Japan's Managed Globalization

Adapting to the Twenty-first Century

Ulrike Schaede, William W. Grimes

• Publisher: Routledge
• Year: 2015
• Topic: Economics
• eBook ISBN:
  9781317466871
• Subtopic: Business General
• Index: Economics

As Japan moves from a "catch-up" strategy to a post-developmental stage, it is changing its actions and reactions both in terms of international political economy and domestic policy issues. The current changes in Japan can best be understood as following a path toward "permeable insulation." Japan's government and economic system continue to insulate domestic businesses from full competition and the rigor of market forces, but this insulation is also permeable because a decline in state power vis-a-vis the private sector since the 1990s has combined with a decline in the solidarity of private institutions (such as keiretsu or trade associations) to make strategies of insulation much less rigid and uniform. As a result of the "permeable insulation," Japan's response to the global and domestic challenges of the 1990s is neither one of full acceptance nor rejection of global standards and practices. Instead, the basic scheme is one of pragmatic utilization of new rules and circumstances to continue industrial policies of promotion or protection in a new post-developmental era. By bringing together in-depth case studies of eight critical issue areas, this book looks at Japan's responses to globalization and move toward "permeable insulation." Part 1 introduces the reader to the concept of "permeable insulation" and provides a detailed review of past practices and changes in policy. Part 2 deals with international trade issues, Japan's compliance with and resistance to global trade rules, and the domestic interests visible in Japan's compliance. Part 3 focuses on domestic measures and policies that Japanese firms have used to adapt to the changes, within Japan and abroad, triggered by globalization and liberalization.

Part I

Introduction

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Introduction

The Emergence of Permeable Insulation

Ulrike Schaede and William W. Grimes

Circumstances have changed dramatically between the early 1990s, when the world hailed Japan as one of its economic superpowers, and the early twenty-first century, as the country entered its second decade of economic stagnation. Domestically, Japan’s industries have experienced major structural change, the relocation of production abroad, deregulation, and experimental macroeconomic policy such as zero-level interest rates. Internationally, the rise of the yen after 1985 and the increasing competitiveness of industrializing economies in Asia have reduced opportunities for firms producing inside Japan. At the same time, trade liberalization and financial market integration have increased pressure for governments throughout the developed world to comply with international rules in such diverse areas as competition policy, financial regulation, subsidization of private investment, and the adoption of multilateral trade dispute settlement. External and internal pressures have thus combined to force Japan to change in potentially fundamental ways. Interestingly, however, many Japan observers disagree about just how much, and into what, Japan is changing.

How Japan is changing is so difficult to evaluate because Japan’s reactions to these pressures for change have unfolded in ways few would have predicted. At one level, Japan has reacted to the internal and external challenges by removing regulations, restructuring industries, revising associated policies, and playing a more prominent role in multilateral organizations. But despite change in some unexpected areas, many pockets of old practices remain in the very areas where true change seems to be most called for. Many seasoned observers of Japan are therefore at a loss as to how existing models and past experience provide a roadmap to predict change in Japan. Overstating the case only slightly, one can say that by the late 1990s Japan analysts were largely divided into two schools of “change forecast.” One group has argued that Japan is not actually changing at the core, but is basically continuing its attempts at industrial and other policies that preserve the Japanese system (e.g., Yamamura 1997, Dore 2000, Carlisle and Tilton 1998). Analysts from the opposite camp have argued that for Japan to regain its competitive strength, it will finally have to open up and completely reform; some even claim that this complete overhaul has already begun, and is turning Japan into a fundamentally new entity (e.g., Nakatani 1999, Katz 1998, Edwards 1999).

In contrast to these two scenarios, we submit that Japan is in fact changing significantly, but in unforeseen ways and often with surprising consequences, leading to possible misinterpretation by those who adhere to one of the two polar views. Some of Japan’s new policy choices are unprecedented, whereas others look much like previous measures and reactions. If we want to understand the new Japan fully, we need to evaluate both new and familiar policies in light of a fundamentally altered domestic and global situation. And even in instances where the actual policy measures look familiar, their intended and unintended consequences may well be different, given the changing global environment.

