Economic Growth and Regulation of Financial Markets : Japanese Experience during Postwar High Growth Period

Abstract

IntroductionDuring the period 1953-1972, Japan experienced an exceedingly high rate of economic growth.The annual growth rate of real GNP during the twenty years was 9.2 , exceptionally high when compared to the growth rate of 3.7 for 1910-38 and 3.9 for 1973-81.The change in industrial structure was also drastic.The share of the primary sector in GDP was 36.4 in 1910 and 18.3 in 1938, but fell to 6,1 in 1970.The annual decrease in labor force in the primary sector was 36,500 persons during 1950-65 period, 6 times as high as 6,200 persons during 191C 40 period.It was really a turbulent period.What was particularly interesting for the researchers in money and banking was that this rapid economic growth had taken place within a highly regulated financial framework.The time deposit rate was regulated, entry into the bond issue market was regu]ated, international asset transactions were virtually forebidden, and so on.In the prewar period, the financial system was essentially free, both in terms of interest rate movements as well as entry into financial markets.After about 1975, the financial markets have been rapidly deregulated and liberalized, domestically as well as internationally.Therefore, the system * This is the revised version of the paper presented at the United Nations University Conference on "Financial Liberalization and the Internal Structure of Capital Markets" held during April 22-24, 1985 in Tokyo.The author is very thankful to the comments from the participants of the conference.He is also greatly indebted to comments and suggestions by Kermit Schoenholtz (Yale University).* As ot the longterm financial development of Japan, refer to Patrick, H. (1982) and Teranishi, J. (1982).' Mckinnon, R. [7].' Since average reserve holding by banks was 10-15 of deposits, it can be seen that the deposit rate is still lower than call rate even if adjustment is made for reserve ratio : deposit rate=(1 -reserve rate) x call rate.' Refer to suznki, Y. (1980).** Sakakibara E R. Feldman and Y. Harada (1980).Similar view, especially with respect to the role of ' ., Japan Development Bank, has been expressed also by Higano, M. (1981).

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