- Ancient Japan to 1185
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In the first decades after World War II, Japan’s complex financial system was significantly different from that of other developed countries in several respects, most notably in the major role played by banking and the relatively minor position of securities. However, these differences gradually disappeared as markets were deregulated and internationalized. By the 1980s the Japanese financial establishment had become a major international force: Japan’s banks had come to dominate international banking, while the Tokyo Stock Exchange emerged as one of the largest securities markets in the world, in terms of capitalization. However, much of this growth was based on speculation in the “bubble” economy of highly inflated real estate values. The bursting of the bubble in the early 1990s seriously affected both banking and the securities market into the early 21st century and precipitated a prolonged period of recovery. Meanwhile, over a period of some two decades beginning in the mid-1980s, the laws regulating the financial system gradually were revised, and the operation of banks, securities, and insurance companies was liberalized.
Banking
The Bank of Japan, established in 1882, is the sole bank that issues the yen; it also plays an important role in determining and enforcing the government’s economic and financial policies. Until the late 1990s the bank was under the indirect control of the Ministry of Finance, but legislation enacted at that time made it autonomous of the ministry. Also in the late 1990s a new Financial Supervisory Agency (since 2000 called the Financial Services Agency) was established to take over auditing and supervisory operations formerly performed by the Ministry of Finance.
The bulk of domestic banking business is transacted through commercial banks, as has been the case for decades. However, since the late 1990s, regulatory reforms have broken down the barriers that traditionally segmented the Japanese banking system into several types of lending establishments, and many of the large commercial banks have been transformed by mergers and acquisitions. There are also a number of trust banks and long-term credit banks, some government financial institutions—including the Japan Bank for International Cooperation, the Japan Finance Corporation for Small and Medium Enterprise, and the Development Bank of Japan—several dozen foreign banks, and many mutual savings and loan banks and credit associations. One of the more significant developments in the early 21st century has been the 10-year privatization program (completed 2007) of the Japan Post Bank, which has the largest deposit holdings of any bank in the country.
The Japanese financial system long was characterized by the high degree of interdependence between the central bank, the commercial banks, and industry. Traditionally, manufacturers relied on banks for a large part of their borrowing requirements, and, although the importance of the manufacturers’ own capital has increased, private and government financial institutions still account for a substantial part of the total borrowed. Since the commercial banks are responsible for so much of the credit extended to industry, their influence on their client companies is considerable. Their active lending policy also means that their liquidity ratios have tended to be low by Western standards and that they have been forced to rely on call money (money that is readily available to banks as loans) and on large-scale borrowing from the Bank of Japan. The central bank thereby has been in a strong position to influence bank operations and to bring about a quick adjustment in the volume of credit through credit ceilings. With the bursting bubble economy, many private financial institutions were saddled with massive bad loans, and the government was forced to intervene, temporarily nationalizing some banks and forcing others into mergers. The process of banks merging continued into the early 21st century, and banks again found themselves in trouble with the start of the global recession in 2007–08.
Securities
Japan’s capital market has become one of the pillars of the global 24-hour securities market. There are several stock exchanges in Japan; the two most important, Tokyo and Ōsaka, account for almost all the business. Stock trading grew rapidly during the late 1980s, partly in response to a stronger yen, declining interest rates, and the existence of a large amount of capital for financial investment. However, at that time the market also was highly speculative, and the advances were followed by a serious decline. Recovery was slow, mirroring the slow growth pace of Japan’s economy in the late 20th and early 21st centuries, and was hit again by the economic downturn that began in 2008.
Japan’s bond market is relatively undeveloped because the government’s low long-term interest rate policy has made bonds unattractive against the comparatively high level of short-term rates. Individuals and institutional investors tend to buy discount debentures only. Bond buying, therefore, is confined chiefly to banks and other financial institutions, which are expected to purchase government and government-guaranteed bonds according to an unofficial allocation quota. The secondary bond market has been in operation since the mid-1960s, and, although over-the-counter transactions have risen rapidly, a significant proportion of the business consists of trading in financial debentures.
In the 1980s efforts were made to expand the bond market by introducing a greater diversity of bond instruments and by establishing a number of bond-rating institutions. A step toward improving the efficiency of the bond market was made in the early 1990s, when the market was partially deregulated and banks were allowed to participate in the corporate market through subsidiaries. The Tokyo market became involved in international capital transactions in 1971, when yen-dominated foreign bond-issue offerings were first introduced; later, nonresident institutions were allowed to issue bonds in foreign currency denominations.