JPRI Working Paper No. 39: October 1997
Japan's Big Bang: Illusions and Reality
by Akio Mikuni

The press has labelled the proposals made by the Hashimoto government to streamline Japan's financial system "big bang," the name given to the thorough-going liberalization of the City of London in the early 1980s. I'm afraid it is neither a very apt name nor an apt comparison. Hashimoto's measures do not amount to anything that approaches a wholesale "liberalization" or "deregulation" of Japanese finance. Market economies do not simply appear, fully developed, just because authorities decree that henceforth such and such an economy shall be subject to the rule of the market. Even if the authorities are sincere, such things take time. Market participants need practice. The Japanese may not need as much practice as the East Germans did, but they will need a lot. And it is by no means clear that the Japanese authorities are committed to transforming Japan's financial system into one ruled by market forces. I'm not sure they even fully understand what this entails. Changes to the laws governing holding companies and cross-border foreign exchange may have their merits. But they do not come close on their own to bringing about any genuine revolution in the Japanese financial system. For without fundamental changes in Japan's tax system, and without subjecting the bureaucracy itself to the rule of law, it is difficult to envisage any lesser reform of the financial sector bringing about significant market-driven efficiencies.

Even those efficiencies the authorities hope to capture are not compatible with the continued existence of Japan's lifetime employment system, the core of the quasi-socialist arrangements that protect so many sectors of the Japanese economy from competition. It is a delusion to expect the fundamentals of Japan's economic system to change unless the bureaucracy gives up its activist, micro-management of the economy. And no evidence exists today that the bureaucracy has any intention of voluntarily surrendering that power.

This does not mean that events may not force the bureaucracy to surrender much of its control over the Japanese economy. But the forces that will bring real change to Japan's quasi-socialist, bureaucratized economy have little or nothing to do with the so-called big bang discussed in the press. There are, in fact, actually two big bangs in the offing. The one being promoted by the Hashimoto government is a set of mostly cosmetic policy changes dished up largely for the purpose of mollifying Japan's trading partners. The other one, the real big bang, will come when the pressure from the magma of contradictions in Japan's economic and financial systems explodes into view. The burst bubbles in the stock and real-estate markets are already undermining the foundations of the nation's banking system and its productive capacity.

Disclosure Requirements and Japan's Bad Debt Problems

Much discussion of the deficiencies of the Japanese financial system has focussed on the issue of disclosure; the tightening of disclosure standards called for in the Hashimoto government proposals are heralded by many as an important and far-reaching change. In fact, Japan already has quite a good disclosure system-but it operates for the benefit of the mandarins at the MOF and other insiders, not for the public at large. Companies must file audited financial reports with the MOF within three months of the end of the fiscal year, complete with detailed notes. However, it takes an additional two months before the MOF prints them and make them available to outside investors at ¥1,400 a copy. In the meantime, companies announce summaries of their financial results about two months after the fiscal reporting period ends, but without any meaningful details. It is to these summaries that the markets react, not the detailed information that only trickles out slowly, months after the fact.

Economic ministries such as MOF, MITI, the Health and Welfare Ministry, and the Post and Telecommunications Ministry are privy to inside information from companies in the industries they oversee. The companies consult their ministry officials on virtually a daily basis. If any important publicly traded company in a key industry determines that it might be unable to meet the demands of its creditors, that company's so-called main bank is effectively required to provide the liquidity to keep the company in business. This way of doing things naturally demands that the government stand behind the banks.

Indeed, the MOF and the Bank of Japan (BOJ) have total access to the banks' books. Japan's bank licensing system gives the MOF essentially unlimited power to uncover what is going on inside banks-which is why the ultimate responsibility for Japan's bad loan problem lies with the MOF. Japan's bad debt problem is not the result of speculative banking practices by individual banks. The MOF has supervisory powers more than adequate to prevent that sort of thing. Rather, the bad debt problem is a direct result of policy decisions taken by MOF officials. After the sharp rise of the yen against the dollar in the wake of the 1985 Plaza Accord that severely injured many industries, the MOF launched a vast operation to rescue these industries and the banks that financed them. In order to compensate for shrinking cashflow in these industries, prices of assets such as stocks and land were deliberately raised. Usually, of course, a reduction in cash flow lowers the prices of the assets generating that cashflow. The reverse happened in the late 1980s in Japan. We have a term to describe a situation where asset prices are far too high for the cashflow the assets are capable of generating: the term is bubbles. The MOF deliberately blew up huge asset bubbles in Japan in the late 1980s.

