Deleveraging and Monetary Policy: Japan since the 1990s and the United States since 2007

TLDR: The Japanese government did not act promptly to recapitalize banks that were suffering from the erosion of their capital buffer due to their large holdings of stocks and as a result, Japan’s banks only slowly recognized bad loans, while stopping lending to promising new projects as mentioned in this paper.

Abstract: Japan’s deleveraging became serious because the negative feedback loop was Japan’s deleveraging became serious because the negative feedback loop was not contained in its early stage of development. The Japanese government did not not contained in its early stage of development. The Japanese government did not act promptly to recapitalize banks that were suffering from the erosion of their act promptly to recapitalize banks that were suffering from the erosion of their capital buffer due to their large holdings of stocks. As a result, Japan’s banks only capital buffer due to their large holdings of stocks. As a result, Japan’s banks only slowly recognized bad loans, while stopping lending to promising new projects. Slow slowly recognized bad loans, while stopping lending to promising new projects. Slow but protracted asset sales resulted in a long period of asset price declines. Nonfi nanbut protracted asset sales resulted in a long period of asset price declines. Nonfi nancial companies perceived the deterioration of their balance sheets as permanent cial companies perceived the deterioration of their balance sheets as permanent and cut spending drastically. As Japan’s economy stagnated, the total amount of bad and cut spending drastically. As Japan’s economy stagnated, the total amount of bad loans turned out to be much larger than initially estimated. loans turned out to be much larger than initially estimated.