In the previous paper I looked at the factors which contributed to emergence of the banking crisis in Japan. In this paper I will examine the measures which were taken by the government to stop the banking crisis. Particularly, I will describe the “Big Bang” reforms and try to answer the question of whether these reforms were successful.
After the collapse of the “bubble economy” Japan suffered the problem of a huge amount of non-performing loans. Cargill, at al. (1997: 118) estimated that in 1995, non-performing loans amounted of 10% of GDP (6% of all loans). The Ministry of Finance was slow in reacting to this problem. It was a strong belief that the economic situation would recover soon and asset prices would start to increase. The MOF conducted the „forbearance” policy, allowing financial institutions to hold non-performing loans without special write-offs. Unfortunately, the expected economic recovery did not happen, and the amount of non-performing loans ballooned in the first half of the 1990s. Therefore, the regulators took some measures to mitigate the problem of non-performing loans. However, it was ad hock approach to the problem. Hutchison (1997: 2) described this policy as a series of uncoordinated actions, proceeding on a case-by-case basis. There was no true policy to contend with the banking crisis until 1996. When the financial problem became evident because even large institutions were in serious difficulty, the government was forced to take a stronger approach.
The main assumptions of the “Big Bang”
Due to the subject of this study I will describe the elements of the “Big Bang” plan which mainly contributed to the recovery of the Japanese banking system.
In November 1996 the Prime Minister Ryutaro Hashimoto proposed a package of reforms called the Big Bang. The plan was to reform Japan’s financial system according to the following principles:
- a free market,
- fair trade, secured by transparent and reliable rules,
- an institutional framework that would satisfy international standards in such areas as law, accountancy and banking supervision (Horiuchi, 2003: 78).
The most basic assumption of the new reform was to accelerate deregulation and liberalisation of the Japanese financial system by 2001. The Big Bang plan promised specific measures including: (1) the removal of unnecessary barriers separating the banking, securities and insurance sectors, (2) the liberalisation of various charges, commissions and premiums, (3) the galvanising of disclosure rules, (4) the establishment of new laws for introducing complex financial products such as derivatives, and (5) the reorganisation accounting and taxation rules to bring Japan into line with emerging global standards (Malcolm, 2001: 112).
In order to stop the banking crisis and change the Japanese banking system into a sound and market-based system the government intended:
- to change legislation in order to resolve the problems of weak banks,
- to resolve problems of non-performing loans and to provide the public funds for the weak banks,
- to reform the accounting standards,
- to create independent financial supervision and strengthen prudential regulation,
- to strengthen competition on the banking market.
In 1998, the Diet passed the Financial Revitalisation Law and the Financial Early Strengthening Law and amended the Deposit Insurance Law to provide a broad framework for the resolution of banking problems (Kanaya and Woo, 2001: 41). It also led to the establishment of the Financial Restructuring Commission (FRC) in order to proceed with the task of resolving the banking crisis. The Commission was independent from the MOF. Its task was to oversee banks that were temporarily nationalised as part of the restructuring programme. The FRC was located in the Prime Minister’s Office and headed by a political figure from Liberal Democratic Party (LDP). Maswood (2002: 48) stressed that the appointment of a political figure to chair such an important institution and independence of the FRC from the MOF changed the balance of power between elected politicians and bureaucrats. It was also a sign the MOF started to lose the confidence of the politicians. Maswood also pointed out that FRC had achieved more to strengthen the banking industry than the MOF since the beginning of economic stagnation in Japan.
The Financial Early Strengthening Law was passed to establish a scheme to recapitalise still solvent banks with public funds. Under the new law, the weakest banks would be merged, temporarily converted into a “bridge bank”, nationalised, or shut down. In the first case, the government would send receivers to assess the financial standing of a bank and find another institution willing to take over the ailing bank (Amyx, 2004: 209). In the second case, when a bank failed, a receiver (financial administrator) was appointed to administer the business and manage the assets of the bank. The failed bank would become a so called “bridge bank” and continue to provide loans to sound borrowers. The receiver would seek a suitable bank to take over the failed bank’s operations. However, if a suitable bank could not be found, then the bank’s operations would be transferred to a public bridge bank. Public bridge banks would be established as subsidiaries of a holding company established by the Deposit Insurance Corporation (DIC). The bridge bank was to be set up for an initial period of two years with a purpose to finding a suitable bank to take over its assets and liabilities (Levy, 1998: 120). In the third case, the government would temporarily nationalise the bank and then sell it to private investor.
