The destiny of Japan, for a long time the strongest Asian economy, continues to raise concerns. The country that entered a downward spiral at the onset of the 1990s continues to struggle with the realization of an economic recovery. For many years following “the catch-up model of economic growth”, Japan is now stuck in the quagmire of weak growth and excessive bureaucracy that blocks progress (Gibney 1998:39). Will the needed drastic changes be implemented, realizing the long-awaited fundamental transformation? Opinions differ on this issue.
Some believe that the Japanese people are aware of the crisis in their economy and have manifested support for economic deregulation, and that economic and political pressures will compel significant liberalization of the national economy. Others points to signs of slowdown in the reform process. This paper will consider both sides of the argument and try to answer the question whether Japan will be able to achieve a liberal, competitive economic model. 1. Reforms in the Financial Sector The greatest promise for economic liberalisation in Japan is held by the reforms of the Japanese banks and other financial institutions.
Allocation of financial resources to promising projects is the most necessary condition of successful business development. In Japan, in contrast to the classical market economies, capital had always flowed under the strong influence of the state and was tied in integrated economic units such as keiretsu and zaibatsu. Distribution of funds on the basis of family ties or political connections often led to ineffective allocation and accumulation of non-performance loans on the banks’ portfolios.
Following the failure of three Japanese banks, Sanyo, Hokkaido, and Yamaichi, the nation’s leadership implemented a series of measures that came to be known as the “Big Bang” of 1996. The insurance and securities business was liberalised, corporations received tax cuts, and “the regulatory power of the Ministry of Finance” was limited through the establishment of a host of complementary bodies including a Bank of Japan, the Financial Reconstruction Commission, and the Financial Supervisory Agency (Helwig 2000:30). The Big Bang initiative has led the Japanese government to adopt more market methods in the regulation of the banking sector.
Thus, it permitted banks to write off their non-performing loans instead of supporting them with cash infusions as was the tradition before. Japanese companies began to seek support of the foreign capital. As a result, the Foreign Direct Investment flows doubled in1997-2000 and comprised $11. 3 billion in the first half of 1999 (Helwig 2000:31). The rise in investment activity is signalled by the need to create more markets in Japan, including a NASDAQ Japan planned venture and MOTHERS (Market of the High-Growth and Emerging Stocks).
The proliferation of new trading opportunities will facilitate small companies’ access to capital, spearheading economic development. These efforts have led to a spree of new IPOs, often underwritten by foreign banks whose role in the Japanese economy has increased manifold since the liberalisation when they were permitted to “participate in the mutual fund and retail banking sector” (Helwig 2000:32). These developments in the financial sector represent a radical change in the Ministry of Finance’s regulatory philosophy. In 1994, even the proposal to liberalise certain auto insurance products was accompanied by vehement rejection of the MoF.
The Ministry officials, talking about “excessive competition”, seemed to accept the idea that “competition is evil” (Gibney 1998:118). Maintaining the so-called Goso Sendan regulatory regime, the MoF helped borderline firms to survive and function. The bankruptcies of the three large banks, however, convinced the Japanese financial regulators that they could not bear the burden of overseeing the health of their sector on their own. The result was a quick development of the area and the spread of new financial products, such as pension accounts modelled after the US 401(k) plans. 2.
Industrial Development The promise has appeared not only in the financial sector – the liberalisation is also felt in Japanese industry. With the election of Junichiro Koizumi as Prime Minister, the government rhetoric changed to indicate that the reformers have come to power. The fact that Koizumi could win popularity by “criticizing his party’s habit of funnelling subsidies to inefficient, but well-connected sectors of the economy, such as public-works contractors” inspires confidence that the Japanese public may finally have realised that reforms are inevitable (Shoppa 2001:77).
Within private Japanese companies, the economic slowdown and liberalisation of the financial sector that has inspired banks and other companies to invest in promising firms has led to the shift of the attention to the bottom line. Businesses have become more interested in profits than ever, and this drives them to undertake voluntary restructurings, enter alliances and merge, split off non-core businesses, and take measures to reform their operations, increasing their competitiveness in the global markets (Helwig 2000:33).
The influx of foreign investment and the advent of overseas companies have given Japanese managers new insights into the nature of their business, exposed them to global pool of technical and managerial expertise, and propelled their drive to achieve competitive advantage over foreigners. The reforms might be breaking up traditional keiretsu structures, promoting a freer circulation of shares.
For instance, Fuji Bank and the Industrial Bank of Japan, after the merger with Dai-ichi Kangyo Bank have announced their decision to sell a part of their stock to the public (Helwig 2000:34). The restructuring of fixed interwoven ownership structures of keiretsu groups, increasing public control of major corporations. When the company’s body of shareholders widens to include individuals, foreign buyers and other corporations, the pressure on the management to reform their business to implement global standards will rise, leading to positive changes in business.