Lessons from Japan's Financial Crisis of the 1990s
Akihiro Wani '82 LL.M. Chronicled a History of Financial Reforms in Japan in the Aftermath of the Financial Crisis of the 1990s, in a Talk at Columbia Law School
New York, November 19, 2015—Strict regulations enacted after Japan’s financial crisis of the late 1990s shielded the country from the worst effects of the global economic collapse in 2008, said Akihiro Wani ’82 LL.M. in a recent presentation at Columbia Law School. Wani, a senior counselor with Morrison Foerster in Tokyo who specializes in capital markets said Japan’s response to the failures of banks and securities companies presaged America’s actions in the Great Recession.
Wani’s talk was sponsored by Columbia Law School’s Center for Japanese Legal Studies and introduced by the center’s director, Curtis J. Milhaupt, the Fuyo Professor of Japanese Law and the Parker Professor of Comparative Corporate Law.
The seeds of Japan’s financial crisis were in a real-estate bubble that had been inflating since the 1980s, said Wani, and when that bubble burst in the early 1990s, property companies and their lenders were hard hit. “A general stagnation began,” he said, “and it lasted almost 20 years.”
With a rise of non-performing loans came a chain of bankruptcies at banks and securities companies. These institutions were also hurt by the larger Asian financial crisis. “In one year’s time, many visible banking institutions went bankrupt,” Wani said, and this shocked the public. For example, Yamaichi Securities, the nation’s third largest brokerage firm, had been in business for a century. “It had a good reputation, but they had done too many window-dressing transactions” to prop up its balance sheet, explained Wani. It went to the Bank of Japan, but no help was offered “because its indebtedness was so huge.” At the time, Yamaichi’s 1997 closure was the largest business failure since World War II, and Wani likened its impact to the 2008 bankruptcy of Lehman Brothers. The crisis worsened.
Just two days before the 1998 collapse of the Long-Term Credit Bank, the nation’s second largest credit bank and a major financier of postwar economic development, Japan introduced the Financial Rehabilitation Act (now consolidated into the Deposit Insurance Act). The government injected cash into the economy and temporarily assumed responsibility for the operations and rehabilitation of troubled financial institutions. The Long-Term Credit Bank, for example, was nationalized and then sold in 2000. Today it’s called Shinsei Bank.
“The basic idea was that, in a financial crisis, the government should supply liquidity, take over the company, control it, and if necessary liquidate it,” Wani said. “The U.S. legislation adopted after the Lehman crisis is almost the same as this mechanism. But, in fact, the idea was not Japan-originated. It was suggested by Larry Summers [at the time Deputy Secretary of the U.S. Treasury] and Ben Bernanke, who was then a professor at Princeton. He said the government should inject as much money as possible into the troubled financial institution.
“What happened in the late 90s in Japan looked like what took place later in this country,” Wani said, when financial institutions were rocked by the bursting of another real-estate bubble and its effect on mortgage-backed securities. While Japan took years to come up with a remedy for bank failures, America acted faster. In early 2008, the U.S. government provided a loan to Bear Stearns, which almost immediately merged with JP Morgan Chase. Under harsh criticism, Bernanke, then chairman of the Federal Reserve, defended the bailout. Six months later, Lehman Brothers went bust. U.S. Treasury Secretary “Hank Paulsen never proposed injecting tax money into Lehman, and we don’t know why,” said Wani. “The next day AIG got tax money. We Japanese have some difficulty understanding why AIG was rescued but Lehman was not.
“Luckily Japan was not so much impacted [by the global crash], because by that time financial institutions had been screened by rigorous standards, and regulators encouraged them not to be too optimistic,” Wani said. “The market in Japan also realized that liquidity would be provided by the government in case of financial difficulties. The regulators remembered what they did in the 1990s. Japanese do not think that ‘Too Big to Fail’ is a bad idea. Actually, if you look at the history of AIG’s insolvency, at the end of the day the Federal Reserve made a profit.”
Japan is now trying to encourage more foreign investors in its securities market, as part of wider “Abenomics” efforts to revitalize the economy. “In this time of globalization, Japan is trying to figure out how to change,” Wani said. “I believe the Japanese regulators’ positions are the same, but they are becoming a little more relaxed.”