POL 334
Political Economy of Japan
Dr. Lairson
Japan Economy
Second Japanese miracle – 1955-1973 10% growth
Japan is like China today during that time – amazing and frightening
Sources of Japanese growth
Already developed but damaged economy
What did Japan already have? 292
International economic and political environment
What helped Japan grow?
How did GE and GM help Japan?
National commitment to growth
Role of the Japanese state
MOF; MITI
Indicative planning; informal persuasion; administrative guidance;
regulatory control
Power of economic bureaucracy – shape and regulate private
investment
Protectionism; cartels; targeted loans; limit foreign investment; limit
foreign investment; industrial policy
Relationship of the state and private firms
What kinds of industries were emphasized during the 1955-1973 era? 294
US consumerism as model to emulate
Japanese savings
How are zaibatsu and keiretsu alike and different? What were the economic
advantages to Japan from keiretsu?
Oligopolistic competition
Keidanren
What kinds of innovations did Japanese firms develop that gave them
significant competitive advantages against US firms?
Toyota
Political Economy of Economic Growth
Iron Triangle
What were the political processes that led to LDP political dominance?
Koenkai – support associations
Pork barrel
Money
Multimember districts
What are habatsu why do they matter?
Describe the opposition political parties in Japan.
What negative externalities of economic growth led to conflicts over policy?
Describe the events that undermined Japanese economic growth in the 1970s.
How did the Japanese government react?
Rosenbluth, Frances McCall; Thies, Michael F. (2010-04-12). Japan Transformed.
Princeton University Press.
Export sector versus non-traded sector
Convoy capitalism
Political Economy of Japan means?
How can we relate the political regime to the economic system?
Identify and explain the key ideas, terms and assertions made in these paragraphs.
How did Japan tumble so quickly from an economic powerhouse to a basket case? In
this chapter,
we argue that an economic growth strategy based on industry protection
contained the seeds of later failure from the very beginning. Japan’s rapid
economic development in the postwar years and its later decline were both
products of a postwar political deal to protect big investors in war industries
after World War II. Industry grew quickly in a pro-business climate, to be sure,
but protectionist policies accommodated increasingly large amounts of
deadwood into the Japanese economy, especially in the nontraded sectors that
were most sheltered from competition.
Japan’s industrial policy was supported by well-known economic institutions—
the main bank, cross-shareholding, and lifetime employment, to name just
three. The minimalist nature of the Japanese welfare state, and the unequal
opportunities for women in the workforce, are also well documented. A
political logic undergirded the entire system of “convoy capitalism,” 3
propping up firms and whole industries that would have failed in a lessregulated economy, and foisting on Japanese taxpayers high prices and taxes,
limited choice in the marketplace, and rigid career paths.
For the staying power of the postwar system, we blame Japan’s rules of electoral
competition that pitted LDP politicians against each other in multimember
districts. As we described in the previous chapter, LDP politicians were unable
to campaign on the basis of a party platform, however public spirited they
may have been, and therefore had to “sell” protective regulation in exchange
for campaign contributions. Any notion of the “public good” was swamped by
the flood of patronage doled out to specific private interests. Moreover, the
multimember-district system lent itself to creating new protected groups, and
before long big business in Japan had to share policy favors with farmers and
small business proprietors in sectors of the economy not engaging in
international trade and who were therefore under less market pressure to
innovate. Along the way, so many different producer groups were cut in on the
bargain that, as it turned out, Japanese economic development proved to be
relatively egalitarian.
Over time, the LDP had to spend ever more to keep all of its diverse group of
supporters in tow. It was only when the economy finally collapsed under the
weight of massive resource misallocation that the hidden costs of convoy
capitalism became clear. Reformers within the LDP demanded an end to
money politics, splitting the party and destroying its parliamentary majority.
Within a year, the politicians agreed to change the electoral system to one that
would foster party-based competition. We describe the process and the political
effects of that reform in chapter 6, and the economic policy effects in chapter 7. In
the remainder of this chapter, we lay out the logic of Japanese convoy capitalism,
and explain how global economic integration in the 1980s and early 1990s
pulled the rug out from under the LDP’s money politics.
Given the shortage of capital and an abundance of labor, Japan’s comparative
advantage in world trade should have been in light manufacturing. The textile
industry had been the engine of Japan’s economic growth before the military
coup in 1932, and a number of economists, including Bank of Japan governor
Ichimada Hisato, argued that Japan’s government would be best served by the
decentralized, small-scale capitalism of the prewar period. 6 In theory, Japan’s
investment in heavy industries during the war constituted a misallocation of
resources and should have been considered unrecoverable sunk costs.
Industrial Policy— the Coalition of Steel and Rice
The Japanese government’s heavy industrial development policy (keisha seisan
hoshiki), administered principally by the Ministry of International Trade and
Industry and reinforced by other agencies and quasi-public banks, favored heavy
industry in a variety of ways.
