This paper examines the role of long-term funds in the process of economic development. Two roles are examined in light of the experience of high-growth-period Japan. First, a shortage of long-term funds is considered to increase term-transformation burden on a financial system. Intensification of the burden induces the banking sector to have incentives for excessive liquidation of short-term loan commitments. Second, lender-customer relationships under short-term loan contracts tend to result in monopoly of internal information of the borrowers by banks, and hence exploitation of the former by the latter. Long term funds are expected to mitigate these two inefficiencies. Time series movement of term-transformation index is examined. Supply of long-term, funds is shown to have positive effect on investment rate, and also to cause diversification of funding sources of firms.
