日本经济失去的十年十多年来，日本经济已经从让世人的羡慕的模式到不再被别人反复传说。几乎所有的经济指标都在下降，特别是一直是引人注目的资产价格。经过十多年的停滞，目前的情况并不比以前更好。没有明显的政策能够克服目前的困难局面：虽然几个经济刺激计划与庞大的财政支出都是零利率，但还是出现了负增长，通缩，高失业率。1 在日本经济萧条的十年期间，日本经济究竟发生了什么事（事实- 提供数据，表格，汇总的经济状况图表）。在20世纪90年代的“泡沫经济”下，日本有所谓的“失去的十年”。经过日本战后的经济增长后，土地等资产和股票的价格上涨非常之高。正如在图中看到的数字，1989年大约是1986年的两倍，1991年却突然降低。The Lost Decade In The Japanese Economy Economics EssayThe Japanese economy has gone from an envy of the world to a model not to be repeated by others in ten years. The decline of almost all indicators, especially asset prices, has been striking. After ten years of stagnation, the current situation is no better than before. There is no obvious policy response that could surely overcome the current difficult situation: negative growth, deflation, high unemployment, despite zero interest rate and several stimulus packages with large fiscal expenditures.1. Describe what happened to the Japanese economy during the “lost decade” (facts – provide data, tables, graphs that summarize economic conditions).Japan had what is called “lost decade” in the 1990s following its “bubble economy”. After Japan’s post-war economic growth, the prices of assets such as land and stock jumped up extremely high. As you can see in the chart the figure in 1989 is approximately double that of 1986, and suddenly fell in 1991.So, why did the prices go up? It is because Japan’s central bank forced down the bank discount rate, to increase money supply according to1985 Plaza Accord with US. (The bank discount rate is the rate of interest which a central bank charges when lending money to commercial banks and other financial intermediations.) As the bank discount rate was low the private banks borrowed more money from the central bank. In turn, the private banks lent funds to firms with the use of land as mortgage. The prices of those two assets, land and stock were highly inflated. It was a widespread belief that the land price would keep rising and never fall. Hence, the acceptance of land as mortgage by private banks. It was difficult for people at that time to realize the busting bubble until it happened.However, the central bank had suddenly increased the bank rate from 2.5% to 4.25% in 1989 and it was further raised to 6% within the following eight months as the assets prices were going down. This phenomenon threatened the survival of banks that lent all their money and accepted land as the mortgage. They just ended up with non-performing loans (NPLs). However, the many firms, including banks continued to invest in the land and stocks even after becoming insolvent. Insolvency is the financial condition in which the bank has been overextended and is unable to pay its debt. The reason why firms could continue investing was because the government gave them public-funded bailout.“Now let’s move on to see what the government did wrong.”Firstly the government made a mistake in timing to the increase of the bank rate. They should have tightened the regulation earlier rather than wait until the inflation became that high. Also the government shocked banks by increasing the bank rate sharply.Finally because of the bailout, there was the occurrence of severe moral hazard. The term moral hazard means the increased likelihood a party undertaking more risk-taking, as a result of miscommunication between two involved parties. For example, a bank will feel protected by bailout from the government and will be daring to invest beyond its actual capacity. This false confidence is the outcome of the government’s promise of protection against failure. What government really has to do is not bailout insolvent banks but ensure that banks and firms take responsibility for their own management. Usually bailout is made by government for solvent but illiquid banks; however, insolvent banks could be given bailout if they were “too big to fail”. That is, influential banks would cause severe problem in the banking system if they collapse, so government tries to bail them out. Assuming that they are protected by government, bank owners and managers will take risk more freely, which makes moral hazard worse.In summary, the government needs to monitor banks carefully and, once it finds that a bank is getting weak, take actions to close or emerge the insolvent bank before it becomes too late. Also it is important to make it clear that the government will not guarantee banks losses, rather, banks are fully responsible for their own management of resources. This will avoid moral hazard.Japanese companies built Oregon factories, seeding the Silicon Forest. They bought Rockefeller Center and acquired the Pebble Beach Golf Links, alarming Americans who thought Japan was taking over the world economy. The Japanese Imperial Palace grounds were said to be worth more than California.After its miraculous recovery from World War II and unprecedented growth in the 1980s, the Japanese economy faltered as the “bubble economy” burst in the 1990s – heralding the onset of Japan’s notorious “lost decade”.The Japanese Economy experienced a ‘miracle’ growth phase after the end of the Second World War and up until the 1980s to become the second largest economy in the world. However, in the 1990s it experienced a “Lost Decade”.Source: Yahoo FinanceDecember marks the 20th anniversary of the Nikkei 225 Stock Average’s bubble-years peak of 38,915. Japan’s "Lost Decade" began soon after. In some ways, it has been two decades. The first – 1990 to 2000 – was a crisis-filled