the fact that both include failed loans, loans past due for three months or longer, and loans for which lending conditions had been eased. However, the two concepts adopt different classification methods, that is, while the starting point for risk-monitoring assets is the past due interest payments and then loans concerned are classified into those to failed borrowers and other loans (past due loans), under the disclosed assets of the Financial Recovery Act, division is between credit to failed borrowers and credit to borrowers that have not failed but have a high probability of non-recovery. In addition, risk-monitoring assets cover only loans, but disclosed assets under the Financial Recovery Act cover total credit including securities lending. Also, risk-monitoring assets are based on an asset-by-asset classification but disclosed assets under the Financial Recovery Act are based on a borrower-by-borrower classification).
- 8.
Nakaso (2001) gives a most detailed and clear chronological explanation of the unfolding of the financial crisis and authorities’ responses.
- 9.
Even before the 1996 amendment of the Deposit Insurance Law, DIC had the power to give financial assistance to the acquiring banks of failed banks, so as to make a deal possible, but the assistance was limited to the so-called payoff cost. Payoff cost usually refers to the amount of funds necessary to pay depositors the full insured amount (10 million yen per person, per bank) when a bank failed, less the remaining value of the failed bank (Nakaso 2001, 4).
- 10.
Nakaso (2001, 6–7)
- 11.
A total of 30 trillion yen of public funds, including those for capital injection, were made available, with 17 trillion yen assigned to the Special Account of the DIC to cover the losses of failed financial institutions and 13 trillion yen allocated for capital injection into banks.
- 12.
This was just when the supervisory power of the MOF was taken over by the newly created Financial Supervisory Agency (FSA).
- 13.
The early correction measure introduced in April 1998 is the scheme under which the authorities order a bank to take corrective measures, such as the submission of a management improvement plan or strengthening of its capital base, based on its capital–asset ratio.
- 14.
Refers to “Bankruptcy,” “De facto bankruptcy,” and “In danger of bankruptcy.”
- 15.
Nakaso (2014) wrote that, triggered by public funds injection into Resona Bank, stock prices gradually started to rise, and it was finally felt that the crisis was gradually waning. Nishimura (2011) pointed out that public funds injection into Resona Bank with no writing off of stocks shows a clear example of a soft landing approach, which the administration of the time was taking, despite its hard pressures on banks to dispose of NPLs.
- 16.
The full deposit protection, which was introduced in 1996, was scheduled to be terminated by end March 2001 but was extended to end March 2002 for time deposits and to end March 2003 for checkable deposits. The full protection of checkable deposits was extended further to end March 2005.
- 17.
Supplement 2 in this chapter gives a very rough estimate of the size of the excess assets (it is estimated that excesses accounted for nearly three-tenths of all assets), and an estimate of an increase in the number of unemployed people and a rise in the unemployment rate if excesses were promptly disposed of.
- 18.
In the case where loans with the total face value of 100 incurred a loss of 10, there are two types of disposition.
-
Indirect disposition (registering loan loss reserves)
-
(Asset) Loans 100
-
(Liabilities & Capital) Debt 80, Capital 20
-
→ (Asset) Loans 100
-
(Liabilities & Capital) Debt 80, Loan loss reserve 10, Capital 10
-
-
-
-
Direct disposition (removing the troubled asset)
-
(Asset) Loans 100
-
(Liabilities & Capital) Debt 80, Capital 20
-
→ (Asset) Loans 90
-
(Liabilities & Capital) Debt 80, Capital 10
-
-
-
Direct deposition can be done through such measures as seizing and selling collaterals (factory, office, machines, etc.) or resolving the debtor.
-
- 19.
Financial institutions tended to regard it as their mission to assist those borrowing companies, which were considered viable but experiencing temporary difficulties, through reduction of interest rates or the rescheduling of loan repayments, and such loans were not regarded as NPLs. This approach was later modified in the process of the resolution of NPL problems, and those loans for which conditions were alleviated were included in the category of NPLs.
- 20.
