Japanese Governance: Beyond Japan Inc. (Politics in Asia Series)

Japanese Governance

‘Japan Inc.’ was once used to describe the powerful political and economic system that delivered Japan’s transformation to an industrial power. This book is about the breakdown and failure of policy coherence in Japan in the 1990s, and how the political economy of Japan has changed in response. The essays in the volume seek to identify where change has occurred, as well as where things have not changed and why. The issue of policymaking transparency is accorded particular attention. The book covers a wide range of Japanese institutions and policy areas, including the political party system, electoral and legal reforms, deliberation councils and the financial and agricultural sectors. The findings suggest that resistance to change through the political system is at the root of Japan’s inability to deal with its national policy problems. Nonetheless, there has been considerable reform and change towards more open economic and political competition. And, these changes profoundly affect the way in which foreign governments must now relate to domestic political processes in their dealings with Japan. This interdisciplinary book draws together contributions from experts in political science, economics, law and Japanese studies to give a deeper understanding of how Japan’s political economy and policymaking processes are working today. Jennifer Amyx is Assistant Professor in the Department of Political Science at the University of Pennsylvania. Peter Drysdale is a Professor of Economics and the Executive Director of the Australia–Japan Research Centre at the Australian National University.

RoutledgeCurzon series

1 Politics in Asia series Formerly edited by Michael Leifer London School of Economics 2 ASEAN and the Security of South-East Asia Michael Leifer 3 China’s Policy towards Territorial Disputes The Case of the South China Sea Islands Chi-kin Lo 4 India and Southeast Asia Indian Perceptions and Policies Mohammed Ayoob 5 Gorbachev and Southeast Asia Leszek Buszynski 6 Indonesian Politics under Suharto Order, Development and Pressure for Change Michael R.J. Vatikiotis 7 The State and Ethnic Politics in Southeast Asia David Brown 8 The Politics of Nation Building and Citizenship in Singapore Michael Hill and Lian Kwen Fee 9 Politics in Indonesia Democracy, Islam and the Ideology of Tolerance Douglas E. Ramage 10 Communitarian Ideology and Democracy in Singapore Beng-Huat Chua 11 The Challenge of Democracy in Nepal Louise Brown

12 Japan’s Asia Policy Wolf Mendl 13 The International Politics of the Asia-Pacific, 1945–1995 Michael Yahuda 14 Political Change in Southeast Asia Trimming the Banyan Tree Michael R.J. Vatikiotis 15 Hong Kong China’s Challenge Michael Yahuda 16 Korea versus Korea A Case of Contested Legitimacy B.K. Gills 17 Taiwan and Chinese Nationalism National Identity and Status in International Society Christopher Hughes 18 Managing Political Change in Singapore The Elected Presidency Kevin Y.L. Tan and Lam Peng Er 19 Islam in Malaysian Foreign Policy Shanti Nair 20 Political Change in Thailand Democracy and Participation Kevin Hewison 21 The Politics of NGOs in South-East Asia Participation and Protest in the Philippines Gerard Clarke 22 Malaysian Politics under Mahathir R.S. Milne and Diane K. Mauzy 23 Indonesia and China The Politics of a Troubled Relationship Rizal Sukma 24 Arming the Two Koreas State, Capital and Military Power Taik-young Hamm

25 Engaging China The Management of an Emerging Power Edited by Alastair Iain Johnston and Robert S. Ross 26 Singapore’s Foreign Policy Coping with Vulnerability Michael Leifer 27 Philippine Politics and Society in the Twentieth Century Colonial Legacies, Post Colonial Trajectories Eva-Lotta E. Hedman and John T. Sidel 28 Constructing a Security Community in Southeast Asia ASEAN and the Problem of Regional Order Amitav Acharya 29 Monarchy in South-East Asia The Faces of Tradition in Transition Roger Kershaw 30 Korea After the Crash The Politics of Economic Recovery Brian Bridges 31 The Future of North Korea Edited by Tsuneo Akaha 32 The International Relations of Japan and South East Asia Forging a New Regionalism Sueo Sudo 33 Power and Change in Central Asia Edited by Sally N. Cummings 34 The Politics of Human Rights in Southeast Asia Philip Eldridge 35 Political Business in East Asia Edited by Edmund Terence Gomez 36 Singapore Politics under the People’s Action Party Diane K. Mauzy and R.S. Milne 37 Media and Politics in Pacific Asia Duncan McCargo 38 Japanese Governance Beyond Japan Inc. Edited by Jennifer Amyx and Peter Drysdale

Japanese Governance Beyond Japan Inc.

Edited by Jennifer Amyx and Peter Drysdale

First published 2003 by RoutledgeCurzon 11 New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canada by RoutledgeCurzon 29 West 35th Street, New York, NY 10001 This edition published in the Taylor & Francis e-Library, 2003. RoutledgeCurzon is an imprint of the Taylor & Francis Group

© 2003 editorial matter and selection, Jennifer Amyx and Peter Drysdale; individual chapters, the contributors

All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data ISBN 0-203-22225-3 Master e-book ISBN

ISBN 0-203-27674-4 (Adobe eReader Format) ISBN 0-415-30469-5 (Print Edition)

Contents

List of figures List of tables Acknowledgements List of contributors Preface Abbreviations

ix x xi xii xiii xv

1

Background Jennifer Amyx and Peter Drysdale

1

2

Electoral pressures for change: the effect of political reform J.A.A. Stockwin

15

3

The dynamics of coalition politics in Japan Aurelia George Mulgan

36

4

The Ministry of Finance and the Bank of Japan at the crossroads Jennifer Amyx

55

5

The Big Bang financial system reforms: implications for corporate governance Horiuchi Akiyoshi

6

A changing Ministry of International Trade and Industry Kohno Masaru

96

7

Reform and continuity in Japan’s shingikai deliberation councils Gregory W. Noble

113

77

viii Contents 8

Re-regulating Japanese transactions: the competition law dimension Veronica Taylor

134

9

Japanese women and the ‘new’ administrative state Leon Wolff

156

10

Agricultural policy and agricultural policymaking: perpetuating the status quo Aurelia George Mulgan

170

Index

194

Figures

4.1 4.2 4.3

Establishment of the Financial Supervisory Agency (FSA) Japan’s financial regulatory structure following the passage of the Financial Revitalisation Law and related bills July 2000 changes in the financial regulatory structure

59 63 69

Tables

1.1 A2.1 A2.2 A2.3 A2.4 A2.5 A2.6 A2.7 A2.8 A2.9 A2.10 A2.11 A2.12 A2.13

Ministries/agencies/special entities engulfed by scandal since the early 1990s Checklist of coalition governments in the 1990s Parliamentary seat breakdown, 20 January 1993 Parliamentary seat breakdown, 6 August 1993 Parliamentary seat breakdown, 26 April 1994 Parliamentary seat breakdown, 18 July 1994 Parliamentary seat breakdown, 20 January 1995 Parliamentary seat breakdown, 4 August 1995 Parliamentary seat breakdown, 20 January 1996 Parliamentary seat breakdown, 29 November 1996 Parliamentary seat breakdown, 29 September 1997 Parliamentary seat breakdown, 12 January 1998 Parliamentary seat breakdown, 30 July 1998 Parliamentary seat breakdown, 27 November 1998

4 29 30 30 31 31 32 32 33 33 34 34 35 35

Acknowledgements

The authors and publishers would like to thank Taylor and Francis for granting permission to reproduce ‘The Dynamics of Coalition Politics’ by Aurelia George Mulgan, first published in Asia Pacific Review (www.tandf.co.uk/journals), November (2000).

Contributors

Jennifer Amyx is Assistant Professor, Department of Political Science, The University of Pennsylvania. Peter Drysdale is Executive Director of the Australia–Japan Research Centre, and Professor of Economics, The Australian National University. Horiuchi Akiyoshi is Professor at the Graduate School of Economics, Faculty of Economics, University of Tokyo. Kohno Masaru is Associate Professor, Department of International Politics, Aoyama Gakuin University. Aurelia George Mulgan is Associate Professor of Politics, School of Politics, Australian Defence Force Academy, University of New South Wales. Gregory Noble is Associate Professor at the Institute of Social Science, Tokyo University. J.A.A. Stockwin is Nissan Professor of Modern Japanese Studies, St Antony’s College, Oxford University. Veronica Taylor is Professor of Asian Law and Director of the Asian Law Centre, University of Washington, Seattle. Leon Wolff is Lecturer in the Faculty of Law, University of New South Wales.

Preface

This book grew out of a conference on ‘Beyond Japan Inc: Transparency and Reform in Japanese Governance’, which was organised by the Australia– Japan Research Centre at The Australian National University in September 1999. Six of its chapters derive from papers that were originally presented at that conference. The remaining chapters were stimulated by the discussion of these and other papers presented to the conference or commissioned specifically for the book. The 1990s have been described as Japan’s ‘lost decade’. Following decades of rapid economic growth and Japan’s rise to prominence as the world’s second-largest industrial power, the bursting of the asset bubble of the 1980s saw a decade of economic stagnation and policy malaise. ‘Japan Inc.’ was once used to describe the powerful economic and political system that delivered Japan’s transformation to an industrial power. But the challenge of industrial and demographic maturation required policy change and reform of the economy and the political system that seemed to have served so well in the past. This book is about the breakdown and failure of policy coherence in the 1990s and how the political economy of Japan has changed in response. The change is continuing. The book seeks to identify where it has occurred and where things have not changed and why. The Japanese economy and Japanese policymaking undoubtedly became more open and pluralistic over the last two decades of the 20th century. The impact of these changes is both striking and complex. The essays in the volume illustrate both the importance and complexity of the changes in some parts of Japan’s system of governance and policymaking. One conclusion is that resistance to change through the political system is at the root of Japan’s inability to deal with its national policy problems at the beginning of the 21st century. Nonetheless, there has been considerable reform and change toward more open economic and political competition. Another conclusion is that these changes profoundly affect the way in which foreign governments must now relate to domestic political processes in their dealings with Japan. The Japan Foundation provided generous financial support for this project and we are very grateful to the foundation for its generous assistance.

xiv Preface Takahashi Masaji, Arthur Stockwin, Aurelia George Mulgan, Alan Rix, Leon Wolff, Veronica Taylor, Tanaka Naoki, Jenny Corbett, Malcolm Smith, Horiuchi Akiyoshi, Mervyn Lewis, Greg Noble, Glenn Withers and Ross Garnaut all took part in the conference that was the origin of the book. Their contribution to its genesis was essential. Their patient and continuing support and that of the authors of the chapters that follow is warmly acknowledged. The encouragement of Craig Fowlie and his colleagues at Routledge in taking the project through to publication is also much appreciated, as too is the support of Maree Tait and her colleagues at Asia Pacific Press who were responsible for editing the final manuscript. Marilyn Popp, Andrew Deane and the staff of the Australia–Japan Research Centre provided excellent and cheerful assistance to the project throughout. We hope that this volume contributes in some small way to assisting understanding of the important changes that are taking place in Japan’s political and economic system.

Jennifer Amyx and Peter Drysdale Canberra, August 2002

Abbreviations

AEM–MITI AMEICC AMS APEC ASEAN AVM BOJ BOT-M CEFP CRIEPI DIC DPJ DSP EC EPA EU FDI FILP FRC FSA GATT GDP IAI IPP IT JCP JDA JFTC JSP LDP LP LTCB

ASEAN Economic Ministries–MITI ASEAN–MITI Economic and Industrial Cooperation Committee Aggregate Measurement of Support Asia Pacific Economic Cooperation Association of Southeast Asian Nations Administrative Vice-Minister Bank of Japan Bank of Tokyo-Mitsubishi Council for Economic and Fiscal Policy Central Research Institute for the Electric Power Industry Deposit Insurance Corporation Democratic Party of Japan Democratic Socialist Party European Community Economic Planning Agency European Union foreign direct investment Fiscal and Investment Loan Program Financial Reconstruction Commission Financial Supervisory Agency/Financial Services Agency General Agreement on Tariffs and Trade gross domestic product Independent Administrative Institutions Independent Power Providers information technology Japan Communist Party Japan Defence Agency Japan Fair Trade Commission Japan Socialist Party Liberal Democratic Party Liberal Party Long-Term Credit Bank

xvi Abbreviations MAFF MCA METI MHW MIGA MITI MMC MOC MOE MOF MOFA MOL MPT MTN NCB NCD NPA NPO ODA OECD PA PCA RCC RPM SCAP SDF SDPJ SII SMD SME SNTV URAA US WTO

Ministry of Agriculture, Forestry and Fisheries Management and Coordination Agency Ministry of Economy, Trade and Industry Ministry of Health and Welfare Multilateral Investment Guarantee Agency Ministry of International Trade and Industry Multi-member constituency Ministry of Construction Ministry of Education Ministry of Finance Ministry of Foreign Affairs Ministry of Labour Ministry of Posts and Telecommunications medium-term notes Nippon Credit Bank negotiable certificate of deposits National Police Agency non-profit organisation official development assistance Organisation for Economic Cooperation and Development Postal Agency prompt corrective action Resolution and Collection Corporation resale price maintenance Supreme Commander for Allied Powers Self-Defence Force Social Democratic Party of Japan Structural Impediments Initiatives single-member district small and medium-sized enterprise single non-transferable vote Uruguay Round Agriculture Agreement United States World Trade Organisation

1

Background Jennifer Amyx and Peter Drysdale

Japan’s two and a half decades of rapid economic growth after the Pacific War attracted attention across the globe and sparked interest in the nature of the political and economic system behind what was dubbed the Japanese ‘miracle’. Among the ideas that emerged to explain Japan’s remarkable economic growth in this period was the idea of ‘Japan Inc.’. Japan Inc. was a metaphor for an economy propelled forward by a system in which interests of big business, the Liberal Democratic Party (LDP) and the bureaucracy were aligned in the pursuit of national economic goals and all the apparatus of the state was brought to bear on that end.1 This was never an accurate account of how the Japanese economic and political system worked. But the metaphor conveyed some sense of the distinctive features of the Japanese political economy that were present to a lesser degree in other marketoriented economies (especially the United States). In Japan, there appeared to be more cooperative rather than contentious relations between government and industry and a blurring between the public and private spheres. Even in its initial formulation, however, the concept of Japan Inc. failed to acknowledge sufficiently competition among the triumvirate or the differences in the locus of policy influence across different sectors and in different circumstances, such as during crises or in times of business as usual. The idea of Japan Inc. persisted in various forms and still has resonance in some circles outside Japan that have influence in business and government. The contrast between Japan’s rise as an economic juggernaut and the stagnation that has typified economic performance since the bursting of the asset bubble in 1991 is stark. The implosion of the nation’s financial sector in 1991 plunged the economy into a decade of economic malaise marked by low—and then negative—growth. The financial crisis became acute with the collapse of major financial institutions in November 1997 and persisted through October 1998. The 1990s were dubbed as Japan’s ‘lost decade’, but in the first years of the new millennium many financial and economic indices looked even bleaker. Deflation, largely stagnant growth and postwar high unemployment rates characterised the economic landscape in 2001. Mounting national debt—at approximately 130 per cent of annual gross domestic product (GDP)—led Japan’s own finance minister to describe government finances as ‘nearly catastrophic’. The overhang of bad debt in the financial system

2 Japanese governance

stood at unprecedented levels, land prices recorded their 10th consecutive year of decline, and the Tokyo Stock Exchange’s Nikkei Index sought to recover from a 16-year low. The breakdown in a system that had appeared to perform so well in earlier years has led many—both inside and outside of Japan—to reevaluate the nation’s distinctive and once highly admired economic institutions. This scrutiny has included not only the political and administrative institutions of governance such as the Liberal Democratic Party (LDP) and the Ministry of Finance (MOF), but also institutions that helped define corporate Japan, such as lifetime employment, cross-shareholding and keiretsu enterprise groupings. This reexamination of Japanese institutions is taking place at a time when industrialised countries, and countries that aspire to industrial modernisation, across the globe acknowledge the need for more transparency in governance structures—a recognition that was sparked both by the global progress of market institutions and by the financial crises and other problems that the globalisation of world markets inevitably brought with it. The chapters in this volume document the nature of recent changes in Japan’s political economy across a range of institutions and policy sectors and the extent to which these changes have heightened transparency in the governance of Japan. ‘Japan Inc.’ suggested a less than transparent policymaking process—one that looked to many outsiders as collusive. Has the earlier image of strength conveyed by the metaphor simply been replaced by one of obstinate weakness—Japanese government and business unified in defiance of international pressures, global deregulatory trends and marketoriented reform? This volume contends that the reality is far more complex. By any measure, Japan’s political economy and policymaking process are radically more open and transparent than in the past. Large-scale policy breakdown and failure, ongoing deregulation and financial duress have given rise to more intense economic and political contest in many key policy areas. In the corporate sector, there are unprecedented levels of foreign direct investment (FDI), mergers and acquisitions, and foreign takeovers of Japanese firms. In politics, single party rule has been replaced by coalition in government. The rise of Prime Minister Koizumi over the heads of LDP powerbrokers by direct appeal to the political grassroots was unprecedented. If there was ever any truth in the idea of a coherent and cooperating triumvirate—and that is very unlikely— the assumption of institutional continuity and stability in Japanese political economy is no longer apposite. The tide of transparency, reform and a more intense contest among policy protagonists has not swept evenly over every policy sector or institution. Neither has greater political competition, reorganisation of the bureaucracy or a strengthening of the government executive made the Japanese policymaking process easier to understand or necessarily more effective. The contributions to this volume reflect this ambivalence about the impact of

Background 3

recent reforms and the trend towards increased transparency in the processes of Japanese government. Some contributors highlight the power of particular Japanese institutions to resist the forces of change, despite their exposure to the onslaught of greater market pressures, harsh public criticism, and the accusation that they lay at the heart of the nation’s inability to rebound from stagnation after the collapse of the bubble. Others make the case that institutional resilience has given way to accelerated change in critical areas. Collectively, the chapters point to a system in flux and suggest that one must think beyond the ‘Japan Inc.’ paradigm to make sense of Japanese policymaking today. BEYOND ‘JAPAN INC.’ What developments in Japan’s political and economic landscape have affected reform and transparency in Japanese governance? The collapse of Japanese growth after the bursting of the bubble and the challenge of managing Japan’s industrial and demographic maturation has triggered questioning of established economic and political institutions and put issues on the political agenda that had hitherto been considered taboo. There is now more openness in political contest and policymaking than at any time in Japan’s postwar history. These developments have effected significant changes in the nature of government– business relations and in the political dynamics underlying interaction between the bureaucracy and the LDP.

More open economic competition Once, the perception was that cosy government–business relations were a competitive advantage that allowed Japan to eclipse US economic might. ‘Japan Inc.’ is one term that represented the power of cooperation within and between Japan’s government and business worlds. Corporate balance sheets revealed little to the public. Informal but institutionalised channels of consultation and information-sharing between borrowers and their banks, as well as between banks and the MOF, were utilised to deal with most problems that arose. Much policymaking circumvented the Diet, and government regulators enjoyed wide discretion, relying heavily on extra-legal administrative guidance (gyosei shido) for intervention in the management of the economy. As a result, the public had little access to, or insight into, the policymaking process. Negative aspects of cosy government–business relations and the scope of bureaucratic discretion became more egregious in the 1990s, especially in the financial sector, which was still subject to tight regulation and government interference. A raft of scandals began to engulf government ministries and agencies (Table 1.1). Heightened competitive pressures, the breakdown of norms and internal organisational controls, and lowered public tolerance for collusive practices raised the political stakes.2 Never before had the abuse of public authority in Japan been so closely linked to policy breakdown. Japan’s

4 Japanese governance Table 1.1

Ministries/agencies/special entities engulfed by scandal since the early 1990s

Ministry/Agency Scandal MHW

Tainted blood importation permitted despite knowledge of danger, leading to hundreds being infected with HIV

MOF

‘Excessive’ wining and dining accepted by officials; alleged acceptance of bribes and disclosure of confidential information

MOC

Acceptance of bribes by MOC Minister; compliance with bid rigging

MAFF

‘Excessive’ wining and dining for favours

JDA

Collusion with defence contractors, resulting in overcharging of the government and loss of taxpayer money

BOJ

Acceptance of bribes; disclosure of confidential information

NPA

Covering up of drug use by police officials

MOFA

Misappropriation and embezzlement of funds

MOL

Labour Minister’s acceptance of bribes from the quasigovernment corporation, KSD

SDF

Passing of classified materials by a senior officer to a Russian military attaché

PA

Illegal election campaigning by officials on behalf of former boss/colleague

Note: Ministry of Health and Welfare (MHW), Ministry of Finance (MOF), Ministry of Construction (MOC), Ministry of Agriculture, Forestry and Fisheries (MAFF), Japan Defence Agency (JDA), Bank of Japan (BOJ), National Police Agency (NPA), Ministry of Foreign Affairs (MOFA), Ministry of Labour (MOL), Self-Defence Force (SDF), Postal Agency (PA).

growth as an economic and financial power in the international economy made ad hoc reconciliation of interests by the administrative authorities increasingly problematic. Public reaction was harsh and forced political response. In the wake of these scandals and the palpable regulatory breakdowns, the government introduced a number of new laws and ordinances intended to effect a shift to greater transparency in relations between government and business and to limit the scope of bureaucratic discretion. Five are particularly noteworthy.

Background 5

First, the Administrative Procedures Act, introduced in 1994, makes it mandatory for government agencies to have a legal basis for administrative guidance and to document the guidance in writing when requested. Second, the introduction of a so-called public comments procedure, following a March 1999 Cabinet resolution, requires ministries and agencies to solicit comment from the public at the mid-point of deliberations over setting, changing or abolishing regulations or their interpretation. The new procedure strives to enhance the fairness, transparency and inclusiveness of the policymaking process. Third, the new National Ethics Law for Central Government Public Servants, introduced in April 2000, defines acceptable behaviour for central government bureaucrats vis-à-vis the individuals and companies they deal with in an official capacity. More specifically, the law prohibits the type of wining and dining (settai) that went on between regulators and those they regulated in the past in an attempt to eradicate collusive relationships between central government bureaucrats, industries and external government organisations.3 Fourth, the introduction of an Information Disclosure Law in April 2001 forces Japanese government agencies to make more information available to the general public about its interactions with regulatory constituencies and its financial expenditures. While some communications between government regulators and the companies they regulate, once written down, will probably be conveyed verbally hereafter,4 recent court decisions provide private sector actors with additional disincentives to follow blindly informal bureaucratic guidance. In the September 2000 conviction of Daiwa Bank’s management, for example, the presiding judge found former directors guilty of actions taken under informal MOF guidance, citing insufficient proof of MOF instructions.5 Finally, the introduction of consolidated and market value accounting rules in Fiscal Year 2001, in line with internationally accepted standards, brings the public and the market into monitoring business behaviour in a way that they had not been before, and decreases the capacity of government actors to extend extraordinary assistance to ailing firms behind the scenes. In the past, Japan’s corporate accounting system failed to provide a fair and reasonable assessment of corporate performance, and the ripple effects of these greater information disclosure requirements in the face of the continued economic downturn have been profound. These pressures have weakened ties between keiretsu enterprise groups, encouraged an unwinding of crossshareholding, given companies clear incentives to distinguish themselves from competitors rather than act in unison (yoko-narabi) and opened up unprecedented opportunities for FDI in Japan. Japan’s unique industrial organisational structure of horizontally and vertically integrated enterprise groups was long portrayed as the primary culprit in stifling economic reforms and impeding foreign firms from entering the Japanese market. The new accounting rules make it more difficult for

6 Japanese governance

main banks or parent companies to assist group member companies through hard times, without themselves being penalised by the market. Furthermore, the financial pressures imposed by these new rules have promoted tie-ups of Japanese financial institutions across keiretsu lines. At the same time, firms in the vertical keiretsu that integrate manufacturers with their supplier subsidiaries are increasingly turning away from longstanding suppliers towards lowercost suppliers when faced with the need to cut costs. This is particularly true when foreign firms become involved, as in the case of Renault’s takeover and restructuring of Nissan. FDI surged to postwar highs in 1999–2000. Foreign involvement in the information technology, automobile and financial sectors has been particularly prominent. While levels of FDI into Japan are still low by global standards, the scope for future growth is now greater than ever before. In short, heightened transparency of balance sheets, combined with more arms-length rules-based regulation, deregulation and ongoing financial duress, have ushered in greater competitive pressures through the market and dealt a blow to the insularity that once characterised much of corporate Japan.

More open political competition Policy failure and the end to single-party rule by the LDP have also changed the policymaking environment significantly. Fierce factional competition was always a characteristic of the governing LDP, but the factional contests for power largely took place behind the scenes, with very little conflict playing out in the Diet. The axis of negotiation pivoted primarily between the LDP and the bureaucracy or between the LDP and highly organised and institutionalised interest groups. In 1993, the LDP split apart and lost its hold on government for the first time since 1955, leading to the formation of the non-LDP Hosokawa Cabinet. One-party rule was replaced by minority party, coalition rule, and political conflict began to filter increasingly into the Diet. It was only a matter of time before the contest for party political power became a public contest. The public debates between the aspirants for LDP leadership in 1998 were the first symbol of this change. Koizumi’s direct appeal to the electorate in 2001 entrenched the process. The arrival of coalition government did not enhance political transparency as soon or as much as many hoped. The LDP has smothered the conflict between advocates of big and small government policies among its coalition partners, muddling the stance of the government as a whole.6 Old-style consensus-building among coalition partners, with negotiations over political settlements between coalition members carried out by a select group of party leaders behind closed doors, has continued to make political processes opaque. The weakness of the LDP in the 1990s also inspired the opposition parties to play a stronger and more vigilant watchdog role. During the ‘financial Diet’ of late 1998, the LDP’s inability to find a coalition partner allowed the opposition to gain the upper hand in designing policies for financial reform.

Background 7

The axis of political contest was—perhaps for the first time—between those on the ‘inside’ (central government bureaucrats and top LDP officials) and those on the outside (LDP backbenchers and the opposition parties).7 Relations between big business and the LDP have also changed radically. Keidanren, the Japanese Federation of Business Organisations, served as the business community’s most powerful political lobby over the postwar period. Historically, the organisation had strong and institutionalised fund-raising ties with the LDP, promoting the image of big business united behind the governing party. Until the 1990s, the Japan Socialist Party (JSP) posed the most formidable challenge, while Keidanren served as the conduit for corporate donations to the LDP, ensuring that pro-market politics prevailed. Today, most parties represent pro-business positions, the JSP is greatly weakened after its period in coalition government with the LDP and, since 1994, Keidanren has abandoned mediating corporate political donations to the LDP. Policy failure and a more open and contestant political process have also fundamentally altered the LDP’s relations with the bureaucracy. In the era of one-party LDP rule, many ex-bureaucrats ran for political office, backed almost without exception by the LDP. While the majority of ex-bureaucrats running for political office remain affiliated with the LDP, the number of former bureaucrats running on opposition party tickets has risen steadily. In the 2001 Upper House elections, for example, three former Japan Defence Agency (JDA) bureaucrats went head to head in the same district, one running on the LDP ticket, another on the Liberal Party (Jiyuto) ticket, and a third on the Democratic Party (Minshuto) ticket. Among ex-METI (Ministry of Economy, Trade and Industry) officials running for the first time in the 2001 Upper House elections, there were at least two former officials running on the Democratic Party ticket who had previously occupied prominent positions within the ministry. In short, the assumption that all elements of the bureaucracy support the governing party no longer holds as it did in the past. Policy failure and more intense political competition were also behind major bureaucratic and administrative reforms intended to shift policymaking power and initiative to the political level. Bureaucratic rigidities and rivalries long impeded policymaking responsiveness in Japan.8 Rising levels of intrabureaucratic conflict were evident in the 1980s and 1990s as an increasing number of issues crossed ministry or agency jurisdictions. Through the reallocation of resources and changing of lines of authority, bureaucratic reorganisation carried out in January 2001 sought to heighten policy responsiveness and efficiency, and also bring bureaucratic behaviour more in line with political will. 9 The reorganisation consolidated many, though not all, of the policy jurisdictions that overlapped, paring Japan’s 23 ministries and agencies down to 13. This has the potential to speed up the policymaking process considerably.10 In some cases, the transformation of debates, which had

8 Japanese governance

hitherto taken place between agencies, into intra-agency debates, in the interests of greater efficiency, may result in reduced transparency. A system of policy evaluation, established within each ministry, is intended to preempt this. After self-evaluation of policy within each office and ministry, the General Affairs Ministry (Somusho) will conduct policy evaluations using a thirdparty organ established within it comprised of ‘knowledgeable individuals from outside of government’ (Headquarters for the Administrative Reform of the Central Government, 2000:18–19). The establishment of Independent Administrative Institutions (IAI) after April 2001 also seeks to reinforce more transparent administration. The IAI are implementing organisations affiliated with particular ministries and offices.11 The principles and requirements of corporate accounting and information disclosure are applied to these institutions. Their performance is periodically evaluated by committees of competent individuals from outside the public sector, established both in the relevant ministries and in the General Affairs Ministry. IAIs with scales of operation above a certain threshold will additionally be subject to professional audit. The reorganisation of the bureaucracy has also seen efforts to shift policymaking power and initiative from the bureaucracy to the government executive. The establishment of a Cabinet Office (Naikaku-fu) and an increase in the number of aides (hosakan) provides the prime minister with more support, and thereby raises his capacity to lead on a wider range of issues (Prime Minister’s Residence, n.d.). The number and role of political appointees operating within government ministries and agencies have also been raised. In the past, politically appointed parliamentary vice-ministers remained entirely outside the policymaking process. Now, individuals occupying these political appointments are integrated into the process. Previously, bureaucrats answered questions on behalf of political appointees in Diet debates. From October 1999, politicians must now fend for themselves in regular question times introduced into Diet debate. The importance of political initiative in the policymaking process is considerable. Bureaucracies tend to operate by standard rules and procedures, and this limits flexibility in government and policy change. Government by bureaucracy may have had fewer costs in a time when innovation and creativity were not keys to economic success, but managing Japan’s new economy requires flexibility in government and political initiative. Yet, the shift in the locus of policymaking to the political level has thus far failed to produce the kind of policy change necessary to lift Japan out of economic stagnation. To some, it appears that the political impediment to economic revitalisation merely shifted from the bureaucracy to the LDP. For many years, the Japanese economy was a hybrid of strong exporting industries such as automobiles and consumer electronics, and weak sectors such as construction, distribution, small and medium-sized enterprises, and agriculture.12 The centre of policymaking power in the stronger sectors was

Background 9

located within the relevant ministerial bureaucracy, while the centre of policymaking power in the weaker sectors was characterised by prominent involvement by LDP zoku or ‘policy tribes’ and institutionally organised interest groups. Whatever the basis of consensus across business, the bureaucracy and the LDP in the past, political clout in Japan became increasingly concentrated in the factional power bases in the LDP—in agriculture, construction, and small and medium-sized enterprise sectors. This was detrimental to the public interest and also to larger economic outcomes. Massive public works spending—the LDP’s primary means of repaying its support groups in the agricultural and construction sectors—drove the nation’s budget into serious structural deficit, unparalleled among advanced industrial democracies in the 1990s. Public money was wasted on a gigantic scale to support the LDP’s political power base. The policies necessary to meet the challenges of industrial and demographic maturation have been wanting. As one financial analyst notes, Japan might have become a global leader in information technology (IT) if as little as one-third of this spending had been on information infrastructure rather than political patronage.13 The LDP’s heartland constituencies also accounted for most of the nonperforming loans held by banks. They were a major impediment to effective and aggressive cleaning up of the financial sector’s bad debt problem. The LDP continues to be heavily reliant on organisations such as the association of small and medium-sized companies, the association of store owners, the private organisation of postal workers and the agricultural cooperatives for its political sustenance. Only by leapfrogging these traditional constituencies and appealing to a broader electoral base could Koizumi establish his political leadership in 2001 against the will of LDP factional bosses. There is a continuing tension in the LDP-led government. It is reliant on narrow vested interests, most of which are resistant to change, for the majority of its funding but is challenged by the national task of economic reform and revitalisation of the economy, which requires the destruction of these national interests. The party organisation shows little sign of abandoning these traditional constituencies despite their drag on the economy. The LDP came to the end of the era when it functioned as a ‘catch-all’ party. The party’s implosion or fundamental reconstruction thus seems a prerequisite to deep-seated and lasting reform. ‘Normal’ LDP politics dominated by locally based interests cannot be maintained if the structural transformation of the economy so desperately needed is to move forward. Indeed, as reform and transparency are pushed forward in many areas of the economy and policymaking, the most obvious areas where reform and transparency remain lacking are in party operations, political funding and candidacy procedures. The more prominent role of the political executive and the turmoil within the LDP under the Obuchi, and especially the Mori, Administrations also

10 Japanese governance

brought signs of greater political interference in personnel appointments within the bureaucracy and the strengthening of links between particular bureaucrats and particular politicians. Such interference introduced an unsettling degree of uncertainty into the policymaking process, worked against efforts to heighten transparency and corroded cohesion in national government. While such interference has long characterised the politicised and inefficient domestically oriented sectors such as agriculture, construction and distribution, the expansion of factional political influence over personnel appointments in those ministries heading the drive toward economic revival was disturbing and destructive of policy coherence. One implication is becoming increasingly clear. Despite the opaqueness that long surrounded policymaking processes in Japan, understanding Japanese political economy and predictions of Japan’s future path have become more rather than less difficult with the changes over recent years. In the past, statements by particular bureaucratic actors could be assumed to be definitive proclamations of future policy directions in particular sectors. Now there is a wider range of actors, and the field of political play is still evolving. The bargain over policies has become more complex and unpredictable. In the economic arena non-government actors and the discipline of the ‘market’ carry more weight. Even the formation of foreign policy and external economic policy is becoming more contested, open and subject to broader political influence and control. These changes profoundly affect the way in which foreign governments must now relate to domestic political processes in their dealings with Japan. Gaining a grasp of the emerging, new Japan poses a formidable challenge. THE BOOK J.A.A. Stockwin opens Chapter 2 with an examination of the electoral pressures for change, focusing in particular on the effects of political reform. Stockwin argues that the effects of change in the Lower House electoral system in Japan have been limited. A system based on two-party alternation has not emerged, as hoped by many reformers earlier in the decade, and Stockwin finds little evidence that change in the electoral system has produced more effective governments. He argues, nonetheless, that the advent of coalition governments and the challenge to single-party rule has been a significant development. The electorate now holds in its hands the possibility of enforcing a democratic system of checks and balances against the excesses of political power and ambition—the possibility of forcing governments to enter into coalitions and thereby take other views into account. In Chapter 3, Aurelia George Mulgan analyses the era of coalition politics that commenced in 1993 and shows that the key difference between the pre1993 and post-1993 periods is the shift from LDP single-party rule to LDP-led coalitions (in short, from LDP to LDP plus). She identifies the factors that contributed to coalition rule, examines Japan’s experience with coalition

Background 11

governments in light of more general theories of coalition-building, and analyses the differences evident between the politics of consultation of the earlier period and the politics of coalition. The appearance of coalition government has brought conflict and adjustments at the party political level out into the open and expanded the opportunities for legislative innovation. Yet, because opposition parties have been readily seduced into power sharing with the LDP, the emergence of a unified and effective excluded opposition— a prerequisite to major change in Japanese politics—has been frustrated. George Mulgan finds that the consultative and deal-making habits of the 1970s and 1980s laid the foundation for coalition-building in the 1990s and provided the foundations for continuation of LDP dominance. Jennifer Amyx focuses on the impact of organisational reforms in the Ministry of Finance (MOF) and the Bank of Japan (BOJ) in Chapter 4. She identifies the pressures that came to bear on these two agencies in the 1990s and argues that the effects of reforms in the conduct of financial regulation and monetary policy were significant. More specifically, Amyx documents the changes brought about by the creation of the Financial Supervisory Agency (FSA) in June 1998 and the passage of multiple packages of reform legislation through the Diet in October 1998. In addition, she examines the effects of the Revised Bank of Japan Law enacted in April 1998. The implications of these changes for policymaking are set out—including the impact of the fragmentation in regulatory institutions on the speed and ease with which policy and regulatory decisions are made, and the impact of political independence on the conduct of monetary policy. Related to this, Amyx explains the tensions that have emerged between the MOF, the BOJ, the FSA (now the Financial Services Agency) and the Financial Reconstruction Commission (FRC) as bureaucratic authority over financial policy has been reallocated among these agencies. In Chapter 5, Horiuchi Akiyoshi examines the progress made in reform of the financial system despite the lingering non-performing loan problem. He argues that the so-called Big Bang reforms represented a turning point in the breakdown of the financial regime that had governed the Japanese economy over the second half of the 20th century. The previously slow pace of financial system deregulation and the safety net that it provided for financial institutions meant the absence of contestability in the banking sector. Without contestability, depositors and investors in bank-issued debt had few indicators with which to gauge the relative health of various financial institutions. Deregulation has brought greater competition, exposing and making more transparent the relative health of institutions, but also an erosion of the government’s capacity to determine policy outcomes. Horiuchi highlights how past and present structures are likely to be different as the Big Bang reforms move forward and points, in particular, to the way in which greater transparency in the financial sector is critical to the health of the whole economy. Finally, he looks at the tension between stronger government

12 Japanese governance

intervention to buttress prudential regulation and the more hands-off approach taken in pushing ahead financial system reforms. Kohno Masaru, in Chapter 6, explains how the Ministry of International Trade and Industry (MITI) has undergone a major internal transformation in its mission, character and strategy over recent years and argues that this transformation continues in the renamed Ministry of Economy, Trade and Industry (METI). He documents this shift and explores the various sources of changes—both domestic and international. Finally, Kohno shows how these shifts relate to issues of policymaking and regulatory transparency, and speculates about their implications for Japan’s foreign economic relations. In Chapter 7, Gregory Noble examines the moves to reform the deliberative council (shingikai) system, a component of the policymaking process. He assesses how well the reforms have enabled deliberation councils to retain the advantages of information interchange while creating an open style of communication less amenable to bureaucratic control. Noble argues that efforts to increase transparency have begun to exert a measurable and positive impact on the operation of the shingikai. These avenues to greater transparency include greater disclosure of the contents and outcomes of meetings, and changes in the selection of council members. While documenting these changes, Noble also questions the overall impact of these reforms on policymaking and proceeds to suggest which actors benefit and which lose from the increase in transparency. Finally, he places the deliberation council reforms in the context of broader trends in Japanese administration and politics in the 1990s. Veronica Taylor argues that the 1990s stand as a historical turning point in Japanese law in Chapter 8. She focuses on the role played in this transformation by the introduction of a legal system reform agenda (shiho kaikaku). Competition law and its enforcement occupy a central role on this agenda, and she argues that the last decade has seen an unprecedented degree of change in both the qualitative and quantitative significance of competition law and the Japan Fair Trade Commission (JFTC). Taylor offers concrete evidence for this assessment by first highlighting the enhanced ‘formal’ capacities for competition regulation through an analysis of institutional change surrounding the JFTC. She then provides evidence of complementary change in the more informal aspects surrounding competition law, such as the diffusion of competition norms throughout corporations and society, accompanied by increasing reliance on penalties to enforce transparency and accountability. In Chapter 9, Leon Wolff questions whether Japan’s administrative law reform agenda aimed at promoting greater transparency in decisionmaking will necessarily lead to better policy outcomes for Japanese women. His chapter evaluates recent legislative reforms and policymaking initiatives in the area of sexual harassment and argues that these developments do not improve the situation for Japanese women. The reason is that the new rules effectively charge corporations with the responsibility to self-regulate, thereby

Background 13

transforming sexual harassment from a public issue of human rights to a domestic issue of corporate governance. Wolff concludes by stressing the interest in locating the general issue of transparency within the specific context of gender. Aurelia George Mulgan’s final chapter on agricultural policymaking demonstrates that the tide of reform has not swept evenly over every policy sector or element of Japan’s political economic system. In the agricultural sector, she finds that familiar patterns of resistance to change persist and even show signs of deepening. While acknowledging changes such as organisational restructuring in the agricultural cooperatives (Nokyo) and the introduction of the New Basic Law for Agriculture, George Mulgan argues that the impact on the policymaking process has been minimal. Changes thus far have occurred more at the margins than at the core of policymaking processes. In contrast to some of the other policy areas examined in the volume, agricultural policymaking is most notable for its perpetuation of the status quo. NOTES 1 2

3

4 5

6 7

Van Wolferen (1989) provides a portrayal of the Japanese political economy that has some similarities to the ‘Japan Inc.’ concept—a collusive System in which all actors’ interests are seemingly aligned. In the banking sector, for example, particular banks sought confidential information concerning rivals from bank inspectors, and other financial institutions allegedly wined and dined the regulators ‘excessively’ to gain favour in receiving the ministry’s permission concerning the development of new financial products. The new law stipulates that those in the position of assistant section chief or higher must report the receipt of entertainment and gifts worth 5,000 yen or more and that the receipt of entertainment or gifts valued at 20,000 yen or more must be made public every three months (Kokka Komuin Ronri Kyohon [National Public Servant Ethics Textbook] (2000) Tokyo: Kokka Komuin Ronri Chosakai). The reports for April–June 2000 have already been made available to the public at all ministries and agencies. In 2000, Transparency International’s annually compiled corruption perceptions index ranked Japan twenty-third, higher than previous years and only one of four countries to have improved its score significantly relative to the year prior (Japan Times Online, 2000a). Amyx interviews with central government bureaucrats, 1999–2000. ‘It was inexcusable for management not to make decisions on its own and to instead rely on the judgment and instructions of the Finance Ministry,’ said the presiding judge (Japan Times Online, 2000b). Numerous other examples have emerged in which private sector actors were ‘betrayed’ by the government officials they had once turned to for guidance. After the jusen housing and loan bail-out and the loss compensation scandals in the securities industry, for example, the bureaucracy and ruling party teamed up to force management to resign to take responsibility when industry behaviour had reflected informal MOF guidance. This was particularly true of the LDP–New Komeito–Liberal Party coalition that assumed the reins of power in 1999. At the core of this outside group was the seisaku shinjinrui or ‘new policy tribe’, a cross-party coalition of junior legislators.

14 Japanese governance 8

9 10

11 12 13

For example, the Ministry of International Trade and Industry (MITI) clashed with the Ministry of Posts and Telecommunications (MPT) over high-tech policies toward computer-related industries and with the Ministry of Education (MOE) for control of Japanese government research and development policies (Callon 1995). On environmental issues, MITI engaged in fierce battles with the Environment Agency. The MOF likewise struggled with the Ministry of Health and Welfare (MHW) for control over the pension system and with the MPT over the future of postal savings. A notable fragmentation of financial regulatory authorities was carried out prior to the January 2001 reorganisation. See Chapter 4 of this volume for details. The starkest exception to consolidation is with information technology, where both MITI and MPT retain authority. Jurisdictional overlap also remains in the oversight of nursing home care—an important area given the aging population. Those managed by private companies or individuals fall under the purview of the Ministry of Health and Welfare, while those run by corporations affiliated with prefectural governments are under the purview of the Ministry of Construction. One example of a newly established IAI is the Trade Insurance Agency, whose functions were previously undertaken within MITI. See Okimoto (1989), Calder (1988), Samuels (1987), Williams (1994) and Woodall (1996) for more on this dual political economy concept. Jiro Ushio, Chairman of Ushio, Inc., quoted in ‘Economic outlook: IT seen as key to Japan’s competitiveness’, Nikkei Net Interactive, 2 October 2000.

REFERENCES Calder, K.E., 1988. Crisis and Compensation: Public policy and political stability in Japan, Princeton University Press, Princeton, New Jersey. Callon, S., 1995. Divided Sun: MITI and the breakdown of Japanese high-tech industrial policy, 1975–1993, Stanford University Press, Stanford. Headquarters for the Administrative Reform of the Central Government, 2000. Central Government Reform of Japan, Headquarters for the Administrative Reform of the Central Government, Government of Japan, pp.18–19. Japan Times Online, 2000a. ‘Japan graft rank: 23rd cleanest out of 90’, The Japan Times Online, 15 September. Japan Times Online, 2000b. ‘Daiwa execs ordered to repay $775 million’, The Japan Time Online, 21 September 2000. Okimoto, D.I., 1989. Between MITI and the Market: Japanese industrial policy for high technology, Stanford University Press, Stanford. Prime Minister’s Residence, n.d. ‘Home page’, http://www.kantei.go.jp/jp/kids/ hanashi/tyuou.html, Prime Minister’s Residence, Tokyo. Samuels, R., 1987. The Business of the Japanese State: Energy markets in comparative and historical perspective, Cornell University Press, Ithaca, New York. van Wolferen, K., 1989. The Enigma of Japanese Power, Macmillan, London. Williams, D., 1994. Japan: Beyond the End of History, Routledge, New York. Woodall, B., 1996. Japan under Construction: Corruption, politics, and public works, University of California Press, Berkeley.

2

Electoral pressures for change: the effect of political reform J.A.A. Stockwin

A cartoon in the Asahi Shimbun dated 11 August 1993 shows the leaders of the seven political parties participating in the Hosokawa coalition government formed two days before. They are wielding samurai swords and standing triumphant on the inert body of a dinosaur labelled ‘single party control’. One of the leaders is holding a banner that reads: ‘Next is political reform’, and the caption to the cartoon expresses the following sentiment: ‘By launching [the new Cabinet], “One Great Task” has been completed’ (Asahi Shimbun, 11 August 1993). At the time it was easy to regard the formation of the first non-Liberal Democratic Party (LDP) Cabinet for nearly 38 years as a heroic event. A party mired in corruption, preferring backstage deals to open government and massively influenced by irresponsible bureaucrats and self-serving interest groups had been vanquished by a coalition of far-sighted reformers. These reformers were proposing a coherent program to democratise and modernise the political, economic and social systems and practices of Japan. As happens following most revolutions, however, what ensued was far more messy and confusing, the politics more murky, and the achievements more ambiguous than the initial mood of euphoria would have predicted. Indeed, within a mere nine months of losing office, the LDP dinosaur had revived and, though much less powerful than before, was taking its first steps on the road to regaining its dominant political position. The Hosokawa Cabinet adumbrated a reform agenda whose principal elements were deregulation, decentralisation, economic reforms and a radical change to the electoral system for the House of Representatives. In the event, partly because the tenure of office of his government was so brief, Hosokawa’s only solid achievement in the area of political reform was a wholesale rewriting of the electoral law for the Lower House.1 Although this was arguably the one really major political change that took place in the 1990s, to gauge its effects is far more problematic. Indeed, it is a central argument of this chapter that the effects of changing the Lower House electoral system have been quite limited, and that the causes of the most crucial political changes of the 1990s must be sought largely elsewhere. (It is possible, of course, that the

16

Japanese governance

new electoral system may produce more substantial effects in the future, but in any case we cannot assume that the new system will not be further revised in the next few years.) CONCEPTUALISING THE POLITICS OF THE 1990s For many observers, the predominant impression of Japanese politics in the 1990s has been one of utter confusion. Political parties have split, amalgamated, changed their names, switched coalitions, appeared, disappeared, and reappeared—with barely discernible rhyme or reason. Politicians who were sworn enemies became bosom friends, and bosom friends became sworn enemies. Ideological difference or similarity seem to have little predictive value in relation to coalition behaviour. Political leaders whose images are strong show little leadership when given the opportunity, whereas apparently weak leaders demonstrate an unexpected capacity to lead (or at least to lead more than was expected of them). Bureaucrats control politicians, but politicians control bureaucrats, and pressure groups of all kinds both manipulate, and are manipulated by, both bureaucrats and politicians. Superficially at least, Japan’s political system is a vast amorphous organism, pulsating and constantly changing shape, but lacking clear direction or internal distinctions that can be readily grasped. Rules exist, but rarely seem to determine outcomes. There is, however, a pattern that informs the political events of the 1990s. The fact that this pattern has been difficult to discern may well relate to the way the problem has been expressed by various participants and observers of the political process in the 1990s. In the opinion of Ozawa Ichiro, the highest profile reformer of the decade, the political choice is between a continuation of single-party dominance (essentially the system up to 1993), and a two-party alternation. According to his argument, two-party alternation is democratically desirable since it provides the electorate with a genuine choice between two sets of politicians, each holding different political philosophies and programs. This is democratically desirable, in that it gives a genuine choice to the electorate. It is also desirable in terms of getting things done, since, with a single party permanently dominant, vested interests make it exceedingly difficult to change entrenched policies. Such a system has a tendency toward corruption, toward economic policies distorted by the influence of narrow groups occupying a strategic position and, in a pithy phrase, ‘crony capitalism’. Ozawa did his best to bring into being an alternative party that would be capable of challenging the LDP. His most impressive effort in this regard was the formation of the Shinshinto (New Frontier Party), an amalgamation of several pre-existing parties that was launched in December 1994 but ignominiously collapsed a mere three years later, in December 1997. It reached the height of its popularity at the House of Councillors elections of July 1995,2 but subsequently suffered a steady trickle of defections and was beset

Electoral pressures for change 17

by increasingly difficult problems of internal cohesion. The reasons for all this need not detain us. Whether, given somewhat different circumstances, the Shinshinto might have developed into an alternative government to the LDP is academic. The hard fact is that it did not. Just before the general elections for the House of Representatives held in October 1996, another serious opposition party, the Minshuto (Democratic Party of Japan, DPJ) was formed, with aspirations to be an alternative party of government. It too was an amalgamation of different groups, having a more left-of-centre orientation than the Shinshinto, but most contemporary observers would probably agree that its chances of forming an alternative government are substantially slimmer than those of the Shinshinto in its heyday. On the other hand, an important political innovation of the 1990s (though not entirely without precedent) is coalition government. We shall examine below the varieties of coalition government, and the electoral and other conditions that have led to them. But at this point we need to advance the proposition that the politics of the 1990s may be conceptualised as a clash between two opposing principles. The first is the principle of single-party dominance, in which the LDP has far more seats in the Diet (Japan’s parliament) than any other party, and other parties, rather than acting as an opposition, operate without power in a role supportive of the dominant party. A partial example would be the Hashimoto government between October 1996 and the early months of 1998, when the Social Democratic Party (SDP, formerly Japan Socialist Party, or JSP) and Sakigake—both very weak following the October 1996 general elections—lent their support to the LDP without participating in government. But, more broadly, this principle means that power rests essentially within one political organisation (party), and other parties either act as satellites round the LDP sun, or maintain a position of impotent opposition (for instance the Japan Communist Party, JCP). The opposing principle is that of a coalition government: that is to say, where different parties join together in a coalition arrangement, and there is a genuine sharing of political power between them. Such an arrangement will only take place where the LDP (or, theoretically, another dominant party) lacks a parliamentary majority. An example from the middle of the decade is provided by the LDP–JSP–Sakigake coalition under Prime Minister Murayama between June 1994 and January 1996. Although from various perspectives this was not the most impressive of governments, it was one where a variety of political perspectives were allowed free play, and political debate within government about contentious policy issues became important.3 It is true, of course, that the experience of the Murayama and subsequent Hashimoto coalition governments was electorally catastrophic for the Socialists,4 but at the time the style of government was notably different from what had normally prevailed under LDP single-party rule.

18

Japanese governance

Our contention is that it is an understanding of the complex process of interaction between these competing principles that can bring conceptual order into the admittedly highly confused politics of the 1990s. On the one hand, the LDP, having lost its parliamentary majority in 1993–94 (as the result of large-scale defections), and having gone into opposition, set out to reestablish its dominant political position. To a remarkable extent, the party has been successful in this ambition. By June 1994, it was back in government as part of a coalition; in January 1996 it regained the prime ministership. In the Lower House elections of October 1996 it won about 30 new seats, but was still short of a majority; in September 1997 it found itself once again with a Lower House majority in its own right; and by 1999 the LDP had a fairly comfortable Lower House majority. The one prize that remained elusive was the regaining of a majority in the House of Councillors, and indeed in the elections to that House, held in July 1998, the LDP lost seats. Consequently, the LDP can only continue in office in what the Japanese press describes as a situation of ‘stable government’ (Asahi Shimbun, 10 September 1999)— that is, if it enters into coalition arrangements with other parties that may be quite different from it in core constituency, organisational structure and policy preference.5 How then does the present situation differ from that which prevailed between 1955 and 1993, a period which is generally regarded one of singleparty dominance? First of all, we have to enter the caveat that the political system during those years was not unchanging; in particular, from 1989 the LDP lacked an Upper House majority. But secondly and more importantly, the 1990s have seen some important developments that have effected major changes in the way Japanese politics operates. Arguably the change that has been the most far-reaching in its effects has been the near demise of the Japan Socialist Party (now the Social Democratic Party). In January 1993, the JSP had 141 (out of 512) seats in the House of Representatives and 73 (out of 252) seats in the House of Councillors. By 1999, the corresponding figures for the SDP (same party under a new name) were 14 and 14. Even though the JSP had enjoyed varying fortunes during the period of LDP dominance up to the early 1990s, it had always been the leading party of opposition, with sufficient parliamentary numbers to block constitutional revision (when it teamed with other smaller parties). More broadly, nobody expected the Socialists to become popular enough to take power (at least, not on their own). Nevertheless, their presence as a constant veto block, backed by public sector unions, intellectuals, teachers and others, acted as a balancing force against the ambitions of right-wing LDP politicians desirous of reversing certain aspects of the Occupation settlement of the late 1940s and early 1950s. Issues of peace and war were most prominent, and a kind of tacit agreement ensured the integrity of the Japan–US security relationship, but maintained strict limitations on Japan’s use of military force. In essence, this was an agreement premised on the continuance of the Cold War. When the Cold War ended, the rationale for such a balance to

Electoral pressures for change 19

continue was weakened. By ironic circumstances, the Socialists, riding high in the polls at the outset of the 1990s, were rapidly declining in electoral strength just as the opportunity came to participate in a series of coalition governments with varying partners. This in turn accelerated the process of decline. Many of their votes plainly went to the Communists, who continued to act like an opposition and have been gaining in electoral strength from a low base. The main point for our argument, however, is that a party that for years had represented a limited but effective veto force had by the late 1990s almost disappeared. As a result of the near-demise of the Socialist Party and the return to strength of the LDP, there has been a distinct but subtle shift in the nature of political debate across a range of issues. The trend that has been accorded the largest amount of publicity—and occasioned disquiet in some quarters— is a perceptible shift to the right of the balance of opinion in the political class. One telling example is the decision of the Diet (July 1999) to conduct a debate on the 1946 Constitution for the first time in its history.6 On the other hand, there is evidence of an opening up of debate on a range of issues where outcomes are difficult to classify as ‘right wing’. For instance, the Freedom of Information Act passed through Parliament in its 145th session that ended on 13 August 1999. That session proved one of the most varied, as well as active, parliamentary sessions of recent years, and included, among others, an ambitious bill to cut back the number of government ministries from 23 to 13.7 It is beyond the scope of this chapter to develop a full analysis of why this parliamentary session should have been so active. To explain it would involve considering the narrower spectrum of opinion within the political class, as well as the substantial rewriting of the political agenda that began with the Hosokawa Cabinet in 1993 (although it is possible to trace the changes to an earlier time than that). The pressures caused by the East Asian economic crisis and various foreign policy problems would also need to be taken into account. COALITION GOVERNMENT IN THE 1990s We now need, however, to enter into a discussion of the second principle of Japanese politics in the 1990s, that of coalition government. There have been a variety of coalition arrangements since 1993, but what is significant is that despite the LDP’s successes in clawing back dominant political power since 1994, it has remained dependent on entering into coalition with other parties in order to secure passage through the Diet of its legislative program. Up until September 1997 this was because it lacked a majority in the House of Representatives, and the Lower House is of course the more important of the two. But crucially, the LDP has lacked a majority in the House of Councillors ever since its defeat in the Upper House elections of July 1989 in the aftermath of the Recruit Scandal.

20

Japanese governance

Until the upheaval of 1989, it had been widely assumed that the House of Councillors was of little significance for either government or opposition. Indeed, with the LDP in control of both houses, as it was between 1955 and 1989, this was largely the case. In law, however, the Upper House has the power to reject legislation sent to it from the Lower House (except for the budget, treaties and the designation of a new prime minister). While a twothirds majority of the House of Representatives may override an Upper House rejection, governments do not normally have a Lower House majority as large as that.8 ‘Stable government’ relies on a majority in both houses of the Diet, and this dictates the need to create coalition regimes. Apart from the minority Hata government, which lasted a mere nine weeks between April and June 1994, every government of the 1990s has enjoyed a Lower House majority (although some have been more comfortable than others). On the other hand, several governments have lacked an Upper House majority. This was an embarrassingly difficult problem for the Kaifu (LDP) government at the time of the Gulf crisis and war in 1990–91. At that time the LDP SecretaryGeneral, Ozawa Ichiro, attempted to make deals with certain parties in opposition (especially the Komeito) in order to secure Upper House approval of a peacekeeping operations bill. This did not succeed at the time, although it led to an agreement after the war was over, in 1992. It is instructive to examine the degree to which the variously composed governments from 1993 were ‘secure’ in terms of their majority (of lack of it) in the two houses. This can be seen from the tables attached as appendices, but the following is a brief summary. The figures throw considerable light on the rationale for the formation of various kinds of coalition. In January 1993, the Miyazawa (LDP) government as of January 1993 controlled 53.5 per cent of Lower House seats, but only 42.1 per cent of Upper House seats (Table A2.2). Following substantial defections from the LDP in June 1993 and the defeat in the House of Representatives elections in July, a coalition government was formed under Hosokawa Morihiro, consisting of seven parties and one Upper House grouping, but excluding the LDP. The Hosokawa government had a bare majority (50.7 per cent) of Lower House seats, and 52.0 per cent of seats in the Upper House (Table A2.3). Even though it could control both houses, its majority was so thin in both that legislative success was premised on the maintenance of greater parliamentary discipline among its own often squabbling ranks than it was readily able to command. The next government, headed by Hata Tsutomu, was, as we have seen, in a minority in both houses (35.6 per cent of seats in the House of Representatives) (Table A2.4). It was tolerated for some nine weeks essentially because a government was required in order to pass the budget, which had been delayed. Many observers expressed astonishment at the formation, and subsequent ability to survive, of the three-party coalition governments (LDP,

Electoral pressures for change 21

JSP and Sakigake), led successively by Murayama Tomiichi (JSP) and Hashimoto Ryutaro (LDP), between June 1994 and the first Lower House elections under a reformed electoral system in October 1996. The LDP and JSP were long-standing enemies, so an alliance between them appeared to go against nature. When we inspect the parliamentary arithmetic of these governments, however, we see that their formation and maintenance made a great deal of sense from the perspective of the participants. A month after the formation of the Murayama government (July 1994), it commanded 57.8 per cent of seats in the House of Representatives, and approximately 63.5 per cent of House of Councillors seats (see Table A2.5).9 The figures changed little over 18 months of that government (58.5 per cent and 63.9 per cent in January 1995 (Table A2.6); 56.9 per cent and 60.7 per cent in August 1995 (Table A2.7)). When the prime ministership was taken over by Hashimoto (and thus the LDP) in January 1996, the figures initially remained much the same (57.3 per cent and 59.5 per cent) (see Table A2.8). The general elections for the House of Representatives held in October 1996, under the new election system, produced, on the other hand, a more complicated situation. The JSP (now the SDP), split shortly before the elections, leading to the formation of the Minshuto (Democratic Party of Japan (DPJ)). As a result, the Socialists were reduced to a mere rump of 15 seats. Moreover, the Sakigake party was almost wiped out as a result of the election, ending up with only two Lower House seats. The upshot was that the SDP and Sakigake remained in alliance with the LDP but did not participate in government. The LDP gained seats in the election but not enough to form a government in its own right. It could only survive provided it was able to rely on the parliamentary support of the two parties that had now left the government. Thus the Hashimoto government, as of November 1996, now commanded only 46.6 per cent of Lower House seats, although, with Socialist and Sakigake seats added, the figure rose to a bare majority—51.0 per cent. In the House of Councillors, the government as such was now short of a majority (44.0 per cent), but was much better off when the votes of the two parties supporting it were added (56.7 per cent) (Table A2.9). Over the next year and a half the position of the Hashimoto government in the House of Representatives gradually improved, largely as a result of defections to the LDP from other parties on the principle of ‘getting with the strength’. By the end of September 1997, Japan’s largest political party had just 50 per cent of the seats in the Lower House or 53.4 per cent when the support of the SDP and Sakigake is added. A majority still eluded it in the Upper House, where on its own it commanded 44.4 per cent of the seats. With the seats of the two supporting parties, it held 54 per cent of the Upper House (Table A2.10). What is evident from these figures is that, even though the parliamentary position of the LDP was improving, the Hashimoto government was in a

22

Japanese governance

substantially less comfortable parliamentary position for the year following the October 1996 general elections than it had been in the months preceding it. The LDP continued to attract a trickle of defectors from other parties, and by January 1998 the picture looked rosier. In 1998, the LDP controlled 51.8 per cent of Lower House seats (55.2 per cent when adding the seats belonging to its two supporting parties), and 47.2 per cent of Upper House seats (56.7 per cent when we include SDP and Sakigake seats) (Table A2.11). These defections were severely disrupted by the results of the July 1998 elections for half the seats in the House of Councillors when the Hashimoto government suffered the blame for the banking crisis, the economic recession and rising levels of unemployment. With the consequent resignation of Hashimoto as prime minister, his successor, Obuchi Keizo, began his government with a slightly improved majority in the House of Representatives (52.6 per cent of total seats), but a poor position in the House of Councillors (42.1 per cent) (Table A2.12). The SDP and Sakigake had abandoned their support for the LDP government before the elections, so the LDP was now once more on its own in government. The period of coalition arrangements crossing the left–right divide appeared to be over. The Obuchi government thus started out with an unsustainable parliamentary position. It was likely to be severely frustrated in attempts to realise its legislative program, being so far short of a majority in the Upper House. Such a situation, especially for a government facing an economic crisis, called for the forging of a new coalition alliance. This was, in part at least, accomplished with the signing in November 1998 of a coalition agreement with Ozawa’s Jiyuto (Liberal Party). The Jiyuto had been formed by a small group of Ozawa loyalists following the collapse of the Shinshinto, and advocated relatively radical policies of political reform. The new coalition gave the Obuchi government an outright majority in the House of Representatives (59.6 per cent)—although this was still not large enough to override obstruction by the House of Councillors. The Jiyuto, however, was weak in the Upper House, and the two parties together accounted for only 46.0 per cent of seats there (Table A2.13). This situation explained the negotiations that took place in August and September 1999, with a view to forming a three-party coalition government including the Komeito as well as the LDP and Jiyuto. This coalition materialised in October 1999, giving the Obuchi government a comfortable majority in the House of Councillors, and a massive majority (for the first time more than the two-thirds required to revise the Constitution) 10 in the House of Representatives. On the other hand, other parties have found the Komeito (with its monolithic and cohesive organisation closely linked with the Soka Gakkai Buddhist sect) difficult to work with in the past.11 It appears that the negotiations were difficult, with the Komeito and Jiyuto taking opposite positions on the question of reducing the number of Lower House members, among other issues.

