Institutional Change in Japan After four decades of rapid growth that transformed Japan into a wealthy country at the world’s technological frontier, the decade of the 1990s brought prolonged economic stagnation. The rapid run-up in asset prices in the late 1980s, followed by their collapse in the early 1990s, left a debt overhang that paralyzed the economy. Policy reforms were initially half- hearted, and businesses were slow to restructure as the global economy changed. Indeed, Japan’s struggle has called into question the ability of the country’s economic institutions – originally designed to support factor accumulation and rapid development – to adapt to the new economic environment of the twenty-first century. Institutional Change in Japan analyzes institutional change within this period of economic transition. It addresses the origin, development, and recent adaptation of core institutions, including financial institutions, corporate governance, lifetime employment, the amakudari system and marriage and family. Importantly this analysis is grounded in a broad historical and international context, with comparisons made to Meiji Japan as well as to recent economic and financial reforms in Korea, Switzerland and New Zealand. A leading field of international contributors contend that, contrary to conventional wisdom, there has been significant institutional change over the last decade. Institutional Change in Japan consequently offers a fresh perspective to the current debate that will be essential reading for those studying the Japanese economy, economic history/futures and institutional economics. Magnus Blomström is Professor of Economics at the Stockholm School of Economics and President of the European Institute of Japanese Studies. Sumner La Croix is Professor of Economics at the University of Hawaii- Manoa. European Institute of Japanese Studies, East Asian economics and business series Edited by Marie Söderberg, Stockholm School of Economics, Sweden This series presents cutting edge research on recent developments in busi- ness and economics in East Asia. National, regional and international per- spectives are employed to examine this dynamic and fast-moving area. 1 The Business of Japanese Foreign Aid Five case studies from Asia Edited by Marie Söderberg 2 Chinese Legal Reform The case of foreign investment law Yan Wang 3 Chinese–Japanese Relations in the Twenty-First Century Complementarity and conflict Edited by Marie Söderberg 4 Competition Law Reform in Britain and Japan Comparative analysis of policy network Kenji Suzuki 5 Financial Liberalization and the Economic Crisis in Asia Edited by Chung H. Lee 6 Institutional Change in Southeast Asia Edited by Fredrik Sjöholm and José Tongzon 7 Japan’s China Policy A relational power analysis Linus Hagström 8 Institutional Change in Japan Edited by Magnus Blomström and Sumner La Croix Institutional Change in Japan Edited by Magnus Blomström and Sumner La Croix I~ ~?io~!~~n~~~up LONDON AND NEW YORK First published 2006 by Routledge Published 2017 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN 711 Third Avenue, New York, NY 10017, USA Routledge is an imprint of the Taylor & Francis Group, an informa business Copyright © 2006 Editorial matter and selection, Magnus Blomström and Sumner La Croix; individual chapters, the contributors Typeset in Times by Wearset Ltd, Boldon, Tyne and Wear The Open Access version of this book, available at www.tandfebooks.com, has been made available under a Creative Commons Attribution-Non Commercial-No Derivatives 4.0 license. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data A catalog record for this book has been requested ISBN13: 978-0-415-38015-7 (hbk) Contents List of figures vii List of tables viii List of contributors ix Series editor’s preface x Preface xi Introduction 1 MAGNUS BLOMSTRÖM AND SUMNER LA CROIX PART I Institutional change in theory and practice 13 1 Institutional change in Japan: theories, evidence and reflections 15 SUMNER LA CROIX AND AKIHIKO KAWAURA 2 Institutional change in Meiji Japan: image and reality 45 JANET HUNTER 3 Institutional reform in Japan and Korea: why the difference? 71 CHUNG H. LEE PART II Japanese institutions: what has changed, what has not, and why 95 4 A lost decade for Japanese corporate governance reform? What has changed, what hasn’t, and why 97 CURTIS J. MILHAUPT vi Contents 5 Japan’s economic and financial stagnation in the 1990s and reluctance to change 120 THOMAS F. CARGILL 6 Japanese lifetime employment: a century’s perspective 152 CHIAKI MORIGUCHI AND HIROSHI ONO 7 The Japanese labor movement and institutional reform 177 LONNY E. CARLILE 8 The changing pattern of Amakudari appointments: the case of regional banks, 1991–2000 202 KENJI SUZUKI 9 Divorce in Japan: why it happens, why it doesn’t 221 HIROSHI ONO Index 237 Figures 4.1 Number of deals involving Japanese targets, 1993–2000 105 4.2 Ratio of