Globalization: Role of Institution Building in the Japanese Financial Sector

This paper strives to appraise -- in terms of contributions to economic development -- Japan's postwar financial system, a system that has been exposed to a variety of environmental changes over time including globalization. Having been designed to foster growth, the postwar financial system did contribute to Japan's rapid economic expansion. As such, it served an instrumental role in bringing about what was termed the "Japanese Miracle." However, the 1980s and thereafter witnessed the surge and collapse of a Japanese economic bubble under this same system. With the mounting burdens of non-performing loan that ensued, the financial system has since been remained as an issue of concern in the Japanese economy's "lost decade." As recent research indicates, an economic system that is successful within one set of environmental conditions could lead to failure if those conditions change. Such environmental changes need not be purely external. The overall institutional arrangements surrounding the system may misfit with the changing environment and ultimately make the original system somewhat incompatible or obsolete. The financial system of postwar Japan has been described as a classic example of this phenomenon. This paper looks back to the key development of Japan's postwar financial system, and then makes some conclusions about the main features of Japan's system.