In the face of economic recession and financial system difficulties, the
extent to which the Japanese political economy is undergoing change has
merited considerable attention. Despite continued international pressures
to liberalize its economy, Japan has long been relatively
impervious-maintaining a developmental state in defiance of laissez-faire
prescriptions. Events of the past twenty years, however, suggest that some
aspects of the Japanese variant of capitalism have been ceded in adherence
with international demands. If this is true, several questions are begged.
First, what were the salient political and economic characteristics of the
"Japanese model" of capitalism in the first post-war decades and how did
these differ from other models? Second, what changes have been wrought in
recent years and how has this affected the distribution of economic and
political power within the system? Finally, and more speculatively, to
what extent do these changes necessitate a reconsideration of Japan's
political economy?
I. The Japanese Model in the High Growth Period of the 1950s to 1970s and
Subsequent Liberalization
In an early and widely-cited statement on the relation between a country's
financial structure and its industrial economy, John Zysman (1983)
identifies three distinct types of national financial arrangements. The
Anglo-American model is characterized by decentralized, market-based
capital allocation decision making; the German model is typified by
oligopolistic decision making by a small number of financial institutions
who work in concert with the state; and the French model is one in which
the state dominates the allocative decision making process. According to
Zysman, Japan most closely matches the third model in which the state
directs financial credit disbursements and sets prices according to its
industrial development goals.
Zysman's state-led model appears to capture the essential dynamics of the
Japanese system at least through the first several decades following World
War II. The specific political structures that have nurtured post-war
industrial growth have been the bureaucracies of the Ministry of
International Trade and Industry (MITI) and the Ministry of Finance (MOF).
The MOF largely directs the actions of the central bank, the Bank of Japan.
State financial decision-making is centered in the MOF bureaucracy and
thus is somewhat isolated from direct electoral pressures, however,
continuity has also been provided in the larger political environment in
that the Liberal Democratic Party (LDP) has maintained control of Japan's
parliamentary government (though tenuously in recent years) for most of the
post-war era.
The strength of the professional bureaucracy has origins in the Meiji
Restoration of 1868. The new regime reordered governing structures by
creating a centralized and professional civil service administration that
operated alongside of a nascent parliamentary democracy. Economic
decision-making power became consolidated in the MITI and the MOF, however,
in the aftermath of World War II and American occupation. With regard to
capital finance, the MOF imposed a system of stringent regulations which
effectively restricted equity finance and encouraged bank credit finance of
industrial development. Moreover, financial institutions were regulated to
ensure specialization by purpose and type of finance provided; personal
savings placed in the postal system, for example, were directed toward
government investment while deposits and Bank of Japan loans to the
nineteen major banks were channeled to corporate investment. By rationing
credit to banks, the state, operating through the arm of the MOF and the
Bank of Japan, was able to intervene in the fledgling post-war economy and
target manufacturing development to key industries such as steel and
chemicals. Lacking alternative financing, industries depended upon the
state for research and development subsidies, favorable loan terms, and
reliable, low interest rates. As a result of state planning and
intervention in allocation decisions, the Japanese manufacturing economy
blossomed through the 1950s, 1960s, and into the 1970s.
The state-led, bank-financed, export promotion industrialization of this
era resulted in the country's strong economic growth. In this period, real
GNP growth ranged around ten percent, dropping from a high of nineteen
percent in the late 1960s to five percent in the first half of the 1970s.
Inflation was kept relatively low, creeping up to nearly twelve percent by
the mid-1970s, but remaining around five percent before and after this
time.
