POLITICAL ECONOMY OF REFORM:JAPAN AND HER INSTITUTIONAL CHAR

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POLITICAL ECONOMY OF REFORM:
JAPAN AND HER INSTITUTIONAL CHARACTERISTICS

쿠니코 이노구치(Kuniko Inoguchi)
소피아대 교수


1. Introduction

What are the important institutional characteristics that influence the shape and speed of economic reform in Japan? Japan is in the process of transition, and even some of the long-standing institutional characteristics are now being questioned and face enormous pressure for change. On the other hand, some of the most important changes are carried out by the most traditional institutional forces, and, often by the mainstream powers within the traditional institutions. This implies that to some extent the Japanese institutions have always had internalized endogenous capabilities for innovations and reforms. Otherwise Japan would not have become the first non-Atlantic nation to rise to major economic power status, to start with. However, since those institutional characteristics are endogenous, and not universal, it is most difficult for outside forces to understand and anticipate the shape and speed of reforms that Japan is trying to achieve. Let us outline some of Japan's institutional characteristics, explain why they prevailed, and discuss their impact on her current political, economic and social changes.


2. Bureaucracy-led Postwar Reconstruction and Modernization

Japan achieved universal suffrage and full democratization only after World War II under the occupation forces and after regaining her independence in 1952, Japan tried hard to rejoin the international system as a full-fledged member. One of the major characteristics of the postwar international system was a strong statist orientation. The newcomers to the international community were expected to have a strong and externally-responsible and responsive state. The strong and reliable modern government was expected to be responsible for leading the nation toward development, and serving as an impeccable agent that transmits the core values of the postwar international system, such as economic growth, democracy, financial stability, free trade and liberalization, to her people.
Japan, in a haste to recover from damages of war in terms of her international status and credibility, tried hard to create a strong reliable state and live with such new core values as manifested by the major victorious powers. However Japan’s democracy was still in its formative stage, and the political powers, caught in struggles of alignment and realignment in pursuit of stable power distribution, was not sufficiently strong to fulfill statist goals. Thus it was Japan’s imperative to build and maintain strong technocratic institutions staffed with meritocratic bureaucrats, so that Japan can most surely and quickly become a strong responsible state.
There are two important institutional characteristics that emerged from this experience.


3. Discriminant Transmitter

First, the Japanese bureaucracy, while trying hard to appear as an impeccable transmitter of values of the outside world to her endogenous population, learned to play the quiet role of mitigator, and often discriminant sorter, of exogenous values and pressures. They did so because they correctly knew, that if they simply played the plain role of blatant transmitter, Japan would have gone through politically intolerable social destabilizations because of the enormous gap that existed between the universally manifested values and Japan’s traditional social culture. The US government as well as US-led international regimes were well aware of such bureaucratic maneuvers, but decided to tolerate them because of the absolute importance of stability in East Asia during the Cold War.
But as time went by, the Japanese civic culture and expectations have come to converge with most of universally sought values. However the Japanese bureaucracies have been caught with a typical bureaucratic malaise, the bureaucratic inertia. They still try to play the role of discriminant transmitter and gate-keeper of global standards and values. They cling to the sweet memories of heroic functions they played as a buffer between advanced international standards and helpless domestic reality. Today they are confronted with a new challenge of becoming what they were initially supposed to become, i.e., the reliable modernizer that would harmonize Japan with global values and standards. They must know, that by now, Japan is capable of maintaining her traditional integrity even if we opt for globalization, and that, in fact, cultural strength and integrity can be maintained much easily if one enjoys major economic and political power status, that can be achieved only by constant exposure to and participation in the global competitive network. If they fail to come to terms with this reality, once the enhancer of Japanese development, could now become the spoiler of Japan's willingness for reforms.

