No. 22 — June 9, 2000


Feature Article


Barbara Wanner


Most observers of Japan's post-1945 transformation from a devastated, war-torn nation into the world's second-largest economic power have attributed this stunning turnaround in large part to the extraordinary level of cooperation between business and government in pursuing the shared goals of growth and prosperity. Analysts variously term the close relationship among corporate Japan, the bureaucracies that regulate big business and the lawmakers who represent these interests as Japan, Inc. or the "iron triangle." While this alliance served Japan well from the 1950s through the 1980s, the bursting of the economic "bubble" at the start of the 1990s and the nation's prolonged recession have both revealed and magnified the system's flaws.

The cozy three-way ties have bred recurrent corruption, as evidenced by a spate of political scandals in the last decade and more recent examples of bureaucratic graft. Equally important if not more so, the iron triangle, which was geared toward taking care of bureaucrats, politicians and business executives alike, rendered Japan incapable of a dynamic response to the fast-changing global economic developments and technological advances of the new millennium. As a consequence, much of corporate Japan now is scrambling to catch up with its major industrial brethren, just as it was in the immediate postwar period.

Following a 1993 rebuke at the polls, in part a reaction to politicians' corrupt ways, lawmakers made a show of cleaning up their side of the triangle by enacting a package of political reforms the following year. In mid-1999, the Diet approved a plan designed to streamline and reorganize the government, ostensibly to liberate business from the bureaucracy's heavy regulatory hand. Also last year, the nation's elected representatives passed a new ethics code for bureaucrats aimed at reducing the potential for bribery and other types of business-government collusion.

Notwithstanding rhetoric about reform and even some action, these changes, in and of themselves, do not seem to have fundamentally altered the conduct of politics or the nature of business-government relations. The Liberal Democratic Party appears to be just as driven by the desire to amass and hold power as it was before the passage of the 1994 reforms, which sought to end money-centered, interest group-driven politics. In fact, in the weeks leading up to the June 25 lower house elections, some prominent LDP lawmakers have actively worked to derail or to defer deregulatory initiatives that would hurt their traditional support groups.

By the same token, some experts have observed strains developing between corporate Japan and its former protectors in the political establishment and the bureaucracy. Business contributions to political parties have sagged since 1994, a trend that the media has attributed to recession-related belt-tightening. However, insiders link these cutbacks to the private sector's rising disillusionment with the LDP's ability to solve the nation's economic problems and to address the increasingly diverse agenda of big business. The twin pressures of recessionary conditions at home and growth and technological advancement abroad have splintered and differentiated corporate Japan's interests and priorities, they say. Concurrently, the same competitive forces have created new requirements in the private sector for information and action that Japan's lumbering bureaucracy cannot provide quickly enough.

Judging by the recent precipitous slide in Prime Minister Yoshiro Mori's approval ratings, voters who participate in the late June lower house elections conceivably could upend the political order, which would add to the pressure on Japan, Inc. However, a good portion of the electorate simply may stay home, turned off by the lack of credible leadership alternatives, while LDP stalwarts as well as committed backers of its governing partners, the New Komeito and the New Conservative Party, flock to the polls to ensure perpetuation of the status quo. Regardless of which party comes out on top, revolutionary change is not about to happen in Japan. The iron triangle eventually must be dismantled if the nation is to remain a world-class competitor, but the bedrock conservatism of the Japanese will slow the reform process.

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Weekly Review


The Japan Economic Institute of America has come to the conclusion that it must phase out operations over the course of the current fiscal year, which ends March 31, 2001. Several considerations dictated this difficult decision: reduced and uncertain funding from the Ministry of Foreign Affairs due to the tight budget situation of the Japanese government, lower revenues from JEI's publications and from other activities, and the difficulty of finding additional funds from alternate sources for continued operations. Over the past several years, JEI's sister organizations in Australia, Canada, France, Germany and the United Kingdom have had to make similar decisions.

We hope to publish JEI Report through September 2000. Subscribers with subscriptions that run beyond that time will receive a refund for the unfilled portion.

In the 10 years that I have been president of JEI, the organization has enjoyed the whole-hearted support of the Foreign Ministry, even when we published reports that were not totally consistent with official policy. In fact, it was JEI's analytical independence that gave its publications and staff the credibility valued by our audience.

The entire staff of the Japan Economic Institute would like to thank subscribers as well as other colleagues and friends for their support and interest in the organization and its work over the years.



With his approval ratings in a free-fall, Prime Minister Yoshiro Mori dissolved the House of Representatives June 2 and formally called for elections June 25. Although the official 12-day campaign does not kick off until June 13, members of the three ruling parties — the Liberal Democratic Party, the New Komeito and the New Conservative Party — and opposition party lawmakers wasted no time in taking jabs at each other in their efforts to galvanize Japan's notoriously ambivalent electorate. Election analysts contend that the prospects for continuity — or change — in government leadership hinge on the extent to which the massive bloc of unaffiliated voters exercises its constitutional right.



What did the late Prime Minister Keizo Obuchi have in common with The New York Times, the Organization for Economic Cooperation and Development and any number of Tokyo-based economists? Like them, he was skeptical about the accuracy and the usefulness of Japan's broadest measure of economic activity — the gross domestic product — in general and the fourth-quarter 1999 figures in particular.



Japan's top commercial banks posted much-improved business results for the fiscal year ending March 31, 2000. All but one institution reported a return to profitability after taxes. Moreover, expenses related to writing off nonperforming assets fell by more than half from FY 1998's total, and the amount of bad loans still on bank books shrank. Executives trumpeted these three developments, arguing that they are well on their way to restoring the financial health of their companies. This news, combined with the planned consolidation of Japan's major banks (see JEI Report No. 17B, April 28, 2000), means that the domestic banking industry will be better prepared for increasing competition from foreign rivals and other domestic financial services providers.



Japanese companies once again are going bankrupt in record numbers. Several forces are driving the latest trend. The government's loan-guarantee program for small businesses (see JEI Report No. 12B, March 26, 1999), which was boosted in the fall of 1998 when failures were reaching disturbing levels, ran out of money last year. Since then, almost 3,000 firms that had received government-backed bank loans have foundered as the economy has continued on its indecisive course.



The Asian Development Bank approved May 23 the creation of the Japan Fund for Poverty Reduction, a ¥10 billion ($90.9 million at ¥110=$1.00) resource intended to help alleviate poverty in Asia. Finance Minister Kiichi Miyazawa had proposed the idea at the ADB's annual meeting, held in Chiang Mai, Thailand in early May. The facility will finance grants for poverty reduction and social development activities. In contrast, the Asian Development Fund, the multilateral development bank's main financing vehicle, extends loans on concessional terms to poor nations.

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