The Effect of Japanese Financial Liberalization on Keiretsu, the Main Bank System, and Japanese Corporate Financing: Evidence for 1972-1992

Critics of the Japanese financial system have long held that Japanese keiretsu and the Main Bank system have helped Japanese corporations reduce their cost of capital and therefore gain a cost comparative advantage over their western counterparts. These institutional practices, claim critics, have limited the access of foreign firms to the Japanese product and financial markets. In this paper we bring some evidence in support of these critics' claim, but only for the period 1972-1985. From the mid-1980s onwards, the evidence shows that Japanese financial liberalization has not only reduced the financial influence of these institutions, but has had a varied impact on Japanese corporate flow-of-funds patterns and on Japanese corporate size. The first section of this paper introduces the Keiretsu, the Main Bank system, and the impact of financial liberalization; the second section presents the data and data analysis, and the third section ends with the summary and conclusions.