issued government bonds were bought by private banks, and one year later the Bank of
Japan purchased all of them. Therefore, few bonds circulated outside the banking sector.
After 1970, however, the issuance of government bonds became so large that the Bank of
Japan could not purchase all of them. The government bonds were issued at a high price,
and therefore the private banks that bought them suffered enormous losses. The banks
demanded that the Ministry of Finance (MOF) deregulate the selling of bonds to the market,
and the MOF began to relax the restriction in 1977. Consequently, a secondary market for
government bonds rapidly emerged. The emergence of a large free financial market was a
major event that significantly affected the Japanese banking sector in that the market
enabled the securities companies to offer a mutual fund that could compete with deposits.4
This situation might have promoted some dis-intermediation. A greater degree of
disintermediation did not occur because the issuance amount of the mutual fund was
regulated so that securities companies were prevented from meeting the potential demand
such funds. Nevertheless, it is probable that the emergence of the secondary government
bond market applied greater competitive pressure on the Japanese banking sector.5
The next important liberalization was that of deposit interest rates. Jumbo time-
deposits and Money Market Certificates were introduced in 1985. The interest rates of the
former were not regulated, and those of the latter were tied to market interest rates.
4 The medium-term government bond fund was the main brand of mutual fund.
5 The threat of dis-intermediation was also created by the revision of the Foreign Exchange and
Foreign Trade Control Act in 1980, which facilitated investors’ access to foreign markets. The
internationalization of the financial markets was promoted over 1980-85.
3