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 since collapse of "bubble economy" and Asian crisis.
Political instability--seven prime ministers served during 1990s,
and nine have served during 2000-2013. 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 Shinzo 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 word, karoshi, 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
a. Reduced the length
of the standard legal workweek from 48 to 44, and then to 40 hours.
b. encourage workers
to use more of their authorized vacation time,
UPDATE: November 2008
21 (Bloomberg) -- Keidanren, Japan's biggest business organization
... urged its 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...
c. more housing near
places of work.
d. some Japanese companies are now paying bonuses to employees who are willing to take their time off.
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.
Feb 2002 -- a weak recovery began that continued
until the global recession hit in 2008.
The situation is complicated by high government
debt (170% of GDP, the highest among industrial countries).
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 in 2015.
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.
Japan: Annual Growth of GDP
(actual and forecast)
Source: Penn World Tables and OECD Economic Outlook
Japan: Consumer Price Inflation
1961 - 2015 (%)
Source: World Bank, World Development Indicators (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 do not join keiretsu
groups to earn monopoly profits, but to provide the security and stability
of a family relationship.
Business organizations that wield great influence over the government.
Symbols of “crony capitalism.”
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), 2008 (%)
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.
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. Largest financial institution in the world, is the
postal savings system,
which encourages saving with services and tax breaks.
F. "Big Bang" 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.
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
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
ministries). At its April 2017 meeting, the Council made plans for an increase in the minimum wage and in legislating equal pay for equal wpork, both aimed at boosting consumption spending.
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.