The Japanese Economy Reconsidered

The Japanese Economy Reconsidered Makoto Itoh The Japanese Economy Reconsidered Also by Makoto Itoh THE WORLD ECONO...

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The Japanese Economy Reconsidered

Makoto Itoh

The Japanese Economy Reconsidered

Also by Makoto Itoh THE WORLD ECONOMIC CRISIS AND JAPANESE CAPITALISM POLITICAL ECONOMY FOR SOCIALISM POLITICAL ECONOMY OF MONEY AND FINANCE (with Costas Lapavitsas) THE BASIC THEORY OF CAPITALISM

The Japanese Economy Reconsidered Makoto Itoh Professor of Economics Kokugakuin University Tokyo

© Makoto Itoh 2000 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1P 0LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2000 by PALGRAVE Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N. Y. 10010 Companies and representatives throughout the world PALGRAVE is the new global academic imprint of St. Martin’s Press LLC Scholarly and Reference Division and Palgrave Publishers Ltd (formerly Macmillan Press Ltd). ISBN 0–333–66519–8 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Itoh, Makoto, 1936– The Japanese economy reconsidered / Makoto Itoh. p. cm. Includes bibliographical references and index. ISBN 0–333–66519–8 1. Japan—Economic conditions—1945– I. Title. HC462.5 .I86 2000 330.952—dc21 00–041488 10 09

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Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham, Wiltshire

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Contents

viii

List of Tables and Figures Preface

ix

1 The Long Downturn in the Japanese Economy High Economic Growth and its Deadlock The Basic Framework of High Economic Growth Was it a Keynesian or a Fordist Regime? The Deadlock of High Economic Growth Several Phases of Continuous Instability An Inflationary Crisis, 1973–75 Recovery Through Exports and State Expenditure, 1976–79 A Longer Downswing, 1979–83 Recovery Following Reaganomics, 1983–85 Depression Due to the Soaring Yen, 1985–86 Recovery Induced by a Bubble, 1987–90 Complex Depression in the 1990s Strengths and Weaknesses of the Japanese Economy Strengths Weaknesses Toward Zero Growth Capitalism? Complex Depression Due to the Burst of the Bubble A Tendency Toward Industrial Hollowing-out and De-industrialization Depressed Consumer Demand and Excess Capacity Falling Population

1 1 1 3 6 8 9 11 12 13 13 14 16 17 17 20 23 24

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25 27 28

vi The Japanese Economy Reconsidered

2 Information Technologies and Competitive Restructuring of Capitalism The Impact of the Information Revolution Technological Grounds Changes in Capitalist Firms Changes at the Workplace and in the Labour Market The Revitalization of the Atomistic Market Economy Diversification of Models and Products The Restructuring of the Retail Market System Are Consumers in a Stronger Position? Neoliberalism and the Spiral Reversal of Capitalist Development The Historical Tendency of Capitalism Until the Beginning of the 1970s The Spiral Reversal of Capitalist Development The Significance of and Problems Created by Neoliberalism 3 Changes in Industrial Structure and Family Life Industrial Hollowing-out Changes in Industrial Structure Toward a Service Economy The Soaring Yen and Changes in Industrial Structure Industrial Hollowing-out Passing a Watershed The Economy Shifts Toward the Tertiary Sector An Expanding Service Sector A General Tendency Toward a Service Economy The Influence of ME Information Technology The Impact of the Soaring Yen Changes in Family Life and Challenges of Feminism The M-Curve of Japanese Women’s Labour Participation Rate and its Changes Changes in Family Life How Should the Tendency Toward Lower Population be Analysed? The Significance of Falling Population and Possible Options 4 The Burst of the Bubble and the Political Economy of the 1990s Depression The Swell of the Bubble The Triggering Role of Monetary and Fiscal Policy

30 30 30 32 34 37 37 38 39 42 42 44 45 49 51 51 53 54 56 56 56 58 60 61 61 65 69 71

76 77 78

Contents vii

Economic Recovery with Expanding Domestic Demand The Role of the Financial System The Burst of the Bubble and the Pressure of Depression The Process of Bursting the Bubble Complex Linkages in the Spiral of Depression Failure and Confusion in Economic Policy The Failure of Neoliberalism Political Economy of the Fiscal Crisis of the State

80 83 87 87 90 94 94 97

5 Asia and Japan in the Process of Globalization The Globalization of the Capitalist Economy What does Globalization Mean? Contemporary Features The New World Order and Globalization The Globalization of Japanese Capitalism The Asian Connection High Economic Growth of Asian Economies in the Vicinity of Japan Globalization and Diversification of Economic Systems The Meltdown of the Asian Economic Miracle and After

106 106 106 108 111 115 121

Concluding Remarks

134

Notes and References

138

Bibliography

145

Index

149

121 123 128

List of Tables and Figures

Tables 1.1 Basic Indices of the Japanese Economy (1973–98) 3.1 Distribution of Employed Workers by Industry (1930–97) 3.2 International Comparison of Distribution of Employed Workers (1968–95) 4.1 Outstanding Government Bonds and the Rate of Taxation (1973–99) 4.2 The Government’s Outlook on Economic Growth and Actual Results (1991–98) 5.1 Regional Distribution of Outstanding Overseas Direct Investment by Major Countries (1977–95)

9 50 52 98 100 118

Figures 1.1 Capacity Utilization in Japanese Manufacturing (1973–95) 3.1 Female Labour Participation Rates by Age Group (1975–96) 3.2 International Comparison of Female Labour Participation Rates (1987–90) 4.1 Nikkei 225 Shares Average Price by Half Year (1983–97) 4.2 Indices of Land Prices (1983–96)

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Preface

In 1973, high economic growth in the Japanese economy, characteristic of the long boom following World War II, came to an end. The economy entered a dramatic long downturn lasting to the present day. The annual average growth rate fell sharply from 9.2 per cent in 1951–73 to 3.9 per cent in 1974–90. Despite this downswing, until the end of the 1980s the Japanese economy was generally regarded as exceptionally stable, strong, and exempt from the worldwide crisis that emerged at the beginning of the 1970s. Its growth rate was still higher than that of other advanced countries by 1–2 per cent. The rate of unemployment seemed much lower. By 1987, combined with the effect of continuous appreciation of the yen, Japan’s GDP per capita surpassed that of the USA in international dollar-denominated comparison. Several Western scholars, such as Vogel in Japan as Number One (1979) and Johnson in MITI and the Japanese Miracle (1982), presented Japanese success stories as appropriate lessons for other countries. The Japanese style of business and labour management, based on Japanese social culture and orchestrated by clever bureaucrats with a longer perspective on industrial policies, was thought to be the secret of Japan’s economic success. In the 1990s, the Japanese economy continued to record large trade surpluses by maintaining its international competitive power on the basis of workers’ cooperation with management. Thus, Japan has accumulated by far the largest amount of foreign exchange reserves in the world – US$220 billion by the end of 1997 – and the largest foreign assets. She has, indeed, more than achieved the long-cherished national target set at the Meiji Restoration in 1868 (the beginning of her modernization), namely to catch up with Western advanced countries and become one of the major economic powers. ix

x The Japanese Economy Reconsidered

These facts notwithstanding, the great majority of Japanese people are uneasy and worried about their economic life. In the 1990s, Japan has experienced a severe stagnation in wages, and the reduction of overtime wage income and bonus cuts, while educational and medical expenditures and the burden of consumer tax increased. Business failures, loss of employment even in mid-career, and a difficulty in getting proper jobs even for young people and graduates, have become commonplace. At the same time there is concern about insurance and pension funds, and even deposits with banks and other financial institutions. While giving rise to such serious anxiety and real difficulties among the mass of the people, the Japanese economy has also dramatically deteriorated in terms of macroeconomic performance in the 1990s. Its average growth rate in 1991–98 declined to 1.2 per cent and has become the lowest among advanced countries. The economy has approached a nearly zero growth rate, and in some years (such as fiscal years 1997 and 1998) it has actually registered growth below zero. Its growth trend thus seems to have made a double downward lurch: from high economic growth of nearly 10 per cent, to below 4 per cent, and further to nearly 1 per cent. What happened to the Japanese economy? Has there been mismanagement of it? Or does its predicament reveal a new trend in the Japanese economy, as well as the fundamental instability and a crisisridden nature of the capitalist market economy in a contemporary way? These questions require reconsideration of the Japanese economy. The following five overlapping issues are fundamentally important in this connection. First, why and how did the process of high economic growth end, ushering in a period of lower growth trend, and, further, extremely low growth in the 1990s? Is the Japanese economy fundamentally strong or weak? Can the Japanese economy overcome the present extremely low rate of growth and restore an intrinsically higher growth path in the twenty-first century? Or are we about to witness a real-life test of the viability of capitalism with zero or negative growth? Second, what has the impact been of spreading information technologies? How are they related to revitalization of competitive market economy and intensified individualism? In common with other advanced countries, the previously influential ideologies of Keynesianism and the Welfare State began to be replaced by neoliberalism in Japan at the beginning of the 1980s. At the same time, Japan became even

Preface xi

more strongly a company-centred society. In general, the big Japanese enterprises managed to secure cooperation of their workers, to improve their financial structure and to intensify their international competitive power. On the other hand, militancy of trade unions in protecting and strengthening the position of workers has been much weakened. Combined with the effect of the collapse of Soviet-type socialism, this has led to a serious crisis and many trials for the Japanese left. Third, what changes have occurred in Japanese industrial structure and family life? Has there been an industrial hollowing-out in Japan? How have the service, or tertiary, industries fared? How are we to analyse these changes with the future of society in mind? The changes in family life and lifestyle of women are also great. The challenges posed by feminism have important implications in this respect. How are we to assess and cope with the rapid decline in population growth and transition toward an ageing society? This is also an issue of great importance for the Japanese economy in the twentyfirst century. Fourth, the way in which the huge bubble of the late 1980s has burst, its strong deflationary impact, and distribution of the burden it has bequeathed are certainly worth reconsideration. Why did such a huge bubble swell in the Japanese economy, and why has it been so difficult to overcome the resultant bad loans? Are the difficulties simply limited to mismanagement originating in financial circles, or is there a vicious circle between finance and industry (between money capital and real capital)? We also need to rethink the government’s responsibility in deepening the fiscal crisis of the state, given that it has not properly understood the downward shift of growth in the Japanese economy. Are there possible alternatives for solving the fiscal crisis? Fifth, what is the effect of globalization of capitalist economies on the Japanese economy? What is Japan’s position in the new world order, given the trend toward globalization? Important issues also emerge here in relation to economic growth and crisis in the Asian countries in the vicinity of Japan. This volume examines these issues and reconsiders the Japanese economy at a historically significant turning point. Methodologically, the volume is at the level of concrete empirical analysis of contemporary capitalism, and certainly not at the level of principles of political economy, or at the intermediary level of stages theory of capitalist

xii The Japanese Economy Reconsidered

development – to use K. Uno’s distinction.1 Following Uno’s methodology, I have avoided direct application of basic theories to the level of empirical analysis. As a result of this approach, I hope that this volume as well as my earlier The World Economic Crisis and Japanese Capitalism (Itoh 1990) can find a broader readership among those who do not have an academic background in economics or theories of political economy. Any reader interested in the recent performance of the Japanese economy can easily follow the substantial contents of this volume. However, my own theoretical background is in Marxist political economy. My other books in English, Value and Crisis (Itoh 1980), The Basic Theory of Capitalism (Itoh 1988), Political Economy for Socialism (Itoh 1995), and Political Economy of Money and Finance (Itoh and Lapavitsas 1999), are largely concerned with basic theories of political economy. The theoretical background provided by these works, though not directly applied here, still guides my analysis in this volume by establishing the following broad historical perspective. Capitalist development has entered a spiral of reversal on a large scale, toward a more competitive and globalized market order. It used to be thought that capitalism had begun to move away from its pure form, based upon an autonomous free market economy, at the time of the first great depression of 1873–96. With the growth of heavy industry, giant industrial corporations tended to form monopolistic organizations in order to avoid free competition. Trade unions could grow relatively easily within such industries as well as in the public sector, and protect workers’ positions by tempering cut-throat competition. State interventionism intensified in one way or other, beginning with imperialism, and had to oppose socialism, especially after the Russian Revolution. Thus, Uno thought that capitalist development after the late nineteenth century became increasingly impure, diverging from the model of pure capitalist society. After a century of such trends, however, the signs point to capitalism spiralling back to its intrinsic direction of development, giving rise to a great depression after 1973 and moving again strongly toward a more competitive market with a reduced role for the state. The tidal shift in policy away from Keynesianism and toward neoliberalism has found material grounds in such underlying changes in the capitalist economy, and is not just a reaction to the failures of Keynesianism. At the same time, the emergence of gigantic financial bubbles and the destructive effects of their bursting reveal anew the

Preface xiii

fundamental instability of the capitalist financial system, though the contribution of misguided policy to those should not be discounted. The capitalist market order, as it attempts to increase its efficiency, operates destructively not only through financial crises but also in creating difficulties for the lives of the mass of the people. The performance of the Japanese economy is of worldwide interest and importance not only because of its enlarged size, but also because it exemplifies these changes that are common to all advanced industrialised countries – without denying its specific features. The Japanese economy was supposed to be a model economy in the recent past until the end of the 1980s. For non-Japanese readers, it is worth understanding the actual processes taking place in the Japanese economy in order critically to assess the contemporary world and their own countries by comparison. In my earlier book, The World Economic Crisis and Japanese Capitalism (Itoh 1990), I was critical of the excessive praise heaped upon the Japanese economy. I pointed to some serious distortions, especially in the economic life of workers, and suggested the danger inherent in the collapse of the speculative bubble economy. I stated, for example, that: ‘If the time-bomb of speculative bubbles actually explodes in the revived stock exchange market or in the real estate market with a rise of interest, the end of this extended boom will be more acute and decisive’ (p. 179). Incidentally, this is the most worrisome aspect of the US economy at present. The ‘time-bomb’ actually exploded in Japan with severe destructive effects, although the process was less acute and more prolonged than I had imagined. I have felt that I ought to extend the analysis presented in that book, including this particular point. Though my basic view of the underlying changes in the Japanese economy has not altered much, this volume contains new insights from a deeper reconsideration, as well as developing the previous book to account especially for the 1990s depression. I shall be happy if this volume helps readers critically to appraise the contemporary Japanese and world economies. I also hope that it is of some help in restoring the will and the hope for better alternatives for the new century in the spirit of international cooperation among people. Several people and institutions helped me greatly in writing this volume. Costas Lapavitsas took the trouble of editing the first draft, facilitating revision of some parts with his professional knowledge of

xiv The Japanese Economy Reconsidered

the Japanese economy. I was fortunate enough to be invited to deliver a lecture course on ‘World Capitalism and the Japanese Economy’ at the University of Sydney for two months in the summer of 1997, thus preparing the substantial contents of this volume. Communication with Joseph Halevi, Frank Stilwell and Dick Bryan, as well as their students at the University of Sydney, was especially encouraging and stimulating. I benefited also from the opportunity to give lectures at the series of Iwanami seminars for the general public in the autumn of 1997 in Tokyo. This resulted in a book in Japanese, [Reconsideration of the Japanese Economy ] (Tokyo: Iwanami-shoten, 1998), on which this volume heavily depends. Two international conferences were also useful in developing related chapters of this volume. One was ‘From Miracle to Meltdown: The End of Asian Capitalism?’ held by the Asia Research Centre, Murdoch University, Australia, in August 1998. The other was on ’Housing Finance Futures: Globalization, Housing and Inequality in Japan, the USA and South Korea’ at the University of California, Riverside, in March–April 1999. Communications and conversations with Andrew Glyn, Bob Rowthorn, Geoff Hodgson, Gary Dymski, Robert Brenner and Robert Boyer on various occasions were both enjoyable and stimulating in the preparation of this volume. In Japan, Makoto Iki helpfully obtained recent macroeconomic data; Mariko Adachi helped with data on women’s social life; and Akira Matsumoto found data on land prices. Other colleagues and friends who helped are too numerous to mention. I am deeply indebted to those persons and institutions, though any imperfections this volume may contain are certainly my responsibility. Makoto Itoh

1 The Long Downturn in the Japanese Economy

High economic growth and its deadlock The basic framework of high economic growth The Japanese economy has been in continuous downturn since 1973, initiated by the inflationary crisis of 1973–75. Broadly, the process of this downturn lasting to the present time can also be seen as a continuous crisis, enforcing a great transformation of society, with hardships for capitalist firms and working people. Through the long downturn the Japanese economy has performed a double shift downward: from high economic growth to lowered growth, and further to extremely low growth in the 1990s. Each time the result has been a growth rate less than half the one before. The origins of economic crisis as well as the determinants of its special features are usually found in the preceding phase of prosperity. In the 22 years since 1951, the Japanese economy enjoyed continuous prosperity with an average annual growth rate of 9.2 per cent, and increased its real GDP sevenfold. Such high economic growth now seems an old fable of miracles, though it was a relatively recent occurrence. Let us reconsider the major factors behind continuous high economic growth in the Japanese economy, and why and how they came to an end at the last phase of that period. In retrospect, Japanese high economic growth was made possible within a basic framework consisting of the following four factors: 1. A favourable international environment. In contrast to the historical experience of defeated countries after World War I, the Cold War was 1

2 The Japanese Economy Reconsidered

favourable to Japan and other defeated countries. The main reason was the US global strategy of creating ‘a bulwark against communism’1 by the substantial reduction of war reparation in addition to a recovery aid programme. The special procurement demand by the USA for the Korean War in 1950–53 provided a further springboard for Japanese high economic growth. In the 1950s and 1960s, the rate of economic growth of advanced capitalist countries taken together was historically higher than during any other period – on average, about 5 per cent a year. Along with such high economic growth, world trade grew even more rapidly under the stable Bretton Woods international monetary system: real average annual growth amounted to about 7.6 per cent.2 These were evidently favourable circumstances for the Japanese economy, allowing it to expand exports relatively easily in line with rapid growth and to obtain the necessary means of international payment for increasing the imports of oil, other primary products and new technologies. 2. Availability of new technologies. A wide range of industrial technologies, mainly from the USA, were made available to Japan in the postwar period. The high adaptability of Japanese workers to new technologies, based on a steadily rising level of education in addition to training experience gained during World War II, and the cooperative attitude of company-based trade unions made it possible for Japanese firms easily to transplant one modern industrial technology after another, mainly from the USA. As this process was taking place, production and utilization of various consumer durables of increasingly higher quality became generalized in Japan, eventually transforming the country into an automobile society. At the same time, Japan was increasingly becoming a high energy-consumption economy, in particular a high oilconsuming economy. The proportion of oil in the Japanese energy supply increased from 20.5 per cent in 1955 to 77.6 per cent in 1973. 3. Favourable terms of trade. An increased supply of cheap oil, at below US$2 per barrel, was steadily available as a result of expansion in the supply of oil from the countries of the Middle East. Dollar prices of other primary products, such as iron ore, wood, cotton and corn, also remained low in the world market until the late 1960s. Consequently, the terms of trade moved favourably for Japanese manufactured goods. In addition, as the productivity of Japanese manufacturing industries rose more rapidly than that of most primary industries

The Long Downturn in the Japanese Economy 3

abroad, the labour costs to the Japanese economy of obtaining a given quantity of primary products from abroad were steadily reduced. 4. Relatively cheap and docile labour. As the proportion of Japanese workers employed in primary industries fell from 54.2 per cent in 1947 to 12.7 per cent in 1975, the total number of Japanese wage workers increased by almost 20 million, from 14.2 million in 1950 to 33.8 million in 1970. Such a large shift in working population away from agricultural areas provided the necessary amount of relatively cheap labour for the rapid growth of urban secondary and tertiary capitalist industries. On this broad basis, the Japanese style of labour management, which rests on lifetime employment (that is, until about 55–60 years of age), seniority wages and company-based trade unions, became widespread among large enterprises. This style of management was a result of the historic compromise with the militant labour movement immediately after World War II. It was also suitable to the need of large firms stably to procure the increasing numbers of experienced workers they required, and resultantly promoted a loyal and cooperative attitude among Japanese workers. At the same time, we should note that under the so-called dual structure of the labour market, the even larger proportion of Japanese workers in medium and small firms did not enjoy lifetime employment with seniority wages. With lower wages and insecure employment, workers in medium and small firms continued to put in long hours of hard work, participating in Japan’s company-centred postwar social culture. Japanese capitalism took advantage of the dual structure of the labour market through the highly organized subcontracting system between large, medium and small firms as an efficient way of exploiting workers with lower wages.

Was it a Keynesian or a Fordist regime? What role did Keynesian macroeconomic policies play in bringing about the period of high economic growth? In the post-World War II period, Keynesianism became dominant on the basis of the argument that capitalism was able to achieve full employment and steady growth by means of effective demand policies. Most of the theories of state monopoly capitalism within the Marxist tradition also recognized the effectiveness of such government intervention in one way or another. Nevertheless, there is not much evidence, especially in Japan, that high


economic growth was supported by fiscal policy. Although the government certainly supplied the necessary infrastructure, such as seaports, roads, railways and communication systems, by expanding public expenditure, the state budget did not go into deficit but was in surplus due to the ‘natural’ increase of tax revenue as economic growth typically proceeded faster than initially forecast. Thus, Keynesian macroeconomic policies to expand effective demand by means of government budget deficits were not actually implemented. If Keynesianism were really effective, it is hard to understand why it could not prevent or solve the economic crisis and depression after 1973. In this regard, an alternative view advanced by the French Regulation school deserves attention. According to this school, although expansion of effective demand was essential for high economic growth, it was brought about not by Keynesian policies but mainly by the coordination (or spontaneous regulation) of the social relations between capital and labour in advanced countries. An explicit or implicit social agreement to raise real wages roughly in proportion to the annual increase in labour productivity became widespread and formed the Fordist regime of accumulation, or Fordism. A virtuous circle spread through proportionally expanding supply and demand among advanced capitalist countries, a social generalisation of the pre-war Ford factory with its high productivity and high wages. In the Fordist regime, the necessary expansion of effective demand for the maintenance of high economic growth was achieved through increased expenditure by workers’ households as real wages rose in line with productivity. Controversy exists about whether a Fordist regime of accumulation also emerged in Japan.3 Although some Regulationists, such as B. Coriat, do not agree with applying the concept to the Japanese economy, the high economic growth in Japan could well be interpreted as a model of Fordism. In the period of high economic growth, Japanese trade unions managed to raise real wages annually through the spring offensive (Shunto), and made possible the expansion of effective demand by workers’ households. More concretely, while Japanese manufacturing industries increased labour productivity by a factor of 3.99 (9.7 per cent annually) during 1955–70, real wages increased by a factor of 2.29 (5.7 per cent annually) in the same period. At the same time, it is noteworthy that the Japanese high economic growth was mainly dependent on an expanding domestic market and maintained a relatively low rate of export dependency (export/GNP) of around 10 per cent. The


increase in real wages together with a large increase in employment was clearly decisive in expanding the domestic market. Relative to a pure model of Fordism, however, there was not an explicit social contract to index wages relative to productivity in Japan. Rises in real wages tended to lag behind labour productivity. Therefore, two more factors were necessary in order to fill the gap between increases in labour productivity and in real wages. One factor was a continuous rise in income of agricultural families due to the combination of agricultural land reform after the war, price support for agricultural products (especially rice), and rising wage income from supplementary side jobs. Indeed, this period was exceptional in Japanese history as it witnessed a substantial improvement in the economic conditions of most rural areas equal to those in urban areas. Despite a reduction of working population in agriculture, the total number of farmhouses did not fall much below 6 million. A variety of consumer durables, such as electrical appliances, motorcycles and automobiles, were sold in large numbers to farmers’ households, while rural houses themselves were rebuilt in a more modern style. At that time, it was commonly said that the entire Japanese population of 100 million people were all becoming middle class. Though it was certainly exaggerated, this view reflected the perception of economic change among the mass of the people. The other factor was private investment demand in plant and equipment, which grew in real terms at the rate of 22 per cent per annum on average in 1956–73. Investment reached 25.1 per cent of Japanese GDP in 1973. Besides substantial profits reserved for reinvestment, 40–50 per cent of investment funds came from so-called bank overloan. Due to the need to save in order to be able to meet relatively high housing costs and expenditures after retirement, Japanese households maintained a high rate of saving – around 15–20 per cent of private disposable income. Banks could gather deposits from the savings of the public relatively easily just by paying almost zero real interest for depositors; they could then lend the money to big business for investment in plant and equipment. Thus, Japanese big business typically maintained a very high ratio of debt to own capital. In this regard, the Keynesian monetary policy of keeping the rate of interest low to encourage industrial investment did work, in the form of bank overloan. However, in contrast with Keynes’ original strategy of inducing the euthanasia of parasitic rentiers through inflationary monetary


policy, the Japanese policy of maintaining a low real rate of interest actually mobilized the savings of working people and provided cheap funds to big business. The deadlock of high economic growth The process of high economic growth for Japanese capitalism dialectically eroded its own basic conditions both internationally and domestically, and resulted in deadlock. At the international level, a series of advanced industrial technologies, which powered US economic hegemony until the 1960s, approached maturity. New types of innovation became necessary in order to reactivate further industrial development. As a result, the rising competitive power of Japanese industries, as well as that of Germany, began to imperil US economic hegemony. Thus, the trade balance of the USA turned from surplus to deficit in 1971. Simultaneously, and due to the continuation of the Vietnam War, US political and military expenditure abroad remained at a high level. Multinationalization of US firms from the 1960s onwards continuously increased private foreign investment, leading to the substantial outflow of dollar funds. In sum, the US balance of payments began to register massive deficits with little prospect of correction. Hence, as the US promise to convert US$35 into 1 oz of gold appeared less credible, dollar crises occurred. Speculative demand for gold in exchange for dollars was intensified and eventually led to the breakdown of the convertibility of dollars into gold in 1971 – in other words, the breakdown of the basic core of the Bretton Woods international monetary system. The Smithsonian floating peg system was put in place for a couple of years, but the international currency system became a fully floating exchange rate system in March 1973. It was generally believed at that time that gradual spontaneous changes in the exchange rates of currencies would resolve the international trade imbalance. The exchange rate of the currency of a country with a trade surplus would appreciate so as to promote increases of imports and decreases of exports, and vice versa for a country with a trade deficit. This theory of the automatic adjustment mechanism did not work, as we shall see later; particularly in the case of Japan. In the course of the transformation of the international monetary system, monetary authorities in several countries accumulated substantial dollar foreign exchange reserves and were apt to supply inflationary money and credit. Once convertibility of the dollar into gold


was abandoned, the US Federal Reserve was in a position freely to supply dollars (the key international currency). Therefore, inflation was accelerated globally. In Japan, the government and the Bank of Japan consciously promoted ‘adjustment inflation’ in order to avoid drastic appreciation of the yen against the dollar. It was expected that the difficulties confronted by exporting industries due to the depreciation of the dollar would be mitigated by such a policy. In 1973–74, the Japanese interest rate was kept below the rate of inflation, resulting in negative real interest rates. Speculative stockpiling, especially of raw materials financed by credit expansion, was naturally set in motion and contributed to inflation. Thus, in the course of the breakdown of the stable Bretton Woods international monetary system, vicious inflation spread across the world market, including Japan. Capitalist reproduction was thrown in turmoil and partially destroyed as the necessary means of production were withdrawn from the markets for the purposes of speculative stockpiling. Even potentially profitable industrial firms had to curtail their operations due to shortages of raw materials. Economic turmoil and difficulties accompanied by vicious inflation, however, were not only due to the loss of stability in money and credit. Continuous industrial capital accumulation in the advanced countries throughout the period of high economic growth rested on technologies that demanded much energy and resources. Such demand became excessive relative to the limited supply of primary products toward the end of the 1960s. One result was a rapid rise in the price of primary products, reflecting a changed balance between demand and supply. As a result, Japanese terms of trade worsened dramatically – by 32 per cent in 1970–74. The first oil shock, leading to a quadrupling of the price of crude oil within a short period from late 1973 to the beginning of 1974, was not an isolated event due to the fourth war in the Middle East, but formed the last phase in this trend of the world market. Since the Japanese economy depended more on primary products, especially energy resources, than most other advanced countries, the damage of the first oil shock was particularly great and was estimated to have directly reduced the Japanese economic growth rate by 3.8 per cent. At the same time, overaccumulation of capital occurred also in relation to the size of the Japanese working population, as in many other advanced countries. In the case of Japan, for the first time in its history as a capitalist country, the balance between demand and supply in the


labour market became favourable to workers. As a result, the negotiating position of trade unions was strengthened. Nominal wages in Japanese manufacturing thus rose by 63 per cent in 1970–73. After allowing for the rise in the consumer price index, real wages rose by 31 per cent. When deducting the rise in GDP deflator for manufacturing from the nominal wage index, we find that the rise in ‘product wages’ in manufacturing was 44 per cent in those three years. Since labour productivity in Japanese manufacturing rose only 27 per cent during the same period, the profit share declined from 40.7 per cent to 32.9 per cent. Combined with a sharp rise in the price of raw materials and fuel, this severely depressed Japanese rates of profit in 1970–73. It is estimated that the profit rate in business corporations declined from 34.8 per cent to 21.6 per cent (a fall of 38 per cent), and in manufacturing from 52.7 per cent to 38.8 per cent (a fall of 26 per cent).4 This occurred before the oil crisis, which made the situation worse. Thus, as the framework within which high economic growth had occurred actually broke down, the Japanese economy experienced difficulties arising from the overaccumulation of capital in advanced countries in the form of profit squeezing and vicious inflation. The process as a whole reveals the fundamental weaknesses of a capitalist economy in the contemporary world. A major weakness of capitalism lies in treating the human subjective capacity for labour as a commodity. An inelastic supply of labour power was actually combined with a similarly inelastic supply of primary products in the world market, and in combination constrained high economic growth by leading to overaccumulation. A further weakness lies in the difficulty of controlling speculative trading and limiting the boost given to speculation by the monetary and financial system. These fundamental weaknesses of capitalism have reappeared in the contemporary form of inflationary crisis after the breakdown of the Bretton Woods system. In response, international capitalism began to restructure itself, aiming at restoring the vitality of the competitive market. Below we examine more concretely what actually occurred in the Japanese economy after the period of high economic growth.

Several phases of continuous instability The Japanese economy entered a continuous process of crisis and transformation after 1973. Unlike the previous period of high economic


Table 1.1 Basic indices of the Japanese economy (1973–98) Years

1973 1974–75 1976–79 1980–83 1984–85 1986 1987–90 1991–92 1993–98

Real GDP Gross fixed Wholesale Balance of growth capital price state budget2 1 1 1 rate (trillions formation index of yen) (%) (%) (%) 8.8 0.8 5.2 3.5 4.8 2.6 5.0 2.8 1.0

13.7 5.1 5.1 0.3 5.0 4.8 9.9 1.0 0.3

15.8 14.9 3.1 3.9 0.4 4.7 0.1 0.1 1.1

0.2 2.8 9.6 12.9 11.7 8.4 5.0 7.0 18.9

Balance of trade2 (billions of dollars) 1.4 4.4 5.7 6.4 40.2 83.2 68.5 92.2 109.0

Notes:

1 Annual average rate of change. 2 Annual average amount. Averaged numbers may conceal wide fluctuations from year to year. For instance, the balance of trade in 1979 and 1980 was in large deficit, US$ 7.6 billion and US$ 10.7 billion, respectively. Source: Bank of Japan, [Comparative Economic and Financial Statistics].

growth, the Japanese economy became very unstable and experienced at least seven wildly fluctuating phases. The basic variables of these phases are summarized in Table 1.1. Although these phases form a continuous great depression, let us briefly review them as preparation for further analysis of the various changes in the Japanese economy and the nature of its double downward lurch. An inflationary crisis, 1973–75 By 1973, and as a part of the overaccumulation of capital in advanced countries across the world, Japanese capitalism was suffering from a falling rate of profit due to the increase in both real wages and the price of primary products from abroad. In contrast to the classic process of economic crisis in the periodical business cycle of the nineteenth century, the supply of money and credit was not restricted as crisis appeared, but greatly expanded as the Bretton Woods international monetary system broke down. As a result, speculative trading and inflation became pronounced in the Japanese economy as well as across the world. The Japanese government exacerbated this process by an ‘adjustment inflation policy’. Thus, the real rate of interest became strongly negative in 1973–74; more so than in other major advanced countries.


As wholesale prices went up sharply (see Table 1.1) – rising by 31.6 per cent in 1974, for example – speculative stockpiling of various raw materials increased enormously and disturbed the Japanese economy. In the classic type of crisis in the mid-nineteenth century, overaccumulation of industrial capital would result in a shortage of loanable capital, or money as means of payment, and would thus generate a superabundance of commodities seeking sale. This time, overaccumulation of capital appeared in the completely opposite form of a superabundance of money and credit and a scarcity of commodities necessary for production. The Japanese annual economic growth rate duly declined from 8.8 per cent in 1973 to 1.2 per cent in 1974. As the profit rate in Japanese manufacturing fell from 38.8 per cent in 1973 to 15.0 per cent in 1975, Japanese manufacturing and mining output fell rapidly by more than 20 per cent. Capacity utilization of Japanese manufacturing also declined sharply (see Figure 1.1). One-third of Japanese firms were estimated to be running at a deficit at that time. In all these respects, Japan was experiencing one of the worst inflationary crises among advanced capitalist countries. Through this phase of sharp crisis, vicious inflation was drastically damped down. The annual rate of increase in the wholesale price index fell from 31.6 per cent in 1974 to 3.0 per cent in 1975. The main reason was much depressed investment and consumption demand, which Figure 1.1 Capacity Utilization in Japanese Manufacturing (1973–95) 96 94 92 90 88 86 % 84 82 80 78 76 74 72 70 68 1973 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 Year

Note: December 1960 ¼ 100 (every June and December). Source: Nikkei data-base, Nikkei NEEDS (MT 863501).


sharpened competition among industrial firms. Also, in the face of such deflationary pressures, trade unions refrained from demanding substantial increases in real wages, while expecting companies not to dismiss their employees. Although Japanese unemployment also increased from 1.3 per cent (0.7 million) in 1973 to 1.9 per cent (1.0 million) in 1975, it was still quite low in comparison with other advanced capitalist countries. There are at least three reasons for this. First, Japanese firms maintained their lifetime employment policy, since they believed that the crisis would not last long, while also expecting the cooperation of trade unions in negotiating over wages and rationalization. Second, the official definition of unemployment is very narrow in Japan,5 and for the figure to be comparable with other advanced capitalist countries it should be at least doubled. Third, the tertiary sector was growing, and increased its employment by 0.9 million in 1973–75. Recovery through exports and state expenditure, 1976–79 The Japanese economy restored its real economic growth rate to 4.8 per cent in 1976 and maintained an annual average rate of 5.2 per cent in 1976–79 (Table 1.1). Capacity utilization in manufacturing also recovered to a certain extent (Figure 1.1). There are two major factors explaining this recovery. First, Japanese exports increased from US$56 billion in 1975 to US$98 billion in 1978, in conjunction with economic recovery in the USA, which was by far the largest market for Japanese exporters. The Japanese trade balance turned from a deficit to a surplus (Table 1.1), and was estimated to have raised Japan’s GDP by 2 per cent in each of these years. Extensive industrial ‘rationalization’ was powerfully pursued to expand Japanese exports. By restrengthening labour discipline, shutting down inefficient old lines and plants and introducing microelectronic (ME) automation systems, labour productivity in Japanese manufacturing increased at a remarkable 9.2 per cent annual average in 1975–80, even higher than that in 1960–65. During the same five years real wages remained quite stagnant, rising by only 1.7 per cent per annum and providing a typical new feature of post-Fordism in Japan. The gap between productivity and real wages, which reflected both the pressure of depression and the cooperative attitude of Japanese workers, was put to use to strengthen Japanese industrial competitive power in the world market.


