Banking system of Japan 1990–2022: narrating the next phase

A narrative for the future mandating increased capital velocity — and efficiency

Daniel Gusev
Fintech Blog
Published in
6 min readMay 9

The research was done together with a great team of Finmirai, based outside of Tokyo and New-York: Steve Monaghan Eddie Lei and Shota Ishii, — now hard at work developing “Hai”, a major platform to assist the financial industry of Japan and beyond — with regards to improving the capital facilitation efficiency. It was pure joy to assist their journey — while also satisfying one’s curiosity about the characteristics of the banking market of Japan.

The roots of the Japanese financial system start with the economic profile of the nation: a major manufacturing hub for the region — and the world.

Ample profits were first generated by subsidies from the government and discounted loans — and then supported by undervalued yen.

The Plaza Agreement of 1985 ended the era of artificially low exchange rate of yen vs. USD — and laid the foundation for the massive market crash of 1989–92.

After the crash followed the doldrum years of deflation. Loaded by non-performing loans the banks were saved from totally losing face by the government — that provided emergency facilities and stimulated market consolidation.

While the Asian crisis of 1997–98 stimulated countries like South Korea (report by Bank of International Settlements and Asian Development Bank in 2002) and Singapore (note by Bank of International Settlements) to also reform and build their banking systems on new foundation — the Japanese banking system consolidated — but not reformed.

The banks in Japan focussed to facilitate the economic model of the country, remaining conduits for facilitating payments between corporate manufacturers (themselves awash in cash) and converting foreign-currency-denominated profits through acquisition of government debt — steadily issued during “doldrum years” and then during QE time.

Source: The Ministry of Finance of Japan

Revenue from debt issuance the government has started using to support growing cost of social programs of the greying population — compensating for the shortfall of younger generations’ participation to invest in the economy (as will be demonstrated below).

Carry trade — and the looming stick of inefficiencies:

Leading banks (so called City Banks) have focussed predominantly on international trade facilitation for Japanese multinationals and carry trade via mismatch on low borrowing cost of yen and yield received on USD-denominated securities.

It largely remained the case until Q2 2022, when the steady rounds of interest rate changes by the US Fed kick-started the process of Japanese investors to disengage from international securities.

During the phase of “easy money” the Japanese (city) banks grew accustomed to being facilitators of the corporate domain capital flows — and to their own game of carry trade.

The extremely thin yields create both the impetus to invest in high-yielding regions — and disincentivize bank from technological modernisation — since recouping capital investment would take many years.

The signs of domestic market’s neglect:

The banking system of Japan for many years piggy-backed on ample pension savings — but this is also changing. The slow redistribution of wealth from regional banks towards City Banks is happening as the population of Japan declines: trillions of yen are moving from regional banking groups to the big banks.

That, for one, started the process of regional banking groups transformation — more attentive to consumer business. One such example is the multi-year technological map of Fukuoka Financial Group — that also stands behind a modern neobank Minna-no-Ginko.

Still, the journey is rife with challenges, the net interest margins and overall yield on deposits remanning low: the inflation cycle if it happens — can be unpleasant — but also important to flush out the inefficiences from the banking system.

For the time being, big banks remain involved in acquiring assets abroad.

Mid 2022 MUFG acquired 2 lending outfits operating in Indonesia and the Philippines previously owned by Czech-based PPF.

The lightning bolts of thunder — and the sound of (expected) change:

The much-needed stimulus to change, apart from the tightening of the monetary policy to tame the inflation spike, can come from the very sector that wants to retain its position in the world — the corporate manufacturing sector.

Their cash position and their objective to stay competitive amid the supply-chain readjustment, changing consumer sentiments (China being a globally leading EV producer as the Japanese toyed with hydrogen fuel-cell)— the multi-layered networks of intermediate and original suppliers — employing millions of passionate workers in Japan and beyond — mandates to improve the efficiency of capital deployment.

Citing the potential end of “easy money”, inflationary pressures, consumer trends, supply-chain shocks — and old guard of big banks in Japan demotivated to change — the “big bang” should happen sooner than later.

A plethora of new players leveraging the tenents of improved capital velocity to aid the corporate domain — and the employers domain — shall happen.

It rather must happen.



Daniel Gusev
Fintech Blog

14 years in global payments and ecommerce. 3 exits. VC at @gauss_vc