Japan Cases

ADDITIONAL LEARNING
Japan THE MIRACLE YEARS
 Japanese governmental actions to
promote growth through technology
 Three government agencies were critical in effecting industrial policy: the Ministry of International Trade
and Industry, the Ministry of Finance, and the Economic Planning Agency.
 The Occupation had left the Japanese government with some powerful tools that would help the three
agencies to implement industrial policy: 
 A central banking system under the control of the Ministry of Finance.

 Government banks that could make long-term loans to key industries. Most important were the Reconstruction
Finance Bank and its successor, the Japan Development Bank.

 Discretionary controls over imports, foreign capital, and imported technology.

 On occasion, MITI also encouraged lending to chosen industries by the Japan Development Bank, promoted special
tax incentives, and tried to prevent excess investment in production capacity.
 The EPA helped assemble and interpret the data used for political decisions on economic policy – so as to identify
the ‘declining’ and ‘growth’ industries to be targets for ‘retrenchment’ and for ‘guided development’.
 Japanese governmental actions to
promote growth through technology
 Parliamentary legislations:
 In September 1953 cartels were legalized when “deemed . . . necessary on the grounds of averting a
recession or for the purpose of rationalization.”
 Legislation was passed in 1955 to encourage the development of the petrochemical industry.
 In 1956 a law on Extraordinary Measures to encourage the development of the machinery industry was
enacted.
 A similar law was passed for the electronics industry in 1957.
 In 1958 legislation was passed which established the Japan Aircraft Manufacturing Corporation.
 Other legal actions
 Proposed investments were to be accepted only if they contributed to
 (1) improvement of the balance of payments (increase in the current account surplus or decrease in the deficit);
 (2) development of essential industries or public enterprises; or
 (3) continuation or revival of needed technological assistance contracts.
Japanese Labor Unions

 Instead of emerging with nationwide craft or industrial unions, Japanese

labor entrusted its interests to unions organized at the enterprise level.
 Instead of excluding white-collar workers, these unions enrolled lower
supervisors and often even elected them to office.
 Instead of proselytizing or insisting on the union shop, these unions
tended to ignore their employers’ low-paid casual and female workers
and the low-paid workers of subcontractors, preferring to maximize
gains for present members.
 Instead of backing their demands with long strikes, the unions
appeared to have regard for their firms’ competitive positions
 Japan’s distinctive macro-finance system

 Japan’s high personal savings flowed not into equities but into banks and other financial institutions.
 In turn, these institutions supplied most of industry’s needs for substantial outside financing
 Japan’s experience is that monetary and fiscal work with quite different time intervals of effectiveness.
 Monetary policy works much the more quickly and much the more directly upon the balance of payments, both on financial account (by drawing in loanable funds, such as
Euro-dollars, from abroad) and on current account (by cutting down imports).
 By contrast, restriction of demand by higher tax rates works on the balance of payments only after a time lag; and the Japanese say that at times of balance of
payments trouble the restriction of demand and imports after a time lag is likely to be the precise reverse of what they want. 
 Because the commercial bankers have to come begging to [the Bank of Japan] when they want new funds to increase their lending further, the entire credit
structure of Japan is under the Bank of Japan’s control.  The control by the Bank of Japan is exercised in various ways.
 The one “orthodox” weapon is Bank rate, which it is certainly able to make effective; most of Japan’s other interest rates are tied to it, and Japanese businesses’ heavy
dependence on borrowing means that they are very susceptible to changes in borrowing rates.
 A second and more controversial weapon is the so-called ‘window operation’. The Bank of Japan holds regular consultations with the commercial banks, reviews the likely
trend of advances of each bank for perhaps a month ahead, and warns individual banks (or at times of balance of payments crises, warns all big city banks) that they
should please start to restrain their advances; if necessary it will even suggest an ‘overall loan level’ for the big banks as a whole.
 Finally, although the Bank will not generally in the last resort refuse to lend to any big banks, it does levy penalty rates on what it regards as its ultimate margin of less
desirable loans to the commercial banks.
 As part of the same process the Bank of Japan will offer favorable discount rates on particular types of lending paper.
 The commercial banks in turn also have a schedule of penalty rates which they levy on those who borrow from them, according to the status of the borrower concerned.
 And when they have to cut back lending, they have no hesitation about putting pressure on borrowers whose position they regard as unsound.
 The small local banks, who lend mostly to smaller local firms, will do the same thing when a credit squeeze makes it more profitable for them to use some of their funds in other ways. The
consequence is that tight money during credit squeezes can lead to bankruptcies of small firms in Japan.
 FRONT AND REAR VIEW
Abenomics MIRRORS
 Abenomics’ Structural Reforms

