The Japanese Banking Crisis of the 1990s

Since 1995 several revolutionary changes have been observed in Japanese financial markets, and also the steady decline in the health of its banking system. This decline began with the bursting of the asset bubble, leading to a serious crisis in April 1997, when gross domestic product and industrial output posted their first decline. Moreover, several problems for the banks surfaced in 1992 and a decade-long slump caused considerable disruption in the flow of credit to business firms. Given the very large size of Japanese banks, this crisis had deep implications for the global economy. During the 1980s, the economy posted a growth of 5 per cent on average, as well as the stock and real estate market being in a boom, fuelled by expansive monetary policy and huge lending by the banking sector. The tightening of monetary policy by the BOJ in mid-1989 to slow down overheating was crucial, leading to a slump of stock and real estate prices. In autumn 1989, a falling market for Japanese equities, when the Nikkei 225 index fell from 38,900 in October 1989 to less than 13,000 and the Dow-Jones index boomed from 2400 in 1989 to more than 10,000. Hence Tokyo, by market capitalization in 1989 still the largest stock exchange in the world by ¥385 trillion, fell to rank third behind New York and London.