Substantive financial deregulation under the ‘Big Bang’ program, initiated in 1996, and reform of Japan’s regulatory style were critical components of this effort. The aim was to transform a highly regulated, bank-oriented financial system to a transparent, market-based financial system. A newly efficient capital market would, then, lead to the revitalisation of Japan’s economy by attracting bank deposits into higher-return assets such as stocks, developing emerging-growth companies, and expanding the financial services sector and Tokyo’s role as a financial centre.

Both popular opinion and academic literature hold these reform efforts as a failure. Many cite Japan’s continuing low economic growth, particularly compared to the United States’ 1990s financial innovation, and strong economic growth in China over the past decade. Scholars have especially focused on the possibility that international competition among economic and legal systems would lead to global convergence (presumably towards the US model), and have noted the lack of a clear, transformative change in Japan. Commentators agree that, although Japan may talk about reform, it has merely changed laws ‘on the books’ and not actual practices.

But these views are based on a questionable assumption that financial deregulation, accompanied by other structural and administrative reform, naturally leads to sustained economic growth under a new post-industrial economic model. This understanding presumably arose from the perceived success of the US post-industrial model and the prior ‘Big Bang’ deregulatory programs in New York and London.

The 2008 financial crisis has challenged these assumptions. The US and other countries were forced to take extraordinary ‘Japan-like’ measures in both fiscal and monetary policy, including large budget deficits and quantitative easing to increase the money supply. There is now serious concern in the US that America might repeat Japan’s experience of slow growth and a lingering deflationary environment. Accordingly, the post-2008 environment provides a good opportunity to reassess a number of long-standing issues, including the significance of Japanese efforts at deregulation and related reforms.

The ‘Big Bang’ financial deregulation program has, together with other reforms, significantly altered Japan’s regulatory style, particularly in the financial services industry. Japan has successfully evolved towards a regulatory framework with an increased emphasis on information disclosure and transparency, and a greater reliance on formal rules and market mechanisms. Moving clearly towards a rule of law system is a significant accomplishment.

Evidence of this evolution is abundant. It includes changes in the structure of regulatory agencies (and increased independence for the Bank of Japan), the end of administrative guidance practices such as the use of informal tsutatsu, far greater information disclosure by government agencies, the end of institutions such as ‘MOF-tan’ to deal with government agencies, and, in particular, a corresponding rise in the importance of lawyers to advise on rules in the administrative and regulatory processes.

Even though Japan’s program of financial deregulation was more extensive than that undertaken in New York or London, it was not nearly as successful in growing Japan’s financial services industry or achieving other broad goals related to a service-oriented, post-industrial society. The reason for this outcome is not primarily a failure to carry out promised regulatory reforms. Rather, it illustrates the limits of what can be accomplished through financial deregulation alone and the necessary contribution of other important factors.

Japan faced very strong headwinds: a rapidly aging society with increasing social welfare payments, a debilitating banking crisis, a reluctance on the part of banks to cede ground to the slowly expanding capital markets, poor economic growth and stock market performance, deflationary pressure, mounting debts from government fiscal stimuli to keep the economy afloat, and unfortunate external shocks in 1997 and 2008.

Still, Japan is better off for having completed substantial reform in financial deregulation and in its regulatory style. It is now considering a variety of measures unrelated to deregulation to achieve its goals. Assessment of Japan’s reform efforts must consider the balance between deregulation to promote competition and regulation to maintain investor confidence and market stability. It must also take into account the role of non-regulatory factors such as macroeconomic growth and financial market performance in creating efficient capital markets that can support a post-industrial society.

Bruce E Aronson is Professor of Law at Creighton University Law School, and a former Senior Fulbright Researcher at the University of Tokyo. He has also worked as an Associate Research Scholar at Columbia Law School.

This is an article from the last edition of the East Asia Forum Quarterly, ‘Regulatory Reawakening’.