BIS Papers 
                                          No 6 
                                          The financial crisis in Japan 
                                          during the 1990s: how the 
                                          Bank of Japan responded 
                                          and the lessons learnt 
                                          Hiroshi Nakaso 
                                          Monetary and Economic Department 
                                          October 2001 
         
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
      This volume, number 6 of the BIS Papers series, was written by a member of the Monetary and 
      Economic Department at the BIS. The views expressed in BIS Papers are those of the authors and do 
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      ISSN 1609-0381 
      ISBN 92-9131-626-1 
                                                                                          
                                                                                                                                                                                                                                                                                  Table of contents 
                                                                                         Introduction .....................................................................................................................................  1 
                                                                                         1.                            Policy responses of the financial authorities  ........................................................................                                                                                                                                                                                                                                                                                                                              2 
                                                                                                                       1.1                          The early stage, 1991 to mid-1994 ............................................................................                                                                                                                                                                                                                                                                                                          2 
                                                                                                                       1.2                          The beginning of the crisis, mid-1994 to 1996 ...........................................................                                                                                                                                                                                                                                                                                                               4 
                                                                                                                                                    1.2.1                                The failures of Tokyo Kyowa and Anzen .......................................................                                                                                                                                                                                                                                                                                      4 
                                                                                                                                                    1.2.2                                Limits of the collective contribution by the private sector ..............................                                                                                                                                                                                                                                                                                         5 
                                                                                                                                                    1.2.3                                The jusen problem .........................................................................................                                                                                                                                                                                                                                                                        6 
                                                                                                                                                    1.2.4                                Amendment to the Deposit Insurance Law in 1996 ......................................                                                                                                                                                                                                                                                                                              7 
                                                                                                                       1.3                          The financial crisis of 1997 .........................................................................................                                                                                                                                                                                                                                                                                                  7 
                                                                                                                                                    1.3.1                                Bailout of Nippon Credit Bank .......................................................................                                                                                                                                                                                                                                                                              7 
                                                                                                                                                    1.3.2                                The financial crisis of autumn 1997 ...............................................................                                                                                                                                                                                                                                                                                8 
                                                                                                                                                                                         1.3.2.1                                      The failure of Sanyo Securities ......................................................                                                                                                                                                                                                                                                8 
                                                                                                                                                                                         1.3.2.2                                     The failure of Hokkaido Takushoku Bank ......................................                                                                                                                                                                                                                                                          9 
                                                                                                                                                                                         1.3.2.3                                     The failure of Yamaichi Securities .................................................                                                                                                                                                                                                                                                   9 
                                                                                                                                                                                         1.3.2.4 The market turmoil .........................................................................  11 
                                                                                                                                                                                         1.3.2.5                                     The introduction of public funds and the first capital injection .......                                                                                                                                                                                                                                                         11 
                                                                                                                       1.4                          The financial crisis of 1998 .........................................................................................                                                                                                                                                                                                                                                                                            12 
                                                                                                                                                    1.4.1                                The failure of Long Term Credit Bank of Japan ............................................                                                                                                                                                                                                                                                                                    12 
                                                                                                                                                    1.4.2                                Outline of the new laws .................................................................................                                                                                                                                                                                                                                                                    13 
                                                                                                                       1.5                          Systematic management of the crisis, late 1998-2000 ..............................................                                                                                                                                                                                                                                                                                                                14 
                                                                                                                                                    1.5.1                                Nationalisation of Nippon Credit Bank (NCB)  ...............................................                                                                                                                                                                                                                                                                                 14 
                                                                                                                                                    1.5.2                                Capital injection into major banks in March 1999  .........................................                                                                                                                                                                                                                                                                                  15 
                                                                                                                                                    1.5.3                                More systematic approach ............................................................................                                                                                                                                                                                                                                                                        16 
                                                                                         2.                            Why has it taken so long?  ....................................................................................................  17 
                                                                                                                       2.1                          A paradigm shift .........................................................................................................                                                                                                                                                                                                                                                                                        17 