Electoral pressures for change 23

This suggests that, while progress with re-establishing the fact of the LDP’s dominance has been substantial, it can only be achieved through the construction of coalitions with other parties that may well prove to be awkward partners. The 1990s have given politicians a good deal of experience with coalition government, including its requirement for compromise in relation to both policy and the structure of policymaking. In terms of the two principles proposed earlier, while aspiring to single-party dominance, LDP politicians are facing the practical reality of having to adjust to the much more demanding reality of coalition arrangements. This has begun to create a more dynamic and less stereotyped policymaking environment than that which prevailed under the 1955 political system with its Cold War dichotomies. THE IMPACT OF ELECTORAL REFORM What part, then, has electoral reform played in the political process of the 1990s? It seems necessary to analyse in some detail the political dynamics of the decade before dealing with the effects of electoral reform, simply in order to distinguish changes caused by reforming the electoral system from changes whose causes lie elsewhere. As suggested earlier, the principal concrete achievement of the Hosokawa government was reform of the electoral system for the House of Representatives, and associated tightening of the laws related to political corruption. Even though the relevant laws did not come onto the statute book until late in 1994 when the Murayama Cabinet was in office, the shape of the reforms was basically decided, at times through difficult negotiation and compromise between contending interests, by the Hosokawa Cabinet itself. It needs to be stressed, however, that the new system was in a fundamental way the product of compromise, and turned out to be far less radical in its impact than some reformers expected and hoped. In order to explain the rationale for this last assertion, we need first to give a brief description of the former system, followed by a short examination of the new system, including the way it worked in the elections of October 1996. The former electoral system for the House of Representatives was used in every election between 1947 and 1993 (a total of 18 general elections). A rather similar system operated between the 1920s and the war. Although some details were changed from time to time, the essence of it was that each elector had a single, non-transferable vote, but each constituency elected several members. For most of the period of the system’s validity, there were roughly equal numbers of three-, four- and five-member constituencies, though latterly a small number of two- and six-member constituencies were created. It was a system based on single non-transferable votes (SNTVs) in multimember constituencies (MMCs). Broadly speaking, the system resulted in certain political consequences.12 First, although this was not a system of proportional representation, by

24

Japanese governance

comparison with either the British or Australian Lower House electoral systems, it contained a strong proportional element. This was because, since a candidate might well be elected with a mere 15 or 20 per cent of the total vote in a constituency, minority parties commanding approximately that proportion of the vote across a number of constituencies might expect to maintain significant parliamentary representation.13 Second, in the case of a large party such as the LDP, which might expect to win several seats in particular constituencies, different candidates of the same party in the same constituency were competing with each other as much as they were with candidates of other parties. In the particular case of the LDP this accentuated (although it probably did not cause) factional divisions within the party. It also led to a situation where each candidate maintained a personal support group (koenkai) of constituency electors for the purpose of promoting his (or her) campaign, but had weak or nonexistent links with the party as such.14 The central party organisation had an important role in ensuring that not too many candidates bearing the LDP label stood in any particular constituency. In this, it was generally effective. Third, competition between different candidates of the same party seems to have encouraged what in Japan is delicately called ‘money politics’ or, in stronger words, corruption. In part because of the electoral system and in part because of lax anti-corruption laws, astonishing amounts of money were spent on elections. Fourth, however, it is arguable that the often intense intra-party competition stimulated by the electoral system acted to increase the LDP vote. Candidates for smaller parties (including the Socialists), mainly standing as sole candidates for their party in their constituencies, would in many cases scarcely need to campaign, since they could rely on their organisational backers (for example, labour unions) to deliver a sufficient proportion of the vote to get elected. This, together with the fact that the various opposition parties were incapable of combining into a single party, greatly favoured the LDP. Fifth, the former electoral system was marred by severe problems of malapportionment. Migration of people from the countryside to the cities was inadequately reflected in constituency-boundary correction. Although palliative corrections were made from time to time, there were periods when the discrepancy in the value of a vote between the most-favoured and leastfavoured constituency was more than four to one. By favouring the rural areas, this malapportionment (the ‘negative gerrymander’) was advantageous to the LDP. The advertised purposes of abandoning SNTV in MMCs and moving to a new system were to get rid of money politics, shift the emphasis of electoral campaigning from personality-based appeals to appeals based on policy choices, and create a politics that would be genuinely competitive between parties. Some advocates, notably Ozawa, consciously wished to move to a system of two-party alternating politics (Ozawa 1994:66). What actually

Electoral pressures for change 25

emerged, however, was the hybrid product of intense bargaining and compromise between different political interests and principles. Parties on the conservative side of the spectrum in the main wished for a system based predominantly on single-member constituencies and first-past-the-post voting, whereas the smaller parties of the centre and left wanted to maximise the number of seats determined by proportional representation. The result was a compromise between the two, with the weighting towards the model favoured by the conservative parties. The total seat number was reduced from 511 to 500, of which 300 were to be elected from singlemember constituencies, and the remaining 200 from 11 regional blocs by the d’Hondt system of proportional representation. Each elector was to have two votes, one for each type of seat. The same candidate could stand for both constituencies. If elected in both, he or she would take the seat won in a single-member constituency, so that the regional bloc seats came to be seen as a kind of second best. The regional bloc seats, however, constituted a crucial second chance for candidates unable to muster the plurality required to win a single-member seat. Moreover, in a peculiar arrangement, parties could distribute seats among their candidates in the regional proportional representation blocs depending on the candidates’ relative margins of defeat in the single-member constituencies located within the regional bloc.15 The effect of this arrangement, even though not all parties took advantage of it, was to bring back an important characteristic of the former (SNTV in MMCs) electoral system for the Lower House. Under the old system, a candidate commanding a relatively minor proportion of votes in a given constituency was often able to be elected, given that the first three, four or five candidates in terms of their proportion of the vote, were declared elected. The ‘margin of defeat’ rule in the new electoral system in effect made it possible once again for a candidate who failed to win a seat in a single-member constituency to win a seat in a regional bloc depending on how well the candidate had performed in the single-member constituency. This was neither a true firstpast-the-post, nor a true proportional representation system, but an underhand way of resuscitating one of the key elements of the former system. Ozawa had been trenchant in his criticism of this aspect of the old electoral arrangements. In his words, [i]n the present electoral system, each district throughout the country elects from three to five representatives. Invariably, at least one opposition candidate wins a seat even if he never appears in public…Extraordinarily, it is the opposition parties that enjoy the greatest security in this setup. The largest, the Socialist Party, seems convinced that there is no need to go through the struggle of actually campaigning to win an election. The Socialists will never rule, left as they are. What is more, they seem content with that. It makes one wonder why they are a party at all. It is the multi-seat district system that has so indulged the opposition parties, particularly the Socialists. As a consequence of their weakness, the LDP has been assured of its semi-permanent rule so that it, too, has become immobilized. (Ozawa 1994:64)

26

Japanese governance

CONCLUSION Since this was written, the Socialists have been more or less eliminated from the political picture. Nevertheless, it seems evident that the much-heralded electoral reforms of 1993–94 have been less radical in their effect than appeared at first sight. Apart from the technical factors outlined above, the tightening of the anti-corruption laws does not seem to have had a great effect of eliminating money politics, even though the state now provides a proportion of electoral funding to parties. The koenkai system still reigns supreme, and indeed the need in single-member constituencies to win a plurality (not just 20 per cent of the vote) has led to ever bigger koenkai. The alternative opposition parties formed since the change in the system have either collapsed (Shinshinto), or failed to take off (the DPJ). In the absence of a single viable opposition party, the single-member constituencies are extremely advantageous to the LDP, and in this sense privilege the single-party dominance principle discussed earlier. The less numerous regional proportional representation blocs are where smaller parties are able to carve out a niche for themselves, but elements in the ruling establishment would like to reduce their number still further. On their own, these regional blocs are incapable of privileging the alternative principle that we advanced earlier, that of coalition government. Indeed, if the Japanese parliament were a single-chamber parliament, the LDP would have completely re-established its political dominance. The House of Councillors, however, has proved to be a significant actor in Japanese politics after the LDP defeat in the Upper House elections of 1989. A decade later, moreover, it remained the principal institution compelling the Obuchi government to enter into coalition arrangements. This is ironic, since the electoral system for the House of Councillors is even less reconstructed than that of the House of Representatives. But the electorate is sophisticated enough to be adept at using Upper House elections as a means of checking governmental power without actually removing the LDP from power. Given also that only half of the Upper House members are renewed at each election, the LDP will not be able to regain control all that quickly.16 The 1990s did not lead, as reformers had hoped at the beginning of the decade, to a system of two-party alternation, and it seems unlikely that this can be achieved in Japan. The 1990s did, however, see the emergence of coalition governments and a challenge to single party dominance. Even though there is absolutely no guarantee of the future success of this challenge, it seems currently the best guarantee of a healthier political system. Faced with economic crisis in the late 1990s, as well as difficult issues to resolve in the areas of foreign policy, the future of social welfare and the structure of government, the record of successive governments has been mixed. Nevertheless, the role of the Diet in the promotion of reform across a range of areas has become more lively and vigorous, and legislative innovation makes it, more so than in the past, an institution to watch.

Electoral pressures for change 27

The continuance of such a healthy trend is not guaranteed. Neither is the continuance of political balance guaranteed, since the dangers of a radical shift of the centre of gravity to the nationalist right are real. Given the weakening of the traditional left, right-wing politicians are showing signs of flexing their ideological muscles with greater freedom than before. Electoral reform has had only a limited impact on these issues. But even though the electoral system remains to a very large extent unreconstructed, the electorate holds in its hands the one possibility of enforcing a democratic system of checks and balances against excesses of political power and ambition—that of forcing governments to enter into coalitions and thus take other views into account. NOTES 1

2

3 4

5 6

7 8

The relevant laws, including a revision of laws relating to corrupt practices in electoral campaigns, did not come onto the statute books until late in 1994, well after the demise of the Hosokawa government, but it was that government that negotiated the basic agreement to change the system. The Shinshinto polled 30.75 per cent of the vote in the national constituency and 26.47 per cent of the vote in the prefectural constituencies. This surpassed the LDP vote percentages, which were 27.29 per cent in the national constituency, and 25.40 per cent in the prefectural constituencies. The LDP still ended up with substantially more seats (107 as against 56 for the Shinshinto) because only half the seats were being renewed (Asahi Shimbun-sha 1996:255–56). For only the second time in Japanese political history, the prime minister was a Socialist. And the deputy prime minister, Kono Yohei, was the only president of the LDP not to become prime minister. Murayama notoriously abandoned long-held Socialist rejection of the Self-Defence Forces, the Japan–US Security Treaty, the national anthem and national flag. This, in all probability, was the primary cause for the later loss of much of his party’s core constituency. In September 1999 Prime Minister Obuchi was actively negotiating with the Komeito to form a three-party coalition of LDP, Jiyuto (Ozawa’s Liberal Party) and Komeito. Other important examples are the legalisation of the flag and anthem (both having right-wing connotations) in August 1999, and the passage of a wiretapping bill in the same month. It is debatable how far a move to the right among the political class is reflected in the electorate as a whole. Much has been made of the election of Ishihara Shintaro—a celebrated right winger—as governor of Tokyo prefecture in April 1999. But Ishihara only won 30.6 per cent of the total vote in 1999 (1,646,549) against five significant opponents who split the vote between them, as against 43.9 per cent of the total vote (2,336,359) in 1975, when he came second (Asahi Shimbun-sha 1976:259; Asahi Shimbun, 12 April 1999). (The figures for the 1999 election are provisional, with 97 per cent of the vote counted.) A comprehensive list of the bills passed in the 145th session of the Diet is given in Asahi Shimbun, 13 August 1999; 14 August 1999. The success rate of government bills was 87 per cent. Constitution, Article 59, paragraph 2. In paragraph 3 of the same article, there is a provision for the calling of a joint committee of both houses, but this is not a

28

9 10 11 12 13

14

15 16

Japanese governance fail-safe method of ensuring the passage of legislation from a government’s point of view. For a fuller discussion, see Stockwin (1999:113–16). Loyalties in the Upper House were fluid at the time, so the figure is approximate. Article 96 of the 1946 Constitution requires a concurring majority of two-thirds of the members of each house of the Diet voting separately, followed by a simple majority in a referendum of the people. One important cause for the collapse of the Shinshinto in December 1996 was the failure of the Komeito elements to assimilate fully into that artificially created party. This is not to argue that such consequences were inevitable, but rather that in the particular political circumstances of Japan between 1947 and 1993 these consequences were observable. By contrast the Democratic Labor Party maintained a little under 20 per cent of the vote in several constituencies for the House of Representatives in Victoria, Australia, between the late 1950s and the early 1970s, but never won a single Lower House seat. This need not necessarily be seen as an inevitable consequence of SNTV in MMCs. It is possible to imagine a situation where the central party organisation coordinated the campaigns of its several candidates in the same constituency, dividing up the constituency into districts in such a way as to optimise the effectiveness of the party vote and avoid vote wastage. The fact is, however, that this did not happen in Japan. For details of how this worked, see Stockwin (1999:130–1). The remarkable significance of the House of Councillors during the Obuchi government was stressed by Hyde (1999).

REFERENCES Asahi Shimbun-sha, 1976. Asahi Nenkan [Asahi Annual], Asahi Shimbun-sha, Tokyo. ——, 1996. Asahi Nenkan [Asahi Annual], Asahi Shimbun-sha, Tokyo. Hyde, S., 1999. Survey of domestic politics, 1998–99, Paper presented at the 7th Annual Japanese Politics Colloquium, University of Birmingham, 7–9 September. Ozawa, I., 1994. Blueprint for a New Japan, Kodansha International, Tokyo, New York and London. Stockwin, J.A.A., 1999. Governing Japan: divided politics in a major economy, Blackwell, Oxford.

Electoral pressures for change 29

APPENDIX Table A2.1 Checklist of coalition governments in the 1990s Prime Minister

Participating parties

Lower House elections, July 1993 Hosokawa

Hata

Dates

JSP Shinseito Komeito JNP DSP Sakigake Shaminren Minkairen (Rengo)

August 1993 – April 1994

The above parties, minus: JSP and Sakigake

April – June 1994

LDP JSP Sakigake

June 1994 – July 1995

LDP JSP Sakigake

July 1995 – Jan 1996

LDP JSP Sakigake

January–October 1996

Murayama

Upper House elections, July 1995 Murayama

Hashimoto

Lower House elections, October 1996 Hashimoto

LDP [JSP] supporting [Sakigake] government but not in it

Upper House elections, July 1998 Obuchi LDP Liberal Party (Jiyuto) Obuchi

Above parties + Komeito

October 1996 – 1998

January 1999 – September–October 1999 –

30

Japanese governance

Table A2.2 Parliamentary seat breakdown, 20 January 1993 [Miyazawa Kiichi, Prime Minister]

LDP JSP Komeito JCP DSP Rengo Niin Club JNP Independent Vacant Total seats Total gov’t seats

House of Representatives

House of Councillors

274 141 46 16 13 – – – 7 15 512 274

106 73 24 11 11 11 5 4 7 0 252 106

Source: Asahi Nenkan, 1994:116. Note: Parties in bold are government parties.

Table A2.3 Parliamentary seat breakdown, 6 August 1993 [Hosokawa Morihiro, Prime Minister from 9 August]

LDP JSP Shinseito Komeito JNP DSP Sakigake Shaminren Minkairen (Rengo) Niin Club JCP Independent Total seats Total gov’t seats

House of Representatives

House of Councillors

227 76 60 52 35 19 13 4 – – 15 10 511 259

99 73 8 24 4 11 – – 11 5 11 6 252 131

Source: Asahi Nenkan, 1994:118. Note: Parties in bold are government parties.

Electoral pressures for change 31 Table A2.4 Parliamentary seat breakdown, 26 April 1994 [Hata Tsutomu, Prime Minister] House of Representatives LDP Kaishin* JSP Komeito Sakigake JCP Mirai Seiun Independent Vacancies Total seats Total gov’t seats

206 130 74 52 15 15 5 3 9 2 511 182

Source: Asahi Shimbun, 26 April 1994. Notes: * An amalgam of Shinseito, Kaikaku, DSP, Shinto Club, Liberal Party and Kaikaku no kai. The JSP and Sakigake defected from the coalition as a result of the formation of Kaishin, which excluded them. Parties in bold are government parties.

Table A2.5 Parliamentary seat breakdown, 18 July 1994 [Murayama Tomiichi, Prime Minister] House of Representatives LDP Kaishin JSP Komeito Sakigake JCP Koshikai Mirai Shinryokufukai Niin Club Liberal Independent Vacancies Total seats Total gov’t seats

200 126 74 52 21 15 6 5

10 2 511 295

Source: Asahi Nenkan, 1995:248. Note: Parties in bold are government parties.

House of Councillors 95 68 24 11 38 5 5 6 252 163

32

Japanese governance

Table A2.6 Parliamentary seat breakdown, 20 January 1995 [Murayama Tomiichi, Prime Minister] House of Representatives LDP Shinshinto Heiseikai* JSP Sakigake Shinryokufukai JCP Minshu Shinto Club Niin Club Liberal Independent Vacancies Total seats Total gov’t seats

208 176 70 21 15 3 14 4 511 299

House of Councillors 95 47 66 15 11 5 5 8 252 161

Source: Asahi Nenkan, 1996:241. Notes: * An alliance of Shinshinto and Komeito-derived members in the Upper House. Parties in bold are government parties.

Table A2.7 Parliamentary seat breakdown, 4 August 1995 [Murayama Tomiichi, Prime Minister]

LDP Shinshinto Heiseikai JSP Sakigake Shinryokufukai JCP Minshu no kai Niin Club Minshu Shinto Club Mushozoku Club Heiwa Shimin Independent Vacancies Total seats Total gov’t seats

House of Representatives

House of Councillors

207 169

111

64 20 15 5

68 39 3 5 14 4

3 3 14 11 511 291

Source: Asahi Nenkan, 1996:244. Note: Parties in bold are government parties.

2 6 252 153

Electoral pressures for change 33 Table A2.8 Parliamentary seat breakdown, 20 January 1996 [Hashimoto Ryutaro, Prime Minister]

LDP Shinshinto Heiseikai SDP (JSP) Sakigake Shinryokufukai JCP Shimin Forum Shin Shakaito Niin Club Mushozoku no kai Jiyu Rengo Independent Vacancies Total seats Total gov’t seats

House of Representatives

House of Councillors

207 170

111 68 36 3 5 14 4 3 4

63 23 15 8 2 2 2 5 14 511 293

2 2 252 150

Source: Asahi Nenkan, 1997:175. Note: Parties in bold are government parties.

Table A2.9 Parliamentary seat breakdown, 29 November 1996 [Hashimoto Ryutaro, Prime Minister] House of Representatives LDP Shinshinto Heiseikai DPJ (Minshuto) SDP (JSP) JCP 21 seiki Niin Club Sakigake Mushozoku Club Shin Shakaito Independent Total seats Total gov’t seats Total 3-party alliance seats

238 152 52 15 26 5 2 10 500 238 255

House of Councillors 111 65 (DPJ/Shinryokufukai) 14 29 14 4 3 4 3 5 252 111 143

Source: Asahi Nenkan, 1997:180. Notes: Democratic Party of Japan (DPJ–Minshuto) formed in September 1996. The first House of Representatives elections under new electoral system were held in October 1996. Parties in bold are government parties; parties in italics are parties supporting the government, but not taking office.

34

Japanese governance

Table A2.10 Parliamentary seat breakdown, 29 September 1997 [Hashimoto Ryutaro, Prime Minister]

LDP Shinshinto Heiseikai DPJ SDP (JSP) JCP Taiyoto (Sun Party) Niin Club Mushozoku no kai Jiyu no kai Sakigake Shin Shakaito Independent Total seats Total gov’t seats Total 3-party alliance seats

House of Representatives

House of Councillors

250 129

112 59 23 21 14 3 4

52 15 26 10 5 2 11 500 250 267

4 3 3 6 252 112 136

Source: Asahi Nenkan, 1998:179. Note: Parties in bold are government parties; parties in italics are parties supporting the government, but not taking office.

Table A2.11 Parliamentary seat breakdown, 12 January 1998 [Hashimoto Ryutaro, Prime Minister]

LDP Minyuren Heiwa Kaikaku Komei Jiyuto JCP SDP (JSP) Sakigake Mushozoku no kai Niin Club Shin Shakaito Kaikaku Club Independent Vacancies Total seats Total gov’t seats Total 3-party alliance seats

House of Representatives

House of Councillors

259 98 46

119 41

42 26 15 2 2

9 1 500 259 276

25 12 14 21 3 4 3 3 7 252 119 143

Source: Asahi Nenkan, 1999:171. Notes: Shinshinto collapsed in December 1997. Jiyuto (Liberal Party) was formed by Ozawa Ichiro in December 1997. Parties in bold are government parties; parties in italics are parties supporting the government, but not taking office.

Electoral pressures for change 35 Table A2.12 Parliamentary seat breakdown, 30 July 1998 [Obuchi Keizo, Prime Minister]

LDP DPJ Heiwa Kaikaku Komei Jiyuto JCP SDP Mushozoku no kai Sakigake Niin Club Kaikaku Club Independent vacancy Total seats Total gov’t seats

House of Representatives

House of Councillors

263 92 47

106 55

40 26 14 5 2 9 2 500 263

24 12 23 14 3 4 3 8 252 106

Source: Asahi Nenkan, 1999:174. Notes: DPJ expanded, absorbing other groups, in April 1998. House of Councillors elections were held in July 1998. Seats in bold are government seats.

Table A2.13 Parliamentary seat breakdown, 27 November 1998 [Obuchi Keizo, Prime Minister]

LDP DPJ Komeito Jiyuto JCP SDP Mushozoku no kai Sangiin no kai Sakigake Niin Club Independent Total seats Total gov’t seats

House of Representatives

House of Councillors

263 93 52 35 26 14 5

104 55 24 12 23 14 11

2 4 10 500 298

5 252 116

Source: Asahi Nenkan, 1999:177. Notes: Komeito re-emerged as a single party in November 1998. Seats in bold are government seats

36

3

Japanese governance

The dynamics of coalition politics in Japan Aurelia George Mulgan

Japan has entered an era of coalition politics. It began in August 1993 with the formation of a seven-party coalition of new and old opposition parties under Prime Minister Hosokawa,1 thus ending the continuous rule of the Liberal Democratic Party (LDP) from 1955. Over the past seven years, Japan has experienced coalition governments of various kinds, ranging from formal coalitions with multi-party cabinets to ad hoc issue-by-issue coalition-building and quasi coalitions in the form of loose parliamentary alliances. Although the formation of the Hosokawa Cabinet was heralded at the time as a new beginning in Japanese politics, it appears in retrospect to have been more of a brief aberration in LDP dominance. The key difference between the pre- and post-1993 Diets is the shift from LDP single-party rule to LDPled coalitions (in short, from LDP to LDP plus). Coalitions are a product of the need for working majorities in parliamentaryCabinet systems. Parties do not normally enter them by choice, but out of necessity. In June 1994, the LDP was able to resume power only by entering into a formal coalition agreement with two defectors from the seven-party coalition—the Socialist Party (JSP/SDPJ)2 and Sakigake.3 The three-way coalition lasted until the Lower House (House of Representatives) elections of October 1996, when the LDP just fell short of regaining its majority. The shortfall in seats saw the LDP continuing a parliamentary alliance with the Socialists and Sakigake until September 1997, by which time it had attracted a sufficient number of Lower House Diet members back into its ranks to regain a majority. In spite of the restoration of its majority-party status, the LDP continued its cooperative relationship with the SDPJ and Sakigake outside the Cabinet until April 1998 when the Socialists and Sakigake pulled out of the alliance in order to underscore their identities as separate parties in the lead-up to the July 1998 Upper House (House of Councillors) election. The LDP’s propensity for forming quasi-coalitions during this period was influenced to some extent by its weakened position in the House of Councillors. The LDP first lost its majority in the Upper House in 1989 and, although it made some gains in subsequent elections (in 1992 and 1995), it remained short of an outright majority.

The dynamics of coalition politics in Japan

37

The 1998 election heralded yet another reorientation in LDP-led coalition politics. Despite the LDP’s comfortable majority in the Lower House, the number of seats it held in the Upper House fell to such a low level that it again pursued the coalition option, this time with the Liberal Party (LP), which was brought into the Cabinet in January 1999 (a combination that still fell short of a majority of seats in the Upper House), followed by the ‘New’ Komeito,4 which was formally incorporated into the coalition in October. In April 2000, the LDP and Komeito ended their coalition with the Liberal Party, but invited back into the coalition a group of defectors from the Liberal Party who had formed the Conservative Party (Hoshuto). The results of the 2000 House of Representatives election have only served to entrench coalition politics further. The three ruling parties presented voters with a solid coalition front, with a clear choice between the tripartite alliance and a number of separate opposition parties. The poll was unprecedented in the degree to which coalition candidates stuck to unified campaign pledges and the coalition parties cooperated in arranging combined candidacies in particular electorates.5 Furthermore, the LDP’s overall performance in the election meant that a continuation of coalition arrangements was necessary because of the loss of its clear majority in the Lower House. The LDP has now reverted to its post-June 1994 Diet configuration. It is without a majority of seats in either house. Although it remains the largest single party, it is in a significantly weaker position than it has been for some years. Whereas the LDP enjoyed the option of reforming a coalition after the 1998 Upper House election, the coalition has now become a necessity. An unravelling of the coalition could mean loss of government. The era of coalition politics is likely to last until at least 2004. The LDP has little chance of regaining its outright majority in the House of Councillors in the 2001 election, and its more uncertain prospects in the House of Representatives—where the loss of city districts have led to a contraction in the LDP’s support base—raise serious questions about the party’s electoral future as a single ruling party. Structural factors may also play a role. The relatively large number of proportional representation seats in the Lower House supports the existence of smaller parties and prevents large parties from dominating the House.6 When combined with the deterioration in the LDP’s electoral performance, this would tend to suggest the need for further coalition-type arrangements. This will be the case, even if the Conservative Party uses the formal alliance with the LDP as a stepping stone to returning to the LDP fold (as the New Liberal Club did in 1983–86).7 FACTORS CONTRIBUTING TO COALITION RULE Apart from the overriding logic of Diet management, which requires seat majorities to support the government and to pass legislation, a number of independent political forces have contributed to the emergence of coalition politics in Japan.

38

Japanese governance

The opposition parties have become more palatable as potential partners in a coalition for a number of interrelated reasons. First, some of the LDP’s coalition or loose alliance partners contain elements which were formerly from the LDP camp itself, such as the Liberal, Conservative and Sakigake parties. This is a reflection of restructuring in the party system which reached a peak between 1993–98. Many of Japan’s new opposition parties began as breakaway groups from the LDP. Second, from 1993–2000, all the main opposition parties or their predecessor organisations, except for the Japan Communist Party (JCP), or Nihon Kyosanto, have gained government experience in coalitions and hence most are potential partners in an LDP-led coalition. Third, the LDP contains within its own ranks a conservative-centrist span, which enables it to team up with political groups such as the Liberal Party on the right and the Komeito on the centre-left (Kabashima 1999:9). Its policy flexibility was particularly evident in June 1994, when it formed a coalition with the Socialists and Sakigake. Anxious to regain power, the LDP put aside its long-standing confrontation with the SDPJ on matters such as Article 9 of the Japanese Constitution, the status of the Japanese Self-Defence Forces and the US–Japan Security Treaty.8 Fourth, the fading of ideological polarities amongst the political parties since the end of the Cold War has muted policy differences. What is more, no new axis of confrontation has emerged to divide the ruling and opposition parties. Such an axis may, of course, arise in the future over issues such as constitutional and economic reform, but the political parties in Japan (except perhaps for the Communists on the left and the Conservatives/Liberals on the right) seem to be converging towards the political centre, which is rational given the bell-curve distribution of voter preferences on a progressive– conservative, left–right scale (Kabashima 1999:16). Differences on policy issues amongst the majority of Japan’s political parties have become blurred and are more a matter of nuance in the 1990s than they were in previous decades. One can contrast, for example, the diminished differences between the LDP and the largest single opposition party at the present time—the Democratic Party (DPJ)9 —on various policies including security and defence,10 with the much sharper policy differences that existed between the LDP and the opposition Socialist Party and JCP during the years of LDP one-party rule. Even the JCP has displayed a certain readiness to abandon their opposition to the US–Japan Security Treaty in order to join a possible anti-LDP coalition government.11 A final related factor is the nature of parties as organisations and their links to voters. With the exception of the Komeito and JCP, party boundaries are not tightly drawn in terms of membership, policies or ideologies. Some of the parties seen in recent times have been little more than temporary alliances of mutual convenience among groups of like-minded legislators motivated by political opportunism and personal loyalties rather than by any clear and collective

The dynamics of coalition politics in Japan

39

commitments to concrete policy agendas and well-defined groups of supporters. Many have been ‘parties in search of a policy’. In spite of the new Lower House electoral system, which is designed to place more emphasis on parties than on individual candidates as the basis of the vote, party identification amongst voters remains weak. In fact, the 1990s have seen a distinct trend toward realignment among Japanese voters (Mair and Sakano 1998:195). In the 300 SMDs of the Lower House, voting remains more candidate-centred than party-centred.12 Symptomatic of this are the ‘even bigger koenkai (personal support organisations)’ that came into being prior to the 1996 Lower House poll (Stockwin 1999:20), candidates’ continuing reliance on the organised votes of affiliated interest groups, and intensified pork barrelling by politicians vying for seats. In the zero-sum party competition in the SMDs, candidates are being driven by the need for a plurality (Stockwin 1999), not just 15–20 per cent of the vote—which was sufficient under the old multi-member district system. In a situation where the majority of constituents vote for individual politicians rather than for their parties, where the koenkai remain the primary political machines to drum up support, and where personality, personal favours and connections, and various specific considerations relating to individual candidates remain the primary determinants of voting behaviour rather than party affiliation, it matters less what party politicians belong to. They can switch parties and still take their supporters with them. In fact, many individual politicians have transportable support bases, which gives them greater freedom of choice with respect to party affiliation—the freedom to chop and change, dissolve parties, set up new ones and so on. In addition, weak party loyalties and unstable party identification will continue to produce electoral volatility (Laver and Kabashima 1998), which will be conducive to fluid politics and party instability and thus a continuation of coalition government rather than a reversion to LDP single-party rule. COALITION THEORY AND THE JAPANESE CASE The theory of coalition-building argues that parties wanting to hold or retain government will pursue a ‘minimal winning coalition’, that is, a parliamentary majority of the minimal size, sufficient only to guarantee the passage of legislation (which means 51 per cent or as little as possible above that proportion) (Riker 1962; Leiserson 1968:770–87; Kato and Laver 1998:229– 52). In terms of rational self-interest, this strategy enables parties to minimise the distribution of the spoils of office and the extent of policy compromise. From this perspective, while the LDP’s dual-party setup with the Liberal Party in 1998 undershot the minimal winning coalition objective (the LDP and Liberals were still 11 seats short in the House of Councillors), the threeway coalition with the Komeito overshot it by a comfortable margin.13 In fact, it made the retention of the Liberal Party in the coalition redundant.

40

Japanese governance

These developments raise a number of questions. Why did the LDP enter the coalition with the Liberal Party when the latter’s numbers were insufficient to give the coalition a majority in the House of Councillors?14 Why did the LDP keep the Liberals in the coalition when they became surplus to requirements? Finally, why did the LDP choose a formal coalition with the Komeito rather than ad hoc issue-by-issue coalition-building, which it had opted for before and after the formal coalition agreement with the Liberals? After all, there were a sufficient number of conservative independents in the Upper House to make this a realistic Diet strategy (Kabashima 1999). To answer these questions we need to broaden our understanding of the dynamics of coalition politics beyond the minimal winning coalition principle of coalition theory. First, coalitions that incorporate elements of the opposition help to weaken and divide it as a countervailing force in the parliament. The LDP, having experienced the new and united front of the opposition parties over banking legislation in early October 1998,15 wanted to break up the opposition ‘coalition’ at the same time as undermining the leadership of a revamped and more powerful opposition headed by the DPJ (Curtis 1999). As for the choice of coalition partner, the LDP’s erstwhile allies, the Socialists and Sakigake, were no longer useful for coalition purposes. Sakigake was almost defunct as a parliamentary force,16 and the Socialist rump under Takako Doi was a less attractive partner for the LDP than the earlier and much larger JSP with its centre–left span (certainly compared with the Liberals, who had many basic philosophies and ex-members in common with the LDP). Also, practical cooperation with the Liberal Party over a series of crucial banking bills in late October 1998 had demonstrated that an LDP–Liberal Party coalition could work. For their own reasons, the Liberals were also receptive to LDP advances.17 As for the LDP’s choice of the Komeito, a prime consideration was the attractiveness of the party as a reliable vote-gathering force amongst its eight-million strong Soka Gakkai membership. The Komeito provided the LDPled coalition government with a much-needed organised support base in urban areas. This helped to offset the erosion of support for the LDP amongst city voters during the 1990s (see George Mulgan 2000, especially Chapter 5). Second, when smaller parties enter coalitions they have to make a variety of concessions to their more dominant partner. In June 1994, the SDPJ relinquished its ideological objections to the Japan–US Security Treaty and to the existence of the Japanese Self-Defence Forces in order to enter the alliance with the LDP. These changes represented the most dramatic shift in the Socialist Party’s policy in the postwar period.18 The LDP, on the other hand, made few policy compromises, but did compromise on the top job in the new coalition Cabinet. Its masterstroke was to offer the prime minister’s position to the Socialists (Curtis 1999). In this gesture, the administration of Tomiichi Murayama was born. Although Murayama was the titular head of the government, the LDP’s greater numbers in the Diet assured it of Cabinet dominance, which ‘had the effect of largely locking in the Socialists to LDP policy positions’ (Curtis 1999).

The dynamics of coalition politics in Japan

41

In policy negotiations prior to coalition formation, the dominant party has a powerful bargaining chip on its side—the offer of power-sharing. This usually means that it ends up making fewer concessions on policy than potential new entrants. In 1998–99, the LDP was able to entice the Liberals and Komeito into government with modest concessions to the latter and agreements with the former which also advanced LDP interests, particularly the focus on reducing the power of bureaucrats and enhancing the position of larger parties in Diet elections.19 Third, formalising coalition arrangements curtails the bargaining power of new entrants once the coalition has been established.20 This is because smaller parties in a coalition develop a stake in its survival, so they are more willing to concede on policy issues than when out of power. Being part of a coalition is their only chance of preserving their rights of government. In the LDP’s case, this factor worked to limit the concessions it had to make to its coalition partners in 1998–99. Over the objections of the Komeito, the LDP disregarded some elements of the three-party coalition accord in relation to nursing care policy and announced new measures on nursing policy without the approval of the Liberal Party. The LDP also ignored the Komeito’s wishes on granting voting rights to non-Japanese permanent residents and on engaging in lavish spending on welfare,21 and aligned itself with the Liberal Party against the Komeito on the political ethics issue of business donations to individual politicians and on the issue of reducing the number of proportional representation seats in the Lower House.22 The LDP’s rather cavalier approach to its coalition partners’ wishes may have been partly due to the fact that it held a working majority in the far more powerful House of Representatives, which meant that if either or both the Liberal or Komeito parties had withdrawn from the coalition, the LDP would not have lost government.23 In fact, one might argue that the LDP conceded more to the Liberal and Komeito parties when they were out of government in 1998–99 than when they were part of the formal coalition, because it had to make considerable compromises in order to secure their votes on individual items of legislation, compared with merely observing what proved to be a rather flimsy threeparty coalition accord. In late 1998, for example, the LDP accepted the Komeito’s rather dubious proposal to issue ‘merchandise coupons’ aimed at the elderly and families with young children in order ‘to gain that party’s support for the fiscal 1999 budget’ (Kawachi 1999:7). This level of concession to specific Komeito policies was not repeated during the three-party LDP–Liberal Party– Komeito coalition, although after the Liberal Party left the coalition, the Komeito’s weight in the coalition expanded, and the LDP became more inclined to concede to its partner’s wishes in areas such as national and social security (Yomiuri Shimbun, 27 June 2000). In general, however, smaller parties in coalitions trade their power to extract policy concessions for office, in spite of the fact that they enter coalitions expressly to get their policies implemented. The examples already provided

42

Japanese governance

suggest that the Komeito weakened its bargaining position by entering the coalition with the LDP in January 1999. It relinquished its crucial role as parliamentary ‘balancer’ between the LDP and the DPJ, thus losing a powerful casting vote on individual items of legislation. When it held the balance of power in the Upper House, the Komeito found itself being courted assiduously by both the LDP and the Democrats—a stronger position than it had ever held in its Diet history (Curtis 1999). It was the prospect of power-sharing with the LDP, however, that proved the decisive consideration in pushing the Komeito to join the coalition rather than aligning itself with the DPJ and the more uncertain prospects attached to that course of action.24 In short, the Komeito gained power but lost leverage as part of the ruling coalition. Once in government, smaller parties may be more actively involved in the policymaking process, but they also run the risk of being submerged by the dominant party. This fear was explicitly expressed by anti-coalition Liberal Party members prior to their party’s entry into the coalition with the LDP, and also by younger members of the Komeito, who were opposed to entering a formal coalition with the LDP (Nikkei Weekly, 2 November 1998).25 Fourth, coalitions inevitably work to tame the opposition by helping to neutralise the policy differences amongst the newly aligned political groupings.26 Mutual compromise is mandatory if coalitions are to survive, but such merging of policy differences can also have the effect of drawing the sting out of opposition party criticism of dominant party policies once the coalition has been established. Formal coalitions thus moderate the behaviour of opposition parties and remove their potential to disrupt the Diet process—a critical consideration if controversial pieces of legislation are in the offing. In 1999, a number of such controversial bills were due to be passed in the Diet, such as legislation implementing the revised US–Japan defence cooperation guidelines; bills to reorganise the ministries of the central government; and bills to authorise wiretapping for investigative purposes and to establish officially the Hinomaru (the national flag) and Kimigayo (the national anthem). This aspect of coalition dynamics explains why the LDP formed a coalition with the Liberals (despite the fact that they were insufficient to bring coalition numbers to a majority in the Upper House), and why the LDP retained them in the coalition even though it no longer needed their numbers after the linkup with the Komeito. The LDP wanted the Liberals on board for all of the controversial bills, especially the new defence cooperation guidelines, in order not to be outflanked from the political right. Furthermore, in such a large coalition, the LDP was in an even stronger position to override any challenges from the remaining opposition parties over important bills in the Diet. Finally, while succeeding in the Diet is one thing, being successful in national elections is something else altogether. Coalition partners may pay the price of their policy concessions and their political opportunism at election time. In public opinion polls prior to the 2000 elections, a clear majority of respondents

The dynamics of coalition politics in Japan

43

were critical of the existing coalition framework. This was borne out on voting day in the electoral losses sustained by the coalition parties in contrast to the electoral advances made by all the non-coalition parties except for the JCP.27 One of the negative aspects of coalitions is that the muting of policy differences and the compromises inherent in the formation of a cross-party consensus make it more difficult for coalition members to project a clear image of their respective parties and policies to the electorate. Sometimes it is not clear what the coalition parties stand for. One of the reasons why the Sakigake and the SDPJ were routed in the October 1996 and July 1998 elections, despite having withdrawn from the parliamentary alliance in April 1998, was that their party identities were no longer easily distinguishable. This was one of the considerations weighing on the mind of Liberal Party leader Ichiro Ozawa in the lead-up to the party’s departure from the coalition in April 2000.28 As the subsequent election demonstrated, the decision rebounded to the Liberal Party’s electoral advantage. It outperformed the Conservative Party, which remained in the coalition,29 while the Komeito also paid dearly for being part of the ruling alliance. Opposition groups also attract criticism from voters simply for being party to coalition arrangements with the LDP. One of the reasons why constituents vote for opposition parties is because they want them to oppose the LDP, not to support it. One leading LDP politician warned, for example, that opposition parties that supported the LDP regime would lose public support for this reason (Nikkei Weekly, 2 November 1998). That prediction proved to be accurate. According to one media report: ‘voters found it especially unacceptable that Komeito had taken part in the coalition government by switching its position from an opposition to a ruling party. That was the main reason why the party suffered a setback in the election’ (Asahi Shimbun, 26 June 2000). Furthermore, the appearance created by the three-party LDP–Komeito– Liberal/Conservative coalition, based not only on the naked political opportunism of its minority participants, but also on the image created by a three-party juggernaut30 sweeping all before it on the floor of the Diet, ran real risks of being resented by many voters because of the coalition’s ability to ignore opposition party views and because it rendered the opposition weaker in the Diet than is desirable in a democratic system. The Komeito, in particular, came in for especially harsh criticism for reversing its previous opposition to the wiretapping bill and the laws recognising the Hinomaru as the national flag and Kimigayo as the national anthem, and thus allowing this controversial legislation to be passed (Sataka 2000). Nor is coalition politics without dangers for the LDP. In addition to the possibility of voter resentment arising from antipathy towards the coalition, it also runs the risk of fragmenting its party identity between Liberals and Conservatives on the right and the Komeito on the centre-left (Kabashima 1999; reported in Kawachi 1999). The effort of trying to balance the coalition’s left and right wings inevitably exerts a drag on LDP policy leadership and prevents a clear message being

44

Japanese governance

projected to the electorate. Apart from promises of more public works spending, the LDP’s 2000 electoral platform relied on vague promises of doing more to lift the economy out of recession.31 This was only matched by the equally abstract coalition pledges to ‘revitalise the Japanese frame of mind’ and ‘realise a state where people can live safely and at ease’ (Yomiuri Shimbun, 27 June 2000).32 Coalition politics also encourages further party de-alignment amongst voters because of the merging of policy differences among parties to the coalition.33 Voters tend to become sceptical of politicians who are ready to compromise their policy principles and party identities in order to share power. The result is greater disillusionment with politicians and political parties, and rising voter apathy. Symptomatic of public disaffection from politicians and politicians was the satirical poem (senryu) that says, in effect, ‘“I ask my secretary/what party do I belong to now?”—referring to the stupidity of Diet members who often change political parties’ (Sataka 2000). At the same time, the existence of cross-party government provides an opportunity for non-coalition parties to stake out a clearer policy position. This opportunity was not lost on the Liberal, Democratic and Social Democratic parties, who, both before and after the 2000 elections, tried to carve out distinctive policy positions for themselves, at the same time as resisting the temptation to merge into an opposition coalition.34 Moreover, as exit polls of the 2000 elections showed, de-alignment does not necessarily prevent voters from supporting particular parties. The DPJ, for example, captured about 38 per cent of non-aligned (predominantly city) voters in the election (Yomiuri Shimbun, 27 June 2000). In the wake of the 2000 elections, tensions rose in the LDP–Komeito alliance with some Komeito members arguing that the party should distance itself from the LDP in the 2001 Upper House election (Sydney Morning Herald, 27 June 2000). This was despite the fact that the Komeito gained power in the coalition because of the loss of the LDP’s ability to rule in its own right. In policy terms, the LDP’s greater dependence on Komeito numbers in the House of Representatives will mean greater concessions to Komeito interests in order to preserve the coalition. On the other hand, if growing numbers of Komeito members begin to voice strong opposition to the coalition with the LDP, it may lead to a further realignment in Japanese politics (Asahi Evening News, 26 June 2000). THE POLITICS OF CONSULTATION VERSUS THE POLITICS OF COALITION In spite of the apparently radical shift in Japanese party politics from singleparty dominance to coalition rule, the question remains whether the contrast between the pre- and post-August 1993 eras is as marked as it looks on the surface. Strong parallels exist in the LDP’s Diet management strategies in both periods. In fact, the present state of Diet politics can be seen as a more highly

The dynamics of coalition politics in Japan

45

developed form of the kind of Diet politics that prevailed between the LDP and opposition parties at certain times in the 1970s, 1980s and early 1990s. The LDP was in a substantially weakened position in the Diet after the Lower House elections of 1976 and 1979, when it failed to achieve a majority of seats and had to seek support from independents to bring it over the line. In 1983–86, it was in a similar position. In the Upper House, the LDP’s majority was stripped to a bare minimum in the 1977 elections, and in the 1989 elections it permanently lost its majority in that house. The period of diminished LDP majorities became known as the hakuchu jidai—the era of evenly balanced forces between the government party and the combined opposition parties in the Lower House. The LDP’s more tenuous Diet position led it to engage in ‘teahouse’ or ‘deal-making’ politics with the opposition parties, whose ‘opposition’ in the Diet was often nothing more than a ritual. Behind the scenes, the LDP and opposition parties were doing deals, ‘joining hands in Diet politics’ as a long forgotten observer of Japanese politics once said, with concessions traded in return for smooth passage of government legislation. The opposition only really opposed the ruling party in the areas of defence and security, where they sought to blunt LDP excesses. Informal negotiations behind the scenes were supplemented by more formal approaches for cooperation and collaboration. In 1979, the Fukuda and Ohira factions wooed the Komeito and Democratic Socialist Party (DSP) in the Diet vote to designate the prime minister (Foreign Press Centre 1985). In 1983, only a formal coalition with the New Liberal Club (made up, like the Liberal Party, of ex-LDP politicians) enabled the LDP to ride out the crisis of its poor showing in the Lower House election of that year (Foreign Press Centre 1985). In 1984, the DSP Chairman proposed ‘creating a setting for policy discussions’ with the LDP. The LDP viewed this as an attempt to form a ‘policy coalition’ that would include the possibility of cooperation outside the Cabinet (Foreign Press Centre 1985:91). Meanwhile, the Socialist Party was unsuccessfully trying to woo the Komeito in an effort to formulate a more realistic policy line with a view to possibly forming an opposition coalition government (Foreign Press Centre 1985). There was, in other words, a distinct trend toward coalition-style politics from about the mid-1970s onwards.35 Voters often supported the opposition parties in order to curb the power of the LDP, rather than envisaging them as a possible alternative government. They wanted ‘buffer players’, as Kabashima calls them (1997:173–74). Since 1989, Japanese voters have continued to engage in this kind of strategy with split-ticket voting in the Lower House and by voting for the opposition parties in Upper House elections (Stockwin 1999). The general point being argued here is that the LDP’s approach to interparty policy coordination in the current era of coalition politics is not radically different from the kind of Diet management strategies it employed during the hakuchu jidai in the Lower House and since 1989 in the Upper House. Although

46

Japanese governance

the orientation towards coalition has grown stronger—particularly in the absence of an LDP majority in the Lower House between June 1994 and September 1997, and in the wake of its disastrous performance in the 1998 Upper House elections—it could be argued that coalition politics is just a more developed form or extension of deal-making politics. As Serikawa (1998) points out, the process of tri-party policy negotiations between 1994 and 1998 could ‘be viewed as similar to the old LDP–JSP coordination in the Diet under the 1955 system’. So in this respect, coalition government is hardly the important political innovation of the 1990s that some commentators argue it is (Stockwin 1999). There are, in fact, some characteristics of the LDP that predispose it towards coalition-style rule. The first is the existence of factions. The ruling party is constantly doing deals internally amongst its factions. Under coalition government or loose alliance arrangements, negotiations are simply extended to include opposition parties who are treated like other LDP factions, especially when the former are composed of many ex-LDP members like the Sakigake, Liberal and Conservative parties. Coalition governments are a manifestation of factional politics in yet another way. A coalition can bolster the prime minister’s position against rivals from within his own party. LDP factions may form temporary alliances of convenience with opposition parties in order to reinforce their numbers in crucial votes in the Diet or to strengthen their position in policy negotiations inside their own party.36 In 1999, for example, the coalition reinforced Obuchi’s bid for the party presidency against his strongest rival for the job, Koichi Kato, effectively guaranteeing his re-election (Kawachi 1999). It also consolidated the power of the Obuchi faction in intra-LDP policy negotiations. In some respects, it was the Obuchi faction that formed the three-way coalition with the Liberal and Komeito parties, rather than the LDP as a whole. Second, the LDP’s strong orientation toward inclusiveness or consensusstyle Diet politics can be discerned in its openness to policy negotiations with opposition parties even when their votes are not needed for a majority. A good example is the loose alliance the LDP maintained with the SDPJ and Sakigake between September 1997 and April 1998, even though the restoration of its Lower House majority meant this was no longer necessary.37 Even after the LDP formalised its coalition with the Liberal Party in January 1999, it engaged in a process of loose de facto coalition-building with the Komeito (in order to guarantee its majority in the Upper House), but even more significantly, with the Democratic Party, whose support was not vital for legislation to be passed. The DPJ was brought into negotiations with the LDP on several crucial policy issues following the 1998 elections38 and also in 1999, although its legislative influence varied depending on its level of unity and its expertise on particular policy issues (see Amyx 1999). Significantly, the DPJ (as well as the Liberals) proclaimed their efforts in compiling some of the bills that passed during the mammoth Diet session that ended in August 1999, such as the laws on introducing debates between the prime minister and opposition leaders in the

The dynamics of coalition politics in Japan

47

Diet, and on prohibiting career bureaucrats from answering questions in the Diet—probably owing to the fact that curbing bureaucratic power was on the policy agenda of both parties. Another good example was the passage of the new defence cooperation guidelines bills in May 1999, in which the LDP sought to get the Democrats on their side almost as much as it did the Komeito, even though it did not really need the support of the Democratic Party. Because of LDP compromises with both parties, the bills ended up being supported by 70 per cent of the Diet (Green 1999). There are some issues in which a crossparty consensus is desirable, and defence policy is one of them. On constitutional questions, it is absolutely mandatory for both political and constitutional reasons. The general principle of the LDP’s Diet management is the same—the more people you have on board the better. The LDP often negotiates with other parties to achieve that end. Another rationale is also at work. The LDP is always attuned to the risk of one of its formal coalition partners falling off the bandwagon. After all, ‘in the world of coalition politics, only God knows when one’s partners will change’ (Kawachi 1999:7). The hoho rengo conservative–conservative (LDP– Liberal Party, or L–L) alliance sporadically creaked at the seams only to be replaced by a slightly different hoho rengo in April 2000. One LDP leader, Yohei Kono, argued against ‘letting dialogue with non-coalition parties languish’, stating that [w]hat we mustn’t have is a situation in which the ruling parties push through whatever they want, drawing a rigid line between themselves and the opposition, and are unable to do anything once part of the coalition quits in a huff. (Mainichi Shimbun, 11 June 1999)

What has changed in the coalition politics of the 1990s and new millennium is a retreat from the old method of deal-making, which was largely a behindthe-scenes activity.39 In the new coalition politics, deal-making is much more open, not only with formal coalition agreements but also with more meaningful and open debate amongst the parties in both the pre-parliamentary and parliamentary stages. During the LDP–JSP–Sakigake coalition, for example, the three parties institutionalised policy cooperation by means of both formal and informal policymaking committees. The tripartite policy accord that formed the basis of the coalition ‘called for transparent and democratic policymaking procedures and for the establishment of specific new inter-party decisionmaking bodies’ (Curtis 1999:200). Inter-party coordinating and decisionmaking bodies were subsequently established, and they operated until April 1998, when the Socialists and Sakigake left the loose parliamentary alliance. As Serikawa notes, [t]he coalition created a new transparency in policymaking, an effect of considerable value…The coalition government…spent a great deal of effort on interparty coordination in a bottom-up approach. This involved project teams, policycoordination meetings, meetings of party leaders and other processes that con-

48

Japanese governance sumed a lot of time and trouble, but offered the frequent opportunities for discussion necessary to form a highly democratic consensus. (Nikkei Weekly, 8 June 1998)

Negotiations between the LDP and DPJ both prior to and following the formation of the three-party coalition in October 1999 have also been characterised by greater transparency and by their conspicuousness as part of the Diet process. This is primarily due to the DPJ’s approach to inter-party coordination, which sees it as rightly belonging in the context of Diet deliberations. Thus, while the tripartite alliance of 1994–98 might have put the focus on inter-party policymaking outside the Diet, intra-Diet negotiations have, to some extent, regained their importance because of the pro-active role of the DJP in consultations with the LDP. Coalition politics is, therefore, enhancing the transparency of political decisionmaking in Japan and strengthening the function of inter-party and intra-Diet policymaking. While the LDP and the bureaucracy remain dominant entities in the policymaking process, important new layers now exist in this process. THE CONSEQUENCES OF COALITION POLITICS FOR THE OPPOSITION An important consequence of coalition politics is that it undermines the will of the opposition parties to oppose, and thus to form viable alternative governments. In the Japan of the 1990s and 2000, opposition parties are being more thoroughly seduced into power-sharing arrangements than ever before. The Komeito, for instance, is less interested in lining up with the SDPJ and DPJ to bring the government down than in joining it.40 This is despite the fact that the Komeito’s position as a centrist party on the ideological spectrum enables it to go either way (Kabashima 1999). Historically speaking, however, joint LDP–opposition party coalitions have always won out over coalitions based exclusively on opposition parties, there having been only two short and unsuccessful examples of the latter in Japan’s postwar Diet history—in 1947– 48 and 1993–94. What would really constitute a major change in Japanese politics would be the emergence of a unified and effective excluded opposition. This, however, is very unlikely to occur. The new Lower House electoral process will not produce a two-party system. It retains too many elements of proportionality; because, as already noted, the new system encourages split-ticket voting which serves to disperse popular dissatisfaction with the LDP (Sato 1997). At the same time, the strong social, religious, class, territorial or ethnic cleavages on which parties can be built are absent (Watanuki 1967; Hrebenar 1986; Richardson 1991; Mair and Sakano 1998). The parties tend to be collections of like-minded politicians with vague catch-all policies, rather than groupings coalescing around clear policy positions derived from a shared ideological worldview. The pork-barrel opportunities conferred by incumbency will also

The dynamics of coalition politics in Japan

49

tend to entrench the LDP in the SMDs (Gallagher 1998). Furthermore, none of the opposition parties has an effective national organisation enabling it to win a sufficient number of SMD seats (Sato 1997; Mair and Sakano 1998). The most likely nominee for the role of dominant opposition party—the DPJ—is hardly a likely candidate as a cohesive and clear alternative to the LDP, given its composition as a schizophrenic compound of ex-LDP and exSDPJ members, its weak party identity, its low level of ideological cohesion and its lack of party solidarity (Kabashima 1999). Its only prospects hinge on voter antipathy towards the parties in the tripartite coalition. This was borne out in the June 2000 Lower House elections, when it became the default option. But given that its strongest support was secured in city districts with the highest concentrations of non-aligned voters, its future performance is not necessarily guaranteed. CONCLUSION The origins of Japan’s current era of coalition politics lie in the process of party realignment precipitated by the Ozawa-initiated fracture of the LDP in 1993. The end of single-party dominance and the demise of the stable political order known as the ‘1955 political system’ took place against a background of dramatic change in global affairs and the onset of economic recession in Japan. The economic and political turbulence of the 1990s has continued into the new century and the formation of a two-party system and the creation of a new political order remain as elusive as ever. Indeed, the era of coalition politics has served to obscure differences amongst the parties further—not to accentuate them. The process of party fission and fusion will probably continue, creating new and different coalition options. The factors that will shape future coalition politics will be the strategic calculations of opportunistic elements in the minority parties, the success—or lack—of coalition campaign cooperation, the attitudes of general voters towards coalition arrangements as expressed in elections, and the size of the LDP’s Diet membership after successive Upper and Lower House elections. The emergence of coalition politics obscures those elements of continuity that can be discerned in both the Diet and party politics of the 1990s and earlier periods—and in the late 1970s and early 1980s consultative and dealmaking habits which laid the foundation for coalition-building in the 1990s, and the continuation of LDP dominance in other forms. What underlies the current era of coalition politics is what underpinned the politics of consultation and consensus in the 1970s and 1980s—the LDP’s weaker position in the Diet and thus its need to engage in cooperative, inter-party consultations as a means of preserving the status quo and ensuring the passage of legislation. The more controversial the bills, the greater the need for dialogue because of the potential for opposition parties to disrupt the legislative process. One-party dominant systems are not necessarily incompatible with coalition or consensusstyle parliamentary politics—at least in Japan’s case.

50

Japanese governance

For the most part, the energies of the non-LDP parties remain concentrated on negotiating with the predominant ruling party like satellites (Stockwin 1999:5). Collectively they present little chance of forming a viable alternative government unless the Democratic Party can consolidate its leadership of non-LDP groupings. The enduring success of the LDP in government has trained the opposition parties to think that they can only be effective by sharing power with the LDP, not by confronting it. The current challenge for parties outside the coalition is to retain their relevance in the face of the overriding strength of the tri-party ruling group. If excluded from meaningful dialogue, they may resort to the kind of negative tactics seen in earlier decades of parliamentary confrontation.41 For the coalition parties, the challenge is to deliver an arrangement stable enough for effective Diet politics and for implementing key policies and legislation to deal with Japan’s current economic and fiscal difficulties. The ruling parties will also need to weigh up the benefits of power sharing against the potential costs at the ballot box. NOTES This chapter was originally published as ‘The dynamics of coalition politics’, in Asia–Pacific Review, November (2000). The journal’s web site is: <www.tandf.co.uk/ journals>. 1 It was an eight-party coalition if one includes the Democratic Reform Party (Rengo Sangiin or Rengo Upper House Group) in the House of Councillors. 2 Although the JSP, or Japan Socialist Party (Nihon Shakaito) altered its English title to Social Democratic Party of Japan (SDPJ) in January 1991, only in January 1996 did it change its Japanese name to Social Democratic Party (Shakai Minshuto, or Shaminto). 3 The full title was Shinto Sakigake (New Party Harbinger) until October 1998, when it became just the Harbinger Party, or Sakigake. 4 The Clean Government Party or Komeito was re-formed in November 1998 but essentially is the same as the pre-1993 party. The supporters of Komeito are from Soka Gakkai, a lay organisation of the Nichiren Shoshu sect of Buddhism. This party calls itself Komeito in Japanese and will be referred to as such from now on. In English it calls itself New Komeito. 5 The extent to which electoral agreements amongst the parties held up in practice varied according to party. For example, commentary on the 2000 election suggests that Komeito voters were more inclined to support LDP candidates than vice versa (in fact 50 per cent as against 2 per cent). In short, the Komeito was able to deliver votes to LDP candidates in many seats, but LDP voters were disinclined to reciprocate. As a result, Komeito candidates lost out compared with LDP candidates (Asahi Shimbun, 4 July 2000; Yomiuri Shimbun, 27 June 2000; Sydney Morning Herald, 27 June 2000). 6 The number of proportional representation seats in the Lower House was reduced from 200 to 180 as a result of legislation passed in the Diet in February 2000. See also below. 7 Prior to the 2000 elections, Prime Minister Mori even raised the possibility of a merger between the LDP and the Komeito (Nikkei Weekly, 5 June 2000). He also suggested a merger of the LDP and its two coalition partners into a single entity ‘if they share common policy views’. He appeared to see this as a stepping

The dynamics of coalition politics in Japan

8

9 10

11

12 13

14 15 16 17

18

51

stone to the formation of a two-party political system similar to those in the United States and United Kingdom because the current Lower House election system is weighted in favour of single-seat districts (Asahi Evening News, 13 June 2000). Curtis comments that the LDP’s reinterpretation of its differences with the SDPJ on these matters took the form of a diplomatic division of labour in which the LDP saw itself as having ‘managed the alliance with the United States [while]...the Socialists kept open lines of communication to the Soviet Union and China’ (Curtis 1999:189). In fact, the LDP’s concessions on this issue turned out to be far less than the SDPJ’s. The English title of this party is Democratic Party of Japan (DPJ), whilst the Japanese is Minshuto, or Democratic Party. This discounts the distinction that appears to be emerging between the DP’s representation of city voters and urban interests (consequent upon its electoral victories in those districts in the 2000 Lower House elections), and the LDP’s representation of rural voters and agrarian interests. The emerging difference in the electoral support bases of the two parties may in future be expressed in policy terms in opposing positions on the allocation of public works expenditure, for example. This possibility arose in the wake of the JCP’s convention in September 1997 when it formally dropped its policy of ideological isolation in favour of ‘a softer line that would sanction its participation in a ‘coalition government of progressive parties’ (Asahi Shimbun, 14 April 2000). Prior to the June 2000 elections, the JCP also expressed its willingness to participate in a coalition led by the DP should the ruling coalition led by the LDP fail to achieve a majority of Lower House seats. In a 1999 poll reported in the media, 59 per cent of respondents said that candidates’ personalities came first, while 35 per cent cited party affiliation. In a 1996 poll, the proportions were 65 per cent and 28 per cent respectively. The three-party coalition ended up with 141 seats in the Upper House, which was 14 seats in excess of a majority in the Upper House (127). The surplus was even more apparent in the Lower House, where the coalition secured 357 seats, well above the 251 required for a majority. The LDP’s 104 seats added to the Liberal Party’s 12 seats made a total of 116 seats, which was still 11 short of a majority in the Upper House (127). The LDP was also forced to endure a censure motion in the opposition-dominated Upper House against the Director-General of the Defence Agency, Fukushiro Nukaga, over destroying incriminating evidence in a defence contract scandal. Sakigake had been reduced to only one seat in the House of Councillors (and one seat in the House of Representatives). The Liberal Party was motivated by two main objectives: to get its legislative agenda enacted and to obtain joint LDP backing for Liberal Party candidates in Lower House SMDs (where small parties are at a disadvantage) in the House of Representatives election due to be held by mid October 2000. When the New Frontier Party (Shinshinto) broke up in December 1997, the Liberal Party lost its grass-roots base of Soka Gakkai voters (attached to the Komeito) and the backing of labour unions formerly affiliated to the Democratic Socialist Party (see Watanabe 1999). As Curtis elaborates, this ‘compromise put a much heavier burden on the Socialists than it did on the LDP since it obligated the Socialists formally to renounce many if not all of their party’s traditional policy positions. Murayama…[separated] himself from virtually all the policies that had formed the core of the Socialist Party’s platform. Murayama declared the self-defence

52

19

20

21

22

23 24

25 26 27

28

Japanese governance forces to be constitutional, the US–Japan security treaty to be indispensable, the national anthem Kimigayo and the Hinomaru national flag to be legitimate, nuclear-energy plants in Japan to be necessary, and an increase in the consumption tax to be unavoidable. He contradicted long-standing Socialist Party policy on each of these issues’ (Curtis 1999:197–98). The LDP–Liberal Party coalition agreement included a reduction of the size of the Cabinet from 20 to 17 (implemented in the coalition Cabinet of 5 October 1999); shrinking the size of the Lower House by 50 members (20 were subsequently cut); introducing a system of deputy ministers (implemented in April 2000); and prohibiting bureaucrats from answering questions in lieu of ministers on the floor of the Diet (implemented as part of Diet revitalisation legislation in August 1999). This original list was reported in Curtis (1999:219). Serikawa notes, however, that the 1994–98 three-way alliance involving the JSP/ SDPJ, LDP and Sakigake was not entirely meaningless in that the ‘Murayama administration passed a law to protect nuclear-bomb victims more extensively than before and resolved a few long-standing issues, such as the law more broadly covering victims of mercury poisoning in Minamata Bay. Murayama said Japan was to be blamed for colonial rule in Taiwan and Korea and for wars of aggression in the area including China and Southeast Asia during World War II. With the alliance of the LDP, SDPJ and Sakigake, the government settled some problems that would not have been dealt with if the LDP had held its own majority’ (Serikawa 1998). On the other hand, the Obuchi government did postpone the passage of bills dealing with emergencies and lifting the ban on the participation of the SelfDefence Forces in UN frontline peacekeeping operations in deference to the Komeito (Yomiuri Shimbun, 6 April 2000). There was some compromise on this issue with the Komeito given that the LDP and Liberal Party initially agreed to cut the number of Lower House proportional representation seats by 50, a figure that was reduced to 20 after negotiations with the Komeito. As Kabashima points out, the LDP did not really need the Liberal Party in order to form a government or to pass the budget because of its majority in the House of Representatives (1999:15). Considerations relating to electoral arrangements such as the desire for LDP backing for Komeito candidates in Lower House SMDs and having a direct influence on the timing of the next general election also weighed heavily on the Komeito. The Liberal Party leader’s intransigent position on a number of policy positions has been attributed to this factor. Kabashima also reports that the Komeito was well liked by the LDP (1999: 15–16). The ruling coalition’s seat tally fell from 335 members of the Lower House prior to the election to 271 seats (the LDP’s declined from 271 to 233, the Conservatives from 18 to 7 and the Komeito from 42 to 31), while the DP gained 32 seats for a new total strength of 127. The Liberal Party gained four seats to take its total to 22, while the SDPJ’s seat tally rose by five from 14 to 19. Factors motivating Ozawa’s threats to take the Liberal Party out of the coalition included his view that policy agreements with the LDP had not been sufficiently implemented, his contention that there had not been adequate cooperation between the two parties on preparations for the Lower House election, and his concern that public recognition of the Liberal Party would decline (as a member of the coalition government) and therefore the party would be more successful on its own in the forthcoming election (Daily Yomiuri Online, 28 March 2000).

