Japan Transformed: Political Change and Economic Restructuring

Japan Transformed

Japan Transformed

POLITICAL CHANGE AND ECONOMIC RESTRUCTURING

Frances McCall Rosenbluth

and

Michael F. Thies

PRINCETON UNIVERSITY PRESS

PRINCETON AND OXFORD

Copyright © 2010 by Princeton University Press

Published by Princeton University Press, 41 William Street, Princeton, New Jersey 08540 In the United Kingdom: Princeton University Press, 6 Oxford Street, Woodstock, Oxfordshire OX20 1TW

All Rights Reserved

Library of Congress Cataloging-in-Publication Data

Rosenbluth, Frances McCall.

Japan transformed : political change and economic restructuring / Frances McCall Rosenbluth and Michael F. Thies.

p. cm.

Includes bibliographical references and index.

ISBN 978-0-691-13591-5 (hardcover : alk. paper) — ISBN 978-0-691-13592-2 (pbk. : alk. paper) 1. Japan—Politics and government. 2. Japan—Economic policy. I. Thies, Michael F. II. Title.

JQ1631.R67 2010

320.952—dc22

2009030845

British Library Cataloging-in-Publication Data is available

This book has been composed in Sabon

press.princeton.edu

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

Contents

Tables and Figures

Preface

The midst of the most severe global financial crisis since the Great Depression might seem an odd time to be writing a book about Japan’s new political economy. So much is up in the air in Japan and in the world economy that a book aiming at enduring explanation might appear fool-hardy. In the most stable of times, unforeseen contingencies can have dramatic effects on the flow of events, and such uncertainty is even greater when the global financial system is shaken to its core. Like other countries, Japan will be forced to adjust to skittish international investors and lackluster consumer markets at home and abroad, and it will employ a wide array of policy measures to do so. Add to this the fact that the Liberal Democratic Party that has ruled Japan for so much of the postwar period faced its greatest electoral challenge ever in 2009, and the present surely seems like a less than propitious moment to launch a book about Japan’s political system. But this book is about deeper structural changes that shape the ways in which political parties compete with each other, how they fashion their party platforms, and who will be the winners and losers in the Japanese political economy in today’s hard times, and in years to come.

The pivot of our analysis is a momentous change in electoral rules in 1994, when Japan abandoned its personalistic Single Nontransferable Vote system in favor of new rules with a more partisan and more majoritarian cast. Under the old system, three to five candidates were elected from each district. Multimember districts sound innocuous enough, as long as voters vote for parties, and each party receives its fair share of legislative seats. But in the old Japanese system, voters could cast only a single vote for an individual candidate, and since any party seeking to win a legislative majority had to field multiple candidates in most districts, electoral competition was dominated by blood feuds between members of the same parties.

The Liberal Democratic Party formed a legislative majority in 1955 when two smaller parties merged. Gaining control of the budget and policy making gave the majority party a huge advantage, but it now had to mitigate the potentially fratricidal combat among party members who were running against one another in each district. Following the path of least resistance, the party sought to distribute votes across multiple candidates by giving individual politicians the resources with which to cultivate personal followings. The LDP sold targetable favors in the form of tax breaks, budget subsidies, and regulatory and trade protection to corporate and agricultural constituents. With the coffers of campaign contributions raised from these sales, LDP politicians ingratiated themselves with voters. LDP politicians and their minions showed up at weddings and funerals with money in their pockets. They sponsored flower-arranging classes, local festivals, trips to hot springs, and all sorts of other activities that connected name recognition with goodwill in their districts.

Money-intensive electoral politics and politicized market regulation introduced huge inefficiencies into the economy. These were largely invisible during the 1960s and 1970s, when export revenues were pouring in and the economy was growing rapidly. To be sure, Japanese voters as consumers were paying exceedingly high prices because politicians were selling protectionist regulation to industry. And protectionist regulation dampened the motivation to innovate in many areas. But for Japanese voters enjoying rising incomes and high employment, the occasional glimpses of government-business corruption were not alarming.

Many Japanese voters and foreign admirers thought that the postwar economic miracle would last forever. The Japanese system seemed a smarter variant of capitalism that took seriously the value of government-business cooperation, long-term corporate planning, and worker loyalty. Japan enjoyed superhigh economic growth and rapid urbanization for decades without experiencing the ill effects that often attend social dislocation, such as income inequality or crime. In the world outside, Japan’s buying spree of American and European real estate and corporate assets set off waves of awe, self-doubt, and xenophobia.