That bubble-blowing had nothing to do with disclosure requirements. Funds flowing into the banking system that fueled the asset bubbles were available because of the widespread understanding in Japan that the MOF stands behind all deposits. The MOF has, in fact, admitted disclosure statements are inadequate by saying that depositors do not have the means to evaluate bank risk on their own. That is the justification they have used to bail out all depositors to banks that have failed. The government is legally required only to bail out deposits up to ¥10 million, but in cases such as the Hanwa and Hyogo bank failures, all depositors have been made whole. Even in the interbank market, rumors that a bank may be insolvent do not halt the flow of funds; banks themselves assume the MOF will stand behind all bank deposits.

Although we already know which banks in Japan are in trouble, and while improving accounting rules would probably be a good thing, this would not in and of itself enable us to measure the extent of the bad debt problem. Bankruptcies do not serve as much of a guide in Japan because bankruptcy proceedings are not made public. And of course the assets of a bankrupt entity represent liquidation value, not the value of an ongoing concern. This gap is not fully appreciated in Japan because until recently liquidation values were also high due to extremely high land prices.

Calling for tightened disclosure before deposits are marked down to reflect their true value is actually putting the cart before the horse. At present, no one has really been hurt, so no one much cares. It is only when depositors start to lose their money that they will insist on accounting and disclosure systems that can help them evaluate risk. Accounting practices will change when people understand that even large companies and banks can fail. If they are not allowed to fail, then why bother with financial statements?

One possible reason is the threat of legal sanction. Under Japan's Securities and Exchange Act, deliberate misrepresentation of financial information is a criminal offense. But despite Japan's huge bad loan problem, the MOF has never sued any bank or C.P.A. for violation of this law. Since the MOF is empowered to license banks and C.P.A.s, the MOF is ultimately responsible for their conduct and thus to sue such entities is, in a manner of speaking, to sue itself. Prosecutors do not, in practice, commence legal proceedings under this law without consulting MOF. If parties not licensed by MOF initiate proceedings, they don't get very far. Judges, being bureaucrats themselves, will almost always work to protect their own, siding with licensed bankers and C.P.A.s. Other important market players who might conceivably bring suit are themselves subject to disclosure requirements. They understand that those who live in glass houses should not throw stones. Since the laws governing financial markets are thus ultimately hollow, disclosure becomes meaningless, irrespective of the extent to which accounting rules may be changed. Nor is disclosure of financial information used to price securities. The MOF allocates funds to industry via banks. Capital, in the Japanese system-whether in the form of loans, bonds, or equity capital-is thus ultimately controlled by banks. Market prices of securities held by outsiders-a small percentage of total capital to begin with-are manipulated in favor of insiders to serve insider interests. Corporations and banks have historically controlled the price of equities by selling and buying to and from each other.


If disclosure of financial information is not used to price securities or to determine the viability of public companies, then accounting has really only one function: tax assessment. Japan's accounting regulations are largely determined by tax considerations, making them subject to political horse trading. With respect to taxation, the MOF, like Roman Emperors, has long practiced a policy of divide and rule. Tax policy is never discussed from a macroeconomic perspective, bur rather in light of conditions in each industry. This enables the MOF to control individual industries by striking deals. Each segment of the financial community competes to get the best tax breaks in order to increase its after-tax return. In other words, Japanese financial institutions are subsidized via tax reductions on financial products. And the marketability of financial products depends heavily on tax treatment.

Postal savings receive the most favorable treatment. Conventional wisdom in Japan has it that the MOF overlooks tax evasion that utilizes postal savings; one could almost say that postal savings are a kind of officially sanctioned tax evasion system. There is a reason for this. The MOF largely controls the disposition of the assets of the postal savings system, one of its key instruments of control of the Japanese economy. Postal savings form the biggest component of the notorious second budget, which the MOF at various points in the last decade used to prop up prices of Japanese real estate, Japanese Government Bonds, Japanese equities, U.S. Treasury bonds, and the dollar.

Many predict that changes in the foreign exchange law called for in the Japanese government's big bang will be the catalyst for the most profound changes in the Japanese financial system. This will be true only if the tax laws change to permit free flow of cross-border funds. In the past, many heralded the introduction of bankers' acceptances as a key vehicle in allowing foreign participation in the short-term money market and believed it would bring about a full-fledged liberalization. But these hopes turned out to be false. Since BA's carried heavy stamp duties, they were unacceptable to most investors, and the market remained as effectively closed as before.

