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1. Introduction
In the 1980s, Japanese financial institutions increased their presence in Western financial
markets. Japanese financial institutions had close business relationships with large Japanese
corporations (interlocking keiretsu business relationships) and suffered few non-performing
loans because of the country's steady economic development, making them the soundest
financial institutions in the world. Table1 shows the transition in the eredit ratings of major
Japanese financial institutions and demonstrates that in 1988, many Japanese financial
institutions were given a top credit rating.
However, in the 1990s, the financial condition of Japanese financial institutions deteriorated
rapidly as a result of an increase in non-performing loans brought on by an economic slump. For
example, Figure 1 shows the changes in the balance of non-performing loans that Japanese
banks held. At its peak at March 2002 (i.e., the end of FY 2001), this level exceeded ¥40 trillion.
Figure 2 clearly indicates the severity of the problem, and Figures 1 and 2 show that, despite
disposing of non-performing loans exceeding ¥10 trillion several years in the late 1990s, the
balance of non-performing loans stillincreased.
In 1997, the financial condition of major banks grew severe, as evidenced by the failure of
institutions such as Hokkaido Takushoku Bank, which had a significant standing among major
commercial banks, and Yamaichi Securities, one of the four major security corporations. Many
financial institutions that survived with government assistance barely escaped bankruptcy.
In the past, Japanese banks were subjugated under extremely strict regulations implemented by
the Ministry of Finance. In the 1980s, however, financial globalization progressed, increasing
the concern that if the regulations did not change, they may promote the hollowing out of
domestic markets. Beginning in 1996, the Japanese government advocated Japanese “Big Bang"
financial reforms and fundamentally restructured the regulations. These reforms could have
becen viewed as a "constructive" approach to financial regulations for a new cconomic
environment.
On the other hand, the deterioration of the business conditions of financial institutions
progressed at a speed and scale greater than what was anticipated. Because the laws that
