The Japanese keiretsu system – A safeguard against financial crises?

André Feldhof Course: International Political Economy Course coordinator: Dr. Paul J. Cook Date: 6 May 2012

Introduction In the Eurocrisis, it is often asserted that the recovery of Greece, Spain, Italy and Portugal is hindered by the fact that these countries do not have their own monetary systems and their own independent central bank1. It has also been criticized that the European Central Bank has refused to step in as a lender of last resort in order to absorb the negative effects of the crisis2. Economists continue to assert that an exit from the Eurozone could be beneficial for southern European countries, because a devaluation of the national currency would help them to grow again3. This would in turn ease the effects of the financial crisis on overall social and economic welfare. To shed light on the contribution of independent monetary and fiscal policy to economic welfare, this paper turns to the case of Japan, the Asian financial crisis in 1997 and the period that has been called Japan’s “Lost Decade”. The paper originally aimed to argue that the particular structure of the Japanese financial system, in combination with the fiscal and monetary policies enacted in reaction to the crisis, have served as a means to safeguard economic welfare in Japan. However, the following analysis shows that this was not the case; the Japanese system was not able to maintain economic welfare. To make its argument, the paper is segmented into three different parts. The first part outlines the specificity of the Japanese corporate structure and its implications for the exposure of the Japanese economy to international crises. The second part focuses on the role of the Bank of Japan and the Japanese government in the aftermath of the 1997 crisis and details what policies they used in order to counter the economic downturn. The third chapter applies the findings of the previous chapters to indicators of welfare (detailed below) and shows to what degree Japan has been able to maintain economic welfare throughout the crisis. The conclusion will bring together the main strands from the preceding chapters and deduce implications for the macroeconomic model of the EU. Methodology Economists have discussed the framing of economic welfare for a long time and                                                                                                                
1 2

Spiegel, 2012 IPE, 2011 3 Spiegel, 2012  



produced different definitions, among others focusing on optimal distribution of goods and services4, GDP, a combination of purchasing power, leisure time and environment5, or access to economic resources and happiness6. For the purpose of this paper, and based on a paper produced for the United Nations Research Institute for Social Development (UNRISD), economic welfare will be defined as a combination of income (in terms of GDP/capita, average salary per hour, and the number of household bankruptcies), equality (derived from the Gini coefficient), purchasing power (derived from the inflation rate) and total levels of employment7. On grounds of the author’s observation of the financial crisis in the EU and a review of academic literature8, it will be assumed in this paper that welfare is “maintained” if all of the following conditions are fulfilled: a) GDP/capita does not fall by more than 10% throughout the crisis, b) average salary per hour does not decline by more than 10% overall, c) the Gini coefficient does not increase by more than 10% overall, d) the number of household bankruptcies does not rise by more than 10%, e) the inflation rate does not increase by more than 10 base points overall, and f) the unemployment rate does not exceed 8% in any of the crisis years (1997-2003). Other economic indicators such as health, personal savings or household and government indebtedness will not be considered by this paper. 1. The structure of Japan’s corporate system To argue that the corporate system in Japan protected the Japanese employees, this section establishes that it allowed for a redistribution of wealth from investors to employees and the society, helped the government to conduct socially beneficial policies, and protected Japanese companies against takeovers and the possibility of capital flight. To begin with, it can be argued that the Japanese economy has long been divided into two different kinds of corporations. The first kind is made up of independent companies of different sizes, small and medium-sized as well as large enterprises9. The second kind consists of several large groups of enterprises called                                                                                                                
4 5

Pareto in Grant & Brue, p. 398 Tobin and Neuhaus, 1972, pp. 12ff 6 Greve, 2008, p. 58 7 Esping-Andersen, 2000, pp. 8f 8 Tobin & Nordhaus, 1972, pp. 1ff, Krugman, 2012; Carta & Porcu, 2010   9 Moerke, 1997, p. 1



keiretsu or keiretsu business groups10. A keiretsu is generally understood to be a business arrangement between different enterprises which involves interlocking shareholding, close contact between the management of the firms and between buyers and suppliers, and very importantly, a bank at the center which provides loans to the enterprises and controls a part of their shares11. Generally, it can be said that the keiretsu operate across many different sectors and normally only allow one company per sector12. Until 1997, the organizational system of the keiretsu effectively shielded its member firms from the international markets. There was normally a high degree of cross-shareholding between the core firms of the keiretsu, protected by an intermediary firm13. If any member firm wanted to sell its shares of another member firm, it had to notify the intermediary, which would then notify the other firm14. As a result, there was a high threshold to the selling of shares in another member firm. This made the keiretsu resilient against hostile takeover attempts and left them less exposed to the corrective pressures of the international financial markets than other firms15. Indeed, Nakamura and Morck (2004) hold that the top managers “were free to run their firms as the wanted, without regard for share value, or its determinants such as profits and dividends”16. In the event of an economic crisis, it was assumed that the keiretsu could withstand the shock better because many of the outstanding shares were held by firms within the group, an arrangement which would prevent capital flight. Thus protected, the keiretsu, in opposition to Western corporate systems, could favor their employees over their shareholders17. Japan has a history of high attachment to the welfare of employees and stakeholders. Possibly because of a history of close family ties, employees in Japan are generally very loyal to their companies and many are prepared to work overtime without compensation18. The                                                                                                                
10 11

