Trichirapalli Progress 1

Topic chosen for the research project is to analyze the crisis in Japanese banking system in 1990 and subsequent collapse.

Article by Masahiro Kawai provided by Institute of Economic Research, Hitotsubashi University in its series Hi-Stat Discussion Paper Series with number d05-102 explains what factor caused the problem to Japanese banking system and how it affected the system. Article initially analyze the condition of bank and the macro economic developments in the prior period before the crisis started.

The asset price bubble is one of the cause for the collapse of the banking system. The rate of increase in asset prices, both stock price and house price, was greater than the increase in nominial GDP. Both stock prices and home prices after reaching a peak in 1989 dropped suddenly. Stock prices lost its value by 50% in two years and home prices dropped by 20% in one year and 60% in the next year. This reduction in asset value deteriorated highly indebted firms' ability to repay their debts. Capital base of commercial banks declined. In mid 1990s, small financial institutions became insolvent.

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