We argue that Japan’s responses to the economic and global political challenges of the twenty-first century are best understood as “permeable insulation”—a dual-track approach that allows for sectoral policy differentiation, and therefore calls for a case-by-case evaluation of policy intent and policy outcome. Permeable insulation is Japan’s attempt to manage the process of globalization by differentiating its speed and reach by political issue-area and economic sector.

Changing Japan

The main reason why Japan observers continue to be divided in their interpretations is that at the turn of the century, the past is a less than perfect predictor of Japan’s future strategies. This difference derives from the fact that throughout the postwar period of rapid growth, Japan fundamentally reacted to shocks, whether external or internal, from a position of strength. Even though Japan’s policy makers may not have seen it that way at the time, during the 1960s and even following the oil shock recession in the 1970s, Japan’s economy operated under signs of enormous upward potential. In terms of international competition, Japan could continue to purchase advanced technologies abroad, as “catchup” was not yet fully accomplished and the international environment allowed ongoing infant industry protection and export promotion. Industrial policy was especially effective in the face of global excess capacity in basic materials such as steel in the late 1970s and early 1980s, allowing Japanese firms to survive worldwide slumps and capitalize on the ensuing disarray in global markets caused by recessions in other countries. Specific structures of economic organization, such as keiretsu corporate alliances and enterprise-based unions, provided insulation without rigidity and contributed to Japanese firms’ ability to avoid the kind of paralysis seen in many Western countries beginning in the 1970s.¹

Domestically, too, the Japanese state worked from a position of strength. Even well into the 1980s, the state had many tools at its disposal to reconfigure economic structure in a relatively orderly way—both through direct means, such as the ability to arrange recession cartels and create incentives to increase energy efficiency following the 1973 oil crisis, and more indirectly, such as through tax policies that encouraged research and development. Moreover, solid government finances in the early 1970s allowed the Japanese state considerable latitude to encourage adjustment in some industries, and to maintain protection in others through the heavy use of deficit-financed compensation during global stagflation later that decade.²

However, by the early twenty-first century, Japan’s position had changed dramatically, due to a domestic push for change in some important sectors of the economy, the concurrent external pressure for economic globalization, and the multilateralization of world politics. The changing domestic and global environment in the 1990s and the early twenty-first century mean that Japan can no longer operate from a position of comparative strength; the country now has to face adversity from a position of comparative weakness. With technological catch-up accomplished in the manufacturing sectors, Japan is struggling to adopt new models of industrial policy and business organization in an attempt to induce more rigorous efforts at innovation. Trade disputes with the United States and the European Union put limits on overt government policies aimed at blocking imports and promoting exports. Multilateral organizations such as the World Trade Organization (WTO) further limit Japan’s latitude to protect specific industries at the expense of free trade flows. The slow but continuous process of deregulating and revising foreign trade laws and specific industry laws since the 1980s has progressively undermined the state’s powers of administrative guidance.³ While the state’s guidance of business strategies has never been one-directional or absolute, it is now more than ever dependent on industry cooperation. Finally, the combination of electoral politics and the ongoing economic crisis of the 1990s and early twenty-first century has caused Japanese fiscal policy to focus almost completely on helping the economically weakest (often also the politically strongest) sectors through distributive, rather than strategic, economic policies (Grimes 2001). The transformation of large parts of industrial policy into compensation has also reduced potential for economic growth—and thus growth in both government revenues and corporate profits. In combination, these factors have fundamentally altered policy intent and policy measures in Japan.

Given this underlying shift in relative power, the Japanese state has had to modify its policy approach to allow new openness in some instances while providing continued protection in others. To be sure, other countries faced similar challenges as they approached the turn of the century. However, among industrialized nations, Japan is arguably the one that has pushed the political agenda of industrial policies hardest—regardless of whether or not these were successful. The reliance on industrial policy throughout the postwar period has created or strengthened institutions and processes that, in combination, have resulted in a distinctive political economic path that continues to guide and constrain Japan’s future choices. The very existence of interventionist tools and precedents makes it difficult for policy makers to leave matters to the market, even where they prefer to do so. As a result of this legacy of industrial promotion and protection policies, Japan faces particular challenges in dealing with the changing domestic and global situation at the beginning of the twenty-first century.