The introduction of the BIS capital–adequacy ratio, agreed to in the late 1980s, may have acted as another constraint on banks. Under the agreement, banks were required to clear the minimum capital–asset ratio of 8% by end March 1993. Himino (2005) pointed out that, the capital–asset ratio of Japanese city banks was as low as 3%, if calculated based on the original proposal of the United States and the United Kingdom in 1987. Japanese authorities requested that unrealized capital gains of securities held by banks had to be included in capital, and it was agreed in late 1987 that 45% of unrealized capital gains could be included in capital. Most of Japanese banks cleared the requirement by end March 1990, partially helped by this treatment. After the burst of the bubble, however, continuous decline in stock prices continued to depress banks’ capital, increasing the instability of bank operations (Komine 2011, 324–26).
- 21.
The number of companies with capital less than 10 million yen declined to 1.3 million (i.e., 54.4% of total 2.4 million) in 1997, and their share in total employment declined to 15.9%. This decline reflects changes in capital requirements under the 1991 amendment of the Commercial Law, which raised the minimum capital to 10 million yen for stock companies, with the transition period lasting until end March 1996.
- 22.
This scheme is under the jurisdiction of the SME Agency of the Ministry of Economy, Trade and Industry and is widely supported by political circle. The ratio of insurance has been in principle reduced to 80%. As of February 2016, 2.8 million cases of loans are insured and the outstanding balance insured amounts to as much as 25.8 trillion yen.
- 23.
Ministry of Finance, “Kinnyu gyosei no tomen no unnyo hoshin” (On the current policy of the financial sector supervision), August 18, 1992.
- 24.
Fukao (2009) pointed out that the estimated combined amount of net business profits (inclusive of losses due to disposition of NPLs) of banks (city banks, long-term credit banks, and regional banks), a concept similar to operating profits, was negative for 10 straight years from FY 1993 to FY 2002; that is, after the burst of the bubble, banks could not cover credit risk by their profits from their main business operations. Banks recorded surplus in terms of final profits in 5 out of the 10 years, through sales of assets. He also pointed out that the accumulated losses of banks arising from disposition of NPLs amounted to 96.8 trillion yen over 14 years from March 1992 to March 2006, equivalent to 19% of GDP in 2006.
- 25.
Matsushima, and Takenaka (2011, 225–6). “Nihon Keizai no Kiroku Jidai Shogen Shu Oraru Hisutori” (Records of the Japanese Economy—Testimony of the Era—Collection of Oral History) 2011 Economic and Social Research Institute, Cabinet Office, Japanese Government (“Baburu/ Defure ki no Nihon Keizai to Keizai Seisaku (Rekisi Hen) 3” (“the Japanese Economy and Economic Policy in the Period of Bubble and Deflation Vol. 3 (History)”) 2011 Economic and Social Research Institute, Cabinet Office, Japanese Government) pp. 225–226.
- 26.
- 27.
When dissolving Jusen, public funds were used to avoid negative impacts on the financial system by imposing loan loss onto agriculture-related financial institutions that had lent heavily to Jusen. However, according to a book written by a journalist (Nishino 2003), the agricultural sector demanded that saving the agricultural-related financial institutions should not be used in the explanation as objectives of the use of public funds. In the absence of a clear and easily understandable explanation, the general public, and therefore, political circle, considered that the public funds were used to bail out Jusen, for which cases of fraudulent activities were widely reported in the media.
- 28.
Disclosure requirements were gradually strengthened. See footnotes 6 and 7 in this chapter.
- 29.
Matsushima and Takenaka (2011, 225).
- 30.
The Ministry of Finance announced that the size of NPLs of large banks was 7–8 trillion yen in April 1992 and around 12 trillion yen in October 1992. However, this covered only major banks and did not cover all financial institutions. Also, the assets covered were limited to bankrupt or past due claims. As for claims on non-bank financial institutions, including Jusen, creditor financial institutions did not grasp the actual situation, and therefore, they were not classified as bankrupt or past due.
- 31.
Matsushima and Takenaka (2011, 220–1).
- 32.
The official discount rate, which was raised to 6.0% in June 1990, but was lowered beginning in July 1991. The aggregate lending limit, which was introduced in March 1990, was lifted in December 1991. A Banking Bureau executive at that time said later, “When we lifted the aggregate lending limit, most of the newspaper articles criticised (it), by writing ‘If policy reaction is eased, land price will never fail to rise again’” (Matsushima and Takenaka 2011, 313).
- 33.
