The Japanese economy was seen as a role model for other emerging economies which were striving for consistent economic growth and it was all set to take over the US by the 1990s. However, Japan experienced structural problems that pushed the economy deep into stagnation. The economic growth of Japan during the late 1990s was around 0.8%. The economy faced some severe problems like drastic increase in its fiscal deficit and accumulated debt. The `asset bubble', and the collapse of stock markets in the 1990s followed by South East Asian crisis in late 1990s affected the fortunes of the banking industry in the country. The non-performing assets in the Japanese banking industry were one of the highest in the world, leading to bankruptcy of many banks in the economy. Though the government initiated measures to bring the economy back on to the track of economic growth, nothing great has been achieved as the economic woes still continue.

As soon as the world war II ended in 1945, the Japanese Government turned its focus towards reconstruction and development of the Japanese economy. The need of the hour was huge capital for rapid development of the country. Japan realized that it had the potential to become one of the dominant players in industry segment. It chalked out the policies in favor of rapid industrialization in the country. However, the biggest challenge before the government was from where would the capital come from? It was during this phase, the banking industry played a crucial role in the economic development of the country. During 1950 to 1980, the banks in Japan were the major source of finance for industries. The Japanese banks had an advantage working for themthe restrictions placed by the government on industry to opt for other forms of financing. This resulted in huge cash surplus in the form of savings with the Japanese banks. The banks were comfortably placed with huge profits and very less NPAs in the banking system. In 1970, in order to take on US in terms of industrialization, the government of Japan started initiating some major financial market reforms, which changed the fate of the Japanese banking system.

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