Japanese Banking Problems: Implications for Lending in the United States

J apanese banking problems have received substantial attention worldwide. Critics of Japanese policymakers have argued that problems at Japanese banks threaten the Japanese economic recovery. They also point out that because Japanese banks have been among the most active in expanding their presence beyond their domestic borders, they could play a major role in prolonging the financial problems in many other Asian and emerging market countries, as well. Fueled by a high saving rate, active exporting firms, and a booming stock market, Japanese banks expanded aggressively worldwide during the 1980s. By 1988, all of the 10 largest banks in the world were Japanese, with a significant presence in Southeast Asia, Europe, Latin America, and the United States. The penetration into U.S. domestic markets was particularly striking. By the early 1990s, Japanese banks were the dominant foreign banks in the United States, accounting for about 18 percent of all commercial and industrial loans to U.S. addresses. In the 1990s, however, the tide turned. Japanese banks experienced a significant diminution of capital as a result of sharp declines in the Japanese stock market and substantial increases in nonperforming loans. Increasingly constrained by international capital requirements, Japanese banks began to shrink their international operations while insulating their domestic lending operations. The reduction in foreign lending since 1990 has been substantial, with the Japanese share of the U.S. commercial and industrial lending market falling from roughly 18 percent in late 1991 to under 14 percent by the first quarter of 1998. This decline is likely to continue, as Japanese banks shrink further in order to satisfy capital requirements. Not only have Japanese banks reduced U.S. lending, but they also have announced major restructurings of their U.S. operations, including sales of some of their U.S. subsidiaries and consolidations among their U.S. branches and agencies. Many of the actions of Japanese banks are being influenced by changes in government policies towards them. In March of 1998 major