CJEB Annual Report 2012-2013

Center on Japanese Economy and Business

Annual report 2012–2013 Table of Contents

Letter from the Directors 2 The Rise of Foreign Policy as an Electorally Salient Issue in Japan 40 CJEB Team 4 “Haven” Can Be Hell: Impact of the European Sovereign Leadership and Staff 4 Debt Crisis on the Japanese Economy 40 Core Faculty 6 Should We Be Worried about Japan? 41 Research and Faculty Engagement 9 Global Leadership Challenges for Japanese Companies 41 “Japan’s Abenomics: Recovery Leading to Good Growth?” Postelection Briefing with Professor Gerald Curtis 41 by Hugh Patrick 9 What’s Wrong with Japan? . . . It’s the Politics! 41 Current Research Highlights 16 Japan’s New Political Landscape 42 Faculty Engagement 18 Japan’s Fiscal Sustainability and Interest Rate Risk in Research Paper Series 19 the JGB Market 42 The Economic-Security Nexus in Northeast Asia 42 The New Global Financial Architecture 25 Samsung and LG: From Also-Rans to Dominance in the Consumer Electronics Industry 42 Events 26 Abenomics: A New Economic Policy Is Turning Conferences 26 Japan Around 42 Inequality, Fragmentation, and Integration in the World Economy 26 Resources 43 The Japan Project Meeting 26 Faculty Advisory Committee 43 2013 Tokyo Conference Special Report 28 Visiting Fellows 44 Symposia 36 Research Associates 45 The Role of Credit Rating Agencies in Japan and the Professional Fellows 46 United States 36 International Advisory Board 47 Shale Gas Revolution and Energy Security 36 Promoting Exchange of Ideas 48 Lectures 37 CJEB in the News 48 Another Year, Another Government: Making Sense of Japan’s Political Confusion 37 Enhancing the MBA Experience 48 NAIIC Report on Fukushima: Lessons Learned and Enhancing the Columbia Experience 49 Next Steps Forward 37 Visits from Japan to Columbia 50 Banker to the World—Lessons from the Front Lines of Fellowship and Scholarship Programs 50 Global Finance 38 Library and Data Resources 51 3.11: Disaster and Change in Japan 38 Discussion Groups 51 Tokyo’s Place in the World: Through the Eyes of Tokyo Japan Economic Seminar 51 Governor Naoki Inose 38 Monetary Policy Discussion Group 51 Japan’s Sustainable Growth Strategy 38 U.S.-Japan Discussion Group 51 Lunchtime Seminars 39 Building an International Fashion Brand: From Japan Financial Support 52 by Way of China 39 Corporate Sponsorship Program 52 Japan’s Powers That Be: Ideals, Reality, and Rhetoric in Letter from the Directors (in Japanese) 53 Comparative Energy Policy 39 “Japan’s Abenomics: Recovery Leading to Good Understanding Japan’s ODA Policy 39 Growth?” by Hugh Patrick (in Japanese) 55 Lessons from Financial Crises: Japan’s Perspective Based on Its Experiences of the Bubble, Bust, and “Lost Two Decades” 40 Center on Japanese Economy and Business The preeminent academic center in the United States on Japanese business and economics

Established at Columbia Business School (CBS) in 1986 under the direction of Professor Hugh Patrick, the Center on Japanese Economy and Business (CJEB) promotes knowledge and understanding of Japanese business and economics in an international context. CJEB is a research organization widely recognized for its symposia, conferences, and lectures held both in New York and Tokyo, which provide prominent speakers from the public and private sectors a forum for collaboration and reflection on Japan, the United States, and the global economy.

With the leadership of Professor David E. Weinstein, director of research, CJEB supports research projects, student and faculty scholarship, and library and computer-based resource initiatives. Other CJEB core faculty members are Japan specialists drawn from Columbia’s Business School, Law School, School of International and Public Affairs, Department of Economics, and Department of Political Science. Funding and resources are provided by corporate sponsors, foundations, individuals, CBS, and Columbia University.

Since its founding, CJEB has developed, grown, and evolved in order to carry out its mission effectively in a changing Japan and a changing world. In this way, CJEB has been able to build and maintain its status as the preeminent academic center in the United States on Japanese business and economics.

Further information about CJEB can be found on the Center’s website: www.gsb.columbia.edu/cjeb.

CJEB Annual Report 2012–2013 | 1 letter from the directors

Letter from the Directors

Dear Friends,

The Center on Japanese Economy and Business (CJEB) was established in 1986 with the mission to promote knowledge and understanding of the Japanese economy and business systems in domestic, East Asian, and global contexts, with a special focus on the Japan–United States relationship. As Japan, the United States, and the world have changed over these past 27 years, CJEB has taken on the wonderful challenge to develop, grow, and evolve in ways that allow the Center to continue car- rying out its mission. The number of academic organizations specialized in Japanese business and economy in the United States has unfortunately dwindled since the Center’s founding, and we take pride in the fact that CJEB continues to vigorously pursue an active and diverse agenda of Japan- Hugh Patrick, Director focused public programs, research projects, and student and faculty support.

The 2012–2013 academic year featured a range of outstanding lectures, symposia, and conferences. CJEB held its annual conference in Tokyo on March 21, 2013, with keynote speaker Joseph E. Stiglitz, Nobel Laureate and University Professor at Columbia University. This conference, titled “Inequality, Fragmentation, and Integration in the World Economy,” also featured a number of distinguished panelists. A summary with excerpts from the conference presentations and a description of our postconference dinner meeting with Prime Minister Abe starts on p. 28.

Highlights from the on-campus 2012–2013 programming calendar include the 14th Annual Mitsui USA Symposium in April 2013, “Shale Gas Revolution and Energy Security,” which gathered participants from Columbia Business School (CBS) and the professional community for a wide-ranging and David E. Weinstein, Director of Research thought-provoking panel on energy in both Japanese and global contexts. Professor Gerald Curtis gave his eighth annual lecture on Japanese politics in September 2012, addressing “Another Year, Another Government: Making Sense of Japan’s Political Confusion.” He then gave a briefing following the Lower House election in December 2012 and a talk on Japan’s new political landscape in January 2013. CJEB Research Associate and close advisor, Takatoshi Ito, dean of the Graduate School of Public Policy at the University of Tokyo, gave two on-campus lectures in November 2012 and April 2013, the first on the impact of the European sovereign debt crisis on the Japanese economy, and the second on “Abenomics.” Other CJEB events this year addressed Japan’s fiscal sustainability, interest rate risk in the Japanese Government Bond (JGB) market, and the consumer electronics industry. Several of these talks were part of CJEB’s lunchtime zadankai seminar series, which has continued to be well attended, providing a forum for speakers to meet informally and openly share their insights with Columbia students and members of New York City’s professional community. Summaries from all of these events can be found in this Annual Report, starting on p. 26.

As is expected at a world-class research university such as Columbia, one of CJEB’s core mandates has always been the engagement in, support of, and dissemination of research on the Japanese economy and its business and management systems. The Center accomplishes this through projects, seminars and discussion groups, public programs, and library and computer-based resource initiatives. In addition, the Center hosts a Working Paper and an Occasional Paper series. Summary descriptions of the 2012–2013 papers can be found, starting on p. 19.

2 | CJEB Annual Report 2012–2013 CJEB is fortunate and unique among American academic organizations, to have such a strong research agenda, which is organized and led by David E. Weinstein, whose own research you can read about on p. 16. Under his guidance, CJEB will continue to provide venues and resources for research to maintain its status as the preeminent academic center in the United States on Japanese business and economics.

As the newest facet of the CJEB research agenda, we are very pleased to announce the founding of annually awarded CJEB Doctoral Fellowships. The Fellowships (also described on p. 50) are available to PhD students in the Columbia Graduate School of Business or the Columbia Economics Department who will develop Japan expertise, culminating in dissertations focused primarily on Japan. The Center developed this initiative to address the need to find and train the next generation of specialists on the Japanese economy and business and management systems. The first two CJEB Fellowships have been awarded starting in fall 2013—one to a student from the Graduate School of Business and one to a student from the Columbia Economics Department Doctoral Program. The CJEB Fellowship, along with the CJEB doctoral grants and summer stipends, are part of the way in which the Center supports students at Columbia and encourages research on Japan’s economy and business systems at the School and University. The Center is actively fundraising in order to facilitate continuance and further development of this initiative.

We had another successful year with our Visiting Fellow Program. CJEB annually selects members of the corporate, academic, and government sectors to spend a period of time in residence at CBS to pursue independent research. As in years past, the 2012–2013 Fellows (p. 44) participated in CJEB research gatherings, presented lectures on their research findings, attended seminars and public events, and audited courses. The Fellows continue to be an important part of the CJEB and CBS dynamic.

CJEB is well established at Columbia, in the United States, and with a global reach. The Center will continue to move forward under the joint leadership of us both, Hugh Patrick and David E. Weinstein, with an eventual transition to the sole leadership of David Weinstein, who is also currently chair of Columbia University’s Economics Department.

As always, the dedication, hard work, intelligence, and energy of the Center’s core faculty and staff, the resources provided by the Business School and the University, and especially the funding provided by corporate sponsors, foundations, and individuals all contribute to the ongoing successes of the Center. We thank them all.

With warm regards,

Hugh Patrick David E. Weinstein Director Director of Research

CJEB Annual Report 2012–2013 | 3 CJEB Team

Leadership and Staff

Hugh Patrick is director of CJEB, codirector of Columbia’s APEC Study Center, and R. D. Calkins Professor of International Business Emeritus at Columbia Business School. He joined the Columbia faculty in 1984 after some years as professor of economics and director of the Economic Growth Center at Yale University. He completed his BA at Yale University in 1951, earned MA degrees in Japanese studies (1955) and economics (1957), and a PhD in economics at the University of Michigan (1960). He has been a visit- From left to right: Tamaris Rivera, Andy Wanning, Ryoko Ogino, Caroline Hasegawa, Kahori Takahashi, Emiko Mizumura ing professor at Hitotsubashi University, the University of Tokyo, and the University Pacific Trade and Development (PAFTAD) of research at the Center on Japanese of Bombay. Professor Patrick has been between 1985 and 2005, having served on Economy and Business. He is also director awarded Guggenheim and Fulbright fellow- the committee since PAFTAD’s inception in of the Japan Project at the National Bureau ships and the Ohira Prize. His professional 1968. He was on the board of the Social of Economic Research (NBER) and a mem publications include 16 books and some Science Research Council from 1982 to ber of the Council on Foreign Relations. 60 articles and essays. His major fields of 1988 and served as its chairman from Previously, Professor Weinstein was senior published research on Japan include macro- 1985 to 1988. He was a member of the economist as well as a consultant at the economic performance and policy, banking Board of Directors of the Japan Society Federal Reserve Bank of New York, the and financial markets, government-busi- for seven three-year terms. He is a Senior Federal Reserve Bank of San Francisco, and ness relations, and Japan–United States Scholar of the Jerome A. Chazen Institute the Federal Reserve Board of Governors. economic relations. His recent publica- of International Business. In November Prior to joining the Columbia faculty, tions include Reviving Japan’s Economy: 1994, the Government of Japan awarded Professor Weinstein held professorships Problems and Prescriptions (MIT Press, him the Order of the Sacred Treasure, at the University of Michigan and Harvard 2005), coauthored and coedited with Gold and Silver Star (Kunnitō Zuihōshō). University. He also served on the Council Takatoshi Ito and David E. Weinstein; and He was awarded an honorary doctorate of Economic Advisors from 1989 to 1990. How Finance Is Shaping the Economies of social sciences by Lingnan University, His teaching and research interests include of China, Japan, and Korea (Columbia Hong Kong, in 2000. He also received an international economics, macroeconomics, University Press, pending, 2013), co- Eagle on the World award by the Japanese corporate finance, the Japanese economy, edited with Yung Chul Park. He served as Chamber of Commerce and Industry of and industrial policy. Professor Weinstein one of the four American members of the New York, Inc., in November 2010. earned his PhD and MA in economics from binational Japan–United States Economic the University of Michigan and his BA at David E. Weinstein is Relations Group appointed by President Yale University. He is the recipient of many Carl S. Shoup Profes- Carter and Prime Minister Ohira from 1979 grants and awards, including five National sor of the Japanese to 1981. He is on the Board of Directors Science Foundation grants, an Institute for Economy and chair of the United States Asia Pacific Council New Economic Thinking grant, and a Google of the Department and has been a member of the Council Research Award. Professor Weinstein is of Economics at of Foreign Relations since 1974. He was the author of numerous publications and Columbia University chairman of the International Steering articles. His recent publications include and the director Committee for the conference series on “Exports and Financial Shocks,” Quarterly

4 | CJEB Annual Report 2012–2013 Journal of Economics (2011); “Trade Finance and leading community-wide education Andy Wanning and the Great Trade Collapse,” American programs with the Japan Exchange and Senior Program Officer Economic Review Papers and Proceedings Teaching (JET) Programme. She earned BA, Anthropology and Sociology, (2011); “Product Creation and Destruction: her BA magna cum laude from Carleton Lafayette College Evidence and Price Implications,” American College in art history with a focus on East MS Candidate, Sustainability Management, Economic Review (2010); and “Optimal Asian art and her MFA in creative writing at Columbia University Tariffs: The Evidence,” American Economic the University of Arizona. She continues to Review (2008). visit Tokyo regularly. Japan Representative,

Alicia Ogawa is senior Ryoko Ogino is asso Tokyo advisor at CJEB and ciate director for Terumi Ota led CJEB’s Program administration at BA, Tsukuba University on Alternative Invest- CJEB. She officially ments from 2006 to joined the Center in Interns 2009. She is also an September 2010 adjunct associate pro- after successfully Po Linn Chia fessor at the Columbia managing the Center’s BA, East Asian Languages and Cultures, University School of International and Tokyo Conference in spring 2010. Prior Columbia University Public Affairs (SIPA). Until 2006, she was to that, she held positions at Shiseido and Hyun Jee Cho managing director at Lehman Brothers, Sony Corporation of America and brought BA, Political Science and East Asian where she was responsible for managing with her a wealth of experience in program Languages and Cultures, Columbia the firm’s global equity research. Prior to production, PR, international marketing, University joining Lehman Brothers, Professor Ogawa and staff management. Her current spent 15 years in Tokyo, where she was responsibilities include managing and Shunsuke (Sean) Hirose a top-rated bank analyst and director of expanding the Center’s public and media MIA Candidate, School of International research for Nikko Salomon Smith Barney, relations. She graduated magna cum laude and Public Affairs, Columbia University having managed the original Salomon from the State University of New York, Yu Ishihara Brothers Research Department through Buffalo, with a major in human relations in MBA Candidate, Columbia Business three mergers. She is a member of the multinational organizational settings. School Board of Directors of the Maureen and James Lee Mike Mansfield Foundation and is a con- Officers sultant on Japan markets to a number of MA, Liberal Studies East Asian Studies, global investment funds. She graduated Emiko Mizumura Columbia University from Barnard College and earned a mas- Assistant Director for Programs Larry Lom ter’s degree in international affairs at SIPA. BA, American and English Literature, MIA, International Finance and Economic Otsuma University Policy, Columbia University Caroline Hasegawa MS, Information and Knowledge Strategy, Anne Smith is director for admin- Columbia University istration at CJEB, MPH Candidate, Health Policy Analysis, Tamaris Rivera having joined the Columbia University Senior Administrative Coordinator Center in February Sayaka Tsuno BA, English, Wesleyan University 2010. Before com- BA Candidate, Chemistry, Barnard College MS, Information and Digital Resource ing to the Business Management, Columbia University Fangyuan (Laura) Wang School, she worked MBA, Columbia Business School at Columbia University’s Weatherhead Kahori Takahashi East Asian Institute, developing interna- Senior Program Coordinator Miguel Yanez tional programs and symposia. Prior to BA, Sociology, Waseda University BA, The Fu Foundation School of that, she lived in Japan for three years, MA, Aaron Copland School of Music, Engineering and Applied Science, teaching English to middle school students City University of New York Columbia University

CJEB Annual Report 2012–2013 | 5 Core Faculty

CJEB’s seven core faculty members World Award of the Japanese Chamber Merit E. Janow is provide the Center’s intellectual foun- of Commerce and Industry of New York, dean of Columbia dation and are drawn from Columbia Inc., the Japan Foundation Award, and University’s School University’s Business School, Law the Order of the Rising Sun, Gold and of International School, Department of Economics, Silver Star conferred by the Emperor of and Public Affairs. Department of Political Science, and Japan. Professor Curtis serves on the Dean Janow is School of International and Public Board of Directors of the Japan Society an internationally Affairs. In addition to Hugh Patrick and and of the Japan Center for International recognized expert in David E. Weinstein, CJEB’s core faculty Exchange (USA), is councilor of the U.S.- international trade members are as follows: Japan Council, and is a member of the and investment, with extensive experience Council on Foreign Relations. in academia, government, international Gerald L. Curtis is organizations, and business. In addition, Burgess Professor Glenn Hubbard is she has had a lifelong involvement with of Political Science dean and Russell L. Asia and is an expert in that region. For at Columbia University Carson Professor of the past 18 years, Dean Janow has been and former director of Finance and Econo- a Professor of Practice at Columbia Columbia University’s mics at Columbia University’s School of International and Weatherhead East Business School. Public Affairs (SIPA) and affiliated faculty Asian Institute. He Dean Hubbard re- at Columbia Law School. She teaches is the author of ceived his BA and graduate courses in international trade/ numerous books and articles published in BS degrees summa cum laude from the WTO law, comparative antitrust law, China both English and Japanese on Japanese University of Central Florida and also holds in the global economy, and international politics, government, foreign policy, AM and PhD degrees in economics from trade and investment policy, among others. and United States–Japan relations. Harvard University. In addition to writ- She has held a number of leadership He currently divides his time between ing more than 100 scholarly articles in positions at the University. Currently, she Columbia University and Tokyo, where economics and finance, Dean Hubbard is is codirector of the APEC Study Center and he is active as a columnist, speaker, and the author of three popular textbooks, chair of the Faculty Oversight Committee writer on Japanese domestic affairs and as well as coauthor of The Aid Trap: Hard of Columbia’s Global Center East Asia. on East Asian international relations. Truths about Ending Poverty, Balance: The Previously, she was director of the Master’s He is also a senior fellow at the Tokyo Economics of Great Powers from Ancient Program in International Affairs and the Foundation. Professor Curtis has held Rome to Modern America, and Healthy, International Finance and Economic Policy appointments at the Royal Institute of Wealthy, and Wise: Five Steps to a Better concentration at SIPA, as well as chair of International Affairs, Chatham House, Health Care System. His commentaries Columbia University’s Advisory Committee London; the College de France, Paris; appear in Business Week, the Wall Street on Socially Responsible Investing. Her the Lee Kwan Yew School of Public Journal, The New York Times, the Financial research interests focus on international Policy, Singapore; and in Tokyo at Keio Times, the Washington Post, Nikkei, and trade and investment, Asia, competition University, the University of Tokyo, the Daily Yomiuri, as well as on television law, and economic globalization. She has the Research Institute for Economy, and radio. From 2001 until 2003, he was written several books and numerous articles Trade and Industry, the Graduate chairman of the U.S. Council of Economic and frequently speaks before business, Research Institute for Policy Studies, Advisors. In the corporate sector, he is policy, and academic audiences around the and Waseda University. He is the on the boards of ADP, BlackRock, KKR world. While at Columbia University, Dean recipient of numerous prizes and honors, Financial Corporation, and MetLife. Dean Janow was elected in December 2003 including the Chunichi Shimbun Special Hubbard is cochair of the Committee on for a four-year term as one of the seven Achievement Award, the Masayoshi Capital Markets Regulation; he is a past members of the World Trade Organization’s Ohira Memorial Prize, the Marshall Green chair of the Economic Club of New York (WTO) Appellate Body, which is the court of Award of the Japan-America Society and a past cochair of the Study Group on final appeal for adjudicating trade disputes of Washington, D.C., the Eagle on the Corporate Boards. between the 153 member nations of

