Japan is one of the world’s largest economies and has one of its oldest modern financial systems. Its history runs from the family-owned zaibatsu of the prewar era through the bank-centered keiretsu, the bubble of the late 1980s and the banking crisis that followed, to two decades of zero and negative interest rates that ended only in 2024. This guide explains the main institutions, the yen and the stock market, and what changed in recent years.
From Zaibatsu to Keiretsu
Before 1945 the Japanese economy was dominated by a few family-controlled conglomerates, the zaibatsu. The four largest were Mitsui, Mitsubishi, Sumitomo and Yasuda. Each was controlled through a family-owned holding company and included its own bank, trading company, mines, shipyards and factories, which allowed the groups to finance themselves internally.
The American occupation dissolved the holding companies after 1945 and sold their shares to the public. The companies themselves survived, and in the 1950s they regrouped as keiretsu: looser networks of firms that held each other’s shares and relied on a “main bank” for long-term loans, advice and, in bad times, rescue. Mitsubishi, Mitsui and Sumitomo were again among the leading groups, joined by networks built around Fuji Bank (the former Yasuda bank), Sanwa Bank and Dai-Ichi Kangyo Bank. Cross-shareholdings have been reduced sharply since the 2000s under pressure from investors and Japan’s Corporate Governance Code, but the group names are still well known.
The Yen
Creation and the Fixed Rate
The yen was introduced by the New Currency Act of 1871, replacing the many coins and paper notes of the feudal domains. The Bank of Japan was founded in 1882 to issue a single national currency. After World War II, inflation was brought under control with the Dodge Line policies, and in 1949 the yen was fixed at 360 to the U.S. dollar, a rate that held until the end of the Bretton Woods system in 1971. The yen has floated freely since 1973.
Strong Yen, Weak Yen
Under the Plaza Accord of September 1985, the major economies agreed to bring down the dollar. The yen roughly doubled in value against it within three years, from about 240 to around 125 per dollar. Exporters moved production abroad, and the Bank of Japan’s low interest rates helped fuel the asset bubble of the late 1980s. The yen reached its strongest level in 2011, at about 75 per dollar, hurting carmakers and electronics firms. The trend then reversed: with Japanese interest rates far below those in the United States, the yen fell past 160 per dollar in 2024, its weakest level since 1986.
A weak yen raises the profits of exporters and attracts record numbers of foreign tourists, but it makes imported energy and food more expensive for households.
Cash and New Banknotes
Japan has long been known as a cash society. New banknotes entered circulation on July 3, 2024, featuring the industrialist Shibusawa Eiichi on the 10,000-yen note, the educator Tsuda Umeko on the 5,000-yen note and the bacteriologist Kitasato Shibasaburo on the 1,000-yen note. At the same time cashless payments, by credit card, QR code and IC card, have grown quickly and passed 40 percent of household consumption in 2024.
The Bank of Japan and Monetary Policy
For most of the postwar era the Bank of Japan acted in close coordination with the Ministry of Finance and steered lending through “window guidance,” informal quotas for bank credit. The revised Bank of Japan Act, in force since April 1998, gave the central bank independence in setting monetary policy.
After the bubble burst, Japan became the testing ground for unconventional policy:
- 1999: zero interest rate policy.
- 2001–2006: the world’s first program of quantitative easing.
- 2013: “quantitative and qualitative easing” under Governor Haruhiko Kuroda, with massive purchases of government bonds and stock exchange-traded funds.
- 2016: a negative interest rate of minus 0.1 percent on part of bank reserves, followed by yield curve control, which capped 10-year government bond yields.
- March 2024: under Governor Kazuo Ueda, the bank ended negative rates and yield curve control, its first rate increase in 17 years.
- September 2026: after a series of further increases, the policy rate stands at 1.25 percent, the highest in more than three decades.
The Bank of Japan holds roughly half of all Japanese government bonds. Japan’s gross public debt is more than twice the size of its economy, the highest ratio among major advanced economies, but most of it is held at home, which has kept borrowing costs low.
Banks
The Banking Crisis of the 1990s
When land and stock prices collapsed after 1990, banks were left with huge bad loans. The crisis peaked in 1997 and 1998 with the failure of Hokkaido Takushoku Bank and Yamaichi Securities and the nationalization of the Long-Term Credit Bank of Japan and Nippon Credit Bank. Public capital was injected into the major banks, and a new regulator, today’s Financial Services Agency, took over supervision from the Ministry of Finance.
The Three Megabanks
Mergers turned the former city banks into three large groups:
- Mizuho Financial Group, formed from Dai-Ichi Kangyo Bank, Fuji Bank and the Industrial Bank of Japan (holding company established in 2000).
- Sumitomo Mitsui Financial Group (SMBC Group), from the 2001 merger of Sumitomo Bank and Sakura Bank, itself the successor of Mitsui Bank.
- Mitsubishi UFJ Financial Group (MUFG), created in 2005 from Mitsubishi Tokyo Financial Group and UFJ Holdings; it is the largest of the three.
Alongside them operate the Resona group, regional banks, shinkin cooperative banks and the agricultural cooperative bank Norinchukin.
Japan Post Bank
The postal savings system was for decades the largest deposit-taker in the world, and its funds financed public works through the government’s Fiscal Investment and Loan Program. Prime Minister Junichiro Koizumi made privatization his central reform; the postal privatization laws passed in 2005, the Japan Post group was split into separate companies in 2007, and Japan Post Holdings, Japan Post Bank and Japan Post Insurance listed their shares on the Tokyo Stock Exchange in November 2015. The government still holds a controlling stake in Japan Post Holdings.
Stock Markets
Stock exchanges opened in Tokyo and Osaka in 1878. In 2013 the two merged under Japan Exchange Group (JPX): cash equities trade on the Tokyo Stock Exchange, derivatives such as Nikkei 225 futures on the Osaka Exchange. The Tokyo Stock Exchange is one of the largest in the world by the market value of its listed companies.
Since April 2022 Tokyo-listed companies are divided into three segments:
- Prime: large companies with high liquidity and stricter governance requirements.
- Standard: established mid-sized companies.
- Growth: younger companies with high growth potential.
The two main indexes are the Nikkei 225, a price-weighted average of 225 large companies published by the Nikkei newspaper, and TOPIX, a market-capitalization index calculated by JPX. The Nikkei’s bubble-era record of 38,915 points, set on December 29, 1989, stood for more than 34 years until it was surpassed in February 2024.
Households and Investment
Japanese households keep about half of their financial assets in cash and bank deposits, a far higher share than American households. To shift savings into investment, the government relaunched the tax-free NISA account in January 2024: investors can put up to 3.6 million yen a year into stocks and funds, with a lifetime limit of 18 million yen and no time limit on the tax exemption. Millions of new accounts were opened in the first year.
Frequently Asked Questions
Who controls Japan’s monetary policy?
The Bank of Japan’s nine-member Policy Board, led by the governor. The bank has been legally independent from the government since 1998.
What are Japan’s largest banks?
Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho Financial Group, known as the megabanks, plus Japan Post Bank on the deposit side.
What is the difference between the Nikkei 225 and TOPIX?
The Nikkei 225 is a price-weighted average of 225 selected stocks. TOPIX is weighted by market value and covers a much broader range of Tokyo-listed companies.
Why was the yen fixed at 360 per dollar?
The rate was set in 1949 as part of the postwar stabilization program and the Bretton Woods system of fixed exchange rates. It ended when that system broke down in 1971.
