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The Japanese Financial Sector's Transition from High Growth to the 'Lost Decades': A Market Economy Perspective

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  • Wataru Takahashi

    (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)

Abstract

This paper looks at Japan's experience in transforming its financial system. While the country is considered a model of successful Asian economic development, it has encountered many difficulties as introducing market economy. During the 1960s and 1970s, Japan experienced high economic growth, contributed by its regulated financial sector. Cooperation among the government, banks and corporations created a strong system, in which main banks played an important role. They supported companies and, sometimes, in addition to their role in the corporate governance of client enterprises, they also rescued troubled companies. In addition, banks extended loans to businesses in promising sectors, thereby assuming risks similar to those taken by venture capitalists. However, during the 1970s and 1980s, Japan's financial system, under pressure from the changing economic environment, was compelled to adjust. Economic growth led to changes in the money flow, as Japanese big business began to lose its appetite for borrowing. Instead, there developed circumvented financing outside the domestic market that, with the growing bond market and accumulation of other financial assets, led to financial liberalization.In the late 1980s, this liberalization resulted in a combination of loose monetary conditions after the Plaza Agreement, an economic boom, and the bursting of the asset bubble. Then, between 1991 and 2000, Japan experienced a "lost decade." Now, in order to pull itself out of its economic malaise, Japan continues to focus on market orientation in a bid to achieve economic reform but, so far, this has been little benefit. One of the main challenges Japan still faces is developing a new set of institutional complementarities.

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File URL: http://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2011-29.pdf
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Bibliographic Info

Paper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number DP2011-29.

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Length: 32 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:kob:dpaper:dp2011-29

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Keywords: Institutional Complementarities; Network Capitalism; Personalized System;

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  1. Takeo Hoshi & Anil Kashyap, 2000. "The Japanese Banking Crisis: Where Did It Come From and How Will It End?," NBER Chapters, in: NBER Macroeconomics Annual 1999, Volume 14, pages 129-212 National Bureau of Economic Research, Inc.
  2. Aoki, Masahiko & Patrick, Hugh (ed.), 1995. "The Japanese Main Bank System: Its Relevance for Developing and Transforming Economies," OUP Catalogue, Oxford University Press, number 9780198288992, September.
  3. Trezise, Philip H., 1982. "MITI and the Japanese miracle: The growth of industrial policy, 1925-1975 : , Stanford, California: Stanford Univ. Press, 1982. x + 363 pp., index. $28.50," Journal of Comparative Economics, Elsevier, vol. 6(4), pages 436-439, December.
  4. Masazumi Hattori & Hyun Song Shin & Wataru Takahashi, 2009. "A Financial System Perspective on Japan's Experience in the Late 1980s," IMES Discussion Paper Series 09-E-19, Institute for Monetary and Economic Studies, Bank of Japan.
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