IMPLICATIONS FOR REGULATORY AND SUPERVISORY POLICY

Former Prime Minister Ryutaro Hashimoto announced that government would undertake an extensive deregulation of Japan's financial system by 2001- a proposal likened by senior officials to the "Big Bang" financial deregulation in the United Kingdom more than a decade ago. The exact nature of these reforms, the timetable for implementation, and indeed whether the reforms will be as sweeping as promised, is still uncertain. The fundamental changes proposed, even were they to greatly benefit the Japanese economy as a whole, would necessarily entail losers as well as winners. And the potential losers, at present protected (by regulation) from market competition in Japan's compartmentalized financial-services industry, are likely to vigorously oppose change. Financial deregulation in Japan has been on the agenda for many years, proceeding only gradually, and some skeptics argue that a sense of deja vu surrounds the present push for deregulation as well.

Japan's financial system, however, is at a juncture today which is not comparable to any oth

The international character of asset inflation suggests common explanatory factors. The coincidence of financial liberalization and asset inflation and deflation has led a number of observers to argue liberalization played a major role in the financial disruptions of the 1980s and in the problems that the 1990s inherited from the boom-and-bust period. This view is rooted in the traditional argument that unregulated and competitive banking is inherently unstable in the absence of government supervision. In the context of liberalization in the 1980s, the removal of binding portfolio constraints permitted banks and other depositories to adopt more riskier investment and loan portfolios, including the adoption of high loan-to-value ratios.

er episode during the past 45 years. Stress in the Japanese financial system, especially failure to quickly resolve the non-performing loan problem, continues to hold back the economy and has stagnated a large part of the real estate market. And the shortcomings of the existing regulatory and supervisory structure, pit against vastly different financial institutions (and markets) than just 15 years ag

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Approximate Word count = 769
Approximate Pages = 3 (250 words per page double spaced)