Political Economy of Japan

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 less-regulated economy, and foisting on Japanesetaxpayers 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 IchimadaHisato, 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 (keishaseisanhoshiki), 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.

enjoyedprivileged 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 short-run 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 long-term 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.