one. The second, which is still playing out, has been more stable, yet not without its own perils.Source: The Japanese economy and future growth prospects, Department of the Treasury, Australia, Sian Fenner,http://www.treasury.gov.au/documents/817/HTML/docshell.asp?URL=05_article_4.aspEven after Japan began growing around 2002, it was only because of the economic equivalent of steroids. If you took away near-zero interest rates and massive fiscal “pump-priming”, growth would have fizzled. So, in a sense, Japan’s longest postwar recovery was a mirage. Japan has yet to find the exit strategy the US is now beginning to search for.Japan has some peculiarities that have marked its rapid rise from the ashes of the Second World War, to preeminence in the 1980s. In particular, manufacturers, their suppliers and distributors work closely together in informal but tight structures called keiretsu, with intimate support from financial institutions and the government. For most of the last fifty years, large Japanese corporations have also provided guaranteed employment for life to ‘salary men’, typically male employees who work the longest hours on the planet in return for that commitment.Both of these classical Japanese structures are now breaking down under the weight of globalization and the negative impact of the ‘Lost Decade’, a period during the 1990s when the Japanese economy was stagnant. Some of the structural problems that Japan faced then still need addressing.The Plaza Accord (depreciate USD against ￥ and DM)Affects exportsEcon growth 4.4% (1985), 2.9% (1986)Bank of Japan (BOJ) responds and cuts discount rate from 5% to 2.5%Monetary policy provides air for the bubble2. Explain what caused the crisis (analysis).EconomistsThe problem for Japan is that its policy choices are extremely limited compared to those of many other countries. Interest rates were already close to zero before the BOJ announced its latest rate cut, while years of ill-directed public-works spending during the 1990s did little to revive the economy and succeeded instead only in draining the fiscal coffers and leaving Japan with very high national debt. This meant that Japan has a severe lack of public money to spend on fiscal stimulus. Japan, in short, may have avoided taking action sooner simply because it did not expect its policy response to be very effective. The fact that the global turmoil has not yet caused the collapse of Japanese financial firms on a large scale could have been a further disincentive to act immediately. Japan's policy tools are so limited that, understandably, the authorities may have wished to use them sparingly in case of greater need in the future.Surplus in Savings: Japan has traditionally enjoyed an unusually high savings rate and a comparatively low consumption rate. During the decades of recovery and high-speed growth, this "savings surplus" supplied sorely needed capital to private industry in the form of bank loans. This money was used to build and expand Japan's industrial infrastructure and to achieve the rank of a world-class manufacturing power. However, during the 1990s, the "savings surplus", once the indispensable fuel for high-speed growth, became a serious, structural impediment, leading to a severe slump in demand and causing a heavy drag on Japan's economic recovery.#p#分页标题#e#Yen Appreciation: Another underlying cause of the bubble, sustained asset deflation, and the liquidity trap is the steep, long-term appreciation of the yen relative to the dollar. For Japan, yen appreciation has been a chronic problem. Exchange-rate factors have limited the effectiveness of certain policy tools that might have cleaned up Japan's financial mess. Caught in a classic liquidity trap, for example, the option of designing monetary policy to hit specific inflation targets would be difficult, in part because a sudden, sharp devaluation of the yen would put enormous pressure on South Korea and Taiwan to devalue their currencies. In an era of global capital flows, the constant national need to make adjustments in the value of key currencies, and the costs of overshooting, misalignment, and potential speculative attack have enormously complicated domestic macroeconomic management.Liberal Democratic Party (LDP) and Vested Interest Groups: LDP support from interest groups representing protected, inefficient sectors of the Japanese economy has contributed to Japan's economic malaise but has also made it difficult for the Japanese state to implement the reforms necessary to get back on track. Focused on staying in power, the LDP has been reluctant to implement far-reaching reforms or tackle the tough issues, such as the ominous overhang of nonperforming loans (NPLs). The LDP's coalition of interest group supporters, which supplies money and votes, has lobbied hard to sandbag or dilute reform measures. The unprecedented length of Japan's asset deflation and liquidity trap is largely due to the absence of effective, far-sighted political leadership. Whether Prime Minister Koizumi, who has a clear-cut electoral mandate to reform an outmoded economic system, can push through necessary but politically painful changes remains to be seen.Policy Mismanagement: The lack of political will and effective leadership are reflected in serious policy mistakes. These include: the consumption tax hike in 1997, which stifled nascent signs of recovery; the unparalleled slowness in disposing of NPLs; and the heavy-handed