Japan, the System That Soured

Richard Katz

• Publisher: Routledge
• Year: 2015
• Topic: Economics
• eBook ISBN:
  9781317467175
• Subtopic: Business General
• Index: Economics

After seven long years of economic malaise, it is clear that something has gone awry in Japan. Unless Japan undertakes sweeping reform, official forecasts now warn, growth will steadily dwindle. How could the world's most acclaimed economic miracle have stumbled so badly? As this important book explains, the root of the problem is that Japan is still mired in the structures, policies, and mental habits of the 1950s-1960s. Four decades ago while in the "catch-up" phase of its economic evolution, policies that gave rise to "Japan, Inc". made a lot of sense. By the 1970s and 1980s, when Japan had become a more mature economy, "catch-up economics" had become passe, even counterproductive. Even worse, in response to the oil shocks, Japan increasingly used its industrial policy tools. not to promote "winners", but to shield "losers" from competition at home and abroad. Japan's well-known aversion to imports is part and parcel of this politically understandable, but economically self-defeating, pattern. The end result is a deformed "dual economy" unique in the industrial world. Now this "dualism" is sapping the strength of the entire economy. The protection of the weak is driving Japan's most inefficient companies to invest offshore instead of at home. Without sweeping reform, real recovery will prove elusive. The challenging thesis articulated in this book is receiving widespread media attention in the United States and Japan and is sure to provoke continuing debate and controversy.

Part One

The Two Japans

Chapter 2

Japan’s Deformed Dual Economy

The Two Japans

Nowhere do we see more sharply the obsolete and self-defeating nature of the Japanese system—and what happens when countervailing institutions are missing—than in the field of international trade. Japan remains entangled in a thicket of informal barriers that keeps imports, indeed overall trade, inordinately low. The result is a deformed “dual economy” unique in the industrial world. The secret of the economy’s tribulations is that there is not one Japan, but two.

The bright side of Japan’s economy is its exporting sector—industries like autos, consumer electronics, semiconductors, and machinery. This is the Japan that Americans see. Almost all the images of a rich, powerful, efficient Japan stem from these exporting industries.

In most cases, these export stars owe their initial takeoff to the “developmentalist” policies applied in the 1950s–60s. For example, an initially uncompetitive auto industry was rescued from oblivion by aggressive protection against cheaper European imports. Until the early 1960s, anyone wishing to import had to seek foreign exchange from MITI. In the case of autos, MITI refused to grant foreign currency for any imports beyond minimal quotas until 1965 when the industry was competitive on world markets. Even then, the quota was replaced by a prohibitive tariff. Similarly, the TV industry was not only given import protection, but it operated both legal and illegal cartels in which the industry charged high prices at home to subsidize lower-priced exports.

As these industries became export superstars, they drove the rapid industrialization of the rest of the economy. This success is what gave Japanese neomercantilism its legendary reputation.

But what the Old Guard in Japan and its U.S. admirers forget is that—as we’ll detail in Chapter 6—promotion and protection succeeded only when used for genuine infant industries. That is, industries which had the intrinsic potential to become self-sufficient exporters, but which had not yet gained the economies of scale or learning-by-doing efficiencies to be competitive. They needed an initial jump-start.

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Table 2.1

Japanese Output per Hour by Industry Compared to the U.S. (U.S. = 100)

Source: van Ark (1995), pp. 56–73

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Precisely because these exporters faced international competition, they could not permanently rest on government aid. They either had to hone their competitive edge or die. And so, they did. In many of these exporting sectors, Japan leads the world in productivity and technology (e.g., see machinery in Table 2.1). Japanese labor productivity is 24 percent ahead of the U.S. in automaking, and 15 percent ahead in consumer electronics. Japanese firms have often been the first in the world to introduce new products, from VCRs to oil supertankers, or to apply new processes, from solid-state TV to the continuous casting of steel.

Unfortunately, most Japanese live and work in quite another Japan—a Japan that neither exports nor imports and is therefore unknown to most Americans. This Japan is the product of the dark side of Japanese neomercantilism, the side that increasingly dominated in the 1970s and 1980s.

