Equity Financing to Bank Financing under the ‘Convoy System’
As a matter of fact, before World War II, corporate firms relied more on capital markets for their financing
of investment. Commercial banks then often lacked the capacity to evaluate borrowers’ repayment
capabilities and associated risks. As the war became imminent, the government tried to provide a larger
portion of available funds to military-related industries by seeking more direct control over fund flows. The
authorities denounced stock markets for their speculative and disorderly nature, and encouraged markets of
financial intermediation by banks. The authorities believed that financial intermediation by banks was much
more controllable. Therefore, the seed of the main-bank system was formed in WWII, when the Japanese
government took steps to make banks the key financiers of the economy. In 1942, examination departments
were introduced into commercial banks by government regulation and began their regular monitoring of
borrowers. This scheme was thought to be the origin of the main-bank system established after the war
(Noguchi, 1995). The main-bank system facilitated Japan’s economic growth by allocating funds to growing
industries. Tight regulation of the financial sector by the Ministry of Finance, or the so-called ‘convoy
system’, kept this sector ‘orderly’ and preserved a stable main-bank scheme. The main-bank scheme helped
businesses to develop long-term plans by regularly providing loans and serving as a lender-of-last-resort in
case of financial difficulties. Thus, the main-bank scheme played an important role in Japan’s corporate
governance as it kept corporate management prudent and long-term oriented