Japan Now and the United States Then: Lessons from the Parallels

For much of the last decade, Japan’s banking crisis has been at the center of attention in the ongoing discussion of that country’s broader economic difficulties and of what public policy actions could alleviate them. The enormous loan losses and balance sheet erosion that nearly all Japanese banks have sustained during this period, and the resulting impairment of their ability to carry out ordinary credit creation activities, have been both a consequence and a cause of Japan’s prolonged economic stagnation. Of the 21 institutions that made up the standard list of Japanese ‘‘large banks’’ in 1990, by the decade’s end two had disappeared through failure and nationalization, and four others were consolidated into two by merger. At the time of writing, five of the remaining 17 are in the process of merging into two new entities, thus reducing the list to 14. But few observers think the shrinkage is over, or that the banks that remain are now healthy institutions. Questions about what further steps the Japanese authorities should take to foster the banks’ recovery—and to ensure their soundness once they have recovered—therefore continue to be pertinent. A decade ago, it was US banks, and even more so the US savings and loan (S&L) industry, that were in crisis. These institutions too suffered major loan losses, experienced failure rates unprecedented since the depression of the 1930s (especially among S&Ls, but among banks as