Tsutsui W.M. A Companion to japanese histоry

Подождите немного. Документ загружается.

CHAPTER SEVENTEEN

The Postwar Japanese Economy

Bai Gao

The postwar Japanese economy has experienced a major swing: from the 1950s to the

end of the 1980s, it achie ved an astonishing record of economic growth, and then for

much of the 1990s it fell into a deep stagnation which lasted into the first decade of

the twenty-first century. It has finally shown signs of recovery since the second

quarter of 2003. In this essay, I adopt a globalization perspective to explore the

causal mechanisms behind the postwar movements of the Japanese economy. This

perspective is conceptualized according to the common historical experiences shared

by all major industrialized economies. It treats the evolution of the postwar Japanese

economy as part of a long-term movement of capitalist economies in the process of

globalization. Differing from various structura l perspectives that highlight the in-

creasing free flows of capital, commodities, and technology, the globalization per-

spective adopted in this essay is institutional in nature and emph asizes the interactions

between the international economic order and national economic institutions.

According to this perspective, capitalist economies have experienced two major

waves of globalization. The first wave started in the 1870s and was sustained by the

international gold standard and various international treaties on tariffs under British

hegemony. This wave of globalization headed toward a downturn in 1914, triggered

by the collapse of the international gold standard and the outbreak of World War I.

The decline of the ratio between international trade and world gross domestic

product (GDP), the commonly used measurement for the degree of globalization,

did not reach its lowest point until 1953, having decreased steadily through the Great

Depression and World War II. Sustained by the Bretton Woods system and the

General Agreements on Trade and Tariffs, the second wave of globalization began

to evolve under American hegemony. It started gaining momentum from the early

1970s as the collapse of the Bretton Woods system brought about two profound

structural changes in the long-term movement of capitalist economies: the shift in the

cycle of capital accumulation from the expansion of trade and production to

the expansion of finance and monetary activity, and the shift in the major policy

paradigms in advanced capitalist economies from social protection to the release of

market forces.

This globalization perspective holds that the outstanding performance of the

Japanese economy before the 1970s can be seen as being sustained by an institutional

A Companion to Japanese History

Edited by William M. Tsutsui

evolution of the Japanese economic system which started from the early 1930s to

cope with the downturn of the first wave of globalization. This evolutionary process

progressed further in many ways during World War II, and in the postwar period it

reconfigured the Japanese economic system to meet the challenges of a new inter-

national environment. The Japanese economic system that resulted from this institu-

tional evolution emph asized coordination and stability. In the postwar period, it was

able to stimulate aggressive corporate investments and bank lending through exces-

sive competition and to maintain a high level of employment through a strategy of

total employment.

There were, however, some deeply rooted dilemmas in this

system. Its strong coordination was achieved at the cost of weak control and mon-

itoring. Its high level of stability was maintained at the cost of low capacity within the

system to upgrade the economic structure. When the collapse of the Bretton Woods

system triggered the globalization of finance and the release of market forces in

the 1970s and the 1980s, its weak control and monitoring and its inability to upgrade

the economic structure became major challenges to the Japanese economic system.

In a series of interactions between inter national factors and domestic factors, the

‘‘bubble economy’’ rose and fell, leading the Japanese economy into a decade-long

stagnation.

This essay is divided into several sections, each of which deals not only with a

specific period in postwar Japanese economic histo ry, but also with a specific focus in

the current scholarship, such as the postwar recovery, high growth, reversal and

stagnation, and reform versus recovery. I use the globalization perspective to drive

my analysis of the Japanese economy throughout the postwar era and for each period.

In each section, I first briefly discuss the structure of the political economy in a

particular period, and then highlight the major issues within that period covered by

the current literature. I focus on how Japanese economic institutions evolved in the

process of structural change and how scholars have perceived these institutional

evolutions. In this sense, this review is as much an institutional history as an intellec-

tual history of the Japanese economy.

