“Why Japan Can’t Reform”

Susan Carpenter called “Why Japan Can’t Reform” – same title as her new book. She has worked extensively in Japan, and seemed well placed to desribe the situation there.

I was curious – I know little about Japan, but given the sclerotic nature of the Japanese economy over the past couple of decades and the potential for Japan to be seen as a model for the global economy in recession, I thought it sounded interesting.

Carpenter described how Japan had got to its current position, with a tripartite and archaic economic system comprising of the government, the bureaucracy, and business, and how each had vested interests which prevented adequate reform. The intimate relationship between all three, which dates from the 1870s and in the past provided Japan with the structures with which it succeed in world trade, now restrains the economy and its reform. She characterised the culture as insular and conservative, resisting change, prone to xenophobia and protectionism. Despite the close relationship with USA, she saw a failure to internationalise as central – interesting, given Japan’s strength as a trading nation. The governing elite seems incestuous – dynasties remaining doing what they can to remain in power.

The connections between politicians, bureaucrats and business identified by Carpenter created a very close-knit network. In the regeneration package following World War 2, government ministries established public corporations, managed by bureaucrats under the patronage of politicians. When bureaucrats retire, they move into roles in the corporations – a process called amakudari (which poetically translates as “descent from heaven”) – which binds the two closer together. The LDP, which has governed almost continuously since WW2, tried to privatise these companies, but botched the job. In other cultures, such close connections between businesses and their regulators, with bureaucrats moving into jobs with the business they regulate, might sound corrupt.

Japan has a mercantile economy – it exports at all costs – and its trade imbalances lead to an economic bubble in the late 1980s, as people sought investments for their cash and business overinvested. When the bubble burst, share and real estate prices crashed. (These are all symptoms of the current global malaise – hence Japan being seen as a model.)

During the 1990s, the government tried fiscal stimulus, spending money building new infrastructure. The government also recapitalised the banks, provided loan guarantees. There was also an increase in protectionism. All these things are being undertaken or discussed by large economies in the west. They didn’t work in Japan. As a result, in June 2008 Japan had debt equivalent to 180% of GDP.

The government relaxed the accounting rules and capital adequacy requirements for banks in attempts to get banks lending.

It seems an intransigent situation. Carpenter suggested that rather than retiring into roles in big, state-owned or state-regulated companies, bureaucrats are enticed into roles in small and medium size businesses, where their experience can help increased the ability of the sector to compete, without increasing the links between big business, bureaucrats and the government.

The government had another go at reforming the bureaucracy in 2008 with five major proposals, but the proposal were watered down under the pressure to maintain the status quo.

It doesn’t bode well.

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