Second, the Japanese government pursued a kind of Keynesian strategy and expanded public expenditure despite stagnant tax income. As a result, the state budget began to register huge deficits (Table 1.1), and the volume of outstanding government debt increased from ¥7.6 trillion (6.5 per cent of GDP) in 1973 to ¥70.5 trillion (28.7 per cent of GDP) in 1980. This also helped to restore effective demand and to reactivate the Japanese economy. It is remarkable that this huge increase in government debt did not fuel inflation. The annual rate of increase of wholesale prices fell to 3.0 per cent in 1975 and stayed at the moderate level of 3.1 per cent in 1976–79 (Table 1.1). This shows how deeply depressed domestic demand was on the side of consumption. Investment demand recovered, but slower than the total growth rate (Table 1.1). In addition, continuing high private savings, which were once channelled into industrial investment, were utilized as a very important source of funding for the government debt, thus contributing to avoidance of the inflationary expansion of money and credit.

A longer downswing, 1979–83 The second oil shock, which was initiated by revolution in Iran in October 1978, pushed up the oil price from US$13 per barrel at the beginning of 1979 to US$31 per barrel in May 1980. The rise in oil price by a factor of 2.4 is estimated to have directly reduced Japanese GDP by 3.3 per cent. The Japanese balance of trade turned again into a huge deficit, amounting to US$18.3 billion in the two-year period 1979–80 (see note 2 to Table 1.1). A sharp revaluation of the yen from ¥293 to ¥195 to the dollar between the end of 1976 and the end of 1978 tended to curb Japanese exports. Then, foreign markets depressed as a result of the second oil shock forced a reduction in Japanese exports by 8.8 per cent, from US$152 billion in 1981 to US$138 billion in 1982. Japanese exports remained low also in 1983 (below the level of 1981). Moreover, in 1981, Japanese economic policy shifted away from expansionary Keynesianism toward an austerity policy, following Thatcherism and similar policies in other advanced countries. Although state budget deficits continued to increase (Table 1.1), this was no longer due to expansion of public expenditure but rather to depressed tax revenue.


Therefore, two major factors that supported the previous recovery – namely, the expansion of exports and state expenditure – faded away. The underlying tendency toward great depression reappeared, and Japanese aggregate indicators drifted steadily downwards for three years after March 1980. Capacity utilization fell (Figure 1.1), and fixed capital formation became quite stagnant (Table 1.1). The rate of unemployment increased and touched 2.7 per cent in January 1983. Real wages in manufacturing declined by 1.5 per cent in 1980, and hardly rose until 1983. Japanese domestic demand and investment were thus very stagnant. These depressed conditions, together with tightened fiscal and monetary policies, explain why the Japanese economy could ‘absorb’ the second oil shock without facing vicious inflation (Table 1.1). Recovery following Reaganomics, 1983–85 The Japanese economy began to recover in the summer of 1983, following recovery in the USA. The annual rate of economic growth rose to 4.8 per cent in 1984–85 (Table 1.1). This recovery was obviously export-led. Japanese exports expanded rapidly from US$138.8 billion in 1982 to US$175.6 billion in 1985. The trade surplus increased sharply in this period (Table 1.1), and surpassed that of Germany in 1983. Japan’s export dependency reached a peak of 13.5 per cent in 1984. The strong expansion in Japanese exports was made possible not only by the recovery of the USA and other foreign markets, but also by the continuous strengthening of Japanese industrial competitive power as ME automation systems became widespread and combined with stagnant real wages. In addition, appreciation of the dollar, from ¥203 at the end of 1980 to ¥251 at the end of 1984 (a rise of 23.6 per cent), clearly facilitated Japanese exports to the US market. The dollar’s high exchange rate in spite of the increased US trade deficit resulted from extensive inflows of money capital to earn the higher rate of interest that emerged in the course of the Reagan recovery. As a substantial portion of such international money investment in the USA was a transfer of the Japanese trade surplus, a vicious circle appeared comprising increasing trade imbalance between the USA and Japan, speculative international monetary investment and appreciation of the dollar. Depression due to the soaring yen, 1985–86 The appreciation of the dollar against the yen was fragile, as it was contrary to the trend of trade balance and was maintained by speculative


financial investment. Thus, the exchange rate of the dollar fell sharply after the G5 meeting in New York in September 1985 (resulting in the Plaza agreement among financial ministers and presidents of the central banks of five major capitalist countries). Conversely, the yen soared from ¥240 to ¥150 to the dollar in just eight months until May 1986. As the Japanese recovery from 1983 fully depended on the expansion of exports, especially to the US market, the rapid appreciation of the yen was a serious shock for the Japanese economy. For example, in order to sell the same cassette recorder at the same price of US$100 in the US market, Japanese suppliers had to cut their export price from ¥24 000 to ¥15 000. Profits of business firms, especially in manufacturing, fell sharply. Among medium and small firms engaging in export-related business and manufacturing, cuts in operations, temporary or permanent closures and bankruptcies spread. The unemployment rate again increased to 2.8 per cent (1.8 million) in 1987. In 1986, although Japanese exports still increased in dollar terms, they fell in yen terms by 15.9 per cent compared to the previous year. While the wholesale price index fell by 4.7 per cent (Table 1.1), the Japanese growth rate fell to 2.6 per cent in 1986.

Recovery induced by a bubble, 1987–90 Despite depression in the real economy, the Tokyo stock market began to rise in 1986 along with the upward motion in the New York stock market. In 1986, the weighted average of 225 stocks in the Tokyo Stock Exchange (Nikkei average) rose from ¥13 137 to ¥18 701 (42 per cent). The average rose further to ¥26 646 by October 1987. Following a reduction in the US Federal Reserve bank rate, the Bank of Japan reduced its discount rate from 5 per cent at the end of 1985 to 3 per cent in November 1986, and further to 2.5 per cent in February 1987. This relaxation of monetary policy was implemented to reactivate domestic demand and to mitigate trade friction with the USA. Many large Japanese firms had improved their financial position by paying off older debts to banks, and further obtained idle money capital through equity finance. They were able to use plenty of idle money capital for speculative zaitech operations (financial techniques), while the size of their real investment had been stagnant and remained relatively low as new ME technologies were introduced. ME information technologies also helped banks and other financial institutions to mobilize idle funds,


and thus increased the liquidity of the economy. These circumstances combined to promote the rise of stock prices in Japan. In addition, real estate prices, especially in the Tokyo metropolitan area, began to rise, more than doubling in the two years from the beginning of 1986. Increased demand for office space and housing in the metropolitan area, given the tendency toward centralization of domestic firms and internationalization of the Japanese economy, expanded effective demand for real estate and tended to generate increasingly speculative transactions. Capital gains from the upward movement of prices of stock and real estate worked to reactivate domestic demand, beginning with the wealthier sections of the populace. Under the pressure of both depression and US requests to expand the Japanese domestic market in order to mitigate the trade imbalance, the Japanese government also implemented a large-scale emergency supplementary budget of ¥6 trillion (about US$40 billion) in the spring of 1987, turning away from restrictive policy. Local government was also advised to expand public expenditure. These expansionary policies added to the rise in real estate prices and fostered a recovery in domestic demand. Under pressure from trade frictions and the soaring yen, Japanese manufacturing firms also strove hard to regenerate domestic demand for their products, often by means of easier conditions for consumer credit. It was said at the time that Japanese businesses were cultivating anew the second biggest market in the world. Thus, recovery after the spring of 1987 clearly depended on a reactivated domestic market for the first time since the great depression began in 1973. Japan’s rate of export dependency decreased from 13.5 per cent in 1984 to 9.7 per cent in 1987, below its level in the period of high economic growth. The recovery was initiated by a financial speculative bubble and had an unstable relation to the financial boom. On 20 October 1987, a panic occurred in the Tokyo Stock Exchange: following the crash in New York on the previous day (Black Monday), the Nikkei average crashed by 14.9 per cent, the biggest ever fall in a single day. Although this crash created concern about the future in Japanese business circles that lasted until the beginning of 1988, the recovery and expansion of the real economy was not greatly affected. Led by the expansion of domestic consumer demand, investment in plant and equipment was also reactivated in 1989–90 after many years of stagnation in almost all areas of business.


Very cheap money became available by means of equity finance to promote such real investment, and was mobilized together with idle money accumulated within big corporations. Thus, investment in fixed capital formation contributed considerably to the expansion of domestic demand in this period (Table 1.1). The financial bubble once again swelled much more than the expansion of the real economy after the spring of 1988, and the Nikkei average reached its historic high of ¥38 195 at the end of 1989. The financial sector seemed most prosperous and enjoying relatively independent growth far beyond the pace of expansion of the real economy.

Complex depression in the 1990s The Japanese economy entered a phase of extremely low economic growth in the 1990s after the bubble burst, even lower than that of the lowered growth that prevailed after 1973. The Japanese government has repeatedly declared a recovery of the economy since the autumn of 1993. Nevertheless, unlike the US economy in the same period, the Japanese economy continued to register extremely low (almost zero) economic growth with much instability largely due to the soaring yen besides the cumulative difficulties in the financial sector until the middle of 1995. In 1996, recovery of consumer expenditure temporarily raised economic growth above 4 per cent. This recovery was mostly in order to avoid an announced increase in the consumer tax burden from the spring of 1997, and did not reflect an actual recovery of confidence. Indeed, after a rise of consumer tax from 3 to 5 per cent in April 1997 (together with a rise in individual costs for medical services), consumers reduced expenditure and the economy plunged into serious depression again. More than two years of negative economic growth followed. There was clearly an error in the government’s economic outlook, as indicated by the frequent declarations of recovery after 1993 and the mistake in raising consumer tax. In reality, the Japanese economy has remained in deep depression with a lowered growth rate. The major factors and problems that caused the complex depression of Japan in the 1990s will be re-examined later in this chapter. Before doing so, we should consider again why the Japanese economy seemed so strong until the 1980s, and summarize the strong and weak aspects of the Japanese economy.


Strengths and weaknesses of the Japanese economy Strengths There is no standard way of defining and measuring the strengths and weaknesses of an economy. The Japanese economy received a shock from the oil crises, suffering from a large trade deficit and a sharp decline of its growth rate, because its rate of import dependency for energy consumption was extremely high. Nevertheless, it managed to overcome the difficulties by intensifying its international competitive power, thus reversing the trade balance from deficit to a large surplus. According to conventional textbook analysis, in a floating exchange rate system the exchange rate of a currency of a country with a trade surplus will tend to appreciate, making imports easier and exports harder, thus returning the balance of trade to equilibrium at a certain exchange rate. The Japanese experience did not accord with this theory. The so-called reverse J-curve effect, which assumes that there would be an initial increase in the dollar amount of Japanese exports (kept at a similar volume by inertia) before this amount is reduced as a result of the appreciation of the yen, is an insufficient explanation of such a longterm phenomenon. The reaction of the Japanese economy to economic difficulties, including the oil crises and the appreciation of the yen, actually did not remain at the surface level of adjustment of international trade flows, but went deeper to strengthen its fundamental industrial competitive power. Relying on the cooperative attitude of workers, Japanese firms rapidly introduced ‘rationalization’ in the form of factory automation (FA) and office automation (OA) to confront their competitive difficulties. Workers in Japan’s large enterprises, benefiting from lifetime employment and company-based trade unions, did not offer much resistance to the reallocation of jobs in the course of the introduction of new technologies, as long as they could continue their careers with the same company and still receive seniority wages. ME ‘rationalization’, therefore, could be undertaken more easily. As a result, it is estimated that in 1986, for example, 60 per cent of all robots in the world were working in Japan. The number of industrial robots deployed in Japan in 1988 was 175 000, more than five times that of the USA, and nearly ten times that of Germany.6 Increasing sophistication in industrial technologies was combined with a re-intensification of labour discipline through small group


activity at the workplace, such as QC (quality control) circles, and ZD (zero defects) movement. In the ten years of depression since the middle of the 1970s, labour productivity in Japanese manufacturing more than doubled, rising even more rapidly than in the period of high economic growth. By increasing labour productivity, large Japanese industrial firms improved their international competitive power, overcoming the oil crises and the difficulties resulting from the appreciation of the yen. As a result, the trade surplus was not only restored but widened, especially after the middle of the 1980s. This was further facilitated by an unexpected appreciation of the dollar lasting until the Plaza agreement of September 1985. However, the rapid appreciation of the yen after the Plaza agreement did little to alter the rise in the Japanese trade surplus. Appreciation of the yen reduced the costs of imported energy, raw materials and intermediary products. This contributed to the fall in the total yen value of imports, thus substantially helping to increase the Japanese trade surplus (given that exports had not declined much due to the intensified competitive power of Japanese firms). The increased trade surplus acted for further appreciation of the yen, and thus led to a vicious circle. Due to this process, Japan’s foreign exchange reserves as well as her trade surplus became the biggest in the world. Japan also became the biggest creditor country, largely shifting surpluses from trade to financial investment in US securities (among others), while the USA became the biggest debtor country in the world. To a certain extent, the apparent strength of the Japanese economy was coupled with overspending in the US economy. Simultaneously, the financial position of Japanese big business was generally much improved. ME information technologies allowed large firms to raise labour productivity without large-scale investment in plants and equipment. Thus, higher profits were not fully reinvested into real capital. A substantial part of internal reserves of profit, together with extended equity finance in the 1980s, was used by big business to reduce past debt. The characteristic ‘overloan’ to industrial firms in the period of high economic growth thus came to an end. Even large industrial firms began to traverse ‘the golden cross’ – the point at which financial payments balanced out – and earn net surpluses in their financial operations. Toyota, for example, was often called the ‘Toyota


bank’ as its financial earnings from zaitech operations amounted to almost 40 per cent of its earnings from its main business of car production. If the financial position of a firm without net debt is thought of as desirable, then many Japanese firms improved their position and accumulated large amounts of idle funds that they could use for zaitech operations. As a result of continued appreciation of the yen driven by the intensified international competitive power of industrial firms, Japanese GNP per capita grew rapidly in dollar terms, and surpassed that of the USA in 1987. In that year national income (GNP) per capita was US$19 553 in Japan, higher than the US$18 570 in the USA and US$18 373 in West Germany. Though it was still lower than that of Switzerland, it was clearly the highest among the major countries. (After a decade of continuous severe depression in the 1990s, however, it again turned below that of the USA in 1999.) The long-cherished Japanese aim of catching up with Western economic powers seemed still distant in the middle of the period of high economic growth. At the very end of that period, however, Japanese national income per capita was actually approaching the level of many European countries. Yet, in the midst of continuous economic crisis and restructuring since 1973, Japan achieved this aim at a totally unexpected time, and mostly due to the appreciation of the yen. However, working people did not feel that their real standard of living had risen substantially since the mid-1970s, since everything that mattered to them was denominated in yen. Their real wages actually remained quite stagnant. It is curious to observe that even the stagnant real wages of Japan appear to have trebled in international comparison as the yen appreciated from ¥360 to the dollar in 1971 to ¥120 to the dollar in the 1990s. This is certainly an expression of the profound problem in economic theory of how to measure income and wealth accurately. Be that as it may, the strength of the Japanese economy attracted international attention, especially after the strong rise in national income per capita in dollar terms. At the same time, Japanese firms intensified their multinationalization and increased foreign direct investment in the late 1980s. In 1986–89, the outflow of Japanese long-term investment amounted to US$480 billion, and was huge in comparison with the outflows of long-term investment from the UK (US$70 billion) and from West Germany (US$60 billion). The amount of foreign direct investment


by Japanese firms reached US$110 billion in the same years. The presence of Japanese funds in financial markets and the activities of Japanese firms seemed much expanded across the world. By the end of 1980s, Japan was internationally thought of as a leading economic power, an impression that appeared to be shared by the majority of the Japanese people. The relatively low rate of unemployment added to the impression of good performance by the Japanese economy. In sum, the core of Japanese economic strength in these respects lay in the adaptability of Japanese firms in finding ways of restrengthening their international competitive power in the face of continuous difficulties. The feature of Japan as a characteristically company-centred society was thus continuously intensified. Weaknesses On the other hand, several weaknesses were piling up in the Japanese economy. In the process of the complex depression of the 1990s, their significance has grown as both cause and result. Two of these are particularly important. First, there were increasingly difficult conditions at work and worsening conditions of life for working people, as well as exacerbated socioeconomic unevenness. Above all, there was a broad unevenness between much increased productivity and stagnant real wages, unlike the previous period of high economic growth. In Japanese manufacturing, for instance, labour productivity increased by a factor of 2.17 from 1975 to 1985, even faster than during the period of high economic growth, whereas real wages increased by only 5.9 per cent during the same period. Even in the expansionist period of 1986–90, the disparity remained wide – a 33.9 per cent increase in labour productivity and an 8.7 per cent increase in real wages. The Fordist regime of accumulation, based on expansion of effective demand from within capital accumulation through raising real wages along with productivity, clearly broke down. Japanese firms would no longer redistribute among their workers an increasing share of the fruits of increased productivity. They utilized workers’ loyal cooperation to increase productivity and intensify their international competitive power, as well as to revise their financial position and accumulate spare money for zaitech. Yet they reduced workers’ earnings by limiting the number of regular workers and reducing payments for overtime, bonuses, and even wages. The social position of trade unions was weakened as various types of ‘irregular’,


unskilled part-timers and casual employees were increased in the course of the spreading of automation systems, both in factories and in offices. From the viewpoint of workers, their cooperation in the introduction of ME automation systems and their harder work with increased stress were not rewarded. Yet it was these factors that made possible the rise in productivity and the increase in the trade surplus, thus facilitating the appreciation of the yen. As a result, exporting industrial firms were forced to economize on wage costs and to push for further ‘rationalization’. A vicious circle was thus created, comprising more severe conditions for workers, intensified competitive power, appreciation of the yen, and further need for ‘rationalization’ based on more sacrifices by workers. The proportion of housewives with wage-earning jobs increased, spurred by the rising costs of childcare, education and housing, compared to the very stagnant real wages of their husbands. These women workers have been increasingly mobilized as a cheaper labourforce by firms employing automation systems. At the same time, as it became normal to have two wage earners per family, a rise in wages was prevented as the value of labour power was spread over plural members of each family.7 The tendency toward a smaller number of children per family originating largely in this change in family in a company-centred society, also limits the prospects for recovery of the Japanese growth rate. An important method of ‘rationalization’ for Japanese firms was to reduce the proportion of their regular workers. Relatively cheaper irregular workers, such as part-timers recruited among housewives, workers dispatched from other companies, and foreigners often without work permits, have been flexibly employed to economize on wage costs as well as on fringe benefit costs. Since Japanese trade unions focused mainly on organized regular workers, the rate of unionization inevitably and widely declined. The unions’ social position and negotiating power were thus much weakened. As a result, workers found it difficult to resist severe ‘rationalization’ and attendant reduction of regular employment, fringe benefits, extra payments and real wages. Wage differentials among different industries, firms, men and women, regions, workers with different educational backgrounds and job status in a given firm, and types of employment were diversified and expanded. Unevenness between wealthy assets owners and ordinary working people, or between urban areas and underpopulated rural villages, also widened through the period of the bubble economy in the late 1980s.


In the period of high economic growth, the entire population was said to become middle class and actually enjoyed a lessening of differentials in income and asset ownership. Under the same company-centred social order, the historical tendency to form a relatively egalitarian economic order in the period of high economic growth was completely reversed, and the unevenness of economic life was clearly increased in the period of competitive restructuring after 1973.8 This represents, in a sense, a restoration of the fundamental workings of a capitalist market economy, whilst worsening the distortions of social order unfavourable to economic democracy. A second serious weakness in the Japanese economy lies in the deepening fiscal crisis of the state. The Japanese state used to run balanced budgets in the period of high economic growth. In contrast, in the process of the great depression after 1973, the Japanese state has continually registered large budget deficits (Table 1.1). As a result, the total outstanding balance of government long-term debt increased enormously from ¥7.6 trillion (6.5 per cent of GDP) in 1973 to ¥327 trillion (66 per cent of GDP) in 1999. If that is taken together with shorter-term government debt, the total amount of government debt amounted to ¥502 trillion (101.2 per cent of GDP) in 1999. The ratio of such debt against GDP became higher than that of most major advanced countries. Interest payments on state debt reached ¥11.2 trillion in 1998, and absorbed 65 per cent of income tax. This burden of the budget crisis has tended to be shifted onto the shoulders of weaker people through cuts in state expenditure for welfare and public education, as well as the introduction of consumer tax in 1989. In 1997, the increase in people’s burden in the form of a rise in consumer tax rate, abolition of special allowances for income tax and medical insurance costs amounted to ¥9 trillion. Cuts in public pension provision and a shift toward pension schemes and the costs of care for the elderly relying more on individual responsibility are also on the agenda and being realized. On the other hand, emergency economic policies in the form of additional public expenditures favouring construction companies among others, and rescue operations for banks and other financial institutions were repeatedly undertaken, thus deepening the fiscal crisis of the state. The difficulties faced by many Japanese financial institutions which hold huge amounts of bad loans were also mitigated by lowering the official rate of interest to extremely low levels. The longterm rate of interest has been below 2 per cent in the 1990s (the official


rate of interest having been at 0.5 per cent since 1995), thus mitigating the costs of debt for both financial institutions and the state. At the same, it has worsened conditions for the elderly who rely on interest received on the savings. Due to various special reductions in corporation taxes, several big companies have continued to invest abroad without paying domestic corporation tax. Unfairness in the tax system – especially in obtaining exact information of actual taxable incomes among social classes out of wage earners – was not addressed. In the face of a deepening fiscal crisis for the state, the corporate tax rate, inheritance tax rates and the marginal rate of income tax were alleviated for wealthier persons on the pretext of revitalizing the market economy in line with neoliberalism. In the contemporary capitalist society, three major economic subjects constitute and support the national economy: namely, capitalist firms, households of working people, and the state. Balance among them is necessary in order to maintain a sound and healthy economic system. In the course of Japanese economic restructuring, the revitalization of capitalist firms had one-sided costs. Neoliberalism was employed to restrengthen the company-centred socioeconomic order. Resolving the fiscal crisis of the state tends to impose greater burdens onto the shoulders of weaker people, with repeated injections of public money to alleviate the difficulties of big businesses and banks. The state does not mitigate but helps the capitalistic law that the stronger prey upon the weaker. This trend is directly opposed to the egalitarian economic tendencies and ideas of the period of high economic growth. It also seems to form a vicious circle comprising depressed consumer demand, the fiscal crisis of the state, and worsening debt crisis among financial institutions. Below we re-examine more concretely the factors that have generated the Japanese economic impasse in the 1990s, having these structural distortions in mind.

Toward zero growth capitalism? Earlier we opened the analysis of the continuous depression that has bedevilled the Japanese economy in the 1990s. Four related factors are important in this context and, though we shall investigate them throughout this volume, they are briefly presented below.


Complex depression due to the burst of the bubble While capitalist recessions mainly refer to contractions of economic flows, the 1990s depression comprised contractions in both stocks and flows, as Miyazaki (1992) stressed very early on. It was characterized by a continuous deflationary spiral of the prices of shares and real estate after the burst of bubble, which caused a financial crunch and further depressed the flows of national income. The total fall in asset prices following the bubble is estimated to have reached ¥1000 trillion. Such asset deflation has been a serious blow to financial institutions. Deterioration of mortgages has increased bad loans, which banks and other financial institutions find more and more difficult to write off. According to a report from the Ministry of Finance in January 1998 in a newspaper, the total of bad loans by 146 banks amounts to ¥76.7 trillion (12.3 per cent of total loans). Failures of banks and other financial institutions have continued to occur in almost every year after the end of the bubble. Financial difficulties have been aggravated by the BIS (Bank of International Settlement) regulations stating that, from April 1993, international banks must maintain a ratio of at least 8 per cent of owned capital against total assets. When this regulation was agreed in 1988 among BIS members (twelve countries), Japanese banks obtained the dispensation of being allowed to count as own capital a certain proportion (45 per cent) of their latent capital gains on equity held. This dispensation seemed necessary, as the ratio of own capital against total assets has traditionally been low for Japanese banks. During the 1990s depression, however, the BIS regulation has become a heavy burden on Japanese banks, since the latent capital gains have largely melted away. Equity finance in order to increase own capital more directly has also become much more difficult to obtain. As a result, Japanese banks have withheld new loans or ceased the renewal of old loans in order to avoid increasing their bad loans, and have attempted to reduce the total amount of their assets in order to clear the BIS regulation. The financial crunch has thus spread and created serious difficulties especially for medium and small businesses that depended heavily on borrowing to keep their operations going. This is an important reason for the high level of business failures and strong deflationary pressure among medium and small businesses. The deflationary spiral in asset prices is certainly aggravated by the financial crunch as well as by depressive business activities.


In order to alleviate the difficulties of the banks and the financial crunch, the Bank of Japan has reduced the official rate of interest from 6 per cent in 1990 to 1.79 per cent in 1993, and further to 0.5 per cent in September 1995. This unprecedented low rate of interest has been maintained for five years so far. It operates as a kind of subsidy to banks, as they can easily obtain higher interest on purchased state bonds, with, say, a 2.5 per cent coupon rate. However, the difficulties of banks and other financial institutions generated by bad loans have been so great and deep-rooted that they have not yet been solved even by such an extremely low official rate of interest. Keynesians can find a good example of the liquidity trap in the Japanese economy at present, where monetary policy to lower the rate of interest simply does not work. This demonstrates the difficulty of solving the problems created by the burst of the huge bubble, and the resultant depressant spiral in real business activities and consumer demand. There is, finally, a strong paradox in the operation of the BIS regulation. Although the regulation was intended to increase financial stability through international cooperation, it actually added to serious financial instability and economic crisis in the Japanese economy. This is yet another example in the long history of capitalism of serious difficulties and failures resulting from attempts to control and stabilize the workings of money and finance.9 A tendency toward industrial hollowing-out and de-industrialization The second factor that has lowered the growth trend of Japanese economy is the trend toward de-industrialization through increased foreign investment accompanying the multinationalization of Japanese enterprises. Given the tendency toward yen appreciation under the floating exchange rate system, Japanese foreign investment began to rise, initially in the form of investment in foreign state bonds and securities. In the 1980s, especially in the latter half of the decade, Japanese firms also greatly increased foreign direct investment. Its total amount in 1986–89 amounted to US$110 billion and was bigger than the total foreign direct investment of the USA and the UK in the same period. As shall be seen in Chapter 5, the major part of Japanese foreign direct investment is in the USA and Europe, forming an important link in the mutual penetration of business activities among advanced countries. Japan still has a relatively high proportion of investment in the


developing world (particularly in Asian countries) compared to the USA and Europe. Since prices of land, labour and other materials are much lower in Asian countries, direct investment in those countries makes possible a much greater amount of production than is indicated simply by monetary comparison with other advanced areas. Japanese manufacturing industry sharpened its international competitive power not only domestically but also by using more multinationalized factories, or subsidiary firms, in surrounding Asian countries. As a result, the multinationalization of Japanese firms did not cause industrial hollowing-out until the beginning of the 1990s, unlike the UK or the USA. Although the proportion of tertiary industry in the total working population also increased markedly in Japan, the absolute number of workers in Japanese manufacturing continued to expand until 1992. However, the pressure of a depressed domestic market after the burst of the bubble as well as the rapid appreciation of the yen (reaching ¥79.75 to the dollar in April 1995) became almost unbearable for most Japanese manufacturers. Japanese manufacturing firms – including medium and small ones – opted for a survival strategy that involved the transfer of their factories to other countries, especially Asian. The absolute number of workers in Japanese manufacturing began to decrease in 1993. By 1998, 1.87 million jobs (12 per cent) were lost. Such contraction of employment in Japanese manufacturing industry is unprecedented in peacetime in the course of capitalist development since the Meiji Restoration. For the first time, the Japanese economy is experiencing a tendency toward industrial hollowing-out through increased direct foreign investment. On the other hand, the Japanese tertiary industry, which has taken up more than 60 per cent of the working population since 1993, is slow in raising its productivity and weak by international competition. The Japanese economy has been registering large trade deficits in services. Thus, the de-industrialization of Japanese economy with an increasing tertiary industry also signifies a tendency toward lower economic growth. Given that Japanese economic growth used to depend on the expansion of manufacturing industry, de-industrialization and reduction of manufacturing activity and employment necessarily adds to the difficulty of alleviating the burden of bad loans on financial institutions. Thus, there exists a vicious circle comprising depressant pressure from


the difficulties faced by financial institutions and the tendency toward de-industrialization, or industrial hollowing-out. Depressed consumer demand and excess capacity A combination of depressed consumer demand and excess capacity form the third major structural difficulty for the contemporary Japanese economy. The burst of the bubble directly and immediately reduced demand for luxuries, such as expensive houses, paintings, golf club memberships and luxury cars. However, as economic stagnation spread, with increasing business failures, lay-offs, unemployment, and cuts in overtime, bonuses, and even wages, Japanese consumer demand became generally depressed. Introduction and increases in consumer tax were not balanced by rises in wages. The second largest national market in the world has thus remained stagnant throughout the 1990s. After the completion of projects of expanded investment in plant and equipment in the course of the bubble in the late 1980s, excess capacity resulted in the 1990s. As is shown in Figure 1.1, the rate of capacity utilization in Japanese manufacturing in 1993 had declined by 17 per cent from its peak of 1990, and it fell again after a feeble recovery in 1994. Continuing excess capacity certainly depresses investment in plant and equipment. As the share of consumer durables in total consumer demand became greater, such as houses, cars and electrical appliances, it became commonplace to witness postponement of substantial parts of consumer demand for lengthy periods of time when the overall economic situation was problematic. Unlike demand for basic foods and other necessary goods, demand for consumer durables tends to be reduced when workers suffer cuts in employment and stagnant wages, especially when the burden of consumer tax, education costs and medical services also increases. Since Japanese industry has shifted the weight of its production toward such consumer durables, depression actually intensified as demand for consumer durables contracted and hardly recovered in most of the 1990s. The difficulty in selling housing units and consumer durables has exacerbated the difficulty of dealing with the extensive bad loans of financial institutions. On the other hand, short-run economic recovery can be accentuated by pent-up demand for consumer durables, when consumer expenditure is somehow stimulated. Such a phenomenon was witnessed at the


initial phase of economic recovery in the Japanese economy beginning in the 1970s. In 1996, the same phenomenon occurred when the domestic demand restored the rate of growth to 4.4 per cent, after the announcement of an increase in consumer tax in the next fiscal year. Nevertheless, Japanese consumer demand fell in the fiscal year of 1997, as an additional burden of ¥9 trillion was placed on householders due to increases in consumer tax, individual payment for medical services and abolition of special allowances on income tax. The government failed to understand the importance of consumer demand by working people. In contrast, huge public funds were poured into rescue operations for banks and other financial institutions. Public expenditure aimed at reviving the operations of construction companies in the phase of severe depression was also hugely increased. Japanese economic policies thus tended to intensify the company-centred nature of society, making the economic life of working people increasingly severe. Contrary to policy intentions, this tendency aggravates the basic deflationary pressure from excess supply of houses and other real estate, as well as from excess productive capacity. It reveals in a contemporary way the fundamentally problematic nature of capitalism itself. Falling population Can the Japanese economy recover its previously strong rate of growth if short-run deflationary factors, such as the difficulties of financial institutions with bad loans or the excess capacity, are eventually cleared away? Does the much lowered Japanese growth rate in the 1990s forecast a continuously low growth rate for Japanese capitalism in the twenty-first century? In this respect, the recent tendency toward a fall in population is worth noting as the fourth factor underlying the complex depression. According to a demographic forecast, the Japanese population will begin to decrease after 2007, and will be halved by the end of the next century. The average annual rate of decrease is projected at 0.7 per cent. Company-centred restructuring and the resultant mobilization of lowwage female workers has made it increasingly difficult for the younger generation to find the time to enjoy marriage, and the birth and raising of children. Thus, the average birth rate for Japanese women has declined sharply, from 2.05 in 1974 to 1.34 in 1999. With such a reduced birth rate, the long-run trend of Japanese economic growth will be constrained by a tendency toward falling population. The Achilles’ heel


of a capitalist economy is the commodity labour-power, especially the difficulty of regulating the balance between its supply and demand. Rapid decline of the birth rate has also brought about a rapid change toward an ageing society. The burden of welfare costs and medical care for the elderly increases economic pressure on the younger generation. An unpredictable future for social welfare, pension schemes and costs of medical services for the elderly discourage consumer expenditure. In addition, the need to preserve the ecological balance, restrictions on natural resources available across the world, and the tendency toward de-industrialization do not seem particularly encouraging for future growth. Thus, the Japanese economy can hardly expect a strong recovery in its growth trend. Rather, it seems to be undertaking a new historical experiment of capitalism with zero or negative growth. What kinds of policies are appropriate in this connection? The Japanese government has failed to recognize the shift in the growth trend and repeatedly offered an erroneous economic outlook in the 1990s. The deepening fiscal crisis of the state and the company-centred nature of recovery policies that worsened the economic condition of working people call for reconsideration in view of the lowered growth trend of the Japanese economy.

2 Information Technologies and Competitive Restructuring of Capitalism

The so-called information revolution has had a strong impact on the restructuring of the Japanese economy after 1973. In particular, it has promoted the reactivation of a competitive capitalist market economy, and formed an economic order favourable to the neoliberal policy tide. To be sure, there are shared aspects with other capitalist countries as well as special features of the Japanese economy in these respects.

