Seminar Abstract

yOrganisational Inertia in the Ministry of Finance 
  and the Financial Crisis in Japanz

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Speaker: ]“ª —²Ž¡

Affiliation:
School of Economics, Faculty of Economics and Commerce
The Australian National University

Date and Time: 2002.10.10 (Thu), 4:30 - 6:00 p.m.

Place: 3F1136

Chair: ’†‘º –L

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Abstract: 

This paper is motivated by the organisational inertia of 
the Ministry of the Finance (the MOF) in its response to 
the financial crisis during the 1990s. The adherence to 
conventional policy was a puzzling feature of the MOFfs 
behaviour in that period when the banking sector problem 
was escalating to crisis level. The MOF was very reluctant 
to build up a robust safety net against systemic risk, 
even though it was well aware of the potential risk of 
financial crisis. It continued to resort to a traditional 
case-by-case approach. Consequently, a strong safety net 
had not been built into the Japanese economy prior to 
November 1997 when the financial system nearly broke down. 
Furthermore, it was not the leadership of the MOF, but 
politiciansf strong initiatives that paved the way for 
the construction of the framework to manage the banking 
sector crisis. This episode reveals how fiercely the 
organisational inertia was working in the MOF.

We model a situation where, as one of its tasks, a 
hierarchical authority is responsible for overseeing the 
banking industry. We show that the career concerns of 
officials in the authority generate the organisational 
inertia that a new junior official leaves the decision 
made by a former junior official unchanged. Consequently, 
the inertia may result in possible deviation from optimal 
policies. The model also suggests that this kind of 
inertia is acute in typical Japanese organisations where 
lifetime employment and inside promotion are prevalent. In 
our model gbad money drives out good moneyh is the 
dynamic response of an organisation to the entry of 
self-interested officials. In addition, our analysis 
provides the career concerns of government officials as a 
new source of soft budget constraints.