The implementation of the “bridge bank” scheme was a signal that the government had resigned from the “convoy system”. The convoy system where “no bank was allowed to fail” was abandoned. It was a radical shift in policy toward troubled banks away from bailing them out, to helping only the healthy ones and facilitating the liquidation of the rest.
The Long-Term Credit Bank of Japan (LTCB) was the first banking institution to be nationalised and placed under the rescue programme. Goldman Sachs was appointed to find a suitable buyer for the LTCB. In 2001 the government gave US-based Ripplewood Holdings Co. the right to negotiations to take over the LTCB. Under Ripplewood, the LTCB was restructured and resumed trading as Shinsei Bank. Only one other bank, Nippon Credit Bank, was nationalised. (Maswood, 2002: 50).
Under the earlier mentioned new law, the government also encouraged mergers that would give banks chance to compete with foreign banks in Japan and in the global economy. On the other hand, banks were conscious that they must consolidate their activity to compete successfully with foreign financial institutions. Thus, in the early 2000s there was a series of mergers among the Japanese banks. In April 2001, Bank of Tokyo-Mitsubishi, together with Mitsubishi and Nippon Trust Banks, established a company, Mitsubishi Tokyo Financial Group. Other mega mergers included: Mizuho Financial Group, Sumitomo Mitsui Financial Group, UFJ Holdings and Resona Holdings (Kawai, 2003: 16). As a result of mergers at the beginning of the 21st century the banking scene in Japan was radically changed, and in place of a large number of financial institutions there emerged four large banking groups. Table 2 demonstrates the newly established banking groups in Japan.
Banking Groups in Japan
Major Subsidiary Banks
|1. Mizuho Financial Group (MHFG)
(Established in January 2003)
|Mizuho Bank, Mizuho Corporate Bank, Mizuho Trust & Bankig||Industrial Bank of Japan, Daiichi Kangyo, Fuji, Yasuda Trust Banks|
|2. Sumitomo Mitsui Financial Group (SMFG)
(Established in December 2002)
|Sumitomo Mitsui Banking Corporation (SMBC)||Sumitomo Bank, Sakura Bank|
|3. Mitsubishi Tokyo Financial Group (MTFG)
(Established in April 2001)
|Bank of Tokyo-Mitsubishi (BTM), Mitsubishi Trust & Banking Corporation||Bank of Tokyo-Mitsubishi (BTM), Mitsubishi Trust Bank, Nippon Trust Bank|
|4. UFJ Holdings
(Established in April 2001)
|UFJ Bank, UFJ Trust Bank||Sanwa Bank, Tokai Bank, Toyo Trust & Banking|
|5. Resona Holdings
(Established in December 2001)
|Resona, Saitama Resona, Kinki Osaka, Nara Banks, Resona Trust & Banking||Asahi Bank, Daiwa Bank|
Source: Kawai (2003: 16)
Resolving the problem of non-performing loans
After years of ignoring problem, the government began to resolve the bad dept problem that plagued Japanese bank. The government decided to inject a huge amount of public money to the ailing banking system. First of all, it provided 30 trillion yen in public funds to strengthen the Deposit Insurance Corporation (DIC) and to create a financial crisis management fund. The purpose was to provide DIC with adequate financial resources to offer the full protection of banks’ deposits and most credits until March 2001 and to ensure the efficient management of assets received from failed banks (Levy, 1998: 116). The Deposit Insurance Corporation was established in 1971. It covers deposit in deposit taking institutions – commercial banks, long-term credit banks, trust banks, regional banks, and credit cooperatives. The authorities made a decision to inject public money into DIC because after the Hokkaido Takushoku Bank failure in November 1997 it was widely recognised that the resources of DIC were inadequate. Out of 30 trillion yen, 17 trillion yen was aimed to absorb losses of the bankrupt institutions, and another 13 trillion yen as capital injection into viable financial institutions (Ito, 2000: 96). Amyx (2004: 209) stressed that these funds were necessary to support the temporary nationalisation of banks, the establishment of temporary bridge banks, and the recapitalisation of banks nearing insolvency.