MITI Heavy Industries Bureau limited entry and often regulated pricing to help
stabilize profits.
enjoyed privileged access to cheap loans from the Japan Development Bank.
The Japan Development Bank was the largest of several quasi-governmental
financial institutions funded by the Fiscal Investment and Loan Program (FILP)
which pooled millions of savings accounts from post offices around the
country.
without import competition, many businesses that grew rapidly in this
hothouse environment failed to keep innovating and eventually proved
incapable of competing globally.
But the firms and sectors that received the most JDB loans, subsidies, tariff
protection, and tax relief actually grew at a slower rate and showed lower
productivity growth than did the rest of the Japanese economy. 14 Steel and
cement manufacturing, shipbuilding, and mining, for example, lagged behind
the less favored electronics and auto sectors.
The incentives that Japan’s electoral rules gave politicians to develop loyal personal
support provided an opening for new interest groups besides big business to find
representation in the LDP.
The result was a “steel and rice” coalition backing the LDP, whereby heavy
industry provided money for campaigns and farmers turned out the vote in large
numbers. 16 As with Bismarck’s “iron and rye” coalition in nineteenth-century
Germany, both members of the coalition were willing to make a costly trade for the
bigger prize of protection. Japan’s heavy industry would have preferred protection
for themselves but open markets in agricultural products to lower food prices and
therefore wages. Farmers would have preferred open markets in industrial goods to
lower the costs of food production while keeping their own markets closed to
foreign competition. Instead, the LDP brokered a deal to give each group its
highest priority, of market protection, at some cost to each group— and
especially high costs to consumers— of higher prices.
In the late 1950s and early 1960s, small businesses also joined the LDP support
coalition, forming the third leg of the stool that propped the LDP’s long-term
tenure in office. Mom-and-pop retailers, as well as small manufacturers and
subcontractors of the manufacturing giants, were present all around the country
and were organized into many LDP Diet members’ support networks. In exchange
for their votes, the LDP gave small stores regulatory protection from retail giants.
Although Japanese agriculture and retail are known for their low productivity of
labor, allowing the market to winnow out the less productive enterprises would
have been counterproductive for the LDP, which liked them precisely because of
their large numbers that could turn out at elections and vote in predictable ways.
Are there any positive effects of bank lending?
Main Banks and Keiretsu
Banks are one piece of an interlocking set of economic institutions that
characterized the postwar Japanese system of corporate governance: banks loans
and stable shareholding arrangements released management from short-term
thinking, and lifetime labor contracts motivated workers to invest in
productivity-enhancing skills and routines
Keiretsu firms bought each other’s shares to maintain internal control over
shareholding
From the standpoint of the Anglo-American model of corporate governance,
shielding incumbent managers from market discipline is a bad idea. 24 While
shareholders, as the firm’s owners, want to maximize profits, managers, as salaried
agents of shareholders, may prefer some mix of goals that includes their job security
and leisure. In a stock-market-based system of corporate finance, share prices
provide a constant measure of how well managers are marshaling the firms’ assets,
and a low share price can trigger takeovers or otherwise result in the replacement
of management. 25 To solve the potential problem of managerial slack, according to
the Japanese model of corporate governance, banks monitor firm performance and
play a managerial role if necessary. If they get it right, the system is nearly perfect:
cross-shareholding allows corporate managers to take the long-term view, while
oversight by main banks ensures that managers do not use the freedom from shortrun performance metrics to enjoy job security at the expense of the firm.
But there is more to this argument. Not only do banks keep managers on their toes,
but long-term bank loans also make it possible for firms to offer employees longterm labor contracts, and this is crucial if workers are key players in the Japanese
model of the firm. Job security motivates workers to invest in firm-specific skills,
making possible the Japanese manufacturing techniques of team production and
quality control that rely extensively on inputs from skilled labor, and that are
central to productivity in Japanese manufacturing. 26 According to this model,
Japanese workers are not merely replaceable cogs in a generic production
process. Instead, because of their superior loyalty and stock of knowledge, they are
suppliers of indispensable ideas and techniques that make Japanese products
of reliably high quality.
The Japanese have shown that there are multiple efficient ways to produce
things, only one of which is the U.S. way of using low-skill labor to fill in the
cracks around capital-intensive production processes. Highly skilled and
motivated workers have been protected from layoffs in economic downturns
through a variety of measures. But this rosy picture of Japanese stakeholder
capitalism is only one part of the story. Banks were sometimes poor monitors,
and the companies that relied on long-term bank loans did not in fact become the
engines of Japanese economic growth. 28 The banks, moreover, were recipients of
political favors in their own right.
After World War II, attempts by SCAP to reduce the market power of the largest
banks were cut short by the Reverse Course, and by 1947, the Occupation
authorities began to prioritize the health of the banking system over economic
deconcentration.
Along with steel and construction, banks were among the three biggest contributors
to the LDP’s electoral coffers in the 1960s through the 1980s. In exchange, banks
enjoyed various regulatory favors including a low ceiling for interest rates paid on
savings accounts, which prevented banks from competing away the spread between
their cost of money and the rates at which they could lend to growing businesses.
