Japan’s Financial Slump: Collapse of the Monitoring System by Yasushi Suzuki

By Yasushi Suzuki

This booklet evaluates the salient positive aspects of jap relation-based banking, rather within the publish warfare interval, and Anglo-American mode of banking to provide an explanation for the character and quantity of transition failure that brought on lengthy monetary and monetary stoop in Japan.

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Extra resources for Japan’s Financial Slump: Collapse of the Monitoring System under Institutional and Transition Failures

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It was also at this time that the transition to the Anglo-American and Basel-type monitoring system began, but we argue that in fact this transition made it more difficult to resolve the structural failure affecting the Japanese financial system. How did the change in the economic environment surrounding the Japanese financial and monitoring system actually affect the economic performance of Japanese banks and cause the 1997–98 financial crisis in Japan? A case study of the collapsed LTCB is provided as an illustration in Chapter 5.

In theory, the owners of a bank in the form of shareholders have the incentive to monitor the managers of the bank because the proper monitoring of managers brings them higher residuals in the form of higher dividends. This insight from Alchian and Demsetz (1972) is a development of their explanation of the emergence of the capitalist firm as a solution to the ‘shirking’ problem that arises due to the moral hazard problem of teamwork in a context of asymmetries of information where each team member (player) has an incentive to shirk.

A second-best structure would be one in which banks were not owner-managed but the owners could coordinate their actions to hire and fire managers to maximize their rents. However, in this second-best structure, the adequacy of franchise value for creating sufficient incentives for monitoring by shareholders is by no means self-evident. This is why externally enforceable criteria such as capital requirements become perceived, presumably by owners of banks, as important mechanisms for constraining the behaviour of bank managers.

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