Do the Japanese and East Asian crises spell the failure of state-led models of development? My dissertation research offers a novel framework to understand the Japanese financial crisis. While most existing explanations focus on the domestic weaknesses of the Japanese system, I argue that the failure of Japan’s institutional response to the bubble period and to the subsequent economic crisis can only be understood in the context of the internationalization if Japan’s political economy, a process which started in earnest in 1984. Whether Japan is seen as a state-led developmental state or as a state-coordinated network state, opening to free international capital flows is disruptive. By offering differential opportunities and threats to different key actors in the political economic system, it creates systemic entropy. This entropy in turn implies a decrease in the state’s capacity to coordinate the economy and to respond to economic crises. Specifically, I plan to analyze the consequences of the shift from a credit-based to a market-based financing system for large export-oriented corporations, following Japan’s opening to free capital flows. Two precise research questions emerge out of this analysis. First, to what extent did large export firms shift their financial liabilities and assets from domestic bank loans and deposits to international market instruments following the deregulation of capital flows and the rise of the Yen? Second, what was the impact of these changes on banks, the inefficient business sector, the Liberal Democratic Party, and the bureaucracy’s ability to coordinate the economy? What were the responses of these actors to the changes?