Conditions began to change, however, as early as the oil-price shock of
1973; at the time, Japan depended on imported oil for nearly 75 percent of
its energy needs. One of the results of the shock was a shift in
manufacturing emphasis away from heavy and material-producing industries
and toward services, computers, and industries which were generally less
dependent on imported oil. Many of these newly favored industries also
required less capital accumulation. Oil-price shock, combined with the
shift from a fixed to floating exchange rate system and liberalization
demands from the United States in reaction to its continued trade
imbalances with Japan, increased external pressure on the country's
traditional growth management strategy and laid the groundwork for a number
of deregulatory and financial reform policies which were implemented over
the ensuing twenty years. Growing government debt in the 1970s and early
1980s, along with an increasing inability of the Bank of Japan to
repurchase that debt from banks and securities companies, stimulated
domestic demand for reform as well in that financial institutions became
increasingly resistant to accepting debt that they then were restricted
from reselling in secondary markets. In the face of these multiple
pressures, capital flow restrictions were relaxed, interest rate controls
were eased, portfolio opportunities expanded, and the role of the secondary
market in the financial system grew substantially.
As a result of (and aiding in) the deregulatory actions taken by the
Japanese state in the 1970s and 1980s, a number of significant structural
changes have occurred. First, Japan's largest corporations have been able
to shift from a reliance on bank loans to market financing, particularly in
the Euromarkets. Second, Japan emerged as a major creditor nation, with
rapidly growing trade and financial surpluses and increasing investments
outside of the country (particularly in the United States and in Asia's
newly industrializing countries). Third, in a country known for its high
levels of personal savings, consumer spending increased substantially.
Fourth, the country's banks and other financial institutions increasingly
directed financial resources toward the purchase of real estate and shares,
driving prices up and creating the "bubble" economy of the late 1980s which
then crashed in the early 1990s.
Economic hardships have followed the stock market crash in 1991. The most
notable outcome has been the growing volumes of bad debt held by Japan's
banks, estimates of which range from thirty percent of GDP (which would put
it at roughly ¥144 trillion) to ¥76 trillion. The cumulative value of
non-performing loans written off in fiscal years 1991 to 1997 held by the
top nineteen banks has been estimated at ¥37.5 trillion. Not only have
corporate bankruptcies grown, but banks are reported to be increasingly
loan-shy and many are thought to be inadequately capitalized, further
jeopardizing banks' flexibility. Export and import levels continued to
grow throughout the first half of the 1990s, although Japan's ability to
maintain its trade surplus most recently has been attributed to declining
imports. Real GDP increased annually by a few percentage points until
1996, at which point, growth slowed and then declined.
II. Situating Liberalization: The Eclipsed State or Strong State?
In light of continued gradual reforms, many predict that Japan's
traditional state-led economy will recede and a more decentralized
competitive market system will emerge to make capital allocation decisions.
In tandem with this, the state's recent policy decisions are often
portrayed as the product of pluralistic bargaining between party
politicians and various business and financial interest groups, rather than
as the result of the actions of insulated bureaucrats. However, not all
are as willing to concede the state's autonomy, arguing rather that the
state's discretion in industrial policy is key to its ability to adapt to
the new world environment and that the state may, in fact, be facilitating
some aspects of internationalization as a pro-active adaptive response.
An even stronger version of this suggests that Western hubris has created a
myth of Japanese decline and thus misses the extent to which the state is
still firmly directing long-term economic growth for the welfare of the
whole society.
While resolving the convergence/distinctiveness debate is beyond the scope
of this paper, initial steps can be made to untangle the relationships
between key economic and political actors. To the extent that the
preferences of various actors can be identified and situated historically
in the context of Japan's internationalization, some insights may be gained
into the likelihood of convergence and the form that such a convergence
might take. This then provides leverage for assessing the continued
integrity of Zysman's state-led model.
Under the aegis of the state, the cornerstone of Japan's economic growth
has been the keiretsu, huge conglomerates comprised of sectorally diverse
manufacturing firms which are organized around the country's large city
banks and other financial institutions. There are six horizontal keiretsu
groups which are responsible for a significant proportion of Japan's
economic output. Three (Mitsui, Mitsubishi, and Sumitomo) have origins in
pre-war, family-owned zaibatsu groups and three (Fuyo, Daiichi Kangyo, and
Sanwa) were organized after the war. The economic significance of these
six keiretsu, even today, cannot be overestimated. Combined, they contain
roughly 190 core companies which, as of the early 1990s, were responsible
for 17 percent of Japan's total paid-in capital, over 15 percent of
aggregate company sales, and over 15 percent of total assets. If
subsidiaries and affiliates are included, the number expands to roughly
12,000 firms which, combined, are responsible for over 25 percent of
Japan's sales output and hold nearly 27 percent of assets.