Lai, 1999, p. 424 Lai, 1999, p. 424; Moerke, 1997, p. 1 12 Nakamura & Morck, 2004, p. 83   13 Nakamura & Morck, 2004, pp. 77f 14 ibid. 15 Madsen, 2004, p 30 16 Nakamura & Morck, 2004, p. 79. It has also been asserted, in particular in the case of Korea, that crossshareholding enabled owner-families to expropriate companies at the expense of minority shareholders, and thereby helped cause the financial crisis (Joh, 2003). This point is conceded but shall not be further investigated in this paper, given that its focus is on the maintenance of economic welfare. 17 Moerke, 1997, p. 9 18 Ichimura, 1998, p. 22; Lai, 1999, p. 426



degree of unionization and the number of working days lost through labor-related disputes are also considerably lower in Japan than in Europe or the US19. In return, employees are frequently consulted through a formalized system before business decisions are made, work is often carried out in an inclusive way through working groups, and most importantly, 86% of the employees in the industry enjoy lifetime employment20. Stability of employment is not only in the employees interest but also in the firm’s interest and can even become one of the most important objectives of corporate policy21. The state provided an additional degree of security, if not for the entire industry at least for the keiretsu. The business groups generally enjoyed preferential relations with the state. The Ministry of International Trade and Industry (MITI) regularly provided information and forecasts about international markets for the benefit of the Japanese industry22. Until the financial crisis of 1997, MITI and the Ministry of Finance were also heavily involved in industrial planning23: When MITI issued what was called “administrative guidance”, it was normally assumed that the keiretsu would implement it24. MITI’s influence also manifested itself in the fact that former MITI officials were given seats on the Boards of Directors of the bigger keiretsu – almost every second member firm had a former government official on its board25. These former officials served to ensure a smooth flow of information between the ministry and the keiretsu (p. 2). The close contact with the government furthermore allowed the keiretsu firms and in particular the keiretsu bank to heavily influence government policy26. As a result, Nakamura and Morck (2004) observe a “clear pattern of repeated bailouts of weak keiretsu firms, but not of otherwise similarly troubled independent firms”27. A final element which cemented the security of the keiretsu system was the bank at the center of each group which fulfilled multiple roles. The bank provided the

19 20

Ichimura, 1998, pp. 22f Ichimura, 1998, p. 147 21 Nakatani in Moerke, 1997, p. 7   22 Ichimura, 1998, pp. 21f 23 After the financial crisis, MITI is more and more charged with deregulating the industry, rather than promoting it (Yergin & Stanislaw, 2002, pp. 149f). 24 Yergin, Stanislaw, 2002, p. 146 25 Moerke, 1997, p. 14 26 Johnson in Lai, 1999, p. 428 27 Nakamura & Morck, 2004, p. 78



majority of loans to the member firms of the keiretsu28. Madsen (2004) argues that “elected leaders and civil service […] use the banks as a tool for the achievement of social and political goals as well as to pursue strictly economic desiderata”29. In other words, banks serve as an implementation device of the government in order to safeguard the economic welfare of the people. This became particularly relevant in the 1997 financial crisis when many smaller companies went bankrupt because they were not able to obtain any more loans by Japanese banks30. Nakatani argues that in times of crisis the kereitsu firms can normally count on the support of the bank to provide them with funds31. The bank is also one of the main shareholders in the keiretsu firms32. In other words, the bank is both a firm’s creditor and its shareholder and thereby has a considerable influence on its corporate policy. Although it has been pointed out above that managers are somewhat insulated from shareholder pressure, the bank regularly audits and monitors the firm33. As a disciplinary measure for firms with poor performance, banks have also resorted to placing their own officials on the Board of Directors of the firm34. Overall, the keiretsu system thus enabled the government to redistribute wealth from investors to employees to some extent. Through the close contact with the keiretsu banks, the government was also able to conduct socially beneficial policies such as targeted lending to particular keiretsu firms. Furthermore, the system of interlocking shareholding was conceived as a means to protect the keiretsu against hostile takeovers through foreign investors. The obligatory sale of shares in firms of the same keiretsu through a mediator deterred keiretsu firms cemented this system of shareholding and made sure that capital could not flee the country in case of a crisis. The keiretsu system arguably faced its biggest challenge during the late 1990s and the early 2000s. At the end of the 1980s, a real estate bubble emerged in the Japanese economy and burst in the early 1990s35. Many keiretsu banks had invested heavily into it and faced a serious setback to their portfolio36. At the same time, Japan began to be confronted with unprecedented demographic change that prompted a                                                                                                                
28 29

Moerke, 1997, p. 1 Madsen, 2004, p. 31; cf. Ichimura, 1998, p. 23 30 Sawada, Nawata, Ii & Lee, 2010, p. 2 31 Nakatani in Moerke, 1997, p. 2; cf. Hoshi, Kashyap & Scharfstein, 1991, p. 39 32 Dinç, 2006, p. 3062 33 Nakamura & Morck, 1999, pp. 321f 34 Weinstein & Yafeh, 1998, p. 636; Nakamura & Morck, 1999, p. 337 35 Dinç, 2006, p. 3069 36 ibid.



large part of the (already very frugal) society to accumulate savings for their retirement rather than to consume37. This led to growing inventories, falling consumption and decreasing profits for the keiretsu. Madsen (2004) argues that the situation was aggravated by the fact that Japan’s trade partners imposed restrictions on Japan’s possibilities to export38. During the 1980s, the Japanese economy had become so important for global trade that a Japanese export boom would have exported poverty to its trade partners and compelled them to retaliate39. As a result, the keiretsu could not invest their capital abroad and used it to invest in machinery equipment which largely sat idle40. While this would have been the moment to restructure the Japanese economy, Madsen (1998) asserts that Japanese banks kept lending to the keiretsu firms and accumulated non-performing loans (NPLs) amounting to at least ¥77 trillion or 6-8% of GDP41. Many bankrupt firms began to dissimulate the fact that they were insolvent, leading to the fact that numerous NPLs could not be identified as such42. As a result, many banks and foreign investors began to fear for their investments and stopped lending altogether43. They thereby forced smaller firms out of business and created a situation in which unemployment began to rise and economic welfare began to decline44. Some of the keiretsu banks were so seriously affected by the number of NPLs that they inched towards bankruptcy themselves45. It was time that the Japanese government and the Bank of Japan stepped in as a lender of last resort. 2. The Bank of Japan and the crisis This section makes the case that independent monetary and fiscal policies allowed the Japanese government and the Bank of Japan (BOJ) four main options to tackle the crisis and to safeguard economic welfare, three of which were effectively used. All of them have their roots in the Keynesian approach to resolving a financial crisis. First, the government used public funds to guarantee people’s deposits and to recapitalize                                                                                                                
37 38

