Japanese Financial Instability and Weaknesses in the Corporate Governance Structure

Mitsuhiro Fukao

Faculty of Business and Commerce, Keio University, 2-15-45 Mita, Minato-ku, Tokyo 108-8345, Japan, Tel: +81-3-3453-4511(ex.3179), Fax: +81-3-3798-7480 PXU01061@nifty.ne.jpfukao@fbc.keio.ac.jp

JEL Numbers: E44, G21, G28, G30, M40

Abstract

The sudden collapse of major financial institutions in November 1997, which were subject to examination by the authorities and external auditors, brought about the extraordinary situation whereby financial institutions lost mutual trust in the soundness of business operations. The interbank money market started to malfunction and an intense credit crunch emerged. Japanese financial institutions, companies and Asian nations faced a severe tightening of bank credit. The biggest causes of this turmoil are the Japan's weak accounting system, and the excessive stock portfolio held by banks. To restore confidence in Japan's financial system, corporate governance of financial institutions must be overhauled.

Acknowledgments

This paper was submitted to the International Symposium on the Role of Markets and Governments sponsored by the Japan Ministry of International Trade and Industry and Research Institute of Trade and Industry on March 17-18, 1998. The author would like to gratefully acknowledge the help of Mr. Yoshihiro Uematsu of the Bank of Japan in creating some of the figures used in this paper. He would also like to thank Mr. Masahiro Higo of the Bank of Japan and Mrs. Yuri Okina of The Japan Research Institute Ltd. for their valuable comments.

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