Japan's Crippled Banking System
October 14, 2002
Japan's economy has been in the tank for a decade because for all its post-war reforms that led to its business boom, one key element of the pre-war system remained unchanged: banking.
- In Japan, businesses were encouraged to get most of their financing from banks, which were then allowed to own equity in the businesses.
- In the U.S., banks were prohibited from owning equity and businesses got most of their financing from bonds and stock.
- The result in Japan was very concentrated business ownership, versus the much more decentralized ownership in America -- and eventually Japanese businesses and banks became deeply interlocked.
In the 1980s, liberal economists saw this as a source of strength for Japan, because businesses could manage for the long term without pressure from stockholders for profits or fear of hostile takeovers. In fact, it meant Japanese businesses had no pressure to perform and ultimately became complacent.
- During the 1990-91 recession, American businesses restructured; Japanese companies made no significant reforms.
- When the savings and loan problem hit the U.S., banks were closed, assets sold and the issue put behind us.
- When similar banking problems hit Japan, however, banks were reluctant to write-off bad corporate loans because they also owned the companies, so they continued throwing good money after bad.
- Today, the Japanese banking system is paralyzed with so many bad loans on it books that it cannot make loans to new businesses or existing ones needing capital for expansion.
But rather than bite the bullet and liquidate the bad loans, the Japanese government just keeps hoping that the problem will take care of itself. Even if Japan pulls out of the worst of its current difficulties, it is hard to see a return to high growth without drastic reforms
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, October 14, 2002.
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