Japanese Financial Restructuring

While recognizing Japan and China are at far different economic stages, the Japanese financial sector reform in the late 1990 may tell us some issues and concerns applicable to Chinese case. In 1996, Japanese government decided to drastically deregulate the financial market to accelerate financial reforms. Until the deregulation called ЃeBig BangЃf, Japanese financial sector had been highly regulated, controlled, and supported by the Japanese government. The domestic banks had lent money to the inefficient, but politically influential companies based on the real estate value as collateral regardless of the profitability and the liquidity risks. The Big Bang created severe competition where most of the domestic banks were not able to survive. Eventually, 19 commercial city banks merged into 4 bank groups to pursue efficiency, yet they continue to be saddled with massive amounts of bad loans . Most banks were obliged to be under the control of the government again as a result of governmental subsidization and injection of public capital. To implement reform measures imposed by the Japanese government, the banks dealt decisively with non-performing loans: they required the non-financial companies (debtors) of drastic restructurings for the loan repayment.

Meanwhile, foreign shareholders ownership has been dramatically increased because the Big Bang also deregulated stock market. Foreign ownership ratio went up from 10.5% to 23.7 % (1996/3-2005/3). As a result, the requirement from the shareholders became more though because foreign shareholders normally demand companies to increase profitability much harder than Japanese institutional investors, who used to be described as silent investors.

Pressure by both shareholders and creditors urged the non-financial companies to do severe restructuring and resulted in massive job losing. JapanЃfs unemployment rate increased to above 5%, the highest since the government started keeping statistics in