The political ramifications of overhauling the tax code to bring about genuine liberalization are far too radical to make such an overhaul likely. If the MOF were really serious about reform, it would already have outlined its intentions to overhaul the tax code. At present, the tax code discourages households from putting their savings into securities. Dividend income in excess of a certain amount is subject to double taxation, whereas interest income is not included in general income and subject to only a modest 20% withholding tax. As a result, entrepreneurs do not willingly increase dividends, nor have they needed to do so. As long as corporations can manipulate stock prices by selling and buying from each other, dividends do not matter. The tax system also plays a crucial role in ensuring that stock prices can be manipulated. The tax code discourages corporations from selling stock while encouraging holdings. Companies are allowed to deduct from taxable income losses from declines in the market value of equity they hold but taxed on any capital gain resulting from sale of stock at the full corporate income tax rate. Meanwhile, individuals pay a capital gains tax of only 1% of total sales proceeds regardless of the actual gain or loss, giving them every incentive to sell.

Tax treatment of debt securities is just as incompatible with a financial system governed by market forces rather than bureaucratic imperatives. There are two classes of bondholders in Japan: institutions officially authorized to purchase bonds as registered bond holders and everyone else. The officially authorized institutions are primarily domestic financial institutions licensed and controlled by the MOF. The Bank of Japan serves as registrar for Japanese Government Bonds (JGBs) while banks and trust companies are registrars for corporate and municipal bonds. Officially registered institutions can buy bonds as registered holders and receive full coupon payments without being subject to withholding tax. All other investors, including foreign investors, are subject to withholding tax and may not register as bondholders with either the registration system for JGBs or that for corporate and municipal bonds. They are thus blocked from direct participation in the main bond markets where domestic financial institutions trade.

In the case of JGBs, foreigners avoid the withholding tax by trading in so-called name registration forms issued by actual registered owners. However, this exposes them to the credit risks of the domestic registered holders and effectively discourages foreign participation in the JGB market since foreigners are actually buying Japanese bank credit risk at Japanese sovereign prices. As for corporate bonds, the registration system creates a two-tiered system whereby non-designated investors must purchase certificates subject to withholding tax and can only trade in a separate and limited market for those in physical possession of certificates.

The system permits the MOF and designated financial institutions to control bond prices. Especially noteworthy is the corporate bond system, established in 1942 as part of total mobilization for war. In economic terms, Japan's efforts to establish the wartime Greater East Asian Co-prosperity Sphere can be understood as an attempt to substitute a controlled economy for the market-oriented Anglo-Saxon system. A key to this control was the elimination of bankruptcies through what I have labelled the "socialization of credit risk." It was essential that the corporate bond market be strictly controlled so that interest rate differentials would reflect not profitability but importance in the war effort. In turn, it was essential that profit-seeking investors be blocked from participating in order to ensure that bond prices did not seek to reflect credit risk or profitability.

The systems for registering corporate and government bonds work well as tools of market control so long as MOF and licensed investors remain powerful. But once their control slips, interest rates could skyrocket. If outstanding JGBs exceed the purchasing power of the MOF's Trust Fund Bureau and licensed domestic institutions, new investors-investors subject to the 20% withholding tax-must be induced to purchase JGBs, and will only do so through higher returns. It will then no longer be possible for the Japanese government to issue JGBs at prices too low to attract market interest. Meanwhile, in the corporate sector, we already see what is happening with Nippon Credit Bank debentures, for which, despite efforts, no new buyers can be found. It should be clear from this brief overview of the tax treatment of debt and equity securities that Japan's tax system is far more of a stumbling bloc to the liberalization of the financial system than the Foreign Exchange Control Law.

Contradictions in the Japanese Economy

Even though the measures labelled "big bang" in the press do not amount to any fundamental change in the Japanese economy, change is coming as a result of the buildup of contradictions. The Japanese economic system is predicated on the ability to export surplus production. As Japan built up huge current account surpluses, it became a net creditor nation, and it could not prevent the yen from strengthening fourfold over the past 25 years against the dollar.

