Institutional Restructuring in the Japanese Economy since 1985

By Matsuura, Kazuyoshi; Pollitt, Michael et al. | Journal of Economic Issues, December 2003 | Go to article overview

Institutional Restructuring in the Japanese Economy since 1985


Matsuura, Kazuyoshi, Pollitt, Michael, Takada, Ryoji, Tanaka, Satoru, Journal of Economic Issues


The Japanese economy has experienced an unprecedented period of macroeconomic turbulence over recent years. (1) Even before the 1997 Asian crisis, this had led to a sharp rise in the number of financial institutions experiencing bankruptcy, including a number of large regional banks and an international stockbroking firm.

The question we seek to address is, What effect has this economic turbulence since 1985 had on the four institutional foundations of post-World War II Japanese industrial success? (2) First, we examine the Japanese "main bank" system whereby a "main" bank is involved in a special type of long-term relationship with the non-financial firms that it lends to. (3) Second, we review the Japanese employment system characterized by lifetime employment, a seniority wage system, and enterprise unionism. (4) Third, we look at the inter-corporate relationships between main firms and their suppliers. (5) And, fourth, we consider the nature of Japanese industrial policy, the interventionist role of the Ministry of International Trade and Industry (MITI), and the relatively weak role of Japanese competition policy under the authority of the Japan Fair Trade Commission (JFTC). (6) In each case we present evidence that suggests that these institutional foundations of the Japanese "economic success story" have been weakened over the period we look at. Before turning to the institutions, we sketch the wider macroeconomic, political, and supply side situation of the Japanese economy.

The Japanese Economic System

Morishima asked the question "Why has Japan 'succeeded'?" in 1982. The answer that he gave suggested that there was a distinctive set of institutional characteristics present in Japan that significantly contributed to Japanese economic success. The interesting thing for Morishima was that although many of the elements of the Japanese system were present elsewhere, it was only in Japan that they were combined in the particular way that fueled the rapid growth of the post-war Japanese economy. In this paper we have picked out four of the most obvious institutions that were part of this Japanese economic system.

The Japanese main bank system successfully recycled domestic savings into manufacturing investment at a time when the stock market was underdeveloped. The keiretsu relationships between main firms and their suppliers in the manufacturing sector provided a combination of knowledge sharing, quality control, and flexibility for export-oriented firms. The lifetime employment system for workers in exporting firms reduced competition for scarce skilled labor while motivating workers with the threat being fired and losing future earnings.

These first three institutional arrangements fostered highly co-operative, non-confrontational relationships between related groups in society at a time when economic policy was focused on the stated goal of catching up with western levels of productivity. These private sector aspects of the economic system were supported by the co-operative environment which the Japanese government promoted via MITI. MITI bureaucrats sought to guide the private sector's efforts to catch up with the West. They did this by subjugating competition policy (under the control of the Japan Fair Trade Commission) to their own industrial policy. Under this arrangement there was legislative underpinning for domestic cartels, aimed at supporting international competitiveness, and government-supported co-ordination of domestic private sector investment activity.

The system successfully managed to promote co-operation in a way which reduced the transactions costs of competition while maintaining its incentive properties. Masahiko Aoki pointed out that this co-operation and its underlying incentive structures were consistent with rational profit-maximizing behavior (1988).

As in the nature of successful systems, all the elements of this system are consistent with one another, lf one or more of them were to be undermined, it is not at all clear that the other elements would have a rationale and could survive. …

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