The impact of the information revolution Technological grounds Continuous economic crisis and the restructuring process in the capitalist world since 1973 is often compared with the great depressions of the late nineteenth century and the 1930s. It can properly be defined as the third great depression in the history of capitalism. While great depressions deliver a heavy blow to capitalist economies, they also foster innovation in industrial technologies on a large scale. This is because serious attempts at survival and recovery are forced upon capitalist firms. In the process of the current great depression, attempts to develop a series of new industrial technologies were actually undertaken. Development of new materials, of biotechnology, of new technologies in medical services, of environmental preservation and of new energy sources has been widely attempted. The most influential among these new technologies has been electronic information technology combined with new telecommunication technologies. Its impact is 30

Information Technologies and Competitive Restructuring of Capitalism 31

spreading broadly in the process of the restructuring of industries and firms, as well as in workplaces and people’s daily lives. An important technological foundation for this lies in the development of silicon integrated circuits (ICs). Japanese industrial production technology for cameras and lenses was usefully applied in printing increasingly complicated electronic circuits on tiny silicon chips. In 1960, a silicon chip smaller than a square centimetre could perform semiconductor functions equivalent to ten transistors. By 1976, performance of functions had grown to an equivalent of 64 000 transistors. The technological basis for the information revolution was thus prepared. The sophistication of IC chips has continuously advanced, their degree of integration quadrupling every three years. In 1995, NEC made a type of IC-DRAM that performed functions equivalent to 2.24 billion transistors in three square centimetres. With such development, the cost of ICs continued to be reduced, and had dropped to roughly one-thousandth its previous level within about 15 years. Various grades of ICs that could be utilized for a variety of purposes were produced with much lower prices. The semiconductor function, which is loaded on a silicon chip, serves as the basis for digital computer technology that uses the binary system of calculation. Therefore, the development of IC chips made possible greater sophistication and a reduction in size of computers, while prices continued to fall. The functions of computers were broadened, dealing not only with numerical calculation but also with linguistic and figurative information. In order to convert various types of information into, or out of, digital binary numerical data, which is handled by computers, the development of software programming is an essential part of information technology. With sophisticated hardware and software for computers, increasingly rapid treatment of various types of information – saving, classification, sorting, communication and transformation – became possible. Together with such computer technologies, telecommunication technologies have also been much developed, thus facilitating the emergence of fax, e-mail, internet, mobile telephone and car-navigation systems. Optical fibre and communication satellites were also widely employed to transmit large quantities of electronic information. The impact of the information revolution on the Japanese economy has been conspicuous. Below we examine it more concretely by focusing firstly on changes in capitalist firms.


Changes in capitalist firms The operation of capitalist firms has became more flexible and competitive by means of information technologies. The unit of investment in plants and equipment aimed at raising productivity could thus be relatively smaller. Firms were able to multiply their models of products and relocate their plants and offices flexibly using new information technologies. In the period of high economic growth, the Japanese economy was led by large-scale investment in plant and equipment, typically in construction of heavy industrial complexes. Production lines used to be inflexibly designed to supply a single model of car or refrigerator. Scrapping and rebuilding entire production lines, requiring massive investment, was generally necessary to renew the method of production or the type of product. Therefore, plant and equipment tended to be utilized for many years to produce the same model by the same method. When information technologies were introduced from the 1970s onwards, automation systems, such as robots controlled by computers, could be incorporated in the existing production lines with relatively little investment. Guided by flexible computer programs, automation systems were able not only to increase labour productivity but also to produce multiple models on the same line. Unlike the previous period, different models of cars are now produced by the same assembly line. Automatic computer control has made possible multi-model massproduction in electrical appliances, clothing, and many other industries. Capitalist firms were thus able flexibly to multiply and alter their models of products competitively to meet the changing demand of individual consumers. The competitive market order was thus reactivated. When competitive changes in models and functions of products are frequent, monopolistic control of product prices is difficult to maintain even in industries with giant corporations. As is clear from the personal computer industry, price competition tends to be active when more sophisticated functions of products can be repeatedly offered at lower cost in a short period of time. Competition also became fostered globally through the multinationalization of industrial firms – though the possibility of the emergence of global monopolies has not been eliminated completely. In the process of the great depression of the 1930s, monopoly capitals attempted to maintain their monopolistic product prices by reducing


production, and thus deepened the difficulties caused by increased unemployment and depressed markets. In contrast, revitalized pressure of domestic and international competition among capitals (containing the effect of the information revolution), has tended to depress profitability in the current great depression. As the units of real investment became smaller, the total amount of investment in plant and equipment in the Japanese economy was reduced and lost its former role as a powerful locomotive of economic growth, though it still served to raise labour productivity effectively. However, in the final years of the 1980s, Japanese investment in plant and equipment did increase with the swelling of the bubble, but the increase rapidly turned into idle capacity in the 1990s after the bubble burst, as was shown in Figure 1.1. In the course of restructuring after 1973, Japanese firms have attempted to relocate factories and offices to economize on operating costs by utilizing new information technologies. In order to strengthen their global business activities, many firms based in Kansai (in the Osaka area) shifted their headquarters to the Tokyo metropolitan area. In order to economize on costs of land, wages and local taxes, or simply to avoid traffic jams, several industrial firms relocated their factories, warehouses and operating offices. Toyota, for example, moved one of its main factories from its traditional business territory of Toyota-city to the southern island of Kyushu in the late 1980s. Such moves became typical and contributed to the multi-nationalization of Japanese firms, particularly since the latter half of the 1980s. Since the development of information technologies has facilitated trade by enabling the widespread exchange of economic information, it was expected to provide equal business opportunities for local areas and thus to serve as a basis for the reactivation of rural areas. There have been instances of such local revitalization based on inviting or renewing industrial activity, but they are exceptional. As a whole, the distribution of wealth and income among local areas in the Japanese economy has clearly become more uneven in contrast with the period of high economic growth. Concentration of economic power in the metropolitan areas was intensified in the process of the information revolution and globalization of the economy, with deepening economic difficulties in the depopulated rural villages. Following the main metropolitan area, local cities are also attracting economic activity and workers of capitalist firms.


Thus, the geographical distribution of the anarchical activity of capitalist firms cannot bring about well-balanced and harmonious regional development. Despite their potential, information technologies could not solve but actually worsened this problem in contemporary Japan. Changes at the workplace and in the labour market In the period of high economic growth, several heavy industries invested heavily in massive fixed capital, leading to the employment of increasing numbers of regular, male workers. The well-known Japanese style of labour management was formed after stormy labour struggles lasting a decade after World War II. This operated as a common framework for big business in the period of high economic growth. It comprised lifetime employment, seniority wages and the companybased trade unions.1 Workers once employed in regular jobs in big business following graduation from schools or colleges could expect a continuous career in the same company until 55–60 years of age. They could also expect an annual increase in wages both on the basis of seniority and via the annual upgrading of basic wage rates resulting from the spring offensive (Shunto). Company-based trade unions focused on the raising of basic wages through Shunto, and cooperated in the introduction of new technologies, as long as their members were not laid off. If workers could remain with the same company, there was not much opposition to being shifted to different jobs or workplaces in accord with the needs of management. Thus, the loyal attitude of workers to their company grew with the Japanese style of labour management. It facilitated rapid increases in productivity by the introduction of new technologies and worked as an important ground for Japanese industries to intensify their international competitive power. The extent of such secure employment was, however, limited to regular workers of large businesses; in total, little more than one-third of the working population. Despite this, loyalty and a disciplined work ethic also spread to medium and small businesses through subcontracting relations and the sociocultural climate. In the process of economic crisis and restructuring after 1973, the Japanese style of management facilitated the introduction of information technologies into factories and offices. At the same time, it eroded its own basic characteristics through the very process of information revolution.


Since Japanese workers and trade unions cooperated in the introduction of new technologies, factory automation (FA) and office automation (OA) could easily be pushed forward. In contrast, in Europe and the USA, craft unions resisted automation systems, as the skills and crafts of their members were reduced and even lost through automation. Without similar resistance by trade unions, Japanese firms could introduce robots and other automation mechanisms far more rapidly. With spreading FA and OA, skills, crafts, experience and muscle power became increasingly unnecessary in many Japanese workplaces. Firms reduced the proportion of ‘regular’ male workers, and increased their numbers of relatively cheaper ‘irregular’ workers, such as women part-timers, workers dispatched from other companies, and temporary workers. In most cases such irregular workers would not receive bonuses, annual increases of wages, retirement allowances or other fringe benefits. Therefore, firms could cut their operational costs by flexibly increasing the proportion of various types of irregular workers. Since Japanese trade unions organized mainly male regular workers in big business or the public sector, a decline in the proportion of regular workers weakened the unions’ social position. Their rate of organization (or membership percentage) fell from 35.4 per cent in 1970 to 25.9 per cent in 1989, and further to 22.6 per cent in 1997. In addition, the privatization of three public corporations in 1985 worked against the militant trade unions in the public sector, as we shall discuss below. While Japanese firms incorporated advanced automation systems and intensified their international competitive power, the foundations of labour management in the stable lifetime employment with companybased trade unions was being dismantled. Positions left vacant by retired regular workers were often filled by part-timers. With the closure or relocation of factories and offices, even regular workers in the middle of their careers were increasingly sent to subsidiary companies or laid off. Trade unions cannot powerfully and successfully organize struggles against such tendencies. In addition, as business failures spread to giant corporations, especially in the 1990s, the position of regular workers in big business was no longer safe and secure. Workers in irregular positions as well as those in medium and small firms suffer from more unstable and competitive work conditions as firms adjust employment flexibly in the process of restructuring. They do not have the customary guarantee of lifetime employment, and are mostly without protection from trade unions. Increasing numbers of


Japanese workers, therefore, confront the severe conditions of the competitive labour market as vulnerable individuals. Given these conditions in the labour market, Japanese workers and trade unions could not push successfully for rises in real wages, despite effective cooperation with firms in increasing labour productivity. The fruits of rising labour productivity – due to information technologies – were not shared by workers. Though this tendency has been more or less common in capitalist advanced countries in the period after the end of Fordism, the gap between rises in productivity and stagnant real wages is most conspicuous and broadest for the Japanese economy since the 1970s. Information technologies also changed conditions of work in factories and offices. As automation systems spread in workplaces, many workers became isolated and continuously confronted keyboards and display screens of informational appliances as individuals. A human sense of cooperation and direct communication with fellow workers and a human rhythm of work allowing for a little relaxation after concentration became untenable in many jobs. In many workplaces, work now requires incessant and strenuous effort undertaken in isolation. Adam Smith pointed out long ago that one effect of the division of labour is to save the time commonly lost in passing from one type of activity to another.2 He also noticed that a great many workers are confined to a few simple operations and thus lose the habit of exercising invention. Hence, the worker ‘becomes as stupid and ignorant as it is possible for a human creature to become’.3 Marx stated even more sharply that the capitalist character of manufacture based on the division of labour converts the worker into a crippled monstrosity by ‘suppressing a whole world of productive drive’, tortures workers and ‘provides the materials for industrial pathology’.4 Information technologies potentially extend individual intellectual and creative ability. Yet company-centred use of these technologies in the form of automation systems isolates individual workers, deprives them of relaxation time in passing from one type of activity to another, and enforces soul-destroying and monotonous work to keep up with the pace of automated machines. Increasing numbers of workers suffer from excessive stress, fatigue, industrial pathological and psychological troubles, and visit counsellors and medical doctors in contemporary Japan. Notorious karoshi (death from overwork) also increased after the spread of automation systems.5 Even though automation systems have


the potential to reduce labour time by increasing productivity, they were used in the Japanese economy simply to reduce the operational costs of capitalist firms. In many workplaces, the reduction in the number of workers has meant that those employed tend to be worked harder and longer, and their lives are devastated. The company-centred use of information technologies has resulted in inhuman conditions in many Japanese workplaces.

The revitalization of the atomistic market economy Diversification of models and products The characteristics of the consumer market have also greatly changed as firms have attempted rapidly to change or multiply their models of products by using sophisticated information technologies and a flexible combination of various types of workers. Consumerism has become intensified in the direction of individualism. Diversified models of audio-visual (AV) machines and cars with different functions are supplied to meet consumers’ individual preferences according to their age and personal taste. Many types of consumer durables are no longer designed for families but for individual consumption. As a variety of models of electrical appliances, clothes, foods and other commodities are produced and supplied to satisfy diverse individual tastes, the consumer market in shopping streets, department stores, superstores and convenience stores has become particularly affluent. Especially in Japan, imported commodities have also proliferated and increased in volume as the yen appreciated and import custom duties decreased greatly after the 1970s. An important change in the business strategy of manufacturers and retailers was to target individuals as units of consumption in order to expand and deepen the market. Indeed, in the period of high economic growth, marketing of consumer durables such as electrical appliances had mostly targeted family units, thus making available more or less standardized models. However, with the impact of the information revolution, firms were able to supply diversified models via the same production line. They began to supply increasing volumes of AV appliances, personal computers and other commodities for use by the individual. Mobile telephones are a case in point, since they are clearly for individual use.


It is assumed by some economic theorists, especially those in the tradition of the Austrian school, that a market economy comprises atomistic individuals, each with separate preferences. Other economic theorists, particularly those of the classical school, conceived of the family household as the unit of income, consumption and saving. With the development of heavy industries toward the end of the nineteenth century, the male worker as sole wage-earner for the family became the normal foundation of economic life. At that time, the concept of households as units of final consumption seemed realistic and proper. Consumption within family units tends to be largely standardized, regardless of individual personal preference, according to the levels of average wages. In this context, the Austrian emphasis on individual preference with varied personal tastes and different information seemed a fiction somewhat remote from consumers’ actual behaviour. As a result of the information revolution, however, the market economy came closer to the image of the Austrian school, and individual persons have become more important units of final consumption and targets of marketing than before, although family households still maintain a certain role in the market economy. When a consumer market is converted from a family-based into an individual-based market, its size tends to expand. Thus, if an average family contains four people, the market for consumer durables could be quadrupled by selling to individuals rather than to families. In fact, TV advertisements tend to emphasize the suitability of car models and other consumer durables in meeting personal taste, and stress the importance of appreciating delicate differences among goods in order to obtain satisfaction as contemporary individual consumers. Thus, in both the labour market and the consumer market, restructuring toward individualism became a conspicuous and strong current under the impact of the information revolution. The restructuring of the retail market system As industrial firms pursued a strategy of multiplying types of commodities, the structure of commodity circulation markets, including retail shops, has also greatly changed. The marketing strategy of manufacturers and retailers has become more focused on individual consumers. Shops selling electrical appliances, such as audio equipment, mobile telephones and personal computers, are now aimed largely at catering for the individual and not for families. Accordingly,


the size of shops has expanded to make it possible to exhibit diverse types and models of commodities. A small family-run shop can no longer display a sufficiently large range of diverse models of commodities for individual needs and tastes. Consumers are also attracted to large shops in order to be able to choose from many different models. As competitive pressure from large shops became more and more threatening to the traditional small, family shops, regulations were introduced in Japan to restrict the establishment of large retail outlets in 1974 and 1979. With the neoliberal policy trend of the 1980s, however, regulations on the business hours of the large retail shops were lifted in 1994, and the law regulating such shops was finally abolished in 1998. Chains of convenience stores also developed fully in Japan by utilizing information technologies. Many traditional family shops became modernized and merged into chains of convenience stores. In order to display a diverse range of commodities to individual consumers without bearing the costs of carrying large stocks of commodities, chain store management of both large shops and smaller convenience stores has organized a highly flexible and rapid system of replacing sold items within a few hours. The point of sale (POS) scanning system automatically sends sales information from cash registers, by reading bar codes at retail shops, back to the operating centre and then to the producers, enabling the rapid replenishment of stock. For such a feedback system between sales points and suppliers to work efficiently, the diverse models of commodities have to be standardized. In this regard, while types of commodities were multiplied, they also became more compatible with the need of suppliers to handle them easily. Computer-controlled operations tend to promote standardization of processes for both production and circulation of the many types of commodities, thus facilitating acceleration of turnover of these processes. Information technology seems to have expanded the logic of capitalist production in this sense to the process of circulation, and makes circulation more automatic and mechanical without the need for excessive stock-holding levels.6 Are consumers in a stronger position? As types and models of commodities are competitively diversified by means of information technologies, the position of consumers is strengthened. Competitive supply of constantly changing new models makes it difficult for suppliers to consolidate monopolistic control of the


market. The position of consumers could be stronger than otherwise since they can choose more selectively what and when to purchase. Suppliers, including retailers, cannot force consumers to purchase commodities, but simply expect them to do so, and at the most offer inducements via sales promotions and advertisements. The concept of consumer sovereignty, so strongly emphasized by neoclassical economics, reflects this fundamental position of consumers. Consumer sovereignty appears to have been substantially intensified recently with a broader range of goods and stronger competition among sellers. However, the effect of the information revolution is considerably more complex and does not simply result in greater satisfaction for the majority of consumers. In Japan, the characteristic company-centred nature of society has been intensified by information technologies, and the fruits of increased productivity have hardly been shared by workers. As a result, real disposable income for working people has become stagnant. Increasing household expenditure on housing, education, taxes and other social payments must be met – often by housewives’ wages, which are usually part-time but also regular. Increased working time for housewives outside the home has necessitated increased expenditure on prepared food, clothes and services. The constraints for the majority of individuals as consumers thus remain very restrictive and cause incessant frustration in the face of an affluent consumer market with a large range of diverse commodities. In addition, consumers face difficulties in choosing a type of commodity that is appropriate for them among the range on offer. Ironically, the necessary information regarding information-related equipment, such as personal computers, is hard for consumers to obtain and assess. Detailed explanations based on complex jargon require demanding study on the part of consumers, and without a prior sense of which of the product functions are actually necessary. For many people, selection of consumer durables in the market has become more timeconsuming and tiring. Consumers could easily know the quality and functions of massproduced standardized commodities. However, uneven distribution of knowledge and information on the functions of the use-value of commodities has grown widely as types, models and functions of commodities have been rapidly altered and diversified with the development of information technologies. Consumer behaviour depends more on blind groping or guesswork, as in game-theoretic models, and


contradicts the neoclassical assumption of perfect information available in the market. Though consumers seem to have a wider range of options for individual selection available to them, they cannot actually trust their own subjective judgement and tend to rely on the more fashionable brands. In this regard, advertising on TV is also more influential than before. Even after purchase, consumers are often dissatisfied and distressed because they often feel that, had they made their purchase six months later, they could have obtained a more advanced type of good, or they may have found that the functions of a purchased model were actually inadequate, inappropriate or excessive. Thus, the information revolution has not altered the basically passive position of consumers who are forced to choose among types and models of commodities designed and offered by capitalist enterprises. In a sense, it weakened consumers’ power by widening the already uneven distribution of information in the market. J. Robinson (1964) once commented on the neoclassical assumption of consumer sovereignty that, ‘No one who has lived in the capitalist world is deceived by the presence that the market system ensures consumer’s sovereignty. It is up to the socialist economies to find some way of giving it reality.’7 Indeed, it is not easy in a capitalist society based upon private ownership of enterprises for consumers to find exactly what they need or to indicate to companies what they really want. It is also difficult to alter the uneven distribution of information concerning the constituent materials, additives, manufacturing processes, useful functions and unintended effects of commodities. Information technologies have not yet been fully utilized to make such information available to consumers in the spirit of economic democracy. However, even in the capitalist Japanese economy, consumer co-operatives (co-ops) have extended their organization more easily by means of fax, e-mail and computer-aided communication. They organize the social position of consumers, demand safe foodstuffs to farmers and companies, and concentrate seasonal orders from consumers to strengthen their demand. In contrast with the weakening social position of trade unions, consumer co-ops have increased their membership. By 1996, the number of Japanese consumer co-op members reached 19.41 million households, or 44 per cent of total households in Japan, and their total sales reached ¥3.39 trillion. There are other citizens’ movements and organizations, beside co-ops, that test commodities or renounce excessive advertising. Information technologies have been


useful for co-ops and other consumers’ organizations in extending networks among members. Without such attempts to strengthen economic democracy from the grass-roots level, consumer sovereignty in a true and substantial sense could not be realized even in a socialist economy.

Neoliberalism and the spiral reversal of capitalist development The historical tendency of capitalism until the beginning of the 1970s The impact of the information revolution in the course of the great depression since 1973 has fostered a restructuring of the capitalist economic order and restrengthened the atomistic competitive market for both labour power and consumer goods. This tendency expresses a great spiral of reversal of capitalist development in view of its history during the last century.8 The significance of changes in the recent Japanese economy must be reconsidered in this context. After the great depression of 1873–96, capitalist development tended to restrict free market competition in three respects – all very different from the previous period of liberal capitalist development. First, the leading industry changed from that of light cotton to heavy industry with massive fixed capital. Giant joint-stock companies, not individually owned industrial capitals, became the dominant form of enterprises of core industries. As their numbers in the same industry were reduced, they tended to avoid cut-throat competition and formed monopolistic organizations, such as cartels, trusts and concerns, or followed price leadership by the top company in the domestic market. Monopoly prices were formed to provide monopolistic profits securely for giant monopoly capitals. However, this did not bring about macroeconomic stability, but rather amplified the reduction of production and employment by maintaining monopolistic prices in the phase of depression. The difficulties faced by peripheral medium and smaller enterprises were also greater due to a bigger reduction of effective demand, often with higher monopolistic prices for materials. The great depression of the 1930s was clearly deepened and prolonged by these effects created by monopoly capitals. Second, in such giant industrial corporations, male adult workers with muscle and experience were necessary and gathered in large numbers.


They were able to form and extend trade unions. The growth of the public sector providing relatively stable employment also favoured the trade union movement. Thus, the labour market changed from an individualistic competitive market into, at least partly, a more collectively organized negotiating place between the employers and the trade unions. While the determination of the substantial content of the value of labour power, or the social standard of living of workers, ‘contains a historical and moral [i.e., social] element’, as Marx claimed,9 the organizational and negotiating power of trade unions began to carry greater weight. The role of trade unions extended not only to the determination of real wages, but also to the dynamism of employment and lay-offs. Third, in relation to these aspects, the economic role of the state expanded in various ways and inversely reduced the weight of the free market. Imperialist tariff and colonial policies were implemented to protect the national interest of monopoly capitals. The resultant imperialist world wars induced the formation of a state-controlled war economy. New Deal policies during the great depression of the 1930s were combined with Keynesian theory to form effective demand policies under the managed currency system after World War II. At the same time, social democratic welfare policies, which redistribute income from wealthier persons and companies to weaker, low-income persons, spread more and more from the north-western European countries across the advanced countries in the world. Aspects of these trends and ideas can be found throughout most of the history of Japanese capitalism since the Meiji Restoration. After World War II, the social position of trade unions was significantly strengthened. Article 25 of the Constitutional Law, which was promulgated in 1946, declares that ‘All the members of our nation have the right to enjoy healthy and civil minimum life. The State must endeavour to elevate and improve social welfare, social security and public health in every aspect of life.’ The direction toward a welfare state was not particularly prominent in actual policies, but was socially agreed as a common ideal to be realized, even if gradually. The concept of social progress toward an egalitarian welfare state was also promoted by lateral pressure from the growth of Soviet-type socialism. The left wing of the Japanese Socialist Party (JSP), the leading nongovernment party, dominated the party with a programme aiming for a Japanese road to socialism. Though the road was defined as different


from that of the Soviet Union, by relying on democratic participation in Parliament, the final aim was socialism with public ownership of the means of production. A strong, left, national centre of trade unions, the General Council of Trade Unions of Japan (Sohyo), supported this wing of the JSP. Japanese industrial policies for recovery and economic growth, as well as the idea of a welfare egalitarian state, contained the influence of socialism, or the intention to counter socialist powers internationally and domestically. Among Japanese elite bureaucrats and politicians, even in conservative parties, socialism (especially Marxism) was a common educational background in the post-World War II period. Although the welfare policies were insufficient, their gradual introduction worked in combination with strong policies of support for rice and other agricultural products. As long as the operations of trade unions were also effective in raising real wages in the course of expanding employment during high economic growth, the Japanese economy actually moved toward an egalitarian economic order. Living standards in rural agricultural villages became more and more equal to those of urban areas for the first time in Japanese history. All of Japan’s people were said to have become middle class, if surely with some exaggeration. Domestic expansion of effective demand could thus promote continuous growth of consumer durables industries, and formed the Japanese model of Fordism. The spiral reversal of capitalist development In the course of the restructuring of capitalist firms during the great depression since 1973, the precedent trends in capitalist development for about a century were largely reversed among advanced countries, including Japan. First, with information technologies, the necessary units of investment to realize automation systems became lighter and smaller. Firms are easily able to multiply models of products, to raise productivity and thus to confront rival competition in the market. Unlike the great depression of the 1930s, monopolistic behaviour by giant corporations is seldom heard as the main cause of economic difficulties. Under the impact of the information revolution, firms have intensified sales competition in their products and services, both domestically and globally. The competitive market economy is revitalized everywhere. Japanese industrial firms, especially in the fields of electrical appliance


manufacture, and the production of cars and general machines, managed to obtain the cooperation of workers, to intensify international competitive power, and to maintain the expansion of exports in the global market, though with stronger rivalry from others. Second, as capitalist firms promote automation in order to compete flexibly in the market, they have increased employment of irregular workers to economize and flexibly adjust labour costs. As a result, the union membership rate among workers has declined. The social position of trade unions and workers has weakened, in common with all major capitalist countries in the world. The labour market has become more competitive and individualistic compared to the previous period of high economic growth. The strength of trade unions has been eroded by unfavourable labour markets, increased numbers of irregular workers who are hard to organize, the privatization of public enterprises, and competition from low-waged foreign workers in the process of globalization of the economy. The gap between increased productivity and stagnant real wages has become rather more significant in Japan compared to other major advanced capitalist countries. Third, corresponding to these changes, the role of the state has been reduced in the direction of neoliberalism, which stresses the necessity of competitive market principles to revitalize the capitalist economy. In retrospect, capitalism historically grew by liberating the market economy from the fetters of the feudal social order and by abandoning mercantilist national protection and intervention, thus bringing about self-regulating industrial growth in the sea of a competitive free market. The development of capitalism since the late nineteenth century, however, tended increasingly to restrict the competitive free market through the monopolistic organization of giant firms, the growth of trade unions and an increased role for the state. Under the heavy pressure of the current great depression combined with the impact of the information revolution, capitalism seems to have entered a spiral of reversal of these tendencies, and to be attempting to restore its vitality by drawing strength from its mother sea, the competitive free market. Below we consider more closely the significance and limitations of neoliberalism for Japanese capitalism. The significance of and problems created by neoliberalism Neoliberalism became a dominant political current among the major advanced countries in the 1980s as a reaction to the failure of


Keynesianism. The prestige of Keynesianism was lost as it could not effectively prevent, solve or analyse the great depression after 1973. Rather, it worked adversely by aggravating inflation and the budget crisis of the state. In opposition to Keynesianism, neoliberalism argued for limiting state intervention to regulate and control the economy in order to reactivate private economic vitality with a smaller public burden. Such neoliberal policies are centred on the perceived effectiveness of free market competitiveness in leading to the recovery of the economy. They are also suitable for increased activity of multinational corporations crossing over national borders. At the same time, neoliberalism was inclined toward the restructuring of the labour market into an individualistic competitive order by weakening the militancy of trade union organizations. This inclination was openly stated and first practised by the Thatcher government in the UK after 1979. The most conspicuous example was the attack on the National Union of Mineworkers in 1984–85, including pit closures, mass lay-offs and oppressive police operations against militant coal miners. In Japan, the turn to neoliberalism took the form of administrative reform. The second blue-ribbon commission of administrative reform was inaugurated in July 1980 and submitted a series of recommendations from July 1981. Though reconstruction of a balanced national budget to solve the deepening fiscal crisis of the state was said to be the main goal, the actual spirit and effects of administrative reforms were obviously in line with Thatcherism and Reaganomics, and with neoliberal strategies. A representative Japanese neoliberal policy was the privatization of three state-owned enterprises in 1985 – Japan National Railways (JNR), Nippon Telegraph and Telephone Public Corporation (NTT) and the Japan Tobacco and Salt Public Corporation. This policy aimed to reduce the burden of the deficit – particularly of JNR – on the state budget, creating a money fund for the state by selling shares of privatized enterprises and promoting the competitive vitality of the market. However, it also added to the instability of the economy in the 1990s, as was shown by a deep fall in the share price of NTT to below one-third the government sale price. At the same time, Japanese administrative reform in this privatization policy heavily attacked the traditionally militant trade unions of the public sector. Through ruthless ‘rationalization’ in the process of privatization, the number of workers in JNR and in the subsequently created six JR ( Japan Railways) corporations was reduced by almost half


its 1987 level of 400 000. The number of JNR trade union members declined even more sharply, from 200 000 to 40 000 in the same period. It was generally argued that the cumulative debt of JNR was due to strong trade unions, resulting in insufficient work discipline. It is much more likely, however, that the huge construction costs of extending the unprofitable Shinkansen lines all over Japan from the early 1970s onwards (undertaken due to reflationary policy favouring general construction companies) were the most important cause of the cumulative debt of JNR. Selective firing of trade union activists and members was pushed forward heavily in the process of privatization. Discriminatory changes of jobs and workplaces were forced upon remaining union members. By 1996, rescue orders had been recommended by 39 local labour relations commissions for 131 cases involving tens of thousands of workers. Nevertheless, JR corporations would not hear and obey these orders. In addition, the Tokyo district court passed judgment in May 1998 that only the old JNR and not the new JR corporations were responsible for unfair labour practices applied to JNR union workers. There is absolutely no common sense in this judgment since the whole of the business, the management personnel and the remaining workers of JNR were completely taken over by JR corporations. The General Council of Trade Unions in Japan (Sohyo) was a large and strong national centre of the Japanese left labour movement in the postWorld War II period, based largely on JNR and other public sector unions. Therefore, the heavy blow to these unions and their activists through the privatization policy operated destructively on Sohyo. It was strange, however, that the Japanese labour movements could not effectively unite and organize opposition to this neoliberal attack in the form of privatization. The main current of the Japanese trade union movement was now found in the private sector, and tended to cooperate with business circles in promoting administrative reform. As a result, Sohyo had to dissolve itself and fused with the traditionally more centrelined Domei (the Japanese Confederation of Labour), forming a new national centre of trade unions, Rengo (the Confederation of All PrivateSector Trade Unions) in 1989. The left wing of the Japanese labour movement was tragically weakened, also delivering a shock to the Japanese Socialist Party ( JSP). The collapse of the Soviet Union added to the shock. JSP had to alter its programme from a socialist position to a social democratic ‘realist’ stance. It then joined a coalition government with the conservative Liberal Democratic Party (LDP) in 1994 and


diluted its traditional pacifist and socialist policies in many respects, changing its name to the Social Democratic Party of Japan (SDPJ). It has continued to lose votes heavily, and has become smaller than the Japanese Communist Party (JCP) in parliamentary representation.10 The growth in parliamentary seats of the JCP could not balance out the decline of the JSP and an overall general tendency for conservatism in Japanese policy. As a continuation of this trend, relaxation of protective labour laws was broadly enacted in 1998. Thus, the employment agency business was liberalised; the range of jobs open to dispatched workers was expanded; overtime work was made free and without limits on the basis of discretionary payment; the time limit of one year on part-time employment was abolished, making it possible for young women to work as part-timers for long periods of time. Other protective laws, such as those restricting overtime for women workers, were also abolished. As juridical protection for women workers was lessened and employment contracts were deregulated, capitalist firms were able flexibly to combine various forms of employment and different categories of workers to economize on labour costs. Trade unions found it more difficult to organize such a great variety of workers. Workers have to face firms individually in an increasingly competitive labour market and are forced to endure more severe labour conditions. As will also be seen in the following chapters, neoliberal restructuring of the socioeconomic order aimed at revitalizing the competitive capitalist market economy has intensified individualism among workers and further worsened their economic condition. This trend is combined with a reduction in the role of the state, lower tax burdens for corporations and wealthier persons, cuts in welfare policies to increase individual costs of medical and educational services, and the introduction of consumer tax paid by the mass of people. The company-centred characteristics of Japanese society have been much strengthened. While the neoliberal direction of restructuring was not always consistently maintained, such policies were not merely a reaction to the failures of Keynesianism. They have drawn strength from the underlying foundation of revitalization of the competitive capitalist market economy by means of sophisticated information technology.

3 Changes in Industrial Structure and Family Life

The industrial structure of an economy refers, in most cases, to the proportion and composition of its industries. In particular, the relative sizes of primary, secondary and tertiary industries are often regarded as important points of reference. According to the classification shown in Table 3.1, primary industry contains mainly agriculture as well as forestry and fisheries. Secondary industry comprises mainly manufacturing plus construction and mining. Tertiary industry broadly includes commerce, finance, insurance, real estate agencies and other services. Tertiary industry is often treated as the service industry in a broad sense, and is compared with the relative position of agriculture and manufacturing. The recent increasing size of the tertiary industry in advanced countries has attracted attention as the growth of service economy or de-industrialization. The changes in industrial structure relate also to the changes in social position and behaviour of large, medium, small and family-type businesses. The nature of the labour market, labour relations within enterprises, conditions at the workplace, consumer behaviour and family life are all widely affected by changes in industrial structure. Changes in the tastes and demands of people as a result of economic growth surely induce transformation of industrial structure to a certain degree. However, in many cases, development of industrial technologies works more fundamentally to cause interrelated changes in industrial structure and lifestyle among people. 49

Years

19301 19401 19471 1950 1955 1960 1965 1970 1975 1980 1985 1990 1993 1997 Notes:

Total

Primary2 Secondary3

Tertiary

(000s)

(%)

(%) Manufacturing (%)

29 341 33 839 33 329 36 420 41 310 44 360 47 300 50 940 52 230 55 360 58 070 62 490 64 500 65 570

48.5 43.6 53.4 50.6 42.9 26.9 23.5 17.4 12.7 10.4 8.8 7.2 5.9 5.3

20.4 26.2 22.3 21.3 22.9 28.0 31.9 35.2 35.2 34.8 34.3 33.6 33.7 32.5

16.0 21.3 16.3 16.5 17.3 21.3 24.3 27.0 25.8 24.7 25.0 24.1 23.7 22.0

Construction (%)

3.3 3.1 4.0 3.5 4.3 5.7 6.9 7.7 9.2 9.9 9.1 9.4 9.9 10.4

(%)

30.0 29.5 23.0 27.9 34.2 45.1 44.6 47.4 52.1 54.8 56.9 59.2 60.4 62.2

1 From [Census Reports]. The remainder are from [The Survey of Labour-Power]. 2 Primary industry is agriculture, forestry and fishing. 3 Secondary industry includes mining, in addition to the two industries listed. Sources: Prime Minister’s office, [Survey of Labour-Power]; [Census Reports]. Bank of Japan, [Comparative Economic and Financial Statistics].