For many years, the MOF has tacitly amplified the voices of economists and other commentators who argue for the usefulness of Japan's current surplus as a source of capital for the world. But even MOF officials know that huge chronic current account surpluses are not indefinitely sustainable. However, they cannot accept a reversal of Japan's postwar policy of unlimited expansion in production capacity-which is implied in any structural reduction of the current account surplus. Such a reversal would undermine the MOF's power and legitimacy. The result is an onerous imbalance in the relationship between Japan and the rest of the world. The country's net creditor position is now on the order of $700 billion and may exceed $1 trillion by the turn of the century. This combination of Japan's huge direct foreign investment holdings and nominal inward investment makes the country extraordinarily vulnerable to political instability and economic blackmail.

In the meantime, the soaring of the yen against the dollar meant that continuous expansion of production capacity by exporters did not result in a concomitant expansion of yen cash flow-and this is the real origin of Japan's huge bad debt problems. When Japanese banks began to reveal the extent of their bad debt problems, they were effectively revealing the end of the MOF's ability to control outcomes. The main bank system that enables banks to extend credit in large amounts to large companies has turned into the dynamite that threatens to blow up Japan's financial system. For the government cannot protect and support faltering companies forever, especially in light of the fierce global competition prevailing in many industries.

The MOF has chosen to defer needed structural changes in the Japanese economy by working with the U.S. Treasury to orchestrate a strong dollar. As production rises without any concomitant rise in consumer spending, exports pick up while imports are again being priced out of Japan. If and when the current account surplus rises again-which it surely will-the yen will again rise against the dollar. The next cycle of dollar weakness may force Japan to reduce production capacity in key industries fostered by the government. Since production capacity in Japan includes lifetime employees, the unemployment rate will climb, bringing it into line with that of market-driven economies. The effect will be to demonstrate the fallibility of the government. Bureaucrats will see their control over economic policy weaken as market forces-the only alternative to bureaucratic control-come to dominate economic decision-making.

Without meaningful expansion of external demand-impossible for a country in Japan's creditor position-the domestic market cannot tighten. Increases in prices of land, stock, wages, and products cannot be generated. Deflationary pressure will continue to develop, making it increasingly difficult to service debts, whether through cash flow from operations or from asset sales.

When corporations and their banks suddenly appear exposed to the risk of failure, scared depositors will begin withdrawing funds. Already, banks can no longer manipulate the prices of securities. A graphic example of this was provided a few weeks ago when the MOF armtwisted banks into mounting a stopgap rescue operation for Nippon Credit Bank. In the past, such a clear sign that the MOF was moving to deal with a problem would have generated a stock market boost. But this time, shares of the banks as a sector fell. As securities decline in price, the exposure of "main banks" to failing borrowers will be spotlighted. Banks are now willing to securitize their loans-particularly those of weak borrowers-and sell other securities they hold. But this destroys their role as main banks. The MOF cannot continue to protect everyone in the wake of a crumbling of the main bank system and will be forced to retreat from some of its commitments.

Dealing with Bank Crises

Many believe Japan lacks experience in coping with these sorts of problems. Foreign financial experts often advise Japan's monetary authorities to study the American S&L crisis, the U.S. banking crisis of the early 1980s, the U.K. secondary banking crisis, and the Scandinavian banking crisis of several years ago. But in fact, Japan does have the historical experience of coping with a system-wide banking crisis. This crisis occurred in the wake of Japan's defeat in World War II and is neglected today for several reasons. One is that it occurred because of the war, a national policy, whereas according to conventional wisdom today's problems are the result of bubbles fueled by greed. This earlier crisis also occurred before the postwar constitution was put into effect, and while Japan was occupied by a foreign power. Today's financial system is vastly more complicated and more subject to international influences.

Despite these differences, however, the postwar crisis offers some lessons for the present one. The tools used then were patterned after those used in the U.S. banking crisis of the 1930s and should be applicable to the current crisis with some modifications. Japan's economic system, together with the legal framework within which it operates, was established for the purpose of total mobilization for the war effort, and survived Japan's defeat essentially intact. Actual measures taken in the late 1940s can therefore legally be repeated, with new measures enacted as appropriate.

The two crises, although vastly different in scale, are qualitatively similar from a financial point of view: deposits in the Japanese banking system represent claims on real assets that cannot generate cash sufficient to pay off deposit holders. In the 1940s, the assets had either been destroyed in war or they had been ordered shut down by occupation authorities who demanded the closure of Japan's war-making capacity. Today, assets purchased during the bubble economy bear no relation to their underlying ability to generate cash. They have been kept on life support by extremely low interest rates, an undervalued yen, and the absence of any pressure on companies to liquidate unprofitable assets or face threats of bankruptcy or takeover.

