POLITICAL ECONOMY

Japan

Japan's sudden introduction to the global political economy in the nineteenth century fostered the development of a mercantilist political economic system concerned with neither liberal freedom nor communist equality. Compelled by American gunships to open the country's borders to "free" trade with the West, the Meiji oligarchs recognized that Japan must either modernize quickly or, like China, be overrun by Western imperialism. State-led economic development became not a means of serving the public, but rather one of preserving national sovereignty. The oligarchs' national slogan, "rich country, strong military," acknowledged that Meiji modernizers were fully aware from the outset of the strong relationship between economic development and industrialization on the one hand, and military and political power in the international arena on the other.

Even with all the turmoil that Japan experienced in the twentieth century, the basic structure of this "catch-up" mercantilist political economy persists. Forged under conditions of military rigor, refined during the U.S. occupation and perfected under the aegis of American military and economic protection, this developmental model propelled Japan from the ashes of devastating military defeat to become the second largest economy in the world. Not surprisingly, scholars and policymakers alike have sought to understand this developmental "miracle," and the investigation of Japan's "capitalist developmental state" model has become an important field of academic study and policy analysis. ¹

Because Japan's capitalist developmental state differs significantly from the liberal capitalist system that Americans often presume to be capitalism's only "true" form, each of the three components of this label is worth examining. The Japanese state may be described as "developmental," because its top priority has been economic development, not regulation (as in the U.S.), welfare (as in Europe's social democracies), or revolution (as in Communist China). But the system is nonetheless "capitalist," based on private property and profit-motivated private firms participating in highly competitive local and global markets. But far more than in the American case, the "state" has guided the private market.

This guidance has included a host of formal and informal economic measures often grouped under the term industrial policy. These policies are formulated and implemented by Japan's elite economic bureaucracy, after consultation and coordination with the private sector. These measures include imposing protective tariffs and nontariff barriers on imports, encouraging cooperation and limiting "excessive" competition in strategic export sectors, and offering low-interest loans and tax breaks to firms willing to invest in targeted industries. Government guidance didn't always work well or as planned.

But for many decades, state-led developmental capitalism kept Japan's economy strong, wealthy, and internationally competitive. The prewar family zaibatsu were replaced by professionally managed keiretsu conglomerates with ready access to cheap capital. Workers agreed to forgo disruptive labor strikes in exchange for promises of permanent employment, assuring management a skilled and disciplined workforce. And as early heavy-handed policies of protectionism and explicit control proved unwieldy, bureaucrats came to rely more on informal directives known as "administrative guidance" and subtle incentives more suitable for the increasingly internationalized Japanese economy. After growing at an average rate of over 10 percent per year during the 1950s and 1960s, Japan's economy still managed to grow over 5 percent per year during the 1970s and 1980s, substantially faster than the economy of any other advanced industrial democracy. The flagship automotive and consumer electronics companies of Japan's large conglomerates became multinational giants and household names, and the fruits of Japan's rapid growth lifted the incomes of and opportunities for nearly all Japanese.

Economic Policies and Issues

By the 1980s, this very prosperity was masking what now, in hindsight, is much easier to detect as serious structural problems within this model. As the international political economy was becoming ever more integrated and hypercompetitive, the costs of doing business in Japan were mounting. Japan's multinational automotive and electronics exporters felt this competitive pressure first but kept their heads above water by shifting production overseas and drastically cutting costs at home. However, most of Japan's companies were not able to react so nimbly; nor was the government prepared to tolerate the kind of unemployment that would have resulted from the wholesale transfer of production abroad. Rather than face the winds of global competition, inefficient industries used their influence within the iron triangle to seek protection. They obtained it from a government that had become accustomed to looking after not just economically but also politically strategic industries. This government assistance led to waste, overcapacity, and overpricing.

These corporate welfare measures, combined with a rapid jump in the value of Japan's currency, propelled Japan's stock and real estate markets skyward in the latter half of the 1980s, leading to a dangerous overvaluation of both securities and land. At one point in the early 1990s, Japan's stock market was valued at fully half of all the world's stock markets combined. At its peak value, the land under the emperor's palace grounds in central Tokyo was worth as much as the land of the entire state of California! Japan was awash in over-inflated assets and easy money, leading companies, banks, the Japanese mafia, and even the government to invest in grossly overpriced assets and risky (even foolish) business ventures. When this asset bubble burst in 1992, the values of stock and property plummeted, growth slowed, and already uncompetitive companies were left with huge debts (and dwindling assets and production to repay them). The Japanese have labeled these firms "zombies"-essentially dead, but still propped up by banks and a political system unwilling to force them into bankruptcy. The government slides deeper into debt as it sustains not just these insolvent firms, but also the banks that carry their debts (now in the trillions of dollars), even as it attempts to stimulate individual consumption. Japan is now in its second decade of slow-to-no growth and slow-to-no reform of its political economic system.

Although there is no question that government-business cooperation and the state's laserlike focus on economic development fostered Japan's postwar economic boom, that boom was sustained by a political economic structure that is collapsing under its own weight. Producer-oriented industrial and financial policies and protectionist trade measures secured continued LDP rule and guaranteed bureaucrats the autonomy to focus on development. But they also sowed the seeds of destruction of this well-oiled conservative political economy. The corporate welfare that sustained the politicians' positions and the bureaucrats' vision came at the expense of the competitiveness of the Japanese economy and led to the collapse of Japan's vaunted lifetime employment. And that same welfare has offered little relief or consolation to Japan's battered consumers. Although these destructive inefficiencies were tolerable during the boom years, they have become a political albatross to the still powerful LDP and a potential millstone for the Japanese economy.

Just as the loosening of the iron triangle is bringing political competition to Japan, so, it is hoped, the painful weaning of firms from government protection and loosening of the bonds of companies to their keiretsu alliances and the ties of employees to their firms will breathe much-needed market competition and efficiency into the Japanese economy. But precisely because changes are painful, Prime Minister Koizumi has thus far failed almost completely to deliver on his bold promises of structural reform in the face of conservative bureaucratic and political resistance.