Banks and Economic Growth: Implications from Japanese History

Abstract:     
Several decades ago, Gerschenkron famously argued that banks facilitate economic growth in "backward" countries. To similar effect, theorists sometime claim that banks promote growth by reducing informational asymmetries and thereby improving the allocation of funds. As a fast-growth but allegedly bank-centered economy, Japan plays an important part in these ensuing debates.

In early 20th century Japan firms relied heavily on bank debt, observers argue. Those firms with preferential access to debt outperformed the others, and those that were part of the zaibatsu corporate groups obtained that preferential access through their affiliated banks.

In fact, Japanese banks did not play the role attributed to them. Japan in the first half of the 20th century was not a bank-centered economy; instead, firms relied overwhelmingly on equity finance. It was not an economy where firms with access to bank credit outperformed their rivals; instead, firms earned no advantage from such access. And it was not a world where the zaibatsu manuipulated their banks to favor affiliated firms; instead, zaibatsu banks loaned affiliated firms little more (if any) than the deposits those firms had made with the banks. During the first half of the last century, Japanese firms obtained almost all their funds through decentralized, competitive capital markets.

JEL Classification: G2, G3, K3, N2

Accepted Paper Series