debts and stop borrowing, further reducing the demand for loans.
) banks also reduce lending because banks fear to burden its balance with non-performing loans, and because banks liabilities do not decrease their balance sheet will deteriorate.and credit crunch causes a decrease in interest rates. However, despite the near-zero interest rates, companies are reluctant to take out loans. As a result, banks are not able to direct the attracted deposits to lending, funds are accumulated in bank reserves, or are withdrawn from the circulation (so-called liquidity trap). This withdrawal of money from the circulation causes a deflationary spiral, which only exacerbates the fall in asset prices and deteriorate the balance sheets even further., A credit crunch emerges not because banks are inability to lend but because the crisis of balance sheets of companies. crunch leads to decrease in deposit that reduces the interest rate on deposits to close to zero level, forcing the owners of time deposits to immediately withdraw funds and move them to risk-free current accounts.of the liquidity trap in Japan allows to point out the following phases of its development.first phasefirst phase is characterized by a decrease in assets of the borrowers and increase of non-performing loans:
· in the late 80 s - late 90 s of the last century in Japan Nikkei 225 fell from 38,900 to 13,000, land price in 1992-1998 decreased by more than 10% (figure 1) ), in July +2013 the Nikkei 225 index was less than 15,000, which is lower than in 1989 by 2.5 times). Decrease in value of companies assets made difficult the payment of loans: in 1992-98 cumulative amount of non-performing loans in Japanese banks stood at about 60 trillion yen.
The requirement of banks to replenish the devalued collateral also negative impacted on the companies balance sheets.
1. Nikkei index and the dynamics of land prices in Japan
second phasesecond phase is characterized by a deleveraging - companies and individuals stop borrowing and pay back loans:
decrease in value of companies and individuals assets reduces their creditworthiness. As a result, they get fewer loans.
decrease in value of assets of borrowers increasing the risks of insolvency triggered the process of de-leveraging of borrowers.and decrease of demand for loans reduce lending interest rates: in Japan lending interest rate is below 2% (Figure 2).
Figure 2. Lending interest rate in Japan,%
banks also reduce the lending: increase of non-performing loans (by 1 995 74% of mortgage loans were non-performing (Akihiro Kanaya, David Woo 2000, p. 24) deteriorates banks balance sheets, and banks with weak balance sheets become more likely to forbear on loans.a result, despite the lowest interest rates on loans claims of financial sector on other sectors of the domestic economy in Japan in the period 2003-2012 decreased more than 15% (Figure 3 ).
Figure 3. Claims of financial sector on other sectors of the domestic economy in Japan, annual growth,%
The third phasecrunch forced banks to decrease the demand for deposits. It leaded to the reduction of interest rates on deposits to a close- to-zero level (Figure 4) .is worth noting that not lower interest rates on deposits reduce the amount of deposits, conversely, low demand for deposits by banks reduces the interest rates on them.
4. Interest rates on deposits in Japan,%
crunch, sharp decline of stock price of banks (the market price of many bank stocks fell to only 10% of their previous peak value (Benjamin M. Friedman, p. 50), drop in real estate prices, increase of non-performing loans caused deterioration of banks balances:
· as the result of failing of real estate price the quality of loans to the real estate companies deteriorated
· the drop in real estate prices eroded the value of collateral
· the decline of the stock prices of banks also negatively impacted on banks balances.fourth phase
Banks losses (in 1 995 banks losses were 4.9 trillion yen. In 1996 losses were avoid due to reduction of provisioning from 23.3 trillion yen to 11.5 trillion yen that allowed banks to report a small profit of 236 bln. yen. But when banks increased their provisioning again, banks faced losses: 10.3 trillion yen in тисячі дев'ятсот дев'яносто сім and 10 trillion yen in тисяча дев'ятсот дев'яносто вісім (Akihiro Kanaya, David Woo 2000, p. 41) forced Central Bank to carry out large-scale program of savings of banks: discount rate is lowered to 0.3%, the value of governmenta...
