Financial crisis and the lost decade

Japanese banks incurred heavy losses in the early 1990s due to the bursting of the bubble economy of the 1980s. Japanese regulators allowed undercapitalized banks to operate under a very lenient application of capital requirement rules. At first, the regulators did not have strong institutional mechanisms and budgetary funds to take care of weakened banks. Even after obtaining strong power and money in 1988 to tackle the banking problem, the regulators would not nationalize a large number of banks because they could not manage nationalized banks themselves. The recent recovery of the Japanese economy gives the Financial Services Agency a chance to make up for the lost decade of regulatory discipline. Reprinted by permission of Blackwell Publishing