Academic journal article The Economic and Labour Relations Review : ELRR

If Corporate Governance Is the Answer, What Is the Question? the Illusory Relation between Structural Solutions and Japanese Deflation

Academic journal article The Economic and Labour Relations Review : ELRR

If Corporate Governance Is the Answer, What Is the Question? the Illusory Relation between Structural Solutions and Japanese Deflation

Article excerpt

Introduction

It is a truth universally acknowledged that any economy lacking economic growth must be in want of policy advice (with apologies to Jane Austen). Japan's extended fling with economic narcolepsy provided any serious analyst with a rare opportunity. Like a multi-car collision, Japan's stagnation elicited a seemingly endless number of curious observers. Blessed with penetration, if not with responsibility, each one of these self-styled experts seemed at that time to be endowed with his or her own particular approach to resolving this chronic problem. The assured knowledge that the Liberal Democratic Party (LDP) is unlikely ever to implement any given policy suggestion has transformed Japan into a virtual free fire zone for punditry. A tendency to make unsubstantiated claims inevitably has flourished. Not only has the climate been receptive, but also the unusual challenge of a flagging economy combined with an extended period of falling prices posed a puzzle not encountered since the days of the Great Depression. It should come as no great surprise that a good deal of the discussion during that period (1997-2003) could be classified in retrospect as confused. Usually what was lacking from these prescriptions was the exact mechanism that might work these proposed policy engines. Combined with an unfortunate propensity for making sweeping generalities was a seeming disinterest in winkling out the necessary evidence that would validate the links holding these proposals together.

To point out the intrinsic corrosiveness of this practise, we would like to look at an example, perhaps an extreme one, that focuses on a variant which emphasised a structural understanding as the best explanation of Japan's woes. To put the argument in context, as Japan floundered, a rising call for better corporate governance swelled, not only from Japan's traditional critics abroad but also from internal ones. (1) According to this chorus, better corporate governance could play a key role in reviving the Japanese economy. But such arguments often had a sweeping though annoyingly imprecise quality to them. The point we intend to make is not specifically about corporate governance itself. This serves merely as an example. The problem we are at pains to point out is that macroeconomic policy can degenerate into what we term 'policy by assertion'. In other words, rhetorically persuasive arguments may lack sufficient evidential underpinnings. This tendency becomes more pervasive in an environment where policy is based less on economic analysis than on political expediency.

Our goal is then not to pass judgement on the need for Japan to make any specific structural changes, still less to present any extensive follow-up of Japan's current economic progress. Our contribution is more in the way of a case study showing how policy by assertion can evolve and gain credibility. To do so, we limit ourselves to a period between 2001 and 2003 when Japan's economic outlook appeared forlorn. For this reason we do not assume any knowledge that would in retrospect be obvious.

Certainly at the time there were connections made between the need for better corporate governance in Japan and the key role such reformed governance could play in reviving the Japanese economy. The extremes of this structural approach transformed, in an almost haphazard fashion, undesirable characteristics found within any economy into a modern day version of the Four Horsemen of the Apocalypse. In common with its biblical predecessor, causation often is invoked rather than documented. Closer examination provides more questions than credence in a chain of argument that runs from corporate governance to deflation and ultimately to economic revival.

The Four Horsemen of the Apocalypse

Who is worthy to open the book, and to loose the seals there of? (Revelation 5: 2).

To clarify the distinct absence of any tight connection linking this specific policy proposal we need to start from the undeniable fact of Japan's decade of poor economic performance and work our way back. …

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