Analysis of Japan’s Economic Structure

Analysis of Japans Economic Structure The Japanese economic structure has always been perceived to be both stable and reliable. Despite periods of difficulty, the rules and regulation surrounding the Japanese banking industry have always attempted to deal with any potential problems and to manage them both on an international and national level. However, there is an argument that the stringent nature of the regulation in itself has caused some problems for the sector, with many banks finding themselves in distressed positions having followed the approaches advocated by the central Ministry of Finance. Prior to the difficulties faced in the 1980s, which will be discussed in greater detail later, the Japanese banks largely followed the guidance of the Ministry and felt safe in the knowledge that there was a safety net in place should they fall into financial difficulties. Japanese banking, as a whole, was not particularly profitable and instead operated a cautious, yet extremely stable service. Despite this approach, the Japanese banking sector hit a substantial crisis in the 1980s, shocking not only those within the Japanese banking system, but also those involved in banking arond the globe. By studying the events that caused this period of difficulty and looking more specifically at the activities of one banking group, in particular, it is hoped that lessons can be drawn from the scenario that will prevent similar events happening again. Background to Japanese Banking The bursting of the bubble in the 1980s did not just come from nowhere; in fact, when the banking system within Japan is studied, for many decades before the bubble burst, it is clear to see that the foundations for this difficult time had been laid some considerable time in advance of the events themselves. Post war Japan took a very segmented and internal approach to banking. Very few transactions were conducted internationally, with almost all financing products being offered to Japanese corporations. This worked in the main due t o the mentality of the Japanese people; they were keen savers, therefore, the banks in Japan had a steady flow of funds available to offer financing to Japanese corporations. As a general rule, city banks offered financing to larger corporations, whereas regional banks offered financing to smaller and more local businesses. In fact, international trading was so low down on the agenda that the government used the Bank of Tokyo in the 1950s and 1960s to deal with the foreign exchange needs of the country and to act as the main foreign representative. Banks within Japan worked together, with the long term credit banks offering completely different services to the commercial banks. The banks were very customer orientated, offering financing at incredibly cheap rates to stimulate the economy, often at the expense of the banks’ profitability. All elements of the banking sector were managed closely by the Ministry of Finance which was largely responsible for all rate setting and ban king relationships. Mergers between banks rarely happened and when they did they were often unsuccessful due to the segregated nature of the different banks, thus making it difficult for companies to merge successfully in terms of culture, administration and ethos.