As Japan matured, it naturally ran out of “infant industries.” Protection was now superfluous and should have been abandoned. But Tokyo nonetheless applied a whole new round of widespread protection.

The initial impetus for the new protectionism was the deep industrial slump that followed the 1973 oil shock. Growth halved. Once-prosperous industries were suddenly plagued by chronic excess capacity. For many, this was not just a temporary shock. Aluminum, petrochemicals, shipbuilding, textiles, basic steel, and many others were now permanently priced out of the market: not just by the oil shock, but by the rise of the Asian NICs, the elevation of Japanese wages, and other fundamental trends. The troubled industries accounted for at least half of Japan’s manufacturing output, and a third of its factory workers.

Unwilling or unable to endure the pain of downsizing, companies and workers cried out. And the bureaucracy, often spurred on by the Liberal-Democratic Party zoku (caucuses), granted them relief. After all, the ruling Liberal-Democratic Party (LDP) depended for money and votes on some of the sectors that would be most hurt by the economic shakeup. And so, industrial policy degenerated into little more than political pork barreling and logrolling.

All of this belies the myth that, at the heart of the “Japanese economic model,” lies a bureaucracy that is immune to political pressure and therefore free to make decisions in the national interest. Now, it is certainly true that many industrial policy decisions were based on Japan’s genuine economic needs. But, it is equally true that ministries are often captives of the industries they are supposedly guiding.

A classic case involves the years of struggle by former MITI official Morihisa Naito to end restrictions on gasoline imports as well as the ban on self-service gas stations. Success finally came in 1996–1998. The restrictions had subsidized Japan’s notoriously inefficient refiners, led to rampant price-fixing, and provided a cushion for 60,000 gas stations, twice what a free market would support. When word of Naito’s efforts got out, gas station owners distributed a “Wanted” poster with his photo. Meanwhile, his colleagues at MITI accosted him, demanding to know why he was jeopardizing their future job prospects. Like most officials in Japan, these bureaucrats expected to retire in their mid-50s and get a cushy position at the very companies they are overseeing. No wonder they didn’t want any feathers ruffled.

Multiply such stories hundreds of times and one can easily see why so many moribund sectors won protection.

MITI and other agencies claimed that their protective measures were designed to smooth the downsizing, provide a social safety net, and ease the transition to Japan’s next industrial phase. In reality, measures like the famed “recession cartels” of the 1970s and 1980s¹ did precisely the opposite. They tried to resist the decline, slow it down, or even shift the burden to other countries (i.e., by exporting at “dumping” prices, which forced companies in other countries to take a greater share of global cutbacks).

In the end, a trade pattern that had begun as a way of promoting genuine infant industries was increasingly reduced to a crude protection racket for a host of “has-been” and “never-was” sectors. From cement, paper, and glass, to petroleum refining and petrochemicals, and even the formerly competitive basic steel, it seemed that almost no one was denied insulation from market competition.

Like a permanent crutch that leaves the muscles atrophied, protection left whole sections of the Japanese economy ossified and backward. As a 1995 report of the United Nations Industrial Development Organization (UNIDO) put it:

A major feature of the Japanese economy is the dislocation between the domestic market and the rest of the world. While the former is served by the uchi [“inside” companies —rk], which are among the most inefficient companies, the latter is served by the soto [“outside” companies —rk], which are among the most efficient in the world. Traditionally, the uchi have been subjected to a plethora of governmental regulations designed to protect them from foreign competition or newcomers at home. Under these very favorable conditions, the uchi have not been motivated to re...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Acknowledgments
• List of Figures
• List of Tables
• Introduction: What Happened to the Miracle?
• Part One: The Two Japans
• Part Two: The Success and the Souring
• Part Three: Open Trade: The Heavy Artillery of Economic Reform
• Part Four: The Road Ahead
• Appendices
• Notes
• Bibliography
• Index
• About the Author