Disintermediation and Bond Market Development in Japan

Abstract

Analysis of flow of funds data provides evidence of gradual disintermediation in Japan's financial system, however the major channel for the allocation of domestic savings to productive assets remains bank intermediated lending. Consistent with earlier proposals by Schinasi and Smith (1998) and Rhee (2001), we argue that developing a viable domestic bond market is critical for the allocation of excess liquidity, and the on-going health of the Japanese economy. Specific recommendations examined include: (i) the removal of regulation which limits access to the underwriting and trading process; (ii) reducing the concentration of market power in the hands of banks; (iii) encouraging a broader investment choice by Japanese investors including households and institutional investors; (iii) improving infrastructure for the issuing and trading of securities; (iv) promoting the issuance of debt securities among potential domestic borrowers; (v) encouraging non-resident borrowers to tap the pool of Japan's excess domestic savings through domestic bond issues; and finally (vi) encouraging further internationalization of the yen, since there is a lack of yen funding requirements by foreign firms.