The Ministry of Finance (MOF) implicitly guaranteed the solvency of banks, not by
requiring banks to hold capital in reserve against the possibility of bad loans, but by
regulating the competition among banks and across different types of financial
institutions in a way that maintained even the weakest as a going concern.
The MOF had attempted repeatedly to shift more responsibility for financial system
stability onto banks themselves through prudential rules of various kinds, but in
each instance the ministry was thwarted by LDP politicians with close ties to the
banks. 34 As we have argued, LDP politicians were more preoccupied with
providing particularistic policy favors to big campaign contributors than with
formulating public policy with the average citizen in mind.
Japan’s most productive firms, in automobiles and electronics, typically had
lower than average dependence on main banks. When the MITI in the 1960s
pressured the smaller automobile companies to merge with either Toyota or Nissan,
they were able instead to solicit capital investments from foreign firms: Mitsubishi
from Chrysler and Isuzu from General Motors in 1971, Mazda from Ford in 1979,
and Suzuki from General Motors in 1981. By the mid-1980s, when firms such as
Toyota or Canon or Panasonic began to look good to banks, those firms no longer
needed loans. They had become profitable enough to finance their investments
through retained earnings, and had established corporate credit ratings that gave
them access to the cheapest sources of capital in the world. International product
competition and internal competition for the top corporate jobs, rather than
monitoring from banks, kept the management of these firms on their toes.
It would be an exaggeration, however, to say that these exporting firms grew hardy
in the thin air of laissez-faire, for they, too, were recipients of a variety of
government measures to promote domestic businesses. Until the mid-1970s, the
Japanese government protected domestic manufacturers from international
competition behind a high wall of import tariffs.
Throughout the 1970s and 1980s, chronic Japanese trade surpluses against the
United States aroused ferocious pressure from the U.S. Congress. The Japanese
responded with a string of concessions, including the elimination of import tariffs on
manufactured products by 1978, voluntary export restraints on steel, automobile,
and textile exports to the United States, and promises to buy more U.S. products. But
farmers and retailers continued to hide behind protectionist barriers. Moreover,
although many of the visible barriers to trade in manufactured goods were out of
the way by the 1980s, American trade officials complained that the real
problems were invisible “structural impediments,” including the keiretsu and
main bank arrangements just described, 39 while Japanese trade officials
countered that Japanese companies were just better at manufacturing. There
was truth to both sides: companies like Toyota were outcompeting American
companies wherever they met, whereas other industries, including
agriculture, food processing, construction, and transportation, were
backwaters that could not survive without props.
THE POLITICS OF THE JAPANESE WELFARE STATE
Japan’s welfare state does not fit easily into typologies that have been built
around European and American examples. 40 Like the liberal market economies
of the United States and the United Kingdom, Japan is a chary welfare state as
measured by direct government spending on welfare as a percentage of GDP. On the
other hand, much of Japan’s labor market is characterized by long-term labor
contracts, as in the coordinated market economies of Europe. Japan has universal
health insurance, but because pensions are employment based and relatively
modest, many Japanese citizens sock away a large chunk of their wages into savings
accounts to make up the difference. 41 This jumbled picture does make sense,
however, once one understands the nature of Japanese political coalitions.
Labor
THE POLITICS OF THE JAPANESE WELFARE STATE
Japan’s welfare state does not fit easily into typologies that have been built around
European and American examples. 40 Like the liberal market economies of the
United States and the United Kingdom, Japan is a chary welfare state as
measured by direct government spending on welfare as a percentage of GDP.
On the other hand, much of Japan’s labor market is characterized by long-term
labor contracts, as in the coordinated market economies of Europe. Japan has
universal health insurance, but because pensions are employment based and
relatively modest, many Japanese citizens sock away a large chunk of their wages
into savings accounts to make up the difference. 41 This jumbled picture does make
sense, however, once one understands the nature of Japanese political coalitions.
Long-term labor contracts in Japan emerged in conditions of labor scarcity but not
labor political empowerment, first after World War I and then in their current form
after World War II. 43 Unlike the continental European model, in which the
interests of organized labor were championed by strong social democratic
parties that participated in, or even dominated, governments, the LDP’s
coalition excluded labor. 44 Japan has no counterpart to the legislative
protections of labor that European labor parties have succeeded in
incorporating into the industrial bargaining landscape.
Health Insurance
Health insurance, which is provided universally at a far lower price than the
private health insurance scheme in the United States, is one of Japan’s success
stories. But even this ostensibly social welfarist outcome bears the
unmistakable mark of Japanese politics. National health insurance is an
umbrella for substantially unequal plans that are based on employment status
and wages.
We noted above that the system of lifetime employment led to discrimination
against women in the workforce— it was a greater risk (or higher cost) to
commit to a female employee who might leave the firm to have children.