Permeable Insulation

The shift in relative strength of the Japanese state, combined with this legacy in political processes and institutions, makes it difficult to apply past experience and assumptions in evaluating current Japanese policies. Even where policy measures look quite familiar, their causes and consequences are often unexpectedly different. We propose that the analysis of Japan’s new policy measures, and their intended and unintended outcomes, is greatly advanced by the new perspective of “permeable insulation.” While permeable insulation includes parts of the 1980s trade concept of the “new protectionism,” which was mainly implemented through nontariff barriers, it extends well beyond trade policies. As an analytical category, permeable insulation calls for more precision in that it introduces differentiation, both by sector and issue area, into the study of Japanese policies.

“Insulation” occurs in the sense that, in many areas, government and corporate policies continue to have at their core an attempt to shield companies from full competition and the rigor of market forces. Insulation is seen in the continued efforts by the Japanese government to design policies that support domestic firms in international competition and also shield domestic sectors from that same competition. It can also be seen in industry-led efforts to ensure survival by informally regulating domestic competition. These efforts fit comfortably into the traditions of managed competition that have characterized Japanese industrial policy for so long.

Importantly, this insulation is “permeable” in that it is not absolute, but rather allows for differentiated application by industry, institutions, or issue areas. Permeability has two main consequences. First, not all parts of government pull in the same direction, leading to trade-offs and loopholes for industries to get around rules they reject. The “embedded mercantilism,” which Pempel argues has constituted a dominant policy paradigm in Japan’s political economy, is being replaced with a less comprehensive policy approach, even if the underlying principle of protection or promotion may remain unchanged. Thus, Japanese foreign economic policy is becoming ever more “unbundled,” or much less coherent (Pempel 1987, 1998). Second, industrial policies have become less inclusive or binding. For instance, under the former industrial policy regime, if one industry (perhaps steel) asked for continued protection while another (perhaps automobiles) preferred to operate independently, the pro-active industry would have been held back by protectionist policies. In contrast, in the new environment, the policy outcomes or protectionist walls are more permeable for industries not interested in this protection. In fact, policies of insulation are themselves permeable to the new dynamics of international markets. An example of this paradox can be seen in the campaign for internationalization of the yen—a policy that, as Grimes (Chapter 3) shows, was aimed at insulating Japan’s markets from external volatility, but where success would ironically depend on acceptance by international markets.

Thus, the new insulation is permeable because reductions in state power vis-à-vis the private sector since the 1990s have combined with stricter world trade rules and diminished solidarity among private institutions such as keiretsu. “Insulation” in post-developmental Japan is increasingly flexible, as it is used either to stave off change or to make its pace more manageable, depending upon the sector. In the twenty-first century, more than ever before, Japanese firms are making strategic decisions about how to embrace the global economy in the context of more diversified and less predictable government policies.

“Permeable insulation” means that Japan’s response to the global and domestic challenges of the 1990s is neither one of retreat and denial, nor one of full acceptance of global standards and practices. Instead, the basic thrust is one of pragmatic utilization of new rules and circumstances to continue industry policies of promotion or protection in a new, post-developmental, paradigm. Moreover, the approach sees Japan, for the first time in memory, as an active player in actually shaping the international environment through political and legal means, rather than simply reacting to real or perceived shocks. This new approach of shifting its insulation strategies to global or regional frameworks is one of the most important facets of Japan’s response to the global economic and political pressures of the twenty-first century.

Politics and Permeable Insulation

The new permeable insulation does not rely on a unitary state.⁴ Rather, even more than before, it is based on clientelistic subgovernments, or what Calder (1988) has called “circles of compensation” among firms in a given sector, and the bureaucrats and politicians who support them. What is more, the new vulnerability of ruling coalitions and of individual Diet members, caused by the long-dominant Liberal Democratic Party’s (LDPs) initial breakup in 1993, has created more interest in the substance of policies among politicians (see Chapter 2).⁵ Moreover, politicians’ endeavors to play a more prominent role were he...

Table of contents

• Cover Page
• Half Title Page
• Title Page
• Copyright Page
• Contents
• List of Tables and Figures
• List of Abbreviations
• Preface
• Part I: Introduction
• Part II: International Political Economy and Permeable Insulation
• Part III: Domestic Political Economy and Permeable Insulation
• Part IV: Conclusion
• About the Editors and Contributors
• Index