TY - JOUR AU - Hoshi,Takeo AU - Kashyap,Anil TI - The Japanese Banking Crisis: Where Did It Come From and How Will It End? JF - National Bureau of Economic Research Working Paper Series VL - No. 7250 PY - 1999 Y2 - July 1999 UR - http://www.nber.org/papers/w7250 L1 - http://www.nber.org/papers/w7250.pdf N1 - Author contact info: Takeo Hoshi School of International Relations and Pacific Stud University of California, San Diego 9500 Gilman Drive La Jolla, CA 92093-0519 Tel: 858/534-5018 Fax: 858/534-3939 E-Mail: thoshi@ucsd.edu Anil Kashyap Booth School of Business University of Chicago 5807 S. Woodlawn Avenue Chicago, IL 60637 Tel: 773/702-7260 Fax: 773/702-0458 E-Mail: anil.kashyap@chicagobooth.edu M1 - published as Takeo Hoshi, Anil Kashyap. "The Japanese Banking Crisis: Where Did It Come From and How Will It End?," in Ben S. Bernanke and Julio J. Rotemberg, editors, "NBER Macroeconomics Annual 1999, Volume 14" MIT (2000) AB - We argue that the deregulation leading up to the Big Bang has played a major role in the current banking problems. This deregulation allowed large corporations to quickly switch from depending on banks to relying on capital market financing. We present evidence showing that large Japanese borrowers, particularly manufacturing firms, have already become almost as independent of banks as comparable U.S. firms. The deregulation was much less favorable for savers and consequently they mostly continued turning their money over to the banks. However, banks were also constrained. They were not given authorization to move out of traditional activities into new lines of business. These developments together meant that the banks retained assets and had to search for new borrowers. Their new lending primarily flowed to small businesses and became much more tied to property than in the past. These loans have not fared well during the 1990s. We discuss the size of the current bad loans problem and conclude that it is quite large (on the order of 7% of GDP). Looking ahead, we argue that the Big Bang will correct the aforementioned regulatory imbalances. This will mean that banks will have to fight to retain deposits. More importantly, we expect even more firms to migrate to capital market financing. Using the U.S. borrowing patterns as a guide, we present estimates showing that this impending shift implies a massive contraction in the size of the Japanese banking sector. ER -