6 | CJEB Annual Report 2012–2013 the WTO. She was the first woman to of the Council on Foreign Relations and the of his innovative teaching in the field of busi- serve on the Appellate Body. She was Trilateral Commission. ness law. Professor Milhaupt received his involved with more than 30 appeals. While BA from Notre Dame in 1984 and his JD in Curtis J. Milhaupt is on the Appellate Body, she organized a 1989 from Columbia Law School, where he the Fuyo Professor series of global conferences with leading was an editor of the Columbia Law Review. of Japanese Law experts and senior government officials He joined the Columbia Law School faculty and Parker Professor that focused on the Appellate Body, the in 1999, after private law practice in New of Comparative international trading system, and economic York and Tokyo, and five years on the Law Corporate Law at globalization. From 1997 to 2000, Dean School faculty at Washington University in Columbia Law School. Janow served as the executive director of St. Louis. He also serves as the first international antitrust advisory the director of the Joseph E. Stiglitz is committee of the U.S. Department of Center for Japanese Legal Studies and as University Profes- Justice that reported to the attorney the director of the Parker School of Foreign sor at Columbia general and the assistant attorney general and Comparative Law. Professor Milhaupt’s University in New for antitrust. Her report recommended the research interests include comparative York and cochair of creation of a global network of enforcers corporate governance; the legal systems Columbia Univer- and experts, which is now the ICN. Prior to of East Asia (particularly Japan); and law sity’s Committee joining Columbia’s faculty, Dean Janow was and economic development. In addition on Global Thought. deputy assistant U.S. trade representative to numerous academic articles, he is the He is also the for Japan and China (1989–1993). She was coauthor or editor of seven books, includ- cofounder and copresident of the Initiative responsible for developing, coordinating, ing, most recently, U.S. Corporate Law for Policy Dialogue at Columbia. A and implementing U.S. trade policies with (Yuhikaku, in Japanese, 2009); Law and graduate of Amherst College, he received Japan and China. She negotiated more Capitalism: What Corporate Crises Reveal his PhD from MIT in 1967, became a full than a dozen trade agreements with about Legal Systems and Economic Growth professor at Yale in 1970, and in 1979 Japan and China during a period of intense around the World (University of Chicago was awarded the John Bates Clark Award, economic and political tension between Press, 2008); and Transforming Corporate given biennially by the American Economic the United States and both Japan and Governance in East Asia (Routledge, 2008). Association to the economist under China. Dean Janow is on the Board of His research is frequently profiled in The 40 who has made the most significant Directors of several corporations and Economist, the Financial Times, and The contribution to the field. He has taught at not-for-profit organizations. In 2009, Wall Street Journal and has been widely Princeton, Stanford, and MIT and was the she became a charter member of the translated. Professor Milhaupt lectures Drummond Professor and a fellow of All International Advisory Council of China’s and teaches frequently throughout the Souls College, Oxford. In 2001, he was sovereign wealth fund, China Investment world. He was appointed by the European awarded the Nobel Prize in economics for Corporation or CIC. Early in her career, Commission as the Erasmus Mundus Fellow his analyses of markets with asymmetric Dean Janow was a corporate lawyer in Law and Economics at the University of information, and he was a lead author of specializing in cross-border mergers and Bologna (June 2008). He served as the Paul the 1995 Report of the Intergovernmental acquisitions with Skadden, Arps, Slate, Hastings Visiting Professor in Corporate Panel on Climate Change, which shared Meagher & Flom in New York. Before and Financial Law at Hong Kong University the 2007 Nobel Peace Prize. In 2011, becoming a lawyer, she worked at a think (May 2007) and visiting professor of law at Time named Professor Stiglitz one of the tank where she focused on U.S.-Japan Tsinghua University in Beijing (fall 2006). 100 most influential people in the world. trade and economic relations. She grew up In 2012 and 2010, he was named Teacher Professor Stiglitz was a member of the in Tokyo, Japan, and is fluent in Japanese. of the Year at the Duisenberg School of Council of Economic Advisers from 1993 She has a JD from Columbia Law School, Finance, University of Amsterdam, where he to 1995 during the Clinton administration where she was a Stone Scholar, and a teaches regularly. At Columbia Law School, and served as CEA chairman from 1995 BA in Asian Studies with honors from the he was appointed the 2008 Albert E. Cinelli to 1997. He then became chief economist University of Michigan. She is a member Enterprise Professor of Law in recognition and senior vice president of the World

CJEB Annual Report 2012–2013 | 7 Bank from 1997 to 2000. In 2008, he was theory, to development economics and pirated editions, and in the nonpirated asked by then French president Nicolas trade theory, to public and corporate editions has sold more than one million Sarkozy to chair the Commission on the finance, to the theories of industrial copies worldwide. Other recent books Measurement of Economic Performance organization and rural organization, and include The Roaring Nineties (W. W. Norton); and Social Progress, which released its to the theories of welfare economics and Towards a New Paradigm in Monetary final report in September 2009. In 2009, of income and wealth distribution. In the Economics (Cambridge University Press), he was appointed by the president of the 1980s, he assisted in reviving interest with Bruce Greenwald; Fair Trade for All United Nations General Assembly as chair in the economics of R&D. His work has (Oxford University Press), with Andrew of the Commission of Experts on Reform helped explain the circumstances in Charlton; Making Globalization Work (W. of the International Financial and Monetary which markets do not work well, and how W. Norton and Penguin/Allen Lane, 2006); System, which also released its report selective government intervention can The Three Trillion Dollar War: The True in September 2009. Professor Stiglitz improve their performance. Recognized Cost of the Iraq Conflict (W. W. Norton helped create a new branch of economics, around the world as a leading economic and Penguin/Allen Lane, 2008), with Linda “The Economics of Information,” exploring educator, he has written textbooks that Bilmes of Harvard University; and Freefall: the consequences of information asym have been translated into more than a America, Free Markets, and the Sinking metries and pioneering such pivotal dozen languages. He founded one of the of the World Economy (W. W. Norton and concepts as adverse selection and moral leading economics journals, The Journal Penguin/Allen Lane, 2010). His most hazard, which have now become standard of Economic Perspectives. His book recent book is The Price of Inequality: How tools not only of theorists, but also of policy Globalization and Its Discontents (W. W. Today’s Divided Society Endangers Our analysts. He has made major contributions Norton, June 2001) has been translated Future, published by W. W. Norton and to macroeconomics and monetary into 35 languages, besides at least two Penguin/Allen Lane in June 2012.

The 14th Annual Mitsui USA Symposium audience

8 | CJEB Annual Report 2012–2013 Research and faculty Engagement

Japan’s Abenomics: Recovery Leading to Good Growth? By Hugh Patrick

What a dramatic sea change in Japan from required. Everyone assumed the DPJ would suggest deflation is being conquered— late summer 2012 to late summer 2013! lose, the LDP would win, and Abe would July’s 0.7% annual rate was the highest More in the politics than in the economy, but become prime minister. And that happened, since November 2008. even more in the mood, sentiment, expecta- but the DPJ still held the upper house. Now, The second is to achieve stable long-run tions, and hopes of consumers and busi- after comfortably winning the July upper GDP growth over the coming decade of 2 nesses. The selection of Tokyo for the 2020 house election in coalition with its small percent in real terms, and 3 percent in cur- Olympics is a welcome further boost to Komeito Party ally, Abe and the LDP fully rent prices. Japanese spirits. control the Diet. The third is fiscal consolidation—bringing With two decades of mediocre economic These solid electoral victories reflect to an end the enormous government budget performance and ineffective government more a disenchantment with the DPJ than deficits and ever-rising amount of govern- policy, a widespread sense of resignation a strong endorsement of the LDP. Still, ment debt as a percentage of GDP, and and malaise had prevailed. After six years Japan is entering an era of political stabil- eventually even reducing that ratio. of weak governments reflected in annual ity. Attention can now be focused on the changes of prime minister and exacerbated challenge of economic revitalization and the To achieve these, what has been branded by split control of the two houses of the further renewal of confidence that is both a “Abenomics” will use monetary stimulus, Diet, Japanese were sick and tired of it all. condition and a result of revitalization. The near-term fiscal stimulus to be followed Voters were eager to support a govern- substance of economic policy objectives by fiscal consolidation, plus deregulation ment committed to economic change. Now and proposals has not changed in recent and structural reform to achieve good Shinzo Abe’s Liberal Democratic Party (LDP) years. But now Abe has the political power. growth. These are termed the “three arrows seems set to govern for at least three more And he has strongly stated his political of Abenomics,” reflecting the proverb that years until the next upper house elections will to achieve three major economic policy while one arrow can be broken, three arrows in December 2016, and probably beyond. objectives. together cannot.

For three years and three prime minis- The first is to end 15 years of small but Before the Diet session begins on October ters, the Democratic Party of Japan (DPJ) pernicious deflation. The specific goal is 15, Abe will have to announce a major held the government but was struggling to achieve what the Bank of Japan (BOJ) decision: whether to allow the consump- and losing support. Rather than hold on, appropriately terms price stability, defined tion tax increase from 5 percent to 8 per- in November 2012 it announced a lower as a 2 percent annual increase in the CPI. cent scheduled from April 2014. Actually, house election for December, sooner than Small CPI increases in July and August Abe has decided to allow this tax increase, according to a well-orchestrated leak to the Japanese press on September 12. Consensus is widespread that such a large increase will reduce growth by 0.7 percent (the government’s optimistic estimate) or as much as 1.5 percent (private-sector estimates). A major debate ensued over the summer whether to have the consumption tax increase proceed as scheduled, to delay it, or replace it with annual 1 percent increases for five years. In the same leak, it was indicated that the government will provide a supplementary budget stimulus package of ¥5 trillion ($50 billion) later this fiscal year to cushion about two-thirds of the impact.

Abe must also deal with two other major Hugh Patrick and participants at a CJEB reception

CJEB Annual Report 2012–2013 | 9 economic policy issues. One is to clarify 2013 (ending March 2014). Abenomics: his growth strategy, determine its priori- Growth is expected to slow significantly in ties, and propose legislation to begin imple- Macroeconomic Demand fiscal 2014 and beyond because economic mentation. The other is to determine the Management slack will be absorbed, and government fiscal 2014 government budget in light of expenditures for Tohoku earthquake recon- the consumption tax decision, increasing The main objectives of Abenomics mon- struction and public works will taper off. mandated welfare expenditures, and fiscal etary and fiscal policies are to conquer Also, with the April 2014 consumption tax consolidation objectives. deflation, overcome inadequate aggre- increase, households will accelerate pur- gate demand that has plagued Japan for Vested-interest opposition is pervasive and chases before then, and consumption will years, and stabilize the government debt/ strong, so Abe really has only a year or subsequently slump late next spring. GDP ratio. These macroeconomic policies, so to enact his aggressive but necessary the first two Abenomics arrows, are essen- Uptake of underutilized labor and excess programs and leave time for the political tial, but not sufficient to achieve sustained capacity has contributed to 2013’s rapid dust to settle before the 2016 upper house growth. Monetary and fiscal policy aims growth. How complete recovery from the elections. to complete Japan’s recovery, absorb the 2012 recession is depends on how much remaining slack in the economy, and move slack remains. There may be more than Overview of the Economy Japan onto a path of sustained growth. indicated by the standard measures: the Since the early 1990s, Japan’s GDP growth output gap between actual and potential Abe clearly indicated, even before being rate has averaged less than 1 percent, GDP, the unemployment rate, and changes elected prime minister, that he wanted the below potential; labor markets weakened; in wages. The Cabinet Office estimate of Bank of Japan (BOJ) to pursue a policy of and prospects seemed bleak. However, to the output gap in summer 2013 is about 2 further monetary easing even though, as term these as two “lost decades” is mis- percent. One problem is that the measure in the United States, interest rates were guided. There has been significant insti- is crude, since not only is it difficult to esti- already extraordinarily low. To that end, the tutional change, with firms, industries, mate potential GDP, but also government Diet appointed Haruhiko Kuroda as gov- and government in an ongoing process of estimates of actual GDP are revised several ernor and Kikuo Iwata and Hiroshi Nakaso adjustment. Labor productivity (GDP/hour times, sometimes substantially. as deputy governors. They took office on worked) in the 1990s grew by 2.0 percent March 20. On April 4 the BOJ announced Japan’s unemployment rate improved to annually and in the 2000s by 1.5 percent. a new dramatic easing policy far stronger 3.8 percent in July, approaching the 3.3 to These compare well to the United States than I and most others expected. 3.5 percent considered full employment. (1.8 percent and 1.9 percent) and Germany However, the share of part-time, contract, Moreover, Governor Kuroda stated the BOJ (2.8 percent and 1.1 percent). temporary, and others who are not regular would continue extraordinary monetary eas- Japan’s economy was recovering rather well full-time workers has risen from 20 percent ing until deflation is ended. He set an ambi- from early 2002, when it was pummeled of employees in 1990 to 35 percent today. tious target of a 2 percent annual increase by the global financial crisis, recession, and Many would prefer full-time regular jobs. in the CPI within two years. It is important Lehman shock. The economy has been sput- With poor job prospects, people have left to understand that this target and some CPI tering with three quarters of GDP decline the job market. Prospects for young workers forecasts are net of the effect of the 3 per- until the second half of 2011, and then three have been particularly weak. The opportu- cent increase in the consumption tax, which quarters of recovery. In the second and third nity to obtain regular employment for young is projected to add about 1.5 to 2 percent quarters of 2012, the economy relapsed into males aged 22–30 has dropped more than to the CPI in fiscal 2014. recession. Recovery resumed in the fourth 10 percentage points over the past 15 It takes time for monetary policy to affect quarter (1.0 percent quarterly GDP growth, years, for females by 5 percentage points prices. Achieving the CPI target, exclud- seasonally adjusted annual rate), spurted to (from a lower base). ing the consumption tax increase effect, a (second revised) 4.1% percent annual rate Despite Abe’s admonitions to companies to within two years will be difficult, but that is in 2013 first quarter and (first revised) 3.8 raise wages, that will not happen until labor not as important as conquering Japanese percent in the second quarter, significantly markets become tight. While 2013 summer deflationary expectations and sustaining better than the good initial report of 2.6 bonuses increased for the first time since expectations that the CPI will continue to percent growth. Like others, I assume growth 2007, basic wage rates have been declin- rise modestly over the longer term. will continue to do well in the fall. GDP is esti- ing slightly in current prices. mated to increase by 2.8 percent in fiscal The 0.4 percent CPI increase in June

10 | CJEB Annual Report 2012–2013 2013 and 0.7 percent in July suggest that August quarterly nationwide survey an ambitious 10-year target of 2 percent monetary policy is succeeding. However, reported that prices had risen in 99 of the annual growth in real GDP and a 1 percent almost all of those increases were due to 150 survey points. This is good news, since rise in the GDP deflator, for 3 percent cost-push rather than demand-pull factors, stabilization of land prices is key in over- GDP growth in current prices. Abe evi- notably the rise in prices of electricity and coming deflationary expectations. dently took his targets from the August imports. In August the Cabinet Office pro- 2012 growth strategy scenario produced Fiscal stimulus to support demand-based jected a 0.5 percent CPI rise this fiscal year. by Cabinet Office officials for the DPJ gov- recovery has proceeded in tandem with Including the expected consumption tax ernment. In a slight updating, the Cabinet monetary stimulus. In March, the govern- increase, it estimates that in fiscal 2014 Office’s “Economic and Fiscal Projection for ment passed a major supplementary budget the CPI will rise 3.3 percent, but exclud- Medium to Longer-Term Analysis” released of ¥10.3 trillion (then about $110 billion). ing the tax effect the increase will be 1.2 August 8, 2013, presents both an “eco- That has sustained increased government percent. These are optimistic projections, nomic revitalization” growth strategy sce- public works spending, as have ongoing above those of private-sector analysts. It is nario and a more prudent “reference” sce- Tohoku reconstruction expenditures and the still too early to believe that deflation has nario. The growth strategy projection is real fiscal 2013 government budget deficit of halted. GDP growth averaging 2.1 percent for the 9.3 percent of GDP. 2013–2022 decade, and growth in current Asset prices have also responded to Assuming that offsetting demand stimulus prices of 3.4 percent. The GDP deflator is Abenomics. Foreign institutional short-term will only partially offset the consumption expected to be 1.3 percent and the average traders are significant players in Japanese tax increase, fiscal consolidation will begin CPI increase 2.1 percent. stock and foreign exchange markets, so next spring with the fiscal 2014 budget. market indicators do not always well reflect To achieve 2 percent annual growth over Demand management in both the near term Japanese investor expectations. But it is the decade to 2023, the growth strategy and the longer run will require a careful worth noting that after the December 2012 scenario makes strong, perhaps unrealistic, balancing of fiscal and growth policies. One election was announced, traders, particu- assumptions. Growth depends on changes risk is that fiscal consolidation will proceed larly foreign hedge funds, decided that the in labor inputs and increases in output per prematurely, that is, before deflation has stock market was too low and the yen too worker. Total factor productivity (TFP) is been terminated and a good growth path strong. The Topix stock index soared more projected to gradually increase to 1.8 per- achieved. than 75 percent from its November 12, cent annually by 2020, significantly above 2012, close to a May 22, 2013, intraday the historical average of about 1 percent. peak of 1,284, and the yen depreciated The Abenomics Growth Full employment will be at 3.3 percent. 30 percent to 103.52 yen/dollar. The Topix Strategy Importantly, the participation rates are pro- then plummeted 19 percent to an intraday jected to rise significantly—by 8 to 9 per- low of 1,040 on June 13. It subsequently Abe announced his economic strat- centage points for women 30 to 34 and 7 has rallied modestly. Although below its May egy on June 14, based on the Industrial to 8 percentage points for those 65 to 69. peak, on August 30 the Topix stock index Competitiveness Council (ICC) report of two Such increases in participation rates would was up 55 percent from last November. weeks earlier. That report is a wide-ranging mean that the total number of workers will After depreciating to 103.5 yen/dollar in compilation of good economic ideas from not decline significantly. If present par- late May, the rate has bounced between 95 the government bureaucracy, but without ticipation rates continue, decreases in the and 100; on August 30 it was 98.2. The clear priorities or concrete implementa- population and in its working age compo- Japanese Government Bond (JGB) market tion proposals. With the upper house elec- nent would reduce the labor force by about has also been volatile, as investors reacted tion then five weeks away, such vagueness 1 percent annually. The world economy is to the effects of BOJ monetary policy on was not surprising, though frustrating. A projected to grow at 5.0 percent, with con- the interest rate structure. Massive BOJ Ministry of Economy, Trade, and Industry comitant increases in Japanese exports. purchases of JGBs have succeeded in keep- (METI) report in August rearranged the The Cabinet Office eportr reference sce- ing the yield in the benchmark 10-year bond items in the June ICC report as the growth nario projects about 1.3 percent average below 1 percent. On August 30 it was 0.72 strategy’s three pillars: unleashing the pri- real growth for the coming 10 years and a percent. vate sector potential, maximum utilization of human resources, and development of 1.5 percent rise in the CPI. It assumes that After having declined since 2008, urban new markets. TFP will maintain its historical 1 percent land prices seem to have turned the corner growth rate and that the current labor force and begun a slight rise. The government’s In his election campaign, Abe announced participation rate by sex and age will not

CJEB Annual Report 2012–2013 | 11 change. The world economy is projected to The Cabinet Office growth strategy sce- half on consumption taxpayers and half on grow at 4.0 percent. nario states that stability will be achieved the elderly, implies a consumption tax rate within a few years, certainly by 2020. But of 16.7 percent and a reduction in elderly Abe’s 2 percent growth target will be dif- it is not clear how its projection is derived; support per capita of 26.9 percent. ficult to achieve. Significantly raising labor it seems too optimistic. The scenario proj- productivity (and total factor productivity) These stark choices indicate that achiev- ects that the government, which borrowed and providing an adequate support struc- ing a stable government debt/GDP ratio 11.2 percent of GDP in 2012, in 2020 will ture to make higher labor force participa- by 2020 will be extraordinarily difficult. have to borrow 5.6 percent of GDP, and tion more attractive are huge challenges. If growth averages only 1 percent or so in that the primary balance (excluding govern- Implementation depends on major new the coming decade, fiscal stability will be ment interest payments) will decline from measures of deregulation, market liberaliza- even more difficult. However, what prob- a negative 6.4 percent of GDP in 2012 to tion, and structural reforms—all strongly ably is more important is that investors and a negative 2.0 percent. The scenario proj- opposed by vested interests. These are the others perceive that the government has ects a stable ratio of government debt to third arrow of Abenomics. developed a credible program for eventual GDP of 186 percent, less than the present fiscal consolidation, even if the time frame Embedded in the ICC growth strategy ratio because the government will receive is longer. That perception, and reality, will report is a significant tension between two about ¥6 trillion from the sale of Japan be essential to prevent an eventual crisis in fundamentally different policy approaches. Post. These projections exclude the special the JGB market. One relies on markets: deregulation, Tohoku reconstruction expenditures, taxes, and temporary government debt. increased domestic competition, and cor- The Trans-Pacific Strategic porate reform. The other focuses on govern- In its 2013 annual spring consultation with ment industrial policy: incentives for growth Economic Partnership the Japanese government, the IMF con- industries, funding new technologies, and cluded that, to be able to reduce the gov- (TPP) and Agriculture lagging-sector consolidation. While both ernment debt/GDP ratio, Japan will have to approaches can help, reliance on markets The TPP, led by the United States, ambi- raise taxes and reduce expenditures by 11 should be key. Only deregulation and struc- tiously aims to create a comprehensive, percent of GDP, a huge reduction in domes- tural reforms will generate adequate incen- high-standard, free trade area among its 12 tic demand. tives for firms to invest and people to work. members by eliminating tariffs, major non- In the longer run, Japan has to switch to a In a cogent analysis of the Cabinet Office tariff barriers, and setting rules for matters consumption-based growth model to assure August report, Robert Feldman estimates such as intellectual property rights, rules adequate domestic demand growth. That that to stabilize the ratio, even with 2 per- of origin, and state-owned enterprises. For will require wages and household incomes cent growth, the consumption tax will have Japan the most sensitive, and symbolically to become a higher share of GDP. to rise substantially beyond 10 percent and and substantively most important issue, is per capita expenditures for those over 65 agriculture. Both the government’s definition and imple- will have to decrease significantly in real mentation of its growth strategy are likely to Japan’s agricultural sector has been trans- terms. His analysis shows that the growth be piecemeal. Two major aspects are under- formed dramatically over the past several strategy scenario implies that government way: the Trans-Pacific Strategic Economic decades through a combination of mar- expenditures per elderly person would Partnership (TPP) trade negotiation, and ket forces, demographic transition, and the decrease by 17 percent in real terms, but reform of the electric power industry. Each desire of the children of farmers to enter because further consumption tax increases is discussed below. other occupations and live elsewhere. The are not projected, the government debt/ median age of farmers in 1960 was 42; GDP ratio would continue to rise. He calcu- today it is 68. There were 5.8 million farm Fiscal Consolidation lates five alternative policy choices. At one households in 1960; today there are 1.5 extreme, a consumption tax of 10 percent, Growth and fiscal policies are deeply inter- million. In 1960, Japan had 14.5 million as now legislated, requires reducing per twined. The demand management challenge workers in agriculture, forestry, and fish- capita support of the elderly by more than is how to both sustain good growth and ing; in 2012 only 2.53 million (3.9 percent 40 percent. At the other extreme, no reduc- achieve fiscal consolidation. For the fore- of the labor force), producing 1.2 percent tion in real per capita expenditures for the seeable future fiscal consolidation means of GDP. The amount of farmed land also is increasing number of elderly requires a con- achieving a stable, if extraordinarily high, declining. Still, Japan has too many farmers sumption tax rate of 31 percent. The middle ratio of government debt to GDP. and farms, especially small ones. option, putting the fiscal adjustment burden

