The fundamental question in economic growth that has preoccupies researchers is why do countries grow at different rates. The empirical growth literature has come up with numerous explanations of cross-country difference in growth, including factor accumulation, resource endowments, and the degree of macroeconomic stability, educational attainment, institutional development, legal system effectiveness, international trade, and ethnic and religious diversity. The list of possible factors continues to expand, actually without limit.

One critical factor that has begun to receive considerable attention more recently is the role of financial development in the growth process. The important link between financial development and economic growth has been the subject of numerous studies, for many years. More specifically, these researchers have highlighted, at the theoretical as well as empirical level, the significance of having a developed financial system to support economic growth. Additionally, recent studies have also addressed this topic from an open economy perspective and found that financial integration with the global economy like financial deepening can bring about economic benefits. Studying the relationship between financial development and economic growth is a vital one, considering the continuing progress in its financial sector.

The general consensus of an ever-increasing number of empirical and theoretical works on economic growth is that a well-developed financial system plays an essential role in fostering a country’s economic growth. We used to see that the development of different aspects of the financial development has different impacts on economic growth. In this study, we focus on Japan. Japan is a good indicator of financial market development in analyzing the relationship with economic growth. Hence, well-developed financial systems could channel financial resources to the most productive use.

Financial development in developing countries and emerging markets is part of the private sector development strategy to encourage economic growth. A solid and well-functioning financial sector is a powerful engine behind economic growth. It generates local savings, which in turn lead to productive investments in the local business. Furthermore, effective banks can channel international streams of private remittances. The financial sector, therefore, provides the rudiments for income growth and job creation.

Financial development has classified as two either of the bank-based type or stock market-based type. It is a crucial policy question on which type of financial development should the government actively promotes to foster the economic growth. There are three basic characteristics of the financial system that are now regarded as capturing the impact of these five functions on economic growth: i) the level of financial intermediation; ii) the efficiency of financial intermediation, and iii) the composition of financial intermediation. Historically, the role of banks and non-bank financial intermediaries ranging from pension funds to stock market has been to translate household savings into enterprise investment, monitor investment and allocate funds, and to price and spread risk. Yet, financial intermediation has strong externalities in this context, which are generally positive such as information and liquidity provision but can also be negative in the systemic financial crisis which is endemic to market systems.


Japan is the second largest industrial economy in the world. It is the market for about one-sixth of the exports of ASEAN-4 (Indonesia, Malaysia, Philippines, and Thailand) and South Korea. Their growth in general and their export growth, in particular, have to be supported by growth in domestic demand in Japan. Since the bursting of the asset price bubble in 1990, however, the Japanese economy has been in a morbid state.

Since 1990, however, the Japanese economy suddenly has been in recession with GDP growth at an average of 1.7%. As the bubble’s collapsed in 1990, the Japanese economy slumped into the long stagnation in 1990. To solve this stagnation, the government began to encourage financial reform. In 1992, the financial reform law was approved and financial institutions were allowed to enter into other kinds of financial business by establishing subsidiaries. For example, banks were allowed to engage in securities business through their subsidiaries.

From 1993, the GDP of Japanese economy achieved a high rate of economic growth. The following years, GDP growth quite stable until rapidly drop to 1.8% in 1997 because of financial crises that gripped the region during 1997 and 1998.

Japan emerged as the highest ranked Asian country (4th) by delivering well-rounded performance in financial development. it is strongest scores are seen with respect to financial intermediation and in particular its highly efficient banks, IPO and M&A activities, insurance, foreign exchange and derivatives markets. But Japan’s institutional and business environments appear less successful. Corporate governance is a weak point characterized by a need for greater incentive-based compensation of management and better audition and accounting standard. Japan’s large public debt, fueled in part by massive spending on public works projects, goes beyond levels that may be considered healthy for the financial system. But the difficulty of access to private credit, loans, and venture capital places Japan in the bottom half of these measures of capital access.

The financial development performs an important role in promoting a good economic growth, particularly through their role in allocating finance for productive activities. Every an economy requires having an efficient financial system to perform a better economic development. A more efficient financial system will provide better financial services and this enables an economy to increase its GDP growth rate. Otherwise, a non-efficient financial system will worst the economy growth of a country. The important role of financial intermediaries and financial markets, therefore, merits more attention from researchers and policymakers. It is a crucial policy question which type of financial development (bank-based or stock-market based type) should the government actively promote. The relative importance of these two types of financial structures in economic growth has been debated for over a century. The policy implication of this view of points is the importance of formulating policies aimed at expanding the financial system in order to encourage growth. On the other hand, an interesting question remains why, if financial system the is very excellent for growth, but still have so many countries remained financially or even economically underdeveloped?

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