The 'crisis' of non-performing loans: A crisis for the Japanese financial system?

The recent problems of non-performing loans in the Japanese financial services industry have raised the issue of the alleged 'inefficiency' of the Japanese financial sector. Of central concern in analyzing these problems are the role of the Ministry of Finance (MOF) in the regulation of the Japanese financial sector and the strengths and weaknesses of the Japanese paradigm of government-business relationship, of which the MOF's supervision of the financial sector forms an integral part. This paper offers 'standard', 'neoclassical' and 'revisionist' analysis of these problems drawn from both journalistic sources and the political economy literature. It takes the position that the recent troubles in the Japanese financial sector should not be examined in isolation from the rest of the Japanese economy and that they need to be analyzed in the broader context of the current debate on 'Capitalism vs. Capitalism'. In this broader perspective, the current troubles do not seem to indicate a fundamental weakness in the Japanese financial sector that will necessitate fundamental changes in the MOF's power over the economy. The paper ends with thoughts on the role of the financial sector in 'Japan Inc.' and on the dynamics of the relations between financial structure and industrial performance in a world of rising protectionism, managed trade and divergent national economic policies.