12 | CJEB Annual Report 2012–2013 The agriculture sector is bifurcated into the retirement of more Japanese farmers; have to increase electricity prices to cover 423,000 full-time farm households, some 56 percent of Japan’s rice farmers are 70 these costs. relatively efficient; and the myriads of very or older. While Japanese adjustments due to Once two Kansai Electric reactors at Oi inefficient part-time, elderly farmers with TPP will be substantively less onerous and were closed for routine maintenance on only 1 or 2 hectares of land, who derive difficult than its critics assert, nonetheless September 15, none of Japan’s nuclear most of their income from nonfarm jobs. a successful TPP agreement will support power plants are in operation. Four power Thanks to protection, subsidies, and high and perhaps galvanize liberalizing reforms companies have applied to restart 12 reac- output prices, farm household per capita in Japanese agriculture and other protected tors at six sites, all relatively new pres- incomes are higher than nonfarm house- sectors. surized water reactors, different from the holds. Some 87 percent of the farms have Fukushima boiling water reactors. The NRA rice paddies, but 300,000 fulltime farmers The Electric Power is proceeding initially with its safety reviews produce more than 90 percent of Japan’s Industry for six reactors. This will take about six rice. Rice is the symbol of agriculture and of months, so reopenings will not begin before Japanese culture, yet in 2010 by value (at A major Abenomics reform is restruc- early 2014. Other reviews have been high prices) rice comprised only 19 percent turing the electric power industry. The delayed to determine whether the reac- of agricultural production, substantially Cabinet approved a sweeping proposal in tors can withstand a major earthquake or below the 28 percent share of vegetables. April that will be submitted to the Diet in tsunami. In the Oi case it was decided on October, where both the LDP and other In its TPP negotiations the Japanese gov- September 2 that the reactors are not on an parties support it. The 10 regional electric ernment has identified five sensitive, highly active fault, so the inspections can proceed. power monopolies will be required to set protected agricultural categories: rice (778 up separate companies for electricity gen- The LDP and the power companies are percent import tariff), wheat (252 percent), eration, transmission, and distribution. New pressing for many reopenings, but it is sugar (328 percent), dairy products such entrants will compete in power generation unclear how many eventually will. The clout as butter (360 percent), and beef (38.5 and distribution. Since some large manu- of the power companies, historically extraor- percent). While all the TPP members are facturing companies already have their own dinarily strong, has been diminished by their committed to comprehensive liberaliza- generating facilities, in principle they will be pre-Fukushima assertions that their nuclear tion, each fights for its own exceptions able to sell to the national grid, as will solar plants were completely safe. Tokyo Electric of particularly sensitive matters, including and wind plants. Implementation will take Power Company (TEPCO) has continued to the United States with trucks and sugar, years, and the devil is in the details, but this seriously mishandle the ongoing Fukushima and Japan with its five items. TPP is an will be a significant reform. disaster. Many Japanese are now mistrust- important policy mechanism to help achieve ful of the government, of power companies needed reforms while blaming intense for- A related major issue is the fate of the 50 in general, and especially of TEPCO. eign pressure (gai-atsu). nuclear reactors still idle as a policy con- sequence of the post-Fukushima decision The first TPP negotiations with full to close them until more stringent safety The Corporate Sector Japanese involvement were held in Brunei in standards enforced by the new Nuclear late August. A further session is being held As a market-based, capitalist democracy, Regulation Authority (NRA) have been met. in September, and negotiators are meet- Japan’s economic performance is driven These plants generate electricity more ing actively between sessions. The United by its private sector. Japan has 4.2 million cheaply than fossil fuel or solar or wind States is pushing vigorously to complete enterprises, excluding the primary sector, of plants and do not emit CO2. Import costs negotiations and reach an agreement by which 1.8 million are incorporated compa- for electricity have risen as Japan has sub- the end of this year. Much of the negotiating nies. Some 87 percent (3.7 million, of which stituted oil, gas, and coal for nuclear power. is basically bilateral; and the agreements 1.4 million are incorporated) are small, with Japan is the world’s largest importer of between the United States and Japan are few employees; 12.7 percent are medium liquefied natural gas (LNG), second larg- particularly important. It will be difficult sized; and only 11,925 (0.3 percent) are est importer of coal, and third largest net both to reach decisions on the full agenda large. Some 3,400 domestic companies are importer of crude oil. Its import costs for and meet the year-end deadline. One of the listed on Japan’s stock exchanges. fossil fuels increased 36 percent in 2011 most important TPP adjustment measures following the Tōhoku earthquake, and Over the years since Japan’s bubble burst, will be the time allowed for phasing out another 10 percent in 2012, comprising 30 businesses have paid off debt, trimmed tariffs and other barriers. A phaseout of 10 percent of total imports. Power companies employment through attrition, and upgraded years or more will be commensurate with

CJEB Annual Report 2012–2013 | 13 facilities and equipment. The companies Most are energetic, have skills, and want Japanese exports of goods and services in we know most about, the listed compa- to continue working. About 70 percent of fiscal 2012 recovered to 15.6 percent of nies, overall are doing well with substantial new retirees either have their employment GDP. At a yen/dollar exchange rate of 80, increases in profits. They have strong cash extended, are rehired by the same firm, or the yen was too strong; at 95 to 100, a flows from high depreciation allowances are introduced to another firm, often a sub- weaker yen is a further incentive (and relief) and huge cash balances since corporate sidiary. Some 20 percent of Japanese over for Japan exporters, though higher import savings rates are high even after ongoing 65 work, the highest rate in any developed costs are borne by Japanese consumers real investment. country. Companies are under pressure to and producers. extend the retirement age but are doing It is difficult to know much about the myriads Japan’s political and security alliance with so slowly. In April 2013, the minimum age of small and medium enterprises (SMEs). the United States is fundamental. It is in at which retirees can collect government Quite a few are strong players domestically good shape and strong. While the U.S. is pensions rose to 61; this is scheduled to and even globally, especially in niche mar- no longer Japan’s largest trading partner, increase by a year every three years to kets; they are Japan’s hidden champions. the bilateral business relationship is well- reach 65 by 2025. But at least 50,000 are estimated as being established, large, stable, productive, and in dire straits, kept alive only by loan roll- Large-firm mergers are difficult because mutually beneficial. It is a major bulwark of overs by creditors unwilling to record losses of senior management resistance. The the alliance. The U.S. recovery proceeds by forcing them into bankruptcy. Japan is Abenomics growth strategy includes con- moderately, but still with high unemployment not very forgiving of recognized failure, solidation in industries where scale is impor- and ongoing fiscal consolidation challenges. so forbearance is an important value. This tant to competitiveness. LCD TVs, railroad The sustained slump in the 27 member comes at a significant cost. Forbearance cars, medical diagnostic imaging equip- European Union (EU) and its 17 member prolonged and exacerbated Japan’s 1990s ment, and water treatment facilities have eurozone seems to have ended, but with financial-sector problems. Today zom- been targeted. Consolidation is important high unemployment rates, unresolved bank- bie companies in various sectors weaken in petrochemicals and shipbuilding as well. ing system problems, and still serious dif- healthy firms and contribute to resource The business establishment complains ficulties in southern tier countries. Japan misallocation. Government support for bank that the high corporate tax rate relative to is the EU’s fifth largest trading partner, but loans to zombie companies ended in March foreign countries puts Japanese firms at taking into account overseas production, 2013, and banks are gradually forcing them a competitive disadvantage. However, if Japan is second. Trade is dominated by to close. the corporate tax rate is reduced, so too machinery and transport equipment and Most listed companies are controlled by an should depreciation rates in order to shift chemical products in both directions. The entrenched, self-replicating, powerful man- management incentives away from easily EU also exports agricultural products to agement cadre. Shareholders are relatively spending free cash flow. In the longer run, Japan, and Japan is a major investor in EU passive. In many instances the major stake- Japanese companies need to enhance R&D, countries. Japan typically has run trade sur- holders, aside from management, are the be prepared to pay higher wages as labor pluses, though they have not been as large regular employees, since they have, by law markets tighten, and compete vigorously in the last few years as earlier. and custom, strong job security. Corporate under the deregulatory and other struc- Japan’s economic relationships with other governance has evolved over the past two tural Abenomics third-arrow initiatives. Asian economies are extensive, deep, and decades, and companies have spun off or Increasing base wages will be a major issue on the whole very good. They are based on sold off noncore units, but hostile take- in labor negotiations next spring. the WTO global multilateral trading system overs are rare. Good corporate governance and on effective regional supply chain pro- remains a serious concern, as evidenced by International Context duction systems. However, Japanese tariff firms continuing to invest in domestic facili- and other trade barriers persist in agricul- ties and equipment despite the low returns. Growth of the world economy and trade ture and many services. But worker and managerial jobs are saved. are vital to Japan’s economic performance. World output growth slowed to 3.1 per- With the WTO Doha Round moribund, Japan Japan’s retirement age by custom and law cent in both 2012 and 2013; world trade is rather reluctantly engaging in regional is 60, notably for large companies and gov- slowed to a 2.5 percent increase in 2012 trade liberalization discussions. In addition ernment officials. SME retirement is more but should be 3.1 percent in 2013 and is to entering TPP talks, Japan is participat- fluid.At 60, Japanese men can expect to projected at 5.4 percent in 2014. ing in ASEAN’s blueprint for a Regional live another 23 years, women another 29.

14 | CJEB Annual Report 2012–2013 Comprehensive Economic Partnership Deflation probably will be brought to an end the same problem. The evidence from the (RCEP), which includes China, as well as over the coming year. Achieving the 2 per- 2007–2008 global financial crisis and China-Japan-Korea trilateral trade nego- cent CPI growth target within two years will Great Recession is that an austerity pol- tiations. On March 25, 2013, the EU and be difficult, but that is less important than icy is very costly and not very success- Japan officially launched negotiations for a creating public and market expectations ful, despite the needs for structural reform free trade agreement. The most immediate, that deflation has been conquered and that and improved incentives. Simply stabilizing and probably the most important, is TPP. appropriately small increases in the CPI will Japan’s government debt-to-GDP ratio at a be sustained. This will be a major monetary high level will require major reductions in the The benefits of economic cooperation have policy achievement. budget deficit, with some combination of successfully overcome differences in eco- significantly reduced benefits for the elderly nomic and political systems, epitomized by Japan’s population will decline about 0.3 and further consumption tax increases. China being Japan’s largest trading partner. percent annually the rest of this decade, Fiscal consolidation will take many years. In 2012, 18.5 percent of Japan’s exports and at about 0.6 percent in the next decade. There is no quick fix. went to China and 21.3 percent of its With a declining population, to measure per- imports came from China. Japanese FDI formance and well-being we need to focus Abenomics policy proposals are not new. in China rose by 14.4 percent in the first even more on the growth of GDP per capita What is new is Abe’s political will. Public half of 2013. Nonetheless, it seems to be rather than GDP growth. In the long run, support and expectations are strong, the slowing because of higher Chinese wages, assuming adequate aggregate demand is rhetoric is good, Abe and the LDP gov- and corporation diversification strategies sustained, growth per capita will depend ernment have a strong mandate and the as well as political relationship issues. mainly on measures to increase labor pro- legislative power to develop and carry out ductivity: innovation, R&D, education, job Abenomics—but the realities are somber. Some 17 percent of the 8.4 million foreign training, and reduced obstacles to partici- Inevitably, it will take time for Abenomics tourists visiting Japan in 2012 were from pating in the labor force as fully and effec- to be implemented, and then to see the China, in addition to the 24.4 percent from tively as Japanese would like (particularly results. South Korea and 17.5 percent from Taiwan. for young adults, married women, and those It is impressive that while China-Japan dip- While Abenomics has been proceeding over 65). lomatic and political relations are tense, the well so far, it is too early to determine its economic relationship continues to flourish. Achieving Abe’s GDP growth target of 2 eventual success. My view is a mixture Since the Chinese economy will continue percent requires major structural changes of concern, caution, and—optimist that I to grow annually at 7 percent or so for in the Japanese economy, including fur- am—hope. the next decade, its importance for Japan ther major deregulation and incentives for September 26, 2013 will continue to be significant. China needs growth industries, consolidation in uncom- Japan’s technology and markets, and Japan petitive industries, and closing distressed needs China’s markets and FDI opportuni- SMEs. The challenge for the Abe govern- ties. China’s effective integration into the ment is to implement these policies wisely, global economic system is a major opportu- strongly, and well. nity and challenge. I am not persuaded that 2 percent growth Conclusion will be achieved. Japan’s 1.2 percent “prudent GDP growth” scenario also is above Japan may finally be escaping its doldrums earlier estimates of potential growth rates of the past two decades. The economic of 0.5 to 1.0 percent but is more readily recovery is proceeding, with good growth achievable. Under that scenario, GDP per this year absorbing much of the slack. If capita would grow at 1.5 percent, similar to Abenomics is successful, Japan will enter the EU and the United States. a new, better economic era. But that is far Japan’s most challenging longer-run eco- from sure. The vested interest obstacles to nomic problem is to resolve constructively structural reform are strong. Much depends the deep tension between sustaining full upon Prime Minister Abe’s political will and employment growth and engaging in fiscal leadership and sufficient support from his consolidation. The U.S. and the EU face own party, the LDP.

CJEB Annual Report 2012–2013 | 15 Current Research Highlights

From left to right: David E. Weinstein , Gerald L. Curtis, Curtis J. Milhaupt, Alicia Ogawa

CJEB places a high priority on promoting He also has been working on a project aimed search and Google Maps for several coun- research related to the Japanese economy at understanding the mismeasurement of tries). This project aims to measure inflation at and its businesses, management systems, inflation in Japan. This research demon- a daily frequency and explore how daily price and financial markets. Typically, faculty strates that there are significant upward and consumption data respond to macroeco- members associated with the Center indi- biases in the Japanese CPI on the order of nomic shocks. Professor Weinstein expects vidually obtain funding through competitive two percentage points per year. His work that the construction of daily price and con- outside grants, and CJEB provides addi- on Japanese inflation involves examin- sumption indexes for major economies will tional financial and administrative support. ing how problems in the measurement of alter our understanding of how policy and eco- inflation should ffecta monetary policy. In a nomic shocks are transmitted to economies. David E. Weinstein leads the Center’s paper summarizing this research, Professor research activities and has several indi- He is also pursuing a related research proj- Weinstein shows that when the Japanese vidual projects under way funded in part by ect, “Internet Prices and Price Indexes,” for CPI measures inflation as low (below 2.4 the National Science Foundation (NSF), the which he will study the vast amount of percent in our baseline estimates), there is Institute for New Economic Thinking (INET), daily price and click-through data available little relation between measured inflation and a Google Research Grant. Professor on Google Product Search. This project and actual inflation. However, outside this Weinstein’s research and teaching focus on aims to provide new ways to measure the range, measured inflation understates actual international economics, macroeconomics, quality of goods online as well as improve inflation changes. In other words, one can corporate finance, the Japanese economy, our understanding of aggregate pricing. accurately infer inflation changes when the and industrial policy. In addition to being Furthermore, by merging data available on CPI is high, but not when measured inflation CJEB’s director of research, Professor Google Product Search with data available is close to zero. If Japan were to shift to a Weinstein is the chair of the Columbia from ACNielsen, both in the United States methodology akin to the U.S. PCE deflator, University Economics Department and and internationally, he will be able to better the problem would be reduced but not elimi- codirector of the NBER Japan Project, examine the integration between online and nated. This nonlinear relationship between cosponsored by CJEB. brick-and-mortar markets, as well as under- measured and actual inflation has important stand the specifics of trade costs that exist In 2012–2013, Professor Weinstein contin- implications for the conduct of monetary between countries. ued his research on systemic financial risk policy in low inflation regimes. in Japan. He has a major project under way Professor Weinstein’s research is frequently Professor Weinstein has continued his work that aims to understand how banking crises cited and discussed in the media, and he on “Prices in Space and Time,” a research affect aggregate investment. In particular, is a frequent commentator on Japan. In project using detailed (barcode) data from the this research will answer the question of 2012–2013, he was featured in news out- ACNielsen HomeScan (for purchases in the how important problems in individual large lets including NHK. United States), Nikkei-POS, and ACNielsen financial institutions are for understand- Scantrak (for retail sales in Japan and several Gerald L. Curtis, in addition to his aca- ing aggregate loan volatility in general and other countries), and Google’s price and click- demic writings, regularly publishes columns what impact bank loan supply has on firms’ through information (for all retail products and in both Japanese and English language investments. real estate reported on the Google Product

16 | CJEB Annual Report 2012–2013 newspapers, is a frequent guest commen- Hugh Patrick, together with Professor Professor Patrick gave policy-oriented tator on Sunday morning news programs on Yung Chul Park of Korea University, has talks based on his research at conferences Japanese television, and is widely quoted been leading a major project on the ongo- and private lunches. As recent examples, by international media outlets on issues ing financial development of China, Japan, he addressed Abenomics both in his key- relating to Japanese politics and society and Korea. During the year they completed note address at the Stanford Project on and United States foreign policy. Professor editing a book based on this project, Japanese Entrepreneurship Conference in Curtis’s article on “Japan’s Cautious Hawks” How Finance Is Shaping the Economies June and in a lecture at the Seoul Forum in the March/April 2013 issue of Foreign of China, Japan, and Korea, which is for International Affairs in May. He also Affairs is part of a larger research project on scheduled to be published by Columbia made a presentation on the Trans-Pacific U.S.-Japan relations and the international University Press in late 2013. Professor Partnership (TPP) at Japan Society’s Keizai relations of East Asia. Patrick has also continued his work on Doyukai (Japan Association of Corporate Japan’s current economic performance Executives) Roundtable in May. He was Merit E. Janow, recently appointed dean of and institutional changes. His most recent featured widely in the media, including in Columbia University’s School of International paper is his annual essay on the current such outlets as Nikkei, Jiji News Bulletin, and Public Affairs, researches financial Japanese economy, included in this Annual and NHK’s “Global Debate WISDOM.” regulatory reform as well as international Report, starting on p. 9. In 2012–2013, trade and investment. Over the past year, she has spoken to international corporate, academic, and policy audiences on topics including financial regulatory reform in the United States, developments in international trade and investment, comparing Chinese and Japanese industrial policies, and corporate governance issues. She is continuing a research project on China that focuses on sources of tension and opportunity in China’s external economic relations.

Curtis J. Milhaupt continued his research on comparative corporate governance; the legal systems of East Asia, particularly Japan; and law and economics. Professor Milhaupt will serve as the editor of The Research Handbook of Asian Corporate Governance, to be published by Edward Elgar in 2015.

Alicia Ogawa continues her private con- sulting work on Japan’s politics and economy, her teaching at Columbia University’s School of International and Public Affairs, and her work at the Maureen and Mike Mansfield Foundation. Professor Ogawa has continued to be in high demand as a public speaker. She also continues to work closely with CJEB Visiting Fellows by assisting them with their research and David E. Weinstein seminar presentations.

CJEB Annual Report 2012–2013 | 17 Faculty Engagement

CJEB endeavors to support Columbia Business School (CBS) faculty members not formally associated with the Center by serving as an entree to Japan’s business, professional, academic, and cultural worlds. The Center funds Japan-related research and seeks ways that Business School professors can incorporate study of Japan’s economy and business systems into their research and teaching. The Center uses its extensive network of Japanese corporate contacts to arrange for speakers from the private sector to talk in CBS classes. CJEB also has access to various Japan-related databases that faculty use for research and, where appropriate, can fund and arrange faculty research trips to Japan.