Madsen, 2004, pp. 10ff Madsen, 2004, pp. 44ff 39 Madsen, 2004, pp. 45f; Ichimura, 1998, p. 210 40 Madsen, 2004, p. 20 41 Madsen, 1998, p. 51; Nakaso, 2001, p. 17 42 Kobayashi, 2008, para 3 43 ibid. 44 Sawada, Nawata, Ii & Lee, 2010, p. 2 45 Hoshi & Kashyap, 2010, p. 400



the banks. The BOJ effectively acted as a lender of last resort. Second, the government restructured debt and allowed banks to write off bad loans. Third, the BOJ had the option to depreciate the yen. It will be shown why this measure was not taken. Fourth, the government engaged in a Keynesian stimulus program to activate domestic demand. First, the government and the BOJ stepped in to guarantee people’s deposits and to recapitalize the banks. The financial crisis reached its climax in November 1997 when four Japanese banks became insolvent shortly after one another46. The first default of a bank (Sanyo Bank) on relatively minor loan sent interest rates on interbank lending flying47. Confidence eroded in the market and foreigners became very skeptical of lending to Japanese banks in general. To save the situation, the BOJ “injected massive liquidity into the market” to calm investors and lenders48. Within weeks, however, a second and third major bank became bankrupt. The BOJ guaranteed that depositors would not lose their savings and contributed a total of ¥2.6 trillion to one of them within the next three months49. The other was allowed to terminate its existing contracts and received a capital injection from the BOJ, given that the latter feared systemic consequences in case of an uncontrolled default50. When the forth bank collapsed shortly afterwards, panic erupted. Depositors were afraid that the crisis was spreading and feared for their savings. At the height of the crisis, the government issued a note saying that deposits of the people were guaranteed by the BOJ51. It had by now become apparent that many other banks were affected by NPLs and would need recapitalization. The Parliament therefore authorized the government in February 1998 to dispense ¥30 trillion or 6,4% of Japanese GDP52, ¥17 trillion of which to guarantee deposits, and ¥13 trillion to recapitalize banks53. Several banks with insecure finances wanted to refuse a public bail-out for fear that their lenders might foreclose their positions (pp. 410f). They therefore collectively requested public funding so as to dissimulate their real balances and received a total of ¥1.8 trillion (p. 401). Hoshi & Kashyap (2010) argue however                                                                                                                
46 47

Nakaso, 2001, p. 8 ibid. 48 ibid. 49 Nakaso, 2001, p. 9 50 Nakaso, 2001, p. 10 51 Nakaso, 2001, p. 11
52  Figure

of 1998 GDP from the IMF at Author’s calculations.  
Hoshi & Kashyap, 2010, p. 401



that this was not sufficient to recapitalize them. It calmed the situation for a while, but the economy had not been reformed, confidence was still at a low and for fear of losing investment, the interest rate remained high54. Another major recapitalization therefore became necessary in March 1999. The government lent the banks ¥25 billion or 5,4% of Japanese GDP55, thereby calming the markets and lowering borrowing cost for Japanese banks56. The BOJ simultaneously lowered the discount rate to zero and thus incited banks to borrow money directly from the Central Bank57. Scholars criticize however that the authorities were too timid in recapitalizing the banks; they acted slowly and piecemeal instead of providing a general rescue package to the Japanese banks: “(O)ur calculation suggests that a recapitalization that was at least two and a half times bigger in 1999 was needed; put differently, [an] extremely conservative estimate of the Japanese capital shortage would suggest that another 3% of GDP was needed”58. However, it appears that the government underestimated the capital shortage in the Japanese banking sector and was too afraid to commit more public funds to saving the banks59. As far as policy-makers feared inflation due to expansionary fiscal and monetary policy, it should be pointed out that a lack in consumption had contributed to the crisis and that Japan during the crisis was experiencing deflation rather than inflation60. Closely aligned to the first measure, a second measure to counter the crisis was to restructure debt and to allow banks to write off their NPLs. The government set up several asset management companies, financed in part by the government and the BOJ, whose task it was to buy bad loans, to restructure the borrowers and to try and sell the loans once they had been converted into viable loans61. In total, the asset management companies bought up more than ¥35.4 trillion62 in bad loans and thus almost half of all NPLs that Madsen and Nakaso estimated to be in the market63. However, Madsen (2004) asserts that the ruling Liberal Democratic Party (LDP) had                                                                                                                
54 55

Hoshi & Kashyap, 2010, p. 401 Figure of 1999 GDP from the IMF at Author’s calculations. 56 Hoshi & Kashyap, 2010, p. 401 57 Vollmer & Bebenroth, 2010, p. 16; Nakaso, 2001, p. 48 58 Hoshi & Kashyap, 2010, p. 412 59 Madsen, 2004, p. 59; Hoshi & Kashyap, 2010, p. 411 60 Baba et al., 2005 61 Hoshi & Kashyap, 2010, pp. 405f 62 Author’s calculation on basis of figures in Hoshi & Kashyap, 2010, pp. 405f 63 Madsen, 1998, p. 51; Nakaso, 2001, p. 17



an interest not to restructure a range of companies that were unable to repay their debt because they belonged to the traditional sponsors of the party64. He provides a telling anecdote about the only bank that was bought up by foreign investors during the financial crisis and renamed Shinsei (“rebirth”). The bank soon went into several disputes with the government, among others over an obligation to lend to small and medium-sized enterprises (SMEs) close to the LDP and over the disclosure of the real amount of its NPLs:
In preparing its accounting statements for fiscal 2000 Shinsei informed the regulators that it intended to classify 19.6% of its portfolio as non-performing. The [government] objected to this proposal because it knew that all the City Banks held similar portfolios, and if Shinsei pronounced such a high proportion of its assets to be risky the market would expect the rest of the major lenders to do the same. Those banks would then face a real dilemma. If they followed Shinsei’s precedent they would reveal themselves to be insufficiently capitalized, but if they refused to do so they would cast doubt on the veracity of their accounting statements and on the competence of the regulatory authorities. To forestall such discomfiture, the big banks and senior regulators reportedly urged Shinsei to lower its NPL estimate towards the industry norm of about 7%. Shinsei, however, would not budge. Rather than conform to what it saw as the industry’s obfuscatory norms, it went ahead and declared that a fifth of its loans were partially or fully impaired65.