                                                                                                                       2.2                          The central bank’s dilemma .......................................................................................                                                                                                                                                                                                                                                                                                17 
                                                                                                                       2.3                          Structural problems that allowed a delay in recognition of the seriousness of the 
                                                                                                                                                    NPLs problem .............................................................................................................                                                                                                                                                                                                                                                                                         18 
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                                                                                                                       2.3.1 Insufficient provisioning .................................................................................  18 
                                                                                                                       2.3.2                                Inadequate public disclosure .........................................................................                                                                                                                                                                                                                                                                       19 
                                                                                         2.4                           Deterioration in banks’ real capital positions ..............................................................                                                                                                                                                                                                                                                                                                     19 
                                                                                         2.5                           Negative impact on the economy ...............................................................................                                                                                                                                                                                                                                                                                                    20 
                                                                                         2.6 The market’s response ...............................................................................................  21 
                                                            3.                           Lender of last resort function of the central bank  .................................................................                                                                                                                                                                                                                                                                                                                           21 
                                                                                         3.1                           Purpose of the LoLR function .....................................................................................                                                                                                                                                                                                                                                                                                22 
                                                                                         3.2                           Classification of the LoLR function .............................................................................                                                                                                                                                                                                                                                                                                 22 
                                                                                                                       3.2.1                                Type 1: Emergency liquidity assistance to a failed deposit-taking institution                                                                                                                                                                                                                                                                                                23 
                                                                                                                       3.2.2                                Type 2: Provision of liquidity to interbank markets ........................................                                                                                                                                                                                                                                                                                 23 
                                                                                                                       3.2.3                                Type 3: Emergency liquidity assistance to a failed non-bank financial 
                                                                                                                                                            institution ........................................................................................................                                                                                                                                                                                                                                                         23 
                                                                                                                       3.2.4                                Type 4: Provision of risk capital to a financial institution ...............................                                                                                                                                                                                                                                                                                 25 
                                                                                                                       3.2.5                                Type 5: Emergency liquidity assistance to a temporarily illiquid institution 
                                                                                                                                                            (where solvency is questioned) .....................................................................                                                                                                                                                                                                                                                                         25 
                                                                                                                       3.2.6                                Collateral and provisioning policy with regard to LoLR assistance ...............                                                                                                                                                                                                                                                                                            26 
                                                                                         3.3                           Other institutional frameworks involving the central bank ..........................................                                                                                                                                                                                                                                                                                                              26 
                                                                                                                       3.3.1                                The lending to the DIC ...................................................................................                                                                                                                                                                                                                                                                   27 
                                                                                                                       3.3.2                                The lending arrangements to the Investors Protection Fund and the 
                                                                                                                                                            Policyholders Protection Corporation ............................................................                                                                                                                                                                                                                                                                            27 
                                                                                         3.4                           Principles governing the exercise of LoLR assistance ...............................................                                                                                                                                                                                                                                                                                                              28 
                                                                                         3.5                           Information necessary for the provision of LoLR assistance ......................................                                                                                                                                                                                                                                                                                                                 29 
                                                                                         3.6 Summary .................................................................................................................... 29 
                                                            4. International comparison ...................................................................................................... 30 
                                                                                         4.1                           Size of non-performing loans ......................................................................................                                                                                                                                                                                                                                                                                               30 
                                                                                         4.2 LoLR assistance .........................................................................................................  31 
                                                                                         4.3                           Utilisation of public funds ............................................................................................                                                                                                                                                                                                                                                                                          31 
                                                                                                                       4.3.1 Timing ............................................................................................................  32 
                                                                                                                       4.3.2 Scale ..............................................................................................................  32 
                                                                                         4.4                           Who was protected and to what extent? ....................................................................                                                                                                                                                                                                                                                                                                        33 
                                                                                         4.5                           Other forms of central bank involvement ....................................................................                                                                                                                                                                                                                                                                                                      33 
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