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This paper is examines the evolution of Japan’s capital markets and the related regulatory reforms after the Global Financial Crisis. We start by looking at the importance of capital markets in the Japanese financial system. We study how the size of financial flows through capital markets relative to those through the banking sector changed since the 1980s in Section 2. Then, in Section 3, we look at how Japan’s financial system responded to the Global Financial Crisis. We find that the disruption of the financial system in Japan was small. Section 4 then surveys the financial regulatory changes in Japan since the Global Financial Crisis. While the Japanese regulators tightened the regulation to improve the financial stability as the regulators in the U.S. and Europe did, they also continued the efforts to develop capital markets in Japan. The efforts continue and receive strong endorsement from Abenomics, which put an emphasis on economic structural reform to restore growth in Japan. We examine the capital market policies in Abenomics in Section 5. Section 6 concludes.

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Takeo Hoshi
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Daniel Sneider, associate director for research at the Walter H. Shorenstein Asia-Pacific Research Center, provides an in-depth analysis of how the agreement on the “comfort women” issue between Japan and South Korea was reached late last year. In Japanese publication Toyo Keizai Online, Sneider writes that – after at least four years of negotiations between the two governments – political leadership in Seoul and Tokyo as well as pressure from the Obama administration can be credited for the breakthrough.

Read the article in English and Japanese.

Earlier in December, David Straub, associate director for the Korea Program, said the agreement is a sign of progress. He said it vindicates the victims and is a positive development for Korea-Japan relations. 

Read his comments in reporting done by Yonhap News and Voice of America.

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South Korean Foreign Minister Yun Byung-Se (Right) shakes hands with his Japanese counterpart Fumio Kishida (Left) during their meeting at the Foreign Ministry in Seoul Dec. 28, 2015.
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The breakthrough agreement on the comfort women issue between Japan and South Korea on Dec. 28, 2015, was the culmination of at least four years of negotiations between the two governments. South Korean President Park Geun-hye and Japanese Prime Minister Shinzo Abe pushed for the agreement; the Obama administration provided persistent pressure while resisting a mediation role. The danger of the agreement falling apart is apparent to officials in Washington and Seoul, and hopefully Tokyo too, writes Sneider.

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Stanford nuclear experts said they were skeptical of North Korea’s claim that it had detonated a hydrogen bomb this week.

However, they said the test was an important step forward for North Korea’s nuclear program and would have a destabilizing effect on the entire region.

“I don’t believe it was a real hydrogen bomb, but my greatest concern is not so much whether or not they actually tested a hydrogen bomb, but rather that they tested at all,” said Siegfried Hecker, former director of Los Alamos National Laboratory and senior fellow at Stanford’s Center for International Security and Cooperation.

North Korean dictator Kim Jong-un has “a track record of exaggerated statements, hyperbole and outright lies,” according to Scott Sagan, Caroline S.G. Munro professor of Political Science.

“The propaganda machine in North Korea has made all sorts of claims about Kim Jong-un’s personal prowess and his history, and it is totally unsurprising that he might make exaggerated claims about North Korea’s military prowess,” Sagan said.

Former U.S. Secretary of Defense William J. Perry said he also doubted that North Korea had detonated a two-stage hydrogen bomb.

“Whether it’s a hydrogen bomb or not, it’s very dangerous, destabilizing development,” said Perry.

“It’s obvious they’re working to increase the capability and size of their nuclear arsenal and that represents a huge danger to the region and creates major instability and major concerns on the part of South Korea and Japan.”

Many North Korea watchers had been anticipating another nuclear test.

“We’ve thought that the North Koreans could test at any time – that the tunnels were ready, that they could do this at any time – so it would be a political decision, not a technical decision,” said Thomas Fingar, senior fellow at the Freeman Spogli Institute for International Studies.

Hecker said North Korea’s latest nuclear test would move the country closer to being able to miniaturize a nuclear warhead and mount it on a missile, extending the reach of their nuclear weapons.

“They will have achieved greater sophistication in their bomb design – that is the most worrisome aspect,” Hecker said.

“At this point, what makes their nuclear arsenal more dangerous is not so much explosive power of the bomb, but its size, weight and the ability to deliver it with missiles.”

