Recent developments in Japan's financial sector: Bad loans and financial deregulation

This paper discusses two major recent developments in Japan's financial sector. First, the bad loans problem is reviewed to assess to what extent bad loans have affected banks and to identify issues that need to be addressed. Japanese banks have been experiencing balance sheet troubles to an extent unseen in the post-World War II period. Second, financial deregulation is reviewed and its future direction is discussed. Important deregulation measures have been introduced, albeit at a cautious pace, to Japan's financial sector which until recently was heavily regulated and protected. In an effort to address such concerns as the lack of international competitiveness and the hollowing-out of the sector. Prime Minister Hashimoto has recently pledged to introduce Japan's equivalent of Britain's "Big Bang" by the year 2001. The resolution of bad loans and the introduction of extensive deregulation would most likely lead to a major reorganization of Japan's financial sector, entailing the closure of some weaker institutions.