Next, the government announced that 1.8 trillion yen in March 1998 and 7.5 trillion yen in March 1999 would be injected to help major banks meet the required capital adequacy. Finally, the government provided 60 trillion yen (more than 12% of GDP) for financial support for banks in October 1998. Out of 60 trillion yen, 17 trillion yen was retained from the original plan to protect depositors of failed banks, 25 trillion yen was for capital injections into weak but viable banks and 18 trillion yen for funding operations of temporarily nationalised banks (Kawai, 2003: 12).
Banks with serious debt problems could apply for public funds to write off bad debts. On the other hand, they would be required to begin the restructuring process and develop cost-cutting measures. Maswood (2002: 51) stressed that at the beginning only several banks applied for public funds. There was a fear that an application for public funds would lead to a disclosure of the true state of their financial position and that it might result in the escaping of depositors from them. The reluctance of banks to apply voluntarily for public funds prompted the Financial Supervisory Authority to begin an examination of all banks to asses the real amount of non-performing loans. In early 1999 the FRC urged the 17 banks to accept public funds to write off a substantial part of their bad debt (Maswood, 2002: 52).
The authorities also took measures to calculate the real amount of non-performing loans. The MOF identified the total amount of non-performing loans for major banks as of March 1998 to be 22 trillion yen. However, the newly established Financial Supervisory Agency, under the guidance of the Financial Reconstruction Commission and together with the BOJ, assessed the total amount of non-performing loans for all deposit taking institutions as of March 1999 to be 39 trillion yen. The problem of estimating the total amount of non-performing loans was connected with the fact that there was a lack of a reliable accounting system in Japan. Horiuchi (2003: 85) noted that it was “Achilles’ heel of the Japanese financial system”. There were cases of firms going bankrupt although their balance sheets had seemed sound and had been certified by auditors immediately before the bankruptcy. Thus, foreign investors and the public did not fully believe in the accounting information provided by the Japanese companies. Furthermore, in order to strengthen the transparency of banks, the reform of Japanese accounting system was essential.
The reform of accounting system
The reform of the system was implemented in three areas:
- Consolidated accounting rules were rationalised.
- The principle of marking-to-market accounting of financial commodities was introduced.
- Companies are now required to disclose pension liabilities (Horiuchi, 2003: 85).
It was necessary to introduce new consolidated accounting rules because in the past the ailing financial institutions often tidied up balance sheets by transferring non-performing assets to their subsidiaries, with the introduction of consolidated accounting such practices have been impossible. From 2001 the new rule requires also both financial and non-financial companies to adopt the marking-to-market principle for recording marketable financial assets in their balance sheets. Under the new rule, companies are also obliged to disclose unfunded pension liabilities (Amyx, 2004: 225). In 2000 “cash flow-based accounting” was introduced. Cash-flow accounting is important because it enables people to evaluate the performance of companies in terms of the discounted present value of cash flows (Horiuchi, 2000: 243).
The creation of independent banking supervision and strengthening prudential regulation
The Big Bang reform pack included also the reform of the supervision system in Japan. It was decided to create a new supervision agency which would be independent from the MOF.
Why was it decided to take over banking supervision from the MOF? First of all, after the collapse of the bubble economy the MOF was widely criticised for its supervision policy that allowed the banks to avoid prudential regulation whilst heavily investing in real estate. Second, through the 1990s, the MOF repeatedly failed to deal with the jusen problem and the failures of 6 Japanese banks (Hyōgo Bank, Taiheiyō Bank, Hanwa Bank, Kyōtō Kyōei Bank, Hokkaido Takushoku Bank, Tokuyō Bank) between 1995 and 1997. Third, it was also argued that the MOF allowed the banking problem to grow to a monstrous size. Finally, it was disputed that the MOF had too much power, both financial legislative power and financial examination power. This situation led to the fact that in the first half of the 1990s the MOF conducted the forbearance policy and did not force the banks to disclose the real amount of non-performing loans. It was considered that the concentration of so much power at the MOF led to corruption. A series of scandals hit the MOF in the mid-1990s when some the Ministry’s’ officials had been treated to wining, dining, and golfing by bankers for a long time. There were also cases when expensive foreign trips of the MOF officials were funded by the bankers (Hoshi and Ito, 2004: 231).