CJEB often arranges to cosponsor programs with other centers at the Business School. In addition, CBS faculty members often participate as speakers or panelists for various CJEB public programs. Hugh Patrick and Sheena Iyengar Patrick Bolton, David Zalaznick Professor of Business at CBS, served as a discussant at CJEB’s November 29, 2012, CJEB also arranged for Gur Huberman, Association (JBA) to support the travel symposium, “The Role of Credit Rating Robert G. Kirby Professor of Behavioral of a CBS faculty leader for the spring Agencies in Japan and the United States.” Finance, to go to Japan on a one-week pro- 2013 Chazen International Study Tour Sheena S. Iyengar, S. T. Lee Professor gram organized by the Keizai Koho Center to Japan. This year, Nicolás E. Stier- of Business at CBS, gave a luncheon (KKC), an arm of Nippon Keidanren. KKC Moses, associate professor in Decision, zadankai seminar, “Global Leadership arranges a week of meetings in Japan Risk, and Operations at CBS, led the Challenges for Japanese Companies.” with corporate executives, scholars, gov- study tour. ernment officials, and politicians, with the Joseph E. Stiglitz, CBS faculty member CJEB’s support for faculty research is goal of promoting understanding of the and University Professor at Columbia not limited to Business School faculty. Japanese economy, corporations, and man- University, served as the keynote speaker The Center also supports the research agement methods. CJEB’s Hugh Patrick at CJEB’s March 21, 2013, conference of Kay Shimizu, assistant professor of and Charles Wolf Jr., senior economic advi- in Tokyo titled “Inequality, Fragmentation, political science at Columbia University, sor and corporate fellow in international and Integration in the World Economy.” The who has been conducting studies on economics of the RAND Corporation, are 14th Annual Mitsui USA Symposium on Japan’s regional finance and central-local responsible for selecting faculty from April 17, 2013, “Shale Gas Revolution and fiscal relations. Her current book manu- Columbia and four other top-tier academic Energy Security,” brought together, among script, titled “Politics of Fiscal Austerity: institutions to participate in this excellent, other speakers, Geoffrey M. Heal, Donald Moving Private Money as Public Funds,” well-received program. C. Waite III Professor of Social Enterprise addresses Japan’s political struggles to at CBS, and Travis Bradford, CBS faculty As in years past, CJEB worked with adjust to a postindustrial economy. member and associate professor of profes- the Business School’s Jerome A. Chazen sional practice in international and public Institute of International Business and affairs at Columbia University, to discuss the MBA student-run Japan Business Japan’s energy future.

18 | CJEB Annual Report 2012–2013 Research Paper Series

CJEB fosters dissemination of research consistent with evergreening behavior by expressions for pricing kernels, we test the on Japan’s economy and business within banks toward listed firms, consistent with ability of three consumption-based models Columbia and in the broader academic, prior studies. However, the more striking to price indexed bonds in the UK and find business, professional, and public policy result is that banks appear to treat the that the standard general equilibrium, com- communities. While much of the research smaller, unlisted firms differently, being plete markets model is soundly rejected in produced by scholars affiliated with the much less willing to engage in evergreening favor of two uninsurable-risk models. Using Center ultimately appears in scholarly behavior for these borrowers. The differ- the estimated bond price equation, impulse books and professional journals, early drafts ence in treatment of unlisted firms rela- response analysis is undertaken to under- of the work and research results can be tive to listed firms does not appear to be stand the effects of three macroeconomic found in CJEB’s Working Paper (WP) Series. related to systematic differences in size fundamental shocks on real interest rates. We also accept interesting, topical papers between the two groups of firms. Thus, it In contrast to the estimates that typically not slated for eventual publication in our appears that the distinguishing charac- arise in equity markets, the estimated coef- Occasional Paper (OP) Series. Papers in teristic that determines whether a bank ficient of relative risk aversion is found to be both series are available for free download might evergreen loans to a firm is whether small in this class of models with uninsur- through our website at www.gsb.colum- or not the firm is listed. Furthermore, this able risk. bia.edu/cjeb/research, which links to the effect appears to be stronger for those Columbia University Libraries’ Academic firms listed on the more prestigious Tokyo WP 306 Commons website. Stock Exchange, compared to firms listed on other exchanges; being listed matters, Is Japan Really a “Buy”? The Corporate 2012–2013 and being on the A-list matters even more. Governance, Cash Holdings, and Economic Performance of Japanese Companies Working Papers Moreover, among listed firms, for which data on ownership by banks are available, Kazuo Kato, Associate Professor of a higher concentration of ownership of Information Management, Osaka WP 304 the firm by either the main bank or the University of Economics firm’s top three lenders increases the likeli- Nice to Be on the A-List Meng Li, Assistant Professor of hood of the firm obtaining increased loans, Yasushi Hamao, Associate Professor of Accounting, The University of Texas suggesting that bank ownership of the Finance and Business Economics, Marshall at Dallas firm stimulates evergreening behavior to a School of Business, University of Southern greater degree. Douglas J. Skinner, John P. and Lillian California A. Gould Professor of Accounting, Booth Kenji Kutsuna, Professor of Entrepreneurial WP 305 School of Business, The University of Finance, Kobe University Chicago Uninsurable Risk and the Determination Joe Peek, Gatton Endowed Chair in September 2012 of Real Interest Rates: An Investigation International Banking and Financial Using UK Indexed Bonds Over the past ten years there has been Economics, Gatton College of Business much discussion about whether corporate and Economics, University of Kentucky; David Barr, Professor of Economics, governance in Japan has improved and, if former Visiting Economist, Federal Durham University so, whether this results in improved corpo- Reserve Bank of Boston Parantap Basu, Professor of rate performance. We investigate whether observed changes in Japanese firms’ cash August 2012 Macroeconomics, Durham University holdings and payout policy are consistent This study addresses an important short- Kenji Wada, Professor of Business and with improved governance. To do this, we coming of most of the existing literature Commerce, Keio University benchmark Japanese firms against U.S. on credit availability by including a set of firms. We find mixed evidence on whether August 2012 unlisted firms (which are the firms most Japanese governance has improved overall, likely to be bank dependent) in the analysis, This paper investigates the empirical in that, conditional on firm characteristics, and by investigating differences between performance of a new class of uninsur- the cash holdings of Japanese firms are the treatment of listed and unlisted able risk models in the context of the UK still systematically higher than those of firms by their lenders. We find evidence indexed bond market. Using closed form U.S. firms. There is evidence, however, of a

CJEB Annual Report 2012–2013 | 19 strong increase in total payouts (dividends breaches the ceiling imposed by the domes- regulatory relief that would improve growth and repurchases) for Japanese firms, espe- tic private sector financial assets, the JGB in Japan. One set of changes show how cially those that make repurchases. We rates can rapidly rise and the Japanese to reduce the cost of conducting business also find that there is an inverse relation government can face difficulty rolling over in Japan. Each of these is achievable, and between changes in (excess) cash holdings the existing debt. A simulation is conducted together they would modestly improve busi- and changes in performance for Japanese on future paths of household saving and ness conditions and the efficiency of doing firms, consistent with improvements in gov- fiscal situations to show that the ceiling business in Japan. We also explain how to ernance being associated with improved would be breached in the next 10 years or stop the protection of zombie firms and iden- performance. Further, we find that the mar- so without a drastic fiscal consolidation. tify several other government regulations ket valuation of cash holdings was lower This paper also shows that the government that also discourage productivity growth, for Japanese firms than U.S. firms in the debt can be kept under the ceiling with suf- especially in the nonmanufacturing parts 1990s, which is indicative of poorer gov- ficiently large tax increases. The JGB yields of the economy. Regarding deregulation, ernance, but that this difference largely can rise even before the ceiling is hit, if an approach that the Koizumi government reverses in the 2000s. Overall, the evi- the expectation of such drastic fiscal con- tried was the creation of structural reform dence suggests that governance practices solidation disappears. This paper points out special zones. As our earlier report found, in Japan have improved for some firms, and several possible triggers for such a change these special zones had mixed results, so that when governance does improve, it is in expectation. However, downgrading of we also explain the conditions that a special associated with improvements in perfor- JGBs by credit rating agencies is not likely zone should satisfy in order to be growth mance and valuation. to be a trigger, since past downgrades have enhancing. Section 3 examines the gains not produced any change in the JGB yield. that can be achieved by opening up the WP 307 If and when the JGB rates rapidly rise, the Japanese economy. One avenue for doing Defying Gravity: How Long Will Japanese Japanese financial institutions that hold a this is via the Trans-Pacific Partnership Government Bond Prices Remain High? large amount of JGBs will sustain losses (TPP), for which Japan has finally decided and the economy will suffer from fiscal to join the negotiations. We explain why Takeo Hoshi, Pacific Economic Cooperation austerity, financial instability, and inflation. participating in this deal is desirable. A Chair, Professor in International Economic perpetual roadblock to trade negotiations Relations, School of International Relations WP 308 in Japan has been the pressure from agri- and Pacific Studies, University Policy Options for Japan’s Revival cultural interests to protect that sector of California, San Diego from competition. Productivity gains in the Takeo Hoshi, Pacific Economic Cooperation Takatoshi Ito, Dean, Graduate School of Japanese agricultural sector have been dis- Professor in International Economic Public Policy; Professor, Graduate School Relations, School of International Relations mal, and we also discuss policies that could of Economics, The University of Tokyo and Pacific Studies, University help improve that situation. A third path to openness is through increased immigration. September 2012 of California, San Diego We sketch immigration reforms that would Recent academic papers have shown that Anil Kashyap, Edward Eagle Brown be growth enhancing. Section 4 explores the Japanese sovereign debt situation Professor of Economics and Finance, the growth impediments resulting from is not sustainable. The puzzle is that the Booth School of Business, The University poor macroeconomic policies. The threat bond rate has remained low and stable. of Chicago; Consultant, Federal Reserve of a debt crisis that could cripple Japanese Some suggest that the low yield can be Bank of Chicago growth is real. We explain why a credible explained by domestic residents’ willing- plan for fiscal consolidation is necessary December 2012 ness to hold Japanese government bonds and propose some principles that should (JGBs) despite their low return, and that as In this report, we identify some specific be part of such a plan. Monetary policy long as domestic residents remain home concrete steps Japan can take to jump start has also been bad because of the Bank of biased, the JGBs are sustainable. About growth. Our recommendations are orga- Japan’s legal independence. We identify the 95 percent of JGBs are currently owned nized around three broad themes: regu- type of monetary policy framework that is by domestic residents. This paper argues latory reform, opening up the Japanese necessary to end more than a decade-long that even with such dominance of domestic economy, and improving macroeconomic deflationary period. Section 5 offers some investors, if the amount of government debt policies. Section 2 identifies four types of brief conclusions.

20 | CJEB Annual Report 2012–2013 WP 309 David E. Weinstein, Carl S. Shoup and persistency in household arrange- Professor of the Japanese Economy, Chair ments that insufficiently incorporate Turning Japanese? Lessons from Japan’s of the Department of Economics, Columbia women’s improved status in marriage. Lost Decade to the Current Crisis University; Director of Research, CJEB Our analyses show how a country’s mar- Masazumi Wakatabe, Faculty of Political riage market imbalance has been trans- December 2012 Science and Economics, Waseda mitted globally, which may be useful to University We show that supply side financial shocks understand the global implications of an have a large impact on firms’ investment. increasing sex-ratio imbalance in China. December 2012 We do this by developing a methodology to WP 312 As the world economic crisis continues, peo- separate firm credit shocks from loan sup- ple are turning to the Japanese example. ply shocks using a vast sample of matched Japan Post Bank: Problematic Issues Japan has experienced the burst of a bubble bank-firm lending data.We decompose loan Edward Lincoln, Professorial Lecturer, The economy, a financial crisis, and more than a movements in Japan for the period 1990 George Washington University; Research decade-long deflation and stagnation known to 2010 into bank, firm, industry, and com- Associate, CJEB as the “Lost Decade.” Some commentators mon shocks. The high degree of financial are even suggesting the Japanization of the institution concentration means that indi- March 2013 Western countries. The paper focuses mainly vidual banks are large relative to the size Japan, like many countries, has long on the economic controversies and debates of the economy as in Gabaix (2011). As offered savings deposits through the during the Great Stagnation from the mid- a result, idiosyncratic bank shocks—i.e., postal system. That system has under- 1980s to the early 2000s, along with a movements in bank loan supply net of bor- gone some reform over the past dozen brief description of the Japanese economy rower characteristics and general credit years, and beginning in 2007, the sys- characterized by a series of macroeconomic conditions—can have large impacts on tem was to undergo privatization, with policy mistakes. It is true that there are aggregate loan supply and investment. We Japan Post Bank eventually becoming an some distinct differences between Japan’s show that these idiosyncratic bank shocks independent entity. A new law passed in response to the financial crisis and that explain 40 percent of aggregate loan and 2012 has stalled the privatization process. of the other countries, including its aca- investment fluctuations. Regardless of how the issue of privatiza- demic, economic, cultural, and initial policy WP 311 tion plays out, the existence of a savings responses. However, there are certain simi- bank embedded within the postal system larities: the discussions became more and Brides for Sale: Cross-Border Marriages raises a number of troubling issues. This more divisive and heated as the crisis contin- and Female Immigration essay addresses five of those problems: ued; economists turned to more “structural Daiji Kawaguchi, Associate Professor, a level playing field, market power, cross causes” of the stagnation as the crisis pro- Faculty of Economics, Hitotsubashi subsidization, social policy, and risk of longed; the effectiveness of macroeconomic University inefficiency. These issues concern the fair- policy became increasingly questioned; and ness of competition within the banking the old ideas such as liquidationist think- Soohyung Lee, Department of Economics, industry, future financial stability of the ing returned. It is from this confusion and University of Maryland Japan Post Bank, and broader economic mistakes that one can derive lessons to be inefficiency within the Japanese economy. learned from Japan’s Lost Decade. December 2012 This paper argues that government owner- WP 310 Developed East Asian countries import a ship of the Japan Post Bank is unjustified large number of women from abroad as on economic or social grounds. Complete How Much Do Bank Shocks Affect brides every year, although such cross- privatization should resolve some of the Investment? Evidence from Matched border marriages virtually did not exist problems, especially that of a level playing Bank-Firm Loan Data 20 years ago. With a theoretical frame- field. But issues of economic inefficiency Mary Amiti, Assistant Vice President, work and empirical evidence, we argue and future financial stability could remain International Research Function, Federal that developed Asian countries’ demand even after privatization. Reserve Bank of New York for foreign brides is the result of rapid improvement in women’s economic status

CJEB Annual Report 2012–2013 | 21 WP 313 Naoki Shinada, Associate Senior system of governance, was designed to Economist, Development Bank of Japan separate the executives from the pro- Syncretism: The Politics of Japan’s cess of monitoring, in reality, firms sim- Financial Reforms March 2013 ply reduced the size of the board, leav- Kenji Kushida, Takahashi Research The aim of this paper is to investigate the ing membership heavily weighted toward Associate in Japanese Studies, Walter H. optimal monetary policy when bubbles executive officers. Based on a combina- Shorenstein Asia-Pacific Research Center, boost and burst. The monetary policy in tion of qualitative and quantitative stud- Stanford University the form of open market operation has real ies, we argue that this is not merely effects: that is, it influences the growth in decoupling or symbolic management; Kay Shimizu, Assistant Professor, investment and the size of bubbles. The rather, the legitimacy of the EOS system Department of Political Science, Columbia central bank faces a trade-off between made it readily accessible and salient to University stimulating investment and appreciating firms searching for a solution to problems March 2013 bubbles. The optimal policy is contingent in decision-making. The legitimacy of EOS on the state of the bubbles. When bub- as the “global standard” of corporate gov- This paper examines how diversely orga- bles arise, the central bank may maintain ernance enabled top executives to frame nized capitalist societies evolve by ana- or give up easing, depending on how it difficult board reforms to internal actors. lyzing the transformation of Japan’s finan- puts weight on the state of the bursting Through adoption of EOS, firms were cial system since the 1990s. The bank- of bubbles; while when bubbles burst, able to “kill two birds with one stone” by ing, securities, and insurance, as well as the central bank adopts an easing policy. appealing to investors as well as solving the postal financial institutions changed The optimal policy is the same, irrespec- internal problems. This research contrib- significantly but are hardly converging to tive of whether foreign capital inflows are utes to our understanding of diffusion and Anglo-American or “liberal market” mod- allowed for, unless capital markets are variation, the nature of decoupling, global els. We contend that Japan’s new financial severely restricted. spread of Anglo-American corporate gov- system is best characterized as syncretic, ernance, and NIT and BTF accounts of with new, traditional, and hybrid forms WP 315 diffusion of new practices. of practices, organizations, and norms Killing Two Birds with One Stone: Board coexisting. Syncretism in industry was Reforms in the Japanese Electronics WP 316 driven by a distinctive pattern of inter- Industry est group politics we call syncretization. Legal Background to the Low Profitability Strong political leadership, facing serious Christina Ahmadjian, Professor, Graduate of Japanese Enterprises electoral threats, shifted the policy logic School of Commerce and Management, Noboyuki Kinoshita, Executive Director, Hitotsubashi University from gradual, incremental reforms follow- Bank of Japan ing traditional interest group dynamics, Toru Yoshikawa, Associate Professor to rapid reforms that excluded the tra- April 2013 of Strategic Management, Lee Kong ditionally powerful interest groups most Chian School of Business, Singapore Japanese enterprises have shown low affected by these reforms. We support Management University profitability for quite some time now. the notion that diverse industry outcomes This paper presents several hypotheses can be complementary to broader politi- March 2013 regarding the influence of Japan’s legal cal economy reforms that take Japan This paper combines insights from A systems on this phenomenon. The laws away from its traditional model, part of a Behavioral Theory of the Firm (BTF) and discussed in this paper cover not only broader “convergence towards diversity.” Neo-Institutional Theory (NIT) to provide corporate law but also “enterprise law” WP 314 a more comprehensive understanding of as a whole, including bankruptcy law, how new practices are adopted and trans- capital markets law, and civil litigation Monetary Policy and Transmission of formed. The setting is the spread of the law. Besides this, I examine not only the Bubbles Executive Officer System (EOS) in the “laws on the book” but also “legal systems Masaya Sakuragawa, Professor, Japanese electronics industry. While this in practice.” As for the research design Department of Economics, Keio University system, based on the Anglo-American of this paper, I identify major differences

22 | CJEB Annual Report 2012–2013 in the enterprise laws among Japan, the Daisuke Miyakawa, Associate Senior is second in TV sales, fifth in cellphones. United States, and Germany. On the other Economist, Research Institute of Capital Samsung fabricated its first LCD screen hand, I assume incentive structures for the Formation, Development Bank of Japan in 1995, well after such screens already parties concerned, such as management, Keishi Shoji, Researcher, House of dominated laptop computers, and shipped shareholders, creditors, investors, and Representatives of Japan its first cell phone only in 1988. LG wasn’t regulators—that they play their roles on even founded until 1958, when it started the basis of economic rationality. Then I April 2013 its development of the first Korean-made combine both examinations so as to con- This paper examines how firms’ decisions radios. By 1982 it shipped its first color sider the possible effects caused by the to start exporting are affected by the TV—made in the U.S. In this time frame, differences in legal systems. Under this availability of information on export mar- not even 20 years ago, TV shipments approach, this paper discusses the indi- kets. Unlike existing studies, which focus were dominated by Japanese consumer vidual law system that may influence the on information sharing among firms, we manufacturers and cell phones were behavior of the enterprises. First, I discuss are interested in the information provided the business reorganization system. Here I led by Motorola and Nokia. This paper by the firms’ main banks. Specifically, point out Japanese enterprises might retain explores possible sources of the secret using a unique dataset containing infor- to the Koreans’ success and finds that significant cash reserves to avoid the dan- mation on both Japanese firms’ export the usual metrics—in particular patents, ger of being compelled to file for bankruptcy activities and their main banks’ expe- protection. Next, I examine the takeover rience transacting with other exporting R and D investment, and low cost labor— systems and argue that a potential bidder firms, we examine whether main banks act don’t explain it. We speculate that “indus- might regard the takeover of a Japanese as a conduit of information on export mar- trial policy” measures of the South Korean enterprise as irrationally difficult. This sys- kets. We find that information spillovers government may have been decisive. tem might bring about an insufficient indus- through main banks positively affect cli- WP 319 try reorganization and weak market present firms’ decisions to start exporting sure on individual enterprises. As for the (extensive margin), implying that informa- The Dynamics of Multinational shareholders’ activities, I suggest that the tion on foreign markets provided by banks Corporation-Impacted Comparative corporate governance disclosure system substantially reduces the fixed entry cost Advantage: Relevancy to Ricardo’s in Japan might provide negligible pressure of exporting. On the other hand, we do View on Cross-border Investment on enterprises and investors because of not find any evidence that information and Samuelson’s Skepticism about the separation of corporate law and market provided by banks has an effect on the law. Concerning the enforcement of enter- export volume or on the growth rate of Globalization prise law such as lawsuits by shareholders exports (intensive margin). Our results Terutomo Ozawa, Professor Emeritus of highlight that the channel of information or actions by regulators, I show that the Economics, Colorado State University characteristics of the enforcement system spillovers other than those examined in in Japan might contribute to weak market the literature so far may be of consider- April 2013 discipline and risk aversion in the business able importance. The notion of “pro-trade” vs. “anti-trade” decisions of directors. I hope this paper WP 318 foreign direct investment (FDI) was con- stimulates further research and widespread ceptualized by Professor Kiyoshi Kojima constructive discussion on this issue. Samsung and LG: From Also-Rans to Dominance in Consumer Electronics (1921–2010) of Hitotsubashi University WP 317 and theoretically formalized in an article Robert Myers, Senior Vice President, in The Hitotsubashi Journal of Economics Information and Export Decisions: The Fairfield Resources International, Inc., (Kojima and Ozawa, 1984; repro- Bank’s Role as a Conduit of Information Darien, CT; Adjunct Professor, Columbia Business School duced in the United Nations Library on Tomohiko Inui, Professor, College of Transnational Corporations, vol. 8). The Economics, Nihon University April 2013 core idea is that multinational corpora- Keiko Ito, Professor, School of Economics, Today, Samsung is the world leader in tions’ (MNCs’) overseas investments in Senshu University flat screen TV and cell phone sales. LG emerging markets have two opposing