In January 1997, Prime Minister Hashimoto (LDP) declared the intention to start drastic reforms in six areas, including fiscal structure and the financial system. Directed by Prime Minister Hashimoto, the Ministry of Finance, then the supervisory authority of banks and securities firms, started examination of comprehensive liberalization of the Japanese financial system called “Japan’s Financial Big Bang,” and reform plans were authorized by advisory councils attached to the MOF in June 1997. Those reforms were surely necessary for Japan, but their timing was not right. With hindsight, when the financial sector was fragile, as evidenced by series of failures of financial institutions, the greatest care should have been paid to maintain stability of the sector and markets without embarking on drastic reforms.
- 34.
Supplement 2 in this chapter gives a very rough estimate of impacts on employment of a prompt resolution of excess assets. According to the estimate, if the total excess assets had been disposed of in fiscal 1991, the number of unemployed people would have increased by more than 12 million, and the unemployment rate would spiked by more than 10 times, increasing from an actual 2.1% to an estimated 21.2%.
- 35.
Explanation in this part is based on IMF (1995).
- 36.
The expected growth rate held by companies for the next three years declined further from 2.2% in Period I (Initial Adjustment Period, 1991–1997) to 1.0% in Period II (Financial Crisis and Its Impacts Period, 1998–2002), as explained in Chap. 3.
- 37.
Financial surplus/deficit corresponds to the difference between the amount of financial investment and the amount of fundraising, which is conceptually equal to net lending/net borrowing (formerly called “the difference between savings and investment”) in the national account.
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Appendices
Supplement 1
1.1 Chronology in Period II (1998–2002), Period III (2003–2007), and Period IV (2008–2012)
1997 | |
January | Prime Minister Hashimoto (LDP) declared intention to start drastic reforms in six areas, including fiscal structure and the financial system |
April | Consumption tax rate increased from 3% to 5% |
June | BOJ law amended (its independence strengthened) |
June | Comprehensive financial liberalization (Japan’s “Financial Big Bang”) authorized by advisory councils to MOF |
July | Thai baht recorded a sharp fall (start of the Asian currency crisis) |
November | Sanyo Securities filed a petition for protection under the Corporate Rehabilitation Law, causing default in the interbank market |
November | Hokkaido Takuchoku Bank announced its inability to continue |
November | Yamaichi Securities announced closure of business |
November | Fiscal Structure Reform Act enacted |
1998 | |
April | Comprehensive economic measures decided |
May | Fiscal Structure Reform Act amended |
October | Government decided to nationalize the Long-Term Credit Bank of Japan (first nationalization of private bank after the war) |
November | Emergency economic measures decided (historically largest size) |
December | The Nippon Credit Bank nationalized |
1999 | |
February | BOJ introduced the zero interest rate policy |
2000 | |
August | BOJ lifted zero interest rate policy |
2000–2001 | |
Collapse of the dot.com bubble | |
2001 | |
March | Government declared Japanese economy was under moderate deflation for the first time after the war |
March | BOJ introduced Quantitative Easing Policy (QEP) |
April | Koizumi administration started (return to the fiscal consolidation and policy orientation for structural reform) |
2002 | |
January | The economy hit a bottom (start of the long economic recovery) |
October | Financial Services Agency (FSA) formulated financial revival program (aimed at halving the NPL ratio of major banks by end March 2005) |
2003 | |
January 2003–March 2004 | Great intervention |
2008 | |
September | Lehman Brothers collapsed (start of the GFC of 2008–2009) |
2009 | |
September | The Democratic Party took the power |
October | Misreporting of fiscal position by Greek government uncovered (start of the European debt crisis) |
2011 | |
March | East Japan Great Earthquake |
2012 | |
December | Second Abe administration and Abenomics started |
Supplement 2
1.1 Impacts on Employment of Prompt Disposition of Excess Assets
In this supplement, we will conduct a very rough estimate on what impacts would have been imposed on employment if excess assets had been speedily disposed of.
Fig. 4.38 shows developments in total assets of corporations (excluding financial and insurance companies), based on Financial Statement Statistics of Corporations by Industry (MOF). We can see that there is a bump (excess assets) in the period from the mid-1980s to the first half of 2000s. The figure also shows an approximate line (a trend line) for the entire period, except for the years from fiscal 1985 to 2004 when there was a bump, that is, a trend line for the period from fiscal 1960 to 1984 and then the period from fiscal 2005 to 2016. If we regard the difference between the actual size of the total assets and the amount indicated by the trend line as excess assets, then the excess assets account for nearly three-tenths of the total assets in the first half of 1990s as indicated in Fig. 4.39 which shows the ratio of the excess of total assets over the amount implied by the trend line to the total assets.
