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The Post-War Japanese Political-Economy: From the Japanese Miracle to the Lost Decade

The Post-War Japanese Political-Economy: From the Japanese Miracle to the Lost Decade

The rise of the Japan out of the ashes of the Second World War amazed the world, with many proclaiming the 'Japanese miracle'. Japan underwent a rapid economic expansion, becoming one of the economic superpowers of the world in just thirty years. Many attributed this success to the perceived stability, and stalwart nature of the Japanese government and political-economy. Despite this, Japanese postwar politics have been criticized as overly stable. While such a criticism might appear paradoxical, the excessive stability of the system, turned it into an unwieldy bulk, which no one could control nor steer through troubled economic waters.1

The policies which created a stable foothold, for Japan to rebuild itself, also led to its stagnation, as economic and political rigidity caused the country to become inflexible and prone to destabilization. Following the end of the Second World War on September 2nd, 1945, Japan came under Allied, mainly American jurisdiction and control, as efforts were made to demilitarize the country. From the end of the war until 1952, Japan was under the control of the Allied Occupation. Consequently the country lost much of its autonomy, and was obliged to passively follow American policy decisions.2

During this period the main focus of both the Japanese government and American military was to rebuild the country. The devastation left by the war, as well with Japan's uncertain future prospects, led both the American military and Japanese civilian leadership to opt for strong centralized control.3 This trend of strong central control, has led Japan to be characterized as a unitary state. Unitary states concentrate power at the national level, with limited local authority.

Emergence of the Asian Model of Capitalism

Proponents of this power structure argue that this configuration leads to more effective governance, as well as preventing federalism, which is seen to weaken state efficiency.4 It is also important to clarify the level of state participation in the Japanese economy, for it is not an entirely planned economy. The Japanese economy is described as operating along 'developmental-state' or 'organization-oriented' capitalism, as opposed to purely market-orientated capitalism such as in the United States.5 Therefore, while the market is the main guiding force of the economy, the government does shepherd it in order to achieve its industrial policies.6 The climate of the Cold War, along with the virulent anti-communism in America and its policy of containment, prevented any more state control, for the United States would not have allowed the emergence of a communist system in Japan.7

This preference for centralized power, is not foreign to Japanese history for both military and civilians planners during the 1930s distrusted capitalist motives and market forces, preferring strong governmental control in the economy.8 While the American military undertook efforts to break the link with the old regime, American economic directives fostered the continuation of wartime policies, such as wage and price controls.9 Such measures along with the creation of the Economic Planning Agency (EPA), further reinforced the inclination of the Japanese bureaucracy “to arrange economic affairs, as well as their disinclination to trust markets.”10 There are however, those who argue that the emergence of the 'Japan Model' (to be discussed in detail later on) is more complicated. Lincoln argues that the development of the unique nature of the Japanese political-economy, was not merely a regression back to Imperial practices or passive acceptance of American directives, rather the product of serious thought and debate.11

While certain tendencies and aspects of the Japanese political-economy continued into the post-war era, the government took an active role in shaping the new peaceful Japan. The Japanese economy has long been modelled along the lines of a family dynamic, with the state playing a paternalistic role.12 Since the distinction between the state and the private sector is substantially blurred, the government is not viewed as interfering, rather managing the constituent parts of the nations.13 While this notion of “administrative guidance” harkens back to WWII policies, the post-war Japanese government altered and developed the idea, with it eventually becoming a defining feature of government-industry interactions. 14

The late 1940s and 1950s saw the creation of both legislation and policy designed to stabilize the economy and promote reconstruction. The implementation of the Finance Act 1947, began an era of responsible government spending, and introduced the notion of a balanced budget. The Act also included a clause prohibiting the issuing of long term national bond debt.15 1952 saw the creation of the Loan Trust Law, which authorized trust companies to use general public stable funds and channel them into critical industries.16 These actions were implemented in order to prevent any turbulent market or financial behaviour, for the government needed the economy to remain predictable in order to effectively rebuild Japan. This preference for stability was further enhanced when, in 1955, after a decade of fractious politics, the Liberal Democratic Party (LDP), came to power.17 The LDP would rule Japan almost continuously for the next 54 years, massively impacting both the economic and political profile of the nation.18

The LDP and its Mighty Morphing Ministries

The progression of the postwar Japanese political-economy can be divided into three phases, the high growth period lasting roughly from 1952-1970, the stable growth period of 1975-1990, and the stagnation of the 1990s. The period of high growth was characterized by an average annual growth rate of 10%.19 Such high growths rates were due to several factors, such as the imposition of high tariff barriers which kept foreign competition at bay, as well as specifically targeted subsidies to key industries such as automobiles, electronics and semiconductors.20

