Change in Japan's New Economy

Who Will Benefit?

Katalin Ferber, Japan Studies Program, Tokyo International University [About | Email]

Volume 2, Issue 1 (Book review 6 in 2002). First published in ejcjs on 25 June 2002.

Blomstrom, Magnus, Byron Gangnes, and Sumner La Croix (eds.) (2001) Japan’s New Economy: Continuity and Change in the Twenty-First Century, Oxford: Oxford University Press, ISBN 0-19-924 173-2, Paperback, 332 pages with index.

Will the current economic crisis open up a new period for Japan? Will the turmoil of the last decade lead to fundamental changes in Japan’s economy? Japan’s New Economy, edited by Magnus Blomström, Byron Gangnes and Sumner La Croix, is a fresh attempt to search for answers to these and other questions concerning Japan’s economy at the beginning of the twenty-first century. The volume consists of fourteen essays and is organised around three main issues: macroeconomic changes, regulatory regimes and industrial restructuring, and foreign direct investments and trade. The book asserts that a "wide compass of changes are already afoot in Japan" (page 24). Thus, the reader might assume that the future challenges for Japan will be profound. A second discourse in the volume (albeit an implicit one) asks how the ‘new Japan’ will operate after the implemented institutional and regulatory changes. As the three editors predict in the introduction:

[The "new" Japan] will be a more balanced economy, less dependent on traditional export industries for growth. It will be a less regulated economy in many spheres, if not the wide open marketplace that the West might favour. And the government will continue to play a visible, but not always transparent role in promoting egalitarian as well as competitive aims (page 25).

The book is a useful text for scholars because it raises the most important of scholarly topics – the effect of "change" on a nation’s economy. However, while the book is a very well written and extensive volume, it largely fails to address some of the major issues facing the Japanese economy. Perhaps this failure is due to the number of authors involved (twenty-four), although some of the contributors have clearly grasped the significance of Japan’s current circumstances (Horioka or La Croix and Mak are the best examples). A more likely source of the book’s malaise, however, is the use or misuse of the two main concepts – "continuity" and "change".

Already, this review has described several different types of change and continuity: first, change and continuity brought about by structural and "uncontrolled" forces; and second, change and continuity consciously and intentionally pursued by individuals and groups. What Japan’s New Economy fails to do is conceptualise and explain these two variations, and thus the book fails to develop the necessary intellectual framework needed to make sense of the myriad of changes and continuities that exist within the modern Japanese economy. The reader is left with the feeling that this book has merely paddled upon the surface of the Japanese economy without diving beneath to examine the murkier realities lying below.

Three particular aspects stand out as failures on the part of the authors to examine more rigorously the varieties of change and continuity within the Japanese economy. First, the book produces a body of evidence to support its main argument – that the current economic crisis will not unduly affect Japan’s macroeconomic position – which is at best scantily clad. In the face of overwhelming evidence to the contrary, the book’s attempt to make this argument shows its failure to understand the "structural" changes and continuities currently moulding the Japanese economy. Second, the book virtually ignores the Japanese government’s use of state assets as an economic tool except of one brief summary written by Cargill (pages 159–160). The government’s use of state assets has been a primary, but as yet unattained, object for conscious change for much of the 1990s, and the failure to achieve such change provides the best insights into the characteristics of both intended change and structural continuities. Third, Japan’s New Economy fails to undertake more than a perfunctory examination of Japan’s attempts to liberalise its economy, an issue which again involves fundamental issues of conscious policy change and structural inertia.

Japan’s New Economy

In the first section of the book, David Weinstein analyses the historical structural and macroeconomic precedents to the current economic crisis (page 29). Weinstein argues that the Japanese economy is structurally rigid, and that the main reason for its rigidity in such sectors as agriculture, transportation or banking is excessive governmental regulations. The next chapter, written by Andrew Mason and Ogawa Naohiro, focuses on demographic changes and their subsequent effect on the labour force and savings. According to Mason and Ogawa, although population changes have led to drastic structural transformations in the labour market, such as the changing ratio of male–female labour and the rapidly decreasing birth rate, the government still lacks a comprehensive welfare policy (pages 48–75). Chapter 3, written by F. Gerard Adams and Byron Gangnes, studies economic change in the area of the current account surplus. Charles Yuri Horioka critiques Japan’s public pension system, which he then compares with his "ideal" pension system (page 99). The chapter by Marcus Rebick provides a detailed account of the Japanese labour market (page 120), especially the gradually changing employment practices of the corporate sector.

