Why was last Sunday a sad day for Japanese democracy? Because it was demonstrated that a TV celebrity who also happens to be the prime minister of Japan managed to hijack the cause of reform, placed meaningful policy discussion out of bounds, and was given the opportunity to continue blocking the real repairs that Japan does need. Koizumi’s achievement is amazing if you consider that genuine privatization of postal savings is unthinkable. We need to be very clear about this right away; what I write here is not controversial opinion, it is a reality anyone can see. The money collected by the post office has a peculiar function that is crucial in helping to keep the Japanese economy going through the zaisei yushishikin – which officials can treat as a “second budget”. If you expose the huge amount of money involved to real market forces – which is what privatization means – Japan’s financial system would collapse along with many of its agricultural institutions, and practically the entire construction sector would go bankrupt. Just one further detail: In combination, this fund, administered by Ministry of Finance officials, together with Japan Post itself, are the biggest holder of Japan Government Bonds, which helps to ensure that this form of government financing remains insulated from real – unreliable – market forces. The few who have immersed themselves in these details are not worried about the possibility of a calamity, seeing that as the legislation put forward by Koizumi is designed to be implemented in the dim future twelve years hence it does not begin to represent believable policy.

But if any opposition candidates told the public that Koizumi and those who had remained loyal to his plan were not offering a policy at all, their voices were drowned by the din created by the media in which “reform”, “reform”, “reform” echoed from all sides. Anything they tried to get across about genuine policy, and about Japan’s real problems was also lost in the frenzy created by Koizumi and his election tacticians; a frenzy that was supposed to reflect the Japanese public’s deep desire for reform. In forty years of watching Japanese elections I have seen many funny as well as disturbing things, but found that Japanese voters usually have some sense of balance and common sense. Last Sunday’s must have been the most nonsensical postwar election ever to have taken place in this country. Mostly due to the incredibly superficial imagery on TV and the strange Japanese enchantment with the term “reform”.

That began twelve years ago when, during the last political upheaval that brought a temporary end to LDP hegemony, a new notion took hold of a large part of the Japanese population: fundamental change in the way that Japan was being governed was not only necessary, but also possible. Before then, most politically astute Japanese had not thought that their rather rigid political system would ever allow fundamental change without a shock from outside. “Reform” became the talk of the day for at least nine months. The very word “reform” seemed to gain some magic resonance as it circulated in all publications and reverberated among the public.
And so it became an amulet; something treated as if it has a magic power of its own; with the assumption that solely by being mentioned it helps itself become reality.

Koizumi Junichiro seized the amulet when he became prime minister and he has been flaunting it ever since. In no other country will you hear so much talk of reform as here. In the months following Koizumi’s rise to the top the amulet was constantly visible; TV and newspapers were worshiping it every day. This caused a heady atmosphere. Japan was going to change for the better, change totally. There was only one curious aspect to all this. No one at the time ever bothered going into details on the thousands of occasions when the issue of reform was raised. Reform of what? And precisely how? It did not seem to matter. Commitment to “reform” was enough by itself; it had become Japan’s sacred political cause.

Four years later, what has Koizumi as prime minister managed to accomplish with respect to policy initiatives that seemed to be obviously necessary in 1993, initiatives that would turn Japan, in the words of Ozawa Ichiro, “a normal country”? Preciously little. He has essentially followed the agenda of Ministry of Finance officials who have long waged a campaign to restrain the worst excesses of public spending paid for by the “second budget”. His postal savings plan is in line with this agenda as well, making sure that in the longer term they can maintain and enlarge control over that money.

To be fair to Koizumi, whatever desire for genuine reform he might once have had, he faces the same impediment that has curbed the ability to be effective of almost all his predecessors. Japanese prime ministers simply do not in practice have the mandate that they have in theory and that comes with the job in most European or other Asian countries. The same goes for cabinet ministers who rarely have a real say over the portfolios they hold and are considered temporary visitors in their ministries. Outsiders are frequently misled on this point as elected Japanese officials are treated with an impressive show of deference, which compensates for their lack of true power over policy. It was thought to be among the priorities in 1993 to repair that situation, so that Japan could become a “normal country”. And it has been an important issue in the political thinking of the top Minshuto politicians.

Because Koizumi is more flamboyant than almost all other LDP politicians, and because he is a relative outsider who does not mind breaking the unwritten rules of the traditional Japanese political elite, he indulges in political gestures that give spectators the impression of steadfastness and daring. Their results do not help Japan one bit. In the six party talks concerning North Korea – one of the most important strategic issues in Japan’s neighborhood – Japan plays an entirely subordinate role. Koizumi’s North-Korean initiative went haywire because he had not thought it through, and had not made it part of a much broader strategy that would have included a marshalling of forces so as to ensure a broad national grasp of his goal. Diplomacy with Japan’s neighbors has virtually come to a standstill under Koizumi, as relations with China, Russia, and South Korea have all deteriorated. Koizumi appears to thrive in a peculiar realm of Japanese politics where gestures and symbols substitute for policy substance, and so he worsened relations with China by stubbornly repeating his visits to that relic of State Shintoism, the Yasukuni shrine.

His “great victory” of last Sunday is likely to confirm the valor of steadfastness to himself, which is a good reason for Japan’s political players to be alert to new surprise actions that will not help Japan one bit. Those players, also inside the LDP, will help themselves and their country by keeping in mind that this victory was the result of a trick that worked because it came entirely unexpected; a sign of how vulnerable Japan’s democracy has become. Koizumi decreed that only one subject counted and the country, dazed by fake reform frenzy, went along with this deception. He played the media better than any prime ministers before him, so that he could make news stories revolve around the question of whether he or disloyal party members would win. Real policy issues as well as the opposition parties that might have raised them were shoved aside in national media attention, fatally undermining the process for which elections are held to begin with – at least outside dictatorships. The trick could have been designed by Karl Rove, the political strategy genius but totally unconscionable wrecker of democracy who is behind George W. Bush’s election maneuvers. It may all seem permissible as part of the mean art of politics, but it causes the demise of public influence over what happens in a country.

