Rebuilding After the Bubble
A. Admirers of the
Japanese system recommended its:
1. "Share economy,"
supporting full employment (Martin Weitzman)
government-industry relations, known as "Japan, Inc." (Chalmers Johnson)
enterprise system," of lifetime employment and egalitarianism (William
Ouchi, Robert Ozaki, and others).
B. Critics emphasize:
long working hours, low standards of living, high suicide rates (Woronoff
instability and stagnation since collapse of "bubble economy" and Asian crisis.
Political instability--seven prime ministers served during 1990s,
and seven served during 2000-2012. Some stability restored when Shinzō Abe entered office in 2012, and he is now (March 2019) in his third term, but a majority are opposed to a fourth term of office.
Between 1955 and 2009, 22 of the
25 PMs came from the center-right Liberal Democratic Party. During
2009-2011, three PMs came from the center-left Democratic Party,
but LDP rule was restored in 2012 with the selection of Shinzō Abe.
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
B. Taming the Work
1. Past refrain: "We
must work very hard because we are a poor island nation." A new Japanese term, karo shi, was coined to mean "death by overwork," and now families are compensated by both the government and the employer for these deaths.
2. Recent efforts to
moderate work ethic
Reduced the length of the standard legal workweek from 48 to 44, and then to 40 hours. Employees who work more hours are supposed to be paid overtime, and there's a legal cap on how many hours can be worked overtime. On the positive side, some firms are shifting to a 4-day work week to encourage employees to go home, and some are turning off their lights at night. In June 2018, the government passed a new labor law that limits overtime to 100 hours per month (a lot!), but included a loophole that allows white-collar workers to exempt themselves from that limit.
However, at many firms, staying within legal limits is considered a form of "disloyalty," and workers find ways around those limits -- for example, by working without clocking in. According to BBC, "Nearly a quarter of Japanese companies have employees working more than 80 hours overtime a month, often unpaid, a recent survey found. And 12% have employees breaking the 100 hours a month mark."
C. Culture of
Conformity – homogeneity and
Tokugawa era (1603) - Military dictatorship
brought peace, law, order, and isolation. In 1853, Commodore Perry
demanded opening trade relations.
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.
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.
Korean War - Increased demand for Japanese
exports and caused the U.S. to see Japan as an important ally.
IV. The Economic
Growth of capital stock - The largest
contribution to growth, supported by saving rate.
Technology - 2nd ranking cause of growth was
the contribution of knowledge and technology to factor productivity.
Facilitated by the adoption of foreign technology.
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
recovers, Japan soars, but with trade imbalance.
Plaza Accord --
Japan accepts large
appreciation of the yen, compensating for slow export growth with
expansionary monetary policy. Easy money triggered speculative
rising real estate and
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
1993-2002 – Annual GDP
growth of only 1.2%, compared to 2.9% average for industrial countries. Deflation started around 1999 and has continued during most years.
2012 -- Shinzo Abe became Prime Minister and introduced "Abenomics,"
characterized by "three arrows:" 1. Pressuring the Bank of Japan to
launch aggressive monetary easing and setting a target of 2% inflation
to support a target of 2% real GDP growth (4% nominal growth); 2.
deficit-financed supplemental government budget with new public works
spending; and 3. a program of structural reforms to achieve growth
through stimulating private investment. However, the Ministry of
Finance has refused to pursue a vigorous fiscal policy, and
structural reforms have moved slowly, as usual. So the main policy
instrument has been a late-in-the-game expansionary monetary policy,
including a negative interest rate policy that managed to push
inflation above 2% in 2014, but then it fell below 1% again during 2015-2017.
Many commentators have concluded that Abenomics was not sufficiently
comprehensive and bold to meet the demands of the Japanese economy, and
some have written its "obituary."
NOTE: The Japanese experience with
deflation had a major impact on the U.S. response to the recent
recession. See Ben Bernanke's
2002 speech, "Deflation: Making Sure 'It' Doesn't Happen Here": high
real interest rates, high cost of repayment in valuable money, delayed
purchases, complication of monetary policy.
UPDATE: Along with deflation, the declining population in Japan (currently falling by 400,000 per year), caused by low fertility and marriage rates and unwillingness to accept foreign workers, have been associated as major causes of declining economic growth. In December 2018, Abe pushed through the parliament a controversial bill to accept 345,000 foreign workers over the next five years and to simplify the procedures for them to renew visas. To address concerns that the immigrants would depress wages for Japanese workers, the new law stipulates they must be paid the same as their Japanese peers.
