Banks recapitalization policies in Japan and their impact on the market

The following measures to boost banks’ capital were implemented from December 1997 through March 1998 in Japan: (1) Banks were given the option to choose the cost method in the valuation of their equity portfolios. (2) Reevaluation of bank property assets at current market values was introduced. (3) Public funds were injected into the banking system. This article examines whether or not the announcements of these measures have had any impact on stock prices. We find: (1) The announcement of the introduction of the cost method in the valuation of equity portfolios had a limited effect on stock prices. (2) The announcement of reevaluation of property assets had a relatively strong impact on stock prices. (3) The aim of capital injection by the government might be interpreted by investors in general as an attempt to favor weak banks rather than to bolster the capital base of strong banks.