Japan Incorporated: Drowning, Waving, or Considering its Options?
Conflicting interpretations of the Japanese Financial Crisis

Richard Tanter [1]

1998 in East Asia is the Year of the Tiger, but for millions of Japanese citizens it feels more like the Year of the Endangered Species. In the real formateurs of Japanese public opinion - the television game shows and the weekly magazines - there are signs of deep public distress [2]. Business sentiment is uniformly bleak, and the economy has been officially declared "stagnant".

The year opened with queues outside the few foreign retail banks operating in Japan, with depositors searching for a measure of security both in US dollar-holdings and the apparent reliability of foreign banks. Money has flooded from the major banks to the yucho, the government-guaranteed post office savings system.

Television news and current affairs programmes are filled with images of fresh-faced young salarymen in suits marching in line into the headquarters of giant corporations, banks, securities companies, and even the Ministry of Finance. Not corporate samurai, but bright young men from the Tokyo prosecutor's office following paper trails of high-level corruption in business and government.

Virtually every aspect of the financial system is implicated in the crisis - banks, non-bank lenders, securities companies, the probity of financial regulators, the stock market, pension funds, insurance companies, and of course the precipitous decline in the value of the yen against the US dollar. There is a strong sense that nothing is what it seems to be, and that anything financial and Japanese melts into air.

A sense of political crisis is not unusual in Japan, and for many years people have responded to revelations of high level political and bureaucratic and business corruption with cynical resignation: shikata ga nai - nothing can be done. Not only is the sense of financial crisis at century's end widespread, but there is a sense of the crisis that the real crisis may be deeper still, pointing to strains in the real economy, and to the possible exhaustion of the present social structure of accumulation.

The immediate Japanese financial crisis

In a year of appalling financial news, a series of events in late 1997 and early 1998 brought long simmering public anxiety into open distress. In November a major regional bank, the Hokkaido Tokushoku Bank, saddled with almost 1 trillion yen in bad loans, declared itself insolvent, and was allowed by the Ministry of Finance to cease operations. The following month, the country's fourth largest brokerage company, Yamaichi Securities, turned turtle, and investigators immediately revealed that a major cause of the company's collapse was its illegal compensation of large customers' losses on the stock market, with much of Yamaichi's own massive losses being hidden in foreign subsidiaries. International bond-ranking companies rapidly downgraded certain city banks to little above junk bond status, and almost all banks were forced to pay a "Japan premium" above normal international interbank rates for overseas loans. When business opened in the New Year, the Nikkei stockmarket index, which stood at over 32,000 four years ago, plunged to below 16,000. And on the foreign exchange markets the yen, standing at US$1=93 yen a year before, was sold desperately, resulting in a plunge to more than US$1=132yen [3].

The political response from the Liberal Democratic Party-led coalition headed by Hashimoto Ryutaro simultaneously tried to deal with four quite different pressures: rising public anxiety, collapsing foreign investor confidence registered in the value of the yen and the stock market, US and IMF pressure to expand the domestic economy to serve as "the locomotive of Asian recovery", and the financial and political consequences of a major shift in the character of the Ampo alliance with the United States. In late January, just as the rush to sell yen had slowed following the announcement of a rescue package, the Finance Minister was forced to resign following the arrest of the head of the Finance Ministry's bank inspectorate on suspicion of receiving payoffs from the biggest banks in the country seeking to avoid official recognition of their massive portfolio of bad debts. More importantly and without precedent, the head of the Ministry of Finance, the Administrative Vice-Minister of Finance - arguably the most powerful public figure in the country after the prime minister - was also forced to resign.

Four successive rescue packages announced between October 1997 and February 1998 included the following measures [4]:

• 17 trillion yen in public funds (10 trillion in extra government guarantees and 7 trillion in government bonds) to guarantee depositors' funds in all financial institutions (previously only credit cooperatives were protected).
• 13 trillion yen in public funds to subsidize banks' and financial institutions' capital bases through government purchase of banks' subordinated bonds and preferred stocks.
• 3 trillion yen in tax reduction, including reductions in corporate taxes (to US-levels), financial transactions taxes, land taxes, and income tax (temporarily reduced).
• Immediate supplementary budget for FY1997 of 2.5 trillion yen for public works [5].
• Assistance to Southeast Asian economies by providing 300 billion yen for Japanese companies.

