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1 Thirty years of neo-liberal reforms in Japan
Yves Tiberghien
This chapter has three ambitions. First of all, it proposes a chronology of the structural reform process over 30 years and describes its nature. Second, it offers an explanation for this process and analyses the forces that motivated it, when the majority of the Japanese population were apparently opposed to it. Finally, the chapter evaluates the reform outcomes, especially in terms of the balance between state and market.
Through a political analysis of the process of neo-liberal reforms and deregulation since 1980, I argue that the transformation of Japanese capitalism has not been linear, but has consisted in two distinct reform phases: that of Yasuhiro Nakasone in the 1980s, and that of Prime Ministers Hashimoto, Obuchi and Koizumi between 1996 and 2006. These two phases followed very different logic and goals, and were separated by a long pause. After 2006, neo-liberal reforms mostly stopped, due to a combination of inertia, voter backlash and doubt about the US model after the 2008 financial crisis. From 2006 to 2009, although the Liberal Democratic Party (LDP) remained in power, the reform movement lost momentum and experienced both popular backlash and internal resistance within the LDP. In 2009–11, under the first two administrations of the new Democratic Party of Japan (DPJ), an effort was made to pursue instead a more distributive social agenda, in order to respond to public concerns about inequality and welfare erosion. This agenda did not get the chance to come to fruition, due to a combination of weak DPJ governance, fiscal obstacles and the March 2011 triple disaster. By the third DPJ administration, under Prime Minister Noda (September 2011-December 2012), the government had turned toward fiscal retrenchment, trade liberalisation and energy policy. The social agenda was essentially abandoned. In turn, in December 2012, the LDP came roaring back to power under an Abe administration, version 2.0. Voters grew tired of policy incoherence under the DPJ and shifted their worries from one about inequality to one about low growth. The promise of a new economic policy that combined aggressive monetary stimulus, renewed fiscal Keynesianism, and ill-defined package of growth-enhancing structural reforms (the three-pronged ‘Abenomics’) received voters’ qualified approval. By early 2013, Abe launched his macro-economic policies with big effect. The ‘third arrow’, however, is a more uncertain package. At the time of writing, it seems clear that Abe does not intend to revive Hashimoto-style or Koizumi-style neo-liberal economics, even though he has recreated the key Industrial Competitiveness Council (ICC) used by Obuchi to push key reforms and relies on a Cabinet secretary (Yoshihide Suga) who was a key Koizumi supporter during postal reforms. Rather, Abe 2.0 may be seen as a functionalist or pragmatist.
History is not yet written and it is too early to gauge the nature of Abe 2.0. For example, the conclusion or not by the Abe government of the Trans-Pacific Partnership (TPP) will be a criterion to evaluate its neo-liberal nature, as TPP may be used as a Trojan horse to introduce a new wave of neo-liberal reforms. However, at this stage, it seems improbable that Abe 2.0 will proactively revive the neo-liberal agenda of reforms, not only because of the strong opposition within the LDP, but also because his agenda is primarily driven by a desire to revive Japan’s power in the context of a rising China. Instead, he may only preserve the major outcomes of the neo-liberal agenda and act as an heir in what may be already called a post-neoliberal era. As we shall see, the reform process has been sharply contested at every stage and has thus followed a non-linear track that sometimes makes it seem incoherent. The key moments of the reforms have often had to be accompanied by political gestures or counter-reforms in order to appease those who opposed them. The tactical pro-reform coalition has never been able to exert complete control, in the manner of Margaret Thatcher in the UK. The reforms of the 1990s could only progress at the price of compensatory fiscal expenditure on behalf of the losers from these same reforms, and this contributed to the explosion of Japanese public debt (which reached 200% of Japanese gross domestic product (GDP) in 2010, and more than 210% by the end of 2012).
At the end of this complex process of progressive reforms, it is clear that Japan has itself experienced a ‘neo-liberal transition’, especially between 1996 and 2006, but with a period of preparation under Nakasone. Many authors have emphasised the combination in Japan of decentralisation with serious inertia in the system of political economy (Amyx, 2000, 2004; Bouissou, 2003; Katz, 2003; Lincoln, 2001; Okimoto, 1990; Schoppa, 2001; Tiberghien, 2003, 2007; van Wolferen, 1989). In these conditions, it is not surprising that the institutional changes that have characterised Japan over this period have been gradual, which does not mean that they have not been significant and profound, in conformity with the concept developed by Streeck & Thelen (2005). The cumulated change in institutions after 1996 and the responses by firms to those new possibilities have certainly amounted to the greatest overhaul of the Japanese capitalist system since the war.