As a lesson of the controversy with Shinsei, the government refused further sales of Japanese banks to foreign investors, even though foreign investors at times topped Japanese bids by $540 million66. It only reluctantly started a wider program for the restructuring of the debt that had accumulated in keiretsu firms and other firms in 200267. Parts of the real economy were thus allowed to remain financed by the banks, and ultimately by the depositors. A third measure that the authorities could have taken but did not take was to depreciate the exchange rate of the yen. This could have allowed the Japanese economy to devolve some of the problems to its trade partners such as the US and the European Union. However, the US and other trade partners were not willing to accept this. Madsen (2004) argues that the US government was short-sighted and preferred a strong yen that would allow American companies to export to Japan, not understanding that Japan was facing a large structural problem in its economy which made the purchase of American goods even more unlikely68. Besides, the BOJ was hostile to a depreciation of the yen for two reasons. First, the BOJ believed that a                                                                                                                
64 65

Madsen, 2004, p. 38 Madsen, 2004, pp. 39f 66 Madsen, 2004, p. 54 67 Hoshi & Kashyap, 2010, p. 410 68 Madsen, 2004, p. 45



highly-valued currency would force Japanese enterprises to become more efficient69. Second, keeping a highly-valued currency was a matter of prestige, with the side effect that Japanese consumers did not experience a loss in purchasing power for foreign goods70. As a result, the yen remained highly-valued, even though scholars assert that a depreciation would have been both beneficial for economic growth and politically feasible71. Fourth, the Japanese government used a Keynesian stimulus program to boost domestic demand. It has been asserted that the zero interest rate policy put Japan into the danger of facing a liquidity trap72. Skidelsky (2010) defines a liquidity trap as a situation where cheap funds for investment (“liquidity”) are available, but entrepreneurs lack the faith to borrow and to invest73. Keynes has therefore advocated that the government engage in a public spending program to unleash a multiplier effect and boost domestic demand74. In other words, as the government employs private sector companies for infrastructure projects and other public domain projects, the latter see their income and purchasing power grow. They can in turn consume more goods and services from other private actors in the market, thereby increasing their purchasing power as well. This would return confidence to the market and induce entrepreneurs to start investing again75. The Japanese government thus engaged in a series of public spending programs throughout the 1990s and 2000s that came up to a total of 28% of 2000 GDP76. According to Brückner & Tuladhar (2010), they were composed of
public works and social infrastructure related projects, including land acquisition (14.2 percent of 2000 GDP); credit guarantees and augmentation of credit lines to banks for loans to small and medium-sized enterprises and for the housing sector (8.5 percent of GDP); employment assistance and cash transfers (2.1 percent of GDP); and tax measures (3.3 percent of GDP)77.

It could be asserted that the government used the public spending program largely as a means to safeguard economic welfare and equality, in much the same way as it used the keiretsu banks. Thus, Yamano & Ohkawara assert that the government programs did not place economic efficiency and return on investment in the center but focused                                                                                                                
69 70

Madsen, 2004, p. 48 Madsen, 2004, p. 49 71 Madsen, 2004, pp. 47f; Coenen & Wieland, 2005, pp. 7f 72 Coenen & Wieland, 2003, pp. 6f 73 Skidelsky, 2010, Min 07:15 74 Keynes, 1936, pp. 116f 75 Keynes, 1936, pp. 116f 76 Brückner & Tuladhar, 2010, p. 5 77 Brückner & Tuladhar, 2010, p. 5



on “social infrastructure such as rural roads and agriculture, which have lower marginal productivity compared to larger urban-based projects”78. Madsen (2004) shows that despite inefficiently high employment levels in the construction sector after the implosion of the housing bubble in the early 1990s, the government increased the budget from which construction work was financed by 47,8% between 1990 and 199979. It could be argued that this was a direct transfer of wealth from the taxpayer to the construction industry. A similar case could be made about the retail industry80. Nevertheless, it has also been asserted that the fiscal stimulus allowed the Japanese economy avoid a recession. Madsen (2004) holds that “fiscal spending added almost a tenth to yearly economic output over the course of the decade [of the 1990s]. This more than compensated for the decline in private non-residential investment and helped Japan eke out GDP growth of some 1.0% per annum”81. It also has to be noticed, however, that the government paid dearly for the growth rates of the economy. Thus, Japanese government debt increased from 13,2% of GDP in 1990 to 77,6% in 2003 and 112,8% in 2010 according to the IMF82 and scholars hold that real government debt is double the figure calculated by the IMF83. 3. Translating policies into welfare effects It has been seen in the first section, that the Japanese government tried to protect employment and economic welfare through the keiretsu which, additionally protected against foreign takeovers through cross-shareholding, could guarantee their employees lifetime employment and thereby stabilize social peace. It has also been mentioned, however, that the system generated inefficiencies. Thus, Moerke (1997) has found that keiretsu firms are generally less profitable than independent firms84. It has been seen in the second section that the government’s response to the financial crisis 1997 also allowed inefficiencies to prevail in the interest of safeguarding economic welfare. From a Hayekian point of view, it could be argued that the                                                                                                                
78 79

