Predicting banking crises: Japan's financial crisis in international comparison

Abstract

This article compares features of Japan's banking crisis with the experiences of other industrial economies. Using a probit statistical prediction model, we find that Japan's banking crisis follows a pattern found in many other industrial countries, i.e. formal tests do not distinguish Japan as a special case. Our model predicts that Japan was particularly "vulnerable" to a banking crisis in the early 1990s. That is, the model indicated that there was a 50 percent probability of a banking crisis in Japan in 1992 given the configuration of asset prices, credit conditions and other economic factors prevailing at the time. The main factor distinguishing Japan from other industrial countries is the slow and largely ineffectual policy response by the Ministry of Finance to resolve the country's financial crisis.