Financial Sector Profitability and Double-Gearing

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Abstract
This chapter assesses the current size of the losses for the insurance companies and banks. It shows that the structural problems in the banking sector are deep. The banks have not made a profit from operations since 1993, and the loan losses continue to accumulate, even though the banks have already written off ¥82 trillion (over 16 percent of the gross domestic product through March 2002). The chapter highlights two key problems that underlie the banks' inability to make profits. The first is deflation, which limits their ability to raise interest rates without crippling their borrowers. The second problem is the operations of government-subsidized financial agencies, which often undercut the banks' pricing power. It is argued that until both of these conditions are reversed, the banks will continue to hemorrhage.

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