On the diplomatic agenda, the U.S. and its allies will likely push for stronger sanctions in the wake of the tests, according to Kathleen Stephens, a former U.S. Ambassador to the Republic of Korea and William J. Perry fellow at Walter H. Shorenstein Asia-Pacific Research Center (APARC).

“In the UN the U.S., Japan and South Korea will likely look for another, and stronger, UN Security Council resolution, presumably with some efforts to attach to it some teeth and strengthen sanctions,” Stephens said.

The U.S. Congress is currently considering financial sanctions that would cut of all access to U.S. banks for any banks dealing with the North Koreans.

But financial sanctions would likely be less effective in dealing with North Korea than they had been with Iran, according to Fingar.

“It’s like hitting a masochist,” said Fingar.

“North Korea is relatively insulated from the external economy, where Iran wasn’t. Iran had a middle class, you could make sanctions hurt, they could have a real effect. You could make it hard for the North Koreans to buy luxury goods, but at the end of the day, is that going to bring down the regime?”

Financial sanctions against North Korea could have the unintended consequence of also hurting China, said David Straub, associate director of the Korea program at APARC.

“This could be problematic for China because many of the transactions that North Korea conducts would be going thorough Chinese banks, and the Chinese, understandably might not be happy about the US financial sanctions on them, in effect,” Straub said.

Perry recommended that the U.S. reinvigorate diplomatic talks with North Korea in collaboration with China, South Korea, Japan and Russia.

“I would not give up on negotiations with North Korea yet,” Perry said.

“What could have been done many years ago was following through on negotiations with North Korea at the turn of the Century, which were proceeding robustly in the last years of Clinton’s second term, but were abandoned by the Bush Administration...That was a geo-strategic error.”

But Hecker said those negotiations would be harder now.

“I have previously argued that we should focus on three “No’s” for three “Yes’s” – that is no more bombs, no better bombs (meaning no testing) and no export – in return for addressing the North’s security concerns, its energy shortage and its economic woes,” said Hecker.

“This could have worked when I first proposed it 2008 after one of my seven visits to North Korea. It will be more difficult now."

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A protester burns banners depicting North Korean leader Kim Jong-un during an anti-North Korea rally in central Seoul, South Korea, January 7, 2016.
A protester burns banners depicting North Korean leader Kim Jong-un during an anti-North Korea rally in central Seoul, South Korea, January 7, 2016.
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Former Los Alamos National Laboratory director Siegfried Hecker assesses North Korea’s claim to have detonated a hydrogen bomb in an underground nuclear test this week. Hecker is one of the world’s top experts on the North Korean nuclear program. He has visited North Korea seven times since 2004, and is the only Western scientist known to have ever been inside a North Korean uranium enrichment facility. He is currently a senior fellow at Stanford’s Center for International Security and Cooperation, and a research professor of Management Science and Engineering.

Do you believe that North Korea actually detonated a hydrogen bomb in its latest nuclear test?

I don’t believe it was a real hydrogen bomb, but my greatest concern is not so much whether or not they actually tested a hydrogen bomb, but rather that they tested at all. Since this test worked, they will have achieved greater sophistication in their bomb design – that is the most worrisome aspect. This is their fourth test – with each test they can learn a lot.

What makes a hydrogen bomb a more threatening weapon than a conventional atomic bomb?

A hydrogen bomb can be a hundred or a thousand-fold more powerful than a fission bomb. Certainly a blast of a megaton will be much more destructive than the Hiroshima bomb, but the more important part is the ability to deliver at long range and to do it accurately. That is what would threaten the United States and its allies most; even with the size of nuclear blasts they have already demonstrated.

White House officials say that initial data from nearby monitoring stations are not consistent with a hydrogen bomb test. How will we know for sure whether it was a hydrogen bomb or not?

The short answer is that we may never know. The telltale signs of a hydrogen bomb are very difficult to pick up in a deeply buried test. Typically hydrogen bombs have greater explosive power or yield. This test is currently believed to have resulted in a seismic tremor of 5.1 on the Richter earthquake scale. That would make it roughly equivalent to the third nuclear test in February 2013. At that time, North Korea claimed it tested a miniaturized atomic bomb – there was no mention of a hydrogen bomb. My estimate of the yield for the 2013 test is roughly 7 to 16 kilotons – which is in the range of the 13-kiloton Hiroshima blast. As far as destructiveness, a Hiroshima-scale explosion is bad enough. Detonated in Manhattan, it may kill as many as a quarter million people. The power of the 2013 and the current explosion is more consistent with fission bombs than hydrogen bombs.