The Postwar Recovery

The period 1945–9, that is, between the end of World War II and the implementation

of the Dodge Line , was very important to the postwar Japanese economy. Two

seemingly conflicting trends can be obser ved and both of them together have

profoundly shaped the postwar Japanes e economy. On the one hand, Japan under-

went a series of democratic reforms instituted by the occupation authorities. These

reforms marked some great departures from Japan’s prewa r and wartime legacies. On

the other hand, however, in a battle for survival amidst severe sh ortages of materials

and the resulting hyperinflation, Japan was also able to preserve many institutions and

mechanisms that had developed before and during the war. The coexistence of these

two trends has stimulated longstanding continuity–discontinuity debates in academic

discussions of the Japanese econo my.

To those who emphasize discontinuity, postw ar democratic reforms have exerted a

profound impact on postwar Japan by bringing about significant changes in

the structu re of the Japanese economy. The dissolution of zaibatsu changed the

300 BAI GAO

organizational structure of the Japanese economy. Despite the fact that former

zaibatsu companies were able to reorganize the mselves into keiretsu, these groupings

were never able to control other companies and indust ries in the same way. The first

anti-monopoly law was enacted in 1947. Even though the Fair Trade Commission

has been we ak and the law was amended twice and often twisted to support Japan’s

industrial policy, big corporations were restricted in their ability to organize into

combines. Labor unions also became more powerful in politics. Although their

position was weakened after the implementation of the Dodge Line, they remained

a significant political force and their continuing struggle for job security and wages

constituted one of the major driving forces for large corporations to institutionalize

the lifetime employment system.

To those who focus on transwar continuities, the

battle for survival in the unprecedented economic crisis in the late 1940s contributed

greatly to the institutional inheritance of the prewar and wartime practices.

In the 1945–9 period, underproduction was the major challenge faced by the

Japanese economy. As a result of the defeat in World War II, Japan lost all its formal

colonies which used to be the major sources of supply of cheap materials and labor, as

well as captive markets. Also as a result of the war, much of its infrastructure and

production equipment was either destroyed or overused. The production level of the

Japanese economy in 1945 was only 37 percent of the 1937 level. It went down to 20

percent in 1946, before going back up to 25 percent in 1947 and 33 percent in 1948.

Although production decreased sharply, domestic demand for goods and services

increased rapidly as a result of the postwar repatriati on of millions of military and

civilian Japanese from overseas. This led inevitably to hyperinflation. If the 1937 level

is taken as 100, the wholesale price index for major industries was 442 in 1945, 1,210

in 1946, 3,860 in 1947, and 10,508 in 1948.

The Jap anese government adopted the famous ‘‘priority production program’’

envisioned by a group of economists headed by Arisawa Hiromi in an effort

to promote production with limited resources in the coal, iron and steel, and fertilizer

industries. The strategies and philosophies driving the priority production

program had a profound impact on the developm ent of the postw ar Japanese econ-

omy, as a number of the debates on key policy issues during this period laid

the intellectual foundation for Japan’s postwar economic growth. Production

was given the highest priority while consumption was underplayed; class conscious-

ness was suppressed in the interest of national unity to survive the major

crisis; economic growth was regarded as more important than sustainability; and

national economic independence was considered more important than attracting

foreign investments.

The implementation of the priority production program served as an important

mechanism of the institutional reproduction of the Japanese economic system

through which many practices that had existed before and during the war continued

to be used as legitimate means of economic governance. First of all, state intervention

was further strengthened and bureaucrats became even more powerful than they had

been during the war. The establishment of the Economic Stability Board (ESB),

especially its strengthening under the leadership of Wada Hiroo from mid-1947,

greatly enhanced the capacity of the Japanese state in policy integration. Both were

due partly to strong support from the occupation authorities and partly to the fact

that many business leaders who had long opposed efforts to strengthening state

THE POSTWAR JAPANESE ECONOMY 301

interventio n in the economy were purged because of their wartime connections to

the military.

Two practices that had originated during the war and were subsequently adopted

by the ESB greatly influenced postwar Japanese industrial policy. During the war,

planning for demand and supply started with annual resource mobilization plans.

