Brief Case Analysis The Japanese Financial System: From Postwar to the New Millennium

Background The case deals with the crisis faced by the Japanese economy and the way that it progressed over the years. There was a shift from a highly regulated economy in the post war era, which slowly shifted towards a market determined one. The change took place in a slow manner and the process itself created much inefficiency in the system. These policies led to a crisis where there was high inflation and many companies started defaulting on their loans. Analysis • • • • • • • • • • • • In the post war era, the Japanese economy was highly regulated. There were numerous restrictions on foreign investments and on the interest rates that were offered. The currency was a fixed exchange rate regime. The banks were very strictly monitored by the Bank of Japan (BOJ) which in turn was highly controlled by the MOJ. There was a high level of monetary guidance that was given by the central bank to the other banks. The bond, stock and securities markets were discouraged and companies were predominantly encouraged to go in for bank lending. This was done by lowering the interest rates at which the banks used to lend. Over a period of time, deregulation started taking place and other forms of financial instruments became more popular. Banks were allowed to invest and become shareholders in companies. A financial bubble was created due to a high level of investor confidence, coupled with financial jugglery by banks which used to refinance bad loans with new loans. Loose monetary policy followed by the BOJ also added fuel to the problem. When eventually, the financial bubble burst, plenty of loans started defaulting and the entire scandal came to the forefront. This had been possible due to the loose regulatory policies followed the MOJ which had gone for a system of administrative guidance rather than for a concrete set of rules. This lack of objectivity in the system, coupled with a degree of corruption led to the financial crisis. An attempt was made to recover from the crisis by consolidation of various companies and by implementing better monetary and fiscal policies.

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