Economic Environmental Changes and Institutional Changes

Abstract

Why did the traditional Japanese monitoring system become less efficient? In the context of the institutional approach (see section 2.4), the question can be rephrased to ask why the transaction cost in the system was getting higher. Section 4.2 aims to overview the changes in economic environment and the associated changes in the relative cost of monitoring, which made the traditional financial and monitoring system gradually ineffective. The main points in our discussion are summarized below (see also Figure 4.1):

• (A) Changes in the relative cost of monitoring (see section 4.2.1)

  • 1 Changes in industrial structure/paradigm shift from the ‘catching-up’ economy to the ‘frontier’ economy → Borrowers who still relied on bank loans are exposed to fundamental uncertainty to a greater extent → increasing cost of monitoring

  • 2 Internationalization of Japanese economy → increasing cost of monitoring

  • 3 Financial deregulation → reduced bank rent opportunities (see Figure 4.2) which had given banks incentives for playing a role as a long-term monitoring agent and financial intermediary

• (B) Changes in the relative cost of supervising by the Japanese regulatory authorities (see section 4.2.2 and 4.2.3)

  • 1 Technological changes/Innovations in financial engineering and products → increasing cost of supervision.

  • 2 Internationalization/globalization → increasing cost of monitoring.

  • 3 Foreign pressure accelerating financial deregulation.