Changes in political economy Japan in 1990s Changes in political economy

Changes in political economy Challenges to stability of equilibrium domestic socioeconomic or political problems external economic or security problems Changes of different magnitude adjustments in public policy changes in socioeconomic basis changes in economic or political institutions major shifts in two or three spheres

Bubble burst (1990)

Bubble burst (1990) Massive stock and land price collapse annual GDP growth rate around 1% manufacturing productivity decreased corporate bankruptcies unemployment rate economic performance at bottom of industrialized democracies opposite from 1960s

Japan slows down

GDP growth (annual %)

GDP in constant 2010 US$

Political earthquake of 1993-95 Economic stagnation since late 1980s Major corruption scandals of LDP leaders 2.5 billion yen contribution from a company 1 billion yen income tax evasion media revelation of systematic corruption Businesses’ demand for political reform high cost of doing business political bribes and contributions

Industrial contributions

Party Realignment (‘90s)

Prime Ministers 1993-2001 3 non-LDP Prime Ministers 1993 - 1996 LDP coalition cabinets since 1996

New Electoral Rules (1996) 480 members in House of Representatives 300 elected from single-member districts 180 elected from 11 proportional representation districts 252 members in House of Councillors 100 elected from proportional representation district 152 elected from 47 prefecture constituencies

More shocks in 1990s Large and rising government deficit and debt (~150% of GDP) Aging population Banking crises and non-performing loans Asian financial crisis (1997-8) “Hollowing out” of industry natural disasters and terrorist attacks

Economic transformation capital market and currency had become deeply integrated into world markets investment abroad formal trade barriers and limits on foreign direct investment largely eliminated Japanese-owned firms became multinational overseas production, financing, R&D, and technological alliance

Appreciation of yen

Changes in economic policies New reliance on consumption taxes borrowing debt service public debt more than twice its GDP move away from monetary restraint zero interest rate

Negative interest rate

Changes in economic policies privatization of nationalized industries Telegraph & Telephone (1985) National Railways (1987) Japan Post (2007) official effort to support declining industries protect the inefficient promote the competitive

Inconsistent policies Lack of cohesiveness and singularity in economic policy internal contradictions no longer a cohesive strategy directed at structural improvement of economy eclectic mixture of ad hoc efforts to deal with economic problems

Still an outlier Comparison with other industrialized democracies markets for imports remained skewed against high value-added manufacturing goods imports from overseas subsidiaries of Japanese-owned multinational corporations

Still an outlier Comparison with other industrialized democracies limited amount of foreign direct investment in Japan FDI per capita in Japan is less than 10% of that in Germany, less than 5% of that in UK