Kavan Choksi Japan on Yen Currency and Japan’s Monitory System in Light of Liberalization of the Financial Markets

For many decades until the 1970s, the monitory system and rule-makers of Japan discouraged the usage of the Yen as an international currency. As observed by Frankel in 1984, Japan’s monetary authorities and central bank were largely concerned that the foreign holdings of their currency at a higher degree may reduce their control over the supply of money, which may increase the exchange rate variability. So, the financial system in Japan was regulated strictly through controls on quantity and effective distribution of interest and credit rates, which were at lower clearing levels.

Also, Japan’s financial system was segmented rigidly and meant to enhance personal savings so that the capital needs of the private industry and the infrastructure rebuilding of the public sector could be done at a lower interest rate. Also, there were controls on the capital flows, which isolated the Yen from the foreign market influencers.

Kavan Choksi Japan – The influencing factors

Kavan Choksi Japan explains that many influencing factors emerged during the 1970s to provide a boost to the financial markets of Japan. During this period, there were also some big deficits in the government budget, and the overall economy entered a contractionary phase in Japan. Also, the public sector started assuming the position of a borrower, and it had also become a necessity to divert personal savings from industrial investments to support the overall budget deficits. Later in 1984, the volume of outstanding government bonds had risen about eight-fold during the fiscal years starting from 1974 to 1982, which was risen from 7% of the GNP to about 32% of the GNP.

This further contributed to a quick growth in the bond markets of Japan, both primary and secondary. It also led to some pressure from the financial fraternity to take measures for the improvement of financial markets. As a result of this, the long-term bonds by the government with ten years of maturity were underwritten, including that of major financial institutions. To tackle the burden of debt-servicing, interest rates of the new issues were kept below the clearing levels of the market, which had led to a lower profit for banks. With this move, banks lost the market share in some parts as the companies regulated interest rates that the financial institutions could not meet. Banks also started seeking freedom, and therefore new instruments like the negotiable certificates of deposit came into the market.

As Kavan Choksi Japan points out, liberation measures to strengthen the Yen and the economy were planned in light of this background, which helped develop new markets and deregulate the interest rates. The primary measure was to authorize syndicate banks to resell the government bonds to create a secondary market for government bonds, which were rapidly accumulating. Further to this, the issues based on government bonds increased. With this, both primary and secondary markets have expanded for government bonds, which have significantly boosted the economy.