Can you rule out the possibility that it was a hydrogen bomb?

I find it highly unlikely that the North tested a real hydrogen fusion bomb, but we know so little about North Korea’s nuclear weapons design and test results that we cannot completely rule it out. A modern hydrogen bomb is a two-stage device that uses a fission bomb to drive the second stage fusion device. A two-stage device is very difficult to design and construct, and is likely still beyond the reach of North Korea today. However, by comparison, China’s early nuclear weapon program progressed rapidly. It tested its first fission bomb in 1964 and less than three years later demonstrated a hydrogen bomb – and that was 50 years ago. North Korea has now been in the nuclear testing business for almost 10 years, so we can’t rule anything out for certain.

If it wasn’t a hydrogen bomb, what kind of bomb might it have been?

What may be more likely than a two-stage hydrogen bomb is that they took an intermediate step that utilizes hydrogen (actually hydrogen isotopes) fuel to boost the explosive yield of the fission bomb, a sort of turbocharging. Such a device has a fusion or “hydrogen” component, but is not a real hydrogen bomb. It allows miniaturization – that is making the bomb smaller and lighter. Moreover, it would be the first step toward eventually mastering a two-stage hydrogen bomb.

The most important aspect then is to miniaturize, whether it is a fission bomb, a boosted fission bomb, or a hydrogen bomb. The Nagasaki bomb weighed 5,000 kilograms. It was delivered in a specially equipped B-29 bomber. North Korea wants to demonstrate it has a deterrent. To do so, it needs to be able to credibly threaten the U.S. mainland or our overseas assets. For that, you have to make the bomb (more correctly, the warhead) small enough to mount on a missile. The smaller and lighter, the greater the reach. At this point, what makes their nuclear arsenal more dangerous is not so much explosive power of the bomb, but its size, weight and the ability to deliver it with missiles.

How close is North Korea to being able to credibly threaten a nuclear strike against the mainland United States?

North Korea is still a long way off from being able to strike the US mainland. It has only had one successful space launch. It needs a lot more, but it has a large effort in that direction.

Do you think North Korea conducted this test for political or technical reasons?

North Korea had very strong technical and military drivers for this test, as well as follow-on tests. The political environment is mostly what has constrained it from testing earlier and more often. However, this test demonstrates that Pyongyang is willing to weather the political storm this test will bring. It has done so for all previous tests.

What are your current estimates on the size of North Korea's stockpile of nuclear weapons and materials?

Much like in the area of sophistication of the bomb, we have little information of what North Korea actually possesses. The best we can do is to estimate how much bomb fuel, plutonium and highly enriched uranium, they may have produced and estimate how many bombs they can produce from that stockpile. My best estimate at this time is that they may have enough bomb fuel for 18 bombs with a capacity to make 6 to 7 more annually. That, combined with the increased sophistication they surely achieved with this test, paints a troublesome picture.

How should the U.S. respond?

I am concerned about we haven’t done to date. Washington has lost many opportunities we have had since North Korea began its nuclear weapon production in earnest in 2003. One thing that’s clear is that doing what we and the rest of the world have done so far – half-hearted diplomacy, ultimatums, and sanctions – have failed, so these are not the answer. I have previously argued that we should focus on three “No’s” for three “Yes’s” – that is no more bombs, no better bombs (meaning no testing) and no export – in return for addressing the North’s security concerns, its energy shortage and its economic woes. This could have worked when I first proposed it 2008 after one of my seven visits to North Korea. It will be more difficult now.

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CISAC senior fellow Siegfried Hecker on a tour of North Korea's Yongbyon nuclear facility in 2008.
CISAC senior fellow Siegfried Hecker on a tour of North Korea's Yongbyon nuclear facility in 2008.
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Booseung Chang joins the Walter H. Shorenstein Asia-Pacific Research Center as Shorenstein Postdoctoral Fellow for the 2015-16 year.  His research interests span comparative foreign policy and policymaking process.

