Japan’s Reluctant Globalization

Japan’s Reluctant Globalization

by Brian J. McVeigh

Starting with the famed “chrysanthemum-and-the-sword” description, Japan
seems to invite portrayals that attempt to capture contradictory or
ostensibly conflicting trends. Its political system has been described
as “patterned pluralism,” “compartmentalized pluralism,” and one of
“bureaucratic -led mass inclusion.” Its economy is said to have “guided
markets” and “managed competition.” Its capitalism has been
characterized as “nonliberal” (or even illiberal). It is a nation where
corporate concerns trump politics (“Japan Inc.”). Internationally, it
is a “fragile superpower,” an economic giant but a political dwarf.[1]
“Is-Japan-really-changing?” is another fixation that orients
interpretations of Japan.

In a highly readable, cogent, and important volume, Ulrike Schaede and
William Grimes have put together a collection of articles that asks if
and how Japan is changing while offering another rendering of Japan’s
political economics: “permeable insulation.”

How has Japan, “a county that has resisted global rules for its domestic
markets for many years,” responded to globalization? After all, no
other nation “seems more challenged by these pressures than Japan” (p.
xi). According to Schaede and Grimes, Japan has attempted to manage
globalization by controlling “both the speed and reach with which global
rules and markets affect domestic players” (p. xi). The authors in this
valuable collection of articles explore Japan’s policy responses to
globalization–which have been “proactive and occasionally aggressive”
(p. xi)–from the angles of political science, business, law, and
economics. The first two chapters, which lay the groundwork for the
book’s later contributions, comprise “Part I: Introduction.” Chapters 3
through 6 contain “Part II: International Political Economy and
Permeable Insulation,” while chapters 7 through 9 comprise “Part III:
Political Economy and Permeable Insulation.” Part IV consists of the
concluding chapter.

In chapter 1, Schaede and Grimes explain the meaning of “permeable
insulation” within the context of the major structural change Japan’s
industries have experienced (e.g. the relocation of production abroad
and deregulation). Chapter 2, “Japanese Policy Making in a World of
Constraints” (Grimes and Schaede), provides historical context for the
following chapters. This chapter, which provides a remarkably concise
backdrop for the non-specialist, is crucial, because it affords
a perspective of what has changed and what has not changed. Besides the
forces of globalization, the tectonic shifts in Japan’s political
economy we are now witnessing have their roots in the past
(administrative reform and privatization, financial deregulation, fiscal
woes, declining industries). Grimes and Schaede outline the relation
between new global challenges and Japan’s domestic political economic
scene that constrain policy responses. Politically, key considerations
include a party system still in flux since 1993 and the “ideological
interchangeability” of politicians which makes policymaking less
predictable and creates more cleavages. The result is new complications
in “compensation politics,” or the redistributive balancing act between
civil servants, politicians, and businesses. Moreover, politicians have
a larger role vis-a-vis the bureaucrats. Such changes reverberate
throughout patterns of political support and relations between
politicians and bureaucrats, government and business, and state and
society. Economically, constraints on policy formation are seen in
government finance, the Fiscal and Investment and Loan Program, banking
regulations, monetary policy, changes in the corporate system, and the
challenges of new types of competition.

A major strength of this book is that all the chapters are neatly tied
together by the theme of permeable insulation. So what does this term
mean? Basically, it describes policies that “have at their core an
attempt at continued protection of domestic interests” (p. xi). It is
an effort to face “shifting comparative advantage” (p. 70). Permeable
insulation “means that Japan’s response to the global and domestic
challenges of the 1990s is neither one of retreat and denial, nor one of
full acceptance of global standards and practices” (p. 8). It permits
“entry and market competition in areas where that is the best approach
for existing market players, while protecting (or allowing
self-protection in) less competitive sectors” (p. 244). Permeable
insulation characterizes policies that “continue to have at their core
an attempt to shield companies from full competition and the rigor of
the market forces” (p. 7). In this sense, it is a type of managed
competition. However, the “insulation” is not absolute, “but rather
allows for differentiated application by industry, institutions, or
issue areas” (p. 7).