The commitment of such gigantic sums of public monies presages two sets of financial structural reforms, one long planned, and the other a matter of fortune for Hashimoto. In December 1996 Hashimoto announced his cabinet's intention to deregulate large sectors of the financial system beginning in April 1998, with the intention of providing the Japanese financial institutions with the capacity they presently lack to compete globally against US and European rivals. [6]

The New Year scandals in the Finance Ministry gave Hashimoto sufficient leverage with the elite bureaucracy and its LDP supporters to consider substantial reduction of the power of the Finance Ministry by promising to separate its fiscal and financial regulation functions. [7] Such convenient "discovery" of high-level Ministry of Finance [MOF] corruption by the Tokyo Prosecutor may well have come with outside assistance - quite likely from circles close to the Bank of Japan, the leading corporate representative council Keidanren, and parts of the LDP close to the Prime Minister himself. The Bank of Japan, the part of the Japanese state directly linking the crisis-ridden domestic financial system and the global financial system, is to be made more independent of direct government intervention, following similar shifts elsewhere. Keidanren, as the public face of the somewhat fractured collection of the most powerful financial and industrial corporations, has long been distressed by the inability of LDP politicians to stabilize the political system or effect substantial reduction to particular types of bureaucratic regulatory activity seen as hindering the resolution of both financial crisis and economic recession.

Hashimoto's stocks are low, and he may well be forced to resign, but there will be no serious challenge to LDP government, nominal coalition or not. There is no effective political opposition in Japan. For a brief moment in 1993-94 the LDP lost its 40-year stranglehold on power, and it seemed that Japan might move towards a two-party system with a real chance of politicians limiting the power of the bureaucracy. That possibility has now vanished: shaky though it may be, without opposition the one-party state is back.

The financial crisis has corresponded with the complete collapse of the opposition New Frontier Party lead by former LDP secretary-general Ozawa Ichiro, due to conflicts over both policy and Ozawa's autocratic style. The next general election will see the virtual disappearance of the Social Democratic Party (former Socialists), currently in coalition with the LDP. Having sacrificed principle for power in 1995, the JSDP found that it could exert little real influence on its LDP coalition partner, and is now barely perceptible in public opinion polls. Some former liberal and conservative non-government Ozawa allies may emerge strengthened, but have little chance of challenging the LDP in the near future.

What could the crisis mean?

The question arises as to whether there is in fact anything new about this round of financial scandals and economic recession in Japan, and whether it is a harbinger of more profound disturbance to come. Beyond the details of the rapidly heightening Japanese financial crisis proper, four sets of inter-related questions stand out. These questions may well be unanswerable at present, but each carries considerable political and analytical significance in Japan and elsewhere.

1. Will the rescue package return Japan to economic growth, and at whose expense?

Will the proposed measures simply prolong the day of reckoning for the financial system, making the final social price to be paid higher still: higher taxes to bail out insolvent banks and drastically underfunded pension-funds; yet higher levels of bankruptcies [8]; and a massive wave of unemployment that will shatter the capacities of the various social practices that until recently have largely buffered Japanese workers from mass unemployment since the 1950s?

It is not yet clear whether the combination of 30 trillion yen in spending, tax cuts, and government guarantees will in fact stimulate substantial economic growth. Further stim ulus packages are likely in mid-1998. Although by mid-February the yen and the stockmarket recovered to pre-Christmas levels, there was also widespread expectation that the end of the financial year on March 31 would see more market strife. For the present there is little possibility of returning to Hashimoto's plans for reducing the level of public debt which at present stands at 93% of GDP [9].

Many pro-deregulation critics, both domestic and foreign, including senior Clinton administration officials, have been vocal in their doubts. Clyde Prestowitz epitomized widespread globalizing free-market criticism by indicating that the "the job that needs to be done in Japan" will require far more than Hashimoto's proposals of tax cuts and fiscal stimulus.

It will require extensive deregulation and restructuring measures such as: open skies in aviation and complete deregulation of inland transportation, telecommunications and distribution; drastic reduction of taxes on the buying and selling of land along with removal of most land use restrictions; government decentralization; introduction of criminal and triple damage penalties along with a right of private action in anti-trust cases; introduction of standard international accounting rules the breakup of major government ministries; dramatic strengthening of the ability of Japan's prime minister and Diet to actually direct the activities of government; and cessation of implicit governmental loan guarantees and government-directed price support operations for financial markets" [10]