Wholesale & retail (%)

Finance, insurance, real estate (%)

14.0 12.6 6.4

0.7 0.9 0.8 11.7 16.3 20.3 21.3

19.9 21.6 22.5 22.7 22.6 22.4 22.5

2.6 3.3 3.5 6.8 8.3 8.5 8.8

Services (%)

8.4 8.7 8.0 6.7 10.4 12.9 13.7 14.7 16.4 18.1 20.6 21.3 22.3 23.5


Table 3.1 Distribution of employed workers by industry (1930–97)

Changes in Industrial Structure and Family Life 51

Industrial hollowing-out Changes in industrial structure toward a service economy The recent characteristic change of industrial structure in terms of the relative size of manufacturing and service industries in Japanese economy is compared with those in other advanced economies in Table 3.2. The service industry in the table refers to a broad category which includes commerce, finance, insurance and other services, and is identical to the tertiary industry. From Table 3.2 it can be seen that the proportion of working people in the service industry in the Japanese economy has grown by 12 per cent in the period between 1968–73 and 1990–95, in accord with a similar trend in other advanced capitalist countries. The growth of the service sector is, thus, an important common trend in the contemporary changes of industrial structure. In Japan, however, there is another remarkable phenomenon, also seen in the table – the proportion of the working population in manufacturing industry in the Japanese economy has remained relatively stable. It stood at 24.6 per cent in 1980–89 and 23.7 per cent in 1990–95, and no less than 23.7 per cent in 1960–67 during the period of high economic growth. If we include the construction industry in the secondary sector, until 1993, the proportion of working people in that sector had remained at more than one-third of all Japanese workers (Table 3.1). Therefore, growth of the tertiary or service industry in the Japanese economy until the beginning of the 1990s was brought about mainly by a corresponding decline in primary industry. This is also shown in the changes in industrial composition of national income. Between 1970 and 1992, for example, the proportion of national income by Japanese primary industry declined from 7.8 per cent to 2.2 per cent, while the proportion by tertiary industry increased from 54.1 per cent to 60.4 per cent. Meanwhile, the secondary industry maintained its proportion in the whole national income fairly well and reduced only a little from 38.1 per cent to 37.4 per cent. At the same time, employment in Japanese manufacturing industry actually increased its absolute numbers from 14.36 million in 1973 to 15.69 million in 1992 (a rise of 9.3 per cent). This was clearly different from the so-called hollowing-out of manufacturing industry, or deindustrialization, in other advanced capitalist countries. The proportion

Manufacturing

Japan USA UK (W) Germany France Italy Canada

Services

1968–73

1974–79

1980–89

1990–95

1968–73

1974–79

1980–89

1990–95

26.9 25.8 36.1 36.6 27.6 27.9 23.8

25.4 23.0 32.6 35.1 27.2 27.5 21.7

24.6 18.9 27.5 32.4 23.5 24.2 17.7

23.7 16.9 23.8 29.2 – 22.4 15.0

47.5 61.5 52.8 43.6 47.6 40.4 61.5

52.3 64.9 57.4 48.4 52.5 45.3 64.8

56.4 68.6 63.2 54.1 59.7 53.6 68.8

59.5 72.4 68.4 57.4 66.8 59.6 72.7

Source: OECD, Historical Statistics, 1960–87, 1989, 1997.


Table 3.2 International comparison of distribution of employed workers (1968–95). Average in each period (%)


of working people in manufacturing industry in the US economy, for example, typically fell from 25.8 per cent in 1968–73 to 18.9 per cent in 1980–89 (Table 3.2). Similar decreases in the proportion of manufacturing workers can also be seen in the UK, West Germany, France and Canada. The soaring yen and changes in industrial structure It is noteworthy that the relative strength of Japanese manufacturing was maintained in the face of yen appreciation by a factor of nearly three: from ¥360 to the dollar until 1971 to about ¥126 to the dollar in 1992. Conventional textbooks would have expected that appreciation of the yen would make the international (dollar) prices of Japanese exports higher and yen prices of Japanese imports lower, and would thus be unfavourable to Japanese manufacturing industry. A strong appreciation of the yen would, therefore, work to contract Japanese manufacturing industry in the international division of labour, thus promoting a transformation of the Japanese economy increasingly into a service economy, de-industrializing faster than other countries. Paradoxically, actual changes were the opposite of this conventional theory. Despite appreciation of the yen, Japanese manufacturing maintained, and even increased, employment, while the USA and other countries with depreciating currencies experienced faster de-industrialization. Why did Japanese manufacturing industry repeatedly strengthen its international competitive power in the face of appreciation of the yen? The most important factor lay in the rapid introduction of ME information technologies to spread FA and OA among Japanese firms depending upon workers’ cooperation, as was discussed in Chapter 2. The most advanced Japanese manufacturing industries producing cars, electrical appliances and general machines continuously and flexibly increased productivity and their international competitive power by altering and multiplying product models. With the cooperation of workers, real wages remained stagnant while the ME automation system widely increased productivity. The gap between stagnant real wages and a sharp increase in productivity was utilized to economize on the costs of production and to maintain the competitive international (dollar) prices of Japanese exports in spite of the repeated appreciation of the yen. At the same time, with the spread of automation systems employing ME technologies, the remaining human labour strengthened its role in determining relative international competitive power. This was achieved


not only by determining the speed of introduction of automation systems. As various electrical appliances and cars came to incorporate ME parts, they became harder for consumers to repair. Therefore, product reliability and lower rates of defects in operation became an important factor in international competition. The ability of labour accurately to manipulate productive equipment, and carefully to check parts and assembled products in the workplace has become indispensable in increasing product reliability in the international market. Japanese firms encouraged small group activities in the workplace, such as QC (quality control) circles and ZD (zero defects) movement, to mobilize loyal cooperation and subjective motivation for diligent work. Success served to strengthen their international competitive power by allowing them to supply reliable products in advanced fields of manufacturing, but it also generated excessive stress and chronic fatigue among workers, even driving some to karoshi. In addition, dollar prices of oil and other primary products continued to decline after the second oil shock, and favoured Japanese manufacturing industries. As the yen appreciated, the costs of energy and raw materials became even cheaper in terms of yen. In the 1980s, furthermore, Japanese manufacturing firms extended direct investment in surrounding Asian countries, and intensified their competitive power by extending the international division of labour, often in the form of an international subcontracting system. Industrial hollowing-out passing a watershed The Japanese economy has continued to register large trade surpluses as the import prices of energy and raw materials declined in the world market and the international competitive power of Japanese manufacturing industry intensified. The serious depression of the domestic market in the 1990s after the burst of the bubble further boosted this tendency by strengthening the export drive of Japanese manufacturers. Appreciation of the yen was sustained by the tendency toward trade surpluses. The exchange rate of the yen against the dollar soared from about ¥145 in 1990, to around ¥100 in late 1994. It further jumped to ¥79.75 in April 1995, when international confidence in the dollar was shaken following the Mexican currency crisis in January of the same year. In the 1980s Japanese manufacturing industries had already begun to increase direct investment abroad in order to secure natural resources, utilize cheaper labour power and avoid trade frictions. Continuing


appreciation of the yen in the first half of the 1990s greatly strengthened this trend and fostered the multinationalization of Japanese manufacturing companies. Even medium and small manufacturing businesses began to make their operations multinational to mitigate the heavy depressive shock of the sharp appreciation of the yen until 1995. As a result, by 1995 the overseas share in total production by Japanese machinery firms was as high as 26 per cent. For audio-visual (AV) appliances, the proportion of overseas production was 55 per cent, more than that of domestic production.1 As was noted above, until the beginning of the 1990s, increasing Japanese direct investment abroad did not bring about the hollowingout of domestic industrial activity, but rather served to intensify the international competitive power of Japanese exporting industries and to increase the absolute volume of employment in manufacturing. However, after its peak in 1992, absolute employment in Japanese manufacturing industries began to decrease. While even medium and small manufacturing firms in local areas began to shift their factories abroad, 50 per cent of firms planning to go abroad after the sharp appreciation of the yen since June 1994 intended to reduce domestic production.2 Thus a hollowing-out of industry began to take place in the Japanese economy. In the following six years, absolute employment in Japanese manufacturing decreased rapidly by 1.87 million (12 per cent) from its 1992 peak of 15.69 million. The extremely high level of the yen against the dollar in 1995 was reversed as the Mexican economic crisis subsided and US economic recovery – together with the rising price of securities – encouraged international financial investment into the US capital market. In contrast, the yen fell and reached ¥140 to the dollar in 1998 as concern deepened about the Japanese financial crisis and continuous domestic depression. As the yen depreciated, Japanese exports and the trade surplus increased again. However, they could not balance out the unfavourable effect on manufacturing of both the depressed domestic market and the Asian monetary and economic crisis after 1997. As a result, the number of Japanese workers in manufacturing decreased by 740 000 in one year to April 1998. This contributed greatly to raising the Japanese unemployment rate to the historically high level of 4.1 per cent (2.9 million). In April 2000, the unemployment rate rose still further to 4.9 per cent (3.49 million). It is especially worrying to note that unemployment


among male workers is 5.2 per cent, and worse than average. This suggests that the processes of restructuring and de-industrialization also badly affect breadwinners.

The economy shifts toward the tertiary sector An expanding service sector The relative weight of tertiary industry in the composition of the Japanese working population has increased conspicuously since the 1970s, as it has in other advanced countries. The tertiary industry took more than 60 per cent of the Japanese working population after 1993, while the proportion had been only 47.4 per cent in 1970 (Table 3.1). The tertiary industry’s share in national income had already exceeded 60 per cent by 1980. With regard to the internal composition of the tertiary sector (Table 3.1), wholesale and retail commerce increased their proportion very little until 1985, and their share fell slightly afterwards. The sectors that contributed to the growth of tertiary industry were finance, insurance, real estate and other service industries narrowly defined. Within the narrowly defined service industries, services to persons increased during 1970–90 from 4.19 per cent to 5.46 per cent of the national product, while services to corporations grew greatly, from 10.26 per cent to 17.97 per cent.3 There are three interrelated factors which have sustained such an expansion of the service sector in the Japanese economy: first, a general long-run tendency toward a service economy; second, the effect of spreading information technologies; third, the tendency of the yen to appreciate. A general tendency toward a service economy Rowthorn and Wells (1987) have summarized the characteristics of the long-run path of economic development from industrialization to de-industrialization in advanced countries in the following way.4 First, agriculture, which initially takes up a large proportion of the working population of an economy, continuously decreases in the process of economic development. Such development finally reaches the stage of ‘maturity’ when the number of working people in agriculture becomes small and further decrease no longer substantially helps to increase employment in other sectors. Second, the proportion of service industries in the composition of the working population continuously


grows and becomes more than 50 per cent, or bigger than the total of agriculture and manufacturing industries. Third, the proportion of manufacturing industry, which increases at the initial and middle periods of economic growth, becomes stagnant and begins to decrease in the long run to result in ‘de-industrialization’. ‘Positive’ de-industrialization at the stage of economic maturity with continuous full employment and economic growth should be distinguished from ‘negative’ deindustrialization with increasing unemployment and depressed performance of manufacturing industry, which can occur at any stage of economic development.5 Broadly speaking, it tends to be assumed that ‘positive’ de-industrialization at the stage of economic maturity is due to changes in composition of demand among people. However, this assumption does not hold, since in terms of real output the service industry is not growing faster than manufacturing. Rowthorn and Wells thus stress that the basic cause of de-industrialization in the composition of the workforce lies mainly in the faster growth of labour productivity in manufacturing compared to the service sector. Three characteristic features of economic development leading to de-industrialization, as formulated by Rowthorn and Wells, would not necessarily occur in that order. For the Japanese economy, the rise in the share of the tertiary industry above 50 per cent of the working population had already occurred at the beginning of the 1970s. However, the third feature of de-industrialization did not occur at that time. Although the proportion of tertiary industry continued to increase, that of secondary (mainly manufacturing) industry did not decrease for two decades. Meanwhile, labour productivity, measured as annual average growth of real output per worker, in manufacturing grew much faster than that in services in 1970–80: 6.7 per cent compared to 3 per cent. Despite this gap in the growth rates of productivity, the proportion of workers in the manufacturing industry remained high, while that in the tertiary industry continued to increase. There are basically two factors explaining this phenomenon. First, growth in tertiary industry could still be achieved in this period largely due to a proportional decrease in the agricultural sector. Second, the strengthened international competitive power of Japanese manufacturing industry served to maintain its employment by rapidly expanding the volume of its production. As the proportion of the working population in primary industries decreased to only 5.9 per cent in 1993, the Japanese economy has probably entered the ‘maturity’ stage of Rowthorn and Wells’ theory.


In addition to the tendency to transfer Japanese manufacturing abroad, the Japanese economy seems to have passed a watershed in the direction of de-industrialization around this period.6 The watershed became apparent as difficulties in Japanese manufacturing exports increased due to a number of factors, such as appreciation of the yen, trade frictions with the USA and other advanced countries, intensified rivalry with other Asian countries, and further multinationalization of Japanese manufacturing firms. If there is a possibility of mitigating de-industrialization in Japan, it probably lies in a reduction of the difference in the growth rates of productivity between manufacturing and the service industry. Change must take place in manufacturing, as the growth of labour productivity in the service industry is characteristically low. Verdoorn’s Law empirically states that the growth rate of labour productivity of an economy is usually half the macroeconomic growth rate. It is probable that this law applies to the growth rate of productivity in Japanese manufacturing, and entails its lowering along with the decreased rate of economic growth. As a result, the proportion of Japanese manufacturing employment may be maintained. On the other hand, de-industrialization could proceed without such equalization of relative growth rates in labour productivity. In either case the Japanese economy cannot help but face a lowered growth trend. The conclusion would be more certain if we considered the factor of a decreasing younger labouring population, as we shall do later in this chapter. The influence of ME information technology The development of ME information technologies made possible a rise in productivity in some types of tertiary industry. De-industrialization in the composition of the working population may also possibly be mitigated by this change. However, the influence of ME information technologies has promoted the growth of tertiary industry and its employment in various respects. In this regard, Rowthorn and Wells’ theory of de-industrialization concerning the gap of productivity growth between manufacturing and the service industry at the macroeconomic level of analysis needs to be extended. As we saw earlier, the growth of services provided to corporations has been especially conspicuous in the Japanese economy. It includes services relating to information technologies, such as systems engineering (SE), lease business for information appliances, providers of internet


communication systems, and maintenance and cleaning of factories and office spaces. Capitalist firms economize on labour costs by FA and OA with flexible combinations of various types of workers, and they also economize on operating costs by outsourcing, or ordering to outside vendors, certain operations that used to be performed within firms. Some kinds of operations relating to the setting up and maintenance of software systems, for instance, require certain amounts of costs and labour that are suitable for such outsourcing. Setting up, writing initial manuals and undertaking the repair and maintenance of hardware equipment also frequently require the dispatch of specialists. At the same time, by fully utilizing information technologies, industrial firms have attempted to reduce their operational costs and employment by creating or hiring other firms to sell, repair and maintain their products. While manufacturing firms reduce their internal operational functions by such forms of outsourcing, the service industry grows in relation to such corporations. At the same time, as more and more housewives are mobilized in workplaces, often as low-wage part-timers, the service industry grows also in relation to personal life. The work of cleaning, cooking, caring for children and elderly parents, and some aspects of education, that used to be done by domestic labour at home have become increasingly dependent services purchased in the market. This tendency is exacerbated in the Japanese economy by the fact that many male workers are separated from their families and sent to remote workplaces in the course of relocation of factories and offices. Increasing numbers of single people also have the same effect. In these aspects, including the direct and indirect influence of the information revolution, the growth of the service industry has also come from the demand side arising from the behaviour of both business firms and individual consumers. In retrospect, the market economy originated as a form of intersocial economic relations, and penetrated communal societies by causing a decomposition of communal relations. While the capitalist economy forms the most thoroughgoing market economy, the internal activity of capitalist firms is not organized on the basis of the market; there can be more or less communal relationships in the workplace. The Japanese style of management in big business stresses the communal aspect in the form of a family spirit that regular workers can be proud of. Human relations to domestic work within the family are also basically communal, and do not conform to market principles. The growth of the service economy under the influence of information technologies, on the one


hand, facilitates the mobilization of labour power from domestic life to the labour market. On the other hand, it widens and deepens the penetrating function of the market economy into the activities that lie inside business firms and families by expanding the range of vendible services sold to both corporations and individuals. This decomposes non-market relationships in society, reduces their role and works to strengthen individualism. While the capitalist economy renews its competitive vitality in a borderless global market, it also restrengthens the inward penetration of market relations into domestic firms and families. Here lies an important basis for the neoliberal ideology of restoration of the vitality of the competitive free market economy in our age. The impact of the soaring yen The tendency toward appreciation of the yen since the 1970s has also facilitated the growth of the service industry in the Japanese economy. In contrast to primary and secondary industries, the tertiary industry is relatively immune from competitive rivals from abroad, especially in the field of services.7 Appreciation of the yen facilitated the importation of agricultural products and thus threatened Japanese agriculture, especially as it coincided with deep reductions, or even the abolition, of protective custom duties. It created difficulties for exports of manufactured products, while intensifying competitive pressure through the importation of foreign products with lowered yen prices. The service industry lies largely beyond foreign trade and competitive pressure from imports as the yen appreciates. Services such as medical treatment, education and the care of children are usually demanded by local society, and are remote from the effects of appreciation of the yen. Therefore, the flow of capital and working people has had a tendency to shift toward services in a broad sense, thus avoiding the unfavourable effects of yen appreciation. The growth of the service industry indeed contributed greatly to the increase of the total Japanese working population by 13.5 million in 1970–93, and to maintaining a relatively low rate of unemployment. While agriculture used to serve as a buffer absorbing the latent industrial reserve army within the Japanese economy, its role has been replaced by services and other tertiary industries. Though a large part of tertiary industry depends mainly on the domestic market, there are some service areas subject to international trade, such as transportation, communication, insurance, finance, technical expertise, business consultation and tourism. Their roles and


relative weight have significantly increased as ‘soft’ economic activity has tended to grow with globalization. In these areas, the Japanese economy is making large trade deficits. While Japan has strong international competitive power in informational hardware production, she depends greatly on imports, mainly from the USA, in the field of informational software. On the other hand, high prices in tourist hotels and restaurants, reflecting both the appreciation of the yen and high real-estate prices, have resulted in unfavourable conditions for foreign tourists, while the appreciating yen has encouraged an outflow of Japanese tourists. Thus, the Japanese service trade in 1990 made a net deficit of US$22.2 billion, even after deducting the net receipt of foreign investment yields of US$23.2 billion from the gross deficit of service trade. This net deficit in service trade was more than one-third of the US$63.6 billion Japanese trade surplus. The Japanese balance in the service trade, excepting foreign investment yields, is now continuously making deficits of several tens of billions of dollars a year. This situation in the Japanese economy is also promoted by pressure from the USA demanding further deregulation for foreign businesses to participate in the Japanese market of services such as insurance, finance, business consultancy and pension fund investment. In the service industry, contrary to manufacturing, Japanese international competitive power is clearly weak. Therefore, there is a danger that de-industrialization in the Japanese economy, with a tendency for employment in manufacturing industries to decline, may easily fall into ‘negative’ de-industrialization with increasing unemployment, in line with Rowthorn and Wells’ theory. The recent severe depression in the Japanese economy with a much increased level of unemployment would present such a danger. From the viewpoint of economic democracy, it is desirable to maintain a broad range of jobs and sufficient opportunities for employment according to individual inclinations and tastes, including the fields of manufacturing and agriculture.

Changes in family life and challenges of feminism The M-curve of Japanese women’s labour participation rate and its changes As information technologies and the service industries spread in the process of the restructuring of the Japanese economy, Japanese firms


increased their dependency upon women workers. While ME automation systems were widely introduced in both factories and offices, skills, experience and muscle power became unnecessary at many workplaces. Therefore, low-waged irregular workers, typically housewives working part-time, tend to be employed to reduce wage costs for firms. In 1973–96, for instance, women’s employment in Japan increased by 8.94 million (from 11.9 million; an increase of 75.1 per cent), while men’s employment increased by 8.10 million (from 24.3 million; an increase of 33.3 per cent). Thus, in percentage terms, growth in women’s employment was more than twice that of men. As a result, the proportion of women employed against men employed increased from less than one-half in 1973 to two-thirds in 1996. It is clear that women have come to represent an increasingly important source of wage labour in the Japanese economy. Figure 3.1 presents in more detail the substantial changes in female labour participation rates by age group. The labour participation rate of Japanese women is highest in the age group 20–24. The majority of Japanese women want to obtain jobs immediately after graduation from high school, college and university. The rise in participation rate is obvious, beginning from this age group. The rate of Japanese women finding a job at this age increased from twothirds in 1975 to three-quarters in 1990. Its slight decline in 1996 reflects the difficulty of obtaining jobs due to the severe depression. Until about 1975, the female participation rate declined sharply in the next age group, 25–29, to form a trough. The lowest point of the trough shifted to the higher age group of 30–35 after 1985, and its level became higher by around 10 per cent, thus making the downward slope gentler. After hitting this lowest point, the Japanese female participation rate rises again to form another peak at the age group 45–49. The slopes to and from this second peak are relatively gentle. The level of the second peak was also elevated by about 10 per cent during the period from 1975 to the 1990s. Thus, the labour participation rate of Japanese women clearly shows an M-shape curve with two peaks, one at the age group 20–24 and another at 45–49. The M-curve shows that many Japanese women quit their jobs when they get married or have babies. This M-curve of participation rate is characteristic of Japanese women in comparison with other advanced countries, as is shown in Figure 3.2. In Sweden, the labour participation rate of women is much higher, and more than


Figure 3.1 Female labour participation rates by age group (1975–96) 75 70

1996

65

1990

60 55 1985

% 50 45 40

1975

35 30 25 20

0

15–19 20–24 25–29 30–34 35–39 40–44 45–49 50–54 55–59 60–64 65þ Age group

Source: Prime Minister’s Office (each year), [Survey of Labour-Power].

90 per cent of women during their twenties and fifties continue to have jobs. This is made possible by the Swedish Welfare State providing social care that allows women to continue with their careers through marriage, childbirth and childcare. For the USA, though the female participation rate is lower than in Sweden, there is also no evidence of an M-curve. For France and West Germany there is a slight M-curve, but not as conspicuous as that for Japan.


Figure 3.2 International comparison of female labour participation rates (1987–90) 100 USA (1989)

90 80

Sweden (1989)

70 % 60 50

W. Germany (1988)

40 30 20

France (1987)

Japan (1990)

10 0 15–19 20–24 25–29 30–34 35–39 40–44 45–49 50–54 55–59 60–64

65þ

Age group

Source: Ministry of Labour, [White Paper on Labour 1991], based upon ILO, Year Book of Labour Statistics.

Regarding the M-curve for Japan, the job conditions relevant to the second peak are in many cases different from those for the first peak. Ordinarily, when Japanese women re-enter the labour market after having left to marry and have children, they cannot be regular full-time workers again but have to work as irregular workers, typically as parttimers. Even when they go back to their old workplaces doing the same or similar work, they are not employed as regular workers. The firms can use them flexibly according to their demand for labour power, at a lower wage rate and without fringe benefits. Many housewives, moreover, themselves adjust their wage income to within ¥1.03 million a year, because that is the cut-off point for the tax exemption for dependants on husbands’ wages, and thus total household income might be lower if they earned a higher income. Thus, many Japanese housewives tend to regulate their wage income themselves, combining domestic labour and social activities with part-time jobs, without strongly pushing for higher wages or longer working hours. Furthermore, the level of the second peak of the M-curve became considerably higher in the 1990s. Among women aged 40–55, about 70 per cent had jobs (Figure 3.1). Though the participation rate of the 20–24 age group declined slightly in 1996 due to the severe depression, the rate for the age groups around the second peak and after that


rose slightly. During the severe depression of the 1990s, and with an expanding service economy, Japanese firms relied more on low-waged irregular women workers, while women’s wage income became indispensable for many households. The trough of the M-curve also shifted upwards by more than 10 per cent in 1975–96. Even at the lowest point of the trough, about 55 per cent of women now continue to work as employees. The bottom age group moved rightward and now comprises those aged 30–35 years. In 1996, the participation rate of the age group in their late twenties became higher than in 1975 by more than 25 per cent; almost 70 per cent of women in that age group now have jobs. This signifies, for one, that many younger people marry later than before, and singles among them have increased. For another, it also suggests that the old habit of women quitting their jobs at the time of marriage has been abandoned in many firms and workplaces. Many women actually continue with their careers after marriage. However, not a few of them have to quit the labour market for several years just after having a baby, thus forming a trough for the 30–36 age group. Thus, the M-curve of the labour participation rate of Japanese women has not disappeared, but shifted upwards. While the participation rate has become higher for each age group over 20, it has been especially elevated for those aged 40–55. These changes constitute an important aspect of restructuring by Japanese firms in economizing on wage costs by means of ME information technologies and promoting automation systems in both factories and offices.

Changes in family life What changes has the rise in women’s labour participation rate brought to family life, and further to the Japanese economy? Until some years after World War II most Japanese households were large families comprising three generations. The number of children was larger, and they often lived together with their grandparents and young uncles and aunts. However, the typical form of the family changed into the nuclear family comprising two generations as massive migration of the labouring population from agricultural villages to urban cities continued throughout the period of high economic growth. Such a change in the family unit necessarily increased the number of families more than the natural increase in population. While the


Japanese population grew from 83.2 million in 1950 to 111.9 million in 1975, the number of households almost doubled from 16.58 million to 32.14 million, with a fall in the average number of people per household from 5.02 to 3.48.8 The number of households in urban areas increased remarkably fast from 6.9 million to 25.27 million in the same period. The increase in the number of households, especially in urban areas, contributed to the expansion of the domestic market in consumer durables, such as refrigerators, vacuum cleaners, TVs, audio appliances and cars; and house purchases also increased. This was an important aspect of the Japanese Fordist mode of accumulation. The shortage of houses was particularly severe throughout most of the period of high economic growth. The continuous expansion of the housing market was a source of the long boom in domestic demand in this period. It was also generally assumed at that time that the male head of the household ought to be the family’s sole wage-earner. Wife and children, and often the retired elderly parents, were usually thought to be family dependants to be fed and clothed by the man’s wages. Trade unions demanded and obtained increases in basic wages in the annual spring labour offensive (Shunto). Collective bargaining was undertaken from the viewpoint of the need to maintain the living standards of the whole family. However, when the Japanese economy entered into the period of continuous crises and restructuring, the annual spring labour offensive repeatedly failed to raise real wages. Labour productivity rose no less than in the previous period of high economic growth through both the closure of inefficient production lines and the introduction of ME automation systems. Nevertheless, unfavourable conditions in the labour market, and the pressure to intensify international competitive power in the company-centred socioeconomic order prevented rises in real wages by breaking the Fordist virtuous circle between increasing productivity and rising real wages. Meanwhile, living costs for families continued to climb due to increases in housing costs, taxes, other social costs and education expenditures. To meet such increases in household expenditure in the face of stagnant real wages, more and more housewives began to seek paid employment in order to earn additional income, thus changing family life. During the same period, capitalist firms tended to increase the employment of low-wage female workers, especially housewife part-timers, thus cutting down wage costs by spreading FA and OA. The growth of tertiary


industry, such as trade, finance and services in urban economic life, also offered more opportunities to women part-timers. In the contemporary Japanese social environment comprising nuclear families without sufficient public facilities for childcare, many housewives find it difficult to maintain a full-time job and prefer (or are forced) to work part-time when they have infant children. Income tax exemption for dependants also encourages housewives not to earn more than ¥1.03 million a year by limiting their working hours, as we have already seen. This regulation is a historical and habitual legacy of the notion of family wages lasting throughout the period of high economic growth. In the past, when a family had two wage earners instead of one, the second income – even that of a part-timer – had the effect of raising the disposable income of the household above that of others. However, as a double income became the norm for family life, the necessary living costs of a family, including the cost of generational reproduction of labour power, or the cost of bringing up and educating children, normally became borne by two people. Marx had already noted that one effect of machine production is to reduce the value of labour power as it becomes spread among several members of a family.9 A similar change in family life actually occurred in the Japanese economy and served as the social condition allowing continuous severe limitation of real wages from the mid-1970s on. The change in family life with the increasing participation of housewives in the labour market had the effect of expanding the domestic market for capitalist firms. The reduction of domestic labour as various electrical home appliances came to be owned widely, such as washing machines, vacuum cleaners and electric cookers, was one condition enabling women to obtain jobs. As housewives found employment outside the home, more efficient and automated home appliances became popular and sold easily. At the same time, busy housewives began to purchase more processed foods at convenience stores on the way back from work, and the market for microwave ovens that enable quick rewarming of such food also expanded. Even when the kind and quantity of food remained the same, capitalist firms could increase total sales and revenue by expanding the market for more processed foods. As the national income is calculated upon the basis of total sales in the market, it also clearly increases when a reduction in domestic labour results in an increase in the purchase of processed foods and other consumption goods.


Similarly, more and more childcare and education became dependent upon services purchased in the market outside the home, as housewives became employed workers. Childcare, nursery schools, private evening schools, various private lessons for piano, dance and other accomplishments are bought increasingly in the market, and form a part of the growth of the service industry. On the other hand, family life has tended to become more empty as an increasing number of previously shared domestic activities, such as the care, education and discipline of children, are performed outside the domestic sphere.10 This is not due simply to changes in the activities of women; as the characteristics of company-centred society have become stronger in Japan, husbands have had to do more overtime at work, or have simply had to mix socially after work and been unable to return home until midnight most days. In addition, commuting time has become longer and easily exceeds three hours a day in the Tokyo metropolitan area and other big cities. Men find it hard to secure the time to enjoy domestic activities or to play with children. Children have also become short of time – they have to prepare for and attend private lessons or other extracurricular activities in addition to studying for various examinations. It has become harder for both parents and children to share common domestic activities. As a result, individualism has been strengthened in family life. CD radio cassettes are used in private rooms individually rather than in a common sitting room. Mobile telephones have also spread rapidly, reflecting the tendency toward a more individualistic lifestyle. Thus, the nuclear family seems to be suffering from internal fission. Such a change in family life has had the effect of expanding the market for consumer durables and services, since these are sold to individuals rather than to families. This trend is perfectly in accord with the direction of the restructuring of capitalist firms to diversify their models of products and services for individual consumers by means of information technologies. Therefore, advertising by capitalist firms strategically promotes individualistic fashionable changes in consumption. The growth in various personal service businesses as well as chains of convenience stores selling processed and fast food is another example of the spread of individualistic consumption. In retrospect, communal family life was regarded as an important characteristic and traditional foundation of Japanese society. The capitalist market economy in the post-World War II period changed this in


various ways. In the period of high economic growth, the nuclear family became the typical family unit. More recently, nuclear families themselves have become increasingly penetrated by the market economy and have been decomposing toward a life of individualistic consumption. This is another reason why neoliberalism has become so powerful and dominant in the Japanese economy, given its belief in the efficient working of individualistic market principles.

How should the tendency toward lower population be analysed? The change in family life has brought with it another important new trend – that toward a smaller number of children and a consequent tendency toward lower population in Japan. In the restructuring process in the course of the great depression beginning in the early 1970s, the Japanese economy has depended greatly upon women workers to economize on costs of operation among capitalist firms. It has become the norm for housewives to have jobs, even if part-time. The chance to exploit the potential and active power of women thus arose, and fresh social opportunities were made available to Japanese women. It is certainly desirable for Japanese society to enjoy the benefits of women’s vitality in all its forms. However, Japanese society did not have the social institutions necessary for increasing numbers of women to work outside the home. Cooperative and institutional arrangements to support childbirth and childcare for working women were insufficient. This is a historical legacy of traditional large families and of nuclear families in which housewives were active only at home. As a result, younger people have found it increasingly difficult to have and to bring up children. This trend is also intensified by the social fashion for individualistic consumption, promoted by the companycentred market economy under neoliberalism. It is generally forecast that a nation’s population decreases when the average birth rate per woman falls below 2.1. In Japan, the average birth rate per woman has declined rapidly: it was above 2.1 until the 1960s, dropped to 2.05 in 1974, and then declined rapidly to 1.34 in 1999, as women’s participation rate in the labour market rose in the course of the restructuring of the economy. The decline initially came from a fall in the average birth rate per couple from 4.27 in 1940 to below 3 in the 1960s and to 2.2 in the 1970s. Since then, the decline has increasingly


been a result of the rise in the number of unmarried people. According to the census of 1995, 49 per cent of women and 66 per cent of men in the latter half of their twenties were unmarried; even in the latter half of their thirties, 10 per cent of women and 23 per cent of men were unmarried. There is still a strong social custom in Japan for women not to bear children outside marriage. This is in sharp contrast with other advanced countries, such as Sweden, where almost half of all babies are born outside formal marriage. Also, as a result of both the custom within companies and the lack of social arrangements to support women with babies, many women have to retire from their jobs when they get married and especially when they have children. When they return to the labour market after several years of childcare, most of them can no longer be hired as regular workers and instead become low-wage parttimers. Combined with a shortage of affordable housing for married couples, these factors sustain the tendency for people to remain unmarried as well as the fall of the Japanese birth rate. Along the changes in the M-curve of female employment discussed earlier, this fall in the birth rate has been a notable phenomenon among Japanese women. As mentioned in Chapter 1, it is estimated that the Japanese population will peak in about 2007 and will then decline by half toward the end of the twenty-first century. Such a rate of decline would amount to 0.7 per cent annually. With a smaller number of children and young people, Japan is rapidly becoming an aged society. The number of people above 65 years of age, who mostly live on their pension after retirement, is clearly and sharply increasing compared to the productive population between 15 and 64 years of age, who work and pay the most taxes and social insurance. While the percentage of elderly above 65 years of age against the productive population was 10.3 per cent in 1970, it rose to 20.9 per cent in 1995, and will go up to 46 per cent in 2025. Conversely, the number of working people who support an older unproductive person has declined from 9.7 people in 1970 to 4.8 people in 1995, and will further fall to about 2 people in 2025. Such a change will continuously increase the burden of costs of medical care and pensions on the shoulders of working population, and will work as an important deflationary factor in the Japanese economy. The severe prospect of the rising burden of an ageing society has already created concern about the future of pension and medical services among Japanese people, and not only those approaching retirement age.