Despite appearances of stability, however, tectonic plates were shifting under Japan’s postwar political economy that eventually set off a succession of political earthquakes. First, Japan metamorphosed from a poor agrarian society into a rich urban one. Not only are wealthier voters less easily impressed by pork and patronage, but urban, middle-class voters were ill served by the barriers to food imports and the bullet trains to nowhere with which the LDP had consolidated its rural base. As the interests of a dwindling rural population diverged from those of a burgeoning urban one, the LDP’s electoral machine became less efficient in generating electoral majorities. Electoral costs soared, and politicians’ need for ever more campaign finance led to an accelerating drumbeat of scandals.

Second, as Japan’s economy grew, it became inextricably intertwined with the world economy. However much the LDP may have tried to help Japanese exporters and protect importers, Japan’s growth intensified foreign demands that it open its markets to foreign competition. Sectors of the economy that depended less on government protection, including automobiles and consumer electronics, came to see the LDP’s dependence on the agricultural vote, and on campaign contributions from weak sectors of the economy, as a liability. Foreign governments, angry about Japan’s agricultural protection, had no means of retaliating directly against Japanese farmers, but they could pressure Japan by imposing tariffs on Japanese cars or electronics. Economic globalization thus exposed the internal contradictions of the LDP’s winning coalition of steel and rice, and the party split and lost power for the first time.

New electoral rules adopted in 1994 ushered in a system of 300 plurality-rule single seat districts and 180 seats allocated to parties proportionally, with voters casting two separate votes—one for a district candidate and the other for a party list. This is a complex electoral system with some subtle effects that we describe, but the upshot of it is that it eliminates intraparty competition and strengthens parties’ ability to put forward competing platforms that aim at the average voter—urban and middle-class. Institutions matter, but they themselves are shaped by political choices. We pay careful attention to the reasons why the politicians adopted these new rules, so as not to confuse the effects of the underlying reasons for change with the effects of the rule change per se.

Sweeping demographic and economic changes doomed the old coalition of steel and rice producers, rendering the electoral system for which it had been constructed an anachronistic burden. But there is more than one way in which rich democracies can come to terms with their largely urban populations and globalized economies, and Japan’s particular choice of electoral rules has sweeping consequences that we document in this book. By moving in a majoritarian direction, Japan’s political leaders chose electoral rules that would produce policies with a strong neoliberal center of gravity. A political party seeking a legislative majority under these new rules needs a broad coalition of voter support, the most efficient strategy being a set of policies that appeals to many voters without imposing unnecessary costs. Parties competing under majoritarian rules tend to emphasize low taxes and consumer protections over redistribution and protection. The contrast with proportional electoral systems—the road not taken in Japan—is striking. Where parties get legislative representation in proportion to their actual popularity (especially when districts are large and even small parties can win a few seats), a single majority party is unlikely and governments are formed by coalitions of parties. But because each individual party remains separately accountable to its particular constituency base, coalition governments often logroll to give each party something that its constituents care about intensely. Governments in proportional representation countries are more likely than governments in majoritarian countries to establish strong social security systems and regulations protective of labor and other groups that might be disadvantaged by trade openness.

The current financial crisis that erupted in the autumn of 2008 will loom large in discussions of policy and politics for some time to come. Governments everywhere must focus on the immediate threats to banking systems, employment, and consumer confidence. This might make a theoretical approach such as ours, which emphasizes the importance of institutions and the rules for political competition for explaining long-run patterns in politics and economic policy making, seem hopelessly academic.

But the current crisis will end at some point. While we cannot predict precisely what Japanese political economy will look like as the country grapples with emergency measures—which party or coalition will hold power, or how soon Japan will return to the path of economic liberalization—we are more sanguine about predicting the medium-term future. Unless the current crisis generates a strong enough sense of economic insecurity to cause Japan to abandon its new majoritarian electoral rules in favor of more proportional rules, the eventual policy response will be consistent with maintaining free markets internationally and domestically.

