Japanese Resistance to American Financial Hegemony

Global versus Domestic Social Norms

Fumihito Gotoh

• Publisher: Routledge
• Year: 2019
• Topic: Politics & International Relations
• eBook ISBN:
  9781000672817
• Subtopic: Politics
• Index: Politics & International Relations

This book investigates why the convergence of Japan's bank-centered financial system to an American-style capital market-based model has lost steam since the mid-2000s, despite financial deregulation during the 1980s and 1990s.

Examining the ideational conflict within Japanese elites between the market liberalization and anti-free market camps, it scrutinizes the American and Japanese credit rating agencies operating in Tokyo and explores the differences between the two major industrial associations, Keidanren and Doyukai, which have played a key role as "ideational platforms" for Japanese corporate society. The book emphasizes the concept of "systemic support", whose broadened definition incorporates dominant elites' support and protection of subordinates in exchange for the latter's obedience and loyalty. It argues that Japanese society's anti-liberal, anti-free market norms centered on systemic support are a form of counter-hegemony, and this has resisted American financial hegemony, promoting international capital mobility and capital markets, and prevented capitalist dominance from severing long-term social ties such as management-labor cooperation and corporate group alliances. Yet this resistance has generated growing problems for Japan.

With a focus on social norms, bureaucracy, credit rating agencies, industrial associations and corporate governance, this book will provide useful insights for scholars and students of international political economy, sociology, cultural studies, and business studies.

1 Introduction

Research puzzle

Credit markets dealing with government, corporate, and household debts, whose social foundations vary by region and country, are double-edged swords for capitalist states. Whereas periodic credit crises create destructive impacts on these states, credit is a driving force for the economic development of capitalist states. Credit markets are politically important as they are heavily involved in the distribution of wealth within states, and all of the people and institutions under the sun are either directly or indirectly influenced by credit markets. Nevertheless, managing credit markets has proved to be extremely difficult for states. If a state provides excessive autonomy for a credit market, it can make the latter overly volatile and potentially lead to the formation and subsequent bursting of a credit bubble, as the recent global financial crisis indicated. In contrast, if a state heavily regulates a credit market, it hampers market efficiency, resulting in economic stagnation, as the collapse of the Soviet Union showed.

A credit market’s levels of autonomy change over time and are strongly affected by influential economic ideologies and international capital mobility. The growing influence of higher international capital mobility has driven the “financialization” of industrialized countries’ political economies. The financial sector’s enhanced profitability and enlarged role within the economy and society are included in common themes of financialization, which can change not only the features of firms and financial markets but also the society encompassing them (Clift 2014: 241). Higher international capital mobility is likely to promote a government’s regulatory adjustments to attract mobile capital to its financial market, retain capital within its jurisdiction, and achieve its policy objectives in competition with other governments seeking similar goals. Furthermore, enhanced capital mobility is also expected to diminish the role of banks as intermediators of debt capital to corporate borrowers because of the increased access of companies to “more efficient and lower cost capital markets,” namely “financial disintermediation” (Rethel and Sinclair 2012: 3).

The research puzzle of this book is why Japan’s financial disintermediation (i.e., shift from a bank-centered to market-based financial system) has stalled since the mid-2000s despite its financial deregulation during the 1980s and 1990s. In the 1980s, Japanese blue-chip firms increasingly tapped the Eurobond market due to its very low-cost funding and the foreign exchange deregulation by the government. The growing Eurobond issuance, the requests from large Japanese firms and securities companies to relax the domestic bond regulation, and the US government pressure to pry open Japanese financial markets encouraged the Japanese government to deregulate its domestic corporate bond market in the 1980s, but the Japanese government itself also needed to deregulate the bond market in order to deal with the expansion of Japanese government bonds (hereafter JGBs). The Japanese government incrementally liberalized the heavily regulated bank-centered financial system during the 1980s and the first half of the 1990s. Furthermore, the enormous bad debt problem, which reflected the malfunctioning of the system, prompted the announcement of Japan’s Big Bang financial deregulation in November 1996. The US and local credit rating agencies have assigned Japanese borrowers credit ratings since the mid-1980s, and the volume of corporate bond issuance in Japan rapidly increased during the mid to late 1990s. However, the growth of the corporate bond market has become stagnant since the mid-2000s, and the market mechanism of Japan’s financial system is still underdeveloped.

Japan’s annual domestic corporate bond issuance amount increased from 4.4 trillion yen in 1986 to 10.7 trillion yen in 1998, but it has been range-bound between 6.1 and 11.5 trillion yen, merely 1–2% of its GDP, since then. Consequently, the outstanding amount of domestic corporate bonds moderately increased from 55 trillion yen in 1998 to 60 trillion yen (11% of GDP) – still dwarfed by that of bank loans for companies (roughly 400 trillion yen) – in 2017. The recent trend of the Japanese credit market is different from some European countries. Both France and Germany, the financial systems of which are categorized in the “bank-centered camp” along with that of Japan (Zysman 1983; Allen and Gale 2000), have substantially developed their capital markets. The outstanding amount of German corporate bonds dramatically expanded from 710 billion euro in 1988 to €2,055 billion in 2008. Although the outstanding amount of its bank debt securities plunged from €1,876 billion in 2008 to €1,164 billion (37% of GDP) in 2016 due to the global financial crisis, that issued by non-financial corporates soared from €2 billion in 1988 to €276 billion (9% of GDP) in 2016.

