ABSTRACT
This chapter examines how the continued high government deficit has produced mounting domestic pressures to liberalize the Japanese financial market, particularly in the area of interest rates. The pressures include internationalization pressure on the Japanese financial market. The pressures for the liberalization of interest rates have been shifting the Japanese financial system from the bank credit-control paradigm to the market-determining open money market paradigm. Though the Japanese financial system is clearly shifting from a bank credit-control paradigm to a market-determining money paradigm, there still remain regulations that are carried over from the bank credit-control paradigm. The persistence of the current-account surplus has no doubt contributed to deregulation of foreign exchange controls over international capital movements, which was an essential part of the Japanese bank credit-control paradigm. The policy measures were aimed at preventing too rapidly an appreciation of the yen and its overshooting.
