Japan’s Financial Crisis and Economic strongStagnationstrong.pdfVIP

Journal of Economic Perspectives—Volume 18, Number 1—Winter 2004—Pages 3–26 Japan’s Financial Crisis and Economic Stagnation Takeo Hoshi and Anil K Kashyap he recent Japanese economic experience has been dismal. Growth has collapsed, deflation has taken hold and the financial system is in shambles. TWe begin our story by documenting the macroeconomic troubles that appear to have triggered the collapse of Japan’s financial sector. We argue, how- ever, that the macroeconomic factors alone are not likely to explain the full extent of the problems in the Japanese financial system. We then turn to the sector-specific factors that are facing the Japanese banks, insurance companies and government financial institutions, which together constitute roughly three-quarters of the finan- cial system. Finally, we provide estimates of the size of the losses that have been accumulated and review the steps necessary to resolve the problems promptly so that the losses stop growing. The estimated losses from Japan’s financial system problems, which presum- ably will be borne by taxpayers eventually, are huge. Even our fairly conservative estimate suggests the full cost to the taxpayers is at least 20 percent of Japan’s GDP. The sheer size of the cost, along with the interaction among the related economic problems, has made a decisive resolution of the problems politically difficult. y Takeo Hoshi is Pacific Economic Cooperation Professor of International Economic Rela- tions, Graduate School of International Relations and Pacific Studies, University of Califor- nia at San Diego, San Diego, California, and Faculty Fellow, Research Institute of Economy, Trade, and Industry, Tokyo, Japan. Anil K Kashyap is the Edward Eagle Brown Professor of Economics and Finance, Graduate School of Business, University of Chicago, and Consul- tant, Federal Reserve Bank of Chicago, both in Chicago, Illinois. Both author