Direct and Indirect Finance
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Explain the difference between “indirect” finance and “direct” finance.
Indirect finance is a system in which financial institutions intermediate between households and firms lend to firms deposits collected from households, with credit risks
assumed by financial institutions. Direct finance is a system in which households and other retail investors assume direct risk and purchase prime securities issued by firms in the stock market.
2) Please refer to the table below. This table shows the changes in the households’ preference in portfolio selection between Japan and the US in a time-series comparison between as of March 1990 and March 2000. Describe the characteristics in each household’s preference, then point out a systemic problem in Japan’s financial structure if Japan is moving to the Anglo-American “securities-based” financial system. (See Suzuki 2009, pp.109-113)
Categories of financial assets
March 1990
March 2000
Japan
Currency and deposits
449 (48.5%)
748 (53.8%)
Bonds
69 (7.5%)
57 (4.1%)
Investment trusts
36 (3.9%)
35 (2.5%)
Shares and other equities
123 (13.3%)
117 (8.4%)
Insurance and pension reserves
191 (20.6%)
384 (27.6%)
Others
57 (6.2%)
49 (3.5%)
Total (Trillion yen)
926 (100%)
1,390 (100%)
Currency and deposits
2.9 (19.4%)
3.5 (9.6%)
Bonds
1.9 (12.8%)
3.3 (9.2%)
Investment trusts
0.8 (5.6%)
4.2 (11.5%)
Shares and other equities
5.1 (33.7%)
13.4 (36.9%)
Insurance and pension reserves
3.9 (25.8%)
11.0 (30.5%)
Othres
0.4 (2.9%)
0.8 (2.3%)
Total (US$ Trillion)
15.0 (100%)
36.2 (100%)