Many, perhaps most, elections in other countries are not much about policy either; the commonly heard joke in Japan about elections being political beauty contests happens to be, unfortunately, the truth in much of Europe and the United States. Democracy appears to be deteriorating everywhere. For much of the time this does not have terribly negative consequences as long as there are no emergencies and things continue to run smoothly. But isn’t new policy necessary in Japan? Since 1993 Japanese people with an interest in the future of the country seem to have been convinced of it.

So what should the Minshuto, the smaller parties, the LDP dissenters and the rest of us be thinking about while Koizumi makes his moves to give, perhaps inadvertently, the bureaucrats a longer lease on their beloved status quo?

One area that ought to be the subject of serious thought and discussion concerns the working relations between bureaucrats and politicians. Many have long understood that this is the core problem. Elected politicians have the duty ultimately to determine what a government should do. But in Japan they have had great difficulty to achieve an effective partnership with the unelected bureaucrats; professionals who know more about their area of responsibility than the politicians do. Once Japanese politicians attain knowledgeable leadership over these officials, genuine policy initiatives will become possible. A most direly needed one is tricky and complex; it concerns Japan’s support of the dollar because of which Japan loses its savings to the United States. Many of the problems that are known to the public, such as the coming pension crisis and slow growth, are connected with this unexamined policy of the Ministry of Finance. When Japanese politics reaches the stage when it can shed the bonds of vassalage to the United States and become a truly independent (and normal) country, it can begin to devote attention to the spreading of Japan’s accumulated wealth among the population. It should, even before then, begin to respond to the world as a significant and responsible political entity. There is today virtually nothing in Japan’s foreign policy thinking that reflects the momentous political changes that its giant neighbors — China and Russia — have undergone in recent times. Also the role of the United States in the world has in the past four years changed dramatically. True political leaders, when they make their appearance, will have to inspire the gaimusho urgently to develop new diplomacy to cope with an entirely new reality produced by those changes.

The best hope for all this to be accomplished is still a genuine opposition party. If Minshuto keeps itself together, fights its tendency to become a mirror image of the LDP, and continues its way toward a two party division in Japanese politics, it could fulfill that task. It would do well to start using the term “repair” instead of “reform”, whose amuletic function has rendered it meaningless. This is not the time for opposition ambitions to evaporate. Because contrary to present appearances there is actually little politically significant life left in the LDP. It used to win elections because of its subsidies and infrastructure spending. It now must seduce the voters with gross illusions, while it is badly divided and out of touch with its traditional base, all of which means that its huge breath last Sunday could be its last. Maybe the next elections will yet save Japanese democracy.

Japan’s prime minister Junichiro Koizumi is a master illusionist. Playing the media better than any of his predecessors, he has managed to create the widespread impression that voters will have chosen reform if they return him and the LDP candidates supporting his favorite project to the Diet next Sunday. Years before he became prime minister an idea was implanted in his mind that true reform in Japan would begin with an overhaul of the postal savings system. Ever since he has believed that they ought to be privatized, and he has frequently repeated that he would stake his “political life” on an attempt to accomplish this. In the four years that he has headed Japan’s official government he was creeping toward this seemingly receding goal until the Lower House of Japan’s parliament passed related bills, which were subsequently voted down by the Upper House on the 8th of August. This prompted Koizumi to challenge his own party, and Japan’s political elite more generally, dissolving parliament and calling for a snap election. In the current campaign he insists that his plan of privatizing postal savings is the sole issue deserving of debate. He makes it appear as if the future of Japan depends on it, and refuses to be drawn out on other subjects, including some that would appear to deserve more urgent attention.

The Japanese postal savings system is in effect the world’s largest bank. True privatization of it is unthinkable because of the role its assets play in making the informal part of Japan’s political economy go round. That part – relationships and transactions, which are never scrutinized and are beyond legal control – is huge, and gives the Japanese economy its peculiar and enigmatic strengths. Household savings have long been a core element of what used to be called the Japanese economic miracle. Their interest yield is minuscule, but the post office has always offered marginally better rates, which has made its savings system the most popular. The savings are controlled by the Ministry of Finance – a rival bureaucracy to the ministry of Post and Telecommunications. They used to be administered by its Trust Fund Bureau and went straight into the zaisei toyushiin, more popularly known as ‘the second budget’. Today the money follows a less clear course through other channels, known as the Fiscal Loan Fund but continues to be allocated at the discretion of Ministry of Finance officials through a myriad of largely unaccountable administrative entities. Among many other functions, it is crucial in sustaining the Japanese Government Bond system – which should not be called a market because it is deliberately insulated from market forces.

The national financing function of the postal savings system dates from the later war years when, along with the supposedly commercial banks, it helped ensure an unimpeded flow of funds to the munitions industry. That arrangement formed the basis of an intricate system of financing that served postwar Japan’s legendary rapid reconstruction. Once that was accomplished, the huge amounts that were allocated through the “second budget” found new purposes under the control of Japan’s postwar political genius Kakuei Tanaka – the most influential politician of two generations, who was most powerful when working behind the scenes. Tanaka ran an “army” of parliamentarians and political operatives that excelled in guaranteeing electoral success through public spending on infrastructure. In its post-Tanaka development this tradition has bestowed upon Japan numerous unnecessary tunnels, bridges and three-lane highways leading to nowhere or into unmovable mountain-sides. These porkbarrel benefits are still significant for many campaigning politicians, especially LDP candidates. Hence the “background story” today is that Koizumi must fight vested interests within his party who hate to see a reduction of porkbarrel spending. There is, however, much more to what is done with this “second budget” than waste. It guarantees flows of money to parts of the country that otherwise would have little to stimulate regional economic activity. But most importantly, Japan’s excessive public spending helps solve a little known and even less understood problematic aspect of its political economy. It is forever in need of ways to create yen so as to balance its gigantic dollar holdings, most of which can find no other destination than to circulate in the American economy. The creation of accounts for contractors, who subsequently pass on the money they theoretically receive for construction tasks to the accounts of subcontractors – there are roughly half a million of those in Japan – ensures that a lot of yen enters the economy.