The new supervision agency – the Financial Supervisory Agency (FSA) was established in June 1998 to take over the supervision of banks from the MOF and to consolidate the segmented supervisory function previously held by various bodies. The FSA was overseen by the new established Financial Reconstruction Commission (FRC). The FRC was managed by five government-appointed members. The task of the new supervisory body was licensing, inspecting and supervising financial institutions, including agricultural, labour and non-bank institutions. The FSA oversaw banks, securities houses, insurers and non-bank lenders that were supervised by the MOF. The FSA reported to FRC which further reported directly to the Prime Minister in an attempt to eliminate bureaucratic red tape (Anderson and Cambell, 2000: 201). The table 3 presents the shift in the supervision process after 1998.
Supervising regulators for Japanese financial institutions
|Financial Institutions||Supervisor before 1998||Supervisor after 1998|
|City banks, long-term credit banks, trust banks, regional banks, tier II regional banks, Shinkin banks||MOF Banking Bureau||FSA|
|Life insurance companies, casualty
life insurance companies
|MOF Insurance Bureau||FSA|
|Securities companies||MOF Securities Bureau||FSA|
|Credit unions||Prefectures||FSA (after April 2000)|
|Labour cooperatives||Ministry of Labour||FSA and Ministry of Labour and
|Agricultural cooperatives||Ministry of Agriculture,
Forestry and Fishery
|FSA and Ministry of Agriculture,
Forestry and Fishery
Source: Hoshi and Ito (2004: 233)
From the beginning of its activity the FSA proved to be tough in forcing financial institutions to correct problems. It forced the nationalisation of both the Long-Term Credit Bank and Nippon Credit Bank. The Agency also finalised the January 1999 Mitsui Trust and Chuo Trust merger in only 3 weeks. This merger was completed much faster than the 1996 Bank of Tokyo-Mitsubishi merger, which took over a year to work out (Anderson and Cambell, 2000: 202). In 1999, the Financial Reconstruction Commission began to deal with insolvent regional banks. During the year, it closed five regional banks (Kokumin Bank, Kofuku Bank, Tokyo Sowa Bank, Namihaya Bank, Niigata Chuo Bank) and put them under the receivership of the Deposit Insurance Corporation. In 2001 and 2002 other insolvent banks were closed – Ishikawa Bank and Chubu Bank. Table 4 demonstrates the main bank closures between 1998 and 2002. The FSA also conducted on-site inspections of major banks in March 2002, particularly focusing on the quality of loans to largest borrowers (Hoshi and Takeo, 2004: 235). Moreover, the FSA recommended prosecutors bring criminal charges of breach of trust against the top management of failed banks (Amyx, 2004: 217).
Bank closures: 1998-2002
|Long-Term Credit Bank of Japan||23 October 1998|
|Nippon Credit Bank||13 December 1998|
|Kokumin Bank||11 April 1999|
|Kofuku Bank||21 May 1999|
|Tokyo Sowa Bank||11 June 1999|
|Namihaya Bank||7 August 1999|
|Niigata Chuo Bank||2 October 1999|
|Ishikawa Bank||28 December 2001|
|Chubu Bank||8 March 2002|
|Ashikaga Bank||29 November 2003|
Source: Hoshi and Ito (2004: 238)
In order to strengthen the inspection process and surveillance system in August 1998 the Working Group on Financial Inspection Manuals was formed to prepare the inspection manuals. The Group consisted of lawyers, public accountants, and representatives of the financial industry. The Group published the principle that financial inspections are to reinforce the management of financial institutions according to self-responsibility and focused on two points: (1) inspections should take place under self-management rather than led by regulatory authorities as in the past and that (2) inspections should focus on risk management rather than on the traditional assessment of assets (Hino, 2000).