In the immediate postwar years, the MOF's response to the crisis was to freeze deposits. The MOF was forced to take this step by the Occupation's refusal to allow the Japanese government to compensate companies for war-related losses-something the government had originally intended to do. Accounts were separated into sound and unsound ones. At various city banks, depositors eventually received some 70-80% of the face value of the deposits, depending on individual conditions. Even deposits in the postal savings system-hitherto regarded as sacrosanct-were written down by some 30%. At the same time, reorganization and reconstruction of both industry and banks were launched.

Of course, the measures were not sufficient to restore the system to health. The conditions of the time-a nearly complete destruction of Japan's productive capacity-ultimately required inflation to wipe out monetary savings that were far in excess of functioning productive assets. Rising prices were needed as an inducement to renewed production and investment. The deposit freeze formed part of an anti-inflation program announced in February, 1946, but inflationary pressures overwhelmed the program, allowing the necessary cure to occur.

Paradoxically, today the MOF is trying to induce inflation-something that macroeconomic conditions make almost impossible-while eschewing the methods that were tried and found inadequate in 1946 but that could work, with suitable modifications, today. Why has the MOF not dealt as forthrightly with today's banking crisis as it did in the late 1940s? I believe the reason is that the MOF for a long time has refused to admit the existence of a crisis. The MOF thought it could control outcomes and did not realize early enough that it had lost control of land prices. But since the MOF has found itself unable to bid up land prices to bail out problem banks, it is finally forced to admit the existence of the problem.

MOF policies have not been explicitly approved or endorsed by the Diet. MOF direction of financial institutions is a matter of practice and convention; and while MOF's legal powers are very great, they are also deliberately vague. As long as the financial institutions were successful, there was no concern over these arrangements. But now that financial institutions are in trouble, a systemic problem has been revealed. The current crisis cannot be ascribed to any specific policy. The Diet is not responsible, having not set any policy that led to the crisis. The MOF can be held morally responsible and can be criticized for benign neglect, but it is not legally responsible. Each institution is theoretically responsible for its own well-being. The MOF does not want to introduce tax funds to support the banking system because this is impossible without discussions in the Diet. Rescue measures would involve open acknowledgment of the purpose and source of government funds used to effect the measures. MOF will thus do whatever possible to meet its commitments with resources it currently commands, plus those from institutions it licenses. Many of its commitments are not legally binding and have not been written into law. Bank deposits, except for postal savings, are not guaranteed by any legislation. With the exception of deposits at credit unions, no legal provisions allow taxpayers' funds to be diverted to support deposits.

The MOF would like to generate inflation to solve the crisis and avoid legal and legislative procedures. But it can neither generate inflation nor meet all of its unwritten commitments. It may be able to honor only its strictly legal obligations, and recent legislation provides for only very limited obligations on the part of the government. The public knows this, which is why they are hoarding money and shifting deposits from weaker banks to stronger ones. Individual investors are not likely to return to the Tokyo stock market so long as public pension funds are still being used to support stock prices. The support of share prices is vitally important, since sales proceeds are used to repay bank borrowings. Thus, deposit destruction is taking place as deposits generated by sales proceeds are used to pay back bank borrowings. This process exerts a bearish impact on asset prices.

The MOF, with its complete control of the financial system, has failed in its efforts to maintain growth and is not in a position to cope with its mistakes. Some entity without past commitments that block effective action is needed to undo the tangled system. It used to be said that the words "surrender" and "retreat" could not be found in the training manuals of officers in the Japanese Imperial Army. Such tactics were never studied. As a result, the Imperial Army found retreat a horrendous business. Similarly, the retreat of the MOF in financial markets will turn out to be comparably messy.

The Real Big Bang

Once companies and banks are allowed to fail, once creditors start losing money, then finally we can expect to see ruined creditors turn to judicial remedies and political protests. Only then will meaningful disclosure be forced upon companies. I estimate that in the coming few years, 10% of Japan's public companies-some 300 companies, including 10-15 banks-will either fail or be taken over. The accounting system will be forced into a radical overhaul that provides a realistic picture of corporate financial health as investors and creditors who have lost money attempt to recover damages from those responsible.

