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Japan's Lost Decade — 1989 to 2006

Japan's Clean-Up and Recovery, 2002 to 2006

Explain how Japan's banking regulator pushed the major banks to cut their bad loans from 2002, how the period ended, and how far general government gross debt had risen by 2005.

Before you start

What you'll be able to answer

  1. How did the push to cut the major banks' bad loans from 2002 work?
  2. How did the period end?
  3. How far had general government gross debt risen by 2005, and why?

Where this sits

Japan's Lost Decade — 1989 to 2006 · this module is lit

  1. Dec 1989Share prices in Japan peak
  2. Aug 1990The Bank of Japan's last rise in its discount rate, the interest rate at which it lent to banks
  3. Aug 1992The government announces the first of six spending packages up to 1995
  4. 1995-96The first direct use of taxpayers' money against financial instability covers losses at failed housing-loan companies, the jusen
  5. 1 Apr 1997The consumption tax rate, a tax on what people buy, is raised
  6. Nov 1997Sanyo Securities, Hokkaido Takushoku Bank and Yamaichi Securities fail
  7. Oct-Dec 1998Japan's parliament, the Diet, makes more public money available to deal with banks' bad loans, and the state takes over the Long-Term Credit Bank and Nippon Credit Bank
  8. Feb 1999The Bank of Japan begins its zero interest rate policy, pushing its overnight rate as low as possible
  9. Mar 1999Public capital, new capital paid for by the state, is put into the major banks
  10. Mar 2001The Bank of Japan begins quantitative easing, a target for the money banks keep in their accounts with it
  11. Oct 2002The Financial Services Agency, the banking regulator, launches its programme to cut bad loans
  12. Mar 2006The Bank of Japan ends quantitative easing

In 2002 Japan's big banks still held large bad loans

By 2002 Japan's government had spent years propping up its banks. It had made public money available, taken two failing banks into public ownership and put new capital paid for by the state into the major banks. Yet the banks still held large bad loans, loans that were not being repaid, and the economy barely grew that year. In October 2002 the Financial Services Agency (FSA), the banking regulator, set the major banks a deadline.

Take a guess

A bank has set no money aside against a large loan. It decides the loan will never be repaid and writes it off, taking it off its books as lost. What does that do to the bank?

The FSA set the major banks a deadline to halve their bad-loan ratio

The target was in the FSA's Program for Financial Revival of 30 October 2002. The major banks' bad-loan ratio, their bad loans as a share of their lending, was to come down to about half its March 2002 level by March 2005, the end of the 2004 financial year. Ending the bad-loan problem by then was the stated aim.

Three kinds of pressure were meant to get the banks there: valuing their loans more strictly, strengthening their capital, and tightening how they were run, with outside auditors checking their accounts more strictly. The programme's wider aim was a banking system people could rely on, able to support reform of the economy.

The FSA made the banks value their loans more strictly

Each bank graded its own borrowers, from normal, through in danger of bankruptcy, down to the worst grades, and set money aside against the loans it expected to lose. The FSA tightened that grading. For large borrowers that were weak but not yet in danger of bankruptcy, the major banks were to set the money aside loan by loan, from the cash each borrower could be expected to pay. Special inspections in 2003 and 2004 checked how the banks had graded their borrowers, and the FSA published the gap between the banks' own grading and its inspectors'.

Capital came under the same scrutiny. Part of it was deferred tax assets, tax a bank expected to save on future profits. The FSA treated these as a less solid kind of capital and said it would count them strictly.