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The Underlying Problems of the Japanese Government

Compiled by Scott Teresi

Imagine a country with the following characteristics:

Streets are clean
Drugs cause few problems
Muggings are almost unheard of
Trains run on time
Most people are well dressed
Most people are able to afford the most expensive trifles that money can buy
Life is long
Taxes are modest
Unemployment is lower than in Europe
People are polite, thrifty, and unbelligerent
They are munificent givers of foreign aid, vigorous investors abroad, and profuse lenders

Such a country is Japan, and to many it might seem paradise. Yet open a newspaper and you will see that this is a country in economic crisis. How so? [1] (More on culture at the end of this article.)

Why is Japan in Crisis?

Japan: a bureaucratic and political mess. If Japanese politicians have shied away from trying to sort out the country's problems, that may be partly because it is so difficult to identify where one problem ends and the next beings. Anyone looking for neat separations in Japan will search in vain. Instead, academics usually refer to an "iron triangle" comprising big business, the long-ruling Liberal Democratic Party (LDP), and the bureaucracy, whose interlocking relations form a nexus of power. And as with the power-wielders, so with the activities they control: none can be said to be discretely economic, or political, or bureaucratic; they are usually all three. So if you wonder how Japan got into its current mess, it is hard to know where to begin.

With bad loans, a speculative bubble deflates. Japan's banks are not notably inefficient by international standards, but they have plainly engaged in some foolish lending. Why? One reason is that... in 1985, the Ministry of Finance opened the monetary throttle and lowered interest rates. That set off a borrowing binge, with much of the money flowing into property. Before long, property prices—which were not set by the market but by indexes drawn up by bureaucrats to suit their own purposes—went crazy. The gardens of the Imperial Palace in central Tokyo were said to be theoretically worth as much as the entire state of California, or all of Canada. [So] borrowing became easy, since land was used as collateral for almost all bank loans. Share prices shot up; the Nikkei doubled between 1987 and 1989. And because Japanese banks and businesses have long had huge holdings in each other, the popping of the speculative bubble brought both of them crashing down together. ...

The government routinely props up companies to avoid unemployment. The politicians were hardly blameless in all this. They pumped money—taxpayers' money—into companies that were so inefficient that they should have been allowed to go bust. Their motives were not all bad. In a society where work is all, especially for men, and welfare benefits limited, the politicians were desperate to avoid unemployment. They therefore used some industries, notably construction, to soak up labour laid off by other industries. Construction was also used as an instrument of regional aid. By building roads, bridges, airports, tunnels, no matter how unnecessary, they could direct money and jobs to the many parts of the country with no efficient companies. ...

Government-financed construction is an economic force. Even today the building budget is gigantic: construction-related [government] spending has comfortably exceeded the budget of the American Defence Department in recent years, and about 10% of Japan's workforce, some 6 million people, still derive their jobs from it, far more than in other rich countries. Unsupported, about half the industry might collapse, throwing millions out of work.

All industry is somewhat controlled by the government. Not all of Japan's industry is inefficient, though. The parts that have been exposed to foreign competition, which drove the country's post-war GNPism, are proven world-beaters. But practically all of industry has, by tradition, been to some degree influenced or controlled by non-commercial actors—if not politicans, then bureaucrats. This "administrative guidance" was given partly informally, partly through bureaucratic control of the access to capital, partly through regulation.

Companies plan long-term. For years it all worked well. With their flows of capital assured, Japanese companies were able to take the long view. With the help of lifetime employment, pliant enterprise unions and a seniority system whereby labour came cheap at the outset in return for guaranteed rewards at the end (young workers are underpaid as part of an implicit bargain in which, after automatic promotion, they will be overpaid when older [4]), companies could invest in research and development. Productivity and profits soared, and everyone grew rich.
        But the bureaucrats guiding this venture were not infallible. In particular, they chose to operate the financial and banking system as though Japan were an economy short of savings, when in reality centuries of uncertainty about the future—always likely to be punctuated by earthquakes, typhoons, tsunami and volcanic eruptions—have made the Japanese among the most thrifty of peoples. Unfortunately, their thrift now contributes to the lack of demand, which keeps the economy mired in recession. ...

Japan is basically socialist. Through the Fiscal Investment and Loan Programme, the FILP, the Ministry of Finance lends money at subsidised rates to a variety of instituions and projects. In other words, money is distributed according to a grand plan worked out in the ministries and financed by the banks and the postal system: no wonder aspects of Japan are so often likened to the Soviet Union. ... Since the bureaucrats have always lent on the basis of equality of access to cheap funds, the successful have not been rewarded and the unsuccessful punished, as economic logic would demand.
        Mr. Koizumi wants to change all this. But why did no one try in the 1990's? The answer lies in the mysterious world encompassed by... the Diet (parliament), the main ministries, and the special corporations. [2]

The Bureaucrats: Construction, and Corruption

The bureaucrats—the people who administer the system [and who are] the heirs of those who devised it—stand to gain enormously from its perpetuation. One way they do so is through amakudari (descent from heaven), the practice whereby top beureaucrats on retirement land in comfortable sinecures in the industries they used to be responsible for. ... Retiring in their 50's, they can hope to spend up to 30 years doing the rounds [not only in private industry but also in the special corporations which receive enormous government subsidies]. ...

And the bureaucrats are creatures of extraordinary power in Japan. Todays' elite are the functional descendants of the samurai, the warrior class that provided the administration in feudal Japan. ... [After WW II, their] power grew, largely thanks to the desire of the victorious Americans to rule indirectly through the bureaucracy rather than through a political elite. Soon the latter-day samurai were involved in every aspect of control, from micromanagement of the economy to writing the laws of the land. ...