Yamano & Hokawara in Brückner & Tuladhar, 2010, p. 8 Author’s calculation based on figures in Madsen, 2004, p. 55. 80 Madsen, 2004, pp. 26f 81 Madsen, 2004, p. 50 82 Source of the figures: IMF Database. Japan, General government net debt in percent of GDP. 83 Madsen, 2004, p. 57 84 Moerke, 1997, pp. 4f



government should have allowed for a larger degree of creative destruction of unproductive keiretsu firms and other firms, in particular in the construction and retail sectors. This would have been efficient, but it would have been associated with a loss in economic welfare. However, it has been asserted that the Japanese system accepts these aspects in order to protect of economic welfare. The following section provides an analysis of the macroeconomic targets established above to see if Japan has been able to “maintain” economic welfare or not. The first target of the paper was a decline by GDP/capita by not more than 10% throughout the crisis. According to the IMF, GDP/capita actually grew by 1.1% over the six years from 1997 to 200385. This is well within the target of this paper and shows a positive development. It is consistent with the findings above, indicating that government spending safeguarded economic growth in Japan. The second target was a decline of average salary per hour by no more than 10% throughout the crisis. Salary per hour has been chosen to include the reduction in salary that might arise from a reduction in working time. According to data from the Ministry of Health, Labor and Welfare and on basis of the author’s calculations, overall salary per hour declined by 10,02% between July 1998 and July 2003. This tendency is shown even more pronouncedly when the December figures are considered in which an end-of-the-year allowance is included. There, salary per hour declined by 10,66% between December 1998 and December 200386. This is consistent with findings from the OECD (2005), which however document a lower fall in wages: “(T)otal compensation started declining in real terms in 1997, and by 2003, had fallen by a cumulative 6 per cent”87. While the fall in wages is steeper than the target stipulated in this paper and thereby indicates a failure to maintain economic welfare, it has to be balanced against two factors. First, it should be balanced against the development of household savings, to see if the high savings rate helped Japanese households to withstand the crisis. Figures from the OECD (2005) show that overall household savings decreased throughout the crisis, namely from 10% of disposable income in 1997 to 6,2% of disposable income in 200388. This can be taken as an                                                                                                                

GDP per capita was ¥3,767,946 in 1997 and ¥3,807,514 in 2003 (Figures from the IMF, Author’s calculations. See more extensive figures in the annex to this paper.) 86 Author’s calculations based on data from the Japanese Ministry of Health, Labor and Welfare. See more extensive figures in the annex to this paper. 87 OECD, 2005, p. 175 88 OECD, 2005, p. 52



indication that savings were not fully exhausted at the end of the crisis and point to a maintenance of economic welfare. Second, it should be balanced against the Gini coefficient to see if loss of welfare has been evenly distributed or if inequality has increased. The target for the Gini coefficient was an increase by not more than 10% overall. Figures between 1997 and 2003 were not available, but it can be shown that the “Gini coefficient for disposable income rose by 13% between 1985 and 2000, compared to an average increase of 7% in the OECD area”89. It has also been asserted that the “Gini coefficient in 2005 was identical to that in 1999 according to calculations by the Japanese government”90. Taken together this information, it will be assumed in this paper that the period between 1997 and 2003 may have accounted for a rise in close to 10%, but not reaching 10%. In other words, although scholars have asserted that Japan’s inequality rose quite substantially during the financial crisis91, it will be assumed that economic welfare has been maintained. The fourth target was a rise in the number of individual bankruptcies by not more than 10%. However, it can be shown that the number of individual bankruptcies more than tripled from 71299 in 1997 to 251799 in 200392. This is far more than the target set by this paper. Although the number of people who filed for bankruptcy in 2003 only made up 0.2% of the total population93, such a rise in bankruptcy cases must indicate a steep decline in economic welfare. This assumption could be supplemented with the fact that there was a steep increase in the number of suicides, in particular among men. In 1995, 23.4 of 100000 men committed suicide; in 2003, this number had almost doubled to 38.2 of 10000094. Watanabe, Furukawa, Nakamura & Ogura (2006) show that there is a correlation between personal bankruptcies and suicides95. The fifth target was an increase in the inflation rate by not more than 10 base points overall. During the 1990s and the 2000s, the issue of deflation was much bigger than the issue of inflation. Consumer prices rose by 1.76% in 1997 in                                                                                                                
89 90

OECD, 2008, p. 93 OECD, 2008, p. 121 91 OECD, 2008, p. 93 92 Source of the 2003 figure: West, 2005, p. 234. Source of the 1997 figure: Efrat, no date, p. 51. Author’s calculations. See more extensive figures in the annex to this paper. 93 Total population in Japan in 2003 was 127,634,000 according to figures by the IMF. Author’s calculations. 94 Watanabe, Furukawa, Nakamura & Ogura, 2006, p. 2 95 Watanabe, Furukawa, Nakamura & Ogura, 2006, p. 8



comparison to 1996, but in the years that followed, goods actually became cheaper rather than more expensive. The inflation rate in 2003 was -0.25% and thereby well within the target set by this paper96. Excluding other considerations, it can be said that based on the inflation figures, a Keynesian stimulus program by help of expansionary monetary policy was absolutely justifiable. The danger of inflation, often brought as a counterargument to quantitative easing97, does not seem to hold. However, it has been shown above that Japan faced the danger of a liquidity trap, explaining why there was less demand for cheap money and, consequently, why inflation did not rise as steeply as in European countries after governments introduced a Keynesian stimulus program98. Besides, it has been mentioned that the budget deficit of the government increased to very high levels throughout the crisis. Finally, the sixth target was maintenance of the unemployment rate under 8% in all of the crisis years. This target has been chosen to compare with some of the European countries suffering from the current economic crisis. Thus, Greece had an unemployment rate of 21.6% in December 2011 while Spain had an unemployment rate of 23.2%99. In Japan, total unemployment rose from 3.395% to 5.25% between 1997 and 2003, meaning an increase by 1.855 base points100. This can be considered rather moderate and is far below the target of 8 base points established in this paper and the unemployment rate in Greece and Spain. However, it has to be qualified that unemployment in Japan seems to be seen as a much more serious social and personal problem than unemployment in the EU. Although the unemployment rate is lower than in most European countries, Watanabe, Furukawa, Nakamura & Ogura (2006) show that there is “significant association between the unemployment rate and suicide mortality among middle-aged men in Japan during the late 1990s and early 2000s”101. It has been shown before that the crisis prompted a steep increase in the number of suicides in Japan.


