Japanese financial system

The main elements of Japan's financial system are much the same as those of other major industrialized nations: a commercial banking system, which accepted deposits, extended loans to businesses, and dealt in foreign exchange; specialized government-owned financial institutions, which funded various sectors of the domestic economy; securities companies, which provided brokerage services, underwrote corporate and government securities, and dealt in securities markets; capital markets, which offered the means to finance public and private debt and to sell residual corporate ownership; and money markets, which offered banks a source of liquidity and provided the Bank of Japan with a tool to implement monetary policy.

Japan's traditional banking system was segmented into clearly defined components in the late 1980s: commercial banks (thirteen major and sixty-four smaller regional banks), long-term credit banks (seven), trust banks (seven), mutual loan and savings banks (sixty-nine), and various specialized financial institutions. During the 1980s, a rapidly growing group of nonbank operations—such as consumer loan, credit card, leasing, and real estate organizations—began performing some of the traditional functions of banks, such as the issuing of loans.

In the early postwar financial system, city banks provided short-term loans to major domestic corporations while regional banks took deposits and extended loans to medium-sized and small businesses. Neither engaged much in international business. In the 1950s and 1960s, a specialized bank, the Bank of Tokyo, took care of most of the government's foreign-exchange needs and functioned as the nation's foreign-banking representative. Long-term credit banks were intended to complement rather than to compete with the commercial banks. Authorized to issue debentures rather than take ordinary deposits, they specialized in long-term lending to major keiretsu (系列).

Trust banks were authorized to conduct retail and trust banking and often combined the work of commercial and long-term credit banks. Trust banks not only managed portfolios but also raised funds through the sale of negotiable loan trust certificates. Mutual loan and savings banks, credit associations, credit cooperatives, and labor credit associations collected individual deposits from general depositors. These deposits were then loaned to cooperative members and to the liquidity-starved city banks via the interbank money markets or were sent to central cooperative banks, which in turn loaned the funds to small businesses and corporations. More than 8,000 agricultural, forestry, and fishery cooperatives performed many of the same functions for the cooperatives. Many of their funds were transmitted to their central bank, the Norinchukin Bank, which was the world's largest bank in terms of domestic deposits.

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