Considering its many functions, some of them essential to the informal, extralegal ways in which things are done in Japan, exposure of this system of financing to anything remotely resembling a market would certainly constitute a revolutionary overhaul. But it would also cause the collapse of the construction industry and of vital financial and agricultural institutions. A collapsing Japanese financial sector would be like an earthquake whose tsunami would inundate Wall Street, London, Frankfurt and much more. Not surprisingly therefore, there are no serious plans for what Koizumi claims to be the first huge step toward an overhaul of the country, even as he avers that it will help solve all other problems.

A quick glance at Koizumi’s privatization scheme that the Upper House rejected is enough to put any worried minds at rest. It aims to split the post office into four entities (mail delivery, savings, post offices and postal insurance), but not before 2017. Any legislation of this type designed to be implemented twelve years hence does not constitute policy in any serious democracy. Furthermore, there exists no genuine private sector to begin with, with respect to large-scale financing. This is conceptually challenging, but elementary to understanding of how Japan is put together – the supposedly private sector banks, for instance, have never been in the business of profit making.

What then are we witnessing? An incredible show, the deeper significance of which may have escaped Koizumi himself. How to explain his role? One needs to keep in mind that Japanese prime ministers do not for practical purpose have the mandate that comes with the job in most European or other Asian countries. The Japanese political system has not in our memory, and perhaps never, made room for a genuine functioning prime minister; or for that matter cabinet ministers with a real say over the portfolios they hold. That is not the impression that outsiders get. Anyone who has observed Japanese cabinet ministers up close must have noticed how they are treated with exceptional deference by those around them. But this bowing and scraping is in stark contrast to the infinitesimal influence these politicians have in their own ministries, where they are usually considered mere temporary visitors. It is as if worshipful attention has to make up for the lack of factual power.

For the Japanese prime minister this is true in a magnified manner, since he gets much respectful international attention on top of what he gets at home. And in the case of Koizumi this odd discrepancy has led to trying big things in a way that gives the impression that he likes to jump into the water just to discover whether he can swim. His North-Korean initiative went haywire because he had not thought it through, and had not made it part of a much broader strategy that would have had to include a marshalling of forces – including the media – so as to ensure a broad national grasp of what he tried to achieve. Most controversial have been his stubbornly repeated visits to the Yasukuni Shrine, seen by China (and Korea) as a demonstration of misplaced respect for war leaders branded as war criminals, which has led to a worrisome deteroriation in Sino-Japanese relations.

If institutional obstacles deprive you of the power that the title of your office suggests you ought to have, you cannot ever test that power. You are also tempted to indulge in symbolic actions on a par with the ritual devotion you receive from your surroundings. Japan’s public political life is hardly ever concerned with the real substance of relations and transactions among those who share power; it is put together of gestures, symbols, and scandals. Koizumi thrives in this environment. He has never been suspected – this is very important – of involvement in a scandal. He has projected utter sincerity about urgent issues in his daily press conferences, and seems to be steadfast, even though he has not found a way to steer a new political course. He is the first Japanese prime minister who is also a TV celebrity, and is much more flamboyant than the average Japanese politician.

Helped by the wishful thinking of many in the media he still comes across as a reformist politician even after four unproductive years. Reform is what Japanese want. The almost magical term has resonated with the public since a period of party political upheaval in 1993 when the idea gained ground that fundamental change in the way things were arranged in Japan was not only desirable but also possible. But exactly what any genuine reform might actually entail is rarely put before the public, with frustrated voices of the more thoughtful opposition politicians hardly ever getting through the din of supposed public opinion created by the media. So far Koizumi has served the agenda of activist officials within the Ministry of Finance. These believe that they have been instigating reform ever since they felt the need to restrain the public spending excesses caused by the the Tanaka army corps. The postal money project fits in with this restraint and with their overriding aim to keep savings under their control.

The question now is whether the electorate will wake up in time to the fact that they actually do have a choice next Sunday. The events of 1993 gave rise to politicians who have come to understand how they might gradually reform what urgently does need attention. The Japan Socialist Party, which with its mainly ritualistic opposition had been a dismal failure for 38 years of Japanese politics has now been displaced by a party created by these reformist-minded politicians: The Minshuto (DPJ). Its more eloquent politicians convey a relatively good grasp of Japan’s real problems, as they speak of the horrendous pension problems and – a first for Japanese elections – the need to address the deteriorating relations with Japan’s neighbors.

This group of genuine reformists can conceivably form a coalition to end the virtual monopoly the LDP has enjoyed for half a century, and thereby re-introduce the prewar two-party system, as well as reclaim significant power for the prime minister. The election on Sunday can either bring this about or postpone it indefinitely.

They are up against grand theater. As his current challenge demonstrates Koizumi is capable of putting on quite a spectacle. He has shocked a public by shattering the (supposed) harmony within his party; helping to spread the notion that the great policy task he must fulfill also overrides basic Japanese social commands. Koizumi has brilliantly managed to accomplish something all politicians try when faced with onerous problems. He has changed the subject. The story now is about loyalty, about steadfastness, about followers turning against their master. Adding to the spectacle are the so-called “assassins”, handpicked candidates – ten of them female, chosen with an eye to their looks – to run against the heretics. The only thing lacking is a dramatic love theme, but otherwise it could be grand opera. Koizumi loves opera and, as I had ample opportunity to discover in conversations before he became prime minister, he is thoroughly familiar with many opera plots. This may be his own finest production. By using harsh tactics against opponents within the LDP he causes the public to believe that he is fighting vested interests. Whereas in fact and probably unintentionally he will if successful be prolonging their grip on Japanese politics.