reliance on interest rate cuts from 1985D1987 to deal with the deflationary impact of sharp yen appreciation following the Plaza Accord. While it would be unfair to blame the bubble, asset deflation, and the liquidity trap solely on Japan's politicians and policymakers, it is accurate to say that policy mismanagement has aggravated the problems and prolonged the processes of recovery.Structural Impediments: The complex structure of Japan's political economy – particularly the close, symbiotic ties between the economic bureaucracies, like the Ministry of Finance (MOF), and the corporations under their regulatory jurisdiction, like banks and insurance companies – has also contributed to Japan's problems. The interests of the Banking Bureau of MOF and the banking industry are interdependent. There is little transparency or public accountability. Information is hoarded about the actual scope of bad loans. Old methods of crisis management (specifically, administrative guidance) prevail. These elements help to explain why it took the government so long to deal with the massive hemorrhaging of Japan's financial system. Although Japan has made progress toward developing a more transparent, rules-based system, the problems of non-transparency and weak accountability have not disappeared.Global Capital Flows: Japan's rapid growth from 1955-1975 and its steady growth from 1975-1991 can be understood as part of a global expansion of trade. But if postwar Japan has benefited from the globalization of trade, it has profited less from the globalization of capital flows. Neither the public nor private sector has handled the liberalization of capital movements as adroitly as the liberalization of global trade. Japan has received surprisingly low returns on its massive dollar assets abroad. Moreover, the Asian financial crisis between 1997 and 1998 crippled the country's efforts to shake off its stagnation. Japanese manufacturing industries were better prepared to take advantage of the globalization of trade than Japanese financial institutions were to utilize the opportunities created by the globalization of capital flows.To start with, Japan’s economy continues to operate far below capacity. The output gap stands at 7%, three times bigger than it has been at any time since Japan’s asset-price bubble burst 20 years ago, according to Richard Katz of the Oriental Economist, a newsletter. The gap between actual GDP and potential GDP (when the economy is at full throttle) correlates well with deflation, he argues (see chart 1). That suggests consumer prices have further to fall. In its latest estimate the Bank of Japan (BoJ), the credibility of which should rest on ending deflation, predicted that consumer prices would continue to fall until March 2012.Source: The Economist, Japan's debt-ridden economy, Crisis in slow motion, Apr 8th 2010Falling prices mean that nominal GDP, which last year hit its lowest level since 1991, is likely to remain in the deep freeze. That will add to pressure on the public purse: in the 2010 budget, borrowing, at ￥44 trillion ($468 billion), is for the first time forecast to exceed tax revenues, at ￥37 trillion. It also means the gross debt-to-GDP ratio, already the highest in the rich world at 190%, will continue to rise.Slow growth of the economy in the late 1990s led some people to express fears about the competitive capability of Japanese industry. Still, technological innovation has enabled Japan to regain a strong market position in the construction of large-scale machinery, while retaining its position as a leader in the semiconductor and automobile industries. One salient feature of Japan's economy is that it consists of two distinct tiers-the large and powerful multinational companies, many of which are now household names abroad in the last three decades; and a plethora of small, often family-owned, enterprises and medium-sized companies, with 300 or fewer employees. The latter accounts for 99% of the manufacturing concerns. This two-tiered3. Why was deflation such a problem for Japan?While lower prices may boost individual purchasing power, deflation is generally bad for the economy overall. It plagued Japan during its "Lost Decade" in the 1990s, hampering growth by depressing company profits and sparking wage cuts. It also means that even at zero, interest rates are too high because prices are in negative territory.Price deflation is when the rate of inflation becomes negative. I.e. the general price level is falling and the value of money is increasing. Some countries have experienced deflation in recent years – good examples include Japan and China. In Japan, the root cause of deflation was slow economic growth and a high level of spare capacity in many industries that was driving prices lower. In China, economic growth has been rapid – but the huge amount of capital investment and rising productivity has led to economies of scale being exploited and a fall in production costs.Japan has been experiencing deflation – meaning an annual drop in prices – since 1999. In 2008, however, the whole world has been buffeted by rising oil, food and commodity prices. Japan’s inflation rate – excluding volatile fresh fruit, fish and vegetable prices – rose 1.5% in May 2008, its highest rate since 1998.For a decade now, Japanese consumers have grown accustomed to dropping prices. With prices suddenly going up, consumer spending is expected to drop, spelling further trouble for the