By Alexander, Arthur
The International Economy , Vol. 22, No. 3
Over the past two decades, the Japanese economy has been proceeding through a major transformation as it moves away from the economic system constructed during the 1930s, organized to mobilize the economy for war. Under this system, which survived seven years of post-World War II American occupation, most Japanese tended to rise and fall together, mostly rise. As the old system winds down, Japan is becoming a nation of winners and losers--across regions, industries, firms, and individuals.
END OF THE 1935-45 MOBILIZATION ECONOMY
Drawing lessons from the large-scale fighting during World War I, Japan's military strategists saw the need for mobilization planning, led by the military itself and by like-minded government bureaucrats. Mobilization staff promoted the idea of government authority over economic affairs in wartime. These ideas were put into practice with Manchurian industrial development in the 1930s, coordinated by these mobilization bureaucrats.
As Japan's war in China expanded in the 1930s, the government chose to impose economic controls to allocate resources rather than to rely on markets to do the job. After Japan enlarged the war by attacking American and other territories in December 1941, counterattacks on Japanese transportation networks and industrial facilities intensified supply shortages and increased the premium for effective planning. Military planners and government administrators turned to an increasingly controlled and planned economy, taking advantage of the experience gained just a few years earlier in Manchuria's government-led industrialization.
Two institutions, in particular, were critical for the course of later economic developments: bank-centered finance and a new legal structure of corporate governance, which combined to dethrone both shareholders and profitability from their premier positions influencing firm behavior.
The financial institutions were expected to provide long-term as well as the customary short-term funds in a timely and straightforward manner. Until the 1930s, large Japanese companies raised most of their funds by retaining earnings, by selling shares in the company, and by issuing bonds. For large corporations, bank loans accounted for no more than 15 percent of total funding. This picture changed in the mid-1930s, particularly among firms supplying the military. Within ten years, the ratios were reversed with banks providing the bulk of companies' financing needs.
Dividend payments, which had averaged 60-80 percent of profits until 1937, fell to 30 percent in 1944. The downward trend continued in the postwar years when the average payout fell below 10 percent. Some scholars refer to the ideas, methods, and institutions that came out of the war as the 1935-45 system, which continued to influence public policy for several more decades.
THE POSTWAR SYSTEM
What may be called the canonical Japanese postwar economic system included: bank-centered finance; corporate governance with weak shareholders, managerial control, and oversight by main banks; networks of businesses centered on a key group company, often owning stakes in one another as a means of finance and mutual security; reduced price competition, including cartels, both legal and informal; internal labor markets with a commitment to so-called lifetime employment; and tight regulation of key sectors along with industrial policy that promoted specific industries. These elements formed an interlocking system with mutually reinforcing parts, given additional strength by their consistency with cultural norms.
Despite government's key role, any sense of an overall vision quickly lost coherence. As elsewhere, government planners and regulators often became the pawns of politicians and of the industries and companies they were supervising. Internal battles for dominance within the government further weakened any sense of coordinated strategy. …