ECONOMIC DEVELOPMENT OF JAPAN -- FINAL EXAM

(3:00pm–4:00pm, July 18, 2008)

Instructor: Kenichi Ohno

l PLEASE WRITE CLEARLY. Poor handwriting will be ignored and you will get no points.

l Answer ALL questions. You may answer in any order. Each question is worth 20 points.

l Use only TWO official answer sheets. Use only FRONT side of each answer sheet.

l No books, data, documents, notebooks or electronic devices are allowed.

l You may leave the room if you finish early. At 4:10pm, model answers will be distributed.

l Overall exam results will be posted in the web and your graded exam will be returned through GRIPS Academic Office.

Q1. What is zaibatsu? Explain how Mitsubishi Zaibatsu emerged.

Q2. Describe Japan’s domestic labor market in late Meiji (around 1900).

Q3. Compare the fiscal and monetary policies of Finance Minister Junnosuke Inoue (during 1929-31) and those of Finance Minister Korekiyo Takahashi (during 1932-36).

Q4. Explain the output recovery strategy proposed in the 1946 MOFA Report (*). Is there any difference between this and the IMF’s policy advice to the former Soviet Union republics in the early 1990s?

(*) Ministry of Foreign Affairs Special Survey Committee, “The Basic Problems of Japanese Economic Reconstruction,” September 1946 (English translation published in Saburo Okita, ed, Postwar Reconstruction of the Japanese Economy, University of Tokyo Press, 1992).

Q5. Explain the “1955 Regime.”
Model answers
(Other answers are also possible. Long answers do not necessarily improve points.)

A1. Zaibatsu is a business group owned by a certain family whose activities range over many sectors, each with often a large market share. Mitsubishi Zaibatsu was founded in early Meiji by Yataro Iwasaki, a seisho (politically connected merchant) engaged in maritime transport. With the support of the government, Mitsubishi’s activities expanded to coal mining, shipbuilding, banking, steel, electrical machinery, and trade. By 1920 Mitsubishi was reorganized into a holding company which controlled member joint-stock companies (the “Konzern” system). In the 1930s heavy industries were added. All zaibatsu, including Mitsubishi, were disbanded after WW2 by the order of the US supreme commander.

A2. The labor market in late Meiji exhibited individualism and high turnover (job hopping) with little attachment to a particular company. Engineers often migrated among SOEs or military factories to acquire new technology then set up their own factories with second-hand equipment. Workers generally lacked discipline and had low propensities to save. The post WW2 characteristics of long-term relationship and company loyalty were not present in Meiji. There was a large pool of rural surplus labor which began to supply service workers (such as housemaids) and industrial workers in the cities. Labor management was often indirect, with labor brokers mobilizing workers to execute contracted tasks for the factory.

A3. FM Inoue (Minsei Party) argued that industrial inefficiency and bad debt created by the WW1 bubble had to be quickly removed and Japan should return to the gold standard (fixed exchange rate). For this purpose, he adopted deflationary policy with fiscal austerity. Together with the negative impact of the worldwide Great Depression, this policy plunged the nation into deep recession (Showa Economic Crisis). FM Takahashi (Seiyukai) reversed Inoue’s policy by floating (i.e. depreciating) the yen, expanding public spending, lowering interest rates and letting the Bank of Japan monetize fiscal deficit (i.e., direct purchase of government bonds). As a result, the Japanese economy began to recover strongly around 1934. FM Takahashi then tried to curb military expenditure but was assassinated in a failed military coup in 1936.

A4. The 1946 Report argued that long-term goals should be set for recovery as well as for Japan’s global positioning in the new world economy. To realize these goals, concrete industrial strategies were explored for each sector. Such real-sector pragmatism was in sharp contrast to the typical IMF/WB policy advice in more recent years which emphasizes macroeconomic stability as the primary requirement, dislike of selective intervention in specific industries, greater trust in markets, and improving institutions and business environment generally without specific industrial goals.

A5. In 1955, political instability of the early postwar period was ended by the creation of the Liberal Democratic Party (LDP) through the merger of two conservative parties. The Japan Socialist Party (JSP) was also reorganized to become the largest opposition party. Japanese politics ever since evolved along the pro-US/pro-business line (LDP) vs. the socialist/reformist line (JSP). However, in terms of numbers LDP continued to dominate JSP and other opposition parties, and no alternation of power (as seen between Seiyukai and Minsei Party in 1924-32) occurred. LDP secured rural votes by agricultural support and public works. Although LDP’s majority ended in 1993, LDP continues to hold power by forming coalition to this date.