Assumptions held by Western economists, policy makers, and commentators about the nature of the world’s second largest industrial power are so much at variance with observable reality there, that they ought to disturb our peace of mind. The realization that the discrepancy results from conceptual filters with which reality is normally apprehended, ought to have far-reaching consequences for those ready to rethink what is to be done about the world’s international economic order.

CREDIT ORDERING

A quick look at Japan’s commercial banks affords an immediate glimpse of routine misinterpretation. In the eyes of Western governments and businessmen these are profit seeking institutions, operating in a private realm under the supervision of the Ministry of Finance (MOF). This would lead one to expect that they are regulated under civil law. But civil law and the commercial code do not at all control the activities of Japanese banks. Administrative law does, and in Japan this is entirely a tool in the hands of ministry bureaucrats. The Banking Law has a mere 66 clauses, leaving the operational details for the banks to be settled by the ministry officials in informal instructions (tsutatsu) that they present to banks and other financial institutions. Japanese bureaucrats draft almost all laws to begin with, and make sure to keep them extremely vague, providing maximum room for changing interpretions in keeping with what they think they need for different occasions. They can fix the rules, to give one example, in such a way that depositors are forced to buy government bonds. The Bank of Japan is a fundamentally different institution compared to Central Banks elsewhere in the industrialized world; it is not a referee. There are no impartial regulators scrutinizing important transactions; wrong-doing in this realm is not subject to legal process.
A couple of striking characteristics among major Japanese lenders and among major borrowers ought to to awaken the world to their actual place in the Japanese political economy: The first are poorly trained in calculating credit risk, and hardly interested in the subject, while the latter appear to have a disdain for cost-of-capital considerations.
     We should right away be prepared to accept that the Anglo-American legacy of market-centered economic thought does not readily provide the type of questions to make the Japanese political economy intelligible. At the same time, if we come to the Japanese economy with questions prompted by its own peculiarities, we may discern exciting but as yet hardly employed new ways of looking at the political economies of the world in general.
     A crucial institution is one that has no recognized name as yet, but which economic guardians have brought to a high level of sophistication, and which can explain much of Japan’s recent economic vicissitudes. We could call it credit ordering. It entails highly coordinated credit creation, preferential credit allocation, and systematic credit denial. Because it does not rest on intellectual underpinnings formulated by Japanese theorists or businessmen, it has remained well-nigh invisible as an institution in orthodox perspectives. Credit ordering ensures the hierarchical order necessary for the survival of Japanese industrial organization. The post-1945 version of it was shaped to a large extent by wartime financing methods and wartime restrictions on entrepeneurism. It has evolved for the purpose of building productive capacity, has helped provide entire industrial sectors with the wherewithal to engage in massive expansion unrelated to demand or profitability, as well as in campaigns for expanding international market share. And it has almost entirely socialized credit risk.
What makes credit ordering work is its embeddedness in an industrial structure whose major relationships and transactions are in the final analysis by and large not based on economic considerations of profit-making, but rather on political considerations of mutual protection and long-range expansionary goals.
     Two huge intersecting organizational structures ensure order among Japan’s large corporations: the set of horizontal keiretsu and the web of federations in every branch of industry. They perform powerful complementary functions that are extralegal and frequently at odds with official regulations (such as the anti-trust legislation that is supposed to be enforced by Japan’s Fair Trade Commission). The keiretsu that tie companies in different industries together, and form huge corporate safety nets, have become relatively well-known since 1989. But the many federations that tie companies in the same industry together, ensuring relative stability, order and hierarchy among firms in the same field, have remained largely unexamined. There are no all-powerful keiretsu centers that exist to dictate corporate policies to members. But the assertive tendencies of each firm are strongly curtailed by the informal commands of group integration, mistakenly represented in Japanese parlance as loyalty (they have no choice). A few very powerful companies (Toyota, for example) need not worry much about fellow keiretsu members. Keiretsu companies own each other.
     Power is diffuse to a point where accountability is practically non-existent. The fact that no one is ultimately in charge of the keiretsu clusters, and that no one person or company is ultimately responsible for them, makes them sufficiently amorphous to permit industry-wide bureaucratic guidance. For purposes of industrial policy-making the government bureaucracy and business bureaucracy are completely entangled. Guidance does not emanate directly from government ministries, but is channeled mostly through the intersecting organizational structure of industrial federations. Sometimes dominated by one or a couple of giant corporations, these federations monitor and control all industrial sectors, coordinate production plans in specific sectors, help with collective technology acquisition, and give direction to Japanese industrial development at the highest levels. They can block projects of huge companies for all manner of non-economic reasons. What they decide on behalf of groups of companies has the force of law. Their high officials are usually retired bureaucrats from government agencies in whose bailiwick the association plays a role. Since Japan does not have an independent judiciary, and denial or refusal of membership means virtual exclusion from the economic mainstream, all Japanese companies fall under the extralegal jurisdiction of these associations. It is therefore not surprising that becoming the chief of an industrial federation is the highest goal nurtured by many presidents of prominent companies.
     Credit ordering is the main agent of cohesion in this system, and of course helps determine the nature of the Japanese consumer economy. Rigid sluices in the financial system have ensured that the comparatively large pool of household savings is available for large-scale industrial investment. Prices in the Japanese consumer economy are almost wholly fixed, and allow for a very heavy de-facto tax with which Japanese households help subsidize export industries and those known as “strategic.” Consumer credit remained virtually unknown until the 1970s, and continues to be restrained and rigged by customary practice in favor of sellers.
     The main organizations animating Japan’s economy frequently behave with utter disregard for conventional market considerations, and have repeatedly demonstrated that profit-making is not their primary concern. Hence, imperfections of the market, to use orthodox terminology, are so plentiful and omnipresent in Japan that markets can only perform a subsidiary function, forcing the conclusion that sound economic theory with a claim to universality cannot accept the market as the pivotal institution of economies.

