By Zhang Liping & Zhao Yunji, Research Team on "Study on Strategies of China's Financial Reform", DRC

For a relatively long period of time after the end of the Second World War, the Japanese government had exercised a rigorous control over the financial sector. With economic boom, Japan was facing a growing pressure from both home and abroad to ease control over the financial sector. By the 1970s Japan started a deregulation-centered financial liberalization reform including liberalization of interest rate, opening of capital account, deregulation of stock market and lifting of restraints over segregation of financial business. After the outbreak of Asian financial crisis in 1997, Japan embarked on the Big Bang financial reform featured by structural reform.

Japan's financial liberalization reform exerted a far-reaching impact on non-financial sectors, banks and individuals. First, large manufacturing enterprises no longer relied solely on bank financing and started turning to capital market for funds. Second, instead of falling, the share of Japanese households' bank savings in total GDP kept rising, for deregulation of both financial and capital market appeared to be too slow for individual investors. Third, banks had to engage in competition by means of raising interest rate, changing business scopes and asset mix. Fourth, the surge in asset price, in turn, facilitated fundraising with increased values of the collaterals. Fifth, the Big Bang financial reform, the liberalization of foreign exchange market and the establishment of full-service banks also affected the lives of average people.

China could draw on Japan's experience relating to financial liberalization reform. First, though deregulating stock market is an effective way to facilitate the small and medium-sized enterprises and households to obtain bank loans, it is vital to guard against risks of a wild expansion of mortgage loans and property bubbles. Second, as the impacts of the liberalization of interest rate are both dynamic and persistent, market fluctuations and risks should be monitored while interest controls are loosened step by step. Third, in the process of financial deregulation, monetary policies should be directed to the right course and destructive impacts of bubbled economy should be avoided. Last but not least, financial monitoring and control should also be strengthened during the deregulation.