CJEB Annual Report 2012–2013 | 23 effects on the basis for trade; one is Wilhelm Friedrich Hegel (1770–1831). on two approaches to achieve the above; to expand comparative advantage (i.e., Akamatsu was very much engrossed in the first is to have built-in stabilizers a pro-trade effect), and the other is to Hegelian dialectic. His analysis was, in fact, in place in the form of special systems reduce comparative advantage (i.e., an couched in dialectical perspectives. What and/or schemes; the second is to raise anti-trade effect). This paper shows how is most fascinating was that Hume (1754) awareness of and have in place processes the theoretical distinction above helps observed how a rich country is destined to that address psychological biases behind clarify both David Ricardo’s pessimism lose its competitiveness in manufacturing the various assumptions and analysis we about the welfare effect of cross-border and compels its producers to “gradually shift use in our day-to-day operations. investment on the home country and Paul their places, leaving those countries and OP 61 Samuelson’s skepticism of the long-term provinces which they have already enriched, benefit of free trade to the United States and flying to others, whither they are allured Japan’s Sputtering Economic Recovery in an age of globalization. by the cheapness of provisions and labour” Amid Heightened Political Turmoil (emphasis added). Hume thus zeroed in WP 320 Hugh Patrick on the core mechanism of cross-border R. D. Calkins Professor of International The Classical Origins of Akamatsu’s industrial transmigration and a sequential Business Emeritus “Flying-Geese” Theory: A Note on a spread of economic growth and prosperity Director, CJEB Missing Link to David Hume from one emerging economy to another. His insightful observation amply adumbrated December 2012 Terutomo Ozawa, Professor Emeritus of Akamatsu’s flying-geese theory, though the Economics, Colorado State University latter apparently didn’t notice this. The purpose of this paper is to provide an overview of the current state of the April 2013 2012–2013 Japanese economy and to consider some of the major challenges it faces during The “flying-geese” theory of economic Occasional Papers development introduced by Kaname these tumultuous political times. It begins Akamatsu (1897–1974) of Hitotsubashi OP 60 with an economic policy proposal focused University in the mid-1930s is the only on Japan’s muddling recovery amidst “Japan-born” theory that has so far attracted Built-in Stabilizers and Risk Literacy: the difficult political climate presently wide attention and some acceptability in Protecting the Sustainability of the inhibiting growth. I then discuss several academia worldwide. Studying in Germany Insurance Industry domestic and global issues likely to impact for two years in 1924–26, Akamatsu Shigeyuki Goto, General Manager, recovery of the Japanese economy. was strongly influenced by a number of Corporate Risk Management Department, development-stages theories expounded MS&AD Insurance Group Holdings, Inc. by the German historical school, notably Friedrich List (1789–1846), Bruno May 2012 Hildebrand (1812–1878), Karl Marx Just as any chain is only as strong as (1818–1883), and Gustav von Schmoller its weakest link, any sophisticated, (1838–1917). Akamatsu also drew on the cutting edge assessment is only as good ideas of Alexander Hamilton (1757–1804) as the robustness of the underlying and Henry Carey (1793–1879), both assumptions. This is increasingly true for Americans, who, along with List, advocated tail-risks, where even the most advanced infant-industry protection in order to predictions and modeled outputs are build national industrial development. It is not immune from judgment errors and/ surprising, however, that there is no mention or statistical uncertainty. On the part of David Hume (1711–1776) in Akamatsu’s of insurers, this warrants better pooling works, despite the fact that Hume was a of risks by way of creating a better noted thinker on economic development diversified portfolio and the building and a major philosopher, who impacted both up of capital buffers for unforeseen/ Immanuel Kant (1724–1804) and Georg unpredicted events. In this paper, I touch

24 | CJEB Annual Report 2012–2013 the new Global Financial Architecture

The New Global Financial Architecture

Building upon CJEB’s “Program on and financial market participants in the The NGFA program began with CJEB seed Alternative Investments,” which ran suc- United States, Japan, Europe, and China. funding, and in 2011, Aflac Japan became cessfully from 2002 to 2009, the Center While emphasis is placed on Japan and the first sponsor. The Center continues to established a program in July 2009 titled the United States, this necessarily is in seek a small number of appropriate spon- “The New Global Financial Architecture” the broader context of the global finan- sors prepared to make significant annual (NGFA). The purpose of the NGFA program cial system and all of its major players. commitments for three years. We encourage is to engage in analytical and policy-ori- Potential topics include, but are not lim- anyone interested in becoming involved in ented evaluations of major global finan- ited to, financial system restructuring; the NGFA program to contact us. cial and economic issues and regulatory development of national and international This year, CJEB held two major NGFA con- changes through conferences, brainstorm- regulatory systems; effective governance, ferences, one at CBS, “The Role of Credit ing sessions, and research activities, with, supervision, and monitoring; the oper- Rating Agencies in Japan and the United of course, a major emphasis on Japan. ations of and interactions among spe- States,” in November 2012 (see p. 36) and cific financial markets; the relationships The program brings together distin- one in Tokyo, “Inequality, Fragmentation, between finance and the performance of guished finance and economics profes- and Integration in the World Economy,” in the economy; and the nature and role of sors at Columbia Business School and March 2013 (see p. 26 and p. 28). government and monetary policies. other parts of the University with scholars

CJEB Annual Report 2012–2013 | 25 Each year, CJEB organizes and hosts numerous major conferences, symposia, lectures, and seminars featur- events ing outstanding speakers. These programs bring together students, academics, members of the private sector, and policymakers from Japan and the United States. The 2012–2013 events are listed below, split into the following sections: Conferences, Symposia, Lectures, and Lunchtime Seminars. All professional titles listed for participants are accurate for the time of the event. In addition to the descriptions below, videos and reports can be found on CJEB’s website: www.gsb.columbia.edu/cjeb. Conferences

From left to right: Joseph E. Stiglitz; Alicia Ogawa, Anya Schiffrin, Hugh Patrick, John Lipsky, Joseph E. Stiglitz, Peter A. Petri, Yang Yao; David E. Weinstein

Inequality, Fragmentation, John Lipsky, Distinguished Visiting Scholar, The Japan Project Meeting Johns Hopkins University and Integration in the July 26–27, 2013; Asian Development World Economy David E. Weinstein, Carl S. Shoup Bank Institute, Tokyo, Japan Professor of the Japanese Economy, CJEB Tokyo Conference Columbia University; Director of Research, This annual meeting was held in partner- CJEB ship with the National Bureau of Economic March 21, 2013; Roppongi Academyhills, Research (NBER), the Center for Advanced Tokyo, Japan Heizo Takenaka, Professor and Director, Research in Finance at the University of Global Security Research Institute, Keio Tokyo, and the Australia-Japan Research This conference was part of CJEB’s program University Centre at the Crawford School of Public “The New Global Financial Architecture” Policy of the Australian National University. and was cosponsored by Mori Building Moderator: Alicia Ogawa, Senior Advisor, Professor Weinstein organized this two- Co., Academyhills. A description with tran- CJEB day academic conference with Professors scripts of select presentations can be found Panel II: Japan and New Trade Agreements Jenny Corbett of the Australian National starting on p. 28. University, Charles Horioka of Osaka Panelists: Opening Remarks: Hugh Patrick, Director, University, Kazuo Ueda of the University CJEB Peter A. Petri, Carl J. Shapiro Professor of of Tokyo, and Takeo Hoshi of Stanford International Finance, Brandeis University University. The organizers are grateful to Keynote Speech: Increasing Inequality the Asian Development Bank Institute and within Countries: The Cost for the World’s Motoshige Itoh, Professor, Faculty of to Miki Futagawa of the European Institute Economies Economics, The University of Tokyo of Japanese Studies for their generous Speaker: Joseph E. Stiglitz, University Yang Yao, Professor and Director, China assistance and support. The following Professor, Columbia University Center for Economic Research, Peking papers and topics were presented and University discussed: Moderator: Hugh Patrick Moderator: David E. Weinstein Welcome Remarks: Masahiro Kawai, Dean, Panel I: Fault Lines in the World Economy Asian Development Bank Institute Closing Remarks: David E. Weinstein Panelists:

Takehiko Nakao, Vice Minister of Finance for International Affairs, Ministry of Finance, Japan

26 | CJEB Annual Report 2012–2013 From left to right: Heizo Takenaka; David E. Weinstein, Koichi Hamada, Hugh Patrick, Joseph E. Stiglitz; Motoshige Itoh

Dynamics of the Gender Gap in the Railroad Expansion and Entrepreneurship: The Effectiveness of Government Workplace: An Econometric Case Study Evidence from Meiji Japan Intervention to Promote Elderly of a Large Japanese Firm Author: John Tang, Australian National Employment: Evidence from Elderly Authors: Takao Kato, Colgate University; University Employment Stabilization Law Daiji Kawaguchi, Hitotsubashi University; Discussant: Tetsuji Okazaki, The Authors: Ayako Kondo, Yokohama National Hideo Owan, The University of Tokyo University of Tokyo University; Hitoshi Shigeoka, Simon Fraser Discussant: Yukiko Abe, Hokkaido University How Much Do Bank Shocks Affect University Discussant: Hidehiko Ichimura, The Investment? Evidence from Matched University of Tokyo By a Silken Thread: Regional Banking Bank-Firm Loan Data Integration and Pathways to Financial Authors: Mary Amiti, Federal Reserve Multidimensional Green Values: A Case Development in Japan’s Great Bank of New York; David E. Weinstein, of Green Condominiums with Longer Life Recession Columbia University and NBER Spans Authors: Mathias Hoffmann, University Discussant: Anil Kashyap, The University Authors: Jiro Yoshida, Pennsylvania of Zurich; Toshihiro Okubo, Keio of Chicago and NBER State University; Ayako Sugiura, Tokyo University Association of Real Estate Appraisers Discussant: Tarek Hassan, The University Panel Discussion: Discussant: Joshua Graff Zivin, University of Chicago and NBER Panelists: Robert Feldman, Morgan of California at San Diego, and NBER Stanley Japan Ltd.; Takatoshi Ito, The How Fast Are Prices in Japan Falling? University of Tokyo and NBER; Ryuzo Authors: Tsutomu Watanabe, The Miyako, Bank of Japan University of Tokyo; Satoshi Imai, Moderator: Kazuo Ueda, The University Statistic Bureau of Japan; Chihiro of Tokyo Shimizu, Reitaku University Discussant: David E. Weinstein, Columbia The Impact of Interstate Tensions University and NBER on Economic Exchange: Evidence from Shocks to Sino-Japanese Relations Lunch Speaker: Hiroshi Nakaso, Authors: Raymond Fisman, Columbia Deputy Governor, Bank of Japan (introduced by Alicia Ogawa, Columbia Business School and NBER; Yasushi Hamao, University) University of Southern California; Yongxiang Wang, University of Southern California Discussant: Shiro Armstrong, Australian National University

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CJEB held its annual Tokyo Conference on March 21, 2013. This year it was titled “Inequality, Fragmentation, and Integration in the World Economy” and explored the changing economic atmosphere in Japan: from one of resignation in the face of continued downturn to one of hope and expectation for an improved future. A full summary of the conference can be found on the CJEB website.

Joseph E. Stiglitz, Nobel Laureate and University Professor at Columbia University, gave the keynote address on “Increasing Inequality within Countries: The Cost for the World’s Economies,” the transcript of which can be found starting on p. 29. Following his participation in the CJEB conference, Professor Stiglitz also wrote an opinion piece in The New York Times titled “Japan Is a Model, Not a Cautionary Tale” (June 9, 2013).

David E. Weinstein’s presentation, “How Worried Should We Be about Megabanks?” was one of several perspectives provided in the two panels featured at the conference, “Fault Lines in the World Economy” and “Japan and New Trade Agreements.” A transcript of Professor Weinstein’s talk can be found starting on p. 33, and a full list of the distinguished panelists can be found on p. 26. The panels explored various aspects of both Japan’s ongoing challenges, including its aging population and the need for economic structural reforms, as well as its recently enacted policy measures, including entrance into the Trans-Pacific Partnership (TPP) negotiations and the implementation of other aspects of “Abenomics.”

The conference was extremely well attended, drawing a crowd from the business, government, and academic communities, as well as a large media representation. Media cover- age of the conference included articles in the Associate Press, Nikkei Business, Jiji Press, and Nikkei Shimbun.

CJEB also arranged for several meetings between Professor Stiglitz and the Center’s corporate sponsors. At a late private dinner hosted by a corporate sponsor following the conference, Professors Patrick, Weinstein, and Stiglitz, along with several other Columbia faculty members, were delighted to have the opportunity to meet with Prime Minister Shinzo Abe. PM Abe attended for one and one-half hours, and engaged in an informal lively discussion.

28 | CJEB Annual Report 2012–2013 “Increasing Inequality in Japan, but as Hugh Patrick forcefully shows how wrong that idea is. In the United pointed out, this confidence is finally coming States, while the top has been doing extraor- within Countries: The Cost back. And in light of Japanese productivity, dinarily well, the middle has seen its income for The World’s Economies” as well as several other factors, I think there’s stagnate or decline. The median family good reason for that. income in the United States is the same Presentation by Joseph E. Stiglitz today as it was more than a decade and a The third point, on which I’ll spend a great I’m going to begin by setting out some of half ago, 15 years ago. So while you’ve been deal more time, is the growing inequality in talking about stagnation, we’ve been living the challenges facing Japan today, because most countries around the world. I’ll also in many ways the problems facing Japan it. It’s actually even worse if you look at talk about the diminution of opportunity, other measures of well-being. are very similar to those faced by all of the mostly in the context of the United States. advanced industrial countries, particularly But the problems in the United States are The median wealth in the United States is the United States and Europe. Each of us just an exaggerated form of the problems that at the same level that it was two decades has those problems in different ways. Some are evident in many other countries, includ- ago. Furthermore, if you look at particular of these problems have occurred earlier in ing, to some extent, in Japan. demographic groups in the United States— Japan, and some have not yet arrived quite take a group that’s particularly well repre- as forcefully. There are four I want to talk The fourth issue is that of structural reform. sented here, males—the median income about very briefly. We’ve talked about structural reform in the of a full-time male working in the United case of Japan, but every advanced industrial The first is global warming, and more States is lower than it was 40 years ago. So country needs to restructure its economy. if you wonder why you see some bitter- broadly, the problems of the environment. In fact, I’ll argue a little bit later that one All of us are going to have to adapt and find ness and anger among certain groups in the of the reasons that the United States and United States, it’s because the economy has alternatives to fossil fuels as energy sources Europe have not been doing very well is that and become more energy efficient. not been delivering for a majority of the they too have been failing in the structural American population. The second is the problems posed by the reforms of their economies. aging of the population. This has hit Japan Lack of opportunity is equally troubling. I’ll first talk about the last two issues, start- America has long been thought of as the Land earlier than other countries, but it is also hit- ing with growing inequality. These problems ting Europe very strongly, and if it weren’t of Opportunity; the American Dream is one are most manifest in the United States, in which everybody can make it from the for the large amount of immigration into where one statistic that’s gotten a lot of the United States, it would become a more bottom or middle to the top. And you do see attention is the discussion of the “one per- stories of people who’ve made it from the bot- important problem in the United States, cent.” Some of you may know about Occupy too. There are a large number of conse- tom to the middle and to the top, and those Wall Street, whose slogan was “We Are stories have a lot of human resonance. But the quences to the decrease in the labor supply. the 99 Percent.” The reason that had such One is a false perception of how well you’re reason that the newspapers write about them salience was that the upper 1 percent has is because they are so unusual. Newspapers doing, or how badly you’re doing: If you’re been receiving about 20 percent of the total growing at 2 percent and your labor force don’t write about dogs that bite people; they national income—and that ratio is twice as write about people who bite dogs. is stagnant, that means output per unit of large as it was just 30 years ago. In fact, the labor is growing at 2 percent. If the United share received by the upper one-tenth of 1 In fact, if you look at the evidence, what States is growing at 2 percent and our labor percent is three times what it was 30 years matters are not the stories, but the statistics: force is growing at 1 percent, that means our ago, so inequality has been getting even the probability and likelihood of somebody output per unit of labor is growing at just 1 more extreme. from the bottom making it to the middle or percent. When the aging of the population is the top in the United States is worse than taken into account, it becomes clear that the Now, it would be one thing if increases of in other advanced industrial countries. It Japanese economy’s productivity—in terms income at the top led to an increase in the is worse even than in old Europe, which of output per worker—is doing better than well-being of everybody in society. That’s we think of as being ossified. Or, to put that of either Europe or the United States. an old notion called “trickle-down econom- it another way, the life chances of a typi- This is an important point, because for the ics.” It never had a theoretical or empirical cal American are more dependent on the last 20 years there’s been a lack of confidence basis to it, but the more recent evidence income and wealth of his parents than in

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any of the other advanced industrial coun- forces, in ways that help the top 1 percent have built in a system that leads to more tries. And that is a result, in part, of defi- but often disadvantage the rest. There are inequality, discourages equality of oppor- ciencies in our public education system. many examples of how this happens, and the tunity, and privileges the interests of banks reason that I’m talking about it here, in the over education. There are a whole set of explanations context of Japan, is that as your government for this, but the fact is that the idea that formulates a growth strategy, it ought to The final point I want to make has to America is a land of opportunity is now a think about some of these details. do with the title of my book in English, myth. And that, of course, will also have which is The Price of Inequality. What I try profound effects on our economy and our One aspect is obviously education. If those to argue is that we are paying a very high society. These changes that I’ve described in the middle or the bottom don’t have good price—not just a moral one, but in real have become much worse in the Great educational opportunities, they are not going economic terms—for the inequality that we Recession. For instance, the median wealth to have the ability to rise to the top. For have. It used to be said that there’s a trade- in the United States fell by 40 percent over instance, in the United States, we have what’s off: you can only have more growth if you the period of the Great Recession. Also, called “needs-blind” admission at our best give up on equality; and if you want more from 2009 to 2011, in the recovery from universities, in which the university pays your equality, you have to give up on growth. the Great Recession, 121 percent of the tuition on the basis of what your need is; so What I argue in the book is that we can increase in income in the United States anybody who has the quality can be sure to have both more growth and more equality; went to the top 1 percent, which means attend regardless of the income of his or her that much of the inequality in the United that all the recovery you’ve seen was not a parents, which is a very important provision. States is a result of rent-seeking, which is recovery for most Americans; it was for the But a striking statistic is that, in spite of this, just a term meaning that certain groups are top one percent. A couple of weeks ago, only about 8 or 9 percent of those in these able to seize a larger piece of the pie rather America celebrated the stock market reach- better universities come from the bottom 50 than increasing the size of the pie. ing a new peak—not adjusted for inflation, percent of our population. This is because but still a new peak. But in terms of the they don’t get an adequate high school or The result of that rent-seeking activity is typical American, there is no new peak. primary education. In fact, the problems start that the economy gets less efficient. We’re Their wealth is still considerably below what much further back, even before kids enter all used to thinking that countries like oil- it was before the crisis. school. President Obama has recognized this, rich ones are full of rent-seeking, and that’s and the need to have more preschool pro- why they don’t do very well. We talk about As we look around the world, we see many grams. But the fact is that, so far, we haven’t the “resource curse.” But in fact, America different outcomes. America has so much done anything about it—the wealthiest, and and many other advanced industrial coun- more inequality and less equality of oppor- thus most politically powerful, have had little ties have become, to a large extent, rent- tunity than other countries. There are even incentive to push for change. seeking countries, in a variety of forms. For a few countries where inequality has come instance, when you find a financial sector down—Brazil and a couple of the other Another example is bankruptcy law. In the that is engaged in manipulating Libor, that’s Latin American countries. The fact that there United States, bankers will determine who a kind of rent-seeking, which undermines are such differences suggests that they aren’t gets paid first if somebody can’t pay their the efficiency of the economy. just because of market forces; the same forces debts. We gave precedence to the deriva- operate on both sides of the Pacific and the tives—those risky products that led to AIG’s When you have monopolies, how do they Atlantic. Laws of demand and supply and the collapse and required a U.S. bailout of $180 make profits? Monopolies restrict produc- laws of globalization affect all the countries billion. Meanwhile, according to U.S. bank- tion, so rather than making the economy around the world. So this leads to the ques- ruptcy law, students cannot discharge their grow, they are engaged in rent-seeking. tion: Why is America so different? Why are debt, even in bankruptcy, almost no matter When you have a pharmaceutical industry the countries changing in their level of equal- what happens, and the parents cosign the that succeeds in getting a provision in a bill ity, inequality, and the level of opportunity? student’s loan. If the student dies through that says the U.S. government, the largest an accident or illness, the parent cannot purchaser of drugs, can’t negotiate with the The answer I suggest in my book is that it discharge that debt. That discourages invest- drug companies, that’s rent-seeking. That’s a has to do with politics. It has to do with ments in human capital, and discourages single provision that costs something like a the way our political processes shape market opportunity. So in our legal framework we half a trillion dollars over ten years. This is