Standard deregulationist fare in many respects, but in the Japanese context such prescriptions amount to a call for the dismantling of the Japanese capacity to maintain its present social structure. While there is room for doubt about the Hashimoto cabinet's plans, there is no doubt at all that the demands of foreign globalizers like Prestowitz will have two certain immediate results. Firstly, a great deal, if not most, of what is now characteristic and beneficial about Japanese society would be lost along with some well known negative aspects. Secondly, such foreign pressure will activate what the Japanese psychoanalyst Kishida Shu calls the "Black Ships" fantasy in Japanese political culture [11], invoking once more the cycle of inferiority and aggression underlying certain versions of Japanese nationalism. Not surprisingly, nationalist ideologists have responded to the economic crisis in terms of "a second occupation" (Eto Jun [12]) and the need for renewed national resilience and self-determination (former Prime Minister Nakasone Yasuhiro [13]).

2. Is there a fundamental shift in the political economy of Japan?

Does this financial crisis, and the fiscal and legislative changes expected in the coming months mean that a fundamental shift is underway in the nature of the Japanese political-economic system? In what ways does the financial crisis link to the prolonged economic recession in Japan and the ongoing restructuring of Japanese production? Does this round of political-financial instability in Japan mean that there is any possibility of a shift in the dominance of Japanese politics by the bureaucracy? And is the financial crisis connected to much more deeply-rooted turbulence in the social structure and ecological foundations of accumulation in Japan?

The "Big Bang" deregulation of the financial markets will certainly have a rippling effect through the financial structure as whole, as major banks and other financial institutions are exposed to foreign competition within Japan, and as funds can be moved more freely in and out of the country [14]. Foreign securities companies and banks have moved rapidly to profit from bankruptcies [15], and to establish either retail subsidiaries or joint ventures. Foreign stockbrokers already handle more of the business of the Tokyo Stock Exchange than the four largest Japanese companies [16]. But while many foreign companies have longer experience (post-Reagan and Thatcher) in both the domestic and global practices of casino capitalism, Japanese companies are perfectly capable of catching up in time.

Both inside and outside Japan opinions are divided as to whether any political change of substance flows from the financial crisis. One view is that the laws of capitalist economics are universally applicable, and that as a consequence, not only is Japan not immune from what The Economist terms "reality", but that what is variously termed Japan Incorporated, the developmentalist state, or the iron triangle (big business, the elite bureaucracy, and the Liberal Democratic Party), is basically on the way out [17]. In this analysis, the pressures of US-led globalisation, the internal contradictions of the present system, and nascent Japanese domestic public opinion will together force politicians to establish a new system, usually seen as characterized by widespread de-regulation, acceptance of North American/European business practices, two-party parliamentary politics. Most importantly, an end to elite bureaucratic power is as a prerequisite to any assumption of political responsibility by elected politicians.

The contrary view, most sharply expressed in English by Chalmers Johnson, is that this is mostly wishful thinking based on an inadequate appreciation of the vitality and resilience of the Japanese developmentalist state, and the fact that Japanese political and economic institutions are simply different from those of other advanced capitalist states, especially North American and British liberal economies. Not only has "Japan [...] re-invented the institutions of modern capitalism", but "[t]he Cold War is over", quipped Johnson [18], "and Japan won". Public opinion is largely irrelevant to political change; LDP and indeed most) politicians are structurally implicated in corrupt relations with big business; the prosecution of bureaucratic scandals is a shadow-play for public consumption only; and the principal elite bureaucracies, MITI and the Ministry of Finance, while subject to criticism and some loss of capacity, have in fact retained most of their former vis-à-vis politicians and their strategic collaborative role with large export-oriented corporations.

There is no doubt that the status of the elite civil service has been tainted by the revelations of corruption amongst career-path civil servants in the Ministry of Finance and related bodies. Equally, there is clear pressure from some sectors of business for major deregulation beyond that already proposed. Successive scandals in securities companies and major banks, combined with prolonged and deepening recession, increased unemployment and bankruptcies and rising taxes have resulted in a loss of legitimacy for the elite bureaucracy, which was previously assumed to be the competent guardian of the public interest.

Yet postwar Japan has in fact never been characterized by ideological hegemony of any kind, apart from a diffuse acceptance of the need for "economic growth". More than any other advanced capitalist country, public opinion has been radically and consistently split on fundamental issues about the nature of the state. This is most striking in relation to the Constitution, the role of the Emperor, and the legitimacy of the Self Defence Forces and the US alliance. In other words, this current loss of bureaucratic legitimacy may not have the impact many observers, especially non-Japanese, would expect. This question must remain open.

