Japan’s financial regulatory responses to the global financial crisis

Japan's financial regulatory responses to the global financial crisis and recession show two seemingly opposing trends: (1) collaboration with international organizations to strengthen the regulation to maintain financial stability and (2) regulatory forbearance for the banks with troubled SME borrowers. This paper evaluates the post-crisis responses by the Japanese financial regulators in five areas (Basel 3, stress tests, over the counter (OTC) derivatives regulation, recovery and resolution planning, and banking policy for SME lending), and concludes that the effectiveness of the new regulations for financial stability critically depends on the willingness of the regulators to use the new tools.