Financial Structure and Corporate Behavior in Japan and the US: insulation versus integration with speculative pressures

This paper examines the impact of speculative financial markets on corporate behavior under the Japanese and US financial systems. While both countries experienced speculative financial booms during the 1980s, real sector corporate decision making was relatively insulated from such activity in Japan by its bifurcated capital markets: high-turnover trading of much equity coexists with another segment in which large blocks of firms equity and debt are held long term, by capital suppliers who are strategic business allies. In the American system, in contrast, fluid and impersonal stock trading leaves firms vulnerable to the impact of short term price movements. This avenue for speculative financial market pressures has militated toward reduced time horizons and financial ratio-based decision criteria in the US corporate sector. The main implication is that mechanisms must be found for insulating American corporate decision making from speculative pressures. Rather than attempting to mimic the undemocratic role played by banks and other buysiness insiders in Japan, US policy makers should achieve a similar insulating effect by vesting more power in corporate constituences other than shareholders—especially employees. An approach built around ‘democratic stakeholder governance’ is proposed.