In July 2000, the Financial Supervisory Agency and the Financial Division of the Ministry of Finance were integrated into a new supervisory agency – the Financial Services Agency (Horiuchi, 2003: 90).
The establishment of the FSA was important because it shifted the responsibility for monitoring financial institutions from the MOF to a new and independent agency directly responsible to the Prime Minister. The new supervisory agency was able to carry out the supervisory process much better than the MOF. Amyx (2004: 217) noted that FSA’s way of conducting supervision was “rule-based supervision”. Thus, it was a departure from the relations-based supervision observed in the MOF where regulatory results were determined more through a process of negotiations.
The Big Bang plan also included the reform and strengthening of the prudential regulations of banks. According to Horiuchi (1999: 34) despite the fact that prudential regulations existed in the Japanese banking law they were not effective until the end of the 1980s. The Ministry of Finance did not regard prudential regulations as essential for financial stability. Moreover, the bankers did not take these regulations seriously, and the MOF permitted some divergence between required and actual performance by individual banks. In many cases the prudential regulations were replaced by the amakudari system. In that system the supervision process was based on informal contacts between banks and the regulators. The supervisory decision toward an individual bank was based on mutual negotiations between the bank and the regulators.
A system of prudential norm was strengthened including loan classification, capital adequacy requirements and prompt corrective action (Kawai, 2003: 19). Firstly, banks were obliged to classify loans into one of four credit categories – healthy loans, loans requiring close attention, potentially unrecoverable loans, and unrecoverable loans – to establish loss reserves. Secondly, a new method for calculating capital adequacy ratios for banks was introduced. This method was compliant with standards of the Basel Committee On Banking Supervision. The new standards required that internationally active banks should have at least 8% capital adequacy ratio (capital to assets ratio). The banks engaged in domestic business only with a ratio less than 4% had to prepare a management improvement plan. All banks with a ratio below 0% were required to suspend operations (Craig, 1998b: 6). Finally, prompt corrective action would be introduced in response to a deterioration of a bank’s capital ratio. Kawai (2003: 20) explained that this procedure would force undercapitalised banks to take corrective measures to strengthen their capital base. Its objective was to move away from case-by-case regulation to a rule-based system of bank supervision and regulation. From that moment banking supervisors did not take any ad hoc decision to resolve the problem of a weak bank. All banks were forced to carry out their business with accordance to the prudential regulations.
Strengthening competition on the banking market
One of the main purposes the Big Bang reform was creating a free financial market. “Free” meant that it would operate according to market principles. The purpose was to promote competition and reduce governmental control over the financial market. According to Horiuchi (2003: 87) it was important aim because free market and market competition provides a discipline on financial institutions by forcing weak and inefficient companies to exit.
First of all, most of the remaining restrictions on crossover entry in the financial sector were abolished. The banks, trust banks, securities firms and insurance companies were allowed to enter into other sectors. Toya (2006: 122) stressed that “while the financial reforms of 1991-1993 took a first step towards eliminating the segmentation in finance, those reforms strictly restricted what types of new lines of business the subsidiaries of financial institutions could engage in”. Such restriction was abolished by the Big Bang, leaving the financial companies free to enter other financial businesses through their subsidiaries. It resulted that from 2000 there were some new entries into the financial industry. Ito-Yokado, one of Japan’s largest supermarket chains, has established IY Bank to provide services to the retail sector. The IY Bank has installed 8,000 ATM-machines in Seven-Eleven shops across Japan and showed a profit in just its third year of operation (DiPietro, 2004).
Next, the Anti-Monopoly Law was revised and the ban on financial holding companies was revoked. It was a component of the deregulation of business cross-entry and created a legal framework for financial holding companies. Finally, the Big Bang reform abolished the monopoly of banks in the foreign exchange business. During the post-war period foreign exchange transaction could only be carried out through banks authorised by the Ministry of Finance. The Big Bang reform has changed this. On the one hand this would be expected to hurt the banks, but the on the other hand it would benefit non-financial firms, especially those heavily involved in international business (Toya, 2006: 124). The Big Bang reform was aimed to increase competition not only among banks but also between banks and other non-financial institutions. Table 5 summarises the business open to banks as a result of the Big Bang.
