Japanese Deregulation and Financial Liberalization between 1990s and the New Century

In the late l980s, Japan was moving to a competitive market-based system of banking and capital markets; new environment created new kinds of risks as also opportunities and dangers of taking risks. The pace of financial liberalization and deregulation was accelerated which spurred competition. But forces leading to the asset bubble started building up much earlier with the slowdown in the economy. The government deficit started rising and share of government bonds rose from 5 per cent of GDP during the l970s to over 18 per cent during late l980s. During the decade, the Nikkei share price index, from its 1989 peak, fell by more than 50 per cent; between l99l and 2000, land prices declined by more than 30 per cent. The OECD estimates point out that net wealth losses incurred by the economy between 1989 and l999 due to this asset price collapse amounted to more than two years' wealth of GDP or about $7 trillion, of which more than 50 per cent was borne by the households. This massive loss in wealth had serious negative consequences; the banking sector was saddled with a large amount of non-performing assets and they drastically curtailed heir lending. The progressive tightening of monetary policy during late 1990s and inevitable unwinding of borrowing boom produced a steep drop in the growth of real money supply and bank lending also weakened appreciably. This rapid rise in stock prices up to l989 was seen as an abnormality; was it the speculative zeal of investors or unmanaged monetary policy or business losses in corporate sectors? While since the early 1990s the MOF pursued vigorous liberalization of bond market and internationalization of stock and bond markets and introduction of a futures market for bonds, etc, these reform measures began with relaxation of the collateral rule. The Paper makes an attempt to understand and highlight a slew of measures taken by Japanese government to liberalize and deregulate its financial sector and has pointed out the ups and downs of such bold initiatives taken by the government.