economy. Indeed, in the second quarterly report of 2008 issued by the Bank of Japan, 58.7% of those surveyed said they expect to cut their spending this year. This is the highest figure on record since the survey started in 1997.Japanese exports are rising, but deflation at home is cause for concern. Japan has been in deflation for 12 straight months, figures released by the government show. Prices fell by 1.2% in February from a year earlier, threatening the country’s recovery from recession. Japan’s economy has been periodically plagued by deflation since the “lost decade” of the 1990s, which led to years of stagnation. The prospect that goods will become cheaper in the future makes consumers reluctant to buy today. This leads to a vicious circle of falling company profits and wages (downward trend). The latest figures – where the core consumer price index fell by 1.2% – are not as bad as in previous months.Miscellaneous1. Japan’s economy consists of two tiers; the large multinational corporations such as Sony, Honda, and Toyota, and small, family owned enterprises.2. Aging Population: Japan’s population is aging faster than that of any other nation in the world. This will threaten Japan’s economy as it is expected that to some extent its labor supply will diminish, public spending to support the elderly will increase, its ability to save will shrink and industry will be forced to move abroad  .The Bubble EconomyAt the September 1985 Plaza Accord, the G5 countries – specifically Japan, Germany, the U.K. and France – appreciated their currencies against the highly appreciated U.S. dollar at the request of the United States in order to increase competitiveness and reduce the U.S. trade deficit. Upon implementing this measure, the Japanese yen doubled within two years (1 USD equaled 244 yen in September 1985 and 121 yen in December 1987), resulting in the loss of competitiveness for Japanese exports relative to the U.S. #p#分页标题#e#To alleviate the damage to the export industry, the Japanese government implemented several counter measures. First, to induce investment, the Bank of Japan cut the official discount rate to 2.5%, the lowest rate ever since the end of WWII. The government also expanded infrastructure projects during the late 1980s to compensate for the loss coming from the slump in exports. The price of real estate in commercial areas of major cities increased sharply with the 1989 Forth Comprehensive National Development Plan and in resort areas with the 1987 Resort Law. Additionally, financial investment in the domestic market increased as investors sought to avoid foreign exchange losses from the appreciation of the yen, contributing to the increase in prices of stock and real estate. Consequently, the huge increases in capital gains made it easier for investors to borrow money against land assets, as banks deemed such assets to increase in value with no upper limit.However, the acceleration of asset prices soon began to draw government concern. In March 1990, the Ministry of Finance issued regulations to limit the increase in total lending to the real estate industry to an amount less than the increase in overall lending.  Lending was further dampened with the 1989 Bank of Japan contractionary monetary policy that increased the official discount rate from 2.5% to 6.0%.  With the increase in oil prices following Iraq’s invasion of Kuwait, the bubble economy collapsed with plunging stock prices in 1990 and the tumbling of land prices in the following year. The Nikkei index recorded the highest price ever – 38,915 yen – on the last business day of December 1989. However, in October 1990, just nine months later, it had decreased to 20,000 yen.  Because investors often used land as collateral to secure banks loans, when land lost value banks were left with large amounts of non-performing loans – in 1992 major banks had non-performing loans worth eight trillion yen.  The government failed to take immediate action to solve the spiral of non-performing loans; hence, beginning in 1997, banks and securities firms fell into bankruptcy one after another.  The government finally began to bail-out private banks and nationalize several banks, including the Long-Term Credit Bank of Japan. Reforms were halted and in 1998 monetary policy was once again relaxed as the economic situation began to improve. However, the collapse of the IT bubble in 2001 reenergized the reform movement in the government to reduce non-performing loans in banks, which had peaked at 8.4% in March 2002. To achieve the goal of drastically reducing the percentage non-performing loans, banks cutback lending, causing private companies, especially small and medium-sized firms, to face financing difficulties, which resulted in the deterioration of their business performance.  To overcome this situation, companies conducted restructuring and cut their employment. Many senior aged workers were fired and many companies hired temporary workers or outsourced those job positions to China or other Asian countries to save on labor costs.  The massive layoffs from labor restructuring caused a decrease in consumption and triggered a deflationary trend. On the supply side, to cut costs retailers passed up wholesalers, purchasing directly from producers. The competition for lower prices intensified among retailers and deflation soared. Since 2001, Prime Minister Koizumi began drastic reforms to rescue the economy. To solve the non-performing loan issue, the government established the Industrial Revitalization Corporation, which bought up banks’ shares of poorly performing companies for restructuring.  