30 | CJEB Annual Report 2012–2013 nice for those who are receiving it, but a very And with their income going down, there was returning to full employment any time soon. high price for the rest of our society. no demand for goods in the urban sector, and One way of seeing this is that the growth they didn’t have the resources to get the train- rate is at about 2 percent. With the labor So when you don’t have equality of oppor- ing and to move. So the economy got trapped force growing at 1 percent and the normal tunity, this means that you are not using in a depression equilibrium for a very long productivity growth of around 2 percent, if your most valuable asset, your human time. It was only with World War II that we we don’t grow at 3 percent, we’re not grow- resources. Those at the bottom are not liv- emerged from the Great Depression. We did ing fast enough to create the new jobs for ing up to their opportunity. So the general grow a little bit under the New Deal, but then the new entrants in the labor force. We are point I want to leave you with is this notion the ideology of austerity spread, the New Deal not making a significant dent in unemploy- that all of our societies are paying a high was cut back, and the economy went into the ment, and so most forecasters do not see the economic price for this inequality. We’re recession of 1937. But there was something United States returning to full employment also paying a high political price because it’s else about what happened during the New within this decade. That’s a pretty dismal leading to a divided politics and a divided Deal, as well as before and during World War picture. Moreover, it will contribute to the society. So that’s one set of global problems II that was really important: we restructured growing inequality in our country, because as I want to call attention to. the economy. After World War II, the GI Bill the economy is weak, unemployment will be provided education for all Americans to give high, and real wages will stagnate. And with The second set of problems is structural them the skills they needed in order to be the raising of the payroll tax that happened reform. We are, in a sense, the victim of our productive in a manufacturing economy. The on January 1, take-home pay is going down. own success. This phenomenon is similar necessities of the war meant people moved to the years before the Great Depression. In from the rural sector to the urban sector. We There is some good news in the United the 19th century, 70 percent of the labor created housing in the urban areas too. States, however. One is obviously the discov- sector was agricultural; they had to do that ery of gas, with attendant gas prices coming work to grow the food that we all needed So our industrial policy, in effect, was World down. High-tech industries are doing well; to live. But then, as a result of government War II and its aftermath. In the years follow- but to put that in perspective, while Apple investments in research and development, ing 1945, this policy succeeded in creating has a capitalization greater than GM at its and some private sector involvement, we a strong set of regulations on the financial peak, it only employs about 49,000 people had enormous increases in agricultural sector, strong will for the government, strong in the United States—with most of them in productivity. The result of that has been a investments in infrastructure, strong invest- low-paid retail jobs. There are some high- boom, but it has also meant that we had to ments in technology, and strong investments paid engineers and designers, but it’s not restructure our economy. Today, in Japan in research. As a result, we had a long boom going to be the salvation of America’s labor and the United States, about 1 or 2 percent period with shared prosperity. Our growth force. The real question is whether it is likely of the labor force produces more food than rate in those periods was far faster than it was that those strengths will be able to pull us our populations can consume. in the period after 1980, when we started out of our current malaise. I think the answer deregulating. It was a period in which every is no. The only thing that makes America That’s a boon to the economy, but it’s also a group in population did better, but the bot- feel good is that things could be worse, as problem. All those agricultural workers had tom grew at a higher rate than the top. In they are in Europe. to move elsewhere; in the middle of the 19th contrast, since 1980, all the gains or most century and the beginning of the 20th cen- of the gains have gone to the top. We had a The interpretation of what’s wrong with the tury, they moved to manufacturing. But mar- period of stability, but we’ve not had shared European countries, though, is not anything kets can’t easily make that transition on their prosperity. Yes, we had small fluctuations, fundamental. They have a good educational own. People in agriculture, as their incomes but afterwards we had the Great Recession. system, higher equality than the United collapsed, couldn’t move into the other sec- Deregulation set the stage for this kind of States, and a good welfare system. The tor—they didn’t have the training, the hous- lower growth and more instability. European model of social welfare is basically ing, or the resources to move. Between 1929 strong. But they made one mistake, and it and 1932, agricultural income in the United I’m not very optimistic about the United shows you how costly a single mistake can States fell by more than 50 percent, but States in terms of the one variable that I par- be: they decided to implement the euro. 25–30 percent of the population remained in ticularly care about, which is unemployment. What is needed is not so much structural that sector. Most forecasters do not see the United States reform within countries, though there are

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some needed structural reforms. Rather, beginning our careers in economics. It is trained to be fluent in English. For better or what is needed is structural reform and still an amazing feat. for worse, English has become the language policy reform of the euro itself. people have to learn in order to participate In Japan, I think the overall structure of in the global economy. So, education is far And Europe needs to move away from what is being talked about now—a more more important than trade agreements. austerity. aggressive monetary policy, fiscal expansion, and a growth strategy—are all important, I mentioned the demographic problem No large country has succeeded with aus- and I think they all have to work together. before. One of the important ways of terity, especially in an environment with Instituting a separate monetary policy apart addressing this problem is with policies that trading partners who are underperforming. from the fiscal policy or the growth strategy support greater labor force participation, The European countries need to create a real won’t work. You really need all three pil- particularly by women. Child care, preschool, banking union, which has not only common lars, or, in this case, “arrows,” if it’s going family policies, and other programs are supervision but common deposit insurance to work. The hardest part is going to be needed to enable educated people to engage and common resolution. They also have to using the fiscal resources in a way that will in the labor force. The Scandinavian coun- create a real fiscal union in which they have be most productive to promote economic tries invest about 1 percent of GDP in these a euro bond or some kind of shared fiscal growth. policies, and they can have a very large role authority. I don’t have time to talk about it in terms of long-term economic growth. now, but there are fundamental problems in So one should focus on the long-run, under- the creation of the euro. It was not an opti- lying problems that I listed in the beginning: Finally, let me say just a few words about two mal currency area. They knew that, but they global warming, the environment, inequality, issues that have become more controversial: didn’t respond in a way that could have made restructuring, and demographics. Thinking liberalization and trade policy. In the area it work. They are now paying an enormously about these issues will give you an agenda of liberalization, one has to remember that high price for those mistakes. of how you ought to be spending money in the issue isn’t regulation or deregulation; ways that can promote sustainable growth. it’s about having the right regulations. No The good news is in emerging markets and in For instance, one of the things that one society can function without regulations. Asia. Emerging markets have shown that they needs to do is use some resources to help If we didn’t have stoplights in New York at can grow even when the rest of the world is retrain individuals as the manufacturing sec- every corner, we would have crashes or we not growing very well. There’s been a kind of tor almost inevitably declines. This is part of would have gridlock. If you don’t have regu- decoupling. Many of us were a little surprised the global phenomenon in which the increase lations, you can’t trust the food that you eat. when this happened in the aftermath of the in productivity in manufacturing exceeds the The question, then, is how to get the right 2008 crisis, because many of these countries rate of increase in demand; assuming this regulations. The United States made a very were export dependent, and we worried that occurs, global employment in manufacturing fundamental mistake when it deregulated if their export markets weren’t doing very will decline, the share of global employment the financial sector, and the whole world well, they wouldn’t do very well. But they in the advanced industrial countries will has suffered as a result. It’s important not to have shown a resilience that has been very decline, and Japan and Germany may be able come under the influence of those from Wall impressive, partly because they filled in with to do better than the United States. But the Street and the U.S. Treasury who say you strong Keynesian policies to substitute for advanced industrial countries as a whole have ought to follow the American lead—unless, weaknesses in exports. So the new scope is to face this reality of changing and restruc- that is, you like to have crises! One ought to demonstrating that these policies can work. turing, and that means investing in retraining think very carefully about the design of the But, unfortunately, the strength in these is crucial. liberalization-deregulation agenda. countries won’t be able to bring Europe and America back to economic health. People—or the market—won’t be able to Of course, special interests will work hard do it on their own. The government needs to prevent some of the changes that are These countries will manage to grow, to play a leading role. A more fundamental needed. And in fact, the liberalization agenda though perhaps somewhat slower than aspect of this is the need for investment in is also a special interest agenda, based in the before. For instance, China may only grow education and research. As I mentioned United States. Recall that I talked about the about 7.5 percent. But you have to put before, globalization is going to be an impor- bankruptcy law, which was not a good law. that in historical perspective. No country tant aspect of the modern economy, which It was captured, and I could go through even aspired to 7.5 percent when we were means there has to be a labor force that is all the legislation and show you how it was

32 | CJEB Annual Report 2012–2013 captured. The same thing is true about the “How Worried Should We the labor force growth rates in Japan and Trans-Pacific Partnership (TPP). in the U.S. (Table 3). So, the U.S. has to Be about Megabanks?” grow 1 percentage point per year faster I sometimes jokingly say that, when I’m Presentation by David E. Weinstein than Japan just to have the same per worker often asked about trade agreements and income growth. I believe that the right way whether, for example, a particular country My talk may resemble a roller coaster ride— to think about international comparisons should sign a trade agreement—and these you may at times feel bad, then good, then is not to compare real GDP growth in dif- are all usually called free trade agreements— bad again. Perhaps that’s a little bit like the ferent countries but to compare real growth I say, respond to the United States. We’re Japanese economy. per worker. If we do this, Japan still is at the willing to sign a free trade agreement. A free bottom (Table 4). trade agreement would be about three pages I want to begin by giving a pessimistic view long. We abolish our tariffs and nontariff of what has happened in Japan over the last However, we must compare two distinct barriers; we abolish our subsidies and you two decades. Pessimists point to a picture periods. There are the 1990s, known as do the same. Have any of you seen what a that shows Japanese real GDP growth over the “Lost Decade,” when there was a trade agreement looks like? It’s hundreds the last two decades. In Table 1, I’ve nor- major financial crisis. Then there was a and hundreds of pages. It’s not about free malized the GDP levels of the five largest period in which there were an enormous trade; it’s about managed trade. economies in the OECD, plus Australia and amount of economic reforms such as Canada, with Japan represented by the red the “Takenaka reforms” or the “Koizumi From that perspective, the best regime is the line. You can see that real GDP in Japan reforms,” in which things, especially in global regime, and these bilateral and regional stagnated relative to these other economies, finance, were changed quite dramatically. trade agreements have been undermining giving rise to this idea of the “Lost Two What is quite striking is that in this sec- the global regime. There has been legisla- Decades.” Indeed, if you look at the last ond period, from 2000 to 2010, Japan tion intended to get benefits for particular ten years, Japan also tends to look bad. The is not at the bottom; it’s actually at the interests—in some cases, at very great cost for reason given for this low growth has typi- top. It has some big fluctuations in out- developing countries, which is where I’ve been cally been productivity growth—that there put right around the time of the Great most involved in these issues. are structural impediments or problems in Recession (Table 5). Japanese corporations. There’s a story that illustrates these issues. This comparison suggests that the aging of The president of one Latin American coun- However, I would like to introduce Japan’s population is a major factor behind try asked me whether he should sign a free another factor. As a result of the aging of the perception of Japan’s lack of growth. trade agreement. I looked him in the eye the Japanese population, there are fewer However, there are reasons why things are and said, “You can’t.” He asked why. I said workers entering the Japanese labor force, not quite as positive as this picture suggests. that since he was a physician, and had thus so Japan will inevitably produce less output In particular, it turns out that Japan has signed something called the Hippocratic than a country in which more workers are the most volatile economic growth of all of Oath, which says, “Do no harm,” that sign- entering the labor force. This is highly rel- these countries, significantly more so than ing the agreement would be a violation of evant for understanding Japan’s economic the U.S. or France. this oath. One particular result would be performance. that generic drug prices in his country would A lot of this volatility has to do with big rise. People would die, and access to health, This plot (Table 2) shows the Japanese pop- fluctuations in investment and lending. intellectual property, investment agreements, ulation pyramid. The horizontal axis shows For instance, this plot (Table 6) shows the environment, and capital flows would the number of people and the vertical axis loan growth rates in blue over the time fall—it would have all kinds of adverse con- shows their age. As you can see, there are period and investment to capital ratios sequences. So my message is that it’s fine to many fewer people entering than are exiting in red. You can see that there’ve been big join the negotiations, but you have to negoti- the Japanese labor force. Japan looks very spikes and troughs. There were the bubble ate hard. The U.S. trade representative is a different from other countries. For instance, years, in which there were booms in lend- very tough bargainer who typically represents if we compare Japan’s labor force growth ing and investment. Then, both fell as the special interests, not the national inter- to U.S. labor force growth, we see there’s the financial crisis deepened. There was ests, so you really have to bargain hard. about a one percentage point difference in another boom in the 2000s, followed by

CJEB Annual Report 2012–2013 | 33 Table 1 Table 2

Table 3 Table 4

Table 5 Table 6

34 | CJEB Annual Report 2012–2013 The Center on Japanese Economy and Business Annual Tokyo Conference Special Report

a crash, along with the recent financial Table 7 crisis. One wonders what is driving all of this volatility in Japan.

Surely a major part of it has to do with aggregate forces: poor investment opportunities, timidity of firms, and declining productivity. Industry factors such as the difficulty of competing with China, Korea, and other countries in some sectors also played a role. Moreover, exchange rates may have affected performance.

However, there have also been some really big financial crises in Japan, and some major financial institutions have failed. Up until this point, we’ve had a hard time understanding, for example, the impact of events like Lehman’s failing on the U.S. economy or the Long-Term Credit Bank of Japan’s failing on the Japanese economy. Could these things actually be contributing to the fluctuations we observe in Japanese wave that occurred in Japan was shared 40 percent of the movements in aggregate investment behavior? by a merger wave in Europe and in the investment are being driven by idiosyn- Here is a plot (Table 7) that shows what United States. In fact, if you compare cratic movements or idiosyncratic decisions has happened to the share of corporate Japanese banking to that of Western in megabanks. Europe in general, Japan looks a little lending from the top financial institu- Part of this is simply due to the fact that tions. In the shaded region at the top, less concentrated than a lot of European countries, and about the same level as when banking is this concentrated, the I’ve aggregated together the financial well-being or lack thereof of the larg- institutions with less than a 1 percent in the UK, Italy, and Germany. By contrast, if you look at the United States, est institutions really matters for the market share of corporate lending. What economy. In other words, countries are you see is that, due to a series of changes the three largest institutions— Bank of America, J.P.Morgan, and Citigroup— small and banks are big. Potentially, as in regulation, Japanese finances have we move forward, this will be a cause for become increasingly concentrated, to the hold about 49 percent of all banking assets. This is an unusual situation, and concern about the stability of the finan- point where the three largest financial cial system. institutions account for about half of it has many implications. all Japanese lending. If you think about Mary Amiti, of the Federal Reserve Bank this in terms of Japanese history, that’s of New York, and I have done research about double what it was at the height of in which we’ve estimated to what extent Zaibatsu, and much more concentrated aggregate fluctuations are due to the fact than it ever was during the time that that much of lending is channeled through Japan’s economy was dominated by Kigyo very few institutions. These institutions Keiretsu. Japanese finance in particular has have idiosyncratic movements in their become very concentrated. lending, due either to mismanagement or Interestingly, this phenomenon is true good management, and that drives aggre- in every major economy. The merger gate investment. We concluded that about

CJEB Annual Report 2012–2013 | 35 Symposia

From left to right: Paul J. Scalise, Nobuo Tanaka, Hugh Patrick, Geoffrey M. Heal, David E. Weinstein, Travis Bradford; Hidetaka Tanaka, Douglas L. Peterson

The Role of Credit Rating Shale Gas Revolution and Discussant Geoffrey M. Heal, Donald C. Waite III Professor of Social Enterprise Agencies in Japan and the Energy Security at CBS, made the distinction between United States The 14th Annual Mitsui USA Symposium the United States and Japan in terms of their energy positions in the world. November 29, 2012; Columbia University April 17, 2013; Columbia University Discussant Travis Bradford, president of the Prometheus Institute for Sustainable This symposium, sponsored by CJEB’s This symposium addressed the topic of Development and associate professor NGFA program, featured a panel discussion shale gas, the newfound availability of at Columbia University, expressed cau- about credit rating agencies (CRAs) with which has become important for Japan fol- tion over the extent of economic and high-level representatives from the United lowing the lack of nuclear energy available trade impacts that the discovery of States and Japan. Topics included regula- after the Great East Japan Earthquake shale gas will have, given its unknown tion of CRAs, CRAs’ role in the recent finan- and subsequent tsunami nuclear disas- risks. Finally, discussant Paul J. Scalise, cial crisis, and potential conflicts of interest. ter in Fukushima. Nobuo Tanaka, former JSPS Research Fellow at the University Douglas L. Peterson, president of Standard executive director of the International of Tokyo and fellow at the Institute of & Poor’s Rating Services (S&P), discussed Energy Agency (IEA) and global associate Contemporary Asian Studies at Temple the history, priorities, and advantages of for Energy Security and Sustainability University, explored the potential for the S&P and its role in the U.S. financial crisis. of the Institute of Energy Economics in NIMBY (Not In My Back Yard) phenom- Hidetaka Tanaka, senior executive manag- Japan, spoke on the consequences of enon to lead to energy deficiencies in ing director of Rating and Information Inc. shale gas for the geopolitical future of the most parts of the world, including Japan. (R&I), discussed CRAs in Japan with a focus world given the steadily increasing con- The panel discussion concluded with a on R&I’s strategies. Patrick Bolton, David sumption of energy by emerging markets. question-and-answer session with the Zalaznick Professor of Business at CBS, He focused on the changing role of the audience. Hugh Patrick moderated this provided an academic perspective on credit United States in relation to the Middle symposium, which was cosponsored by agencies, shared his research and sug- East as the United States becomes the the Mitsui USA Foundation. gested reforms for CRAs under the Dodd- largest producer of gas. Mr. Tanaka dis- Frank Act, and gave his perspective that cussed the need for Japan to consider credit agencies lie in the middle ground building an interconnected electricity between reputational intermediaries and market with neighboring countries, the sellers of regulatory licenses. Professor unconventional sources of energy tak- Patrick served as the moderator for the dis- ing hold in the Japanese market, and the cussion. This symposium was cosponsored importance of continued production of by the Center for Japanese Legal Studies at nuclear energy in Japan. Columbia Law School.

36 | CJEB Annual Report 2012–2013 Lectures

From left to right: Naoki Inose; Hugh Patrick, Gerald L. Curtis; His Excellency Kenichiro Sasae, Hugh Patrick

Another Year, Another political system where it is not the stron- was formed in part due to the realiza- gest power, whereas the United States tion that the Japanese government, Government: Making and China focus on their respective posi- TEPCO, other business leaders, and its Sense of Japan’s Political tions in the world order. This lecture media were losing the world’s trust, and Confusion was moderated by Professor Patrick and a commission would be necessary to cosponsored by Columbia University’s regain it. The 10-member commission September 19, 2012; Columbia University Weatherhead East Asian Institute. was formed on December 8, 2011, with a six-month deadline to investigate the Gerald L. Curtis, Burgess Professor of NAIIC Report on causes of the accident. Dr. Kurokawa Political Science at Columbia University, was especially concerned with transpar- gave his eighth annual lecture on Fukushima: Lessons ency, and almost all meetings were open Japanese politics as part of CJEB’s Learned and Next Steps to the public, with simultaneous English Distinguished Lecture Series. Professor Forward translation. When the investigation was Curtis started his lecture by stating that over, he felt that the Commission had Japanese politics will “become more Japan Society Evening Lecture documented “a real man-made disaster,” confused, not less” in the short-term, October 17, 2012; Japan Society with “regulatory capture” being the main because neither party is likely to gain a institutional culprit. The NAIIC made majority in the upcoming elections for The National Diet of Japan Fukushima several recommendations for structural the Lower House. He noted that the Nuclear Accident Independent Investiga- reforms, including transferring the job critical election issue will be the Senkaku tion Commission (NAIIC) was estab- of monitoring the nuclear regulatory Islands because the Liberal Democratic lished to investigate the causes of the body to the Diet; reforming Japan’s cri- Party has proposed building port facili- Fukushima nuclear disaster on behalf of sis management system; and revising ties on the islands. He voiced his opinion the Japanese people and to make pro- Japan’s nuclear energy laws, including that the only solution to the many ter- posals on how to prevent nuclear acci- the establishment of a system of inde- ritorial disputes in Asia is to “shelve” dents in the future. Dr. Kiyoshi Kurokawa, pendent investigation commissions. Dr. them for future generations. With former chairman of the NAIIC, academic Kurokawa concluded that “we have to regards to Japan’s current political con- fellow at the National Graduate Institute create a better, more functional democ- fusion, Professor Curtis primarily faulted for Policy Studies (GRIPS), and chair- racy, watching and suppressing each Japan’s political leaders, many of whom man of the Health and Global Policy other’s power among the three branches are only serving because of generational Institute, discussed findings from the of the democracy.” Daniel Bases, corre- obligations. He concluded with an analy- Commission’s six-month investigation, spondent for Thomson Reuters, presided sis of Japan’s foreign policy, noting that including proposals on how to avoid future over the event. Japan focuses on how it can survive in a nuclear catastrophes. The commission

