Restructuring and Forgiveness in Financial Crises D: The Japanese Financial Crisis of the 1990s

Abstract

In November 1997 the Japanese government confronted a problem of enormous proportions when the turmoil that had been roiling the financial markets since the collapse of a real estate and stock market asset bubble in 1990 reached a crescendo with the failure of four major financial institutions in quick succession in the space of a month. Prior to these failures, the damage done by the collapsing bubble had seemed to be limited to certain segments of the financial landscape, and the government’s response consisted largely of targeted intervention when necessary for clearly insolvent financial institutions, with a more comprehensive approach yet to be developed. Yet with the November 1997 failures it was clear that the damage was not limited and that the crisis in the Japanese financial system was reaching a systemic stage. Given that the frameworks developed during the early stages of the financial crisis were not designed with such failures in mind, initial efforts to assist these more major financial institutions were organized on an ad hoc basis while Japanese authorities simultaneously worked on developing a new framework. Ultimately, two pieces of legislation were enacted that would provide much of this framework – an act allowing for the temporary nationalization of systemically important banks for purposes of restructuring them and an act earmarking additional funds for bank recapitalization.