Stephen Church of Analytica Japan, a consultancy, enumerates the modern bureaucracy's main characteristics: control of the market through permits and regulations (hence hostility to deregulation and opening up); giving priority to producers over consumers (to promote Japan Inc.); the philosophy of messhi hoko, self-sacrifice for the sake of the group (i.e., Japan Inc., once again); and the promotion of conformity, especially through the education system (to reduce dissent). "What distinguishes Japan's 'totalitarianism'," writes Church, "is that there is no observable Big Brother figure. It is the structure itself that functions as Big Brother, [which] makes it almost impossible to change the system." ...

With a caste of people exercising such enormous and deep-rooted power, Japan might be considered an oligarchy or an autocracy. It is of course a democracy, and not just in form. Indeed, in at least one respect, it is highly democratic: that is, that elected politicians dutifully serve the people, or, to be more exact, their constituents (and, no doubt, themselves). By tradition at least, they do not engage in forming policy, nor do they really have any sense of the common good. In the Japanese system, politicians chiefly act as mediators between the bureaucrats [(who set the policy)] and the voters, a role they perform mainly by delivering goodies back to their districts.

The main vehicle for this is the Liberal Democratic Party (LDF).... This makes Japan a one-party state in many respects, with some similarities to the Soviet Union (central planning, enforced conformity), more to pre-2000 Mexico (reformers and "dinosaurs" within the ruling party), and even more to pre-1990's Italy (constant changes of prime minister without any change of party control, manipulation of power from behind the scenes, an opaque faction system within the ruling party). To these characteristics could be added two more that are common to all one-party states: corruption and conservatism.

In such a system, huge quantities of money flow between government and voters. ... This is where the construction industry comes in. The country is littered with airports that no one uses, bridges that carry no traffic and roads that go nowhere. To give just one example, the Seto inland sea is already served by three bridges connecting the islands of Shikoku and Honshu, yet vested interests have been agitating for two more. Not for nothing is Japan known as the construction state. ...

A system in which power lies in an amorphous swamp of bereaucracy and ruling party, each pumbed into the private sector, is unlikely to welcome scrutiny, and indeed secrecy is one of its notable features. Even more serious perhaps is the general lack of any sense of responsibility or accountability. ...

Complaisant attitudes are fortified by compliant institutions. To some extent this is a consequence of the post-war constitution, which was partly written by the Americans to ensure that Japan stayed politically and militarily weak. It has never been amended. ... When things go badly, the ministries neither propel forward any individual to take charge nor do they provide the institutional impetus needed for corrective action. Japan has no equivalent to... American's Congressional Budget Office or its General Accounting Office. ...

At the apex is the prime minister. In the past ten years prime ministers have come and gone every year or so, grey old men, most of them, frequently controlled by faction leaders behind the scenes and unable anyway to do much before some scandal or failure unseated them. The factions they serve may have some modest ideological flavour, but most are vehicles for distributing party and ministerial posts; they seldom promote reform. ... [3]

Social and Cultural Circumstances

Everything is made more difficult by a concatenation of deep-rooted tradition and new circumstances. Together these provide a formidable obstacle to political change.

Japan's society is consensual. The Japanese themselves consider wa, harmony, to be its foundation, and though the facts may not support this belief, conflict is undoubtedly frowned upon and consensus favoured. Plenty of good consequences follow from this. Japan appears to be an exceptionally contented society. It is certainly an egalitarian one, with a huge middle class, little social envy and remarkably small income disparities, especially considering that the transition from poverty to Prada has happened so fast. In how many countries could a fall in asset values as big as that just experienced in Japan occur without huge social disruption? ...

But, as with so many aspects of Japan, the good tends to be accompanied by the bad. It is partly the desire to ensure social harmony that has led to the cosseting of rotten businesses and incompetent public-sector corporations: unemployment, even in the short term, has to be avoided at all costs. That makes any kind of restructuring difficult. ...

Another conseqence of this cohesive egalitarianism is that it reinforces the lack of individualism. ... Japanese do not like to stand out in a crowd. They tend to operate in groups, and any kind of breaking away is frowned upon. This does wonders for wa, but it discourages risk-taking. It also militates against the creation of a culture of personal responsibility, which is necessary for a culture of accountability. And it does nothing to encourage leadership, the lack of which is so conspicuous. ...

The fondness for group activity means most Japanese travel in groups, a habit that is said to date back centuries to the days when they flocked from temple to temple to hear Buddhist teachers. Nowadays it means that when they go abroad, instead of meeting foreigners, they tend to talk only to each other, and thus learn little at first hand of people beyond their shores.

Japan closes itself off from the world in other ways too. The Japanese are less ethnically homogeneous than they would like to believe, but the absence of people who are obviously of foreign descent is a striking feature of even Tokyo, let alone places beyond the capital. Contrary to what some Japanese believe—Yasuhiro Nakasone, a prime minister in the mid-1980's, once remarked that "the Japanese have done well for... 2000 years because there are no foreign races in the country"—foreigners actually bring in ideas and practices that can make life better. [4]


The preceding was completely excerpted from "A Survey of Japan," sixteen pages between pages 52 and 53 of The Economist, April 20, 2002. The following articles were quoted:

[1] What ails Japan?
[2] How did it get into this mess?
[3] Corruption, construction, conservatism
[4] Consensus and contraction


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