NRI Papers
No.151 March 1 , 2010
  Japan's disposal of bad loans: failure or success?
— A review of Japan's experience with bad debt disposals and its implications for the global financial crisis —
 
Richard KOO, Masaya SASAKI

As of winter 2009, the US and a number of other countries are experiencing serious credit crunches coupled with problems in the financial sector related to bad loans. These problems were triggered by an asset price bubble and its subsequent collapse and are identical to those that Japan faced starting in the 1990s.

The Japanese government implemented a total of nine policies in response to the banking problem brought about by the post-bubble collapse. The cost of these programs to taxpayers was 11,499.9 billion yen, or 2.32 percent of nominal fiscal year 2008 GDP. Japan was able to keep costs in check by adopting a gradualist approach and allowing banks to dispose of bad loans over time, as earnings allowed.

While the government's actions were not entirely without fault, they had a substantial positive impact. The government's injections of capital into banks and the special credit guarantees provided to small businesses were both successful in eradicating the credit crunch soon after their implementation, something that cannot be said for the TARP more than a year after its implementation.

In particular, the US in response to the credit crunch ignored the fact that the twin objectives of strengthening individual banks and easing a nationwide credit crunch are at heart contradictory. Hence, the credit crunch continues while some banks are returning public funds to the government. Financial authorities in the US and Europe may have to implement further capital injections in order to end the credit crunch.

As the US responds to the financial crisis and the problems with bad loans, it needs to learn from Japan's experience and do more to ease the credit crunch while allowing financial institutions to dispose of bad loans over a longer period. The disposals should proceed at a realistic pace that does not put undue stress on banks' financial positions.

Contents
I Was Japan’s response to the financial crisis really a failure?
II Overview of Japan’s response to the financial crisis and attendant costs
III Learning from Japan’s experience

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