Corporations may be said to be engines of any market economy and their proper behavior is a key to economic, hence human, security. This paper argues that one of the most important causes for the prolonged period of recessions of the Japanese economy in the 1990's is deeply rooted in the long-established financial structure of the economy and in the closely related issue of corporate governance. Although Japanese corporations have been traditionally understood that their activities are monitored and governed by "main banks," this framework has been changing over the last 10-15 years toward corporate governance driven by pressure from capital markets. This change has been necessitated by: (a) less need on the part of corporations to rely on banks in acquiring funds, (b) ongoing dissolution of cross shareholdings, (3) an increasing importance for the role of institutional investors, and (4) innovations in information and communication technologies. The change may be regarded as being one from "process innovation" toward a system conducive to "product innovation;" hence a desirable shift. There remain, however, a number of policy tasks, such as institutional improvement in securities investment trusts and the need to better define the role of institutional investors.

The 21st century center of excellence program "Policy innovation initiative: human security research in Japan and Asia"