The dynamics of coalition politics in Japan

53

29 Electoral commentary suggested that the Hoshuto performed badly because of voters’ judgment that the action of its members in remaining in the coalition was self-serving, while voters appreciated the Liberal Party’s courage in dropping out of the ruling coalition (Asahi Shimbun, 4 July 2000). 30 The departure of the Liberals but the retention of the Conservatives reduced the coalition’s numbers by a total of 24 Diet members. 31 Specific promises were to create 500,000 jobs each year, measures to front-load public works projects and cuts in gift taxes (Yomiuri Shimbun, 20 May 2000). 32 This was part of a pledge to ‘put an end to five sources of anxiety’, by which the parties referred to problems regarding peace, welfare, education, public safety and the economy. It called for the ‘realisation of a renewed Japan’ based on the philosophy of ‘Japan’s renewal’ (Yomiuri Shimbun, 20 May 2000). 33 A public opinion survey undertaken in March 2000 revealed that the proportion of those polled not supporting any political party had risen to 40 per cent. Among those not backing any party, about 30 per cent said that they could not distinguish any differences among the parties. Compared with a December 1999 survey, supporters of the LDP fell to 30 per cent (from 37 per cent), while supporters of the DPJ rose slightly to 12 per cent (from 10 per cent) (Asahi Shimbun, 13 March 2000). 34 The DPJ, for example, campaigned on a clear platform of lowering the tax threshold and reducing wasteful public works spending, while the Liberal Party promised economic reform centring on deregulation, and the SDPJ promised to maintain the war-renouncing Article 9 of the Constitution ‘by all possible means’ (Yomiuri Shimbun, 27 June 2000). 35 In the 1980 House of Representatives’ elections, the LDP massively shored up its majority as a result of the large sympathy vote in the wake of Prime Minister Ohira’s death. 36 The example of the Fukuda and Ohira factions enlisting the support of the DSP and Komeito in the crucial Diet vote on the prime ministership in 1979 has already been given. 37 The LDP’s margin of seats, however, was very small, hence its willingness to continue Diet cooperation with the SDPJ and Sakigake. 38 The most outstanding example is the legislation on bank rescues that passed the Diet on 12 October 1998. With respect to the latter, Curtis writes that the DPJ ‘insisted that it would draft its own legislation and then bargain with the LDP in the Diet, and in the full light of the television cameras, over the shape of the final legislation’ (1999:203). The leadership role of the DJP in the negotiations over this banking legislation must be seen in retrospect as an aberration from the norm of MOF and LDP-led policymaking. Furthermore, it was only made possible, as Curtis points out, by cooperation between younger members of the LDP and the DJP. (Curtis 1999:217). The expertise that the Democrats were able to bring to bear on this issue was due in part to the presence in the party’s policy advisory section of a former employee of the now-defunct Hokkaido Takushoku Bank who landed a job with the party soon after the bank’s collapse in November 1997. He was behind the party’s push in the Diet debates and inter-party negotiations on this issue (Asahi News, 1 January 2000). 39 This was necessitated partly by the fact that money sometimes changed hands when the LDP literally bought off the opposition. 40 In an article in the Bungei Shunju in July 1999, Yukio Hatoyama bemoaned the greater propensity of the Komeito to align itself with the LDP than with the DPJ, a party with which it had a great deal more in common. 41 This, for example, was seen in the opposition party boycott of the Diet session that began on 20 January 2000.

54

Japanese governance

REFERENCES Amyx, J., 1999. MOF at the crossroads: the future of bureaucratic power in Japan, Paper presented to the International Conference on Beyond Japan Inc.: transparency and reform in Japanese governance, The Australian National University, 20 September 1999. Curtis, G., 1999. The Logic of Japanese Politics, Columbia University Press, New York. Foreign Press Centre, 1985. The Diet, Elections, and Political Parties, ‘About Japan’ Series 13, Foreign Press Centre, Tokyo. Gallagher, M., 1998. ‘The political impact of electoral system change in Japan and New Zealand’, Party Politics, 4(2):203–28. George Mulgan, A., 2000. The Politics of Agriculture in Japan, Routledge, London and New York. Green, M.J., 1999. ‘US–Japan relations: strong, but stay tuned’, Comparative Connections: An e-jour nal on East Asian bilateral r elations, http:// webu6102.ntx.net/pacfor/cc/992Qus-japan.html, accessed July 1999. Hrebenar, R., 1986. The Japanese Party System: From one-party rule to coalition government, Westview Press, Boulder. Kabashima, I., 1997. Seiji Sanka [Political Participation], Tokyo University Press, Tokyo. Kabashima, I., 1999. ‘An ideological survey of Japan’s national legislators’, Japan Echo, 26(4):9–16. Kato, J. and Laver, M., 1998. ‘Theories of government formation and the 1996 general election in Japan’, Party Politics, 4(2):229–52. Kawachi, T., 1999. ‘The evolving political scene’, Japan Echo, 26(4):6–8. Laver, M. and Kabashima, I., 1998. ‘Introduction: political change and the 1996 general election in Japan’, Party Politics, 4(2):147–50. Leiserson, M., 1968. ‘Factions and coalitions in one-party Japan: an interpretation based on the theory of games’, American Political Science Review, 57(2):770–87. Mair, P. and Sakano, T., 1998. ‘Japanese political realignment in perspective: change or restoration’, Party Politics, 4(2):177–202. Richardson, B., 1991. ‘European party loyalties revisited’, American Political Science Review, 85:751–75. Riker, W.H., 1962. The Theory of Political Coalitions, Yale University Press, New Haven. Sataka, M., 2000. ‘Comment’, Asahi Evening News, 26 June. Sato, S., 1997. ‘Is one-party dominance reemerging in Japan’, Asia-Pacific Review, 4(1):83–100. Serikawa, Y., 1998. ‘Unlikely coalition comes to long expected demise’, Nikkei Weekly, 8 June. Stockwin, J.A.A., 1999. Electoral pressures for change: the effect of political reform, Paper presented to the International Conference on Beyond Japan Inc.: transparency and reform in Japanese governance, The Australian National University, Canberra, 20 September 1999. Watanabe, T., 1999. ‘Summary of LDP–Liberal coalition and Japan’s policy direction’, Centre for Strategic and International Studies, Jakarta, Japan Chair Forum, 27 January 1999. Available online at http://webu6102.ntx.net/japan/jc990127.html, accessed July 1999. Watanuki, J., 1967. ‘Patterns of politics in present-day Japan’, in S.M. Lipset and S. Rokkan (eds), Party Systems and Voter Alignments: Cross-national perspectives, Free Press, New York.

The MOF and the BOJ at the crossroads

4

55

The Ministry of Finance and the Bank of Japan at the crossroads Jennifer Amyx

Since the collapse of a speculative asset bubble in 1991, Japanese banks have been burdened with enormous amounts of non-performing loans. The failure of the Ministry of Finance (MOF) to tackle this problem aggressively had grave repercussions as macroeconomic policy mistakes sank the economy into prolonged recession and exacerbated the magnitude of bad bank loans. A fullblown financial crisis hit in 1997, following the collapse of the nation’s tenth largest bank and the fourth largest securities firm, and continued until late 1998. Once cited as the most capable technocracy in the world, the MOF was implicated in the regulatory breakdown and ensuing crisis. The ministry’s lax supervision of banks and its influence over the central bank in the making of monetary policy became the focus of fierce political debate from 1995 through 1998. A product of this debate was a reorganisation of both the MOF and the Bank of Japan (BOJ). In April 1998, authority over monetary policy was transferred from the MOF to the central bank with the implementation of the new Bank of Japan Act. In June 1998, the MOF’s inspection and supervisory authority over private sector finance was also transferred to a newly created Financial Supervisory Agency (FSA). Redrawing the formal lines of authority alone, however, was insufficient for effecting far-reaching change in regulatory dynamics. A distinctive characteristic of Japan’s system of financial regulation was long its overwhelming reliance on informal means to achieve policy goals. As the body responsible for regulation of private sector finance prior to June 1998, the MOF sat at the centre of a dense and pervasive web of ties that extended to financial institutions, the BOJ, the Diet and other government agencies (Amyx 2000). These ties involved opaque and exclusionary relationships that blurred the line between public and private actors. A shift in the government authorities’ primary orientation, from being promoters and coordinators to being monitors and prudential regulators, required change in both the formal and informal institutions of governance. This chapter argues that the Financial Revitalisation Law and related bills passed in the Japanese Diet in October 1998 critically complemented the earlier reform of formal regulatory structures by replacing informal institutions

56

Japanese governance

of problem resolution with universal legislative schemes. Moreover, this legislative package largely severed the network of relational ties that had inhibited more aggressive tackling of the nation’s non-performing loan problem.1 In these ways, the financial revitalisation package facilitated an almost revolutionary shift from a opaque system of financial regulation based on relationships to one of more objective and transparent rules-based regulation. Although this change has by itself been insufficient for resolving the woes of the Japanese financial sector, it represents a necessary first step towards resolution of the nation’s massive bad debt problem and the revival of the Japanese economy.2 PRESSURES ON THE MOF IN THE 1990s From 1991 to 1995, Japan’s general economic downturn—rather than the large amount of non-performing loans held by Japanese banks—captured the attention of the voting public and determined the MOF’s policy priorities. Within the ministry, the non-performing loan problem was perceived as a reflection of problems with corporate Japan, rather than as being indicative of problems in the banking sector in particular (Author interview with MOF official, 1999). When bank inspections by MOF officials in 1992 revealed that some banks were creating paper companies as temporary havens for nonperforming assets, the MOF decided not to take action against the practice.3 Optimistic about the prospects for an economic rebound and operating under the assumption that an improved business environment would turn such bad assets into good, ministry officials viewed the creation of paper companies as a reasonable ‘interim measure’. This allowed officials to avoid revealing the true magnitude of the non-performing loan problem to the public and meant that the banks could continue to serve as a buffer between corporate Japan and the real economy. Depositor panic was also staved off. Disclosing to the public the severity of the non-performing loan problem would also have jeopardised the MOF’s position as a largely autonomous decisionmaker in this policy sector. While the Diet approved all financial legislation, the structure of the nation’s electoral system and the paucity of legislative staff had hitherto provided incentives for nationally elected representatives to focus their political resources on more locally based niches of the economy. The MOF had therefore been entrusted with much discretion in filling in the details of broad and vaguely worded laws with ministerial regulations and administrative notices. Private sector actors were given written notifications or informal verbal instructions from the ministry—a practice known as ‘administrative guidance’ (gyosei shido). Unfortunately, the expected economic rebound did not happen, and the magnitude of non-performing loans ballooned in the ensuing years. The protracted decline in land prices and the stock index also meant that the value of collateral continued to drop along with the value of bank equity holdings.

The MOF and the BOJ at the crossroads

57

By 1995, the mounting non-performing asset problems plaguing the jusen (non-bank housing and loan corporations), which were suffering acute financial difficulties following the bursting of the bubble, put these institutions in imminent danger of collapse if government support was not forthcoming. If simply allowed to fold, however, some of the jusen’s financiers—most notably the Nokyo organisation of agricultural cooperatives—would also fail. Because of the political clout of the agricultural lobby, this was unacceptable to the Liberal Democratic Party, and the use of public funds appeared the only solution. When the MOF finally revealed to the public the true severity of the jusen problem and the need for taxpayer money to resolve it, there was public outcry. In an atmosphere of unprecedented political volatility accompanying the end of nearly 40 years of uninterrupted rule by the LDP, and in the midst of economic recession, any request for the use of public funds was politically sensitive. The general perception that regulatory breakdown had been spurred by collusion further darkened the public mood. Numerous jusen had employed retired MOF bureaucrats on their boards, for example, a fact which indicated the close ties these companies had with the ministry. In an attempt to stem the public outcry, the three-party government coalition comprised of the LDP, Sakigake and Social Democratic parties stipulated that discussion of MOF reform would be a condition for debating the jusen resolution package in the Diet. For some time, the LDP managed to temper its coalition partners’ demands for the actual removal of authority from the MOF. MOF officials, too, tried to redirect the focus of attention from a breakdown in regulatory oversight to a breakdown in monetary policy. In so much as the ministry bore responsibility for the jusen fiasco, MOF officials argued that their responsibility lay in the prolonged period of loose monetary policy in place in the late 1980s. At that time, unusually low interest rates encouraged the inflation of an asset bubble and it was amid this lending and investment frenzy that the jusen borrowed funds to engage in risky investment. MOF officials and the ministry’s supporters in the Diet thus argued that the central bank’s lack of independence from the MOF in formulating monetary policy was the real problem. Thus, BOJ reform rather than MOF reform was needed. A June 1996 proposal to revise the BOJ Act did little, however, to placate outraged taxpayers, and, as the October 1996 general elections approached, the stakes rose for appearing to be too ‘soft’ on the MOF. Accordingly, the LDP shifted its position to favour the transfer elsewhere of the MOF’s inspection and supervisory authorities over private sector finance. In March 1997, bills to establish a new and independent financial regulatory agency were submitted to the Diet and, in June 1997, legislation providing for the creation of such an agency in 1998 was passed. In these ways, the environment of increased political volatility, combined with the revelation of regulatory breakdown and alleged collusion between the MOF and the financial industry, gave rise to a change in formal regulatory structures.

58

Japanese governance

THE FINANCIAL SUPERVISORY AGENCY (FSA): INDEPENDENT BUT INITIALLY CONSTRAINED On 22 June 1998, the Financial Supervisory Agency commenced business as an independent agency attached to the Prime Minister’s Office, and the remnants of the MOF’s Banking and Securities Bureaux were merged into a single Financial System Planning Bureau (see Figure 4.1). The transfer of supervisory and inspection functions to the FSA was an important development. In addition to private sector finance, the MOF had overseen many other areas—notably budgetmaking and taxation—and had assumed the lead role in monetary and exchange rate policy. Bank inspections received very low institutional priority in the MOF and supervision of the sector was always carried out in the context of discussions about the economy as a whole. In contrast, the newly created FSA had a single mandate—to supervise financial institutions. Yet, the agency was constrained in its ability to exploit this positive institutional development. These constraints were three-fold. First, in the absence of a credibly funded systematic scheme for dealing with bank failures, the FSA faced significant impediments to adopting a tougher stance toward banks. Judgments about asset values necessarily contain a subjective element, and any reversal of the MOF’s overly optimistic judgments on the financial condition of banks would have plunged numerous institutions into insolvency. This, in turn, would have spurred panic and incurred the public’s wrath rather than respect. While the authority to approve mergers, issue corrective orders and suspend business lay with the FSA, the Minister for Financial Reconstruction was required to consult with the Finance Minister when agency decisions had potentially destabilising consequences for the nation’s financial system. In the absence of an infrastructure for dealing with failing banks, falling bank shares and low market confidence, this meant consulting with the MOF in any decision to declare a financial institution insolvent. Decisions surrounding the use of deposit insurance funds also remained in the MOF’s domain. And, since radically different asset assessments by the FSA would have suggested that the ministry had supported essentially insolvent institutions in the past, the FSA was further likely to encounter an uncooperative MOF.4 In the absence of a credibly funded scheme to deal with failing banks, the process of problem resolution necessarily remained particularistic and opaque. The pillar of solvency support methods had long been the ‘rescue merger’, in which the MOF arranged behind the scenes for stronger banks to take over the operations of a weaker institution. Without an alternative arrangement in place, the MOF and the FSA worked in tandem to secure the cooperation of other private sector actors in this quiet recapitalisation of ailing banks. In the process, the MOF and FSA continued to treat each bank’s loan problems as a peculiar case, despite the pervasiveness of the problem throughout the sector. Second, the new regulator lacked credible monitoring resources to back up newly introduced prompt corrective action (PCA) measures. The PCA program

The MOF and the BOJ at the crossroads

59

Figure 4.1 Establishment of the Financial Supervisory Agency (FSA) (22 June 1998)

was included in legislation passed along with the jusen bail-out legislation in June 1996 but was not put into effect until April 1998 (for internationally active banks) and April 1999 (for domestic banks). For the first time, the program specified actions required by banks, and these were based on objective capital ratio standards.5 In this way, it was a scheme intended to narrow the band of discretionary authority accorded regulators. Yet, this program relied on banks to self-assess their assets. In the absence both of sufficient numbers of bank inspectors and of expertise in such matters, the FSA could not credibly monitor banks to ensure compliance. Furthermore, the penalty for window dressing and inaccurate disclosure remained vague, decreasing the likelihood of compliance. Third, the staffing of the FSA with large numbers of so-called non-career officials led to a skewing of the incentive structures for individual bureaucrats.

60

Japanese governance

The hiring process for those MOF bureaucrats on this non-élite promotion track in the ministry differed considerably from that of those bureaucrats staffing the top decisionmaking posts. Officials in the MOF’s Inspections Division were individuals promoted to the ministry’s main organ in Tokyo after first passing lower levels of the civil service examination and working for a period of time at a Local Finance Bureau under the MOF umbrella. For these officials, job motivation was based largely on their affiliation with a ministry that was perceived to be at the peak of the bureaucratic hierarchy. Now, however, they were affiliated with an agency perceived as weak, only nominally independent, and lacking in resources. In this way, demoralised staff comprised a large portion of the new regulatory agency.6 In the above ways, then, change in formal regulatory structures alone failed to sever the informal ties between banks and regulatory authorities or eliminate the ad hoc institution of solvency support represented by ‘rescue mergers’. Key elements necessary for a real shift to prudential regulation were missing. And, in the months following the FSA’s creation, little deviation from past patterns of regulation or problem resolution was evident. Market perceptions of the financial soundness of major Japanese banks and confidence in Japanese regulators thus continued to deteriorate in the wake of this formal institutional change. Since the initial decision to establish the FSA, the financial system had fallen into a state of crisis. While the banking sector’s non-performing loan problem had been severe ever since the bursting of the speculative asset bubble in the early 1990s, their impact on the real economy only became clear in 1997. The failure of the nation’s tenth largest bank and fourth largest securities firm in November 1997 pushed down the stock prices of all banks, thereby raising the costs of capital procurement for Japanese financial institutions in both the overseas and interbank markets. As a result, Japanese banks became extremely cautious about extending and rolling over loans to corporate clients, thus spurring a credit crunch.7 Stock prices continued to fall in 1998, further weakening banks—themselves large shareholders. Government actors were no longer able to fend off market forces due to the rising ratio of shares which were not cross-held and speculative attacks on fundamentally unsound financial institutions such as the Long-Term Credit Bank (LTCB). At the same time, a string of bribery scandals involving MOF officials and suggesting collusive relations between the MOF and individual financial institutions emerged between January and March 1998, further hurting the credibility of financial authorities. While MOF officials announced the creation in March 1998 of ‘impartial and transparent forums’ for exchanging information between the ministry and financial sector actors (Nikkei Net Interactive 2000b), the absence of an infrastructure to deal with failing banks meant that opaque and exclusive relations between the MOF and banks persisted. Concern over the viability of the LTCB—whose stock values had plunged—was at a peak and both the MOF and FSA worked frantically behind the scenes to arrange a rescue merger. In September 1998, each agency

The MOF and the BOJ at the crossroads

61

proclaimed support for the LTCB’s merger with Sumitomo Trust and Banking, a healthier bank that had come forward as a potential merger partner. FROM RELATIONAL TO RULES-BASED REGULATION The pressures bearing upon the Japanese financial system and government actors in the fall of 1998 were such that some degree of change in the system of dealing with ailing banks was certain. The degree of reform and transparency introduced into the regulation of private sector finance in the October 1998 financial reforms was, however, in no way inevitable. The key to the farreaching changes lay in the opposition parties’ capacity to seize control of the legislative agenda in the wake of the LDP’s poor showing in the July 1998 Upper House elections. The LDP came up with a ‘bridge bank’ scheme, which was intended to ensure the uninterrupted flow of funds to industry despite financial sector problems. The opposition rejected this proposal, however, and succeeded in having its own legislative alternatives—formulated without consultation with the MOF—passed into law on 12 October 1998. This package of legislation, comprising of the Financial Revitalisation Law and related bills, established a new regulatory trajectory emphasising transparency and universally extending resolution methods.8 In the process, the package severed the informal relational ties that had become so central yet problematic to more aggressive resolution of financial sector problems. These reforms effected, in four main ways, a shift in the primary orientation of government authorities from being promoters and coordinators to monitors and prudential regulators of the financial system. ELIMINATING THE THREAT OF SYSTEMIC RISK First, the reforms transformed solvency support from the ad hoc measure of solvency support represented by rescue mergers into a universal scheme for dealing with ailing financial institutions. The legislation passed in October 1998 at last established a credibly funded infrastructure for dealing with insolvent financial institutions of any size. Sixty trillion yen in public funds— an amount close to that of the annual government budget—was injected into the Deposit Insurance Corporation (DIC), enabling it to be used to support the temporary nationalisation of banks, the establishment of temporary bridge banks and the recapitalisation of banks nearing insolvency.9 As a result, the FSA was able to do its job without incurring systemic risk.10 Furthermore, with the universal scheme in place, the FSA was able to move forward and introduce stricter standards for asset assessment and loan loss reserve provisions without spurring panic among depositors. A necessary element in authorising the bankruptcies of the Long-Term Credit and Nippon Credit Banks in late 1998, for example, was the acknowledgment—for the first time—that their hidden losses on marketable securities constituted excessive levels of debt (Sasajima, Hasegawa and Fukushima 1999:7). A new criterion for loan-loss reserves—70 per cent of doubtful loans and 15 per cent of loans needing

62

Japanese governance

special monitoring—also introduced more stringent guidelines than those found in the United States. TOUGHER LEGAL STANDARDS Second, the reforms brought about further change in the legal and institutional arrangements governing the financial system. The FSA’s tougher stance on asset assessment was supported by legislative provisions that widened the definition of bad debt, made disclosure of non-performing loans legally binding and stipulated that banks found to have intentionally covered up such information would be investigated for illegal activity on falsification charges (Sasajima, Hasegawa and Fukushima 1999:12).11 Although criminal charges of breach of trust have so far only been brought against the top management of failed banks, this development alone is a notable break from the past. In a number of cases involving brokerages, moreover, the FSA has ordered the temporary suspension of business.12 GREATER INSULATION OF DECISION-MAKING FROM THE MOF Third, the Financial Revitalisation package enacted further changes in financial regulatory structures that provided the FSA with more insulation from MOF influence and provided the agency with more credibility as an independent regulator. These changes included the establishment of a Financial Reconstruction Commission (FRC) to oversee the FSA and assume further responsibilities from the MOF and the establishment of a Stock Price Evaluation Commission to determine the price at which shares of nationalised banks were purchased (Figure 4.2). Proposed by the Democratic Party of Japan (DPJ), these changes embodied this opposition party’s slogan of ‘kan kara minei’ (from bureaucracy to the people). Named to the commission were an accountant, a former judge, a former Bank of Japan (BOJ) official and an executive from private industry. The Stock Price Evaluation Committee— initially numbering five but increased to six in May 1999—was also composed entirely of non-bureaucrats including: two university professors, one lawyer, two certified public accountants and a manufacturing company executive. In contrast to earlier reforms, therefore, the additional transfer of authority from the MOF went this time to entities that the ministry could not potentially ‘colonise’.13 MOF officials sent to occupy top FSA posts received one-way tickets, never to return to the ministry.14 The FRC’s committee structure also meant that its mode of decisionmaking differed significantly from that formerly found in the MOF. Decisionmaking in the FRC took place in committee meetings, and career bureaucrats working on policy issues had to obtain the understanding of each of the four committee members and the Minister for Financial Reconstruction. The burden of explanation was heavier in the FRC than it was in the MOF, where—because officials shared similar backgrounds—it was unnecessary in most cases to explain minute details (Author’s interview with official in FRC Secretariat 1999).15

The MOF and the BOJ at the crossroads Figure 4.2 Japan’s financial regulatory structure following the passage of the Financial Revitalisation Law and related bills (23 October 1998)

63

64

Japanese governance

Although more time-consuming, this process of decisionmaking in the FRC translated into greater transparency and accountability. The FRC assumed authority over decisions concerning the solvency of financial institutions from the FSA. Authority for decisions concerning the injection of funds into banks was also transferred to the FRC from the MOF. Decisions once entrusted to the Deposit Insurance Corporation (DIC) under the MOF umbrella were furthermore transferred to the FRC. In line with the heavy responsibility accorded the commission, the law required it to issue a public report on its activities twice a year. The package of financial reform legislation passed in October 1998 furthermore established a new Cabinet post, the Minister for Financial Reconstruction, bringing political leadership to the FSA that has been critical to its effective functioning. In contrast to MOF officials, who have to deal closely with politicians in the annual budgetmaking process, FSA officials need not maintain close ties with politicians in order to carry out their work well. Nonetheless, having a minister devoted to agency representation in the Diet has been important for a number of reasons. It has given the agency a voice in the Diet—someone to speak out on its behalf when politically sensitive decisions, such as the decision to nationalise banks, are taken. Political representation has also helped in the FSA’s efforts to gain additional resources. The first Minister for Financial Reconstruction, Yanagisawa Hakuo, made a successful appeal for additional personnel resources in budget deliberations, for example. As a result, personnel numbers have increased substantially every year since the agency’s establishment—even while numbers are being cut everywhere else in government. Furthermore, political leadership helped pave the way for the agency’s hiring of individuals from failed private sector institutions and elsewhere—a clear departure from traditional civil service hiring procedures. This type of staffing, in turn, has enhanced the agency’s expertise and credibility. The fact that a Cabinet member heads the new regulator also raises the agency’s status to a level higher than other agencies attached to the Prime Minister’s Office.16 The creation of the Cabinet post of Minister for Financial Reconstruction has also brought more transparency into inter-agency interactions. Although the MOF was long referred to as kyoku atte sho nashi or as being ‘more like a collection of bureaux than a coherent agency’, these bureaux were nonetheless under the same roof and led by the same Cabinet minister in the past. Final decisions concerning financial policies were made through negotiation between the MOF Secretariat (Daijin Kanbo) and the finance minister, with the MOF Secretariat holding a great deal of authority in such negotiations (Author’s interview with official in FRC Secretariat 1999). Today, in contrast, final decisions are made through negotiations between two Cabinet ministers—the Finance Minister and the Minister for Financial Reconstruction. In this way, final decisions are more removed from the influence of incumbent MOF bureaucrats and the debates are made more obvious to the public. When the two Cabinet ministers

The MOF and the BOJ at the crossroads

65

have had differences of opinion on policy issues, this mode of decisionmaking has also been more time-consuming (Author’s interview with official in FRC Secretariat, 1999). Yet, the greater transparency also brings the public in as an additional actor and monitor of compliance and general government behaviour. The use of public funds to cover loan forgiveness, for example, provoked an angry reaction from the public, as was seen in the Sogo Department Store case.17 ELIMINATION OF OPAQUE TIES BETWEEN THE REGULATOR AND BANKS Finally, the Financial Revitalisation Law and related bills effectively eliminated the opaque ties between the government regulator and the banks. In the past, the ministry had been accused of allowing its officials to be wined and dined by so-called MOF-handlers (MOF-tan) in each bank and securities firm. Arrests of MOF officials in early 1998 on charges of accepting bribes had further undermined the credibility of Japanese financial regulators in the eyes of market players and the general public. The position of ‘MOF-handler’ no longer exists in private sector financial institutions and no position of ‘FSA-handler’ has emerged. While individuals within banks continue to be assigned to maintain contact with the MOF and FSA, such individuals representing private sector interests no longer cultivate relationships with specific individuals in those agencies (Author’s interviews with financial sector, MOF and FSA actors, 1999). Thus, their function is now more akin to that of the ‘Fed watcher’ in the United States, obtaining access only to publicly available information. Rather than meeting individually with private sector actors after hours, FSA officials convene public forums for discussing key issues. The April 2000 enactment of the National Public Service Ethics Law provides a further legislative complement to these changes in the direction of greater regulatory transparency.18 A restructuring of the way the All Japan Bankers’ Federation works has accompanied the abolition of the wining and dining practice. The opaque nature of interactions between the chair of the industry association in a given year and MOF officials was one reason why individual financial institutions began in the 1950s to pursue more direct links to the ministry through the institutionalisation of the MOF-tan position (Amyx 1998; 2001). Since 1999, however, day-to-day operation of the industry association has been restructured so as to introduce greater transparency into its operations and into its interactions with the government. Furthermore, foreign financial institutions— once excluded from membership—are now counted among member banks. The circumstances surrounding the FSA’s development of a bank inspection manual (formally referred to as a ‘Financial Auditing Manual’) illustrate the extent of change in the interaction between regulators and private sector firms. The establishment of a manual in April 1999 clarifying a classification system of borrowers and standards for loan-loss reserves and bad loan write-offs was a

66

Japanese governance

significant development, but even more noteworthy was the process through which it was developed.19 The introduction of the manual followed eight months of public discussions with banking sector officials—discussions that included the solicitation of public comments from various business organisations and individuals. Summaries of these discussions were made available to the general public on the FSA’s web site. In the past, discussion of an industry-wide issue such as this would have been carried out in opaque negotiations between the MOF and the Bankers’ Federation, supplemented by numerous discussions between MOF-tan and MOF officials in after-hours exchanges. Changes have also occurred in another aspect of informal ties linking regulators to private sector financial institutions—the hiring of former government officials, a practice referred to as amakudari or ‘descent from heaven’. The additional personnel costs incurred by banks through such appointments run counter to the cost-cutting measures the FSA is pressuring the banks to undertake. With the abandonment of the government’s implicit guarantee of no bank failures, the benefits of maintaining such relations have shrunk considerably—particularly for the larger commercial banks. The decisions to nationalise Nippon Credit Bank (NCB) and the LTCB were particularly notable developments symbolising the severing of such entrenched informal ties between financial regulators and private sector financial institutions. These two institutions long served as depositories for high-ranking MOF retirees but, upon their nationalisation, criminal charges of breach of trust were brought against former MOF officials on their boards.20 While flows of former MOF officials into the top-tier private sector financial institutions have significantly decreased, former MOF officials continue to be in strong demand to staff top posts in regional banks, the Tokyo Stock Exchange, nonfinancial corporations and industry associations.21 In brief, the arrangements for prudential regulation of Japanese financial markets have changed dramatically. The FSA’s motto of ‘rule-based supervision’ (horitsu ni shitagatte kantoku suru) contrasts with the relations-based supervision observed in the MOF, where regulatory outcomes were determined more through a process of negotiation. Decisions coming out of the FSA provide evidence in support of this shift. After five decades of coddling the sector, Japan’s regulators placed two of the nation’s largest banks under temporary government control in late 1998 and declared five smaller regional banks insolvent in 1999, taking them into government receivership. Furthermore, bank shareholders were, for the first time, forced to take losses. In short, the changes represent more than a marginal drift from past patterns of financial governance. The unprecedented level of participation of foreign financial institutions in the Japanese financial sector serves as further testimony to the heightened prudential regulatory standards, clearly articulated rules and more transparent administration ushered in by the Financial Revitalisation Law and related bills.22 The 1999 public fund injection into banks with bad loans and the extensive deregulation under the ‘Big Bang’ financial reforms have, of course, also played

The MOF and the BOJ at the crossroads

67

important roles in stabilising the financial sector and facilitating greater foreign involvement. Yet, it is unlikely that foreign actors would have entered the Japanese financial market with such zeal had regulators not been perceived as credible and had suspicions about collusion remained. THE CHALLENGE OF PRIVATE SECTOR ADJUSTMENT TO RULESBASED REGULATION Banks must now accelerate changes in organisational conventions to complement the new regulatory framework and competitive exigencies. This necessarily includes clarifying management responsibility, and restructuring. Japanese banks have historically been top-heavy, with boards of directors made up of as many as 50–60 members—few of whom were cognisant of major bank decisions. The FSA has required banks to clarify which individuals assume final responsibility for bank decisions and has urged reductions in the numbers of managing directors. The consolidation of major banks into four holding companies, however, has led banks to become top-heavy again.23 Furthermore, restructuring so as to boost profitability remains a major challenge as the amount of non-performing loans continues to mount amid the ongoing decline in asset prices. Due to the continued weak demand for credit from the corporate sector, the level of performing loans has also fallen, leaving banks without a significant improvement in financial health overall (Nikkei Net Interactive 2000c). The entry of Japanese corporations without a historical presence in finance—such as Sony Corporation and Ito-Yokado Corporation—into the banking industry has brought increased competition, exerting even greater pressure on existing Japanese banks. Hereafter, Japanese banks will have to compete with companies that have different (and more dynamic) business styles and greater experience in areas in which Japanese banks have been historically weak, such as information technology. Employment issues also remain politically important, a fact that constrains rationalisation efforts in the industry. Despite the spate of mergers since October 1998, banks face hurdles in enacting sharp reductions in personnel numbers. Thus, while the change in regulatory arrangements has produced a clear change in private sector behaviour—as evidenced, for example, by the increasing sales by banks of ‘risky’ or category-2 loans with the potential to turn into non-performing assets—political impediments to greater profit performance persist. The success of government-level changes depends heavily on improvement in the banks’ bottom line. The repayment of public funds received in 1998–99 will require better profit performance, and the return of these funds, in turn, remains politically important.24 IMPLICATIONS FOR FISCAL AND MONETARY POLICYMAKING The establishment of the FRC and the greater empowerment of the FSA through the October 1998 legislation were later followed up by further institutional reorganisation.25 In July 2000, the FSA absorbed the MOF’s Financial Planning

68

Japanese governance

Bureau and was renamed the Financial Services Agency (Kinyucho) (see Figure 4.3). Functions formerly carried out by the FRC were transferred to this new agency in January 2001, when a larger reorganisation of the central government was carried out. At this time, the MOF’s Japanese name, Okurasho, was also changed symbolically to Zaimusho (literally, ‘Treasury Ministry’) to reflect the more limited nature of its administrative authority.26 But the challenge to the MOF has extended beyond the realm of financial regulation. Japan’s financial and economic woes have spurred new demands in the area of fiscal policy as well. The ongoing non-performing loan problem and the stagnant economy have also presented the Bank of Japan with significant challenges in the aftermath of its 1998 reorganisation. TRANSPARENCY AND REFORM IN FISCAL POLICY The demand for greater transparency in the regulation of private sector finance has been accompanied by rising demands for greater transparency in public finance. Successive years of record-high, but ineffective, amounts of government spending in the 1990s have led the level of Japanese government debt to surpass amounts held by any other advanced industrial nation. Recent reforms in corporate accounting—including the introduction of market-value accounting, consolidated-basis accounting and the inclusion of unfunded pension liabilities—have placed greater pressure on private sector actors to reveal actual balance sheet conditions and thus aided in the identification of bad debt. This advance in private sector accounting now needs to be paralleled by similar reforms in the MOF’s public accounting system. Some headway was made in October 2000 when the MOF unveiled a draft version of a national balance sheet that for the first time consolidates the central government general account budget with its 38 special accounts. In anticipation of public scrutiny concerning computation methods, ministry officials prepared three different calculations of future pension liabilities, based on three distinct assumptions. Such a move to enhance transparency in public finance was unprecedented. Nonetheless, opaque practices in other areas of public finance continue to be problematic.27 Although the Fiscal and Investment Loan Program (FILP)—often referred to as Japan’s ‘second budget’—has been the target of major reform, it is still unclear how much transparency this reform will bring to the public investment carried out under its umbrella. Postal savings and pension reserve funds have long been deposited in one of the government’s special accounts in the MOF’s Trust Fund Bureau and used to fund government-affiliated organisations (often referred to as ‘public corporations’). Without having to worry about a source of funds, however, these organisations have often been mismanaged and run into substantial debt.28 FILP reform ostensibly generates greater transparency by removing the automatic flow of funds into government-affiliated organisations starting in fiscal year 2001. Government-affiliated organisations will, in principle, have to

The MOF and the BOJ at the crossroads

69

Figure 4.3 July 2000 changes in the financial regulatory structure

issue bonds to secure funds to finance their programs. This exposure of management to market forces is important for improving governance and streamlining operations, but budget requests for fiscal year 2001 revealed that only 15 of 33 government-affiliated organisations falling into this category plan to issue their own bonds. The government will issue bonds on behalf of the remaining organisations—ones that are deemed likely to ‘have difficulty raising funds on their own’ (Daily Yomiuri Online, 26 September 2000). As a result, those government-affiliated organisations with the greatest need for changes in governance structures continue to be shielded from the disclosure and restructuring pressures that raising funds on the bond market entails. In the end, therefore, FILP reforms may be limited in their substantive impact.29 Furthermore, the maintenance of strong amakudari flows between the MOF and the so-called public finance corporations suggests that the ministry may resist radical reform of these institutions.30 The MOF has not only been under pressure to increase transparency in fiscal policy but has also faced the threat of having some of its authority in this policy area usurped by other actors. As part of the January 2001 reorganisation of the central government ministries and agencies, a Council for Economic and Fiscal Policy (CEFP) was established within the Cabinet Office and a new Cabinet post, the Minister for Economic and Fiscal Policy, was created. Although it is not yet clear what impact this new council will have on the MOF’s influence over fiscal policy—and budgetmaking, in particular—it is clear that this council

70

Japanese governance

presents the potential for further significant encroachment on this traditional realm of the ministry’s authority. GREATER TRANSPARENCY AND INDEPENDENCE IN MONETARY POLICY The MOF’s ties to the BOJ have also altered considerably since the new Bank of Japan Act came into effect on 1 April 1998 and devolved responsibility for monetary policy to the central bank. In the past, tradition dictated that the BOJ Governor alternated between a career BOJ official and a former MOF Administrative Vice-Minister (AVM). The occupation of the top BOJ post by a former Ministry AVM was problematic—not only in terms of MOF influence on BOJ policy but also in terms of political influence on the central bank. This was because every MOF AVM was well versed in annual budget negotiations with politicians and was necessarily very political. The tradition of staffing the BOJ governorship with former MOF officials is unlikely to continue. Since its 1998 reorganisation, the BOJ has been led by an individual with both private sector and central bank experience and has displayed much greater independence from the MOF than in the past.31 Amid concerns over the high yen in late September 1999, for example, central banks officials clearly rejected the expressed desires of MOF officials to carry out additional monetary relaxation. Yet, the simple assertion of greater central bank independence and more transparency in monetary policy decisionmaking does not equate with sound monetary policies. The Bank of Japan fell under heavy criticism from other government actors and Diet members in 1999. In particular, the BOJ’s decision to end its so-called ‘zero interest rate policy’ brought the Bank severe criticism and was alleged by many to be the catalyst for pushing the nation back into recession. In March 2001, the central bank adopted a new policy framework, shifting to a qualitative monetary policy that pushes overnight interest rates down toward zero by making sure that banks hold large reserves of surplus funds. In the same month, the BOJ also introduced a ‘Lombard-style lending’ facility to help banks avoid defaulting on debt. The BOJ remains at the centre of intense debate, however, with some politicians even calling for the Bank’s newly earned independence to be revoked. In these ways, the Bank of Japan faces significant challenges in the aftermath of its reorganisation. CONCLUSION Accountability, accessibility and transparency are all characteristics of the new financial regulatory regime that have been promoted through a series of changes in the organisation of Japan’s financial authorities. These attributes all relate to process, however, and are not direct indicators of broader outcomes—even though they have become more important indicators in the present era of financial liberalisation, when markets increasingly penalise governments for opacity. Japan’s economic and financial problems are clearly not over. Private

The MOF and the BOJ at the crossroads

71

sector capital investment and consumer demand have not yet taken over from government spending as the impetus for growth. Furthermore, amid the positive changes in financial governance there have been a number of politically motivated moves representing disappointing steps backwards. These include the Diet’s decision to delay the reintroduction of a ceiling on deposit insurance protection until 2002 and movements in the Diet in 2001 to establish a stockpurchasing fund to prop up banks and their borrowers. Nonetheless, the decisive actions taken since October 1998 by Japan’s Financial Supervisory Agency and its successor, the Financial Services Agency, contrast sharply with the previous eight years of policy paralysis and delay in addressing the banking system’s huge non-performing loan problem under the MOF. These actions also contrast sharply with the FSA’s own regulatory behaviour in its first four months of existence, thus illustrating the limited impact of changes only at the level of formal institutional structures. Japan’s new financial regulator nonetheless faces ongoing challenges in bringing about a final resolution to the non-performing loan problem. And, while the MOF and the BOJ do not bear primary responsibility for financial regulation today, each plays an important role in the eventual resolution of the bad debt problem. Fiscal and monetary policies provide a critical context for regulatory decisions and initiatives. Indeed, mistakes in the timing and nature of past fiscal and monetary policy decisions arguably contributed as much to Japan’s current financial sector woes and recession as did regulatory breakdown. The Ministry of Finance and the Bank of Japan clearly stand at a crossroads. The relative success of policies coming out of these institutions in the coming years will determine whether each is able to regain legitimacy and respect and thereby fend off future attacks on administrative and policy authority. More importantly, however, fiscal and monetary policies formulated by these institutions will play a critical role in determining whether Japan’s economy is able to stage a comeback or continues to languish. NOTES 1 2 3 4

The law’s full name is the Law concerning Emergency Measures for the Revitalisation of Function to the Financial System (Kinyu kino saisei kinkyu sochi ho). For a discussion of the political impediment that remain to a final solution of Japan’s non-performing loan problem, see Amyx (2002). Notably, however, the issue did generate debate within the ministry and some in the Financial Inspections Division were opposed to this judgment. Bureaucracies have a tendency to resist reversals in institutional judgments, because any such reversal will draw criticism—not only of those making the change in judgment but also of those who exercised lenient judgments at an earlier time. The flow of former MOF bureaucrats into private sector financial institutions (amakudari) upon retirement exacerbated the inherent inertia in the MOF. Former ministry officials in positions in private sector banks would be

72

5 6 7 8

9

10

11 12

13 14

Japanese governance affected negatively by stricter regulatory standards; yet, such individuals played a role in deciding the amakudari postings of more junior colleagues still in the ministry. Thus, implicating one’s former boss could have a direct bearing on one’s own future. The PCA measures were modelled after a similar program introduced by US regulatory authorities in 1991. The media’s scepticism about the new regulatory agency and allegations that the shift of regulatory authority to the FSA was merely a case of kanban nurikai, or switching of the signboards, further undermined the agency’s credibility. Major financial institutions that collapsed in this period included Sanyo Securities, Hokkaido Takushoku Bank and Yamaichi Securities. The second package of government-proposed legislation that followed in the Diet later in the same month was also clearly important in stabilising the financial system. These bills dealt with the recapitalisation of relatively healthy banks. Nonetheless, the effectiveness of this legislation was greatly enhanced by its implementation under the new rules of the game, established by the Financial Revitalisation Law and related bills. The DIC was established in 1971 but had been inadequately funded. Funds were insufficient to cover the failure of even a regional bank. Under the new scheme, regulators had three possible routes. First, the FRC could send in receivers to assess the condition of assets and find another institution willing to take over the ailing bank once its condition was clarified. Second, if there was no willing candidate to absorb the problem bank, the failing institution became a bridge bank and credit continued to be extended to sound borrowers until a receiving bank was found to assume its business and customers. Third, the FRC could temporarily nationalise a bank (either through the bank’s request or forcibly). In the case of temporary nationalisation, the government took all ordinary shares, and the Stock Price Evaluation Committee under the umbrella of the FRC determined the price at which shares were purchased, based on its appraisal of the value of good assets held by the problem bank. The selection of only nonbureaucrats to the committee ensured that no government officials were involved in making judgments about stock prices. The FSA assumed authority for decisions concerning the solvency of financial institutions from the October passage of the Financial Revitalisation Bill until the Financial Reconstruction Commission (FRC) commenced business on 15 December 1998. It was during the FSA’s period of responsibility that the LongTerm Credit Bank (LTCB) and Nippon Credit Bank (NCB) were nationalised. This shift may be interpreted as more than an acknowledgment of changed conditions. The shift may also be seen as an institutional defence strategy— adoption of stricter criteria avoided future criticism of the agency. For example, in February 2000, the FSA ordered the Daihyaku Mutual Life Insurance Company to clarify management responsibility for the erroneous reporting of its solvency margin ratio to authorities and to take steps to ensure that the disguising of its loans does not happen again. In June 2001, the FSA (now the Financial Services Agency) ordered Kokusai Securities to suspend business as a penalty for falsification of information provided to regulatory authorities. Approximately half (19) of the 37 individuals staffing the FRC Secretariat, however, were on loan from the MOF. In this way, those individuals sent to staff the top posts were perceived in some sense as having been ‘kicked out’ of the ministry. This perception is said to have served as a motivating factor for these individuals to assert their independence from the MOF (Author’s interviews with MOF officials, 2001).

The MOF and the BOJ at the crossroads

73

15 The nature of the FRC meetings also differed significantly from other governmentrelated committee meetings such as deliberation councils (shingikai). Deliberation councils brought experts from diverse backgrounds together but usually issued reports even if all members’ opinions were not entirely reconciled. Because the burden of individual responsibility weighs less heavily in shingikai, dissenting members generally do not object too much (Author’s interviews with central government bureaucrats, 1999). See Greg Noble’s chapter in this volume for more on deliberation councils. In contrast, each FRC member felt the need to personally accept final responsibility, and final decisions therefore failed to move forward in the presence of any single member’s dissent. 16 The Japan Fair Trade Commission (JFTC), for example, has long been criticised for its lack of clout and independence, and its lack of political leadership is often cited as a factor in this. Political leadership can also have drawbacks. Of the five individuals who served as State Ministers for Financial Reconstruction between October 1998 and January 1999, two adopted explicitly anti-reform stances, placing them in conflict with FSA officials and damaging the credibility of the agency. One other individual was also forced to resign, clouded in scandal. 17 Not all debt waivers have led to greater transparency. The Resolution and Collection Corporation (RCC), a wholly owned subsidiary of the DIC and recipient of public funds, agreed to waive 60 billion yen in credit claims between April 1999 and September 2000 (Nikkei Net Interactive 2000a). As of June 2001, the Japan Bankers’ Federation and the Federation of Economic Organisations – both private sector actors – were drafting more transparent debt waiver guidelines for banks, with the Financial Services Agency participating in these discussions as an observer. 18 See Chapter 1, footnote 3 for more details on this legislation. 19 With the manual, inspection standards were clarified for the first time—thereby eliminating the frequent past practice of administrative guidance. 20 Although the amakudari link between private sector financial institutions and the MOF has changed drastically in the last two years, banks still hire many former bureaucrats from other agencies. Officials from the Police Agency, for example, are often hired to assist banks in dealing with the sokaiya (racketeers disrupting shareholding meetings) and yakuza (those in the crime world involved in such activities as money laundering). 21 In March 1998, for example, 61 individuals served as directors at the Bank of Tokyo-Mitsubishi (BOT-M). Although unusually large in number, the size of BOT-M’s board reflected a long-standing problem created by bank mergers in Japan—the inflation of executive ranks and obscuring of any locus of accountability or responsibility due to the desire to avoid conflict among merging entities. 22 In September 1999, for example, it was announced that the Aoba Life Insurance Company would be sold to a French holding company, marking the first sale of a failed Japanese financial institution to a foreign company. The sale of the nationalised Long-Term Credit Bank (LTCB) to a US-based consortium of financial institutions was announced soon after and was finalised in March 2000. 23 The largest banks merged into four megabanks in 2001. BOT-M and the Mitsubishi Trust and Banking Corporation formed a holding company; the Industrial Bank of Japan, Dai-ichi Kangyo Bank and Fuji Bank linked together to form the Mizuho Financial Group; Sumitomo Bank and Sakura Bank combined to form Sumitomo Mitsui Bank; and Sanwa and Tokai Banks allied. 24 As of mid-2001, only the Bank of Tokyo-Mitsubishi had repaid the public funds it had received.

74

Japanese governance

25 The nationalisation and bridge bank schemes were also temporary measures provided for by the October 1998 legislation and were designed to expire in March 2001. 26 The MOF prevailed, however, in its battle to keep the official English translation of its name as the ‘Ministry of Finance’. 27 For an assessment of fiscal transparency practice in Japan in relation to the IMF Code of Practices on Fiscal Transparency, see ‘Japan Report on the Observance of Standards and Codes – Fiscal Transparency Module’, IMF Country Report No. 01/156, August 2001, International Monetary Fund, Washington DC. 28 For example, the Honshu-Shikoku Bridge Authority, a government-affiliated corporation under the jurisdiction of the Ministry of Construction, had a debt of over 4 trillion yen as of September 2000 and its liabilities exceeded its assets by 837.7 billion yen (Nikkei Weekly, 25 September 2000). 29 Although the Koizumi administration announced its intention to carry out a thorough assessment of public corporations in 2001, concrete measures to close down essentially insolvent government-affiliated organisations have yet to emerge at the time of this writing. 30 Aggregate numbers of amakudari postings from the bureaucracy into the private sector have declined, making posts in the public corporations all the more valuable. 31 Ironically, because the BOJ no longer has a role in management of bank failures, its influence on private sector finance has diminished. In the past, even more former BOJ officials took up posts in private sector banks than did former MOF officials. Under the new Bank of Japan Law, BOJ officials are no longer permitted to assume management positions in private sector banks upon retirement from the central bank.

REFERENCES Amyx, J., 1998. ‘Banking policy breakdown and the declining institutional effectiveness of Japan’s Ministry of Finance: unintended consequences of network relationships’, PhD Dissertation, Stanford University. Amyx, J., 2000. ‘Political impediments to far-reaching banking reforms in Japan: implications for Asia’, in G.W. Noble and J. Ravenhill (eds), The Asian Financial Crisis and the Architecture of Global Finance, Cambridge University Press, Cambridge:132–51. Amyx, J., 2001. ‘Informality and institutional inertia: the case of Japanese financial regulation’, Japanese Journal of Political Science (Summer/Autumn):47–66. Amyx, J., 2002. ‘Reforming Japanese banks and the financial system’, in J. Graham, S. Maswood and H. Miyajima (eds), Japan–Change and Continuity, Curzon Press, Richmond, Surrey. Asahi Shimbun, 2000. ‘Ethics law is signal to Tokyo that it’s time to clean house’, Asahi Shimbun, 2 April. Available online at http://www.asahi.com.english/asahi/ 0402/asahi040204.html. Nikkei Net Interactive, 2000a. ‘Govt debt collector forgives 60 Bln Yen in loans’, Nikkei Net Interactive, 21 September. Nikkei Net Interactive, 2000b. ‘MOF, financial institutions to exchange info via new panels’, at Nikkei Net Interactive, http://www.nni.nikkei.co.jp/AC/FEAT/failures/ failures00263.html, accessed 17 April 2000.

The MOF and the BOJ at the crossroads

75

Nikkei Net Interactive, 2000c. ‘Risky bank loans shrink 3.4% in FY99 1st Half’, Nikkei Net Interactive, available online at http://www.nni.nikkei.co.jp/AC/TNKS/ ecopol.htm, accessed 27 January 2000. Sasajima, K., Hasegawa, K. and Fukushima, A., 1999. ‘Japanese banking sector’, Warburg Dillon Read Research Report, Tokyo, 2 February.

76

Japanese governance

APPENDIX 4.1 CHRONOLOGY OF CHANGE IN JAPANESE FINANCIAL AUTHORITIES 1991 June 1996

Japan’s speculative bubble crashes. Legislation passed to authorise the use of public funds to resolve the jusen housing and loan crisis. Dec. 1996 Ruling coalition decides to transfer authority for inspection and supervision of financial institutions to a new agency. June 1997 Legislation passed in the Diet to establish an independent agency for financial inspection and supervision. Nov. 1997 Acute financial crisis hits, with collapse of major financial institutions. April 1998 Revised Bank of Japan Law goes into effect. June 1998 Financial Supervisory Agency (FSA) commences business. Oct. 1998 Passage of Financial Revitalisation Law, establishing a framework for dealing with failed financial institutions and providing for additional reorganisation of the financial authorities, including the establishment of the Financial Reconstruction Commission (FRC). Legislation also passed to provide funds to recapitalise the banking sector. Dec. 1998 FRC commences business. March 1999 First credible recapitalisation of the banking sector carried out through the injection of public funds. April 2000 National Ethics Law for Central Government Civil Servants takes effect. July 2000 Financial Planning Bureau of the Ministry of Finance is merged with the Financial Supervisory Agency to create the Financial Services Agency (FSA). Jan. 2001 FRC dissolved and its Secretariat absorbed by the FSA.

The Big Bang financial system reforms 77

5

The Big Bang financial system reforms: implications for corporate governance Horiuchi Akiyoshi

Japan’s financial system has been heavily burdened with non-performing loans since the beginning of the 1990s—a decade ago. Because the government failed to act quickly, the situation progressively worsened and emergency injections of public funds were needed to recapitalise banks and stabilise the financial system. The financial system is not merely a mechanism for transferring funds from savers to users, it constitutes a core part of the corporate governance system of a market economy. Financial intermediaries such as banks directly monitor and discipline corporate managers, and suppliers of funds to financial and capital markets act to supervise and evaluate the managerial capacity of firms. A malfunctioning financial system disturbs the mechanisms of corporate governance and reduces the efficiency of the corporate sector. Because the banking sector dominates Japan’s financial system, the banking crisis has been particularly serious for the Japanese economy (Horiuchi 1999; Hoshi and Kashyap 1999; and Milhaupt 1999). The seriousness of the crisis forced the Japanese government to take emergency measures in 1998 to recapitalise ailing banks. The crisis also forced the Hashimoto government to reconsider its program of financial reforms, and in November 1996 a comprehensive package of reforms was announced—the ‘Big Bang’—which aimed at making the Japanese financial system more efficient, transparent and globally competitive. Piecemeal reforms had been underway since the early 1980s—the period when financial liberalisation began worldwide. In a world of connected capital markets, deregulation became contagious, compelling other governments to follow along the same path. Japan was no exception. The Japanese government’s program of financial reform began in 1980, with the 1979 Foreign Exchange Control Law amended to deregulate foreign exchange markets. The number of areas in the financial system that were heavily regulated either by statute or by administrative guidance have been gradually reduced. This gradual liberalisation is the reason some analysts view the Big Bang as the culmination rather than the beginning of Japan’s financial deregulation.

78

Japanese governance

There were, however, some major discontinuities in the Big Bang reforms. Most importantly, the MOF’s control over the reform program has lessened as the Big Bang plan has materialised. The ministry’s loss of power reflects its failure to cope effectively with the financial crisis caused by non-performing loans. For better or worse, the decline of MOF’s influence marks the disappearance of a regime that previously unified Japan’s segmented financial system. This chapter explains how the Big Bang reforms have aided the breakdown of the financial regime that has governed Japan’s economy during the past half-century. The old regime, formed after the financial crisis of the late 1920s, was strengthened by wartime controls during the first half of the 1940s and by the reconstruction package implemented immediately after World War II. This regime dominated corporate finance during the highgrowth era from the early 1950s to the early 1970s. Japan is now constructing a new financial regime more suited to the 21st century, and the Big Bang marks the beginning of this change. This chapter investigates what the new regime is likely to be and how it is likely to influence the Japanese economy. The chapter explains how the old regime was perpetuated by the safety net established by the MOF to shelter existing institutions from competition and prevent company failures. It looks at how delayed financial deregulation led to inefficiency in Japan’s financial system and how MOF’s influence over the Big Bang plan has lessened as a result of its policy mistakes. The first financial reforms to come out of the plan are examined, and the chapter asks what issues remain before the goals of the Big Bang can be realised. Finally, there is a discussion of how the Big Bang can be expected to influence the Japanese economy. WHAT IS THE BIG BANG? In November 1996, then Prime Minister Ryutaro Hashimoto proposed a package of reforms called the Big Bang. The plan was to reform Japan’s financial system according to the principles of (1) a free market, (2) fair trade, secured by transparent and reliable rules, and (3) an institutional framework that would satisfy international standards in such areas as law, accountancy and banking supervision. The plan came in response to the recognition that the blame for Japan’s inefficient financial system and the prolonged bank crisis lay in MOF’s opaque administration and the lack of competition in the sector.

Delayed financial deregulation The banking crises experienced by many countries during the 1980s and 1990s are conventionally explained by a combination of financial deregulation and a lack of effective prudential regulation (Keeley 1990; Lindgren et al. 1996). According to this view, financial deregulation reduced the profitability of traditional providers of financial services, inducing banks and other financial

The Big Bang financial system reforms 79

institutions to take high risks in the knowledge that the government would not allow them to fail. The absence of prudential regulation made it possible for banks to increase their risk, and a surge in non-performing loans pushed these countries’ financial sectors into crisis. It is doubtful that the conventional thinking holds true for Japan. The seriousness of Japan’s banking crisis is explained by the absence of competition, not excessively fierce competition (Hanazaki and Horiuchi 1998). The postponement of full-scale financial deregulation produced the banking crisis in the early 1990s, forcing the Japanese government to use the shock therapy of the Big Bang to make the financial system more competitive and transparent. Some deregulation of financial and capital markets had occurred prior to 1996. For example, Takeda and Turner (1992) place the start of the reforms at around the beginning of the 1980s. However, the policy of the government (particularly MOF) was one of ‘gradualism’ in order to maintain the status quo in the financial system as long as possible. The MOF believed gradual reforms were needed to prevent a surge in market competition that could damage existing financial intermediaries. The government saw a stable financial system as synonymous with the absence of exit (through either liquidation or bankruptcy), and the pace of deregulation was kept gradual to protect inefficiently managed institutions. This was sometimes called the convoy policy.1 For example, MOF introduced the negotiable certificate of deposits (NCD) in 1979 as the first step in the deregulation of interest rates on fixed-term deposits. NCD issues were heavily restricted, however, and full liberalisation was accomplished only in 1994, 15 years after deregulation began. Japan’s financial system was established immediately after World War II, and the government has restricted entry into the financial service industry and prohibited financial institutions from expanding into other areas within the industry. This segmentation protected the vested interests in each sector and made the financial system as a whole less contestable.2 The lack of competition has meant that inefficiently managed financial institutions were tolerated. Non-performing loans and the other difficulties that surfaced in the early 1990s immediately after the bubble economy burst revealed the poor management of Japanese financial institutions. The complaints from consumers about inefficient financial services were an important catalyst in promoting the Big Bang reforms.

MOF’s comprehensive safety net A by-product of gradual deregulation was that the government was unable to dispose of distressed banks quickly. The government did not want to recognise the need for exit and therefore maintained stability by securing small-scale depositors and also investors in bank-issued debts against bank failures. MOF guided (or more precisely ordered) the relatively strong (larger) banks to absorb those at the brink of bankruptcy.