 Abe intended to close loopholes that allowed government officials to award government contracts to friends or for personal
gain rather than through a competitive bidding process.
 Abe introduced a unique form of deregulation that targeted something called “bedrock” regulations around health care,
energy, and agriculture.
 For example, before the changes, private-sector involvement in agriculture was restricted (i.e., the amount of land one entity could own)
and the reform would expand private ownership of agriculture.
 Efforts would also center on reforming companies’ ability to fire workers— employees traditionally counted on a lifetime
employment and were protected from being dismissed.
 Restoring confidence would also include how investors looked at corporations.
 To that end, codes on corporate governance would be implemented to address issues such as that over three-fifths of Japan’s leading
companies had no independent directors on their boards
 In addition to deregulation, there would be special economic zones set up in six designated areas.
 Within these zones, “guest workers” from other countries would be allowed
 There would also be a cut to the corporate tax rate.
 Asset allocation in the government pension investment fund would also be reconsidered
 as roughly 60% of the funds went straight into Japanese government bonds,
 which had the benefit of reducing government borrowing costs but the downside of low returns on pension assets.
Paradox of
THE MAN IN THE LEATHER
Japanese SUIT

Capitalism
 Financial Crises – Why does it take
SOOOO long to recover from one?
 Japan and the ‘wariness of lending’ syndrome
 In general, a bank’s ability to initiate loans is constrained by regulatory requirements to hold a certain portion
of customer deposits as reserves, and a fraction of its risk-weighted assets in high- quality capital.
 Once a bank had loaned as much as permitted, the bank could only make new loans once it had recapitalized.
 It could do this by attracting new deposits, accumulating interest income on loans, or liquidating the collateral
of loans it held.
 Japanese banks’ ownership of non-performing loans—which depleted their capital base and failed
to provide interest income—therefore limited their ability to make new loans.
 Foreclosing or otherwise disposing of non-performing loans would have helped Japanese banks to recapitalize.
 But the banks were reluctant to do this, in large part because real-estate prices in Japan were so depressed
that the banks would have to recognize a significant loss on their balance sheets. 
 This “wariness of lending” made it more difficult for new ventures in Japan to get funding, dragging down the
country’s growth potential – making the recovery period longer.
 Japan – Education system and
business culture
 The Japanese education system, for example, had historically emphasized discipline.
 Junior pupils in schools were expected to behave respectfully, deferentially, and even obediently to more senior
students.
 This practice persisted even as Japan developed and modernized, in contrast to Western industrialized nations,
which had generally shifted to more casual school mores over time.
 At home, too, families of higher social standing (from which Japanese business and political elites largely hailed)
emphasized the value of social conformity to their children.
 Large Japanese firms exhibited a similar emphasis on conformity.
 Employees used language that metaphorically compared their firms to families—for example, calling their company
“uchi” (“our house”).
 Some firms had employees sing company songs at the beginning of the work day.
 Others even subjected new hires to physical drills or embarrassing tasks (such as singing company songs publicly).
 These practices were intended to “mold the newcomers into selfless and egoless employees who are willing to
subject themselves to company orders, no matter how unreasonable they may be.”
 The downsides to the INCJ – Japan’s
proposed public sector Venture
Capital firm
  First, was a concern that the fund would “crowd out” private investments in “next-
generation” businesses, or, alternatively, that the government would be left with the
“lemons” after private venture capitalists invested in the most promising start-ups.
 Second, there was the concern that the fund could be influenced by political pressure—e.g.,
a politician might call the INCJ and pressure it to invest in a family member’s start- up, using
the INCJ’s continued access to public funds as a bargaining chip.
 Investing public funds in risky start-ups would be unpopular in Japan at large – a
conservative culture.
 Japan was in a unique situation as the country faced an unprecedented demographic transition: a
“grey tsunami,” in which a large proportion of its population would be elderly dependents unable to
work. Given this coming reality, could Japan really embrace more competitive capitalistic practices?
Womenomics IN JAPAN
 Japan’s restrictive labor market

 Several distinctive practices shaped Japan’s labor market over much of the postwar period.
 The practice of “lifetime” (until retirement) employment, selectively introduced in the largest Japanese firms in the early twentieth century,
became commonplace across corporate Japan in the postwar years to retain workers hired fresh out of school amid accelerating demand for
labor.
 The 1950s also saw widespread adoption of the seniority-based pay system, whereby low wages paid to new hires increased with one’s
tenure at a company rather than because of individual performance, and promotions were made at relatively fixed intervals in one’s career
from among a cohort of employees of like age and rank.
 Leaving the company for a corporate rival, however, would reset a worker’s seniority clock to zero, and was therefore uncommon. 
 Restrictive labor laws made layoffs difficult for Japanese corporations.
 Full-time employees could be dismissed only for cause, or for economic reasons only after a company had
 (1) experienced two years of financial distress,
 (2) exhausted all alternatives to layoffs,
 (3) applied fair and objective criteria to determine who would be laid off, and
 (4) implemented the layoffs fairly.
 Japan’s corporations responded by creating capacity buffers to manage unexpected labor demand, such as by requiring overtime work or by
hiring temporary and part-time workers, some of whom worked full-time but did not receive lifetime employment, seniority-based salary and
advancement, or protection from layoffs.
 The prolonged economic stagnation that began in the 1990s led Japanese firms increasingly to replace retiring employees with part-time and
temporary labor. Lifetime employment waned, though the practice of seniority-based wages and promotions persisted.