electronic journal of contemporary japanese studies

Book Review 1 in 2007
First Published in ejcjs on 31 January 2007

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The Political Economy of the Japanese Financial Big Bang

Institutional Change in Finance and Public Policy Making

By

Masato Kamikubo

PhD Candidate
Department of Politics and International Studies
University of Warwick

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electronic journal of contemporary japanese studies

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Toya, Tetsuro (2003), Kinyū Biggu Ban no Seiji Keizai Gaku: Kinyū to Kōkyō Seisaku Sakutei ni okeru Seido Henka [The Political Economy of the Japanese Financial Big Bang: Institutional Change in Finance and Public Policy Making], Tokyo: Toyo Keizai Shinpo-sha, ISBN: 978-4492393994, 432p.

Japanese politics in the 1990s has become an interesting area of study for many political scientists. The ruling Liberal Democratic Party (LDP) lost control of the government in 1993 for the first time in 38 years; the government bureaucracy was heavily criticized for its role in several policy blunders and scandals during this decade, and central ministries and agencies were forced into carrying out comprehensive structural reforms. Thus, the nature of politics during this decade has become an issue of considerable debate; specifically, did Japanese politics change, or did it remain the same? In Kinyū Biggu Ban no Seiji Keizai Gaku: Kinyū to Kōkyō Seisaku Sakutei ni okeru Seido Henka [The Political Economy of the Japanese Financial Big Bang: Institutional Change in Finance and Public Policy Making], Tetsuro Toya argues that Japanese politics did change. In addition to this, the aim of this book is to argue that there are limits to structural reforms by emphasizing that Japanese politics are constrained by a system developed in the past.

To support the validity of his view, Toya attempts to examine the financial Big Bang and the financial politics of the 1990s through four general questions. The first has to do with the above-mentioned debate. In other words, for Japanese politics in the 1990s, what was more important, change or the status quo? The second is related to the causes of the financial Big Bang. In other words, what moves among the financial and political actors in this scenario — such as the LDP, the Ministry of Finance (MOF) and the financial industry — led to the Big Bang? The third question looks into the conclusions that can be made about the Big Bang occurring within the financial, political and economic culture of Japan in the 1990s. Finally, the fourth question relates to whether this kind of study can produce the kind of theoretical insights that can be applied to regulatory reform not just in Japan but also in the rest of the world.

The book is divided into three parts. Part 1 summarizes earlier research on Japanese politics, financial politics and the Big Bang. Chapter 2 introduces the three main approaches — the system-oriented approach, the actor-oriented approach and the mutually complementary approach — of past research on Japanese politics. Toya then introduces his own method of analysis, which he calls the 'rational actor approach' and describes it as a method that improves upon the faults of the three approaches above, and as a behavioural model for these actors that he calls the 'logic of organizational survival'. In Chapter 3, Toya first defines the actors — political parties, ministries, agencies, companies, special interest groups and the public — who played roles in the financial politics of the 1990s. He then indicates what the actors' preferences are, examines whether his new behaviour model applies to them, and uses his findings to construct the financial reform scenarios that could occur. He then attempts to construct a theoretical framework related to institutional change and organizational survival. Of particular importance here is the relevance Toya gives to the role of the public, which has been downplayed by past research into Japanese politics. He also examines the two systems that were widely seen in play in Japan's financial politics through to 1995, the convoy system and bureau-pluralism. In Chapter 4, he examines the issues related to Japan's economic society during the 1990s, the setting of the Big Bang — including the aging of Japanese society, personal financial assets totalling JPY1200 trillion, the move from indirect finance to direct finance, liberalization that began in the 1980s, the bubble economy and the problem of bad debts, and the scandals that hit the MOF and the financial sector. He then proceeds to discuss the policies that created the Big Bang and the effect they had on the actors, in an attempt to determine which of the actors were the winners and losers of reform. Toya also points out that the Big Bang had, in actuality, been predicted to have a negative effect on most of the domestic financial institutions that acted as valuable 'insiders' for the policy making process known as bureau-pluralism.

In Part 2 of the book, Toya conducts a positivist analysis of financial politics in order to properly examine the four questions he presents at the beginning of the book. Chapter 5 consists of an analysis of the political process that existed until Prime Minister Ryutaro Hashimoto issued his 'Big Bang directive' in November 1996. Here, Toya focuses on determining who caused the Big Bang, and attempts to show how the 'logic of organizational survival' acted upon the political parties, ministries, agencies and businesses that played roles in the political process. He depicts the relationship between the MOF and LDP until the Big Bang as a complex struggle for political gain, in accordance with the 'logic of organizational survival', where the two organizations would intermittently cooperate with, compete against and clash with each other where financial politics was involved, and describes how they decided to coordinate their actions to allow the Big Bang successfully to materialize. Both the MOF and LDP were in danger of losing the public's support due to scandals and policy blunders, such as the failure of bank-affiliated housing loan companies, and the reformers who appeared in both organizations attempted to restore public trust by prioritizing public interest over the interests of their supporters. Toya notes that the reformers clearly represented the 'logic of organizational survival', and were winning the policy competition within their respective organizations. Finally, he points out that bureau-pluralism is a system that primarily represents the interests of supporters, and interprets the fact that the Big Bang did not go through this standard decision-making process as a 'change' in bureau-pluralism. In Chapter 6, Toya analyzes the process in which policies were conducted following Hashimoto's Big Bang directive. By comparing the financial Big Bang with three other financial reforms in the past, Toya shows that financial institutions were unable to exert as much political influence as they had with the other three reforms, and as a result were unable to prevent reforms that would put them in a disadvantaged position, lost the protection that government regulations had given them in the past, and had become 'losers'. By focusing on this change in the role of the financial institutions, Toya clearly shows that the bureau-pluralistic political process of the interest groups had been pushed aside by public interest politics. In Chapter 7, Toya summarizes the observations he has made so far. Here, he attempts to switch the focus of his discussion from the Big Bang to financial politics in general to clearly indicate the change that financial politics went through after 1995. Comparing the Big Bang to the so-called Financial Diet Sessions of 1998 that dealt with banks' bad-loan problems, he argues that the financial industry, once a major actor in the bureau-pluralism of financial politics, had been replaced by the public in its role as the decisive factor for making financial policies, due to a combination of the facts that a coalition government led by an opposition party came into power in 1993 and that a financial crisis had developed due to policy failures and scandals.