80

Japanese governance

The most conspicuous example has been the 1986 rescue of Heiwa Sogo Bank, one of Japan’s largest cooperative regional banks and a poor performer mainly due to inefficient management. MOF persuaded Sumitomo Bank to absorb Heiwa Sogo. Sumitomo bore all the costs associated with the bail-out. The rescue operation protected not only all Heiwa Sogo’s depositors and investors, but also its shareholders. Moreover, some Heiwa Sogo managers kept their positions on the board. In return, Sumitomo obtained Heiwa Sogo’s branches in the important Tokyo Metropolitan area. Because Japan’s deposit interest rates were heavily regulated, banks used their network of branches as a tool of non-price competition. MOF controlled the number and location of bank branches, and manipulated the distribution of rents among banks. This restriction of competition was part of MOF’s wide safety net. MOF conferred rents on banks and financial institutions, particularly large-scale ones, who in turn collaborated with MOF to support the safety net. The policy seemed efficient in that it did not require explicit financial support from the public—the end-users of financial services bore the costs, paying high prices for low-quality services. The financial reforms have highlighted the fact that this safety net is not viable. Financial deregulation has been gradual but steady, making it more and more difficult for MOF to persuade banks and financial institutions to collaborate in maintaining the system. In addition, the opaqueness of MOF’s control over the banking system undermined the safety net as it prevented any examination into whether or not it was being implemented cost effectively. As Kane (1995) points out, lack of effective monitoring of the regulator can result in agency problems—the regulator does not necessarily pursue the roles the public has delegated to it. There is a danger that the regulator and the regulated financial institutions will transfer the costs of imprudent management to end-users of financial services and then ultimately to the public. Japan experienced just this problem in the 1980s and 1990s. Thus, the establishment of a competitive financial system through the Big Bang reforms is closely related to the issue of how to rebuild the safety net. WHO PROMOTED THE BIG BANG? After the end of World War II, MOF took all important decisions regarding the financial system. But MOF’s repeated policy errors meant that, from the mid-1980s, its role in drawing up the Big Bang reform program was not influential. MOF’s decision to continue gradual reforms of the financial system in the face of a rapidly changing economic and technological environment was a significant mistake. The Laws Related to Financial Reformation (Kinyu-seido kaikaku kanren hou) were passed in 1992, allowing subsidiaries of firms operating in various financial sectors to cross over to other sectors. The Ministry of Finance, however, reduced the impact of the legislation by restricting the scope of the business that newly established subsidiaries could

The Big Bang financial system reforms 81

undertake. For example, securities subsidiaries of banks were not allowed to undertake stock brokerage because this was considered an important source of revenue for existing small securities companies. The trust-bank subsidiaries of commercial banks, long-term credit banks and securities companies were not permitted to develop full-scale trust businesses because the MOF was worried about the damage this would cause to existing trust banks. Therefore, despite this new legislation, the Japanese financial system remained far from contestable. The serious problem of non-performing bank loans revealed the flaws associated with MOF’s opaque administration and traditional procedures. MOF’s failure to dispose of problem banks encouraged moral-hazard in banks’ and financial institutions’ behaviour, undermined the viability of the safety net and placed a huge burden on taxpayers.3 There is much evidence that MOF’s opaque administration produced the policy of forbearance, which only worsened the problem of non-performing loans. In June 1998 the Laws for Financial System Reformation were passed, implementing an important part of the Big Bang. These laws amended the Banking Law (Ginko ho), the Securities Exchange Law (Shoken torihiki ho) and the Law for the Insurance Industry (Hokengyo ho), with a view to promoting market competition and protecting end-users (particularly individual investors) from undue risk. Formally, these amendments were based on reports submitted a year earlier by MOF’s prestigious advisory councils.4 In this respect, the Big Bang appears to have followed the usual MOF pattern, but the reality has been quite different. By the mid-1990s, it was clear that the MOF’s claims that its administrative intervention had made the Japanese financial system more efficient and stable were unfounded. The Big Bang began outside MOF and was a direct response to criticisms of the administration and of MOF’s financial reforms. In April 1995, the Deregulation Subcommittee (Kiseikanwa Sho-iinkai) of the Administrative Reform Committee (Gyosei Kaikaku Iinkai) drew up a list of desirable reforms in various areas and asked the relevant administrative offices to take specific measures to realise these goals. The subcommittee’s list included several items related to the financial sector, reflecting the strong dissatisfaction of end-users (particularly non-financial firms) of financial services. Directly responsible to the Cabinet, the subcommittee wielded significant influence, and the MOF was forced to respond to its demands.5 The subcommittee’s agenda contributed to MOF’s policy shift from conservative gradualism to positive financial deregulation. In addition, in the late 1990s, Diet members increased their influence over legislation to deal with financial crises, which is remarkable considering the overwhelming influence of the bureaucracy in Japanese politics. The decline of MOF’s influence over financial policy will help make the Japanese financial system more transparent. But it might not necessarily lead to more efficient policy management of financial matters. Because legislators

82

Japanese governance

lack information and analytical capacity, it is uncertain whether they will be able to lead the bureaucracy’s decisionmaking regarding financial matters effectively. Moreover, politicians tend to be short-sighted in policymaking, as has been proven by the government’s recent decision to postpone paying off the insured deposits of failed banks. SPECIFIC REFORMS Since the announcement of the Big Bang in November 1996, many areas of the financial system have undergone reform. The 1998 Laws for Financial System Reformation were particularly important because they provided a blueprint of the Big Bang reforms. Further financial reforms have also been introduced during the past few years.

Improvements to asset-management markets One aim of the Big Bang is to improve the asset-management industry. Although Japanese households have accumulated huge financial wealth, they have not enjoyed high-quality services for managing their assets—traditional banking practices have dominated.6 From 1965 to 1996, personal financial assets increased nearly fourfold from 32 trillion yen to 1,200 trillion yen. The relative share of securities decreased from 23 per cent to 12 per cent over the same period, while the relative share of deposits (bank deposits plus postal savings) remained at a little higher than 50 per cent. Over the same period, the personal sector’s holdings of insurance increased significantly. The reliance on the banking system suggests that the efficiency of the entire financial system has crucially hinged on the risk management of the banks and that the disturbances in the banking sector are likely to influence the whole economy. While bank credit is a very important way of sharing risk, other methods of financing should be gaining importance in Japan. Other authors have argued that bank credit is less effective in promoting venture businesses than the capital market mechanisms supported by venture capitalists (Black and Gilson 1998; Milhaupt 1997). These authors recommend a direct flow of funds from savers to fund users (that is, venture businesses), but assetmanagement services need to be improved substantially if this is to occur. Trust banks and life insurance companies have dominated asset management in Japan. These intermediaries have tended to adopt investment strategies inconsistent with the interests of investors (that is, households). Insurance companies, for example, have reportedly held blocks of the shares of non-financial companies to ward off capital market pressures. To compensate the insurance companies for holding these shares, the companies become faithful clients of the insurance companies and offer jobs to their employees. The system has not benefited policyholders. It is also noteworthy that Japanese insurance companies have been deeply involved in MOF’s ad hoc practice of bailing out distressed banks by providing banks with capital

The Big Bang financial system reforms 83

without yielding reasonable returns. In the past, insurance companies have been required to purchase junior debt or preferred stocks issued by banks in order to strengthen their capital bases. Since these purchases have usually experienced capital or default losses, this investment policy is not justifiable.7 The rules regarding the establishment of asset-management companies have been liberalised, fostering greater competition in the asset-management industry. Many Japanese financial institutions have been forced to improve their management of assets either through establishing joint ventures or collaborations with foreign institutions. The government has also started to reform the market for investment trusts. Amendments to the Investment Trust Act in June 1998 allowed private trusts to be set up and also allowed banks and insurance companies to sell investment trusts directly to customers.8 Aimed at vitalising the market for investment trusts, the reforms should make asset-management markets more comprehensive and competitive and will increase the presence of individual investors. Because intermediaries will no longer be able to neglect the interests of individual investors, the influence investors have over corporate governance in Japan may increase.9

Reforms in corporate finance The financial reforms that followed the announcement of the Big Bang plan contain various policies to liberalise the corporate finance system. For example, new financing tools such as perpetual bonds and medium-term notes (MTNs) have been introduced. The unique characteristic of MTNs is that they are continuously offered to investors over a period of maturity bands: nine months to one year, more than one year to 18 months and two years up to 30 years. MTNs are registered under the shelf-registration rule, which gives the issuer maximum flexibility for issuing securities on a continuous basis. The government also initiated the development of an over-the-counter market for stocks and began to promote unlisted stockmarkets with a view to helping small firms raise funds from capital markets. In May 1999, non-bank finance companies were permitted to issue bonds and commercial paper to finance their loans, making the market for personal and small-business loans more competitive. These reforms do have merits, but in reality some merely ratified the market-driven development of corporate finance in Japan. Many blue-chip companies have been active in international capital markets, such as the euro-bond market, as a means of avoiding domestic restrictions on raising funds. If the government is to prevent the hollowing out of Japanese capital markets, it must liberalise domestic markets. As Horiuchi (1999) explains, the major companies had already started to reduce their reliance on borrowing before the 1980s when the government began a campaign of financial deregulation, and had moved instead to internal funds (mainly from depreciation and retained profits). While financial deregulation increased

84

Japanese governance

bond and equity financing during the 1980s, the increases were at most marginal. The overwhelming importance of internal funds during the past two decades suggests that the impact of financial deregulation on the financing decisions of major companies was not as significant as many analysts believed. The most important policy change has been the promotion of capital markets for small businesses. Small businesses in Japan have traditionally relied heavily on bank credit and bank relationships, although the use of bank credit was relatively small during the high-growth period from the early 1950s to the early 1970s. In 1980, bank loans to small businesses accounted for only a third of the total amount of bank credit, but the share rapidly increased to around 70 per cent in the late 1980s, and has remained at this level since. This suggests that small businesses have found it difficult to branch out from bank credit to other forms of financing, primarily because of asymmetric information problems. Small companies have had a greater reliance on their relationships with banks than have large companies (Petersen and Rajan 1995), which find it easier to attract other sources of finance. The banking crisis has shaken bank–firm relationships. Smaller companies have been hit harder by the shrinkage of lending caused by the non-performing loans because they have not disclosed their business in a reliable way. Lacking information, the capital market has been reluctant to take the place of banks in supplying funds to small firms. Small businesses need alternative sources of funds in order to maintain liquidity.10 The heavy reliance on bank financing has also not been constructive for high-risk venture businesses, which require more comprehensive mechanisms of risk sharing and technical evaluation. Venture businesses have relied heavily on the capital market for financing but, despite its large scale, the Japanese capital market has only just started to take an interest in venture businesses. Japan could learn much from the US experience with developing venture capital (Black and Gilson 1998).

Reforms of the capital market Since the liberalisation of foreign exchange transactions and international capital movements in the early 1980s, Japan’s capital market has become far more involved in international markets than other sections of Japan’s financial system. Because capital market intermediaries have been more vulnerable to competition from abroad, their push for liberalisation has been stronger than that of other domestically oriented intermediaries. The deregulation of domestic securities markets has been swift, and the brokerage fees on stock trading were completely liberalised by the end of 1999. The liberalisation of brokerage fees greatly improves the efficiency of the stockmarket in Japan by forcing securities companies that have relied on profits from controlled brokerage fees to be more competitive and making it possible for innovative companies to offer investors various means to cut the costs of stock trading. Although not directly related to the Big Bang, the 1993 amendment to the Commercial Code, which substantially lowered the cost to shareholders of

The Big Bang financial system reforms 85

initiating derivative actions, seems to have been changing the landscape of corporate governance in Japan (Milhaupt 1996:55–7). Shareholders previously needed a huge amount of money to file a derivative suit, but the amendment fixed this fee at 8,200 yen. The many scandals involving incumbent managers that surfaced in the early 1990s destroyed the credibility of the traditional system of bank-centred management monitoring (the main bank relationship).11 The amendment to the Commercial Code will strengthen the ability of the capital market to monitor corporate managers. From 1950 to 1990, only 27 derivative suits were filed, but the number jumped up to 23 in the three years from 1991 to 1994, mainly because of the amendment to the Commercial Code.

The Big Bang in the accounting system Efficiency in the capital market relies on transparent accounting methods in the business sector. The lack of a reliable accounting system has been the Achilles’ heel of the Japanese financial system. Even in recent years, cases were observed of firms going bankrupt although their balance sheets had seemed sound and had been certified by auditors immediately before the bankruptcy. These cases have increased public distrust. Foreign investors do not fully believe in the accounting information disseminated by Japanese firms. Drastic reforms are necessary to bring Japanese accounting standards up to global standards if the system is to be credible. The Council of Business Accounting (Kigyou Kaikei Shingikai), an important MOF advisory committee, has been notoriously slow in responding to the increasing demand for transparent accounting in the Japanese capital market. The council has belatedly submitted several recommendations since 1997 to remedy Japanese accounting standards. These recommendations preceded the Big Bang reforms in the accounting system. The system has been reformed along three fronts—consolidated accounting rules have been rationalised, the principle of marking-to-market accounting of financial commodities has been introduced, and companies are now required to disclose pension liabilities. These reforms are strengthening the transparency of company activities. Consolidated accounting rules. Since March 1999, Japan has been shifting to a new rule of consolidated accounting. The old standard of consolidation, effective until the 1997 fiscal year, allowed companies to manipulate their balance sheets by transferring losses or bad assets from their own accounts to those of their subsidiaries. This loophole was opened up by the definition of a subsidiary in terms of the relative amount of shares held by the parent company. A company was able to transfer bad assets to de facto subsidiaries (whose shares the company did not heavily hold) because it was not required to consolidate its own accounting with those of its subsidiaries. The new standard maintains the criterion of de facto influence in stipulating that those companies that are substantially influenced by their parent company

86

Japanese governance

in terms of managerial decisionmaking are to be regarded as subsidiaries even if the parent company does not hold substantial shares. This more stringent standard of consolidated accounting began in March 1999 (the 1998 fiscal year) for banks and financial companies. The standard was later applied to non-financial companies in April 2000.12 The marking-to-market principle. Under the current accounting rule, only financial institutions are required to record the market values of those financial assets they hold with the intention of selling in the future. Thus, the markingto-market principle has not applied to stocks held by financial institutions for the purpose of cross-shareholding. Non-financial companies are not required to record the market value of financial assets at all. The new rule, which took effect in March 2001, requires both financial and non-financial companies to adopt the marking-to-market principle for recording marketable financial assets, including some derivatives, in their balance sheets. Under the current accounting rule, the existence of hidden profits (that is, the accumulated capital gains of financial assets) does not give a true picture of the assets of individual firms. Under the new rule, window dressing by manipulating hidden profits will not be possible, thereby contributing to greater transparency in corporate management. Pension liabilities. Under the current accounting rule, Japanese firms do not have to be explicit about their pension liabilities. It is claimed that this allows employers to be indifferent about these liabilities and makes it difficult for outsiders to grasp the true shape of a firm’s balance sheet. A new rule, introduced in March 2001, requires firms to explicitly disclose their pension liabilities.

Reforms for greater market competition If the performance of Japan’s financial service industry is to improve, new entry into every section of the industry should be allowed, thus making the industry more contestable. Market competition provides a discipline on financial institutions by forcing inefficiently managed firms to exit. The Japanese government’s attitude toward reducing barriers to new entry has, however, been timid. The most likely candidates for new entry are financial institutions active in closely related areas. For example, entry into the securities business would be easier for banks than for non-financial firms. This explains why in 1993 the first step in promoting contestable financial markets was to allow existing financial intermediaries to establish subsidiaries in other specialities within the industry.13 The government has protected existing companies competing with the new entrants by limiting the services that the newcomers can offer. Securities subsidiaries established by banks, for example, have not been allowed to undertake stock brokerage because this is the most lucrative area for existing securities companies, particularly small firms. These subsidiaries have also

The Big Bang financial system reforms 87

been restricted in their underwriting businesses because their parent banks were believed to be unduly influential in the fundraising decisions of client companies. The 1992 Laws Related to Financial Reformation permitted commercial banks and securities companies to establish trust banks as subsidiaries. The subsidiaries were, however, not allowed to develop fullscale trust businesses in consideration of existing trust banks. The government’s policy of gradualism has been criticised for keeping the Japanese financial system far from contestable. The Big Bang reforms responded to this criticism by lifting some restrictions on new entrants, as did the 1998 Laws for Financial System Reformation by abolishing most of the remaining restrictions on crossover entry in the financial sector.14 The Antitrust Law had prohibited so-called pure holding companies, defined as companies in which other companies’ shares represent more than half the assets. In June 1997, the Antitrust Law was amended to permit pure holding companies to be set up, including in the financial services industry. So, while the 1992 Laws Related to Financial Reformation permitted the subsidiaries of banks and other financial institutions to engage in financial services outside their own speciality, the amendment to the Antitrust Law allowed firms to set up holding companies to restructure their business. In order to make the 1997 amendment of the Antitrust Law workable, the Commercial Code was amended to allow easier establishment of a ‘parent–child relationship’ between two companies where the parent company holds all the shares of the other company.15 These changes are expected to promote restructuring and reduce compartmentalisation and should bring about greater competition and flexibility in the financial sector. The decrease in the intermediation capacity of the banking sector and rapid advances in electronic technology have induced non-financial companies into the banking sector. At the end of 1999, Ito-Yokado, one of the largest supermarket chains, and Sony, a multinational electronics company, announced plans to start offering banking services. While Ito-Yokado will focus on providing settlement services to the retailing sector, Sony wants to specialise in offering Internet banking to the public. The Banking Law does not prohibit non-financial companies from engaging in banking services, leaving the decision up to the financial authority, the Financial Supervisory Agency (FSA), which is also responsible for regulating those companies that do enter. The FSA has already determined the guidelines for non-financial companies to enter the banking business. This development will increase the pressure for a more contestable banking sector in Japan.

Strengthening prudential regulation The financial crisis forced the Japanese government to recognise the importance of prudential regulation of banks and other financial institutions. The crisis also forced the government to take emergency measures to reconstruct the financial system’s safety net. A complete discussion of the

88

Japanese governance

emergency measures is beyond the scope of this chapter, but important developments in prudential regulation are highlighted below (see Horiuchi 1999; and Milhaupt 1999). Several important reforms of prudential regulations were implemented after the announcement of the Big Bang in 1996. The establishment of the FSA in June 1998 was the most important because it shifted the responsibility for monitoring financial markets and institutions from MOF to a new and independent regulatory agency directly responsible to the prime minister. This regulatory reform is commendable. The FSA will be more able to accumulate information from the financial sector than MOF, which had amassed a wide array of responsibilities over the financial sector, public finance, taxation and the budget. The FSA has maintained an arm’s-length relationship with individual banks and financial institutions to strengthen the supervision of managerial activities and prevent moral-hazard problems. In 1996, the Banking Law was amended to require banks to take prompt corrective actions (PCAs) on occasion to self-assess their capital adequacy subject to external audit. After April 1998, banks with capital below certain specified levels are required to restructure or even cease operations to avoid transferring excessive risk to the deposit insurance fund. By introducing transparent rules of intervention into bank management, the PCA scheme aims to (1) prevent the government’s forbearance policy by promoting the timely settlement of distressed banks, and (2) motivate banks with low capital to restructure their balance sheets as soon as possible. The scheme should be able to identify troubled banks quickly and therefore protect the banking sector from widespread bank failures. Unfortunately, because it was introduced at a time when the banking sector was fragile and because it places strong pressures on bank managers by forcing them to be conservative with credit, the policy seems to have worsened Japan’s economic woes.16 REMAINING ISSUES This chapter has sketched out recent financial reforms instituted under the Big Bang plan. These reforms aim to revitalise the Japanese financial system by improving managerial efficiency and strengthening supervisory mechanisms. However, many issues still need to be resolved if the broader goal of the Big Bang is to be achieved.

Is free exit possible? A competitive financial system requires not only free entry, but also free exit of inefficient intermediaries. However, the recent mix-up over the procedure for dealing with distressed banks shows that Japan’s financial system is not well prepared for the exit of inefficient financial institutions. Falling asset values and overly generous long-term liabilities of insurance companies, reflecting poor risk management, are likely to lead to another crisis. Explicit

The Big Bang financial system reforms 89

rules allowing those institutions to fail while limiting the impact on ultimate users and clients need to be established. During the late 1990s, the Japanese government faced a severe banking crisis and a shrinking traditional safety net. The government’s commitment to start paying off the insured deposits of failed financial institutions in April 2002 implies that holders of non-insured deposits and other bank debts will have to bear at least some of the costs associated with bank failures (Horiuchi 2000). This reduction of the safety net will give depositors and other investors greater incentives to monitor bank management, thereby increasing the market discipline for prudent management (Calomiris 1999). However, it remains unclear whether the FSA will use stringent supervision to force unsound banks to exit the industry. A problem emerges out of the asymmetric nature of information regarding the quality of individual bank loans. In traditional relationship banking, information concerning the soundness of the corporate borrower’s management was concentrated in the banks (Rajan and Zingales 2001). Thus, it is difficult for outside investors or even supervisory authorities to accurately assess whether given loans have turned sour and to what extent. Under such conditions of asymmetric information, bank managers have incentives to underestimate amounts of non-performing loans so as to avoid a drastic decrease in their equity capital. The FSA has been suspected of allowing the banks, particularly big banks, to confine their assessment of non-performing loans to amounts able to be covered by current profits, thereby concealing the actual shortage of bank capital (Fukao 2001). If the FSA has adopted such an approach toward banks, then the agency is simply practicing forbearance. Discerning the difference between forbearance and appropriate supervision is virtually impossible for taxpayers, however. In the decade since 1991, more than 170 banks and depository institutions went bankrupt due to non-performing loans. Most of the bank failures were small-scale ones, with 130 accounted for by failures of credit cooperatives. Because these small-scale financial institutions have financed small and medium-sized enterprises (SMEs) in local areas, politicians do not want to see their further disappearance — even if they are inefficiently managed — when SMEs are experiencing a credit crunch. The Japanese Government yielded to the political pressure exerted by politicians and postponed the reimposition of a ceiling on deposit insurance payoffs until April 2002. This decision endangered the credibility of financial reforms to date and suggests that forbearance permitting ‘zombie’ banks to survive is likely even under the reformed financial system.

Is the new financial agency efficient? The Big Bang plan assumes that financial markets will work efficiently. It does not, however, eliminate the role of the government in the financial system. In particular, the government must be responsible for preserving a fair and stable financial system by supervising market transactions and financial

90

Japanese governance

prudence. These functions have been integrated into the FSA, which collects information from banks and other financial intermediaries while maintaining an arm’s-length relationship with them. Because the agency needs to increase its knowledgeable staff, the administrative costs of implementing effective supervision may be large. On the other hand, as we have learnt from recent MOF scandals, it is difficult to provide the supervisory agency with appropriate incentives to accomplish the role delegated to it by the taxpayers (Kane 1995; Horiuchi and Shimizu 2001). Removing supervisory authority from MOF, which now concentrates on fiscal matters, was necessary but the issue remains of how to motivate the FSA to work efficiently. It is probably necessary for the agency to disclose its activities according to a specific format to prevent deviation from its designated role. In July 2000, the Financial Supervisory Agency and the Financial Division of MOF were integrated into a new government agency—the Financial Services Agency (Kinyu-Cho). This new agency specialises in matters relating to the Japanese financial system.17 It utilises information collected during supervisory activities to improve the efficiency of financial administration. In order to economise on supervisory costs, the government should transfer some tasks to the market. If they can access relevant information, investors will have strong incentives to monitor the management of banks and other intermediaries. A well-balanced division of labour between the government and the market is badly needed in Japan.

Should the public financial institutions be retained? One of the mysteries of the Big Bang plan is that public financial institutions were not explicitly included. Public financial institutions, particularly the Postal Savings and Postal Life Insurance (kan’i hoken) Services, are a major part of the Japanese financial system. It will be difficult to achieve the objectives of the Big Bang if these huge market players are insulated from market discipline. The main reason for the silence on the issue of the public financial institutions is, of course, political. The Postal Savings Service forms the backbone of public finance. Postal savings and life insurance are under the jurisdiction of the Ministry of Posts and Telecommunications (MPT). The ministry is politically very influential because of the indirect support the postal network has given to many politicians by providing a convenient tool for distributing subsidies to specific areas or industries. Sectionalism in the Japanese bureaucracy and the reluctance of politicians to abandon the public financial institutions have prevented the inclusion of the public financial institutions in the plan. The public financial institutions have perpetuated Japan’s old-fashioned financial system. The government has reportedly used funds from the public financial system to intervene in stock trading with the intention of sustaining stock prices above the market level. These price-keeping operations have been regarded as an important tool to help banks and financial institutions

The Big Bang financial system reforms 91

avoid decreases in their equity capital. Although it is unclear, both theoretically and empirically, whether or not this practice has been effective, policymakers believe it has been and that it would be unwise to abolish this convenient institution. There has been an expectation that the public financial institutions will be used to mitigate the credit crunch. Public financial institutions could provide emergency funds but it is important not to allow emergency measures to preempt the structural reform that is necessary to construct an efficient financial system. The involvement of the public financial institutions in an emergency package holds the danger of transferring risk from private agents to the public sector, which would hurt the financial system as a whole. The public financial institutions are at odds with the new financial regime the Big Bang plan is constructing, but when and how this contradiction will be settled remains to be answered.

Can the infrastructure adapt to financial reforms? Financial markets rely on infrastructure such as clearing systems to achieve efficient transactions in financial markets, but some infrastructure problems remain. For example, the clearing systems in Japan’s securities markets have been technologically separated. The clearing systems for government bonds, stocks, corporate bonds and commercial paper have functioned almost totally independently of each other. This situation is inconvenient for investors and needs to be rectified if securities markets are to be efficient and competitive. It will not be as easy as foreigners may expect to establish a unified clearing system covering the entire Japanese securities market. The equilibrium among interest groups that the compartmentalism of the financial system has produced has made it difficult to introduce financial reforms. When attempts were made to introduce a unified clearing system, each interest group tried to build up a clearing system specific to its group. The result was the current system of narrowly subdivided sections. The Japanese government has been unable to resolve this issue. Japanese traditions of consensus building and unanimity have prevented a more comprehensive clearing system from being introduced.

Is the tax system market friendly? The taxation of financial transactions in Japan is complex. The taxation on securities trading is comprehensive and the exchange tax is widely regarded as having prevented the development of a derivatives market in Japan. The complex tax system is not only a problem for the financial services industry. Consequently, the system must be reformed as soon as possible. Although the distortions created by the present taxation system have been widely recognised, MOF, which is responsible for managing the system, does not seem to be enthusiastic in addressing the problem. The ministry seems to be more interested in collecting taxes than developing an efficient financial system free from tax distortion.

92

Japanese governance

CONCLUSIONS The Big Bang plan has forced Japan’s financial system to face a change of regime. The crisis in the old financial regime compelled the government to embark on financial deregulation. The Big Bang is more than a continuation of the gradual liberalisation policy followed until the mid-1990s. Significant reforms have already been enacted, although many issues need to be settled before the larger aims of the plan will be fully realised. Although it was motivated by financial crisis caused by the non-performing loans, the Big Bang is fundamentally about long-term deregulation of the financial system, particularly of the traditional safety net managed by MOF. The Big Bang plan emphasises the importance of market competition and transparent rules of supervision in financial services, and therefore should improve the governance of financial institutions in the long run. Drastic changes in the structure of the financial services industry are still required before this goal can be realised. For example, increased competition will force a reduction in the number of banks and their employees. The plan has tended to promote the development of securities markets rather than banks and this should change the system of corporate governance in Japan. Banks have played a overwhelmingly important role in corporate governance in Japan (Hoshi, Kashyap and Scharfstein 1990, 1991; and Aoki and Patrick 1994). The development of securities markets will decrease the banks’ importance and increase the disciplinary role of capital markets. In this sense, the Big Bang will move the Japanese system toward the AngloAmerican system, where the capital market plays an essential role in corporate management, and may force managers to adapt to environmental changes. It is uncertain, however, whether the system change will contribute to efficient management in the corporate sector in the long term. ACKNOWLEDGEMENT I appreciate the constructive comments and suggestions of Peter Drysdale and Chris Becker on the original version of this paper. They greatly improved its quality.

NOTES 1

2

MOF’s view that the most important objective of financial administration is to prevent bank failures induced it to take various opaque measures to bail out distressed banks and, somewhat ironically, hindered it from introducing explicit rules to deal with bank failures. This led to the notorious policy of forbearance, which allowed banks to hold non-performing loans in the hope of eventual economic recovery. The breakdown of the system of long-term credit banks provides the most conspicuous evidence of the failure of the compartmentalisation policy. This system was effective immediately after World War II when firms needed longterm credit but savers (households) wanted highly liquid short-term stores of

The Big Bang financial system reforms 93 value. The system lost its raison d’être as the economy grew, but the government has continued to protect it by suppressing the development of securities markets that would compete with these banks. The maintenance of the policy despite the rapid reduction of major companies’ reliance on bank borrowing indulged the long-term credit banks. If the government had abandoned the policy at the beginning of the 1980s, long-term credit banks would have faced the need to restructure much earlier. The fact that two of the three long-term credit banks are now under state control because of extremely poor performance illustrates the failure of the policy. 3 The Law on Emergency Measures to Revitalise the Functions of the Financial System and the Law on Emergency Measures to Promptly Restore the Functions of the Financial System, both of which were enacted in late 1998, established two special accounts within the Deposit Insurance Corporation (DIC). The Account for Prompt Financial Restructuring provides financial support for strengthening banks’ capital bases, while the Financial Revitalisation Account provides funds to liquidate, temporarily nationalise or transfer failed banks to bridge banks temporarily. These accounts are publicly supported by 53 trillion yen in the form of government guarantees. The DIC also has a special account, supported by 7 trillion yen of government bonds, that protects depositors from bank failures. 4 These are the Council for the Financial System (Kinyu Seido Chosakai), the Council for Securities Transactions (Shoken Torihiki Shingikai) and the Council for the Insurance Industry (Hoken Shingikai). It is believed that MOF has almost completely controlled the topics to be investigated in those councils and what their reports propose. The councils’ reports can be regarded as MOF’s policy agenda. 5 The Administrative Reform Committee was formed by the Murayama Cabinet, which consisted of a coalition of anti-LDP groups. In spite of the change of the government to the LDP-dominated Hashimoto Cabinet, the Deregulation Subcommittee continued its activities. This implies that the subcommittee’s deregulation campaign was independent of the ruling political party. 6 According to the flow-of-funds account reported by the Bank of Japan, the personal sector’s financial assets totalled 1,200 trillion yen in December 1996. 7 The insurance industry has faced abnormally low returns in financial markets as a result of the crisis. Since most of their liabilities were issued during the asset bubble of the late 1980s, which promised high returns to policyholders, insurers have been hurt by the abnormally low interest rates maintained by the Bank of Japan. By July 1999, two life insurance companies had gone bankrupt. 8 According to a Kinzai survey, the outstanding amount of investment trusts sold by banks and insurance companies as of May 1999 was 1.1 trillion yen—only 2.2 per cent of the total sold. Although the share is small, it is expected to increase in the future (Kinyu Zaisei Jijo, 23 June 1999:38–9). 9 The development of the asset-management industry is expected to increase the influence institutional investors have on corporate managers, forcing them to become more orientated toward shareholders. Some scholars expect these changes in corporate governance to improve managerial efficiency in Japan (see, for example, Gibson 1998). 10 During the crisis, many firms were cornered because their banks refused to supply liquidity. The banks’ attitude was a natural response to the need for recapitalisation, but it damaged the trust firms had placed in the banks. It may take a long time for these relationships to be rebuilt. 11 It was, reportedly, the United States’ Structural Impediments Initiative that forced a substantial amendment to the Commercial Code. The amendment also lowered the threshold percentage of stock ownership required to inspect corporate books from 10 per cent to 3 per cent.

94

Japanese governance

12 The number of subsidiaries reported by banks increased in March 1999 because of this change to the consolidating rules. The new system showed the nonperforming loans of city banks to be 139 billion yen (1 per cent) higher as a result (Nikkei Shimbun, 22 May 1999). 13 The insurance industry was excluded from this deregulation. Even after 1993 the insurance industry has been segregated from other financial services. 14 There has been some new entry into the financial industry. For example, from March 1999, Orix Trust Bank made telephone and Internet banking facilities available to investors. In April 1999, Mitsubishi Trading Company entered into the securities and investment advisory businesses, and in November 1999 ItoYokado, one of Japan’s largest supermarket chains, announced plans to establish a bank to offer settlement services to the retail sector. 15 The Japanese banking industry has begun metamorphosing through the establishment of holding companies. Daiwa Securities Company has already become a holding company. In August 1999, Dai-ichi Kangyo Bank, Fuji Bank and Industrial Bank of Japan announced a plan to establish a holding company to integrate and restructure their businesses by autumn 2000. In October 1999, Tokai Bank and Asahi Bank announced a plan to establish a holding company in October 2000. 16 The PCA had been applied by the FSA to five banks by June 1999 and is clearly of practical use. An emergency policy is needed to force drastic structural changes on existing banks and other financial institutions. This would require the government to take over the management of several banks to recapitalise them quickly. The fact that this goes against the ideals of the Big Bang complicates the process of financial reform in Japan. 17 Not all the administrative tasks related to the financial system have been removed from MOF, which is still responsible for dealing with financial crises and for supervising the Deposit Insurance Corporation in collaboration with the Financial Services Agency.

REFERENCES Aoki, M. and Patrick, H., 1994. The Japanese Main Bank System: Its relevancy for developing and transforming economies, Oxford University Press, New York. Black, B.S. and Gilson, R.J., 1998. ‘Venture capital and the structure of capital markets: banks versus stock markets’, Journal of Financial Economics, 47(3):243–77. Calomiris, C.W., 1999. ‘Building an incentive-compatible safety net’, Journal of Banking and Finance, 23(10):1499–519. Fukao, M., 2001. ‘Financial deregulation, weakness of market discipline, and market development: Japan’s experience and lessons for developing countries’, Paper presented at the IDB-JCIF Workshop, Japan’s Experience and Implications for Latin America and the Caribbean, June 2001. Gibson, M.S., 1998. ‘Big Bang deregulation and Japanese corporate governance: a survey of the issues’, Division of International Finance, Federal Reserve Board (mimeo). Hanazaki, M. and Horiuchi, A., 1998. ‘A vacuum of governance in the Japanese bank management’, Discussion Paper Series F-29, Centre for International Research on the Japanese Economy, Faculty of Economics, University of Tokyo. Horiuchi, A., 1999. ‘Financial fragility and recent developments in the Japanese safety net’, Social Science Japan Journal, 2(1):23–43. ——, 2000. ‘Japan’s bank crisis and the issue of governance’, in P. Drysdale (ed.), Reform and Recovery in East Asia: The role of the state and economic enterprise, Routledge, New York:28–58.

The Big Bang financial system reforms 95 —— and Shimizu, K., 2001. ‘Did amakudari undermine the effectiveness of regulator monitoring in Japan?’, Journal of Banking and Finance, 25(3):573–96. Hoshi, T. and Kashyap, A., 1999. ‘The Japanese banking crisis: where did it come from and how will it end?’, in B.S. Bernanke and J. Rotemberg (eds), NBER Macroeconomic Annual 1999, MIT Press, Cambridge. Hoshi, T., Kashyap, A. and Scharfstein, D., 1990. ‘The role of banks in reducing the costs of financial distress in Japan’, Journal of Financial Economics, 27(1): 67–88. ——, 1991. ‘Corporate structure, liquidity, and investment: evidence from Japanese industrial groups’, Quarterly Journal of Economics, 106(1):33–60. Kane, E.J., 1995. ‘Three paradigms for the role of capitalization requirements in insured financial institutions’, Journal of Banking and Finance, 19(3–4):431–59. Keeley, M.C., 1990. ‘Deposit insurance, risk, and market power in banking’, American Economic Review, 80(5):1183–200. Lindgren, C., Garcia, G. and Saal, M.I., 1996. Bank Soundness and Macroeconomic Policy, International Monetary Fund, Washington DC. Milhaupt, C.J., 1996. ‘A relational theory of Japanese corporate governance: contract, culture, and the rule of law’, Harvard International Law Journal, 37(1):3–64. ——, 1997. ‘The market for innovation in the United States and Japan: venture capital and the comparative corporate governance debate’, Northwestern University Law Review, 91(3):865–98. ——, 1999. ‘Japan’s experience with deposit insurance and failing banks: implications for financial regulatory design?’, Monetary and Economic Studies, 17(2):21–46. Petersen, M.A. and Rajan, R.G., 1995. ‘The effect of credit market competition on lending relationships’, Quarterly Journal of Economics, 110(2):408–43. Rajan, R.G., and Zingales, L., 2001. ‘Financial systems, industrial structure, and growth’. Oxford Review of Economic Policy 17 (4), 2001. Takeda, M. and Turner, P., 1992. ‘The liberalization of Japan’s financial market: some major themes’, Economic Paper 34, Bank for International Settlements, Basel.

96

6

Japanese governance

A changing Ministry of International Trade and Industry Kohno Masaru

The 1990s will be remembered by future generations of Japanese people as the decade during which the institutional foundations that sustained the growth and development of Japan’s post-World War II political economy underwent significant transformation. The dragging economic recession following the collapse of the bubble and incessant waves of globalisation brought about structural changes in the so-called convoy system, keiretsu groupings and life-time employment practices, which had long been the distinctive characteristics of Japan’s financial system, industrial organisation and labour relations. It is also noteworthy that, by coincidence (or perhaps luck), a series of scandals involving élite bureaucrats surfaced and the scope of reforms reached the core of Japan’s administrative structure. Even the most stubborn sceptics would have difficulty denying the effect of sweeping reforms which include the revision of the Bank of Japan Law, the breakup of the Ministry of Finance, and the strengthening of the functions of Cabinet. Important change also took place in the political arena when the introduction of a new electoral system triggered significant partisan realignment and new patterns of government formation. The previous political landscape, with the Liberal Democratic Party (LDP) confronting dogmatic Socialists and other minor parties, disappeared, and the LDP—though maintaining its legislative plurality—was forced to form a coalition to establish a majority government. Finally, yet no less significantly, the 1990s witnessed growth and maturing of various civic activities at the regional and grass-roots levels, as represented by ombudsmen and other non-profit organisations (NPOs). Their demands for decentralisation, administrative transparency and participatory democracy were clearly heard, affecting the results of some gubernatorial and local elections, as well as influencing the course of important legislative deliberations on regional autonomy, NPO activities, the environment and public health in the national Diet. While other chapters of the volume address various aspects of the changes listed above, I focus in this chapter on the recent transformation of one particular government agency, the Ministry of International Trade and Industry (MITI). I argue that, during the past decade or so, there have been notable

A changing Ministry of International Trade and Industry

97

changes in the mission, character, and strategy of MITI. The nature and implications of these changes deserve systematic scrutiny because they reflect significant evolution in Japan’s economic structure, Japan’s industrial and trade practices, and Japan’s position in the regional and world economies. These changes are bound to have long-term effects, not only on Japan’s domestic political economy, but internationally as well. Furthermore, studying MITI in the larger context of contemporary reforms in the 1990s is appropriate precisely because MITI has been regarded as one of the most central institutions in Japan’s postwar development. Indeed, since the publication of Chalmers Johnson’s pioneering analysis (Johnson 1982), MITI’s industrial policy and its contribution to Japan’s miraculous economic growth has been the focus of numerous studies on modern Japan. However, Johnson’s presentation of MITI as the central organ of a developmental state that utilises its policies and regulatory discretion to manipulate Japanese private business must now be corrected. Johnson’s book has been criticised from various directions but, as discussed below, even these critics do not capture the most recent changes in MITI and their implications. We now need a new perspective, which updates and properly places MITI’s role within Japanese government and Japan’s industrial and trade strategies in the changing environment. OUTDATED PREMISES OF THE CONVENTIONAL PERSPECTIVES ON MITI Since the publication of Chalmers Johnson’s influential work, MITI and the Japanese Miracle, in 1982, Japan’s industrial policy and the role that MITI played in coordinating this policy and promoting Japan’s miraculous economic growth have become the focus of numerous studies. Indeed, Johnson’s work was (and still is) incomparable in its contribution as a scholarly book written about contemporary Japan. Although his original analysis was centred on this particular ministry, Johnson’s thesis established the so-called bureaucracydominant perspective in the literature of Japanese policymaking more generally (cf. Johnson 1975). Moreover, Johnson’s concept of a developmental state was quickly and systematically embraced in the field of political economy as a model alternative to the dominant neoclassical paradigm (Zysman 1983; Katzenstein 1985; Johnson 1987; Koo 1987; Amsden 1989; Wade 1990; Haggard 1990). Scholars thus began to view Japan in a comparative and more theoretical context, finally departing from the previous characterisation, which overemphasised the uniqueness of Japan’s political and economic systems. Johnson’s view, of course, was later criticised from various directions. With regard to the patterns of the domestic policy process, a group of so-called pluralists made counter-arguments, based on case studies and survey analyses. They argued that not only bureaucrats but also politicians, political parties, interest groups and mass media, among other actors, can also influence policymaking and implementation in Japan (Otake 1979; Sato and Matsuzaki 1986; Kabashima and Broadbent 1986; Inoguchi and Iwai 1987). More recently,

98

Japanese governance

a new generation of scholars, inspired by the rational-choice perspective, has attacked Johnson’s core analysis of bureaucratic dominance, highlighting informational and institutional foundations for political control of bureaucracy (Ramseyer and Rosenbluth 1993; Cowhey and McCubbins 1995). With regard specifically to industrial policy, there also have been many criticisms, emphasising MITI’s inability and limitations in formulating cohesive policies (Callon 1995; Uriu 1996) and highlighting MITI’s reciprocal and often compromising relations with business sectors (Okimoto 1989; Samuels 1987). Furthermore, while some political scientists were eager to extend Johnson’s perspective in explaining other East Asian miracles, others, especially economists, have generally been less sympathetic to the view that the governmental interventions were the key for these economic successes (World Bank 1993; Aoki et al. 1996). Although these debates have for some time dominated the literature of comparative political economy involving Japan, they no longer provide an appropriate framework for understanding MITI and Japan’s industrial and trade policies. The nature of MITI has changed so significantly in recent years that the basic terms of these debates seem to have become obsolete and irrelevant. The common premises upon which these debates took place can no longer be taken for granted. We now need a new perspective on MITI and Japan’s trade and industrial strategy. For example, those observers in the previous generation took it for granted that MITI’s influence, if any, came from the regulatory power it exercised visà-vis Japan’s business establishments. The point of controversy was the extent to which such influence actually existed and whether MITI could formulate cohesive and effective policies. MITI today, however, possesses very little regulatory power compared to other powerful governmental agencies such as the Ministry of Finance and the Ministry of Health and Welfare. As Japan’s internationalisation progressed and its economy became integrated with the rest of the world, MITI’s regulatory power largely disappeared. MITI’s raison d’être now lies not in its weakening regulatory regime but rather in its vigorous promotion of deregulation in Japan. In some cases, deregulation initiatives have been aimed at Japanese industries that were traditionally protected by MITI itself. In other cases, MITI has taken on other agencies within the Japanese government persuading and negotiating for further deregulation. Johnson’s central premise of the Japanese developmental state, or the idea that MITI, largely insulated from societal forces, pursues the generalised, national interest, is also now dubious. Such an image might have been accurate in the earlier decades of Japan’s industrialisation but, as Callon (1995) argues, MITI’s advantage over the private sector in information, expertise and resources had disappeared by the mid-1980s as Japanese manufacturing firms became larger in size, and their products became internationally competitive. The increased economic interdependence between Japan and other parts of the world, especially East Asia, has further eroded MITI’s autonomy in recent years. It is no

A changing Ministry of International Trade and Industry

99

longer proper to define MITI’s goals solely in terms of the success of the Japanese economy and industries. MITI has no choice but to include in its mission the recovery and expansion of the Asian regional economy as a whole, even by promoting Asian exports to Japan. Thus, MITI is not simply the organ of Japan’s developmental state. Since the mid-1980s, in accordance with Japan’s growing connection with East Asia, MITI has defined its trade negotiation strategy in line with multilateralism, exemplified in the norms and procedures of the General Agreement on Tariffs and Trade (GATT), World Trade Organisation (WTO) and other accompanying international organisations (Searight 1997). MITI today is far more reluctant to engage in special bilateral trade arrangements with the United States, such as voluntary export restraints, which once dominated the patterns of dispute settlements between the two countries. In contrast to Japan’s security and defence policies, which depend exclusively on the alliance with the United States, MITI’s preferences and strategies in trade are multidirectional. Various other developments also illustrate the changes in this important governmental agency. MITI takes environmental concerns far more seriously today than before, for example, by engaging in various measures to promote industrial recycling. MITI’s initiatives in this area culminated in the establishment of The Basic Law for Establishing the Recycling-based Society and four other related laws in May 2000. MITI also imposes, in accordance with the spirit of the Kyoto protocol (‘The Protocol to the United Nations Framework Convention on Climate Change’), high standards and tough sanctions to control the emission of substances said to have global greenhouse effects. On a different front, MITI now pursues measures to protect consumers at large, enhancing monitoring mechanisms for industrial and business malpractice under its jurisdiction. MITI has been especially enthusiastic in developing a consumer protection regime for ever-growing Internet transactions (Nihon Keizai Shimbun, 3 September 2000; 6 October 2000). Other surprising recent MITI initiatives include the reversal of its previous position regarding the introduction of an invoice system in the collection of consumption taxes. MITI had for years voiced its opposition to such a system because the ministry believed that, while it would enhance efficiency and fairness in tax collection, it would raise transaction costs, especially for small and mediumsized businesses (Nihon Keizai Shimbun, 28 August 2000; 2 October 2000). Of course, in contrast to these initiatives, MITI still engages in a wide net of conventional protection measures for small and medium-sized enterprises. There is no doubt that because of continuing recession, MITI continues to face tremendous political pressures from the governing LDP and incumbent politicians to sustain these traditional programs. The important point to emphasise, however, is that the above set of initiatives were all taken at the expense of Japanese manufacturing and service industries, which had long been MITI’s own policy clients. Compared to the speed and scope of the change that has been taking

100

Japanese governance

place in other government agencies in Japan, it is difficult to deny the significance of MITI’s transformation. FROM REGULATORY TO DEREGULATORY AGENCY Contrary to the prevailing image, MITI now possesses very little regulatory power. It is true that the number of laws and administrative orders that fall under MITI’s jurisdiction is enormous in comparison with other governmental agencies, and this gives the appearance that MITI remains the regulatory powerhouse in Japan. But, this image is misleading. MITI is, in fact, firmly committed to the ideology of liberalisation and deregulation. Obviously, it is senseless to simply count and compare the number of regulatory measures that are in effect across different governmental agencies. Given that it is the agency that supervises an overwhelming majority of economic activities in Japan, it is no surprise that MITI has more regulatory measures under it than other ministries. Furthermore, such quantitative comparison obscures more crucial qualitative differences across various types of regulatory measures. MITI hardly possesses regulatory power that controls ‘entry and exit’ of businesses in a designated industry. Most of the legislation and administrative orders under MITI seek to stimulate industry by providing favourable tax treatment and subsidies. In contrast, other powerful ministries, such as the Ministry of Finance and the Ministry of Health and Welfare, still posses many of those ‘entry and exit’ control types of regulations. Perhaps the only significant exception, until recently, was MITI’s control over the energy industry, in which an oligopoly had been allowed to form among the handful of regionally based firms. Japan’s Electricity Utility Law long protected the interests of these firms in the electricity business, which in turn had provided designated amakudari (descent-from-heaven) slots for retired MITI officials. It should be stressed, however, that the production and provision of energy is fundamental to all domestic industrial activities and that Japan is no different from other industrial countries in adopting tight entry (and exit) controls. The existence of the Electricity Utility Law in Japan, therefore, does not constitute any proof that regulatory power of MITI is particularly noteworthy. I even suspect that practices similar to amakudari, or the special connection more generally between the government and energy industries, are widespread among many other industrial democracies. It should be noted that MITI has taken a series of initiatives to revise the Electricity Utility Law since 1996. The price of electricity in Japan is markedly high relative to other industrial countries, and MITI is convinced that the high price is hindering Japan’s economic revitalisation. As a result of the revisions, new firms are now allowed to enter the wholesale and large-lot retail business of electricity provision. The liberalisation measure also changed the previously rigid business practice in this industry—conditions which have been criticised widely by Japanese consumers. Under the revised law, the seasonal changes of pricing and the introduction of special discount rates can

A changing Ministry of International Trade and Industry

101

take place without MITI’s prior authorisation. In June 2000, MITI took the symbolic action of announcing that it would procure electricity for its own use through competitive bidding. Two months later, Diamond Power Corp., a subsidiary of one of Japan’s major trading firms, won the bid, and began providing electricity to the MITI offices in Kasumigaski. It is said to have lowered MITI’s procurement cost by 4 per cent. It is true that the electricity business is still regarded as one of the most protected industries in Japan. Despite the liberalisation, the United States has repeatedly criticised the established utility firms for monopolising local power transmission lines that actually connect the retailers and consumers. In response to these criticisms, MITI continues to explore ways of increasing competition in the electricity business. For example, in August 2000, MITI announced a plan to loosen its regulation of small-scale private power-generating systems so that convenience stores and condominiums can set up and operate their own systems without the 24-hour presence of licensed technicians (Nihon Keizai Shimbun, 20 August 2000). In this vein, MITI has also encouraged the utility firms to establish their own subsidiaries for the private power-generating business. In any case, these developments, suggesting that MITI has given up its last hold of the ‘entry and exit’ regulation in the electricity industry, are only symbolic of the change in MITI’s character from being a regulatory to a deregulatory agency. Even in international trade, MITI now seems prepared to put itself at the forefront of Japan’s liberalisation and deregulation. MITI’s Trade Bureau had monopolised the business of export insurance, but it was decided that this business would be transferred to an independent administrative agency (Dokuritsu Gyousei Hojin) by 2001 (Nihon Keizai Shimbun, 7 January 1999). This development is in line with trends in other industrial democracies where the export insurance business has been privatised and the market for shortterm trade insurance liberalised. Because export insurance is an important tool of Japan’s economic policy toward Asia, MITI is likely to retain the planning responsibility. Responsibility for implementation of the insurance and the new agency’s management will, however, be independent of the general account of the annual budgetary schedule. The fact that MITI is ready to part with this lucrative business shows its fundamental commitment to the ideology of liberalisation and its belief in market forces. What caused this shift to deregulation? The underlying force has undoubtedly been Japan’s internationalisation. In his original analysis written in 1982, Johnson already noticed a symptom of this effect, and foresaw that the waves of internationalisation were changing MITI’s character. He wrote that, [t]he next major sign of internationalisation was the ministry’s decision to dismantle its main statutory powers, the Foreign Exchange and Foreign Trade Control Law of 1949 and the Foreign Capital Law of 1950. On November 11, 1979, almost 30 years to the day after SCAP [Supreme Commander of Allied Powers] approved it as a temporary measure, the Diet enacted MITI’s revision of the

102

Japanese governance Trade Law. This revision, which went into effect a year later, abolished the Foreign Capital Law. It also altered the language of the basic purpose of the Trade Law from ‘prohibition in principle’ to ‘freedom in principle,’ and reduced the powers of the government to residual rights of intervention in the economy in the event of balance of payments difficulties or other emergencies. (Johnson 1982:302–3)

As the pressures of internationalisation increased, MITI officials were the first among Japan’s governing élites to recognise the need to raise the productivity of Japanese industries to enable them to compete in the global markets. Their experience during the late 1970s and early 1980s of constantly having to deal with American criticisms of Japan’s protected industries in bilateral trade negotiations made these officials acutely sensitive to the inefficiency and lack of competition in Japan’s domestic economy. In the late 1980s, MITI thus began a vigorous campaign for the importation of industrial goods and services, not only to ease trade frictions but also to reinforce the foundation of healthy competition for Japanese industries themselves. The irreversible trend of internationalisation has been compounded by the transformation of Japan’s industrial structure. As the Japanese economy shifted its relative weight from manufacturing to service sectors, MITI needed to extend its reach beyond the traditional policy clients, looking for new areas of business to promote. Following the collapse of the bubble economy, MITI took on the large task of revitalising the Japanese economy. But the environment in which MITI found itself was quite different from the earlier postwar years of Japan’s economic recovery and industrialisation. In its attempts to stimulate Japan’s economy, MITI has often encountered barriers of regulations under the jurisdiction of other governmental agencies. Here lie the origins of the reversal of MITI’s role. MITI now defends the utility of deregulation, mostly in opposition to other ministries which have cross-cutting jurisdiction over many of the service industries. Some examples serve to illustrate this point. In the early 1990s, MITI’s Service Industry Bureau engaged in a series of negotiations with the Ministry of Health and Welfare (MHW) regarding the latter’s regulations in day-care/nursery businesses. Under the MHW’s control, or the 1948 Children Welfare Law, the day-care and nursery centres under governmental subsidy programs were allowed to operate for only eight hours a day, from 9:00am to 5:00pm. This tight regulation was regarded as the major obstacle to Japanese mothers working in full-time jobs because it was virtually impossible for them to leave their workplace early enough to pick up their children before these centres closed. MITI’s Service Industry Bureau attempted to persuade the MHW to relax this regulation—not only for the expansion of employment opportunities in this particular business, but also based on the belief that women would be vital part of the future Japanese workforce. MHW finally decided, in 1994, to initiate temporary emergency measures to increase within the following five years the number of centres open for an additional hour, so that one in every two centres in cities (and one in every four in rural areas) would operate after 5 o’clock.

A changing Ministry of International Trade and Industry

103

This decision served as the impetus for a series of further deregulations in daycare/nursery businesses regarding the time, location and ownership status of their operations. Likewise, MITI’s Service Industry Bureau engaged in a series of negotiations with other governmental agencies to revitalise the Japanese movie industry. One idea the bureau put forward was to construct a number of North-Americanstyle multiple theatre complexes in order to attract a range of different types of customers at once. Obviously, however, the construction of such huge complexes would have to be consistent with other existing public regulations, such as safety standards and hygiene requirements (for instance, the number of toilets). In initiating negotiations with other governmental agencies, MITI nevertheless used a broad interpretation of its own Establishment Law’s Article 4 Section 9, which states that the purposes of establishing this ministry include the overview of ‘development and improvement of commercial, manufacturing and mining industries’. According to MITI officials’ interpretation, this included jurisdiction over the movie industry. As these examples suggest, MITI’s policy initiatives often aim at tearing down the regulatory measures administered by other relevant agencies. In interviews with the author, several MITI officials, as well as officials from rival ministries, confirmed the above observations, echoing that MITI’s raison d’être now lies not in its regulatory regime but rather in vigorous promotion of deregulation in Japan. Precisely because it lacks formal regulatory power and the ‘entry and exit’ control type of measures, MITI needs to find a new mission within the Japanese administration. The quest for deregulation has clearly been one such new mission. EXTENDING INDUSTRIAL POLICY TOWARD ASIA There is now a complex interdependence between Japan and other Asian (especially East Asian) economies. It is well-documented (for example, in Hatch and Yamamura 1996) that Japan’s provision of capital, technologies, labour and other resources provided tremendous stimulus for the miraculous economic development of East Asia during the 1980s and early 1990s. Increased interdependence, of course, can work negatively, and some argue that Japan’s Heisei recession was at least one of the sources of recent financial crises in the rest of Asia during the late 1990s (Hatch 1998). While Japan’s connection to East Asia is generally recognised, MITI’s role is often overlooked. Much of the media attention thus far seems to have focused on the direct investments made by Japanese private firms and the massive amount of financial assistance orchestrated by the Ministry of Finance bilaterally and multilaterally through the International Monetary Fund and the Asian Developmental Bank. In addition to these financial contributions, MITI’s industrial policy constitutes another important dimension of contemporary economic relations between Japan and East Asia. The recovery and expansion of the East

104

Japanese governance

Asian economy has now become indispensable to the economic success of Japan as well. Does this indicate that MITI is no longer the central organ of Japan’s developmental state, as originally characterised by Johnson (1982)? In understanding the role of MITI and of its industrial policy, Johnson emphasised two factors—Japan’s peculiar pattern of modernisation and the Allied Occupation after World War II—as the main reasons why MITI was insulated from societal forces and was thus able to pursue the generalised, national interest. In this historical perspective, it might seem puzzling that MITI pursues goals beyond national boundaries. In my view, however, MITI’s function should be regarded as an institution that remedies market failure associated with transaction and information cost problems, which brings more efficient outcomes in otherwise non-cooperative interactions among self-interested actors. MITI’s recent efforts to promote East Asian prosperity share common attributes with the incentive measures and subsidy programs MITI put together to promote Japanese domestic industries during the early postwar years (Hatch 1999). MITI indeed acts as the coordinator of East Asian economic cooperation, especially among ASEAN countries. For example, MITI has for years held dialogues with ASEAN’s economic ministries (AEM-MITI), and these meetings led to the first meeting in late November 1998 of the so-called AMEICC, or the ASEAN-MITI Economic and Industrial Cooperation Committee. At this meeting, MITI proposed to further upgrade and regularise its communication channels with ASEAN counterparts in order to promote international industrial division within ASEAN. Following MITI’s initiatives, Japan and the ASEAN countries will hold annual or semi-annual meetings, which representatives from both government and industry will attend, to develop a common understanding about regional market trends and thereby increase investment efficiencies. Specialists of various industrial sectors will also participate in the Joint Government–Private Sector Dialogues under AMEICC, in order to organise basic statistical information about the different industries of each member state. Behind these initiatives is MITI’s recognition that failure to grasp industrial reality led in the past to uncoordinated, excessive production, which unnecessarily lowered the prices of ASEAN manufacturing goods (Nihon Keizai Shimbun, 23 November 1998). In other contexts, MITI is also pushing for standardisation of statistical information produced in the region, based on its belief that common measures are necessary for the exchange of information used in research and development. For example, in October 1998, at the APEC meeting of ministers for science and technology, Japanese delegates emphasised the merits of the standardisation of these measures in monitoring each country’s progress in research. This would promote healthy industrial competition and the effective transfer of technologies from industrial to developing countries within the region (Nihon Keizai Shimbun, 19 October 1998). MITI also proposed that it would facilitate technological cooperation and business tie-ups between small

A changing Ministry of International Trade and Industry

105

and medium-sized Japanese firms and ASEAN countries. According to this proposal, MITI would create a database of information regarding important technologies owned by local firms in Thailand, Malaysia and Indonesia, and begin distributing this information through the Internet to Japanese firms planning to invest in the region in 1999 (Nihon Keizai Shimbun, 23 August 1998). In May 2000, MITI proposed to the ASEAN nations, as well as China and South Korea, that standardised rules for business transactions through the Internet should be established in East Asia. Under the rubric of this socalled e-Asia plan, MITI also offered to provide funds to develop basic Internet infrastructure in the region (Nihon Keizai Shimbun, 28 April 2000). Clearly, MITI, as an organisation, now seeks to reduce transaction and information costs and attempts to mitigate market failure in East Asia. Since the East Asian economic crisis, MITI has been innovative and forthcoming in adopting measures to supplement the financial assistance packages orchestrated by the Ministry of Finance. MITI’s initiatives often include concrete micro-level intervention and guidance, reminiscent of its domestic programs of earlier years. In the summer of 1998, for example, MITI announced that it would provide funding to send a group of specialists to Indonesia for two years so that the Indonesian manufacturers of furniture and consumer electronics products could obtain sophisticated designing technologies. Indonesian products are known to be competitive in terms of price, but their exports to Japan had not expanded because the design was poor (Nihon Keizai Shimbun, 9 August 1998). Behind this initiative, of course, was MITI’s recognition that an increase in exports to Japan is an important ingredient for Indonesia’s economic recovery. Another example of concrete measures initiated by MITI was its decision to provide direct subsidies to Japanese companies operating in ASEAN, in an attempt to decrease the number of lay-offs of locally hired workers. MITI’s initiative prevented approximately ten thousand workers in the region from becoming unemployed (Nihon Keizai Shimbun, 15 August 1998). Furthermore, in December 1999, MITI announced that it would send 200 technical engineers and managers to Asia as advisors, targeting small and mediumsized enterprises that have business relations with Japanese firms. MITI believed that the credit problems in this region originated in poor business management, and that the dispatch of these advisors would be beneficial (Nihon Keizai Shimbun, 18 December 1999). In particular, MITI decided to send policy advisors to help the Indonesian government develop a package of programs to strengthen small and medium-sized business in that country (Nihon Keizai Shimbun, 27 November 1999). It is difficult to view any of these MITI measures as reflecting the narrowly defined national interest of Japan. MITI’s industrial policy now extends to other East Asian nations, reflecting the fact that Japan’s economy is intimately dependent on that of East Asia as a whole. To put it another way, MITI recognises that Japan’s national interest now carries a wider definition which includes the economic health of the entire region.

106

Japanese governance

In addition to these micro-level measures, MITI has used export-import insurance, currently administered by its Trade Bureau, as the central tool in its economic policy toward East Asia. This innovative scheme works as follows. Traditionally, export insurance meant that the Japanese government could take over the risk of Japanese firms’ trade and investment overseas. MITI decided to expand this framework so as to take over the risk of Japanese financing to Asian countries as well. This was first implemented in late 1998, when MITI used the scheme to insure bonds (worth 70 billion yen) issued in Malaysia by Nomura Securities and the Sumitomo Bank, which would be used in the construction of industrial infrastructure. The second case involved the issue of bonds (of 60 billion yen) in Thailand by the City Bank (Nihon Keizai Shimbun, 23 September 1998; 23 November 1998; and 5 January 1999). In January 1999, MITI showed its further willingness to expand the scope of this scheme by agreeing to reinsure up to 90 per cent of the Singapore government’s trade insurance for Singapore-based Japanese companies investing in other Asian countries. It was reported that MITI would be willing to use this new re-insurance scheme for transactions not involving Japanese firms as well (Nihon Keizai Shimbun, 22 January 1999). It should be noted that MITI uses this insurance carefully and extremely strategically. When directed to East Asian countries, as described above, MITI seems not only liberal but also innovative in its administration of export insurance. In contrast, when directed to Russia, for example, MITI has been far less enthusiastic and extremely careful in extending its insurance (Nihon Keizai Shimbun, 26 August 1998; 24 January 1999). The business of export insurance, of course, involves some high risks. In February 1999, MITI was forced to increase the general insurance fee up to 30 per cent for the exports bound for Indonesia, Thailand and Malaysia, because of the worsening political and economic situations in these three countries (Nihon Keizai Shimbun, 22 February 1999). On the other hand, however, MITI also continues to be innovative in the application of this insurance scheme for regional development. In April 1999, it was reported that MITI had entered into an agreement with the Multilateral Investment Guarantee Agency (MIGA), an organisation affiliated with the World Bank, to cooperate in promoting Japanese foreign investments in developing countries. Cooperation with MIGA makes it possible for MITI to engage in large investment projects that MITI would not able to insure on its own (Nihon Keizai Shimbun, 7 April 1999). MITI also announced in April 1999 that, in some cases, the evaluation of investment opportunities and risks would be conducted on the basis of individual firms, and not on a country-by-country basis. This ensured that those firms with a consistent record of healthy financial standing would not be excluded from the insurance coverage simply because they were located in countries considered risky (Nihon Keizai Shimbun, 11 April 1999). These reforms of the export insurance policy derive from MITI’s

A changing Ministry of International Trade and Industry

107

conviction that Japan now has responsibility to promote foreign investment in developing countries, particularly Asia. In sum, in light of the increased interdependence between the Japanese and East Asian economies, MITI has taken a new role promoting international cooperation and economic growth of the region more generally. It is increasingly difficult to view MITI as simply the organ of the Japanese developmental state. STRATEGIC MULTILATERALISM Another important dimension of MITI’s transformation involves its trade strategy and negotiation tactics. Until the mid 1980s, MITI was a passive participant in multilateral discussions on international trade matters. In the past, it was usually Japan’s trade and industrial practices that were criticised, and MITI had to take the defensive role in international negotiations. In the earlier postwar years especially, Japan only reluctantly accepted the norms and procedures of the General Agreement on Tariffs and Trade. When the United States and other countries threatened to use sanctions against Japan in the 1970s and early 1980s, MITI bilaterally negotiated a number of voluntary export restraints to settle trade disputes. As Searight (1997) has shown, MITI’s trade strategy has changed significantly in recent years. Japan is no longer a passive or reluctant participant in the multilateral trade regime. In contrast to its previous low profile in GATT settlements, Japan strongly supported the creation of the World Trade Organisation and took positive initiatives in its Uruguay Round discussions. MITI has also adopted a legalistic and aggressive strategy, taking advantage of the established norms and procedures of the WTO, and often wins favourable dispute settlements. According to Searight, it was in the late 1980s that Japan began turning to multilateral dispute settlement. Previously, Japan had appeared in GATT dispute panels many times as the target of complaint, usually settling the case before a panel was established or a decision was reached…The 1988 case against the EC [European Community] marked a turning point. The case involved EC regulations which imposed a surcharge on goods produced in screwdriver assembly plants. Japan pursued the case through the panel procedure and won its claim, although the EC refused to comply with the ruling. With the establishment of the WTO, Japan began pursuing more cases in the dispute settlement procedures. Japan filed one of the first cases in the WTO, against the United States for retaliatory tariffs in the 1995 automobile dispute. It has also filed complaints against Indonesia and Brazil, in cases also involving automobiles…In the dispute with the United States over photographic film and paper, Japan insisted that the case be brought to the WTO, refusing to even negotiate the case bilaterally except in Geneva, under the auspices of the WTO. (Searight 1997:5–6)

108

Japanese governance

The shift from bilateralism to multilateralism reflects Japan’s changed position in the world economy. Throughout the 1970s and 1980s, as its manufacturing products became internationally competitive, Japan lowered its tariff rates both unilaterally and through various GATT negotiations. Although it is difficult to compare tariff rates across countries, many economists in Japan argued in the late 1980s that Japan’s trade barriers were the lowest among the major advanced industrial countries. Japan has reached a point where it benefits from implementation of the liberal open-trade norms and dispute settlement procedures embodied in the WTO rules. MITI’s reliance on the WTO mechanism for settling trade disputes is evident in the recent steel controversy with the United States. When US steel makers sued three Japanese trading firms in November 1998 for alleged dumping of Japanese-made steel, MITI, together with the Ministry of Foreign Affairs, responded quickly and requested a bilateral discussion on the matter with the US government. Japan threatened to take this matter to the WTO unless the United States changed its domestic law, the 1916 Anti-Dumping Law. Contraventions of this law can result in criminal charges and extensive financial compensation. MITI believed the law clearly violated WTO rules (Nihon Keizai Shimbun, 21 January 1999). As the ministers’ meeting for the WTO approached, tensions between the two countries heightened and MITI finally decided to resort to the WTO’s panel procedure for settling the matter (Nihon Keizai Shimbun, 21 October 1999). Later, in April 2000, the panel’s report concluded that the US Anti-Dumping Law indeed violated WTO rules, and this report was finally adopted by the WTO in September 2000 (Nihon Keizai Shimbun, 27 September 2000). MITI’s strategic orientation is also evident in its December 1998 decision to promote bilateral trade and investment agreements with selected Asia–Pacific countries. It was reported that internal documents prepared by MITI’s Trade Policy Bureau (one of which is entitled ‘On Regional Economic Agreements’) point to the necessity of simultaneously pursuing both multilateral and bilateral discussions on Japan’s trade and investment relations. Under this new policy guideline, MITI will seek early conclusion of the bilateral investment agreement and, possibly, the free-trade agreement with South Korea. MITI also puts priority on concluding an agreement with Singapore on the mutual recognition of national standards, which would greatly reduce the transaction costs involved in importation. MITI’s White Paper on International Trade, published in 1999, clearly declares the merits of strengthening regional trading relationships. This new stance, however, by no means represents MITI’s retreat from its commitment to the WTO and multilateralism. In MITI’s thinking, successfully concluded bilateral agreements with some key Asian partners would increase Japan’s bargaining position in the next WTO round, especially in light of the emerging economic regionalism in North America and Europe (Asahi Shimbun, 13 December 1998).