4. Segmentation of Spheres of Responsibility

Second, one of the major sources of legitimacy of bureaucratic power in the above-mentioned postwar context was supposed to be found in its impeccable reliability. In order to achieve this goal, the Japanese bureaucracies have strictly defined the spheres of responsibility of each ministry or agency in the manner of mutually exclusive and exhaustive categorization. Thus the outreach of the bureaucratic responsibility is extensive, but the coordination of their power and their joint problem-solving capability in newly-emerged issue areas and/or intermixing complex conjunctions are extremely limited. This results in an excessive burden of transaction costs for both domestic and overseas actors if they go into consultations or negotiations with the Japanese bureaucratic institutions, since their sphere of power is segmented and their willingness to engage in heuristic interactive coordination among different ministries is institutionally limited. They are also unaccustomed to any kind of intrusion upon their sphere of power and responsibility, whether in the form of inter-ministerial coordination or deregulation and liberalization.
This is why one of the major emphasis of former Prime Minister Hashimoto’s and Prime Minister Obuchi’s initiatives for administrative reforms is pit on the enhancement of inter-ministerial coordination and the flexibility of the Cabinet Secretariat to push for what is called comprehensive coordination, i.e. politically-led initiatives to override ministerial segmentation, inertia, and vested interests. The law to enact the final report of the Prime Minister’s Committee on the Administrative Reform, of which the author was a member, was adopted last year, and Japan will have a newly-defined set of bureaucratic institutions and functional formula in year 2001.

5. Piecemeal Adaptation vs. Conceptual Articulation

Aside from such bureaucratic characteristics that emerged form Japan’s postwar experiences, there are some other important characteristics that influence Japan’s capabilities for reforms.
It is often incorrectly pointed out that Japan never changes in any significant ways, but in reality Japan does show, if there is an urgent necessity, a strong willingness to adapt to and live with externally defined constraints and roles. One can hardly name any other country that has gone through such tremendous change of economic and social life as Japan during the last half-century, and it would be fair to argue that Japan’s political and bureaucratic institutions have shown relatively steady adaptive skills. What Japanese institutions have not done skillfully is to give sophisticated explanations and conceptual articulation of its intentions and commitments. Thus they often invite misled perceptions and wrong images. Japanese institutions are not so enthusiastic about forcefully presenting principles and concepts, and, in fact, they were not in the position to do so, particularly in the postwar era when Japanese decision-makers were destined to behave more as decision-takers that decision-makers in the international community. It was a lot more important for Japan to be adaptive than talkative. Moreover, since the demands on Japan from the outside world was not always consistent or constant, partly because of Japan’s extraordinary capability to adapt and change as seen in her industrial development, and since Japan tried to jeep its internal integrity despite her externally adaptive behavior, adaptation was on a piecemeal and ad hoc basis rather that a systematic one, which is more amenable to conceptual articulation.
Japan does not realize how quickly her position has changed from the same decision-taking status to that of a decision-maker, and that the international community is waiting for some brilliant decisions from Japan on various non-military problems ranging from, for example, the East Asia economic crisis and currency stabilization to poverty reduction and environmental controls. As Japan takes on the new roles as an agenda setter and consensus producer regarding global governance issues, Japan must upgrade its power for conceptual articulation, so that the world would better understand Japan’s willingness and commitments, and feel more comfortable about the partnership with Japan.

6. Gender Imbalance in Decision-making

Japan is not a homogenous country, but is often perceived to be one because of the strong homogeneity at the decision-making level. At all places, including the national government, local assemblies, private firms, banks, universities, or labor unions, middle-aged men with similar educational backgrounds are the mainstream decision-makers. Young people and women are conspicuously absent, and this could also be considered as one of Japan’s institutional characteristics.
Because of such extreme gender inequality and generational imbalance in decision-making ranks at most institutions, Japan may have suffered from an inability to foster a well-balanced development. Despite impressive macroeconomic statistics that qualify Japan as a major economic power, Japanese people in general face numerous unfair day-to-day problems and worries, such as long working hours, long-distance commuting, poor housing, insufficient child-care services, excessive competition in education, scarce help for elder citizens, etc. If there were more women in decision-making circuits, economic reforms and policy mix to overcome the current recession might have shown more diversified priorities, for example, more emphasis on the household sector and welfare services, and if there were greater number of younger men and women in boardrooms and ministries, more emphasis might have been put on venture capital, software business, conservation projects, etc., as opposed to the traditional construction-based recovery plans. If Japanese institutions were able to appoint more women to higher positions, it is most likely that Japanese economy would become a lot more resilient, flexible, creative, and, in fact, more reform-oriented.

