Japanese Banks and Market Discipline

Recently, Japanese banks reported their financial results for the fiscal year ending in March 1999. The 17 largest banks suffered a net combined aftertax loss of ¥3.6 trillion ($29.51 billion at $1 = ¥122). Moreover, even after spending ¥10.4 trillion to dispose of nonperforming loans in the 12 months previously, the total nonperforming loans at these banks stood at over ¥20.9 trillion, representing a little over 3% of total loans of the banks. These reports were the latest installment of bleak news for a banking system that has been in the grip of a deep and prolonged crisis. Since the collapse of stock and land prices in 1990, the Japanese economy has exhibited tepid performance, with continued declines in asset prices and sharp increases in business bankruptcies. Consequently, the quality of assets at Japanese banks has deteriorated significantly, culminating in the failure of several large institutions in 1997 and 1998. Currently, it is estimated that the bad loans of major banks alone total about 7% of gross domestic product (GDP). This figure far exceeds the amount of government resources spent, 2.5% to 3% of GDP, to resolve the savings and loan crisis in the U.S.