The Japanese population grew from less than 35 million at the time of the Meiji Restoration in 1868 to 126 million in 1997. This ‘natural’ increase, together with the continuous migration of workers from the latent surplus population in rural villages to urban industrial areas, has served as an important basis for Japanese economic growth. However, at a time when the latent surplus population in rural areas is almost exhausted and the Japanese economy has caught up with advanced Western countries, the economy has become unable to maintain its population numbers and is moving toward a population reduction. The very economic foundation of any form of society must be the replenishment of its population. Japanese capitalism can no longer guarantee this fundamental economic rule and is entering a period of self-destructive population reduction. What does this signify for the Japanese economy? And what options are there for coping with this problem in the future? The significance of falling population and possible options When a longer perspective is assumed, the tendency toward a lower population, especially of the younger productive population, must clearly be a factor lowering the growth rate of Japanese capitalism. In order to maintain a positive rate of economic growth, labour productivity has to rise even more and cancel out the negative effect from the decrease in productive population. This does not seem easy, if possible, as the proportion of employment in the service industry, which has a very slow growth of labour productivity, is rising, while that in manufacturing, which has relatively rapid productivity growth, is falling. Therefore, Verdoorn’s empirical law – that the growth rate of labour productivity usually remains about half that of the real national economic growth rate –would work even more repressively on growth in the Japanese economy. The need to undertake environmental protection, such as the measures agreed at the Kyoto International Congress of 1997 to reduce the quantity of CO2 emissions by 6 per cent by 2012, will also add to the difficulty of restoring the Japanese growth rate. Increasing difficulties in obtaining natural resources in the world market will similarly work repressively. While the national propensity to consume may rise as more elderly persons consume their savings, younger generations may lower their propensity to consume since they worry about the future. With a lowered birth rate, the proportion of single-child families is obviously increasing in each generation. If the sociologists’ observation is


correct that the first child generally tends to be more conservative and avoid adventure, the Japanese economy may also lose some ability to innovate as more couples have only one child. Constrained by these factors, it is highly probable that the Japanese economy will undertake the unprecedented experiment of surviving as a capitalist economy with zero or nearly zero long-term economic growth. It is conceivable that the Japanese population will continue to decline by inducing a very stagnant economy for at least several decades more, if the Japanese people accept this trend. This scenario may be desirable for global – and Japanese – survival, since Japan possesses an economic system that is a heavy consumer of energy and resources, but this scenario may also turn out to be inevitable as a result of various circumstances. However, since Japan has a capitalist economic system, other options are bound to be sought to keep economic growth positive as far as possible. On the one hand, there will be attempts to increase labour productivity in all industries, including services. On the other hand, Japan will have to grope her way among the following options to confront the problem of the tendency of the younger productive population to decline. The first option is to allow the entry of more foreign workers, especially from the surrounding Asian countries. Already numbers of low-wage foreign workers are increasing in many workplaces, often without formal work permits. At the moment, foreign workers without special skills are not allowed to work in Japan. If entry were freely allowed, a great many workers would flow into Japan from poor agricultural villages in surrounding Asian countries, including China. This is bound to cause too much turmoil and inequality within the Japanese socioeconomic order for it to be favourable to capitalist economic growth. The Japanese sociocultural milieu is unlikely to prove welcoming to foreign workers without special skills; particularly those with no knowledge of the Japanese language. This option therefore cannot be a decisive solution, though foreign workers will continue to enter the Japanese economy – slowly, but increasingly. The second option would be to utilize the potential of elderly people more widely. The uniform retirement age of 60–65 seems out of date, though it was appropriate during the period of high economic growth when there was a surplus among the younger labouring population. As health care has been much improved, life expectancy has been prolonged by well over 10 years: from 65.32 for males and 70.19 for females


in 1960, to 77.16 for males and 84.01 for females in 1998. There are many elderly people who still have sufficient energy for work after retirement. It would certainly be desirable for many people to have easier working conditions or to be moved to more congenial workplaces, beyond a certain age and according to their health conditions. The right to retire in order fully to enjoy free time after a certain age should also be retained. It is, however, against the fundamental human right to work, and also unfair, to have a uniform retirement age for the average worker while privileged top managers and politicians can continue to work without an age limit. In the USA and Canada, for example, dismissal of workers due to their age is considered as discrimination contrary to Constitutional Law, and similar to discrimination concerning race and gender. It is peculiar that Japanese companies neglect this despite their tendency to follow US business practices in many ways. Even if only a part of the pensions of elderly people with a certain income were cut, it would serve greatly to alleviate the burden on the younger generation. Firms would also have to reconsider ways of extending the employment of elderly people to mitigate the decrease in numbers of the younger labouring population in the near future. As a third option, dependency on female labour may further be raised. If the trough of the M-curve of female labour participation rate is raised to the peak, as for Sweden in Figure 3.2, the negative effects of a decreasing younger labouring population would be mitigated to a certain degree. In fact, the possibility of expanding female labour has been made much more realistic with spreading ME information technologies and the growth of service industries. The future of Japanese firms depends much upon how well they can utilize the potential of female workers. Nevertheless, many Japanese firms actually discriminate against women in employment of fresh regular workers, and in promotion and dismissal. This is also contrary to the spirit of the egalitarian law of employment opportunities among men and women, passed in 1986. From the viewpoint of firms, women are hard to treat equally with men as regular workers since they may retire in mid-career to marry and have children. Therefore, if social arrangements were designed to allow women to continue their careers as regular workers throughout the process of childbirth and childcare, discrimination against women in employment and promotion would be substantially mitigated. The M-curve of the female labour participation rate will also be attenuated with more egalitarian treatment of women in workplaces. These


changes are desirable not only for women who want to find jobs and work on an equal footing with men, but also for Japanese firms as a necessary foundation for growth in the near future. The fourth option would be an attempt to restore the birth rate. The rapid decline in the Japanese average birth rate is not a natural and inevitable phenomenon but could well be restored by social arrangements. The Swedish average birth rate, for instance, rose from 1.65 in 1984 to 2.13 in 1990 by a series of social arrangements:11 before and after childbirth, a ‘nursing holiday’ of 450 days was made available, of which 360 days are paid at 90 per cent of regular wages; public nurseries were established where children from birth to 6 years are cared for 12 hours a day, starting at 6.30 in the morning; and parents of infant children are allowed to reduce their working hours to 6 hours a day, though with a cut in wages. In Japan, without these types of social arrangement a following vicious circle may arise in the economy, fostering depopulation. While firms would depend increasingly on female workers, women would have to retire in mid-career due to childbirth and childcare. As they would not be able to obtain jobs as regular workers again, they would be reluctant to retire and would postpone, or avoid, marriage and childbirth. With the resultant tendency toward falling population among the productive younger generation, firms would thus increase their dependence on female workers even more. These options, especially the second, third and fourth, are not mutually exclusive but rather complementary. Together with the trend toward lower population there is also a broad sociocultural change in gender relations in the Japanese economy. As more and more women become reliant on their own wage income, they begin to regard marriage and childcare as a sacrifice of their individual freedom and enjoyment of life. This kind of individualistic idea and culture has also spread among men. As a result, marriage has tended to be postponed and singles have increased. Urban life is favourable to unmarried life in terms of residential units, shopping at convenience stores, and enjoying various services. This trend also suits the need of capitalist firms flexibly to rearrange workers across various workplaces in different regions. In such social circumstances, the divorce rate has also risen to 2 per 1000 couples, and the number of divorced has risen to 243 000 in 1998 from less than 100 000 until 1970. While the number of singles increases, the relationship between parents and children has also become more variable. Social understanding


should now be more flexible and allow for various forms of family to occur. For those who wish to form and maintain the traditional family, the social arrangements facilitating childbirth and childcare should be provided more extensively. Such social arrangements and moral sympathy should not be denied to single parents. Without a cooperative partnership between men and women, with or without formal marriage, childbirth and childcare are very difficult, if not impossible. The forms of such partnership should be allowed to vary and need not be limited to traditional marriage. Contemporary feminism demands egalitarian female rights at the workplace and in the home, and attempts to form cooperative gender relations for childbirth and childcare. Giving women’s vitality fuller play in the workplace and socially supporting childbirth and childcare are among the most important conditions for the future of Japanese economy.12 In order to form and enjoy a cooperative partnership with women in bringing up children, men should also be relieved of much of the stress and fatigue due to daily overwork in the Japanese company-centred economic order. As more and more women work outside the home, men clearly need to have more free time to share in domestic work, including childcare. In an economy of overworked workers, the younger generation would find it difficult to enjoy childbirth and childcare, and happy children are unlikely to be the result. In so far as the female labour participation rate will continue to increase together with related changes in family life or gender relations, it is both necessary and desirable for men to have more free time to help partners in the home. In the present situation of increasing unemployment, it is time for overtime work to be reduced or even abolished, and further for regular working hours per week to be reduced, rather than reducing employment. This may lower economic growth as well as waged income per worker in the short run, but could contribute to restoring the birth rate and thus economic growth in the long run, within a sounder human social order.

4 The Burst of the Bubble and the Political Economy of the 1990s Depression

The features of the Japanese economy have changed greatly in the 1990s compared to the 1980s. The economy shifted to an extremely low growth trend and its continuous depression has caused international concern among the advanced countries. A major cause of these difficulties was clearly the swell of the huge bubble in the speculative trading of shares and real estate in the late 1980s, and its subsequent burst. This resulted in an enormous amount of bad loans for Japanese financial institutions, generated a credit crunch, worsened the assets of firms and households, and caused uninterrupted business failures and a vicious circle of asset deflation. The swelling of bubbles caused by mobilizing the ability of the credit system to expand, and their resultant destructive burst, have been seen frequently in the history of capitalism – for example, the tulip crisis in the Netherlands and the South Sea bubble in the UK in the nascent period of capitalism in the seventeenth and eighteenth centuries, the cyclical crises in the nineteenth century, and the great crisis of the 1930s. In the world economy since the late 1980s, the tendency of capitalism to cause speculative bubbles that eventually burst has reappeared. The Japanese economy could not escape it. The burst of speculative bubbles may be understood at an abstract level by Minsky’s post-Keynesian financial instability hypothesis.1 If we follow this hypothesis, firms and individuals in the Japanese economy in the late 1980s started from a position of hedge finance, in which the cash flow from assets held is expected to exceed the cash flow arising from liabilities in every period. Then, increasing numbers of them moved to speculative finance, in which the cash flow from assets in the near 76

The Burst of the Bubble and the Political Economy of the 1990s Depression 77

future falls short of near-term contracted payments, but expected cash receipts in the longer term are still expected to exceed cash payments outstanding. In addition, at the last phase of speculative development, increasing numbers of economic agents came to Ponzi finance, in which the net income from receipts falls short of interest payments in both the short and the long run, increasing outstanding debt in the expectation of a future profits bonanza as the only way out. However, neither the fact that in a capitalist economy it is generally possible for financial bubbles to emerge, nor a largely hypothetical course of events are sufficient to explain fully the reasons and the magnitude of the damage wrought by financial instability in the Japanese economy in this period. We also have to reconsider the role and functions of the government and the Bank of Japan in fiscal and monetary policy, and of the deepening fiscal crisis of the state. Finally, we shall discuss possible ways out of the crisis.

The swell of the bubble We have to examine first how and why the huge bubble swelled in Japan in the late 1980s. The bubble was characterized by speculative trading and rising prices in shares and real estate, swelling much faster than real economic growth. These are shown in Figures 4.1 and 4.2. While

Figure 4.1 Nikkei 225 shares average price by half year (1983–97) 40 000 35 000 30 000 25 000 ¥ 20 000 15 000 10 000 5 000 0 1983

84

85

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Source: [Nikkei Macro-Economic Data] 1997, (Nikkei Overall Economic File I-C-80).


Figure 4.2 Indices of land prices (1983–96) 350

Osaka area

Index

300 250

Average of 3 major urban areas

Tokyo area

200 150 100

National average Average of local area

Nagoya area

50 1983

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Source: Prime Minister’s Office, [ Japanese Statistical Yearbook 1997, 1998].

Japanese nominal GDP grew by a factor of 1.35 in 1985–90, average share prices in the Tokyo Stock Exchange rose threefold, and average land prices in Tokyo and three other major urban areas rose by a factor of 2.5. What were the main factors that caused this asset price bubble? The triggering role of monetary and fiscal policy The factor that directly triggered the bubble in Japan was fiscal and monetary policy aimed at expanding domestic demand after the 1995 meeting of the G5 leading to the Plaza agreement. It was then agreed to cooperate internationally to revise the excessively high exchange rate of the dollar and trade imbalances. Japanese economic recovery after 1983 largely depended on the expansion of exports, especially to the US market. This was greatly aided by the appreciation of the dollar caused by massive international capital flows into the US economy that were attracted by a high rate of interest due to Reaganomics. After the Plaza agreement, the dollar, the rise of which had been the result of speculative capital flows contrary to the underlying balance of trade, began to fall rapidly. In just eight months to March 1986, the yen appreciated from ¥240 to ¥150 to the dollar, as we noted in Chapter 1. This was a serious shock to Japanese exporting industries and generated depression.


However, in 1986 the Nikkei average of 225 share prices began to rise from ¥13 137 at the beginning of the year to ¥18 701 at the end of the year (an increase of 42 per cent), despite the depression in the real economy. This was the start of the bubble in share prices, as shown in Figure 4.1. A key factor causing this was a fall in interest rates. Following the Plaza agreement, the prime rate of the US Federal Reserve Bank came down from 7.5 per cent at the beginning of 1986 to 5.5 per cent in August of that year. Correspondingly, the official rate of the Bank of Japan was reduced from 5 per cent at the end of 1985 to 3 per cent in November 1996, and further to the unprecedented rate of 2.5 per cent in February 1997, staying there until the spring of 1989. The expansion of domestic demand aimed at mitigating trade friction with the USA had to be sustained mainly by monetary policy, as fiscal operations were constrained by the need to solve the worsening state budget crisis. At the same time, the policy of lowering the rate of interest was facilitated greatly by the floating exchange rate system combined with increasing foreign exchange reserves in Japan. Other things being equal, a fall in the interest rate raises the prices of shares and land (or the value of fictitious capital) through comparison with the efficiency of investment.2 Indeed, share prices began to rise in the New York Stock Exchange and also in the Tokyo market in 1986. Simultaneously, land prices in Japan also began rising sharply, starting with the Tokyo area, as shown in Figure 4.2. In addition, the Japanese government deviated from tight fiscal policy adopted from the beginning of the 1980s and implemented a large emergency spending policy in the spring of 1987 through a supplementary budget of ¥6 trillion aimed mostly at public investment. The purpose was to boost domestic demand in order to mitigate both the depression caused by appreciation of the yen and trade friction with the USA. Local governments were also advised by central government to expand regional redevelopment projects, such as a plan to construct a bay area business centre in Tokyo. These policies provided a stimulus to developers, real estate agents and construction companies, facilitating a rise in the price of land and other real estate. The Bank of Japan, like many other central banks, has traditionally been concerned with maintaining the value (or purchasing power) of its bank note, mostly by avoiding general inflation. The general price level happened to remain stable in the late 1980s as import prices of energy and other materials were rather depressed, due to both the effect of the


appreciation of the yen and the balance between demand and supply in the world market. Thus, the Bank of Japan continued to supply money funds, allowing banks and other financial institutions to expand loans for speculative trading in shares and real estate, and did not pay much attention to the danger of the swelling bubble in asset prices. As a result, the money supply in Japan – that is, the aggregate of cash, deposits payable on demand, time deposits and negotiable certificates of deposit (CD) – registered double-digit annual growth rates from the second quarter of 1987 until the third quarter of 1990; much faster than real economic growth rates. Economic recovery with expanding domestic demand Monetary and fiscal policies are not necessarily successful in initiating economic recovery. In the Japanese economy at this point, however, they managed to generate an expansion of effective demand, starting with that of wealthier people and business firms, by increasing capital gains from rising prices of shares and land. Consumer demand began to expand initially for luxury commodities, such as sophisticated residential units, large passenger cars, fur coats and jewels for wealthy people. Department stores and fashion shops expanded their range of high-quality expensive goods by world famous brands. As it was difficult for Japanese firms to increase their exports due to the appreciated yen, they attempted anew to boost domestic demand for their products by multiplying models in accord with market trends. As we have mentioned earlier, they seemed discovering at that time the second largest consumer market to cultivate in the world. Expansion of consumer credit with lower rates of interest, often combined with credit card payments, were presented as a key part of this endeavour. When the rise in prices of housing and land generally began to be noticed, demand for houses and residential units in condominiums expanded rather than declined. As there had been a continuous shortage of housing in the Japanese economy during the post-World War II period, especially in urban areas with a rapidly growing number of families, prices of housing units and residential land had never fallen. People saw residential units and land as the most secure assets to possess. For a great number of working people, their greatest aim in life was to obtain a housing unit for their family before retirement. Against this background, once prices of housing units and residential land began to rise conspicuously, the expectation spread that the earlier the


purchase, the bigger the capital gain from rising asset prices. Such an expectation encouraged people to buy real estate, generally beginning with wealthier people. The rising price of residential units and land thus fostered expansion of demand for these assets in order to make earlier and more substantial capital gains. As we shall see later in this chapter, banks had promoted housing loans since the late 1970s, and expanded them greatly in the late 1980s.3 From the third quarter of 1986 until the first quarter of 1988, private investment in houses continued to surpass its level in the same quarter of the previous year. Many people were advised by real estate agencies and banks to realize capital gains by selling their houses and buying new, larger units by means of easy housing finance with a low interest rate. Many followed this advice and also purchased cars, furniture, electrical appliances and clothing, often by means of consumer credit. At the same time, demand for offices also swelled, especially in the Tokyo metropolitan area. As the international activities of firms rapidly expanded, it seemed advisable to relocate the headquarters of firms into the Tokyo metropolitan area, nearer to the international financial and business centre. Therefore, many companies which had traditionally been based away from the metropolitan area, especially in Kansai (around Osaka), shifted their headquarters to Tokyo. As globalization proceeded, many foreign companies moved into the Tokyo area and opened their branches or offices. Consequently, construction of office buildings boomed in those years and led to a further rise in land prices, beginning in the Tokyo area. The feeling of economic recovery and prosperity thus spread from the construction industry to manufacturing industries following the expansion of domestic demand. As long as Japanese firms relied upon expansion of domestic demand, they could take advantage of both the lowered rate of interest and the lowered yen prices of imported raw materials and oil to boost their profitability. As many companies within the same keiretsu (a group of business companies) held shares in each other, as well as land, at book value, the rise in price of shares and land widely increased latent asset value and strengthened their financial position. Many Japanese firms also accumulated idle money funds not only through retained profits but also by means of equity finance or issuing new shares, convertible bonds (CB) and warrant bonds (WB), both domestically and internationally. They used a part of these money funds


to expand plant, equipment and offices, but also used them heavily for zaitech – that is, speculative financial operations for capital gain via the rising price of shares and real estate. The bubble in the price of shares and land was greatly accelerated by such zaitech among capitalist firms. As domestic demand expanded, Japanese investment in plant and equipment stirred again after many years of depression and rose substantially for three years from the beginning of 1987. The Japanese economy seemed to enjoy recovery and boom in almost all industries, including raw material suppliers. For the first time since 1973, the great depression seemed to have reached resolution through economic growth oriented on the domestic market for the first time after 1973. The panicky fall of share prices following Black Monday in October 1987 did not significantly curtail this expansive trend in the real economy, and was considered a temporary episode in the course of economic recovery. The average annual rate of economic growth in the fiscal years 1987–1990 was 5.2 per cent. However, economic recovery in those years was fragile and distorted as it was led and fostered by the bubble in asset prices. The rise in price of shares and real estate was certainly not mere illusion. To a certain degree, it both caused and reflected the recovery and growth of the real economy. Nevertheless, given that it exceeded growth in the real economy, it acquired an increasingly fictitious nature that could not be sustained. Expansion of domestic demand led by capital gains from the swelling of asset value also largely lacked solid foundations. Its nature was different from the steady and substantial growth of domestic demand based upon a continuous rise of real wages nearly in line with rises in labour productivity during the period of high economic growth. Investment in plant and equipment in manufacturing industries, such as the automobile industry, was also promoted greatly by the bubble economy and expanded production lines to produce more sophisticated and multiple models in expensive facilities. This was actually paving the way for firms’ difficulties in forming massive excess capacity in the subsequent depression of the 1990s. Meanwhile, unlike the speculative boom at the beginning of the 1970s, inflation remained subdued during the boom of the late 1980s, despite an increasing supply of money and credit. The reasons were declining yen prices of imported raw materials and oil, basically reflecting the balance between demand and supply in the global and domestic market plus the effect of the appreciation of the yen, plus stagnating real


wages. In fact, the annual wholesale price index fell continuously in 1985–88. Against this background, speculative trading was concentrated in the stock exchange and the real estate markets, and operated as an outlet for the ample and cheap supply of money and credit. The role of the financial system Compared with other advanced countries, the savings rate of Japanese households has been high throughout the post-war period. This is an important foundation on which to examine the functions of the financial system in Japan. The Japanese average household savings rate was about 15 per cent of disposable income in the period of high economic growth. It rose to 23 per cent in the middle of the 1970s and then fell slowly, remaining at about 15 per cent.4 There is no definitive theory explaining why it has been relatively high. The following historical and institutional factors have combined to bring it about. One important factor is worry among Japanese working people about their living costs after retirement given insufficient social welfare, and especially as the average lifespan in the nuclear family has increased. Saving has been made possible by several conditions, such as continuous increases in disposable household income, the bonus system bringing in annual sums of up to four to six times the monthly wage being divided into payments twice or three times a year, and the custom of a retirement payment for regular workers that is often two to four times the yearly wage. People have also needed to save to purchase relatively expensive residential units for their families before retirement. In the period of high economic growth, banks and other financial institutions could collect such household savings at a nearly zero real rate of interest. Main banks for each keiretsu group, in cooperation with other financial institutions, poured collected funds into loans for investment in plant and equipment by big business. The pumping of household savings by financial institutions into investment in plant and equipment formed the so-called overloan tendency of Japanese big business, and served as an important basis for high economic growth in this period. In the process of economic crisis and restructuring since 1973, however, this close relationship between banks and big business has changed greatly. Given the transition to a low economic growth trend and the spread of ME information technologies, big business has reduced its scale of investment in plant and equipment. Correspondingly, it has


attempted to reduce debt by repaying borrowed funds, the purpose being to cut interest payments as part of economizing on operating costs. Further, in the 1980s increasing numbers of big firms accumulated financial assets in excess of their financial debt, and thus went through the ‘golden cross’ earning net revenues from their financial operations. Such net financial asset was formed not just by retained earnings but also by equity finance. More and more big firms employed direct finance, instead of indirect finance through banks, to obtain monetary funds in the capital market by issuing new shares, CB, WB and SB (straight bonds) with cheaper costs. Especially in the late 1980s, with the appreciation of the yen, international direct finance in dollar terms allowed big Japanese firms to obtain monetary funds, often with a negative rate of interest or negative costs in terms of yen. When share prices began to rise, direct finance in the form of issuing new shares or some bonds with the right to obtain shares under certain conditions (like CB and WB) became more attractive. Thus, the amount of money funds obtained through equity finance by the listed companies in the Tokyo Stock Exchange increased from ¥4 trillion in 1983 to ¥28 trillion in 1989.5 In the late 1980s investment in plant and equipment recovered and increased after many years, but only in the region of ¥5 trillion in 1987 and ¥9.7 trillion in 1989 (the highest point). Many firms could finance such real investment by retained earnings and only partial utilization of equity finance. Therefore, a large part of the huge funds obtained by equity finance was used for zaitech speculative trading in financial assets and real estate, as well as foreign investment with speculative trading in foreign currencies. This was a major source of the speculative swell of the bubble. Consider some of the evidence below. In 1985–89, the total market price of shares of listed companies swelled from ¥196 trillion to ¥630 trillion (1.6 times GDP). In 1985–90, the units of shares listed increased by 21 per cent, or 66.6 million units. Of these additional shares, business firms obtained 34 per cent, financial institutions 36 per cent, and investment trusts 17 per cent, while individual persons obtained only 17 per cent. Of the total of listed shares in 1989, financial institutions held 42.3 per cent and business firms 24.8 per cent, while individual persons held only 22.6 per cent. This shows that the Japanese economy possesses features of corporate capitalism, in contrast with the US economy in which individual persons own almost 60 per cent of existing listed shares. Given that corporations mutually


own a large part of existing shares, the traded shares in the market are relatively few and are more readily subject to speculative rises in prices. Into this share market, business firms and life insurance companies injected a large quantity of money funds directly or indirectly, often in the form of designated trust funds through trust banks and security companies. The estimated outstanding amount of such designated trust funds increased from ¥5 trillion at the end of 1985 to a huge ¥37.6 trillion at the end of 1989. It is evident that the bubble in share prices in these years in Japan was led by zaitech speculative trading among big business firms and financial institutions, though individual persons were also involved. Meanwhile, Japanese banks tended to lose more and more large corporations as borrowing customers. They began to be threatened also by increasing competition from post offices and insurance companies selling new types of financial deals to individual households by means of information technology. Therefore, Japanese banks tended to expand their business activities abroad, especially in the latter half of the 1980s, by taking advantage of the appreciation of the yen. Between the end of 1985 and the end of 1989, for example, the outstanding amount of Japanese international banking assets increased by 30 per cent annually, to reach US$1967 billion. Its share in the total of international banking assets sharply increased from 26 per cent to 38 per cent in the same period. Such rapid expansion of Japanese international banking operations caused concern among international financiers, particularly regarding the fragility of the international system. Thus, the Bank of International Settlement (BIS) came to an agreement on capital adequacy requirements (Basel agreement) in 1988. This agreement required banks with international business to maintain own capital of more than 8 per cent of total assets (after adjustment according to different kinds of asset groups) after the end of the 1992 fiscal year. Japanese banks asked for and received the allowance of 45 per cent of their latent assets from holding shares – that is, the latent capital gain between current prices and old book prices – to be included as own capital. As long as share prices continued to rise, the Basel agreement appeared unproblematic, given this concession. Thus, Japanese banks assumed that they could go on expanding loans unaffected by the agreement as long as the bubble swelled. However, the main domestic borrowers for Japanese banks were no longer the large businesses of the period of high economic growth, but


medium and small businesses, especially real estate agencies, construction companies, specialized housing finance companies (non-banks which did not receive deposits) and individual persons. Despite substantial change in composition, the annual average rate of increase of total assets (mainly loans outstanding) of 151 Japanese major banks (including city banks, regional banks and trust banks) rose from 9.6 per cent in 1980–84, to 16.6 per cent in 1985–89, reaching 28.9 per cent in 1989. While the annual average rate of increase of total loans by those banks was 12.2 per cent in 1985–89 and 16.1 per cent in 1989, that of loans to real estate business was 14.1 per cent in 1985–89 and 24.3 per cent in 1989. The annual rate of increase of loans to non-bank and other financial business was 30.4 per cent in 1985–89 and 21 per cent in 1989. According to a survey by the Ministry of Finance, the total flow of loans into the real estate market at the end of 1991 reached ¥120 trillion. Of those total loans, major banks owned ¥59 trillion and nonbanks owned ¥50–55 trillion. As the source of the major part of nonbanks’ loans was borrowing from the banks, it is clear that the huge bubble in the prices of land and other real estate was substantially facilitated by the flow of money directly or indirectly from banks. In 1988, the resultant capital gain in land prices alone amounted to ¥416 trillion, or 1.21 times the GNP of that year.6 Although a similar bubble in land prices also occurred in the USA, capital gains remained at only 3 per cent of GNP of that year. By comparison, the Japanese bubble in land prices was enormous. In 1989, the total land price of Japan was estimated as four times that of the total land price of the USA. Since the total area of Japan is one-twenty-fifth that of the USA, the average price of Japanese land stood at 100 times that of the USA. Land prices in the Tokyo area and other large cities were much more expensive than the national average. The average price of residential units also rose. For instance, the average price of a condominium in the Tokyo metropolitan area increased from ¥35.8 million in 1987 to ¥61.2 million in 1990.7 In comparison with the average annual income of workers’ households in the same area, it rose from 5.5 times to 8 times the annual income. An obviously unfair and uneven redistribution of wealth, which was not at all related to individual personal industry or diligence, took place on a great scale between existing owners and new purchasers of land and housing units. As real estate prices rose rapidly, the average amount of loans to those who purchased houses without buying the land on which these were


built, or those who built houses on plots they already owned, also increased from ¥16.7 million in 1987 to ¥23.4 million in 1990, and to ¥27.4 million in 1992. Since it became too difficult for an individual to secure a loan large enough to purchase a residential unit, banks and other financial institutions often offered housing loans that could be repaid over two generations. Along with the rising speculative demand for real estate, banks and other financial institutions also positively promoted expansion of loans for speculative trading in office buildings, houses, condominium units, empty land, and vendible membership of golf clubs. Soaring prices of shares and real estate were regarded as secure mortgages for banks and other financial institutions to offer, expand or renew loans to business firms, real estate agencies and individuals.

The burst of the bubble and the pressure of depression The process of bursting the bubble The inflated prices of shares and land, which, through speculative transactions, had risen far beyond the trend of real economic growth, were destined to collapse. However, it was hard to predict when and how that would happen, and what the repercussions would be for the real economy. The turning point came in 1989. Internationally, the appreciation of the yen peaked in 1988 and the yen began to slide downward; at the same time, the dollar price of oil turned upward. The Japanese wholesale price index thus tended to rise, beginning with import prices. Domestically, as a result of broad economic recovery, the rate of unemployment declined to 2.2 per cent and the active vacancies ratio – that is, the ratio of vacancies to applicants – exceeded 1.3 in 1989, reflecting an actual shortage of labour power. Consequently, wages in manufacturing rose fairly rapidly that year, by 6.5 per cent. Meanwhile, the US Federal Reserve Bank gradually raised the official interest rate from 5.5 per cent in 1986 to 7 per cent in 1989. The widened gap in the rates of interest between the USA and Japan induced international capital to flow into the USA, and thus helped the fall of the yen relative to the dollar. To prevent inflation, the Bank of Japan raised the official interest rate three times and brought it from the level of 2.5 per cent in the middle of 1989 to 4.25 per cent at the end of that


year. It was anticipated that the Bank of Japan would raise the official rate again in early 1990; indeed, it was raised to 5.25 per cent in February 1990, and further to 6 per cent from the summer of 1990 until the autumn of 1991. As we have seen, the Nikkei average of 225 shares in the Tokyo Stock Exchange had risen from ¥13 137 at the beginning of 1986 to ¥38 915 at the end of 1989. Just as the lowered interest rate promoted speculative zaitech mainly among business firms and financial institutions, resulting in a huge bubble in share prices, the rise in interest rates decisively lowered these prices. Japanese share prices actually entered a period of decline from the very beginning of 1990. The Nikkei average fell by about ¥10 000 (or 25 per cent) by March 1990. Capital losses in financial assets were estimated at ¥160 trillion by that time. The fall in share prices did not easily stop in the following years. The Nikkei average declined to around ¥15 000 (38 per cent of its peak) in the latter half of 1992. Estimated capital losses in the share market alone by that time amounted to ¥430 trillion. The Nikkei average slid below ¥13 000 in the autumn of 1998. The Japanese bubble economy started to collapse in 1990 as share prices began to fall. However, the price of land did not immediately follow the path of share prices. As Figure 4.2 shows, the peak of land prices occurred in 1990. Land prices in three major urban areas did not fall much below that peak even in 1991, and remained higher than the level of 1989. The decline in land prices occurred more slowly than that of share prices, became conspicuous in 1992, and persisted during the following years. The real economic growth rate was also maintained at the relatively high level of 5.1 per cent in 1990, despite the fall in share prices, and entered a depression from the spring of 1991. What is the significance of the difference in timing in the bursting of the different parts of the huge Japanese bubble? The following factors were important. Initially, business firms and financial institutions maintained a lot of latent capital gains through mutually held shares of companies in the same keiretsu group, and sufficient money funds obtained through equity finance in the course of the bubble. Thus, most firms did not immediately need to sell land, abandon projects to acquire the real estate, or scrap investment in plant and area development. Banks also assumed that, despite BIS regulations on own capital, they could hold onto loans relating to land and other real estate on the basis of their


latent capital gains in share prices. Various real estate development projects, such as the plan to construct the Tokyo bay area business centre, took a long time to complete and were hard to stop in midconstruction. Business firms and individuals believed in the myth of the tendency of land prices to rise continuously. They often continued with speculative trading in land and other real estate on the expectation of offsetting capital losses in share prices by capital gain in land. Similarly, investment in plant and equipment continued at a fairly high level until about the spring of 1991, despite the collapse in share prices. Projects to construct plant and equipment also frequently take a long time to complete. Many firms had already obtained sufficient money fund through equity finance and other sources to allow them to continue with their construction projects. Investment demand still seemed quite strong. However, land prices, which had been swollen by speculative trading based on credit, could not sustain the widening gap with the falling share prices, and their distance from real economic growth. The government, the Bank of Japan, banks and other financial institutions became worried about worsening loans relating to the real estate market, especially as Japan witnessed a contemporary wave of bank failures in the US economy. The Ministry of Finance advised banks to regulate the total quantity of their loans to real estate in April 1990, and thus concretely expressed this worry. Nevertheless, banks initially continued to roll over, and even to expand, loans relating to real estate, often through non-bank channels. They believed, together with many business firms and individuals, that land prices would sooner or later return to an upward trend and resolve the problem of worsening loans in real estate. This meant postponement of a sharp burst of the bubble in land prices. In the course of this process, however, banks suffered a fall in the ratio of their own capital against total assets, as their loans to real estate (often through non-banks) rose but returns did not. This situation occurred because real estate held at highly speculative prices became more and more difficult to sell. The reduction of banks’ latent capital gains in the price of shares also added to the decline in the ratio of their own capital. Since Japanese banks were expanding their international banking activities, they had to follow the BIS Basel agreement to keep the ratio of own capital against total assets above 8 per cent after April 1993. To meet this regulation, banks had to restrain loans, and this exacerbated the credit crunch.8


Thus, increasing numbers of medium and small firms, especially in the field of real estate, were forced to restrict and reduce their business since they had depended greatly on borrowing from banks and nonbanks to expand their activities. Big firms, such as Toyota which constructed a huge new plant at Kyushu island, also had to reduce investment in plant and equipment when their newly built capacity came on-stream and substantially increased supply at a time when markets were already depressed. Intensified competition worsened the company’s profitability, and reduced investment demand spread the deflationary effect. Thus, when the Japanese economy clearly entered an actual depression in the spring of 1991, effective demand for offices, vacant land, residential units and membership of golf clubs began largely to contract, forcing a decline in prices. The obvious decline in land prices in the Tokyo area and in three major urban areas in 1992 (Figure 4.2) exemplifies this general movement. Figure 4.2 shows that the decline in land prices has persisted, though it has been slower than that in share prices. As a result, land prices fell to half their peak in the Osaka area and to about 60 per cent of their peak in Tokyo and the three major urban areas by 1996. The fall in asset prices on such a scale has been a major factor behind the depression in the Japanese economy in the 1990s. Complex linkages in the spiral of depression It is estimated that the total decline in Japanese asset values, mainly due to the fall in prices of shares and land, amounts to ¥1000 trillion (about half pertains to financial assets and the other half to real estate). This represents a fundamental component of the complex depression of the 1990s, which has affected both stocks and flows in the economy.9 As latent capital gains in the prices of shares and land melted away, many business firms found it difficult to expand their activities either by self-finance or by borrowing on mortgage. They tended to lose the flexible ability to resist the deflationary pressure of the credit crunch. Thus, as business firms restricted and reduced their activities, employment conditions became more severe and real wages stagnated. In 1993, real wages actually declined, and wage income from overtime was also cut. As a result, real disposable household income – that is, real household income minus taxes and social security payments – began to fall in 1993. Domestic consumer demand therefore cooled down and the depression deepened in the flows of household income.