As we elaborate in this book, however, Japan faces a larger challenge than merely climbing out of the current economic malaise. In a society that is aging more rapidly than any in history, whose working-age population is shrinking precipitously, and whose welfare model has until now depended on employment protection for male breadwinners, the increased volatility brought by globalization and liberalization will send shockwaves through Japanese society for decades after the financial crisis has subsided. Inequality will rise to levels unknown since the 1950s. Japanese governments will have to build a new welfare model that can withstand the creative destruction of more unfettered capitalism and the inevitable expansion of economic immigration. Our reading of the New Japanese Political Economy suggests that the outcome will resemble the liberal market economies, such as the United States and the United Kingdom, much more closely than they will the more comprehensive social welfare systems of continental Europe.

Acknowledgments

Writing a book is rarely a solitary experience, and ours has been enriched with help from many quarters. In some ways our collaboration began almost twenty years ago at the University of California, San Diego, where Gary Cox and Mat McCubbins inspired us to learn more about American politics as a vantage point from which to think about Japan, and where we benefited enormously from their interest in Japan. In subsequent years we have gained insights and received corrections from conversations with many colleagues on both sides of the Pacific. In particular, we wish to thank Masahiko Asano, Kathy Bawn, Barry Burden, John Campbell, Peter Cowhey, Gerry Curtis, Margarita Estévez-Abe, John Fere john, Alan Gerber, Carol Gluck, Keizo Goto, Peter Gourevitch, Bernie Grofman, Koichi Hamada, Yasushi Hamao, Yusaku Horiuchi, Takeo Hoshi, Ikuo Kabashima, Junko Kato, Masaru Kohno, Ellis Krauss, Ikuo Kume, Arend Lijphart, Kenneth McElwain, Meg McKean, Michio Muramatsu, Megumi Naoi, Greg Noble, Roger Noll, Hugh Patrick, Robert Pekkanen, T. J. Pempel, Sam Popkin, Mark Ramseyer, Steve Reed, Ron Rogowski, Jun Saito, Rob Salmond, Dick Samuels, Hiroshi Sasaki, Ross Schaap, Ethan Scheiner, Len Schoppa, Susan Shirk, Matthew Shugart, Jack Snyder, Steve Vogel, Rob Weiner, Barry Weingast, and David Weinstein. Jun Saito and Annalisa Zinn had a great deal to do with the research and analysis behind chapter 8, for which we thank them. Margarita Estévez-Abe’s and Len Schoppa’s suggestions made for a much better book, and their factual corrections spared us grave embarrassment. Carles Boix suggested links to the literature on democratic transitions, Torben Iversen insisted on relevance to comparative political economy, and Ian Shapiro cleared away more jargon from the manuscript than we like to admit. For excellent research assistance, we would like to thank Linda Hasunuma, Andrea Katz, Natsu Matsuda, Shoki Omori, Adam Scharfman, Sakina Shibuya, Kyohei Yamada, and Yuki Yanai—Japan scholars of the future.

We are fortunate to have been the recipients of generous funding from a variety of sources including the Council on Foreign Relations, the Abe Fund, and the MacMillan Center for International and Area Studies at Yale, as well as UCLA’s Terasaki Center for Japanese Studies and Academic Senate Committee on Research. For masterful editorial help and suggestions, we thank Chuck Myers at Princeton University Press.

Abbreviations and Stylistic Conventions

ABBREVIATIONS

Electoral Systems, Political Parties, Politics

Bureaucratic Agencies and Programs

CONVENTIONS

For Japanese names, we follow Japanese practice and write the surname first, followed by the given name.

Romanization of Japanese words is not completely standardized, especially as regards long vowel sounds, as with the o sounds in Tokyo. In some works, long vowels are presented with a macron over the vowel, or as oh or ou. Except in the case of names whose owners prefer another style, we eschew all such guides to pronunciation, and do not distinguish between long and short vowel sounds. We are hoping that if the text is ever performed onstage or reproduced as an audio book, a fluent speaker of Japanese will be hired for the job and will know what to do.

Japan Transformed

CHAPTER 1

Why Study Japanese Political Economy?

INTRODUCTION

Japan limped into the twenty-first century with an economy in deep malaise. Following the collapse of the Tokyo stock and real estate markets that began in 1990, the Japanese economy failed to regain its stride, languishing at near-zero growth for a decade and a half. Saddled with a large fiscal deficit, the government was hard pressed to stimulate the economy in the wake of the 2008–2009 financial tsunami originating in New York.¹ The prolonged slump that had been called Japan’s lost decade began to look more like a chronic affliction.