In the currently dominant Western perspective, the Japanese political economy is badly weighed down by collusion, interference in markets, and meddling bureaucrats. Triumphalist voices, having ascertained a grand victory for true “capitalism” in the final decade of the twentieth century, now tend to point at current Japanese problems as definitive evidence that operating an economy in a deviant market-disdaining manner is bound to fail. This conclusion ignores half a century of industrial development that transformed a war-devastated industrial base into one which within a mere 20 years became the second most powerful in the world; a process which received emphatic applause from the rest of the world, for longer than any other country has enjoyed.
     The problems of Japan’s financial system are of course real. But what should have gained special attention of the world’s economists is the extraordinary story of the survival of this system. Japan’s financial mandarins, financers and top industrialists together have so much informal control over the economy that first they could insulate a horrendous inflation in capital assets from the consumer economy, then prevent economic collapse when the stockmarket lost about 40% of its value in half a year, and continued to avoid the calamity that would almost certainly be the result in a Western setting of a banking system that is by and large technically bankrupt, saddled as it is with the equivalent of perhaps a trillion dollars or more in problem loans (no one knows exactly).

“CREDIT RIGHTS”

Historically informed economists will observe reflections of German, French, and other continental European financial structures in the Japanese case. And one can point at evidence of German inspiration for relations between banks and industry before the 1940s, which helped Japanese authorities formalize an earlier variant of the, then as yet un-named, keiretsu system. But the Japanese political setting has allowed for an intertwining of economic interests, and an institutionalization of informal symbiotic relations, so much farther developed than anything to be found in Europe, that we do well to consider the Japanese case as a qualitatively different system.
     The common metaphor among Japanese analysts for the guarantees that important financial institutions will not go under, is a “convoy” of merchant ships guided by the warship of the MOF. But this falls short of conveying the complexity, ubiquity and effectiveness, of credit ordering, and its interaction with the intersecting webs of industrial organizations and industrial bureaucracies. Also the terms “network capitalism” or “alliance capitalism”, which sometimes have been used to describe the Japanese political economy, fail to do justice to reality, as theories thus labelled still implicitly presuppose the existence of separate private and public sectors. A clear view of how things work in Japan can only be had if one gives up that assumption.
     Where in this Japanese system could one conceivably draw a line between private and public sectors? The umbrella organizations placed above the industrial federations, such as Keidanren, Keizai Doyukai, and Nikkeiren, are also in Japan commonly refered to as “private sector” institutions, and the first two are known, occasionally, to take bureaucrats to task for shortsightedness or questionable priorities. Conflict is fairly widespread throughout the system, but it does not pit alliances of entrepreneurs and business bureaucrats against ministry bureaucrats. The alliances that do exist consist of government officials and economic organizations within their bailiwicks.
     The notions of “private” and “public” are not analytically meaningful in the Japanese context. Neither sector ever emerged over the centuries of Japanese political evolution.
In that perspective it can be more easily understood how keiretsu companies have, for all practical purposes, long considered their access to financing, regardless of their profitability, as a matter of course. It is appropriate to speak of “credit rights” enforced by the MOF. And, significantly, the legitimacy of the MOF in the eyes of Japanese industry directly depends on the continued ability of its officials to keep the political economy going in predictable ways by guaranteeing these “rights”. Since Japanese officialdom operates almost entirely beyond the political control of elected parliamentarians and cabinet, these “democratic” institutions cannot be a source of legitimacy.

COSTLESS CAPITAL

In administering the banks as money pumps for rebuilding a war-devastated industry, and for gaining huge international industrial power, Japan’s authorities have not been held back by theory, as they faced the challenge of overcoming what elsewhere would be considered as insurmountable economic limitations. In applying their credit ordering institution they have done what worked in practice. Extraordinary industrial organization and interdependence, which have effectively eliminated possible dissenting independent voices about what constitutes economic reality, have helped the financial mandarins accomplish feats that Westerners would not have dared believe possible.
     In the second half of the 1980s (during the so-called bubble economy) Japan’s large corporations were supplied with close to costless capital by a doubling, tripling and even quadrupling of real estate values, with very few major transactions actually taking place. High land prices appeared to justify the rise to astronomical levels of Japanese equities, and vice versa. The common assumption among Western commentators, governments and businessmen that all this was due to waves of wild speculation by independent investors vividly illustrates the systematic misinterpretation of Japanese economic reality in the West. The point of this exercise was to enable industry to offset the dire effects of the dramatically risen value of the yen, as it launched the largest wave of plant and equipment investments in history. Speculators were exploiting the situation, to be sure, but they were marginal and many were ruined.
     Costless capital did of course not come from altogether nowhere. Credit ordering operations during the bubble simply accelerated the steady transfer of wealth from the household sector to the industrial sector, which had been the earlier condition for “miraculous” industrial growth. The bubble was fed by household savings that found their way to the stockmarket through insurance companies and trust banks. Japanese corporations still have the assets that these investments financed. But after the mandarins decided on a guided deflation, and the market “collapsed,” Japanese households and the financial intermediaries saw trillions of yen wiped out.
The politically determined overcapacity of Japanese industry, further expanded through the bubble economy, has reached a point where major adjustments are necessary to draw the Japanese economy out of the doldrums.
     But while the “convoy system” has recently been somewhat reconfigured, as the officials have had to allow a small number of second-tier Japanese financial institutions to be declared bankrupt, it continues to support a large number of institutions that, measured by conventional Western standards, would be considered altogether unviable. The spectacular mergers that have taken place in the late 1990s among large Japanese banks (beginning with the creation of the Sakura bank out of the old Mitsui and Taiyo Kobe banks and continuing through the recent IBJ-Fuji-DKB merger) must be seen in this light. This process in Japan is different from that which drives the big bank mergers in other countries, in that it primarily serves a political rather than an economic purpose — that of preserving the credit ordering system. Official declarations that a more market-oriented approach has become desirable do not herald fundamental structural change. Abolishing the system under MOF control is not conceivable. It would risk industrial collapse.