Correspondingly, capacity utilization in Japanese manufacturing declined sharply in the 1990s (Figure 1.1, p. 10). With huge excess productive capacity, Japanese firms sharpened their competitive pressure in the markets. Thus, a vicious circle leading to a spiral of depression set in in the Japanese economy, comprising falling prices of shares and land, falls in workers’ income, and depressant prices in the markets for products and services. Reacting to the depressed domestic market, Japanese firms again intensified attempts to export. However, as the trade surplus increased, the yen appreciated sharply and created severe difficulties for Japanese exporting industries. The yen exchange rate with the dollar (annual average) appreciated from ¥145 in 1990 to ¥127 in 1992, and to around ¥100 in late 1994. Further, in 1995, as confidence in the dollar was shaken after the monetary and financial crisis of the NAFTA (North American Free Trade Agreement) that started with the Mexican crisis, the yen appreciated against the dollar, to ¥79.75 in April. As we noted in the previous chapter, this appreciation of the yen created serious difficulties for Japanese exporting industries and encouraged them to transfer their factories abroad, leading to industrial hollowing-out. Depression thus deepened in the Japanese economy for both domestic and international reasons, and the country did not participate in the economic recovery led by the USA and other advanced economies after 1993. The great earthquake of January 1995 in the Kobe area delivered an additional shock; especially to the Kansai region, the second largest business area in Japan. The rapid decline of the birth rate and the transition to an ageing society were added important factors repressing Japanese economic growth. All in all, the Japanese economy has assumed an extremely low growth trend compared even with that of the 1970s and 1980s, not to mention the period of high economic growth. Exacerbated by continuous difficulties in real accumulation, the tendency of asset deflation to generate bad loans for banks and other financial institutions has also continued and intensified. When the London Financial Times reported in May 1992 that it estimated the total of bad loans in Japanese banks to stand at around ¥42–56 trillion (roughly 10 per cent of the total ¥450 trillion in loans), the Bank of Japan immediately objected to this as an exaggeration. In March 1994, an official estimate declared that the total of bad loans (those impossible to collect and those with payments deferred for more than six months)


of city banks, long-term credit banks and trust banks was ¥13.57 trillion. This figure was clearly an underestimation aimed at avoiding financial unrest, since it neglected loans on which interest payments were only possible after fresh loans via non-banks. These operations were regarded as both necessary and reasonable as long as the price of mortgaged assets backing these loans was still expected to recover. The operation could not continue, however, as the expectation that asset prices could recover failed to materialize. Indeed, after several years of attempting to reduce bad loans, in January 1998 a survey by the Ministry of Finance revealed that the total of bad loans still amounted to 12 per cent of total loans by various banks, or ¥76 trillion. Even this amount could easily increase if asset deflation continues. Step by step, the Bank of Japan reduced the official interest rate from 6 per cent in 1990 to 1.75 per cent in 1993 and to 0.5 per cent in September 1995. At the time of writing, this unprecedented interest rate has been maintained for nearly five years. This monetary policy is clearly intended to mitigate the difficulties of banks and other financial institutions with huge bad loans. Partly due to an effect of this monetary policy, disposing of the Japanese bubble, especially that part relating to speculative trading in land and other real estate, has taken much longer than it might otherwise have done. It is often remarked upon that disposing of the US bubble of the late 1980s took a lot less time and occurred through a wave of failure of financial institutions. However, in Japan, the size of the bubble in relation to real estate was huge when compared with the USA. The scale of the banks and other financial institutions involved was also much bigger; they could not be easily allowed to fail by the government and monetary authorities. Thus, elimination of the difficulties faced by Japanese banks and other financial institutions had to proceed gradually, and required official support including a nearly zero official rate of interest. As shall be seen later in this chapter, a huge amount of public money was also deployed in rescue operations for banks and other financial institutions, in addition to extra public investment. These policies were made possible by Japan’s large amounts of foreign exchange reserves resulting from continuous trade surpluses. Though they brought serious distortions in income distribution and prolonged depression in the Japanese economy, they were still effective in preventing an acute and total deflationary spiral such as the one that occurred in the US Great Depression of the 1930s.


Despite supportive monetary policy, however, the latent capital gains in shares held by banks continued to melt away. BIS regulations, which allowed 45 per cent of latent capital gains in share prices to count as banks’ own capital, started to torment Japanese banks severely. In order to maintain own capital above 8 per cent of total assets, Japanese banks had to reduce their total assets by reducing loans. This worsened conditions in the real estate market through a credit crunch that affected not only the real estate business but also the business activities of medium and small firms. Worsening conditions in the real estate market led to the deterioration of mortgages and more bad loans as prices fell. Thus, the financial position of banks and other financial institutions was further worsened, completing the vicious circle. As the complex depression deepened with the difficulties of financial institutions, not a few illegal financial operations were revealed that had been based on the expected recovery in prices of shares and land which never materialized. The general belief that banks and other financial institutions in Japan would never fail in the post-World War II period broke down. Failures have occurred intermittently among banks and other financial institutions, including the biggest. Hokkaido Takushoku Bank (the leading bank in the Hokkaido region), Yamaichi Securities (one of the top four securities companies), Sanyo Securities and Tokuyo City Bank failed in November 1997. These failures, together with the Asian monetary and financial crisis that was then in full swing, had a serious impact on the Japanese economy, including employment. In retrospect, the Japanese economy has strengthened its companycentred character through the process of continuous economic crisis and restructuring. Spreading ME automation systems have led to increases in the proportion of female irregular workers. While real wages stagnated, the international competitive power of big business was strengthened. The financial structure of big business was also improved with the formation of large idle money funds and latent capital gains through zaitech with equity finance. The swell of a huge bubble in the prices of shares and land in the late 1980s was, in a sense, a result of the success of Japanese capitalism in strengthening the company-centred character of society. Dialectically, the consequent results of this success brought a series of setbacks to the Japanese economy in the 1990s. As the huge bubble burst, a vicious circle between asset deflation and financial instability originating in bad loans continued. Appreciation of the yen accelerated industrial hollowing-out. The fall in the birth rate and


decline in population, especially among the young productive generation, is causing a rapid trend toward an ageing society. All of these setbacks were the result of forming an excessively company-centred society, as we have seen. Since they have not yet been dealt with, the Japanese economy will probably stagger along on a trend of extremely low growth, though tentative short recoveries may always occur. Furthermore, after almost a decade since the end of the bubble, there still remains the possibility of a sharp financial crisis due to accumulated bad loans and asset deflation. In addition, a larger fear exists of global crisis, possibly due to the burst of the current bubble in the New York Stock Exchange. It is, in a sense, remarkable that the Japanese economy, after such serious setbacks, has so far avoided an explosive and total crisis similar to the Great Crisis after 1929. However, Japan has not yet reached a reliable and stable economic order.

Failure and confusion in economic policy The failure of neoliberalism The fact that the Japanese economy has been suffering from a vicious circle of setbacks and instability is clear evidence of the failure of neoliberalism which has set the tone of Japanese economic policies since the beginning of the 1980s, in the wake of the UK and the USA. Although Keynesianism dominated the capitalist world in the postWorld War II period until the 1970s, it could neither prevent nor resolve the inflationary crisis of the beginning of 1970s, but rather worsened it by promoting inflation, and so lost its prestige. Thereafter, neoliberalism became the basic framework for economic policy in the major capitalist countries aiming at economic recovery. Contrary to Keynesianism, it demanded reductions in the economic role of the state and believed in the ability of the competitive market to bring about a rational and efficient economic order. As was noted in Chapter 3, neoliberalism is not simply a reaction to Keynesianism, but its character suitably reflects in economic policy the direction of restructuring among capitalist firms. By introducing ME information technologies, capitalist firms have reintensified flexible competition in the market through multiplying models of products, relocating factories and offices both domestically and internationally, and developing labour management to increase the numbers of irregular part-time workers.


Neoliberal economic policies in Japan were initiated and promoted by five reports of the second blue-ribbon commission on administrative reform in 1981–83. These reports recommended a series of administrative reforms to achieve a balanced national budget without tax increases. Following recommendations in the reports, financial support for health and medical expenses, as well as subsidies to private universities and colleges, were cut. Three state-owned enterprises – Japan National Railways ( JNR), Nippon Telegraph and Telephone Public Corporation (NTT), and the Japan Tobacco and Salt Public Corporation – were privatized in 1985. It became generally believed that the basic strategy for economic recovery must be to strengthen the vitality of private firms to pursue profits upon competitive market principles. Militant trade unions had to be curtailed in line with the neoliberal spirit. As we have seen, active JNR trade union members were discriminated against in the process of privatization. This caused serious damage to the left wing of the Japanese trade union movement. As a result, the General Council of Trade Unions in Japan (Sohyo), which had been the national centre of left trade unions, dissolved itself in 1989 and merged into the Confederation of All Private-Sector Trade Unions (Rengo), which is more cooperative with firms. Thus, Japanese firms have found it easier to implement managerial strategies to economize on labour costs in various ways by means of information technology. Labour laws and regulations have also been altered to enable firms to combine various types of workers flexibly. Given the neoliberal policy trend of strengthening free competitive market principles, Japanese big firms introduced ME information technologies, ‘rationalized’ labour management, suppressed real wages, and re-intensified their international competitive power. Company-centred endeavours to improve profitability obtained workers’ cooperation, and led to increases in the trade surplus and appreciation of the yen. The Japanese model of management attracted global attention as a successful model in overcoming economic crisis. Indeed, big Japanese firms improved their financial position and accumulated large money funds by both retained profit and equity finance in domestic and international capital market. They expanded foreign investment, rapidly increased Japanese external assets and swelled foreign exchange reserves. With an appreciated yen, national income per capita in Japan surpassed that of the USA, and Japanese company-centred restructuring under neoliberalism seemed a miraculous success story.


However, neoliberal belief in competitive market principles did not produce a rational, efficient and fair economic order. Wide and anarchical fluctuations in foreign exchange rates along with enormous international flows of speculative funds have caused economic damage to a wide range of firms and workers. At the same time, companycentred profit-making within free market principles led to the swelling of a huge bubble that caused a lot of damage after it burst. These events demonstrate the fundamental instability of speculative development intrinsic to a free competitive capitalist market economy. Neoliberal economic policies could not prevent this irrational and unfair economic disaster. Rather, they promoted a political and social atmosphere in which company-centred speculative profit-making became acceptable in the name of market principles. They even worked to foment and encourage private money-making among politicians and bureaucrats, as if that was a natural right in all economic activity. Scandalous corruption has been incessantly exposed. Japanese bureaucrats had been regarded as excellent contributors to the success of the Japanese economy, but their credibility, prestige, functions and confidence were largely undermined in the 1990s. Neoliberalism not only failed to achieve its promises but could not even result in a consistent framework of economic policy in contemporary society. Intervention in the market economy by means of fiscal and monetary policy has not been eliminated. The Japanese government and monetary authorities actively operated economic policies to lower the rate of interest from the end of 1986 onward, and greatly expanded public expenditure in the spring of 1987. These policies were partly a response to strong pressure by the US government to expand Japanese domestic demand in order to mitigate trade friction. As we have seen, they obviously contributed to the initiation and swelling of the bubble. It was then inevitable that the setback was caused by tightening monetary policies in 1989–90, giving rise to the burst of the speculative bubble. Contrary to the neoliberal creed, economic policy actively influenced the working of the market order in this period in Japan. However, policy could not effectively control the destructive volatility of the market economy, but rather initiated and amplified its instability. In the subsequent depression of the 1990s, neoliberal policies have been further pushed forward. For example, labour laws and controls of regulations of working conditions have been relaxed to allow firms to


use various types of workers more flexibly. Restrictions on large retail shops aimed at protecting small family businesses in local regions were lifted. Liberalization of financial businesses commensurate with the global financial ‘big bang’ has also been introduced. However, despite its neoliberal policy stance and the belief in a smaller state, the Japanese government has continued to intervene strongly in the workings of the market economy. It has actually expanded public expenditure and injected enormous amounts of public money into the rescue operations of banks and other financial institutions suffering from bad loans. The Bank of Japan has cooperated with the government and reduced the official rate of interest from 6 per cent in 1990 to the extremely low level of 0.5 per cent in 1995, which is still in place at the time of writing. These interventionist policies have had large income redistribution effects and caused unfair distortions in the economic order, contrary to the assertions of neoliberalism. Economic policy under neoliberalism thus did not cause one-sided reduction in the role of the state. Japanese economic policy has not been consistent with neoliberal theories, and has tended to give priority to mitigating the burden of economic crisis for big business in construction, banks and other financial institutions. In contrast, policy has tended to neglect the increasing economic difficulties and sacrifices among the majority of workers and economically weak people, stressing the primacy of individual responsibility under market principles. Such tendencies can also be observed in dealing with the fiscal crisis of the state. Political economy of the fiscal crisis of the state Throughout the period of high economic growth lasting until 1973, the Japanese government maintained a practically balanced budget. Although the influence of Keynesianism was strong among bureaucrats and leading politicians, the government did not need to operate deficit finance. While large public expenditure to construct infrastructure for industrial growth and urbanization was regularly undertaken, it was financed by the ‘natural increase in tax’ accruing in the process of high economic growth. After 1973, however, when economic crisis began to persist, the volume of outstanding government bonds began to increase rapidly. Initially, public expenditure was expanded aiming at economic recovery in accord with Keynesianism, but it was unsuccessful in restoring both economic growth and tax revenue. As a result, outstanding government


bonds largely increased from ¥7.6 trillion (6.5 per cent of GDP) in 1973 to ¥70.5 trillion (28.7 per cent) in 1980 (see Table 4.1). In the 1980s, as the basic tone of economic policies became neoliberal, government expenditure on social security and education was severely curbed and state-owned enterprises were privatized to reduce subsidies. Nevertheless, the attempt to restrain government expenditure could not countermand the tendency to stagnation and a fall in tax revenue. Therefore, government deficits continued at a high level (Table 1.1, p. 9). As a result, government bonds outstanding increased to ¥166.3 trillion (37.9 per cent of GDP) in 1990 and further to about ¥327 trillion (66 per cent of GDP) in 1999 (Table 4.1). The 1999 level is almost seven times the annual tax revenue of the state. As noted earlier in Chapter 1, if the outstanding government bonds are taken together with shorter-term government debt, the total amount of government debt in 1999 amounts to ¥502 trillion (101.2 per cent of GDP). The ratio of such debt against GDP became higher than that of most major advanced countries. For instance, at the end of 1997 the Japanese proportion of total public debt (of central and local governments) against GDP already stood at 92.6 per cent, and was much higher than the comparable proportions of 64.1 per cent for the USA, 60.7 per cent for the UK, and 64.4 per cent for Germany. The total government debt of ¥502 trillion in 1999, which is equivalent to more than ¥4 million per capita, or ¥11 million per household (of 2.75 members), piles its burden on the shoulders of Japanese people, and the burden is

Table 4.1 Outstanding government bonds and the rate of taxation (1973–99)

Outstanding government bonds (trillion yen) (their ratios to GDP, %) Rate of taxation (%)1 Rate of tax and social security (%)2

1973

1980

1985

1990

1995

1999

7.6

70.5

134.4

166.3

225.2

3273

(6.5) 21.4

(28.7) 22.2

(41.5) 24.0

(37.9) 27.8

(46.0) 23.3

(66)3 22.3

27.4

31.3

34.4

39.2

36.5

36.6

Notes: 1 National and local taxes/national income. 2 Taxes and social security payments/national income. 3 Approximate figures. Source: Economic Planning Agency, [Economic White Paper 1999].


still growing. This is obviously an additional barrier to the Japanese economy’s efforts to restore a high rate of growth. Increases in the amount of interest payments against the public debt have been relatively restrained by the monetary policy of keeping the interest rate extremely low. Still, interest payments on state bonds alone reached ¥11.2 trillion in 1998, and absorbed 65 per cent of income tax. This works as a powerful means of income redistribution from the great number of taxpaying workers to the owners of state bonds. In 1997, banks and other financial institutions owned 19.3 per cent of the outstanding government bonds; if we add the Bank of Japan, financial institutions owned 36 per cent of government bonds. In comparison, few if any state bonds were owned by the majority of workers’ households. As long as banks borrow from the Bank of Japan at 0.5 per cent interest and simply invest in public debt, the great bulk of interest payments on public debt operate practically as a subsidy to banks. In 1998, compensation for employees in the national income statistics is estimated to be around ¥280 trillion. It is of considerable concern to witness the equivalent of 4 per cent of this income redistributed as interest just on government bonds. Interest payments for government bonds alone already amount to 1.8 times the total government expenditure on education and culture, and is approaching the size of that on social security. Worries about further increases in interest payments on public debt must be one reason making the Japanese government and monetary authorities reluctant to revise the extremely low official rate of interest. The rate of interest on deposits has been kept very low – very near zero – following the pattern of the official rate. This has caused great difficulties for pension funds in attempting to meet their promised pension payments. It has also severely inconvenienced older persons who expected to gain substantial interest on their savings. Notwithstanding the low rate of interest, the burden of interest payment on government bonds has itself become a source of the fiscal crisis of the state, since it has made the total amount of government expenditure so hard to reduce. In this regard, the Japanese state budget resembles that of the reckless business firms which have to increase their debt in order to meet interest payments (that is, Ponzi finance). It is curious to witness the state budget of Japan falling into such a deep crisis, similar to that of many developing countries, given that Japan has become a great economic power with strong business firms,


the largest foreign exchange reserves and the largest net foreign assets in the world. This indicates the presence of unsound relations in the Japanese economic order and the operations of policy. The failure of the government to acknowledge the much lowered growth trend in good time was a source of the deepening fiscal crisis. The Japanese government tended to expect higher economic growth and therefore greater state revenues annually. It was actually left high and dry by the lowered growth trend and confronted substantial gaps in tax revenue. In the 1990s – with the exception of 1995–96 – the economic outlook offered by the Japanese government has been systematically wrong compared to the real outcome of the economy (see Table 4.2). The government assumed that a growth rate of around 3 per cent could easily be achieved in Japan, and would not lower its outlook closer to the actual new trend. It finally shifted its growth expectation closer to the lowered trend only in 1997. Even this revised outlook, however, was shown to be false when negative rates of growth actually materialized. Several reasons contributed to the difficulties faced by the Japanese government in revising its economic outlook downwards. While the annual size of the budget is directly affected by the economic outlook, reduction of expenditure in the budget has not been easy. The government had to have expectations of fairly high economic growth in order to draw up budget plans with a certain level of expenditure. On the other Table 4.2 The government’s outlook on economic growth and actual results (1991–98)1 Fiscal year 1991 1992 1993 1994 1995 1996 1997 1998 Note:

Outlook

Actual result

3.7 3.5 3.3 2.4 2.8 2.5 1.9 1.9

2.9 0.4 0.5 0.6 3.0 4.4 0.4 2.0

1 Both outlook and actual results are on real GDP growth rate against the previous year. Source: [Nikkei Newspaper] for outlook and [Economic White Paper 1999] for results.


hand, under neoliberalism, the government publicly promised to restore a balanced budget without tax increases, has maintained various special tax exemptions for corporations, and has actually reduced inheritance tax and land taxes for wealthier people. Thus, while state revenue tended to stagnate and was severely limited in the course of depression, budget expenditure on social security was hard to cut in light of the transition to an aged society, and the burden of interest payments on public debt continually increased. Moreover, an important aspect of the Japanese fiscal crisis originates in state policies aimed at mitigating the difficulties of big business. Despite the government’s promise to restore a balanced budget, for instance, national defence and official development assistance (ODA) have continued to increase since the 1980s. Even after the end of the Cold War, against the trend of reducing military expenditure among advanced countries, the Japanese defence budget continued to increase. The Japanese government has taken an increasing share of the costs of keeping the US military bases in Japan, and has purchased more sophisticated military aircraft and other weapons, mainly from the USA. This can be regarded as a necessary cost for Japanese politicians and business circles in order to maintain the largest export market in the world and mitigate trade friction. In response to international requests, furthermore, Japanese ODA rapidly increased to US$14.5 billion in 1995, almost twice as much as that of the USA and Germany. This money often serves as a practical subsidy for Japanese business firms aiming at expanding their multinational activities in the surrounding Asian countries. It also serves to reduce trade friction with the USA and other countries. At the same time, public expenditure benefiting civil engineering and construction firms has been kept at a high level, though this is very inconsistent with neoliberalism. The share of public investment, measured as government fixed capital formation (total investment in public utilities, including attached facilities and equipment of central and local governments, minus the costs of purchasing necessary land) in GDP used to stand at around 4 per cent before 1970. The figure increased to 6 per cent after 1972, and reached 6.6 per cent in 1978–79 when the economic crisis began and deepened under Keynesianism. With the turn to neoliberalism in the 1980s, it declined to 4.9 per cent in 1985 as expenditure curbs came in aimed at a balanced budget. However, with policies to expand domestic demand in the late 1980s there was an


upward surge, and the figure further rose as additional emergency economic policies were adopted to confront persistent depression in the 1990s. Thus the figure increased to 6.9 per cent in 1996, and public investment stood at more than ¥30 trillion. Its share in GDP is almost four times that of the USA, and more than three times that of Germany.10 If we add the public corporation costs of purchasing necessary land and undertaking highway construction, total investment in public utilities rises to ¥50 trillion. This takes up 10 per cent of GDP, and is close to the total tax revenue of ¥55 trillion in 1996. It is not much of an exaggeration to characterize Japan as a civil engineering and construction state. This enormous amount of expenditure on public utilities allows politicians and bureaucrats to promote various vested interests. Politicians in government parties can impress their regional voters by construction projects and by maintaining employment in construction. They can also expect political donations from the construction companies. Bureaucrats expect to secure appointments in related private companies after retirement from public service. Such expenditure is expected to mitigate the deterioration of the price of land and real estate and to stimulate the land market. In this regard, increased public investment rests on the political intention to help financial institutions faced with the heavy burden of bad loans. However, increased public investment has not worked as an effective pump priming policy in the face of depression pressures in the Japanese economy in the 1990s. Pressures from asset deflation have been extremely pronounced and consumption demand, which occupies about 60 per cent of total demand, has been quite stagnant because of worries among general people about the future of their economic life. Construction and repair of roads and highways, moreover, no longer had substantial effect on the volume of domestic car sales. The employment effect of public investment, finally, has become increasingly less significant as civil engineering and construction industries have introduced more heavy machinery to economize on direct labour costs. Thus the multiplier effect of public investment in civil engineering and construction has been substantially reduced.11 Since the monetary policy of maintaining an extremely low rate of interest and the fiscal policy of expanding public investment did not succeed in bringing about economic recovery, the threat of asset deflation did not recede and the fear of a chain reaction of failures in financial institutions has remained. Therefore, new policies in public


spending were adopted. Initially, there was an injection of ¥685 billion of public money into financial institutions when seven specialized housing loan companies ( jusen) failed in 1996. Then, under the pretext of maintaining order in the financial markets, the enormous amount of ¥30 trillion and then ¥60 trillion of public money was allowed to be injected into banks and other financial institutions to prevent failure or to safeguard the depositors of failed banks in 1998–99. The upper limit of ¥60 trillion was expanded to ¥70 trillion in 2000. This new type of policy is clearly aimed at countering the destructive effect of asset deflation and protecting the economic interests of asset holders among big firms, wealthier people, and financial institutions with bad loans. It is sometimes claimed that such a policy is a means of protecting depositors. But if a means of protecting small depositors was truly sought, it would have been cheaper to strengthen savings insurance organizations. In any case, injections of large amounts of public money in order to save banks and other financial institutions is totally inconsistent with neoliberalism. Nor can it be legitimated by Keynesian theories – it does not signify a return to a Keynesian policy stance. From the standpoint of dominant economic theory, it cannot yet be logically explained, though it is not a type of policy unique only to Japan among advanced countries. It is now called ‘too big to fail’ policy, and apparently promotes merger projects among Japanese city banks to form four mega-banks. Thus, while the policy presents theoretical problems to be explained especially in relation to the neoliberal theorems, it is still basically in tune with the spirit of a company-centred socioeconomic order. Correspondingly, the burden of the fiscal crisis of the state has been passed on to working people. The consumer tax, which is typical mass taxation, was introduced in 1989 at the rate of 3 per cent, and raised to 5 per cent in 1997. The government misread the increase in consumer demand in 1996, which was larely due to consumers’ attempts to forestall the announced rise of consumer tax, believing it to be a strong sign of real economic recovery. The government thus assumed it was timely and possible to come back to reconstructing the budget. It increased private contributions for medical services from 10 per cent to 20 per cent of actual costs, and abolished special reductions of income tax, as well as raising consumer tax to 5 per cent from April 1997. The total annual amount of the increased burden on the mass of people reached ¥9 trillion. The government’s optimistic projection that the effect of


this increased burden would be brief and light was profoundly mistaken. As consumer demand cooled down again, the Japanese economy returned to depression. The Asian crisis also intensified Japanese economic difficulties, forming a reciprocal international chain reaction. As a result, four financial institutions, including Yamaichi Securities and Hokkaido Takushoku Bank, failed in November 1997, further deepening the economic difficulties and exacerbating the concerns for the future among working people, especially as unemployment started to rise rapidly. Thus, while neoliberalism became the basic policy stance for confronting the fiscal crisis of the state, a series of fiscal and monetary policies were implemented in favour of big business, especially in civil engineering, the construction industry and finance. The swell and burst of the huge bubble was initiated and promoted by such economic policies. In the course of the depression of the 1990s the scale of monetary and fiscal policies was expanded, as we have seen. These policy operations served to mitigate the difficulties of financial institutions, big business and wealthier persons due to asset deflation. However, they were clearly inconsistent with neoliberalism and theoretically confused; they have exacerbated the fiscal crisis of the state; and they have still not been effective in bringing about macroeconomic recovery. Meanwhile, the burden of the fiscal crisis of the state has been shifted increasingly toward working people in the form of increases in consumer tax, individual payments increased for medical services, and so on. The operation of recent Japanese economic policies is, in this regard, thoroughly capitalistic despite its theoretical confusion and inconsistency. The government has paid little attention to economic difficulties and the increasing concerns for the future among working people. It has not sought proper and sufficient social policies concerning the rapid fall in the birth rate, the transition to an ageing society, and worsening employment conditions with increasing unemployment. Depressed consumer demand caused by concern for the future among working people lessens the probability of economic recovery and consequently prevents the reduction of bad loans. The failure of economic policies in 1997 is a typical example of this process. Is there hope for a reversal of the underlying direction of Japanese economic policy? It is certainly desirable from the point of view of economic democracy to change the strongly capitalist character of


economic policy. The potential of the Japanese economy can, and must, be redirected toward forming a strong economy for working people, with stable social policies that make it easier to have and to raise children. Such a reversal of the basic policy stance may not instantly overcome the trend of low economic growth. However, the current vicious circle comprising rising unemployment and deflationary pressure in the economy can be abolished by restoring confidence in the future among people, thus revitalizing consumer demand from below. Neoliberalism and inconsistent emergency economic policies in favour of big business and financial institutions are not inevitable policy options for the Japanese economy. They are, rather, counter-progressive and destabilizing. Unfortunately, there is no political party in contemporary Japan that could powerfully present such alternative policy options for working people, with the exception perhaps of the relatively small Japanese Communist Party ( JCP) and the Social Democratic Party of Japan (SDPJ). Nevertheless, this political situation does not negate but rather enhances the importance of critical analyses of the roots of confusion in Japanese economic policy, especially for the future of economic democracy and socialism.

5 Asia and Japan in the Process of Globalization

The globalization of the capitalist economy What does globalization mean? Globalization of the capitalist economy has recently attracted much attention. Increasing numbers of firms, their products, more and more money, and workers, seem drawn into the whirlpool of a global competitive market. The new trends in the Japanese economy are deeply related to this process of globalization. But is the globalization of economic activities truly a new phenomenon? Has it not been a fundamental aspect of the capitalist market economy from the very beginning of its development? According to Wallerstein (1974, 1983), for example, we have seen two kinds of world system in human history: world empires and the capitalist world economy. Modern capitalism appeared through ‘the long sixteenth century’ as a new type of European world system, replacing the preceding world empires. While world empires were integrated by political and military power, the capitalist world system formed a global system of division of labour mainly by means of the self-regulating market order. Indeed, capitalism has anarchically promoted the marketoriented system of the division of labour, beginning with the expansion of the world market after the discovery of the American continent and the circumnavigation of the globe. Clearly, capitalism has been grounded upon the global market economy from the very beginning. The forms of market economy such as commodities, money and (merchant and usurer) capital were, however, not peculiar to the modern capitalist age. They have appeared and existed from the early 106

Asia and Japan in the Process of Globalization 107

stage of human history. They sprang and grew, as Marx pointed out,1 as inter-social economic relations. When one communal society came into contact with another, two possibilities arose: either one would conquer the other by force, or trade would be undertaken by treating products as commodities. All world empires actually included heterogeneous communal social organizations at various levels in different local areas, and always contained horizontal inter-social trade as a subsidiary mode of integration in addition to vertical imperial political and military power. Horizontal trading relations in the forms of market economy were qualitatively different from both the major organizational political order of empire and the intra-social communal social relations. Therefore, substantial growth of the market economy had a destructive effect on the imperial and communal social order. Trading in the market (period and place) was thus restricted in many pre-modern societies so as to limit the growth of the market economy. Modern capitalism developed the forms of the market economy and converted them into the fundamental forms of global integration, as well as its basic intra-social economic order. It did so by dissolving the feudal hierarchical and communal order, beginning in the Western European countries. At the heart, labour power was transformed into a commodity and a thorough commodity economy was formed. Capitals organized the social production of commodities by means of commodities and this resulted in rising industrial productivity. Unlike pre-modern societies, capitalist societies are fundamentally organized by deploying various forms of the market economy, and can therefore take advantage of the world market as an economic order homogeneous with their own internal economic forms of organization. They have exhibited a tendency to move increasingly in the direction of open free trade, both domestically and internationally. As the market economy is basically independent of the political and communal social order, the ideologies that came to prevail in capitalist societies were individual freedom, the fundamental right to private property upon the basis of individual labour, and equal human rights. These ideologies were sustained by the Enlightenment movement to liberate human nature from discriminatory feudal and religious ideologies. The ideological belief that a free competitive market economy would bring about efficient and harmonious economic life as a natural order of liberty sprang from growing capitalism. Support for liberalism by classical political economy and neoclassical economics has been firmly grounded


on this naturalist bourgeois ideology. Neoliberalism in our age draws a certain strength from the underlying age-old and renewed trend toward globalization of the capitalist market economy. In The Communist Manifesto (1848) the young Marx and Engels had already powerfully summarized the global tendency of capitalist development, pointing out that the growth of bourgeois society had exploited the world market and ‘given a cosmopolitan character to production and consumption in every country’.2 They also stressed that its strong growth contained contradictions that caused self-destructive commercial crises. Recent phenomena in the Japanese and other world economies confirm this insight into the fundamental trends of capitalism.

Contemporary features What, then, are the contemporary characteristics of globalization of the capitalist economy? The recent globalization of production, consumption and culture in capitalist economies does not simply represent a straightforward continuing unfolding of the intrinsic nature of capitalism, that had already been demonstrated up to the mid-nineteenth century. Rather, capitalism has restrengthened the fundamental trend toward globalization in the course of restructuring during the continuous crisis and depression after 1973. As discussed in Chapter 2, the historical evolution of capitalism toward restricting the competitive free market through monopoly capital, trade unions and statism that lasted for about a century from the 1870s has been reversed back and market competition has been revitalized, both globally and domestically. There are at least six related characteristics of the contemporary globalization of the capitalist economy. 1. In the course of restructuring after 1973, and amidst continuous economic difficulties, capitalist firms introduced ME automation systems into both factories and offices. Thus they have flexibly raised labour productivity, multiplied models of products, and re-intensified competition, both domestically and internationally. Capitalism seems to be restoring its vitality in the midst of a historic crisis by returning to its original mother sea of the competitive world market. The Japanese economy has played a leading role in this direction. 2. By means of ME information technologies, capitalist firms have also increased their flexibility in relocating manufacturing and business


sites, and have thus formed more and more multinational corporations in many business areas, including manufacturing.3 By 1985, 31 per cent of total exports and 40.1 per cent of total imports by the USA are estimated to have been transacted within multinational corporations. In Japan, the proportions are about 30 per cent of both exports and imports.4 In the earlier history of capitalism, there was already multinational activity of big firms in some fields, such as foreign trade, railway construction, oil and other mineral extraction. However, the recent degree of development of multinational corporations in almost all areas of manufacturing, commerce, finance and other business is quite new. 3. Corresponding with this, monetary and financial transactions have also become global. In particular, speculative global transactions in foreign currency in the floating exchange rate system now amount to 100 times the actual needs of trading and tourism. Huge amounts of speculative money flow continuously through the global financial centres, and have created a continuous 24-hour global financial market system. This is one of the most conspicuous features of globalization of contemporary capitalism and is one source of the financial instability and crises in economies across the world. 4. As ME automation spread in factories, offices and shops, capitalist firms were able to dispense with a large number of their skilled and experienced workers, and have increased their employment of lowwage foreign workers, often without work permits. International mobility of labour has thus risen continuously in the course of globalization of the market economy, although working people cannot be as mobile as capitalist firms. It is estimated that several million workers annually move to richer countries, and that 100 million people now live outside their country of origin.5 Including foreign workers, capitalist firms have taken advantage of flexible forms of irregular employment, such as women part-timers, seasonal workers and temporary workers often dispatched from other companies. Traditional trade unions aimed at regular male workers have thus suffered a decline in their membership percentage and their social position has been weakened. As a result, trade unions have failed to raise real wages despite increased labour productivity. Declines in real wages have even become common for many workers. Unevenness in wage rates and income distribution has increased in the advanced capitalist countries.


