Reconstructing the East Asian Financial System

ABSTRACT

The Fragility of financial system was one of the causes of the 1997 crisis and a factor ofdeepening crisis. It is also pointed out that the process of this crisis has revealed the immaturefinancial intermediary. In East Asia, financial deregulation since 1980's resulted in the bubbleeconomy and excess investment which weakened the financial system through keen competitionfollowing the deregulation entailing immoderate risk-taking of financial institutions.Additionally mismatch between external assets and external liabilities increased reflecting thatfinancial institutions had expanded borrowing short term loans from overseas.

Since the end of the 1980's, much has been made in the financial deregulation, such as interestrate liberalization, expansion of operational scope, relaxation of business entries, growing up ofcapital market, relaxation of foreign exchange control and liberalization of capital account,aiming at mobilizing savings as well as efficient allocation of funds. Under these deregulation,the efficiency and soundness of the management of financial institutions were realizinggradually. However, inefficient management is still a problem and the capability of both assetliability management and risk management was lagging behind.

Since the 1990's, against the background of lasting high economic growth and liberalization ofcapital account, the outstanding of short external debt has reached historic high level. The rapiddepreciation of currencies, charging the growing repayment to non-financial institutions,resulted in huge non-performing loans. Now financial systems are being restructured, takingmeasures such as liquidation or recapitalization of financial institutions, disposal of non-performing loans and reinforcement of prudential regulations. The process of therecapitalization, the most urgent problem, is very difficult under the deepening recession.

Properly speaking, Japan must be a supplier of funds and an absorber of East Asian exports. Inorder to carry out the mission, we must be quick to restructure our own financial system and toswitch our own economy to a recovery.