In addition, this chapter argues that the process of change resulted more from a political logic than from efficiency-seeking economic rationality. This is why I choose to call the process one of ‘neo-liberal transition’.
Second, we analyse the forces that have upheld this transformation. Why has Japan adopted a battery of neo-liberal reforms despite the lack of enthusiasm on the part of the population and the logic of comparative advantage that was pushing it in other directions (Dore, 2000, 1999)? There are several possible hypotheses. Some of them have put forward the idea that the postwar Japanese model simply ran out of steam having reached its optimal point before becoming dysfunctional, whether as a whole or at least in its financial dimension (Fukao, 2002; Katz, 2003). According to this explanation, structural reforms after 1996 (and even those of Nakasone) simply responded to a functional imperative for adaptation and survival of the Japanese model. A variant of this approach put forward the concept of a general institutional crisis, when the different actors in the system and public opinion started to doubt the permanence of the status quo (Aoki, 2001, 2002; Toya, Aoki & Toya, 2003; Toya & Amyx, 2006). Once this moment was reached, a Pandora’s Box of reforms was opened by political actors. Other researchers emphasised direct pressure from Japan’s American ally, as much in matters of trade as in financial and monetary issues, lasting from the end of the 1970s to 1995 (Kikkawa, 1998; McKinnon & Ohno, 1998; Nakanishi, 2002). These relentless pressures, linked to a major trade imbalance between the two countries, may have, according to this view, forced Japan to begin its first financial reforms, and so put out of balance its coherent system of political economy, later making necessary other reforms designed to bring the system back into balance. Finally, another approach emphasised the normative and ideological aspects of the reforms. According to this view, the Japanese elite underwent a conversion, in part because of the diffusion of global norms following the neo-liberal revolution of Thatcher and Reagan, and in part because of the bias of Japanese intellectuals (Dore, 1999, 2000; Eda, 1999; Ōtake, 1994, 1996, 1997). Thus, Ronald Dore argues that economic, bureaucratic and intellectual elites adopted neo-liberal ideas after the middle of the 1990s, and that these ideas gradually became virtually hegemonic, thus pushing forward the reform steamroller.
This chapter adopts a critical view of these different analytical approaches, given the fluctuating and targeted nature of Japanese structural reforms since the beginning of the 1980s. Basically, these reforms have been partial, clustered during particular periods, and strategically linked to fiscal deals. This tends to negate any purely systemic or functional logic. It remains true that many elements support the argument of an ideological transformation, first under Nakasone and more systematically after 1996, but a strong counter-current of conservative ideas in favour of social cohesion and maintenance of the previous advantages of the Japanese system has remained present throughout the period. This counter-current was followed by a more general public concern for inequality and social gaps after 2006, a concern that served as the backdrop for the limited attempts of the DPJ to enlarge the welfare system in 2009–10. So, these two currents of ideas find themselves in permanent confrontation and allow political actors to use and to express one or the other of them throughout the process of reforms and counter-reforms. In this, the force of ideas is not sufficient to explain directly the neo-liberal transformation of Japan.
This is why this chapter proposes a different interpretation of the origins of the Japanese neo-liberal transformation. I argue that an alliance of economic and technocratic elites has promoted key reforms during targeted political windows (Tiberghien, 2007), often in the name of the floating urban middle class, but also in response to stimuli coming from globalised financial markets. This alliance has benefited from the discrediting of the status quo at times of crisis and patent dysfunction. It has nevertheless experienced political failures, especially in periods of stagnation (1988–95, 2000–1, 2006–9), and even of severe electoral reverse when the LDP was defeated in August 2009, partly as the result of social disquiet in the face of rising inequality. Such an approach is thus entirely compatible with the analysis in terms of dominant social blocs advanced by Amable & Palombarini (2009), presented in the Introduction to this book.
