Why does the problem persist? 'Rational rigidity' and the plight of Japanese banks

Kiyohiko G. Nishimura, Yuko Kawamoto

Research output: Contribution to journalArticle

5 Citations (Scopus)

Abstract

One of the most perplexing factors in Japanese financial crises is the persistence of the apparently non-optimal and non-rational behaviour of Japanese banks. We have provided a rational explanation for this behaviour based on a theory of community banking: the long-term relationships between banks and small to medium-sized entrepreneurs that result in rational rigidity in lending. We have identified three clear implications of community banking - a low lending rate, a low bankruptcy rate, and in particular, institutionalisation of rational rigidity (pledge of no profit maximisation) - as these prevail in the Japanese banking system. We have also argued that the community-banking-business model was sustainable so long as the economy rather continuously expanded and asset prices went up, which was the case before the asset markets crashed in 1990. Thus, the stagnation and free-falling asset prices of the 1990s imposed serious strains on the Japanese banking system. However, we have also found that banks continued their community banking role into the 1990s at least partially, although there are also indications that they failed to restructure failing enterprises in industries such as construction and real estate. So, the problem was not that paralysed banks were blocking recovery (although this might be true in some of the industries mentioned above), but that the current community-banking-business model is no longer sustainable as private enterprises in the market economy now suffer from asset price deflation and economic stagnation.

Original languageEnglish
Pages (from-to)301-324
Number of pages24
JournalWorld Economy
Volume26
Issue number3
Publication statusPublished - 2003 Mar
Externally publishedYes

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rigidity
banking
bank
assets
community
stagnation
lending
deflation
profit maximization
private enterprise
industry
bankruptcy
real estate
Japanese banks
Rigidity
Banking
market economy
institutionalization
financial crisis
entrepreneur

ASJC Scopus subject areas

  • Accounting
  • Economics and Econometrics
  • Finance
  • Political Science and International Relations

Cite this

Why does the problem persist? 'Rational rigidity' and the plight of Japanese banks. / Nishimura, Kiyohiko G.; Kawamoto, Yuko.

In: World Economy, Vol. 26, No. 3, 03.2003, p. 301-324.

Research output: Contribution to journalArticle

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