In November one of Japan's biggest financial institutions, Yamaichi Securities, went bankrupt owing billions of dollars. It resulted in share price falls around the world and the voicing of fears that Japan's troubled economy could lead the whole world into recession.

The boom years

Yamaichi's problems are the problems of the whole Japanese economy, and they have their roots in the boom years of the late 1980s.

That was when the Japanese economy was growing at a headlong rate, and companies were expanding and investing as never before.

Much of this investment was being financed by an extraordinary boom in property and share prices. Property and shares were used as security for huge bank loans - when the property markets and stock markets suddenly crashed at the beginning of the 1990s, the whole spiral of borrowing, asset price inflation and investment came to a full stop.

Japan's economy has remained fairly stagnant for the last six years. The stock market has been flat too, making it difficult for companies like Yamaichi to make profits.

The will to reform

Ever since the so-called 'bubble economy' burst, there have been persistent fears that Japan's big banks had so many bad loans on their books that the whole Japanese financial system was in danger of collapse. That appeared to be the first thought of many when the news of Yamaichi's collapse came through.

Japanese financial institutions have been under strong pressure from a government keen to reform the sector before next spring, when the Japanese financial market is due to be deregulated and when Japanese institutions will for the first time face real competition from efficient global operators.

The head of the International Monetary Fund, Michel Camdessus, warned that it was crucial for Japan to introduce immediate and decisive measures to revive the country's financial sector.

The Japanese government announced a plan to try to shore up the country's troubled economy in December. This included a special Yen 10 trillion bond to protect depositors of failed financial institutions.

But it may not be enough to inspire confidence in Japan's financial sector.

Japan has conceded for the first time that its economy is at a virtual standstill, and will fall far short of its 1.9% target for 1997.
 

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