To assess the strength of business vis-a-vis banks, two aspects of the
keiretsu group organization are noteworthy. First, the network of
relationships embodied by the keiretsu organizational structure ensures
enduring patterns of economic elite interactions, information sharing, and
coordinated financing. The main bank provides a significant proportion of
financing to firms in the keiretsu, frequently coordinates lending from
other banks and financial institutions, and is imbricated with the firms in
cross-shareholding. The loose coherency of the groups is further enhanced
by regular meetings of top management. Conversely, capital markets
traditionally have not played as extensive a role in corporate financing
and are still a relatively weak source of financing for any but the largest
firms. As a result, while some of the instability or risk-taking
associated with the arms-length financing of markets has been reduced, this
has been, in part, at the price of corporate dependency on banks (and to a
lesser extent other firms in the group). One implication is that if the
banking system is crippled, as appears to be the case currently, the entire
economic infrastructure is endangered.
Second, the traditionally strong relational ties between banks and firms,
in which trust, cooperation, and obligation are prioritized, help to cement
the structural inducements outlined above to mitigate corporate "exit."
These interlinkages have historically encouraged support and, more crudely
put, corporate bail-outs. For example, Japanese banks have been criticized
for their lack of profitability. Yet this has been due in part to their
role as industrial financiers; since shareholders are also clients, there
is less incentive to maximize return on equity. Of course, since the city
banks at the pinnacle of the keiretsu structures make crucial capital
decisions based on the directives of the MOF and the Bank of Japan,
industry has traditionally been in somewhat of a disadvantaged position.
While selected industries have benefited greatly from government largesse,
others have been less fortunate.
Given the relationship between keiretsu members and their main bank
affiliates, the two possible interpretations of deregulatory changes (i.e.,
converging capitalism or state structure distinctiveness) can be more
closely interrogated. Under an eclipsed state scenario, deregulation is
eroding the traditional relationship by allowing at least larger
corporations to seek alternative domestic and international sources of
finance while gradually exposing banks to more competition (removing
barriers between banking and securities industries, for example). In this
scenario, state capacity for direct oversight and direction is diminished,
and policy is formulated not autonomously, but via a process of negotiated
bargaining that more closely resembles Zysman's German model than the
strong state model. As international liberalization pressures continue,
banks and industry may alternately seek state protection or further
liberalization depending on the stakes in any given policy dispute, yet at
best the state can mediate a pluralistic bargaining between sectors with
greater independence than previously held.
In the eclipse scenario, a reduced state role may help to explain the
current economic crisis. With excess liquidity and less corporate
responsibility, banks were free to invest as they saw fit in the 1980s. As
a result, banks made "unwise" investment decisions that resulted in the
eventual bursting of the bubble economy and subsequent recessions. Because
the keiretsu structure connecting banks and business firms is still
existent, however, the banks' troubles redounded to the entire economy:
corporate bankruptcies have increased; unemployment has risen to a 1990s
high of four percent; GDP growth has slowed; and government debt has risen.
Because the eclipse scenario depicts liberalization largely as a
uni-directional trend, (i.e., to stay competitive, state intervention must
be minimized), continued reform to meet liberalization pressures is
considered the most viable option for the future. However, with economic
instability creating an open space for policy action, a resurgent role for
the state, at least in some areas of financial decision-making, is another
option.
