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Varieties of Advanced Market Capitalism

Chapter VI

Japan: A Planned Market Economy

with Traditional Elements

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Japan As a New Traditional Economy? Experienced the most rapid rate of sustained

economic growth in the world

Maintained low unemployment and inflation rates and a greater degree of income equality

Leading many areas of technology

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Japan As a New Traditional Economy? Have large trade surpluses resulting in the

largest accumulation of foreign reserves

Number One? → stagflation in 1990s

Its conflicts with other nations on trade issues threatened to push the world economy into a trade war and depression

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Japan As a New Traditional Economy? Debates about the basis of Japanese

success Advocates of government economic intervention

argue that bureaucratic guidance through indicative planning and industrial policy has been key to its success

Advocates of laissez-faire argue that these have been more a hindrance than a help, with the most dynamic sectors ignoring the government bureaucrats

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Japan As a New Traditional Economy? A mixture of structures and systems unique in the

world

A market capitalist economy

The government engages in indicative planning and exerts significant influence

The first society of non-European origin to carry out industrialization and modern economic growth

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Japan As a New Traditional Economy? Succeeded in adopting foreign technologies and

practices without giving up its indigenous culture

Late 19th century slogan “Japanese spirit and Western ability”

Familistic groupism of Japanese society → a feudalistic holdover

Harmonious labor-management relations and government-business relations

Planned market capitalism with strong traditional elements

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Historical and Cultural Background of the Japanese EconomyThe Absorption of Chinese Culture A strong sense of identity

High degree of homogeneity arising from their long isolation

The model for integration of foreign influences into its society was its absorption of Chinese culture in the 6th and 7th centuries

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Historical and Cultural Background of the Japanese Economy Buddhism and Confucianism introduced but

modified without displacing native Shintonism (original religion)

Multiple realities Buddhism → funerals Shintonism → marriages Confucianism → civil and political behavior

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Historical and Cultural Background of the Japanese Economy Confucianism

Influence on economic thought

Emphasized loyalty to one’s superiors and respect for state authority (after 1600)

After 1868 → the transfer of the bushido code of the samurai warriors to business management practices

The most important wa (harmony) together with loyalty cements the familistic groupism that dominates the Japanese economy

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Historical and Cultural Background of the Japanese EconomyThe Tokugawa Shogunate Shoguns → military commanders after 1185

During the 1500s, Portuguese traders penetrated and dominated Japan but expelled in 1603

The period of isolation under Tokugawa shogunate Experienced development of business, transportation

infrastructure and literacy laying the foundation for economic takeoff

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Historical and Cultural Background of the Japanese Economy The Meiji Restoration Tokugawa society fell into crisis after being opened

to outsiders in 1853 Overthrew of the Tokugawa shogun in 1868 by

samurai → The Meiji Restoration The country opened to foreign influences and

technologies All rights and powers of the samurai removed,

ending feudalism The samurai were paid off with bonds in 1873, that

later started businesses

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Historical and Cultural Background of the Japanese EconomyIndustrial Development State started many industrial enterprises,

pushing industrial development

Cotton spinning → the first internationally competitive industry by 1900

Support from infant industry tariffs Iron and steel, railroads, mining and machinery

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Historical and Cultural Background of the Japanese EconomyImperializing Neighbors Argued that “fighting against the racist imperialism of

Europe and the United States”

In 1895, Taiwan conquered Leading to the 1905 Russo-Japanese War first victory of an

Asian power over a European one A major trigger of the 1905 revolution in Russia Ongoing dispute over islands taken by the Soviet Union at

the end of WW II

Control of Korea in 1910

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Historical and Cultural Background of the Japanese EconomyPolitical democratization and liberalization

of 1920s Economic domination of four leading

conglomerates, zaibatsus Mitsui, Mitsubishi, Sumitomo, Yasuda

During WW II, each associated with a bank that would be the key entity in the postwar keiretsus

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Historical and Cultural Background of the Japanese Economy New Economic System The province of Manchuria seized in 1931

Elements of economic central planning tested

Invasion of China in 1937

Allying with Germany and Italy

Bombing of Pearl Harbor in 1941 → US in WW II

Surrendered in 1945 after US atomic bombs on Hiroshima and Nagasaki

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Historical and Cultural Background of the Japanese EconomyThe American Occupation and its Aftermath General Douglas MacArthur → The Supreme