These remained indispensable in the implementation of the priority production plan

as resources were very limited and the state had to ensure the supply of materials.

Even after the 1950s, this practice remained useful for the Ministry of International

Trade and Industry (MITI) to nurture Japan’s strategic industries under the con-

straints of international payments. Government regulations over the flow of capital,

commodities, labor, and materials, which had been another major means of ensuring

munitions production during the war, remained important in the priority production

program.

The easy money policy adopted under the leadership of Ishibashi Tanzan

during the priority production program also became a major policy legacy for the

postwar Japanese economy. If the impact of government control over resources on

the Japanese economy was later reflected in MITI’s industrial policy, Ishibashi’s

expansionary fiscal and monetary policies shaped the policy orientations of the

Ministry of Finance and the Bank of Japan through the high grow th period.

The main bank system that had originated during wartime mobilization survived

the postwar democratic reforms, becoming a major link between banks and corpor-

ations. The banking industry as a whole successfully escaped the program of decon-

centration of economic power adopted by the Allie d occupation. Indirect finance by

Japanese corporations through bank loans, and strong links between banks and

corporations through keiretsu connections, later became the foundation for the

Japanese style of aggressive corporate investments and bank lending driven by exces-

sive competition that sustained the high growth.

Because it saw both continuities and discontinuities, the question of how to

interpret the nature of the Japanese economy in this period has been a major issue

for scholarly debate. An important point of division in the debates is that the

continuity arguments always emphasize institutions while the discontinuit y argu-

ments focus on economic structures. In the 1950s, the continuity–discontinuity

debate focused on comparisons of the prewar and the postwar periods. The prevailing

discontinuity arguments at the time highlighted the major departures of the Japanese

economy from its prewar structures as a result of the postwar democratic reforms,

which were also exem plified by land reform and the structural shift of the economy

from textiles to heavy and chemical industries. In the 1960s, however, a continuity

argument emerged to reinterpret economic reforms in the postwar period, including

land reform and the dissolution of the zaibatsu, as an extension of a long-term trend

in state policy that had already started in the early 1930s. From the early 1970s,

comparisons of the wartime and postwar economies became more common, as

taboos about discussion of the war experience faded and some scholars felt that the

omission of the wartime economy in the early postwar debates was less than satisfac-

tory. They contended that many practices during the war, even apparently ad hoc

reactions, had profoundly shaped the postwar Japanese economy in many significant

ways.

Reflections on the Japanese model of economic development after the collapse of

the bubble economy in the early 1990s gave rise to a heated debate on the origins of

302 BAI GAO

the Japanese economic system, shedding new light on our understanding of this

important period in postwar Japanese economic history. A number of Japanese

economic commentators point out that even after half a century, the Japanese economy

still operates, both institutionally and ideologically, under the ‘‘1940 system,’’ a

wartime esta blishment that had been unknown in prewar Japan. Critics, however,

continue to maintain that the postwar changes in Japan’s political, economic,

and social structures should not be downplayed. To a large extent, the ‘‘1940

system’’ debate in the 1990s inherited the basic characteristics of the earlier continuity–

discontinuity debates, being divided by a different focus on either institutions or

structural factors.

From the globalization perspective, the ‘‘1940 system’’ debate has limits not only

because some changes had started before World War II (or even before the full-scale

invasion of China in 1937), but also because the experience of the Japanese econo my

in the 1945–9 period was part of the long-term movement of Japanese capitalism in

the two waves of globalization. Seen through this lens, Japanese efforts to strengthen

state intervention and organize the market in the late 1940s were, to a large extent, in

line with the general trends of increasing social protection and limiting the negative

impact of market forces experienced by all major industrialized countries at the time.

In this sense, the ‘‘1940 system,’’ which has been assumed to be a product of World

War II, may in fact really represent an institutional adaptation aimed at coping with

the downturn of the first wave of globalization that started with the collapse of the

gold standard in 1914 and accelerated by the Great Depression and World War II.