In the second part, the first two chapters, written by Thomas Cargill (page 145) and Ito Takatoshi and Michael Melvine (page 162) deal with monetary policy, regulatory changes and the Japanese "Big Bang" economic policies of the 1990s. As the authors conclude, despite the ongoing attempts at structural reforms in the financial sector, the Japanese market still lacks openness. In Chapter 8, Edward N. Wolff asks whether Japan has specialized in the "wrong industries" (page 175), and argues that sectors with low productivity have not weakened Japan’s macroeconomic performance. In the last chapter, Örjan Sjöberg and Marie Söderberg analyse the rapidly changing circumstances of the trading houses, whose attempts to restructure provide a useful insight into the sharp differences between government macroeconomic policy and corporate strategy (page 198). Sumner La Croix and James Mak select four industries in the service sector in order to "test" the success or failure of regulatory reforms (page 215).

In the last part, entitled "Foreign Direct Investments, Trade, and Regional Integration", the book explores Japan’s economic and political relationships with the world. The chapters include: "FDI in the Restructuring of the Japanese Economy", written by Magnus Blomström, Denise Konan and Robert E. Lipsey; "A New Millennium for the Japanese–North American Policy Relations?" by Steven Globerman and Ari Kokko; "Japan as Number Three: Effects of European Integration" by Ari Kokko, Bruce H. Lambert and Fredrik Sjöholm; and "Economic Development in China and its Implication for Japan", by Abe Shigeyuki and Chung H. Lee. Although liberalisation and deregulation have so far not resulted in Japan’s free entry into the global market, the authors predict that Japan’s current attempts to deregulate its economy will lead to its entry in the future.

Japan’s Macroeconomic Position

Is Japan really heading towards a collapse, or is the current crisis is only a result of unsolved problems, such as the banking sector’s non-performing loans and excessive regulations in some industries? Contrary to the authors’ analysis, the crisis is having and will continue to have an overall impact on Japan’s macroeconomic performance.

What are some of the indicators of Japan’s fundamental macroeconomic problems? Japan’s unemployment rate recently reached its highest level in the post-war period, that is 5.4 per cent; according to non-governmental agencies the real rate of unemployment is twice as high (Asher 1996). The annual growth rate of the GNP is close to 1 per cent, and Japan has regularly dipped into negative economic growth since the bursting of the bubble. In the last six years several stimulus packages (at the expense of taxpayers) have been used to "revitalise" the economy, but they have seemingly been unsuccessful. The state debt is also alarming: "Japan’s public debt ranked No. 1 in the OECD, soared in the 1990’s from 58 per cent of the GDP to (an anticipated) 140 per cent, and is on track to reach 200 per cent by 2005" (McCormack, 2001). Moreover, lying beneath the present economic stagnation is another layer of structural decay that must be faced in the future. The decreasing proportion of the population of Japan’s younger generations – the problem of an ageing society – as well as the changing ratio between females and males (both of which are accidental changes) will pose a range of challenges that must be overcome if Japan is to produce economic growth in the long-term.

In addition, because of the rapidly increasing costs of labour, several large and medium size industrial producers have shifted their production lines from Japan to South-East Asia and South America. This process of ‘de-industrialisation’ apparently deepens the problems at home, since it affects the labour market in the domestic economy. Even the third part of the book (dealing with Japan’s international economic relations) fails to analyse the important links between rapidly spreading Japanese corporations in foreign countries and the resulting deindustrialization of the national economy. At a more abstract level, this process signals a long-term albeit peculiar internationalization of the Japanese economy.

In one sense, therefore, to say that economic stagnation will not affect the macro-economy is correct, because such stagnation is merely a symptom of underlying structural "continuities" within the Japanese economy. However, these challenges and the others behind them cannot be dismissed as just a few "unresolved" problems. Rather, they are key weaknesses in the Japanese economy, weaknesses which have persisted largely untreated for more than ten years. This has likely disappointed both those who thought that Japan could patiently wait for its economy to trade out of trouble and those who thought that the Japanese government would implement solutions. As Thomas F. Cargill comments,

Japan’s financial and monetary institutions broke down in the 1990s. Failure to recognise the new economic and political, and technological environment, and the past success of the existing financial and monetary institutions, led regulatory authorities to believe that the old regime could continue into the twenty-first century. The 1990s and especially the late 1990s, were a critical turning point. New institutions and new attitudes have emerged that if successfully implemented will help Japan achieve the goals of the Big Bang announcement and render Japan’s financial and monetary system an important and stable part of the world economy (page 160).

Sitting and waiting has been the most favoured policy approach: the rigidity of the labour market and continuity in company hiring practices, for instance, suggest that conscious remedies are not on the way (Chapter 2 and 5). Simply, Japan is not currently equipped to meet its long-term structural challenges.