Systematic credit denial is as significant to Japanese economic order keeping as credit creation and allocation. Outside the main bank-supported and systemically coordinated industrial machine there is little opportunity for a solitary entrepreneur, dependent on long-term domestic investment, to flourish. Small companies in service sector areas considered marginal, such as hair-dressers, fashion businesses and retailers have access to more expensive funding, but will find it difficult (depending on the sector) to expand significantly without linking up in some way with a keiretsu or smaller cluster. Small retailers are for a large part either wholly or partly ensconced in so-called distribution-keiretsu: dealer associations with which manufacturers (especially in the consumer electronics sector) control their domestic market shares. Manufacturer members of horizontal keiretsu are themselves often stellar centers of huge planetary systems of sometimes a hundred or more subcontractors; structures known as vertical keiretsu.
     Since a capital market comparable to those of the Western industrialized countries does not exist, few medium-sized and small companies can establish a market niche allowing them the freedom to make their own decisions. The relations that these smaller companies have with their “mother” firms is the sole determinant of their credit worthiness. The upper tier of well-known names of Japanese industry rests on a thick pile of shock-absorbing layers of anonymous factories and sweatshops, which go bankrupt in large numbers and reappear for different part-making requirements in times of economic downturn and shifts in manufacturing focus. Trading companies within the keiretsu, rather than the banks, tend to mediate for, or directly supply credit to, this category. These organizations, for which “business brokers” would be a more accurate label, are huge industrial information centers capable of calculating risk in nearly every area of economic pursuit and they further strengthen centralized control over credit allocation.
     Could those subcontractors, without access to easy credit, be seen as forming a fledgling private sector? If so, it is subjected permanently to the politically well-connected firms, and is likely to be permanently deprived of a political voice.

THE MISSING PRIVATE \ PUBLIC DIVIDE

Nations are not naturally endowed with private and public sectors. For these notions to correspond to significant categories in a political economy, a country must have undergone a legal evolution that cannot be taken for granted. The rise of the bourgeoisie that ended the feudal order in Europe was crucial to this development. In Japan no bourgeoisie ever emerged, even though its urban centers were huge, and the sites of highly sophisticated culture. Edo (later Tokyo) in the 18th century was probably 8 times as large as the largest European cities. But Japanese cities were created by warlords for their own strategic and financial reasons.
     We must condense a complex story, and it is perhaps most instructive to compare the political function of European and Japanese guilds. The European guilds that kept social order, gave status to its members, and regulated economic activity, became the basis for new oligarchic power, a power that existed in opposition to, or at least mostly independent of, the older landed aristocracy outside the cities. Economic development in Tokugawa Japan brought forth a large number of merchant houses, which organized themselves in guilds that were self-regulating to a high degree, became very rich and indirectly powerful. But they were never protected by laws and could never extricate themselves from the power hierarchy to become a potential hotbed of political opposition. The bakufu (military government) authorities recognized their right to exist, and allowed them certain privileges, which frequently grew into monopolies. In return for extra-legal protection, the groups of merchants made sure that economic activity remained controllable and could be checked at any time by the authorities. The effect of these arrangements was that the merchants ended up helping to prevent commercialism from spreading to areas of Japanese life where the bakufu authorities did not want it to go.
     The burgeoning civic institutions within the fortified cities of medieval Europe gradually helped establish a legal order in which property rights could be enforced, and the accumulation of wealth could be safeguarded. In Japan, by contrast, the judiciary had been entirely in the hands of the military authorities, and did not evolve civil law notions of ownership, private property and contract. No contractual thinking developed to provide a political grip separate from the structure of powerholders. In the absence of an institutional background for the emergence of notions of a separation of the powers of government and private wealth (along with notions of individual and citizenship rights), the Meiji Period authorities did not create a division of public and private sectors as they systematically built up Japanese industry. No functioning legal system would have supported such a division.
     To give more depth to this perspective, it is necessary to understand that the Tokugawa rule makers had, by a stroke of political genius, seen to it that society itself became, as much as was possible, a part of the political system. Japanese households, or “ie”, were consciously turned into political units by incorporating them as special legal entities. The closer to the center of bakufu power, the more that was the case. With that, the bosses who unified Japan four centuries ago prevented a division between a potentially recalcitrant society and the governing system. On the level of the individual person, Japanese of samurai status could not own significant property, like land or tools. The “ie” owned things. Individuals could not be said to have much of an identity except as members of an ie. Europeans owned their businesses, whereas the households of their Japanese counterparts were themselves the business — the ie was a corporation. The head of the ie, who had almost unlimited legal power over all its members, was also responsible for their conduct. And the head was automatically part of the political system through a bond of obedience with his superior. At first this political control of society through the ie system covered mainly samurai households. But this kind of highly effective social control was later also applied to well-to-do village households, and city households engaged in business.
     The reformist Meiji authorities made samurai style organization the norm for all of society. There was hardly an alternative. Lacking the institutions which in Europe had evolved to form a genuine private realm, the worker in a city, the artisan or the merchant was only ever aware of power emanating from his own superior or guild in the ruling system. If urban Japanese had any sense of the possibility of an alternative political organization, they might imagine a group of rebels, perhaps a rebel army. The Japanese individual could, however, not bring to mind any example of an alternative political organization that could become a “state”. The state, as it evolved in Europe, with its political arrangements that treated individuals as citizens whose conduct could be judged in the light of universal legal ideas, was simply unimaginable.
     This inherited political structure that blocked the emergence of a bourgeoisie along with conceptions of citizenship and a public sector, was fortified by a powerful ideology. The politically incorporated household was portrayed as something with overarching mystic qualities; as a blessing emanating from a long line of ancestors and endowed upon the persons currently inhabiting it. And the ie was believed to last indefinitely into the future. The political bosses of the Meiji Period were of course not ready to jettison this marvelous tool for maintaining order in exchange for a more European approach to the nature of families. Whatever they imported in the way of modern ideas, it did not include anything that might politically have emancipated Japanese households. And it is not surprising that the Meiji oligarchy extended the legal ie organization to all layers of the population. Until 1945 the ie was obliged by law to produce moral subjects.
     The Meiji authorities blended something even more powerful into the mix of ie mystique. They came up with the notion of the state as a gigantic family grouped around a benevolent emperor. Militaristic propaganda in the twentieth century spoke of “one hundred million hearts beating as one heart”.
In short, whereas in 17th and 18th century Europe the authority structure headed by kings was robbed of its sacredness, in Japan, almost simultaneously, the opposite happened; anyone with the temerity ever to think of the authority structure as less than sacred became prevented from doing so by having been made part of the sacredness himself. Contemporary Japanese law has dropped the formal concept of ie altogether. But the ideology of large business organizations, their “constitutions” and philosophy of founders, and whatever else they hold up for new employees to study and take to heart, tend to be replete with notions directly descended from ie ideology.

