Japan: the banks are back! Or are they?
| Pages | 16-28 |
| Published date | 20 February 2009 |
| DOI | https://doi.org/10.1108/13581980910934018 |
| Date | 20 February 2009 |
| Author | Maximilian J.B. Hall |
| Subject Matter | Accounting & finance |
Japan: the banks are back!
Or are they?
Maximilian J.B. Hall
Department of Economics, Loughborough University, Loughborough, UK
Abstract
Purpose – The purpose of this paper is to demonstrate how Japanese bank “performance” has
improved markedly since fiscal 2003 but to caution against over-optimism.
Design/methodology/approach – The methodological approach adopted involves using
aggregate balance sheet data dating from around 1990 to identify the trends in industry
performance with respect to profitability, asset quality and capital adequacy.
Findings – The bursting of the asset price bubble in the early 1990s clearly had a major adverse
impact on “performance”, as measured by the above-mentioned indicators, but, after fiscal 1992, the
industry’s fortunes began to improve. Problems on each front, however, remain to be resolved.
Practical implications – By identifying the main problems still besetting the Japanese banks, both
the industry and their supervisors are given advice as to which areas they need to focus on to improve
future bank performance.
Originality/value – The paper clearly explains the nature of, and reasons for, the recent
improvement in Japanese bank performance whilst highlighting the areas on which they still have to
focus if they are to regain their former glory within the international banking community. It should be
of interest to all serious scholars of the Japanese banking system and interested commentators alike.
Keywords Japan, Banking,Performance measures, Capital profit, Equitycapital, International banks
Paper type Research paper
1. Introduction
Apart from turning the tide on the non-performing loan (NPL) front, most performance
indicators at the end of fiscal 2002 (i.e. at end-March 2003) painted a fairly bleak
portrait of the Japanese banking sector. Return on assets and on equity were negative;
core and net capital were in steady decline, with deferred tax assets (DTAs) assuming a
growing share of core capital; and the sector was heavily exposed to equity risk, credit
risk and interest rate risk (IMF, 2003; Hall, 2006). At end-March 2004, however, five of
the top seven banking groups (UFJ Holdings and Resona Holdings – Resona Bank had
to be rescued by the Government in May 2003 – were the odd ones out) posted net
profits for the first time in three years, with the sector returning to overall profitability
in fiscal 2004. And the following year, record profits were recorded by the banking
industry. This remarkable turnaround, together with the associated reduction in
financial fragility, are analysed in more detail below, together with the formid able
problems still besetting the sector.
The paper is structured as follows. The next section reviews the structure of the
Japanese banking sector as it stood at end-March 2007 following further conso lidation
and rationalisation. Section 3 analyses the latest trends in bank “performance”, in
terms of profitability, asset quality and capital adequacy. Section 4 looks at the
challenges still facing the sector. And Section 5 summarises and concludes.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1358-1988.htm
The financial support of the Daiwa Anglo-Japanese Foundation is gratefully acknowledged.
JFRC
17,1
16
Journal of Financial Regulation and
Compliance
Vol. 17 No. 1, 2009
pp. 16-28
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581980910934018
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