The Post War Japanese Economy; The Role Of The Banks

The Second World war saw the devastation of Japan, the financial base as well as the physical infrastructure were decimated. The success of these Japanese companies is a reflection of the way in which the Japanese economy has developed. Japanese has been seen in many sectors from electronics to car manufacturing, finance to tourism (Manami et al, 1995).

The reason for this success has been the adoption of a form of capitalism in the Japanese economy and the way that this was embraced and encouraged by the banks and the banking system. . This form of capitalism has been referred to as Ð''peoplism'. After the Second World War the devastation was felt throughout all the sector's of society, the need to change the economy structure in order to facilitate an economic recovery became a priority of the post war government. He need for the banks to play a central role could not be avoided as the new system would rely on investment in the economy and support from the banks. Prior to this change the economic structure of Japan resembled the Anglo-American model of capitalism (Chyssides, 1993).

The basis of Japanese capitalism adopted a different set of strategic objectives; longer term strategic thinking became the main priority. Emphasis was also placed on partnership and consensus, low-cost capital, overseas investment and required returns on ventures were also known leaving more room for further investment (Ishinomori et al, 1996, Sakakibara et al, 1993).

This new approach is an obvious contrast to the short-term profit driven attitude displayed by many Anglo-American companies. Investment and growth became more important than the distribution of profits to shareholders. Arguably without this approach Japan may never have recovered from the economic shock which resulted from its defeat in the second world war (Ishinomori et al, 1996).

The financial controls of the "1940" system, which maintained tight controls (Radin, 2000). The structure of regulation was designed so that investment would be maximised the continuation a financial industry which was heavily compartmentalised by function, being dominated by the commercialised city with the long term credit banks (Radin, 2000). This system was initially maintained by restraints by way of legal and administrative barriers, including capital restraints of on and off shore investments (Radin, 2000). This served to reinforce financial cartels and as such the banks could use the banking system to route funds to priority interests (Radin, 2000).

It was against this background of long termism and plentiful loans by banks as long as there was an ability to repay that lead Japan to the superpower financial status though the easy borrowing and investments made by both he government as well as industry (Radin, 2000).

In considering why the economy became so successful we can also consider not only that investments were being made, but also where those investments were being made. Japan is a small island with a dense population, and much of the land is not habitable, therefore the import of basics such as food and other essentials as the land cannot support the population. The money for earning this must be brought in by exports and in this period there were, realistically only a limited number of exports that may be able to satisfy the required amounts with the available resources, this was technology (LaRouche, 1998), and the investments and backing of technological companies by the banks enabled their growth and lead to the position where their was a trade surplus (Smith, 1999).

During the 1980's this also lead to a very liquid economy, which in turn meant that lending became easier to be given by the banks, and to be received by companies (Smith, 1999). There was reduced public spending, increasing foreign income from investment as well as exports as well as savings (Smith, 1999). This meant that the stock market also boomed, with the market capitalisation reaching $4.4 trillion in 1989 which can be seen to reflect the price earnings ratio of 70:6 (Smith, 1999). To place this into context the capitalisation of American companies at the same time was $3.5 trillion (Smith, 1999).

This was also aided by the low cost of capital in the area, borrowing from the banks was relatively cheap, and as such the economy was more speculative and with this ease also can a lax attitude which resulted in some lending that was unwise, with a high level of indiscriminate lending (The Economist, 1999).

The attitude towards lending is also different, bank involvement in industry (kigyo shudan), has placed much emphasis on the borrowing of funds in order to succeed. This, in conjunction their enthusiasm to lend, has resulted in over-lending, gearing of up to 50:1 has been known, additionally there are strong cross holdings between firms. For this reason it is probably a positive aspect that protectionism is implicit in this unusual economic system (Sakakibara et al, 1993).

It was this that has lead directly and indirectly to the financial problems in the economy and the banking system in recent years (The Economist, 1999). When the bubble did burst it became apparent that the basis for lending had not been commercially viable, and that there was inherent in the existing system a level of corruption and the complex system of 'keiretsu', families of companies that all support each other owning up to 40% of each others