A related but more serious question for analysts of the Japanese developmentalist state is whether or not the elite bureaucracy retains its former capacity to steer the economy towards continuing economic growth and the strategic high ground of the global economy. The record of recent years has been, by postwar Japanese standards, mixed. The efficiency and productivity gains of Japanese manufacturing exporters since 1985, especially those producing in Japan, have been extraordinary, considering the fact that the Plaza Accord orchestrated the revaluation of the yen from US$1=238 yen in 1985 to US$1=93 yen in 1996. Despite the currency burden, exports (overwhelmingly machinery and electronic goods) rose from US$265 billion in 1985 to $450 billion. But despite these gains in exporting efficiency, overall economic growth has been minimal in the 1990s, and in 1997 GDP growth fell to 0.1% according to the Economic Planning Agency [19]. The Ministry of Finance's advice to the Hashimoto cabinet that a 2% increase in the consumption tax in early 1997 could readily be absorbed by the economy proved to be wildly optimistic, to Hashimoto's cost. Stabilizing the financial system and boosting the economy in 1998 will put paid to any possibility of making inroads in the near future into national debt burden which reached 476 trillion yen in 1997 (93% of GDP). The Ministry of Finance engineered the destructive absurdities of the post-Plaza Accord bubble economy, and so must take responsibility for the still to be met costs of recovery. Thus the capacity of the elite bureaucracy to steer the economy is likewise much more open to question than in the past.

3. If Japan won the Cold War, is it losing the post-Cold War global politics of accumulation?

Within the politics of global accumulation, is this the end of "Asian exceptionalism"? As the price of massive assistance, the IMF-US has demanded, apparently successfully, the dismantling of the financial policy capacity of the South Korean mercantilist state. Is the Japanese developmentalist or mercantilist state yielding to the pressure of US-led globalization forces in a comparable manner? Or is the Japanese developmentalist state in fact beating a strategic retreat on financial policy in order to buy time for the completion of a longer-term strategy of "Asia-wide" restructuring of its political economy? What do the responses to this set of concatenating regional financial crises by the Japanese state and capital indicate about the flows of power embedded within the processes of American-led financial, economic and political globalization?

For Japan, questions of "globalization" and the Japanese relation to the United States are effectively much the same issue. For half a century the Japanese state and capital have extracted extraordinary benefits from an apparently subordinate position within a US-led international system, demonstrating in different aspects what might be termed accommodation in the service of nationalism. Weiss usefully criticizes the widespread tendency to assume that all governments everywhere are to a more or less complete degree incapable of resisting the pressures of globalisation led by financial capital. The Japanese state, she argues, as the leading example of "East Asian exceptionalism", has the administrative and political capacity to resist US-led globalizing pressures [20]. Hatch and Yamamura, following Johnson, argue in detail that this has been precisely the strategy of Japanese state and capital in the post-Plaza Accord years, leading to a regionalization of Japanese production relations - globalization, Japanese-style [21]. Despite the de-regulatory concessions of the financial Big Bang, there has been no fundamental shift in economic philosophy within The Ministry of International Trade and Industry [MITI] and the Ministry of Finance. However, following the IMF's demolition of the capacity of the Korean Ministry of Finance to allocate credit resources at the end of 1997, the question arises as to exactly how robust will the Japanese ability to resist such pressures be in the future [22].

Since 1945, the corner-stone of the Japanese political-economy has been its relation to the United States, as defeated enemy turned subordinate alliance partner, turned economic rival. Alliance planning has always, on both sides, had consciously economic aspects, with conservative Japanese governments seeking to balance the psychological and political costs of subordination if not humiliation, with the economic benefits of unrestrained capital accumulation under American strategic protection with minimal wasteful military spending. The calculation has always been a contested one, from many quarters, but the present financial crisis and its visible connection to US-led globalisation is raising the question anew, and with possibly new answers.

To begin with, 70% of the costs of stationing US forces in Japan are paid from the Japanese government's special omoiyari or "sympathy" budget [23], and sympathy for the United States is running low. Secondly, in November 1997, the US and Japan announced a new set of guidelines for the implementation of the Ampo treaty in the post-Cold war era. Not only do the guidelines have the effect of tying the Japanese self-defence forces and Japanese non-military resources much more closely than before to the US military in operational terms, but also they have considerable long-term budgetary implications [24]. And thirdly, in response to unprecedented public hostility to the US bases that dominate Okinawa, the Japanese government agreed to pay all costs for costs and incentives necessary to relocate the US Futenma Marine base to a yet to be determined location [25]. These non-productive expenditures add considerably to expenditures already generating a government deficit already much higher than western Europe or North America.

