Transcript Chapter 6

Varieties of Advanced Market
Capitalism
Chapter VI
Japan: A Planned Market Economy
with Traditional Elements
1
Japan As a New Traditional Economy?
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Experienced the most rapid rate of sustained
economic growth in the world
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Maintained low unemployment and inflation
rates and a greater degree of income equality
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Leading many areas of technology
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Japan As a New Traditional Economy?
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Have large trade surpluses resulting in the
largest accumulation of foreign reserves
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Number One? → stagflation in 1990s
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Its conflicts with other nations on trade issues
threatened to push the world economy into a
trade war and depression
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Japan As a New Traditional Economy?
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Debates about the basis of Japanese
success
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Advocates of government economic intervention
argue that bureaucratic guidance through
indicative planning and industrial policy has been
key to its success
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Advocates of laissez-faire argue that these have
been more a hindrance than a help, with the most
dynamic sectors ignoring the government
bureaucrats
4
Japan As a New Traditional Economy?
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A mixture of structures and systems unique in the
world
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A market capitalist economy
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The government engages in indicative planning and
exerts significant influence
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The first society of non-European origin to carry out
industrialization and modern economic growth
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Japan As a New Traditional Economy?
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Succeeded in adopting foreign technologies and
practices without giving up its indigenous culture
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Late 19th century slogan “Japanese spirit and Western
ability”
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Familistic groupism of Japanese society → a
feudalistic holdover
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Harmonious labor-management relations and
government-business relations
Planned market capitalism with strong traditional elements
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Historical and Cultural Background of the
Japanese Economy
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The Absorption of Chinese Culture
A strong sense of identity
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High degree of homogeneity arising from
their long isolation
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The model for integration of foreign
influences into its society was its absorption
of Chinese culture in the 6th and 7th centuries
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Historical and Cultural Background of the
Japanese Economy
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Buddhism and Confucianism introduced but
modified without displacing native Shintonism
(original religion)
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Multiple realities
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Buddhism → funerals
Shintonism → marriages
Confucianism → civil and political behavior
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Historical and Cultural Background of the
Japanese Economy
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Confucianism
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Influence on economic thought
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Emphasized loyalty to one’s superiors and respect for state
authority (after 1600)
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After 1868 → the transfer of the bushido code of the
samurai warriors to business management practices
The most important wa (harmony) together with loyalty
cements the familistic groupism that dominates the
Japanese economy
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Historical and Cultural Background of the
Japanese Economy
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The Tokugawa Shogunate
Shoguns → military commanders after 1185
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During the 1500s, Portuguese traders penetrated
and dominated Japan but expelled in 1603
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The period of isolation under Tokugawa shogunate
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Experienced development of business, transportation
infrastructure and literacy laying the foundation for
economic takeoff
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Historical and Cultural Background of the
Japanese Economy
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The Meiji Restoration
Tokugawa society fell into crisis after being opened
to outsiders in 1853
Overthrew of the Tokugawa shogun in 1868 by
samurai → The Meiji Restoration
The country opened to foreign influences and
technologies
All rights and powers of the samurai removed,
ending feudalism
The samurai were paid off with bonds in 1873, that
later started businesses
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Historical and Cultural Background of the
Japanese Economy
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Industrial Development
State started many industrial enterprises,
pushing industrial development
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Cotton spinning → the first internationally
competitive industry by 1900
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Support from infant industry tariffs
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Iron and steel, railroads, mining and machinery
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Historical and Cultural Background of the
Japanese Economy
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Imperializing Neighbors
Argued that “fighting against the racist imperialism of
Europe and the United States”
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In 1895, Taiwan conquered
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Leading to the 1905 Russo-Japanese War first victory of an
Asian power over a European one
A major trigger of the 1905 revolution in Russia
Ongoing dispute over islands taken by the Soviet Union at
the end of WW II
Control of Korea in 1910
13
Historical and Cultural Background of the
Japanese Economy
Political democratization and liberalization
of 1920s
 Economic domination of four leading
conglomerates, zaibatsus
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Mitsui, Mitsubishi, Sumitomo, Yasuda
During WW II, each associated with a bank
that would be the key entity in the postwar
keiretsus
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Historical and Cultural Background of the
Japanese Economy
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New Economic System
The province of Manchuria seized in 1931
 Elements of economic central planning tested
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Invasion of China in 1937
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Allying with Germany and Italy
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Bombing of Pearl Harbor in 1941 → US in WW II
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Surrendered in 1945 after US atomic bombs on Hiroshima and
Nagasaki
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Historical and Cultural Background of the
Japanese Economy
The American Occupation and its Aftermath
 General Douglas MacArthur → The Supreme
Commander of the Allied Powers until the
American Occupation ended in 1952
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First time that it was ruled by a foreign power
After 1947 → continuity of rule by traditional
elites
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Japan as a Cold War ally
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Historical and Cultural Background of the
Japanese Economy
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US imposing a constitution that demilitarized Japan
