Recent Banking Sector Reforms in Japan: An Assessment

Abstract

There is widespread agreement that a two-pronged attack, embracing both micro- and macro-economic reform, (eg see Farrant and Markovic, 2003; Kashyap, 2002) is necessary to turn around the fortunes of the Japanese economy. This paper focuses on the former set of initiatives adopted by the authorities in Japan, concentrating on those banking sector reforms implemented since around the year 2000, when the reform programme appeared to enjoy renewed impetus. The paper begins by reviewing the main problems still besetting the Japanese banking industry and responsible for its continued fragility, as exemplified by low profitability, weak capitalization, poor asset quality and excessive credit and market (stock and bond) risk exposure. The main reform initiatives are then identified: the creation of a new financial architecture; the reform of safety net arrangements; the authorities’ attempts to speed up the banks’ resolution of their non-performing loan problems; the Bank of Japan's share-buying activities; the authorities’ quest for the right to engage in ‘pre-emptive’ capital injections; and recent improvements in corporate governance arrangements. The latter part of the paper is an assessment of these reform initiatives, from an efficiency/cost-effectiveness standpoint, and includes recommendations for further change.