This system was permissive on some fronts and restrictive on others. It required firms to approach banks that were flush with funds drawn from household savings for finance. In turn, banks were in a position to use the resulting leverage to ensure that their funds were profitably employed and properly managed. Inasmuch as the government 'permitted' the banks to play this role, Japan saw the emergence of a main bank system where "a bank not only provides loans to a firm, but also holds its stock. Typically, a firm develops a relationship with a particular bank and relies on its steady support in funding over the long term. In return, the firm uses the bank for major transactions from which the banks earns fees and profits." Thus, unlike in the US, where the performance of individual stocks and the threat of takeover when stock prices fell or "the market for corporate control" were the means to ensure effective deployment and efficient utilization of capital, in Japan it was the link between direct and indirect ownership and management that formed the means to realizing these goals. And the state was expected to monitor the monitors, who were the main banks.
 
The restrictive role of the system was that it limited the ability of banks to undertake investments in areas that were not in keeping with development goals. Thus investment in stocks or real estate purely with the intention of making capital gains was foreclosed by regulation. Banks, insurance firms and non-bank financial institutions had their areas of operations defined for them. Regulatory walls which prevented conflicts of interests and speculative forays that could result in financial crises and hamper the growth of the real economy clearly demarcated these areas.
 
During the years of high growth this system served the Japanese economy well. It allowed banks and firms to take a long-term perspective in determining their borrowing and lending strategies; it offered entrepreneurs the advantage of deep pockets to compete with much larger and more established firms in world markets; and it allowed the government to 'intervene' in firm-level decision-making without having to establish a plethora of generalized controls, which are more difficult to both design and implement. Above all, when the rate of expansion of world markets slowed after the first oil shock of 1993, and when Japan, which was highly dependent on exports for its growth, was affected adversely both by this and by the loss of competitiveness entailed by an appreciating currency, the system allowed firms to restructure their operations and enter new areas so that profits in emerging areas could neutralize losses in sunset industries.

Not surprisingly, Japan's economic system was bank debt-dependent for financing investment and highly overgeared. Bank debt accounted for 95 per cent of Japanese corporate borrowing in the mid-1970s, as compared with a much lower 67 per cent in the US. And while outstanding bank loans amounted to 50 per cent of GDP in the US in the 1970s, from which level it gradually declined, the debt:GDP ratio in Japan had touched 143 per cent in 1980 and risen to 206 per cent by 1995. This wasnot a problem, however, because the government worked to stabilize the system. As one observer put it: "A combination of international capital controls, willingness to use monetary policy swiftly to defend the currency, and the absence of other countries simultaneously following the same development strategy shielded Japan from serious problems."
 
In the event, Japan's economic success between 1950 and 1970 resulted in its system of regulation, which was 'unusual' from an Anglo-Saxon point of view, and was looked upon with awe and respect. Even now, but for the fact that Japan is faring so poorly, the overwhelming evidence of accounting fraud, conflicts of interests and strategies to ensure stock price inflation emanating from leading US firms such as Enron, Andersen, Merrill Lynch, WorldComm and Xerox, makes the Japanese system appear far more robust.
 
The question remains, however: why did the system fail to serve Japan as well during the 1990s? The answer lies in the fact that the system was changed and considerably diluted as a result of American pressure during the 1980s. The pressure was applied in three stages. First, international banks and financial institutions wanted Japan to open up its financial sector and provide them space in its financial system. Second, once these external agents were permitted to enter the system, they wanted a dilution of the special relationship that existed between the government, the financial system and the corporate world in Japan, since that implied the existence of an internal barrier to their entry and expansion. Third, these agents, along with some Japanese financial institutions adversely affected by the deceleration of growth in the system, wanted greater flexibility in operations and the freedom to 'innovate' both in terms of choice of investments and instruments of transaction.