Samurai were often broke, and gradually began marrying their daughters to the sons of merchants. But as a result of this intermarrying, the factual Japanese aristocracy did not disappear when the samurai status was officially abolished. By the time the formal status structure disappeared, Japanese aristocracy had already blended in with a hierarchy of economic power. With the adoption of institutions inspired by the examples from the West, private and public sectors were established in theory, but were not allowed to shape the political economy. The “private” and the “public” were perhaps separable entities in the minds of some Japanese thinkers, as they theorized about things, but they did not become living political concepts.
     Japanese zaibatsu became powerful organizations, which frequently showed that they wanted to serve different purposes than those in the minds of central government authorities. At the same time, however, they benefited from the always present readiness of government authorities to encourage oligarchic economic power.

What is officially termed the private sector in Japan today can more profitably be viewed as a collectivity of guilds. Or, in another, similar, way of looking at it: corporations function as if they have franchises from the government to do what they are doing.
     Japanese authorities still enter into relationships with pressure groups through which, ultimately, they can continue to control situations. In exchange the central authorities give the pressure groups subsidies and special privileges. A spectacular continuation of the kind of relationship that existed between the official government authorities and the guilds in Tokugawa and Meiji Japan, is the mutually beneficial relationship enjoyed today between police and yakuza (gangsters). The gangsters are given an informal monopoly on certain activities that are on the edge of legality or just inside the illegal zone, and in exchange for that they serve the police by controlling crime. More organized crime means less unpredictable crime.
     Foreign observers of the Japanese economy continue to focus on signs of change in the way that bureaucrats interact with companies. The imagery that has informed the discussion about Japanese reform has been largely about a meddlesome government sector interfering with a private sector. And the Japanese press dutifully reports on things like the number of retired bureaucrats given cushy jobs by corporations each year. This is a very misleading topic, as it solidifies an erroneous impression that nosy bureaucrats cannot leave hardworking entrepreneurs alone. The often mentioned phenomena that symbolize the “cozy relationships” between bureaucracy and business (amakudari, tsutatsu and gyosei seido) essentially regulate internal communication within a structure that in actual fact forms an almost seamless whole, even while it may be shot through with (mostly unacknowledged) conflict.

MALFUNCTIONING

The fact that in Japan no bourgeoisie emerged, no sense of citizenship evolved, and that the political economy never in practice differentiated between public and private sectors has had dire consequences. The notion of the “public good” is not meaningful to the power clusters within the political economy.
     Few doubt that in recent years the Japanese political economy has been malfunctioning. This is widely understood also among the Japanese political elite, but it is accepted fatalistically. Considering the fact that the politically determined overcapacity is no longer useful for establishing international market share, the fact that the world cannot absorb huge increases in Japanese productive output, and considering the weight of a financial sector much of which is technically bankrupt, a major shift from the producer-centered policies that are now set in stone to policies benefiting consumers would be an obvious task for any Japanese government.
     With the quadrupling of the exchange value of the yen against the dollar over the last 25 years, Japan’s exporters have seen their foreign profit-margins dwindle severely, necessitating systematic subsidizing of Japanese industry by the keiretsu banks. (Until 1990 these banks showed positive results on their books only because of the inflationary real estate and stockmarkets). But the implicit national priority of unlimited expansion of industrial power has remained the national priority. No debate invoking the public good is sorting out possible priorities for Japan’s future.
     There is probably no other advanced industrial country in which for the past ten years so much has been said and written and promised on the subject of fundamental economic and political reform as Japan, and announcements from within government and business bureaucracies about a necessary drastic overhaul go back at least another decade. There has been a corresponding number of accounts about frustrated efforts and false starts. Adjustments are not forthcoming because there is not one political entity that functions as a true government, one capable of identifying new priorities.

The absence of a center of political accountability allows for economic mismanagement on a huge scale, made visible in the gradual destruction of the Japanese countryside, its rivers and coastline through the indiscriminate pouring of concrete. The Japanese construction mafia — construction bureaucrats, politicians and about half a million related companies — is a most tragic example of a Japanese interest group that has become so powerful that it systematically undermines the public good.
     Policies and government spending in the context of a housing policy (an obvious choice in a country with substandard housing) that would not be destroying the countryside, that would still bring employment, and that would have brought truly useful improvements in local infrastructure, have been considered, but there is no effective government to design and implement them.