The Government’s Use of State Assets

If scholars are to examine "continuities" in the Japanese economy, one of the key issues which they should discuss is the use of state assets by the government to manage the economy along mercantilist lines. The Japanese economy achieved unparallel economic growth in the 1960s. This occurred because of a favourable international environment that was good for economic reconstruction and high exports, as well as corresponding domestic institutions and the government’s mercantilist approach. One of the most important elements in this institutional network was monetary and financial policy. The banking sector was the engine of the high growth period, because the capital market was weak, foreign reserves were low, and the demand for imports was high. As Loriaux and Gao argue in their analysis of the French and Japanese post-war economies, both France and Japan developed a financial structure that constituted an "overdraft economy". An overdraft economy is an economy which has become dependent upon "the allocation of credit by institutional lenders" and has become resistant to "government efforts to control the growth of the credit" (Loriaux 1991, 10). This development led to an institutional behaviour where "firms began to believe they were immune to financial distress or, in terms of overdraft economic theorists, that their power to borrow from some lending institution was assured" (Loriaux 1991, 286).

The Ministry of Finance (MOF), which is the government agency in charge of orchestrating Japan’s mercantilist policies, practices "safety-net" policies to avoid the destructive socials costs of liberal economics. The main function of the safety net is a "social system of ex post dealing with distressed banks and of distributing social costs associated with bank failures among related parties" (Horiuchi 1999, 27). Thus, the banks are ordered by the financial authorities "to rescue their distressed peers" (Horiuchi 1999, 27). Despite several attempts in the past five years to introduce new regulations under which the banks would not be rescued by either the government or by other banks via merger, the awareness of risky behaviour is still weak among the economic actors.

Moreover, through the Fiscal Investment and Loan Programme (FILP), which is taken from the Postal Saving System (PSS), MOF has been collecting (until 2001) additional state assets for fiscal and monetary policies. This special account has provided an additional capital source for various banks, as well as for other financial and non-financial institutions. Because this fund has been channelled through intermediaries, such as the Long-Term Credit Bank or the Japan Development Bank, and has offered loans at a lower interest rate than commercial (ordinary) banks, this capital source has also helped to substantially lower the risk for investors in the Japanese economy – what might be described as a "moral hazard". A behavioural pattern similar to the "moral hazard" is mentioned by Charles Y. Horioka (page 104) when he describes the attitudes of many individuals towards the government-financed "safety-net". In general, the safety net minimises or under certain circumstances eliminates the risks for individual or corporate actors in the economy. "Soft constraints" (Kornai 1981) have shaped the behaviour of Japanese economic actors, because the risks and costs of such activities are assumed by various state authorities. Laura Tyson, who has analysed the behaviour of socialist corporations using Kornai’s concept, writes:

Because [firms] are ultimately owned by the state and because the state is ultimately responsible for their welfare and performance, enterprises act in the correct expectations that if they run into difficulties, the state will bail them out. (Tyson 1986, 68)

As Loriaux demonstrates, this "soft constraints" paradigm "generates a moral hazard". Certainly it is beyond the scope of Japan’s New Economy to compare the Japanese "safety net" and the "real" socialist systems, but there is a peculiar, if not suspicious, similarity between the state-owned enterprises in former command economies and the performance of some Japanese financial corporations in the last two decades. In this regard, "Whether the economy is socialist or capitalist matters little" (Loriaux 1991, 287).

The risk-averse corporations certainly obstruct government attempts to adjust the economy. Yet, the chapters of Japan’s New Economy which analyse the financial and fiscal structure of the Japanese economy do not mention the effects of the FILP, do not mention anything on the moral hazard in various sectors (banks, corporations and services) and do not consider what possible "changes" (conscious or otherwise) might occur in the government’s use of state finances in the future. Again, the authors have failed to grapple sufficiently with these key features of change and continuity in the Japanese economy.

Japan’s Attempts at Liberalisation

Finally, as this review’s title suggests, a reader of Japan’s New Economy may entertain doubts about who will benefit from a comprehensive liberalisation of the Japanese economy. Liberalization in the Japanese economic and social context also includes value judgments, and the perceptions of bureaucrats or business groups concerning the actual meanings vary widely. Because the authors of Japan’s New Economy selected a wide range of topics, however, there is no room for a summary of the social aspects of liberalisation, or at least the various (often contradicting) opinions for ongoing reform. As Stephen Vogel’s analysis demonstrates, institutional preferences and conflicting interests are shaping the outcomes of liberalization to equal degrees. The ties that bind consumers to producers and producers to the state bureaucracy (as one example) create an institutional dependency "that [has] slowed the space and shaped the substance of reform" (Vogel 1999, 19). As in the past (and probably in the future), developmental policy determines the outcomes of the Japanese liberalization "movements" via institutional settings and policy (Vogel 1999, 19).


