Japan: The banks are back! Or are they?

2009-02-06T13:28:29Z (GMT) by Maximilian Hall
Since fiscal 2003, the 'performance' of the Japanese banking sector, in terms of profitability, asset quality, and capital adequacy, has improved markedly as the real economy has recovered, suggesting that the widespread pessimism (see, for example, Hall, 2006 and IMF, 2003) expressed earlier concerning the fragility of the sector was somewhat overdone. Yet, despite these positive developments, a number of serious challenges still face the Japanese banking industry and their supervisors. Core profitability, for example, remains very weak, in part due to wafer thin lending margins at home and sluggish corporate loan demand. Asset quality has also widely suffered because of exposure to the re-regulated consumer finance industry and the US sub-prime market. And controversy still surrounds the issues of bank "under-reserving" and regulatory tolerance of "double gearing" on the capital adequacy front. These, and other, problems must be resolved if Japanese banks are to finally re-claim the ground lost to international competitors over the last 15 years or so and secure lasting improvement in their financial health.