An alternative interpretation is that the state is still the most dominant
actor in decision-making and is directing the process of liberalization
through the manipulation of new policy tools. Arguments in this vein rely,
implicitly or explicitly, on an elaborated version of Zysman's strong state
model. State autonomy is maintained in large part because the essential
dynamic of institutional relations maintains. Economic decision making
still resides with Japanese bureaucracy, particularly the MOF, which is
highly prestigious and attracts university elite who embark on long-term
careers as civil servants. In this sense, the MOF represents a Weberian
bureaucracy, par excellence, complete with firmly established institutional
rules, strict hierarchies, and norms of behavior. These formal structures
are reinforced by informal elite networks that date from relationships
established while at university. The autonomy provided by coherent
meritocratic bureaucracy effectively ties an individual bureaucrat's
interests to institutional goals. Transformative economic opportunity
(beyond mere profit-seeking) is possible when the autonomous bureaucracy is
"embedded" in surrounding private sector networks. The host of formal
linkages between the MOF, Bank of Japan, and financial institutions, thus
contributes to state leadership as do strong relational ties. Fellow
university classmates frequently make up the corporate planning department
of banks, for example, and it is through these departments that the MOF
directs much of the activity of the banks.
approximates an ideally collaborative business environment. With regular
management meetings and cross-shareholding commitments, the keiretsu
institutionalizes low monitoring and sanction costs, encourages a long-term
development orientation, and reduces the likelihood that collective action
failures will occur. If their historical legacies are taken into
consideration (i.e., their zaibatsu origins) the strength of keiretsu ties
is likely all the more enhanced. The result is akin to Sylvia Maxfield and
Ben Ross Schneider's (1997) description of "encompassing" business
associations. While these authors are more concerned with how
associations encourage members' productivity and quell particularistic
rent-seeking activity, the connection is that there exist institutionalized
strategies to induce collaborative effort (among groups and with the state)
toward long-term growth and stability, even at the cost of individual
short-term benefit loss. Zysman's model still operates, but state
direction is successful in part because of the receptiveness of the
keiretsu structure in which banks function as primary capital allocators
but in a broader business environment that stresses collaboration.
This still-strong state interpretation differs from the eclipse
interpretation in that the logic of free market economy is questioned.
incompatible with a strong state and functions rather to promote and be
promoted by market ascendancy and pluralistic political bargaining. In the
still-strong state analysis, multiple national goals exist (economic
growth, stability, and perhaps equity, for example) and liberalization is a
policy tool that is selectively employed in service of these goals. As
such, it does not inherently lead to the erosion of state capacity.
The difficulty with the strong state model is that it is difficult to
reconcile with banks' reckless lending patterns of the 1980s and current
economic difficulties. If bank discretion was state-facilitated, then this
represents either a rather large miscalculation on the part of the MOF or,
perhaps, a state whose embedded autonomy is not as altruistically oriented
toward "national goals" as previously suggested. In this case, what is
called into question is the assumption, implicit in the collaboration
scenario outlined above, that the state is committed to pursuing an
identifiable public interest. Rather, the interpretation is that if the
state is still strong, then it has, in effect, allowed itself to be
"captured" by financial interests in that it was quiescent in the face of
disastrous capital decision-making.
This alternative interpretation of the strong state is not meant to suggest
a nefarious collusion or elite conspiracy. Rather, the point is made to
underscore the extent to which a system of intensely networked
state-finance-industry relations, despite its much-celebrated merits, may
have unintended consequences. This is in line with Peter Evans' (1997)
acknowledgment that embedded autonomy can degenerate into state capture if
actions of the state enable business to become more powerful. In this
instance, state-orchestrated deregulation may have provided the economic
leverage through which banks were able to pursue lax standards of
decision-making. Because the existing bad loans stem in large part from
risky speculative ventures in real estate and securities and from loans to
corporations using overvalued collateral, a long history of "collaboration"
between keiretsu members and MOF bureaucrats may have contributed to less
than prudent decision making by the banks and tacit approval by the state.
The strong but captured state scenario is similar to the strong state model
in that the institutional infrastructure, or capacity, still exists for
state leadership in economic decision-making. What is at stake is the
ability of state officials, whether bureaucrats or elected party officials,
to use existing infrastructure to define and impose an economic program
that may be in defiance of the goals of a particular sector. To the extent
that market finance is still relatively underdeveloped and banks are again
in need of state intervention, the necessary (if not sufficient) conditions
for this possibility appear present. Clearly, both of these alternatives
differ from the eclipsed state model in that the state is still accorded a
central role in financial decisions, as originally outlined by John Zysman.
