“Bad Loans”, “Delayed Disposals”, “Follow-on and Zombie Lending”, and the Lost TwoDecades”: Lessons from the Japanese Experience?

Abstract

Many observers describe the last 20 years of the Japanese economy as “the Two Lost Decades”. Many also discuss the “bad loans” in the banking sector and the “insufficient”and “delayed” “disposal of the bad loans.” They urge policies that will accelerate that disposition. Observers have also argued that the “delayed disposal” of the accumulated “bad loans” have caused “damage to bank balance-sheets”. The banks have “shuffled” the loans to cover-up the damage. They have become more “reluctant to lend,” and “financial system instability,” “balance-sheet depression,” and “zombie banks” have resulted. These observers urge the government to adopt “bank bailouts” as a countermeasure. They argue that the banking system has been plagued by”insufficiency in allowance for doubtful loan accounts,” “follow-up lending,” and “zombie lending,” and that these practices have caused both “allocative distortion in product markets” through “the subsidization of bad borrowers” by “discarding loan receivables,”and a “distortion in credit allocation.” Ultimately, they claim, “the delay in bad loan disposal” has impeded Japan’s “recovery from depression” and “exit from the deflationary economy,” and “the Lost Two Decades” have resulted.
After detailed investigation, this article concludes that this dominant view, emphasizing “bad loan problems” and “the Lost Two Decades”, is nothing but a list of fuzzy but colorful and beautiful words and concepts. Full of misconceptions and misunderstandings, the account is a “myth” significantly deviating from the reality.
This article reaches the following evaluation, comparing the dominant view correlated with “bad loan problems” and “the Lost Two Decades” to a “banquet” lasted for two decades amid a flurry of fuzzy and colorful words like “bad loans”.
Most literature that have set up the dominant view in the “Lost Two Decades”debate of the Japanese economy, focusing on “bad loan” and “delay in its disposal”, are “something like xxx” talking about “fuzzy but colorful issues like ¤ ¤ ¤ ¤”presented at a long-lasting grandiose “banquet”. Caballero, Hoshi, and Kashyap [2008] and articles in Ikeo ed. [2009] are representative, and the most well-known as its culmination. “Bad loan”, “delay in bad loan disposal”, “following-up lending”, and “the Lost Decade” represent ” ¤ ¤ ¤ ¤”. Those who have been indifferent or critical with the content and atmosphere of the “banquet” have stayed away from it. Many others joined it once, but since have left.