A Perspective on Japan's Corporate Bond Market

In the past decade, academic research has been awash with proposals on how Japan should reform, redesign and administer its bank-based financial system (Schinasi & Smith, 1998;Kuratani & Endo, 2000;Hattori, Koyama, & Yonetani, 2001;Rhee, 2001;Baba & Hisada, 2002;Batten & Szilagyi, 2003). Until the late 1980s, this unique regime, involving banks having cross-ownership with industry, was a driving force behind Japan's post-war economic miracle. However, the burst of the asset bubble, and the subsequent prolonged ailing of both the banking sector and the economy as a whole suggests that during the bubble period, the monitoring effectiveness of banks was compromised by a lack of independence from industry and the absence of external discipline. This banking crisis ultimately impaired the corporate sector's fund-raising ability, while trapping excess liquidity in the financial system through a lack of attractive investment choice afforded to risk-averse Japanese investors.