Historically in the Japanese system, the resources available to the management of large, well-connected corporations were not subject to trade but were to be maintained permanently. Such resources included bank loans, interlocking shareholdings, land holdings, lifetime employees, and customer-supplier relationships. Since these resources were never traded and were always protected, there were inevitable mismatches between inputs and results, risks and returns, fundamentals and share prices, cash flows and land prices, employee contributions and wages, values and prices. It is important to understand, however, that the system depends upon the American market as the buyer of last resort. This will not be the case in the future, as the U.S. cannot maintain this role forever. When the U.S. can no longer play the role, the Japanese system will stop functioning. What is opening the Japanese markets to imports is not so-called "liberalization" but the rising yen. Because of the closed nature of the Japanese system, the yen has to rise extraordinarily high before imports finally force their way into Japan. Once imports begin to seep into the Japanese market, manipulation by bureaucrats of demand and supply no longer functions, resulting in lower prices and profits.

To date, important players in protected industries have been supported by a strong safety net. If an insider needed to generate profits, he was allowed to sell land or stocks to other insiders. Buyers paid unreasonably high prices because that guaranteed their ability, if necessary, to sell at unreasonably high prices. Insiders would not lay off workers as long as they could generate unrealized capital gains. Therefore, the real adjustment process will start only when opportunities for such gains have disappeared. If the government is serious about "Big Bang," it needs to lower asset prices, or allow them to fall, thus conveying the message that layoffs and factory closures will be permitted. Declines in asset prices will function as a genuine wake-up call for the Japanese economy. But there is no reason why cash flow apart from changes in asset prices should not remain intact. Subsequent restructuring plus sales of unnecessary assets should bring in additional cash, which can be used to further reduce debt. Many companies will see their viability improve markedly.

Of course, the closure of factories and termination of employment will trigger substantial losses, for the original value of these investments has never been recovered by an adequate stream of profits. Japanese corporations have never paid much attention to profits in the first place, which is why many of them are still burdened with indebtedness. In order to remain viable, companies will need to reduce unprofitable investments, including interlocking shareholdings and unused land. Historically, such assets were never sold outright but, if funds were needed, sold to insiders with the profit coming from the difference between market and book values, and then bought back by the company itself. It is this practice that supports asset prices and keeps them out of the reach of outsiders such as foreigners and ordinary Japanese. If and when a major company in Japan, forced by cost pressures, decides to leave this system by selling such assets in the open market and laying off its workers, that will be the genuine big bang. As asset prices and wage rates fall to reasonable, market-driven levels that permit companies to generate profits, unprofitable and inefficient companies will be squeezed out of business. Credit risks will become a reality, and the overall profitability of the economy will rise as unprofitable players exit the market.

So long as Japan has a nearly fully intermediated financial system, however, corporate losses will end up being borne by financial institutions. Thanks to blanket deposit guarantees, the government is expected to pick up the losses. As I noted earlier, the government hopes to ameliorate the cost by generating inflation, thereby transferring wealth from personal financial assets to banks; but it is very difficult to generate inflation in an economy where excessive production capacity and unlimited availability of supplies from abroad put pressure on the prices of tradable goods.

A full markdown of assets in the Japanese system will result in loan losses in excess of perhaps ¥30 trillion, which will wipe out more than one-third the equity of the private banking system. It is therefore reasonable to assume that individual investors will convert one-third of the nation's deposits into securities and investment trusts. These will comprise the fastest growth area for individual financial assets. A genuine securities market-where securities are actively traded and that determines the cost of funds for both corporations and banks-will further polarize Japanese companies between the strong and the weak while forcing inefficient players into bankruptcy. Mutual backscratching among insiders-such as interlocking shareownership-may cease to exist. It remains to be seen whether transactions among insiders will completely disappear. But the shrinkage in Japan's pool of deposits will weaken the ability of insiders to help each other financially.

In the future, Japanese financial institutions will be forced to compete in open markets. They will no longer be able to determine prices by cozy negotiations among themselves, with bureaucrats, and with favored customers. It is not the government's reforms that will bring this about: it is the waves of change crashing over Japan from the outside world. That is the real big bang.

AKIO MIKUNI is President of Mikuni & Co., Ltd., Tokyo, Japan's leading independent, investor-supported bond-rating agency. A graduate of the School of Law, University of Tokyo, Mikuni was an executive of Nomura Securities Co. from 1963 to 1975. He created Mikuni & Co. in 1975. This report is adapted from a speech he gave to British Invisibles, on May 27, 1997.

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