After the series of reforms of Prime Minister Nakasone (1982–87), and above all 10 years of structural reforms between 1996 and 2006, what happened to the relationship between state and market in the Japanese system? On the one hand, some of the traditional tools used by the state to intervene in the economy (such as credit control), as well as support mechanisms for coordinating institutions outside the market, have been abolished; the state is thus less directly present in daily economic activities. On the other hand, it is striking that economic actors continue to expect that the state should play a role of stimulus, catalyst, or signalling agent (including, most strikingly, in the most recent period). Thus, as argued by Vogel (1996), deregulation of traditional state functions requires a process of re-regulation, or the creation of new instruments that fit the new stage of the economy. Deregulation without new regulatory institutions is often dysfunctional and the source of uncertainty (and bubbles). The state accepts and legitimises new behaviour involving a greater market component. The state also needs to intervene to remove institutional obstacles that prevent the formation of new patterns and relationships between private actors during a period of economic transition.
The result of these partial reforms is, from the early 2000s, an economic system much less coherent and interdependent than in 1980, as Chapters 2 to 4 will show.1 Some firms and some economic sectors are now very globalised and open, while others (e.g. distribution, and small and large non-innovative firms) still retain characteristics very close to those of classic Japanese capitalism. As a whole, institutional change has thus been significant; the new system of political economy resulting from it is markedly different from the classic system while suffering from a lack of internal coherence (Sako & Kotosaka, 2012a, 2012b).
This chapter begins with a brief description of the Japanese system on the eve of the transformative process, from the perspective of political economy. It will then proceed, in four stages, to a description of the Nakasone reforms in the 1980s, to a presentation of the pause in the reform process that followed, to analysis of the most intense reforms between 1996 and 2006, and finally to the period of pause and reversal that followed the departure of Koizumi in 2006: inertia in 2006–9, social backlash in 2009–11, transition in 2011–12, and a return to state-led partial reforms in 2013, albeit without the neo-liberal logic. Throughout these four phases, the chapter will evaluate the reforms that took place and the elements of the Japanese model that have been transformed (financial regulation, firm management, inter-firm relations), as well as the elements of the classic model that still persist (most notably the employment system and firm management). For each phase, the chapter will analyse the political forces that have permitted these reforms and those that have been limited, focusing on the cycles followed and sector variations. We shall emphasise the importance of political entrepreneurs under Prime Ministers Hashimoto, Obuchi and Koizumi, partly in response to the perception of a technological and global-environmental change (Chapters 6 and 7). The chapter also touches upon the look-back effect of structural liberal reforms on social inequality (see also Chapter 4) and on the political game in 2006–9, a period follow by a see-saw moment, and eventually a new focus on structural change under state leadership in 2013. The sequence from 2006 to 2013 demonstrates the continual instability of the Japanese model and the search for a new optimal equilibrium in a wake of partial change. Strikingly, the 2013 package of structural reforms proposed under Abe’s third arrow seemed to include both further liberalisation (especially trade liberalisation to stimulate domestic change), and a return to state-led initiatives. The chapter concludes with an analysis of relations between state, firms and market over the course of the past 10 years.
The Japanese system of political economy before the crisis
As the Japanese classical system of political economy has been already described in the introduction and will be analysed more precisely in the first section of each subsequent chapters, we do not enter into the detail of its description here and we just emphasise some points — especially regarding state intervention — that will be useful for the rest of our argumentation in this chapter.
Many authors have described the intensity of relations and networks within the post-war system, and the internal mechanisms for transferring resources between the productive sectors of the economy and the less productive sectors (Amyx, 2004; Aoki et al., 1990; Aoki & Patrick, 1994; Dore, 1983; Dore & Taira, 1986; Sakakibara, 1993; Lechevalier, 2007b). For example, for Bouissou (2003), the Japanese system is an interconnected system round several key elements, notably a market of influence between key political actors (the iron triangle), a social compromise upheld by the state of ‘indirect generalised social protection’, and a national system of ‘indirect generalised psychological protection’.
A variation that distinguishes the Japanese case from that of other coordinated systems is the active and multiple role of the state in co-ordinating between actors, as much by regulation as by more flexible tools, such as bureau-pluralism.2 In contrast to the powerful state that we find in France and in Korea, the Japanese state may be seen as a catalytic state, intimately bound up in the networks of co-ordination and allowing them to function effectively without, however, dominating them (Amyx, 2002a; Okimoto, 1990). Besides, the configurations of networks in different sectors come in various forms and the role of each ministry or even of each bureau within a ministry can also differ.
The interactive and interde...
