In view of the incomplete economic adjustments during the post bubble distress, we fully realize that the malfunction of financial intermediation impedes the resource allocation mechanism in the financial markets. With weak balance sheets, banks tend to continue lending unprofitable businesses and leave them existing. Such lending policy hampers the factor reallocation to more profitable businesses.
Good news is that banks’ lending attitude seems to be gradually becoming far more accommodative than in the previous recoveries. This shows that major banks in Japan have made good progress in  2  BIS Review 41/2004  solving non-performing loan problems. The resultant improvement in bank balance sheets is expected to enhance their loan capacity.