Circles of Compensation

Economic Growth and the Globalization of Japan

Kent E. Calder

• Publisher: Stanford University Press
• Year: 2017
• ISBN:
  9781503602946
• Edition: 1
• Topic: Économie
• Subtopic: Économie politique

Japan grew explosively and consistently for more than a century, from the Meiji Restoration until the collapse of the economic bubble in the early 1990s. Since then, it has been unable to restart its economic engine and respond to globalization. How could the same political–economic system produce such strongly contrasting outcomes?

This book identifies the crucial variables as classic Japanese forms of socio-political organization: the "circles of compensation." These cooperative groupings of economic, political, and bureaucratic interests dictate corporate and individual responses to such critical issues as investment and innovation; at the micro level, they explain why individuals can be decidedly cautious on their own, yet prone to risk-taking as a collective. Kent E. Calder examines how these circles operate in seven concrete areas, from food supply to consumer electronics, and deals in special detail with the influence of Japan's changing financial system. The result is a comprehensive overview of Japan's circles of compensation as they stand today, and a road map for broadening them in the future.

1

Paradox and Japanese Public Policy

For a century and more, from the mid-Meiji era in the 1890s until the collapse of its real estate bubble just over a century later, Japan’s economy was a model for the world, recording some of the highest growth rates on earth. During those proud decades, Japan became the first non-Western nation to industrialize, and remained one of the few countries of Asia or Africa to avoid colonial subjugation by the West. After a dark imperialist interlude of its own during the early twentieth century, Japan resumed its high-speed economic growth as the Korean War began, at even higher rates than previously, recording remarkable equity of income distribution, as well.

The Puzzling Profile of Growth

Since 1990 the picture has been dramatically different. Real Japanese growth has averaged slightly less than one percent a year, compared to 2.5 percent for the United States, and 1.7 percent for the European Union.¹ Japanese growth has also been dramatically slower than that recorded in Japan’s own recent past—4.4 percent for the 1980s² and around 9.7 percent for the high-growth period between 1955 and 1970.³ Meanwhile, inequality in Japan has also dramatically intensified, and Japan has fallen from near the top to twenty-third internationally in per capita gross domestic product (GDP).⁴

Massive Pump Priming

Since the 1980s, in particular, Japan has frequently engaged in massive Keynesian pump priming—endorsed and approved by the international community. That quixotic effort has taken Japan’s general government gross debt to 248 percent of GDP—the highest level on Earth.⁵ In the twenty months following the 1985 Plaza Accord, under Finance Ministers Noboru Takeshita and Kiichi Miyazawa, the Japanese government implemented nearly ¥13 trillion in economic countermeasures to revive domestic demand.⁶ Under the Structural Impediments Initiative of the early 1990s, established jointly with the United States to combat chronic trade imbalances, Japan committed itself to ¥430 trillion in additional fiscal pump priming over the decade following the October 1990 agreement.⁷ During 1998–1999, the Keizō Obuchi government added nearly ¥42 trillion more in combating the Asian financial crisis, the bulk of it devoted to stimulative public works.⁸

Technological Strength

Japan also for many years made significant technological breakthroughs. Its automobile manufacturers gave birth to hybrid cars. Indeed, the chairman of Japan’s top automobile manufacturer, Toyota Motor Corporation, Takeshi Uchiyamada, is the “father of the hybrid.” Japan’s steel companies pioneered in amorphous metals. Its construction firms developed the most advanced and efficient tunneling technology in the world. And Japan’s consumer electronics led the drive to miniaturization as well, pioneering in development, for example, of the world’s most minute and high-capacity random-access memories.⁹

Persistent Effort

There is no question that Japan—its leaders, its outstanding bureaucracy, and its formidably organized corporations—put enormous thought and effort, following the end of high growth, into the struggle for revival—more than two decades of sustained effort. Japan’s leaders were essentially the same people and institutions that had sparked the miraculous expansion of previous decades. Time and again across the high-growth years—in 1958, 1965, 1974, and the early 1980s, just to name a few instances—they had succeeded in reviving the national economy and its remarkable, century-long path of exceptional dynamism. Yet this time it was not to be.

