The Bubble Economy. The Direct Cause Of The Japanese Banking

834 WordsApr 18, 20174 Pages
The Bubble Economy The direct cause of the Japanese banking crisis was the collapse of the asset price bubble during the late 1980s to the early 1990s. During 1980s, sustained economic growth and low inflation rate were the main characteristics of macroeconomic environment in Japan. This condition caused the upward growth expectations of asset prices, uncontrolled credit expansion and financial deregulation. At the same period, the United States has a substantial increase in the current account deficit and a sharp increase in the foreign trade deficit. In order to depreciate the U.S. dollar by intervening in currency markets, five countries including France, West Germany, Japan, the United States and the United Kingdom signed the Plaza…show more content…
At the same time, these financial institutions may loosen their credit standards in order to get higher loan market share. As a consequence, their lending decisions were based more on collateral requirements rather than cash-flow analysis. In order to accelerate credit-check procedures for loan approval, many banks transferred the responsibility for loan-risk evaluation from their credit-investigation bureaus to less independent monitoring bureaus reporting directly to the banks’ sales divisions. The second problem is the defects in corporate governance of Japanese banks. First, because of the structure of bank ownership, few shareholders own the majority of the total shares, most shareholders have modest control over the management of banks. Second, shareholders lack of incentive so it is difficult for them to against managements’ decisions. Third, the internal and external audit was very limited. Besides, the central bank in Japan has also been criticized for its role in aggravating the bubble economy. The Bank of Japan used expansionary fiscal and monetary policies to solve the fears of economic depression. After five rounds monetary easing from January 30, 1986 to May 30, 1989, the official discount rate

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