Japan:
Rebuilding After the Bubble

I.      Introduction

A.  Admirers of the Japanese system recommended its:

1.   "Share economy," supporting full employment (Martin Weitzman)

2.   Cooperative government-industry relations, known as "Japan, Inc." (Chalmers Johnson)

3.   "Humanistic enterprise system," of lifetime employment and egalitarianism (William Ouchi, Robert Ozaki, and others).

B.  Critics emphasize:

1.   Discrimination, long working hours, low standards of living, high suicide rates (Woronoff and Fallows).

2.   Financial instability since collapse of  "bubble economy" and Asian crisis.

3.   Political instability--six prime ministers during 1990-96

4.   “Crony Capitalism”—government protection of industry and finance

5.   Poor leadership for Asian recovery or trade liberalization (U.S. government)

II.  The Environment

A.  Little land or resources—import dependency

B.  Taming the Work Ethic

1.   Past refrain: "We must work very hard because we are a poor island nation."

2.   Recent efforts to moderate work ethic

a.   Reduce the length of the standard workweek

b.   encourage workers to use more of their authorized vacation time,
UPDATE: November 2008
 Nov. 21 (Bloomberg) -- Keidanren, Japan's biggest business organization ... urged its 1,632 member companies to start so-called family weeks that give employees more time for playing with the kids and having more children to reverse a declining birth rate. A survey by Japan's Family Planning Association of about 3,000 married people under age 49 shows couples are having less sex because long work days leave them with too little energy.
In a country where people over 65 will outnumber children two-to-one in five years, companies say they eventually won't have enough workers. Japan's birth rate has been falling since 1972 and threatens to shrink the labor force 16 percent by 2030 from 66.6 million workers in 2006, according to the health ministry.
``You must go home early,'' Nippon Oil Corp. President Shinji Nishio told staff in a speech for the company's two-week family campaign, which ends Nov. 22. ``We expect all workers' active participation.''

c.   more housing near places of work.

d.   legal workweek shortened from 48 hours to 44 hours

C.  Culture of Conformity – homogeneity and groupism
 

III. A Brief History

A.  Tokugawa era (1603) - Military dictatorship brought peace, law, order, and isolation.  In 1853, Commodore Perry demanded opening  trade relations. 

B.  Meiji reforms (1868) - Opened the door to foreign trade, equality of classes, eliminated feudal guilds, divided agricultural estates among the peasants, instituted monetary taxes, and established businesses and supported private industry through loans and subsidies.  Growth continued until 1938 and World War II.

C.  World War II - Destroyed 1/4 of buildings and 1/3 of industrial machinery.  Japan was not surrounded by other countries with expanding markets; recovery initially slow.

D.  Korean War - Increased demand for Japanese exports and caused the U.S. to see Japan as an important ally.

IV. The Economic Growth Miracle

A.  Growth of capital stock - The largest contribution to growth, supported by saving rate.

B.  Technology - 2nd ranking cause of growth was the contribution of knowledge and technology to factor productivity. Facilitated by the adoption of foreign technology.

C.  Labor - Growth in the quantity, working hours, and educational quality of labor was the third primary source of growth.  Low unemployment was promoted by the permanent commitment system and flexible bonus income.

V.  The Bubble Economy

Early 1980s -- Japanese growth was discouraged by U.S. recession 

1983-84 –U.S. recovers, Japan soars, but with trade imbalance.

1985 -- Plaza Accord -- Japan accepts large appreciation of the yen, compensating for slow export growth with expansionary monetary policy. Easy money triggered speculative bubble economy, with rising real estate and stock prices.

May 1989 -- Bank of Japan shifts to more restrictive monetary stance, causing bubble to burst. During 1989-1996, real estate and stock prices both fell by about 50 percent.

1993-2002 – Annual GDP growth of only 1.2%, compared to 2.9% average for industrial countries. 

Feb 2002 -- recovery began that still continues today (April 2007). This expansion will soon become longer than the "bubble" boom of 1986-1991, and it may outlast the boom of the 1960s.  Unlike those earlier expansions, though, when growth rates were 5-10%, the average rate since 2002 has been a more sustainable 2.4%.

VI. Industrial Organization

A.  Big Business

1.   Zaibatsu - Family-owned holding company controlled shares in a diversified group of industrial corporations, trading companies, and banks.  After the war, American-written anti-trust legislation dissolved holding companies.

2.   Keiretsu - Created after WWII, these groups usually involve cross holdings of stock, interlocking directorates, presidents' clubs, and other cooperative arrangements.

a.   financial keiretsu -- Mitsui, Mitsubishi, and Sumitomo, which were formed by regrouping former zaibatsus, plus Fuyo (or Fuji), Sanwa, and Dai-Ichi Kangyo—include manufacturing firms and also banks, insurance companies, and trading companies.

b.   production keiretsu – a large industrial concern and its subsidiaries and subcontractors, with tight, stable relationships, such as Toyota. Able to use just-in-time (kanban) system, shifting the inventory cost to subcontractors.

c.   distribution keiretsu -- exclusive organization that moves products from manufacturers to consumers. Operating like networks of company-controlled auto dealerships in the United States, these are found in the automotive, cosmetic, electrical, and electronic sectors in Japan.

3.   Results -- Japanese companies apparently do not join keiretsu groups to earn monopoly profits, but to provide the security and stability of a family relationship.

4.   Zaikai - Business organizations that wield great influence over the government. Symbols of “crony capitalism.”

B.  Small Business - 99% of Japanese companies, employing 75% of work force, employ fewer than 100 workers.

1.   Subcontractors - 2/3 of small firms in manufacturing.  Large firms shift the cost of holding inventories to subcontractors, and maintain their "permanent commitment" employment by adjusting the use of subcontracting.

