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1) Crisis of the locals banks in 1920s: a.

Local banks can better assess the risk level of entrepreneurs compare to outsiders such as state banks. b. However, as firms grow and build their reputations, in addition to the establishment of the new commercial codes, allow firm to issue corporate bonds and move into direct financing. c. At the same time, large city banks were expanding their branches and undermine the information rent of local banks and cause many of them to go bankrupt and cause the crisis. d. However, share of lending also grew as the market share of large banks grew. This also undermines the relevance of local culture. 2) The occurrence and disappearance of dual labor structure: a. In the rural area, heads of household provide for the less productive members of their families and only use them during planting and harvesting seasons. This created the slack labor. b. Also, at the time, transportation cost was high while personal security was lower. The risk-averse agents preferred the provision of household heads instead of working in the urban area and therefore stayed home and submitted to the authoritarian control of the household heads. c. In the city, as modern industries such as cotton spinning grew, the need for labor force increased. This increased their real wage. Also, since the transportation system was not as developed, these urban laborers enjoyed location rent. d. However, as real wage increases pass the reservation wage level, it attracts more and more rural workers. Also, as the transportation system develops and decreases the costs and risks of commuting to the urban area, there was an inflow of labor into the cities where the manufacturing plants are. This increase the supply for labor and undermine the dual labor structures. e. Also, as the real wage increases, many firms move toward automation processes to decrease labor costs. This decreases the demand for labor. f. The combination of increasing supply and decreasing demand for labor resulted in an outflow of labor from the urban areas. 3) Why is building internal labor beneficial during the 1920s and after WWII: a. Internal labor market is where firms hire fresh graduates and trained them within the company to build up firms-specific human capital. b. Stable growth of the heavy industries faced with tight amount of skilled labor. Also, since skills from Japanese traditional craftsmanship did not fit the need for these sectors, firms needed to train unskilled workers. c. Since the firms with modern technology were minority, skilled tended to be firm-specific instead of industry-specific. d. Also since employees were afraid of hold-up problems, firms sought fresh graduates and trained them for long-term employment. 4) Structure of labor in manufacturing sector:

Integration of Labor market: data shows that there was a huge transfer of labor from traditional sectors to the manufacturing sectors which provided the necessary amount of labor for firms’ expansions. during the 1960s. Since the disputes could destabilize the economy. For that reason. b. These strategically important industries were coal and steel and light manufacturing d. Tenancy was less profitable since wages increased. In addition. In addition. Since manufacturing wages was growing fast. This creates an incentive structure where employees prefer higher wage and tries hard to enter the larger firms to earn the quasi-rent but the reverse direction does not happen. Smaller firms had less technology and required less firm-specific knowledge and offer lower wage. c. Larger firms tend to have higher firm-specific labor force and paid higher wage. The MoF then can allocate funds to industries which they deemed to be strategically important. This created artificial advantages for the long-term credit bank to fund raise money from the stock market whereas other firms could not do so. any firm that needed fund for development needed to borrow from these designated banks which were controlled by the Ministry of Finance. the risk for tenant farmers decreased. the government allocate foreign currency reserves to certain export and import industries. . With the assistance from the government. 6) Government coordinated investment of manufacturing sectors a. Also. b. This in turn increases the real wages of the remaining tenant farmers and often causes disputes between landlords and their tenant farmers.a. b. it attracts many laborers to the city and effectively decreases the supply of agricultural labor. there were special tax discounts and subsidies for machineries important for certain sectors. 7) Key factors of rapid growth in the 1960s a. the Japanese government abolished the regulations on dividends but kept tight controls on corporate bonds issuance by forming the Bond Issuance Committee to set requirements to issue bonds. After the war. the remaining farmers are expected to be able to take risk as land-owners. the government took measures to calm the contention between two sides. d. Technology transfer: FDI was regulated the government and forced Western firms to collaborate with Japanese firms in these projects which allowed Japanese firms to inherit some technological spill-over and high-tech training. In this way. the government coordinated the investment of manufacturing sectors. b. 5) Tenant farmers and their buy-out a. which means subsidies for their growth. The government favored the tenant farmers side and give cheap loans to tenant farmers who met certain conditions to buy-out farming lands from their landlords. c. While smaller firms require less firm-specific skills and paid lower wage. Most banks and firms were not able to issue bonds except for some long-term credit banks which could issue bonds of several years’ maturity.

d. d. c. b. 2) MoF switched to rule of law instead of discretionary policies. After: Relaxed regulation. During the 1970s and 1980s. Also. c. Market entry for banks was impossible b. High investment in R&D by the private sectors improved productivity and real wages which further attract labors from the rural areas. As the result. 3) Market entry was liberalized. Japanese government faced with several international challenges including the fact that the US went off the gold standard and depreciated its currency which caused a small recession in the Japanese economy. During this period. ii. . Any bank that seemed to close to bankruptcy was order to stop operation and nationalized. Before: Strict regulation. But this factor also forced manufacturing firms to be more competitive internationally. iii. Coordinated lending and subsidies from the government helped. Increased in public spending caused drastic increase in budget deficit and forced the Japanese government to revitalize the bond market to support the budget. 8) Lost of industrial policies in the 1980s: a. the US deficit level and Japan’s political tie with the US forced Japanese government to agree to the Plaza Accord and appreciate its currency and caused further difficulty for the Japanese economy and greatly undermined the industrial policies. Joining the OECD group forced Japanese government to liberalize capital imports and other deregulations which further undermined the power of industrial policies. Firms focused a lot more on long-term growth. Monitoring became much stricter. once transacted. Increase demand from the Pacific area due to economic integration. the main banks are more lenient to the firms in short-term down time as long as the firms have profitable long-term projects. While this is tougher to get money. The government also had large investment in public education which increased labor productivity and return on education. 10) Before and after Hashimoto a. 9) Change of corporate financing in 1980s a. Also. the financial deregulation movements in the US and UK in the 1980’s also pressured the Japanese government to liberalize the financial markets. strict monitoring i. f. If firms want funds for investment projects. ii.c. they have to go through the main bank. they switched from indirect to direct financing and decrease their dependence on main banks. The Oil Shock by the OPEC group in the 1970s severely affected the price level and caused further trouble for the industrial policies. The Big Bang deregulation included 1) Using the stock market as the dominant way of corporate financing. The court system expanded to increase monitoring capacities. lax monitoring i. b. e. Famous manufacturing firms were also able to raise fun in domestic and international markets. only long-term credit banks can issue bonds and fundraise in the market.

v. This heavily affected the reliance on main-bank system and undermined the long-term employment structure of Japan. Cross-share holding also slowly disappear .iv.