Japan's Interest Rates and the "Grey" Financial Market

Abstract

JN THE PAST DECADE business investment and national income have grown extremely rapidly in Japan,' and more than half of investment has been financed from external sources. Japan has a highly organized and relatively effective financial system, which on the whole effectively provided the funds for the surge in productive investment. The city banks are at the core of the financial system; they engage in an aggressive, national branch-banking business and dominate in terms of loans, deposits and other indicators of banking activity.2 While individual Japanese financial institutions operate in a generally highly competitive environment, competition is limited by certain major restraints, of which the most notable is the successful government attempt to freeze long-term interest rates. This has produced an official structure relating short-term and long-term interest rates which is distorted relative to that expected under competitive conditions. The purpose of this article is to examine the nature of this distorted interest-rate structure and to trace a variety of marginal market responses to it. Particularly in tight-money periods various unusual and subterranean techniques have been utilized in a grey financial market in an effort to raise effective interest rates and to narrow the disequilibrium between demand for and supply of loanable funds. Some of the broader effects are briefly discussed in a final section. A main focus of governmental controls over interest rates has been on government and private domestic bonds. Five categories of bonds are issued in the capital market. Listed in descending order of amount outstanding, they are: bank debentures (issued primarily by long-term credit banks), industrial bonds (mainly for electric power and manufacturing, plus some for transportation), public corporation bonds (usually guaranteed by the