Whats wrong with Japan's banking system?

Discussion in 'Economics' started by Daal, Sep 30, 2006.

  1. Daal


    I always hear that china and japan banking system needs to be reformed if they want to grow , whats the problem there?
  2. I am not an expert on this topic but until recently a significant focus was to perform a community service rather than make a profit for its shareholders. Any Japanese could get a loan to start a business regardless of their experience, the soundness of their business plan etc. Many banks had so many defaults they went under. The banking system is very ineficient and productivity is at a low level.
    Imagine The Bank of America in the 1950's well its about 10 times worse.
    Many banks also lent money to homebuyers during the Japanese property bubble. Then the market went south....disaster.
    Probably the biggest problem with Japanese Banks still is that they are run by Japanese.
    Corporations expected Banks to be a constant supply of cheap money, no matter how stupid the initiative the Japanese banks would come to the party. Much credit was used expanding ridiculous business plans, when they couldn't deliver the Japanese banks were left with the 'non performing loans'.
    A good case study is Nissan before Carlos Ghosn.
    I personally do invest in Japan through the EWJ iShares but picking winners in that market is frought with dangers.
  3. During bear markets, all of the fraud, waste, corruption and garbage get exposed. It can take years to clean it up before the next big bull market can take place.
  4. It's a long story and really this was a question that would have been more timely a decade ago, when reform efforts started - now they have largely finished. This consisted mainly of clearing up bad loans that had been made during the late 1980s/early 1990s bubble, when it seemed that Japan would fly high for ever. 20 years ago the criteria for deciding loans to favoured customers (corporates with which they had close relationships) were too loose and often depended on land as a collateral when land prices had reached the stratosphere. When the bubble burst, land prices plummeted and the collateral was revealed to be insufficient to cover the loan.

    So far, so unsurprising - this kind of thing has happened in many countries in the past. However, having never really been in this kind of situation before, the Japanese banks found themselves culturally incapable of biting the bullet and calling in bad loans. Indeed, for the larger debts, the banks did everything they could to avoid calling the loans and actually gave bad borrowers more money to prevent them from going bankrupt, because once that happened, the extent of the bad loans could no longer be hidden. So bad loans mushroomed.

    This was a situation that persisted all through the 1990s. From the second half of the decade onward various attempts were made to clear these up e.g. through buying of bad loans by a central loan agency, injections of money by the government into failing banks, mergers between weak banks and so on. Over the past 3-4 years most of the remaining banks have turned the corner and are now in relative good health. Take a look at share prices since mid-2004.

    Note that banks have traditionally been reluctant to lend money to startups and individuals. Individuals, including homeowners, did not play a major part in the Japanese bank problem as far as I know (remember that these people save more than most countries on earth and have done so consistently over the past 15 years). I knew a CEO who was the ex-head of a major Japanese company's semiconductor R&D lab - a name in the industry. He quit to start his own company in the early 1990s and not only could he not get money from banks, but landlords would not even let him offices because he didn't have big company backing. Things have probably changed...

    China I know nothing about, but it's a completely different kettle of fish to Japan.

  5. Very well explained!