7. Summary of Recent Political and Economic Reforms
Finally, let us summarize Japan's recent major political and economic reforms. Despite the above described constraints and characteristics, Japan has shown extraordinary commitments to envigorate her democracy and economy.
(a) Administrative Reform of the Central Government
The Headquarters for the Administrative Reform of the Central Government is determined to keep to the schedule that a new set of government organizations shall start in January 2001. Downsizing of and efficiency improvement in the national government organizations will be enhanced. 84 government activities shall be transformed into so-called Independent Administrative Institutions (IAI), and the total number of secretariats and bureaus shall be reduced from 128 to 96. The government staff will be reduced at least 10 percent in 10 years. While most ministries and agencies will be forced to go into some kind of mergers or downsizing, there are two noteworthy exceptions. First, the current Environmental Agency will be upgraded to become an independent Ministry of Environment, representing Japan's strong commitment to cope with national as well as global environmental problems. Second, a powerful central office to plan, implement, and monitor gender equality issues will be established in the Prime Minister's Cabinet Secretariat, in order to promote Japanese women's empowerment, and overcome the traditional division of labor and prejudice against women.
(b) Financial System Reform
The reform law responds to the diversifying need of investors by expanding the means of asset management, including enhancements to investment trusts, introduction of over-the-counter securities derivatives, and provision of other similar means of investment, thereby enabling more effective asset management. The government will also liberalize security company services and fees, encourage new entries, and engage in other reforms designed to make it easier for market participants to receive higher-quality services from financial institutions. Commissions were liberalized for the portion of trading values in excess of ¥1.0 billion in 1994, but will be fully liberalized by the end of 1999. The government will eliminate the obligation for member insurers of the rating organizations to use premium rates calculated by the rating organization for fire, automobile, and other insurance products. To encourage new entries into the securities industry, the Government will switch from the current licensing system to a system requiring registration only. To promote cross-sectorial entry, the Government will enable insurance companies and other financial institutions to enter in each other's business activities through their subsidiaries. The Government will allow securities companies in Japan to open and operate proprietary trading system, which enable investors to trade electronically.

While adhering to the principle of self-responsibility, the Government will also enhance disclosure requirements and formulate fair trading rules. The law is amended to require consolidated disclosures covering both parent and subsidiary companies when filing securities registration statements and annual reports. A new requirement will be enacted to oblige depository institutions such as banks to make their financial statements, including the amount of bad loans, available for public record. Measures are also being taken to create new securities investor protection fund. Legal obligations are to be provided to manage customer assets separate from company assets in order to protect investors in the event of a securities company failure.
(c) Fiscal Structural Reform
In 1997 the Cabinet declared to aim to achieve the fiscal consolidation target (bringing down the national and local fiscal-deficit-to-GDP ration to 3 percent or less; eliminating the issuance of special deficit-financing bonds) by FY2003. The Cabinet has also decided to designate the three remaining fiscal years of this century as an "intensive reform period" to promote spending reforms and cutback while allowing no sacred areas, including Official Development Assistance, which was in the past allowed exceptional expansion. This initiative for fiscal structural reform was, however, challenged by the alarmingly serious nature of the current recession, and the Government was forced to relax the reform plans, while prioritizing allocations.
(d) Reforms Concerning Financial Regulatory System
Mounting non-performing loans problems at financial institutions and the housing loan companies were the immediate trigger of reforms in the financial regulatory system. The Law Establishing the Financial Supervisory Agency and other related legislation were passed by the Diet in June 1997. Financial Supervisory Agency is established under the Prime Minister's Office and specialize in the authority to inspect and supervise private financial institutions. This is done with the understanding that separating financial-institution inspection and supervision functions from financial system planning and formulation functions will contribute to the conversion of financial administration to more transparent and fair administration. "Private financial institution" imply commercial banks, insurance companies, securities companies, non-bank and other private institutions dealing with financial transactions.
(e) The Amendment of the Foreign Exchange and Foreign Trade Control Law
The goals of the amendment are to liberalize Japan's cross-border capital transactions consistent with global standards, and to further vitalize Japanese market by complete liberalization of the foreign exchange business. Permission and prior notification requirements are abolished in principle, and thus individuals and companies are able to make free capital transactions and settlements with foreign individuals and companies. The authorized foreign exchange bank system, the designated securities firm system and the money exchanger system are all abolished. However in order to ensure a proper understanding of market trends and to prepare statistics on the balance of payments, it is necessary to develop an effective ex-post facto reporting system on cross-border capital transactions.