Japan’s Financial System

Abstract

It is often argued that Japan’s financial system has the following distinctive characteristics: (i) the predominance of ‘indirect financing’, and stemming from this — (ii) ‘credit rationing’, and (iii) the existence of an artificially low interest rates policy.1 It is therefore widely accepted that the flow of capital takes place not on the open market, but at the discretion of banks and other financial intermediaries. By controlling these financial institutions the government is supposedly able to keep interest rates artificially low. According to Shinohara and Kawaguchi, the financial institutions carry out ‘credit rationing’ and have close ties with large heavy industrial companies, to whom they ‘concentrate’ their lending.2 Banks’ competition consists of trying to make long-term relationships with companies from all areas of industry, where possible making them affiliated companies of the bank. The behaviour of banks is seen as a vital background factor in companies’ competition to increase their investment in equipment, and even as the motive power behind Japan’s high growth. For example, Miyazaki argued that the attempts of giant business groups, led by banks, to cover the whole range of different industries and financial institutions, brought about an increase in monopolistic competition on commodity markets and in the financial world.3