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Labor unions legalized
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Zaibatsus broken up
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Land redistributed
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Integration of foreign influences into Japanese
culture
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Historical and Cultural Background of the
Japanese Economy
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Until 1960 considerable labor militancy
1955 Liberal Democratic Party formed
From mid-1950s to the 1970s, the old zaibatsus reformed as loosely organized keiretsus, each
centered on a bank and a trading company
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By 1955, highest real per capita income level
Mid 1970s, per capita income equaled those in many
advanced countries
Continued to grow more rapidly than any of them
In 1975, one of the G7 (now G8), the leading economic
countries
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The Microeconomic Foundations of The
Japanese Economy
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The “Three Sacred Treasures” of LaborManagement Relations
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The Japanese Firm and the Keiretsu System
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Managerial Decision Making
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Industrial Policy by Government
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The “Three Sacred Treasures” of LaborManagement Relations
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Highly educated and well-motivated labor force
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Many quality-and productivity-improving innovations
suggested by workers on site
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Three sacred treasures:
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Lifetime employment
Seniority-based wages
Enterprise unions
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The “Three Sacred Treasures” of LaborManagement Relations
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Japanese labor
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Intra-enterprise job rotation by multifunctional workers
On-the-job firm-specific training
Bonus payments
Compensation flexible
Contracts negotiated annually
Employment stable
Large severance payments at retirement but few
pensions
Dualism
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The “Three Sacred Treasures” of LaborManagement Relations: Lifetime Employment
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The key to stimulating loyalty and drawing forth
innovative, productivity-improving suggestions
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Limited to about 30 % of the labor force, mostly
educated men in large firms that must retire at age
55 with large severance payments and assisted in
getting other jobs in smaller firms
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Japanese workers more likely to stay with a single
firm for a longer period of time, even in small firms
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The “Three Sacred Treasures” of LaborManagement Relations: Lifetime Employment
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Depending on
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Stability of employment
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Rapid growth of the economy between 1945 and
1990
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Synchronized annual negotiating system
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Bonus system → a form of profit sharing
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The “Three Sacred Treasures” of LaborManagement Relations: Lifetime Employment
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Development of firm-specific human capital by
rotating workers from job to job within the firm
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Workers know all about the firm but lack skills that
are transferable to other firms
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On-the-job training of blue-collar workers → but
white collarization in larger firms
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Greater loyalty to firm → Confucian code
Firms more willing to engage in firm-specific training if they
believe workers will remain for a long time
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The “Three Sacred Treasures” of LaborManagement Relations: Seniority Wages
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Confucian view of respect for elders
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Steeper age-wage profile for blue-collar
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Seniority wages reinforcing loyalty to the firm
among lifetime employees
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Expectations of performance-based pay
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The “Three Sacred Treasures” of LaborManagement Relations: Enterprise Unions
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If one is committed for life to a specific company
One has been working at several different jobs with the
company, thus not being tied to a particular skill or craft,
→ it is logical to belong to a union that negotiates directly
with that company and only that company
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Stability of labor-management relations
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“Happy family of the firm”
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Critics “Inefficiency”
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The Japanese Firm and the Keiretsu
System
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The existence of interlocked associations of firms →
keiretsu
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Horizontal keiretsu
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Revivals of the prewar zaibatsus (single holding
companies)
Firms in different industries all linked to a common bank
and trading company maintaining their formal
independence
Vertical keiretsu
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A set of suppliers and distributors linked to a major
industrial producer by long-term contracts
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The Japanese Firm and the Keiretsu
System
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Toshiba Corporation
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At the center of a vertical keiretsu including
distributors, suppliers and suppliers of direct
suppliers
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A member in Mitsui horizontal keiretsu
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The Japanese Firm and the Keiretsu
System
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Horizontal keiretsus practice three sacred
treasures of labor-management relations
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Peripheral firms in vertical keiretsus tend not
to do so
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Keiretsus → cross-holding of stocks
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In horizontal form → much stock ownership by the
bank and a large proportion of loans from the
bank
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The Japanese Firm and the Keiretsu
System
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Network externalities
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Group membership may have a negative impact on
profitability relative to independents run by founderentrepreneurs
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Vertical keiretsus may achieve efficiencies because
their stable long-term contracts allow for just-in-time
delivery, kanban system that minimize inventory
costs and encourage superior quality control
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Managerial Decision Making
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J-mode type of organization in contrast to H-mode
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H-mode includes both the U-form and M-form
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J-mode characterized by “horizontal coordination
among operating units based on sharing of ex-post
on-site information”
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H-mode characterized by “hierarchical separation
between planning and implemental operation and
the emphasis on the economies of specialization”
