Reforming Japan’s Capital Markets

Sadakazu Osaki
JEL codes: 
Public Policy Review, 2005, Vol.1, No.1

The Japanese version of the Big Bang announced in November 1996 was a major plan to drastically reform the financial and capital markets in Japan through significant revisions to laws such as the Securities and Exchange Law. The Japanese Big Bang was planned because of mounting worries about the lowering of the international status of Japanese markets and deadlock of the existing financial structure which depended excessively on indirect financing, mainly of bank loans.
The Japanese Big Bang was supposed to have been completed by the end of March, 2001, but in reality system reforms for financial and capital markets are still continuing including revisions of the Securities and Exchange Law and of the taxation system of securities. Reform of the financial structure — the goal of Big Bang — has not made notable progress, an example being that most privately held financial assets are still in the form of deposits, because of the following reasons.
The first reason is that participation of individual investors in the security market has not significantly increased. This is due to lack of familiarity with security companies that broker investments in securities and lack of knowledge of the market and investments.
The second reason is that the use of financial and capital markets to procure funds is being hindered by the irrational behavior of banks, an example of which is the placement of loans at interest rates which are not commensurate with the risks involved. This is particularly problematic. It is necessary to reveal the values of securities in the trading market to the maximum extent and to promote conversion of bank credit into securities in order to normalize the behavior of banks. To bring this about it is necessary to strengthen supervision to prevent unjust behavior in the market in order to raise investor confidence in the market.
As a consequence of the Japanese Big Bang and subsequent reforms, the financial and capital market systems of Japan now bear comparison with those in the UK and the US, at least procedurally. However, the system reforms implemented in Japan may just become a state of tilling the ground and failing to sow if there is no change in the attitude of control that experts (including the managing authorities who design the systems) persist in maintaining and no change in the way of thinking of companies that regard procurement of funds in the market as merely being the means to make adjustments for bank borrowing.