A Study in the Generating-Expanding Process and the Causes of Financial Institution's Poor Support to their Bad Loans in 1990s' Japan

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Focusing on the second half of 1990s, about two years in particular beginning in the end of 1997, this study investigates the working mechanism and actual figures of Japan's financial markets in (alleged) troubles and confusion. This period, often called as the time of "Credit Crunch" or "Financial Crisis", is regarded as the climax of Japan's economy wide troubles caused by financial institution's poor support to bad loans generated and expanded during "the Bubble Years" in the 1980s. Now the dominant view remembers this period as a case for successful policy intervention with which Japan began the recovering process from a decade-length serious trouble with bank's bad loans. Upon this view, recently, they make policy recommendations to central banks and governments in developed countries fallen in sub-prime loan troubles. Nobody, however, has shown with persuasive evidence the seriousness of the "Crunch" or "Crisis" and confirmed empirically the effectiveness of the policy intervention during this period. Casual observation of macro data causes doubts on the seriousness of the "Credit Crunch" and therefore the policy effectiveness.Using huge set of micro-data on financing behavior of individual firms, from Financial Statements Statistics of Corporations by Industry, Quarterly (Hojin Kigyo Tokei Chosa, Kiho), this study empirically confirms that there was no such serious situation that should be called "Credit Crunch" or "Financial Crisis". Without any serious disease, no policy intervention could be effective. This conclusion suggests that the success story of Japans policy during the "Financial Crisis" period is a myth, which would create a momentum for new researches on the Japans bad loans controversy.The Final Report of the study is downloadable from the Ministry of Finance's homepage : http://www.mof.go.jp/jouhou/soken/toukei.htm