Why Sudden Stagnation?

Why, then, did a Japan that grew so explosively and consistently for more than a century suddenly find it so difficult to grow at all? Why was it abruptly outstripped by countries like the United States—not to mention its dynamic neighbors in Asia—which for so long seemed unable to even approach Japanese performance standards? And why did the pronounced relative shift in growth patterns—from exemplary growth to decidedly subpar, compared to both seemingly similar nations and its own past—occur when it did, with such abruptness? What are the necessary preconditions, including institutional transformation, for its long-term revival? And how important are inherited political culture and entrenched elites as constraints on needed change? Clearly in Japan’s sudden and disturbing transition there is a paradox of major dimensions—for the world of practical affairs and that of social-science theory, as well.

Why No More Rapid Revival?

The Tokyo Stock Exchange’s Nikkei 225 index average reached nearly 39,000 in late December 1989.¹⁰ Twenty-five years later, despite massive stimulus efforts, a host of structural reform plans, and four major shifts in political power, the index still stood, near the end of 2016, at less than half that 1989 level.¹¹ Putative reformers ranging from Morihiro Hosokawa and Junichirō Koizumi to Yukio Hatoyama, Naoto Kan, and Yoshihiko Noda had come and gone, but none had achieved major structural change, despite changes in electoral and regulatory rules that should have significantly changed political-economic incentive structures. While Shinzō Abe, with his vaunted “three arrows,” had temporarily rallied the stock market with aggressive monetary and fiscal easing, the “third arrow” of structural reform showed few signs of transforming Japan’s domestic political economy, either. Growth continued on an uncertain trajectory, as suggested in Figure 1.1. Japan’s balance of trade for goods position remained persistently in deficit, especially after the 2011 Fukushima nuclear accident, and even as Japan’s neighbors, together with most advanced industrial nations, grew much more vigorously. In the second quarter of 2015, for example, Japan’s economy shrank at an annualized rate of 0.7 percent, and its merchandise trade deficit remained at ¥406.6 billion, as exports failed to pick up despite a weakening yen.¹²

The Incongruous Contours of Policy

Together with paradoxes in the contours of growth—particularly its sustained rapidity for more than a century, followed by abrupt deceleration—Japan’s recent history also exhibits anomalies in its pattern of policy formation. These may provide important insights into the puzzling patterns of growth and stagnation outlined above. One example in this regard is Japanese corporate governance, and its sluggish, grudging transformation. In many parts of the world, change has been much more rapid than in Japan.

FIGURE 1.1 Economic struggles since collapse of the bubble

SOURCES: Ministry of Finance, “Table 6s-a-1 Current account (seasonally adjusted) (Quarterly Figures),” Balance of Payments (Historical data); Cabinet Office, “Changes from the previous quarter (at current prices: seasonally adjusted series),” Quarterly Estimates of GDP Jan.–Mar. 2016 (The 2nd Preliminary).

The emergence since the 1980s of a powerful global equity market has transformed incentives for the state worldwide, and presented political leaders with a “golden bargain”—the infusion of cheap and abundant capital into domestic markets, in return for reform of corporate governance and related regulatory innovations.¹³ France and Korea have both embraced this opportunity and undertaken far-reaching reforms to make their firms more attractive to foreign capital. Japan, however, has not done so.

Japanese policies in a broad range of areas relating to globalization also contrast strikingly to those of many advanced industrialized nations to which Japan is otherwise similar. Transportation, real estate, agriculture, and housing are among the contrasting sectors. Japanese policies in most of these areas tend to be rigid, politicized, and parochial, although predictable and advantageous for long-standing participants, as we shall see concretely in Chapters 4 through 9. Change is occurring, but at glacial speed, considering the substantial changes in political-economic incentives, at both the global and national levels, that have occurred over the past generation.

Central Puzzles in the Contours of Policy

Japan’s recent political-economic history exhibits three anomalies in its pattern of policy formation that may provide additional clues in resolving the central puzzle of abrupt growth deceleration.