Permeable insulation appears to describe something quite familiar:
Japan’s dual economy, since it “reinforces the bifurcation of Japanese
industries into world-competitive exporting sectors and domestically
focused, less efficient ones” (p. 18). The policy implications suggest
“that those industries most in need of reform from a global trade
perspective are precisely the ones where change is least likely to
occur–either because the industry resists deregulation, or because
self-regulation is used for self-protection” (p. 252). Permeable
insulation also implies that not all parts of the state move in the same
policy direction, and consequently it encourages the formation of
clientelistic subgovernments (composed of knowledgeable politicians,
bureaucrats, and companies in a given sector that drive “compensation”).
Japan’s trading partners need to be aware that any policy that offers
opportunities has a downside of protectionism and hidden problems (p.
245). Methodologically, permeable insulation shows why
a firm-level or industry-level analysis is the most appropriate tactic
for understanding Japan’s political economics (p. 245). It thus
demonstrates the need for more analytic precision and “introduces
differentiation, both by sector and issue area” (p. 7) and “calls for a
case-by-case evaluation of policy intent and policy outcome”(p. 4).
In chapter 3 Grimes explores attempts to make the yen a key currency in
Asia. The idea is to enhance economic integration with
other Asian nations. Moreover, and perhaps more significantly, the
Japanese economy would be insulated from major currency fluctuations.
However, to accomplish this internationalization of the yen, Japan would
have to liberalize its financial markets, a maneuver that does not
coincide with policies that affect the supply and demand of yen.
Therefore, according to Grimes, this is an example of
“internationalization as insulation” and the relevant policies contain
inherent contradictions: “all of the liberalizing measures were meant to
increase the confidence of the international market participants in
Japanese financial markets and the yen; but, in order to gain that
confidence, Japan would have to make itself vulnerable to the
cold-blooded rigor of the market” (p. 63).

Under GATT, Japan preferred bilateral resolution to legal
embroilment in the GATT dispute settlement process. But in a
significant change, Japan has more recently relied on the WTO to settle
disputes. This is a topic investigated by Saadia M. Pekkanen in chapter
4. Examining several cases, Pekkanen shows how Japan used WTO
rules as “both a ‘shield’ for controversial domestic policies and
measures, and as a ‘sword’ with which to challenge its trade partners”
(p. 78). Such “aggressive legalism” has opened overseas markets for
Japan while its leaders have devised industrial policies that circumvent
WTO rules. In this way protectionist polices have been maintained that
do not violate international agreements.

Mireya Solis, in chapter 5, considers the “multinationalization of
noncompetitive industries” and probes the state’s role in encouraging
subsidized loans to outward-bound foreign direct investment. Such
support from the state has a dual purpose; it insulates Japanese firms
from the impact of a high yen (since the mid-1980s) and aids in
relocating small firms in declining sectors outside Japan. It also
helps to secure a supply of key raw materials for Japan’s own market.
This facilitation of industrial restructuring by shifting industries
abroad with eroding comparative advantage is surprising, given Japan’s
record of protecting domestic industries and keeping labor satisfied.
But remarkably, there was an absence of labor opposition and the
Japanese state “managed to run the largest FDI program in the world
without antagonizing labor ” (p. 119). This is partially explained by
the fact that research and development and high value-added activities
remained in Japan.

