Banking Overview

The Japanese financial sector - and indeed Japan's whole business environment - has long been characterized by the "keiretsu" system of cross-shareholding and interlocking ownership among various companies. So while banks are limited to only 5% of the total equity of a client firm, banks can - and do -exercise greater management control than is implied. But apart from corporate control, the keiretsu also involves greater risk which is borne by both the client company and the lending bank. Japanese banks are on the whole less profitable - some say less efficient - than their counterparts in Europe and North America. Japanese banks, for instance, usually have returns on assets of 0.2% to 0.5%, compared to more than 1% in the U.S.

Japan's bubble economy in the late-1980s was largely financed by bank lending, with overpriced land and bloated shares used as collateral. When the asset bubble finally burst in the early 1990s, Japanese financial institutions were faced with rising bad debt, forcing some of them to close. The knee-jerk response was to move to the opposite extreme, taking on an overly cautious attitude to granting new loans, resulting in a credit crunch, and further fuelling the country's downward spiral into recession.

With the Asian economic crisis in 1997 curbing external demand for Japanese products, Japanese banks underwent restructuring and cost-cutting measures, and were forced to form alliances both locally and internationally, to increase competitiveness. In 1998, then-prime minister Ryutaro Hashimoto introduced the so-called "Big Bang" initiative aimed at liberalizing the financial sector. Within that year, Fuji Bank aligned with Yasuda Trust, and Bank of Tokyo Mitsubishi linked up with Nippon Trust. More mergers followed in 1999, among them Sumitomo Bank with Sakura Bank and Mitsui Trust with Chuo Trust bank.

As part of the government's efforts to bring back stability to the banking sector - and the economy at large - it introduced fiscal stimulus packages in 1998 and 1999 that included committing funds to guarantee existing loans and increasing the public works budget.

The Bank of Japan, the country's central bank, also cut the official discount rate to historical lows of near 0% to allow banks to improve profit margins and recover losses from bad loans.