These policies were part of a larger economic plan which the LDP actively pursued throughout the 1960s and 1970s. During this period two institutions rose massively in prominence and influence; the Ministry of Finance (MOF) and the Ministry of International Trade and Industry (MITI). The MOF regulated the budget and allocated capital funds based on industry needs, as well as government loans, tax incentives and subsidies. The MITI was charged with the promotion of long term strategies and industrial policies.21

The MOF and MITI helped, with ever increasing control, focus government energy on the economy. During the late 1950s and early 1960s, Japan witnessed large budget increases, although this was due to the authorities constantly underestimating both economic and tax revenue growth rates.22 The government also enjoyed increased power over the economy, following the 1966 recession, when the restrictions of the Finance Act were loosened, allowing the government to adopt strong policies concerning business fluctuations.23 Whereas there existed relatively few public enterprises in Japan, during this period, especially when compared to Europe, there emerged a trend of government organizations with business functions.24

These organizations were funded by off-budget monies, and subsequently went unnoticed in their developmental stage during the Occupation. During the 1960s and 1970s, these organization's efforts emerged as the Fiscal Investment and Loan Program (FILP).25 FILP was financed by the postal savings system, thereby setting up parastatal organizations; further consolidating government influence in the economy. This “second budget” freed the LDP from having to consult the Diet for budget approval.26 Japan is characterized by a high savings rate,27 a fact which was utilized by the government as it heavily prioritized economic development over individual consumption. This money was in turn channelled through parastatal organizations or as rewards to LDP friendly companies, with Japan seeing an enormous expansion in infrastructure.28

The Emergence of Keirestsu and the Creation of Japan Inc. 

During the early 1970s the Japanese economy began to slow, as the economy matured and also due to the shocks of the two oil crises.29 The slowdown saw the government strengthen its ties with the business community. The close connections between government officials and the business community in Japan, creates an interesting power paradigm. The influence of companies and 'companyism' is key to understanding postwar Japan.30 Powerful conglomerates have a long history in Japan, as witnessed by the economic power wielded during the pre-war years by family controlled zaibatsu (plutocrats).31

Following the war the more loosely organized keiretsu (business groups), emerged, and founded strong connections with the LDP.32 The keirestsu are defined by strong corporate governance and bank centred finance, in which a network of businesses are controlled by a financial institution. This financial institution owns stakes in the other companies of the group33, and companies draw their largest loans from the group bank.34 This network is designed to foster stability, stable profits as well as to minimize risk and increase ease of business within this group of companies.35

Whereas most governments would see such networks as competing sources of power, the LDP co-opted the keiretsu system and used it as a tool to direct the economy to its wishes. In exchange for “protected and profitable niches”36 along with the proliferation of informal cartels and other anti-competitive behaviour, keiretsu companies and the LDP came to a power sharing arrangement.37 The keiretsu can be conceptualized as “semi-autonomous empires with their own spheres of influence,”38 protected by the government, and in return they headed both formal and informal signals concerning the allocation of credit.39 In addition to such actions, the weak enforcement of and exceptions to anti-trust laws, permitted price cartels and other forms of collaboration by producers.40

The Descent from Heaven

The interplay between the LDP and industry was deeply entrenched, with huge amounts of money going into the pockets of LDP politicians in the form of gifts and party donations.41 Additionally it was common practice for the Secretariat of the MOF to place retiring officials on the boards of keiretsu, in a process known as amakudari; or 'descent from heaven'.42 These contacts between “zoku (business family/clan) representatives and ministry bureaucrats closely resemble those of business partners.”43 This relationship between businesses, the central government and the LDP came to be called 'Japan Inc.'44

The late 1970s and1980s exposed the Japanese economy to tumultuous events, and ultimately demonstrated that below the perceived serenity of the Japanese political-economy were deep structural problems. Whereas in previous decades the government had attempted to avoid deficit spending, the slower growth of the economy caused a net loss in revenue, as expenditures outpaced the tax-base. This caused the government to reappraise the financial system, switch from credit banking to direct finance and to print large numbers of public bonds.45

