The Japanese Finance System
The Japanese economy was dominated by large, family-run conglomerates called Zaibatsu.
Japan's Economy before WWII
While shares would be sold in subsidiaries, controls rested in a family-owned holding company, while financing was handled internally. Production was nationalized during the war, and during the American occupation attempts were made to keep the Zaibatsu from reforming. However, civilian support and a need to quickly re-industrialize the war-torn country left most of these companies intact, although control moved from families to shareholders. Today, companies like Mitsubishi and Sumitomo can trace their lineage back to this system.
The Yen was established with the New Currency Act of 1871, and in 1882 the Bank of Japan was established to centralize currency production. To control the massive inflation after WWII, the currency's value was fixed at ¥360 per US$ from 1949 to 1971. Since deregulation, the Yen has steadily increased in value, becoming a major reserve currency.
The increase in the Yen's value has been a double-edged sword: Although it increases the buying power the Japanese have for foreign goods, it also makes their own goods less competitive in the international market. The Plaza Accord reassessed the value of the American dollar, causing the exchange rate to jump from ¥239 per US$1 to ¥128 per US$1 between 1985 and 1988. This bubble effectively pushed bicycle and electronics manufacturing out of the country, while encouraging automotive companies to build more products overseas.
In the wake of the recent economic crisis, the Yen has increased in value to around 80 per US$, forcing further strain, particularly on the domestic auto industry.
The Bank of Japan originally acted as an arm of the government, enacting economic policies while controlling economic growth through credit growth quotas on commercial banks. Although this relationship still exists on paper, revisions in the Bank of Japan Act have let the institution act independently from the government.
To boost the economy, reforms introduced by Prime Minister Koizumi at the turn of the century have gradually privatized the country's post office. Along with mail delivery, the Postal Services Agency was the largest consumer bank in the country, holding one quarter of Japan's household assets. This effectively moved an estimated $2 trillion U.S. from government control to the private market.
Today, Japan's banking system is dominated by the Mitsubishi UFJ Financial Group, the Mizuho Bank and the Sumitomo Mitsui Financial Group; these three banks can trace their roots back to the Zaibatsu.
The Tokyo Securities and Stock Exchange is the largest stock exchange in the world, handling over 80% of the stock trades in Japan. The Osaka Stock Exchange is the third largest in the world, just behind the New York Stock Exchange. The most popular index is the Nikkei 225, compiled by the Nihon Keizai Shimbun (Japan Economic Daily.)