(1) The paradox of globalization response.¹⁴ In both elite political and mass public discourse, symbols of globalism have been popular in Japan throughout the postwar period: peace, the United Nations, and global responsibility, to name a few. Japan, as a “reactive state,” has been relatively quick to respond, in rhetorical and in national-policy terms, to focused external pressure, or gaiatsu, that aligns with underlying cleavages in the domestic Japanese political economy.¹⁵ Yet both policy in practice and the behavior of domestic enterprise have been slow to respond to the powerful winds of globalization that have transformed most of the world economy over the past three decades, despite Japan’s high level of interdependence with the broader world in such strategic areas as finance.

Japanese ports and airports remain high-cost and domestically oriented; Japanese agriculture is also notably protectionist. Japanese regulatory policies in telecommunications and finance have been slow to respond to the revolutionary changes that have swept the world since the 1980s in those sectors. And Japanese education, like the professions, remains parochial, although these patterns are changing.

(2) The paradox of cross-sectoral contrast. Japan’s public policies since at least the 1950s have exhibited sharp contrasts: a strong market orientation in directly traded sectors of the economy, and acceptance of widespread protection and inefficiency in many nontraded sectors. This bifurcated approach has involved low tariffs on industrial inputs in the traded sectors, and a determined effort to encourage higher value-added production in those sectors. At the same time, public policy in the nontraded portion of the economy has condoned highly protectionist and economically inefficient policies in areas like transportation, construction, agriculture, and services.

(3) The paradox of inconsistency. Japan, like most advanced societies, has meticulous rules for governing. In both international and domestic policy transactions, established insiders—those engaging systematically, over long periods, in routinized dealings with other legitimate policy actors—tend to be accorded favorable, consistent treatment. Japanese policy making, like Japanese social practice generally, tends to favor insiders against outsiders, be they foreign or domestic. It is also often slow to implement abstract global standards, even as many Japanese personally respect and idealize such norms.

It has been argued that Japanese politics is changing, growing less compensation oriented, and leading ultimately to a more neoliberal Japan.¹⁶ Electoral politics has indeed arguably grown more fluid and pluralistic since the electoral reforms of 1994. Yet meaningful neoliberal structural reforms have been slow in coming, even when insistently pressed by forceful leaders such as Junichirō Koizumi and Shinzō Abe.

Problems for Analysis

Social-science theory since Aristotle suggests that the most powerful explanations are those that compare phenomena within a given category, and those that can account simultaneously for both similarities and differences in behavior.¹⁷ Accounting for Japan’s paradoxical recent growth patterns thus seems to be a promising catalyst for theory building, as it involves abrupt, discontinuous changes in a previously continuous variable. In many respects, Japan’s complex growth profile appears to have the character ex post of a natural experiment.

Dual Patterns of Policy and Performance

An explanation for Japan’s recent growth performance needs to account through a unified analysis for two separate and seemingly contradictory patterns: (1) the country’s remarkably buoyant growth of the post–World War II high-growth years (1951–1990); and (2) Japan’s subsequent stagnation (1990–present). If truly robust, a good explanation should also offer potentially verifiable predictions concerning a third analytical challenge: understanding preconditions and prospects for Japanese recovery.

There is considerable analysis regarding the causes of Japanese economic growth, in both mainstream economic and in political-economic literature. Yet most of it fails to anticipate, and cannot easily explain, the difficulties that subsequently transpired. There is much less consideration of the second and third problems—explaining Japan’s recent stagnation and its prospects for recovery. Virtually none of the existing literature attempts to explain recent difficulties using the same variables as are considered in accounting for earlier success.

Muted Response to Globalization?

The recent period of stagnation in the Japanese domestic political economy also coincides with historic changes in the broader global system. Since the late 1970s, the information revolution has emerged with tremendous force, the world financial system has grown much more integrated, the Cold War has ended, the Internet revolution has transpired, and a huge number of new participants, concentrated especially in China, India, and the former Soviet bloc, have joined the world economy. How globalization is a...