The Japanese economy was no exception to these trends and gradually lost its previous characteristics of relative egalitarianism and stable employment. Nevertheless, also taking into account the language barrier, the Japanese economy is still penetrated less by foreign unskilled workers than other major advanced economies, despite an increased flow of such workers in the Tokyo metropolitan area; and the language barrier together with the effect of the appreciation of the yen has tended to discourage Japanese workers from seeking jobs abroad. Japanese people who have the opportunity to work abroad usually want to return and settle in Japan again. In this respect, globalization of capitalism will not easily dissolve the characteristic cultural differences in social life, and would not result in cultural homogenization. 5. Meanwhile, the economic role of nation states has been much weakened as a result of both the failure of Keynesianism and a cumulative fiscal crisis. Nation states have also become less able to maintain exceptional regulations (or control) on national capitals as multinational activities have become intensified. As state economic intervention has declined, neoliberalism and the ideological belief in the competitive free market have replaced Keynesianism as the dominant policy stance in the capitalist world. Under neoliberalism, the privatization of public enterprises has advanced and deregulation aimed at freer market competition has been promoted. State expenditure on welfare, education and medical services as well as the number of civil servants has been cut. These neoliberal policies are not simply a reaction to the failure of Keynesianism but have a more substantial basis in the actual trend toward a revitalization of the competitive capitalist market throughout the world. The basic stance of Japanese economic policies since the 1980s followed this global trend. 6. At the same time, the strong trend toward globalization has also been used as an ideology supporting deregulation, tax reductions in favour of wealthier people and capitalist corporations, and a more open market economy for multinationals to undertake transactions and invest across borders. Ideas emanating from Washington are representative of this ideology and often advocate following the American model of business and market order as a de facto standard for all economies in the age of globalization. In this context, globalization as an ideology contains two layers. However, the difference in economic systems and economic policies across nations and regions will not


disappear easily, but has become more noticeable with the trend toward globalization of economies. In this regard, the ideological justification of neoliberalism and company-centred policies in Japan, on the grounds of globalization, cannot be universally legitimate. The Japanese political tendency to follow US leadership, including globalization, is often criticized as national subordination by the Japanese Communist Party. However, it is also in accord with the Japanese business circles’ interest in keeping open their largest export market and their investment opportunities in the USA. At the same time, on the pretext of necessary costs for globalization, the burden of budget crisis of the state is increasingly being shifted onto the shoulders of working and socially weaker people, by intensifying the nature of company-centred class society in Japan. The new world order and globalization Based on these six features, contemporary globalization of capitalist economies is closely related to the so-called new world order after the end of the Cold War. While the capitalist economy has spontaneously striven to restructure itself by introducing ME technologies, Soviet-type socialism, with a hypertrophied and inelastic state and Communist Party bureaucracy, could not manage to change either its industrial technologies or the structure of its socialism. The difficulty in changing the economic order through restructuring finally led to the dissolution of the regime itself in Eastern Europe and the USSR via increased demands for market economy and democracy, in addition to breakdown via ethnic rivalries and nationalism. The road toward a capitalist market economy has been followed in Russia and most Eastern European countries.6 In the meantime, China maintains Communist Party leadership and has been performing an experiment in constructing a socialist market economy, rather successfully in terms of economic growth, since 1978. Vietnam and Cuba are also following this experiment. However, the socialist market economy in these countries no longer seems an antagonistic and heterogeneous economic order to capitalism, but has become an open market from the point of view of multinational capitals. Thus, these systemic changes in the former centrally planned economies have further extended the space for multinational capitalist firms to invest and trade. The real and ideological grounds for neoliberalism and globalization were obviously complemented by these changes.7


In the Cold War period, the confrontation between the capitalist bloc led by the USA and the socialist bloc led by the USSR resulted in the presentation of powerful competing frameworks for the international and domestic politico-economic order by each bloc. After the end of that confrontation, how could the global politico-economic order be restructured, and what nations could assume a hegemonic position? This is a leading question regarding the new world order. Several possible alternatives have been put forward and discussed.8 One of most likely alternatives for a new world order might be called Phase II of Pax Americana. As the Cold War ended because of the collapse of the USSR, it is in a sense natural to assume that the other superpower will assume global hegemony and lead the world into the second phase of Pax Americana. With its powerful military force, the USA now sits at the summit of the international military order and has the strongest voice in international politics. It also has the biggest national income and the largest national market, leads development in information technologies, has managed to revive industrial activity to a certain extent, and has sustained the position of the dollar as key international currency.9 The USA’s influence in the United Nations and other international organizations is clearly enormous and incomparable. However, the actual position of the USA as a hegemonic power is quite different from that of the first phase of Pax Americana. In particular, the overwhelming economic power that the USA enjoyed during the long post-war boom is now gone. Indeed, the USA has faced increasing trade deficits since the 1970s; it now has the largest net international debt in the world (US$743.7 billion at the end of 1996), and had registered large budget deficits until 1996. Therefore, its hegemonic position in the international military order has become more dependent upon international economic cooperation. In fact, complying with US requests, the Japanese government has increased its share of the economic costs of the US military bases in Japan and contributed the substantial amount of US$13 billion to the cost of the Gulf War (during which the USA collected a total of US$54 billion in international contribution, which exceeded the costs of military operations by US$5 billion). Despite its weakened international competitive power, the USA has continued to receive international capital inflows and to have rising net international liabilities, as the dollar continues to be treated as a kind of global currency or world money. In this international environment, the USA was able to overcome the crisis resulting from the burst of the


bubble in the late 1980s, entered a new phase of economic recovery after 1993 and has witnessed another bubble swelling in the New York Stock Exchange. At present, there is increasing concern that, should the bubble burst, serious damage could be caused to the world economy. As Japan is the greatest holder of dollar assets, the destructive damage of such an event would be most serious for Japan. This frightens Japanese business circles and politicians and induces them to cooperate directly or indirectly with the requests of the US leadership. The second phase of Pax Americana could be sustained only through international politico-economic cooperation, especially by Japan and the European countries. In this regard, the second phase of Pax Americana as a new world order is not very different from the alternative of triple hegemony by the USA, Japan and the EU. Other alternatives, such as Fortress Europe or Pax Nipponica, are far less likely. The European countries participating in the EU are more concerned about the mutual adjustment of their national interests within the EU, as well as reducing high unemployment and reconstructing social welfare. Even if they manage to build Fortress Europe successfully, in the short term they will probably be unable to persuade other countries in the world to imitate them in social organisation. EU ambitions to assume a global hegemonic position would also suffer from the bitter history of governing colonies. Likewise, Japan will face many unhappy historical memories should she attempt to become a hegemonic country in Southeast Asia. Furthermore, her deteriorated economy is no longer a desirable model for other countries. Besides, Japan has historically been a peripheral country learning from advanced countries – in the post-World War II period, mostly from the USA. As a result, Japan lacks the political ability and attitude to design a strategy for global hegemony. Meanwhile, following the EU and the NAFTA, several conceptions of regional economic cooperation have been proposed in Asia, such as APEC (Asia-Pacific Economic Cooperation), ASEAN (Association of South East Asian Nations) or Greater ASEAN, and EAEC (East Asia Economic Caucus). However, Asian countries are so diverse and heterogeneous in their political and economic systems that their integration into an economic union, such as the EU, is virtually impossible. Nevertheless, mutual economic cooperation and adjustment of interests among them might still be promoted in other ways. From the viewpoint of the Japanese economy, if economic integration similar to that of the EU occurred in Asia and allowed migration of


workers across the region without restriction, there would be a massive immigration of low-wage workers from the surrounding Asian countries. This would cause great turmoil in Japanese society and would be socially intractable. There would be problems regarding social security and welfare, and possible frictions with Japanese workers in view of recently increasing unemployment. In addition, Japanese trade, investment and business connections among multinationals have spread across North America, Europe and elsewhere, as well as Asia. Thus, Japanese business circles are less keen to consolidate regional economic unification in Asia, preferring to operate across the world market as broadly and freely as possible, provided that their business activities are not foreclosed out of the EU and the NAFTA, and remain easily accessible to these markets. In the new world order, while nation states have seen a reduction in their economic role, the political and economic role of international organizations, such as transnational regional unions, the IMF, the UN, and summit meetings among major countries, has increased. Japan tends to follow the lead of the USA in these organizations and meetings. It is thus frequently concluded in Japan that Japanese subordination to the USA is strengthened through such developments. However, it should not be forgotten that an important economic basis for these developments lies in the growth of multinational corporations. Indeed, multinational corporations have continuously broadened their investment and mutual business networks as well as intensifying the linkages among their business activities across borders. Nation states have lost a substantial part of independent control over their economies. The heightened role of regional economic unification, of international cooperation, of summit meetings and of transnational organizations, often propounding a neoliberal ideology, largely reflects the need for multinationals to act more freely across borders. The EU and the NAFTA are therefore unlikely to become exclusive economic blocs like those seen in the 1930s. The dominant new world order of a triple hegemony would incorporate the adjustment of frictions and confrontations among the three major economic poles by placing priority on the economic interests of the advanced capitalist countries in accord with the needs and requirements of multinational capitals. What, then, might be the position of China in the new world order? With one-fifth of the world’s population, China has continued to register high economic growth. It has made large trade surpluses, and had


accumulated more than US$100 billion in foreign exchange reserves by the end of 1996 – the second largest in the world after Japan. If we add the foreign exchange reserves of Hong Kong and Taiwan, the total of foreign reserves held by the ‘three Chinas’ amounts to nearly US$240 billion, a sum larger than the Japanese reserve.10 In addition, the economic power of the overseas Chinese network in other Southeast Asian countries and further afield across the world is lively and strong. China is the centre of the entire network. Unlike Japan, it has a strong historical tradition of constructing global strategies, historically believing that it occupies the centre of the world. There is thus a strong possibility that China could become a leading power in addition to the triple hegemony of the capitalist world. Following the road to a socialist market economy, China will continue to be an important and influential actor in the new world order in the twenty-first century. It is imperative for Japan to maintain and extend cooperation with this neighbouring country. The Chinese road to a socialist market economy provides the opportunity for multinational investment in China, and many Japanese companies have expanded investment there. However, the dominant and narrow neoliberal ideology in Japan, which denies any rationality to socialism, works as a fundamental psychological obstacle to generating stable and deeper cooperation with China. It would be to the benefit of all if it were replaced by a more liberal ideological stance which admits that several types of socioeconomic order are possible in the development of nations.

The globalization of Japanese capitalism The globalization of Japanese capitalism seemed a successful process until the end of the 1980s. In the course of high economic growth, Japanese GDP per capita in dollar terms rose from about one-fifth that of the USA and one-third that of the major European countries in 1950, to about two-thirds that of the USA and the same as that of major European countries in 1973. Although the Japanese economic annual growth rate declined sharply thereafter, it was still higher by 1–2 per cent than that of most advanced countries until the end of the 1980s. Through increasing globalization of economic activity in the 1970s and 1980s, the repeated appreciation of the yen worked to raise the relative position of the Japanese economy in international comparison. Thus, as noted in the Introduction, Japan surpassed the USA in per capita GDP in 1987.


By securing workers’ cooperation, Japanese firms could introduce ME automation systems and thus intensify their international competitive power. The Japanese economy increased its trade surpluses by overcoming the huge trade deficits resulting from the two oil crises. It also increased foreign investment – both direct foreign investment and investment in financial assets – especially after the mid-1980s. At the same time, foreign exchange reserves increased sharply from US$27.9 billion in 1985 to US$85.1 billion in 1989, and further to US$216.7 billion in 1998 – by far the largest in the world. Its net foreign assets also grew from ¥29 trillion in 1986 to ¥133 trillion in 1998. As Japan became a great economic power, her economy was globalized in several aspects. As the yen appreciated from ¥360 to the dollar until 1971, to ¥145 in 1990, and given reductions in import duties, the Japanese consumer market was flooded with imported goods. American consumption habits – above all, various electrical home appliances and the widespread use of cars – are already common to most Japanese. Across Japan one can find convenience stores with standardized commodities similar to those in many Western countries. The Coca-Cola brand, McDonald’s and Kentucky Fried Chicken outlets have become common sights in Japanese cities. Sophisticated and expensive fashion clothing, accessories, drinks, food and luxury cars are easily available in the Japanese market. Famous classical and popular musicians and orchestras frequently visit Japan, one of the largest music markets in the world. The globalization of sport, including the Olympic Games, professional tennis and soccer, is also conspicuous. Thus, the point Marx and Engels made about the tendency of capitalist development to give ‘a cosmopolitan character to production and consumption in every country’ is evident in the contemporary Japanese economy. Nevertheless, Japanese foreign trade dependency has paradoxically declined from the mid-1980s in the course of globalization of the economy. Though the export dependency rate (exports/GNP) rose from about 10 per cent in the period of high economic growth to 13.5 per cent in 1984, it has since declined continuously, and even fell below 9 per cent during 1993–96. (It then recovered a little to 10.1 per cent in average in 1997–98.) The import dependency rate is even lower than that, and became 6.5 per cent on average during 1991–96. How can we explain this paradox? There are several reasons for the decline in the export and import dependency rates. As the yen appreciated sharply, Japanese manufacturing


firms suffered from a rise in production costs compared to those of other countries. By taking advantage of the appreciated yen, they increased foreign investment and overseas production to reduce production costs and mitigate trade friction. Increased overseas production naturally resulted in fewer exports from Japan as well as fewer imports of raw materials into Japan. On the other hand, direct investment in Japan by foreign firms did increase, but not by very much since it was hampered by higher costs of operation. Since such investment was also in the main for selling into the Japanese market (unlike that in other Asian countries), its increase did not contribute to the export rate from Japan, while it worked to reduce imports into Japan. In this respect, the effect of foreign investment into Japan is different from that of the more exportoriented foreign investment in surrounding Asian countries. Moreover, given the sharp appreciation of the yen from ¥360 until 1971 to, say, ¥120 to the dollar in the 1990s, more than three times as many dollar imports have become possible even with the same import dependency rate. This effect of the appreciation of the yen was exacerbated by the tendency to decline of the dollar prices of oil and other primary pro-ducts in the world market after the second oil shock. Thus, the fall in the Japanese import dependency rate after the mid-1980s did mask increased quantities of imports. The impression received daily that Japanese consumer markets are awash with imported goods is related to this point. Even from the simple fact that currently 70 per cent of corn consumption and 95 per cent of the primary energy used is by way of imports, we see that the Japanese economy is relying heavily on global economic relations. Furthermore, the tendency of the relative proportion of services and other tertiary industries in the Japanese economy to grow has had the effect of reducing the rate of macroeconomic dependency on foreign trade comprising the export of manufactured goods and the import of raw materials, natural resources and manufactured products. Globalization of the Japanese economy is also noticeable especially in regard to foreign investment since the latter half of the 1980s, as noted in Chapter 1. Japanese total long-term capital outflows in 1986–89 reached US$480 billion, and total direct investment abroad amounted to US$110 billion in the same period. Table 5.1 compares the balance of direct overseas investment among some major countries. The balance in all these countries increased remarkably after the 1970s, clearly showing the globalization of capitalist


Table 5.1 Regional distribution of outstanding overseas direct investment by major countries (millions of dollars, and % in brackets)

USA

1977 1987 1995

Japan

1977 1987 1995

UK

1974 1984 1995

(W.) Germany

1976 1986 1995

Total

Advanced Developing countries countries

Asia

Others

148 782 (100.0) 308 793 (100.0) 711 621 (100.0)

108 047 (72.62) 233 315 (75.55) 508 825 (71.50)

33 706 (22.65) 71 174 (23.04) 202 796 (28.50)

6 267 (4.21) 18 991 (6.15) 62 057 (8.72)

7 029 (4.72) 4 304 (1.39)

22 210 (100.0) 139 334 (100.0) 514 300 (100.0)

9 733 (43.82) 80 457 (57.74) 350 357 (68.12)

12 477 (56.17) 58 877 (42.25) 163 943 (31.88)

6 328 (28.49) 26 658 (19.13) 88 480 (17.20)

24 394 (100.0) 100 711 (100.0) 308 178 (100.0)

19 438 (79.31) 82 216 (81.63) 245 301 (79.60)

5 046 (20.68) 18 495 (18.36) 62 877 (20.40)

2 046 (8.31) 6 719 (6.67) 23 935 (7.77)

19 212 (100.0) 68 791 (100.0) 194 097 (100.0)

14 302 ð74:44Þ 56 547 (82.20) 177 875 (91.65)

3 093 (16.10) 8 142 (11.83) 16 222 (8.35)

358 (1.86) 1 481 (2.15) 6 265 (3.23)

1 817 (9.45) 4 102 (5.96)

Sources: Figures for 1974 and 1987 from Horaguchi (1989). Figures for 1995 calculated from data by JETRO (each year), [Overseas Direct Investment of the World and Japan], and the (UK) Office for National Statistics, Overseas Direct Investment 1995.

economies. In particular, the increase in Japanese overseas direct investment is conspicuous. Its total balance was about one-seventh that of the USA, and smaller than that of the UK in 1977. Subsequently, the Japanese balance grew by a factor of 6.3 by 1987 and further by a factor of 3.7 by 1995, to reach US$514.3 billion, or about 70 per cent of that of the USA. This is about 70 per cent higher than the balance of the UK, which has a strong tradition of overseas investment, and 2.5 times that of Germany. Economic recovery based on expansion of domestic demand


(spurred by the bubble) in the late 1980s and the extremely low growth after the burst of the bubble in the 1990s did not stop the increase in Japanese direct overseas investment, but were rather closely related to it. In the late 1980s, increased idle money capital held by Japanese firms, together with a lowered interest rate and the appreciation of the yen, swelled the bubble and simultaneously promoted overseas investment. In the 1990s, after the burst of the bubble, the rate of interest fell even more and the yen appreciated even more strongly until 1995. Thus, the competitive power of domestically producing firms was further weakened and, together with the persistent depression of domestic demand, further encouraged overseas investment. The resultant tendency toward industrial hollowing-out further worsened conditions for the Japanese economy. Looking at the regional distribution of the balance of overseas direct investment in Table 5.1, until 1987, Japanese overseas direct investment typically flowed less to other advanced countries and more to developing countries, especially Asia. The distribution changed considerably by 1995, and nearly 70 per cent of investment went to other advanced countries. Thus, its pattern became similar to that of other advanced countries. In this regard, the main content of globalization of the Japanese economy has become increasing mutual cooperation and networking among advanced capitalist countries. Still, the proportion of Asian countries in the total balance of Japanese overseas direct investment remained as high as 17.2 per cent in 1995, proportionately twice as much as the share of Asia in US investment. In absolute amounts, the balance of Japanese direct investment in Asia stood at US$88.48 billion in 1995, and was clearly bigger than that of the USA. The share of Asia in foreign direct investment by Japanese medium and small firms, which increased sharply in the 1990s, reached 91.6 per cent in 1995, including China’s 66.3 per cent. In several Asian countries, wage rates are as low as one-tenth those in advanced countries. Land prices are also comparatively low, and there are tax exemptions or favourable deductions for investment from abroad. Therefore, Japanese direct investment in Asian countries has an actual economic size in terms of employment greater than that in the advanced countries, though its nominal amount is about one-quarter the latter. In absolute terms, Japanese firms employ 666 000 workers in Asian countries in 1991 compared to 452 000 in North America and 211 000 in Europe.11


Japanese foreign direct investment appeared to strengthen Japan’s exporting industries by organizing an international subcontracting system mainly in Asian countries. Indeed, Japanese manufacturing industry expanded employment until 1992. The Japanese economy seemed strong enough not to face a hollowing-out of industrial activity in the process of globalization and the growth of tertiary industries. However, due to the rapid appreciation of the yen until 1995 and persistent domestic depression, more and more Japanese medium and small businesses shifted their factories to the surrounding Asian countries. Overseas direct investment by big firms for production at factories closer to the consumer market in other advanced countries, as well as at cheaper factories in Asia, has continued to expand. Thus, the tendency to raise the proportion of overseas production has spread among Japanese manufacturing industries, as noted in Chapter 3. Therefore, the effect of industrial hollowingout on employment has become increasingly serious since 1993. It is highly likely that Japanese overseas direct investment will continue to increase as the domestic costs of operation remain comparatively high. As a result, there will be decreases in employment with a resultant pressure on real wages and working conditions, reductions in corporation tax revenue for the state and stagnation in domestic investment. Are these inevitable sacrifices in the process of the globalization of the Japanese economy? In addition, what should we make of the exacerbated economic instability due to the enormous speculative global flows in foreign exchange markets, even 100 times larger than the demands for trade and other real transactions? The obvious destructive irrationality of such speculative transactions in foreign currencies has led to proposals and experiments to curb them worldwide, including an attempt to create a more stable currency through regional unification or cooperation among nation states (as in the EU), and the proposal for a Tobin tax on transactions in foreign currencies.12 The proposal for a Tobin tax assumes that even a low rate of tax, say 0.2 per cent, on each foreign exchange transaction will operate as a prohibitive cost preventing repeated speculative trades, without greatly affecting trade related to actual goods and services. This proposal, not to mention the creation of a new transnational currency, cannot be realized without international cooperation and political intervention in the market, contrary to neoliberalism. Yet, by this token, why not also introduce some political control over foreign direct investment, say through taxation, for the sake of industrial recovery and reduction of unemployment?


These policy options are congruent with traditional arguments by British liberals, including Keynes, favouring the channelling of financial assets away from overseas investment and toward domestic industrial investment. After the disastrous failure of neoliberal globalization leading to intensified speculative economic instability, more and more economists in that tradition as well as in the socialist current seem to have acquired greater confidence in alternative proposals for the new century. The experience of globalization in Japan has shown the relevance of such ideas, though voices critical of the US neoliberal mainstream are still feeble and scattered.

The Asian connection High economic growth in Asian economies in the vicinity of Japan The capitalist world economy entered a period of continuous crisis and restructuring after 1973, but the newly industrializing economies (NIEs) of Asia (Korea, Taiwan, Hong Kong and Singapore) were able to maintain high rates of growth in the region of 8–10 per cent. The ASEAN countries (Malaysia, Thailand, Indonesia, Brunei, Singapore and the Philippines) also managed to raise their growth rates to 7–8 per cent. The Chinese economy, following waves of economic reform after 1978, joined these countries with an even higher growth rate. Thus, Asia was the only successful area in a depressed world. In fact, during the 1990s Asia accounted for a quarter of world production, but fully half of world growth, and two-thirds of world capital spending.13 Compared to other advanced countries, Japan maintained a closer connection with these Asian countries and formed an international division of labour through international investment and trade. This helped the Japanese economy to sustain a relatively high economic growth rate among advanced economies until the end of the 1980s. As a market for the Japanese exports, Asian countries took up about 30 per cent throughout the 1980s. Their share further increased in the 1990s, and became as high as 44 per cent in 1995–96; much bigger than the share of the USA. Moreover, trade with Asian countries brings to Japan a large trade surplus, as does her trade with the USA. It is not easy to find a full and proper explanation of why Asian countries in the vicinity of Japan entered a continuous process of high economic growth. Japanese visitors to these countries are often


reminded of the Japanese process of economic recovery and growth after World War II, and receive the impression that these countries are following in one way or another a similar course of development to that of Japanese high economic growth. Indeed, there are many similarities. In Asian countries, parents are typically eager to give children a better education for their future. Making the most of the advantages of latecomers, as Japan did, Asian countries could industrialize successfully with imported advanced technologies on the basis of abundant and cheap labour power educated sufficiently to operate new technologies. The productivity of agricultural labour was also raised. In most Asian countries, savings ratios are much higher than in Western countries. As in the course of Japanese high economic growth, banks in these countries have easy access to deposits from households, and thus can lend large amounts of money to firms. The state typically controlled interest rates and guided the flow of bank loans as a type of industrial policy. Thus, relatively ‘repressed’ (or controlled by the state) bankbased financial systems seemed quite efficacious in promoting industrial capital accumulation in Asian countries. In Asia, capital-market-based financial systems employing the direct financing of industry were not much in evidence. On the basis of such similarities, the theoretical model of ‘flying geese’ has described the process of economic development in Asian countries as being led by Japan, especially through international trade relations. The leading flier, Japan, exports products intensive in both capital and information, and imports products intensive in both labour and natural resources. Asian NIEs follow by importing Japanese products, in addition to products intensive in labour and natural resources and exporting products of mid-intensity capital and technology. ASEAN countries follow behind these, followed by China and still other countries, by importing Japanese and NIEs’ products, and exporting products more intensive in labour and natural resources. It is obvious that Japan has been an important influence on the other Asian countries, as if she were the forerunner of a group of Asian flying geese. The Japanese historical experience after World War II – or even after the Meiji Restoration – of becoming one of the major economic powers no doubt served as a model with many lessons and encouragement for other Asian countries. The Japanese model was frequently studied, used as an example against the Anglo-American type of growth path, and employed to justify stronger industrial policies. Such industrial


policies were implemented by controlling the allocation of financial resources and foreign currency, and by trade protection. On many occasions, personal contacts among politicians, bureaucrats and business circles played an important role in directing industrial growth. Western commentators have tended to dismiss this as ‘crony capitalism’ that generates corruption and favouritism in line with Asian cultural traditions. Though they are not totally wrong in pointing to weaknesses, they often miss the rationale for long-term cooperation between government, banks and firms to make the most of high rates of saving in the form of high corporate debt/equity ratios. In addition, the Japanese politico-economic approach to the Asian connection became increasingly positive. Japanese ODA increased rapidly from US$1 billion in 1973 to US$5 billion (the second largest in the world) in 1986; to US$11 billion (the largest in the world) in 1991, and further to US$14.5 billion (twice as much as the USA’s) in 1995. Its distribution has traditionally been in favour of Asia. Nearly 70 per cent of ODA was offered to Asian countries in the 1980s. Most of Japan’s ODA is offered to projects for which there are processes of application and screening. From the stage of constructing project applications, Japanese giant trading companies, in cooperation with other Japanese firms, appear and attach strings aimed at furthering their business opportunities. Thus, Japanese ODA often works in practice as a subsidy to the multinationalization of Japanese firms, especially in Asian countries. It is also used by ruling politicians, bureaucrats and capitalists in the receiving countries and serves as a source of corruption. It is certainly desirable to instigate a stronger inspection system on the functions and uses of Japanese ODA. At least partly promoted or guided by such ODA, a large proportion of Japanese direct overseas investment has been distributed to nearby Asian countries. To a certain extent, this has contributed to high economic growth in those countries, including the effects of transferring technologies as well as Japanese management methods. Globalization and diversification of economic systems Despite the many similarities among Asian countries, there are also differences in the political and economic order and variable historical and cultural traditions among Asian countries. Although these countries seem to follow the Japanese economy, they have not necessarily entered a homogeneous route to development. Heterogeneity of political and


economic systems among Asian countries as well as between the Western and Asian countries has not disappeared. Indeed, it seems to have become more noticeable as the dynamism of the Japanese and other Asian economies became internationally recognised. Despite the globalization of the capitalist economy with ‘the great civilizing influence of capital’,14 homogenizing the style of production and consumption life across the world, there is actually a paradoxical tendency for diversification of politico-economic systems. On the basis of Pax Britannica in the mid-nineteenth century, Marx emphasized the tendency of the global capitalist mode of production to universalize into one homogeneous economic order. In the first phase of Pax Americana in the post-World War II period, the US economic system appeared to be the leading model encouraging the rest of the capitalist world to enter a homogeneous path of development. Thus, the French Regulation school assumed that the same Fordist regime of accumulation, based on expansion of effective demand through rises in real wages roughly in proportion to labour productivity, had spread from the USA to other advanced capitalist countries. The same Regulation school has stressed diversification of trajectories among advanced capitalist countries in the period of post-Fordism. Three different models for restructuring are underlined as the most important trajectories: the US type of neo-Fordism that raised productivity and intensity of labour without redistributing its fruits to workers; the Swedish type of Volvoism aimed at strengthening the basis of social democracy, especially in the workplace, by allowing for wider participation of workers in decision-making; and the Japanese type of Toyotism aimed at developing and flexibly rotating multiskilled workers within firms by relying on their loyal and cooperative attitude.15 In addition to these differences mainly in the social relations between capitalist firms and labour, the role of the state and of financial institutions among these countries has also been variable. In the Asian countries in the vicinity of Japan, there are still more diversified and dynamic politicoeconomic orders. As diversified trajectories of economic development began to gather more attention in the era of restrengthened globalization, the attractiveness of evolutionary economics increased compared to neoclassical economics. Multiple patterns of economic growth can be analysed better by employing the evolutionary approach of biology as a model of science rather than following mechanical physics. The workings of the market


economy form distinct organic processes of economic development in combination with particular institutions, habits, culture and social consciousness or ideologies in broad social relations among people in each different epoch, nation and region. By underlining the roles of these historical and institutional factors for economic growth, evolutionary economics has revived the academic tradition of both the historical and the institutional school. Marxist political economy can easily share with it its concern to discuss concrete historical changes and diversities of capitalist development with different sociohistorical backgrounds. From the view of evolutionary economics, diversification of socioeconomic orders in the contemporary process of globalization of capitalism can be understood as habitat segregation in the process of evolution. However, we should ask further why diversification of economic systems has become so conspicuous in the recent process of restructuring and globalization. An important factor in answering this must lie with the flexible adaptability of information technologies.16 The dominant industrial technologies underpinning the Fordist regime of accumulation resulted in the construction of huge plants for the mass production of more or less uniform models of consumer durables. In contrast, information technologies have generated business opportunities for different sizes of plants, business firms and types of business. At the same time, information technologies have allowed capitals to employ and use various types of workers flexibly and in combination, both domestically and internationally. With relatively high levels of general and higher education for workers, Asian countries have had broader possibilities to activate their economies by using information technologies flexibly according to their economic conditions. In addition, multinational firms can organize the internal systems of operation in many different ways. They have flexible options, for example, in dividing internal departments, branches and factories, as well as in allowing them variable degrees of independence. There are also different ways of organizing vertical and horizontal human relations inside the firm and the workshop. The capitalist market economy cannot dissolve societies completely into atomistic individuals. It must allow both communal and hierarchical non-market human relations, such as the internal human relations within the firm, in the family life of workers as consumers as well as agents for the reproduction of labour


power, and in many other aspects in regional or national societies. In such non-market human relations, historical, cultural and social traditions tend to remain and lead to the diversification of various societies, even though they are themselves subject to change. Multinational firms can make the most of both the qualitative and quantitative diversity of various societies by means of information technologies. If, on the other hand, all societies became truly homogeneous, firms would have fewer incentives to invest abroad. For multinationals, one of the most important motivations for investing abroad is to utilize different social conditions in combination. Thus, while making use of habitat segregation of different social orders flexibly to distribute and rationalize their activities, multinational firms simultaneously promote their global economic activities. Asia characteristically contains widely differing political and economic conditions. This diversity combined with common favourable conditions for economic growth attracts direct overseas investment from abroad. Multinational firms from advanced countries, including Japan, take advantage of different social and economic conditions among Asian countries. Undertaking historical analysis of national income statistics, Maddison compares Asian countries with Western European countries, Western offshoots (the USA, Australia, Canada, New Zealand), Southern Europe, Eastern Europe and Latin America. He finds that in terms of per capita income, by 1992 Asian countries ‘had the widest intra-regional income spread: 27:1, between Japan and Bangladesh. This is huge compared with the spreads within the five regions previously discussed and one must therefore be circumspect in generalising about Asian characteristics, though their extreme heterogeneity is a phenomenon that developed only after 1950.’17 The heterogeneity characteristic of Asian countries is certainly not confined to the quantitative spread in per capita national income. There are also broad differences in socioeconomic order. Japan, for instance, formed a company-centred society (Toyotism) including large and many medium and small businesses, and became a major economic power as one pole of a triple hegemony among advanced capitalist countries. Korea entered a process of rapid catching up according to the flying geese model, but even during democratization of the political order in the 1980s and after it has been dominated largely by large family-owned concerns (chaebols) or groups of large businesses. Korea does not have many independent medium and small businesses, since


big business tends to produce internally all the necessary parts for its products. In contrast, Taiwan has significant numbers of competitive medium and small businesses, strong state intervention, and a strong economy with a per capita income slightly above that of Korea. Countries such as Indonesia have put the Communist Party outside the law and have adopted an Islamic identity. Still others, such as China and Vietnam, have stayed on the road of socialism combined with the vitality of the market economy and under the leadership of the Communist Party. In North Korea, a different type of socialism still exists and tries to maintain a centrally planned economy under the ideology of emphasizing independent subjectivity, though with many economic difficulties. With such quantitative and qualitative heterogeneity, it is even debatable whether the Asian flying geese belong to the same species. The market economy historically originated from economic trading relations between heterogeneous communal societies. In so far as a policy in favour of an open market economy is more or less admitted, globalization of the capitalist market economy has no fundamental obstacles to overcome among the heterogeneous Asian countries. It can provide a stimulus for economic growth by activating domestic and foreign investment. Excepting North Korea, this condition applies to the whole of Asia, including China and Vietnam. With contemporary development of information technologies, the heterogeneity of Asian countries is an extra, attractive reason for investment by multinational firms. The result is therefore a thriving regional market with a growing international division of labour, strengthening each domestic economy. In comparison with Asia, Europe possesses more homogeneous economies and is able to consolidate the European Union upon this basis. As an economic region, the EU actually forms the largest market in the world, taking up around 60 per cent of world trade, and is the wealthiest region in absolute terms. It is often argued that regional integration of the EU further elevates the mobility of capital and labour power across borders, and thus presents a suitable social basis for the broad activities of contemporary multinational corporations. Thus, EU integration is assumed as a desirable path for economic recovery and growth. What will the reality be in the twenty-first century? EU integration could further increase homogeneity in Europe. Can Europe thus solve the problems of high unemployment and economic stagnation, and become a growing centre of the world economy? Or would Asia, with its characteristic heterogeneity, restore and maintain its vitality


and higher rate of growth as a region? The latter seems more likely than the former. In any case, the comparison of dynamism of these two regions is also an interesting issue for the twenty-first century with regard to the diversification of economic development given the tendency toward globalization of capitalism. The meltdown of the Asian economic miracle and after High economic growth in Asia did not continue on a stable basis, despite Asia being subject to the increasingly globalized activities of multinational corporations. A series of monetary and financial crises in Asian countries since the summer 1997 revealed anew the fundamental destructive instability of the capitalist market economy even in this region, and destroyed the Asian ‘economic miracle’ in many countries. The crisis began with the selling of the Thai baht in July 1997. In August, the currency crisis spread to other ASEAN countries such as Malaysia, Indonesia and the Philippines. Speculative selling affected the currencies of Hong Kong and Taiwan in October, and the Korean won in November. By January 1998, falls against the dollar reached 81 per cent in Indonesia, 55 per cent in Thailand and Korea, and 41–46 per cent in Malaysia and the Philippines. Correlated to the currency crisis, the hugely inflated price of shares and real estate fell sharply, and financial markets and institutions in those countries entered a crisis. A sharp fall in economic activities with an increase of unemployment followed in 1998. Growth rates, which had remained at 7–8 per cent until 1996, became strongly negative (7 to 8 per cent in 1998) with an increase in the rate of unemployment from 2 per cent to 7–8 per cent in Thailand, Malaysia, the Philippines and Korea. In Indonesia, the growth rate fell to 20 per cent. The Asian economic miracle was thus generally regarded as having suffered meltdown. This failure was unexpected, as the Asian countries had commonly shown a good macroeconomic performance with seemingly healthy fundamentals, such as a low rate of inflation, a balanced state budget and a high rate of saving. In this regard, the Asian monetary and economic crisis was different from the preceding economic and currency crises in other developing countries, such as those of the early 1980s in Latin America. The cause of the currency crisis in the Asian countries was not the deterioration of the current balance of international payment due to poor domestic macroeconomic performance, the main factor related to the sudden changes in the capital account in these


countries.18 However, economic policies and business activities in those countries also contributed to the crisis. Most Asian countries that fell prey to this contagious crisis had linked their currencies to the US dollar at fixed rates. Confident of their economic growth, and under pressure from the IMF, the OECD and advanced countries, Asian governments followed the neoliberal trend for globalization and undertook radical financial deregulation, especially of international banking loans in the 1990s. Traditional state control and monitoring of banks and other financial institutions, particularly in their international transactions, were boldly removed to facilitate the foreign capital inflow. In addition to the multinationals, banks and other financial firms in advanced countries, including Japan, promoted and welcomed such a policy, as these Asian countries appeared attractive for the purposes of investment and lending. Capital and financial inflows to these Asian countries increased rapidly in the 1990s in the form of securities investment and bank lending, in addition to direct investment. The cost of such finance also appeared cheaper compared to domestic financing (often by as much as half ). In Korea, for instance, foreign debt incurred by banks and companies exploded from very little in the early 1990s to roughly US$160 billion by late 1997.19 In five Asian countries hit by crisis (Korea, Indonesia, Malaysia, Thailand and the Philippines), the banks’ total foreign debt incurred in 1994–96 amounted to US$140.3 billion, and securities investment inflow to US$30.2 billion, whereas foreign direct investment remained at US$15.4 billion.20 Japanese banks and other financial companies were able to rush into these Asian markets, in order to make up for their domestic losses, by taking advantage of the extremely low rate of interest in Japan. In June 1997, the total amount of Japanese bank loans to the five Asian countries amounted to US$97.2 billion; almost the same as that from the whole of the EU (US$98.1 billion) and more than four times that from the USA. The deregulated financial inflows into these Asian countries directly and indirectly promoted speculation, swelling the prices of shares and real estate. Part of the inflow also seems to have helped to maintain a relatively high economic growth. It was as if the bubble economies of the late 1980s in the advanced countries, especially Japan, were transferred to the Asian countries in the 1990s. The boom sustained by large capital inflows into these Asian countries was intrinsically fragile. Moreover, by expanding domestic demand, it


tended to worsen their international trade balance by increasing imports and reducing the drive to export. Meanwhile, the Chinese yuan was depreciated by 45 per cent in 1994 and the Japanese yen fell fairly sharply after May 1995. The actual impact of these changes was not as severe as it might have been since trade with China was not undertaken at the official rate but at higher free rates for the yuan, and the depreciation of the Japanese yen was a fall from the exceptionally high level that followed the fall of the dollar after the Mexican monetary crisis. Still, combined with the influence of the Japanese depression, they worsened the balance of trade in Asian countries. In order to maintain the exchange rate of their currencies with the dollar and to sustain the boom based on capital inflows, these countries had to raise the rate of interest to attract short-term bank funds from Japan and other advanced countries. This made the speculative rises in the price of shares and real estate increasingly untenable, as the debt/equity ratios of many business firms and real estate agencies were very high. In Korea, for example, prior to the currency crisis, the difficulties and failures of some chaebols due to industrial and financial impasse had already been revealed at the beginning of 1997.21 In May 1997, the biggest non-bank in Thailand filed for bankruptcy. The international short-term financial inflows were also highly unstable given the shortage of precise information about emerging economies from the viewpoint of banks and other financial institutions in advanced countries. Witnessing the deteriorating trade balance and the danger of the speculative bubble as a result of rising interest rates, foreign banks and other financial institutions began drastically to reduce lending and investment into these Asian countries. Foreign bank loans to the five Asian crisis countries were actually reduced on an annual basis from US$58 billion during the period from the first quarter of 1995 and the third quarter of 1996, to US$22 billion in one year until the third quarter of 1997. It became an outflow of US$32 billion on an annual basis during the fourth quarter of 1997. As the pegging of the exchange rates of those countries to the dollar increasingly relied on short-term capital inflows, this sudden change in the motion of capital flows made the exchange rates impossible to maintain. Once the exchange rates became floating, or even when the fear was felt that such a change was imminent, foreign banks and other financial institutions rapidly called in their short-term loans to avoid the danger of capital losses. Thus, the transition to a free float caused a freefall of exchange


rates among these countries. This led to an acute economic crisis in these countries as a fall in currency values increased the burden of interest and principals in dollar terms. The burst of the bubble and the financial crisis caused a decrease in domestic demand and an increase in business failures. The workers suffered from drastic reductions in real wages and increased unemployment. The IMF and the USA mismanaged the situation and worsened it because of their belief in neoliberalism. Instead of mitigating the acute currency and financial crises in these countries by organizing an international syndicate to roll over their international bank debts, they demanded severe conditionality with tight policies before offering rescue loans. Transparent business information and easy access to financial markets, in the style of the US financial system, in addition to maintaining balanced state budgets, were also strongly requested. In Korea, for example, it was demanded that the BIS regulation on international banks to keep own capital above the minimum 8 per cent of total assets should be achieved by the end of 1997 – though the condition was postponed and ameliorated the next year. Including the impact of austerity policies to meet the demands from the IMF and Washington, interest rates in Korea shot up to 30 per cent and deepened the economic crisis. The collapse of the Asian miracle amounts to a phenomenal collapse of bubbles related to the instability of massive, deregulated and speculative international capital flows. It shows how dangerous it is to enforce neoliberal deregulation of international financial capital flows across countries with different historical backgrounds and levels of economic maturity. The IMF–Washington neoliberal austerity policy recommendations attached to rescue loans were also counterproductive. In this regard, neoliberalism resulted in a grave failure here also. At the same time, the recent Asian monetary and economic crisis is closely related to the turmoil and difficulties in the Japanese economy, the leader of the flying geese. As we have seen, Japanese capitalism greatly increased its direct overseas investment in the nearby Asian countries from the latter half of the 1980s onward. In the depression of the 1990s that followed the burst of domestic bubbles, this tendency was further strengthened by involving medium and small businesses. Taking advantage of the extremely low rate of interest, Japanese banks and other financial institutions encouraged this and also expanded securities investment and short-term loans to Asian emerging economies. Such