A changing Ministry of International Trade and Industry

109

MITI’s departure from its previous preference for bilateralism in trade matters reflects not only the maturing of Japanese manufacturing industries, but at least two other factors—one external and the other internal. First, the reality of economic globalisation clearly affects the basic orientation of MITI’s current trade policy. MITI has always been at the forefront of international negotiations, and its officials are the most sensitive among Japan’s governing élites to the new trends and emerging patterns of international commercial activities. MITI’s readiness and willingness to engage in, rather than disengage from, multilateral norms and procedures reflects their acceptance of this reality. Second, the fact that a new generation of MITI officials, educated in graduate and business school programs in the United States, is now in charge of formulating Japan’s trade policy is also a significant factor. As a result of MITI’s policy of sending its officials overseas in the early stages of their careers, this new generation has adapted to an American way of legalistic and strategic thinking and is able to formulate a systematic counter-argument in debates and discussions in English. Thus, compared with the 1970s and early 1980s, MITI today is far more prompt in responding to US criticisms of Japan’s trade and industrial practices. MITI now plays an important role in supporting international regimes of trade and investment. In the early postwar years, when Japanese industries were still in infant stage, MITI’s role was simply to protect them from formidable foreign competition. Japan today, however, benefits from the liberal, free open-trade environment. Accordingly, MITI has changed its strategy consistent with the multilateral principles embodied in the WTO. IMPLICATIONS OF MITI’S TRANSFORMATION As a result of the bureaucratic reorganisation initiatives undertaken by former prime minister Hashimoto Ryutaro, the familiar name, Tsusan Sho (shortened from Tsusho Sangyo Sho), has disappeared, and the ministry has been renamed Keizai Sangyo Sho, or the Ministry of Economy, Trade and Industry. This name change has been accompanied by some organisational reform, and the new METI is likely to grow in size and in its range of bureaucratic functions, absorbing some bureaus and sections from other ministries. Some observers speculate that MITI was the largest beneficiary of this bureaucratic reorganisation. The Ministry of Finance (which, together with MITI, formed the so-called twin towers of the outgoing bureaucratic structure) suffered a major setback in this reform process, having to give up its financial policymaking authority to a newly created agency. While MITI’s rivals endure crises, it is likely that its own influence in economic policymaking will increase. More important than the change in organisational appearance, however, is MITI’s internal transformation, particularly in terms of mission, character and strategy. These changes are extensive and significant in scope and speed. Before closing, let me speculate on some important implications of these reforms.

110

Japanese governance

First, the new METI is likely to represent both a hope and a challenge for Japan’s most important partner, the United States. On the one hand, internationally diversified trade, especially the increasing shadow of Asia in the minds of MITI officials, will lead Japan to be more assertive in its economic relations with the United States. It is important to note that, from the late 1970s through the 1980s, METI officials experienced hardly anything but Japan-bashing from their American counterparts in various trade negotiations. Ministry officials were thus sympathetic to the voice of nationalism represented by Japanese politicians such as Ozawa Ichiro and Ishihara Shintaro, who asserted that Japan must become a ‘normal state’ that can say no in the face of pressure from the United States. In this sense, METI may cast some uncertainties on the overall relationship between the two countries. MITI’s (and now METI’s) willingness and tendency to settle international trade disputes in accordance with the norms and procedures of multilateral organisations such as the WTO also do not necessarily benefit the United States. As shown in the controversy between Fuji and Kodak over photography films, Japan can and does win disputes under the WTO dispute settlement mechanism. More generally, the apparent strategic thinking in METI’s trade policy formulation presents a formidable obstacle for US attempts to dominate the new round of discussions in the WTO. It is likely that Japan’s bargaining power in such multilateral international trade discussions will increase. On the other hand, METI and the United States remain important allies. In terms of METI’s new mission as a deregulatory agency, continuing pressure, or gaiatsu, from the United States may provide the impetus to bring politically difficult issues onto the deregulation agenda. The United States, meanwhile, will appreciate METI’s efforts to dismantle the regulatory barriers of other ministries. In the end, the United States and METI are united by a firm commitment to promoting liberalised trade. Second, beyond US–Japan relations, METI’s role in assisting the economies of East Asia has grown. METI clearly recognises that the recovery and expansion of ASEAN and South Korea are important for Japan’s own economic revival. Continued prosperity in East Asia and the political stability this brings will also enhance Japan’s regional security. It is now well documented that economic growth promotes democratisation in the long run1 and that democratic countries do not engage in military conflicts with each other. To the extent that its extended industrial policy can contribute to further economic development of this region, therefore, METI is making an indirect yet steady contribution to regional peace. In domestic political terms, the increased influence of MITI/METI within the Japanese government represents a positive trend towards introducing a liberal, market-oriented approach to policy formulation, and thus increasing transparency in the process of governmental decisionmaking. Deregulation of hitherto protected industries, as well as other government regulatory agencies, is likely to have long-term effects on the nature of Japan’s political economy. It will probably increase industrial efficiency and competitiveness, and cut some of

A changing Ministry of International Trade and Industry

111

the ties that formed the so-called Japan Inc. The decade of the 1990s, therefore, was not entirely a ‘lost decade’, as it is often described by economists lamenting the long-lasting recession. Many institutional reforms were accomplished during the decade, and MITI’s/METI’s transformation certainly helped prepare Japan’s economy to lead in the more globalised markets of the new century. NOTE 1

See for example, Crouch and Morley (1993) and the positive correlation between income and democracy documented in Freedom House (1996).

REFERENCES Amsden, A., 1989. Asia’s Next Giant: South Korea and late industrialisation, Oxford University Press, New York. Aoki, M., Hyung-Ki, Kim and Okuno-Fujiwara, M., (eds)., 1996. The Role of Government in East Asian Economic Development: Comparative institutional analysis, Oxford University Press, Oxford. Callon, S., 1995. Divided Sun: MITI and the breakdown of Japanese high-tech industrial policy, 1975–93, Stanford University Press, Stanford. Cowhey, P. and McCubbins, M. (eds), 1995. Structure and Policy in Japan and the United States, Cambridge University Press, New York. Crouch, H. and Morley, J., 1993. ‘The dynamics of political change’, in James Morley (ed.), Driven by Growth: political change in the Asia-Pacific region, M.E. Sharpe, New York:277–311. Freedom House, 1996. World Survey of Economic Freedom, 1995–96, Transaction Publishers, New Brunswick, New Jersey. Haggard, S., 1990. Pathways from the Periphery, Cornell University Press, Ithaca. Hatch, W., 1998. Grounding Asia’s flying geese: the costs of depending heavily on Japanese capital and technology, Paper prepared for NBR briefing, April. Available at http://www.nbr.org/publications/briefing/hatch98/index.html (accessed 6 September 2001). ——, 1999. Exploring the state: Japanese administrative and financial guidance in Asia, Paper presented at the 1999 Annual Meeting of the American Political Science Association, Atlanta, 2–5 September. Hatch, W. and Yamamura, K., 1996. Asia in Japan’s Embrace: Building a regional production alliance, Cambridge University Press, New York. Inoguchi, T. and Iwai, T., 1987. Zoku-Giin no Kenkyu, Nihon Keizai Shimbunsha, Tokyo. Johnson, C., 1975. ‘Japan: who governs? an essay on official bureaucracy’, Journal of Japanese Studies, 2(1):1–28. ——, 1982. MITI and Japanese Miracle: The growth of industrial policy, 1925–75, Stanford University Press, Stanford. ——, 1987. ‘Political institutions and economic performance: the government–business relationship in Japan, South Korea and Taiwan’, in F. Deyo (ed.), The Political Economy of the New Asian Industrialism, Cornell University Press, Ithaca. Kabashima, I. and Broadbent, J., 1986. ‘Referent pluralism: mass media and politics in Japan’, Journal of Japanese Studies, 12(2):329–62. Katzenstein, P., 1985. Small States in World Markets: Industrial policy in Europe, Cornell University Press, Ithaca.

112

Japanese governance

Koo, H., 1987. ‘The interplay of state, social class, and world system in East Asian development: the cases of South Korea and Taiwan’, in F. Deyo (ed.), The Political Economy of the New Asian Industrialism, Cornell University Press, Ithaca. Okimoto, D., 1989. Between MITI and the Market: Japanese industrial policy for high technology, Stanford University Press, Stanford. Otake, H., 1979. Gendai Nihon no Seiji Kenryoku, Keizai Kenryoku, San Ichi Shobo, Tokyo. Ramseyer, J.M. and Rosenbluth, F.M., 1993. Japan’s Political Marketplace, Harvard University Press, Cambridge. Samuels, R., 1987. The Business of the Japanese State: Energy markets in comparative and historical perspective, Cornell University Press, Ithaca. Sato, S. and Matsuzaki, T., 1986. Jiminto Seiken, Chuo Koronsha, Tokyo. Searight, A., 1997. MITI and multilateralism: The evolution of Japan’s trade policy in the GATT regime, Paper delivered at the Stanford Graduate Conference on Japanese Politics, Stanford University, 15 November. Uriu, R., 1996. Troubled Industries: Confronting economic change in Japan, Cornell University Press, Ithaca. Wade, R., 1990. Governing the Market: The economic theory and the role of government in East Asian industrialisation, Princeton University Press, Princeton. World Bank, 1993. The East Asian Miracle: Economic growth and public policy, Oxford University Press, New York. Zysman, J., 1983. Governments, Markets, and Growth, Cornell University Press, Ithaca.

Reform and continuity in shingikai deliberation councils

7

113

Reform and continuity in Japan’s shingikai deliberation councils Gregory W. Noble

By the end of the 1990s, the movement to increase transparency in government and reduce bureaucratic influence over policymaking appeared to gather considerable momentum in Japan. The Diet passed laws on administrative procedures and information openness while a Cabinet resolution gave a mandate to the establishment of a public comment system throughout the Japanese administrative system. In 1999, the Diet passed a series of bills, implemented in 2001, to reorganise the central ministries and strengthen control over policymaking by the Diet and Cabinet. Amidst all the changes, reform efforts also took aim at the organisation and operation of Japan’s elaborate system of shingikai or deliberation councils. Deliberative bodies designed to provide private-sector input to official decisionmaking are hardly unique to Japan, but in few, if any, countries are they as ubiquitous, stable and closely tied to the central departments of government (Schwartz 1998 and (Ehud Harari 1999). An official survey in 1998 counted more than 450 shingikai and the related but less formal kondankai or discussion councils (Administrative Management Bureau 1998). Major shingikai explore policies for industrial structure, financial and tax systems, social security and local government, and other central concerns of government. Narrower panels consider such issues as motor racing, livestock promotion and female juvenile delinquents (Management and Coordination Agency 1998). A few broad councils, including several working on administrative reform, report directly to the Prime Minister or Cabinet, but most are attached to specific ministries or agencies, which provide administrative support. The push to reform shingikai is surprising, even ironic. Many observers, particularly abroad, have expressed deep admiration for the networks of communication between government and business in Japan epitomised by the shingikai. Hilton Root, for example, writes that ‘deliberative councils…can provide a framework for the cooperation of economic actors by limiting the government’s ability to change policy arbitrarily and, hence, redistribute

114

Japanese governance

economic rents and wealth’. In Japan and other East Asian countries, Root argues that, The council format facilitated bargains between constituent groups in exchange for information needed to formulate rational economic policies. The exchanges helped leadership evaluate policy performance and ensure policy-makers accurate information about private sector assets and strategies. These council formats also facilitated, with varying degrees of success, the sharing of information between firms about markets, marketing strategies, products and new technology…Intervention [by governments in markets] tended to succeed in nations that had effective frameworks for the exchange of information between state and society. The East Asian governments that are conventionally viewed as authoritarian feature a high level of consensus building and are particularly effective at reducing information asymmetries in the economic policy dialogue. (Root 1998:69–70,72)

Sociologist Peter Evans further praises deliberation councils and other informal networks for enabling Japanese ministries and agencies to develop a form of ‘embedded autonomy’. Meritocratic appointments and long career paths help agencies maintain autonomy and avoid corruption, while deliberation councils and other networks enable their officials to exchange information freely with the private sector (Evans 1995:49). Even economists such as Komiya Ryutaro— who gained fame for his biting criticisms of the interventionist policies of the Ministry of International Trade and Industry (MITI)—have highlighted the positive contributions of shingikai. Komiya concluded that ‘whatever the defects in the postwar Japanese approach to industrial policy, [shingikai] have been a very effective means for the collection, exchange and dissemination of information on industry and as such have contributed greatly to postwar economic growth’ (Komiya 1998:19). The World Bank’s famous ‘East Asian Miracle’ study (partly funded by the Japanese government) also singles out deliberation councils for approbation (World Bank 1993:181–82). Despite this praise from economists, sociologists, international financial institutions and consultants, shingikai have come in for withering attacks from specialists in Japanese politics and administration. Shingikai, they charge, lack openness and accountability. Outsiders are unable to participate or monitor council proceedings. Opaque procedures shield discussion and conflict. Deliberation councils pre-empt debate in the Diet and other public fora. Most observers blame the bureaucrats for this sad state of affairs. Japanese ministries, critics charge, use shingikai as ‘magic cloaks of invisibility’ (kakuremino) to obscure the reality of bureaucratic control. Élite bureaucrats set the agendas, select the personnel—often ‘old boy’ alumni of the ministry itself—and draft the reports. Cynics suggest that some shingikai are unwilling to open their business to public scrutiny because in fact they carry out little actual discussion and deliberation. A close observer of a major shingikai, the Financial System Research Council of the Ministry of Finance (MOF), noted that

Reform and continuity in shingikai deliberation councils

115

the council is ‘convened, sponsored, and guided by officials of the [MOF]. As a result, it generally functions as a mechanism for legitimising proposals from the Ministry itself.’ As the chairman of another finance ministry advisory council remarked, ‘the biggest problem is that the bureaucrats ultimately steer these various investigatory councils; no matter how many opinions are aired, the debate invariably moves in the direction the bureaucrats think is right’ (Hartcher 1998:247–48).1 Other critics note that shingikai often serve as a site for rigai chosei (interest coordination) among private firms. In this role the shingikai may facilitate the manipulation of government policy to increase barriers to entry by would-be competitors, and thereby support the maintenance of cartels. Still others claim the shingikai serve insider interests among the zoku (tribe) politicians in Japan’s governing Liberal Democratic Party (LDP) who are constantly on the hunt for benefits to hand to their constituents and campaign contributors. Most analysts pool together bureaucrats, business interests and backbench politicians as ‘vested interests’—three sides in Japan’s version of iron triangles. Where the World Bank sees cooperation and communication, these critics discern exclusion and collusion. The move to reform the shingikai system faces deeply entrenched resistance and raises two important questions. Have the reforms moved shingikai closer to the ideal held by foreigners, retaining the advantages of information interchange while creating an open style of communication less amenable to bureaucratic control? And, what does the fate of the reforms suggest about broader trends in Japanese administration and politics? IMPETUS AND PROPOSALS FOR REFORM The movement to reform shingikai is embedded in larger criticisms of the Japanese bureaucratic system. The call for ‘administrative reform’ dates back at least to 1924 when the pioneering journalist Ishibashi Tanzan (who was to serve a brief stint as prime minister in the 1950s) argued that ‘bureaucratic rule is only a temporary aberration of a revolutionary era. Now…bureaucrats should return to their role as public servants’ (Nakano 1998:299). The first formal administrative reform council emerged in the early 1960s but had little effect.2 Beginning in 1981, the more ambitious second reform council (daini rincho) succeeded in privatising three major public corporations. Its proposals on most other issues foundered in the face of stiff opposition, but its 1983 report did include a call to strive for greater transparency in the operation of shingikai (Nogami 1997:251). Administrative reform received a boost from the weakening of LDP rule and the fraying of close relations between the LDP and the bureaucracy, beginning with the LDP’s loss of its majority in the Upper House in 1989 and accelerating dramatically after the party’s temporary fall from power in 1993– 94. The LDP believed that bureaucrats had cooperated too readily with the parties in the non-LDP coalition. They also sensed that the public had turned against the bureaucracy, following a series of corruption scandals and policy

116

Japanese governance

setbacks (Mishima 1998:982). Events tarnishing the image and reputation of government agencies included a belated response to the massive 1995 Kobe earthquake, the Ministry of Health and Welfare’s failure to protect the public against AIDS-tainted blood, and the Ministry of Finance’s inability to prevent the collapse of several leading banks and securities firms in 1997. The economic stagnation that had dogged the first half of the 1990s seemed about to lift in 1997 when the Ministry of Finance inadvisably increased the consumption tax, nipping the recovery in the bud and further eroding public confidence in the ability of the bureaucracy to guide the economy. Support for administrative reform emanated from several sources (Lonny E. Carlile). General popular support was an important background factor, but was relatively passive and sporadic. Political parties were also ambivalent. Prime Minister Hosokawa, who broke away from the LDP and formed the first nonLDP government in decades, advocated administrative reform but lacked political heft and fell victim to a campaign finance scandal. As prime minister from 1996–98, the LDP’s Hashimoto Ryutaro pledged his political life to reform, but took a relatively narrow, technocratic approach that stressed efficiency more than openness. A former zoku leader himself, he was often unable to overcome resistance from zoku politicians in his own party (Nakano 1998). More consistent support came from three sources. Academics (particularly economists but also some professors of law), administrators and politicians provided intellectual backing for administrative reform, proselytised for the cause and served on many advisory councils. The leading peak business organisation, Keidanren, also acted as a persistent and far-reaching advocate of reforms to reduce expenditures while increasing efficiency and transparency. For at least a decade, observers have portrayed Keidanren as losing in unity and influence but on broad issues such as taxes, labour and administrative reform it has proved itself relatively unified and potent (Noble 1998:fn 82, 211). Within Keidanren, an Administrative Reform Group continuously monitored, advocated and publicised initiatives to increase transparency. Not surprisingly, Keidanren perceived the bureaucracy—rather than entrenched private firms and their political supporters—to be the major obstacle to administrative reform. Yet Keidanren consistently pushed measures aimed at undermining the privileged position of some of its members in the hope of creating a freer and more competitive environment for business as a whole (Keidanren 1998; author interviews, 11 June 1999). Finally, within the bureaucracy, the Management and Coordination Agency (MCA) assumed an important role as promoter and monitor of administrative reform. When the prime minister or Cabinet issued orders to carry out various reforms, the MCA assumed responsibility for implementation. Though the MCA traditionally did not enjoy a reputation as a strong agency, the institutional role of overseer gave it a rationale for intervening in the affairs of other ministries, just as MOF’s control of the budget has allowed it to influence a wide range of policies. Like Keidanren, the MCA has the personnel to provide the oversight

Reform and continuity in shingikai deliberation councils

117

and institutional continuity that politicians, citizens’ groups and academics interested in administrative reform often lack. The administrative reform movement first began to exert a noticeable if still modest impact on the organisation of shingikai at the end of 1991. A committee coordinating the policies of the central agencies reached an accord that shingikai should make available to the public transcripts of their deliberations, interim and final reports and petitions addressed to them (Joho kokai mondai ni kansuru renraku kaigi moshiawase 1991). Only in cases where such disclosure significantly impeded fair and balanced discussion or created inappropriate disadvantages or advantages for specific parties would this principle be overlooked. A similar inter-ministerial committee took a further step in mid 1994 under pressure from non-LDP forces led by Prime Minister Hata Tsutomu, former Prime Minister Hosokawa, and especially the New Party Sakigake. Sakigake emerged as a group of young former LDP representatives who opposed zoku politics and emphasised that administrative reform should not limit itself to attainment of a ‘small and efficient government’ but should strive to create a more open and accountable system of governance as well (Nakano 1998). The Hata Cabinet passed the guidelines the day before it resigned. In addition to repeating the earlier, but often ignored, injunction to provide transcripts and reports, the new guidelines called for ‘fair and balanced representation’ in selecting members for shingikai and provision of public hearings to allow those affected by deliberation council decisions to present their opinions. While slightly more extensive, these guidelines were still far from revolutionary. The inter-ministerial committee emphasised that the guidelines did not replace previous resolutions and were not meant to impinge on the autonomous operations of councils.3 Much more aggressive guidelines emerged just over a year later in the form of a Cabinet Resolution. Pushed by Sakigake, now a minor partner in an odd coalition government dominated by the LDP and its erstwhile enemy the Social Democratic Party of Japan (formerly known as the Japan Socialist Party), the resolution ordered ministries and agencies to •

•

• •

avoid the creation of new shingikai whenever possible. Instead, the development of officials with necessary specialised knowledge should be promoted, public hearings should be held and the opinions of related organisations should be solicited review, before the end of the fiscal year, the necessity of shingikai in existence for more than 10 years or those that have not named new members within the past five years set deadlines for established shingikai to address special and temporary (rinji) issues eliminate duplication, if necessary, by creating subcommittees

118

• •

Japanese governance

eliminate the participation of retired officials, advisers and other ‘old boy’ alumni of ministries, particularly as committee chairs make transcripts (gijiroku) and minutes or summaries (giji yoshi) available for reproduction by ordinary users in hard-copy form, databases or on line, or provide a formal written explanation of why proceedings are not open.

Though the resolution contained a sharper critique and more specific requirements, it also contained two potential loopholes. First, critics noted, it drew a distinction between ‘general’ (ippan no) shingikai, established to discuss policy, and special bodies dedicated to dealing with specific and sensitive administrative matters such as personnel issues and petitions by particular parties against administrative decisions. In principle, only the ‘general’ shingikai were required to make public their proceedings (Nogami 1997:253). A second point attracted less attention but provided greater space for potential abuse. The resolution drew a distinction between shingikai and kondankai, a looser term denoting discussion groups or even social gatherings. Kondankai differed from shingikai, the resolution claimed, because they simply provided a site (ba) for discussion and exchange of ideas on specific administrative operations (gyosei un’ei jo no kaigo) rather than broad policy issues. As a result, the resolution only enjoined ministries to ‘strive to assure transparency’ in operations along the lines laid out for shingikai. In the wake of this resolution, the MCA began, for the first time, to conduct and publish detailed surveys on compliance by shingikai with the principles laid out between 1991–95. The harshest and most sustained criticism of shingikai came in the July 1996 interim report of the Subcommittee for Demarcation of Public and Private Sector Activities, one of three subcommittees of the Administrative Reform Committee (gyosei kaikaku iinkai; the other two subcommittees covered information disclosure and deregulation).4 Six economists and four business executives dominated the Demarcation Subcommittee’s membership of thirteen. Not surprisingly, the interim report of the Administration Reform Committee’s Demarcation Subcommittee, in July 1996, displayed a distinctly Anglo-Saxon orientation—administrative intervention is permissible only in presence of market failures and even then only reluctantly, for strictly limited time periods, and with due recognition of the possibility of (greater) government failure. The interim report called for introducing market principles and explicit cost–benefit analysis wherever possible, application of bond market discipline, and recourse to judicial appeal, as well as promotion of disclosure and accountability. The subcommittee levelled a raft of harsh criticisms at shingikai, repeating the claim that they serve as ‘magic cloaks’ for agencies and perpetuate bureaucratic sectionalism (tatewari gyosei). To the familiar list of suggestions about balance, openness and efficiency made by previous panels and Cabinet resolutions it added a number of bolder or more specific suggestions:

Reform and continuity in shingikai deliberation councils

• • • • • •

119

replace shingikai with public hearings, Diet debates and referenda wherever possible reduce duplication and overall numbers of deliberation councils widen membership of focus on genuine experts, and include more consumers (seikatsu-sha ), women and labour representatives eliminate direct conflicts of interest publicise dissenting opinions strengthen administrative function and keep bureaucrats completely away from the drafting of reports.

The one exception to this barrage of criticism involved the shingikai working on administrative reform, which naturally were presented as valuable. While the subcommittee claimed to represent the public against vested interests, it, like the other reports on the topic of administrative reform, violated its own principles by not discussing costs and benefits, disclosing conflicts of opinion, or presenting alternative options for the prime minister, Diet and society to consider. And of course bureaucrats—in this case officials of the Management and Coordination Agency—were intimately involved in the subcommittee’s activities, as they were in all the shingikai of the administrative reform movement. The subcommittee soon retreated from the lofty heights of economic theory. Shortly after issuing its interim report, the subcommittee held hearings with the ministries. In October 1996, a new election strengthened the position of the LDP. By the time the full committee released its report to the prime minister in mid-December, the discussion of shingikai had shrunk to two short and general paragraphs in the background materials. The paragraphs noted the problems of sectionalism and bureaucratic control and vaguely suggested (‘kento suru koto mo kangaerareru’) greater use of alternatives such as hearings and referenda (Administrative Reform Committee 1997:54). All discussion of shingikai reform disappeared from the formal report. The retreat from the subcommittee’s report reflected a broader counterattack by zoku politicians, their constituents and powerful ministries against Hashimoto’s overall plans for bold reform. Many authors have seized on this as evidence that particularistic politics has yet again triumphed in Japan (Nakano 1998; Mishima 1998; Nogami 1997; and Matsubara 1999). Surprisingly, though, the attempt to reform shingikai did not end with Hashimoto’s retreat. By 1999, Hashimoto’s successor, the deceptively amiable and modest LDP veteran, Obuchi Keizo, succeeded in passing a new law on information openness and in pushing through the first major reorganisation of the Japanese ministries in many decades. While Obuchi’s plans, too, came under attack for having caved in to resistance from bureaucrats and vested interests on some important issues, they did not by any means completely abandon the attempt to reassert political leadership and increase governmental accountability. The laws on ministerial reorganisation included a detailed section on reform of

120

Japanese governance

shingikai.5 While less ideological and scathing in its criticisms than the July 1996 Interim Report of the Administrative Reform Committee’s Demarcation Subcommittee, the new resolution was in some ways even more pointed. In addition to repeating earlier calls to rationalise and reduce the number of shingikai, provide material to the public on shingikai operations, severely restrict appointment of ‘old boys’ and so forth, it introduced a number of new and more specific requirements on both membership and operations including to • • • • • • •

reduce membership to 20 or fewer if possible, or no more than 30 if necessary avoid appointment of politicians, bureaucrats and old people limit representatives of ‘one side’ to one-half or less of total membership increase the proportion of women to 30 per cent within 10 years limit members to simultaneous participation in no more than three shingikai limit individual terms to two years or shorter and a total of 10 years or less after the reorganisation of bureaucracy avoid imposing unanimity on reports and include any dissenting views.

As with previous resolutions, the 1999 guidelines contained a couple of potential loopholes. First, they allowed officials to establish informal kondankai. These kondankai were to avoid creation of permanent rules of order and any implication that they were proffering ‘conclusions’ or ‘opinions’. It was even unacceptable to say that a kondankai had been ‘established’; rather, agencies should speak of kondankai as ‘meeting’. The danger was that provisions intended to emphasise the informal and non-binding character of consultative discussion might actually provide a quasi-secret refuge from the new standards for discussions that might be as serious and high-level as in the old shingikai. Second, the guidelines prohibited shingikai from creating their own administrative organs; instead, they were to rely on existing administrative agencies. While aimed at blocking the accretion of bureaucracy, in practice the regulations seem likely to favour the existing ministries and agencies since they retained independent administrative capacities that the new and reformed shingikai would be forbidden to match. Finally, for the first time the government announced specific plans to eliminate or downgrade many shingikai. Under the guidelines drafted by the MCA, the total number of shingikai would fall by more than half. The number of deliberation councils related to ‘basic policy’ would fall to 22, including such influential bodies as MITI’s Industrial Structure Council and the telecommunications shingikai of the Ministry of Post and Telecommunications (MPT). The number of councils aimed at implementation of laws and regulations would decrease to 42, including MPT’s postal shingikai and the shingikai on local finances. Some councils would be allowed to run until their current mandates expired, while others would move to the Cabinet and lose their status as formal shingikai. The MCA targeted 121 councils for outright elimination, including such bastions of particularistic politics as the shingikai

Reform and continuity in shingikai deliberation councils

121

that set prices for rice and milk, adjusted interest rates and promoted the textile industry. Only four new shingikai would be added—all of them related to the MCA and administrative reform. IMPLEMENTATION For all these bold proposals, the important question is whether deliberation councils have actually altered their ways since criticism and orders to reform began to accelerate in the mid-1990s. Annual surveys conducted by the MCA in 1996–98 (the most recent year for which data are available) provide the most comprehensive overview (Management and Coordination Agency 1998), while supplementary information on specific shingikai updates and adds some detail to the picture. The surveys reveal both continuity and change. Almost all councils publicised their creation, purpose, schedule and list of topics, as well as members and their current affiliations (though not whether they were ‘old boys’ of the sponsoring ministry or agency)—but most had done so for years. As of 1998, admittedly before release of the more specific suggestions for elimination of redundant deliberation councils, the MCA’s figures showed little change in overall numbers. The number of shingikai were still around 212–20, while the average number of participants remained at just over 24 per council, well over the recommended new limits (a rough, unofficial tally in late 2000 suggested a moderate reduction in numbers to around 136).6 Some important signs of change emerge in the figures for participation. Before the Cabinet resolution on ‘old boys’, ministry alumni accounted for a full one-third of shingikai chairs, according to a special MCA survey in May 1995. In 1997 and 1998, the percentage of councils chaired by old boys declined dramatically, first to 9.6 per cent, and then to 3.4 per cent. The average percentage of council members who were old boys dropped from 9.6 per cent in 1995 to 7.0 per cent in 1998 (302 of the total 4,330 members). Only four ministries (the Ministries of Foreign Affairs, Agriculture, Transportation and Finance) topped 10 per cent and even then only barely. The Ministry of Foreign Affairs led the list at 12 per cent while MITI just missed the mark at 9.8 per cent. Sixty-four of 152 relevant councils—including most of the major councils for MOF, MITI and the MPT—provided hearings in which those affected by deliberations would be able to air their concerns. The MCA provided no figures for the degree of participation by those representing ‘one side’ of deliberations, probably because the proposal was not formalised until 1999, though, even had it tried, the agency might have found it conceptually difficult to provide such a count. Some additional—if partial—information suggests that changes in the composition and chairing of panels are real and ongoing. Interviews conducted at MITI the same day that the Administrative Reform Committee submitted its report to Prime Minister Hashimoto (16 December 1996) revealed that ministry officials were seeking to reorient the membership of the Industrial Structure

122

Japanese governance

Council to expand the representation of emerging firms and decrease that of declining industries. MITI researchers have also expressed an interest in increasing the voice of new software companies relative to the established producers of electronic hardware (Kuroki and Kato 1994). Similar changes were visible at the Economic Planning Agency. In early 1999, the agency appointed members to five advisory councils. The newly reconstituted panels were half the size of their predecessors and included three Japanese-speaking foreigners as well as representatives of small, local and new companies. Among the new members was the vice-president of start-up Hokkaido Airlines, which had recently cut ticket prices on flights from Tokyo to Sapporo, Hokkaido’s leading city, to half the levels maintained by the old oligopoly of three incumbent airlines (Nikkei Weekly, 15 February 1999). Finally, some indications suggested that ministries found it increasingly difficult to appoint ministry old boys to stack the advisory system in their favour. The MPT’s postal shingikai, for instance, had long supported the ministry’s attempts to block the administrative reform movement’s efforts to privatise the postal system. When the panel’s chair, a professor from Keio University, retired at the end of 1997, the ministry dragged its heels in naming a new chair, claiming that conflicts within the committee made it difficult to attain consensus. As a result, the panel fell under the leadership of the acting chair, an MPT old boy. This outcome led to bad publicity and public dissatisfaction. In June 1998, MPT announced the new chair—the head of Matsushita Electric (Nihon Keizai Shinbun, 13 February 1998 and 5 June 1998). Apparently, the administrative reform movement’s recommendation that old boys should not serve as chairs of advisory councils had assumed the status of a new norm. Data on openness also show significant progress. By 1998, 89.4 per cent published at least minutes, including 25 kondankai attached to the MPT, 11 under MITI’s jurisdiction and 5 organised by the MOF. The few holdouts pleaded special circumstances, such as a Ministry of Foreign Affairs committee that cited the need to protect diplomatic secrets. In 1996, only half of all shingikai either held open meetings or released transcripts; that figure increased to 68.4 per cent in 1997 and 73 per cent in 1998; 28 per cent did both. Observers divided on whether summaries, which typically did not identify positions with their articulators, were sufficient and desirable. Some argued that only open meetings or transcripts provided the public with a full sense of the debates and positions of members. Others countered that preserving a free atmosphere promoted frank exchange of opinions (not to mention the practical and theoretical difficulties of publishing an accurate transcript of open-ended and often free-form discussions) (Abe 1997:194–95). At any rate, over two-thirds of shingikai providing transcripts of their proceedings by 1998, compared to just under half (49.3 per cent) in 1996. Two-thirds of the councils (102) posted information on their activities in databases or web sites. Many provided intermediate reports (29), opportunities for public comments (33), final press conferences (38), or other methods to disseminate information

Reform and continuity in shingikai deliberation councils

123

to public, including seminars and pamphlets (25). Interestingly, the two main administrative reform councils (gyosei kaikaku iinkai and gyosei kaikaku kaigi) cited ‘protecting free discussion’ as a reason for releasing only minutes (one subcommittee on central–local relations did provide transcripts). Although the general trend to openness ran strongly, differences across ministries remained significant. In 1998, for example, a majority of MITI’s shingikai both held open meetings and released transcripts of their proceedings, while none of the Ministry of Finance’s shingikai did so, limiting themselves to the dissemination of minutes. The Ministry of Finance traditionally allied itself with existing banks, securities houses and insurance firms (and, notably, against the postal banking and insurance operations). Its secretive shingikai represented and supported the status quo. However, financial scandals and failure to keep pace with global competitors stained the reputation of the ministry and demonstrated that Japan’s traditional ‘convoy’ approach to regulation is bankrupt. By the late 1990s, many in the MOF came to argue that the ministry should abandon financial regulation to concentrate on its core missions—compilation of budgets and oversight of monetary policy (Hartcher 1998:24–41, 255–56). Eventually, the MOF lost much of its jurisdiction over financial regulation. The survey results released by the MCA provide evidence that the informal kondankai are less open than shingikai, but they too are improving. There is, as yet, no clear evidence that ministries are surreptitiously moving discussions to kondankai to circumvent the increasingly stringent rules on transparency applied to shingikai, though the possibility remains and would certainly be consistent with Japan’s historical preference for the informal. As suggested in the documents prepared by the administrative reform movement and endorsed by the Diet, kondankai tend to be more specialised and ad hoc than shingikai.7 SHINGIKAI IN ACTION: ELECTRICITY REGULATION AND BROADCASTING The vast array of subjects deliberated by shingikai and kondankai, and the immense volume of the reports they release, render efforts to generalise about the transparency of their operations both difficult and hazardous. According to officials at the MCA, the ministry whose treatment of shingikai is the most open and advanced is MITI; among the other more advanced ministries is the MPT, particularly in telecommunications and broadcasting (author interview, Management and Coordination Agency, Administrative Management Bureau, 9 June 1999). Examination of shingikai reports and interviews with participants conducted for research into the comparative dynamics of deregulation in Japan (rapid in the case of broadcasting, cautious and measured in electricity regulation) can provide insight into the possibilities for change. Study of the use of shingikai in these cases thus constitutes hypothesis generation rather than hypothesis testing—if change is not observable in the shingikai

124

Japanese governance

associated with MITI and MPT (outside postal affairs), then it is not likely to be found in construction, finance or agriculture. If significant change is found, more extensive research is justified. While MITI’s client industries, such as automobiles, electronics and machine tools, sell significant proportions of their output on global markets and thus are highly attentive to competitive pressures, the electricity sector has been a protected, comfortable and very large niche. Throughout the postwar period Japan’s ten electric power companies enjoyed virtual monopolies on power generation within their geographically determined districts. MITI protected and regulated the utilities. They in turn cooperated with MITI, investing during recessions, devoting research and development expenditures to pollution control and alternative fuels, and building nuclear power plants to reduce Japan’s dependence on imported oil. Electric utilities became a prime example of Richard Samuels’ noted proposition that governance in Japan is a process of ‘reciprocal consent’ in which private companies accept government intervention in return for support and stability (Samuels 1987). In the 1990s, the economic and technological premises of this cosy relationship came under increasing pressure. The successful move to competition in the telecommunications industry, combined with developments in technology that reduced economies of scale in electricity generation, suggested that it might not be necessary to view electricity as a natural monopoly. Extended recession and the growing strength of the yen created pressures to reduce Japan’s ‘high cost structure’, including electricity rates that significantly exceeded those of Japan’s main competitors. Concern grew especially intense when the yen approached 80 to the dollar in 1995. By early 1997, conflict between MITI and its erstwhile prize client became intense. On behalf of the overall Japanese economy, MITI demanded that electricity tariffs be cut; the utilities pointed to MITI’s own long-standing goals in Japan’s energy policy, such as energy security, environmental protection, universal service and stability of supply. Years of heavy investments rendered the utilities financially weak, but many of them exerted great economic and political influence in their districts. To up the ante, MITI implemented a ‘yardstick’ system that rewarded the more efficient utilities with favourable rates and even threatened to break up the electricity utilities as a way of introducing market incentives. The utilities fought back by accusing MITI of contravening the injunction of the administrative reform movement to reduce administrative interference in the operations of private firms (Nikkei Weekly, 27 January 1997 and 17 February 1997; author interviews at the Central Research Institute for the Electric Power Industry (CRIEPI), 9 April 1998 and 10 June 1999; MITI Energy and Natural Resources Agency, 8 April 1998 and Tokyo Electric Power Company, December 1996). MITI and the Administrative Reform Committee agreed on the need to reduce the ‘high-cost structure’ and together succeeded in getting the Cabinet to include resolutions pushing for more competition and lower rates. The Cabinet resolution

Reform and continuity in shingikai deliberation councils

125

of December 1996 ordered MITI’s Electric Utility shingikai to find ways to bring Japan’s utility rates down to the level of other advanced industrial countries by the year 2001. The MCA met with MITI and other relevant agencies, while the LDP’s Headquarters for the Promotion of Administrative Reform presented its own report to the Cabinet in March 1997. In May, the Cabinet passed a resolution endorsing an ‘action plan’ that incorporated their suggestions almost unaltered/in full. Once it had gained the support of the Administrative Reform Committee, the LDP and the Cabinet, MITI announced specific policy proposals. MITI created within the electric utility shingikai a new subcommittee on basic policies and for the first time in several years reopened the subcommittee on the rate structure.8 The committee members selected by MITI represented a balance of professors, journalists and other neutral figures, utilities and independent power providers (IPPs). The IPPs were primarily trading companies or heavy industrial providers, such as petrochemical or paper companies, that hoped to generate more of their own power and perhaps sell back a bit to the electric utilities. The IPPs received as many seats as the electric utilities, even though they generated less than 2 per cent of Japan’s electricity. MITI prepared a model of complete liberalisation—the utility monopolies’ greatest fear—and elicited responses from four of the members. Three of them were academic economists while the other was the Representative Director of the Asia-Pacific Energy Forum. While MITI’s report was scrupulously balanced in presenting the theoretical and practical advantages and disadvantages accompanying complete liberalisation, the very form of presentation involved an open admission of pluralistic goals, options and opinions that was previously rare in shingikai (Denryoku Shinposha hen 1999a:199–252). In January 1999, the subcommittee reached a compromise involving partial liberalisation for large users, introduction of competitive bidding for thermal plants, and enhanced flexibility to reduce rates. These measures were fairly conservative compared to electricity deregulation in other countries, but there was little question that MITI utilised the shingikai system to stack the deck in its favour and put extra pressure on the formidable electric utilities. Once the subcommittee had finished its report, MITI pushed ahead again, inviting public responses to the subcommittee’s report. Among the 59 responses, many of them quite detailed, were representations from the US Trade Representative calling for further liberalisation, and four complaints about the lack of transparency and balance in selecting members, who were seen as too close to the industry (Denryoku Shinposha hen 1999a). Since MITI’s goal was to pressure the utilities to move faster, these comments were useful. MITI’s responses showed little willingness to incorporate ideas that would change the ministry’s agenda. Indeed, some industry observers characterised the ministry’s ‘we’ve already considered that’ style of reply as arrogant (author interviews with participants in electricity industry deliberations, Tokyo, June 1999). Next, MITI selected new members for the subcommittees. Building

126

Japanese governance

upon the rationale of avoiding conflicts of interest advanced by the administrative reform movement, it removed all industry representatives, both utility and IPP, from the electric utility shingikai, relegating them to three slots as ‘observers’. MITI’s bold step shocked and concerned the industry (Gekkan Enerugi, June 1999:42–3). With the industry representatives removed, the council’s consisted of 11 economics professors who favoured the more aggressive approach of MITI (if not more). According to people who have attended the meetings, the industry observers were by no means completely isolated—they only had to raise their hands to be recognised by the chair. Nonetheless, MITI’s control over the agenda and committee membership allowed it to reduce the relative influence of the industry, particularly the electric utilities (Author interviews at CRIEPI, Tokyo, 10 June 1999). Even more than in electricity, the legal framework surrounding television broadcasting required the regulator, the Ministry of Posts and Telecommunications, to channel virtually all policy issues through shingikai, while the ministry routinely created kondankai to deliberate on ad hoc issues. For decades, the relationship between the MPT and the broadcasting industry was stable and profitable for all. By the end of the 1980s, that stable relationship was under pressure (Noble 2000). As with electricity regulation, the example of dynamic changes in telecommunications policy, not to mention the even greater technological changes, cast a long shadow. A virtual revolution in digital compression and satellite transponders effectively expanded the electromagnetic spectrum, altering the limited access conditions that had served as the traditional rationale for regulation of broadcasting. MPT shingikai were forced to deliberate a host of new issues, including the allocation of satellite licences, digital broadcasting formats, the speed of digitalisation of signals from conventional terrestrial stations, and the number of channels any one company should be permitted to control. Encumbered by its traditional clients, MPT initially responded cautiously, and at times ineffectively, to technological change, leaving it vulnerable to increasing pressure from MITI, its long-time rival for control over policy in the increasingly merged field of telecommunications and computing. Similar bureaucratic reformulation of shingikai to prod reluctant clients can be seen in the regulation of television broadcasting. The MPT stacked some deliberative bodies with professors and, like the EPA, began to incorporate some Westerners representing new interests. Shingikai meetings remained closed and the MPT cited the need to protect corporate secrets and free discussion as justifications for not releasing full transcripts, but it placed detailed minutes of deliberations going back to 1996 on the Internet. Particularly interesting was MPT’s changing approach to handling conflict. Through the early 1990s, the MPT’s shingikai reports blandly muffled conflicting opinions (see, for example, MPT 1992). In the mid-1990s, as the MPT strove to update policy and the administrative reform movement changed expectations about shingikai operations—reports became much more open. A 1995 panel on the influence

Reform and continuity in shingikai deliberation councils

127

of multimedia on broadcasting not only admitted a split within the committee over when to shift to digitalisation of broadcasting satellites, but also identified the members of the opposing camps within the committee by name.9 The following year, the final report of the kondankai on the upgrading of broadcasting detailed the reactions of various groups to the interim report (Hoso Kodo-ka Bijion Kondankai 1996). In 1997, a deliberative council composed only of academics produced a report on digitalisation that frankly revealed conflicting stances. It reported the results of a survey revealing the existence of a variety of opinions in the industry, and reproduced a long appendix presenting the opinions of each firm or organisation surveyed by the committee (BS-4 Kohatsuki Kentokai hen 1997). It appears that the degree to which conflict is aired reflects strategic manipulation by the MPT. The ministry can stack the deck in its favour by picking only scholars for councils that are intended to challenge existing producers, by issuing unanimous reports when they agree with its preferences, and allowing conflict to surface when it cannot bring the majority, particularly existing producers, on side. As ministries face increasing strains between attaining their organisational missions and protecting old clients, the traditional preference for consensus over transparency seems to be breaking down. In addition to writing specific reports, many of the MPT’s shingikai meet on a regular basis to discuss current issues faced by the ministry. An examination of a recent meeting of the Radio Regulatory Commission provides some insight into current practices.10 Following usual practice, the meeting was held in the ministry’s headquarters rather than an independent or neutral site. Four of the five members attended the meeting—three professors (of law, media communications and engineering) and the president of Kansai Electric. They conferred with at least as many MPT officials. The group discussed a number of issues, some of them legally or technologically complex, including the appropriate number of licences for FM stations in Niigata prefecture and technical results of tests on 720-line progressive digital signals and whether they qualify as high definition. The MPT officials started off with presentations to which the council members addressed questions. Judging from the minutes, the issues excited little controversy. The discussion consisted largely of presentations by MPT officials and answers by MPT to questions, some of them rather elementary, from the council. The meetings, though detailed, did not link specific individuals with questions or answers. The entire meeting lasted one hour and seven minutes. MPT released the minutes after a delay of six weeks. CONCLUSIONS Despite widespread scepticism about administrative reform, persistent efforts to increase transparency have begun to exert a noticeable impact on the operation of Japan’s deliberation councils. The selection of members is now more open and balanced. Participation by the ‘old boys’ ministries and agencies has declined dramatically. New legislation mandates the regular incorporation

128

Japanese governance

of public comments on proposed administrative actions and shingikai deliberations. Meetings and reports are more open and more readily available. Who wins and loses from the increase in transparency? The expanded availability of information and the broadening of participation beyond narrow circles of industry insiders benefit the mass public, increase the ease of access by would-be new entrants and facilitate political debate. These reforms were major goals of administrative reform and to, a surprising extent, they have been attained. A second, more broadly political, goal of administrative reform was to wrest control of policymaking from the bureaucracy. Results to date suggest, however, that efforts to increase transparency—at least in the area of shingikai—have not only failed to humble the bureaucracy, but have actually helped strengthen its position. The bureaucracy retains most of the key prerogatives. It still sets the agenda for deliberation, names the participants, handles administrative arrangements, drafts reports and replies to public comments. While incumbent firms are somewhat checked by the new arrangements, the bureaucracy has gained wider latitude to manipulate conflict for its own purposes. Ministries can selectively stack the deck with reformist academics when it wants changes and maintain a significant industry presence when it wants to deflect or slow suggestions for change. It can modulate the degree of disunity reflected in shingikai reports. Limits on appointments of old boys—ostensibly a major blow against the bureaucracy—may actually be at least as much of an advantage as a restriction, particularly when the ministry wants to challenge industry. Old boys, after all, represent both the ministry at which they served in the past and the industry interests for which they work at present.11 The transparency movement has thus energised ministries, enabling them to break loose from clients when their desire for maintenance of the status quo interferes with attainment of the ministries’ organisational missions. ‘Iron triangles’, after all, are both a support for, and a constraint on, bureaucrats. If industry and its allied zoku supporters in the Diet do not provide iron-clad political support, the ministry might be better off dumping them and pursuing an aggressive promotional agenda of its own. The three major areas regulated by MPT provide an illuminating example of the alternative possibilities. Zoku politicians have been extraordinarily supportive of the ‘three postal services’ (posts plus the banking and insurance products offered by post offices in Japan). The MPT has thus been able to resist with near impunity pressures from Keidanren and the administrative reform movement to privatise the three postal services. Broadcasting, in contrast, elicits much less support from backbench politicians. It is also subject to greater technological and economic pressures for change. The more the MPT resists those pressures, the more antediluvian it looks—for no discernible payback. Telecommunications rests between postal services and broadcasting—more politically powerful and slightly less revolutionised by technology. Not surprisingly, the MPT shingikai support

Reform and continuity in shingikai deliberation councils

129

the status quo on postal services, articulate the case for slow but steady reform of telecommunications and aggressively push for changes in broadcasting, even at the expense of the existing producers. Thus, ministries whose jurisdictions are relatively immune to internationalisation and are heavily influenced by interest groups and zoku politicians are most likely to resist calls for transparency and openness in the operation of their shingikai. The bureaucracy’s ability to emerge stronger than ever from waves of attempted reform has inspired much gnashing of teeth in Japan. To many Japanese, it may seem as though genuine reform is doomed.12 But if we conceive of the problem not in terms of constraining scheming bureaucrats but in terms of weakening Japan’s notoriously closed and particularistic style of policymaking, freeing bureaucrats to articulate a broader vision to get out of Japan’s current morass may actually offer some advantages.13 Analysts agree that political parties are not yet ready to take the lead in policy reform in a more consistent way, though that could change with the reorganisation of the central bureaucracy and possibly, an election or two down the road, the reorganisation of the party system (Nakano 1998; Vogel 1999). Until then, freer discussion of agendas set by the bureaucrats may be the Japanese people’s best chance to influence policymaking. NOTES 1 2 3 4

5

6

7

The complaint came from Kato Hiroshi, chairman of the Tax Committee, quoted in Tokyo Business Today, 1 October 1995. For a review of successive efforts at administrative review, see Nogami (1997). A useful timeline appears in Matsubara (1999:228–32). Shingikai-to Gaidorain Sakutei no tame no Kankei Shocho Renraku Kaigi Moshiawase, 24 June 1994. Administrative Reform Committee 1997. The interim report of the subcommittee (Kanmin katsudo buntan ko iinkai), ‘Ronten Seiri’ [Sorting out Issues], released 24 July 1996, appears on pp. 69–135; discussion of shingikai is featured on pp. 123–26. Membership of the subcommittee is listed on p. 266. In several cases where the Japanese attribution is ambiguous, the English translation uses the title ‘economist’. The detailed English summary does not, however, include the interim report. For a chart that locates the subcommittee in the complex structure of administrative reform organisations, see Nogami (1997:155). ‘Shingikai no seiri gorika ni kansuru kihon teki keikaku’ [Basic plan regarding the rationalisation and reorganisation of shingikai and other deliberative councils], a section of Chuo shocho to kaikaku suishin honbu kettei, ‘Chuo shocho to kaikaku no suishin ni kansuru hoshin’ [Guiding principles on promotion of reform of central agencies], 27 April 1999, later passed in mid-June 1999 as part of the ministerial reorganisation plan. Figures on the number of shingikai must be approached cautiously. Ministries often list ‘kondankai and others’ separately, suggesting that many shingikai may persist in other forms. On the other hand, several shingikai slated for elimination in 1999 were allowed to serve out their terms. See ‘Shingikai-to’ at www1.kantei.go.jp/jp/singi/link-index.html, accessed 2 October 2000. The names of two kondankai, the MPT’s ‘Research group on systems for the realisation of (telephone and fax) number portability’ and the Science and

130

8 9 10

11

12 13

Japanese governance Technology Agency’s ‘Evaluation committee on analysis of radioactivity’ are illustrative of this greater specificity. Nonetheless, the breadth of policy focus of some kondankai appeared to differ imperceptibly from those of shingikai. Examples of such more broadly focused kondankai included the Economic Planning Agency’s ‘Research group on foreign aid policies’, the MOF’s ‘Kondankai on new trends in finance’ or the MPT’s ‘Kondankai to consider the fusion of telecommunications and broadcasting’. Shingikai reports, Cabinet resolutions, industry statistics and other useful materials are collected in Denryoku Shinposha hen (1999a, 1999b). Maruchi Media Jidai ni okeru hoso no arikata ni kansuru kondankai (1995). Denpa Shingikai meeting no.825, 16 July 1999, released 31 August 1999 at www.mpt.go.jp/policyreports/japanese/radio/90831j01.html, accessed 10 September 1999; affiliations from Management and Coordination Agency (1998:437). By the late 1990s, the whole system of amakudari appointments (placement of former bureaucrats into private sector posts) that fosters old boys came under withering public scrutiny. Thus, the sustainability of this system was under question anyway. In addition to the citations above, see the indictment of an indignant and frustrated Takushoku University professor in Tanaka (1999). Thus, I largely concur with the analysis of Japan’s predicament articulated by Mishima (1998) with the benefit of writing two years later and, paying attention to the specific problem of shingikai, I find slightly more grounds for optimism.

REFERENCES Abe, Yoshitaka, 1997. Joho Kokai [Information Openness], Nihon Hyoronsha, Tokyo. Administrative Management Bureau, 1998. ‘Shingikai-to no kokai-to no suishin jokyo ni kansuru foroappu chosa kekka’ [The results of a follow-up survey on the promotion of information openness and other reforms for shingikai and other deliberative councils], Management and Coordination Agency, 20 March. Administrative Reform Committee [Gyosei Kaikaku Iinkai Jimukyoku], 1997. Gyosei no yakuwari o toinaosu: gyosei kanyo no arikata ni kansuru kijun [Official English translation: standards for appropriate administrative intervention], Okurasho insatsukyoku, Tokyo, 28 March. BS-4 Kohatsuki Kentokai hen, 1997. BS hoso no digitaru-ka ni mukete [Toward Digitalisation of Broadcasting by Broadcasting Satellites], Kurieto Kuruzu, Tokyo. Carlile, Lonny, E., 1998. ‘The Politics of Administrative Reform,’ in L.E. Carlile and M.C. Tilton (eds), Is Japan Really Changing its Ways? Regulatory Reform and the Japanese Economy Brookings Institution, Washington, D.C:76–110. Denryoku Shinposha hen, 1999a. Denryoku kozo kaikaku, kyokyu shisutemu-hen [Reform of the Structure of Electric Power: The supply system], Denryoku Shinposha, Tokyo. Denryoku Shinposha hen, 1999b. Denryoku kozo kaikaku, ryokin seido-hen [Reform of the Structure of Electric Power: The rate system], Denryoku Shinposha, Tokyo. Ehud Harari, 1990. ‘Resolving and Managing Policy Conflict: Advisory Bodies,’ in S.N. Eisenstadt and Eyal Ben-Ari (eds), Japanese Models of Conflict Resolution Kegan Paul International, London:38–61. Evans, P., 1995. Embedded Autonomy: States and industrial transformation, Princeton University Press, Princeton. Hartcher, P., 1998. The Ministry: The inside story of Japan’s Ministry of Finance, HarperCollins, London.

Reform and continuity in shingikai deliberation councils

131

Hoso Kodo-ka Bijion Kondankai, 1996. ‘Hoso kodo-ka bijion’ [A vision of the upgrading of broadcasting], Advisory Report to the Director of MPT’s Broadcasting Division, 26 June. Joho Kokai Mondai ni kansuru renraku kaigi moshiawase, 1991. ‘Gyosei joho koho kijun ni tsuite’ [On standards for the openness of administrative information], 11 December. Keidanren [Japan Federation of Economic Organisations], 1998. ‘For the promotion of deregulation aimed at economic revival and the establishment of a transparent system of governmental management—basic thinking’, Keidanren, Tokyo, 20 October. Komiya, R, 1998. ‘Introduction’, in R. Komiya, M. Okuna and K. Suzumura (eds), Industrial Policy of Japan, Academic Press, San Diego. Kuroki, A. and Kato, A., 1994. ‘Shinki gijutsu no hyojun-ka: denshi kiki ni okeru kesu stadi’ [Standardization in new technology areas: a case study of electric and electronic equipment], Tsusan Kenkyu Rebyu [MITI Research Review], 3: 196–212. Management and Coordination Agency, 1998. Shingikai Soran, Heisei 10 nenban [Almanac of Deliberation Councils], Management and Coordination Agency, Tokyo. Maruchi Media Jidai ni okeru hoso no arikata ni kansuru kondankai, 1995. Maruchi Media Jidai ni Muketa Hoso no Tenbo: Hoso ga Chukaku-teki media to shite hatten suru tame ni [Prospects for broadcasting as it faces the multi-media age: Let broadcasting develop into a core medium], Final report, 29 March. Matsubara, Satoru, 1999. Nihon Risutora: Gyokaku koso saisei no kirifuda [Restructuring Japan: administrative reform is the trump card to resuscitation], Tokyo Shoseki, Tokyo. Ministry of Posts and Telecommunications (MPT), 1992. Hoso no Shorai Tenbo [Future Prospects for Broadcasting], Broadcasting Bureau, Ministry of Posts and Telecommunications, Gyosei, Tokyo. Mishima, K., 1998. ‘The changing relationship between Japan’s LDP and the bureaucracy: Hashimoto’s administrative reform effort and its politics’, Asian Survey, 38(10):968–85 Nakano, K., 1998. ‘The politics of administrative reform in Japan, 1993–1998: toward a more accountable government?’, Asian Survey, 38(3):291–309. Noble, G.W., 1998. Collective Action in East Asia: How ruling parties shape industrial policy, Cornell University Press, Ithaca. Noble, G.W., 2000. ‘Let a hundred channels contend: technological change, political opening and bureaucratic priorities in Japanese television broadcasting’, Journal of Japanese Studies, 26(1):79–109 Nogami, Shuichi, 1997. ‘Gyosei Kaikaku’ no Kaimaku to Yukue [The Curtain Raising and Whereabouts of ‘Administrative Reform’], Shin Nihon Hoki, Tokyo. Root, H.L., 1998. ‘Distinctive institutions in the rise of industrial Asia’, in H.S. Rowen (ed.), Behind East Asian Growth: The political and social foundations of prosperity, Routledge, London. Samuels, R.J., 1987. The Business of the Japanese State: Energy markets in comparative and historical perspective, Cornell University Press, Ithaca. Schwartz, F.J., 1998. Advice and Consent: The politics of consultation in Japan, Cambridge University Press, Cambridge. Shingikai-to Gaidorain Sakutei no tame no Kankei Shocho Renraku Kaigi Moshiawase, 1994. ‘Shingikai-to oyobi kondankai-to gyosei un’ei-jo no kaigo no un’ei-to ni kansuru shishin’ [Guidelines on the operation of meetings and other aspects of shingikai and other deliberative councils and kondankai and other meetings on administrative operations], 24 June.

132

Japanese governance

Tanaka, Kazuaki, 1999. ‘Shocho saihen hoan no koko ga mondai da!’ [Here’s the problem with the bill to reorganise ministries and agencies!], Shukan Toyo Keizai, June 12:62–63. Vogel, S.K., 1999. ‘Can Japan disengage? Winners and losers in Japan’s political economy, and the ties that bind them’, Social Science Japan Journal, 2(1):3–21. World Bank, 1993. The East Asian Miracle: Economic growth and public policy, Oxford University Press, New York.

Reform and continuity in shingikai deliberation councils

133

APPENDIX 7.1 SHINGIKAI CHRONOLOGY 1924 1961–64 1981–83 1989 1991 1993–94 1994

1995 1995 1996 1996

1997

1998 1999

Ishibashi Tanzan, journalist and later Prime Minister, criticises the excesses of bureaucratic rule. First Administrative Reform Commission (Rincho) recommends reforms to shingikai system. Second administrative reform movement (Daini Rincho) criticises shingikai system. LDP loses control of Upper House. Cross-ministerial meeting reaches agreement on need to undertake minor reform of shingikai. LDP temporarily loses control of Lower House and Cabinet. Cross-ministerial meeting calls for balanced representation and public hearings and repeats calls for release of transcripts or summaries of shingikai proceedings. Slow response to Kobe earthquake and HIV/AIDS-tainted blood scandal shake public confidence in bureaucracy. Cabinet Resolution sponsored by Sakigake party calls for reduced reliance on shingikai and major revisions to their practices. New Prime Minister Hashimoto Ryutaro makes administrative reform a priority of his administration. An Administrative Reform Committee Subcommittee dominated by economists issues more drastic and specific guidelines to shrink the role of shingikai and ensure their transparency; final report issued by full Committee in December is brief and vague. First major postwar failures of financial institutions, including Yamaichi Securities, further undermine the prestige of the bureaucracy. Hashimoto Ryutaro, advocate of administrative reform, replaced as Prime Minister by consensus-oriented Obuchi Keizo. Diet passes laws on information openness and administrative reorganisation, including detailed guidelines on shingikai operation and drastic cut in the number of deliberative organs (from 176 to 29).

