Intellectual Property and the New Global Japanese Economy

Ruth Taplin

• Publisher: Routledge
• Year: 2009
• ISBN:
  9781134037278
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The Japanese economy is the second largest in the world and is becoming once more one of the most competitive. Despite the stagnation and deflation experienced during the 1990s, Japan has progressively become more aware of the need to be a global player, in particular under the radical administration of former Prime Minister Koizumi. A vigorous approach to intellectual property borrowed from the US and Europe, stressing the importance of innovation, assisted in kick-starting the Japanese economy again and has sustained its increasingly high performance. This book examines how Japan has used this new approach to intellectual property (IP) to revitalise its economy. It explains how IP has traditionally been used in Japan, and goes on to identify the ways in which this has changed in recent years, identifying the different facets of IP utilised to propel the Japanese economy to new heights: Firstly, by promoting IP through Technical Licensing Organisations (TLO) laws and uniting the universities with the needs of industry. Secondly, via radical changes to employees' rights to compensation through the landmark decisions made by the Tokyo District Court. Thirdly, by the streamlining of patenting applications and procedures through the Tokyo and Osaka District IP Courts, and the Japanese Patent Office. Fourthly, by internationalising its capital markets, as displayed by the cooperation between the Tokyo Stock Exchange and the London Stock Exchange (LSE) and other bourses. Overall, this book is essential reading for all those interested in understanding the modern Japanese economy, and how it is adapting to exploit the opportunities and challenges of an increasingly globalised world.

1
Roots of the IP drive and economic globalization

A political and economic tsunami washes over Japan

In April 2001, Japan – the second largest economy in the world – experienced a political and economic tsunami that would shake the country out of its torpor for the next five years and five months. It was delivered in the form of Koizumi Junichiro, who was elected to the Presidency of the Liberal Democratic Party (LDP), subsequently to become Prime Minister of Japan. As most nations and people seek a figure of deliverance in harsh times, Prime Minister Koizumi almost became a religious-like figure who appealed directly to the people of Japan to support his radical reforms. This is unusual in a country where politicians have a more usual disdain for and remote relationship with the electorate, preferring to seek support and solace from fellow party members in their bid to hold on to power, and in a nation that is less than religious in outlook. By appealing to three million LDP members directly, he also addressed the public’s need to see a reformed Japan that would become prosperous once more. Japanese people, and women in particular, resented and protested against the policies of former Prime Minister Hashimoto Ryutaro (1996–8), who had tried to raise the consumption tax. Koizumi was admired in Japan for being plain speaking and honest. This perception was aided by direct interaction through the media and meetings at town halls.

Prime Minister Koizumi came from a family of politicians and his grandfather had already tried to reform Posts and Telecommunications by splitting the two, which his grandson managed to accomplish amid great opposition. He was committed throughout his political career to structural reform that began in the 1970s, when he was parliamentary vice minister of the Ministry of Finance, while the national debt was spiralling out of control. When he was Minister of Posts and Telecommunications in the 1990s he began his struggle for reform by attempting to redirect the flow of funds from postal savings, insurance and national pensions into an alternative budget, but never succeeded. He ran for LDP president twice before he finally succeeded in 2001, as a young aggressive reformer.

Pillars of support for reform

Prime Minister Koizumi also had a talent for choosing like-minded people to support his reforms and defended them when under attack. His greatest expertise and support came from Iijima Isao, who was his chief of staff and who was skilled in recruiting reform-minded bureaucrats to support reforms and in lobbying politicians to ensure reform-based legislation was passed. He served Mr Koizumi throughout his political career as an executive and legislative aide.

Takenaka Heizo was an unusual choice – he had a Ph.D. from Hitosubashi University, had formerly worked at the Development Bank of Japan (DBJ) and was a holder of several academic posts. Dr Takenaka shared with Mr Iijima the passion for reform and the former, despite being a political novice, engaged in successful nemawashi (preparing the ground through negotiation) to persuade key LDP leaders and senior bureaucrats to support legislative reforms put forward by the Koizumi government.

