Financial Reforms in Japan

June 11th, 2014
in Op Ed

by Dirk Ehnts, Econoblog101

Bloomberg (via the Japan Times) reports that the Liberal Democrat Party is set to liberalize the Japanese financial market once again:

The government should consider scrapping the part of a law that limits credit to a third of a borrower's income, Taira said in a recent interview. He also wants to raise the ceiling on interest rates back to 29.2 percent from 20 percent to encourage consumer lenders to make more loans.

Follow up:

Shares of companies including Aiful Corp. and Acom Co. rose on speculation that the move would bolster profits that have been dented by the legislation, which took full effect in 2010 as part of a crackdown on usury and coercive lending.


The LDP pledged to ease the regulations in its successful election campaign in 2012, saying the rules led the consumer loan market to shrink and drove some lending underground to illegal outlets.

This is a very tricky issue that has been on the agenda of most developed countries for a long time. Tightening regulations risk to drive the financial activity underground and/or offshore. So, what do you do? Enforce tight regulation and accept the unregulated financial business activities or relax regulation and thus keep a better eye on what is happening?

Of course, allowing higher interest rates in the official sector will invite more predatory practices and thus increase the size of the problem.

This is a very neat example for why social sciences are so tricky. Observing a phenomenon (high interest rates for borrowers without collateral) by liberalizing financial rules has an influence on what happens in the market you want to observe. The experiment is not independent from the way the observer is contemplating it.  Social sciences are intrinsically difficult because a good theory to explain human behavior will be known by most people, which then react to that information.

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