Similarly, much of the democratic reform initiated by the occupation can also be seen

as an effort to align Japan with the newly established international economic order

characterized by a multilateral free trade regime under the leadership of the United

States. Seen in this light, the continuities in Japan’s economic institutions and the

discontinuities in the structural conditions of the Japanese economy do not, in

theory, have to be mutually exclusive in understanding the nature of Japan’s early

postwar economic history.

The High Growth Era

The Japanese economy grew at an astonishing annual rate of 9.3 percent in the period

1956–73. Between 1955 and 1973, its GDP quadrupl ed from $3,500 to $13,500

per capita. Even when the first ‘‘oil shock’’ ended such high growth, the Japanese

economy still outperformed its counterparts in North America and Western Europe

in the ensuing major structural adjustment, achieving an outstanding record of an

average annual growth of 4.1 percent in the period 1975–91. Since the 1970s, and

especially in the 1980s, the search for the secret of Japanese success in economic

development has become a major research preoccupation in the West. A key question

in the academic discussions on the Japanese economy has been whether Japanese

capitalism is different from the Anglo-Saxon model of liber al capitalism.

Japanese industrial policy has been the most debated issue in studies of the Japanese

economy conducted during the 1980s and the 1990s. As opposed to the regulatory

state in the Unite d States which only sets the rules of game, the developmental state

in Japan was concerned with the economic structure and used its industrial policy to

THE POSTWAR JAPANESE ECONOMY 303

influence the direction of economic change. The Japanese state never left the econ-

omy to be driven completely by market forces.

The debate over Japanese industrial

policy developed along two major lines. The first is whether industrial policy actually

made the difference in Japanese economic performance. Some analysts hold that

Japan’s success was due primarily to the function of market forces, or to the initiatives

of the private sector. The second concern s who really formulated Japanese industrial

policy. Some analysts contend that the private sector had in fact a great input into

Japanese industrial policy.

Closely related to the debate on Japanese industrial

policy, another controversial issue was the relationship between Japan’s banking

system and Japanese industrial policy. Some scholars believe that Japan , like France,

had a credit-based and price-administered banking system. Because of control by the

central bank ove r private institutions, they argue, private banks have had to respond

positively to state requests for cooperation in industrial policy. The critics of this view,

in contrast, argue that Japanes e banks made their loan decisions independent ly.

A different approach to the actor-centered debate is to emphasize the type of

industrial policy adopted by the Japanese state and what consequ ences the industrial

policy had on the institutional evolution of the Japanese economic system. A premise

of this approach is that it is economic institutions that make Japan different from

liberal capitalism. This line of investigation shows that there was a distinctive set of

economic philosop hies and ideologies that constituted the foundation of Japanese

developmentalism. It was sustained by nationalism and held a strategic view of the

economy. It had a strong orientation toward promotion of exports, which became the

backbone of the East Asian model of economic development.

Studies on the

characteristics of Japanese econo mic institutions indicate that the Japanese economy

was governed by various non-market mechanisms, which clearly distinguish it from

liberal market capitalist economies. The keiretsu were organized both vertically and

horizontally. Major manufacturers relied heavily upon subcontractors and also forged

long-term relationships with each other. Cartels were used as an important means to

protect sunset industries and weather the downturn in business cycles. Banks not only

practiced cross-shareholding with corporations, but were als o the major source of

industrial capital for Japanese corporations.

Japanese management received a great deal of attention in the 1980s as Western

corporations tried to emulate the Japanese practices of lean production and team-

work. The distinctive pattern of Japanese management has been interpreted through

two major perspectives. Th e cultural interpretation links Japanese practice at the

company level to the Confucian tradition.

By contrast, the economic interpretation

applies the framework of corporate governance, and contends that delegated mon-

itoring performed the function of keeping Japanese corporations competitive.

In the globalization debate of the 1990s, the success of the Japanese high growth

period was re-examined from new perspectives. New studi es have looked beyond the

domestic factors that used to dominate the literature by highlighting the importance

of international factors which provided an environment conducive to the rapid

growth of the Japanese economy. This research shows that the postwar Japanese

economy benefited greatly from the international economic order represented by

the Bretton Woods system and the General Agreement on Trade and Tariffs (GATT).