In chapter 6 (“Integrated Production in East Asia: Globalization without
Insulation”) Patricia Nelson asks “Could an economic structure designed
to support export promotion be reconciled with a growing dependence on
reverse imports?” (p. 125). She explains how by 2001, East Asia had
become the primary target of Japanese FDI. The original reason for
investing in East Asia and building integrated networks was to provide
the Japanese market with “lower-cost goods,” not “inferior-quality goods.”
In chapter 7 Mark Elder explores the policies of the Ministry of
Economics, Trade and Industry. For those interested in METI’s
predecessor, MITI, this chapter is particularly interesting.
According to Elder, METI has shifted its priorities so as to be able to
respond to new global realities by implementing economy-wide
reforms (rather than within specific sectors), developing
market-conforming policies, and promoting emerging industries.
Nevertheless, existing industries still receive support from the
state, and significantly, “the pressures of globalization had by no
means forced METI to abandon its efforts to promote the
competitiveness of Japanese companies” (p. 162). Significantly,
Elder seems to suggest that METI’s policies are not converging
with the Anglo-American model of minimally regulated markets.
In chapter 8 Schaede explains how deregulation has not led to
liberalized markets in all sectors and she explores the implications of
the shift from official regulation to self-regulation. Trade
associations have taken over the regulatory function of the state so
that self-regulation has increased. Self-regulation operates in two
ways: administrative (the rules of a particular industry) or protective
(entry barriers, boycotts, price restrictions). Industries that prefer
continued protection face little state interference, while more
competitive industries can eliminate protective barriers if they so
choose. This choice between self-protecting or self-promoting
constitutes a type of permeable insulation.

In Chapter 9 Christina L. Ahmadjian notes how discussions of corporate
governance revolved around two extremes: (1) convergence toward a global
standard (usually understood as “American”) versus (2) the preservation
of distinctively Japanese elements with only superficial changes. She
then investigates how, despite all the recent attention given to a
“corporate governance crisis” (due in no small part to corporate
misbehavior), talk of reform, and demands that officers be held
accountable, changes “were of far less consequence than suggested by the
amount of publicity they received” (p. 216). In any case, each firm
configures its own corporate organization and strategies as it sees fit.
Ahmadjian illustrates her contention by looking at “two pillars” of
corporate governance: executive compensation and board composition.
In the concluding chapter Schaede and Grimes outline some of the
long-term ramifications concerning permeable insulation. These
implications result from and affect political economic structures and
processes. In the political realm, they report that as industry
interests have become more diversified and budget constraints have
increased (thereby limiting the government’s largess), ministries have
lost some of their traditional control. Thus, there has been a shift in
power from bureaucrats to politicians. This is an oft-heard view.
However, one must wonder what difference this shift will make if both
Diet members and civil servants believe in a coordinated capitalism
premised on an intractable economic nationalism. In the economic realm,
the dualism of Japan’s economic structure (i.e. progressive,
internationally competitive sectors and slow growing or even declining,
domestically oriented companies) will continue to increase.
Schaede and Grimes note that if current policies become unsustainable,
Japan might become even more subject to intense global trends and
competition. If so, there is a chance that Japan will be forced to
become more permeable. This “might be understood as a harbinger of
convergence with global (or American) economic practices” (p. 251).
However, this appears as a distant possibility. For instance, as of
2001, with the exception of foreign investments in wholesale finance and
automobiles, other types of inbound FDI were “untouched.” And the
tenacious nature or economic nationalism is evident in how some foreign
economic interests have been co-opted: “Once accepted as insiders,
foreign firms enjoyed the same protection that, as outsiders, they had
tried so hard to break up. Thus, even in industries with foreign
participation, more market openness was not necessarily bound to follow”
(p. 252).

In the beginning of the book Schaede and Grimes introduce permeable
insulation by noting that by the late 1990s, there were two schools of
“change forecast”: (1) Japan is not actually changing at the core, i.e.
it is still pursing protectionist polices and industrial promotion to
preserve its politic-economic system; (2) in order to regain its
competitive edge Japan will have to completely reform. Schaede and
Grimes claim to offer a third view: “Japan is in fact changing
significantly, leading to possible misinterpretation by those who adhere
to one of the two polar views” (p. 4). Of course, the “two schools”
appear to be theoretical straw men, and this reviewer is not completely
convinced that the third view is fundamentally different from the first
school’s position.