Also, banks were encouraged to merge to strengthen the banking system as a whole.  Other liberalization triggered to create new companies and corporate tax cuts improved business conditions.  The Koizumi administration cut government expenditures and privatized several public sector institutions, such as the Japan Post Office and the Japan Highway Public Corporation.  Reforms resulted in the improvement of macroeconomic indices, for example, recovering stock prices, decreasing the annual number of private company bankruptcies, and improving the unemployment rate. As a result of the improvements of macroeconomic indicators, the zero-interest rate policy came to an end in 2006.  Unfortunately, although Koizumi era reform policies pulled the nation out of recession and into economic recovery, a growing trend in temporary employment was left in the wake, resulting in unstable labor conditions and low wages for temporary workers (See Appendix N). Due to the current world financial crisis, the Japanese economy is forecasted to be in recession this year. Japan’s annual GDP growth rate is estimated to be -1.8% in 2008.  Also, as a result of the current recession, large corporations, such as Sony, have started to reduce employee numbers  and temporary workers have begun to be laid off.  According to some, the decrease in domestic consumption demands and the downturn of business conditions are causes of the current recession. Government policies to counter the recession include measures aimed at ensuring job security, supporting financing of private companies, and consumption stimulation.Until the end of this year, the government plans to lend money at low interest rates to companies suffering from lack of financing due to the current recession. According to a government plan released on December 9th, 2008, the total amount of lending to such companies will be one trillion yen. To enhance job security, companies that upgrade temporary workers to permanent-employee status will be provided one million yen per upgrade. As part of the December 9th package, the government also plans to establish a 400 billion yen fund in order to create an additional 1.4 million job opportunities.  To stimulate individual consumption demands, the government hopes to provide 18,000 yen per person. This idea is currently being negotiated between the leading Liberal Democratic Party (LDP) and the opposition Democratic Party.  Both the opposition party and some LDP members criticize these emergency measures as discounting the progress in structural reform since former Prime Minister Koizumi’s administration, since the additional funds allocated for the proposed measures will exceed the annual budget and risk a national budget debt3. The ‘Lost Decade’: Was it just wasted?Next, let me talk what happened in the ‘lost decade’ in Japan. Most Japanese tended to think that reflected a big cyclical downturn at the outset of the 90s. They believed that if positive fiscal and reflationary monetary policies were taken altogether for a couple years to expand effective demand, the economy would recover sooner or later. The policy mix in the past had been successfully implemented. They thought “why not again?” The government repeated to deploy massive fiscal plans one after another. But the situation did not recover. The Bank of Japan did not take brave monetary policy quickly due to the bad memory of the failure in the 80s. The Bank made mistakes again in this regard. Western media criticized the Japanese government’s policy as “too small, too late.” It may be correct. However, the negative impact on its economy by the dramatic fall of values of stocks and lands were so big (See Table 1) that no one could have deployed effective fiscal plan given the limited absorptive capacity and the repayment ability of the nation. The multiplier effect has been very low.The ‘Lost Decade’: Was it just wasted?Most Japanese tended to think that the “lost decade” reflected a big cyclical downturn at the outset of the 90s. They believed that if positive fiscal and expansionary monetary policies were taken altogether for a couple years to expand the aggregate demand, the economy would recover sooner or later. The policy mix in the past had been successfully implemented. They thought “why not again?” The government repeated to deploy massive fiscal plans one after another. But the situation did not recover. The Bank of Japan did not take brave monetary policy quickly due to the bad memory of the failure in the 80s. The Bank made mistakes again in this regard. Western media criticized the Japanese government’s policy as “too small, too late.” It may be correct. However, the negative impact on its economy by the dramatic fall of values of stocks and lands were so big that no one could have deployed effective fiscal plan given the limited absorptive capacity and the repayment ability of the nation. The multiplier effect has been very low.Most of the fiscal expenditure were just wasted to maintain or even to strengthen the political power of the vested interests, mostly of the Liberal Democratic Party (LDP). While Japan’s fiscal positions in both central government and regional governments have deteriorated quickly under the deflationary macro-economy and ‘hollowing-out’ phenomena largely seen in the remote regions, its micro-economy also became paralyzed. Since banks reduced their healthy assets mainly due to sharp drop of stock prices, they could not provide enough funds to their client companies. Thus, the government had to increase its fiscal expenditure. But, firms continued to reduce equipment investments to keep net surplus cash flow while their turnover did not increase. Japanese business models full of success stories in the past became outdated under the suppressed economic situation. Japan in the 90s was generally amid the macro-micro economic crisis.