Despite appearances, Japan is not an economic has-been on its last legs but a country in the throes of a transformation from a corrupt, managed economy to an economy shaped by a more open and scrappier political process. Japan’s political system is healthier than ever before, though it will be tested heavily by new global pressures, rising inequality, and a rapidly aging population. This book seeks to explain what happened to create Japan’s new political economy, how it matters, and what it means for Japan’s future.

Japan’s twenty-first-century metamorphosis into a normal democracy has not gripped the attention of the West as did its earlier phase as a voracious conqueror of export markets seemingly on the verge of global economic dominance. The subject of hysterical movies, xenophobic rhetoric, and countless university courses, the once-defeated Japan had turned the tables and was now the Godzilla invading American shores.² In 1988 a group of U.S. congressmen, protesting what they felt were Japan’s unfair trading practices, smashed a Toshiba boom box with sledgehammers on the steps of the Capitol. Historian Paul Kennedy declared that Japan was poised to replace the United States as the world’s leading economy.³

Japan deserves more attention today than it received in its false glory days. As subsequent events made clear, much of the earlier fanfare about, and fear of, Japan was misplaced. Japan’s economic model was not nearly as powerful as it looked. Large market shares masked thin profits and low productivity, signaling trouble for the economy’s endurance. Government protection let inefficient industries survive for too long, hampering what Joseph Schumpeter once described as capitalism’s innovative creative destruction. Essential postwar industries became national and global laggards, compounding inherited problems in the financial and public sectors of the economy.

Though with little domestic fanfare and even less notice from the rest of the world, Japan began reinventing itself in the 1990s in ways that evoke parallels with the Meiji Restoration of 1868. As with the Meiji overthrow of the Tokugawa regime, Japan’s political economy in the twenty-first century replaces a failed attempt to close its borders with one that accepts integration with the world economy as inevitable. Also as occurred in the Meiji Restoration, the old political structure that rested on uncompetitive domestic forces collapsed, to be supplanted by new institutions more compatible with global integration. Japan’s new electoral rules, established in 1994, create noticeably different incentives influencing how politicians regulate the economy and how they approach foreign policy. Because Japan remains the world’s third largest economy,⁴ it is important to understand how its domestic politics will shape its engagement with the world in years to come.

Transformations like those Japan is undergoing tell us about how politics works in a more general sense. When do political institutions change, and do they matter apart from the forces that brought about their change in the first place? How powerful are institutional incentives in shaping the political and economic landscape? How do they interact with inherited political culture and the interests of entrenched elites?

Most theories of politics of the developed world are based on the experiences of the United States and Europe. Despite being one of the world’s richest countries, Japan is often the odd man out, not only because language barriers impede the full integration of Japan’s experience into the Western canon, but also because the policies Japan has adopted have seemed anomalous in the context of either Anglo-American laissez-faire or continental European welfare states. Now that Japan is moving in an Anglo-American direction, should we interpret these changes as harbingers of global economic convergence? The key to understanding the economic system to which Japan is moving, we will argue, lies both in pressures from the world economy and in how they are filtered through domestic political institutions.

JAPAN IN THE WORLD

Despite nearly two decades of economic stagnation, Japan remains a colossal power. Its economy is enormous, and although it has been surpassed in absolute size by China’s (with China’s ten-times-as-large population), Japan is economically still more than a third larger than fifth-ranked Germany and twice as large as the United Kingdom or France. Although Japan officially has no army, navy, or air force, owing to its constitutional renunciation of war, the Japan Self Defense Forces (SDF) are in fact a formidable military by another name. By many other measures as well, Japan is an extremely influential player whose actions have bearing for world peace, prosperity, and health. Understanding why the Japanese do what they do on the world stage requires knowledge of how Japan’s democracy translates the preferences of its citizens, interest groups, bureaucrats, and politicians into national policy and action.

Table 1.1 compares Japan with other OECD countries, plus China, in terms of territory, population, and economic size. Japan’s millions are densely nestled in the valleys and narrow plains of a mostly dormant volcanic mountain range, forming the four major islands and countless small ones that make up the Japanese archipelago. The total land mass is smaller than the state of California and only 4 percent of the size of the United States, and only 12 percent of Japan’s land is arable. Japan is also physically smaller than France and marginally larger than Germany and the United Kingdom. Metropolitan Tokyo, with over 35 million residents, is the world’s largest city, dwarfing Mexico City (19 million) and New York City (18.5 million).

