ECON 4337 Comparative Economic Systems

1
ECON 4337 Comparative Economic Systems

• Lecture 6
• February 24, 2009

2
Japan A Planned Market Economy with Traditional
Elements
3
Japan A Planned Market Economy with Traditional
Elements
4
Japan A Planned Market Economy with Traditional
Elements

• Why do we classify Japan as a planned market
  economy with traditional elements?

5
Japan A Planned Market Economy with Traditional
Elements

• Historical and Cultural Background
• Effect of Shintoism
• 6th-7th centuries Absorption of Chinese culture
• Chinese writing
• Buddhism, Confucianism
• Effect of Confucianism
• Loyalty and respect to ones immediate superiors
  and state

6
Japan A Planned Market Economy with Traditional
Elements

• Historical and Cultural Background
• The Tokugawa Shogunate
• After 1185 ruled by military commanders known as
  shoguns
• In 1500s, first exposure to European culture
• Development of business, transportation
  infrastructure, literacy took off

7
Japan A Planned Market Economy with Traditional
Elements

• Historical and Cultural Background
• 1853 Japan forcibly reopened to outsiders by
  arrival of Commodore Matthew Perrys black
  ships from the U.S.
• 1868 Meiji Restoration
• Landless samurai overthrew the Tokugawa shogun

8
Japan A Planned Market Economy with Traditional
Elements

• Historical and Cultural Background
• 1868-1912 Meiji Restoration
• Sign of end of feudalism in Japan
• Dramatic opening to foreign influences and
  technologies
• Removal of all rights and powers of samurai who
  later started businesses
• Public investment in communication, railroads,
  education, postal services
• Start and support of new industrial enterprises
  by state
• Japan became the fastest growing economy in the
  world

9
Japan A Planned Market Economy with Traditional
Elements

• Historical and Cultural Background
• 1894 War with China
• 1895 Japan conquered Taiwan
• 1905 War with Russia
• 1910 Japan took control of Korea
• 1920s Democratization and liberalization
• Growth of four zaibatsus by government
  sponsorship
• Mitsui, Mitsubishi, Sumitomo, Yasuda
• 1923 Tokyo earthquake (133,000 died)

10
Japan A Planned Market Economy with Traditional
Elements
Index of National Output (1897100)
Source Lecture notes by Assistant Prof. Hui He
11
Japan A Planned Market Economy with Traditional
Elements

• Historical and Cultural Background
• 1937 Japan invaded China
• 1941 Pearl Harbor
• On August 16, 1945 Japan surrendered

12
Japan A Planned Market Economy with Traditional
Elements

• Historical and Cultural Background
• American Occupation
• Japan was under American occupation until 1952
• A new constitution was written
• Japan was formally demilitarized
• Zaibatsus were broken up
• Land was redistributed
• Labor unions were legalized

13
Japan A Planned Market Economy with Traditional
Elements

• Historical and Cultural Background
• After the American Occupation
• 1960s harmonious labor-management relations
  emerged
• From mid-1950s to the 1970s, old zaibatsus
  reformed as keiretsus
• By 1955, real per capita income had reached its
  highest prewar levels
• By the late 1960s, large, persistent trade
  surpluses emerged
• In 1975, Japan became one of the G-7 countries

14
Japan A Planned Market Economy with Traditional
Elements
Index of National Output (1897100)
Source Lecture notes by Assistant Prof. Hui He
15
Japan A Planned Market Economy with Traditional
Elements

• Micro-foundations of Japanese Economy
• 1. Three sacred treasures of labor-management
  relations
• Lifetime employment
• Seniority-based wages
• Enterprise unions

16
Japan A Planned Market Economy with Traditional
Elements
17
Japan A Planned Market Economy with Traditional
Elements

• Micro-foundations of Japanese Economy
• 2. Industrial organization Keiretsu System
• Horizontal keiretsu Firms in different
  industries all linked to a common bank and
  trading company
• Fuyo (Fuji Bank), Ikkan (Dai-Ichi Kangyo Bank),
  Sanwa (Sanwa Bank)
• Mitsui, Mitsubishi, Sumitomo

18
Japan A Planned Market Economy with Traditional
Elements

• Micro-foundations of Japanese Economy
• 2. Industrial organization Keiretsu System
• Vertical keiretsu Suppliers and distributors
  linked to a major industrial producer by
  long-term contracts
• Toshiba, Nissan
• Cross-holdings of stocks in all keiretsus
• Advantages?

