The costs and benefits of financial deregulation in Japan
Along with the BoJ's loss of control of the money supply, deregulation will lead to other effects. One of them is job loss. Japan's over-regulated financial markets have lead to massive over-employment. For example, in the securities sector alone, it is estimated that 50,000 of the 150,000 people employed in 1992 can not survive the heat that a deregulated market will generate. Additionally, a number of regional banks can be expected to become insolvent when interest rates become completely deregulated. Although this may create hardship for some people, Japanese investors, corporations and the employees of these corporations will all benefit from the greater efficiency that deregulation will bring.
Besides lowering costs, deregulation will increase the options available to investors and businesses. Now investors can shop around and place money into a variety of vehicles including bank NCDs of various maturities and highly liquid bond funds. This is very important for Japan because of the graying of Japanese society. Forecasts indicate that by the year 2020 the percentage of people over age 65 will double from the present 12 percent to 25 percent. Also, because these older people will be spending money and not saving it, the savings rate is expected to drop from 16 percent in 1985 to eight percent in the year 2000. It is critical that these older investors receive a decent return on their savings instead of the low or negative returns they used to receive. Likewise for businesses, before corporate bonds were available, they had to listen to their banks or else lose all debt funding. Now they can bypass their bankers and obtain funds from the bond market.
Thus, although deregulation generally means the greatest good for the greatest number, more disclosure must occur in Japan to protect investors. In the past, when banks largely controlled corporate finance, the bankers were corporate insiders. They already knew what was going on in a company, and thus disclosure was not needed. However in today's world, where tradable securities are replacing bank employees, full disclosure of corporate financial information is needed to insure investors know what they are buying. Japan still has a long way to go in this regard, and the MoF should play a greater role encouraging disclosure.
With deregulation the MoF is seeing its role shift away from an omniscient ruler that divides its domain into a number of protected fiefdoms. Instead, the new role of the MoF should be one that requires that financial institutions and corporations fully disclose all pertinent information that an investor would need to make an investment decision. The markets would then use this information to allocate resources to those best able to use the resources - not to those who have the best access to banks and government bureaucrats.