The Japanese Economy, Banking Industry and Securities Markets at the Turn of the Millennium

By the late 1990s, Japan represented something of a paradox to financial professionals based outside the country. Despite nearly a decade of economic stagnation, Japan remained one of the world's wealthiest countries. The stock of financial wealth accumulated by Japan's frugal households had grown to more than $10 trillion by 1998. Yet the largest fraction of this enormous wealth was stashed away in bank accounts earning very low rates of return. Less than 10 percent of household wealth was directly invested in stocks or the Japanese equivalent of mutual funds (Royama 2000). Meanwhile, Japanese stock prices languished at levels more than 50 percent below their 1989 peak. If there was even a modest degree of convergence between the level of ownership in Japan and elsewhere in the OECD (Japanese households? holding of equities and the level of stock ownership that had become commonplace), then this would seem sufficient enough to drive up Japanese stock prices and create enormous opportunities for financial service firms. Why had this convergence not yet occurred by the late 1990s? Why were Japan?s well-educated, industrious households persisting in a pattern of asset allocation that defined every rule of prudent investing followed outside its borders?