The fixed exchang e rate and restraints on the free flow of capital enabled Japan to

apply a combination of expansionary monetary policy to pursue economic growth

304 BAI GAO

and deflationary fiscal policy to control inflation simultaneously. The asymmetric

cooperation between the United States and its allies in the international trade regime

not only enabled Japan to export aggressively while still protecting its own domestic

markets; it also provided a great opportunity for Japan to rely upon private institu-

tions for social protection.

Meanwhile, as scholars examined the forces that sustained the performance of the

Japanese economic system during the high growth period, unintended factors that

may also have supported high growth also began to attract attention. This kind of

analysis, which began in Japan as early as the 1960s, questions the assumption that

high growth was entirely an outcome of rational action and strategic design. Accord-

ing to this view, strategic design did exist in Japanese industrial policy, but, in the

process of implementation, outcomes were often more a product of unexpected than

planned consequences.

The phenomenon of excessive competition in Japanese

industrial finance during this period illustrates well the impact of unanticipated

factors on the high growth of the Japanese economy. High saving and high invest-

ment have been regar ded as critical compon ents in the Japanese high growth model.

However, according to this view, while a primary goal of Japanese industrial policy

was to control overheated corporate investments and bank lending, excessive com-

petition (resulting from the weak control of shareholders over managers and weak

bank monitoring of corporate borrowers) was sustained by the institutional config-

uration of Japanese corp orate governance. In this way, Japan’s high economic growth

was as much an unexpected consequence of excessive competition as a clear outcome

of strategic planning.

Reversal and Stagnation

The growth and the collapse of the bubble represented a major reversal of the

Japanese economy. The bubble economy appe ared in the second half of the 1980s:

the Nikkei index was 12,775 when the Plaza Accord was announced on September

24, 1985. Within two years, the index had doubled. In 1985, 414 million shares on

average were traded per day; by 1987 that number had jumped to 946 million per

day. At the end of 1987, the market cap of Japanese stocks had reached 346 trillion

yen, which was 30 percent higher than the US stock market. At the time, the Tokyo

Stock Exchange was the largest stock market in the world.

The real estate

market also experienced an unprecedented boom. By the end of 1987, the market

value of the entire land area in Japan reached 1,673 trillion yen, 2.9 times that of the

United States. Between 1980 and 1989, the total loans by Japanese banks to all

industries increased by about 120 percent, but loans to the real estate industry

increased by more than 300 percent. Moreover, the loans to non -banking industries

increased by more than 700 percent and most of the loans in this category went into

real estate speculation.

The collapse of the bubble in both stock and real estate marke ts precipitated a

decade-long period of stagnation. According to one estima te, Japan lost 800 trillion

yen in these two markets between 1989 and 1992 alone. The annual report on the

Japanese economy published in October 2003 indicated that land prices had declined

to as little as 5 5 percent of their bubble-economy peak. Capital losses resulting from

THE POSTWAR JAPANESE ECONOMY 305

declines in both land and stock prices during the period from the end of 1989 to the

end of 2001 reached 1,330 trillion yen. Notably, the Japane se economy experienced a

liquidity trap in 1997–8. The annual number of corporate bankruptcies before 1996

was 14,0 00 per year, but increased to 16,365 in 1997 and 19,171 in 1998.

In these

two years, the Japanese economy also had negative growth rates.

Why did the Japanese economy turn so rapidly from prosperity to stagnation?

