Japanese Financial Instability and Weaknesses in the Corporate Governance Structure

Abstract

The sudden collapse of major financial institutions in November 1997, which were subject to examination by the authorities and external auditors, brought about the extraordinary situation whereby financial institutions lost mutual trust in the soundness of business operations. The interbank money market started to malfunction and an intense credit crunch emerged. Japanese financial institutions, companies and Asian nations faced a severe tightening of bank credit. The biggest causes of this turmoil are the Japan's weak accounting system, and the excessive stock portfolio held by banks. To restore confidence in Japan's financial system, corporate governance of financial institutions must be overhauled.