Japanese Economy: Institutional Features of its high-growth period An Overview

 The historical heritage (structural and cultural) is subject to debate. No consensus on the degree of its influence to post-War economy.  History of state involvement in the economy during 17 th -19 th century (military dictatorship 幕府 ). Confucianism as the official philosophy promoted early growth of educational system.  Forced opening by Western aggression & “Meiji Restoration ( 明治維新 )”. The new government actively promoted industrialization for fear of foreign domination. Aggressively imported foreign technology and institutions. Historical Background: State-led pre-War Industrialization

Government directly invested in basic industry and infrastructure – Late 19 th – early 20 th century. – Strong & competent bureaucracy was created by the Emperor and responsible to the Emperor (Meiji). – Invested in railroad, communication, shipbuilding, mining, military, textile, etc. – The assets later turned over to private elites at favorable conditions (the birth of Zaibatsu( 財閥 )). Close relations maintained between the state and the enterprise groups. – Non-tariff barriers to protect domestic industries. Subsidies, marketing & training support, etc. <cf: limited autonomy on tariff until State-led pre-War Industrialization (cont ’ d)

 Historical legacies for post-War economy. Strong interventionist state, led by powerful and competent bureaucracy. Strong & competent bureaucracy. Competent ones recruited thru examination, job security, and good lifetime reward (even “ amakudari ” - parachute) Relatively weak parliament. Leading role of bureaucracy accepted by the business community Well educated population Low burden of defense expenditure (post-War). No formal military forces exist due to its Constitution. State-led pre-War Industrialization (cont ’ d)

 1) Corporate system dominated by industrial (enterprise) groups Called keiretsu ( 系列, group of affiliated enterprises). Former Zaibatsu dismantled during US military rule. There exist several types of keiretsu.  2) Bank dominated financial system, with “ main bank system ” as a key financial feature. In some cases, the main bank is related with keiretsu.  3) Peculiar industrial relations. Lifetime employment, seniority-base wage, etc.  4) Industrial Policy led by government Formal & informal gov ’ t coordination in resource allocation In particular, size & direction of bank loans and the interest rate influenced by government. Major Features of Post-War Japanese Economy: Overview

 Several types of Industrial groups (Keiretsu 系列 : group of affiliated business enterprises) dominate Japanese economy. Financial keiretsu: enterprises connected to a major bank, and general trading company (GTC, 綜合商社 ). Former zaibatsu (Big six): Mitsubishi, Mitsui, Sumitomo, etc. Extensive cross- or circular- shareholding. Give preference to each other in business relations Facilitate information creation and exchange, reducing transaction costs & risk, etc. Vertical keiretsu: special supplier-buyer arrangements in manufacturing (including subcontractors). Based on repeated business and trust. Supplier (buyer) invest in product-specific equipment or R&D (less risky). Automobile (Toyota: JIT), consumer electronics (1) Corporate Structure

Distribution keiretsu Distribution network of consumer goods manufacturers with diverse related products Manufactures maintain network of wholesalers & retailers (nominally independent). (eg) Matsushita (consumer electronics), Shiseido (cosmetics), Toyota (sole dealership) Enterprise keiritsu One core industrial enterprise and affiliated firms in some (non)-related industries (conglomerates). Internalize some external economies (to any single firm) within the group. (eg) subway company with department store at central terminal, amusement park at the other end. (Continued)

 High level of (vertical) integration & conglomerates. High degree of non-market coordination of decision making. Facilitate (formal, informal) government coordination among companies and sectors.  Significant role of ‘trading company’ for the groups. General trading companies (GTC, 綜合商社 ) established for the largest nine keiretsu. Assist the group companies in the foreign markets (for export, import, FDI, etc). Reduce the risks of exchange rate fluctuation and seasonal variations in demand and price, provide export (import) credit & information, etc. Account for substantial portion of Japanese overseas investment. Characteristics of Japanese Corporate Sector due to Keiretsu system

 Japan as a producer economy, rather than a consumer economy. Companies are ‘ empire builder ’ rather than profit maximizer. 1. More emphasis on market share than profit rate. * The empires invest more than the profit-max. firms. 2. Willingness to accept low rate of return if necessary. 3. High debt/equity ratio, highly depending on bank loans. 4. Sacrifice consumers to increase investment. Features of Japanese corporate behavior