Various explanations have been offered to explain this reversal of the Japan’s eco-

nomic fortunes. One interpretation pivoted on capital accumulation and the profit-

ability of the system as a whole. Capitalist production, according to this view, is

unplanned, uncoordinated, and competitive. Furthermore, competition in manu fac-

turing involves large, fixed-capital investments in facilities and equipment. These

facilities, however, tend to become outdated. In the 1950s and 1960s, sustained by

a set of institutions that enabled the state, the banks, and the manufacturing industry

to coordinate with each other, Japan and Ger many enjoyed the advantages of unen-

cumbered modernization through fixed-capital investment. This strong coordination

not only protected Japan’s domestic markets but also channeled its investments into

new technologies. Then, when Japanese and German prod ucts penetrated the Ameri-

can market on a massive scale, rival fixed-capital physical plants were locked in

confrontation, with no easy escape to alternative lines of production. As a result,

profits fell dramatically and in tandem across the entire advanced capitalist world.

Even after two decades, they had still not recovered. A s lower-cost producers con-

tinued to enter global competition, the rate of return on the older c apitalist enter-

prises in advanced industrialized countries was further depressed. As a result, there

was intensified, horizontal intercapitalist competition for overbuilt production cap-

acity, and this competition in turn led to the fall of profitability at the aggregate level.

The result was the long downturn of capitalism.

Development stage was considered another important factor in the reversal of

Japan’s economic course. In the 1950s and 1960s, many industries in the Japanese

economy were in their infancy. The state’s protection of these industries and its

promotion of exports helped to sustain a set of catch-up structural processes: the

economies of scale increased, the whole economy was shifting toward higher-prod-

uctivity industries, the country imported technologies aggressively, and productivity

increased in the agricultural sector. Meanwhile, the promotion of exports through

government subsidies, along with the protection of domestic markets, sustained

industrial growth through the rapid development of manufacturing industries. As

the Japanese economy matured in the early 1970s, however, exports we re no longer

able to keep the economy growing. Meanwhile, the system began to resist the

transformation of economic structures. Increasingly, state policy was aimed at pre-

serving existing industries in an effort to protect resources unwisely invested in

capital-intensive sectors, thereby preventing unemployment and maintaining wage

equality. As market-conforming industrial policy was replaced by market-defying

industrial policy, the economy was ‘‘cartelized’’ and the dynamics for further growth

dampened.

A regime shift, consisting of socioeconomic alliances, political economic institu-

tions, and a public policy profile, was a third interpretation for Japan’s economic turn.

During Japan’s high growth period, conservatives dominated the electoral process.

Public policies were adopted that strengthened the regime’s socioeconomic base and

306 BAI GAO

increased overall public support. The regime also discredited the conservatives’

political opponents, enhanced the conservatives’ ability to control political offices,

and minimized the need for compromise. However, as the economic structure shifted

from agriculture to manufacturing industries, family businesses were increasingly

replaced by corporations and the tight labor market enhanced the bargaining power

of labor unions. At the same time, the electoral pattern switched from two dominant

political parties to multiple political parties. That began to threaten the conservatives’

electoral hegemony. As a result of these changes, state economic policy-making

became politicized, management had to compromise with labor unions, the govern-

ment had to engage in deficit spending to enhance social infrastructure, and Japanese

companies ceased being ‘‘embedded mercantilists’’ and became ‘‘international inves-

tors.’’ All these factors eventually led to the Liberal Democratic Party’s loss of power

in the 1993 election.

The cycle of technolo gical innovation is the fourth factor that contributed to the

stagnation of the Japanese economy. In the history of capitalism, there have been

three identifiable paradigms in technological development. The first in 1760–1870

centered around steam power, which was applied in many types of machines, resulting

in the rapid development of the textile, iron and steel, and coal industries, as well as a

revolution in transportation. The second in 1880–1975 was organized around the

increasing use of human-made materials such as cement, chemical dye s, ammonia,

and rubber, and the exten sive utilization of electricity. The third, which emphasizes

information technology, started in the 1970s. Moreove r, the revolution in informa-

tion technology has taken place in conjunction with the process of globalization. In

this kind of structural environment, the non-liberal market economy in Japan does

not have the institutional advantage of responding effect ively to changes in the

relative prices of resources. At the same time, Japan’s non-liberal market economy

does not tolerate a high level of disparity in incom e distribution. As a result, the

Japanese economy has stagnated.