Dr Takenaka endured a great number of political attacks, which he endured with patience and with the support of Prime Minister Koizumi, because he assisted in breaking up the close relations between LDP politicians, business executives and bureaucrats. Such close relations often culminated in wasteful projects, such as unnecessary bridge-building or other projects such as Seagaia in Miyazaki prefecture, which proved to be white elephants, but were lucrative for local bureaucrats and businessmen and were also carried out to buy rural votes. The pork-barrelling activities of corrupt politicians were high on Dr Takenaka’s list to eliminate. Public corporations were privatized to make them more efficient and less corrupt and the issuance of national bonds was reduced.¹ The other pillar of Prime Minister Koizumi’s reform drives was Arai Hisamitsu, who promoted vigorously and successfully the drive for Japan to be an intellectual property (IP) nation as the Secretary General of the IP Strategy Headquarters, Japanese Cabinet.

In this book we will concentrate on the economic policies of globalization and eliminating waste that occurred under the jurisdiction of Dr Takenaka and the IP reform so capably carried out by Mr Arai.

The need for economic reform

In the decade prior to 1999, the Japanese economy experienced severe recession and deflation. Banks were saddled with non-performing loans; the yen was so strong during the period of endaka (appreciation of the yen) in 1985 that the usual way of recovering through expanding exports globally became less of a viable option; consumers were neither spending nor saving in banks that offered miniscule or non-existent interest rates; and the property market had collapsed.

In addition to the internal stagnation were the external factors of the September 11 terrorist attacks in 2001 in the United States coupled with the continuing negative fall-out from the dotcom boom.

Corporate Japan continued in its traditional path of providing loans through giri, or reciprocal obligation, accruing even greater debt burdens that were never guaranteed to be repaid. Continuing with lifetime employment and other non-sustainable labour policies, in addition to retaining non-profitable, inefficient companies or parts of companies, was preventing the freeing of labour and capital to be used more productively to encourage growth.

Dr Takenaka believed that the Japanese economy could only return to a path of growth by vigorously promoting structural reform in all areas, such as deregulation, fiscal reform and the reform of both pension and insurance systems.

Measures to be taken by financial authorities

By the time the economy bottomed out in 2002, after nearly 15 years of economic uncertainty, the financial authorities had learned a number of lessons for the future and a number of structural reforms were being carried out to prevent the economic disasters of the 1990s.

The size and scale of damage wreaked on the Japanese economy during the 1990s need to be understood before the structural solutions are outlined and the lessons learned analysed. The bursting of the bubble economy and collapse of the property market in 1990 caused wide fluctuations in capital gains and losses in the Japanese corporate sector. The situation was so severe that, by 2004, total capital since the bursting of the bubble had still not recovered sufficiently.

The two characteristics of the bubble bursting in Japan were the scale of loss and the asymmetry of the loss by size and industry of the companies. Overall loses were nearly one-third of nominal gross domestic product (GDP), which was excessively high for a modern economy. The loss was even larger in small and medium-sized enterprises (SMEs). By contrast, the losses to large manufacturing companies were relatively small, while the loss of non-manufacturing SMEs has been so great that full recovery has not been achieved by 2008. The lack of symmetry as to what sectors were the most affected was largely due to commercial property being the major sector affected and non-manufacturing companies not having to compete on a global scale because they were protected by the government.

Large manufacturing companies were forced to restructure and globalize after the appreciation of the yen (endaka) in 1985, which had made them globally competitive and privately financed. Japanese banks eagerly – or some would argue recklessly – financed the non-manufacturing sector, most particularly the real estate industry, without checking that such industries were globally competitive and able to sustain themselves.

It was the scale and asymmetry of loss that brought about serious delays in structural reform policies that were supported by the majority of Japanese people. Ninety per cent of the labour force works for SMEs or the non-manufacturing sector, which made the seriousness of the loss even greater. Had the banks disposed of the non-performing loans (NPLs) all at once, it could have been the case that the bulk of Japanese companies would have become bankrupt, with the result that almost 90 per cent of the population would have become unemployed, which would have been a catastrophe. To prevent panic the government did not inform the Japanese people of the scale of the impending disaster, which was exacerbated by a credit crunch, because the underdevelopment of the corporate bonds and stock market through which companies could raise funds led to an increase in NPLs, accompanied by a reduction in bank profits with an increase in deficits.²

Structural reform programme

With the scale of economic problems at epic proportions, the Japanese economy was suffering from a cyclical downturn because of slowdown in the global economy. Industrial production and business investment declined and, in November 2001, unemployment reached an all-time post-war record of 5.5 per cent. The Koizumi government had to act quickly and efficiently and there was little room for political factional games.