Data from the World Bank. “Inflation, consumer prices (annual %), Japan. See more extensive figures in the annex to this paper. 97 Hayek, 1995, p. 248 98 For an analysis of France and Germany, see Feldhof (2012). 99 Figures from Eurostat. Retrieved on 5 May 2012 at =1. 100 Source of the data: IMF Database, 2012. Author’s calculations. See more extensive figures in the annex to this paper. 101 Watanabe, Furukawa, Nakamura & Ogura, 2006, p. 9



Taken together, it must be said that Japan’s economic policies have not succeeded in maintaining overall economic welfare. The figures indicate that despite continuous GDP growth and a large increase in government spending, the toll on the Japanese people in terms of rising inequality and rising poverty was heavy. The keiretsu system of interlocking shareholding, protected by preferential loans, government spending and the Bank of Japan as a lender of last resort, has not been able to safeguard economic welfare for the society. Conclusion In the face of rising unemployment in the European Union and a rigid monetary policy in the Eurozone that transfers economic adjustment directly to the European workforce, this paper wanted to investigate whether the Japanese model, backed by an independent central bank and interlocking shareholding, could protect its people from the effects of a financial crisis. The above analysis has shown that this is not the case. Rather, it appears that interlocking shareholding, preferential bank loans and a close contact with the government can be seen as a source for moral hazard. The inefficiencies in the Japanese system developed as a result of a failure to restructure the economy. Although Yergin & Stanislaw (2002) assert that the government started a liberalization of the Japanese economy in the 1980s102, Madsen (2004) has shown that several economic sectors remained protected due to political reasons103. The European system in which governments are subject to rigid competition law and where a government has no choice but to restructure its economy appears to have just as much merit as the Japanese system.

102 103

Yergin & Stanislaw, 2002, pp. 148f Madsen, 2004, pp. 26f; p. 55



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Hayek, F.A. (1995). Personal Recollections of Keynes and the Keynesian revolution. In Caldwell, B. (ed.). The Collected Works of F.A. Hayek – Contra Keynes and Cambridge, Essays, Correspondence. London: Routledge. Hoshi, T., Kashyap, A. & Scharfstein, D. (1991). Corporate structure, liquidity and investment: evidence from Japanese industrial groups. In Quarterly Journal of Economics, Vol. 106, pp. 33–60. Hoshi, T., & Kashyap, A. (2010). Will the U.S. bank recapitalization succeed? Eight lessons from Japan. In Journal Of Financial Economics, Vol. 97, Iss. 3, pp. 398-417. Ichimura, S. (1998). Political Economiy of Japanese and Asian Development. Tokyo: Springer. IPE (2011). ECB must become lender of last resort, says Nobel laureate Krugman. Retrieved on 2 May 2012 from Isobe, T., Makino, S. and Goerzen, A. (2005). Falling Down Together? Japanese Keiretsu and the Performance Implications of Affiliation, No 171, Discussion Paper Series, Research Institute for Economics & Business Administration, Kobe University. Retrieved on 13 April 2012 from Joh, S.W. (2003). Corporate governance and firm profitability: evidence from Korea before the economic crisis. In Journal of Financial Economics, Vol. 68, pp. 287–322. Kang, J.-K., Stulz, R.M. (2000). Do banking shocks affect borrowing firm performance? An analysis of the Japanese experience. In Journal of Business, Vol. 73, pp. 1–23. Kawai, M. & Takagi, S. (2009). Why was Japan Hit So Hard by the Global Financial Crisis?, No 153, ADBI Working Papers, Asian Development Bank Institute. Retrieved on 26 April 2012 from Keynes, J.M. (1936). The General Theory of Employment, Interest and Money. Edition consulted: 1973 edition. London: MacMillan Press. Kobayashi, K. (2008). Financial crisis management: Lessons from Japan’s failure. Retrieved on 18 April 2012 from Krugman, P. (2012). Economics of the Welfare State. Class notes. Retrieved 18 April 2012 from Lai, G. M.–H. (1999). Knowing who you are doing business with in Japan: a managerial view of keiretsu and keiretsu business groups. In Journal of World Business, Vol. 34, Iss. 4, pp. 423-448.



Madsen, R. A. (1998). Expect no help from Japan. In World Policy Journal, Vol. 15, Iss. 3, p. 50. Madsen, R. A. (2004). What went wrong: Aggregate Demand, Structural Reform and the Politics of 1990’s Japan. BRIE working Paper 162, September 2004. Retrieved on 14 February 2012 from Moerke, Andreas, (1997). Does governance matter? Performance and corporate governance structures of Japanese keiretsu groups, No FS IV 97-43, Discussion Papers, Research Unit: Market Dynamics, Social Science Research Center Berlin (WZB). Retrieved on 1 April 2012 from Morck, R. & Nakamura, M. (1999). Banks and corporate control in Japan. In Journal of Finance Vol. 54, Iss. 1, pp. 319–39. Morck, R., Nakamura, M. & Shivdasani, A. (2000). Banks, ownership structure, and firm value in Japan. In Journal of Business, Vol. 73, Iss. 4, pp. 539–67. Morck, R. & Nakamura, M. (2004). Been There, Done That: The History of Corporate Ownership in Japan, No 2004-4, CEI Working Paper Series, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. Retrieved on 1 April 2012 from   Nakaso, H. (2001). The financial crisis in Japan during the 1990s: how the Bank of Japan responded and the lessons learnt, Bank for International Settlements. Retrieved on 1 May 2012 from   Nordhaus, W.D. & Tobin, J. (1972). Is Growth Obsolete? Economic Growth, National Bureau of Economic Research, no 96, New York. Retrieved on 26 April 2012 from Obstfeld, M., Shambaugh, J.C. & Taylor, A.M. (2004). The Trilemma in History: Tradeoffs among Exchange Rates, Monetary Policies, and Capital Mobility. Conference paper. Retrieved on 13 April 2012 from OECD (2005). OECD Economic Surveys: Japan 2005, OECD Publishing. doi: 10.1787/eco_surveys-jpn-2005-en. OECD (2008). OECD Economic Surveys: Japan 2008, OECD Publishing. doi: 10.1787/eco_surveys-jpn-2008-en. Sawada, Y., Nawata, K., Ii, M. & Lee, M. J. (2010). Did the Financial Crisis in Japan Affect Household Welfare Seriously? No 2010-11, Working Papers, Towson University, Department of Economics. Retrieved on 7 April 2012 from



