Japan Follow

 In the 1990s, Japan experienced a financial crisis after the bursting of a bubble. Although outside the scope of this paper, the seeds of the crisis might have been sown during the financial deregulation in the 1980s before the formation of asset bubbles. When the gap between competitive pressures in the financial markets and a "convoy" style of banking supervision and regulation that, in effect, ensured the viability of the weakest banks became unsustainable, the crisis erupted. In this regard, it may be argued that the crisis was accentuated by the formation and bursting of the bubble. It was an unprecedented crisis in terms of severity. Though essentially a domestic problem, with the authorities' primary concerns focused on its impact on the domestic financial system and economy, in an increasingly integrated global economy and finance there was a latent, potential risk that a mishandling of the crisis could trigger a cross-border financial crisis. Most of the seven years I spent at the Financial System Division of the Bank of Japan (1993 to 2000) were devoted to crisis management in an attempt to prevent the crisis from getting out of control. Throughout this period the Division remained totally committed to the policy objective of the central bank as stipulated in the Bank of Japan Law, namely, the maintenance of financial system stability. Nonetheless, the efforts to overcome the cri