86 TAKAFUMI SATO
The bad loan problem in Japan led to the failure of many financial institutions that did not have adequate risk management. However, the diversification of policies used to handle failure resolution at each stage, coupled with the expansion of safety nets, including full deposit protection, enabled the financial system to survive. Today, financial instability comes not so much in the form of classic phenomena like bank runs, rather in the form of the huge burden imposed on public finances. As Ikeo has put it, "we are protected as depositors because the government guarantees payback of our deposits while we must bear a burden of loss as taxpayers" (Ikeo, 1994 p.76). The use of public funds to extend full protection to deposits should be thought of as a way to reduce systemic risk. It should not be seen as the attempt to protect each individual depositor, even though in fact we cannot deny that this was a result. During the 1990s, Japan's failure resolution policy was characterized by the diversification of failure resolution schemes, with a view to maintaining financial operations borne by failed financial institutions and protecting deposits to cope with financial instability. The 2000 amendment basically succeeded in achieving the former, but has brought with it important changes with regard to the latter by shifting the emphasis towards principles of self-responsibility and market discipline. This shift towards the limited protection of deposits contains important changes in the way the burden of maintaining financial stability is shared. It involves a change in the relations between benefits and costs, or in other words a shift from the cost being borne by public funds/ taxpayers to it being borne by beneficiaries (financial institutions/depositors), based on the principle of self-responsibility. It also seeks to reduce the social expense by strengthening market discipline. We can surmise that such changes in relations between benefits and costs aim to reduce the costs borne by society as a whole. The transition to the new system must work effectively, avoiding the sowing of mistrust in the financial system. The following are indispensable conditions for this to happen: establishment of the infrastructure for market discipline, including a reliable system of disclosure; the infusion of an awareness of self-responsibility among market participants; and the improved effectiveness of health-check regulations for each financial institution. The period leading up to March 2002 was the 'grace period' in which to ensure that these improvements were firmly rooted and put well on track.
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Conclusions