The Koizumi government under Dr Takenaka introduced two economic policy packages to ease the crisis. One was the ‘Advanced Reform Programme’ in October 2001, which included measures for new job creation, safety nets for those who had lost their jobs and for SMEs and measures addressing the NPL problems. In December, the second package was adopted by the Koizumi government – the ‘Emergency Action Programme for Structural Reform’, which was to accelerate structural reforms. The Action Programme was accompanied by a second draft supplementary budget of roughly $US 34 billion, which was allocated to social infrastructure to facilitate structural reform that lifted GDP by 0.9 per cent over the next year. Instrumental to the success of these policies was the government working with the Bank of Japan (BOJ) to continue the latter’s adoption of appropriate and flexible monetary policies to stem deflation.

Bank of Japan measures to deal with the financial crisis

The BOJ introduced a safety net to prevent systemic risk, which included the speedy purchase and assumption (P&A) scheme. The process meant closing a failed bank on a Friday, transferring protected deposits and sound assets to another bank during the weekend and opening the bank on the following Monday. If the risk of systemic risk was too large, as in the case of large banks becoming bankrupt, the special safety net included transferring deposits to bridge banks and public capital injection into the failed banks or simply a transitional nationalization of these banks.

In tandem with the Koizumi government, the BOJ introduced a bridge bank to take over the whole balance sheet of the failed institutions, investing 20 billion yen, for example, which had been lost.

The BOJ tried very hard to make people aware of the importance of disclosure, but it was not taken seriously as transparency had never been a feature of Japanese financial institutions. In fact, in line with the cultural tendencies of not losing face and not speaking openly of financial situations, people were not inclined to be involved in disclosure. As bankruptcies of financial institutions continued, the dire situation forced the government to produce a ‘comprehensive’ safety net to prevent systemic risk. The government, therefore, declared a blanket guarantee for all deposits, revised the deposit insurance law almost every year and made new legislation for the protection of the financial system.

The delay in dealing with disclosure and making the population aware of the extent of NPLs allowed the continuation of inefficient and poorly managed corporations and banks. In addition, the delay in awareness and disclosure of the NPLs resulted in the gradual disposal of losses and the construction of safety nets. The government before the Koizumi administration lacked strong leadership and could not push through the reforms that were so necessary to restore the equilibrium of the Japanese economy and bring it into positive growth.³

The Koizumi reforms to the economy

As Dr Takenaka pointed out, the essential strength of the Koizumi government lay with its ability to implement structural reform by fighting against vested interests. Vested interests were pulling the economy to pieces, with every interest group taking its own direction and not pulling together to fight economic instability. Instead of revitalizing the rural areas, large cumbersome projects were built with favours granted to certain construction companies and with the outcome of the projects contributing nothing to sustained growth. The projects were isolated and largely unnecessary, benefiting only a small group of people. The Japan Highway Public Corporation was a great offender in squandering public money and undertaking wasteful projects. The Koizumi administration put a stop to this by privatizing it and making it accountable. The Government Housing Loan Corporation was discontinued and expenditure on public corporations was reduced by over one trillion yen in a year.

Administrative reorganization served to make Prime Minister Koizumi more effective. He created a Council on Economic and Fiscal Policy (CEFP) in the Cabinet Office, which took a central role in the formulation of economic and fiscal policies. Dr Takenaka noted that the Council provided him with ‘machines’ for his leadership. The Council was comprised of economic ministers and ‘wise men’ from the private sector and was presided over by Prime Minister Koizumi himself. In line with this hands-on approach, Dr Takenaka steered the Council to ensure that it formed the underpinning of the Prime Minister’s leadership.

C...