Currently, he is working on two projects. One deals with application of game-theoretic approaches to the inter-Korean relations. Specifically, he is interested in how the tools of the game theory can contribute to the improvement of the cooperation as well as the security in the Korean peninsula. The topic of the other article will be the change of Japanese foreign policy. The goal of this article is to shed light on the implications of the recent change in Japanese security-related laws and to measure its domestic, regional, and global impact.

His dissertation, which he seeks to build upon, is titled “The Sources of Japanese Conduct: Asymmetric Security Dependence, Role Conceptions, and the Reactive Behavior in response to U.S. Demands.” It is a qualitative comparative case study of how key U.S. allies in Asia – namely Japan and South Korea – and major powers in Europe - the United Kingdom and France - responded to the U.S.-led Persian Gulf War and the Iraq War.

Chang completed his doctorate in political science from the Paul H. Nitze School of Advanced International Studies (SAIS) of Johns Hopkins University in 2014.

Before joining the Walter H. Shorenstein Asia-Pacific Research Center, he worked for the South Korean Foreign Service for 15 years between 2000 and 2015. During the service, he mostly worked on Northeast Asian affairs including the North Korean nuclear issue. He spent three years in the embassy in Beijing and two and a half years in the consulate general in Vladivostok.

 

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Booseung Chang, 2015-2016 Shorenstein Postdoctoral Fellow
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When I first started the Stanford e-Japan program, I never expected to be up on that podium making a speech [at Stanford University]… Yet there I stood, a little more grown up than before.
—Seiji Wakabayashi, Kumon Kokusai Junior-Senior High School

If I hadn’t participated in this program, I wouldn’t have been as interested in the U.S. as I am right now.
—Hikaru Suzuki, Senior High School at Otsuka, University of Tsukuba

I am very grateful to be given the chance to think about and to discuss with my fellow classmates what we should do in order to strengthen the U.S.–Japan relationship in the future.
—Haruki Kitagawa, Keio Senior High School

 

The Stanford Program on International and Cross-Cultural Education (SPICE) honored three of the top students of the inaugural 2015 Stanford e-Japan distance-learning course at an event at Stanford University on November 2, 2015. The three Stanford e-Japan Day honorees—Haruki Kitagawa (Keio Senior High School), Hikaru Suzuki (Senior High School at Otsuka, University of Tsukuba), and Seiji Wakabayashi (Kumon Kokusai Junior-Senior High School)—were recognized for their coursework and exceptional research essays that focused respectively on “A Comparison and Analysis of Educational Systems: What Is ‘Successful’ Education?,” “Why the Japanese Have a Good Image of America,” and “Schooling Japan.”

Stanford e-Japan Day featured welcoming comments by Dr. Gary Mukai, SPICE Director, and opening remarks on youth and the future of U.S.–Japan relations by Deputy Consul General Nobuhiro Watanabe, Consulate General of Japan in San Francisco. Deputy Consul General Watanabe reinforced that youth are the ones to shoulder the U.S.–Japan relationship in the coming years, and that he is very much looking forward to the day when these students will engage in furthering our two countries’ strong ties.

Waka Takahashi Brown, Stanford e-Japan Instructor, gave an overview of the course. Stanford e-Japan is a distance-learning course on U.S. society and culture and U.S.–Japan relations that is offered annually to 25–30 high school students across Japan. The course presents a creative and innovative approach to teaching high school students about U.S. society and culture and U.S–Japan relations, and provides Japanese students with unique opportunities to interact with diplomats and top scholars affiliated with Stanford University and other institutions through online lectures and discussions. Importantly, the course introduces both American and Japanese perspectives on many historical and contemporary issues.

Each student honoree gave a succinct and lucid summary of his/her research essay and skillfully answered questions from the audience. Following the question-and-answer period, each student was presented with a plaque by Brown. Following the presentations, the students and their families joined the audience in a luncheon.

Following the event, Stanford undergraduate Mathieu Rolfo took time from his studies to take the three honorees on a tour of the Stanford campus. Mathieu is a former student in SPICE’s Reischauer Scholars Program (RSP), a distance-learning course on Japan and U.S.–Japan relations that has been offered to high school students in the United States for 12 years. RSP Instructor Naomi Funahashi honored Rolfo as one of her top three RSP students in 2011. Funahashi and Brown are planning to continue to engage their students “virtually” across the Pacific.