Ultimately, I would have liked this volume, which aimed to examine Japan’s "new economy", to analyse more deeply how Japan will cope with the challenges of integrating the economy and society in the twenty-first century while also maintaining national priorities. A keen sense of the key "continuities" and "changes" of the Japanese economy – both intended and accidental – requires a readiness to refer to the latest research and the most recent debates (by both Japanese and non-Japanese). In this instance, such a readiness would have produced a far more challenging discussion on the direction of Japan’s new economy.

List of Chapters

Abe, Shigeyuki and Chung H. Lee, "Economic Development in China and its Implications for Japan", pp.307–322.

Adams, F. Gerard and Byron Gangnes, "Will Japan’s Current Account Turn to Deficit?" pp.75–98.

Blomström, Magnus, Denise Konan and Robert E. Lipsey, "FDI in the Restructuring of the Japanese Economy", pp.245–262.

Cargill, Thomas F., "Central Banking, Financial, and Regulatory Change in Japan", pp.145–161.

Globerman, Steven and Ari Kokko, "A New Millennium for Japanese–North American Economic Policy Relations?" pp.263–285.

Horioka, Charles Yuji, "Japan’s Public Pension System in the Twenty-First Century", pp.99–119.

Ito, Takatoshi and Michael Melvin, "Japan’s Big Bang and the Transformation of Financial Markets", pp.162–174.

Kokko, Ari, Bruce Henry Lambert and Fredrik Sjöholm, "Japan as Number Three: Effects of European Integration", pp.286–306.

La Croix, Sumner and James Mak, "Regulatory Reform in Japan: The Road Ahead", pp.215–244.

Mason, Andrew and Naohiro Ogawa, "Population, Labor Force, Saving, and Japan’s Future", pp.48–74.

Rebick, Marcus, "Japanese Labor Markets: Can We Expect Significant Change?" pp.120–144.

Sjöberg, Örjan and Marie Söderberg, "The Sogo Shosha: Finding a New Role?" pp.198–214.

Weinstein, David E., "Historical, Structural, and Macroeconomic Perspectives on the Japanese Economic Crisis", pp.29–47.

Wolff, Edward N., "Has Japan Specialized in the Wrong Industries?" pp.175–197.


Asher, David (1996), "What Became of the Japanese ‘Miracle?’", Orbis, Spring, pp.215-234.

Horiuchi, Akiyoshi (1999), "Financial Fragility and Recent Developments in the Japanese Safety Net", Social Science Japan Journal, vol.2, no.1, pp.23–43.

Bai Gao (2000), "Globalisation and Ideology: The Competing Images of the Contemporary Japanese Economic System in the 1990s", International Sociology, September, vol.15, no.3, pp.435–453.

——— (2001), Japan’s Economic Dilemma: The Institutional Origins of Prosperity and Stagnation, Cambridge: Cambridge University Press.

Kornai, Janos (1981), The Economics of Shortage, Amsterdam: North Holland.

Loriaux, Michael (1991), France after Hegemony: International Change and Financial Reform, Ithaca: Cornell University Press.

McCormack, Gavan (2001), "Japan’s Construction State Lies in Ruins", Australian Financial Review, 12 October.

Tyson, Laura D’Andrea (1986), "The Debt Crisis and Adjustment Responses in Eastern Europe: A Comparative Perspective", in Ellen Comisso and Laura D’Andrea Tyson (Eds) Power, Purpose and Collective Choice: Economic Strategy in Socialist States, Ithaca: Cornell University Press.

Vogel, Stephen (1999), "Can Japan Disengage? Winners and Losers in Japan’s Political Economy, and the Ties that Bind them", Social Science Japan Journal, vol.2, no.1, pp.3–21.

About the Author

Katalin Ferber is a comparative economic historian who has taught at various universities in Japan. Currently she is an academic co-ordinator of the Japan Studies Program at Tokyo International University in Saitama. Her main research interest is the history of the Japanese Deposit Fund and its role in empire building (1895–1945). Her forthcoming article, "Run the State like a Business: The Origin of the Deposit Fund in Meiji Japan", will be published in Japanese Studies in September. Since publishing this review Katalin Ferber has moved to become Associate Professor at the School of International Liberal Studies at Waseda University.

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