Japan: Annual Growth of GDP
(actual and forecast)
Source: Penn World Tables and OECD Economic Outlook
Japan: Consumer Price Inflation
1961 - 2017 (%)
Source: OECD from FRED database (online)
Japan and S. Korea: Working Age
(15-64) Share of Population
Unmarried Women in Japan, 1965-2005
in OECD Countries, 2013
(% of total population)
Japan Population Forecasts
A. Big Business
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.
Keiretsu - Created after WWII, these groups
usually involve cross holdings of stock, interlocking directorates,
presidents' clubs, and other cooperative arrangements.
-- 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.
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.
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 did not join keiretsu
groups to earn monopoly profits, but to provide the security and stability
of a family relationship. [UPDATE]With rising competition since the rise of China, that security system has broken down. According to Forbes:
"The keiretsu system reached its peak in 1988 when 55% of all floated TSE stock was held in keiretsu cross-shareholdings. However, as Japanís economic fortunes declined in the 1990s, cracks began to appear and both the cross-shareholdings and the keiretsu system began to unwind.
Over the next 20 years, the flagship firms began squeezing their mid-sized suppliers, forcing them to operate and innovate with smaller teams and tighter margins. The keiretsu also began to diversify their supply chains and source extensively from China and Southeast Asia. Today, those annual sales guarantees are quickly disappearing, and Japanís mid-sized manufacturers are being forced to learn sales and marketing or to go out of business."
Some of them, for example, are now supplying Apple for the iPhone: "More than 700 companies are involved in the manufacture of an iPhone, and unsurprisingly about half (349) of these companies are in China. In second place, however, is Japan with 139 firms, followed by the U.S. with 90."
Now, according to the World Economic Forum, Japan ranks as best in Asia and second-best in the world after Switzerland for the diversity of its markets. The powerful 70-year-old Japan Fair Trade Commission oversees the Anti-monopoly Act, set up by the post-war Allied administration to dissolve the zaibatsu conglomerates firms. The commission has been active ever since with over 800 staff, including 438 investigators.
Small Business - 99% of Japanese companies,
employing 75% of work force, employ fewer than 100 workers.
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.
stores - Average store has only 4 employees. Remained small
because of limited auto ownership and bureaucratic obstacles.
Market and Labor Relations
Unions - Comprehensive enterprise-based unions, affiliated with
industrial, regional, and national federations. Labor-management disputes
are generally kept within family companies.
Spring Labor Offensive - December/January, labor federations target
basic wage increases. April, unions stage brief strikes and
demonstrations. Coordinated negotiations between national labor and
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. Women historically excluded--until recently, participation rate
during early marriage dipped below 50%. It still dips, but not as
Female Labor Participation Rates in
Japan (blue) and U.S. (red), 2016 (%)
Source: International Labor Organization
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.
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.
UPDATE: Wall Street Journal, 4/11/2018: More people are switching careers at for new opportunities, and more companies are willing to hire them because of scarce talent, however:
"many companies resist the idea of midcareer job-switching... The number of employees switching jobs annually is still less than 5% of the Japanese workforce. In 2016, the average worker in Japan had been at one company for about 12 years, compared with an average 8.6 years in the U.K., according to official data. The U.S. Bureau of Labor Statistics doesn't report average employee tenure, but the median U.S. figure was 4.2 years in 2016.
"Employees will see their salary more than double if they continue working for 20 years, so they don't have the incentive to think about changing jobs," said Ryo Kambayashi of Hitotsubashi University.
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.
Bonuses - Account for 20% of pay in manufacturing. Significance:
1. Employee motivation.
Saving - If the bonuses are regarded as transitory income,
permanent income hypothesis suggests that a large portion of the bonus
income will be saved.
"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
Ministry of Finance (MOF)
-- exceptionally broad authority, including influence over fiscal and
monetary policy and informal
of financial institutions.Reformers wish to reduce its power.
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
Commercial banks –
provide large share of company financing, again, because of limited
among most powerful financial institutions in the nation, with nationwide
branches. Serve large and upper-middle-sized corporations.
Regional banks --
branches in single city or prefecture. Serve small and lower-middle-sized
credit banks -- underwrite securities and finance fixed capital
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. Operating in 24,000 post offices nation wide, the largest financial institution in the country is the
postal savings system,
which encourages saving with services and tax breaks. Because of scandals in recent years, it is being transferred to private ownership through a "murky" privatization.
V. The Government
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.
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, and particularly its Council on Economic and Fiscal Policy, 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
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
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.
Fiscal, Monetary, and Trade Policy - Monetary
and fiscal policy are normally 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.
Redistribution of Income -- Rapid economic
growth caused property income to rise rapidly, causing income inequality.
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.
Transfers - Government has paid relatively little
attention to income redistribution because families and businesses take
care of their own. Social security costs are increasing as a growing
percentage of the population reach retirement age.