Policy-based finance, financial regulation, and financial sector development in Japan

The authors state the Japanese government's role in creating a macroeconomic and financial environment conducive to rapid industrialization went beyond maintaining price stability. The government created a stable but segmented and tightly regulated financial system that favored the financing of industry over other sectors of economic activity. Lending practices, the direction of policy based finnance, and the structure of Japan's financial system changed over time, but one thing stayed constant: the authorities'vision. Some observers maintain that Japanese policies - emphasizing the development of internationally competitive industries - retarded economic growth. And government policies were not the only or even the most important factor in Japan's success. One key to success was government agencies'close cooperation with the private sector, and the government's reliance on privately owned and managed corporations to achieve government-favored industrial goals. Japan's financial system was quite different from Anglo-American and continental European financial systems. The authors discuss some characteristics of the Japanese system in the high growth era: 1) the preponderent role of indirect finance; 2) the"overloan"position of large commercial banks; 3) the"overborrowing"of industrial companies; 4) artificially low interest rates; 5) the segmentation and fragmentation of the financial system; 6) the underdevelopment of securities markets and institutional investors; 7) the key role played by the main bank system; 8) the relations between banks and industry; 9) the different roles debt and equity played in the Japanese system; 10) the role large conglomerate groups, especially general trading companies, played in channeling funds to small firms at the industrial periphery; and 11) the role of policy-based financial institutions. These features evolved in the context of high savings rates and an accumulation of assets, mobilized mostly through deposit institutions, including the postal savings system, and transformed into short- and long-term and risky loans through commercial and long-term credit banks as well as specialized government financial institutions. Are hard work and good management the secrets of Japan's success? Hard work may be as much a symptom as a cause of economic success. But good management has unquestionably been a key to Japan's economic success. Whether Japan's approach is better than others is more difficult to answer. Japan may have overtaken several European countries butwas still lagging behind the US and a few European countries in per capita income expressed in purchasing power parity terms. And although the Japanese approach played a significant part in promoting industrialization and accelerating economic growth during the period of reconstruction and high growth, it also entailed significant long-term costs - in terms of poor-quality housing and other urban infrastructure. And the excesses of the 1980s and Japan's current economic recession undermine claims about its ability to continuously outperform other countries.