1. Relative low wage level. 2. Low level of dividend payment to shareholders. * High shareholding by institutions, such as banks, trading partners. <cf: individual shareholder 3. Mutual support within business group (keiretsu). 4. Relative high level of consumer prices. * Substantial non-tariff import barriers. 5. Low interest rate (government-led). 6. High saving rate. * How can this be explained? 7. Japan ’ s unique labor-management relationship (See the industrial relations part below) Enabling factors of corporate as ‘ empire builder ’

 Indirect corporate finance as main source. Bank-based finance. Based on high saving (commercial banks, postal). Postal saving system under direct government influence had large deposit funds. Banks tend to “ over-loan ” with low interest rate. Long term loan by Industrial Development Bank. Implicit guarantee by the gov ’ t & high saving rate. Limited role of capital market (stock, bond). Large institutions (bank, business partner) were major shareholder. <cf: pension fund, insurance in US. Allow long-term business perspectives, w/o concern for short-term performance or high dividend to shareholders. (2) Financial Structure

The Main Bank ( 主銀行 ) system (for large firms) – Main bank responsible for monitoring the borrower as largest single lender – not the sole lender. – The main bank own some shares (stocks) of the keiretsu firms (mostly). – Lead restructuring of the firms when thery are in poor condition – by sending management personnel. – Secure the company ’ s fee business & deposits. Financial Structure (cont ’ d)

 Lifetime employment system Applied only for regular workers of large enterprises. <cf: irregular (temporary) workers, SME workers Possible negative effects : overstaffing during downturn, less-qualified staffs Possible positive effects : lower turnover, less resistance to technological change/reassignment, invest in firm-specific skill, high worker loyalty, etc. Rational arrangement in a rapidly growing economy. When high-quality new workers are in short supply Somewhat flexible in applications Adjustment can be made within group companies. (3) Industrial Relations System

 Seniority-based wages. Paid below their marginal labor productivity earlier in their career, reap rewards later in their career. Several adaptations Promotion based on performances (highly competitive )  Company-based trade union Interests of workers tied to the performance of the firm. Strikes benefit the competitor, labor saving technological change enhancing productivity good for workers in LR.  Worker participation & enterprise familism (high loyalty). QC circle, proposal system, etc. (Toyota system). Small intra-firm income gap & diverse fringe benefits to workers. (Continued)

 History of gov ’ t nurturing of enterprises. Symbiotic relationship bet. gov ’ t & business community.  High prestige of professional bureaucracy in particular, MITI( 通産省 ), MOF( 大藏省 ) & their decision-making power on economic policy <cf: weak Parliament  Close interaction in policy-making process bet. bureaucracy & business leaders. Deliberation Councils (facilitate information sharing). High level of bureaucrats assume top position in enterprises upon early retirement (Amakudari). (4) Role of the State: Industrial Policy

 Focus of the economic policy on supply management (industrial policy). Private sector is assumed to have insufficient vision, coordination, risk-bearing abilities. Gov ’ t provide information, pool resources, coordinate. to alleviate bottlenecks, to avert overproduction, to anticipate market shifts, to develop new technology, etc. Shift industrial structure along dynamic comparative advantage. One component was promoting export & restricting import (neo-mercantalism). (Continued)

 Policy tools Control over low-interest funds. Special depreciation and tax benefits. Provide marketing information and assistance in the foreign market (JETRO) Tariff and non-tariff barriers against imports. Administrative guidance: some type of cartel. (Continued)

 Production-oriented system. Most Japanese people enjoyed the benefits over time. Through sustained economic growth. Consumers bore costs due to this “ Japanese ” system.  These institutional features emerged to foster economic growth under certain conditions (Japan faced in 1950s-1970s). Insufficient economic/business information, imperfect capital market, risky domestic environment (hostile labor relation), etc. Reduce transactions cost, uncertainty & risk, or ensure long-term relations, or facilitate information flows, etc. “ Japanese ” response to the above conditions. Not easily copied by other countries. Changed substantially since 1980s in Japan. Summing-up