Japan: the banks are back! Or are they?

The purpose of this paper is to demonstrate how Japanese bank “performance” has improved markedly since fiscal 2003 but to caution against over‐optimism.

The methodological approach adopted involves using aggregate balance sheet data dating from around 1990 to identify the trends in industry performance with respect to profitability, asset quality and capital adequacy.

The bursting of the asset price bubble in the early 1990s clearly had a major adverse impact on “performance”, as measured by the above‐mentioned indicators, but, after fiscal 1992, the industry's fortunes began to improve. Problems on each front, however, remain to be resolved.

By identifying the main problems still besetting the Japanese banks, both the industry and their supervisors are given advice as to which areas they need to focus on to improve future bank performance.

The paper clearly explains the nature of, and reasons for, the recent improvement in Japanese bank performance whilst highlighting the areas on which they still have to focus if they are to regain their former glory within the international banking community. It should be of interest to all serious scholars of the Japanese banking system and interested commentators alike.