#p#分页标题#e#But, in 95 and 96, Japan’s economic growth rates rose suddenly. They were higher than those of the U.S. and major industrial countries. Many felt that Japan had been conquering long recession to a normal orbit of economic growth. That was the very reason why then PM Hashimoto made a wrong decision. He decided to raise the VAT rate (Value-Add-Tax) to improve the deteriorated fiscal position. However, it caused a catastrophic impact on the monetary system. Capital market reacted very negatively. Eventually, the Long-term Credit Bank collapsed. Yamaichi Securities was also forced to close the company due to the illegal transactions.Thus, near-crisis situation occurred in 98-99. Japanese government decided to throw huge fiscal funds in most of commercial banks to raise their capital/assets ratios. Neither shareholders nor managements of the banks were penalized, which increased frustration of the people. Credit crunches took place widely. It was around this time when big firms decided to restructure their own firms and groups at home and overseas to adopt new business models fitted to them under the new paradigm. They realized that they could not depend on their traditional business models. They began to amend employment contracts to more flexible one, to encourage employees to retire earlier while showing additional money and to restructure overseas operations thoroughly. Their efforts have been reciprocated at least partially. The current profit level of Japanese listed firms in FY 02 rose sizably. Toyota, Honda, Canon, etc. recorded the historically highest profits. ‘Concentration and choice’ became new objectives of their companies, not full-set manufacturing widely seen in the 70-90s. Nowadays, they are aiming at higher ROI, ROA or EVA rather than their traditional targets –‘high amount of turnover with high share in the market’. They have encouraged product innovation, not process innovation. We can safely conclude that the lost decade was not merely wasted and good lessons were well learnt at least in business world. Their business models in export sector for instance have greatly changed.The sorry state of the Japanese economy still exists after low economic growth in the 1990s—which is now commonly known as the lost decade. The economic growth rate averaged below 1.5% from 1992 to 2002. Many articles have been written on why the lost decade happened. (See for example, Cargill, Hutchison, and Ito (1997, 2000).) Most scholars put blames on the collapse of the excess of the 1980s and mistakes in policy responses. The role of policy toward nonperforming loans, monetary policy, and fiscal policy has been examined.The first stage is prompted by the burst bubble. Stock and land prices fell sharply from 1990 to 1992. Many bank loans to construction and real estate companies became nonperforming. However, the first response to the problem by banks and regulators was to deny the existence of the problem. Banks continued to lend to those companies with nonperforming loans so that they can pay interest payments (i.e., ever-greening). The regulators allow these banks’ behavior, hoping that stock and land prices will recover shortly. However, the land prices continued to slide down, and the stock prices did not recover.The first type of financial institutions to fail was housing loans companies (so-called jusen). The first rehabilitation plan of 1992-93 was typical forbearance with optimistic land price projections. When it was revealed in 1994 that the jusen rehabilitation plan collapsed, the policy response was minimal. In 1995, the jusen resolution was debated among policy makers and supervision authorities. Since jusen companies borrowed large funds from banks and agricultural cooperatives, the loss sharing between banks and agricultural cooperatives became political problem. At the end, the agriculture lobby successfully fended off the pressure to shoulder a fair share of burden (loss sharing proportional to lending). The eventual shortfall in filling losses was shifted to public funding. This action invited public anger and made it more difficult to inject fiscal money to deal with preemptively ever increasing banking problems. See Cargill, Hutchison, and Ito (1997; chapter 6).The possibility of a larger problem, that is, spillover of nonperforming loans problem to other types of financial institutions, was neglected. There were ample signals in 1995 that nonperforming loans problems are spreading to banks. In February 1995, two credit cooperatives, Anzen and Tokyo Kyowa, were determined to have failed. That was the first sign of serious problems other than jusen. However, the two credit cooperatives were treated as a special case with management fraud and corruption. The supervision authorities sought to inject public funds of the Tokyo government that is the primary supervision authority for credit unions to deal