Thirty years of neo-liberal reforms in Japan

This chapter has three ambitions. First of all, it proposes a chronology of the structural reform process over 30 years and describes its nature. Second, it offers an explanation for this process and analyses the forces that motivated it, when the majority of the Japanese population were apparently opposed to it. Finally, the chapter evaluates the reform outcomes, especially in terms of the balance between state and market. Through a political analysis of the process of neo-liberal reforms and

deregulation since 1980, I argue that the transformation of Japanese capitalism has not been linear, but has consisted in two distinct reform phases: that of Yasuhiro Nakasone in the 1980s, and that of Prime Ministers Hashimoto, Obuchi and Koizumi between 1996 and 2006. These two phases followed very different logic and goals, and were separated by a long pause. After 2006, neo-liberal reforms mostly stopped, due to a combination of inertia, voter backlash and doubt about the US model after the 2008 financial crisis. From 2006 to 2009, although the Liberal Democratic Party (LDP) remained in power, the reform movement lost momentum and experienced both popular backlash and internal resistance within the LDP. In 2009-11, under the first two administrations of the new Democratic Party of Japan (DPJ), an effort was made to pursue instead a more distributive social agenda, in order to respond to public concerns about inequality and welfare erosion. This agenda did not get the chance to come to fruition, due to a combination of weak DPJ governance, fiscal obstacles and the March 2011 triple disaster. By the third DPJ administration, under Prime Minister Noda (September 2011December 2012), the government had turned toward fiscal retrenchment, trade liberalisation and energy policy. The social agenda was essentially abandoned. In turn, in December 2012, the LDP came roaring back to power under an Abe administration, version 2.0. Voters grew tired of policy incoherence under the DPJ and shifted their worries from one about inequality to one about low growth. The promise of a new economic policy that combined aggressive monetary stimulus, renewed fiscal Keynesianism, and ill-defined package of growth-enhancing structural reforms (the three-pronged ‘Abenomics’) received voters’ qualified approval. By early 2013, Abe launched his macro-economic policies with big effect. The ‘third arrow’, however, is a more

uncertain package. At the time of writing, it seems clear that Abe does not intend to revive Hashimoto-style or Koizumi-style neo-liberal economics, even though he has recreated the key Industrial Competitiveness Council (ICC) used by Obuchi to push key reforms and relies on a Cabinet secretary (Yoshihide Suga) who was a key Koizumi supporter during postal reforms. Rather, Abe 2.0 may be seen as a functionalist or pragmatist. History is not yet written and it is too early to gauge the nature of Abe 2.0.

For example, the conclusion or not by the Abe government of the TransPacific Partnership (TPP) will be a criterion to evaluate its neo-liberal nature, as TPP may be used as a Trojan horse to introduce a new wave of neo-liberal reforms. However, at this stage, it seems improbable that Abe 2.0 will proactively revive the neo-liberal agenda of reforms, not only because of the strong opposition within the LDP, but also because his agenda is primarily driven by a desire to revive Japan’s power in the context of a rising China. Instead, he may only preserve the major outcomes of the neo-liberal agenda and act as an heir in what may be already called a post-neoliberal era. As we shall see, the reform process has been sharply contested at every stage and has thus followed a non-linear track that sometimes makes it seem incoherent. The key moments of the reforms have often had to be accompanied by political gestures or counter-reforms in order to appease those who opposed them. The tactical pro-reform coalition has never been able to exert complete control, in the manner of Margaret Thatcher in the UK. The reforms of the 1990s could only progress at the price of compensatory fiscal expenditure on behalf of the losers from these same reforms, and this contributed to the explosion of Japanese public debt (which reached 200% of Japanese gross domestic product (GDP) in 2010, and more than 210% by the end of 2012). At the end of this complex process of progressive reforms, it is clear that

Japan has itself experienced a ‘neo-liberal transition’, especially between 1996 and 2006, but with a period of preparation under Nakasone. Many authors have emphasised the combination in Japan of decentralisation with serious inertia in the system of political economy (Amyx, 2000, 2004; Bouissou, 2003 ; Katz, 2003; Lincoln, 2001; Okimoto, 1990; Schoppa, 2001; Tiberghien, 2003, 2007 ; van Wolferen, 1989). In these conditions, it is not surprising that the institutional changes that have characterised Japan over this period have been gradual, which does not mean that they have not been significant and profound, in conformity with the concept developed by Streeck & Thelen (2005). The cumulated change in institutions after 1996 and the responses by firms to those new possibilities have certainly amounted to the greatest overhaul of the Japanese capitalist system since the war. In addition, this chapter argues that the process of change resulted more

from a political logic than from efficiency-seeking economic rationality. This is why I choose to call the process one of ‘neo-liberal transition’. Second, we analyse the forces that have upheld this transformation. Why

has Japan adopted a battery of neo-liberal reforms despite the lack of enthusiasm on the part of the population and the logic of comparative advantage

that was pushing it in other directions (Dore, 2000, 1999)? There are several possible hypotheses. Some of them have put forward the idea that the postwar Japanese model simply ran out of steam having reached its optimal point before becoming dysfunctional, whether as a whole or at least in its financial dimension (Fukao, 2002; Katz, 2003). According to this explanation, structural reforms after 1996 (and even those of Nakasone) simply responded to a functional imperative for adaptation and survival of the Japanese model. A variant of this approach put forward the concept of a general institutional crisis, when the different actors in the system and public opinion started to doubt the permanence of the status quo (Aoki, 2001, 2002; Toya, Aoki & Toya, 2003; Toya & Amyx, 2006). Once this moment was reached, a Pandora’s Box of reforms was opened by political actors. Other researchers emphasised direct pressure from Japan’s American ally, as much in matters of trade as in financial and monetary issues, lasting from the end of the 1970s to 1995 (Kikkawa, 1998; McKinnon & Ohno, 1998; Nakanishi, 2002). These relentless pressures, linked to a major trade imbalance between the two countries, may have, according to this view, forced Japan to begin its first financial reforms, and so put out of balance its coherent system of political economy, later making necessary other reforms designed to bring the system back into balance. Finally, another approach emphasised the normative and ideological aspects of the reforms. According to this view, the Japanese elite underwent a conversion, in part because of the diffusion of global norms following the neo-liberal revolution of Thatcher and Reagan, and in part because of the bias of Japanese intellectuals (Dore, 1999, 2000; Eda, 1999; O - take, 1994, 1996, 1997). Thus, Ronald Dore argues that economic, bureau-

cratic and intellectual elites adopted neo-liberal ideas after the middle of the 1990s, and that these ideas gradually became virtually hegemonic, thus pushing forward the reform steamroller. This chapter adopts a critical view of these different analytical approaches,

given the fluctuating and targeted nature of Japanese structural reforms since the beginning of the 1980s. Basically, these reforms have been partial, clustered during particular periods, and strategically linked to fiscal deals. This tends to negate any purely systemic or functional logic. It remains true that many elements support the argument of an ideological transformation, first under Nakasone and more systematically after 1996, but a strong counter-current of conservative ideas in favour of social cohesion and maintenance of the previous advantages of the Japanese system has remained present throughout the period. This counter-current was followed by a more general public concern for inequality and social gaps after 2006, a concern that served as the backdrop for the limited attempts of the DPJ to enlarge the welfare system in 2009-10. So, these two currents of ideas find themselves in permanent confrontation and allow political actors to use and to express one or the other of them throughout the process of reforms and counter-reforms. In this, the force of ideas is not sufficient to explain directly the neo-liberal transformation of Japan.