Policy-based finance, financial
            regulation, and financial sector development in Japan
The authors state the Japanese
            government's role in creating a macroeconomic and
            financial environment conducive to rapid industrialization
            went beyond maintaining price stability. The government
            created a stable but segmented and tightly regulated
            financial system that favored the financing of industry over
            other sectors of economic activity. Lending practices, the
            direction of policy based finnance, and the structure of
            Japan's financial system changed over time, but one
            thing stayed constant: the authorities' vision. Some
            observers maintain that Japanese policies - emphasizing the
            development of internationally competitive industries -
            retarded economic growth. And government policies were not
            the only or even the most important factor in Japan's
            success. One key to success was government agencies'
            close cooperation with the private sector, and the
            government's reliance on privately owned and managed
            corporations to achieve government-favored industrial goals.
            Japan's financial system was quite different from
            Anglo-American and continental European financial systems.
            The authors discuss some characteristics of the Japanese
            system in the high growth era: 1) the preponderent role of
            indirect finance; 2) the "overloan" position of
            large commercial banks; 3) the "overborrowing" of
            industrial companies; 4) artificially low interest rates; 5)
            the segmentation and fragmentation of the financial system;
            6) the underdevelopment of securities markets and
            institutional investors;   7) the key role played by the
            main bank system; 8) the relations between banks and
            industry; 9) the different roles debt and equity played in
            the Japanese system; 10) the role large conglomerate groups,
            especially general trading companies, played in channeling
            funds to small firms at the industrial periphery; and 11)
            the role of policy-based financial institutions. These
            features evolved in the context of high savings rates and an
            accumulation of assets, mobilized mostly through deposit
            institutions, including the postal savings system, and
            transformed into short- and long-term and risky loans
            through commercial and long-term credit banks as well as
            specialized government financial institutions. Are hard work
            and good management the secrets of Japan's success?
            Hard work may be as much a symptom as a cause of economic
            success. But good management has unquestionably been a key
            to Japan's economic success. Whether Japan's
            approach is better than others is more difficult to answer.
            Japan may have overtaken several European countries but was
            still lagging behind the US and a few European countries in
            per capita income expressed in purchasing power parity
            terms. And although the Japanese approach played a
            significant part in promoting industrialization and
            accelerating economic growth during the period of
            reconstruction and high growth, it also entailed significant
            long-term costs - in terms of poor-quality housing and other
            urban infrastructure.  And the excesses of the 1980s and
            Japan's current economic recession undermine claims
            about its ability to continuously outperform other countries.