Navigating the Path of Least Resistance: Financial Deregulation and the Origins of the Japanese Crisis

Abstract

This article reexamines the period of the Japanese bubble (1985–1990) and emphasizes ill-supervised and ill-sequenced financial deregulation as a key proximate factor. Given the subsequent costs of this political choice, what explains such a path of domestic financial deregulation without the establishment of corresponding supervisory institutions? I argue that the suboptimal Japanese outcome represents the equilibrium point for political leaders who had to balance global pressures to deregulate the economy, corporate pressures to liberalize finance, and domestic resistance by an array of politically connected interest groups. The government chose ill-supervised financial deregulation as the path of least political resistance and the golden bullet that could both defuse trade tensions with the United States and readjust the Japanese political economy in a harmless way. Instead, as they interacted with other factors, the choices made in the early 1980s destabilized the Japanese system and carried the seeds of the ensuing financial crisis.