Stanford e-Japan has been generously funded for the first three years (2015–17) by a grant from the United States-Japan Foundation. SPICE supporter Amanda Minami Chao was in attendance and had the chance to share her thoughts on Brown University with student honoree Seiji Wakabayashi who plans to apply to her alma mater.

During a recent trip to Japan, Mukai had the opportunity to meet with other excellent students who were enrolled in the inaugural course. Shoko Kitamura, Waseda Honjo Senior High School, noted that she especially enjoyed a lecture by Dr. Joseph Yasutake on Japanese-American internment during which Yasutake shared his first-hand accounts. Tairi Goto, International School of Asia in Karuizawa, stated that he especially appreciated a class activity during which he was introduced to textbook descriptions of the atomic bombing of Japan from Taiwan, Korea, Japan, China, and the United States. Misaki Katayama, Hiroshima Prefectural Hiroshima Junior/Senior High School, commented on her interest in learning about Japanese picture brides who left prefectures like Hiroshima to the United States in the early 20th century.

Reflecting back on the inaugural Stanford e-Japan course and e-Japan Day, Brown noted, “The inaugural group of e-Japan students was phenomenal. It was wonderful to be able to meet at least some of the students in person on e-Japan Day, although I felt like I had already met them through our interaction during the course. I have no doubt that future leaders, diplomats, and entrepreneurs will emerge from this cohort. ”

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2015 Stanford e-Japan Honorees: Seiji Wakabayashi, Hikaru Suzuki, and Haruki Kitagawa
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Abstract: Numerous polls show that U.S. public approval of Truman’s decision to drop atomic bombs on Hiroshima and Nagasaki has declined significantly since 1945. Scholars and pundits have suggested that this is a sign of the emergence of a “nuclear taboo.”  Such polls, however, do not force respondents to contemplate the tradeoff the U.S. government believed it faced in 1945: choosing between the use of nuclear weapons and a ground invasion of Japan to end the Pacific War. This paper reports on survey experiments recreating that kind of a tradeoff in a hypothetical war with Iran. In order to avoid a ground assault on Tehran that was predicted to kill 20,000 American soldiers, 60% of the U.S. public approved of an atomic attack on an Iranian city that would kill 100,000 civilians and 60% approved of an atomic attack that would kill 2,000,000 civilians. Sixty-seven percent preferred a conventional bombing attack that was estimated to kill 100,000 Iranian civilians. Moreover, the prospect of killing more noncombatants appeared to trigger beliefs in retribution and complicity, as a way of justifying the decisions. Our findings suggest that U.S. public support for the principle of noncombatant immunity is shallow. 

About the Speaker: Scott D. Sagan is the Caroline S.G. Munro Professor of Political Science, the Mimi and Peter Haas University Fellow in Undergraduate Education, and Senior Fellow at the Center for International Security and Cooperation and the Freeman Spogli Institute at Stanford University. He also serves as Project Chair for the American Academy of Arts and Sciences’ Initiative on New Dilemmas in Ethics, Technology, and War and as Senior Advisor for the American Academy of Arts and Sciences’ Global Nuclear Future Initiative. Before joining the Stanford faculty, Sagan was a lecturer in the Department of Government at Harvard University. From 1984 to 1985, he served as special assistant to the director of the Organization of the Joint Chiefs of Staff in the Pentagon. Sagan has also served as a consultant to the office of the Secretary of Defense and at the Sandia National Laboratory and the Los Alamos National Laboratory. 

Sagan is the author of Moving Targets: Nuclear Strategy and National Security (Princeton University Press, 1989); The Limits of Safety: Organizations, Accidents, and Nuclear Weapons (Princeton University Press, 1993); and, with co-author Kenneth N. Waltz, The Spread of Nuclear Weapons: An Enduring Debate (W.W. Norton, 2012). He is the co-editor of Planning the Unthinkable (Cornell University Press, 2000) with Peter R. Lavoy and James L. Wirtz; the editor of Inside Nuclear South Asia (Stanford University Press, 2009); and co-editor of a two-volume special issue of Daedalus, On the Global Nuclear Future (Fall 2009 and Winter 2010), with Steven E. Miller. Sagan’s recent publications include “A Call for Global Nuclear Disarmament” in Nature (July 2012); “Atomic Aversion: Experimental Evidence on Taboos, Traditions, and the Non-Use of Nuclear Weapons” with Daryl G. Press and Benjamin A. Valentino in the American Political Science Review (February 2013); and, with Matthew Bunn, the American Academy of Arts and Sciences occasional paper, “A Worst Practices Guide to Insider Threats: Lessons from Past Mistakes” (2014).

