Financial institutions in Korea and Japan and their role in economic development

Abstract

This paper tries to examine the relationship between financial development and the source of growth for two Asian economies, namely, Korea, and Japan. Particularly, it tries to emphasize the role of financial development and structure (including banking and stock markets), monetary and financial policies, as well as the degree of international capital mobility in the economic growth processes. Economists have long debated the advantages and disadvantages of bank-based financial systems vis-à-vis market-based systems. In market-based financial systems such as England and the United States, securities markets share center stage with banks in terms of getting society’s savings to firms, exerting corporate control, and easing risk management. Some analysts suggest that markets are more effective at providing financial services. Others tout the advantages of intermediaries. The debate is unresolved and hampers the formation of sound policy advice. In bank-based financial systems such as Germany and Japan, banks play a leading role in mobilizing savings, allocating capital, overseeing the investment decisions of corporate managers, and in providing risk management vehicles. This paper also looks at comparing the market-based and bank based financial systems in the specific field of industrial development and economic growth.