This paper is an overview of the Japanese financial system from the long-term perspective. The bank-loan-based system, which has dominated the Japanese financial inter mediation mechanisms for the last half century, was based on some preconditions. This paper explains that the Japanese government deliberately prepared those preconditions to overcome the fragile banking sector during the 1920s, to control financial allocation during the wartime economy, and to reform the corporate system immediately after World War II. This paper also explains how the government policy produced inertia in the financial system that prevented the system from adapting itself to rapid environmental changes since the 1980s. The lack of adaptability has caused a serious crisis in the Japanese financial system.
