Financial liberalization, speculative bubble and banking crisis in Japan

ABSTRACT This paper examines the institutional environment of the Japanese financial system and its role in the asset price bubble and financial crisis. The deregulation process of the 80s eliminated various rules that had previously been used by the government to monitor the economic growth through monetary and credit policies. Banks turned to more risky operations and, under a period of low interest rates, contributed to drive liquidity to speculative sectors, which were at the center of the asset bubble. The change in monetary policy put an end to the rise of asset prices and resulted in default of many borrowers. Since 1991 the Japanese banking sector is trying to absorb the huge volume of non-performing loans of its portfolio related to this process.