Perverse rescue in the lost decade: Main banks in the post-bubble era
Publication Type
Book Chapter
Publication Date
12-2008
Abstract
Two of the most prominent Japanese corporate governance scholars, Professors Miwa and Ramseyer (‘M&R’), have recently published numerous articles and a book setting out their contrarian free-market theory of Japanese corporate governance. According to their theory, contemporary Japanese corporate governance is, and always has been, driven by free-market forces and not government incentives. M&R’s theory is enchanting in its simplicity and universality, as it uses standard economic theory to provide a single, and seemingly logical, solution to a myriad of complex legal, institutional, historical and cultural conundrums that have challenged observers of Japanese corporate governance for decades. Unfortunately, M&R’s theory is also incorrect. This chapter demonstrates why and by doing so provides evidence of the continuing significance of Japan’s unique main bank system in the post-bubble era.M&R’s theory fails to explain the systematic lending of trillions of yen by Japanese banks to ‘loser firms,’ at below-market interest rates, to rescue them from bankruptcy, throughout the lost decade (1990-2002). According to M&R’s free-market theory, lending to loser firms at below-market rates is not a rational, optimal, or credible governance strategy. Therefore, to claim that such behaviour systematically occurred in Japan’s banking system for over a decade would be to create ‘a myth’.A myth it is not. Empirical and case study evidence demonstrates that Japanese banks did in fact systematically lend trillions of yen to loser firms at below-market interest rates to rescue them from bankruptcy. This paper reveals the matrix of institutional incentives that made it a rational strategy for Japanese bank managers to engage in such seemingly irrational behaviour. The result is that unique institutional incentives, and not universal free-market forces, drove Japanese corporate governance — which is weighty evidence of the continuing significance of Japan’s unique main bank driven corporate governance system in the post-bubble era.
Keywords
Japanese corporate governance, Japanese main banks, free-market theory, law and economics, comparative corporate governance, varieties of capitalism, economic models, Basel Accord, banking crisis, zombie firms, evergreening, ponzi scheme
Discipline
Asian Studies | Business Organizations Law
Research Areas
Asian and Comparative Legal Systems
Publication
Corporate Governance in the 21st Century
Editor
Luke Nottage, Leon Wolff and Kent Anderson
ISBN
9781847209238
Identifier
10.4337/9781848445116.00010
Publisher
Edward Elgar Publishing Ltd.
Citation
PUCHNIAK, Dan W..
Perverse rescue in the lost decade: Main banks in the post-bubble era. (2008). Corporate Governance in the 21st Century.
Available at: https://ink.library.smu.edu.sg/sol_research/3988
Additional URL
https://doi.org/10.4337/9781848445116.00010