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IAI Actuarial Core Principles · Business Economics · Recent macroeconomic history

Japan's economy stagnated through the 1990s after the collapse of asset price bubbles in shares and property. Which description best explains why banks' lending stayed weak and the economy struggled to recover?

Japanese banks were burdened by non-performing loans secured on collateral whose value had collapsed with property and share prices. They restricted new lending and were slow to recognise losses, so credit supply stayed weak and the economy recovered slowly through the 1990s.

  1. ABanks held large non-performing loans backed by falling collateral values, so they cut new lending and delayed recognising lossesCorrect
  2. BBanks faced a shortage of deposits because households stopped saving
  3. CThe government ran large budget surpluses that crowded out private borrowers
  4. DHigh inflation eroded real returns and discouraged banks from lending
  5. Strict import tariffs raised the cost of capital goods

Explanation

After land and equity prices fell, collateral values dropped and bad loans accumulated. Banks were weak and slow to write them off, restricting credit and prolonging stagnation. Japan's households saved heavily and the problem was deflationary pressure, not inflation or budget surpluses.

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