Scope of Businesses Open to Banks After the Big Bang
Taking deposits and savings
Lending, discounting bills and notes
Traditional ancillary businesses
Guarantees, bill acceptance
Securities lending (from own portfolio to short-sellers)
Trading for own account
Subscription agency for local government, corporate, and other bonds (1983)
Underwriting of government bonds (from 1 April 1993)
Arrangements for private placements of bonds (1987)
Corporate trust services (from 1 April 1993)
Retail sales and dealing in government bonds (from 1 October 1997)
Retail sales of investments trusts (from 1 December 1998)
Over-the-counter (OTC) transactions in derivatives (from 1 December 1998)
Investment advisory services (for pensions, 1990)
Underwriting of corporate bonds (1993)
Underwriting of shares (1998)
Brokerage in securities (1998)
Insurance (from 1 October 2000)
Source: Hoshi and Kashyap (2001: 294)
The “Big Bang” Reform – success or not?
The Big Bang reform was the first comprehensive reform of the Japanese financial market in the post-war period. Japan experienced earlier reforms of its financial sector in the 1970s. However, these reforms were introduced slowly and gradually. The Big Bang reforms were wider in scope and deeper in degree than past financial reforms. They were comprehensive because extended across the banking, securities and insurance industries as well as to foreign exchange and accounting standards. This reform pack was so wide because Japan was struggling with the biggest and longest-lasting banking crisis in its history. Thus, it covered many areas of the Japanese economy. First of all, the Big Bang reform increased the competition in the banking sector. It was one of the main components of the reform, and in my opinion it was completed successfully. The increase of competition in the banking sector would potentially result in forcing the less competitive and weak banking institutions to exit the market. It would also lead to the recovery of the Japanese banking system because competition would result in the better management process of banks.
During the all post-war period the Japanese banking sector was heavily regulated by the Ministry of Finance which was not interested in increasing competition among banks. The main purpose of the banking system was collecting funds and then channelling them into the recovery of the economy after war damages and the industrialisation of Japan. Furthermore, during several decades Japanese banks concentrated their activity on collecting deposits and granting loans. Because of that the financial market was underdeveloped in comparison with Western standards. Moreover, Japanese banks had no incentives to upgrade their activity because there was not any competition between banks. The purpose of the Big Bang reforms was to change this situation. The total abolishing of the segmentation of the financial market introduced by the reforms meant that competition between banks, securities companies and insurance companies increased. Additionally, the barriers protecting the domestic market against competition from foreign institutions were eliminated. In that situation the Japanese banks faced growing competition from domestic financial institutions and big foreign institutions. Japanese banks were forced to begin a restructuring process or merge together in order to compete successfully with foreign financial institutions. Thus, in the beginning of the 21st century we observed some mergers which caused the establishment of the big financial groups in Japan. The mega merger of Daiichi Kangyo Bank, Fuji Bank, and the Industrial Bank of Japan created the largest bank in the world by 2001 (Toya, 2006: 129). The big mergers among Japanese banks and other financial institutions meant a reduction in the number of large banks from about twenty in 1995 into five major groups: Mizuho Financial Group, Sumitomo Mitsui Financial Group, Mitsubishi Tokyo Financial Group, UFJ Holdings and Resona Holdings. There were also significant mergers outside the financial sector. Nippon Credit Bank, which was temporarily nationalised in 1998, was sold to a group of firms headed by the Softbank – a software company (Toya, 2006: 129). The creation of such big financial groups could help Japanese banks to survive the growing competition of foreign financial institutions. The big advantage of this is the fact that Japanese institutions have a good knowledge of the local market and can offer comprehensive financial services for customers. Additionally, they have combined their assets and capitals together. From that moment, they have funds for investments and to develop their products and activity. The Big Bang reform has successfully liberalised the financial market in Japan. Especially, foreign financial firms stood to gain from the reforms. They can introduce their services developed abroad and gain a competitive edge over domestic banks. The big advantage of foreign companies is that they are global companies. It means that they had experience of how to carry out business in many countries. Furthermore, I agree with the opinion of Tadao Ishihara, board chairman of Goldman Sachs Japan, who endorsed the Big Bang reforms. In his opinion the “globalisation and information technology drove the transactions to the most efficient, low-cost market; in general, the Japanese “corporate capitalism” – based on such features as lifetime employment, enterprise unionism, keiretsu, and cross-shareholding that built long-term trust relationships – needed to give way to the US style market, based on the belief in market efficiency” (Toya, 2006: 136).
