Rebuilding After the Bubble
Admirers of the Japanese system recommended its:
"Share economy" (bonus income based on enterprise
performance), supporting full employment (Martin Weitzman)
Cooperative government-industry relations, known as "Japan,
Inc." (Chalmers Johnson). The Japanese export orientation and
government-industry cooperation established a model of
economic growth that has been emulated, with adaptations, in
other Asian countries.
"Humanistic enterprise system," of lifetime employment and
egalitarianism (William Ouchi, Robert Ozaki, and others).
Critics have emphasized:
Discrimination, long working hours, low standards of living,
high suicide rates.
Financial instability and stagnation since collapse of
instability--seven prime ministers served during 1990s, and
seven served during 2000-2012. Some stability restored when
Shinzō Abe served from 2012-2020, making him the
longest-serving Prime Minister in Japanese history. The
current Prime Minister is Yoshihide Suga who was Chief Cabinet
Secretary under Abe, suggesting continued stability.
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 Abe and continues
“Crony Capitalism”—government protection of industry and
Poor leadership for Asian recovery or trade liberalization.
Little land or resources—import dependency
Taming the Work Ethic
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.
Recent efforts to moderate work ethic:
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
Culture of Conformity – homogeneity and
- a hierarchy of family structures from the nuclear family
up to the old "Japan Inc."
Poor Status of Women– According to the 2020 World
Economic Forum index, Japan currently ranks 121st in the
world - behind China (106), India (112), and the United Arab
Emirates (120) - in gender equality. Women hold only 5% of
seats on company
boards, compared to 22% in the U.S. and more than 40% in
France, Iceland, and Norway. The current controversy is the #KuToo
movement, protesting rules that require women to wear
high heels at work - even in some assembly-line jobs.
Tokugawa era (1603) - Military
dictatorship brought peace, law, order, and isolation.
In 1853, Commodore Perry demanded opening trade
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. U.S. occupation forces initially had little
interest or expectation in quick recovery.
Korean and Vietnam Wars -
Increased demand for Japanese exports and caused the U.S. to
see Japan as an important ally.
The Economic Growth Miracle
1956 until the oil shocks that began in 1973, the Japanese
economy grew at a rate of about 10%/year. According to
econometric estimates, these were the major contributors:
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
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.
The Bubble Economy
1980s -- Japanese growth was discouraged by U.S.
–U.S. 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
bubble economy, with
rising real estate and
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.
– Annual GDP growth of only 1.2%, compared to 2.9% average for
industrial countries. Deflation
started around 1999 and has recurred during many years.
Source: OECD from FRED database (online)
-- 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 failed to follow a vigorous fiscal policy,
and structural reforms moved slowly. So the main policy
instrument was 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.
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
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 considered
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.
In 2020, the Ministry of Economy, Trade and Industry published
an interesting Handbook for the Employment of
International Students and Empowerment after Hiring .
Japan: Annual Growth of GDP
(actual and forecast)
Source: Penn World Tables and OECD Economic Outlook, December
and S. Korea: Working Age
(15-64) Share of Population
Women in Japan, 1965-2005
in OECD Countries, 2013
(% of total population)
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
Keiretsu - Created after WWII,
these groups usually involve cross holdings of stock,
interlocking directorates, presidents' clubs, and other
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.
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.
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 Japan’s 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 Japan’s 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."
While the old keiretsu system has yielded to foreign
competition, other recent
research suggests that a new, more flexible and
competitive keiretsu system has arisen. "Over the past two
decades Toyota’s suppliers’ association (kyohokai) has
remained quite stable: From 1991 to 2011 fewer than 20 of
about 200 companies withdrew. From 1991 to 2010 the average
sales-dependence ratio (the revenue from Toyota-related
business as a share of total revenue) of 44 of the company’s
suppliers has remained about 80%, even as Toyota has expanded
its sourcing pool."
Small Business - 99% of Japanese
companies, employing 75% of work force, employ fewer than 100
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
Retail stores - Average
store has only 4 employees. Remained small because of limited
auto ownership and bureaucratic obstacles.
Labor Market and Labor
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 employer confederations.
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 deeply, and overall
female participation has risen above U.S. levels:
Source: International Labor
Organization ILOSTAT database
a. Security and loyalty of workers who are
b. May contribute to adoption of technology
because workers have little fear of technological unemployment
and employers know their company will benefit from training.
To employers--redundant, incompetent, unmotivated workers
retained, sometimes in meaningless jobs.
To young employees--difficult to leave for a more attractive
To older employees and workers not included in system--
greater job uncertainty.
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
Bonuses - Account for 20% of pay
in manufacturing. Significance:
Saving - If the bonuses are
regarded as transitory income, permanent income hypothesis
suggests that a large portion of the bonus income will be
"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.
The Financial Sector
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 window
Commercial banks –
provide large share of company financing, again, because
of limited securities market.
-- among most powerful financial institutions in the nation,
with nationwide branches. Serve large and upper-middle-sized
Regional banks --
branches in single city or prefecture. Serve small and
Long-term credit banks -- underwrite securities and
finance fixed capital investments
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 Japanese postal
which encourages saving with services and tax breaks. Because
of scandals in recent years, it is being transferred to
private ownership through a "murky"
Views of Governmental Role
Conservatives - Point to conventional measures of government
influence, such as taxation, and claim that the Japanese
success was based on a limited government.
Japan, Inc. - Government is "corporate headquarters" where
policy is planned and investment decisions are made.
Understates the influence of the business community on the
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).
Industrial Policy - Administered
(far less aggressively than in the past) by Ministry
of Economy Trade and Industry (the former Ministry of
International Trade and Industry. Designates industries for
priority development based on growth potential and
contribution to growth of other sectors.
Proponents - Japanese success required governmental direction,
support, and socialization of risk.
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 accommodative.
Redistribution of Income -- Rapid
economic growth caused property income to rise rapidly,
causing income some inequality. However, the World Bank
estimate of the Gini coefficient for Japan is a relatively
egalitarian 33%- similar to those for France and Germany.
Perhaps explained in part by a cultural norm against high
executive pay. Median compensation for U.S. CEOs is 9
times larger than for Japanese CEOs.
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.