CJEB Annual Report 2012–2013 | 37 Banker to the World— of the Center for International Studies at increase business and economic develop- the Massachusetts Institute of Technology, ment. He also spoke about Tokyo’s prepa- Lessons from the Front offered a broad assessment of the March rations in conjunction with the city’s bid Lines of Global Finance 11 triple disaster’s impact on Japan’s gov- for the 2020 Summer Olympic Games, ernment and society—and on its alliance including extended hours for buses and Japan Society Evening Lecture with the United States. He argued that subway systems and an English language January 15, 2013; Japan Society the rhetoric of crisis in national security, ambulance system. He highlighted the energy, and local government now defines Special Zone for Asian Headquarters, Bill Rhodes, president and chief execu- post-3/11 politics and public policy. This where overseas companies can qualify tive officer of William R. Rhodes Global lecture was part of a series of events mark- for discounted tax rates upon establish- Advisors, LLC, senior advisor at Citi, and ing the second anniversary of the March ing their offices. He also spoke about the professor-at-large at Brown University, 11, 2011, earthquake and tsunamis, leadership ability of Tokyo, which he calls spoke about the economic and financial supported by ITOCHU International Inc., the “heart of Japan.” Professor Curtis pre- challenges facing Europe and the East Marubeni America Corporation, Mitsubishi sided over this event. Asia region, notably the looming threats Corporation (Americas), Mitsui & Co. to both the global economic outlook and (U.S.A.), Inc., and Sumitomo Corporation of Japan’s Sustainable the stability of financial market econo- America. mies. An international financial diplomat Growth Strategy and author of the book Banker to the Tokyo’s Place in the World: Japan Society Evening Lecture World, Mr. Rhodes was involved in every major sovereign debt crisis around the Through the Eyes of Tokyo May 22, 2013; Japan Society world until 2005 and played a key role Governor Naoki Inose The Abe government has drawn attention in negotiating a resolution to the sover- for its decision to join TPP negotiations eign debt crises in Latin America, Central Japan Society Evening Lecture and for its economic policies, which have and Eastern Europe, Turkey, and Asia April 15, 2013; Japan Society helped boost the stock market. In this in the 1980s and 1990s. This talk was lecture, His Excellency Kenichiro Sasae, moderated by Harold McGraw III, chair- Two years after the Great East Japan Ambassador of Japan to the United man, president, and CEO of the McGraw- earthquake, and with new hope for Japan’s States, spoke about Japan’s strategy for Hill Companies, and cosponsored by the economy under Prime Minister Abe’s poli- sustainable growth and Japan’s decision APEC Study Center, Columbia University. cies known as “Abenomics,” the Honorable to join the TPP negotiations. Professor Naoki Inose, the governor of Tokyo, dis- Patrick presided over this event. 3.11: Disaster and cussed Japan’s future and his efforts to Change in Japan

Japan Society Evening Lecture

March 12, 2013; Japan Society

The most powerful earthquake in Japan’s recorded history produced a devastating tsunami and caused an unprecedented meltdown at the Fukushima Daiichi Nuclear Power Plant. This triple catastrophe claimed almost 20,000 lives, destroyed whole towns, and will ultimately cost hundreds of billions of dollars. Drawing on his new book, 3.11: Disaster and Change in Japan, Richard J. Samuels, the Ford International Hugh Patrick and Kenichiro Sasae Professor of Political Science and director

38 | CJEB Annual Report 2012–2013 Lunchtime Seminars

From left to right: Kay Shimizu, Makoto Sunagawa, Amy Catalinac, Paul Scalise

CJEB organizes a lunchtime seminar series and developed an eye for spotting trends nuclear reactor partial meltdown, Dr. on campus for students, faculty, and mem- and innovative styles. During a subse- Scalise evaluated the issue of alternative bers of the citywide business community. quent job at a Japan-China trading com- energy sources. Up until this point, Japan These include zadankai, or informal discus- pany specializing in handbag production mostly relied on liquefied natural gas, sions, which involve lengthy question-and- in Hong Kong, he picked up the business but this was very expensive to import. answer periods with the audience and are skills necessary to start a company as Renewable energy sources, despite geared toward presenting new and inter- well as the expertise needed to work becoming more efficient and less expen- esting angles for understanding Japanese with Chinese manufacturers. In 2002, he sive, would require much more unused business and economic issues; and brown founded a fashion bag company, Laugoa land than Japan has—156 square miles of bags, in which CJEB collaborates with Co., Ltd. Laugoa bags, known for their solar panels for every 1-gigawatt nuclear other organizations on campus to sponsor unique handcrafted style and multifunc- plant, and 289 square miles for an equiv- talks featuring a diverse range of topics tional designs, are now sold widely in alent wind farm. Given this reality, Dr. related to Japan. Seminars held during Japan and the United States, with another Scalise decried Japan’s political environ- 2012–2013 included: market emerging in China. ment as driven by “fear and mistrust.” He encouraged a public discussion, led by the Building an International Japan’s Powers That media, on the value of energy security, Fashion Brand: From Be: Ideals, Reality, and environmentalism, and the importance of maintaining current Japanese lifestyles. Japan by Way of China Rhetoric in Comparative This event was cosponsored by WEAI.

Zadankai Energy Policy September 18, 2012; CBS Understanding Japan’s Brown Bag ODA Policy Jun Kokui, President, October 2, 2012; Columbia University Laugoa Co., Ltd. Paul Scalise, JSPS Research Fellow, Brown Bag Institute of Social Science, The October 3, 2012; Columbia University Moderated by Hugh Patrick University of Tokyo Makoto Sunagawa, Senior Advisor, KRI Mr. Kokui began by describing his youth- International Corporation; Visiting Moderated by Kay Shimizu, Assistant ful experiences, from joining motorcy- Lecturer, Akita International University Professor, Department of Political cle gangs to leading a rock band, all of Science, Columbia University which influenced his goal of finding a Moderated by Gerald L. Curtis creative way to make his mark on the With most of Japan’s nuclear reactors Professor Sunagawa reviewed the his- world. Through part-time jobs at flea mar- having gone offline after Japan’s 2011 tory of Japan’s involvement with eco- kets, he discovered his interest in fashion earthquake, tsunami, and subsequent nomic assistance by investigating four

CJEB Annual Report 2012–2013 | 39 From left to right: Ellis Krauss, T. J. Pempel, Takehiko Nakao, Takatoshi Ito specific periods of assistance from the the bubble burst in the 1990s, such as of national security primarily results from a end of World War II to the present day: public debt, foreign assets, population 1996 change in the electoral system. This the postwar period from 1945 to the decline, and underutilized labor forces. rhetoric is an essential element in the new, 1960s; its era of growth from the 1960s Japan’s gross debt has ballooned since more “muscular” Japanese security policy, to 1990s; the bubble economy from the the 1990s, resulting from declining tax leading Professor Catalinac to conclude that 1990s to 2001; and the lost decade revenues and an increase in expenditure, “the rules of the game matter in unexpected from 2001 to the present. He also dis- notably social security, which accounts ways.” This event was cosponsored by WEAI. cussed what makes official development for 75 percent of this amount. Japan assistance (ODA) to Japan unique, and must contend with a rapidly aging popula- “Haven” Can Be Hell: tion in order to address its debt issues. the various potential uses for Japan’s Impact of the European ODA assistance. He stated a belief that Despite these circumstances, Japan has Japan’s assistance should primarily be been the world’s largest creditor for 21 Sovereign Debt Crisis on used to promote development and main- consecutive years. Mr. Nakao argued that the Japanese Economy tain the world economic order, as well as the labor force participation rate among to emphasize cooperation. This event was women and the elderly still remains low in Zadankai cosponsored by WEAI. Japan and that raising this ratio will be a November 15, 2012; CBS key goal in the future. Takatoshi Ito, Dean, Graduate School of Lessons from Financial The Rise of Foreign Policy Public Policy; Professor, Graduate School of Crises: Japan’s Perspective Economics, The University of Tokyo as an Electorally Salient Based on Its Experiences Moderated by Hugh Patrick Issue in Japan of the Bubble, Bust, and Dean Ito discussed the effects of the Brown Bag “Lost Two Decades” European sovereign debt crisis on the November 13, 2012; Columbia University Japanese economy, notably how the yen Zadankai Amy Catalinac, Assistant Professor, appreciated in value due to being perceived November 7, 2012; CBS Department of International Relations, as a “safe haven” and contributed to stagna- Takehiko Nakao, Vice Minister of Finance College of the Asia-Pacific, Australian tion of the Japanese economy. The export for International Affairs, Ministry of National University industries that served as Japan’s economic Finance, Japan growth engine lost competitiveness, among Moderated by Kay Shimizu many factors, as a result of the appreciating Moderated by Alicia Ogawa Professor Catalinac described her hypoth- yen. Dean Ito provided further interpreta- Mr. Nakao spoke on a variety of issues esis that the politicians’ shift from local tions and reasons for the cause of Japan’s surrounding Japan’s economy since “pork-barrel politics” to national messages economic stagnation.

40 | CJEB Annual Report 2012–2013 From left to right: Edward J. Lincoln, Sheena Iyengar, Tokuo Iwaisako, Gerald L. Curtis

Should We Be Worried Professor Iyengar discussed her views a mandate; it was a rejection of the on how Japanese culture creates a Democratic Party of Japan (DPJ), which about Japan? social construct that can hinder motiva- had failed to deliver its manifesto and tion for leadership and innovation within proved itself largely inept at the task Zadankai Japanese corporations, particularly of governance. More broadly, Professor November 29, 2012; CBS among Japanese youth. She expressed a Curtis argued that the election result is Edward J. Lincoln, Professorial Lecturer, belief that cultivating global awareness largely due to the single-member district George Washington University; Visiting and intelligence—which goes beyond system in which, unlike in the United Professor, Department of Economics, solely learning the English language— States, there is much less voter identi- Columbia University and encouraging ideas and decisions fication with a particular party, so politi- from nonsenior management are neces- cians pander to the same audience. Moderated by Hugh Patrick sary to reframe the ideas of leadership Professor Lincoln gave a generally opti- within Japan and help corporations bet- What’s Wrong with Japan? mistic outlook on Japan’s future based ter compete in a globalized environment. . . . It’s the Politics! on its legacy of successful industrial- ization and economic development, Postelection Briefing with Brown Bag stable social and political institutions, Professor Gerald Curtis January 23, 2013; Columbia University and wealth of human capital. Japan’s Ellis Krauss, Professor of Japanese potential, however, is tempered by demo- Zadankai Politics and Policymaking, University of graphic challenges of an aging popula- December 19, 2012; Columbia University California, San Diego tion and Japan’s lack of initiative to fully Gerald L. Curtis, Burgess Professor of embrace globalization, seen recently in Moderated by Kay Shimizu Political Science, Columbia University its ambiguous interest in joining the TPP. Moderated by Hugh Patrick Professor Krauss described the struc- Global Leadership tural, institutional, and political obstacles Following the historic December 16 contributing to dysfunctional party poli- Challenges for Japanese Japanese elections in which the Liberal tics within the Japanese government, and Companies Democratic Party (LDP) regained power the problems these politics pose in solving in the Lower House, Professor Curtis many of Japan’s significant challenges. Zadankai offered a postmortem analysis for CJEB He presented both positive and negative December 10, 2012; CBS core faculty, Visiting Fellows, and staff, short- and long-term scenarios, showing as well as selected Japan specialists. Sheena S. Iyengar, S. T. Lee Professor of that there is hope for Shinzo Abe to be a He started by noting the remarkable Business, CBS transformative prime minister and tackle comeback by the LDP, led by then former these issues, but it will be very difficult. Moderated by Hugh Patrick prime minister Shinzo Abe. As LDP lead- This event was cosponsored by WEAI. ers acknowledged, this did not represent

CJEB Annual Report 2012–2013 | 41 Japan’s New Political short-term sovereign debt crisis prompted by a Discussant: K.C. Park, former Chief surge in the JGB interest rate, since Japanese Executive Officer, eMagin Corp.; former Landscape institutions will have continual demand for Executive Vice President, LG Electronics JGBs for asset-liability management (duration Zadankai Moderated by Hugh Patrick and interest rate risk). He believes JGB fund- January 31, 2013; CBS ing is unsustainable, and called for structural The global consumer electronics market, Gerald L. Curtis, Burgess Professor of reforms such as higher wages to youth and which was once dominated by Japanese Political Science, Columbia University wealth redistribution through tax reforms. companies, has recently been overtaken Moderated by Hugh Patrick by Korean competitors. Dr. Myers explored The Economic-Security possible secrets to Korean success since Professor Curtis assessed the recent elec- Nexus in Northeast Asia the usual metrics—in particular patents, tion in the Japanese Lower House and sub- R&D investment, and low cost labor—do not sequent political developments. He credited Brown Bag explain it. He also speculated that “indus- Prime Minister Abe’s $116B fiscal stimulus March 7, 2013; Columbia University trial policy” measures of the South Korean and 2 percent inflation target for the Bank T. J. Pempel, Jack M. Forcey Professor of government may have been decisive. His of Japan as pragmatic and necessary for Political Science, Department of Political presentation was followed by commentary Japan’s economic growth but doubted its Science, University of California, Berkeley from Dr. Park. long-term sustainability without structural reforms including immigration and women’s Moderated by Charles Armstrong, Director, Abenomics: A New rights. Professor Curtis explained that Prime Center for Korean Research Minister Abe was strategically achieving Economic Policy Is Turning Professor Pempel gave a wide-ranging talk short-term political goals to win the Upper on the economic and security dynamics in Japan Around House elections in July, after which his hon- East Asia, laying out the historical and con- eymoon period would end. On Japan’s secu- Zadankai temporary tensions that exist in East Asia; its rity and foreign policy front, Professor Curtis April 30, 2013; Columbia University increasing economic interdependency, which was optimistic that no major escalation Takatoshi Ito, Dean, Graduate School of tends to reduce tensions; the absence of war would arise in the Pacific over the Senkaku since the Korean Armistice of 1953 and that Public Policy; Professor, Graduate School of Islands as long as U.S. relations remain of Cambodia-China-Vietnam in 1979; and the Economics, The University of Tokyo strong and China does not antagonize Japan many effects of China’s rise to its present sta- to force its hand. Professor Curtis stated a Moderated by David E. Weinstein tus as the number two economic superpower belief that there was presently no solution to on the planet. Regarding the latter, he outlined Dean Ito provided a detailed overview of this dispute and recommended that Japan the bilateral security tensions with China, par- Prime Minister Shinzo Abe’s package of acknowledge China’s claim of an official dis- ticularly with Japan and the United States, economic policies known as “Abenomics.” pute and shelve the issue indefinitely. concluding that China’s rise will be accompa- He discussed the implications and chal- Japan’s Fiscal Sustainability nied by an inevitable change to the status quo, lenges that might arise as a result of this which should not necessarily be seen as a strategy, which consists of “three arrows”: and Interest Rate Risk in threat. This event was cosponsored by WEAI. quantitative easing, fiscal stimulus, and the JGB Market structural reform. Dean Ito also highlighted Samsung and LG: From Prime Minister Abe’s growth strategy as Zadankai Also-Rans to Dominance in key to ensuring that the Japanese economy February 14, 2013; CBS makes the jump from deflationary equilib- the Consumer Electronics rium to good, normal equilibrium. Tokuo Iwaisako, Professor, Institute of Economic Research, Hitotsubashi Industry University Zadankai April 25, 2013; Columbia University Moderated by Hugh Patrick Robert A. Myers, Senior Vice President, Professor Iwaisako noted concern over the lack Fairfield Resources International, Inc.; of fiscal discipline contained in “Abenomics.” Adjunct Professor, Entrepreneurship However, he does not believe Japan will face a Program, Columbia Business School 42 | CJEB Annual Report 2012–2013 resources

Faculty Advisory Committee

CJEB’s Faculty Advisory Committee was Charles W. Calomiris Sheena S. Iyengar formed to provide insight and guidance Henry Kaufman Professor of Financial S. T. Lee Professor of Business to CJEB governance, research, teaching, Institutions Columbia Business School and outreach activities. The diversity of Columbia Business School Merit E. Janow intellectual focus among the committee Fangruo Chen Dean members is central to furthering CJEB’s MUTB Professor of International Business Professor of Professional Practice, mission to serve as a comprehensive Columbia Business School International Economic Law and forum for collaboration and reflection on International Affairs Japan, the United States, and the global Wouter H. Dessein School of International and Public Affairs, economy. In addition to Hugh Patrick and Eli Ginzberg Professor of Finance and Columbia University David E. Weinstein, the members of the Economics committee are: Columbia Business School Bruce Kogut Sanford C. Bernstein & Co. Professor of Robert J. Hodrick Leadership and Ethics Nomura Professor of International Finance Columbia Business School Columbia Business School

43 | CJEB Annual Report 2011–2012 CJEB Annual Report 2012–2013 | 43 Visiting Fellows

Each year, a small number of professional and academic fellows are selected to spend a period of time in residence at Columbia Business School. CJEB Visiting Fellows receive a unique research and networking experience at one of the world’s most prestigious business schools in a top ranking university within Yoshihiro Fujii Akira Goto Yoko Gotoh Atsushi Imuta dynamic New York City. Sophia University GRIPS (National Kanagawa Imuta and October 2012– Graduate Institute University Associates February 2013 for Policy Studies) September 2012– January 2012– March 2013– February 2013 December 2012 April 2013

Misuzu Imuta Yoko Kagami Tatsuya Kimura Kumiko Nakashima Masaya Yukie Sakuragawa Imuta and Komazawa Waseda University January 2013– Sakuragawa Atomi University Associates University March 2012– May 2013 Keio University April 2012– January 2012– April 2013– February 2013 April 2012– March 2013 December 2012 March 2014 March 2013

T akaaki Sato Haruhiko Takahashi Hitoshi Takamoto Shotaro Tanaka Masazumi Taiyo Yoshimi Mitsui Sumitomo Tokyo Metropolitan National Police Kiana Capital Wakatabe Nanzan University Insurance Co., Ltd. University Agency Partners Ltd. Waseda University September 2012– August 2012– April 2013– July 2012– September 2011– July 2012– February 2014 June 2013 March 2014 June 2013 August 2013 September 2012

Keisuke Shimizu Development Bank of Japan June 2012–March 2013 Joint Fellow with the Weatherhead East Asian Institute of Columbia University

44 | CJEB Annual Report 2012–2013 Research Associates

CJEB benefits from ongoing collaboration Research and East Asia Forum Anil Kashyap with Japan specialists from institutions Crawford School of Public Policy Edward Eagle Brown Professor of other than Columbia, principally within The Australian National University Economics and Finance the United States. Research associates Richard N. Rosett Faculty Fellow Robert Eberhart are invited to communicate their research The University of Chicago Booth School Researcher through participation in Center projects and of Business Assistant Professor of Management public programs and by contributing to the Santa Clara University Takao Kato Center’s Working Paper Series. W. S. Schupf Professor of Economics and David Flath Far Eastern Studies Christina Ahmadjian Professor Department of Economics Professor, Graduate School of Commerce Department of Economics Colgate University and Management Ritsumeikan University Hitotsubashi University Professor Emeritus of Economics Kenneth N. Kuttner Masahiko Aoki Poole College of Management Robert F. White Class of 1952 Professor Henri and Tomoye Takahashi Professor North Carolina State University of Economics Emeritus of Japanese Studies Department of Economics Koichi Hamada Department of Economics Williams College Stanford University Tuntex Professor Emeritus of Economics Patricia H. Kuwayama Shiro Armstrong Department of Economics Economist Research Fellow Yale University Professional Fellow Crawford School of Public Policy Australian National University Editor Special Advisor to the Cabinet Center on Japanese Economy and Business East Asia Forum The Cabinet of Japan Columbia Business School Former Vice President Schon L. Beechler Yasushi Hamao JPMorgan Chase Bank, N.A. Senior Affiliate Professor of Associate Professor of Finance and Organisational Behaviour Business Economics Edward J. Lincoln INSEAD Marshall School of Business Adjunct Professor of Economics Lee G. Branstetter University of Southern California Department of Economics Columbia University Associate Professor of Economics and Masanori Hashimoto Public Policy Professorial Lecturer Professor of Economics Heinz School of Public Policy and George Washington University Honors Director Management Department of Economics Robert A. Myers Department of Social and Decision Sciences The Ohio State University Senior Vice President Fairfield Resources International, Inc. Carnegie Mellon University Takeo Hoshi Former Director of Technology, IBM Japan Jenny Corbett Henri and Tomoye Takahashi Senior Pro Vice-Chancellor (Research and Fellow and Director Terutomo Ozawa Research Training) Shorenstein Asia-Pacific Research Center Professor Emeritus of Economics Professor of Economics Professor of Finance (by courtesy) Department of Economics Executive Director of the Australia-Japan Stanford Graduate School of Business Colorado State University Research Centre, Crawford School of Stanford University Public Policy Joe Peek The Australian National University Takatoshi Ito Vice President and Economist Dean Research Department Robert Dekle Graduate School of Public Policy Professor of Economics Federal Reserve Bank of Boston Professor, Graduate School of Economics Department of Economics Adam S. Posen The University of Tokyo University of Southern California President Peter Drysdale Peterson Institute for International Emeritus Professor of Economics Economics Head, East Asia Bureau of Economic

CJEB Annual Report 2012–2013 | 45 Professional Fellows

William V. Rapp A professional fellow appointment at the in investment banking and manage- Henry J. Leir Professor of International Center recognizes former government ment positions in Tokyo. Subsequently Trade and Business officials and business leaders who have he assumed Asia regional responsibil- School of Management had distinguished careers in economics- ity with Drexel Burnham Lambert and New Jersey Institute of Technology related fields. This position facilitates his Bankers Trust Company before joining or her ongoing involvement with CJEB Chase in 1992. Mr. Fallon holds a BA Frances McCall Rosenbluth and its activities. from Ohio University and an MBA from Deputy Provost for the Social Sciences Harvard Business School. Following his and for Faculty Development and Diversity Robert E. Fallon undergraduate studies, he served in the Damon Wells Professor of International is president and U.S. Peace Corps, including three years Politics CEO of Phosplatin as a volunteer mathematics teacher at Yale University Therapeutics Chanel College in Western Samoa. Mr. Ulrike Schaede LLC, a company Fallon is currently a director of the Japan Professor of Japanese Business he helped found Society, former director of the Korea Executive Director of the Center for that is developing Society, trustee emeritus of the Ohio Emerging and Pacific Economies a novel class of University Foundation, and chairman of School of International Relations and anticancer chemotherapy drugs. From the Council on International Educational Pacific Studies 2008–2011, Mr. Fallon was adjunct Exchange, Inc., as well as a professional University of California, San Diego professor at Columbia Business School, fellow of CJEB. He is also a member of where he taught international banking. Michael J. Smitka the Asia Society, the Council on Foreign Prior to his Columbia appointment, Mr. Professor of Economics Relations, and serves on the Asian Fallon was chairman of Korea Exchange Williams School of Commerce Advisory Boards of Deutsche Bank AG Bank, a publicly listed $80 billion institu- Washington and Lee University and Euromoney PLC. tion that is Korea’s leading international Tsutomu Watanabe bank. After taking over as chairman and Patricia Hagan Professor CEO in January 2004, he led a success- Kuwayama has Graduate School of Economics ful reorganization and restructuring that been studying the The University of Tokyo restored the bank’s capital strength and Japanese econ- Eleanor Westney achieved record profitability. He is also omy since she Scotiabank Professor of International the first non-Korean to chair a public was a graduate Business company in Korea. Previously, Mr. Fallon student in the Schulich School of Business was an international banker based in 1960s, complet- York University Tokyo with JP Morgan Chase, where he ing a doctoral was Asia-Pacific division head for the dissertation on effective tariff protec- Chase Manhattan Bank and a member tion of Japanese industry in 1970. She of the Chase Manhattan Corporation became a professional fellow of CJEB in Management Committee. He was 2009, after retiring as a vice president responsible, as senior executive in Asia, and international economist at JPMorgan for Chase’s activities in the Pacific Rim Chase in New York. Previously, she was located across 13 different countries. JPMorgan’s chief economist in Tokyo Mr. Fallon has lived in Asia for 31 years and earlier with Chemical Bank in Tokyo. and enjoys myriad contacts across a From 1970 to 1986, Dr. Kuwayama was wide spectrum of government, corporate with the Federal Reserve Bank of New and financial institutions in the region. York, serving in various research and He travels widely and speaks often on management posts in the International Asian economic and business affairs. He Research, Statistics, and Foreign started his banking career with Citibank Exchange Departments. She has been in Hong Kong in 1975 and later worked a visiting scholar at the Bank of Japan

46 | CJEB Annual Report 2012–2013 International Advisory Board

Institute for Monetary and Economic Research and visiting consultant at the Bank for International Settlements in Basel and taught as a visiting professor at Keio University in Tokyo and at Kobe Gakuin University. Dr. Kuwayama has written widely about Japanese macroeconomic policy, balance of payments issues, and financial institutions, including the postal savings system. She has coauthored the book titled Memoir of a Trustbuster: A Lifelong Adventure with Japan, with Eleanor M. Hadley. She earned her AB and PhD degrees in economics at Harvard University and the City University of New York, respec- tively, and did her Japanese language studies at Columbia University. She actively participates in the CJEB Visiting Fellow Seminars.