In any case, the issue here concerns how to define “change” and “reform.”
When discussing Japan, observers often use these two terms
interchangeably. They shouldn’t. Japan is certainly changing (and
always has been, for that matter). It may even be reforming, though it
is doing so most likely along Japanese lines. For some, “change”
implies that Japan is reforming according to a neoliberal Anglo-American
agenda. After reading _Japan’s Managed Globalization_ this reviewer
believes Japan’s core economic nationalism, despite some fine-tuning, is
not being fundamentally altered. For example, regardless of new
economic opportunities, “the overall data indicated that many of Japan’s
product markets remained difficult to crack. As of 2001 there was still
little evidence of a fundamental, comprehensive opening of the Japanese
economy.

Thus, globalization and insulation coexisted in striking, and
sometimes uneasy, patterns” (p. 38). This is why we should begin to
wonder how seriously the major politico-economic actors are interested
in fundamental change. In spite of announcing “almost too many
deregulation programs to count” (p. 191), we still find that most
markets in Japan “continue to be dominated by Japanese firms” (p. 192)
after twenty years of deregulation. Despite the state’s withdrawal from
some regulatory responsibilities, traces of a “privatized” mercantilism
are still visible in the self-regulation of industries. This indicates
how widespread economic nationalism is, regardless of whether it is a
ministry, a trade association, or private industry doing the regulating.
Ahmadjian concludes that the relative lack of reform, at least in
corporate governance, “suggests that despite the rhetoric, Japan was not
converging with global practices” (p. 237). And consider the major
reorganization of Japan’s ministries in 2001: “An analysis of the actual
structure of the new ministries and their tasks, however, suggests that
there is some old wine in the new bottles” (p. 247). As Schaede and
Grimes suggest, the policies of permeable insulation may merely reflect
nervousness about rapid global change (visible in many nations).
However, in Japan “they follow a familiar trajectory of policies and
processes practiced for decades in Japan. The ubiquity of government
intervention, of industry associations as drivers of sectoral policy,
and of corporate governance for the benefit of management rather than
shareholders, mean that Japan’s response to the generic pressures of
globalization remains distinctive” (p. 254). Japan is “adapting to new
world rules of globalization while maintaining pockets of its old
mercantilist approaches at home” (p. 18). Indeed, but the key question
is how significant are these “pockets” for the global economy. Schaede
and Grimes point out that permeable insulation is not unique to Japan:
“in fact, one could argue that many governments follow a similar dual
approach to policy-making” (p. 244). If this is indeed the case, what
is distinctive about Japan’s own permeable insulation?
That crucial questions about “change” (and its rate), the meaning of
reform, and the different types of capitalism now competing on the world
stage emerge from a set of well written, richly detailed, and carefully
researched pieces is a major strength of this must-read book. The
reader is provided with plenty of food for thought for answering such
questions. This volume is indispensable reading for government
policymakers, business people, academics, and anyone seriously
concerned with Japan’s future direction as well as the prospects for
global trade.

Note

[1]. See Ruth Benedict, _The Chrysanthemum and the Sword: Patterns of
Japanese Culture_ (London: Secker and Warburg, 1947); Frank Gibney,
_Japan, the Fragile Superpower_ (New York: Norton, 1979); Inoguchi
Takashi, _Gendai nihon seiji keizai no kozu: seifu to shijo_ (Tokyo:
Toyo Keizai Shimposha, 1983); Michio Muramatsu and Ellis Krauss, “The
Conservative Party Line and the Development of Patterned Pluralism,” in
_The Political Economy of Japan Vol.1_, eds. Kozo Yamamura and Yasukichi
Yasuba (Stanford: Stanford University Press, 1987), pp. 516-554; Sato
Seizaburo and Matsuzaki Tetsuhisa, _Jiminto seiken_ (Tokyo:
Chuokoron-sha, 1986); Wolfgang Streeck and Kozo Yamamura (eds) _The
Origins of Nonliberal Capitalism: Germany and Japan in Comparison_
(Ithaca, NY: Cornell University Press, 2001).

This is a slightly abbreviated version of a review that appeared at H-US-Japan
on April 11, 2005. Posted at Japan Focus on May 2, 2005.