Reprogramming Japan

The High Tech Crisis under Communitarian Capitalism

Marie Anchordoguy

• Publisher: Cornell University Press
• Year: 2015
• ISBN:
  9781501700859
• Topic: Economics
• Subtopic: Political Economy
• Index: Economics

How have state policies influenced the development of Japan's telecommunications, computer hardware, computer software, and semiconductor industries and their stagnation since the 1990s? Marie Anchordoguy's book examines how the performance of these industries and the economy as a whole are affected by the socially embedded nature of Japan's capitalist system, which she calls "communitarian capitalism." Reprogramming Japan shows how the institutions and policies that emerged during and after World War II to maintain communitarian norms, such as the lifetime employment system, seniority-based wages, enterprise unions, a centralized credit-based financial system, industrial groups, the main bank corporate governance system, and industrial policies, helped promote high tech industries. When conditions shifted in the 1980s and 1990s, these institutions and policies did not suit the new environment, in which technological change was rapid and unpredictable and foreign products could no longer be legally reverse-engineered.Despite economic stagnation, leaders were slow to change because of deep social commitments. Once the crisis became acute, the bureaucracy and corporate leaders started to contest and modify key institutions and practices. Rather than change at different times according to their specific economic interests, Japanese firms and the state have made similar slow, incremental changes.

1The Dynamics of Communitarian Capitalism

After half a century of explosive growth and increasing global competitiveness, Japan’s economic power is in decline. While Japanese firms remain important players in autos, electronics, and machine tools, they are no longer the world’s dominant manufacturers. Talk in the late 1980s of a Pacific Century dominated by Japan has been replaced with a sense that Japan’s economic health is increasingly dependent on the growth of emerging powerhouses such as China. Its banks, once the world’s strongest, are now so weak that some fear large bank failures could trigger a financial crisis. In 1998, its per capita GDP fell behind that of the United States; in 2001, it slipped to fifth place and in 2002 to thirteenth place.¹ In a 2004 survey on global competitiveness, Japan ranked twenty-third, down from number one in 1993, though up from thirtieth place in 2002.²

The economy’s deterioration has been reflected in the stock market. At its peak, firms listed on the Tokyo Stock Exchange accounted for 31 percent of the capitalization of firms listed around the world; by 2002 that number had fallen to 9 percent of the global total.³ In 2002, Okuda Hiroshi, chairman of Keidanren and Toyota Motors, warned that the nation’s problems could lead firms to move their headquarters and factories overseas, and a government official acknowledged that Japan needs foreign investment, technology, and expertise to revitalize its economy.⁴ Official government debt soared to 140 percent of GDP by 2004, far higher than any other industrial nation. Including hidden debt, the level is estimated by some at twice the nation’s GDP. Wage increases have stagnated and wage cuts are common. Economic decline has had serious social implications. Suicide rates rose 30–40 percent between 1997 and 2003, giving Japan the world’s second highest suicide rate, more than double that of the United States.

Despite massive economic problems, the nation has been slow to respond. Its banking crisis has dragged on for a decade and a half. Government debt continues to mount through subsidies to inefficient sectors, such as agriculture and construction, at the expense of more efficient firms. Even relatively efficient firms continue to follow policies widely recognized as debilitating. How can we explain this dramatic reversal of fortunes and the nation’s slow response to these challenges? Why has a nation of highly educated, disciplined, achievement-oriented citizens with a strong sense of nationalism continued to allow its economy to drift? Why do strong firms allow themselves to be held back by the weak? Why do firms in so many industries fail to break away from a losing pattern of similar pricing, product, and R&D strategies? Why does the government continue to prop up the stock market and bankrupt firms that analysts call “zombies”?

Some experts attribute recent failures to poor monetary and fiscal policies. William Grimes and Adam Posen, for example, argue that a weak Bank of Japan (BOJ), tied too closely to the Ministry of Finance (MOF), made major mistakes in monetary policy, such as keeping interest rates too low for too long in the late 1980s. This resulted in a stock and land price bubble, overinvestment in manufacturing capacity, and a huge increase in high-risk loans by banks.⁵ Others see slow and uneven financial deregulation and inadequate corporate governance regulations as key causes. This view suggests that the absence of transparent, accountable monitoring mechanisms led banks to loan and firms to borrow and invest huge sums based on inflated asset prices without properly assessing risks.⁶ The economic woes of the 1990s and early 2000s are also attributed to institutional gridlock and outmoded institutions. Ed Lincoln, for example, points out that many of Japan’s institutions are outdated but that the pain of its economic downturn has not been severe enough to induce sweeping changes.⁷ Richard Katz argues that overinvestment in unproductive industries since at least the early 1970s created problems that were hidden because of the expansion of other healthy industries and the bubble in asset prices.⁸ T. J. Pempel and other political scientists show that domestic political factors, such as long-term one-party dominance and factional politics, have led to vested interests that obstruct economic and political reform today.⁹

To be sure, basic macroeconomic errors such as loose monetary policy and tight fiscal policies, too little monitoring of firms, institutional obsolescence, and vested interests in the status quo are critical parts of the explanation for Japan’s economic doldrums since the 1990s. This book suggests an overarching explanation for why these shortcomings appeared to emerge simultaneously to undermine Japan’s economic power. The source of the problem lies in the form of capitalism that emerged in Japan in the postwar period. I call this system “communitarian capitalism.” The system helped accelerate economic development under the conditions that existed up until the 1980s but is also responsible for the economic paralysis that followed.

