The Macroprudential Implications of the 1990s Japanese Financial Crisis
June 21, 2019
Four takeaways from Boston Fed President Eric Rosengren's June 21 remarks at the 5th Annual Macroprudential Conference held in Eltville, Germany
- Takeaway: The Japanese financial crisis of the late 1990s had significant implications for both the Japanese and global economies.
Excerpt: "…Japan's domestic economy was severely impacted, with lasting effects. In addition, because of the global reach of the largest Japanese banks, the problems were essentially exported, as Japanese banks pulled back on foreign lending in order to bring assets better in line with their shrunken capital. Essentially, Japanese banks reduced their global footprint."
- Takeaway: Effective use of macroprudential tools – that is, banking regulations aimed at mitigating financial-system risk – could have lessened the crisis in Japan. Unfortunately, it wasn't until the financial crisis of 2008 that countries began to work on improving macroprudential policies.
Excerpt: "…my own view is that with effective implementation of macroprudential policies, many of the issues would have been substantially mitigated."
- Takeaway: Bank stress tests and the use of a countercyclical capital buffer (or CCyB) are two macroprudential tools that emerged from the financial crisis which could have reduced the severity of the banking crisis in Japan.
Excerpt: "Rigorous stress tests would have revealed emerging problems, required retention of more bank capital, and discouraged aggressive lending. A CCyB would similarly have brought about a larger capital cushion to absorb shocks, which would have reduced the need for such dramatic shrinkage of lending when asset prices declined."
- Takeaway: The Japanese banking system is again being affected by adverse economic conditions. Like the U.S., Japan might benefit from considering an expanded set of macroprudential tools.
Excerpt: "Despite the passage of time and adoption of better policies, one could argue that the Japanese banking system is now, once again, being threatened by adverse economic conditions. A shrinking population, aging demographics, and very low interest rates provide very little room for Japanese banks to operate profitably. This of course provides an incentive to reach for yield, potentially implying additional risk-taking. …All this raises questions about how resilient the banking system is, or could be, in the face of some future global downturn."