This prompted the government to implement the one year Fiscal Exception Law in 1974.46 This law would enable the government to issue bonds to cover the difference, yet despite being originally intended as a brief stopgap, the government issued bonds every year until 1989. This deficit spending along with increasing protective costs as the government switched from promoting 'winners' to protecting firms in economic trouble, caused a ballooning of government debt. In 1975 the debt to GDP ratio was 10%, 30% in 1980, and 40% in 1985 .47

In order to counter slower economic growth during this period, the government attempted to institute reforms. Prime minister Yasuhiro Nakasone attempted to make state enterprises more efficient and profitable, however only a few companies were actually privatized.48 Many agencies and bureaucrats often barred privatization efforts, for they were reluctant to lose control and influence.49 During the 1980s the government monopolies on telecommunications, airlines, railroads and salt and tobacco were challenged with many arguing that private ventures could do a better job, for the state had retained control since the pre-war years, mainly for 'strategic purposes.'50

Burst Bubble & The Lost Decade

While the number of government cartels diminished from 1079 in 1971 to 12 in 1997, government restraint was replaced with private influence, for “revisions in the power balance should not be confused with the reform in the system.”51 It appears that the bubble economy in the late 1980s as well as the efforts of the government to mask structural flaws by artificially stimulating demand, postponed potential detrimental economic effects.52 Arguably that such staling led to an even harsher and more precipitous drop in economic performance in the 1990s.53

The burst of the bubble economy in 1991, initiated a decade of negligible economic growth, deflation and stagnation.54 The government did not act quickly enough for “Japanese industrial policy became a liability, too slow to react to the unknown future direction of markets.”55 The government adopted several stimulus packages, yet they were too small to be effective, and its reliance on the keiretsu banking system further hampered it.56 The government's tacit consent to bail out banks and its commitment to support its valued corporate clients only worked smoothly when there were not many troubled banks or borrowers.57 The banking crisis and the 1997 Asian Financial Crisis demonstrated the inability for the Japanese government to quickly respond to volatile economic situations. The United States and other developed economies responded quickly to the banking crisis and instituted polices within a year, whereas it took Japan almost a decade to do so, as politicians did not want to be associated with unpopular measures.58

Public frustration boiled over in 1993 with the (albeit temporary) toppling of the LDP government, causing political institutions to go into crisis.59 During the 1990s, the issue of corruption became a massive issue, as the public vented their anger at the lack of progress, which subsequently fall from grace of Japanese bureaucrats in the eyes of the public.60 When then postal minister Junichiro Koizumi, advocated the privatization of the post office in 1992, the LDP blocked the motion for it threatened their 'special franchise' – namely the critical role of postmasters in mobilizing votes in rural areas.61 The expensive and corrupt election process also came under scrutiny, being described as “an effective political machine based on intensely competitive pork-barrel politics at the local level.”62 Such a system contributes to what Stockwin calls 'money politics', with politicians using their keiretsu connections to fund their campaigns, with wide ranging nepotism, as 40% of Diet members are the sons or close relatives of former members.63

Many analysts argue that the “very institutions that fostered Japan's economic success, later contributed to its failure.”64 Whereas political control over the economy and centralization of power aided Japan during its recovery and reconstruction, such strict oversight strangled its attempts to flourish as a developed economy. The political-economy of the country, led by the LDP, was encumbered by corruption and unethical and ultimately unproductive collusion between the public and private spheres. Fettered by bureaucracy, nepotism and cronyism, the Japanese economy payed the price during the 1990s for the sins of the government. As government and business became more intertwined, they became entangled in an unwieldy arrangement, and this leviathan became bogged down in the economic quagmire which it itself had churned up.

Works Cited:

Alexander, Arthur J. 2008. The Arc of Japan's Economic Development. London ;; New York: Routledge.

Boyer, Robert, and Toshio Yamada. 2000. Japanese Capitalism in Crisis :A Regulationist Interpretation. Routledge Advances in International Political Economy. London ;; New York, N.Y.: Routledge.

Cheung, Gordon C. K. 2003. The Political Economy of Japan :An Analysis of Kokutai and Keizai-kai. 2nd ed. Singapore: Eastern Universities Press by Marshall Cavendish.

Lincoln, Edward J. 2001. Arthritic Japan :The Slow Pace of Economic Reform. Washington, D.C.: Brookings Institution Press.

Nakamura, Takafusa. 1995. The Postwar Japanese Economy: Its Development and Structure, 1937-1994 [Nihon keizai.English]. 2nd ed. Tokyo: University of Tokyo Press.

O'Neil, Patrick H. Essentials of Comparative Politics. New York: W.W. Norton, 2010.

