Summary of "Financial Deregulation in Japan"
Japan is going through numerous changes as its financial system awakens from a long slumber of regulation-induced sleep. This regulatory environment was set up by post-World War II occupying forces who wanted to reduce the power of Japan's banks and by Japanese authorities who wished to provide stable finances for rebuilding the country.
Banks were segmented into long- and short-term lending sectors, and deposit rates of interest were strictly controlled. Securities firms were separated from the banks, and trust banks served as a bridge between the two. Insurance was also divided into life insurance and casualty insurance, and cartels ruled each business.
This environment continued until the 1980s when two forces converged to upset the stability which regulations imposed. The first force, large Japanese government deficits, undermined the regulated scheme of interest rates. These deficits also weakened the barrier between banks and securities firms. The second force, improved corporate cash flow, meant that Japanese firms were no longer dependent solely on their bankers for funds. This lead to a further breakdown in barriers between banks and securities firms as banks entered the corporate bond underwriting business.
Although deregulation has increased uncertainty and decreased the government's ability to control the nation's finances, deregulation of financial services will benefit Japan. In the future, the government should move away from the role of a protective mandarin to that of an impartial judge. With increased securitization of finances, the Japanese government should encourage full and accurate disclosure so that the market - not government bureaucrats - can allocate the nation's resources to those who will use them best.