Shijuro Ogata

is the former Zadankai audience deputy gover- nor of the Japan Development The International Advisory Board pro- Charles D. Lake II Bank and the vides overall guidance for the Center. Chairman, Representative in Japan former deputy Members are distinguished leaders in Aflac Japan governor for the fields of Japan-U.S. economic, busi- Yuzaburo Mogi ’61 international relations of the Bank of ness, and political relations. Honorary CEO and Chairman of the Japan. He has served as the nonex- Shinji Fukukawa Board, Kikkoman Corporation ecutive director of Barclays Bank, Fuji Senior Advisor, Global Industrial and Xerox Co., Ltd., and Horiba Ltd.; member Social Progress Research Institute Joseph G. Tompkins ’67 of the International Advisory Council of Former Vice Minister, Japanese Ministry President, Saga Investment Co., Inc. JPMorgan Chase; advisor to the Imperial of International Trade and Industry Hotel, Tokyo; member of the Advisory Noboru Yamaguchi Board of the New Perspective Fund; vice Yotaro Kobayashi Senior Executive Advisor, Fiduciary president of the America-Japan Society, Former Chairman and CEO, Fuji Xerox Service Research Center, Nomura Inc.; and member of the Asia-Pacific Co., Ltd. Securities Co., Ltd. Advisory Committee of the New York Advisor, Corporate Pension Council Stock Exchange, Inc. Mr. Ogata received his BA from the University of Tokyo and his MA from the Fletcher School of Law and Diplomacy at Tufts University.

CJEB Annual Report 2012–2013 | 47 promoting exchange of ideas CJEB in the News Enhancing the MBA Experience

CJEB’s academic directors are regularly CJEB contributes to providing an interna- Stier-Moses, the students met with repre- featured in the media, providing their tional dimension to the Columbia Business sentatives from Japanese corporations and insights and expertise in Japan-related School MBA student experience. One of immersed themselves in various Japanese matters. Highlights for this year include: its main collaborative partners is the stu- cultural sights and experiences. The student-led Japan Business Association (JBA). dents toured a Toyota manufacturing plant, Hugh Patrick CJEB meets with JBA officers regularly visited the Mori Art Museum, and listened to Absence of Strategy and System Reform to exchange ideas on ways to showcase presentati’ons at Fast Retailing (UNIQLO), The Wall Street Journal Japan, October Japanese economic and business related Citigroup Global Markets Japan, and DeNA. 3, 2012 issues within CBS. In Kyoto, they took part in a tea ceremony and visited historical sites including Japan’s Central Bank Chief Vows to As an annual initiative, CJEB and JBA the Golden Pavilion, Kiyomizu Temple, and End Deflation work together to organize the Chazen Sanju Sangendo. They enjoyed a night in a Associated Press, March 21, 2013 International Study Tour to Japan. Led by the traditional Japanese inn with hot springs in Jerome A. Chazen Institute of International Aichi. In Tokyo, the CBS group attended the How Will “Abenomics” Affect the World? Business, the Japan Study Tour sends alumni reception in which they listened to a Global Debate WISDOM, NHK BS1, April a group of students for a weeklong trip presentation about the Japanese economy 27, 2013 through Japan, including cultural excursions given by Professor David Weinstein. While and visits to Japanese corporations. Since in Tokyo, the participants also visited the TPP as Leverage for Opening the Market the tour’s inauguration in 1989, CJEB has Tsukiji fish market and Akihabara. Nikkei, July 3, 2013 helped fund the program and provide input on the agenda. The CJEB Welcome Reception was held on David E. Weinstein October 9, 2012, to welcome Columbia How Will “Abenomics” Affect the World? The 2013 Chazen International Study Tour Business School communities and give Global Debate WISDOM, NHK BS1, April to Japan took place from March 16 to 24, CJEB Visiting Fellows, faculty, and staff 27, 2013 with about 40 MBA student participants an opportunity to network with students, visiting Tokyo, Kyoto, and Aichi. Joined faculty, and staff from other departments. by CBS associate professor Nicolás E.

Chazen International Study Tour at DeNA

48 | CJEB Annual Report 2012–2013 Enhancing the Columbia Experience

JASSA activities included “Recent Political Situation in Japan,” a lecture featuring Yasuo Hasebe, professor at Tokyo University’s School of Law and vice president of the executive committee of the International Association of Constitutional Law.

Like the Chazen International Study Tour to Japan (see p. 48), JASSA organizes an annual student-led trip to Japan that is partially supported by CJEB funds. This year, 20 students from countries such as the United States, France, Mexico, Chile, India, JASSA Japan Study Tour participants in Hiroshima Kazakhstan, and Belarus participated in the trip and went to Tokyo, Kyoto, Hiroshima, The Columbia University community pro- at the EALAC Department’s Harumatsuri. and Osaka. During the one-week trip, stu- vides many resources for students, fac- Ryoko Ogino, CJEB’s associate director for dents visited the Bank of Japan, where ulty, and alumni interested in learning administration, joined the Harumatsuri as a Haruyuki Toyama, director-general of the more about Japan. CJEB is committed to judge for the Japanese speech contest. International Department, gave a lecture supporting organizations across campus on the Japanese economy and monetary CJEB also provided support for the engaged in Japan-related activities, such policy. In Tokyo, the students also met with Consortium for Japan Relief’s initiatives as the Weatherhead East Asian Institute Masahiko Komura, the vice president of the and activities, such as this year’s March 10, (WEAI), the Donald Keene Center, the APEC Liberal Democratic Party (LDP), and dis- 2013, symposium titled, “The Great East Study Center, the Consortium for Japan cussed issues such as Japan’s foreign and Japan Earthquake: Creative Responses Relief (CJR), the East Asian Languages and defense policies, immigration, and the par- and Social Imagination,” which highlighted Cultures (EALAC) Department, and the ticipation of women in business and politics. the creative responses and the social dia- School of International and Public Affairs, In a discussion session with other lawmak- logue that arose as a result of the recent among others. ers in the LDP, they talked about Japan’s triple disaster. This event’s presenters relations with China, Japan’s defense policy, This year CJEB supported the EALAC’s new included Dr. Shunichi Homma, Margaret and the constitution. Students also vis- language course, “Business Japanese,” led Milliken Hatch Professor of Medicine and ited the Japan Railway Shinkansen Control by lecturer in Japanese, Kyoko Loetscher. associate chief of the Cardiology Division Center, where they learned about the oper- Ms. Loetscher developed the course for at Columbia University, and various artis- ations behind the famous high-speed trains. intermediate level students to acquire tic performers, artists, and professors— After visiting cultural sites in Kyoto and tak- advanced Japanese proficiency with a focus all dedicated to addressing multifaceted ing part in a traditional tea ceremony, stu- on using Japanese in business settings. aspects of relief and community rebuilding. dents returned to Tokyo, where they met with Taught entirely in Japanese, the course students from Tokyo University’s Graduate emphasized effective communication in a CJEB supports Columbia University’s School of Public Policy, one of the partner globalized society, Japanese business cul- Japan Study Student Association (JASSA) schools of Columbia University’s School of ture, and communication skills necessary initiatives throughout the year. CJEB-funded International and Public Affairs. Students to work for Japanese companies. Through discussed various issues such as Japan’s use of newspaper articles, TV footage from role in the international community. NHK, and business texts, students were taught to read reports, write a business Following their return from Japan, partici- letter, and give presentations on business- pating students had an opportunity to share related topics. The course culminated in what they learned from their journey with the students creating a project based on other students and faculty at the CJEB a societal and political issues related to cosponsored “Japan Trip Presentation Party.” Japan. The recognized top project, “Japan’s

Declining Birthrate,” was then presented Kyoko Loetscher and Ryoko Ogino with students of Business Japanese course CJEB Annual Report 2012–2013 | 49 Visits from Japan to Fellowship and Scholarship Columbia Programs

CJEB provides select fellowships for Grants and Summer Stipends are also Columbia University students who dem- available to PhD students in the Graduate onstrate outstanding academic ability School of Business or the Department of and a specific interest in Japan and the Economics who wish to pursue Japan- Asia-Pacific economies. The fellowships related research project or language support research and participation in training programs. academic programs related to Japanese The Sumitomo Fellowship Program was economic and business fields. Further established by the Center as part of an information about all of these opportuni- initial operating grant from Sumitomo ties is available at www.gsb.columbia. Corporation of America. The program pro- edu/cjeb/about/fellowships. vides support to recent PhDs and PhD candidates specializing in some aspect of The CJEB Doctoral Fellowship was U.S.-Japan economic and business rela- established in 2013 to support PhD tions. Fellowship recipients typically spend students in the Columbia Graduate JASSA Japan Study Tour a period in residence at the Center to School of Business and/or the Columbia engage in their own research and partici- Department of Economics who will pate in CJEB programs. Groups of Japanese undergraduate develop Japan expertise, culminat- and graduate students often visit CJEB ing in dissertations focused primar- The Mitsubishi UFJ Trust Scholarship during their tours of the east coast. ily on Japan. The Center is pleased to Foundation provides one Columbia These trips are frequently initiated at the award two CJEB Doctoral Fellowships University student each year with tuition suggestion of former CJEB visiting fel- in fall 2013, one to Guannan (Jackson) and living expenses for a program of lows. In 2012–2013, groups from Chuo Lu in the Management Division of the either undergraduate or graduate study University, Bunkyo University, Meiji Graduate School of Business; and one in Japan. CJEB conducts a University- University, Nihon University, and Wako to Misaki Matsumura in the Economics wide competition on behalf of the University came to Columbia University. Department. CJEB Doctoral Research Foundation to nominate this student. Each group met with Professor Patrick, who made a brief introduction and fielded questions. Discussion topics included Japan’s territorial disputes, continuities and changes in Japanese politics, TPP negotiations, social security, immigration, women’s workplace challenges, U.S. foreign policy and economic recovery, challenges presented by Japan’s aging population, and attitudes toward foreign study and employment.

Hugh Patrick with students from Meiji University

50 | CJEB Annual Report 2012–2013 Library and Data Resources Discussion Groups

The Center continues to give the Japan Economic Seminar Monetary Policy Columbia University community access to CJEB’s databank on the Japanese The Japan Economic Seminar (JES) was Discussion Group founded in 1966 by Professors James economy, with an emphasis on finan- This discussion group includes specialists Nakamura of Columbia, Hugh Patrick (then cial markets. It includes time-series and on the Japanese financial system and meets at Yale), and Henry Rosovsky of Harvard. cross-section data on financial markets, several times a year. The participants are With a membership of up to one hundred, institutions, and the macroeconomy from Hugh Patrick, David E. Weinstein, and Alicia it originally was an interuniversity forum for sources, including Nikkei NEEDS (Nikkei Ogawa (CJEB); Michinobu Kishi and Takeshi faculty, other professionals, and advanced Economic Electronic Databank System), Kato (Bank of Japan); Kim Schoenholtz graduate students to discuss ongoing an online news and data retrieval system (NYU Stern); Jennifer Dwyer (Hunter research in preliminary form by specialists that provides essential corporate and College, CUNY); Mike Woodford (Columbia on the Japanese economy. JES now meets economic data, and leading newspaper University); Patricia Kuwayama (CJEB pro- once a year and is sponsored by CJEB and and journal articles on Japan and other fessional fellow); Richard Katz (The Oriental held at Columbia in the early/mid-spring Asia-Pacific economies. CJEB makes Economist Report); and Frances Rosenbluth semester, with the leadership of Takatoshi available to Columbia students, faculty, (Yale University). Ito, dean of the Graduate School of Public and other University affiliates Nikkei Policy at the University of Tokyo. Special NEEDS Financial Quest in English and arrangements have been made to include U.S.-Japan Discussion Japanese, which provides data includ- economists from Japan as paper writers Group ing companies’ financial results, stock and discussants. price data, bond price data, macroeco- Shortly before CJEB was founded, the then CEO of Sumitomo Corporation of America nomic data, and industrial statistic data; This year, the JES was held on February and Professor Patrick took the initiative in and Nikkei Telecom, which provides con- 15, 2013, and was moderated by Dean organizing, on a private, individual basis, venient access to most services, from Ito and Professor Weinstein. The follow- an evening discussion group of senior around-the-clock news to corporate ing papers were discussed: data on all Japanese-listed and OTC Japanese and American businessmen and professionals living in the New York companies. The Center also maintains “How Much Do Bank Shocks Affect area. The group continues to convene to a small working collection of hard-copy Investment? Evidence from Matched discuss frankly and informally—and off the materials on the Japanese and Asia- Bank-Firm Loan Data” record—issues and prospects in U.S.-Japan Pacific economies, including statisti- Authors: Mary Amiti, Federal Reserve business, economic, and political relations. cal resources, academic journals, and Bank of New York; David E. Weinstein, Kazuhiro Takeuchi, the current CEO of periodicals. Columbia University and NBER Sumitomo Corporation of America, and Hugh Discussants: Takatoshi Ito, The Patrick are the co-organizers of this group. University of Tokyo; Satoshi Koibuchi, The members come from the business and Chuo University financial communities, together with several Monetary Policy and the Transmission specialists on Japan from the Columbia of Bubbles University faculty. The group avoids identification with particular companies Authors: Masaya Sakuragawa, or groups and meets twice in the fall and Professor, Department of Economics, spring for dinner and discussion. Topics of Keio University; Naoki Shinada, discussion for 2012–2013 included the Development Bank of Japan development of Abenomics, Japan/U.S./ Discussants: Kosuke Aoki, The China relations, U.S. debt ceiling and budget University of Tokyo; Tokuo Iwaisako, cut issues, and financial institutional reform Hitotsubashi University in both countries (U.S. banks, Japan Post).

CJEB Annual Report 2012–2013 | 51 Financial Support

Financial Support

Columbia University and Columbia Business Corporate Sponsorship Corporate Sponsors School give basic support for the Center Program ($10,000+ annually) by providing faculty salaries and office Fuji Xerox Co., Ltd. space, library and administrative support, Sponsors for the year 2012–2013 are Imuta and Associates and other essential services. However, as follows: Itoh Shokai Co., Ltd. the Center relies on external sources of J.C.C. Fund of the Japanese Chamber of New Global Financial Architecture financial support from foundations, corpo- Commerce and Industry of New York, Inc. Sponsorship Program rations, and individuals for its programs Mitsubishi Corporation (Americas) and research activities. Income is derived Senior Corporate Sponsor Mitsui Sumitomo Insurance Co., Ltd. from the Center’s endowment, operating ($50,000+ annually) Mitsui USA Foundation and project grants, and, especially, from the Aflac Japan Mori Building Co., Ltd. Corporate Sponsorship Program, which was CJEB Corporate Sponsorship Program SMBC established in 1995. Academic indepen- Yaskawa Electric Corporation dence has not been an issue, as there are Lead Corporate Sponsor no special restrictions attached to any of ($100,000+ annually) Individual Sponsors these gifts. Sumitomo Corporation of America ($10,000+ annually) Robert Alan Feldman Senior Corporate Sponsors The Sponsorship Program has been instru- Shigeru Masuda ‘74, CEO, ZERON Group mental in expanding the Center’s activities ($50,000+ annually) and guaranteeing their long-term financial Advantage Partners, LLP Friends of the Center support. The companies listed here give to Mitsubishi UFJ Trust and Banking (up to $9,999 annually) the Center on an annual basis. Sumitomo Corporation Setsuko Kitajima Corporation of America made an initial Toho Technology Corporation Hiroko and Satoru Murase significant contribution that enabled the Tsunao Nakamura Major Corporate Sponsors Center to be established in 1986 and has Hugh Patrick ($25,000+ annually) continued to be a major Center donor. The Sumitomo Chemical Co., Ltd. Daiwa Capital Markets America Inc. Center also greatly appreciates and benefits Sadao Taura from the income derived from the generous Kikkoman Corporation endowments funded by Fuji Xerox Co., Ltd., Ricoh Co., Ltd. Sanken Industrial Policy Research Institute, Saga Investment Co., Inc. the Marine and Fire Insurance Association, Takata Corporation the Federation of Bankers Association, Tsuchiya Co., Ltd. the Security Dealers Association, the Life Insurance Association, and Mitsubishi UFJ Trust and Banking Corporation during the first years of the Center’s establishment at Columbia Business School.

The Center was delighted to have the Tokyo Conference keynote speaker, Professor Joseph Stiglitz, join us to thank our sponsors for their continued support at the Special Luncheon with Professor Joseph Stiglitz for the Center’s corporate sponsors held on Friday, March 22, 2013, at the Hotel New Otani Tokyo.

Anya Schiffrin and Joseph E. Stiglitz with CJEB Corporate Sponsors at the Special Luncheon

52 | CJEB Annual Report 2012–2013 CJEB Annual Report 2012–2013 | 53 54 | CJEB Annual Report 2012–2013 CJEB Annual Report 2012–2013 | 55 56 | CJEB Annual Report 2012–2013 CJEB Annual Report 2012–2013 | 57 58 | CJEB Annual Report 2012–2013 CJEB Annual Report 2012–2013 | 59 60 | CJEB Annual Report 2012–2013 CJEB Annual Report 2012–2013 | 61 62 | CJEB Annual Report 2012–2013 CJEB Annual Report 2012–2013 | 63 64 | CJEB Annual Report 2012–2013 CJEB Annual Report 2012–2013 | 65 Design/Production Columbia Creative Office of Communications and Public Affairs

Editors: Caroline Hasegawa Ryoko Ogino

Assistant Editors: Emiko Mizumura Tamaris Rivera Kahori Takahashi Andy Wanning

Contributors: Koji Hirao Mari Ishiguro Chisa Miura

Photography: Eileen Barroso Michael Dames Michael Di Vito

Hideo Hoshino

Satoru Ishikawa

Alan Klein Andy Wanning

CENTER ON JAPANESE ECONOMY AND BUSINESS AND ECONOMY JAPANESE ON CENTER

Center on Japanese Economy and Business ANNUAL REPORT 2012-2013 REPORT ANNUAL 2M9 Uris Hall, 3022 Broadway New York, NY 10027 Phone: 212-854-3976 Fax: 212-678-6958 Web: www.gsb.columbia.edu/cjeb

CJEB Representative Office in Japan c/o Terumi Ota 1-19-18-1003 Shibuya Shibuya-ku, Tokyo 150-0002 Fax: 03-5467-6012