´´ The J-System (Part One) - Main Bank

Saturday, October 25, 2014

The J-System (Part One) - Main Bank

Introduction

Japan's economic performance after WW II till 1990 was exceptional. As measured by per Capita GNP and net holdings of foreign assets, in only three short decades, Japan managed to rise from a country decimated by a world war to arguably the wealthiest nation on earth.

In 1988, the Japanese economy was nine times larger than in 1955. During the same period, the United States’ economy had grown only about 2.5 times. Per capita GDP, de-nominated in U.S. dollars at the market exchange rate, had overtaken that of the United States by the late 1980s.  (Ito)

Especially the high-growth era between 1950 and 1973 had stunned many Japan observers. During that time Japan’s real GNP growth rate averaged more than ten percent per year. The high growth phenomenon was partly explained by Japan's quick recovery of the productive potential that had been destroyed during World War II. However, already in the 1960`s Japan surpassed its prewar potential trend and the economy kept on growing rapidly throughout that decade and into the beginning of the 1970s. The growth trend of the 1960's slowed abruptly after the first oil crisis in 1973-74, still the annual growth rate over 1975-90 was roughly half of that achieved in the previous two decades, it still exceeded 4 percent. (Ito)

The period was dubbed the "Japanese Miracle", whereby this terminology stems from the fact that economists, using a Solow growth model that analyzes total factor productivity, could not explain the large "Solow residuals" that they found.  (Ito)

The "Solow Residual" inspired a flurry of literature devoted to unraveling the factors behind Japan’s economic success. More and more a broad consensus emerged in academia, that Japan’s unique form of corporate governance, known as the main bank model, was a driving force behind its economic growth and a significant contributor to its competitive advantage over the United States.

Three fundamental elements to the Japanese main bank model exist:

  • Strong long-term relationships between specific banks and specific firms
  • A Keiretsu corporate structure
  • Lifetime employment

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