Tabb, William K. 1995. The Postwar Japanese System :Cultural Economy and Economic transformation. New York: Oxford University Press.

Vogel, Steven Kent. 2006. Japan Remodeled :How Government and Industry are Reforming Japanese Capitalism. Cornell Studies in Political Economy. Ithaca: Cornell University Press.

Yoshikawa, Hiroshi, LTCB International Library Trust, and Kokusai Bunka Kaikan. 2002; 2001. Japan's Lost Decade. LTCB International Library Selection;. 1 English ed. Vol. 11. Tokyo: International House of Japan.


1J.A.A. Stockwin, “The Need for Reform in Japanese Politics,” in The Vitality of Japan: Sources of National Strength and Weakness, 91-112, ed. Armand Clesse, Takashi Inoguchi, E.B. Keehn, J.A.A. Stockwin (Basingstoke, UK: Macmillan Press, 1997), 92.

2Gordon C.K. Cheung, The Political Economy of Japan: An Analysis of Kokutai and Keizai-kai, 2nd ed. (Singapore: Eastern Universities Press, 2003), 24.

3Arthur Alexander, The Arc of Japan's Economic Development (London: Routledge, 2008), 74.

4Patrick H. O'Neil, The Essentials of Comparative Politics, 3rd ed. (New York: Routledge, 2010), 39.

5William K. Tabb, The Postwar Japanese System: Cultural Economy and Economic Transformation (Oxford: Oxford University Press, 1995), 35.

6Cheung, 15.

7Cheung, 3.

8Alexander, 74.

9Alexander, 68.

10Alexander, 68.

11Edward J. Lincoln, Arthritic Japan: The Slow Pace of Economic Reform (Washington: Brookings Institution, 2001), 18.

12Cheung, 14.

13Cheung, 15.

14Cheung, 15.

15 Takafusa Nakamura, The Postwar Japanese Economy: Its Development and Structure – 1937-1994, 2nd ed. (Tokyo: University of Tokyo Press, 1995), 125.

16Tabb, 126.

17Cheung, 3.

18J.A.A. Stockwin, 96.

19Hiroshi Yoshikawa, Japan's Lost Decade, trans. Charles H. Stewart (Tokyo: International House of Japan, 2001), 9.

20O'Neil, 95.

21Cheung, 13.

22Nakamura, 126.

23Nakamura, 125.

24Alexander, 139.

25Alexander, 139.

26Alexander, 140.

27Japan's average savings rate was 27% from 1960 to 1987, much higher than the 17% of the United States during the same time – Cheung, 29.


29Toshio Yamada, “Conclusion: an epochal change...but uncertain future” in Japanese Capitalism in Crisis: A Regulationist Interpretation, 192-215, Routledge Advances in International Political Economy, ed. Robert Boyer, Toshido Yamada (London: Routledge, 2000), 192-193.

30Toshio Yamada, “Japanese capitalism and the companyist compromise” in Japanese Capitalism in Crisis: A Regulationist Interpretation, 19-32, Routledge Advances in International Political Economy, ed. Robert Boyer, Toshido Yamada (London: Routledge, 2000), 28.

31Lincoln, 25.

32Lincoln, 25.

33Alexander, 92.

34Lincoln, 25.

35Lincoln, 26.

36Lincoln, 21.

37Ibid, 18.

38Stockwin, 104.

39Lincoln, 21.

40Steven K. Vogel, Japan Remodeled: How Government and Industry are Reforming Japanese Capitalism, Cornell Studies in Political Economy (Ithaca: Cornell University Press, 2006), 54.

41Stockwin, 104.

42The Japanese government consists almost entirely of career bureaucrats. The low retirement age of 55, saw many placed in keiretsu boardrooms as post-retirement employment. - Lincoln, 49.

43Tabb, 248.

44Cheung, 10.

45Toshio Yamada, “Conclusion: an epochal change...but uncertain future”, 193.

46Alexander, 140.

47Alexander, 140.

48Alexander, 137.

49Vogel, 63.

50Ibid, 138.

51Tabb, 201.

52Vogel, 31.

53Vogel, 24-25.

54Yoshikawa, 9.

55Lincoln, 78.

56Vogel, 25.

57Vogel, 39.

58Yoshikawa, 207.

59Toshio Yamada, “Conclusion: an epochal change...but uncertain future”, 207.

60Toshio Yamada, “Conclusion: an epochal change...but uncertain future”, 207.

61Vogel, 108-109.

62Stockwin, 99.

63Stockwin, 201.

64Vogel, 29

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