Structural Disposal and Cyclical Adjustment: Non-performing Loans, Structural Transition, and Regulatory Reform in Japan, 1997-2011

Japan experienced falling asset prices, financial market reform, and non-performing loan reductions from the late 1990s. We examine whether it was appropriate to guide the banking sector to aggressively write off non-performing loans in the early 2000s under the shadow of regulatory reform and the structural transition of corporate financing. Our results indicate that non-performing loans could have been cyclically reduced only by a further extension of mortgage loans, as the deregulated corporate sector reduced its reliance on banking and increased its bond issuance. Structural non-performing loan disposal is justifiable to avoid another housing market bubble.