Types of financial systems are closely related to those of corporate governance, which relate to the structure of power and responsibility within firms. Generally, a bank-centered financial system favors long-termist, relationship-oriented “stakeholder capitalism,” whereas a market-centered financial system prioritizes short-termist, profit-prioritizing “shareholder capitalism” (Clift 2014: 230–40).¹ Along with their capital market development, both France and Germany have recently witnessed the “hybridization” of corporate governance combining elements from both stakeholder and shareholder capitalism (ibid.: 231–55). However, such hybridization could be less applicable to the case of Japan. Although Matsuura et al. (2003: 1003–13) claim the two roles of the main bank system – providing both corporate finance and corporate governance for companies – have been eroded since the 1980s, this exaggerates the extent of the changes in the Japanese financial system and corporate governance. Although some scholars believe the main banks contributed to corporate governance through monitoring corporate borrowers in the rapid economic growth period (Hoshi, Kashyap, and Scharfstein 1990; Aoki, Patrick, and Sheard 1994), the effectiveness of the monitoring by the main banks even during that period was questionable – these scholars have failed to provide empirical evidence to support their claims (Scher 1997; Okumura 2005).

Figure 1.1 Historical outstanding amount of Japanese corporate bonds.

Source: Japan Securities Dealers Association.

There are three hypotheses in this book that may also have implications for other countries. First, the characteristics of the Japanese credit market are co-constituted by the Japanese government and market participants, with the influence of exogenous factors. Second, the exogenous factors that potentially affect features of the credit market as well as domestic social relations and norms include internationally influential ideas, regulatory trends of key global financial centers, and levels of international capital mobility. Last, endogenous factors such as domestic social relations and norms also significantly affect the characteristics of both the credit market and corporate governance, which are closely correlated.

The research puzzle – why disintermediation has lost steam despite the Japanese government’s deregulation during the 1980s and 1990s – is related to the varieties of capitalism debate, comparing liberal market economies (LMEs) including English-speaking countries, which rely on the market mechanism, with coordinated market economies (CMEs) such as Germany, France, and Japan, which rely on mutual cooperation among economic actors connected by a dense network of institutions (Hall and Soskice 2001). The growing convergence of CMEs’ financial practices towards those of LMEs is often called financial globalization. Moreover, the puzzle is also linked to the convergence–diversity debate on whether CMEs would converge with LMEs (Yamamura 1997; Laurence 2001; Yamamura and Streeck 2003; Schoppa 2006; Rosenbluth and Thies 2010; Vogel 2018). According to Yamamura (1997), proponents of the convergence view (mainly neoclassical economists) focus on market forces enhancing economic efficiency and believe market forces promote convergence, while those of the diversity (non-convergence) view are concerned with both “formal institutions” (e.g., the state, ministries, and firms) and “informal institutions” (e.g., norms and ideologies) and think such institutions shape differences in national preferences, for instance, the trade-off between efficiency and equality. Calder (1988: 465–6) and Okimoto (1989: 31–2) have slightly different perspectives from Yamamura and focus on the trade-off between efficiency and stability (or security).

The effectiveness of bank monitoring in Japanese corporate governance deteriorated due to excessive liquidity and a decreased corporate demand for funds in the Japanese economy from the latter half of the 1990s onwards. Batten and Szilagyi (2003: 83–4) point out the Japanese corporate sector’s significant excess capacity and excessively high leverage built up during the high economic growth period led to its balance sheet restructuring, and warn of “the adverse selection and moral hazard problems” that could stem from the Japanese financial system being overly dependent on intermediated financing when it faces excessive liquidity and a lack of investment choice. They maintain the banking sector’s bad debt problem and the corporate sector’s excess capacity questioned the effectiveness of the banks’ monitoring of the corporate sector, and emphasize the necessity to promote “parallel credit channels” through developing the corporate bond market (ibid.: 96). Market-based financial systems prioritize “exit” over “voice” in order to influence corporate governance, while bank-centered ones prefer “voice” (Hirschman 1970; Zysman 1983: 57). Ikeo (2003: 92–5) claims voice (or a bank-centered financial system) may be more effective than exit (or a market-based financial system) when the economy is at the relatively predictable stage of catching up with more advanced economies, whereas exit may be more efficient when the economy requires a drastic shift from low growth industries to high growth ones.

