Discussion Paper Series 2022-E-18

The Digital Transformation (DX) and the Financialization of Japan: A Case Study of Private Equity

Ulrike Schaede

This paper argues that Japan is experiencing an increase in "financialization" - a process of marketization where the primary focus in all transaction is on the immediate monetary value earned. Left unregulated, excessive financialization can erode the core architecture and health of an economy. Japan's financialization will be further accelerated by the interrelated forces of the digital transformation (DX), societal and employment system changes, and the need for corporate reinvention and repositioning. To showcase the difficulty of finding a balance between the positive discipline of the market and the dangers of excessive short-termism, this paper introduces Japan's emerging private equity (PE) market. Corporate need for a new market for spinouts and carve-outs meets global investors eager to find alternative investments. Together, they create new pressures for short-term financial results, even for companies not targeted by these investments, thus increasing financialization overall. The paper introduces recent U.S. proposals on regulating the PE industry to ensure long-term value creation while reining in financial schemes that are detrimental to the health of companies and the economy. As Japan shows signs of increasing financialization, it may warrant attention to the current discussion regarding the PE industry in the U.S.

Keywords: Japan; financialization; marketization; private equity; digital transformation; corporate reorganization

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

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