with losses from the two insolvent institutions. However, the Tokyo metropolitan parliament refused funding. From July to August 1995, failures of slightly larger institutions continued. Yuai Credit Cooperative and Cosmo Credit Cooperative failed in July. Kizu Credit Cooperative and Hyogo Bank that failed in August 1995 were much larger than any of the institutions that failed earlier. In fact, Hyogo Bank was the first failed bank that is listed in the Tokyo Stock Exchange failed.Even with these signs, policy responses were minimal. Those institutions that were clearly insolvent and with some fraudulent activities were determined to be closed. But, the monetary authorities lacked an adequate legal framework to deal with these weak institutions. No legal framework for dealing with weaker institutions, other than finding a white knight, was available, because the previous regime was based on the assumption that no banks will fail. The political fiasco surrounding the debate of injecting fiscal funds to the two credit cooperatives and the jusen companies made it near impossible even to raise the issue in 1996.Complacency dominated in 1996 to the summer of 1997. The jusen resolution gave a false sense of “the worst is over”. A brief period of robust economic growth in 1996 also enhanced optimism. However, NPL problems did not go away. Policy efforts were directed to pushing legislation for the Big Bang of the Japanese financial system, a wholesale liberalization of the Japanese financial markets to be implemented in three years.The Japanese economy started to slow down when the consumption tax rate was raised from 3% to 5% in April 1997. A combination of consumption tax increase, a repeal of special income tax cut, and an increase in social security contribution in April 1997 amounted to a fiscal contraction of 9 trillion yen, or 1.8 percent of GDP. Although the effect of consumption tax increase was thought to be temporary, external environment became adverse, as the Asian currency crisis that started with the baht floatation of July 2, became worse and worse.The full-blown banking crisis occurred in November 1997, when a large commercial bank (Hokkaido Takushoku Bank) and a large securities firm (Yamaichi Securities) failed. The government decided to inject public funds to stabilize the banking system. In 1998, two large banks were temporarily nationalized. The crisis of November 1997 helped pave way to use public money to help stabilize a financial system. The study group was set up in the Liberal Democratic Party led by former Prime Minister Miyazawa. The study group recommended 30 trillion yen (6 percent of GDP) of public funds to be used to stabilize the financial system. Of the 30 trillion, 13 trillion were for capital injection to sound banks, and 17 trillion were for deposit protection. The blanket guarantee of deposits was issued by the government in 1996, despite a legal protection of only 10 million yen per customer per financial institution. Setting up the special funds was supposed to quell a voice of concern that there is no safety net in failing weaker, insolvent banks. The capital injection was intended to strengthen fundamentally-sound, but capital-lacking banks. However, the capital injection of March 1998 was given to 21 larger banks without serious restructuring efforts. Each bank received about 100 billion yen, which would increase the Basle Capital Adequacy ratio by 1 percentage point. This gave the sense that banks are still treated without discrimination among them—the so-called convoy system would remain. This was a significant change in the government attitude and the public perception. In 1995, a question of injection mere 68 billion yen into the jusen resolution package became a political debate and public anger. This time, injection 30 trillion yen (later increased to 60 trillion yen) was not seriously challenged or criticized.The new legislation was passed to give funding, backed by special Government bonds, to the Deposit Insurance Corporation. The Deposit Insurance Corporation was also given power to arrange a merger between weaker banks.However, the amount of capital injection in 1998 was not enough to address the banking problem. The market was not impressed at the time. The stock prices of Japanese banks remained weak, and the Japan premium, which reflects default risk of Japanese banks, remained high.In the spring of 1998, the Long-term Credit Bank (LTCB), one of the capital injected banks, was reported to have become near insolvent in the market. The stock price plummeted. New legislations to make the financial market rehabilitated and strengthened was debated in the Diet in parallel with the LTCB difficulty in the market. In the end, new legislations, that include the legal possibility of outright temporary nationalization of a weak bank, was passed in the fall of 1998. The LTCB became the first case of bank nationalization. In December 1998, another weak bank, the Nippon Credit Bank (NCB), was found to be insolvent and ordered to suspend operation. This action was widely regarded as a strong determination of the newly create supervision agency, the Financial Supervisory Agency (later reorganized as Financial Services Agency), that commenced operation on June 22, 1998.