The Evolving Japanese Financial System, and the Cost of Capital

The paper surveys the extensive literature on whether Japanese corporations in the 1980s were able to finance investment more easily than Americans. Along the way, it considers: the leverage of Japanese firms, dividend payout, equity price/earnings ratios, corporate taxation, cross-ownership, speculative bubbles, international capital mobility, the lower cost of financing investment internally and through "main bank" relationships, and the move to a more market-oriented system as these relationships, and the move to a more market-oriented system as these relationships appeared to break down in the 1980s. The conclusion that emerges from the literature is that the cost of finance in the 1980s was indeed lower in Japan than in the United States, by a variety of measures. But trends of domestic and international liberalization, followed by the events of 1990-92, have now raised the cost of capital in Japan to the U.S. market level. Some unanswered questions remain, regarding the reported shifts in reliance by firms between banking relationships versus securities markets.

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Working or Discussion Paper
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JEL Codes:
G3; G15
Series Statement:
Working Paper

 Record created 2017-04-01, last modified 2019-08-30

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