Long-standing pro-US vs. nationalist tensions within the conservative camp have been accommodated once more by acceptance of US pressure to participate in UN peace-keeping activities. However, the redefinition of the US-Japan Ampo alliance with its associated economic costs and diplomatic and military risks once more raises the question of an independent foreign policy. In this light, the globalizing pressures from the US exerted during the Asian financial crisis have generated further hostility, and raise again the question of whether or not the Japanese state retains the capacity to pursue an autonomous economic policy.

Beyond uneconomic growth

While many of these questions cannot yet be answered, two final set of questions remains untouched by all of this. What constitutes recovery from this crisis? And is it possible that the erosion of underlying institutions of Japanese society, beyond the particulars of state and market, the social and ecological structure of Japanese capitalism, is being accelerated by the financial crisis?

For millions of Japanese citizens, let alone those in other countries touched by Japan's economy, a rapid recovery of economic growth is the only hope of release from fear of profound economic insecurity, and in many cases the reality of harsh unemployment and bankruptcy. There is good reason to doubt that the present financial rescue package will achieve this goal. But even if it does, the recovery of Japanese economic growth, under new or old policy auspices, is profoundly threatening to both the inner and outer resources required for that growth: the inner social and psychic resources demanded of Japanese working people and their families, and the outer resources of nature in Japan and around the world sacrificed to the idol of economic growth. In dozens of everyday conversations in Japan, one registers the sense of loss that has accompanied economic growth in this country. Memory of the harshness of poverty a bare generation past leaves little regret [26], but an apparently endless sense of things gone awry with family and work, is answered by the fatalist mantra, shikata ga nai - nothing can be done. A culture that prided itself, to the point of hubris, on its historically unique association with nature, is now radically dissociated from nature, and struggles to deal with an economic system, more obviously than most, built on ecological rapacity [27]. The negativity of economic growth, or as Herman Daly terms it in cases likes Japan's, uneconomic growth, is intuitively grasped by many Japanese citizens [28]. Above all, the central meaning of the Japanese financial crisis is whether it will issue in some new answer to the question: which is worse, the poison or the cure?

A sense of crisis has, paradoxically, been chronic in much of post-war Japan, and remains so. In part this is the result of the shadow-play character of corruption scandals where nothing but the names of the criminals changes. Looking more deeply, however, there is the possibility that the limits of the regime of accumulation, or rather, its foundations, are being seen, if not yet reached.

Many of the undoubted "inefficiencies" so remarked on by those operating unreflectively from North American and European premises are in fact conducive to the attainment of understandable and often desirable social and economic goals. In the face of an extremely limited welfare system for example, the "inefficient" service sector in fact provides a buffer for many people who would otherwise become unemployed, and at the same time maintains the invisible bonds of community against complete takeover by the market. Not only is there a coherent long-term Japanese mercantilist economic strategy, but it is underpinned by a social structure of accumulation in which the costs and benefits of market activities are calculated differently from the brave new world of "casino capitalism". The costs of yielding to unrestrained US-style globalised capitalism would exacerbate the already visible strains in Japanese society.

The economist Uchihashi Katsuto regards globalisation of US-led "wild capitalism" as destructive of fundamental aspects of contemporary Japanese social relations: "precision, exactitude, feelings of trust in others - social virtues - all of that is being recalculated." [29]. Already, the costs for families and working people that are taken as given - extraordinary pressures of time and gender relations in work and family life, relatively low disposable income, poor welfare provision, unsatisfactory housing, acceptance of deep state regulation of social life, the deforming consequences of very high family investment in children's cultural capital through education, a profound alienation from nature - all these are well known and recognized, but regarded as either inevitable or taken on trust as necessary for the good of all. In that remarkably negative sense, there is a degree of ideological hegemony in Japan. But Uchihashi's emphasis on the possible further sharpening of these costs by the inroads of free-market globalisation, and hostages to fortune thereby given to extreme nationalism, would mark a dramatic deepening of the costs of economic growth for Japanese society.

There is no clearly definable threshold of tolerance for the social and political costs of economic stress. "Social crisis" accordingly is a matter of rhetoric rather analysis. Equally, "ecological crisis" is rarely used in its scientific sense. But the questions of "recovery for what" and "recovery at what price" point to the depth of the price of renewed accumulation as usual for Japan and all it touches.