Total assets of corporations (excluding financial and insurance companies) and their trend line. Total assets (for the red line). Trend line for the entire period except for 1985–2004. Source: Ministry of Finance, “Financial statement statistics of corporations by industry”
Share of excess assets in total assets: FY1985~FY2010. Source: Ministry of Finance, “Financial statement statistics of corporations by industry”
Now, let us assume that the whole personnel resources—the combined number of executive members and employees—of companies (excluding financial and insurance companies) in the Financial Statement Statistics of Corporations by Industry) are deployed evenly and proportionately to the assets and that, if an asset is disposed of, then the whole personnel staff deployed to the asset are entirely dismissed and become unemployed. Fig. 4.40 shows, for each year from fiscal 1985 to 2010, first, the number of additional people that would have become unemployed if all the excess assets estimated for the year had been disposed of in that year and if the entire personnel staff deployed to these assets had become unemployed; second, the resultant (elevated) unemployment rate; and third, the actual unemployment rate (as of December each year). For example, if all the excess assets had been disposed of in fiscal 1991, additional unemployment amounting to more than 12.5 million would have occurred, and the unemployment rate would have risen to 21.2%, that is, 10 times as high as the actual unemployment rate that year of 2.1%. The figure shows that similarly huge negative impacts would have occurred in any year in the first half of the 1990s. Considering that the estimate assumes an extreme case—that the entire personnel staff deployed to an asset will be dismissed and become unemployed if the asset was disposed of—then, in reality, the resultant direct impacts would have been smaller than estimated. On the contrary, in the case where disposition of excess assets led to abolition of relevant business operations, and indirect impacts spread to other parties such as business partners, secondary effects could have been added to the aforementioned direct impacts, producing an upward risk. No matter what the case may be, the magnitude of excess assets created in the 1980s seems to have been of such a scale that their rapid disposal would have seriously shaken the basis of the Japanese economy. It is unrealistic just to criticize delays in disposing excesses, as is done in the many arguments. It is implied that very strong intervention by the authorities was necessary, if extreme confusion and a sharp increase in the instability of the society was to be avoided.
Additional number of people unemployed and the unemployment rate resulting from prompt resolution of excess assets. Source: Ministry of Finance, “Financial statement statistics of corporations by industry”
Considering that the aforementioned total assets included such assets as liquid assets and securities held for investment purposes, we would like to conduct another estimate that uses physical assets (excluding land) instead of total assets. Fig. 4.41 shows developments in physical assets (excluding land) and an approximate line (trend line) for the period from fiscal 1960 to 1984. If we regard the difference between the actual amount of physical assets (excluding land) and the amount calculated by the trend line as excess, then it can be shown that the size of excess assets amounted to greater than four-tenths of the entire physical assets (excluding land) around the mid-1990s. This implies that prompt disposal of excesses would have created negative impacts greater than calculated in the preceding estimate.
Physical assets (excluding land) of corporations (excluding financial and insurance companies), their trend lines, and the ratio of physical assets to sales. Source: Ministry of Finance, “Financial statement statistics of corporations by industry”
Fig. 4.41 shows an approximate line (trend line) for the period from fiscal 1998 onward. The trend of physical assets (excluding land) is entirely different for the period between before the bubble and after the financial crisis. The figure also shows the ratio of physical assets (excluding land) / sales. The ratio swiftly rose from the 1980s, hit a peak in fiscal 1998, sharply fell until the mid-2000s, and stabilized thereafter. It is implied that in the 1990s, two processes were simultaneously ongoing, one, efforts to overcome the collapse of the bubble (disposition of excess assets) and, two, adjustment to new environments where sales do not grow (restraint on asset size or its downward adjustments). In other words, going forward from some point in time in the 1990s, possibly from the financial crisis, companies began to exhibit investment behavior that assumes that the domestic economy will not expand in the future.
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Aramaki, K. (2018). The Financial Crisis and Its Impacts, Long Recovery, and Afterward. In: Japan’s Long Stagnation, Deflation, and Abenomics. Palgrave Macmillan, Singapore. https://doi.org/10.1007/978-981-13-2176-4_4
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