#p#分页标题#e#Capital injection of March 1998 and March 1999 helped stabilize bank fragility, only temporarily. Capital injection of 8.4 trillion yen into 16 major banks and 11 regional banks certainly raised the capital ratios (in most cases by 1 to 2 percentage points). However, it was too small to induce banks to provision for past, present, and expected losses from all NPLs. Capital injection did not ask bank management and share-holders to take responsibility. Therefore it was perceived as free gift, contributing to moral hazard of management.After April 1999, the Japan premium disappeared and Japanese banks appeared to have regained its strength. Stock prices started to increase in the global IT boom. This created a sense of relief, as Japanese banks hold large amount of equities on their balance sheets. In 1999-2000, several large banks started to negotiate and announce merger plans. The Mitsui-Sumitomo merger plan was unprecedented in the sense that two ex-Zaibatsu group banks planned to merge. This merger was regarded to be harbinger of restructuring of industrial companies, that is a wide-range of affiliation and mergers among manufacturing and service industries as the two banks were cores of the two groups. The three large banks, Industrial Bank of Japan (IBJ), Fuji Bank, and Daiichi-Kangyo Bank (DKB), announced to form the Mizuho group. Under the financial holding company, the corporate, retail, investment banks will be created from restructuring of the three banks. Specialization in various aspects of banking was traditionally weak in Japanese financial institutions, and the Mizuho merger plan was supposed to overcome this weakness. IBJ was strong in some aspects of investment banking and international dealings, while Fuji was strong in retail and corporate banking both international and domestic businesses. The DKB has a strong network of retail banking throughout Japan. Merger and reorganization in specialized banking was expected to create specialized, competitive banks. In the end, the internationally active banks in Japan were to be grouped into four banks: the Mitsubishi-Tokyo financial group, the UFJ (Sanwa and Tokai) group, the Mizuho group (Industrial Bank of Japan, Fuji, and Daiichi-Kangyo), and the Sumitomo-Mitsui Bank.The brief optimism was shattered again, when the prices of IT stocks plummeted, bringing down the market average in the fall of 2000 to the spring of 2001. The economic activities became weak throughout 2001. The Japanese economy turned to a recession in March 2002.The banking system became a source of concern, again, in 2001. The Nikkei 225 stock price index declined toward the 10,000 level in the summer. When the US stock prices declined sharply after the terrorist attack of September 11, 2001, the Nikkei index went below 10,000. As the market value of equity portfolio became below book value, the banks suffered major losses in profits and capital ratio. As operation profits stayed low and as new NPLs emerge every month with low growth and deflation, there is no way out for banks but deteriorate their capital position, unless they could inject more capital from the private sectors or public sector.As of March 2001, Risk-monitored loans amounted to 32.7 trillion yen (6.4% of GDP), while classified loans (Classes II, III, and IV) amounted to 65.7trillion yen (12.8% of GDP). The contentious part is Class II loans that are for doubtful borrowers. However, many banks and supervisory officials think that substantial part of these loans are performing and will remain performing with high probability. Skeptics think that the classification itself is to lax and provisioning for NPLs is too low. When a department store chain Mycal went bankrupt in the fall of 2001, it was revealed that banks classified loans to Mycal in Class II. Therefore, expected profits of banks went down sharply due to the Mycal failure, reflecting under-provisioning. The event made some market participants to suspect that more near-bankrupt loans are classified in Class II loans.The cumulative write-off among banks from April 1992 to March 2001 amounted to 63 trillion yen (12% of GDP). However, this amount is expected to rise further. The provisioning and eventual losses that are not covered by profits have to be deducted from bank capital. The reported capital as of March 2001 was 36.7 trillion yen, and the Basle capital ratio of major banks are 8 to 10 percent. However, the bank capital is not enough. Of the 36.7 trillion bank capital, deferred tax credit (7.2 trillion yen), Government-held equities (7.5 trillion yen), and estimated under-provisioning for NPLs (about 7.6 trillion yen) are included. When they are deducted, net capital is only 14.5 trillion yen. In addition, with the Nikkei level at 10,000 yen, the estimated capital loss on the balance sheets is about 10 trillion yen. (These estimates are due to Fukao (2001).) The Japanese banks certainly need more capital.In order for banks to raise fresh capital in the market, some banks have to show that management will take responsibilities by resigning, and current share-holders have to take responsibilities by accepting writing down some capital. After these actions, the government should not hesitate putting more public funds as preferred shares into banks. For extremely weak banks, the government should not hesitate temporarily nationalize them for restructuring. For those nationalized banks, the government should consider options of restructuring assets by separating good and bad assets, rather than selling it to a new owner with buy-back guarantee of secondary losses—the way used for the LTCB sale to an investor.