Japanese investment and loans were combined with funds supplied in the form of ODA and contributed to the swelling of the bubble in prices of shares, land and other real estate in Asian economies in the 1990s. Japan was exporting her bubble to surrounding Asian economies with the aim of ameliorating her own domestic distress, though she was certainly not the only country to have promoted the Asian speculative bubble. The fall of the yen after 1995 and persistent Japanese depression combined with the effect of the depreciation of the Chinese yuan in 1994, then delivered a severe blow to other Asian economies whose currencies were pegged to the US dollar. The resultant deterioration of the trade balance forced these economies to increase their short-term debt with higher rates of interest, and thus induced financial vulnerability, finally causing the currency crisis and the burst of the bubble. In turn, the burst of the Asian bubble and the currency crisis increased the accumulated bad loans of the Japanese banks. At the end of June 1997, just before the Asian currency crisis, the proportion of bank loans to the five Asian crisis countries against the banks’ own capital reached 39.2 per cent in Japan, while the same proportions in the USA and EU were, respectively, 6.8 and 11.8 per cent.22 Thus, the damage caused by the Asian crisis was most serious for the Japanese banks and financial institutions. The Japanese depression was intensified by this blow to the financial sector in addition to the blow dealt to the exporting industries. Four financial institutions, including the giant Hokkaido Takushoku Bank and Yamaichi Securities, failed in November 1997, reflecting the economic distress of Japan. The OECD estimated that the economic crises in these countries would reduce Japanese economic growth by 1.3 per cent in 1998, while the Japanese Economic Planning Agency (1998) estimated the fall more optimistically at 0.5 per cent. The fear spread that a chain reaction leading to a world financial crisis might arise as a result of the deepening Japanese financial crisis and the failure of financial institutions in the wake of the Asian crisis. Partly to comply with a request from the US government and financiers to forestall this danger, in 1998 the Japanese government decided to allocate the huge sum of ¥30 trillion and then ¥60 trillion of public money to the rescue of Japanese banks. The acute phase of collapse of the Asian emerging economies seems to be over. International rescue loans from the IMF and Japan have worked to a certain extent, while the severe neoliberal conditions attached to IMF emergency loans were more or less loosened to prevent anger and


unrest among the population of these countries. At the same time, continuous economic growth both in China and the USA has substantially (as if they were the two towers of a suspension bridge over the Pacific Ocean) served to settle the Asian crisis, at least for the time being. China decided not to depreciate the yuan and to aim at 7 per cent growth for 1999, the year of the 50th anniversary of the Chinese Revolution. Though there are certain worries in the Chinese economy – increasing unemployment, excess production and uneven distribution of income – its rapid economic growth with a stable yuan elevates its prestige and serves as a moment of stability for surrounding Asian economies. China’s success in avoiding to be drawn into the Asian crisis also presents clear evidence against the neoliberal belief in liberalizing international financial capital flows. The current boom in the US economy is led by the speculative bubble in the New York Stock Exchange and growing consumer loans made possible by continuous huge international capital inflows. The financial bubble thus seems to have been tossed from Japan to its nearby Asian emerging economies, and is now present in the US economy. The US economic boom serves to mitigate the Asian economic crisis through trade and finance, but it will become increasingly vulnerable and fragile. No one can tell for sure what will happen in the world economy if the US bubble bursts. The nightmare of a full-scale world economic crisis cannot easily be excluded. Globalization of the capitalist market economy has thus led to much instability and disillusionment. Neoliberalism is proving powerless to deal with these problems. Alternative paths for the new century must be presented. Instead of freeing international speculative flows of money by multinationals and financial institutions, some re-regulation for stability of international monetary order seems necessary. Moreover, better social conditions for the majority of working people to allow for growth in the domestic market are also desirable for greater stability in economic life. These suggestions are relevant not only for the Japanese economy. They are even more relevant for the nearby Asian countries, since they can thus make better use of their potential for economic growth in the twenty-first century, hopefully along with the socialist market economies of China and Vietnam. The actual diversity of Asian politico-economic systems in the process of globalization should thus be used to support the future interests of the mass of working people.

Concluding Remarks

A new century has begun; can it be a better one for the future of society after such bitter disillusionment at the end of the last century? Keynesianism, which seemed so powerful in the post-World War II period, failed either to prevent or to solve the great depression after 1973, and rather worsened the economic situation by causing a deepening fiscal crisis. Neoliberalism then became the dominant policy current in the capitalist world, and triumphed over Keynesianism and socialism. Its belief in the efficiency of the free competitive market draws a certain strength from the historical reversal of capitalist development toward global competition and increased vitality for multinationals. The collapse of Soviet-type socialism greatly helped the victory of neoliberalism, even leading to euphoria. It is time to assess the achievements of neoliberalism after two decades of domination. Reconsideration of the Japanese economy in this volume presented some evidence for the reassessment of neoliberalism. Similar to Keynesianism, neoliberal economic policies could not alleviate the severe long downswing of the Japanese economy, and rather exacerbated the speculative swell of a financial bubble and its destructive burst. Nor has it been consistent, since a huge amount of public money has been injected into rescue operations for banks and financial institutions and to help construction companies, under the name of emergency economic policies. The only consistent element of neoliberal restructuring was increasingly to shift the burden and costs of deepening economic and fiscal crisis onto the shoulders of working people. Thus, disillusionment with neoliberalism has grown. 134

Concluding Remarks 135

Disillusionment spread naturally with regard to neoclassical economics, one of the foundations of neoliberalism. Neoclassical theory seems to have lost its ability to present scientific analyses of and practical solutions to the difficulties of the economy. Unfortunately, and paradoxically, in Japanese academic and journalistic circles mainstream economics is increasingly dominant, especially as large numbers of young economists receive their professional education in mainstream US universities. Marxist political economy has the advantage of analysing the capitalist economy and its intrinsic contradictions within a broader historical perspective. This advantage is particularly useful in the transitional age of historical crisis that we are now experiencing. The significance and limitations of the transition from Keynesianism to neoliberalism could be better understood if they were located within the context of the historical reversal of the direction of the development of capitalism. The significance of the recent trend of capitalism toward globalization as well as the diversity of politico-economic systems within it can be understood in its historical context by adopting the approach of Marxist political economy, possibly in cooperation with evolutionary economics. It is important, especially for the future living conditions of the mass of working people, to elucidate both the historically changeable nature of capitalism and the diversity of its concrete systems at various levels among individual societies. That would suggest that the domination of neoliberalism, which advocates an open competitive market favouring the flexible activities of multinational capital by imposing sacrifices upon working people, is not inevitable. Despite the continuation of a tendency toward the globalization of capitalism, with the growth of multinationals by means of information technologies, protecting the mass of working people from the destructive instability of the capitalist market economy is certainly possible. Success by means of social democracy, recently restored in the EU, could be an important counterweight to neoliberalism. Indeed, given the difficulties in maintaining the birth rate or generational reproduction of human beings themselves, as we have seen in the context of Japan, occasional returns to macroeconomic Keynesian policies and rescue operations for banks and other financial institutions have been far from effective in solving the basic problems. Companycentred restructuring combined with emergency economic policies that place priority on alleviating the difficulties of big business has deepened


the hardship and worry in the economic life of the majority of people. Young women and men find it economically and socially difficult to cooperate to have and to raise children. This signifies that the class interests of capital and labour have become even more sharply opposed, with an effect of increasing unevenness of income among Japanese people.1 From such reflections, an alternative strategy assigning priority to restoring the living conditions of the majority of people, in line with social democracy and beyond mere Keynesian macroeconomic policy, is both relevant and desirable in order to overcome the historic crisis and depression of the Japanese economy. Furthermore, given that the intrinsic instability of the capitalist market economy cannot be abolished, critical analyses of the workings and the fundamental contradictions of capitalism from the viewpoint of Marxist political economy are necessary. The failure of Soviet-type society is not the end of socialism but rather an opportunity to establish sounder socialist alternatives for the future, as I have argued elsewhere.2 In the same way in which there is notable diversity within the existing capitalist social order, there can also be diversity within an alternative socialist politico-economic order. There can be various types of market socialism and democratic planned economy for the people of each society to choose according to their own historical and cultural traditions. Furthermore, for social democracy, which aims at the redistribution of income within a framework of the capitalist ownership of the means of production, to retain its vitality there must be rivalry as well as cooperation with democratic socialism that is largely based upon Marxism. Unfortunately, Japanese working people are currently suffering from the effects of a social tide moving in the opposite direction. Neoliberal ideological and political attacks in the course of the privatization of public corporations have led to a weakening of the militant wing of the labour movement; even to dissolution of its national centre, Sohyo. The collapse of Soviet socialism has also delivered a heavy body blow to the Japanese socialist movement. Mainstream neoclassical economic thinking has gained full ascendancy, despite its practical ineffectiveness. All these conditions have resulted in a deep crisis in the foundations of the Japanese left labour movement, and are having repercussions on citizens’ activities and on Japanese left-wing intellectuals. How can we find a way out of this crisis among the likely agents of the socialist transformation of society? Marx concentrated his efforts on

Concluding Remarks 137

clarifying the objective workings of capitalist economy as scientific grounds for socialism. Following his approach, we should start from an objective analysis of the dynamism of the Japanese economy and identify the roots of the difficulties confronted by left-wing movements. Compared to Marx’s age, our own era is witnessing much more active movements among workers, environmentalists, feminists and other social and political groups which could potentially cooperate with each other. Furthermore, there is a deep tradition of Marxist political and intellectual activity in Japan. This volume has drawn strength from such factors to present a critical reassessment of the Japanese economy in our age. The author expects to contribute to a proper understanding of the Japanese economy among readers in this regard across the world. International cooperation and communication on the basis of radical critiques of the workings of neoliberalism are both necessary and desirable in order to develop better alternatives for the new century. The author will be happy if this volume proves relevant to these tasks and stimulates reactions from readers interested in constructing a better future for people.

Notes and References

Preface 1. According to Kozo Uno (1897–1977), an original Japanese Marxist economist, political economy as a whole should be systematically divided into three different levels of research. At the most basic level lie the principles of political economy as typically shown in Marx’s Capital. A model of a pure capitalist society is presented there on the historical basis of capitalist development of the kind that occurred in the middle of the nineteenth century. At the second – intermediary – level, a stages theory of world capitalist development is constructed, passing from the stage of mercantilism to that of imperialism until World War I, via the stage of liberalism. Lenin’s Imperialism (1917) is located at this research level. At the third level, concrete empirical analyses of conjuncture in the world economy and of individual countries are undertaken by employing the first and the second levels of theoretical research as frames of reference. See Itoh (1980, Chapter 1; 1988, Chapter 3) and Albritton (1986; 1991) for more details.

Chapter 1: The long downturn in the Japanese economy 1. Clearly stated by the Secretary of the US Ministry of War in a speech of January 1948. When the Cold War began, the initial war reparation programme preventing the recovery of Japanese industrial power was actually much diluted (Itoh 1990, p. 245). 2. The Bretton Woods international monetary system was a fixed exchange rate system based upon a promise by US authorities to convert US$35 into 1 oz of gold whenever requested by foreign monetary authorities. The exchange rate of the yen against the dollar was fixed at ¥360 to the dollar in 1949, and was maintained until 1971, throughout the period of high economic growth. Though the yen rate was initially considered high for Japanese export industries, it became more favourable to them later as their international competitive power grew faster than that of US industries. At the same time, the Bretton Woods system helped to maintain a lower and more even rate of 138

Notes and References 139

3. 4. 5.

6. 7.

8.

9.

inflation among capitalist countries, because faster inflation in one country tended to cause shortage of foreign exchange reserves. See Kato and Steven (1993). Armstrong et al. (1991, p. 183). The definition of unemployment in Japanese official statistics excludes workers who are paid for more than an hour of work in the last week of a month. See Itoh (1990, p. 247). OECD (1989), and Japan Institute for Social and Economic Affairs (1990, p. 27). Marx in Capital (1867, p. 518) discussed the reduction of the value of labour power through spreading the costs of maintaining the economic life of a family over its members. Tachibanaki (1998, pp. 5–6) revealed that the degree of unevenness of Japanese income distribution rose rapidly in the 1980s and 1990s by international comparison. Japan’s Gini coefficient of distribution of household income before tax rose remarkably (by almost 0.1 from 0.349 to 0.439) during 1980–92. This shows that, amazingly, unevenness of household income distribution in Japan in this respect is now greater than that in the USA. For more details see Itoh and Lapavitsas (1999).

Chapter 2: Information technologies and competitive restructuring of capitalism 1. Noguchi (1993) and Okuno and Okazaki (1993) argue that the characteristics of the contemporary Japanese economic system were basically formed by the war economy of the 1940s, and that they are now outdated and ought to be modernized through deregulation. In this view, the Japanese style of company-based trade unions represents a continuation of the companybased units of industrial patriotic organization of the war period. However, this view neglects the historical significance of the collapse of the war economy after the defeat, and the big social changes induced by democratization just after the war. Industrial patriotic organizations were a form of nationalistic mobilization of workers for World War II, and quite different from the trade unions that spread through fierce labour struggles in the decade immediately after World War II. Hara (1995) presents a comprehensive critique of the view stressing the continuity of the Japanese economic system since the 1940s, including trade unions. Hashimoto (1995) also stresses that the 1940s structure of the Japanese economy is discontinuous with the present one. 2. Smith (1922), vol. I, p. 10. 3. Ibid., vol. II, p. 267. 4. Marx (1867), pp. 481, 484. 5. It is paradoxical and tragic to see that karoshi became internationally notorious while the Japanese economy surpassed the leading US economy by GNP per capita. It was estimated that karoshi related to about 10 per cent of nearly 500 cases of application for recognition of working persons’ physical ailments of the brain and the heart. The number of deaths related to karoshi


6. 7.

8. 9. 10.

was officially recognized as 76 cases in 1995, and 78 in 1996, according to the revised standard of recognition in 1996. It is commonly admitted that a large number of Japanese workers are constantly tired due to stress and overwork, making a pool of karoshi candidates. The concrete features of such industrialization of circulation in the Japanese economy are presented in Handa (1996). Robinson (1964), p. 274. Elson (1988), among others, has taken up this point in debating the feasibility of market socialism. See Itoh (1995) for more details. This view of world capitalist development is presented in Itoh (1990). Marx (1867), p. 275. In September 1998, JCP occupied 26 and SDPJ 14 seats of the 500 in the House of Representatives, while JCP had 23 and SDPJ 14 of the 252 in the House of Councillors. In June 2000, SPDJ gained, but still had only 19 seats, while JCP seats fell to 20 of the 480 in the House of Representatives. As JSP used to hold about one-third of all parliamentary seats, it has clearly lost a great deal of its former power, though in local politics it still maintains substantial power. The change of electoral areas from medium-sized into small units after 1996 was also a factor accelerating the decline of JSP and SDPJ.

Chapter 3: Changes in industrial structure and family life 1. 2. 3. 4. 5.

Ministry of International Trade and Industry (MITI) (1996), p.212. Kiji (1995), p. 184. Ibid., Table 1. Rowthorn and Wells (1987), Chapter 1. According to Table 3.1 in Rowthorn and Wells (1987), the proportion of workers in the service sector (including commerce) in the UK rose above 50 per cent after 1961. Until that year, the proportion of workers in the secondary sector, including manufacturing, mining, construction and waterworks, continued to increase, and recorded 47.7 per cent. It then declined to 37.5 per cent in 1981. Therefore, it is remarkable that even in the UK, the motherland of capitalism, de-industrialization is a relatively recent phenomenon. Although the proportion of agricultural workers in the UK was already reduced to 8.7 per cent in 1901, secondary industry could maintain its share of employment for six decades at a higher level than that of the nineteenth century. In view of such historical experience, there may be ways of postponing or deferring Japanese de-industrialization, though the decline of employment in Japanese manufacturing in recent years seems much more rapid and severe. It is clear that neoliberalism cannot help to mitigate this decline. 6. Even Ministry of International Trade and Industry (MITI) (1995) indicated a fear of industrial hollowing-out by mentioning that new domestic construction of factories declined in 1994 to one-third of that in 1989 (pp. 211–12). 7. Petit (1991), p. 68. 8. As this trend continued, in 1997 the number of households reached 45.88 million, while the total population became 126.17 million, resulting in 2.75 people per household on average.


9. Marx (1867), p. 518. After Marx’s time, with the development of heavy industries, male adult workers became predominant in many workshops. The image of a typical worker’s home with the housewife undertaking domestic work, including childcare, while her husband, as head of the family, was the wage-earner must have been a social product of such a period. Though some feminists occasionally condemn Marx’s notion of the value of labour power as containing a prejudiced image of the patriarchal head of the family earning family’s income, this cannot be legitimated by reading Marx’s text. Marx and Engels were concerned about historical changes in family life. Marx’s notion of the division of the value of labour power exemplifies this. It is also interesting that this notion has again become realistic as one aspect of the spiral of historical reversal of capitalism. 10. A brilliant insight into how contemporary capitalism universalizes the market and makes family life empty was presented in Braverman (1974), Chapter 13. 11. Sanpei (1994), pp. 52–5. The rise in the birth rate has, however, been reversed in the 1990s, reflecting the crisis in the Swedish Welfare State after joining the EU. 12. Arranging the father’s economic responsibilities in bringing up his children, if a single mother is to be supported by various forms of public expenditure, is a difficult problem related to the fair and balanced economic burden of the generational reproduction of the population. Many taxpayers would not like to carry the burden of the cost of bringing up children of others who are avoiding their responsibilities. However, it would be too conservative to regard the traditional form of the family as the only possible solution for this problem. Though no strong final solution for this problem is proposed here, it is assumed that easier social conditions for a cooperative partnership between a man and a woman, not necessarily limited to marriage, would produce solutions for the present difficulties faced by single mothers. These solutions need not be based solely on public expenditure.

Chapter 4: The burst of the bubble and the political economy of the 1990s depression 1. See Minsky’s ‘The Financial Instability Hypothesis: A Restatement’ (1978) among other essays in Minsky (1982). 2. For more details see Itoh and Lapavitsas (1999, Chapter 5). 3. The total annual amount of housing loans increased from about ¥17 trillion in 1986 to about ¥28 trillion in 1990 (Imura 1997, p. 161). Though that includes both public and private loans, private loans provided mainly by banks were an overwhelming proportion of both the total and the increment. When Japanese banks began to expand housing loans in the late 1970s, they initially set up specialized housing loan companies as non-banks to channel their loans. However, they soon began to extend housing loans directly so that specialized housing loan companies were forced to extend riskier loans for real estate for business firms.


4. There are two series of statistics on the rate of savings in the Japanese economy: one is based on the GNP statistics (S-GNP), and the other is based on the survey of working households (S-SWH). While these two showed roughly similar movements, they became rather noticeably different in the 1980s. We refer to the movement of S-GNP here, which is lower than S-SWH. The factors resulting in the gap are analysed by Adachi (1993). For instance, interest and principal return payment for household debt are counted as savings in S-SWH. In my view, the relatively high rate of savings among Japanese households may roughly be understood in a model as follows. Assume that all workers spend a sum five times their average annual income in order to purchase one house in 35 working years. Assume also that their savings are to be used only to purchase or construct houses. Then, on average, they have to save one-seventh, or 14.3 per cent, of their annual income to purchase a house by retirement age. This savings rate approximately corresponds with the one observed in the Japanese economy. 5. Haga (1993, 1994, 1995) has presented a detailed analysis of the Japanese bubble economy in this period with useful statistical data to which I owe much. 6. Tsuru (1990, p. 5). In so far as the greater share of land was not sold in practice, the major part of these capital gains was in a sense imaginary. As for the realized part of capital gain, its source may not be confined to the annual flow of income, or surplus value, produced by society’s surplus labour. A significant part must have originated in the redistribution of the stock of monetary assets. This seems applicable also to the source of capital gains obtained by rises in share prices. Conversely, capital losses occurring after the destruction of fictitious asset value may not directly mean a reduction in income flow or reductions in surplus value. The Marxist theory of surplus value should not be applied too directly to such gains and losses. This point relates to our critique of Hilferding’s explanation of founders’ profit in Itoh and Lapavitsas (1999, pp. 114–16). 7. Fudosan Kenkyusho (Research Institute of Real Estate) (1997). 8. Lapavitsas (1999) presents an analysis of the financial instability in current Japanese economy by underlining the central position of banks in the economy. 9. Miyazaki (1992) presented a pioneering analysis characterizing the 1990s depression as a complex depression of stocks and flows as the adjustment process in financial stocks induced negative growth in the flows of GNP. His analysis was, however, insufficient since it identified the flow elements as only short-term inventory adjustments. The actual depression in the flows of the economy was more serious, reaching deeper levels of excess capacity and unemployment with depressed consumer demand and investment. Takumi (1998) defined the 1990s Japanese depression as of a ‘Great Crisis (1929) type’, with the deflationary spiral not having a cyclical nature. This definition is, however, dubious, since monopolistic behaviour by big business has not been crucial to the difficulties of the contemporary Japanese economy – unlike the 1930s. The functioning of the monetary and financial system


under floating exchange rates with managed currencies is also different from that at the time of the great crisis. Historically, comparison with the great depression of 1873–96 is also attractive, as that was non-explosive but more persistent than the great crisis in the 1930s. 10. Okonogi (1998), pp. 139–40. 11. On this issue, Jichitai-mondai Kenkyusho (Research Institute of Local Communities’ Problems) (1998) presents an input–output analysis showing a much reduced multiplier effect of public investment.

Chapter 5: Asia and Japan in the process of globalization 1. Marx (1867), p. 182. 2. Marx and Engels (1848), p. 39. 3. According to Haymer (1979), US corporation strategies of production and merchandising (multicity and nationwide) were applied to their global projects from the 1960s onwards, resulting in the growth of multinational corporations. The United Nations Centre on Transnational Corporations (UNCTAC) defines a multinational corporation as a group of enterprises that have their going concerns in more than two countries, are linked by ownership, and are also combined under the strategic decision-making of the same headquarters. Following American corporations, many European corporations also became multinational. Japanese firms began to multinationalize their activities conspicuously from the 1970s onwards. The trend has spread further to firms in the newly industrializing economies of Asia and has become a really global phenomenon. 4. Sugimoto et al. (1991), p. 68. 5. Thurow (1997), p. 92. 6. See Itoh (1995), Part III, for more details on the causes and processes of systemic changes in socialist economies including China. 7. Thus, just after the collapse of the USSR, Fukuyama (1992) presented the view that world history has come to an end by the final victory of the capitalist free market economy (well suited to liberal democracy) over Marx’s socialism. 8. A summary of alternatives was briefly presented in Itoh (1992). 9. Suzuki (1995) analyses the recovery process and its substantial contents in the US industries. 10. Twu (1997), p. 127. 11. Ministry of International Trade and Industry (MITI) (1993), p. 228. 12. This proposal was presented by Tobin (1978) and its feasibility was theoretically extended by Dornbush (1997). See also Haq et al. (1996). 13. Wade and Veneroso (1998), p. 4. 14. Marx (1939), p. 409. 15. In the French Regulation School, which found a new foundation for growth in Aglietta (1981), both Boyer (1986) and Yamada (1991), for example, extended the analysis of these aspects. 16. I owe this point to a conversation with U. Pagano in 1997. (See also Pagano 1999).


17. Maddison (1995), p. 52. 18. Yoshitomi (1998, Chapter 5) emphasizes this point, though a bit one-sidedly in my view. 19. Wade and Veneroso (1998), p. 10. 20. Calculated from Yoshitomi (1998), p. 247, Table 5.3. 21. Chang (1998). 22. Yoshitomi (1998), p. 253, Table 5.5.

Concluding remarks 1. Tachibanaki (1998). 2. See Itoh (1995).

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Index

Adjustment inflation 9, 13 Administrative reform 46, 95 Aged society 29, 70 Agricultural families 5 American model 110 APEC 113 Appreciation of the yen 14, 54 ASEAN 113, 121–2, 128 Asian economies 121 Asian NIEs 121–2 Asian monetary and economic crisis 128 Asset deflation 24, 91 Austerity policy 12 Automobile society 2

Bad loans 24 Bank of International Settlement (BIS) 85 Banks’ latent capital gains 89 Basel agreement 85 Birth rate 28, 69, 74 BIS regulation 24, 93 Black Monday 15 Braverman, H. 141 Bretton Woods international monetary system 6, 138 Bubble 76 burst of 87 burst of the Asian 132 economy xiii, 82

financial 16 in the New York Stock Exchange 94 speculative xiii, 15 swell of 77 Budget deficits 22 Bureaucrats 96

Capacity utilization 10, 91 Capital gains 15, 80 Capitalist world system 106 China 111, 114, 122, 127 Classical political economy 107 Cold War 1, 112 Company-based trade unions 2, 3, 34 Company-centred restructuring 135 Competitive market order 32 Complex depression 16, 24, 90, 142 Computers 31 Consumer 39 co-operatives (co-ops) 41 credit 80 demand 27 durables 2 market 37 sovereignty 40 tax 16, 103 Consumerism 37 Consumption demand 102 Coriat, B. 4 Corruption 96 149

150 Index

Credit/financial crunch 24, 90, 93 ‘Crony capitalism’ 123 Defence budget 101 De-industrialization 25, 51, 57 Depressant spiral 25 Deregulation 110 Diversification of economic systems 123, 125 Diversified models 37 Division of labour 36 Divorce rate 74 Domei ( Japanese confederation of labour) 47 Double downward lurch x, 9 Dual structure of the labour market 3

Global hegemony 112 Globalization 106–11 of Japanese capitalism 115 of Japanese economy 120 Golden cross 18, 84 Government bonds 98–9 debt 12, 22, 98–9 Great depression after 1973 xii, 46, 142 of 1873–96 xii, 42, 143 of the 1930s 42, 44, 142 third 30 Gulf War 112

EAEC 113 Economic role of the State 43 Egalitarian economic order 44 Emergency economic policies 22, 102, 134–5 Emergency spending policy 79 Enlightenment movement 107 Environmental protection 71 Equity finance 14, 84 EU 113, 127 Evolutionary economics 125 Excess capacity 27, 91 Export dependency 13, 15 rate 4, 116

Habitat segregation 125–6 Haga, K. 142 Haymer, S. H. 143 High economic growth 1 High energy-consumption economy 2 Historical (spiral) reversal of capitalism 44–5, 141 Hokkaido Takushoku Bank 93, 104, 132 Housing loans 87, 141

Factory automation (FA) 17, 35, 53 Family unit 65 Family wages 67 Female labour/workers 62–5, 73 Financial ‘big bang’ 97 Floating exchange rate system 6, 109 Fordism/Fordist regime of accumulation 4, 124 Japanese model of 44 Foreign direct investment 19, 25 Foreign exchange reserves 116 Foreign investment 116–20 Foreign workers 72, 109 (French) Regulation school 4, 124, 143

IMF 114, 129, 131 Individualism 37–8, 60 Individualistic consumption 38, 69 Industrial hollowing-out 26, 54, 119 patriotic organizations 139 structure 49 Inflationary crisis 9 Information revolution 30 Information technologies 53, 58, 108, 125 Injection of public money 23, 103 Integrated circuits (IC) 31 Investment demand 5 in plant and equipment 83–4 Irregular workers 21, 35

Index 151

Japanese Communist Party ( JCP) 48, 105 Japanese economic strength 20 Japanese Fordist mode of accumulation 4–5, 66 Japanese Socialist Party ( JSP) 43, 47, 105 Japanese style of management 34, 59 Japan National Railways ( JNR) 46–7 Japan Tobacco and Salt Public Corporation 46 Johnson, C. ix Jusen (specialized housing loan companies) 86, 103 Karoshi (death from overwork) 36, 139 Keiretsu (a group of business companies) 81, 88 Key international currency 7, 112 Keynesianism xii, 3, 46, 98, 134 Korea 126, 129, 130, 131 Korean War 2 Labour Laws 48, 97 Land prices 78 decline in 88–9 Lapavitsas, C. xiii, 142 Lenin, V. I. 138 Liberal Democratic Party (LDP) 47 Liberalism 107 Lifetime employment 3, 34–5 Low rate of interest 25 Maddison, A. 126 Manufacturing industry 51 Market socialism 136 Marx, K. 36, 43, 67, 108, 139 Marxist political economy 135 M curve of Japanese women 61–5 Meiji Restoration ix Metropolitan area 33, 81 Microelectronic (ME) automation systems 11, 108

Minsky, H. 76, 141 Miyazaki, G. 24, 142 Model of ‘flying geese’ 122 Monopoly capitals 32, 42 prices 42 Multi-model mass-production 32 Multinational corporations 46, 109, 114 Multinationalization 6, 19, 55 Multiple models 32 NAFTA 91, 113 Nation states 110, 114 Neoclassical economics 107, 135 Neo-Fordism 124 Neoliberalism xii, 45, 62, 94, 110, 134 New Deal 43 New industrial technologies 30 New world order 111 Nikkei average 77, 79, 88 Nippon Telegraph and Telephone Public Corporation (NTT) 46, 95 Non-market human relations 125 North Korea 127 Nuclear family 65 OECD 129 Office Automation (OA) 17, 35, 53 Office buildings 81 Official development assistance (ODA) 101, 123 Oil shock first 7 second 12 Overaccumulation of capital 9, 12 Overloan 5, 83 Overseas direct investment 118 in Asian countries 119 Overseas production 117 Overtime work 75 Part-timers 21, 67 Pax-Americana 112 Pent-up demand 27 Plaza agreement 18, 78

152 Index

Point of sale (POS) 39 Population 69 Falling 28 reduction 71 Post-Fordism 11 Primary industry 3, 49–50 Privatization 35, 45, 46, 110 Product reliability 54 Profit share 8 Public expenditures 22, 101–2 QC (quality control) circles 18, 54 Rate of organization 35 Rate of savings 83, 142 Rate of taxation 98 Reaganomics 13, 46 Real estate prices 15, 77, 88 Regional economic cooperation 113 Regional integration 127 Rengo (confederation of all private-sector trade unions) 47 Re-regulation 133 Retail market system 38 Retirement age 72 Revaluation of the yen 12 Reverse J-curve effect 17 Robinson, J. 41 Robots 17, 32 Rural areas 33 Secondary industry 49–50 Second biggest market in the world 15, 80 Seniority wages 3, 34 Service economy 51 industry 51 trade 61 Shinkansen Lines 47 Shortage of housing 80 Shunto (the spring offensive) 4 Silicon chip 31 Smith, A. 36 Smithsonian floating peg system 6 Social democracy 135

Social Democratic Party of Japan (SDPJ) 48, 105 Socialism 44, 136 Socialist market economy 115 Software 31 Sohyo (general council of trade union in Japan) 44, 47, 136 Soviet-type socialism 43, 136 collapse of 134 Speculative money flow 109 Speculative stockpiling 7, 10 State interventionism xii monopoly capitalism 3 fiscal crisis of the 22, 97, 103 Subcontracting system 3 international 54, 120 Taiwan 127 Takumi, M. 142 Tax reductions 110 Tertiary industry 26, 49, 56 Terms of trade 2, 7 Thatcherism 12, 46 Tobin tax 120, 143 ‘Too big to fail’ policy 103 Toyotism 124 Trade friction 14 Trade unions 43 Triple hegemony 113, 114 Tsuru, S. 142 Unevenness of household income distribution 139 Uno, K. xii, 138 US economic hegemony 6 USSR 111 Verdoorn’s law 58, 71 Vicious inflation 7 Vogel, E. ix Volvoism 124 Wage differentials 21 Wallerstein, I. 106

Index 153

Welfare policies 43 Women part-timers/workers 62, 67, 109 World empires 106 World market 106 World War II 2

Yamaichi Securities 93, 104, 132 Zaitech (financial technique) 14, 19, 82, 84, 88 ZD (zero defects) movement 18, 54 Zero growth capitalism 23, 72

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