The profound changes in the international economic order and their impact on

national economic systems represent the fifth interp retation. This view emphasizes

the importance of understanding the ris e and fall of the bubble in the 1980s as the

turning point in the reversal of the Japanese economy from prosperity to stagnation.

After the Bretton Woods system collapsed, Japan’s fixed exchange rate was replaced

by floating exchange rates, and process of liberalizing finance also began. With an

increasingly free flow of capital, the Japanese economic system, characterized as it was

by strong coordination but weak control and monitoring, bore much greater financial

risks. After Japan signed the Plaza Accord in 1985, the rapid appreciation of the yen

and the policy reversal made by the Bank of Japan contributed to the oversupply of

money while domestic pressure for increasing public spending in order to reduce the

adjustment pains caused by the high yen created a favorable macroeconomic envir-

onment. This kind of macroeconomic environment can spawn a bubble in any

economic system. The bubble in the Japanese economy, however, was further inflated

by aggressive patterns of corporate investment and bank lending, an outcome of the

efforts to strengthen coordination.

From this perspective, the radical reforms in Japan during the 1990s not only dried

up the sources of investments; more importantly, they changed the previous institu-

tional logic of the Japanese economic system, creating enormous uncertainties for

THE POSTWAR JAPANESE ECONOMY 307

economic actors in Japan with regard to their future expectations of income and job

security. When banks became reluctant to extend loans to corporations after the ‘‘Big

Bang’’ (and as the collapse of the stock market and real estate markets seriously

damaged corporations), Japanese companies suffered from a shortage of capital for

investment. When the government tried to reduce its budget deficit, public spending

declined. When discussions of eliminating the practice of permanent employment

proliferated, the liquidity trap led to increased corporate bankruptcies, and consumers

held onto their money tightly as the unemployment rate rose. In this sense, stagna-

tion has, to some extent, been sustained by the policies and practices dictated by neo-

liberal reform agendas. This is not to say that Japan should not reform its economic

system, but any radical reforms that drastically increase uncertainties in the expect-

ations of economic actors will not fare well in generating immediate improvements in

economic performance.

Reform versus Recovery

In struggling with the decade-long stagnation, two questions have dominated the

recent discussions and debates on the Japanese economy. First, what caused the

decade-long stagnation of the Japanese economy? Second, in the face of the enor-

mous pressures of globalization, will the Japanese economic system be converted to a

liberal market economy?

Analysts have identified several major competing views on the factors that led to the

stagnation of the Japanese economy in the 1990s. One holds that the stagnation in

the 1990s and the early twenty-first century was largely caused by the structura l

nature of the bubble itself and was macroeconomic in origin. In this view, the collapse

of any bubble would create a downward momentum that could potentially last for

years. In other words, the stagnation of the Japanese economy was simply an exten-

sion of the collapse of the bubble in the early 1990s. Another, more popular, view

attributes the stagnation to the slowness or incompleteness of reforms. It points out

that, while a number of reforms we re made in the 1990s, including the financial ‘‘Big

Bang,’’ changes in corporate governance, deregulation, and health care and pension

reorganization, these reforms were either incomplete or mov ed Japan in the wrong

direction. As a result, vested interests in the establishment have continued to resist

and restrain market forces, and the dynamics of economic growth have not been

released. Analysts with this view often mai ntain that a robust economic recovery

depends on further systemic reforms.

From the institutional perspective adopted by this essay, the stagnation of the

Japanese economy was caused not by the absence of radical reforms, but by the

radical reforms themselves which were initiated by the Japanese government in

1996. In that year, the Hashimoto administration simultaneously carried out a

deflationary fiscal policy and the ‘‘Big Bang’’ policy for the banking industry. The

government limited the combined central and local government budget deficits to 3

percent of GDP until 2003; in addition, it reduced the national debt by 4.3 trillion

yen, raised the consumption tax from 3 to 4 percent, introduced local consumption

taxes, and withdrew the personal income and property tax relief that had been in

effect between 1994 and 1996. Meanwhile, the ‘‘Big Bang’’ program for the banking

308 BAI GAO