The Big Bang reforms have successfully liberalised the Japanese financial market and increased the competition among banks. Another important purpose of Big Bang reforms was creating a new and independent supervision agency. The former supervision system based on the amakudari system finally failed during the “bubble” era and the 1990s. It was essential to establish a modern financial supervision system which could control and discipline banks. In my opinion, it was a success of the reforms that two supervisory agencies – the Financial Reconstruction Commission and the Financial Supervisory Agency – were established in 1998. The fact that the FSA was under the direct control of the Prime Minister’s office represents the importance of this agency. The objective of the supervision conducted by the FSA was to monitor and limit excessive exposure by the banks to various risks that could impact negatively on their safety and threaten the stability of the financial system.
The activity of the FSA and FRC shows that the new financial supervision was determined to recover Japanese banks. During the period from 1998 to 2002, ten insolvent banks were closed. It meant that during the first years supervision agencies concentrated on removing the weakest banks from the system. Additionally, measures to strengthen the inspection and surveillance systems were taken. The system of off-site and on-site inspections was created. The FSA’s inspectors carry out on-site inspections periodically in banks and also analyse financial statements which banks send to the FSA (off-site inspections). The creation of the FSA and FRC was the beginning of a “ruled-based” supervision policy in Japan. From that moment banks were forced to conduct their business safely in accordance with prudential regulations which were introduced by financial supervision. It led to the recovery of the banking sector and prevented moral hazard – type behaviour which was common among the management of Japanese banks during the “bubble” era. Hence, in my opinion, the establishment of the Financial Supervisory Agency, Financial Reconstruction Commission and other measures such as Prompt Corrective Action helped to stop the bank crisis and may help Japan avoid future bank crises.
Another purpose of the Big Bang was to resolve the problem of the huge amount of non-performing loans. In my view, this problem was not resolved completely as was intended. Despite the reforms and the utilizing of the huge amount of public funds the problem of non-performing loans still existed in the banking system in the beginning of 21st century. As of 31 March 2001, the aggregate amount of outstanding non-performing loans held by major Japanese banks was approximately 17.4 trillion yen, which amounted to 5.7% of some 304 trillion yen in their total outstanding loans (Yanagisawa, 2001: 3). It was obvious that after 5 years of reforms the problem of non-performing loans needed more a complex approach and more time to be resolved successfully. This opinion was expressed by Hakuo Yanagisawa, The Minister for Financial Services, who said in 2001 that “holding non-performing loans at the high ratio of nearly 6% over a long period could undermine the confidence of investors and depositors, and foment unnecessary anxieties and confusion both in Japan and abroad. Thus, we have to get rid of this situation as soon as possible” (Yanagisawa, 2001: 4). He stressed also that Japan needed three more years to reduce the ratio of non-performing loans to total loans outstanding at the nation’s major banks to below 4%. The failure of resolving successfully the problem of non-performing loans resulted that after the Big Bang reforms Japanese banks were still under-capitalised. Banks had non-performing loans in their balance sheet and they were forced to create new loan loss reserves. It caused a corresponding decrease in their capital. Furthermore, the resolving of the problem of non-performing loans helped banks to increase the capital base.
On May, 25, 2005, the Minister for Financial Services announced that the aggregate non-performing loan rate has dropped to 2.9% and the aim to normalise the NPLs problem has been achieved. To sum up, according to regulators the NPLs problem was resolved successfully in 2005; four years after the finish of the Big Bang reforms.