Commander of the Allied Powers until the American Occupation ended in 1952 First time that it was ruled by a foreign power

After 1947 → continuity of rule by traditional elites Japan as a Cold War ally

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Historical and Cultural Background of the Japanese Economy US imposing a constitution that demilitarized Japan

Labor unions legalized

Zaibatsus broken up

Land redistributed

Integration of foreign influences into Japanese culture

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Historical and Cultural Background of the Japanese Economy Until 1960 considerable labor militancy 1955 Liberal Democratic Party formed From mid-1950s to the 1970s, the old zaibatsus re-

formed as loosely organized keiretsus, each centered on a bank and a trading company By 1955, highest real per capita income level Mid 1970s, per capita income equaled those in many

advanced countries Continued to grow more rapidly than any of them In 1975, one of the G7 (now G8), the leading economic

countries

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The Microeconomic Foundations of The Japanese Economy The “Three Sacred Treasures” of Labor-

Management Relations

The Japanese Firm and the Keiretsu System

Managerial Decision Making

Industrial Policy by Government

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The “Three Sacred Treasures” of Labor-Management Relations Highly educated and well-motivated labor force

Many quality-and productivity-improving innovations suggested by workers on site

Three sacred treasures: Lifetime employment Seniority-based wages Enterprise unions

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The “Three Sacred Treasures” of Labor-Management Relations Japanese labor

Intra-enterprise job rotation by multifunctional workers On-the-job firm-specific training Bonus payments Compensation flexible Contracts negotiated annually Employment stable Large severance payments at retirement but few

pensions Dualism

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The “Three Sacred Treasures” of Labor-Management Relations: Lifetime Employment The key to stimulating loyalty and drawing forth

innovative, productivity-improving suggestions

Limited to about 30 % of the labor force, mostly educated men in large firms that must retire at age 55 with large severance payments and assisted in getting other jobs in smaller firms

Japanese workers more likely to stay with a single firm for a longer period of time, even in small firms

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The “Three Sacred Treasures” of Labor-Management Relations: Lifetime Employment Depending on

Stability of employment

Rapid growth of the economy between 1945 and 1990

Synchronized annual negotiating system

Bonus system → a form of profit sharing

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The “Three Sacred Treasures” of Labor-Management Relations: Lifetime Employment Development of firm-specific human capital by

rotating workers from job to job within the firm

Workers know all about the firm but lack skills that are transferable to other firms

On-the-job training of blue-collar workers → but white collarization in larger firms

Greater loyalty to firm → Confucian code Firms more willing to engage in firm-specific training if they

believe workers will remain for a long time

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The “Three Sacred Treasures” of Labor-Management Relations: Seniority Wages Confucian view of respect for elders

Steeper age-wage profile for blue-collar

Seniority wages reinforcing loyalty to the firm among lifetime employees

Expectations of performance-based pay

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The “Three Sacred Treasures” of Labor-Management Relations: Enterprise Unions If one is committed for life to a specific company One has been working at several different jobs with the

company, thus not being tied to a particular skill or craft, → it is logical to belong to a union that negotiates directly

with that company and only that company

Stability of labor-management relations

“Happy family of the firm”

Critics “Inefficiency”

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The Japanese Firm and the Keiretsu System The existence of interlocked associations of firms →

keiretsu

Horizontal keiretsu Revivals of the prewar zaibatsus (single holding

companies) Firms in different industries all linked to a common bank

and trading company maintaining their formal independence

Vertical keiretsu A set of suppliers and distributors linked to a major

industrial producer by long-term contracts

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The Japanese Firm and the Keiretsu System Toshiba Corporation

At the center of a vertical keiretsu including distributors, suppliers and suppliers of direct suppliers

A member in Mitsui horizontal keiretsu

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The Japanese Firm and the Keiretsu System Horizontal keiretsus practice three sacred

treasures of labor-management relations

Peripheral firms in vertical keiretsus tend not to do so

Keiretsus → cross-holding of stocks In horizontal form → much stock ownership by the

bank and a large proportion of loans from the bank

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The Japanese Firm and the Keiretsu System Network externalities

Group membership may have a negative impact on profitability relative to independents run by founder-entrepreneurs

Vertical keiretsus may achieve efficiencies because their stable long-term contracts allow for just-in-time delivery, kanban system that minimize inventory costs and encourage superior quality control