Skidelsky, R. (2010). Keynesianism Part I - It's All About Spending. [Video interview]. Retrieved 29 December 2011 from Spiegel (2012). Starökonom Hans-Werner Sinn: "Der Griechenland-Plan ist illusionär". Retrieved on 2 May 2012 from,1518,816291,00.html. Tobin, J. & Nordhaus, W. D. (1972). Is growth obsolete? In Economic Research: Retrospect and Prospect Vol. 5: Economic Growth. Retrieved on 25 April 2012 from Tuladhar, A. & Brückner, M. (2010). Public Investment as a Fiscal Stimulus: Evidence from Japan's Regional Spending During the 1990s, No 10/110, IMF Vollmer, U. & Bebenroth, R. (2010). Policy Reactions to the Financial Crisis in Japan: Lessons from the 1990s, No DP2010-16, Discussion Paper Series, Research Institute for Economics & Business Administration, Kobe University. Retrieved on 1 May 2012 from Watanabe, R., Furukawa, M., Nakamura, R. & Ogura, Y. (2006). Analysis of the Socioeconomic Difficulties Affecting the Suicide Rate in Japan. Discussion Paper No. 626, Kier Discussion Paper Series, Kyoto Institute of Economic Research. Retrieved on 2 May 2012 from West, M. D. (2005). Law In Everyday Japan: Sex, Sumo, Suicide, And Statutes. Chicago: University of Chicago Press. Consulted as a Google Book at on 6 May 2012. Weinstein, D. E., & Yafeh, Y. (1998). On the costs of a bank-centered financial system: Evidence from the changing main bank relations in Japan. In Journal of Finance, Vol. 53, pp. 635–72. Working Papers, International Monetary Fund. Retrieved on 4 May 2012 from Yergin, D. & Stanislaw, J. (2002). The commanding heights: the battle for the world economy. New York (N.Y.): Simon & Schuster.




Statistical datasets used for the analysis:

Japan DATA

This chart uses German decimals in its calculations (inverted function of comma and point)

Japan Wages End of Year Month

Total Cash Earnings

Difference from same month last year


Differenc e from same month last year


Cash Earnings Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Data from Japanese Ministry of Health, Labor and Welfare, http://www.m sh/database/d b-l/monthlylabour.html

¥709,384.00 ¥677,702.00 ¥671,716.00 ¥646,884.00 ¥630,414.00 ¥621,143.00 ¥604,767.00

(-4.2) (-2.3) (-0.9) (-3.7) (-2.7) (-1.5) (-0.5)

289,292yen 283,841yen 285,032yen 281,869yen 280,697yen 280,378yen 273,111yen

(-0.3) (0.4) (0.5) (-1.2) (-0.6) (-0.1) (-0.3)

270,682yen 264,862yen 265,263yen 263,983yen 261,701yen 260,786yen 253,229yen



Japan Wages Regular Month Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 in parentheses, change towards same month in preceding year Data from Japanese Ministry of Health, Labor and Welfare, http://www.m sh/database/d b-l/monthlylabour.html

¥456,368.00 ¥436,890.00 ¥434,993.00 ¥432,637.00 ¥409,738.00 ¥401,724.00 ¥391,643.00

(-2.5) (-2.1) (-0.4) (-0.6) (-5.4) (-1.9) (-0.4)

287,994yen 281,751yen 284,021yen 281,995yen 278,388yen 278,476yen 272,113yen

(-0.6) (0.1) (0.8) (-0.7) (-1.4) ( 0.0) (-0.2)

270,393yen 264,080yen 265,564yen 264,566yen 261,151yen 260,435yen 253,439yen

Hours Worked

Total Hours



Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02

156.10 155.10 156.40 153.20 153.20 153.00 151.50 161.00 158.00 156.80 156.50 158.10

(-0.1) ( 0.0) (0.8) (-2.0) (-0.3) (-0.1) (-0.2) (-1.3) (-1.3) (-0.8) (-0.1) ( 0.7)

146.2hr. 145.0hr. 146.0hr. 143.8hr. 143.0hr. 142.3hr. 140.7hr. 151.6hr. 148.7hr. 147.1hr. 147.3hr. 148.7hr.

(-0.7) (-0.1) (0.6) (-1.5) (-0.7) (-0.5) (-0.2) (-0.7) (-1.3) (-1.0) ( 0.1) ( 0.8)

9.9hr. 10.1hr. 10.4hr. 9.4hr. 10.2hr. 10.7hr. 10.8hr. 9.4hr. 9.3hr. 9.7hr. 9.2hr. 9.4hr.



Jul-03 Jul-04 in parentheses, change towards same month in preceding year Data from Japanese Ministry of Health, Labor and Welfare, http://www.m sh/database/d b-l/monthlylabour.html

157.50 155.30

(-0.4) (-0.6)

147.7hr. 145.1hr.

(-0.7) (-1.0)

9.8hr. 10.2hr.

Number of employed Regular employment Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 in parentheses, change towards same month in preceding year Data from Japanese Ministry of Health, Labor Regular employees Full-time Part-time

41287000 43560000 43538000 43387000 43100000 42956000 42985000 41543000 43705000 43667000 43583000 43271000 43025000 43016000

(-0.4) (-0.1) (-0.1) (-0.3) (-0.7) (-0.4) ( 0.6) (-0.1) (-0.4) (-0.1) (-0.2) (-0.7) (-0.6) ( 0.5)

34,402tho. 34,844tho. 34,505tho. 34,063tho. 33,441tho. 33,047tho. 31,923tho. 34,755tho. 35,149tho. 34,856tho. 34,454tho. 33,768tho. 33,284tho. 32,189tho.