While additional empirical evidence may aid in assessing the comparative
strengths of these three interpretations, the almost daily changes in
Japan's economic forecasts and the current instability of the governing
coalition makes all attempts at prediction tenuous.
Works Cited
Calder, Kent. 1997. "Assault on the Bankers' Kingdom: Politics, Markets,
and the Liberalization of Japanese Industrial Finance." in Michael Loriaux,
et al. Capital Ungoverned: Liberalizing Finance in Interventionist
States. Ithaca: Cornell University Press.
Cargill, Thomas F. and Shoichi Royama. 1988. The Transition of Finance in
Japan and the United States: A Comparative Perspective. Stanford: Hoover
Institution Press.
Corbett, Jenny. 1994. "An Overview of the Japanese Financial System." in
Nicholas Dimsdale and Martha Preveser (eds.) Capital Markets and Corporate
Governance. Oxford: Clarendon Press.
Evans, Peter. 1992. "The State as Problem and Solution: Predation,
Embedded Autonomy, and Structural Change." in Stephan Haggard and Robert
Kaufman (eds.) The Politics of Economic Adjustment. Princeton: Princeton
University Press.
---. 1997. "State Structures and Government-Business Relations." in
Maxfield and Schneider (eds.) Business and the State in Developing
Countries. Ithaca: Cornell University Press.
Fingleton,Eamonn. 1995. Blindside: Why Japan is Still on Track to
Overtake the U.S. by the Year 2000. New York: Houghton Mifflin Company,
1995.
Johnson, Chalmers. 1982. MITI and the Japanese Miracle: The Growth of
Industrial Policy, 1925-1975. Stanford: Stanford University Press.
Kinyo Bijinesu (Finance Business). July 1998.
Kitagawa, Hiroshi and Yoshitaka Kurosawa. 1994. "Japan: Development and
Structural Change of the Banking System." in Hugh Patrick and Yung Chul
Park (eds.) The Financial Development of Japan, Korea, and Tawain: Growth,
Repression, and Liberalization. New York: Oxford University Press.
Maxfield, Sylvia and Ben Ross Schneider. 1997. "Business, the State, and
Economic Performance." in Sylvia Maxfield and Ben Ross Schneider (eds.)
Business and the State in Developing Countries. Ithaca: Cornell
University Press.
Meerschwam, David. 1991. Breaking Financial Boundaries: Global Capital,
National Deregulation, and Financial Services Firms. Boston: Harvard
Business School Press
Miyashita, Kenichi and David Russell. 1996. Keiretsu: Inside the Hidden
Japanese Conglomerates. New York: McGraw-Hill.
Okimoto, Daniel. 1989. Between MITI and the Market: Japanese Industrial
Policy for High Technology. Stanford: Stanford University Press.
"Reviving Japan: Time to wake up." 1998. The Economist. September 26
:21-23.
Rosenbluth, Francis McCall. 1989. Financial Politics in Contemporary
Japan. Ithaca: Cornell University Press.
Smith, Dennis. 1995. Japan Since 1945: The Rise of an Economic
Superpower. London: MacMillan Press Ltd.
Thurow, Lester. 1992. Head to Head: the Coming Economic Battle among
Japan, Europe, and America. New York: Morrow.
Weiss,Linda. 1997. "Globalization and the Myth of the Powerless State."
New Left Review 225 : 3-27.
"Why Japanese banks don't care about profits." 1998. Euromoney.
February: 66-70.
Williamson, John. 1994. "In Search of a Manual for Technopols, Appendix:
The 'Washington Consensus'," in Williamson (ed.) The Political Economy of
Policy Reform. Washington: IIE.
World Bank. 1997. World Development Indicators CD-ROM. February 1997.
Zysman, John. 1983. Governments, Markets, and Growth. Ithaca: Cornell
University Press.