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Did The Asset Price Bubble Matter For Japanese Banking Crisis In The 1990s?

Hossain, Monzur (2004): Did The Asset Price Bubble Matter For Japanese Banking Crisis In The 1990s?

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Abstract

Regarding the causality of Japanese banking crisis, two views are popular: (i) slow and undirected financial deregulations in the 1980s caused trouble for the banks in adjusting with the new environment, and (ii) banks shifted their business in SME market and real estate businesses aggressively in the era of protracted monetary easing in the mid 1980s, that finally contributed to banking failures after the curbed down of asset prices. Instead of these two views, this paper shows that the continuous declining trend of banks profitability (e.g. ROA or ROE) from 1970 was a warning signal for banking crisis, which was just accelerated by the bubble burst. Without any shock (monetary or bubble phenomenon) during the later half of the 1980s, it would take some more time to reach the crisis situation. The paper also highlights some potential causes of declining trend of banks profitability. For analysis, Kaplan-Meire’s Product-Limit method is applied to estimate the survival functions and cause-specific hazard rates for the Japanese banks, along with Cox’s Proportional Hazards Model is used to find the significance of regression coefficients. Again, Accelerated failure time model is used to see whether collapse of the bubble accelerated the failure of the banks. Moreover, cointegration test and Granger causality test have been performed to identify the long- term causality of banks’ declining profitability. The issue is not only important for the Japanese economy, but also instructive for other big Asian economies.

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