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Managerial Decision Making

J-mode type of organization in contrast to H-mode

H-mode includes both the U-form and M-form

J-mode characterized by “horizontal coordination among operating units based on sharing of ex-post on-site information”

H-mode characterized by “hierarchical separation between planning and implemental operation and the emphasis on the economies of specialization”

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Managerial Decision Making

J-mode depends on both long-term relationships between workers and firms and long-term relationships between banks and firms which tend to hold for keiretsu members with lifetime employment systems

Top managers risen from within the firm increase the loyalty Management as the representative of the employees Labor-managed firms

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Managerial Decision Making

Horizontal coordination through processes of consensual decision making

Dependence upon workers for suggestions for improving the firm’s performance

Seniority-based rank hierarchies

Given long-term nature of employee-firm relations and of bank-firm relations, managers use longer time horizon for strategic planning

Emphasis upon maximizing market share subject to minimum profit constraint, rather than maximizing short-run profits

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Industrial Policy by Government Government-business relations labeled industrial

policy

Ministry of International Trade and Industry (MITI)

The state being the driving force of the Japanese economy → supremacy of government bureaucrats

High-level bureaucrats to high-level employment in top firms

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Industrial Policy by Government MITI intervention in markets → product

cycles Beginning stage of an industry

Infant industry tariffs Subsidies for special capital investments Rationalization cartels that carry out MITI-financed

R&D At the end of product cycle

To reduce closeout using depression cartels

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Industrial Policy by Government Overall rapid growth Export success of targeted industries

Shipbuilding, steel and computers MITI failed in the late 1950s to cartelize the

automobile industry down to two firms Honda → the most technically innovative of the

automobile companies and a great export success

Sony → rejected to produce transistor radios Both founded and led by strong-willed entrepreneurs

operating outside of the planning and keiretsu system

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Why Japan Failed to Become Number One

Macroeconomic Performance High rate of growth

High capital investment rate backed by a high savings rate

After bursting of the Japanese stock market bubble in 1990 Growth rate fell below those of other leading market

capitalist economies with unemployment rate increasing

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Why Japan Failed to Become Number One High savings rate

Confucian ideals High growth rates as consumption increases lag behind

income increases Individuals save to make down payments on homes Workers save for old age because of the combination of

early retirement with low pensions and low social security payments

The lumpiness of large bonuses No capital gains tax except on land Most of the postwar period, a relatively young population

But rapidly aging population

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Why Japan Failed to Become Number One

Macroeconomic Planning Policy Market capitalist economy with elements of a traditional economy

and indicative planning Sectoral and technological planning → MITI Macroeconomic plans → Economic Planning Agency (EPA)

Relatively low levels of government spending and taxation

Low level of social transfer payments

Low defense spending, due to US demilitarization

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Why Japan Failed to Become Number One

Quality of Life The highest quality of life

Top in life expectancy

Gender empowerment, (31st)

High per capita income and consumption

Low crime rate

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Why Japan Failed to Become Number One One of the more equal income distributions in the

world Egalitarian wage structure arising from the labor-

management system Workaholics in rabbit hutches

Environmental pollution

Problems of discrimination (against women and foreigners)

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Why Japan Failed to Become Number One

The End of the “Economic Miracle” Rising dependency ratios that reduce savings

Opening of financial markets caused by deregulation, leading to outflows of capital

Technological stagnation

Weakness of the non-tradeable goods sector

The failure of government spending to stimulate the economy

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Why Japan Failed to Become Number One Hollowing out of the industrial base as large

corporations invest in other countries

The emergence of a liquidity trap in financial markets

A decline in the rate of return to capital investment owing to overinvestment in the past

A credit crunch caused by the accumulation of bad loans in the banking sector

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Why Japan Failed to Become Number One A general disruption of the financial sector in the

aftermath of the collapse of the stock market

Deeper cultural arguments involving a breakdown of Confucian values

Saving-investment nexus Rapidly aging society, experience rising dependency ratios

that tend to depress the savings rate A victim of its own success as a society able to support

long life

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Why Japan Failed to Become Number One In early 1990s, a low rate of return for large

corporations resulting from overinvestment

After 1997 Asian financial crisis, credit problem

The collapse of the bubble economy

Technological leadership?