JAPANESE MAIN BANK SYSTEM : A Theoretical Analysis of Costs, Benefits and Current Crises

This paper presents an introductory overview and a basic theoretical analysis of costs, benefits and current crises in Japanese main bank system. The main bank system was designed for stabilizing the financial system in an environment of high macroeconomic volatility and information asymmetries. The most important benefits the system can generate are the reduction of agency costs through investment in monitoring, avoidance of problems of information imperfection and their asymmetric distribution and reduction of restructuring and reorganization costs in times of financial distress. The soft budget constraint and hold-up problems are the two serious flaws with the system that can lead to the misallocation of financial resources. The emergence of the new economic, political and technological forces led to undertake financial deregulations in the late 1970s that substantially changed operating environment and the structure of Japanese financial system. The deregulation of the financial system dramatically altered the structure of corporate financing and substantially reduced the role of main bank in corporate governance and monitoring. The role of main bank system in corporate governance and monitoring is becoming weak but not collapsed. The system can yet be made more effective even in the free, fair and global financial environment