Organizer: Phillip Y. Lipscy, Stanford University, USA Chair: Daniel I. Okimoto, Stanford University, USA Discussant: Daniel I. Okimoto, Stanford University, USA The global “great recession” of 2008 has renewed attention on Japan’s post-bubble financial crisis. How did Japan respond? Which policies were successful? What political and economic factors motivated financial reform, and what were the consequences? These are important questions with significant implications for how other countries manage ongoing and future financial crises. However, it is also important to recognize that the political economy of Japanese finance has undergone fundamental shifts during the past two decades. Does Japan’s financial regulation now resemble that of other advanced industrial economies, or is it still distinctly Japanese? If so, how does it depart from the previous “model?”
This panel addresses these questions from several different angles. Kamikawa traces how financial crisis and reform have repeatedly interacted to produce incremental change in Japan over the past twenty years. Lipscy and Takinami argue that learning was critical in financial crisis response in Japan and the United States - Japan was slow to react because it encountered a fundamentally new type of crisis, while the U.S. responded quickly with a scaled-up version of Japan’s most successful measures. Noble evaluates the politics of financial reform and finds that, over time, political dynamics have shifted the emphasis from private to public sector governance. Japan’s experience in the 2007-2008 global financial crisis differed markedly from that of other advanced industrialized countries. Kushida and Shimizu attribute this to syncretism - public-private interactions and regulatory institutions have developed by synthesizing elements from Japan’s traditional practices and the Anglo-American model.
Japan’s slow, ineffective response to its post-bubble financial crisis has been generally attributed to Japan-specific political and economic factors. We argue that Japan’s response was not necessarily a function of factors unique to Japan. Rather, the novel nature of Japan’s crisis necessitated a process of learning, trial and error, and experimentation to determine the most effective solutions and methods of implementation. Policy innovation, like innovation in the private sector, is a search for unknown solutions under conditions of extreme uncertainty. As such, it takes more time and more effort for first-movers to ascertain the correct policy response. Once effective solutions have been demonstrated by earlier actors, subsequent implementation is much more rapid, targeted, and effective. Hence, when the United States and other countries encountered a similar financial crisis in 2008, the response was a rapid, scaled-up application of policy measures developed gradually over the course of Japan’s economic stagnation. There is, however, interesting variation in learning by policy instrument - learning appears to be greater for policies that are less politicized and more technocratic. Hence, the lessons from Japan were applied vigorously in monetary policy, less so in financial sector capital injections, and least in fiscal policy.
How has Japan’s model of capitalism changed since the bursting of the economic bubble in 1993 and the banking crisis in the late 1990s? In particular, how did Japan restructure the regulatory institutions governing its financial system, once at the core of its postwar developmental model of capitalism? The answer has a direct bearing on Japan’s experience and response to the 2007-2008 global financial crisis, in which financial sectors emerged relatively unscathed, but exports plummeted. We contend that overall, Japan has been surprisingly resilient to change, not simply due to lack of reform, but because of reversals over time. The process of change itself was one of syncretism -- new practices and ideas combining with pre-existing organizations and norms. While new possibilities were opened for political and market actors, powerful veto players and entrenched interests remained, shaping the course of reform. On the one hand, reforms from the late 1990s Financial Big Bang to former Prime Minister Koizumi’s market-facilitating reforms brought the regulatory framework and market opportunities far closer to global standards than ever before. Yet, over time, market opportunities did not necessarily lead to further pressures for change; backlash to the reforms were expressed as political choices, and many of the reforms under Koizumi are undergoing reversals. This paper also provides implications for debates over institutional complementarities and institutional change raised by broader scholarship on comparative capitalism.
This paper examines the role of foreign financial firms in Japan’s policy processes. It contends that regulatory shifts in the late 1990s provided new opportunities for foreign financial firms to enter Japan and create profitable market segments. The regulatory shifts created new opportunities for foreign firms to exercise two types of voice. First, they were able to take advantage of a more legal rules-based system to exploit regulatory loopholes. These disruptive strategies reduced the government’s ability to exercise discretionary authority while altering the norms and expectations in strategic government-business interactions. At the same time, the regulatory shifts also enabled foreign firms to become insiders in traditional policy processes such as industry associations and deliberation councils. As insiders, foreign firms were able to influence the policy preferences of actors from within. By joining existing institutions, however, foreign firms became vested in existing policy processes, entrenching continuity. They did not become a unified force driving political change towards Anglo-American models of government-business coordination. Becoming vested in existing processes also limited the range of influential policy positions foreign firms could take. This paper has implications for understanding globalization and institutional change, since one set of actors critical to globalization -- global financial firms -- are shown exerting multiple types of pressure for change. Short term, immediate change is akin to exogenous shocks to existing systems, while longer term, gradual transformative change is a mechanism of endogenous change.
Japan's anemic macroeconomic performance since the bursting of the financial bubble in the early 1990s has led to widespread complaints that a dearth of political leadership has led to two decades of stagnation. Corporate governance, however, has not been immune to reform. In the 1990s, a financial big bang and revisions to the corporation law thoroughly changed the framework governing management of private companies, leaving observers cautiously (Milhaupt and West 2004) or even aggressively optimistic about prospects for improved business performance. In the 2000s, incremental reforms continued, but the attention of policymakers shifted to reforming the public finance system. This shift in focus reflects the evolving interests of managers (Culpepper forthcoming 2010) and core employees more than those of owners (Gourevitch and Shinn 2005), but it also reflects changing dynamics of the political system. The breakdown in LDP dominance led to a new fluidity in policymaking in the 1990s (Hiwatari and Miura 2002; Institute of Social Science 2006), while after 2001, and especially after solution of the non-performing loan problem in 2003-2004, institutional reforms, the popularity of Prime Minister Koizumi, and strong support from the business community inclined the government to focus on reforming public rather than private sector governance.
This paper explains how changes in financial regulation caused Japan’s financial crisis and how two financial crises (Japan’s financial system instability from 1990 to 2003 and the global financial crisis since 2007) caused change in financial regulation. In the 1980s, “distorted deregulation” caused an economic bubble - financial deregulation on corporate finance was implemented, but financial regulations on the segmentation of financial services had not been eased. In the 1990s, MOF hid the seriousness of non-performing loan problem because financial deregulation proceeded at a very slow pace and kept the tight relationship between the MOF and banks. Subsequently, it was not until Prime Minister Junichiro Koizumi, who insisted on advancing structural reforms despite short-term economic downturn, that the non-performing loan problem was finally resolved. Although financial innovation has developed rapidly in the U.S. and Europe since 1990s, Japanese financial institutions had to deal with the financial system uneasiness until 2004. Therefore, they have been left behind by the global “financialisation.” Ironically, this has kept them from undergoing great losses from the global financial crisis since 2007. However, Japan is facing a more severe economic downturn than the U.S. and the E.U. as the Japanese economy heavily depends on exports to the U.S., whose domestic demand dropped sharply. Thus, the Japanese government has intervened in the banking sector again, implementing several important new steps.
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