19
Japan A Planned Market Economy with Traditional
Elements
Source Lecture notes by Assistant Prof. Hui He
20
Japan A Planned Market Economy with Traditional
Elements
SOURCE OECD, Economic Surveys of Japan, 1995-96,
156.
21
Japan A Planned Market Economy with Traditional
Elements

• Micro-foundations of Japanese Economy
• 3. Managerial decision making
• Masahiko Aoki (1990), Toward an Economic Model
  of the Japanese Firm
• J-mode vs. H-mode type of organization
• Japan J-mode type of organization
• Characterized by horizontal coordination among
  operating units based on the sharing of ex post
  on-site information (learned results)

22
Japan A Planned Market Economy with Traditional
Elements

• Micro-foundations of Japanese Economy
• 3. Managerial decision making
• Consensual decision making
• Input from the bottom up (ringi-shos)
• Long term strategic planning
• Long term bank financing
• Other leveling devices

23
Japan A Planned Market Economy with Traditional
Elements

• Micro-foundations of Japanese Economy
• 3. Managerial decision making
• U.S./Europe H-mode type of organization
• Characterized by hierarchical separation between
  planning and implemental operation and the
  emphasis on the economies of specialization

24
Japan A Planned Market Economy with Traditional
Elements

• Micro-foundations of Japanese Economy
• 4. Industrial policy making by government
• Ministry of International Trade and Industry
  (MITI)
• Main implementer of Japans industrial policy
• Sectoral financial targeting, encouragement of
  bank rather than equity financing, encouragement
  of better labor relations, use of selective
  cartelization

25
Japan A Planned Market Economy with Traditional
Elements

• Micro-foundations of Japanese Economy
• 4. Industrial policy making by government
• MITI intervention related to product cycles
• At the beginning stage of an industry
• Rationalization cartels
• Infant industry tariffs
• Subsidies for capital investment
• MITI-financed RD project
• At the end of the product cycle
• Depression cartels
• Effectiveness?

26
Japan A Planned Market Economy with Traditional
Elements

• Macroeconomic Performance of Japanese Economy
• Most rapid rate of sustained economic growth
• Low unemployment and inflation rates
• Greater degree of income inequality
• Longest life expectancy
• Large trade surplus
• Technological leader in many areas
• Stagnation in the 90s

27
Japan A Planned Market Economy with Traditional
Elements
28
Japan A Planned Market Economy with Traditional
Elements
29
Japan A Planned Market Economy with Traditional
Elements
30
Japan A Planned Market Economy with Traditional
Elements
31
Japan A Planned Market Economy with Traditional
Elements

• Macroeconomic Performance of Japanese Economy
• Why high saving rates (since WW II)?
• High growth rates in income
• Effect of Confucianism
• High cost of housing
• Lumpiness of biannual bonuses
• No capital gains tax
• Saving for old age

32
Japan A Planned Market Economy with Traditional
Elements

• Macroeconomic Planning and Policy
• EPA (Economic Planning Agency)
• Puts forth macroeconomic plans with associated
  sets of policy goals
• Since the 1970s, actual growth has been below the
  target
• MOF (Ministry of Finance)
• In charge of implementing macro plans and of the
  governments fiscal policy
• Low levels of G and T
• Debt/GDP ratio 150 by 2002

33
Japan A Planned Market Economy with Traditional
Elements

• Quality of Life
• High life expectancy
• Low crime rate
• More equal income distribution
• Workaholics in rabbit hutches?
• Environmental pollution problems

34
Japan A Planned Market Economy with Traditional
Elements
35
Japan A Planned Market Economy with Traditional
Elements
36
Japan A Planned Market Economy with Traditional
Elements
37
Japan A Planned Market Economy with Traditional
Elements
38
Japan A Planned Market Economy with Traditional
Elements

• The End of the Economic Miracle
• After 1990, growth rate decelerated
• Savings-investment nexus
• In the early 1990s, overinvestment causing low
  rate of return for large corporations
• With the 1997 Asian crisis, credit problems
  spread to large corporations
• In the late 1990s, liquidity trap problems
• Capital outflows

39
Japan A Planned Market Economy with Traditional
Elements

• The Collapse of the Bubble Economy
• In the late 1980s, high price/earning ratios of
  Japanese stocks
• High real estate prices played a role in
  speculative bubble in stocks
• Bubble economy ended with a decline in stock
  prices