ABSTRACT
This chapter focuses on the costs and benefits of the approach adopted by Meiji Japan after 1880 and on the reasons for the choice of approaches. It reviews the Japan's financial development, then examines the process of establishing the banking and corporate systems and discusses the relationship between the formal and informal financial systems. The government coped with the information asymmetry problem in the bank loan market by allowing entry of shiritsu and quasi banks rather than encouraging branching of kokuritsu banks. As for the market failures related to contract enforcement costs, one of the serious problems faced by banks was that newly established companies in modern industries did not have either reputation or sufficient assets to serve as collateral for bank borrowing. Formal financial institutions include banks, credit cooperatives and government financial institutions. The informal credit system occupied an important position in the financial system in prewar Japan.
