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Financial Crisis in Japan

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Japan learnt how to revise capital framework as there are many financial crisis occurred starting from the middle of year 1994. Based on Bank of Japan (BOF), the provision of the capital was based on Article 25 of the Bank of Japan Law. As a result, Article 25 was the legal basis for the Banker’s lender of last resort function. In 1998, Article 25 was replaced by Article 38 which provided the Bank with the ability to extend funds to maintain financial stability by arranging the minimum capital requirements in line and more closely to banks that have actual risks of economic losses. In most cases, problems are arising from insufficient liquidity, such as expected loss of cash flows or sudden loss of liquidity on part of the borrowers and high risk are regarded as troubled assets. The liquidity value may at least partly be recovered once the market is restored even if the economic circumstances may dictate the loss of future cash flows may not be recovered. If the crisis is spread worldwide, the intercontinental financial institutions are able to estimate the total amount of losses and the national authority should also be responsible for this task to motivate the recapitalize designation and other proposed actions.

Japan also learnt about the ability of market discipline to motivate well-judged management by increasing the level of limpidity in banks’ public reporting. “Market discipline also didn’t not work properly. Public disclosures on NPLs were virtually non-existent before early 1990s, partly because the rules on provisioning were bound by the tax law standards.” (Nakaso, 2001) It sets out the public disclosures that banks should invest greater insight into the capability of their capitalisation. To manage its exposures, participants need to have a enough understanding of a bank’s activities in the market and controls what it’s already in place. They should be able to differentiate between banking organisations so they can reward those who manage their risks carefully and penalise those that do not (NEDfi Databank Quarterly, 2004). Hence suitable disclosure of information to the public will bring in market stability and will definitely promote safety and reliability to the finance system. The Committee suggested two types of disclosure: Core disclosures and Supplementary disclosures. Core disclosures are those that deliver important information for all organizations while Supplementary disclosures are those that are required for some. The Committee suggests that all international active banks should provide full range of supplementary and core information publicly.

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