Why the banking problem in Japan?
The Japanese banking sector has been in distress since the asset bubble collapse in the 1990s, with a large accumulation of non-performing loans. Some attribute this to the financial deregulation which began in the early 1980s, and undermined bank profits as well as their motivation to prudently monitor their client firms (Hellman, Murdock and Stiglitz, 1996). However, Hanazaki and Horiuchi (2001) argue that the problem came not from deregulation, but from the comprehensive safety net provided by the financial authorities and the slow process of financial deregulation, which shielded incumbent financial institutions during the high growth period. Banks monitoring was largely neglected, as the government or market forces were unable to penalize inefficiently managed banks, making the sector potentially fragile even before the 1980s. They explain the Japanese banking problem with changes in banks major clients. As most reputable manufacturing firms no longer relied heavily on bank borrow