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Managerial Decision Making
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J-mode depends on both long-term relationships
between workers and firms and long-term
relationships between banks and firms which tend to
hold for keiretsu members with lifetime employment
systems
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Top managers risen from within the firm increase the
loyalty
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Management as the representative of the employees
Labor-managed firms
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Managerial Decision Making
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Horizontal coordination through processes of consensual
decision making
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Dependence upon workers for suggestions for improving the
firm’s performance
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Seniority-based rank hierarchies
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Given long-term nature of employee-firm relations and of
bank-firm relations, managers use longer time horizon for
strategic planning
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Emphasis upon maximizing market share subject to minimum
profit constraint, rather than maximizing short-run profits
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Industrial Policy by Government
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Government-business relations labeled industrial
policy
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Ministry of International Trade and Industry (MITI)
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The state being the driving force of the Japanese
economy → supremacy of government bureaucrats
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High-level bureaucrats to high-level employment in
top firms
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Industrial Policy by Government
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MITI intervention in markets → product
cycles
Beginning stage of an industry
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Infant industry tariffs
Subsidies for special capital investments
Rationalization cartels that carry out MITI-financed
R&D
At the end of product cycle
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To reduce closeout using depression cartels
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Industrial Policy by Government
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Overall rapid growth
Export success of targeted industries
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Shipbuilding, steel and computers
MITI failed in the late 1950s to cartelize the
automobile industry down to two firms
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Honda → the most technically innovative of the
automobile companies and a great export success
Sony → rejected to produce transistor radios
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Both founded and led by strong-willed entrepreneurs
operating outside of the planning and keiretsu system
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Why Japan Failed to Become Number
One
Macroeconomic Performance
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High rate of growth
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High capital investment rate backed by a high
savings rate
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After bursting of the Japanese stock market bubble
in 1990
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Growth rate fell below those of other leading market
capitalist economies with unemployment rate increasing
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Why Japan Failed to Become Number
One
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High savings rate
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Confucian ideals
High growth rates as consumption increases lag behind
income increases
Individuals save to make down payments on homes
Workers save for old age because of the combination of
early retirement with low pensions and low social security
payments
The lumpiness of large bonuses
No capital gains tax except on land
Most of the postwar period, a relatively young population
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But rapidly aging population
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Why Japan Failed to Become Number
One
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Macroeconomic Planning Policy
Market capitalist economy with elements of a traditional economy
and indicative planning
 Sectoral and technological planning → MITI
 Macroeconomic plans → Economic Planning Agency (EPA)
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Relatively low levels of government spending and taxation
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Low level of social transfer payments
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Low defense spending, due to US demilitarization
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Why Japan Failed to Become Number
One
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Quality of Life
The highest quality of life
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Top in life expectancy
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Gender empowerment, (31st)
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High per capita income and consumption
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Low crime rate
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Why Japan Failed to Become Number
One
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One of the more equal income distributions in the
world
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Egalitarian wage structure arising from the labormanagement system
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Workaholics in rabbit hutches
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Environmental pollution
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Problems of discrimination (against women and
foreigners)
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Why Japan Failed to Become Number
One
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The End of the “Economic Miracle”
Rising dependency ratios that reduce savings
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Opening of financial markets caused by deregulation, leading to
outflows of capital
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Technological stagnation
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Weakness of the non-tradeable goods sector
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The failure of government spending to stimulate the economy
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Why Japan Failed to Become Number
One
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Hollowing out of the industrial base as large
corporations invest in other countries
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The emergence of a liquidity trap in financial
markets
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A decline in the rate of return to capital investment
owing to overinvestment in the past
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A credit crunch caused by the accumulation of bad
loans in the banking sector
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Why Japan Failed to Become Number
One
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A general disruption of the financial sector in the
aftermath of the collapse of the stock market
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Deeper cultural arguments involving a breakdown of
Confucian values
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Saving-investment nexus
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Rapidly aging society, experience rising dependency ratios
that tend to depress the savings rate
A victim of its own success as a society able to support
long life
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Why Japan Failed to Become Number
One
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In early 1990s, a low rate of return for large
corporations resulting from overinvestment
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After 1997 Asian financial crisis, credit
problem
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The collapse of the bubble economy
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Technological leadership?
45