134

Japanese governance

8

Re-regulating Japanese transactions: the competition law dimension Veronica Taylor

REGIME SHIFT IN JAPAN’S COMPETITION LAW? In the wake of Japan’s recession during the 1990s and its diminished prospects for recovery, political scientists, economists and lawyers have been forced to revise their views of how the Japanese economy operates. An early casualty has been the characterisation of Japan as a developmental state, or what has been called the Japan Inc. model (Johnson 1995; cf. Carlile and Tilton 1998:1– 15). Pempel (1997, 1998, 1999) has argued that Japan is in fact experiencing a ‘regime shift’, in which its operating rules and dominant institutions are undergoing fundamental change. We still have, however, a very incomplete picture of the targets, scope and forms of such change. By focusing on the catalysts and outcomes of institutional change in particular instances, we are likely to be better equipped to both analyze a changed Japanese economy, and to formulate predictive and comparative models (see, for example, Aoki 2001). This chapter discusses some apparently new elements in the restructuring of Japanese regulatory institutions. The first is the introduction of a new political initiative—the ‘legal system reform agenda’ (shihoseido kaikaku) and a loosely related set of legal policy changes identified with it (MITI 2000:202). The second focus of the chapter is an institutional shift that seems to be occurring in competition law and its enforcement. This development seems to runs counter to much of the accepted wisdom about the deliberate non-enforcement of competition policy in Japan. Although the changes to competition law and policy described below predate the announcement of a ‘legal reform agenda’ in 1999, I suggest that the two sets of developments are interrelated and to some extent mutually reinforcing. The changes that I describe below are still unfolding, so this chapter does not aim for definitive predictions. One tentative conclusion, however, is that within both the systemic legal reform agenda and the competition regulation sphere the balance in the regulatory mix seems to be tilting toward more legalism and ‘juridification’, with interesting implications for future work on Japanese institutions.

Re-regulating Japanese transactions 135

The chapter proceeds in a reverse chronology. First, I describe the new legal reform agenda and discuss its relationship to deregulation in Japan. Second, I focus on competition law and the way that this has functioned as a ‘litmus test’ of economic reform agendas of the previous decade. In particular, the institutional capacities of the Japan Fair Trade Commission (JFTC) have been the focus of sustained domestic and international criticism. In these critiques, ‘institution’ is synonymous with organisational entity—in this case an (ostensibly) independent regulator. By contrast, following Aoki (2001) this chapter uses a wider definition of ‘institution’. Aoki views institutions as a domain of transactions in which a set of agents participate and which is endogenously created through the agents’ repeated interactions and is thus self-enforcing. He acknowledges, though, that institutions are constructed socially and that, once established, they become objectified and ‘taken for granted’ and begin to govern the agents’ choices. At a second level, institutions thus also function as the rules of the game (Aoki 2001). Using this wider institutional lens, I give roughly equal emphasis to a range of institutional ‘players’ in competition law: the JFTC as a regulatory agency, the courts, the companies that are the focus of enforcement, and academic commentators and the media as contributors to the regulatory ‘climate’. In the third part of the chapter, I discuss law reform developments and case-law results in the competition law area since 1995. This is not a quantitative study of reported cases or non-prosecutions between 1995–2000, nor do I examine the competitive conditions in particular industries (Tilton 1996). Rather, I focus on a small number of cases that were litigated, atypically, to the highest levels in Japan, and the ‘ripple effect’ of these on players outside the direct ambit of the court proceedings. One of these was the Japan Fair Trade Commission, which appears to have gained a stronger political and legal profile since 1995. At the same time, I point to some indications that attitudes towards compliance with competition regulation are changing within Japanese corporations. Compliance norms, in turn, are promoted (and at times subverted) in policy forums, industry forums, the media and through conventional legal channels. What this means is that nuanced evaluations of competition law and policy in Japan require us to look at the total institutional picture, rather than simply focusing on a particular enforcement agency or on reported court cases. COMPETITION LAW AND THE LEGAL SYSTEM REFORM AGENDA Many business and political commentators still routinely describe Japan as a ‘non-legalistic’ country, but this is an increasingly moot proposition (Haley 1978; Ramsayer 1988; Ramseyer and Rosenbluth 1989; Taylor 1993, 1997). One of the indicators of a policy-level climate change was an announcement by Prime Minister Obuchi Keizo in August 1998, which promised a complete overhaul of the Japanese legal system.

136

Japanese governance We will pursue complete reform of the (legal) system in order to make it easier for citizens to use and to ensure that the legal system functions as the basis for a secure life for the populace and for equitable economic activity. (Fujikawa 2000:18)

The former prime minister underlined his commitment to the legal reform agenda by appointing a Legal System Reform Commission (Shihokaikaku shingikai) in July 1999 with a mandate to report within two years. The Commission published its key issues for debate in December 1999 and a preliminary report in April 2000 (Shihokaikaku shingikai 2000).1 Although Obuchi’s successor, Prime Minister Mori, did not declare support for the agenda itself (Fujikawa 2000:18), it seems unlikely to be abandoned. In the short term it will continue simply because budget allocations have already been made for some related items (Author’s interview with section head, Ministry of Justice Research Institute, 2000). A more significant factor is that Obuchi was simply declaring a widely shared consensus that both substantive and procedural legal reforms were overdue in Japan. The desire for legal reform cuts across numerous institutions and interest groups in Japan but the actors involved, their agendas and the pressure points for legal reform in Japan are diverse. The diversity is not immediately apparent when looking at the (abbreviated) list of topics for debate under the legal system reform agenda (MITI 2000:201): Systemic elements (a) Realisation of a more user-friendly legal system • Increasing access to lawyers • Addressing decline in the number of lawyers • Clarifying lawyers’ relationship to adjacent legal professions • Increasing legal aid • Alternative dispute resolution procedures outside court settings • Strengthening publication of, and access to, information relating to legal proceedings and the legal system (b) A civil procedure system that responds to the people’s expectations • Improving access to the courts • Introducing comprehensiveness and speed in civil proceedings • Meeting the need for expert opinions in specialist cases • Reforming civil execution procedures • Strengthening the capacity for effective checks on the judicial system Human resources (a) A criminal procedure system that responds to people’s expectations. This involves • investigative and inquisitorial procedures suited for the present day • comprehensiveness and speed in criminal proceedings

Re-regulating Japanese transactions 137

reviewing a public defender system for accused and defendants in proceedings • citizen participation in judicial proceedings • the jury system/lay participation in adjudication • a review of participation under the existing judicial system (b) The number of, and training for, legal professionals • appropriate increases in number of legal professionals • the stage of training for legal professionals • the national bar examination and Supreme Court Training Institute • the role of legal education in universities • legal ethics • the unification of the branches of the legal profession • strengthening the human resources for courts and the public prosecutor’s office • the internationalisation of the legal system • allocating a budget for the legal system •

As a shopping list of reform topics, the legal system reform agenda looks fairly innocuous. Embedded in each of the ‘topics’, however, are sundry debates, lobby groups and subsidiary agendas. By way of example, large Japanese corporations have been voicing dissatisfaction with the availability, cost and quality of legal services in Japan for some time. Part of the public face of that lobbying can be read in a long-running Nikkei editorial series reflecting a mix of investigative journalism and ‘trashing’ of legal institutions such as the Supreme Court and the Japan Federation of Bar Associations (for example, Nikkei Shimbun, 30 April 2000). The series set out to expose inefficiencies in legal procedures, disparity in access to legal advice across Japan and the anti-competitive effects of Japan being unable to match US legal skills in areas such as biotechnology and industrial property. Those themes are taken up in a more measured way in a Ministry of International Trade and Industry White Paper (MITI 2000). This treatment, however, is in a sense more controversial, because the 11 pages of statistical analysis and commentary simply treat Japan’s legal services as an inefficient services industry that is now a drag on economic growth and industrial innovation. Although MITI (now METI) stops short of prejudging the outcomes of the legal system reform debates, the level of detail in the topics traversed leaves the reader in no doubt about the ministry’s stance. The topics include remuneration in the legal profession the breaking of bengoshi (barrister) monopolies on legal practice, electronic publishing of court decisions and greater transparency in patent examinations In fact, a wave of important legal reforms affecting commercial interests in Japan has been passed or is already pending. Beginning in the mid-1990s, a new Code of Civil Procedure (passed in 1996, effective in 1998) was intended to improve access to the courts, rationalise carriage of cases, create a small

138

Japanese governance

claims jurisdiction, and make the law more transparent by translating it into contemporary language (Kamiya 2001). Although the Code’s reforms predate the legal reform agenda they can be seen as a symbolic downpayment on creation of a more ‘user-friendly’ legal system. A second wave of reforms relates to the Commercial Code, and aims to enable easier corporate break-ups and acquisitions (Nikkei Shimbun, 28 April 2000). Another key area has been the introduction of bankruptcy and insolvency law reforms. In this area, we can see a significant shift in the procedures for law reform in Japan. Where traditionally the role of the Legislative Advisory Council (Hosei Shingikai) was central to the preparation of new legislation, the pace and volume of new legislation presented to the Diet has increased and the council’s role, though not abolished, has in substance been devolved to more specialist groups.2 Circumvention of the Legislative Advisory Council is usually explained as being necessary because the legislation is complex and urgent, and highly specific. In many cases, the old pattern of introducing broad umbrella legislation that is subsequently fleshed out by special laws and regulations has been abandoned in favour of much more exhaustive drafting at the outset. Much of this new legislation is being drafted against the backdrop of the legal system reform agenda and so carries with it implicit promises of procedural efficiencies and improved legal infrastructure and personnel. This is the point at which the commercial and consumer strands in the reform agenda intersect. Implicit in the legal reform agenda is a series of amorphous, tacit promises to ‘citizens’ (shimin) that the reformed system will be more efficient and responsive to their needs. Citizens seem to break down into corporate citizens on the one hand and ‘consumers’ on the other. As a number of scholars have observed, however, identifying the interests of Japanese ‘consumers’ (shohisha) is problematic (Vogel 1999). In Western capitalist systems, the law is often the frontline for conflict between the interests of consumers and corporations. In Japan, by contrast, consumer lobby groups in many cases identify with the interests of producers. Recent attempts to flesh out consumer protection law in Japan, for example, have met with intense opposition from the business lobby (Kitagawa 2000; Ochiai et al. 2000). In the result, the Consumer Contract Law of 2000 promoted by the Economic Planning Agency (EPA) as a regulatory bookend to the 1996 Product Liability Law was largely neutered. The EPA adroitly characterises its constituents as ‘consumers’ and ‘businesses’ who can and should interact without the distorting effect of law (Taylor 1997). This stance is consistent with the rebadging of consumers as seikatsusha in Japan, a term ‘which fuses the notion of consumer with that of worker and citizen’ (Vogel 1999:196). It should not surprise us, then, that the ‘consumer needs’ presently being highlighted in the legal reform agenda seem to be projections by other interested parties, notably government agencies and the Bar, rather than being genuine reflections of public demand.

Re-regulating Japanese transactions 139

Lawyers, not surprisingly, have embraced the legal reform groundswell, despite bitter debate within the wider legal profession about preferred outcomes. Some have described the new agenda as the pivot (kaname) for both the administrative reform and deregulation processes. This may reflect genuine delight at finding lawyers in a position to dust off and implement long-cherished plans for change, or it may be polite way of saying that legal system reform represents Japan’s last chance to revisit a stalled set of economic policy initiatives. For some political and economic commentators, then, the 1990s represent ‘the lost decade’, a decade of infinitesimally slow deregulation and policy reform in Japan. For lawyers, however, the 1990s stand as a historical turning point, the implications of which are only just beginning to emerge. Much could be said here about the political attempt to elevate law and legal institutions to the status of circuit breakers within a system that has traditionally downplayed the need for law. There is more than a visible shadow here of the kind of legal formalism that is resurgent in US law and policy debates and is now a feature of multilateral organisations such as the World Trade Organisation (WTO), the Organisation for Economic Cooperation and Development (OECD), the International Monetary Fund (IMF) and the World Bank. What is significant for the present discussion, however, is that the legal reform agenda is unfolding without visible opposition, and seems likely to legitimate and strengthen the use of formal juridical controls on business and government in Japan. RETHINKING THE INSTITUTIONAL CRITIQUES OF JAPANESE COMPETITION LAW Competition law and policy is implicit in the legal system reform agenda. A telling phrase is MITI’s use of ‘legal services industry’, rather than the nomenclature preferred by that industry—‘the legal profession’. The two labels do not correspond. MITI’s competition perspective is focused on the global number of legal professionals in Japan, including specialists such as patent attorneys, judicial scriveners (shihoshoshi) and sundry para-legals and lawyer-substitutes. The Japan Federation of Bar Associations, by contrast, defines legal professionals as those who have passed the national Bar Examination—lawyers (bengoshi), judges and prosecutors. Both the Bar Exam and the Lawyers’ Law are thus under review as major impediments to fuller provision of service and competition in this sector. Competition law seems to offer a solution precisely because it is both an economic and a legal policy tool (NBL Henshubu 2000).3 It seems to offer a technique for supporting deregulation while also making the market much less congenial for entrenched players. Viewing competition law as a litmus test of Japan’s deregulatory reform is, of course, consistent with the way in which multilateral institutions such as the WTO, the OECD, the IMF, the World Bank and APEC (Asia Pacific Economic Cooperation) now elevate

140

Japanese governance

competition regulation as an important tool of microeconomic reform, market restructuring (Ullrich 1998) and, ultimately, a means of modernising the legal system. The experience of deregulating economies over the last two decades has been that, for every removal of industry-specific regulation or legislation, there is usually a counterbalancing application of law. Typically, restrictive licensing schemes and bars to market entry have been displaced by ‘reregulation’, either directly through legislation, or indirectly through other modes of governance.4 In markets such as Australia, New Zealand and the United States, much of the re-regulatory work has been entrusted to competition and consumer protection laws and their enforcing agencies. Almost without exception, however, foreign commentators have remained profoundly sceptical about whether Japan’s competition law would be given sufficient ‘teeth’ to entrench institutional or market change (Tilton 1996). This, then, is a useful point at which to re-evaluate the character of Japan’s competition law regime. Japanese competition law scholars do not disagree with the proposition that, until recently, the formal enforcement of Japan’s competition law was routinely overshadowed by the intervention of government and industry (Murakami 2000:6). However, they speak of the 1980s and 1990s as being like the ‘night and day’ of domestic competition regulation (Shiraishi 2000). That is, from the standpoint of legal theory and practice, the latter half of the 1990s has seen an unprecedented change in both the qualitative and quantitative significance of competition law in Japan. The balance of this chapter suggests some areas of change that may furnish a basis for this kind of perception. Let us focus first on the ‘formal’ side of competition regulation. The JFTC was unique in being the only independent regulatory agency created in Japan by postwar legal reforms. This partially explains criticisms couched in tones of, ‘Why can’t Japan’s FTC be more like the US FTC, its conceptual model?’ Certainly, for decades the differences between the two agencies were stark. The JFTC was captured by the Ministry of Finance and eviscerated through understaffing and legislative changes designed to undermine its mandate and its capacity to rule against government-sanctioned courses of action. Its present level of 560 staff (a third that of the US FTC) represents an increase on its historical size, albeit an insufficient number of staff to exhaustively investigate and prosecute all breaches of the Antimonopoly Law (Nikkei Shimbun, 29 November 1999) The text of Japan’s Antimonopoly Law reads as substantively similar to US antitrust law or Australian competition law statutes (Shitekidokusen no kinshi oyobi koseitorihiki no kakuho ni kansuru horitsu, Law No. 54, 1947 as amended). The problem has been that its application in the postwar period has been largely curtailed by a political preference for market stability and security for domestic industry over market competition and consumer welfare

Re-regulating Japanese transactions 141

(Tilton 1996:184) The JFTC itself possibly shared that preference for stability over untrammelled market competition (Haley 1997:147). So, for example, the JFTC cooperated with MITI dictates supporting the cartelisation of selected industries in the postwar period (Haley 1997:147). Similarly, the JFTC did not provide a bulwark against the use of administrative guidance by MITI and other agencies. Not surprisingly few foreign companies in the Japanese market, or seeking to enter it, were prepared to test the agency’s complaint process, although this route was open to them. The complaint brought by Kodak against Fuji in the Japanese photographic film market in the 1990s was an exception. By the time that the Kodak–Fuji dispute had exhausted its formal channels, however, there were indications that the behaviour of the JFTC was beginning to change. INSTITUTIONAL CHANGE IN THE 1990s The mid-1990s seems to represent a turning point in competition law enforcement in Japan. By March 1996, the JFTC had pursued complaints against the largest number of enterprises since its inception and had ordered fines in the largest number of infringement cases to that point (NBL Henshubu 1996:68).5 Those figures have subsequently risen. Following revisions to the Antimonopoly Law in June 1996, the JFTC itself was restructured and its enforcement capacity strengthened. The changes included the appointment of a former prosecutor as director of the agency (rather than the traditional secondment from the Ministry of Finance) and the creation of an Administrative Office to coordinate the commission’s administrative functions. A new Economic Transactions Office, Transactions Division, Office of Investigations and Special Investigations Division were also established. From 1996 onward the JFTC identified its two priority activities as (1) comprehensive investigations in cases of deliberate contravention of the law, such as price cartels, collusive tendering and import systems, and (2) the direct use of the market mechanism to enhance deregulation. The latter priority mandated a review of exceptions to, and exclusions from, the Antimonopoly Law, ‘in order to promote the openness and transparency of markets and [engagement in] pre-emptive action to prevent administrative guidance by government agencies that have the effect of limiting competition’ (NBL Henshubu 1996:68). In theory, this amounted to a 180-degree change in the agency’s stance and a formal embrace of the (then) government’s deregulation agenda. In practice, it prefaced a line of well-publicised enforcement moves by the JFTC from the mid-1990s onwards.6 This period also saw a fundamental shift in the JFTC’s enforcement stance. Many studies of this agency to date have suggested that it generally favoured administrative processes over criminal prosecution as the major enforcement route for breaches of the Antimonopoly Law. US trade commentators commonly present this as a flawed choice. It can be more accurately characterised as what Gerber (1998) calls ‘the administrative model’ of

142

Japanese governance

competition typical of Japan and the European Union. The distinguishing characteristic is discretionary policy decisions by bureaucrats who often seek ‘voluntary’ compliance from business. In contrast, ‘the juridical model’ of US competition law treats competition as ‘normal law’ to be applied in the same form, language and modes of thought as other kinds of private or criminal law. Australian competition law and enforcement is an interesting hybrid of these two approaches (Tamblyn 1992). What we see in JFTC enforcement of Antimonopoly Law in Japan during the 1990s is not a diminution of the administrative model of enforcement, but the addition of court support for JFTC investigations, and prosecution of private sector players and their public sector collaborators. An illustrative case was the Tokyo High Court decision (31 May 1996) upholding a JFTC finding that major electrical contractors had engaged in collusive tendering (a dango arrangement) for government contracts. Dango practices themselves were not new in Japan, but the case was given front-page coverage because 17 senior managers of major electrical manufacturing companies including Hitachi, Toshiba and Mitsubishi were found guilty of contravening the Antimonopoly Law and were given criminal sentences. The managers responsible were given suspended prison sentences of 10 months each and their companies were fined A$400,000–600,000 each. The High Court found that between 1989–90 electrical manufacturers had formalised a system for subdividing tenders for government sewerage projects, and that this was done with the active cooperation of the relevant agency, the Japan Sewerage Corporation. This contravened Article 3 of the Antimonopoly Law, which prohibits any unreasonable restraint of trade. In evidence, a number of managers stated that they had misgivings about the scheme because it was not a competitive tendering process, but felt unable to object to such a formal structure. They were furthermore unwilling to jeopardise their company’s status with a public corporation that so clearly supported the status quo. The court was explicit and scathing about the active role played by the public corporation in pre-releasing the specifications and budget for projects. At a time when the level of fines under the Antimonopoly Law had just been increased, the court said, ‘This represented serious criminal behaviour by our country’s leading heavy electrical manufacturers’ and ‘criminal cooperation by a public corporation...in an area affecting citizens’ daily lives’. (Nikkei Shimbun, 31 May 1996:1)

This is strong language for a Japanese judge, and we can hypothesise that this kind of judicial support strengthened the JFTC’s hand. By the time that the High Court handed down this decision, some the effects of the deregulatory push and the US–Japan Structural Impediments Initiatives (SII) negotiations were visible in public contracting, as public corporations and agencies reportedly began to replace tender-by-invitation processes with open

Re-regulating Japanese transactions 143

competitive bidding. The decision may have strengthened this transition, although we have no direct evidence of this. Further pressure for compliance with the Antimonopoly Law and public tendering processes may also emerge from shareholder representative actions. Corporate law reforms in the early 1990s relaxed the procedural barriers to shareholder actions, but most of the resulting actions to date have been against financial institutions for causing shareholder loss through illegal or negligent corporate decisionmaking. Although few, if any, shareholder actions have so far cited breaches of competition law, this remains a latent possibility for the future. Morita’s (1998) study of judicial decisions found that the courts have uniformly adopted and followed the JFTC’s analysis of anticompetitive behaviour. In other cases, including the Shiseido decision discussed below, it is not uncommon for the court’s judgment to include passages from agencies guideline documents, generally without attribution or acknowledgment— standard drafting practice for judicial decisions in Japan. The significance of this is threefold. First, it points to strong judicial support for the JFTC as an agency (or at least judicial confirmation of the agency’s predictions about those cases that it chooses to prosecute). Second, it maps a wider range of enforcement techniques for the JFTC than were generally acknowledged prior to the 1990s. Third, it begins to alter the fundamental regulatory balance. That is, the courts are now ‘written into’ the enforcement of the Antimonopoly Law. This change in turn raises questions about the court’s institutional capacity, which we consider below. Within legal policy circles, the shift is significant because it overturns the traditional separation of ‘public’ and ‘private’ law that held that freedom of contract should be inviolate, and should be able to insulate parties from ‘public law’ interventions such as the Antimonopoly Law. NEW COMPETITION REGIMES AND OLD CONTRACTS Whether Japanese competition law actually gained traction in the 1990s is a matter of debate. Tilton, for example, argues that the ‘gains’ are largely illusory (1996:180). One of his criticisms is that from the mid-1990s, the JFTC devoted considerable energy to pursuing complaints about resale price maintenance in vertical distribution channels, ultimately with little real impact on the practices themselves. He uses the Shiseido case, which reached Supreme Court level, as the paradigm for this proposition—the case was ultimately won resoundingly by a manufacturer who appeared to exert extremely tight control over every facet of its distribution channels, including pricing. Certainly the Shiseido and related cosmetics distribution cases from the 1990s form an important tranche of competition law, but I draw somewhat different conclusions from them. First, it is not clear that the JFTC concentrated resources on policing vertical pricing arrangements in the 1990s. Certainly, this is not the perception of franchising lawyers in Japan during the period (Author’s interview with Kawagoe Kenji, Franchise Law Specialist, 1996).

144

Japanese governance

More data is needed here to support Tilton’s assertion. Outside Japan, it is apparent that vertical pricing arrangements in distribution chains, whether franchised or not, were increasingly ‘left to the market’ by competition regulators in the 1990s. The rationale for doing so was that vertical chains can deliver price efficiencies and that consumer interests are protected by competition in the retail market itself (Personal communication with Alan Fels, Commissioner of the Australian Consumer and Competition Commission, 1996). This presumes competitive markets; an issue which goes to the heart of assessment of Japan’s political and economic structures (Haley 1998). It seems more likely that the JFTC had conflicting priorities—the need to police horizontal pricing arrangements and the need to respond to complaints from disgruntled distributors in vertical arrangements that were no longer viable in a restructuring market. Complaints about resale price maintenance were congruent with dramatic changes in distribution markets in Japan during the 1990s, and also with a wave of litigation commenced within franchised distribution chains during the same period. Tilton (1996:180) cites First (1995) arguing that resale price maintenance (RPM) ultimately benefits smaller, inefficient distributors and that manufacturers benefit from the prohibition of RPM because it allows them to cut margins and supply more efficient distributors. Both of First’s observations are illustrated in the cosmetics distribution cases. The ‘cosmetics cases’ were a series of suits brought against famous brandname cosmetics manufacturers in the 1990s. The brand names were important because it has been routinely argued in the past that familiar corporate names are missing from reported cases in Japan. Shiseido is arguably the most prestigious of Japan’s domestic cosmetics and toiletries makers, although it does not have absolute dominance in terms of market share. Like most manufacturers, Shiseido had developed a web of affiliated distributors and retailers (in this case 25,000—both exclusive and non-exclusive). The conditions for membership in the Shiseido retail distribution chain were prescribed in a tightly drawn standard contract that covered, among other things, the mode of sale, promotion strategies and obligations to participate in corporate training (Shiseido Tokyo Hanbai KK v Fujiki Honten KK 1994; Taylor 1995). Product distribution in this case was through a wholly owned subsidiary of Shiseido. In 1991, the subsidiary terminated its 28-year continuing contract with retailer Fujiki Honten. The reason given for termination was that Fujiki Honten had breached the prescribed sales method. In this case, this meant a failure to sell Shiseido products over the counter (in Japanese, ‘face-to-face’) to consumers. Instead, Fujiki had embarked on discounting via catalogues and order forms faxed to customers. Fujiki counter-claimed against the Shiseido wholesaler, initially on the basis that the contract termination was unfair. The Shiseido case attracted widespread interest from the outset because it pitted a well-known company against a long-term transaction partner and

Re-regulating Japanese transactions 145

required the courts to apply emergent case law on terminating continuing contracts. A key issue was that the contract prescribed one month’s notice for termination, whereas case law indicated that a 28-year contract would require 6–12 months notice, depending on the proportion of the distributor’s business accounted for by the terminating manufacturer’s product (Taylor 1993). The first decision, in favour of Fujiki, also coincided with a wave of consumer product discounting, dubbed kakaku hakai (literally, ‘price destruction’) which marked the rise of discount bulk retailers in Japan and attempts by smaller retailers to remain competitive and break free from resale price maintenance dictated by manufacturers. Shiseido argued in court for the validity of the contract clause allowing termination for breach of a serious condition of the contract, since the breach under question went to the heart of the contract. Fujiki argued, initially successfully, that Shiseido’s termination was wrongful for two reasons. First, Fujiki did not regard itself as being in breach. Second, Shiseido’s refusal to supply the product was unconscionable, being tantamount to the destruction of Fujiki’s business (that is, that it amounted to breach of good faith, or alternatively, an abuse of rights). Fujiki Honten prevailed on this latter point and the Tokyo District Court awarded a significant figure in damages (Shiseido Tokyo Hanbai KK v Fujiki Honten KK 1994; Taylor 1995). On appeal, Fujiki made an additional claim that the structure of the contract was in breach of the Antimonopoly Law because face-to-face product consultations were simply a device to suppress large-volume sales and discounting and ensure resale price maintenance. The High Court rejected this analysis, in what became a highly controversial decision. What had begun as an acrimonious contract termination was rapidly transformed into an attack on the vertical contract controls imposed by cosmetics makers and an equally determined attempt by Shiseido to prevent a retailer from breaking step. For his part, the Fujiki Honten respondent had begun to see himself as the Robin Hood of Japanese retailing—the person who would break Shiseido’s oppressive stranglehold on its distributors (Shiseido Tokyo Hanbai KK v Fujiki Honten KK 1994). The High Court finding for Shiseido appeared to have been influenced by a JFTC investigation of Shiseido’s sales methods, which seemed to show a prima facie link between the sales method, resale price maintenance and anticompetitive outcomes. The JFTC’s search of the premises, given that it involved such a high-profile company, drew headlines. Nevertheless, the JFTC declined to mount a full prosecution against Shiseido. At this time, there was no provision in the Antimonopoly Law allowing private actions. Thus, Fujiki Honten was dependent upon the JFTC exercising its judgment to press forward under the Antimonopoly Law. The agency’s refusal to do so explains why Fujiki Honten’s counter-claim is grounded in contract, with the competition law breach added in as a subsidiary issue.

146

Japanese governance

A practical side effect of both the litigation and the JFTC investigation was that Shiseido and other manufacturers admitted to having changed radically the distribution patterns they had sought to preserve in the court action. Shiseido did not deny, for example, that it was already supplying chain stores and bulk discount stores with stock that could be discounted, and that they would seek a stronger differentiation between luxury lines and everyday toiletries. There is anecdotal evidence that the luxury lines were only made available to retailers who were prepared to comply with Shiseido’s directives on sales methods and promotion, as is the case in the cosmetics industry outside Japan. Many commentators doubted, however, that the High Court had adequately understood the competition dimensions of the dispute. On appeal to the Supreme Court, Shiseido forced a re-examination of the competition question. Shiseido consistently maintained that face-to-face sales were a legitimate sales strategy, with demonstrable benefits to consumers. In particular they argued that guidance from trained consultants was a crucial element of the product because consumers were ‘not only buying the product; they were buying the chance to be beautiful’. Shiseido also stated explicitly that such guidance pre-empted mistakes by consumers that could result in skin allergies or the like. Fujiki argued unsuccessfully on this point that, if the product were really potentially harmful, it would contravene the Pharmaceuticals Law and the Product Liability Law. In its 1998 decision, the Supreme Court upheld the High Court decision and held that the limits placed on the mode of sale were genuine components of the products themselves, rather than anticompetitive devices (Supreme Court 1998). The judges accepted that resale price maintenance might be a by-product of the face-to-face sales method. They were prepared to allow this, however, on the basis that it could be justified with a ‘rational reason’. In doing so, the Court implicitly accepted Shiseido’s claims about brand safety and ‘brand image’. The decision can be read in a number of ways. First, one should note that the final appeal in the Shiseido case was the first competition law case heard by Japan’s Supreme Court in nine years. In a system in which appeals to the Supreme Court were automatic until 1998, this is also an indicator of the relative scarcity of competition litigation to this point. This may explain why, on one reading, the Supreme Court seemed to be avoiding the allegations of anticompetitive behaviour. Nowhere in the judgment, except in Fujiki’s affidavit as respondent in the case, is there any attempt to quantify market share, to analyse product lines and market differentiation or to balance the indirect ban on discounting with consumer welfare. In short, there is no economic or competition law analysis of the kind that we might find in a comparable US or Australian case, although the court implicitly seems to be following a European stance in relation to controls on the distribution of luxury goods.

Re-regulating Japanese transactions 147

On the other hand, the Supreme Court’s decision closely follows the reasoning in prior cases in the context of the argument that this is not simply a self-serve generic product. That is, once Shiseido was able to show that its luxury cosmetics comprised a package of product and service, then there was a ‘rational reason’ why the service component had to be delivered in a stipulated way. As any consumer will testify, prices for these kinds of cosmetics remain considerably higher in Japan than in other markets as a result. What the Shiseido case, arguably did was bring competition law into the focus of public and corporate debates about the nature of market deregulation and the potential for judicial and agency intervention. THE SHADOW OF COMPETITION LAW REFORM The Shiseido decision is less surprising if we consider the role of corporate self-regulation. The evidence from the case reveals that the distribution contracts in question were drawn up very carefully. There was no prohibition on discounting per se; only the requirement that product had to be sold across the counter with the agreed form of promotion and staff training. Strictly speaking, Fujiki Honten’s contract was not terminated merely for discounting. This is consistent with interviews carried out with Shiseido’s Legal Affairs Department, where it was made clear that the company was well aware of the need to comply with the Antimonopoly Law (Uchida 2000). Self-regulatory compliance with the Antimonopoly Law, even where it is formalistic, is arguably a new element in the Japanese regulatory landscape. The internal Shiseido stance reported above is not isolated. It is consistent with the results of ten interviews this author conducted with Japanese companies between 1996 and the present, in which legal compliance— particularly with the Antimonopoly Law—is nominated as the fastest-growing area of corporate legal affairs. Compare this, however with the figures from a Tokyo Foundation study cited by MITI, in which only 50 per cent of 484 randomly selected large corporations (those with over 300 employees) surveyed had an established legal affairs department. The figure dropped to less than 10 per cent for small and medium-sized corporations (MITI 2000:204). Recently, the head of Toyota’s Legal Affairs Division publicly called for an increase in the number of Japanese judges and lawyers competent in competition law (Makino 2000). These companies have not suddenly embraced the religion of rigorous competition. Rather, the indications are simply that some Japanese companies have a growing, grudging acknowledgment that Japanese Antimonopoly Law enforcement is a new feature of their business environment. We see some indications, too, of the reversal of the meaning of ‘selfregulation’ in Japan. As Tilton (1996) points out, the Japanese understanding of ‘self-regulation’ has often been as industry rules and codes of conduct designed to prevent new entrants from coming into the industry, rather than

148

Japanese governance

to ensure members’ compliance with law. In May 1996, when Japan’s nonlife insurance companies abolished ‘self-regulation’, they were in fact abolishing industry-wide fee-setting arrangements—the practice of paying identical fees to insurance agents selling non-life company products. Although this did not amount to price setting per se, it meant in practice identical pricing of premiums for corporate insurance policies in areas such as product liability, fire, marine and plant and machinery. These kinds of corporate policies account for 44 per cent of the casualty insurance market, where the annual income from premiums totals 4,400 billion yen (A$55 billion). Insurance companies are now expected to price these policies independently. At the time, the Insurance Industry Law permitted companies to price consumer insurance such as auto, fire and casualty policies at the same level and exempted the practice from the operation of the Antimonopoly Law. The industry decision anticipated the extension of the law, and was an attempt to deflect the JFTC’s attention following its on-the-spot investigations of plant and machinery insurance policy pricing earlier that year (Nikkei Shimbun, 18 May 1996:1). The impulse toward ‘self-regulation’ that complies with, rather than circumvents, the Antimonopoly Law is also likely to be strengthened by the introduction of reforms that will make it easier to bring private actions under the law. A major bill to amend the Antimonopoly Law was passed in August 2000. It has two major components. The first is the formal abolition of the natural monopolies accorded to industries such as electricity and gas. The second is the provision of strengthened remedies for consumers and corporations who suffer loss as the result of anticompetitive behaviour contravening Article 8(1)5 or Article 19 of the current law. The significance of the latter change is that it introduces, for the first time, injunctive relief. Until now, an alleged victim of anticompetitive behaviour had to wait for confirmation of a JFTC finding against the target company and then apply for damages under Article 25 of the Antimonopoly Law. Alternatively, the complainant could claim tort damages using Article 709 of the Civil Code, in expectation of the traditionally low payouts from Japanese courts, but long after the actions complained of had been taken. The reforms would make it possible to apply for an injunction before a JFTC finding has been formalised, ideally enabling the plaintiff to secure quick relief that is not dependent on JFTC resources. Other provisions in the bill (new Article 83(3)) allow the courts to request formally an opinion from the JFTC and for the agency, in turn—with the permission of the court—to tender an opinion regarding a particular case (NBL Henshubu 2000). One therefore sees in the new reforms a formally enhanced role for the JFTC vis-à-vis the courts. Implicit in this new structure, however, are doubts about the judicial system’s capacity to take on a full-blown competition law jurisdiction. In theory, there is nothing preventing this but, in practice, the bench has very few judges with either experience in competition law or formal training in economics. As tacit recognition of this problem, the proposed

Re-regulating Japanese transactions 149

reforms allow petitions for injunctive relief to be brought in district courts that have high courts attached to them. This convoluted formula is a compromise response to an earlier draft that sought to limit these kinds of cases to the Tokyo District Court. The underlying rationale is to assign judges to competition cases in a way that will build up judicial experience while limiting the scope for divergence in decisions (Shiraishi 2000). On the other hand, Murakami (2000) is more optimistic, pointing to the scope for Japanese judges to draw on established jurisprudence in the area from the European Union and the United States. It remains to be seen what the practical effect of this jurisdictional definition will be. Perhaps more pressing than the problem of judicial inexperience is the question of access to suitably qualified lawyers. There are currently almost no commercial practitioners in Japan who specialise in competition law or trade practices. The severe shortage of lawyers in regional areas—and particular shortage of those with international business experience outside the Tokyo and Osaka areas—also means that legal resources for these kinds of cases are spread very thinly beyond the Tokyo/ Osaka corridor (MITI 2000:204). Again, the impact this will have on litigation patterns, if any, is open to investigation. This enhancement of both the JFTC’s and the court’s role in enforcing the legislation coincides with the changing nature of the agency’s jurisdiction. Its next challenge will be how to deal effectively with intellectual property, particularly in the context of distribution chains. Article 23 of the Antimonopoly Law is interpreted literally by most legal practitioners as exempting the exercise of patent, trademark or design rights from the operation of the Antimonopoly Law. In practice, this means that licensing agreements concerning intellectual property rights may contain restrictive provisions toward the licensee that cannot be challenged by invoking the Antimonopoly Law. A recent example of this was disputes between petrol stations and petrol wholesalers. As the price of petrol fell, petrol retailers sought to sell ‘no-brand’ petrol in tandem with brand-name products. The major oil companies opposed this practice on the basis that it would infringe the trademark restrictions in the retail distribution agreement, which designate the premises as the unit of ‘trademark management’. In 1999, the Petroleum Council within the Agency of National Resources and Energy designated separate pumps and underground tanks as the units of trademark management, thus supporting, in theory, the dealers’ position. Petrol wholesalers remain able to simply prohibit the sale of no-name petrol, however, on the basis of trademark infringement, at least until the JFTC’s 1999 Guidelines on Patent and Know-how Licensing Agreements are tested (Kozuka 1999). The point here is that value in distribution chains is increasingly generated by intellectual property, rather than by the commodity itself. If intellectual property rights continue to be manipulated for anticompetitive purposes, the ripple effect on the economy will be significant. There has been a related recognition of the importance of this issue in the reforms to Japan’s Code of

150

Japanese governance

Civil Procedure, effective 1998. Japan’s Constitution does not permit the creation of specialist courts per se, with the exception of the Family Court. Instead, petitioners in intellectual property disputes are ‘permitted’ to bring their claims to district courts in Tokyo, Osaka and Nagoya in addition to the court that would usually have jurisdiction, if that court is not one of the nominated district courts. The aim is to provide speedier and more expert disposition of a growing number of intellectual property cases in Japan. CONCLUSIONS Economists, political scientists and trade negotiators have been inclined to dismiss competition law as a dysfunctional area of regulation in Japan. The 1990s witnessed lengthy debates about whether formally and informally sanctioned cartels would be dissolved; whether price-fixing would be policed effectively; whether the letter of the Antimonopoly Law would be enforced; and whether Japan’s Fair Trade Commission would be adequately resourced. The answers to some of these questions are now emerging (Schaede 2001) Many commentators would concur that the results so far have been ‘feeble’ (Tilton 1996:180). The ‘shopping list’ style critique of Japanese competition law and policy has some serious limitations. It remains grounded, in a ‘topdown’ view of law and its operation, which typically focuses on the institutional capacity of the JFTC and calls for vigorous prosecution and judicial sanctions of the maximum number of cases. Within trade circles, this view often expressed as a preoccupation with finding legal ‘levers’ to pull in order to open the Japanese market. This view of how the law and its enforcing agencies work is superficially attractive, but ultimately unrealistic. Socio-legal research of the last forty years tends to show, that the factors motivating or reinforcing good corporate citizenship and legal compliance are multifaceted, and not limited to ‘blackletter’ law. It follows that policymakers in the 21st century need to position formal law and the courts to one side of a governance matrix. On the formal, legal side of the governance matrix we need to take into account the systemic characteristics of the target jurisdiction. In Japan’s case, this means factoring in data about the limits of civil procedure enforcement powers such as discovery, a serious lack of lawyers and judges trained in either economics or competition law, and a civilian legal system’s preference for administrative, rather than criminal, regulation. The other side of the governance matrix comprises a host of non-court ‘agents’, whose interactions define and enforce the institutional rules for competition. These include the transaction parties (their employees, institutional and interpersonal relationships and relative economic leverage), the structure of the industry (schemes of self-regulation, bureaucratic directives and guidance), cultural mores and ideology, perceptions of legal rules and court-generated norms (the so-called shadow of the law), and intervention by third parties such as government inspectors, bankers and lawyers (Macaulay 1991).

Re-regulating Japanese transactions 151

Historically the legal/non-legal and formal/informal dichotomies of governance have been recognised as commonplace. So, for example, direct legal controls on business have been supplemented by (and often subordinated to) informal social or commercial controls exercised by communities outside formal legal fora. Tilton (1996) observes this kind of classical ‘self-regulation’ in Japan as a form of market closure. The new insight visible in governance literature (for example, Grabowsky and Braithwaite 1992), legal theory (Habermas 1996) and economic thinking (Aoki 2001) is that regulatory ‘institutions’ draw from both sides of the equation. The formality of legal rules and processes is not insulated from the apparent autonomy of industry bodies, professional groupings and corporate compliance behaviour. It follows that changes in one element are likely to have flow-on effects in other parts of the regulatory sphere, and that this porousness means that industry bodies, professional groupings and corporate behaviour have the potential to be harnessed to change legal policy goals in a range of ways. In the case of competition law and policy, we should be looking for the ripple effect from changes to law and policy in the interplay between state intervention, induced industry ‘voluntarism’, inculcation and absorption of the desired norms by key players (individually and collectively), reinforcement of competition rules through formal and informal government channels, and interventions by change agents such as insurance, banks, legal professionals and the professional managers who design and approve the transactions. I have argued above that the formal legal elements in the governance matrix for competition law and policy in Japan seem to becoming more prominent. What we would expect to see then, is responsive change from the courts, from corporations and in the views of policy commentators from the media and academe. If we follow Aoki’s dualist description of institutions, what we then expect is that the change to the law or the chance in enforcement stance will affect other players. At the same time, however, these players’ perceptions of the changes and their responses to them start to reconstitute the institution, or ‘the rules of the game’. This area deserves greater attention in future enquiry. What is less likely to emerge in Japan is the wholesale embrace of a foreign model or a sudden switch to a putative ‘global standard’ of competition law enforcement. Indeed, the examples discussed here do not illustrate such a trend. This fact suggests, inter alia, that legal responses to economic expansion and restructuring in Japan are not uniformly ‘global’ but local and culturally specific. NOTES 1

Just weeks before Prime Minister Obuchi’s stroke and departure from public life in 2000, he also appointed the outspoken former president of the Federation of Japanese Bar Associations, Mr Nakabo, as a special policy advisor. An alternative and plausible explanation was that Nakabo had already declared his support for

152

2

3

4

5 6

Japanese governance a non-LDP politician and this was a way of preventing Nakabo from campaigning against the government in the 2000 general election. In the case of insolvency law reform, the government set up a Committee on Insolvency Law Reform (Tosan ho bukai) within the Legislative Advisory Council of the Civil Affairs Bureau of the Ministry of Justice (Steele 2000). Japan’s new Civil Rehabilitation Law (Minji saisei ho, Law No. 225, 1999) is the first component in a comprehensive reform of its insolvency law regime. The law was passed by the Diet on 14 December 1999 and came into effect on 1 April 2000. It will replace the Composition Law (Wagi ho, Law No. 72, 1922). See, for example, the Cabinet Decision of 20 March 1999, taken as part of the government’s ‘Three Year Deregulation Plan’ to introduce legislative amendments to abolish cartels for the gas and electricity industries and to introduce new civil remedies under the Antimonopoly Law (NBL Henshubu 2000). Examples of direct legislative intervention can be found in corporate law, environmental protection, consumer protection, insolvency, civil dispute resolution and competition regulation. Indirect forms of governance, by contrast, are modes of political and legal control that go beyond legislation enacted by government. Examples include industry codes or self-regulation, the privatisation of government utilities so that corporate governance and contracts replace industry-specific licensing and direct government supervision, and the monitoring of companies and transactions through third parties such as financial institutions, insurers and legal advisors. The total of the fines levied was the second-highest total for fines reported since the agency’s inception—during 1995, fines totalling 6.4 billion yen (A$80 million) were collected from 741 enterprises in 24 infringement cases. Announcements and investigations by the JFTC were well publicised in the sense that they were front-page news in major newspapers such as the Nikkei Shimbun; a pattern that seems to have continued to the present, although I have not undertaken a formal analysis of the length and placement of the reports.

REFERENCES Aoki, M., 2001. Toward a Comparative Institutional Analysis, MIT Press, Cambridge, Massachusetts. Carlile, L. and Tilton, M. (eds), 1998. Is Japan Really Changing Its Ways? Regulatory reform and the Japanese economy, Brookings Institute, Washington, DC. First, H., 1995. ‘Antitrust enforcement in Japan’, Antitrust Law Journal, 64:137–82. Fujikawa, T., 2000. ‘Shihokaikaku wa seiken koeta kadai’ [Legal reform is an issue that transcends (who holds) governmental power], Nikkei Shimbun, 23 April. Gerber, D.J., 1998. ‘Two models of competition law’ in H. Ullrich (ed.), Comparative Competition Law: Approaching an international system of antitrust law, Nomos Verlagsgesellschaft, Baden-Baden. Grabowsky, P. and Braithwaite, J. (eds), 1992. Business Regulation and Australia’s Future, Australian Institute of Criminology, Canberra. Habermas, J., 1996. Between Facts and Norms, MIT Press, Cambridge, Massachusetts (W. Rehg translation) Haley, J.O., 1978. ‘The myth of the reluctant litigant’, Journal of Japanese Studies, 4(2):359–89. ——, 1997. ‘Review of Tilton, Retrained Trade: Cartels in Japan’s basic materials industries’, Journal of Japanese Studies, 23(1):144–48. —— 1998. ‘Culture, competition and deregulation: Japan’s challenge to international harmonisation of competition law’, in H. Ullrich (ed.), Comparative Competition

Re-regulating Japanese transactions 153 Law: Approaching an inter national system of antitrust law, Nomos Verlagsgesellschaft, Baden-Baden. Japan Fair Trade Commission (JFTC), 1999. Guidelines for Patent and Know-how Licensing Agreements under the Antimonopoly Act [Provisional English translation]. See also the Japanese version in Koseitorihikii’inkai, Tokkyo/Nohau raisensu keiyaku ni kansuru dokusen kinshi hojo no hoshin [Treatment of Patent and Know-How Licensing Contracts under the Antimonopoly Law], Koseitorihiki, 588:57–74 Johnson, C., 1995. Japan: Who governs? The rise of the developmental state, Norton, New York and London. Kamiya, Masako, 2001. ‘Reform of Japan’s code of civil procedure’, Australian Journal of Asian Law, 3:1. Kitagawa, Zentaro, 2000. ‘Shohishakeiyaku rippo ni nokosareta mono—oboegaki’ [Notes on issues neglected by the Consumer Contract Law drafting process], NBL Henshubu, 676:10–18 Kozuka, Shoichiro, 1999. Competition law and contracts in Japan, Paper presented at the Asian Law Centre Symposium, ‘Legal Crisis?’, Asian Law Centre, University of Melbourne, 12–14 August. Macaulay, S., 1991. ‘Long-term continuing relations: the American experience regulating dealerships and franchises’, in C. Joerges (ed.), Franchising the Law: Theoretical and comparative approaches in Europe and the United States, Nomos Verlagsgesellschaft, Baden-Baden:179–237. Makino, Junji, 2000. Head, Legal Affairs Department, Toyota Corp. Remarks at Nagoya University Law Faculty 50th Anniversary Symposium ‘Kokusaika no naka no shihoseidokaikaku’[Legal System Reform Amidst Internationalisation], 14 April. Ministry of International Trade and Industry (MITI), 2000. Tsushohakusho 2000 [White Paper 2000], Okurasho insastukyoku, Tokyo. Morita, Osamu, 1998. ‘Dokkinho ihankoi no shihojo no koryoku’ sairon’ [Validity of contracts in breach of the Antimonopoly Law revisited], Keizaihogakkai nenpo [Economic Law Association Annual], 19:99–122 Murakami, Masahiro, 2000. ‘Dokusenkinshihoihankoi ni tsuite no shijin ni yoru sashitome seikyuken (1)’[The individual’s right to an injunction for conduct contravening the Antimonopoly Law (1)], NBL Henshubu, 686:6. NBL Henshubu, 1996. ‘NBL Joho: Kotoriin Heisei 7 nendo no kachokin nofu meirei no unyo jokyo o matomeru’ [NBL Update: Fair Trade Commission reports on application of orderso for payment of fines during Heisei 7] NBL No. 591, 15 April 1996, p.68. —— 2000. ‘Dokusenkinshihono ichibu o kaisei suru horitsuan ni tsuite’ [The Bill to partially amend the Antimonopoly Law], NBL Henshubu, 686:63. Ochiai, Seiichi et al., 2000. ‘Kiseikanwa to shohishakeiyakuho’[Deregulation and the Consumer Contract Law], NBL Henshubu, 678, 6 (Part 1) No. 679, 36 (Part 2) No. 684, 56 (Part 3). Pempel, T.J., 1997. ‘Regime shift: Japanese politics in a changing world economy’, Journal of Japanese Studies, 23(2):333–61. ——, 1998. Regime Shift: Comparative dynamics of the Japanese political economy, Cornell University Press, Ithaca. ——, 1999. ‘Structural gaiatsu: international finance and political change in Japan’, Comparative Political Studies, 32(8):907–32. Ramsayer, J.M., 1988. ‘Reluctant litigant revisited: rationality and disputes in Japan’, Journal of Japanese Studies, 1(11):111–23. —— and Rosenbluth, F.M., 1989. Japan’s Political Marketplace, Harvard University Press, Cambridge, Massachusetts.

154

Japanese governance

Schaede, U., 2001. Cooperative Capitalism: Self-regulation, trade associations and the Antimonopoly Law in Japan, Oxford University Press, Oxford. Shihokaikaku shingikai [Legal System Reform Commission], 2000. http://kantei.go.jp/ sihouseido/dai18/18siryou.html. Shiraishi, Tadashi, 2000. University of Tokyo, Faculty of Law, Author’s interview April 2000. Shiseido Tokyo Hanbai KK v Fujiki Honten KK (1994) Tokyo Koto Saibansho, 1507 Hanrei Jiho 43, 14 September 1994. Steele, S., 2000. ‘Evaluating the new Japanese civil rehabilitation law’, Australian Journal of Asian Law, 2(1): 53–87. Supreme Court, 1998. Saiko Saibansho, 52 Minshu 1866, 18 December 1998. Tamblyn, J., 1992. ‘Progress towards a more responsive trade practices strategy’, in P. Grabowsky and J. Braithwaite (eds), Business Regulation and Australia’s Future, Australian Institute of Criminology, Canberra:151–67. Taylor, V., 1993. ‘Continuing transactions and persistent myths: contracts in contemporary Japan’, Melbourne University Law Review, 19(2):352–98. ——, 1995. ‘Harmonising competition law within APEC: vertical restraints and US– Japan trade disputes’, Journal of Australian Corporate Law, 5(3):379–89. ——, 1997. ‘Consumer contract governance in a deregulating Japan’, Victoria University of Wellington Law Review, 27(1):99–120. Tilton, M., 1996. Restrained Trade: Cartels in Japan’s basic materials industries, Cornell University Press, Ithaca. Ullrich, H. (ed.), 1998. Comparative Competition Law: Approaching an international system of Antitrust Law, Nomos Verlagsgesellschaft, Baden-Baden. Uchida, Takashi, 2000. University of Tokyo, Faculty of Law. Author’s interview, April 2000 reporting on interviews Uchida conducted with Shiseido in 1997. Vogel, S.K., 1999. ‘When interests are not preferences: the cautionary tale of Japanese consumers’, Comparative Politics, 31(2):187–208.

Re-regulating Japanese transactions 155

APPENDIX 8.1 CHRONOLOGY OF KEY DATES 1994

High Court decision in the Shiseido Case: Shiseido Tokyo Hanbai KK v Fujiki Honten KK (1994) Tokyo Koto Saibansho 14 Sep 1994; 1507 Hanrei Jiho 43. 1995 New Code of Civil Procedure passed (effective 1998) Product Liability Law passed. Significant amendments to Antimonopoly Law 1947 passed. August 1998 Legal system reform agenda (shihoseido kaikaku) announced by Prime Minister Obuchi Keizo. December 1998 Supreme Court decision in Shiseido case handed down: Saiko Saibansho (1998) 18 Dec 1998, 52 Minshu 1866. July 1999 Prime Minister Obuchi Keizo appoints Legal System Reform Commission (Shihokaikaku shingikai). December 1999 Legal System Reform Commission (Shihokaikaku shingikai) publishes key issues for debate. 1999 Fair Trade Commission publishes Guidelines for Patent and Know-how Licensing Agreements under the Antimonopoly Act (JFTC 1999). April 2000 Legal System Reform Commission (Shihokaikaku shingikai) publishes Preliminary Report. June 2000 MITI White Paper published; includes direct critique of legal system and legal profession (MITI 2000). 2000 Significant reforms to Commercial Code. Significant reforms to bankruptcy and insolvency law reforms—Civil Rehabilitation Law (Minji saisei ho, Law No. 225, 1999) passed (effective April 2000). Consumer Contract Law passed. Bill amending Antimonopoly Law passed. Introduces injunctive relief for both consumers and corporations who suffer loss as the result of anticompetitive behaviour contravening Article 8(1)5 or Article 19 of the current law. Other provisions in the Bill (new Article 83(3)) allow the courts to request an opinion formally from the JFTC and for the agency in turn, with the permission of the court, to tender an opinion regarding a particular case.

156

Japanese governance

9

Japanese women and the ‘new’ administrative state Leon Wolff

With a slew of public law reforms aimed at promoting greater accountability in public decisionmaking processes, Japan appears to be fashioning a new system of public administration—one built on greater civic participation in, and tighter oversight of bureaucratic discretion over, public policymaking. Thus, recent administrative legislation, such as the Administrative Procedures Act (Law No. 88 of 1993), the Central Ministries and Agencies (Reform) Act (Law No. 103 of 1998) and the Information Disclosure Act (Law No. 42 of 1999), promises to tighten administrative decisionmaking procedures, rationalise the size and function of the civil service, and improve access to official information. The goals of improving regulatory transparency and heightening executive accountability permeate the architecture of these Acts. But will these legal reforms deliver better policy outcomes for Japanese women? Will the legislatively sanctioned push towards a more streamlined and responsible public administration truly lead to a ‘new’ administrative state capable of responding more proactively to women’s issues? This chapter focuses on recent developments in Japanese sexual harassment policy and suggests grounds for pessimism in this area. The chapter argues that administrative reform efforts to promote regulatory transparency are unlikely to lead to more open and participatory processes for policymaking. This, however, is not because of key design flaws in the legislative reform program itself. Rather, it is ultimately irrelevant whether or not new administrative laws or amendments to existing laws achieve their stated regulatory goals of accountability and transparency because new rules effectively charge corporate governments with the responsibility to ‘self-regulate’ on this important area of women’s rights. In effect, sexual harassment has been transformed from a public issue of human rights into a domestic issue of corporate governance. Current administrative law reforms seek to keep in check the influence of the public service—the ministries—over public policy by entrenching more rigorous public decisionmaking procedures, creating a more streamlined bureaucratic structure and facilitating better access to official information. Key objectives include restoring power to the Diet by privileging a regime of transparent and uniformly applied rules and wresting power away from the

Japanese women and the ‘new’ administrative state

157

bureaucracy by reducing the opportunities for informal and discretionary policy implementation. Yet the private corporation also plays an important role in the Japanese administrative state (Parker and Wolff 2000). In the context of sexual harassment, empirical evidence shows that Japanese corporations increasingly exercise independent public policymaking powers in the area of workplace gender equity. Two dovetailing forces are chiefly responsible for this trend. Applying a contract-based analogy of ‘offer’ and ‘acceptance’, these forces consist of (i) an ‘offer’ of power by legislative grant to corporations to self-regulate on sexual harassment, and (ii) the ‘acceptance’ of the power by corporations through the pro-active adoption of compliance programs. Together, these forces point to an identifiable trend in Japanese public administration—the private governance of public rights in Japan. SEXUAL HARASSMENT AND THE ADMINISTRATIVE STATE

Sexual harassment regulation The issue of sexual harassment has dominated the political agenda for women for over a decade. While the 1970s and 1980s witnessed a sustained campaign by feminists to enhance the employment opportunities for women (culminating in the enactment of the Equal Employment Opportunity Act in 1985 (Parkinson 1989)), the 1990s saw activists focus their attention on specific issues of inequality. These included the dual-track system of employment—by which women are discouraged from pursuing a career in management—and, more particularly, sexual harassment. Feminist lawyers have acted pro bono for victims of sexual harassment by filing lawsuits against their employers. Grassroots feminist organisations have set up victim support groups in every prefecture in the country. Non-government organisations and bar associations have established hotlines and drafted anti-harassment manuals. Although the feminist reform program has diversified lately to include campaigns against domestic violence and stalking, sexual harassment remains a policy priority. A series of high-profile sexual harassment cases—including successful verdicts against politicians and other public identities—have ensured that the issue of sexual harassment remains firmly in the public spotlight. Even so, regulation of workplace sexual harassment in Japan is still in its infancy. Although sexual harassment as a phenomenon has had a long history in Japan, it was not until the late 1980s and early 1990s that it emerged as a problem (Ehara 1995:105). The filing of Japan’s first sexual harassment case in the Fukuoka District Court in 1989 incited media and public interest in the issue and, at the same time, kick-started moves by the academic legal community to explore the legal dimensions of sexual harassment. The judiciary soon took over. Over a series of cases, the courts fleshed out a sexual harassment doctrine based on tort and contract theory (Yamakawa 1999). A slow drizzle of cases gradually became a steady flow. In 1992, there were only two cases pending before the courts. By 1999, 88 cases had resulted in judgment or in-court compromise (Kaneko 1999:191–202).

158

Japanese governance

The pace set by the courts in enunciating a legal response to sexual harassment was not matched by the other two arms of government in their articulation of a political response. Indeed, the reaction by the Diet and the Ministry of Labour to the publicity generated by sensationalistic media coverage of sexual harassment cases was almost phlegmatic. The Diet was deaf to a campaign by feminist activists and human rights lawyers, which lasted over a decade and called for the enactment of new legislation. The Ministry of Labour, besides issuing two pamphlets summarising the emerging case law and commissioning a survey of the extent of sexual harassment in the workplace (Wetherfield 1995:76–78), did nothing. In June 1997, everything seemed to change. The Diet decided to legislate against sexual harassment by enacting the new section 21 of the revised Equal Employment Opportunity Act. The new section, however, is hardly a bold statement on the issue. The provision, although ostensibly about sexual harassment, manages not to even use the term ‘sexual harassment’. Even more curiously, the section neither explicitly outlaws acts of sexual harassment nor provides penalties if corporations fail to provide a workplace free of sexual harassment. Section 21 does, however, provide that employers owe a duty to prevent sexual harassment from occurring in the workplace. More specifically, employers are obliged to ensure that their female employees do not endure ‘any sexual words or conduct’ that lead to unfavourable working conditions for them (so-called quid pro quo harassment) or create a hostile working environment (so-called environmental harassment). The section goes on to provide that the Ministry of Labour is authorised to issue guidelines clarifying the concrete content of section 21. In March 1998, the Ministry of Labour issued its first set of guidelines. In addition to explaining some definitional issues, the guidelines require corporations to draft a corporate sexual harassment policy, distribute it to all employees and educate their workforce as to its purport. Corporations are also required to set up internal dispute resolution and grievance handling systems.

‘Offer’ and ‘acceptance’ of public power This new legislative scheme, which came into effect in April 1999, clearly entrenches a system of intra-corporate regulation of sexual harassment. In this respect, new section 21 neatly demonstrates Japan’s engagement with privatised public administration. Under the scheme, complaints of sexual harassment must be handled internally and in accordance with the company’s sexual harassment policy. The company has almost total discretion over the resolution of individual disputes. For instance, the current state of the law does not require companies to file their policies with the Bureau of Women’s and Youth Affairs (or even report that they have prepared a corporate policy); and the Ministry of Labour has not reserved itself (or any other agency) any power to oversee the operation of each company’s sexual harassment policy.

