Transformation of the Financial Asset Market and Financial Reform in Japan

ABSTRACT

Japan’s financial asset market has seen sluggish growth since the bursting of the bubble. Managed assets in the financial sector in particular have continued to decrease even during the Japanese economy’s process of recovery at the beginning at the new millennium. Meanwhile, managed assets in the financial sector have ballooned in the US and UK financial asset markets, a stark divergence from the real economies. In the background of the current “financial crisis” is this extreme imbalance between the real economy and the financial sector in the US and UK financial asset markets. In Japan’s case, stagnation of the financial asset market has meant that the impact of the “financial crisis” has been relatively mild.

Looking at the functions of the Japanese financial asset market, the “transferring function” through loans has significantly weakened while the “pooling function” such as mutual funds still remains at a low level. These functions pale in comparison to those of the US and UK. Moreover, slow sophistication of the financial market has hampered the Japanese economy’s global competitiveness, and unlike in the US and UK, the rise of the financial industry’s added value share is not necessarily leading to an increase in the per capita nominal GDP.

The “Plan for Strengthening the Competitiveness of Japan's Financial and Capital Markets” published by the Financial Services Agency in December 2007 should be reexamined from a broader perspective based on the current “financial crisis”. In this event, four perspectives of reform become important: 1) recovery for the shrinking financial sector and low level overseas managed assets; 2) formulation of market-strengthening measures that give top priority to functional enhancement of the financial market; 3) shared understanding that strengthening of the financial market is essential to enhancing global competitiveness; 4) establishment of policy that does not strive to make Japan a “Financial Services Nation”. When viewed in a different light, the current “financial crisis” can be considered a golden opportunity for rebirth of the Japanese financial market, whose wounds have been light compared to the US and UK.