Date of Award

Spring 1986

Document Type



Business, Accounting & Economics

First Advisor

Jeffrey Baker

Second Advisor

Robert Swartout

Third Advisor

Michael Robinson


A "miracle," a "secret," and a "paragon" are just a few of the words which have been used in reference to the Japanese economy. Many have pondered and attempted to explain the successes achieved over the past century by the business world of Japan. Some have used Japan as a model and endeavored to learn lessons from the vast economic development. Yet, unperceived by most Westerners, underneath this miraculous economy there in fact lies a secret. Many do not realize that a "lopsided" financial structure of Big Business is at the root of the amazing growth and expansion of the economy. The Japanese financial system is characterized by the use of indirect finance and heavy reliance on bank loans. The end result of these financial practices has been a balance sheet for some firms which is unacceptable from the viewpoint of the United States and European banking institutions. Application of the traditional concepts of financial analysis leads to very unfavorable evaluation as the following two quotations suggest: Obviously the biggest problem that Japan has is that people still don't know whether they should believe in it. The main thing that people in financial circles realize about Japanese companies is the incredible amount of leverage. They basically are trained that that 12 amount of leverage is off the graph. You can't have that much leverage and still be a company.1 (N.Y. investment banker) Most of the debt-equity ratios of the trading companies are 35 to 1. When you look at it with the European eye, you don't understand how a company could be creditworthy with such kinds of ratios. So you are lending on an act of faith, or what your Japanese branch has told you that is standard in Japan. In Europe you usually find a debt-equity ratio of 2 or 3 to 1.2 (U. S. banker in Paris) To explain this phenonmenon, I will begin with a discussion of how the financial structure evolved out of various historical influences. I will then describe and analyze the system in detail. Finally, I will explain the problems Japan is facing today due to this abnormally high debtequity ratio and the reorganization measures currently being undertaken to correct the problems.