Japanese women and the ‘new’ administrative state

159

Applying a contract-based analogy of ‘offer’ and ‘acceptance’, this regulatory regime symbolises privatised policymaking through (i) an ‘offer’ of power by legislative grant to corporations to self-regulate on sexual harassment as an issue of public policy and (ii) the ‘acceptance’ of the power by corporations through the pro-active adoption of compliance programs. The ‘offer’ of power is made in three ways. First, the Equal Employment Opportunity Act uses broad and expansive statutory language in section 21 to invest corporations with policymaking powers over sexual harassment. Second, the statute does not establish any system of sanctions should corporations neglect their statutory responsibilities. Thus, the section imposes a duty—non-actionable in law—that the corporation must exercise this power responsibly and in good faith. Third, the act encourages corporations to work with the civil service in exercising their legislative duties, although corporations still retain a large degree of autonomous discretion in how they do so. By section 21 of the Equal Employment Opportunity Act, the Ministry of Labour is authorised to issue guidelines clarifying the substantive duty of corporations to regulate on sexual harassment. When, in March 1998, the Ministry of Labour issued its first set of guidelines, the ministry did little to direct corporations on how they should handle their legislated duty. Rather, it merely confirmed that corporations were required to draft a corporate sexual harassment policy, distribute it to all employees and educate their workforce as to its purport. It also stipulated that corporations should set up internal systems to provide counselling services and to handle complaints of alleged harassment ‘appropriately and flexibly’. The ‘acceptance’ of power manifests itself in the emerging ‘culture of compliance’ enveloping corporate Japan. Although compliance is not new in Japan, it is becoming more widespread following the banking crisis in the 1990s (Nomura 1999). ‘Compliance’ describes a pro-active corporate management program of self-regulation on a wide variety of public policy issues. The program usually involves redefining corporate goals to incorporate social and environmental responsibilities specifically, even though these invariably fall outside the original charter of the corporation. In this way, the phenomenon of corporate compliance exceeds traditional approaches to corporate governance under which directors are only required to exercise their business judgment to maximise shareholder wealth. As the Supreme Court held in Ikenaka v Tabushi (Judgment of the Tokyo District Court, 16 September 1993, 1469 Hanrei Jiho 25 at 25), corporations are entities that pursue profits by entrusting their operations to directors elected at the general meetings of shareholders. Thus, in principle, the decision of legally elected directors shall be respected where such decision was made within their authority and in the best interests of the company, so that the directors may concentrate on management without being inhibited. In this way, corporations can expect to make profits. [emphasis added]

160

Japanese governance

The latest statistics from Japan on corporate compliance with sexual harassment law show that corporations have not been reluctant in engaging with their policymaking powers. The evidence clearly points to a steady increase in corporate policymaking activity in the field of sexual harassment over the last decade. In November 1989, when sexual harassment was still a relatively new topic of public debate, a survey by Asahi Television showed that 78 out of 80 companies had not given much thought to introducing policies on sexual harassment (Moronaga 1989:11). By the late 1990s, little had changed. In 1997, a survey of 2,254 companies and 6,762 employees indicated that only 5.5 per cent of companies had implemented systems to prevent sexual harassment, with another 14.5 per cent planning to do so in the near future (Shokuba in Okeru Sekushuaru Harasumento ni Kansuru Kenkyukai 1998). In 1999, with the new sexual harassment provisions in the Equal Employment Opportunity Act taking effect from April, a survey of 322 corporations revealed 28.1 per cent had established an internal grievancehandling unit, with a further 23.5 per cent currently preparing to do so. According to this same survey, however, 80 per cent of companies selfreported that they had at least taken some steps to respond to the issue of sexual harassment in the workplace. These steps included incorporating new rules in employees’ code of conduct (55 per cent), amending the internal manual to add information about sexual harassment (34.8 per cent), establishing awareness and training programs (27 per cent), preparing and distributing information pamphlets (24.2 per cent) and developing an internal sexual harassment policy (14.6 per cent). Larger corporations are leading the way in dealing with the issue of sexual harassment: 100 per cent of all companies that have over 3,000 employees reported that they had taken action to combat sexual harassment, compared with 88.5 per cent of companies with between 1,000 and 2,999 employees and 70.7 per cent of companies with less than 1,000 employees (Rosei Kenkyujo Henshubu 1998:6–7). In sexual harassment policy, therefore, corporations are wielding significant public policymaking powers. Sexual harassment is not an isolated example; there is similar evidence of corporatised regulation in other areas of policy, such as environmental management (Nemoto 1999:1–2). This suggests a broad trend of private governance of public rights in Japan. Although this trend is neither new nor unique to Japan, it does subvert the basic tenor of the debate on Japanese-style governance; that is, that the legislature and the bureaucracy compete for supremacy in developing policy. And, in the process, it urges Japan specialists to rethink how Japanese governance works. PRIVATISED GOVERNANCE OF PUBLIC RIGHTS: THE ‘NEW’ ADMINISTRATIVE STATE A basic conceptual oversimplification of law results in the relatively sparse attention accorded to the role of the corporation in models of Japanese policymaking. This oversimplification rests on the categorisation of law into

Japanese women and the ‘new’ administrative state

161

‘public’ (for example, administrative) law and ‘private’ (for example, corporate) law. This two-fold classification artificially assumes that the ‘public’ and the ‘private’ are two separate circles in a Venn diagram, with no points of intersection and no areas of overlap. According to this logic, any discussion of public policymaking means interrogating the roles of public institutions— the legislative, executive and judicial arms of government. Private actors, such as corporations, are excluded from this conceptual picture. The evidence of this conceptual reasoning is ubiquitous in the Japanese governance debate. Competing perspectives on the respective roles of the legislative and executive arms of government stem from the relative importance scholars attach to the phenomenon of administrative guidance. Put simply, administrative guidance refers to the practice of informal implementation of policy, including taking actions that an agency may not have legal authority to institute. Since administrative guidance is assumed to play a role similar to compulsory regulation in other capitalist systems, it is easy then to conclude, if one begins with the assumption of the ministries’ power, that administrative guidance is remarkable because it achieves results that are impossible in other systems without binding legal power. Conversely, if one assumes bureaucratic impotence, it is easy to dismiss administrative guidance as toothless rhetoric. (Upham 1997:399)

For example, those who argue that Japanese ministries exert an all-powerful influence on Japan’s political economy usually invoke the reasoning that administrative guidance effectively precludes judicial review (Ramseyer and Nakazato 1999:205). Thus, van Wolferen (1989:215) contends that lack of judicial review of administrative decisions in Japan ‘had had the effect of totally insulating bureaucratic activity from judicial review’. According to Saunders (1996:373), ‘informal decisions are not reviewable, because most of what MITI and other agencies do is informal and a matter of “guidance”, not a “legal disposition”, and therefore is not reviewable’. And according to Johnson (1995:79), ‘administrative guidance by Japan’s powerful state bureaucracy can often result in rampant lawlessness in favour of those enterprises and interests that enjoy privileged access to the bureaucracy’. This line of reasoning is invariably accepted uncritically by corporate law scholars who conclude that Japanese corporations are passive recipients of administrative guidance. Regulation of corporate law in Japan is the responsibility of the Ministry of Justice, acting through its Local Legal Affairs Bureau. The Ministry of Finance, via the Securities and Exchange Law, has jurisdiction over takeovers, stock exchange listings, supervision of securities businesses, securities market surveillance and, together with the Bank of Japan, foreign corporations. In carrying out their regulatory functions, Japanese administrative agencies rely to a considerable degree on unofficial administrative guidance (gyosei shido) in addition to legislation and subordinate regulations. The practice of adminis-

162

Japanese governance trative guidance has been described as a regulatory technique that, although generally non-binding, seeks to conform the behaviour of regulated parties to broad administrative goals. For example, the Ministry of Finance might impose restrictions on certain securities trading activity by administrative guidance rather than relying on statute. (Bottomley 1999:42)

The opposite viewpoint, by contrast, maintains that administrative guidance is merely part of a richer fabric of formal administrative law. According to this argument, administrative guidance is subject to administrative review, especially if the guidance contradicts the pro-capitalist preferences of the Liberal Democratic Party. [C]laims of virtual non-reviewability [of administrative guidance] are wrong— and wrong because they both miss the obvious and misstate the law. They miss the obvious because to obtain judicial review of administrative guidance, a firm need simply flout it. The agency will then either roll over and play dead or it will sue. If it takes the first tack, the firm wins. If it takes the second, the firm obtains its review. [A]ccounts of [non-reviewability] misstate the law because they miss what courts actually do. (Ramseyer and Nakazato 1999:205–6)

This division of law into ‘public’ and ‘private’, which undercuts the debate over Japanese governance, borrows conceptually from ‘command and control’ regulation theory. ‘Command and control’ regulation assumes a style of regulation in which standards are imposed on corporations backed by criminal or civil sanctions (Ogus 1994:5). With ‘command and control’ theory dividing regulation hierarchically into ‘top’ (the commander) and ‘bottom’ (the controlled), the private/public dichotomy accommodates this conceptual design by splitting law spatially into ‘left’ and ‘right’. Here public law is assigned the domain of the commander and private law is assigned the domain of the controlled. In this way, the governance debate excludes the Japanese corporation because of two dovetailing conceptual assumptions— first, public law cannot recognise an autonomous role for private policymaking actors; and, second, public institutions are the ‘commanders’ and private firms are the ‘controlled’. Since the early 1980s, however, scholars and policy analysts have criticised command and control regulation from two main perspectives: (1) an economic analysis that sees the costs of assessing, understanding and complying with command and control regulation as unacceptably high; and (2) a sociopolitical analysis that finds that much command and control regulation is ineffective in producing compliance with regulatory objectives. The experience of command and control shows that it is not reasonable, practical nor effective for external legislators and regulators to be solely responsible for determining how organisations should manage social issues (Bardach and Kagan 1982). The design and enforcement of regulation to govern every potential social dilemma facing business is simply not achievable. And, even if it were possible, it would

Japanese women and the ‘new’ administrative state

163

not make businesses better citizens, since citizenship implies an internal capacity to respond with integrity to external values (Selznick 1992). John Braithwaite (Grabowsky and Braithwaite 1986; Ayers and Braithwaite 1992; Braithwaite and Makkai 1993; Braithwaite 2000) has led calls for a new model to replace ‘command and control’, analysing how scrutiny by regulators and public interest groups—combined with the background threat of ‘big stick’ legal sanctions and negative publicity—can maximise the potential for corporate self-regulation. For example, Ayres and Braithwaite’s (1992) theory of responsive regulation suggests that, in general, it is better to maximise the possibility for regulatees to comply with regulatory objectives voluntarily rather than to rely constantly on heavy sanctions or coercive regulatory regimes. They find empirically that when regulators use strategies of ‘dialogue, communal judgment, reciprocal wooing, and persuasion, which is minimally coerced by power relations’, they can negotiate more constructive regulatory outcomes (Ayers and Braithwaite 1992:97). By contrast, when regulators use coercive strategies, they often break down the goodwill and motivation of actors who might otherwise have been responsive. They also find, however, that persuasive and self-regulatory regulation is more likely to be effective when backed up by the possibility of more severe sanctions—those regulated, then, will know there is a certainty of punishment if they defect and that others will not get away with breaking the rules. This re-conceptualisation of regulation as an interactive dynamic between regulator and regulatee immediately exposes the public/private dichotomy as a false divide. This has important implications for the Japanese governance debate. By rejecting public governance as the sole province of the public sector, the parameters of the Japanese governance debate may be widened to reflect growing empirical evidence of private sector participation. Upham takes the first step forward in this direction, criticising the emphasis scholars have placed on administrative guidance in the governance debate. Upham questions whether the attention on administrative guidance provides any meaningful clues to how Japan governs herself (1997:399). The problem is that the structure within which regulation operates often makes the debate on administrative guidance irrelevant. In fields as distinct as land use planning and broadcast licensing, Japanese bureaucrats delegate their public power to private parties and function not as direct overseers of regulatory policy, but, at most, as overseers of its private implementation. This pattern frequently extends to the formation of policy as well as its implementation, and the bureaucratic role diminishes to intervention at moments of political crisis. At other times, the agency plays an active monitoring and enforcement role, but seldom does a Japanese agency play the role that one would expect from the classic models of economic regulation.

Upham’s response is to formulate a new theory on Japanese public administration—the delegation of public policy issues to private citizens. Under this theory, Japanese regulators delegate part or most of their power

164

Japanese governance

to private parties. In many cases, regulated parties can make their own decisions without any principled bureaucratic oversight. ‘The administrative agency may intervene during times of political crisis, but rarely does so in the ordinary course of regulation, instead choosing the cheap and safe course of delegation’ (1997:401–2) Upham refers to this as the privatised model of regulation (1997:399–404). This often occurs with policy issues which are chiefly economic or commercial in character. An example is the administration of the Large Scale Retail Stores Act (Law No. 109 of 1973) by the Ministry of International Trade and Industry (MITI). According to the Act, MITI is required to make an independent determination as to whether or not to permit development of a large-scale retail store (sections 5, 7–14). Thus, the statutory procedure formally requires MITI, upon receipt of a notification from the developer of its intention to build a large-scale department store (section 5), to send the plans of the proposed store to two deliberative councils for more detailed consideration. Once the councils report back to MITI with their recommendations (sections 7–14), MITI must then reach an independent judgment based on the interests of consumers and the retailing industry (section 11). In practice, however, MITI requires developers to consult directly with local merchants and to reach a negotiated agreement on the conditions under which both would agree to the opening of a new store (Upham 1997:409). The empirical evidence from sexual harassment suggests a trend in administrative practice that goes even further than Upham’s model. Unlike in Upham’s model, the Equal Employment Opportunity Act does not delegate regulatory authority to those who are being regulated; it shifts the decisionmaking forum entirely to a completely private domain—the corporation. Policymaking is relegated (to corporations) rather than delegated (to the private parties). This style of regulation may be described as a corporatised model of regulation. It appears to be more common with social and environmental policy issues. For example, in the case of sexual harassment, the Ministry of Labour has not provided a ‘regulatory space’ within which female victims of sexual harassment and their employers can ‘create their own decisionmaking structure’ (Upham 1997:401); it charges corporations with full responsibility for implementing and operationalising its own compliance program to target sexual harassment. IMPLICATIONS FOR WOMEN What does this move to corporatised policymaking mean for Japanese women? Most obviously, the private governance of public rights—in which public policy responsibilities are increasingly devolved to corporate ‘governments’— substitutes one apparently closed system of governance with another. Instead of informal, discretionary policymaking by the ministries, policymaking takes place under the shroud of the corporate veil. Corporate governance of public policy introduces a new system of private—and potentially unprincipled— decisionmaking that takes place entirely within the walls of the corporation. An

Japanese women and the ‘new’ administrative state

165

immediate conflict, therefore, arises between the stated goals in public administration reforms of transparency and the reality in private law of intracorporate decisionmaking in fields such as sexual harassment. Does the intrusion of private corporations into public policymaking necessarily undercut the thrust of these reform initiatives? After all, Japan’s system of sexual harassment regulation bears a striking resemblance to systems in place in other countries such as Australia. As in Japan, anti-discrimination legislation in federal and state jurisdictions within Australia attempts to institutionalise public rights to equality and non-discrimination through privatelaw models of compensation. Further, both in Australia and Japan, failure to set up a satisfactory handling system for complaints exposes corporations to potential legal liability. In Japan’s case, the liability arises because of the duty imposed by section 21 on employers to ensure a workplace free from sexually charged behaviour. In Australia, liability may attach because a company will not be able to rely on a due diligence defence when a declaration is sought to the effect that the company be found vicariously liable for another’s acts of sexual harassment. But there are important distinctions. These distinctions mean that the corporate regulation of sexual harassment in Japan will be less likely to promote gender equality in Japan in comparison to Australia. The first distinction is that, unlike in Australia, sexual harassment is not a statutory offence in Japan. The Equal Employment Opportunity Act does not define sexual harassment nor does it expressly outlaw it. This means that the legislation, although relegating responsibility for dealing with sexual harassment to corporations, does not set out the breadth and limits of the conduct they are required to regulate. The first set of ministry guidelines offers little in terms of concrete assistance. Although the guidelines do explain that sexual harassment entails both quid pro quo harassment and environmental harassment, the examples the ministry supplies of each of these types of harassment are either clear-cut examples or merely repeat the factual scenarios of highly publicised court cases. For instance, the ministry cites the following cases as constituting sexual harassment • • • •

firing a woman because she refuses a sexual advance transferring a woman who resists touching on her breasts or thighs deliberately and regularly engaging in sexual innuendo with clients such that a woman feels constrained in a job assignment placing posters containing nudity on office walls.

The lack of standards means that corporations face great uncertainty in carrying out their compliance programs. Corporations cannot be expected to make informed social judgments without explicit legislative guidance, since Japanese law does not recognise any broad corporate responsibility to society (beyond civil and criminal liability).

166

Japanese governance

Although sexual harassment may not constitute a statutory offence under Japanese law, there is nonetheless judicial authority for the proposition that sexual harassment may constitute an unlawful act under article 709 of the Civil Code (the tort provision). Does this make any difference? On an analysis of early case law, the temptation may be to answer in the affirmative. Certainly, the Japanese courts in the early 1990s seized on some of the arguments raised by academics in their scholarship on sexual harassment, and formulated a clear judicial response to the problem. The Shizuoka Sexual Harassment Case 745 Hanrei Taimuzu (Shizuoka District Court, 20 December 1990) led the way, declaring that acts of sexual harassment are unlawful within the meaning of article 709 of the Civil Code since women are treated as ‘mere playthings, rather than people with a real human character’. Recognising that women are entitled to respect, the court indicated that perpetrators of sexual harassment violate a woman’s right to honour and dignity, and accordingly are subject to claims for compensation pursuant to article 709. The Fukuoka Sexual Harassment Case 783 Hanrei Taimuzu 60 (Fukuoka District Court, 16 April 1992) took sexual harassment doctrine one step further, ruling that women may seek damages not only against the perpetrator but also against the company. The court established liability on companies for employees’ acts of sexual harassment on the twin grounds of vicarious liability for the wrongful acts of their employees and direct tort liability for failure to take all reasonable steps to ensure that the working environment is hospitable for all female employees. But subsequent decisions have confused sexual harassment doctrine. For instance, the Tokyo Sexual Harassment Case 655 Rodo Hanrei 44 (Tokyo District Court, 11 April 1994) held that female employees are liable for defamation if they bring false or unproved allegations of sexual harassment to the attention to the management. Another problem for corporatising regulation of sexual harassment disputes lies in the gendered approach applied to litigated cases by Japanese judges since 1992. The issue, then, arises of whether private governance of sexual harassment disputes will replicate—perhaps even accentuate—the patriarchal imprint Japanese judges have stamped on their decisions in sexual harassment cases. For example, in the Yokohama Sexual Harassment Case 670 Rodo Hanrei 20 (Yokohama District Court, 24 May 1995), the court dismissed the plaintiff’s specific allegations of rape and sexual assault on the basis of a stereotypical view of how women should behave as the victim of sexual violation. The court decided that the plaintiff’s testimony was inherently incredible, because ‘no victim of such an intrusive attack as that described by the plaintiff would have submitted as quietly, for as long, and with as little physical resistance as the plaintiff said she did’. Similarly, in the Akita Obscenity Case 1629 Hanrei Jiho 121 (Akita District Court, 28 January 1997), a junior researcher’s claims

Japanese women and the ‘new’ administrative state

167

of sexual harassment against a university professor were doubted because she did not cry out or resist his advances. By contrast, in the Sapporo Sexual Harassment Case 933 Hanrei Taimuzu 172 (Sapporo District Court, 16 May 1996), the plaintiff was believed because she sought assistance from her fellow employees and confided in her friends. In addition, the latest trend in the cases is that judges appear to be taking the maturity of the victim into account for the purposes of assessing damages. Thus, younger victims tend to be compensated more highly than more mature women.1 If the judiciary operates within such a hidden web of patriarchy (Ehara 1995), then it is not unlikely that most corporations will, too. The extra danger intra-corporate regulation poses, however, is that all determinations are rendered behind closed doors and need not be recorded, let alone published, for public oversight. This will make it virtually impossible to chart how successful (if at all) privatised, informal systems of dispute resolution will be for advancing gender equity in society. CONCLUSIONS With corporate Japan given the policy initiative in the area of sexual harassment policy, corporations effectively subsume policy design and implementation within their own walls. Women’s direct participation in policymaking is eclipsed by the devolution of regulatory authority to private corporate governance mechanisms. Therefore, despite the premium placed on transparency in public law reforms, corporate control of workplace gender equity policy ensures that such policy remains ad hoc and hidden, reinforcing the existing values of gradualism and voluntarism that have underscored gender equality policy to date (Parkinson 1989; Knapp 1995). In short, the nation’s ‘transition to transparency’ in public law fails to extend to gender equity and anti-harassment policy. ACKNOWLEDGEMENT I would like to thank Jennifer Amyx, Patricia Boling, Karen Nakamura, Veronica Taylor, Yukiko Tsunoda and Shozo Yamada for their helpful comments. I would also like to thank my research assistant, Elsa Gilchrist, for helping me sift through volumes of legislative materials and commentary. NOTES 1

A stark example of this was the Hachioji Sexual Harassment Case 924 Hanrei Taimuzu 237 (Tokyo District Court, 15 April 1996). Here a mature-age primary school teacher was awarded a mere 500,000 yen in damages even though she proved allegations that the principal rubbed his penis on her at a school function, breathed hot air on her, and asked her for sexual favours.

168

Japanese governance

REFERENCES Ayres, I. and J. Braithwaite, J., 1992. Responsive Regulation: Transcending the deregulation debate, Oxford University Press, New York. Bardach, E. and Kagan, R., 1982. Going by the Book: The problem of regulatory unreasonableness, Temple University Press, Philadelphia. Bottomley, S., 1999. ‘Company Law in Japan’, in R. Tomasic (ed.), Company Law in East Asia, Ashgate, Dartmouth, Aldershot:39–74. Braithwaite, J., 2000. Regulation, Crime and Freedom, Ashgate, Aldershot. —— and Makkai, T., 1993. Trust and Compliance, Administration, Compliance and Governability Program, Research School of Social Sciences, Australian National University, Canberra. Carlile, L. and Tilton, M., 1998. ‘Is Japan really changing?’, in L. Carlile and M. Tilton (eds), Is Japan Really Changing its Ways? Regulatory reform and the Japanese economy, Brookings Institution Press, Washington, DC:197–218. Ehara, Yumiko, 1995. ‘Sekushuaru Harasumento no mondaika’ ha naniwo imi shiteiru koto ni naru no ka? – seikihan to no kanren de –’, Sekushuariti [Sexuality], Iwanami Shoten, Tokyo:105–28. Grabowsky, P. and Braithwaite, J., 1986. Of Manners Gentle: Enforcement strategies of Australian business regulators, Oxford University Press, Melbourne, in association with the Australian Institute of Criminology, Canberra. Johnson, C., 1995. Japan, Who Governs? The rise of the developmental state, Norton, New York. Kaneko, M., 1999. Jirei Hanrei de Miru Seku Hara Taisaku [Dealing with Sexual Harassment: lessons from the cases], Tsukuchi Shokan, Tokyo. Knapp, K.K., 1995. ‘Still office flowers: Japanese women betrayed by the Equal Employment Opportunity Law’, Harvard Women’s Law Journal,18:83–137. Moronaga, Y., 1989. ‘Sekusharu Harasumento’ [Sexual Harassment], Jurisuto, 947: 10–11. Nemoto, K., 1999. Kankyo Risuku Kanri Nyumon [An Introduction to Environmental Risk Management], Hakuto Shobo, Tokyo. Nomura, S., 1999. ‘Kawaru Nihon no Kaisha—Naibu Tosei to Konpuraiansu (Horei Junshu Bumon)’ [The changing face of the Japanese corporation—internal governance and legal compliance], Hogaku Semina, 537:44–47. Ogus, A., 1994. Regulation: Legal form and economic theory, Clarendon Press, New York and Oxford. Parker, C. and Wolff, L., 2000. ‘Sexual harassment and the corporation in Australia and Japan: the potential for corporate governance of human rights’, Federal Law Review, 28(3):509–48. Parkinson, L., 1989. ‘Japan’s equal employment opportunity law: an alternative approach to social change’, Columbia Law Review, 89:604–61. Ramseyer, J.M. and Nakazato, M., 1999. Japanese Law: An economic approach, The University of Chicago Press, Chicago and London. Rosei Kenkyujo Henshubu [Editorial Staff of the Labour and Politics Research Centre], 1998. ‘Kaisei Kintoho ni Kigyo wa Do Taio-shitaka?’ [How have corporations responded to the amended Equal Opportunity Act?], Rosei Jiho, 3415:3–10. Saunders, J., 1996. ‘Courts and law in Japan’, in H. Jacob et al., Courts, Law, and Politics in Comparative Perspective, Yale University Press, New Haven, Connecticutt:315–88. Selznick, P., 1992. The Moral Commonwealth: Social theory and the promise of community, The University of California Press, Berkeley.

Japanese women and the ‘new’ administrative state

169

Shokuba in Okeru Sekushuaru Harasumento ni Kansuru Kenkyukai [Research Committee into Sexual Harassment in the Workplace], 1998. ‘Shokuba in Okeru Sekushuaru Harasumento ni Kansuru Kenkyukai Hokoku’ [Report of Research Committee into Sexual Harassment in the Workplace], in Ministry of Labour, Shokuba ni Okeru Sekushuaru Harasumento Boshi Manuaru [Manual for the Prevention of Sexual Harassment in the Workplace], Ministry of Labour, Tokyo: 45–89. Upham, F., 1997. ‘Privatised regulation: Japanese regulatory style in comparative and international perspective’, Fordham International Law Journal, 20(2): 396–511. Wetherfield, A., 1995. ‘Amerikajin bengoshi no mita nihon no sekushuaru harasumento (ka)’ [A foreign lawyer comments on Japanese sexual harassment law (Part 2)], Jurisuto, 1080:75–81. Wolferen, K. van, 1989. The Enigma of Japanese Power, Macmillan, London. Yamakawa, R., 1999. ‘We’ve only just begun: the Law of Sexual Harassment in Japan’, Hastings International and Comparative Law Journal, 22(3):523–65.

170

Japanese governance

10 Agricultural policy and agricultural policymaking: perpetuating the status quo Aurelia George Mulgan

Of all the economic sectors in Japan, agriculture has been regarded as the one where policymaking involves ‘the closest adhesion (yuchaku) among the LDP, interest groups, and ministries [in terms of] levels of politicization and the closeness of ties among the LDP, interest groups, and bureaucratic agencies’ (Okimoto 1989:201). In this sector, the tripartite model of aligned bureaucratic–LDP– business interests (often referred to as ‘Japan Inc.’) has manifested itself as a classic subgovernment consisting of the Ministry of Agriculture, Forestry and Fisheries (MAFF), the Liberal Democratic Party (LDP) and the agricultural cooperative organisation, or Nokyo.1 This three-way coalition of bureaucratic, party and producer organisations has formed an ‘iron triangle’ of vested interest in agricultural support and protection. The agricultural policy regime has delivered a panoply of economic and social benefits to farmers, including increased agricultural incomes from artificially high ‘administered’ prices for farm products, border measures such as tariffs, tax and pension concessions, crop-related incentive payments, and direct payments to supplement farm incomes. Additional benefits have included subsidies and subsidised loans for agricultural disaster relief, farm improvements, agricultural public works (such as land infrastructure development)2 and small business ventures operated by part-time farmers. For Nokyo, the policy regime has sanctioned highly regulated marketing and distribution systems for agricultural commodities and farm inputs, enabling it to extract monopoly rents from agriculture-related businesses. Similarly, the regime generates organisational subsidies and employment for executives and officials of farmers’ groups and agricultural organisations including MAFFaffiliated agencies. For LDP politicians who have worked to deliver concessions and benefits in the form of agricultural support and protection, the policy regime has delivered votes, organised campaign support, election workers, official organisational endorsement and political funding from farmers, farmers’ groups, MAFF-affiliated agencies, and companies operating in the agricultural sector such as food distributors and construction companies that undertake agricultural public works.

Agricultural policy and agricultural policymaking

171

For MAFF bureaucrats, agricultural support and protection have underpinned two of the ministry’s core administrative powers—its powers to regulate and to subsidise. These, in turn, have been primary determinants of the MAFF’s standing in the intra-bureaucratic hierarchy of ministries and agencies, as well as its wider standing in the community—factors that have also influenced the status, career opportunities and career benefits of the individual officials who work in the agricultural bureaucracy.3 Benefits have included lucrative post-retirement opportunities in MAFF-affiliated agencies and in companies operating in agriculture-related industries.4 Some officials have also received ‘private goods’ such as entertainment, travel, golf club memberships and direct financial bribes from companies contracting services to the MAFF such as public works, as well as from MAFF-affiliated agencies and farmers’ groups.5 In recent years, each of the constituent elements making up the iron triangle of vested interests in the agricultural sector has come under considerable pressure. While labour force participation in agriculture has long been on the decline, a number of new factors have emerged in the 1990s to threaten the political clout of this sector. These factors include the shrinking demographic base of agriculture, electoral reform and the financial distress of agricultural cooperative organisations. Momentum-gaining macropolicy trends such as deregulation and trade liberalisation, as well as greater scrutiny of public works investment present further challenges to the traditional modes and institutions of policymaking in this sector. This chapter examines the extent to which agricultural policymaking and agricultural policies have yielded to reformist trends in the economy and in Japanese politics in recent years. In particular, the chapter evaluates how these forces have impacted on different actors in the agricultural policy subgovernment and the nexus binding them together. A key issue is how recent policy trends have affected the concessions and benefits flowing to the agricultural and rural sectors and whether these trends have served further to entrench or undermine vested interests. The study finds that changes in the policymaking framework represent only incremental adjustments at the margins rather than radical reform. A degree of induced marketisation and liberalisation has taken place in the agricultural sector and all three elements in the agricultural policy subgovernment face problems of political and organisational adjustment. On the other hand, the system of tripartite policymaking in agriculture remains institutionalised and provisions of the 1999 Food, Agriculture and Rural Areas Basic Law, or New Basic Law (Shokuryo, Nogyo, Noson Kihonho), represent a defensive consolidation of the agricultural support and protection regime rather than a source of innovative policy reforms. Moreover, although forces undermining the traditional support for public works—a key component of support for the agricultural sector— seem to be gaining momentum, policies to combat Japan’s protracted economic recession have helped to strengthen support for this type of public investment. In short, reform and innovation in the agricultural sector have been more than offset by factors perpetuating the status quo.

172

Japanese governance

THE CHALLENGE OF ELECTORAL REFORM Japan’s farm households today represent only a little over 10 per cent of the national electorate, and current demographic trends suggest that the nation’s farming population will halve within 15 years (Nikkei Weekly, 17 November 1997). The farm vote has, however, always carried more political weight than sheer numbers would suggest. One of the major causal factors has been the electoral system itself. First, the malapportionment of Diet seats has grossly privileged farmers and rural voters by over-representing the least populated districts in terms of voters per seat and under-representing the most densely populated constituencies. Second, the former single ballot multi-member electoral system for the Lower House6 promoted intra-party competition, encouraging candidates to focus on niches of the economy such as agriculture, as well as to compete for the provision of private goods to local constituencies. Reform of the Lower House electoral system in 1994 has affected the electoral importance of farmers and their organisations in a number of different ways. While the redistribution of Lower House seats has not completely eliminated the disparity between the weight of rural and urban votes,7 the introduction of a mixed system of single-member and proportionalrepresentation districts has worked in conjunction with declining numbers of farm voters to reduce the effectiveness of the farm vote. In particular, the introduction of single-member districts (SMDs) has undermined farmers’ voting power. In the former multi-member system, candidates could scrape by with as little as 10–15 per cent of the vote and therefore win with the backing of only a small portion of a district’s voters—perhaps Nokyo, or a labour union or a chamber of commerce and industry (Nikkei Weekly, 20 November 1995). Under the new system, successful candidates must win a plurality of votes, translating into a much higher proportion of the total vote required for victory (usually 30 per cent or above). Yet, farmers today represent 30 per cent or more of the total eligible vote in less than a handful of districts, making it more difficult for them to influence an electoral result, either positively or negatively.8 Moreover, electoral reform has diminished the relative importance of a single interest like agriculture because politicians must now cater to a broader range of interests and cultivate connections with a number of different interest groups in order to win a plurality. Electoral reform has thus altered the representational character of Diet politicians—there are now strong disincentives to specialise in specific areas of policy.9 In these various ways, electoral reform has loosened the ties between organised agricultural interests and national politicians. On the other hand, recent elections in Japan unequivocally demonstrate that while the LDP has lost its majority in the Diet, its link with farmers remains strong. In the July 1998 Upper House election, for example, the vast majority of LDP seats (28 out of a total of 31) were gained from districts toward the rural end of the spectrum. Moreover, the norin zoku—those LDP politicians specialising in agricultural issues—remain an active lobby group within the party.

Agricultural policy and agricultural policymaking

173

In fact, they, more than any other zoku group, typify the LDP’s zoku system in terms of their solidarity and effectiveness as representatives of special interests.10 LDP Diet politicians also include the largest number of current or former Nokyo executives by far, and Nokyo offers electoral support almost exclusively to LDP candidates.11 The tendency of election candidates to base their appeals on special concessions to local interests in their own districts also remains undiminished. Electoral reform has not eradicated the incentive for candidates to promise public works programs—a main component of agricultural support—as an inducement to voters. The previous multi-member district system was renowned for encouraging this kind of patronage politics because of intraparty competition (that is, within the LDP) between candidates vying for support. Yet, the new electoral system also reinforces tendencies for porkbarrel competition amongst candidates in the SMDs owing to the heightened competition for a single seat rather than multiple seats. As a result, many voters still cast their votes based on how much central-government largesse respective candidates are likely to obtain for the local constituency. Admittedly, a stronger contrast appears to be emerging between the patronage-based appeals of candidates in rural areas and the programmatic appeals of candidates in metropolitan areas. In the 1996 elections, for example, far more attention was paid in city areas to national issues such as administrative reform and the consumption tax increase than was paid in rural areas that operated on the traditional spoils system. The same was true of the 2000 election, where national issues proved effective in appealing to non-aligned and non-organised voters in the cities. Moreover, in both elections, the LDP’s performance in urban and metropolitan electorates was dismal, with a number of veteran LDP politicians losing in city districts, including the MAFF Minister Tokuichiro Tamazawa. It is clear that the LDP cannot win a majority in either house of the Diet without performing well in urban areas. The LDP’s participation in coalition government might be expected to exert additional pressure on the party to deviate from the status quo on agricultural policies. Notably, however, the advent of coalition government has not altered the basic process of policymaking in the agricultural sector. Agricultural policy leadership remains concentrated in the LDP, and the MAFF continues to deal almost exclusively with the LDP on agricultural policy matters. Thus, agricultural policy remains almost the sole preserve of the LDP within the coalition. The LDP and Nokyo’s peak body, Zenchu, keep the other coalition parties abreast of agricultural policy developments, but do not actively engage them in the agricultural policymaking process. Furthermore, because the opposition contains substantial numbers of former LDP members, some of whom rely on farmers’ votes and/or provincial votes tied to the usual pork-barrel-type benefits, it is unlikely that the opposition will adopt an anti-agriculture banner in their attempt to oust the LDP.12 While

174

Japanese governance

two of the main opposition parties have adopted positions in favour of small government (meaning a generally pro-market, anti-regulation, anti-protectionist position), this does not mean that these parties will be willing to campaign for urban consumers at the expense of farmers. Making the picture even more muddled is the New Komeito’s participation in the governing coalition, given that it is a purely urban-based party with a record of being outspoken against agricultural protection.13 Although zero-sum competition may emerge in the budget allocation process in the future and may involve issues such as agricultural public works expenditure, anti-agriculture or anti-farmer sentiment is unlikely to accompany such developments. THE CHALLENGE OF HEIGHTENED PUBLIC WORKS SCRUTINY The agricultural public works component of the agricultural iron triangle combines with rural public works to form key elements of the larger iron triangle of public works, one of Japan’s most notorious interest coalitions. This coalition comprises bureaucrats in the main ministries dispensing public works subsidies (the Ministries of Construction (MOC), Transport (MOT), and the MAFF),14 more than half a million construction companies dependent on lucrative public works,15 and Diet politicians who seek to influence ministry officials in the allocation of public works projects to their electoral districts and in the choice of construction companies to be awarded public works contracts. Rural dwellers and farmers jointly benefit from the high level of governmentsubsidised economic and social infrastructure afforded by extensive public works in rural areas as well as side-employment in the companies engaged in both agricultural and rural public works construction.16 Government expenditure on agriculture, forestry and fisheries has been increasingly skewed toward agricultural and rural public works over the past three decades. In the 1970s, approximately 30 per cent of the agricultural, forestry and fisheries budget was spent on public works. In the 1980s the proportion rose to around 40 per cent, while in the 1990s it climbed further to 50 per cent or more.17 The nature of public works benefits makes it difficult to differentiate agricultural from rural interests, the votes of farmers from rural dwellers more generally, and the farming and construction (agricultural and general) industries as the regional base of the LDP. Public works are a strong common interest binding farmers and ordinary rural dwellers. Signs have emerged, however, that the kinds of policies that have sustained the iron triangle of vested interest in agricultural and rural public works have a finite future. There are at least six reasons for this. First, agricultural and rural public works spending is vulnerable to increasingly harsh criticism of the unproductive nature of much of this expenditure, which advantages so few at the cost of so many. In Japan’s embattled economy, it makes much more economic sense to redirect the massive investments into large cities, where they have a larger multiplier effect on the economy (Nikkei Weekly, 16 November

Agricultural policy and agricultural policymaking

175

1998). In short, efficiency considerations will increasingly undermine the political calculus that sustains the iron triangle of agricultural and rural public works. Second, it is possible that in the face of the government’s towering fiscal deficit,18 increasingly severe pressures will arise for structural reform of the nation’s finances and reductions in government spending across the board in order to service the deficit. This will not only constrain expenditure by the big-spending public-works ministries such as the MAFF, but may see their budgetary shares, which have been fixed for more than 30 years, under attack. The 1999–2000 budget, for example, contained public works expenditure of 9.43 billion yen, an increase of 5 per cent, but spending on agricultural infrastructure projects was down 2.5 per cent (Nikkei Weekly 1999).19 Third, the central government has something of a revolt on its hands amongst local governments whose ‘finances are in a parlous state and who are finding their obligatory contributions to public works programs imposed on them by the central government too onerous for some projects to proceed’ (Asahi Evening News, 15 December 1999). The most serious budgetary problems arise in the case of prefectures continuing big cities such as Tokyo, Kanagawa (Yokohama), Osaka and Nagoya (Aichi). They ‘blame their fiscal distress on the central government’s control over local governments—especially since much of the nation’s economic pump-priming has been paid for with funds squeezed from local coffers—and the tradition of redistributing cities’ tax revenue to less wealthy local governments’ (Nikkei Weekly, 25 January 1998). Persisting with traditional pork-barrel habits that favour rural voters at the expense of city voters has already spurred an electoral backlash from urban areas, as evidenced by the LDP’s poor performance in the July 1998 Upper House election and 2000 Lower House election. Urban voters were outraged not only by the deepening recession but also by the way in which fiscal stimulus through public works benefited mostly rural constituencies but implied future tax hikes for all (Asahi Evening News, 15 December 1999). Tokyo residents receive approximately 30 per cent of what they pay in tax while residents of Shimane prefecture receive more than twice what they pay. The LDP’s emphasis on public works alienated voters in metropolitan areas while gaining rural votes (Asahi Evening News, 26 June 2000). Fourth, public works are being subjected to more intense administrative scrutiny and re-evaluation in the face of rising criticism of public works expenditure. In 1998–99, the government began reviewing public works projects not expected to be completed or even started five to ten years after their initial approval. As part of this program, the MAFF has scrapped and temporarily suspended a number of public works projects (Nikkei Weekly, 3 April 2000). Furthermore, in the face of sustained criticism that public works projects should be subjected to better advanced planning and analysis, the ministries and agencies involved in public works committed themselves to undertaking cost–benefit analyses of all new projects from 2000 and making the results public. This move is epoch-making, since it inevitably means a curtailment of bureaucratic discretion in this area (Nikkei Weekly, 12 April

176

Japanese governance

1999). The unified cost–benefit analysis across ministries and agencies could also lead to changes in project shares among ministries and agencies.20 From April 2001, the MAFF will also introduce rules for stopping or scaling down projects already begun but found to be too costly (Nikkei Net Interactive, 15 April 2000). Fifth, other indicators suggest that agricultural public works spending may be at saturation point. The government has had trouble spending all the funds it set aside in 1995 to help farmers deal with the Uruguay Round Agriculture Agreement (URAA) and the opening of the rice market (Nikkei Weekly, 22 April 1996). Farmers have also been increasingly reluctant to participate in land improvement projects because they have no successors to repay long-term loans. Reports have surfaced of a polarisation of interests between part-time and full-time farmers on land improvement issues, with part-time farmers increasingly reluctant to participate in schemes because their economic and income interests are diversified, their stake in agriculture minimal and their interest in exploiting economies of scale marginal. This has made it more difficult to obtain the two-thirds support from farmers in a particular region necessary to undertake a land improvement project. Sixth, the reorganisation of central government ministries and agencies that took place in January 2001 may have the effect of providing an administrative bulwark against MAFF’s recent encroachment into the area of general public works in rural areas. Of the six ministries and agencies concerned with public works, all except the MAFF and the Okinawa Development Agency21 were combined into the Ministry of National Land and Transport. The stated objective of the merger was ‘to promote better coordinated outlays for public works based on a blueprint for national transportation development and land use’ (Nikkei Weekly 1999). While the MAFF successfully resisted integration, thereby retaining its rights of subsidy over agricultural and rural construction projects, the formation of the new integrated public works ministry suggests that the ministry’s capacity to expand its public works activities may be constrained. Despite these signs of change, however, significant reform in the area of rural public works has yet to emerge in a tangible way. In fact, the rural sector was one of the major beneficiaries of Japan’s 125 trillion yen in stimulus packages (a total of nine) implemented in the 1990s as part of fiscal stimulus strategies to revive the economy. Economic revival policies thus played into the hands of vested interests in the agricultural and rural public works industries. THE CHALLENGES OF DEREGULATION AND TRADE LIBERALISATION As a highly controlled and administered industry, agriculture, as well as its associated food distribution and marketing industries, is a natural target for deregulatory reform. In addition, the international dimension of Japan’s agricultural policies has been increasingly important in generating momentum for deregulation and liberalisation. The application of gaiatsu (foreign pressure) by

Agricultural policy and agricultural policymaking

177

major agricultural exporters such as the United States and Australia, and in multilateral trade settings under the auspices of the GATT (and now the WTO), have produced changes that otherwise would likely not have been forthcoming (George Mulgan 1997). Bilateral trade negotiations in the 1970s and 1980s realised a number of victories for foreign exporters in relation to specific products such as beef and citrus, but the URAA of 1993 represented the first comprehensive multilateral agreement to liberalise agricultural trade. This required Japan to replace import quotas with tariffs on all agricultural products except rice, which was subject to minimum access requirements. In April 1999, the Japanese government converted its quantitative import restriction on rice to tariffs. Gaiatsu impacted not only on Japanese agricultural trade policy but also on the domestic policies on which these external trade policies were based. Those policies most directly affected included agricultural support, price programs and the regulation of domestic agricultural markets. Domestic adjustment in these areas sought to cope with potential price and supply changes wrought by the liberalisation process.22 Anticipating the inevitability of concessions to external pressures, the MAFF endeavoured to harmonise the basic direction of its domestic measures with the principles of market liberalisation. One means was to lower agricultural support prices in order to encourage domestic farmers to become more efficient and therefore competitive. International agricultural trade negotiations also brought more intensive international re-examination of price support systems, and in fact made them specifically subject to reduction agreements (such as that relating to the Aggregate Measurement of Support, or AMS, under the URAA). In the case of rice, a series of incremental deregulation steps was undertaken in the domestic distribution system, culminating in the abolition of the 1942 Food Control Law (Shokkanho) in 1995 and its replacement by the new Staple Food Law (Shokuryoho). These changes were designed to introduce the competitive principle into the domestic market for Japanese rice and thus lower rice prices. They were also designed to prepare the ground for liberalisation of the rice market by switching to a more market-based system driven by the increased competitiveness of domestic rice producers. The objective was to help the domestic sector survive in the event of market opening. Partial rice market liberalisation specifically mandated some element of prior domestic liberalisation. Among other things, the reform allowed for greater competition in rice collection and distribution, thus undermining the privileged position of the agricultural cooperatives in these markets. Furthermore, farmers could sell rice directly to retailers and consumers under a system categorised as ‘non-orderly marketed rice’, or keikakugai ryutsumai (as opposed to ‘orderly marketed rice’, or keikaku ryutsumai). The latter comprised rice collected by the agricultural cooperatives and sold to the government (government rice, or seifumai), and rice collected by the agricultural cooperatives and sold directly to wholesalers (so-called voluntarily marketed rice, or jishu

178

Japanese governance

ryutsumai). Non-orderly marketed rice thus bypassed established distribution routes dominated by the agricultural cooperatives. The government’s role in domestic rice distribution contracted considerably, with the Food Agency of the MAFF committed only to purchasing domestic rice for the purpose of stockpiling at the same time as conducting the state trade in imported rice. The reforms also expanded the application of market principles into pricing, with a shift from government-controlled pricing to a mixture of public and private management of pricing. Under the previous food control system, the government determined the price at which it would purchase rice from farmers (the seifumai price), which acted as a benchmark for the price of better quality jishu ryutsumai negotiated between the agricultural cooperatives and rice wholesalers. Farmers could sell as much rice as they wanted to the government at the seifumai price, which functioned as a guaranteed price. Under the new system, the price of jishu ryutsumai is determined by monthly public tenders from rice wholesalers in a Voluntarily Marketed Rice Price Formation Centre, which functions like a central wholesale market. The tender price acts as an indicator for the local market price and thus determines Nokyo’s selling price, as well as influencing the government’s purchase price. For farmers, there is no guaranteed minimum price and the government is not obliged to buy rice above its minimum stock requirements. In times of good harvest, it is possible for the price of rice to drop. In fact, since 1994, trends in the bidding price for jishu ryutsumai have declined continuously, except for a brief rise in 1998. Since the changeover to the new system, falls in the price of rice have impacted on Nokyo’s income from the rice trade. Not only has the quantity of rice shipped via Nokyo fallen because farmers are selling their produce directly to retailers and consumers, but because Nokyo’s commissions are linked to the sale price,23 profits from rice marketing have also fallen.24 Some farmers have left Nokyo because they no longer need the agricultural cooperatives to market their rice. Those selling rice outside the agricultural cooperative system have found that their real income is higher because of a reduction in trading costs, such as commissions, that they formerly paid to Nokyo. OFFSETTING DEVELOPMENTS The more market-centred outcomes from deregulation of domestic rice distribution and pricing systems have been offset to some extent by a number of other developments. First, although the Staple Food Law provides for the Food Agency of the MAFF to make rice purchases for stockpiling, these purchases have also been used to stabilise the price of rice because rice has constantly been in surplus as a result of good harvests and increasing quantities of imports. The government thus continues to intervene directly in the market to some extent. Second, the orderly marketed rice system is effectively a ‘managed’

Agricultural policy and agricultural policymaking

179

market. Rice passes along specific routes decided by the government, and the government can obtain information about how much rice is being distributed through that system, and price formation is monitored. Third, wholesale prices of jishu ryutsumai, although determined by tenders or bidders, are now linked to farm income stabilisation programs. Assistance policies have been introduced to protect rice farmers from price falls in jishu ryutsumai and to encourage farmers to stay in the managed market. Under a new rice policy launched in September 1997, the government supports farmers participating in rice acreage reductions (gentan) who sell voluntarily marketed rice, thus helping underpin the agricultural cooperatives’ role in that market. The policy was introduced in response to direct pressure from Nokyo and LDP agricultural representatives. The scheme provides for farmers to be compensated for a possible drop in their incomes whenever the market price falls below a so-called standard price.25 At the same time, substantial subsidies are paid to Nokyo’s national trading arm, Zenno, through the Food Control Special Account of the national budget for a number of the tasks it performs under the new rice policy. In 1998 these subsidies amounted to well over 130 billion yen. Nokyo has thus been given primary responsibility for implementing the new rice policy. An important new focus in Nokyo’s rice policy strategy is the maintenance of sustainable agribusiness management, which is code for maintaining farm incomes through measures other than price supports. As part of this, Nokyo’s policy demands now emphasise adjustment of the rice supply in order to avoid price reductions in the market including the allocation of budget funds to encourage rice acreage reduction.26 PERSISTENT RESISTANCE TO DOMESTIC DEREGULATION PRESSURES Despite the changes induced by foreign pressure, the pace and extent of deregulation in the agricultural sector have been relatively slow and incomplete. In many cases, domestic proposals for deregulation have merely intimated future directions for reform or listed items for review and further investigation. Faced with sustained pressure to deregulate, the MAFF has been inclined to present almost any kind of policy adjustment as a contribution to the deregulation process. Furthermore, the MAFF’s deregulatory proposals tend to emphasise technical items (such as modifying the Japan Agricultural Standard (JAS) to meet international standards), rather than those items that are central to the government’s broader agricultural support program. For example, the government’s three-year deregulation plan for 1998–2000 included some 67 items under the administration of the MAFF. Yet, very few of the items for examination and reform were critical elements supporting the regime of bureaucratic intervention in agriculture. The MAFF has also resisted reform proposals emanating from the government’s deregulation and administrative reform committees as being ‘difficult to meet’. In 1995, for example, the deregulation package presented by the Administrative

180

Japanese governance

Reform Committee deferred action on deregulation of agriculture in favour of more study (The Nikkei Weekly, 11 December 1995), despite recommendations to abolish and review various subsidies to farmers. This was an issue on which the MAFF fought hard, arguing that the subsidy system for farmers was necessary to promote regional agriculture.27 Ownership of farmland by joint-stock companies (kabushiki kaisha) is another proposal that was aired by the government’s Administrative Reform Committee but later met with resistance from the agricultural bureaucracy.28 THE MAFF FIGHTS BACK: THE WTO SANSHA KAIGI AND INTERNATIONAL DIPLOMACY In addition to the MAFF’s persistent resistance to domestic deregulation pressures, the ministry has more actively pursued means to combat the effects of foreign pressure on domestic agricultural policies. A recent refinement to the agricultural policymaking process involving the formalisation of a threeway negotiation and consultation process amongst the parties to the agricultural interest coalition is one such example. In late 1998, the MAFF sponsored the formation of a new WTO Tripartite Council (WTO sansha kaigi) to deal with the issue of rice tariffication. The council, consisting of representatives from the MAFF, the LDP, and agricultural, forestry and fisheries groups has subsequently been institutionalised as the principal method of decisionmaking on all WTO-related agricultural trade issues. The sansha kaigi was the MAFF’s idea because the ministry felt disadvantaged in the absence of such a three-way process during the Uruguay Round negotiations, when the Japanese government was forced to capitulate to external and domestic pressures to accede to the URAA, including rice market access (Author’s interview with MAFF official, Tokyo, January 2000). The objective underlying the formation of the sansha kaigi was to facilitate the achievement of a consensus among concerned organisations on Japan’s basic position towards WTO agricultural negotiations (Author’s personal communication with MAFF official, May 2000). MAFF strategists recognised that foreign players had skilfully exploited divisions in the Japanese community during the Uruguay Round by playing to the interests of industrial exporters and consumers. Also, when the issue of rice tariffication came up for discussion in late 1998, the MAFF had a very difficult meeting with the LDP and Zenchu, and the Tripartite Council seemed a suitable means of achieving a harmonious approach to the issue within the agricultural policy subgovernment. Solid agreement among the MAFF, the LDP agricultural leadership, and agricultural, forestry and fisheries groups was considered indispensable for presenting a united front on agricultural policies to other groups in Japanese society, as well as to the outside world. According to Nokyo’s national political organisation, Zenkoku Noseikyo, the formal tripartite policymaking mechanism makes possible the establishment of international trade rules based on the New Basic Law, with agricultural, forestry and fisheries groups, the ruling party and the MAFF operating in a bloc (Nosei

Agricultural policy and agricultural policymaking

181

Undo Jyaanaru 2000d:15). During the three-way negotiations, compensation schemes are worked out to appease agricultural cooperative and farming interests in the face of unpopular reforms. In this way, the government avoids harsh reactions from Nokyo and its members. The sansha kaigi adds a new, formal step in the process of agricultural policymaking. Legislation must receive the approval of the body before submission to Cabinet and the Diet. The sansha kaigi also enhances transparency of decisionmaking on agricultural trade issues because discussions and negotiations among the three interested parties are more formal and out in the open. Given the efficacy of foreign pressure as the main instrument of agricultural trade liberalisation and the domestic consequences of this liberalisation, the constituent components of the agricultural iron triangle have also been determined to bolster their international strategies to avoid isolation at the WTO. The Japanese government bases its negotiating position on two main principles—the multifaceted functions of agriculture and food security. Each has a strong emotional appeal, and can be used to forge alliances with other protectionist countries, such as the European Union (EU), Switzerland, South Korea, and Norway. The government has also deliberately sought allies in the international community using diplomatic and foreign aid leverage. The 1999 White Paper on Food, Agriculture and Rural Areas advocated the strategic use of official development assistance (ODA) to developing nations to influence their position on agricultural trade liberalisation at the WTO.29 The MAFF also dispatched seven teams led by MAFF officials to uncommitted countries in March–April 2000 (Nosei Undo Jyaanaru 2000c:25). THE CHALLENGE OF ORGANISATIONAL ADJUSTMENT Rice is not the only product where Nokyo’s traditional marketing dominance has been challenged in the 1990s. In this decade, the agricultural cooperatives faced intensifying competition in most other sectors of marketing and purchasing as private traders moved into their traditional agricultural product and input supply markets. At the same time, because of its financial mismanagement, Nokyo fell under severe financial duress and public criticism once the bubble economy burst. These developments have led to declining organisational coherence and spurred a process of organisational adjustment.

Heightened business competition The main competition faced by Nokyo today is in its farm input supply business for fertilisers, animal feed, agricultural machinery and agro-chemicals, and in its consumer-related businesses. Greater competition comes from local industries and supermarkets in both these areas. In the past Nokyo’s A-Coop in each village took care of farmers’ purchases (and many non-farmer purchases). There was no competition from other retail outlets. The number of suppliers in these areas has increased, however, and the A-Coop is no longer the dominant supplier.

182

Japanese governance

Moreover, the tendency for farmers to purchase less machinery and invest less in their farming has led to declines in Nokyo’s sales (Author’s interview with Zenchu official, Tokyo, January 2000). In this more cut-throat business environment, Nokyo is hampered by a lack of capable management, over-reliance on the traditional socio-cultural basis of its membership, high staff costs and its complex three-stage management and distribution system of local, prefectural and national organisations (Aguri Fuoramu 1987). The last two factors undermine Nokyo’s ability to compete with private traders in domestic agricultural product and input supply markets because they generate uncompetitive prices for goods and push up the prices of production inputs and other commodities to farmers. As a result, Nokyo has increasingly been seen as a structural obstacle to more entrepreneurial farming. To reduce their overheads, many farmers have gone outside the cooperatives to secure better deals with private companies. Supermarkets can now sell the same goods for less by procuring them in bulk directly from trading companies and wholesalers and by curtailing marketing costs.

Financial duress and a tarnished public image Because agricultural cooperative management relied on profits from their financial operations to offset losses in other areas such as marketing and farm guidance, the process of financial liberalisation in the late 1980s and 1990s profoundly affected the overall financial health of the cooperatives (Saeki 1993:44). The collapse of Japan’s asset bubble in 1991 also had a critical impact on Nokyo’s financial operations, exposing a myriad of problems in agricultural cooperative management—top echelons unskilled in financial matters, substantial losses on the stockmarket and increasing amounts of bad loans, including those to non-bank financial agencies. In 1995, many Nokyo financial institutions faced collapse when a number of housing and loan agencies (jusen) in which they had invested heavily during the bubble period stood on the brink of failure. A settlement pushed through the Diet by the LDP-led coalition government in 1996 reduced the total Nokyo debt burden from 1.21 trillion yen to only 530 billion yen.30 The balance of 685 billion yen was covered by a massive infusion of public funds from the 1996–97 budget (Domon 1996:20).31 Not only did the bail-out expose Nokyo’s gross financial mismanagement and lack of accountability to its members, it also eroded Nokyo’s public standing. The non-transparent nature of the settlement left the strong impression that the organisation had used its political power to ensure a special deal for its financial institutions (Nikkei Weekly, 5 August 1996). Because the financial operations of agricultural cooperative organisations continue to lack transparency and are not subject to disclosure requirements, figures for the total amount of Nokyo’s bad debts cannot be reliably substantiated. In the past, farmers themselves have been described as being in a ‘complete information desert’ concerning Nokyo’s financial operations (Domon 1992:35).

Agricultural policy and agricultural policymaking

183

In the wake of the public bail-out of Nokyo’s jusen losses, prefectural governments have mounted massive rescue programs of local agricultural cooperatives within their regions.32 Despite large allocations from taxpayer funds, however, these governments have been unwilling to press for full disclosure of the financial circumstances of troubled cooperatives. These same governments have also made little effort to clarify responsibility amongst the cooperative officials concerned (Yomiuri Shimbun, 29 April 1998). Organisational reform and realignment have been Nokyo’s major response to the liberalisation of financial markets, the bursting of the economic bubble, the problem of bad loans, the introduction of greater competition in its traditional businesses and the increasing criticism of the management costs imposed by its antiquated three-layered structure. Organisational restructuring involves both vertical and horizontal components. Vertical restructuring entails the absorption of prefectural-level organisations by national-level organisations, thus reorganising the three-tier Nokyo structure into a two-tier structure. Retaining the national layer is a priority for the government, as national Nokyo organisations are important instruments of government agricultural policy. Zenchu, however, faces resistance to its plan for the vertical restructuring of its prefectural central unions. The reorganisation involves Zenchu’s assuming the auditing and public relations functions of these bodies, and shifting those activities more directly related to farming to the local cooperatives. The principal rationale for vertical restructuring is to cut costs, particularly management (that is, staff) costs incurred by the operations of the prefectural groups, thereby lessening the fees levied on local cooperatives. Nevertheless, the integration program could take years because of strong resistance from agricultural cooperative organisations in some regions (Nikkei Net Interactive, 20 April 2000). Nokyo’s horizontal restructuring faces similar problems. The aim is to bring about a sharp reduction in the number of local (city, town and village) agricultural cooperatives as a means of lowering staff costs and increasing their competitiveness, but the planned amalgamations (gappei) are not occurring at the pace set out in Nokyo’s 1996 merger program. In fact, the cooperatives are proving so slow to merge that the goal of 530 nationwide by March 2001 has been unattainable. As of March 2000, 1,411 local cooperatives were still fully functional (Nikkei Net Interactive, 13 April 2000). Obstacles to the planned amalgamations include resistance to expanding agricultural cooperatives across the boundaries of Lower House constituencies, the complexities of merging the multi-functional businesses of the general purpose cooperatives (sogo nokyo) and the difficulties of marrying financially strong and financially weak cooperatives.33 In short, both members and management remain resistant in many ways to amalgamation plans. New regulations easing some conditions for vertical realignment of Nokyo’s financial institutions were implemented in April 2000, and the establishment of an agricultural cooperative equivalent of the Resolution and Collection

184

Japanese governance

Corporation is slated for 2002 (Nikkei Net Interactive, 6 April 2000). Furthermore, the national financial and mutual insurance arms of Nokyo (Norinchukin and Zenkyoren, respectively) plan to integrate their operations over several years beginning in 2001. Even so, Nokyo’s organisational reforms are not proceeding according to plan. This fact creates concerns that Nokyo’s financial institutions will be unable to compete with commercial banks—who are also proceeding with consolidation, but at a much faster pace (Nikkei Net Interactive, 13 April 2000). REFORM REGRESSION: THE NEW BASIC LAW The passage of the New Basic Law in July 1999 ostensibly marked a major turning point in Japanese agricultural policy. This piece of legislation replaced the 1961 Agricultural Basic Law and was touted as being ‘the guideline for the nation’s agricultural policies into the 21st century’ (Japan Agrinfo Newsletter, May 1999:7). Its provisions have wide implications for the entire range of agricultural policies and agricultural trade policies because they establish the legal principles upon which all new measures will be decided. Given the various challenges to the tripartite coalition of vested interests noted in previous sections, one might expect that the new law will embody a distinct departure from the status quo. In fact, however, the new law provides evidence that these same interests remain firmly institutionalised.

Strategy to elicit a nationwide consensus in favour of agriculture The New Basic Law is notable for not mentioning farmers specifically, but instead identifies food, agriculture and rural areas with the notion of improving people’s lifestyle and developing the national economy.34 This is to deflect emphasis from the special interests of the farmers to the interests of the entire population in terms of food, agriculture and rural areas. The broader aim is to elicit a nationwide consensus in support of the law, and thereby provide solid public underpinning for the agricultural sector. Achieving such a national consensus is absolutely vital to counter the weakening of the agricultural sector in Japan’s political economy and its gradual relegation to the status of a minority political interest in Japan’s governing structure. As part of this strategy, the new law also embraces consumers with a reference to their needs in relation to food. The underlying intention is to identify a strong common interest between agricultural producers and food consumers. This, in turn, is expected to make agricultural support and protection more palatable to the public and also to confuse the issue of the basic objectives of agricultural support and protection with the protection of consumers. Notably, however, consumer interests in the law are restricted to issues relating to the supply of food, not the price of food. In this way, the law constructs a defence against demands for increased market access threatening Japan’s inefficient agricultural producers.

Agricultural policy and agricultural policymaking

185

Food security and self-sufficiency The New Basic Law also implicitly endorses the concept of food security and links this concept squarely to the preservation of Japanese agriculture. Thus, the principle of food security is no longer just a national political goal endorsed by unanimous Diet resolutions (as it was during the Uruguay Round negotiations), but a mandated legislative objective of the state, making it a non-negotiable aspect of Japan’s position at the WTO.35 ‘Securing a stable food supply’ is easily translated into maintaining border protection for domestic producers. The objective of securing stable supplies of food can also be used to justify induced changes in agricultural production and the application of production incentives and other policies and subsidies to improve agricultural productivity and expand the production of certain commodities. In this way, the law rationalises government intervention and assistance strategies. The food supply will be ‘managed’ (that is, subject to active intervention by the government) ‘in such a way as to improve agricultural productivity and comprehensively promote the sound development of agriculture and food industries in response to more sophisticated and diversified public demand’. The overall food self-sufficiency ratio target for 2010 (sogo jikyuritsu) was set at 45 per cent on a calorie basis as a ‘potentially realisable standard’ (jitsugen kano na suijun). The LDP demanded that food security and the self-sufficiency rate in food be made clear (Author’s interview with LDP Diet member Hinode Eisuke, Tokyo, January 2000). As pointed out by the Japanese press, ‘[t]he target of raising food self-sufficiency, on a calorie basis, to 45% by 2010 is in fact the first time that a self-sufficiency target has been set’ (Daily Yomiuri, 18 March 2000). Setting an actual target was a direct concession to the farm lobby and particularly to Zenchu, which had been demanding a much higher target at around 50 per cent. The self-sufficiency rate negotiations thus followed the same pattern as earlier discussions about the government’s buying price for rice. The MAFF recommended the lowest level (41 per cent), Zenchu proposed the highest (50 per cent) and the LDP’s agricultural politicians imposed a ‘political addition’ on the MAFF figure (in this case, lifting the self-sufficiency ratio to 45 per cent, which was the finally agreed figure). Given that the food self-sufficiency rate is not a policy variable—it is a result of demand and supply, as well as consumer preference (Honma 2000)—it is correctly seen as a political variable in the sense that it can be used as justification for allocating government funds to the agricultural sector to meet the target. Farming groups and Diet politicians pushed the government to introduce the target for this reason (Honma 2000). The implicit argument is that increased food self-sufficiency can only be achieved with more spending, more assistance and more protection for Japanese agriculture. The risk is that, in stressing the need for Japan to raise its food self-sufficiency rate, this ‘will be used as a pretext for increased agricultural protection or a larger budget for farming’ (Asahi Shimbun 1999).

186

Japanese governance

Institutionalising support for agricultural public works The New Basic Law provides a strong legal foundation for continuing government expenditures on agricultural public works, referring to sustainable development as being ‘promoted by securing agricultural facilities including the necessary farmlands and irrigation/drainage…’. The law also provides the same legal underpinning for rural public works in its reference to rural areas being ‘developed through improvements in agricultural production conditions and rural welfare, including living infrastructure’.