(-1.1) (-1.0) (-1.0) (-1.2) (-1.9) (-1.1) (-0.2) (-1.0) (-1.2) (-0.8) (-1.1) (-2.0) (-1.4) (-0.7)

6,884tho. 8,716tho. 9,033tho. 9,324tho. 9,659tho. 9,909tho. 11,062tho. 6,788tho. 8,556tho. 8,811tho. 9,129tho. 9,504tho. 9,741tho. 10,827tho.



and Welfare, http://www.m sh/database/d b-l/monthlylabour.html These numbers have not been consulted for the calculation of unemployment , as the IMF had a more comprehensive dataset, see below Wage per hour Dec 1998 Dec-99 Dec-00 Dec-01 Dec-02 ¥4,544.42 ¥4,369.45 ¥4,294.86 ¥4,222.48 ¥4,114.97 ¥4,059.76 Dec-04 ¥3,991.86 Wage per ¥2,834. hour July 58 1998 ¥2,765. 13 ¥2,774. 19 ¥2,764. 45 ¥2,591. 64 Wage per ¥2,550. hour July 63 2003 Jul-04 ¥2,521. 85 Difference 10.02 %

Difference 1998 and 2003 Source: Author's calculations on basis of overall wages and working time indicated above





Inflation in Japan (19902010, World Bank) 3.03 3.3 1.71 1.27 0.69 -0.12 0.13 1.76 0.66 -0.33 -0.65 -0.8 -0.9 -0.25 -0.01 -0.27 0.24 0.06 1.37 -1.35 -0.72

Inflation in Japan (20052010, Japanese Bureau for Statistics

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Difference 1997 and 2003:

-0.3 0.3 0.0 1.4 -1.4 -0.7


Source of the dataset: World Bank, http://data.wo untry/japan


Subject Descriptor



Country/ Seriesspecific Notes


Gross domestic product, constant prices

National currency



Percentage change t/w preceding year

GDP full numbers



1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

¥424,494.255 ¥438,605.891 ¥442,198.204 ¥442,954.640 ¥446,779.900 ¥455,457.900 ¥467,345.600 ¥474,802.700 ¥465,291.700 ¥464,364.200 ¥474,847.200 ¥476,535.100 ¥477,914.900 ¥485,968.300 ¥497,440.700 ¥503,921.000 ¥512,451.900 ¥523,685.800 ¥518,230.900 ¥489,588.500 ¥511,301.600 ¥507,478.700 ¥517,826.386 ¥526,664.405 3.324% 0.819% 0.171% 0.864% 1.942% 2.610% 1.596% -2.003% -0.199% 2.257% 0.355% 0.290% 1.685% 2.361% 1.303% 1.693% 2.192% -1.042% -5.527% 4.435% -0.748% 2.039% 1.707%

¥424,494,255,000,0 00.000 ¥438,605,891,000,0 00.000 ¥442,198,204,000,0 00.000 ¥442,954,640,000,0 00.000 ¥446,779,900,000,0 00.000 ¥455,457,900,000,0 00.000 ¥467,345,600,000,0 00.000 ¥474,802,700,000,0 00.000 ¥465,291,700,000,0 00.000 ¥464,364,200,000,0 00.000 ¥474,847,200,000,0 00.000 ¥476,535,100,000,0 00.000 ¥477,914,900,000,0 00.000 ¥485,968,300,000,0 00.000 ¥497,440,700,000,0 00.000 ¥503,921,000,000,0 00.000 ¥512,451,900,000,0 00.000 ¥523,685,800,000,0 00.000 ¥518,230,900,000,0 00.000 ¥489,588,500,000,0 00.000 ¥511,301,600,000,0 00.000 ¥507,478,700,000,0 00.000 ¥517,826,386,000,0 00.000 ¥526,664,405,000,0 00.000

Change between 1997 and 2003 Source of the




dataset: IMF, pubs/ft/weo/2 012/01/weoda ta/index.aspx


Subject Descriptor



Country/ Seriesspecific Notes

Japan Unemployment rate

Percent of total labor force

Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Difference (1997 and 2003): Japan

2.102 2.096 2.16 2.507 2.888 3.151 3.355 3.395 4.106 4.676 4.724 5.034 5.36 5.25 4.717 4.426 4.128 3.849 3.987 5.073 5.06 4.549 4.503 1.855




Year 1990 1991 1992 1993 1994

123.438 123.928 124.367 124.77 125.116

Full amount 123438000 123928000 124367000 124770000 125116000



1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source for Unemployment rate & Population: IMF, pubs/ft/weo/2 012/01/weoda ta/index.aspx GDP/Capita

125.436 125.711 126.011 126.349 126.587 126.831 127.132 127.4 127.634 127.734 127.752 127.746 127.757 127.692 127.551 127.594 127.819 127.329

125436000 125711000 126011000 126349000 126587000 126831000 127132000 127400000 127634000 127734000 127752000 127746000 127757000 127692000 127551000 127594000 127819000 127329000

Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

¥3,438,926.870 ¥3,539,199.301 ¥3,555,591.146 ¥3,550,169.432 ¥3,570,925.381 ¥3,630,998.278 ¥3,717,618.983 ¥3,767,946.449 ¥3,682,591.077 ¥3,668,340.351 ¥3,743,936.419 ¥3,748,348.960 ¥3,751,294.349 ¥3,807,514.455 ¥3,894,348.412 ¥3,944,525.330 ¥4,011,490.771 ¥4,099,077.154 ¥4,058,444.538



2009 2010 2011 2012

¥3,838,374.454 ¥4,007,254.260 ¥3,970,291.584 ¥4,066,837.767

Change from 1997 to 2003 Source of the dataset: Calculation on basis of population and overall GDP, see above Individual bankruptcies


Year 1990 1991 1992 1993 1994 1995 1996 1997




Sawada, Nawata, Ii, Lee, p. 2


1999 2000 2001

Efrat, R. www.csun.e California State du/~re3879 University 1/word/Glob Northridge, p. 51 c 103741 NYTimes http://www. /2000/06/23 /business/w orldbusinessbriefingasiajapanesepersonalbankruptcies .html?src=p m 122741 Sawada, Nawata, Ii, Lee, p. 2 158963 AP/Japanese http://www. Sup Court m/doc/1P1-






AP/Japanese Sup Court



West, 2005, p. 234 ml http://www. m/doc/ ml http://books ooks?id=rCI JoI4ixeMC&

2004 2005 2006 2007 2008 2009 2010 2011 2012

Change from 1997 to 2003 Percent of population that filed for bankruptcy in 2003: Sources of the data indicated at the right of the data

253.159% 0.20%




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