2.   Retail stores - Average store has only 4 employees. Remained small because of limited auto ownership and bureaucratic obstacles.

III.       Labor Market and Labor Relations

A.  Collective Bargaining

1.   Unions - Comprehensive enterprise-based unions, affiliated with industrial, regional, and national federations.  Labor-management disputes are generally kept within family companies. 

2.   Spring Labor Offensive - December/January, labor federations target basic wage increases. April, unions stage brief strikes and demonstrations.  Coordinated negotiations between national labor and employer confederations.

B.  Lifetime Employment

1.   Coverage - Male employees in larger corporations.  About 25-30 percent of labor force.  During the 1990s, the proportion of long-tenure (10-year plus) workers was 43% in Japan, compared to 26% in the U.S.

2.   Benefits 

a.   Security and loyalty of workers who are covered. 

b.   May contribute to adoption of technology because workers have little fear of technological unemployment and employers know their company will benefit from training.

3.   Problems -

a.   To employers--redundant, incompetent, unmotivated workers retained, sometimes in meaningless jobs.

b.   To young employees--difficult to leave for a more attractive job. 

c.   To older employees and workers not included in system-- greater job uncertainty.

d.   For these and other reasons the system is in decline.

C.  Seniority Pay - Wages are determined largely by the length of service of the employee.  Reinforces employee interest in lifetime employment, but reduces employer interest.  System is in decline.
 

D.  Bonuses - Account for 20% of pay in manufacturing.  Significance:

1.   Employee motivation. 

2.   Saving - If the bonuses are regarded as transitory income, permanent income hypothesis suggests that a large portion of the bonus income will be saved.

3.   "Share Economy" - Weitzman claims that bonus system explains low Japanese unemployment.  In share economy, profit maximizing employers would expand employment and output until "every qualified person" has a job. Critics say that bonuses are negotiated in advance, so they aren’t true share contracts, and that Weitzman's theory cannot explain the Great Depression and takes little account of expectations or uncertainty.

IV. The Financial Sector

A.  Ministry of Finance (MOF) -- exceptionally broad authority, including influence over fiscal and monetary policy and informal administrative guidance of financial institutions.Reformers wish to reduce its power.

B.  Bank of Japan -- central bank, led by seven-member Policy Board, is formally independent, but informally subject to the MOF. Because securities markets developed slowly, the Bank uses discount lending, rather than open market operations, as its primary tool, and uses it to support industrial policy through moral suasion, or window guidance, of banks.

C.  Commercial banks – provide large share of company financing, again, because of  limited securities market.

1.   City banks -- among most powerful financial institutions in the nation, with nationwide branches. Serve large and upper-middle-sized corporations.

2.   Regional banks -- branches in single city or prefecture. Serve small and lower-middle-sized companies.

D.  Long-term credit banks -- underwrite securities and finance fixed capital investments
 

E.   Governmental financial institutions -- Japan Development Bank, the Export-Import Bank, Small Business Finance Corporation, and Housing Loan Corporation. These are financed through the Fiscal Investment and Loans Program (FILP), prepared by the Ministry of Finance. Thus, the government has been able to use lending as an important lever to implement its industrial policy. Largest financial institution in the world, is the Japanese postal savings system, which encourages saving with services and tax breaks.

F.   "Big Bang" announced in 1996, removed barriers to competition.

1.   Allow banks, brokerage houses, and insurance firms to compete in respective markets.

2.   Allow financial institutions to issue innovative financial instruments.

3.   Allow freedom to set flexible brokerage commissions.

4.   Remove regulations on asset mix of private pension programs.

5.   Allow more intermediaries to enter foreign exchange market.

6.   Remove ban on financial holding companies.

V.  The Government

A.  Views of Governmental Role

1.   Conservatives - Point to conventional measures of government influence, such as taxation, and claim that the Japanese success was based on a limited government. 

2.   Japan, Inc. - Government is "corporate headquarters" where policy is planned and investment decisions are made.  Understates the influence of the business community on the government. 

B.  Economic Planning - The Economic Planning Agency solicits proposals from business, labor, government, and academia.  It provides information and improve communication between all segments of the economy.  Adherence is voluntary. Targets were exceeded in 1960s and during the Bubble era, but underfulfilled in 1970s and 1990s.
UPDATE:  In 2001, the Economic Planning Agency was merged into a new Cabinet Office that serves as a "brain trust" for  newly strengthened role of the Prime Minister (now able to direct the work of ministries and to make decisions on matters for which there is no consensus in the ministries).
 

C.  Industrial Policy - Administered by Ministry of International Trade and Industry. Designates industries for priority development based on growth potential and contribution to growth of other sectors.

1.   Proponents - Japanese success required governmental direction, support, and socialization of risk.

2.   Critics - Japan succeeded in spite of industrial policy.  MITI picked corporations like Sony and Honda as "losers".  MITI is not as powerful as it seems.  Tax concessions are not as important in a system of low tax burdens and only a small portion of industrial investment is financed by government money.  In recent years, pressure has mounted for deregulation and less cronyism.

D.  Fiscal, Monetary, and Trade Policy - Monetary and fiscal policy are both directed by Ministry of Finance.  Budget approved by the cabinet and the Diet.  Monetary policy is executed by the Bank of Japan, and has generally been accomodative.  

E.   Redistribution of Income -- Rapid economic growth caused property income to rise rapidly, causing income inequality.

1.   Taxation - Has a relatively small role in income redistribution.  Personal tax rates are highly progressive, an unusually large proportion of tax receipts come from business profit taxes, and a small proportion comes from the regressive consumption tax.  Furthermore, the overall tax burden is relatively light.

2.   Transfers - Government has paid little attention to income redistribution because families and businesses take care of their own.  Social security costs will increase as a growing percentage of the population reach retirement age.