This article first appeared in Forum, The Edge Malaysia Weekly on October 19, 2026 - October 25, 2026

Over the past four decades, the world’s largest economies — the US, Eurozone, Japan and China — have traversed strikingly different industrial and financial paths. In the immediate post-war period, Germany and Japan emerged as major manufacturing exporters to the US, which began to actively outsource manufacturing abroad and concentrate on services, software, technology and consumption as the world’s largest consumer. European economies and Japan all faced pressure to revalue against the dollar; currency volatility in Europe drove the creation of the euro. In September 1985, Japan agreed under the Plaza Accord to allow substantial yen appreciation, a decision that unlocked domestic liquidity, fuelled the late-1980s asset bubble and accelerated the relocation of labour-intensive manufacturing — first, to Asean and, later, to China. Beneath these shifts in the real economy, a deeper transformation occurred: in the early 1980s, Japan, Europe and China all operated bank-dominated financial systems. The US stood apart, with corporations relying far more on bond and equity markets than on bank lending.

From China’s accession to the World Trade Organization (WTO) in 2001 onwards, credit and equity markets expanded rapidly while the dot-com boom reoriented US capital markets toward technology. Today, global savings are being reallocated by the promise of superior equity returns, the rise of digital assets and rate differentials, while geopolitics and sanctions increasingly override market signals to divert trade, supply chains and payment systems.

Japan’s trajectory illustrates how a financial structure evolves over time. In 1984, its stock market capitalisation stood at roughly ¥150 trillion. By the 1989 peak, driven by ultra-loose monetary policy and soaring land valuations, it had reached ¥580 trillion to ¥630 trillion, representing roughly 40% to 45% of total global equity value. Following the collapse, valuations were trapped between ¥250 trillion and ¥400 trillion for over two decades. Only recently — fuelled by corporate governance reforms, post-2013 monetary easing (“Abenomics”) and post-pandemic inflows — has the market surged past its former peak, reaching ¥1,400 trillion (RM36.19 trillion) in 2026.

While equities lay dormant, government debt grew relentlessly. From ¥130 trillion (˜40% of GDP) in 1984, gross general government debt rose to approximately ¥1,360 trillion, or roughly 241% of nominal GDP, by 2026. Banking system assets expanded in tandem, climbing from ¥420 trillion to over ¥1,830 trillion, with post-2013 growth driven heavily by the Bank of Japan’s quantitative easing — including massive purchases of Japanese government bonds (JGBs) and exchange-traded funds (ETFs) to hold yields near zero. The result: indirect financing via banks and bonds remains vastly larger than equity capitalisation, even after the recent rally.

The Eurozone’s financial landscape structurally resembles Japan’s, with a strong reliance on bank intermediation and fragmented national equity markets. Government debt rose steadily through successive fiscal expansions, culminating in the sovereign debt crisis of 2010-2012. Even today, banking assets remain the dominant channel of corporate financing while equity markets remain segmented along national lines, lacking a truly integrated single capital market. The Eurozone consistently registers the highest ratio of indirect-to-direct financing among major economies — between 6:1 and 13:1 — reflecting both the scale of sovereign bond markets across member states and the enduring centrality of bank lending.

China’s transformation has been remarkable in speed, scope and scale. In 1984, it had no modern equity market; following the 1990–1991 launch of the Shanghai and Shenzhen exchanges, capitalisation grew from a negligible base to approximately RMB105 trillion to RMB111.5 trillion (RM68 trillion) by 2026. This expansion was driven by listings, partial privatisation of state-owned enterprises and successive waves of retail participation. Yet, it sits atop one of history’s largest credit expansions: banking sector assets rose from under RMB1 trillion in 1984 to RMB498 trillion-RMB520 trillion by mid-2026. Government debt, too, has surged — official central government debt plus estimated local government financing vehicle (LGFV) obligations reaching approximately RMB300 trillion, with LGFV debt alone estimated at RMB57 trillion to RMB60 trillion by independent and international Monetary Fund (IMF) analyses. China’s financial landscape is therefore in active transition: the historically bank-dominated system is steadily making room for deeper equity markets, narrowing the structural gap with international norms.

The US presents the advanced market-centric model. In 1984, total equity capitalisation stood at roughly US$1.8 trillion. By 2026, driven by the 1990s dot-com expansion, post-2008 quantitative easing and the rise of mega-cap technology platforms, it had surged past US$74 trillion-US$78 trillion (RM301.96 trillion-RM318.29 trillion), far outpacing growth in both banking assets and federal debt. Federal debt, meanwhile, climbed from US$1.7 trillion (˜38% of GDP) to over US$40 trillion, accelerating sharply during the Global Financial Crisis and the Covid-19 pandemic. Commercial banking assets grew far more gradually — from US$2.4 trillion to US$26 trillion — reflecting a system where public markets, not lending institutions, serve as the primary engine of capital allocation.

These divergent paths are clearest in the crude ratio of indirect financing (banking assets + bond market capitalisation) to direct equity financing. The US maintains the lowest ratio, consistently between 1.0 and 3.0, meaning equity markets rival or exceed the combined size of banks and bond markets. Japan’s ratio ranges from 3.0 to 9.0, reflecting the enduring weight of bank lending and JGB issuance. The Eurozone sits highest, at 6.0 to 13.0, due to its bank-centric traditions and fragmented capital markets. China’s ratio was historically extreme given its pre-1990 absence of equity markets but has compressed dramatically as stock markets mature, converging toward global benchmarks.

These differences carry profound consequences. Market-centric systems like the US reward rapid innovation and scaling but can amplify volatility and concentrate wealth. Bank-reliant systems — Japan, the Eurozone — offer stability and steady credit provision, yet may reallocate capital too slowly toward emerging industries. China’s hybrid model has delivered extraordinary infrastructure growth but faces ongoing challenges balancing credit expansion with efficiency, transparency and risk management. Fundamentally, stock markets support risk-taking and returns; banking systems are structurally risk-averse.

These structures are increasingly interconnected and interdependent. As Japan raises interest rates to combat domestic inflation, the yen carry trade — borrowing cheaply in yen to invest in higher-yield dollar assets — is unwinding, pushing Japanese capital back home and potentially lifting global bond yields. Large-scale AI infrastructure investment, meanwhile, is increasingly debt-financed, exposing weaker borrowers to higher rates. In Japan, repatriated capital is shifting toward equities, re-energised by improved corporate governance, higher shareholder return expectations and strategic pivots toward semiconductors and defence.

Policymakers are increasingly recognising equity markets as critical for funding high-risk, high-reward innovation while banks continue to serve conventional industries and consumer credit. Without productivity-driven growth, current government debt trajectories become fiscally unsustainable across major economies.

In sum, the global financial landscape is evolving along distinct, historically rooted trajectories. Equities are gaining importance everywhere, yet the institutional legacy of banking and debt remains powerful. The ultimate test will be productivity gains in the real economy — engineered, not financially engineered. Tech platforms are already encroaching on traditional banking franchises through speed, scale and richer data ecosystems. The task for policymakers is to harness deep capital markets while managing debt overhang, valuation excess and uneven development. Finance must serve the real economy; if growth does not deliver shared prosperity, political fragmentation will follow. As four decades of data demonstrate, how an economy innovates, adapts to geopolitical and climate shifts, and funds its future matters more than GDP numbers alone. If GDP grows but people do not thrive, the current system cannot survive for long.

Tan Sri Andrew Sheng writes on global issues from an Asian perspective

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