Sagan was the recipient of the National Academy of Sciences William and Katherine Estes Award in 2015 and the International Studies Association's International Security Studies Section Distinguished Scholar Award in 2013. He has also won four teaching awards: Stanford’s 1998-99 Dean’s Award for Distinguished Teaching; Stanford's 1996 Hoagland Prize for Undergraduate Teaching; the International Studies Association’s 2008 Innovative Teaching Award; and the Monterey Institute for International Studies’ Nonproliferation Education Award in 2009. 

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The Caroline S.G. Munro Professor of Political Science
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Scott D. Sagan is Co-Director and Senior Fellow at the Center for International Security and Cooperation, the Caroline S.G. Munro Professor of Political Science, and the Bass University Fellow in Undergraduate Education at Stanford University. He also serves as Co-Chair of the American Academy of Arts and Sciences’ Committee on International Security Studies. Before joining the Stanford faculty, Sagan was a lecturer in the Department of Government at Harvard University and served as special assistant to the director of the Organization of the Joint Chiefs of Staff in the Pentagon.

Sagan is the author of Moving Targets: Nuclear Strategy and National Security (Princeton University Press, 1989); The Limits of Safety: Organizations, Accidents, and Nuclear Weapons (Princeton University Press, 1993); and, with co-author Kenneth N. Waltz, The Spread of Nuclear Weapons: An Enduring Debate (W.W. Norton, 2012). He is the co-editor of Insider Threats (Cornell University Press, 2017) with Matthew Bunn; and co-editor of The Fragile Balance of Terror (Cornell University Press, 2022) with Vipin Narang. Sagan was also the guest editor of a two-volume special issue of DaedalusEthics, Technology, and War (Fall 2016) and The Changing Rules of War (Winter 2017).

Recent publications include “Creeds and Contestation: How US Nuclear and Legal Doctrine Influence Each Other,” with Janina Dill, in a special issue of Security Studies (December 2025); “Kettles of Hawks: Public Opinion on the Nuclear Taboo and Noncombatant Immunity in the United States, United Kingdom, France, and Israel”, with Janina Dill and Benjamin A. Valentino in Security Studies (February 2022); “The Rule of Law and the Role of Strategy in U.S. Nuclear Doctrine” with Allen S. Weiner in International Security (Spring 2021); “Does the Noncombatant Immunity Norm Have Stopping Power?” with Benjamin A. Valentino in International Security (Fall 2020); and “Just War and Unjust Soldiers: American Public Opinion on the Moral Equality of Combatants” and “On Reciprocity, Revenge, and Replication: A Rejoinder to Walzer, McMahan, and Keohane” with Benjamin A. Valentino in Ethics & International Affairs (Winter 2019).

In 2022, Sagan was awarded Thérèse Delpech Memorial Award from the Carnegie Endowment for International Peace at their International Nuclear Policy Conference. In 2017, he received the International Studies Association’s Susan Strange Award which recognizes the scholar whose “singular intellect, assertiveness, and insight most challenge conventional wisdom and intellectual and organizational complacency" in the international studies community. Sagan was also the recipient of the National Academy of Sciences William and Katherine Estes Award in 2015, for his work addressing the risks of nuclear weapons and the causes of nuclear proliferation. The award, which is granted triennially, recognizes “research in any field of cognitive or behavioral science that advances understanding of issues relating to the risk of nuclear war.” In 2013, Sagan received the International Studies Association's International Security Studies Section Distinguished Scholar Award. He has also won four teaching awards: Stanford’s 1998-99 Dean’s Award for Distinguished Teaching; Stanford's 1996 Hoagland Prize for Undergraduate Teaching; the International Studies Association’s 2008 Innovative Teaching Award; and the Monterey Institute for International Studies’ Nonproliferation Education Award in 2009.     

Co-director of the Center for International Security and Cooperation
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