bust-up value to market capitalization, 2000 108 5.1 Percentage changes in real GDP 121 5.2 GDP deflator, percentage changes 121 5.3 Percentage changes in the CPI 122 6.1 Separation rates of manufacturing workers, 1923–2001 153 6.2 Union membership, density, and working days lost, 1921–2001 157 8.1 Number of agreements registered by National Personnel Authority for amakudari, 1985–2001 203 9.1 Types of marriages in Japan 227 9.2 Women’s labor force participation rates in selected countries 229 Tables 4.1 Major Commercial Code amendments 1993–2002 98 6.1 Corporate welfare programs in 1949 160 6.2 Employment adjustments during business downturns in 1954–55 and 1962–63 161 6.3 Methods of employment adjustment in 2000 168 6.4 Top five reasons why workers didn’t change jobs in 2001 169 7.1 Shunto: key historical statistics 184–5 8.1 Amakudari appointed regional bank executives: 1991–2000 210 8.2 The factors affecting amakudari appointments from MOF and BOJ to regional banks 216 9.1 Divorce, marriage, and family statistics among selected countries 225 9.2 Views on marriage and family among selected countries 225 Contributors Magnus Blomström is Professor of Economics at the European Institute of Japanese Studies, Stockholm School of Economics. Thomas F. Cargill is Professor of Economics at the University of Nevada, Reno. Lonny E. Carlile is Associate Professor of Asian Studies and Japanese Studies at the University of Hawaii-Manoa. Janet Hunter is Saji Professor of Economic History at the London School of Economics. Akihiko Kawaura is Professor of Economics at Doshisha University. Sumner La Croix is Professor of Economics at the University of Hawaii- Manoa. Chung H. Lee is Professor of Economics at the University of Hawaii- Manoa. Curtis J. Milhaupt is Fuyo Professor and Director at the Center for Japan- ese Legal Studies, Columbia Law School. Chiaki Moriguchi is Assistant Professor of Economics at Northwestern University. Hiroshi Ono is Associate Professor at the European Institute of Japanese Studies, Stockholm School of Economics. Kenji Suzuki is Associate Professor at the European Institute of Japanese Studies, Stockholm School of Economics. Series editor’s preface Asia is undergoing great changes, with the rise of the Chinese economy and the development of the economies in the Southeast Asian countries. One of the key questions of this century, and for the future of Asia, is where Japan, the economic giant in the region, is headed. Japan’s future direction will be decisive for Asian development. Is Japan changing? Media and opinion leaders are divided on this issue and present little evid- ence of substance. Some call the 1990s a “lost decade” for Japan and claim that the country is unable to change itself and adjust to globalization of its economy, as well as to changes occurring in Asia. Others see far-reaching, albeit not readily visible, changes to Japanese society and the economic system, with implications for the future. The aim of the authors of this book is to bring some substance and clarity into the debate on Japan’s future role. They achieve this by looking at institu- tional change in Japan in a number of specific and strategically important areas such as financial institutions, corporate governance, employment systems, circulation of the elite between government and business, labour unions and even marriages and divorces. A historical perspective is achieved by comparing institutional change during the Meiji era with what is happening today, and a geographical one by comparing financial reforms in Japan with those that are undertaken in South Korea, Switzerland and New Zealand. The chapters in this book are the result of a conference held in Hawaii, “Institutional Change in Japan: Why It Happens, Why It Doesn’t”, held at the East–West Center, Honolulu, Hawaii, when a number of experts on Japan from various disciplines gathered to present papers and discuss insti- tutional change. Their conclusions do not provide a simplistic, clear-cut picture, but rather a multifaceted one that can still tell us something about Japan’s future direction. The book provides something that, to a large extent, has been missing in the debate on Japan’s change, or lack of change: a nuanced analysis based on facts and figures gathered and analysed by each scholar in his or her specific field of interest. We are proud to welcome this book into our series and believe that it will provide insights for scholar and layman alike, to anyone interested in what is now happening in Japan. Marie Söderberg Preface This book is the result of a long-term collaboration between the European Institute of Japanese Studies, Stockholm School of Economics; the Department of Economics, University of Hawaii-Manoa; and the East–West Center, Honolulu, Hawaii on structural and institutional change in Japan. Our earlier research focused on structural changes in Japan’s economy during the 1990s.