Japan’s Financial Reform

Abstract

Since the 1990s, the Japanese financial market has been undergoing revolutionary changes, preceded by an overheated stock and real estate market, the so-called “bubble-economy”. From the beginning until the end of the 1980s, not only the economy posted a growth of 5% in average, but also the stock and real estate market experienced a spectacular boom, that was fuelled by a heavily expansive monetary policy and almost uninhibited lending by the banking sector. Of predominant significance for the bubble-economy to burst was the tightening of the monetary policy by the Bank of Japan as of mid-1989, in order to slow down overheating. This resulted in a massive slump of the stock and real estate prices. That initiated the falling market for Japanese equities in autumn 1989. The Nikkei-225 index fell from 38,900 in October 1989 to less than 13,000 in October 1998. Simultaneously, the Dow-Jones-index boomed from 2,400 in 1989 to more than 10,000 — at times even above 11,000. As a result, Tokyo — by market capitalisation in 1989 still the largest stock-exchange in the world (Y385 trillion) — fell to rank three behind New York and London. During the same decade not only the number of foreign companies quoted at the Tokyo Stock Exchange fell considerably, but also the total number of the companies quoted remained nearly unchanged, whilst the New York Stock Exchange showed an increase of about 45%. Recovery started only in 1999, when the benchmark Nikkei 225 index powered ahead, spurred by hopes in recovery of the Japanese economy.