Informality and Institutional Inertia: The Case of Japanese Financial Regulation

This article examines the case of institutional inertia in Japanese financial regulation, focusing on the reasons why institutions centered on informal modes of organization and interaction proved particularly ‘sticky.’ The Japanese case serves as a particularly tough test for theories of institutional adaptation and change because even crisis – a time when the costs of inaction tend to far exceed the benefits – failed to produce timely institutional change. The paper argues that informal, exclusionary and opaque relational ties served as a functional substitute for formal regulation and promoted cooperative government-bank relationships in an earlier period. Yet, when the informal attributes of the system began to impede the sound functioning of the financial system, the very opacity of these ties and the informational dynamics underlying them meant that the Diet and the general public were less than fully aware of the extent of dysfunction present as time went on.