In the third and last part of the book, Toya attempts to convey the implications of the matters he discusses earlier. First, to understand the large-scale changes that are occurring in financial politics, he states that we must apply the institutional change framework he discussed in Chapter 3. He then points out that the slow institutional response to the rapid changes in the environment (e.g. technological innovation, the globalization of assets, changes in the population) caused the government's financial policies to fail, and that this failure forced change upon the financial industry's convoy system. Finally, he examines whether this change led to comprehensive institutional changes in the policy process, or whether it was only an example of the system's flexibility. Toya believes that the factors (e.g. failures and political power shifts) that caused the changes in financial politics from 1995 and helped increase the importance of the public's role in politics will continue to have an effect on Japanese politics, and predicts that financial politics will increasingly move away from bureau-pluralism until this finally leads to institutional change.

In Chapter 9, Toya examines whether his conclusions can be applied to other political and economic cases, and attempts to construct a theory about those who make the decisions regarding regulatory reform.

One notable thing about the book is Toya's description of his behaviour model for the actors in the policy process, particularly the replacement model he proposes for the behaviour of government bureaucrats. There is a vast array of research that has been conducted on bureaucratic behaviour, but the most famous is Niskanen's monopoly-bureau model. Niskanen (1971) argues that bureaucratic behaviour amounted to a race to increase budgets. This model, generally known as the budget maximization model, was one of the outcomes of a series of researches conducted into bureaucratic behaviour. Like this previous research, Toya defines bureaucratic behaviour as being logical, but he additionally introduces the notion of 'organizational survival', and separates bureaucrats' logical behaviour between 'budget maximization' and 'organization survival'. Toya should be credited for attempting to define bureaucratic behaviour as something more complex than simple budget maximization.

Another notable feature of the book is that Toya presents us with a replacement model for the Japanese policy process called bureau-pluralism. Japan's political process is usually perceived as being a bottom-up process, where the financial industry, special interest groups, labour unions and other actors pressure politicians and bureaucrats to maintain or increase their interests. However, Toya argues that actors have emerged who are trying to sideline this process and instead build policy through a top-down process. He is pointing out that this process of bureau-pluralism is, in fact, changing.

However, Toya's assertions are not without their problems. First, there is the bureaucratic behaviour model that Toya discusses. It seems inconceivable that the 'logic of organizational survival' on its own could have pushed bureaucrats into advancing as major a reform as the financial Big Bang, through which they stood to lose most of the benefits that their respective ministries and agencies had enjoyed until then. As even Toya himself comments, the public does not generally understand the details of reform policies such as the Big Bang, and in this case they appeared to have simply supported a general atmosphere of reform without showing particular interest in what the reforms actually entailed. This was clearly indicated during the upper house elections of 1998, when a consumption tax increase became a major campaign issue, while financial reform and its results never became serious issues. As a result, the Hashimoto-led LDP suffered major losses in that election. Under such circumstances, it would have been conceivable for bureaucrats to trick the public into believing that they were engaging in reform when, in fact, they were doing nothing of the sort. Besides, if these reforms were conducted only for organizational survival, bureaucrats would have found no need to make as drastic a reform as completely liberalizing Japan's financial market. Yoshimasa Nishimura (2004) in fact argues that the Big Bang and other financial system reforms were the result of many years of debate within the MOF. Would it not be possible to say that these bureaucrats acted not only based on the somewhat passive and inward-focused notion of organizational survival, but also on a will to create a set of effective policies?

There is also a problem with Toya's assertion that the system of bureau-pluralism is changing, namely as to whether a policy process that avoids this bureau-pluralism, as presented in this book, can in fact be described as a change in the political process itself. In fact, one could argue that a top-down policy process that avoids bureau-pluralism has institutionally always been inherent in Japanese politics. For example, Hideo Otake (1979) points out that during the Sato administration, Prime Minister Eisaku Sato conducted US-Japan textile negotiations in a top-down fashion, in spite of domestic opposition from politicians and related industries. Also, it is not as if the bottom-up political process of bureau-pluralism does not exist anymore. Is it not possible to argue that Japan's political process has in fact always been equipped with a flexibility that allows political issues to be resolved in a bottom-up fashion but also, if needed, allow political decisions to be made in a top-down manner? It is true, as Toya indicates, that there has been an increase of issues being solved in a top-down fashion since 1995. However, it is more likely that this was the result of the changes in the situation revolving Japanese politics at the time, and it is debatable whether the system itself changed.

In spite of these problems, however, Toya has written a very significant book that adds new knowledge to previous research in this field, through his presentation of bureaucratic behaviour in a more complex manner than dictated by the budget maximization model and his attempt to modify the model for the Japanese political process of bureau-pluralism. This book, including its faults, will very likely fuel future political discussions, and greatly contribute to advances made in this field.

Copyright: Masato Kamikubo
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