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| Major Financial Deregulation brings about a Bubble Economy |
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| After the Plaza Accord, the Japanese government implemented major credit relaxation in order to counteract the deflationary effects of the stronger value of the yen. This brought about an economic bubble in Japan, and land and share prices rose abruptly. With the increase in the latent value of stocks through the rise in share prices, new demand for bank loans, such as loans for use in land speculation, increased. Banks also aggressively began investing in real estate in order to compensate for the lowered demand in companies' normal funding needs. However, the Bank of Japan shifted to a tightening of Japan's money policy, and share and land prices went on a downspin. As a result, Japanese banks were saddled with vast amounts of nonperforming loans in the 1990s. Furthermore, the fall in share prices brought down the equity ratio of banks and had a critical influence on the management of banks. Another factor that placed an enormous burden on the operation of banks was the need to set aside great amounts of reserves in preparation of a state in which nonperforming loans became irrecoverable. |
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| Credit Crunch Brought About by Banks' Need to Achieve an Adequate Equity Ratio |
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| Banks that could no longer meet the equity ratio standard endeavored to maintain the ratio through such measures as counting in taxable loan-loss reserves that had been set aside. However, differences in interpretation with finance authorities over its authorization, etc. also arose, and many banks were placed in a predicament. Banks were forced to scale back assets in order to achieve the equity ratio standard, and they began taking measures such as curbing new loans and making recovery of loans from companies. |
| This brought about a credit crunch in the Japanese economy and had the aspect of inhibiting general business activities of Japanese companies. Banks that were unable to meet the equity ratio standard despite such measures were forced to either seek public funding or face government takeover. Financially unstable banks and banks with massive amounts of nonperforming loans explored mergers with banks that had sound financial content, while financially stable banks acquired such problem banks. |
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Headquarters of Mitsubishi Tokyo Financial Group, Inc. |
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