Lessons in bank credit from Japan experience
Bank credit in India has been driven by the growth in personal loans which hints at increasing household leverages. These leverages had probably led to exponential rise in the domestic asset prices. This may be attributed either to the changing mindset or overstated economic prospects. It is difficult to deny both possibilities with the information currently available.
In this current context, it would be useful to examine such comparable episodes in other economies even if there are differences in dynamics. The economic backdrop of Japan in the late 1980s appears broadly closer to the current Indian context.
Japan’s course in the 1980s has been marked by thrilling ascents and sobering falls. In that decade, the Japanese economy boomed, driven by exuberance in the equity markets and skyrocketing real estate prices. Japanese consumers enjoyed affluence and Japan seemed to be headed for global economic dominance. Some thought leaders were apprehensive about social costs of seemingly endless leverages, limitless prosperity, effects of affluence on youth and the increasing income divide.
In the middle of that decade, the yen appreciation dampened Japanese exports, prompting the Bank of Japan (BoJ) to cut its benchmark rate from January 1986 onwards—from 5% to 2.5% just over one year later.
The series of rate cuts was intended to stabilise the exchange rate as inflation was relatively muted despite the pronounced monetary expansion.
This monetary easing spurred higher demand for loans, which Japan’s banking sector was willing to satiate, resulting in accelerated leveraged flows from the household sector into equity markets.
The economy evidenced the coexistence of factors such as an increase in asset prices, an expansion in
Read more on livemint.com
