The Japanese financial system is considered as a “main bank system” due to its heavy dependence on the commercial banks of the country. Notably, this financial system is dominated by the banks which are usually in direct contact with the people in form of borrowers and depositors in the banks. This is largely different from the financial systems of other developed countries such as the United States that is dominated by the capital markets. In other words, the United States has a financial system that is market based while the Japanese have a financial system that is based on the banking system.
The Japanese financial system is acclaimed and highly praised for ensuring sustained growth of the country’s economy during the 1980s. As the years progressed, it was later realized in the 1990s that this financial system was actually the reason behind the stagnation of the country’s economy. From this point, the financial system has undergone significant deterioration over the last few decades for its ceasing to continue functioning optimally as before. The same cannot be said about the financial system of the United States that has progressively continued to rise. This market system triggered the highly sustainable expansion of the economy of the United States as well as the booming of capital markets. Apart from that, the current system seems to operate in favor of the market based financial system. Notably, the innovations in technology and globalization implicate noteworthy amounts of weight on both the bank system and the capital market system, aligning itself against the banking system and in approval of the market system. This can be ascribed to the increase in trading activities that will boost the activities of the capital markets thus resulting to further growth. It is noteworthy that these changes will implicate huge forces on the bank system where the flow of cash will be from the banks to the capital markets, squeezing out the profits made by banking system at a considerable proportion that could worsen their functionality.
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Major differences between the capital market system and the bank based system are on stability and efficiency. Notably, the banking system is more about stability of the economy while market based systems seeks to achieve efficiency. As a result, market fluctuations affect the market system implicating negatively on the sector dealing with households. On the other hand, market fluctuations are controlled by the banks in the banking system by extensive application of the central bank. While the market system is controlled by market mechanisms, the banking system is controlled by monitoring of trends in the banks. Notably, the market system discloses all information to the investors in its system while the banking system has hidden information obtained from monitoring. Therefore, it prompts investors to seek this crucial information before making investment decisions while capital market investors get free information about market trends.
In conclusion, majority of economists deem the capital market system as the model to be emulated if a country intends to achieve growth. The rapid growth realized by the United States is hugely attributed to the market system which still continues to propel that economy to even greater heights. They project that the bank based financial system of the Japanese will gradually change and embrace the system of capital markets. However, this may not really be the case since the Japanese government already tried phasing out banks and it proved impossible. Therefore the Japanese government needs to find a balance between the bank system and capital markets to ensure sustained growth.