Despite the above-mentioned rationales for shifting from a bank-centered to a market-based financial system, why has Japan’s disintermediation stalled? Did the Japanese government merely demonstrate mock obedience to the United States (US) since it could not openly resist the US’ liberalization pressure? This explanation might hold some truth, yet it neglects the fact that domestic securities firms and big businesses also urged the government to deregulate, while the government recognized the necessity of it. Then, was the government’s deregulation initiative owing to external and internal pressures constrained by its close ties with banks? This account might be more persuasive but it cannot explain why households and companies, the expected beneficiaries of liberalization, have supported the status quo – the aggregate outstanding amount of bank loans for the corporate sector remains over six times as large as that of corporate bonds, while households keep immense bank deposits despite extremely low interest rates. Despite the inefficiency of the financial system, Japan has not encountered serious capital flight unlike some European countries. Has Japanese society behaved irrationally? Seemingly, the society has long been accustomed to the “socialization of risk” (Woo-Cumings 1999: 13) through the banking sector, strongly supported by the state, and cannot escape it easily.

Three major factors affecting features of financial systems

There are three major factors that significantly affect the features of financial systems including the relative autonomy of markets vis-à-vis states and interest groups. The first factor is domestic social relations in which both state and non-state actors interact with each other and form or undermine a dominant coalition over the financial system. The second one is a level of international capital mobility, which can constrain a state’s autonomy. The third factor is ideas and norms, which greatly influence national political economic systems and world orders. These three aspects are often closely interrelated.

With regard to the first factor, in the case of early post-war Japan, most of the major capitalists were eliminated by the dissolution of the Zaibatsu groups (industrial and financial business conglomerates), the agricultural land reform (which virtually deprived landowners of their property rights), and the heavy wealth tax under the US occupation (1945–52),² as well as the wartime economic damage and the post-war hyperinflation. Unlike the US and Britain, where the powerful capitalist class has been influential in economic policymaking, the absence of a major capitalist class in the early post-war period was one key reason for the delayed capital market recovery and it cemented the dominant position of the banks in the Japanese financial system. During the early post-war period, the major banks held relatively strong bargaining power over borrowers due to a scarcity of capital, yet the export expansion and capital accumulation during the rapid economic growth period empowered export-oriented businesses and securities firms, which demanded financial deregulation from the mid-1970s onwards.

In terms of the second factor, Thomas (2001: 115–18) views mobility as a power resource for owners of capital and a potential threat to the state and the working class, arguing “since states and labor are both relatively immobile, this implies the power of capital has risen relative to both the state and labor” (ibid.: 123). Although this argument generally holds true with regard to English-speaking countries from the 1980s onwards, “international capital mobility is not a law of nature or a machine” (Sinclair 2001: 109), and its power and impact on capital’s bargaining position vis-à-vis a state and labor are contingent on a state’s history and domestic social norms as well as internationally influential ideologies. The relative strength of capital over labor in a certain country may significantly alter depending on the financial market conditions. In a credit boom, when labor enjoys conducive employment conditions and good access to credit, capital has a relatively strong voice, and state financial deregulation, which accelerates international capital mobility, is likely to be legitimized. By contrast, in a credit crisis, when labor’s employment conditions and credit access deteriorate, financial deregulation loses its legitimacy, and labor tends to demand stricter regulation, which can constrain international capital mobility.

A typical example of the third factor occurred when a liberal economic ideology was permeated globally under British leadership in the 19th and early 20th centuries, while the market failures in the Great Depression beginning in 1929, the wartime experience and Keynesian ideas made state intervention in the economy more acceptable among business leaders (Gill and Law 1988: 96). It was not a mere coincidence that Japan adopted a fairly liberal economic policy from the Meiji restoration until the early 1930s, when liberalism was internationally dominant under British leadership. Subsequently, Japan’s post-war dirigiste policy was internationally tolerated because of the prevalence of Keynesianism and the Cold War.³ Due to the decline of major capitalists, many Japanese big businesses were run by internally promoted managers, relatively freed from shareholder pressure, with government intervention as well as support from banks, in the early post-war period. As this example demonstrates, an internationally widespread ideology is often intimately related to specific domestic social groups. Nevertheless, the dissolution of the Bretton Wood system centered on “embedded liberalism” in 1971 and the stagflation during the 1970s discredited Keynesianism, and the 1980s saw the rise of neoliberalism, which promotes a free market and criticizes excessive state intervention. Afterwards, the US became less tolerant of Japan’s interventionism and pressured Japan to deregulate its financial market. In addition to influential economic ideologies, norms deeply ingrained in society play a key role in shaping the features of its financial system. Social norms vary across states and change over time. Although the number of proponents of neoliberalism increased...

Table of contents

• Cover Page
• Half Title Page
• Series Page
• Title Page
• Copyright Page
• Table of Contents
• List of illustrations
• Acknowledgments
• List of abbreviations
• 1 Introduction
• 2 Networks, norms, and alliances
• 3 Japan’s financial system and persistence of systemic support
• 4 The politics of the Japanese credit rating industry
• 5 Japan’s ideational developments and corporate governance
• 6 The dilution of systemic support and growing contradictions
• 7 Conclusion
• Bibliography
• Index