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Abstract

The weakness of the Japanese banking industry, suffering from acute problem of non-performing loans, prevents Japan from restoring sound growth rates despite having undertaken structural reforms and substantial fiscal policy efforts, and, through impairing transmission channels of monetary policy, it has also made ineffective efforts to stimulate the economy through "zero interest rates" and quantitative easing policy. Misunderstanding the roots of the banking crisis contributed greatly to its exceptional length and depth and prevented its early solution. Poor coordination and sequencing of liberalization of financial services together with macroeconomic policy mistakes have been responsible for the crisis. But the origins of those mistakes can be traced to the bureaucratic character of the country's policy-making process often lacking a comprehensive analysis of macroeconomic effects of a particular policy decision. Simple solution to the banking crisis in the form of eliminating non-performing loans burden, bailing out ailing financial institutions etc., if not accompanied by decisive steps restoring rationality to the public spending and resolving the problems arising from the presence of the government sponsored financial institutions, may not be sufficient to achieve sound growth and prevent similar crises in the future.

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