Lincoln, Katz, Pempel, and Grimes are right about the key problems causing Japan’s economic malaise. However, all nations experience these difficulties in adapting policies and institutions to a new environment. During good times, all economies tend to overinvest, leading to excess capacity and bad loans, and this overshooting is always exacerbated to some extent by shortcomings in monetary policy and corporate oversight. Every country has its share of obsolete institutions. Every political system struggles with vested interests that resist change. However, such problems are much more severe in Japan. Even after more than fifteen years of low-to-no growth and the threat of financial collapse, change remains slow and incremental, though it has accelerated since the late 1990s.

Many of these approaches lack an understanding of the norms that broadly shape key decisions. Japan’s capitalist system is embedded in deep-seated communal norms regarding justice, social order, national identity, and national self-sufficiency. These broad social forces aim to maximize a strong sense of community. I suggest that these norms, enshrined in communitarian capitalism, help explain the severity of the economic malaise, as well as the nation’s inability to respond.

Communitarian capitalism explains how overshooting, which leads to excess capacity and bad loans, is a much greater problem in Japan, because firms tend to have similar strategies and product lines; and once they invest, they make commitments that are unacceptable to abandon. In a communitarian capitalist system, it is difficult to eliminate obsolete institutions, because social and developmental norms make it unacceptable to allow the winds of creative destruction to sweep them away. Also, vested interests can cause severe paralysis, because a broad communal consensus is needed before policies and institutions can shift directions. And in such a system, everyone is a trusted member of the same community, the same family; thus monitoring firms is not a “normal” part of doing business. Communitarian capitalism explains how in nations such as Japan, where behavior is governed by intricate social conventions based on trust rather than law, the tendency to hide problems is especially strong because making a mistake or doing something “untrustworthy” results in harsh social sanctions. Yet covering up and not dealing with problems only exacerbates them. In sum, only by understanding the social reality that the Japanese state, firms, and citizens have created and maintained in the postwar period can we explain what otherwise appears to be irrational behavior.

To explore the sources of Japan’s economic success in the postwar period, as well as its recent problems, I draw on a variety of approaches in sociology, law, and political science that emphasize the role of norms in shaping behavior, such as the institutionalist approach in economic sociology drawn from the work of Max Weber and extended by scholars such as Nicole Woolsey Biggart, Gary G. Hamilton, and Mark Granovetter.¹⁰ In contrast to much of the economics and political science literature that views institutions and policies as emerging and evolving over time to advance actors’ economic and political interests, these scholars see economic action as social action. They show how economic behavior is influenced not only by narrow self-interests but also by actors’ histories, desires, sense of justice, habits, religious beliefs, nationalism, and other powerful forces that transcend those narrow interests. In this book, I examine a series of cases inductively and show that the emergence and maintenance of Japan’s postwar capitalist institutions and policies and the system’s paralysis in the past decade cannot be fully explained without understanding the history and social context of these arrangements.¹¹

Just as scholars were identifying some of the key mechanisms that propelled the economy toward rapid growth and industrial competitiveness in the 1960s, 1970s, and 1980s, the system stopped performing. Did we fail to identify the critical ingredients of success, or has the environment changed? If Japan’s development was driven largely by a strong and effective developmental state, why has that state been ineffective in promoting economic growth since the 1990s?¹² If the state has been merely a tool of business or politicians, and market forces have been the primary impetus driving development, why did market forces promote development from the 1950s through the 1980s yet go awry starting in the 1990s?¹³ If, as some studies suggest, business-state networks, keiretsu, the main bank corporate governance system, and trade associations have been essential to development, why did they function well in the past but not in the 1990s and early 2000s?¹⁴

The environment did dramatically change in the 1980s, and the state, firms, and citizens failed to adapt to this new environment because of social and developmental commitments enshrined in the institutions and policies of communitarian capitalism. In the postwar period, patterns of behavior favoring egalitarianism (byōdō shugi), cooperation, consensus decision-making, and national autonomy became “routinized, taken for granted, understandings about the way things are done.”¹⁵ Institutions and policies embedded in these norms were insulated, delaying the impact of and adaptation to the forces of globalization. These rules dictated, for example, that workers were not to be laid off, that loyal suppliers were not to be abandoned, and that firms were to rely on domestic products as much as possible, even if they were not competitive. Allied firms were to be bailed out, even if they were in a hopeless situation, just as one would bail out a sibling. Unwilling to alter practices in ways that would disrupt this social order, the state, firms, and citizens, by default, chose the alternative: economic decline.

1. Communitarian Capitalism

Communitarian capitalism is an economic system characterized by an activist state and a number of private-sector organizations that manage markets to promote development and national autonomy in the context of the broader goals of social stability, predictability, and order. Drawing on the notion of “organizational logic”—a supra-organizational norm that structures social relations—this study posits that the community is the basic organizational logic that guides state, corporate, and individual behavior in Japan.¹⁶ This logic dictates elaborate social conventions about how the state, firms, and individuals should behave in given situations. The rigidity of these customs binds community members into a strong collective identity. Those who do not abide by these customs are rejected as outsiders and excluded from the benefits granted to members of the community. This study uses the concept of communitarian capitalism as an overarching explanation of behavior in postwar Japan. It should be clearly distinguished from George Lodge’s use of it as a general term to describe the tendency of governments of nations such as Japan, Germany, and Sweden to give more priority to the community than countries such as the U.S. and the U.K.¹⁷

Historical Roots of Communitarian Capitalism

Every society determines for itself what mix of states, markets, rules, and corporate control it finds acceptable. The particular mix is a function of history and the kind of trade-off citizens are willing to accept. Japan’s late developer status, its feudal past, the threat of colonization by Western powers, and a strong national consciousness and identity all contributed to the emergence of a strong activist state in the Meiji period, which promoted national autonomy and economic development.¹⁸ After World War II, Japan’s rulers felt the need to return to their statist tradition in order to rebuild their economy. Just as they had in the Meiji period, the nation’s bureaucrats determined that a critical ingredient needed in order to p...