With few stores of natural resources but considerable ingenuity, occasional predation, and institutionalized economizing, Japan built a powerful industrial economy to rival the world’s greatest. Japan’s 2008 GDP per capita was $35,300, well behind Luxembourg’s $85,100 and the United States’ $48,000, but above Germany’s $34,800 and far, far ahead of China’s $6,100. Japan’s weight is felt in visible industrial exports, as well as in its less visible purchases of raw materials from around the world. Japan exported $566 billion worth of industrial and other products in 2007, 22.4 percent of that to the United States and 13 percent to China. Japan’s imports lean toward fuel and raw materials rather than finished manufactured products, a pattern that has gotten it in trouble with its trading partners that covet greater access to Japanese consumers. Toyota, Mitsubishi, and Sony have long been in greater evidence around the world than are American or European counterparts in Japan. In more recent decades, Japanese games and animation have also captured worldwide audiences as the Japanese economy shifts into software and services.

TABLE 1.1

Japan’s Place in World Rankings, 2008: Size and Wealth

Source: Central Intelligence Agency. 2009. The 2008 World Factbook. https://www.cia.gov/library/publications/the-world-factbook/.

Note: The numerical rankings are for all countries of the world, but these lists include only the thirty OECD member countries, plus China and an entry for the European Union as a whole.

†Area includes both land and water, which explains why the United States is ranked as larger than China.

‡GDP and GDP per capita are measured at Purchasing Power Parity. Measured instead at current exchange rates, Japan’s economy is still somewhat larger than China’s.

The Japanese government has spent considerable sums in support of its diplomatic aims to maintain peace and prosperity. Japan is the number two foreign aid donor in the world behind the United States, and also second to the United States in terms of support for the United Nations, the World Bank, and the International Monetary Fund. As a fraction of GDP, Japan pays the UN twice what the United States contributes (and more than Germany or the United Kingdom), and its contributions to the World Bank and the IMF, respectively, are greater than, and on par with, those of the United States.⁵

Evidence of Japan’s financial muscle is consistent with its typical description as an economic giant, but Japan’s military strength is less widely understood. After World War II, the Japanese public was not only disillusioned with the militarism of its own government but also horrified by the devastation visited upon Hiroshima and Nagasaki by American atomic bombs. Japan’s low military profile, though initially imposed via the 1947 constitution by the U.S.-led Occupation, retains widespread popular support. As the economy prospered, however, the small percentage of Japan’s GNP allocated to military expenditures grew to enormous sums. Although Japan’s $42 billion spent on defense in 2007 is still less than 10 percent of the U.S. defense budget, the striking feature of contemporary military spending is not how little Japan spends but how far ahead of the rest of the world are U.S. military expenditures. The United States accounts for about two-fifths of the world’s military expenditures, which is as much as the fourteen closest-ranking military spenders combined, and seven times more than China.⁶ Japan’s military budget in 2007 ranked seventh in the world, after the United States, China, Russia, France, and the United Kingdom, but ahead of Germany.

By whatever measure, Japan is one of the world’s greatest powers. Understanding how Japan became powerful and how it uses its might is important, if for no other reason, for grasping the prospects for world peace. General theories and approaches of politics, suitably modified, are useful in enabling us to understand Japanese politics and policy making. At the same time, the Japanese example can help us understand what is idiosyncratic about theories developed in the American or European contexts, and can contribute to more general theories of politics.

THEORIES

We build the case here that Japan’s policy choices are politically shaped rather than culturally or economically determined, and that politics in Japan follows a logic similar to that of politics elsewhere. There are numerous examples of existing theories that explain aspects of Japanese po litical economy quite well. As we discuss in the following chapters, materialist and institutionalist theories of democracy receive validation in explaining when representative government took root in Japan. A classic materialist account of Japan’s current democratic stability would credit relative income equality after World War II with limiting leftist demands for redistribution. Institutionalists would point to constitutional provisions that regularized political competition and sustained among the electorate stable expectations of peaceful contestation for power. Theories of strategic competition predicted accurately both the number of factions in the LDP and the number of political parties that survived.⁷ For the reforms of the 1990s, materialist theories help account for the collapse of Japan’s electoral rules in terms of changes in the distribution of economic resources. Institutionalist theories, which shift the focus to the electoral underpinnings of policy making, are important for elucidating how electoral incentives buffered and channeled economic pressures for several decades prior to the collapse.

While Japan nicely showcases the usefulness of