Japanese Banking and Finance

The postwar phase in Japan saw the establishment of a new banking system in order to finance the reconstruction of the economy. In this rebuilding period, most Japanese banks operated in one of three general categories. City banks, were the greatest in number, and the primary source of short-term credit for the country’s major companies. These were complemented by regional banks, dealing mostly with smaller businesses, and specialized long-term credit banks

Bank of Japan

Smart, coordinated investment – and lots of it – ensured that Japan’s banking industry prospered along with the rest of the economy over the next few decades. In turn, banks felt secure in providing credit more liberally, which served to further accelerate the growth of the Japanese economy.

The Japanese stock market reached its all-time high in December 1989, amidst of rampant speculation fuelled largely by easy lending. The government was eventually forced to raise interest rates, an action which worked, perhaps a little too well, to burst the bubble.

The Lost Decade of the 1990s

The financial sector was the hardest hit by the post-bubble collapse. All of a sudden, a large proportion of the loans issued in the preceding years became questionable, risky, or just plain junk. The weak government response didn’t help matters, as short-term bailouts were initially preferred to meaningful regulatory reforms. Some of the banks were coerced into providing emergency loans to ostensibly “too big to fail” zombie companies, even though these had no chance of ever being repaid. For a period of about a decade, the Japanese banking industry was slow to enact change on its own, and it received little in the way of outside guidance. This served to extend the length of the crisis.

Tokyo Stock Exchange

The Present

The Japanese banking landscape in the 21st century looks very different from how it did in the heyday of the Japanese economy. At their peak, the “Big Five” Japanese banks – Dai-Ichi Kangyo Bank, Sumitomo Bank, Fuji Bank, Mitsubishi Bank, and Sanwa Bank – were also the five largest in the world, in that order. Although following the collapse and the “Lost Decade” of the 1990s, all of the aforementioned banks were forced into mergers. Now, for consumers, only three Japanese “megabanks” remain, and foreign-based banks have greatly increased their presence in the country.

On the positive side, meaningful reforms were eventually enacted, and the situation in banking and finance in Japan has been relatively stable since about 2005. In fact, the Japanese financial sector has been one of those to come out relatively unscathed from the global financial crisis, while other sectors have certainly suffered.

The Future

At the same time, the Japanese economy in general has continued to stagnate. Had it not been for the slow response to the first Japanese banking crisis, it might have been possible to turn things around more quickly.

Though overall, the outlook for banking and finance in Japan is fairly good. In terms of stable structure and governance, the banking system in particular is among the world’s best, and if the rest of the economy is able to recover at some point, there’s still a chance that Japan’s banks can regain their former stature.

Panorama of Shinjuku and Mt Fuji taken from Bunkyo Civic Center