The Rise and Fall of Bank-Loan Capitalism: Institutionally Driven Growth and Crisis in Japan
In any market economy, banks play a key role in money creation and investment. They are the single most important intermediary for indirect finance across the world. The securities (such as stocks and bonds) market is also another ubiquitous presence for direct finance. The latter, however, normally develops and gains in importance pari passu with economic development; in general, the higher the per capita income, the greater the role of securities (vis-a-vis bank loans) as a source of external funds for business investment [Levine 1997]. Securities involve greater financial risks than bank loans. The American economy has become more dependent on securities than on bank loans for business finance. I In large measure because of' pension funds and mutual funds, more than half of American households are estimated to be shareholders in one way or another.2 America's financial industry is the world's undisputed leader in innovations in the areas of derivatives and securitization, all adding to the rapid growth of the securities market. In these respects, American capitalism can be appropriately called "securities-market capitalism." In contrast, Japan's financial industry, although it was actually remodeled on the American system after World War II, has been sui generis in many respects. It is dominated by banks to such an extent that Japanese-style capitalism can be characterized as "bank-loan capitalism," especially in light of the relatively insignificant role played by the corporate bond market. Bank loans have been critical in financing Japan's phenomenal economic growth in the postwar period-and ironically, be-