Varieties of Advanced Market Capitalism

1. Varieties of Advanced Market Capitalism Chapter VI Japan: A Planned Market Economy with Traditional Elements

2. 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

3. 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

4. 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

5. 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

6. 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

7. Historical and Cultural Background of the Japanese Economy The 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

8. 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

9. 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

10. Historical and Cultural Background of the Japanese Economy The 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

11. 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

12. Historical and Cultural Background of the Japanese Economy Industrial 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

13. Historical and Cultural Background of the Japanese Economy Imperializing 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

14. Historical and Cultural Background of the Japanese Economy Political 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

15. 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

16. Historical and Cultural Background of the Japanese Economy The 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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”

27. 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

28. 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

29. 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

30. 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 systemthat minimize inventory costs and encourage superior quality control

31. 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”

32. 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

33. 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

34. 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

35. 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

36. 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

37. 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

38. 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

39. 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

40. 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

41. 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)

42. 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

43. 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

44. 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

45. 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?