Continued support for family farming The new law identifies the state’s core interest in family farming,36 which means maintaining the status quo, where a majority of inefficient part-time farm households block the emergence of true economies of scale and the entry of companies into commercial operations of land-intensive farming, particularly rice. For the latter, it largely substitutes the notion of incorporating agricultural management (nogyo keiei no hojinka), which is designed to strengthen producers’ farm management structure, with incorporation as businesses. These new forms of farm management are either based on the farm household or on other types of group farming operations such as the agricultural production corporations (nogyo seisan hojin). They are an entirely different proposition to allowing private joint-stock companies into farming, which remains prohibited under the Land Law.37 Such a measure would enable large-scale, commercial producers to develop real economies of scale, particularly in land-intensive farming.38 The entry of joint-stock companies into such farming excites fears of land speculation and concerns that such management will not harmonise with family farm management in the same local district and will throw regional water control and land utilisation into confusion.39

Price formation The New Basic Law embodies the notion of realising price formation of agricultural commodities in a manner that conforms to market principles and more accurately reflects actual supply and demand conditions. This is an area where the new law ostensibly embraces the most radical change, where Japanese agricultural policy has become more market-oriented, and where it is most consistent with WTO principles (Honma 1999:1). As an editorial in the Yomiuri Shimbun opined: [u]p to now, the key policies of the current Agricultural Basic Law have focused on increasing the income of producers and enhancing farm productivity. In comparison, the new law represents a drastic change. It will abolish the price support system for specific farm products…which was aimed at stabilising producer income, and leave the product pricing to the outcome of the free market mechanism. This represents a fundamental shift in postwar Japanese agricultural policy. (Yomiuri Shimbun, 10 March 1999)

Agricultural policy and agricultural policymaking

187

Marketisation will, however, not be permitted to endanger the viability of farm management, that is, farm household incomes. Agricultural prices will be permitted to fall, but farm incomes will be maintained. Only the methods of indemnifying farmers will change. Price supports for a range of agricultural products will be replaced by a policy regime of income guarantees for stabilising farm management combined with tendering systems in wholesale markets where price can more accurately reflect demand and supply (Miwa 2000:14). In short, agricultural prices will be ‘decoupled’ from farm incomes. In this respect, the new law presents a strong contrast to the 1961 legislation, which espoused the principle of price stabilisation for farm products through price policies (Miwa 2000:14). The effect of these changes will be to depoliticise agricultural pricing by taking price decisions out of the hands of the MAFF Minister and leaving them to the market. At the same time, farmers will continue to benefit from income protection from the government.

Production policy Production policy in the 1961 Agricultural Basic Law embraced ‘selective expansion’ of agricultural production in response to demand conditions. In contrast, the new law lays down production targets for the main agricultural products and develops policies aimed at achieving those targets (Miwa 2000:14).40 The MAFF thus has the statutory basis on which to justify a whole range of new subsidies to achieve goals that can only be accomplished with government financial assistance, such as increasing the amount of domestic foodstuffs in which Japan is an inefficient producer, namely wheat, barley and soybeans. In summary, the New Basic Law fundamentally entrenches continuing agricultural support and protection. The general provisions of the law are broadly worded and therefore allow for maximum flexibility of interpretation. The legislation is a monument to the maintenance of the status quo and a formidable legal barrier to reforming the agricultural sector by dismantling the agricultural protection system. This system is the core vested interest of the iron triangle of farmers and farm organisations, agricultural politicians and MAFF bureaucrats. Indeed, the passage of the New Basic Law has energised the agricultural protection industry and provided a whole new legal underpinning for the agricultural support and protection regime. The balance of the legislation is heavily weighted in favour of agricultural support and protection as opposed to agricultural deregulation and liberalisation. Further, the New Basic Law is designed to provide a solid ideological, legal and policy defence against further liberalisation of Japan’s agricultural market in WTO trade negotiations. The timing of its passage in July 1999 (four months before the scheduled November meeting in Seattle) was indicative of its function in this regard. It aimed to lay the legal groundwork for such a defence and was geared specifically to the WTO (Nikkei Weekly, 10 January 2000). Zenkoku Noseikyo has since called for trade rules to be established that will ensure

188

Japanese governance

policy deployment based on the new law (Nosei Undo Jyaanaru 2000b:3). It argues that the survival of Japanese agriculture and rural areas hangs on the WTO agricultural negotiations (Nosei Undo Jyaanaru 2000b:3).41 The new law also pushes to the fore non-trade considerations, such as the multifunctionality of agriculture, and plays on national insecurities about domestic food supplies in the light of steady falls in Japan’s self-sufficiency rate. As already noted, the legislation was designed to elicit the formation of a national consensus in favour of agricultural support and protection, by evoking principles patently linked to the public interest, such as food security and the environmental contributions of agriculture. This position is symptomatic of the revamped strategy being used by the agricultural iron triangle to advance the cause of agricultural protection. The farm lobby no longer engages in special pleading for farmers. Instead, it argues that issues of food, agriculture and rural areas are not just matters for agricultural producers and those who live in rural areas but questions for the people as a whole.42 Concepts such as food security and the multifunctionality of agriculture represent a synthesis of special interests with the national or public interest.43 It is indicative that the new law passed the Diet with the almost unanimous support of all members and parties. CONCLUSIONS Radical changes in Japan’s agricultural policies and agricultural policymaking processes have not taken place in recent years. In fact, as this chapter has argued, agricultural interests have dug themselves in even more firmly for the fight against deregulation and liberalisation. The triad of agricultural interests remains firmly entrenched in spite of the arguably weaker position of each of its entities in Japan’s political economy. This is notwithstanding some deregulation of domestic agricultural markets, liberalisation of import controls, reductions in agricultural support and stabilisation prices and the marketisation of pricing systems. The structure and methods of support may have changed, but little has altered in terms of outcomes. In spite of all the rhetoric surrounding the New Basic Law, it merely genuflects to the principles of efficiency and productivity. Furthermore, pork-barrel politics have become even more entrenched as a result of the singular overemphasis on fiscal stimulus as the main instrument for reviving the economy. The main players in this seemingly unending saga—farmers, farm organisations, MAFF bureaucrats, MAFF-affiliated agencies, agricultural politicians and public works construction companies—still strive to protect their vested interests. The 2000 OECD report on agricultural policy identified Japanese farming as a sector where deregulation, competition and structural change could provide immediate and immense productivity benefits (Australian Financial Review, 31 March 2000). It is not government-inspired policy change that will induce major structural reform in the agricultural sector, but demographic changes and the corporatisation

Agricultural policy and agricultural policymaking

189

of farming in all its forms, with creeping commercialisation extending from the factory-facility type of agricultural production to the more land-intensive types. Although the latter development is dependent on reform of the Agricultural Land Law, agricultural production companies including joint-stock companies are currently establishing factory farms run along entrepreneurial lines, with managers and hired labour, especially in the horticultural and livestock sectors. They are also contracting with farm groups who have agricultural land and who are developing hi-tech farming (Honma 2000). Even traditional family farms are being forced to contemplate some form of conversion to group farming operations because of the lack of ‘successors’ in farm households and the inexorable pressures to increase the competitiveness of farming in the face of further trade liberalisation. In these larger amalgamated farms run along entrepreneurial lines, agricultural production will be undertaken by agricultural labourers and managers working for wages and salaries. Many of these agribusinesses will be established under the aegis of Nokyo, which has belatedly reversed its traditional policy in favour of family farming and is now seeking ways to support agribusinesses by establishing companies that will engage in farming (Yomiuri Shimbun, 3 September 2000). Although government policies currently give priority to the development of various kinds of farm-based agricultural production corporations, an amendment to the Agricultural Land Law passed in November 2000 permits agricultural production corporations to form themselves into joint-stock companies and non-joint agricultural companies, such as general trading companies and food companies, to hold up to 25 per cent of the shares in these corporations. The MAFF is hoping that cross-sectoral flows of capital from competitive industries will lead to greater efficiency in agriculture. Partial deregulation of agricultural land ownership combined with the growth in agribusiness may produce a technologically oriented and capital-intensive agricultural sector, reducing its predominant orientation toward land-intensive farming. Japan may even export products where it has a comparative advantage, such as high-quality beef and mandarin oranges, which it has previously done only occasionally (Honma 2000). Until these developments take hold, however, land-intensive sectors such as rice farming, where part-time farm households are dominant, will remain the Achilles heel of Japanese agriculture and will mean that Japanese farming policy as a whole is likely to retain all its protectionist characteristics. In the medium term, the majority of farm households will remain just as dependent on the government as before, although the mix of support policies may be different. Nonetheless, Japan’s farmers and agricultural organisations will never be able to relive the heyday of agricultural support and protection they enjoyed during the 1970s and 1980s. The overall trend toward marketisation, liberalisation and deregulation is unstoppable. Underlying public policy values are also changing across a whole range of sectors, agriculture included. Furthermore, Japan’s agricultural protection regime remains under external challenge through the WTO. Change is only a question of pace and compensation.

190

Japanese governance

NOTES 1

Depicting the agricultural policy subgovernment as a three-way coalition of Nokyo, the LDP and the MAFF masks a more complex reality. Agricultural interest groups encompass not only the agricultural cooperatives (Nokyo), led by their peak body, the National Central Union of Agricultural Cooperatives (Zenchu), but also a number of other agricultural statutory interest groups, commodity associations and rice-roots farmers’ organisations—such as the farmers’ unions— in representing farmers’ interests to government. Similarly, the LDP is a plural entity, with some but not all of its elements drawn into the agricultural policy subgovernment. The MAFF, likewise, is the chief instrument of state intervention in the farm sector but is complemented by other ministries and agencies that direct government subsidies to agriculture-related purposes, as well as a host of MAFF-sponsored groups known as government-affiliated agencies (gaikaku dantai). Despite this diversity and organisational complexity, the effective decisionmakers are the core élites within each of these segments—namely, Zenchu executives, the leaders of the LDP’s agricultural policy committees and senior MAFF officials. 2 Agricultural public works have traditionally involved farmland consolidation, the installation and maintenance of irrigation facilities for paddy farming and the reclamation of land for agricultural purposes, all of which come under the broad heading of land improvement. See also the section below on rural public works. 3 See ‘Chapter 1: The Interventionist State’ in George Mulgan (forthcoming) Japan’s Interventionist State: MAFF and the agricultural policy regime. 4 For example, the number of former MAFF officials hired by construction firms totalled 166 between 1991 and 1995. Of the total, 133 had been in charge of agricultural public works projects while at the ministry. Studies confirm that contracts for farm-related public works projects are awarded to companies with former officials as directors (Nikkei Weekly, 10 March 1997). Government bureaucrats including MAFF officials have also been wined and dined by their regulatory constituencies. Recent implementation of a new ethics law, however, suggests that such practices have been curbed. 5 MAFF and other government officials caught up in much-publicised corruption scandals in the late 1990s contributed to the push for a new ethics in government law recently (the National Public Service Ethics Law), which took effect from 1 April 2000. 6 Some Upper House prefectural constituencies are also multi-member electorates, but the Lower House is the more powerful of the two houses in the Diet. 7 In 2000, this gap stood at 2.44:1 in the Lower House and 5.02:1 in the Upper House (Nikkei Weekly, 12 January 2000). 8 When categorised according to percentage of workers employed in primary industry, only one constituency has 30 per cent and above in primary industry (Table 2 in Nishihira Shigeki 1995:4099). When classified according to population concentration and industrialisation rates, 27 (9 per cent) of the total number of Lower House SMDs end up being designated as semi-rural (Nishihira Shigeki 1995:4101). 9 The difficulties faced by the LDP in finding persons of talent to fill crucial positions in its agricultural policymaking apparatus underscore this fact (Nosei Undo Jyaanaru 2000a:1). 10 Meetings of the Agriculture and Forestry Division (Norin Bukai) of the LDP’s Policy Affairs Research Council (PARC) are held on almost a daily basis when the Diet is in session, in contrast to other bukai, which typically meet only once

Agricultural policy and agricultural policymaking

11 12 13 14 15 16 17 18

19 20

21 22 23 24 25

26

27

191

a week. The division, moreover, has a reputation for mobilising its political power in a unified fashion (Nosei Undo Jyaanaru 2000a:1). The number of Nokyo Diet members fell, however, from a peak of 51 in 1971 to 13 in 2000. Ichiro Ozawa, the leader of the Liberal Party, is a good example of this. The Komeito came up with a plan for rice market liberalisation in the early 1990s in an effort to appeal to urban consumers. The former Ministry of Construction and Ministry of Transport is now the Ministry of National Land and Transport. See also below. Approximately 550,000 construction companies employ more than 6 million workers in Japan. The array of projects undertaken within the broad category of rural infrastructure development includes the construction of agricultural roads and bridges, dams, waterways, sports and cultural centres, and other facilities. In 1999, the figure was 51.6 per cent. See Table 3.6 in ‘Chapter 3: Patronage Politics’, in George Mulgan (forthcoming), Party and Patronage in Japan’s Rural State. Between 1990 and 2000, outstanding government debt rose from just over 60 per cent of nominal GDP to almost 130 per cent. Japan now has the highest ratio of outstanding long-term government debt to gross domestic product among OECD members (Nikkei Weekly, 30 September 1996). The reallocation of funding away from agricultural infrastructure projects continued in the 2000–2001 budget. The Management and Coordination Agency drew up review guidelines for public works programs. These guidelines were adopted as a global framework for the review process by restructured ministries and agencies from January 2001 (Asahi Shimbun, 22 August 2000). The others are the Ministry of Construction, the Ministry of Transport, the National Land Agency and the Hokkaido Development Agency. A comprehensive evaluation of the impact of agricultural trade liberalisation can be found in Food and Agriculture Policy Research Centre (2000). Nokyo charges farmers a 4 per cent commission on the price they receive for 60 kilograms. Personal interview with Zenchu official, Tokyo, January 2000. This is officially calculated using the average market price of rice over the previous three years. Farmers are compensated for 80 per cent of the difference between the standard price and the price they received for their rice. They must, however, contribute to the stabilisation fund. As acknowledged by one Zenchu official, however: ‘the issue of sustainable agribusiness is a much more complex one than the previous singular focus on the producer rice price. At the same time, it has become much more difficult to motivate the broad mass of farmers to participate in Nokyo-sponsored campaigns because the interests of farmers have become more diverse. In the past a rise in the producer rice price could satisfy everyone. However, in an environment in which there is a much greater focus on the sustainable management of agribusiness, it is difficult to find common interests between part-time and fulltime specialist farmers. Only the WTO issue is a common issue amongst farmers, which makes it more probable to organise collective action around this issue’ (Personal interview with Zenchu official, Tokyo, January 2000). Increasing imports under liberalised markets, as well as Japan’s international obligations under trade agreements, have, however, forced the MAFF to reappraise its position on price supports, resulting in adjustments to several systems in the years since 1995. See below.

192

Japanese governance

28 This idea was presented as a proposal in a December 1995 deregulation package. 29 This was the first time an agricultural White Paper had clearly stressed the strategic use of ODA at the WTO talks. It was directly targeted at the developing countries, who make up about three-quarters of the WTO membership. 30 According to Domon, setting the figure at 530 billion yen meant that only three prefectural trust federations (Miyagi, Tochigi and Saitama) would suffer from excess debts, whereas at 1.21 trillion yen, one-third of all prefectural trust federations would suffer from excess debts (Domon 1996:20). 31 About 685 billion yen from the national budget was allocated to cover jusen losses by the end of 1996 (Nikkei Weekly, 30 December 1996). 32 In 1998, 10 prefectural governments extended a total of 23.8 billion yen to various agricultural cooperatives saddled with massive bad debts (Yomiuri Shimbun, 29 April 1998). According to another source, 20 prefectural governments planned to spend some 30 billion yen in fiscal year 1998–99 on support to ailing agricultural cooperatives to help them dispose of non-performing loans and strengthen their management base. Some of this money was provided as loans to funds that were established to promote mergers among the cooperatives (Financial Times, 28 April 1998). 33 Zenchu plans to restructure poorly managed cooperatives and credit federations and improve their business performance by restricting their investments before their capital adequacy ratios fall below 4 per cent. The aim of the plan is to screen out ailing cooperatives and prevent restructuring from being used as a last-ditch option for financial rescue by cooperatives in dire financial straits (Yomiuri Shimbun, 3 September 2000). 34 According to Zenchu, the objective of the 1961 Agricultural Basic Law was to improve the position of those employed in agriculture and to develop agriculture by correcting the productivity gap between agriculture and other industries in order to equalise the standard of living between farmers and non-farm workers. In contrast, the objective of the New Basic Law is to expand the object (of the law) to include not just agriculture but also food and the rural sector from the standpoint of the whole nation and thus fully demonstrate the multifunctionality of agriculture and rural areas, and the stable supply of food (Miwa 2000:14). 35 There is room, however, for flexible interpretation of such key phrases as securing the nation’s food supply ‘with domestic agricultural production as a basis...together with an appropriate combination with imports and stockpiles’ and securing ‘the minimum food supply required for the people’. 36 According to Zenchu, the New Basic Law takes family farm management as its basis (Miwa 2000:17). 37 Under this law, farmland must be owned by cultivators, and cannot be owned by stockholders (who are not cultivating the land) (Honma 2000). 38 In Japanese land-intensive farming is referred to as ‘land-utilisation-type agriculture’, or tochi riyogata nogyo. 39 ‘Agricultural Policy Reform Outline’, December 1998, quoted in Miwa (2000:70). 40 This is done through the ‘Basic Plan’ mandated under the law. 41 This is backed up by the argument that, because farm size in Japan is so small and because the production costs of agricultural products are high compared to those of exporting countries, domestic production would seriously decline in a short time if importation were to be liberalised under low tariffs. ‘Therefore, “import liberalisation” was a synonym for “abandonment of domestic production”’, (Toda 2000:11). 42 This idea is the basis of Nokyo’s ‘cooperative living’ campaign which seeks to forge common interests with consumers (Miwa 2000:94). 43 See Chapter 7 on ‘Ideological Politics’ in George Mulgan (forthcoming), The Challenge to Vested Interests: Contesting agricultural power in Japan.

Agricultural policy and agricultural policymaking

193

REFERENCES Aguri Fuoramu, 1987. ‘Tokushu: Nihon no kome’ [Special report: Japanese rice], Chuo Koron, 102(2), February:14–20. Domon, T., 1992. Nokyo ga Tosan Suru Hi [The Day that Nokyo Goes Bankrupt], Tokyo, Toyo Keizai Shinposha. ——, 1996. ‘Jusen kokkai ni katte kinyu senso ni yabureru’ [Nokyo won the jusen Diet but was defeated in the financial war], Kinyu Bijinesu, July:24–26. Food and Agriculture Policy Research Centre, 2000. Impact of Increased Imports on Japan’s Food Market, Food and Agriculture Policy Research Centre, Tokyo. George Mulgan, A., 1997. ‘The role of foreign pressure (gaiatsu) in Japan’s agricultural trade liberalisation’, The Pacific Review, 10(2):165–209. ——, (forthcoming). ‘Patronage Politics’, in A. George Mulgan, Party and Patronage in Japan’s Rural State, Chapter 3. ——, (forthcoming). ‘The interventionist state’, in A. George Mulgan, Japan’s Interventionist State: MAFF and the agricultural policy regime, Chapter 1. Honma, M., 1999. ‘The New Agricultural Basic Law and trade policy reform in Japan’, unpublished paper. ——, 2000. ‘Political economy and agricultural policy reform in Japan’, Paper presented at a workshop on Some Key Issues for the East Asian Food Sector, Australia–Japan Research Centre, The Australian National University, 2 May. Miwa, Masao 2000. Fuakutobukku 2000 [Factbook 2000], JA Zenchu, Tokyo. Nishihira, Shigeki, 1995. ‘Shosenkyoku bunrui kijun no teian’ [Proposals for a classification standard for the single-member electorate system], Chuo Chosaho, 449, March:4096–99. Nosei Undo Jyaanaru, 2000a. ‘‘‘Norin giin” mo kokeisha fusoku?’ [Agriculture and forestry Diet members also lack successors?], Nosei Undo Jyaanaru, 30, April:1. ——, 2000b. ‘Dai 42-kai shugiin sosenkyo ni mukete’ [With a view to the 42nd Lower House election], Nosei Undo Jyaanaru, 30, April:2–4. ——, 2000c. ‘Shokuryo jikyuritsu no mokuhyochi’ [The food self-sufficiency targets decided], Nosei Undo Jyaanaru, 30, April:24–25. ——, 2000d. ‘Zenkoku Noseikyo dai-11kai tsujo sokai o kaisai’ [The 11th ordinary general meeting of the National Agricultural Policy Council held], Nosei Undo Jyaanaru, 30, April:14–18. Okimoto, D., 1989. Between MITI and the Market: Japanese industrial policy for high technology, Stanford University Press, Stanford. Saeki, N., 1993. Nokyo Kaikaku [Reform of Nokyo], Ie no Hikari Kyokai, Tokyo. Toda, H., 2000. ‘General introduction and summary: changes in agriculture and food consumption in Japan created by increased imports of agricultural products’, in Food and Agriculture Policy Research Centre, Impact of Increased Imports, Food and Agriculture Policy Research Centre, Tokyo:1–40.

194 Index

Index

‘1955 political system’ 49 Account for Prompt Financial Restructuring 93n3 accounting rules 5, 85, 93n11 accounting system reforms 85–86, 94n12 A-Coop 181–182 administrative councils (see deliberation councils) administrative guidance, defined 56 administrative policy external evaluation of 8 regulation of 160–164 Administrative Procedures Act (1994) 5 administrative reform aims of 156–157 implementation of 121–123, 127– 129 private governance of public rights 158–167 proposals for 115–121 and women’s issues 156 Administrative Reform Committee 81, 93n5, 118, 121, 129n4 Agency of National Resources and Energy 149 agribusiness management 179, 189, 191n26 Agricultural Basic Law (1961) 184, 186, 187, 192n34 Agricultural Cooperative Associations (see Nokyo) agricultural cooperatives 181–184, 191n31–33 (see also Nokyo) Agricultural Land Law 189 agricultural machinery 181

agricultural production corporations 186, 189 agricultural sector cooperatives 181–184, 191n31–33 (see also Nokyo) deregulation of 176–180, 191n22–27 governance coalition for 170, 184, 188, 190n1 impact of electoral reform 172–174, 190n7–191n13 lack of effective reform 171 New Basic Law (1999) 184–188, 189, 192n34–41 policy regime for 170–171 protectionist policies 187–188, 189 public works 174–176, 191n14–21 reform recommendations 188–189 trade liberalisation 176–180, 191n22–27 WTO sansha kaigi 180–181, 192n29 Agriculture, Forestry and Fisheries, Ministry of (MAFF) in agricultural coalition 170, 190n1 agricultural policy regime 171 corruption scandal 4 food security demands 185 public works coalition 174 resistance to deregulation 179–180, 191n27 WTO sansha kaigi 180–181, 192n29 agro-chemicals 181 AIDS-tainted blood 4, 116 airline industry 122 Akita Obscenity Case (1997) 166–167 All Japan Bankers’ Federation 65 amakudari decline in 74n30

Index 195 defined 66 energy industry 100 MOF officials 69, 71–72n4, 73n20 shingikai transparency and 128 sustainability of 130n11 AMEICC (ASEAN-MITI Economic and Industrial Cooperation Committee) 104 animal feed 181 anthem (see national anthem (Kimigayo)) anticompetitive behaviour 148–149, 155 anti-corruption laws 24, 26 anti-discrimination legislation 165 Anti-Dumping Law (1916)(US) 108 anti-harassment policy (see sexual harassment) Antimonopoly Law (1947) amendments to 141, 155 civil remedies 152n3 consumer law exemption 148 enforcement of 140–141, 142–143 intellectual property rights exemption 149 self-regulatory compliance 147 in Shiseido litigation 145 Antitrust Law 87 ‘anxiety, five sources of’ 53n32 Aoba Life Insurance Company 73n22 Aoki, M. 135, 151 APEC (Asia Pacific Economic Cooperation) 104 Asahi Bank 94n15 Asahi Shimbun 16 Asahi Television 160 ASEAN (Association of Southeast Asian Nations) 104, 105, 110 ASEAN-MITI Economic and Industrial Cooperation Committee (AMEICC) 104 Asia industrial policy toward 103–107 war of aggression in 52n20 Asian Development Bank 103 Asia Pacific Economic Cooperation (APEC) 104 asset assessment 62 asset bubble 1, 3, 55, 57 asset-management markets 82–83, 93n6–9 Association of Southeast Asian Nations (see ASEAN)

Australia anti-discrimination legislation 165 competition regulation 140, 142, 146 Democratic Labor Party 28n13 electoral system 24, 28n13 trade negotiations 177 automobile industry 6, 107 Ayers, I. 163 bad debt 62 bank credit 82, 84 banking crisis 22, 78–79, 89 Banking Law 81, 88 Bank of Japan (BOJ) 4, 13n2, 70, 74n31 Bank of Japan Act (1998) 55, 70, 74n31 Bank of Tokyo-Mitsubishi (BOT-M) 73n23, 73n24 bank regulation (see financial regulation) bankruptcy accounting system disguising 85 bank mergers deflecting 79–80 of financial institutions 61 Insolvency Law reform 152n2 law reform for 138 of life insurance companies 93n7 post-1991 data 89 banks (see also financial regulation) 1997 collapse 60, 72n7 disclosure of confidential information 4, 13n2 e-banking 87, 94n14 mergers 67, 73n23, 184 nationalisation of 61, 62, 66, 72n9, 74n25, 93n3 recapitalisation of 72n8 rescue schemes for 53n38, 61, 72n9, 73n25, 93n3 staffing policies 66, 67, 73n20–21 barley 187 Basic Law for Establishing the Recycling-based Society (2000) 99 beef industry 177, 189 bid rigging 4 Big Bang financial reforms accounting system 85–86, 94n12 asset-management markets 82–83, 93n6–9 capital market 84–85, 93n11 corporate finance 83–84

196 Index exclusion of public financial institutions 90–91 inception of 77, 78 to increase market competition 86– 87, 94n13 overview of 92 promotion of 80–82 prudential regulation 87–88, 94n16 and role of government 89–90, 94n17 bilateral trade agreements (see trade agreements) biotechnology 137 BOJ (see Bank of Japan) bond market 69, 83, 91, 106 BOT-M (see Bank of Tokyo-Mitsubishi) Bottomley, S. 161–162 Braithwaite, John 163 ‘brand image’ 146 Brazil 107 bribery 4, 60, 65, 171 bridge bank schemes 61, 72n9, 73n25, 93n3 broadcasting industry 126–127, 128– 129 brokerage fees 84 Buddhism 22, 40, 50n4, 51n17 budget public works share 175, 191n19 regulation of 58 ‘buffer players’ 45 Bungei Shunju 53n40 bureaucracy amakudari employment 71–72n4 collusion with politicians 10 public disillusionment with 115–116 reorganisation of 7–8 shingikai and 114, 128 businesses, capital markets for 84 Cabinet Office, establishment of 8 capital market 84–85, 93n11 cartels 115, 141, 150, 152n3 CEFP (Council for Economic and Fiscal Policy) 69–70 China, People’s Republic of 52n20, 105 cinema complexes 103 citizens, types of 138 citizenship 163 citrus industry 177, 189 City Bank 106 Civil Procedure Code 137–138

Civil Rehabilitation Law (1999) 152n2 Clean Government Party (see Komeito) clearing systems 91 coalition rule during 1990s 19–23, 29 emergence of 2, 6, 13n6–7, 16, 17 factional politics encouraging 46 factors contributing to emergence 37–39, 49 LDP—JSP/SDP coalition 38, 40 LDP—JSP/SDP—Sakigake coalition 17, 20–21, 36, 38, 46, 47–48 LDP—Komeito—LP coalition 13n6, 22, 27n5 political regimes within 44–50, 53n36–39 post-1993 House of Representatives 36–37, 50n1 principle of 17, 18 reasons for 36 coalition theory 39–44, 51n13–53n34 Code of Civil Procedure 137–138 Cold War 18, 23, 38 colonial rule 52n20 ‘command and control’ regulation, theory of 162–163 Commercial Code 84–85, 87, 93n11, 94n15, 138 compartmentalisation policy 92–93n2 compensation, for sexual harassment 166, 167, 167n1 competition law JFTC legislative enforcement 141– 147, 152n5–6 legal system reform agenda and 135–139, 148–151, 151n1–152n4 regime of 139–141 self-regulation within 147–148, 151 in Shiseido litigation 143–147 compliance, corporate 159, 160 Composition Law (1922) 152n2 Conservative Party (Hoshuto) 37 Constitution (1946) 19, 22, 27–28n8, 28n10, 150 Construction, Ministry of (MOC) 4, 14n10, 174, 191n14, 191n21 construction industry 174, 190n4, 191n15 Consumer Contract Law (2000) 138 consumer insurance 148 consumer interests and identity 138 consumption taxes 99, 116 convoy policy 79

Index 197 ‘cooperative living’ campaign 192n42 corporate institutions, defined 2 corporate law 143, 161–162 corporations accounting inspection criteria 93n11 accounting reforms 68 compliance by 159, 160 financial reforms 83–84 legal entities within 147 responsibilities under law 165–166 self-regulation of 160–167 sexual harassment regulation 156, 158–160 Supreme Court definition 159 corporatised model of regulation 164 corruption collusion in tendering process 142 of corporate managers 85 corruption perceptions index ranking 13n3 defence contracts scandal 51n15 electoral reform reducing 23 electoral system encouraging 24 government image tarnished by 115–116 by government officials 3–4, 60, 65, 171, 190n4–5 introduction of regulatory controls 5 public intolerance of 3 Recruit Scandal 19 single party rule encouraging 16 corruption perceptions index 13n3 cosmetics industry 143, 144–147 Council for Economic and Fiscal Policy (CEFP) 69–70 Council of Business Accounting 85 credit crunch 60, 91 ‘crony capitalism’ 16 Curtis, G. 53n38 Daihyaku Mutual Life Insurance Company 72n12 Dai-ichi Kangyo Bank 73n23, 94n15 Daiwa Bank 5, 13n5 Daiwa Securities Company 94n15 day-care/nursery industry 102–103 ‘deal-making’ politics 39n47, 45, 46, 47 debt bad 62 national 1–2, 68, 191n18 debt waivers 65, 66, 73n17

deliberation councils broadcasting shingikai 126–127, 128–129 chronology of 133 criticism of 114–115, 129n1 membership 113, 120, 121, 129n6 praise of 113–114 reform implementation 121–123, 127–129 reform proposals 115–121 role of 73n15, 113–114 utility shingikai 123–126 Democratic Labor Party (Australia) 28n13 Democratic Party (DP) (see Democratic Party of Japan) Democratic Party of Japan (DPJ)(Minshuto) electoral representation base 51n10 fading ideological polarity 38–39 financial reform proposals 62 formation of 17, 21 lack of cohesive policy 49 LDP consensus with 46–47, 53n38 slogan 62 Democratic Reform Party (Rengo Sangiin) 50n1 Democratic Socialist Party (DSP) 51n17 democratisation 110 Deposit Insurance Corporation (DIC) 61, 64, 72n9, 93n3, 94n17 deposit insurance funds 58, 71, 88, 89, 93n3 deposits, personal sector holdings 82 deregulation financial 77, 78–79 internationalisation increasing 101– 102 MITI initiatives 98, 101–103, 124– 126 pre-1996 financial 79 derivative actions 85 design rights 149 design technology 105 d’Hondt system of proportional representation 25 Diamond Power Corporation 101 DIC (see Deposit Insurance Corporation) Diet (see also House of Representatives)

198 Index 145th session 19, 27n7 political seat breakdowns 20, 21, 22, 30–35 digital broadcasting formats 126 digitalisation 126, 127 disaster relief, agricultural 170 discussion councils (see kondankai) Doi, Takako 40 domestic violence 157 Domon, T. 192n30 DPJ (see Democratic Party of Japan) drug use 4 DSP (see Democratic Socialist Party) dual-track employment system 157 duty of care legislation 158, 159, 165 earthquakes 116 e-Asia plan 105 East Asia (see Asia) ‘East Asian Miracle’ (World Bank) 114 Eastman Kodak Company 110, 141 e-banking 87, 94n14 Economic and Fiscal Policy ministerial post 69 economic growth, democratisation and 110 economic performance, post-1991 1–3 Economic Planning Agency (EPA) 122, 138 economic reforms 96, 140 Economy, Trade and Industry, Ministry of (METI) 109–110 (see also International Trade and Industry, Ministry of) Education, Ministry of (MOE) 14n8 electoral candidates affiliations of 7 election determinants 39, 51n12 local issues policies 173–174 unified policies of 37, 50n5 electoral constituents critical of coalitions 44 split-ticket voting 45, 48 voter apathy 44 voter preferences 50n5 voting characteristics 39, 51n12 electoral reform agricultural sector and 172–174, 190n7–191n13 Hosokawa’s reform agenda 16, 27n1 impact of 10, 23–27 pre-1993 House of Representatives 23–24, 28n12, 28n14

electoral system campaign expenditure 24 illegal campaigning 4, 116 overview of reforms 96 party identification 39, 44 post-1993 House of Representatives 24–27, 39 split-ticket voting encouraged by 48 electrical manufacturers 142 electricity regulation 100–101, 123– 126, 148, 152n3 Electricity Utility Law 100 electronics industry 105 embezzlement 4 emissions control 99 employment (see also staffing) construction industry data 191n15 decline in agricultural 171 export of skilled labour 105 gender inequity 157 Hashimoto blamed for decrease in 22 MITI subsidies 105 opportunities for women 102–103 energy industry 100–101, 123–126, 148, 149, 152n3 entertainment, disclosure stipulations 13n3 Environment Agency 14n8 environmental harassment 158, 165 environmental management 14n8, 99, 124, 160 EPA (Economic Planning Agency) 122, 138 Equal Employment Opportunity Act (1985) 157, 158, 159, 160, 164, 165 espionage 4 euro-bond market 83 European Community (EC) 107, 108 European Union (EU) 142, 149, 181 Evans, Peter 114 exchange rate policy 58 export insurance 101, 106–107 factions, political 45, 46 factory farms 189 family farming 186, 189, 192n36–37 farmers demographic trends 172, 190n8 electoral reform and 172–174, 190n7–191n13 family farming 186, 189, 192n36–37 government benefits 170, 190n2 organisations for 190n1

Index 199 rice marketing 177–179, 191n23, 191n25–26 farm input supply business 181–182 FDI (foreign direct investment) 6 Federation of Economic Organisations 73n17 ‘Fed watcher’ 65 feminist activism 157 fertilisers 181 film industry 103 FILP (Fiscal and Investment Loan Program) 68–69 Finance, Ministry of (MOF) advisory councils 93n4 BOJ policy influenced by 70 corruption of officials 4, 60, 65 decreased authority of 58, 61, 62, 64, 78, 123 employment of former officials of 66, 71–72n4, 73n20 financial crisis blamed on 55, 78 financial regulation 55 Financial System Research Council 114–115 ‘gradualist’ reform policy 79–80, 87, 92n1 name change 68, 74n26 NPLs and 55, 56–57 policy errors by 80–81, 93n4 regulatory role 100, 161–162 shingikai opacity 123 staffing policy 60 staff transfers to FSC 62, 72n13–14 structure of 58 finance sources 84, 94n10 Financial Auditing Manual 65–66, 73n19 financial crisis 78 financial institutions 1997 collapse of 60, 72n7 foreign 65, 66–67, 73n22 Nokyo participation 184 public 90–91 Financial Reconstruction Commission (FRC) 62, 67–68, 72n9, 72n10 Financial Reconstruction ministerial post 64 financial reforms Big Bang financial system 77–94 by FSA 11, 61–67, 71, 73n16–17 financial regulation 1990s by MOF 55, 56–57 banking crisis and 78–79 chronology of 76

by FSA 58–61, 89–90 structure of 59, 63, 69 Financial Revitalisation Account 93n3 Financial Revitalisation Law (1998) impact of 55–56, 61, 62, 64–67 implementation of 72n10 passage of 76 recapitalisation of banks 72n8 regulatory structure under 63 Financial Services Agency (FSA) 76, 90 (see also Financial Supervisory Agency) Financial Supervisory Agency (FSA) authority of 63, 64, 73n15, 88 bank reform 11, 61–67, 71, 73n16– 17 constraints on 58, 71–72n4 establishment of 55, 58, 59, 76, 88 Kokusai Securities suspension 72n12 mandate 58 monitoring resources 58–59 name change 68, 76, 90 non-financial companies guidelines 87 prompt corrective action by 88, 94n16 regulatory inertia 60–61 regulatory role 67–68, 90, 94n17 staffing 59–60 financial system exit policy 88–89 government role in 89–90 pre-2000 regime 78, 79, 92–93n2 Financial System Planning Bureau 58 Financial System Research Council (MOF) 114–115 firms, finance sources for 84, 94n10 Fiscal and Investment Loan Program (FILP) 68–69 fiscal policy 68–70 flag (see national flag (Hinomaru)) food (see also rice market) distribution of 176, 192n34–35 security of supply 185, 188, 192n35 self-sufficiency in 185, 188 Food, Agriculture and Rural Areas Basic Law (1999) (see New Basic Law (1999)) Food Control Law (1942) 177 forbearance, policy of 81, 89, 92n1 Foreign Affairs, Ministry of (MOFA) 4 foreign direct investment (FDI) 6 foreign exchange markets 77

200 Index fraud 4 FRC (see Financial Reconstruction Commission) Freedom of Information Act (1999) 19 free-trade agreements 108 FSA (see Financial Supervisory Agency) Fuji Bank 73n23, 94n15 Fujiki Honten 144–147 Fuji Photo Film Company Ltd 110, 141 Fukuda political faction 45 Fukuoka Sexual Harassment Case (1992) 166 furniture industry 105 gas industry 148, 152n3 gasoline market 149 GATT (see General Agreement on Tariffs and Trade) GDP (gross domestic product) national debt share 191n18 public works expenditure 175, 191n19 gender inequity 157, 167 General Agreement on Tariffs and Trade (GATT) 99, 107, 177 Gerber, D.J. 141–142 gifts, disclosure stipulations 13n3 globalisation 109 government-affiliated agencies 190n1 government-business relations 3, 5, 7 ‘gradualist’ reform policy 79–80, 87, 92n1 Great Britain (see United Kingdom) greenhouse gas emissions 99 gross domestic product (see GDP) Gulf crisis 20 Hachioji Sexual Harassment Case (1996) 167n1 hakuchu jidai 45 Harbinger Party (see Sakigake) Hashimoto, Ryutaro 21, 78, 109, 116, 119 Hashimoto administration 17, 21–22, 29, 33–34, 77 Hata, Tsutomu 20, 117 Hata administration 20–21, 29, 31 Hatoyama, Yukio 53n40 Health and Welfare, Ministry of (MHW) 4, 14n8, 14n10, 100 Heisei recession 103 Heiwa Sogo Bank 80 Hilton Root 113–114

Hinomaru (national flag) 27n4, 27n6, 42, 43, 51–52n18 Hitachi Ltd 142 HIV, tainted blood imports and 4, 116 Hokkaido Airlines 122 Hokkaido Development Agency 191n21 Hokkaido Takushoku Bank 53n38, 72n7 holding companies 87, 94n15 Honshu-Shikoku Bridge Authority 73n28 Horiuchi, A. 83 horticultural sector 177, 189 Hoshuto (Conservative Party) 37 Hosokawa, Morihiro 20, 36, 116, 117 Hosokawa administration 16, 19, 20, 23, 27n1, 29, 30 House of Councillors 19–22, 26, 37, 50n6, 172, 190n6–7 House of Representatives 19–22, 26, 37, 50n6, 172, 190n6–7 housing and loan corporations (see jusen) human rights 156 IAI (Independent Administrative Institutions) 8, 14n11 ideology 38, 44, 48, 49 Ikenaka v Tahushi (1993) 159 IMF (see International Monetary Fund) import quotas 177 income protection, for farmers 187 Independent Administrative Institutions (IAI) 8, 14n11 independent power providers (IPPs) 125, 126 Indonesia 105, 106, 107 Industrial Bank of Japan 73n23 industrial organisational structure 5–6, 102 industrial policy, toward Asia 103–107 (see also International Trade and Industry, Ministry of) Information Disclosure Law (2001) 5, 13n3 information technology (IT) administrative representation 122 banks’ weakness in 67 e-banking 87, 94n14 funding deficit 9 increase in FDI 6 jurisdictional disputes 14n8, 14n10

Index 201 MITI initiatives 105 infrastructure agricultural sector 170, 190n1 financial 91 for Internet 105 rural sector 186, 190n2, 191n16 insolvency (see bankruptcy) Insolvency Law reform 152n2 inspection standards 73n19 institutions, Aoki’s definition 135, 151 insurance industry asset management 82–83 export insurance 101, 106–107 financial segregation of 94n13 MITI initiatives 106–107 Nokyo participation 184 personal sector holdings 82 self-regulation in non-life sector 148 Insurance Industry Law 81, 148 intellectual property rights 149–150 interest rate 57, 70, 93n7 internationalisation 98, 101–102 International Monetary Fund (IMF) 73n27, 103, 139 International Trade and Industry, Ministry of (MITI) client industries 124 conventional perspectives on 97– 99, 104 deregulation initiatives 98, 101–103, 124–126 ideology of 100, 101 industrial policy 98, 103–107 jurisdictional disputes 14n8, 14n10 Large Scale Retail Stores Act (1973) 164 legal services industry 139 multilateralist policy 99, 107–109 name change 110 principles of establishment 103 regulatory role 99–101, 109, 124 shingikai transparency 123 staff transfers 100 transformation implications 109– 111 Internet 94n14, 99, 105 Investment Trust Act (1998) 83 investment trusts 83, 93n8 irrigation 186, 190n2 Ishibashi, Tanzan 115 Ishihara, Shintaro 27n6, 110 IT (see information technology)

Ito-Yokado Corporation 67, 87, 94n14 Japan Agricultural Standard (JAS) 179 Japan Bankers’ Federation 73n17 Japan Communist Party (JCP) (Nihon Kyosanto) 17, 19, 38–39, 51n11 Japan Defence Agency (JDA) 4 Japanese Federation of Business Organisations 7 Japan Fair Trade Commission (JFTC) 73n16, 135, 140, 141–147, 150, 152n5–6 Japan Federation of Bar Associations 137, 139 Japan Inc. 1, 2, 3, 13n1, 111, 134, 170 Japan Sewerage Corporation 142 Japan Socialist Party (JSP) (Nihon Shakaito) 50n2 (see also coalition rule; Social Democratic Party) Japan—US Security Treaty 18, 27n4, 38, 40, 42, 51n8, 51–52n18 JAS (Japan Agricultural Standard) 179 JCP (see Japan Communist Party) JDA (see Japan Defence Agency) JFTC (see Japan Fair Trade Commission) Jiyuto (see Liberal Party) Johnson, Chalmers 97–98, 101–102, 104, 161 joint-stock companies 180, 186, 189, 192n37 joint ventures 83 JSP (see Japan Socialist Party) judicial system derivative actions 85 legal resources within 149, 150 reform proposals 136–138, 150 sexual harassment litigation 166– 167 jusen 13n5, 57 Justice, Ministry of 161–162 Kabashima, I. 45 Kaifu administration 20 Kane, E.J. 80 Kato, Hiroshi 129n1 Kato, Koichi 46 Keidanren 7, 116, 128 keiretsu enterprise groups 5 Kimigayo (national anthem) 27n4, 27n6, 42, 43, 51–52n18 knowledge, export of 105 Kobe earthquake 116

202 Index Kodak (see Eastman Kodak Company) koenkai 39 Koizumi, Junichiro 2, 9 Koizumi administration 73n29 Kokusai Securities 72n12 Komeito (Clean Government Party) (see also coalition rule) affiliations of 22 agricultural policy 174, 191n13 ideological polarity of 38 LDP and 40, 41, 48, 50n7, 53n40 reforming of 50n4 role in Shinshinto demise 28n11 Soka Gakkai support 22, 40, 50n4, 51n17 voter criticism of 43 voter preferences 50n5 Komiya, Ryutaro 114 kondankai 113, 120, 122, 123, 129– 130n7 Kono, Yohei 27n3, 47 Korea (see South Korea) Kyoto protocol 99 Labour, Ministry of (MOL) 4, 158, 159, 164 labour unions 24, 51n17, 172 land improvement of 176, 186, 190n2 ownership of 186, 192n37 price of 2, 56 land-intensive farming 186, 189, 192n38 Land Law 186, 192n37 Large Scale Retail Stores Act (1973) 164 law (see also judicial system) categorisation of 160–161 corporate responsibility under 165– 166 Law concerning Emergency Measures for the Revitalisation of Function to the Financial System (see Financial Revitalisation Law) Law on Emergency Measures to Promptly Restore the Functions of the Financial System (1998) 93n3 Law on Emergency Measures to Revitalise the Functions of the Financial System (1998) 93n3 Laws for Financial System Reformation (1998) 81, 82, 87

Laws Related to Financial Reformation (1992) 80–81, 87 lawyers 139 LDP (see Liberal Democratic Party) legal professionals, defined 139 legal resources 149, 150 legal services industry, defined 139 legal standards 62, 72n11–12 legal system reform chronology of 155 competition law and 135–141, 148– 151, 151n1–152n4 corporate law reform 143 corporate self-regulation 147–148, 151 introduction of 134–135 JFTC legislative enforcement 141– 147, 152n5–6 sexual harassment legislation 156– 160, 164–167, 167n1 Legal System Reform Commission 136 legislation drafting procedure 138 Liberal Democratic Party (LDP) (see also coalition rule) 1993 election defeat 6 in agricultural coalition 170, 190n1 candidacy of 24 coalition rule 13n6, 17–23, 27n5, 29–37, 39–50 concessions to SDP 40 Diet management strategy 46–47, 53n38 dominance of 36 electoral representation base 51n10 enmity with JSP/SDP 21 factional nature of 9–10 fading ideological polarity 38–39 food security demands 185 in Japan Inc. 1 links with rural sector 172–174, 190n9–10 policy flexibility 38 policymaking dominance 9 political concessions to JSP/SDP 38, 51n8 political dominance of 17, 18, 19, 23 post-1993 weakening of 6–7 pre-1993 collaborations 44 prognosis for 37 proposed merger with Komeito 50n7

Index 203 sectors supporting 9 Shinshinto challenge 27n2 voter preferences 50n5 Liberal Party (LP)(Jiyuto) 22, 40, 41 (see also coalition rule) livestock sector 177, 189 loan-loss reserves 61–62, 66 local government, fiscal distress in 175 ‘Lombard-style lending’ 70 Long-Term Credit Bank (LTCB) 60–61, 66, 72n10, 73n22 long-term credit banks 92–93n2 loss compensation scandals 13n5 Lower House (see House of Representatives) LP (see Liberal Party) LTCB (see Long-Term Credit Bank) luxury goods 146–147 MAFF (see Agriculture, Forestry and Fisheries, Ministry of) malapportionment in electoral divisions 24 Malaysia 105, 106 Management and Coordination Agency (MCA) 116–117, 119, 120, 121 managers, monitoring of corporate 85 manufacturing sector 102 ‘margin of defeat’ rules 25 market competition 86–87, 94n13 market-oriented economies 1 marking-to-market principle 86 MCA (see Management and Coordination Agency) medium-term notes (MTNs) 83 merchandise coupons 41 mercury poisoning 52n20 mergers agricultural cooperatives 183–184, 192n32–33 banks 67, 73n23, 79–80, 184 METI (see Economy, Trade and Industry, Ministry of) MHW (see Health and Welfare, Ministry of) MIGA (Multilateral Investment Guarantee Agency) 106 military conflict 52n20, 110 Minimata Bay 52n20 Minshuto (see Democratic Party of Japan) Mishima, K. 130n13

MITI (see International Trade and Industry, Ministry of) MITI and the Japanese Miracle (Johnson) 97–98, 101–102, 104 Mitsubishi Electric Corporation 142 Mitsubishi Trading Company 94n14 Mitsubishi Trust and Banking Corporation 73n23 Miyagi trust federation 192n30 Miyazawa administration 20, 30 Mizuho Financial Group 73n23 MOC (see Construction, Ministry of) MOE (see Education, Ministry of) MOF (see Finance, Ministry of) MOFA (see Foreign Affairs, Ministry of) MOF-handlers 65 (see also corruption) MOF-tan 65 (see also corruption) MOL (see Labour, Ministry of) monetary policy 55–56, 58, 70, 71 money laundering 73n20 ‘money politics’ 24, 26 (see also corruption) Mori, Yoshiro 50n7, 136 Mori administration 9 Morita, O. 143 MOT (see Transport, Ministry of) movie industry 103 MPT (see Posts and Telecommunications, Ministry of) multilateral dispute settlement 107, 110 Multilateral Investment Guarantee Agency (MIGA) 106 multilateralism 99, 107–109 multi-member constituencies (MMCs) 23 (see also SNTVs in MMCs electoral system) Murakami, Masahiro 149 Murayama, Tomiichi 17, 21, 27n4, 40, 51–52n18 Murayama administration 21, 29, 31– 32, 40, 51–52n18, 52n20, 93n5 Nakabo, Kohei 151–152n1 Nakazato, M. 162 national anthem (Kimigayo) 27n4, 27n6, 42, 43, 51–52n18 National Central Union of Agricultural Cooperatives (see Zenchu) national debt 1–2, 68, 191n18 National Ethics Law for Central Government Public Servants (2000) 5

204 Index national flag (Hinomaru) 27n4, 27n6, 42, 43, 51–52n18 nationalisation of banks 61, 62, 66, 72n9, 74n25, 93n3 nationalism, Japanese 110 National Land Agency 191n21 National Land and Transport, Ministry of 176, 191n14 National Police Agency (NPA) 4 National Public Service Ethics Law (2000) 65, 190n4–5 NCB (see Nippon Credit Bank) NCDs (see negotiable certificates of deposit) negotiable certificates of deposit (NCDs) 79 New Basic Law (1999) family farming 186, 192n36–37 food security 185, 188, 192n35 passage of 184 price formation 186–187 production policy 187–188, 192n41 public works 186 reform recommendations 188–189 regressive nature of 188 terms of reference 184, 192n34 New Frontier Party (see Shinshinto) New Komeito 50n4 (see also Komeito) New Liberal Club 37 New Party Harbinger 50n3 (see also Sakigake) New Zealand 140 Nichiren Shoshu sect 50n4 (see also Buddhism) Nihon Kyosanto (JCP) (see Japan Communist Party) Nihon Shakaito (JSP) 50n2 (see also Social Democratic Party) Nikkei Index 2 Nikkei Shimbun 137, 142, 152n6 Nippon Credit Bank (NCB) 61, 66, 72n10 Nissan Motor Co. Ltd. 6 Nokyo (Agricultural Cooperative Associations) agribusiness initiatives 189 in agricultural coalition 170, 190n1 agricultural policy regime 170 ‘cooperative living’ campaign 192n42 electoral support from 172, 190– 191n10-11 jusen finance 57

organisational adjustment 181–184, 192n31–33 rice market 178, 191n23, 191n26 Zenkoku Noseikyo 180–181, 187– 188 Nomura Securities 106 non-joint agricultural companies 189 ‘non-orderly marketed rice’ 177–178 non-performing loans (NPLs) assessment collusion by FSA 89 continued rise of 67 FSA standards of disclosure 62 impact of 60, 78 impact of MOF disclosure 57, 77 lending policies tightened due to 84 MOF perception of 56 MOF policy errors blamed for 81 non-disclosure by MOF 56–57 post-1991 magnitude of 55 North America 108 Norway 181 NPA (National Police Agency) 4 NPLs (see non-performing loans) nuclear-bomb victims 52n20 nuclear power plants 124 Nukuga, Fukushiro 51n15 nursery/day-care industry 102–103 nursing home care 14n10 Obuchi, Keizo 27n5, 46, 119–120, 135–136, 151–152n1 Obuchi administration 9, 22, 26, 29, 35, 52n21 Occupation settlement 18 OECD (Organisation for Economic Cooperation and Development) 139, 188 official development assistance (ODA) 181, 192n29 Ohira, Masayoshi 53n35 Ohira political faction 45 Okinawa Development Agency 176 Okurasho 68 (see also Finance, Ministry of) one-party rule (see single party rule) online banking 87, 94n14 opposition parties 17, 18–19, 38, 43, 45, 48 (see also coalition rule) ‘orderly marketed rice’ 177 Organisation for Economic Cooperation and Development (OECD) 139, 188

Index 205 Orix Trust Bank 94n14 Ozawa, Ichiro departure from coalition 43, 52n28 electoral base 191n12 electoral system criticised by 25 Liberal Party formation 22 nationalist politician 110 peacekeeping operations bill 20 political analysis 16 two-party alternating politics 24 ‘paper’ companies 56 Parliamentary seat breakdowns 20, 21, 22, 30–35 patent law 149 patriarchal judiciary 166, 167 PCA program (see prompt corrective action (PCA) program) peacekeeping operations bill 20 penalties, for non-compliance 59 pension liabilities, rules for 86 pension reserve funds 68 pension system 14n8 perpetual bonds 83 personal sector, financial assets 82, 93n6 personnel (see staffing) Petroleum Council 149 petrol market 149 photographic industry 107, 110, 141 Police Agency 73n20 policy advisors, export of 105 policymaking process collusion within 10 critical theses on 97–98 evaluation regulation 8 increasing transparency of 10 initiative power in 8–9 jurisdictional disputes 14n8 jurisdiction regulation 7–8, 14n10 public comments procedure 5 political appointees 8 political system 1990s coalition governments 19–23, 29 1990s turbulence 15–19 increased competition 2, 6–7 politicians, bureaucratic appointments instigated by 10 Postal Agency (PA) 4 Postal Life Insurance Services 90 postal savings 14n8, 68, 82 Postal Savings Service 90

Posts and Telecommunications (MPT) 14n8, 14n10, 90, 122, 126–127, 128– 129 prefectural government, loss mitigation 183, 192n32 prefectural trust federations 192n30 price formation, of agricultural commodities 186–187 private law, defined 161 (see also public rights, privatised governance of) private sector financial regulation 58 financial restructuring 67, 68 privatised model of regulation 164 prompt corrective action (PCA) program 58–59, 72n5, 88 protectionist policies 99, 101, 109, 124, 187–189 prudential regulation 66, 78–79, 87–88 public comments procedure 5 public corporations 68, 69, 74n28–30 public financial institutions 90–91 public funds, banks’ repayment of 56, 67, 74n24 public law, defined 161 public rights, privatised governance of 156, 157, 158–167 public works 171, 173, 174–176, 186, 190n4, 191n14–21 quid pro quo harassment 158, 165 racketeers 73n20 radio (see broadcasting industry) Radio Regulatory Commission 127 Ramseyer, J.M. 162 rape 166–167 RCC (Resolution and Collection Corporation) 73n17, 183–184 recession Hashimoto blamed for 22 Heisei 103 Recruit Scandal 19 regulation theories 162–164 Renault 6 Rengo Sangiin 50n1 Rengo Upper House Group 50n1 research and development (R&D) 14n8, 124 Resolution and Collection Corporation (RCC) 73n17, 183–184 responsive regulation, theory of 163

206 Index retail sector 65, 87, 94n14, 164 (see also cosmetics industry) rice market deregulation of 176, 177–179, 191n23–25 farming practices 189 infrastructure 190n2 Komeito policy 191n13 stabilisation fund 191n25 tariffication (see WTO sansha kaigi) trade barriers 177 WTO sansha kaigi 180–181, 192n29 ‘right wing’, issues classified as 19, 27n6 rural sector (see also agricultural sector) electoral reform and 172–174, 190n7–191n13 infrastructure 186, 190n2, 191n16 public works 174–176, 186, 191n14–21 Russia 106 safety net, financial decrease in traditional 89 emergency reconstruction of 87–88 of MOF 79–80 Saitama trust federation 192n30 Sakigake (Harbinger Party) 17, 21, 40, 50n3, 51n16, 117 (see also coalition rule) Sakura Bank 73n23 Samuels, Richard 124 Sanwa Bank 73n23 Sanyo Securities 72n7 Sapporo Sexual Harassment Case (1996) 167 satellite licences 126 Saunders, J. 161 scandals (see corruption) screwdriver assembly plants 107 SDF (see Self-Defence Force) SDP (see Social Democratic Party) Searight, A. 107 securities companies 13n5, 81, 82, 86– 87 Securities Exchange Law 81 securities markets 91 Self-Defence Force (SDF) 4, 27n4, 38, 40, 51n8, 51–52n18, 52n21 Serikawa, Y. 46, 47–48 service sector 102 settai (see wining and dining) settlement services 87

sexual assault 166–167 sexual harassment citable offences 165 policy for 156 regulation of 157–160, 164–167, 167n1 Shakai Minshuto (see Social Democratic Party) Shaminto (see Social Democratic Party) shareholdings, marking-to-market principle 86 shelf-registration rule 83 Shimane prefecture 175 shingikai (see deliberation councils) Shinshinto (New Frontier Party) 16–17, 22, 27n2, 28n11, 51n17 Shinto Sakigake (see Sakigake) Shiseido 143, 144–147 Shiseido Tokyo Hanbai KK v Fujiki Honten KK (1994) 143–147 Shizuoka Sexual Harassment Case (1990) 166 SII (Structural Impediments Initiative) 93n11, 142 Singapore 106, 108 single non-transferable votes (SNTVs) 23 (see also SNTVs in MMCs electoral system) single party rule 2, 6, 16, 17, 18, 45 small businesses, capital markets for 84 SNTVs in MMCs electoral system 23– 24, 28n12, 28n14 Social Democratic Party of Japan (SDPJ) 50n2 (see also Social Democratic Party) Social Democratic Party (SDP)(Shaminto) (see also coalition rule) demise of 18–19, 26 electoral campaigning 24, 25 fading ideological polarity 38–39 ideology of 27n3–4 LDP and 17, 21, 40, 51–52n18 name change 50n2 political concessions from LDP 38, 51n8 post-1994 weakening of 7 Sogo Department Store 65 Soka Gakkai Buddhist sect 22, 40, 50n4, 51n17 sokaiya 73n20 Sony Corporation 67, 87

Index 207 South Korea 52n20, 105, 108, 110, 181 soybeans 187 split-ticket voting 45, 48 stabilisation fund, rice market 191n25 ‘stable government’ 18, 20 staffing (see also employment) amakudari 66, 69, 71–72n4, 73n20, 74n30, 128, 130n11 banks 66, 67, 73n20–21 BOJ governorship 70, 74n31 employees’ codes of conduct 160 energy industry 100 former MAFF officials 190n4 FRC 62, 72n13–14 FSA 59–60, 64 JFTC 140 MAFF fringe benefits 171 NPA 73n20 political interference 10 public corporations 69, 74n30 Stock Price Evaluation Commission 62, 72n9 US education for 109 stalking 157 standards, national 108 Staple Food Law (1995) 177, 178 statistical information, standardisation of 104–105 steel industry 108 stockmarket brokerage fees 84 index decline 2, 56 stock ownership audit criteria 93n11 Stock Price Evaluation Commission 62, 72n9 Structural Impediments Initiative (SII) 93n11, 142 subsidiary companies 85–86, 94n12 subsidies, agricultural 170, 179, 187 Sumitomo Bank 73n23, 80, 106 Sumitomo Mitsui Bank 73n23 Sumitomo Trust and Banking 61 Supreme Court of Japan 137 Switzerland 181 Taiwan 52n20 Takeda, M. 79 Tamazawa, Tokuichiro 173 tariffs, agricultural 108–109, 170, 177 (see also rice market) tax system complexity of 91

consumption taxes 99, 116 regulation of 58 ‘teahouse’ politics (see ‘deal-making’ politics) telecommunications industry 124, 126– 127, 128–129 telephone banking facilities 94n14 television broadcasting industry 126– 127, 128–129 tendering process 142–143 Thailand 105, 106 theatre complexes 103 thermal plants 125 Tilton, M. 143, 144, 147, 151 Tochigi trust federation 192n30 Tokai Bank 73n23, 94n15 Tokyo Sexual Harassment Case (1994) 166 Tokyo Stock Exchange 66, 176 Toshiba Corporation 142 trade agreements 99, 108, 109, 177 trade barriers 108 Trade Insurance Agency 14n11 trade liberalisation, agricultural 176– 180, 191n22–27 trademark law 149 trade policy (see International Trade and Industry, Ministry of) transparency (see also administrative reform) agricultural cooperatives’ lack of 182 bureaucratic collusion decreasing 10 deliberation councils increasing 122–123 in financial sector 64–67, 73n17 fiscal policy 68–70 global recognition requirement 2 increasing trend in 3 of kondankai 123 lack of, in gender equity policy 167 monetary policy 70, 71 pre-1991 lack of 3 private sector finance 67, 68, 71 regulations increasing 4–6 WTO sansha kaigi enhancing 181 Transparency International 13n3 Transport, Ministry of (MOT) 174, 191n14, 191n21 trust banks 81, 82, 83, 87, 93n8 Trust Fund Bureau 68 Turner, P. 79

208 Index two-party political alternation 10, 16, 24, 26 two-party rule 48 unemployment, Hashimoto blamed for 22 (see also employment) United Kingdom 24, 50–51n7 United Nations Framework Convention on Climate Change 99 peacekeeping operations 52n21 United States (US) antitrust law 140 business school education 109 competition regulation 140, 142, 146 financial regulation 65 Japan—US Security Treaty 18, 27n4, 38, 40, 42, 51n8, 51–52n18 JFTC criticised by 141 jurisprudence in 149 political system 50–51n7 proposed sanctions by 107 protectionism criticised by 102 Structural Impediments Initiative 93n11, 142 trade with 99, 107, 108, 110, 177 utility firms criticised by 101 Upham, F. 161, 163–164 Upper House (see House of Councillors) Uruguay Round 107 Uruguay Round Agriculture Agreement (URAA) 176, 177 utility services 100–101, 123–126, 148, 152n3 venture businesses 82, 84 vertical pricing arrangements 143–144 Voluntarily Marketed Rice Price Formation Centre 178 voters (see electoral constituents) voting (see electoral system) wheat 187 wining and dining (settai) 5, 13n3, 65, 171, 190n4 wiretapping, legalisation of 27n6, 42, 43 Wolferen, K. van 161 women (see also sexual harassment) employment equity 102–103 rights of 157, 165, 166

Women’s and Youth Affairs, Bureau of 158 World Bank 114, 139 World Trade Organisation (WTO) dispute settlement 107, 108, 110 food supply legislation and 185 legal formalism 139 support for 107 trade negotiations 99, 177, 187–188 Uruguay Round 107 use of ODA 181, 192n29 WTO sansha kaigi 180–181, 192n29 World War II 52n20, 78 WTO (see World Trade Organisation) WTO sansha kaigi 180–181, 192n29 WTO Tripartite Council (see WTO sansha kaigi) yakuza 73n20 Yamaichi Securities 72n7 Yanagisawa, Hakuo 64 Yokohama Sexual Harassment Case (1995) 166 Yomiuri Shimbun 186 Zaimusho 68 (see also Finance, Ministry of) Zenchu (National Central Union of Agricultural Cooperatives) 183, 185, 192n33 Zenkoku Noseikyo 180–181, 187–188 Zenno 179 ‘zombie’ banks 89