INADEQUATE TERMINOLOGY

The case of Japan is highly instructive for those who are serious about rethinking the question of what is to be done about international systems relevant to economic activity.
     To begin with, it poignantly illustrates the utter inadequacy of generally accepted terminology and its underlying assumptions with which economists, policy makers and general commentators attempt to make economic issues intelligible to one another. Japan provides a huge warning against the widespread application of familiar economic conceptual categories to unfamiliar phenomena, unexamined political circumstances, and unanticipated cause and effect chains, which has been the hallmark of the globalization discussions. The reality of the world’s second largest industrial power does not remotely resemble the mental imagery evoked by argumentation of mainstream economics and the standard defense of globalization as a political mission. Japanese experience thus supports the conclusion some have drawn from events of recent years that the widely applied conventional frame of reference for understanding world-wide economic developments does not lead to adequate understanding of these developments.

The ubiquitous accounts of a “changing Japan” in popular media as well as academic literature tend to take for granted that change means convergence. Almost all non-Japanese commentators, negotiators and policy makers tend to believe that convergence of Japanese practices with general practices in Western capitalist market economies is desirable; and quite a few start from the premise that it is inevitable. It is important that we realize the presence of such an assumption, as well as its ideological roots, because it has tended to filter the world’s observations of Japanese economic and administrative developments — giving much weight to scattered instances of change that are presented as proof of convergence. But a Japanese metamorphosis into an economic system even remotely resembling the Anglo-American model is no longer possible. Convergence would require something akin to a revolution in Japan, and the process of getting from here to there would undermine the entire global order, given Japan’s position as the world’s number one net creditor nation, principal financier of the US trade and current account deficits, and principal investor in SouthEast Asia. There is no question but that Japan will remain opaque, and have an administered market, have inextricably intertwined government and business bureaucracies that are not ultimately subject to impartial legal scrutiny.
     Vastly complicating any effort to come to terms with Japanese reality is the fact that notions of convergence are inadvertently encouraged by Japanese officialdom in an almost continuous effort to placate American sentiments. Washington has been nagging Tokyo to change its ways for decades, and the diplomatic response has been a plea for patience rather than an explanation that the asked-for changes are not forthcoming because they are impossible. These officials have difficulty in explaining their own political economy to each other in the absence of a shared adequate terminology.
     Japanese officials and commentators know that the language they use is borrowed and does not cover reality, but they do not know exactly where boundaries of terminology and reality cease to overlap.
The true nature of the Japanese political economy is not understood at all by a majority of Japanese citizens, which suits the powerholders fine because their system would be undermined if its built-in hierarchical preferences were made official, and thereby a clear target for potential protest. Japanese political and economic explanations are never forced to be realistic by an evolving public debate on social and political desirables. Academics, media commmentators and officialdom in Japan excell in forcing round pegs in square holes as they explain Japanese developments almost entirely in terms of conventional market-centered economics.

The Japanese experience is a forceful reminder that economies cannot be adequately understood if they are studied in isolation from the political circumstances that helped shape them, and as if they have no historical dimension. To the extent that the current international agenda of liberalization, deregulation, and privatization rests on ahistorical tenets held as if they were self-evident and unchallengeable, it must be critically re-examined.
     More specifically, the application of methods for solving economic problems dictated by theory based on situations in Western economies, which were erroneously believed to be universally applicable (because “scientific”), must be examined for the inadvertent stagnation or severe setbacks in economic development programs they may cause. The Japanese experience teaches us that it is altogether possible for successful economies to emerge without the institutional underpinnings that are needed for the relatively safe operation of free-market capitalism. The ideological force of free-market fundamentalism has blinded otherwise sophisticated policymakers, businessmen, and current affairs analysts to the world’s burden of a set of economies in which basic investor purposes and basic institutional supports are variables. In 130 years of spectacular industrial development, Japan has managed without the emergence of an institution resembling the Certified Public Accountant known to Europe and the United States. We find hardly any bankruptcy law in Japan and only underdeveloped contract law.

THE ASIAN CRISIS

The Asian financial crisis looks entirely different when seen against the background of this Japanese experience than of what mainstream opinion has made of it. The latter pointed at “irresponsible” banking, “unacceptable” informal relations between the private sector and government, and the lack of transparency as having caused structural weaknesses of the financial sector. Formulas for preventing further crises have centered in large part on the elimination of what was popularly refered to as “crony capitalism”, which entailed establishing improved supervisory/prudential standards. The stricken countries were by and large portrayed as having brought disaster upon themselves through their delinquency with regard to banking practices.
     It would be analytically more profitable to consider the much decried informal relations between government and business as part and parcel of a formula for success. The South Korean political economy has followed the Japanese example most closely, and both helped inspire, to varying extents, the development policies of the others. Just like Japan, the Asian tigers wanted to be industrially strong rather than rich, but unlike the Japanese authorities, who have always made sure that their economy would never be at the mercy of jittery and capricious foreign investors by closely controlling foreign investment, the authorities of Thailand, South Korea and Indonesia, followed a fundamentally different strategy of attracting capital from abroad. Most significantly, protective walls surrounding the credit systems of these countries — which have always been kept in place as a matter of course in Japan — were removed under pressure of Washington and international organizations.
     It is not that governments of the crisis countries left serious supervision and sound rules for prudential banking too late in their economic development, but rather that they practiced structural favoritism and had a disdain for short- to medium-term market signals for the sake of gaining industrial strength in the shortest time possible. Providing entire industrial sectors with the wherewithal to expand massively has been a primary concern for these scarce capital countries, and thus their financial systems were designed to allocate capital on an insider basis for the purpose of improving productivity and growth of capacity. The rapid growth of Thai and Malaysian productive capacity would not have been possible without strategic credit allocation that comes with prevailing government favoritism for chosen private enterprises. The chaebol in Korea, like the keiretsu in Japan, would not have developed their tremendous industrial capacity if not for privileged access to credit in which questions of future profitability hardly mattered. The close connections between authorities and businessmen were essential to the allocation process. Capital allocation has taken place mainly through a protected banking system that tolerates very high levels of debt. Costs and risks are under such conditions regarded with entirely different eyes than they are in the West.
     Notions that have prevailed in the discourse on the Asian crisis, those of moral hazard and transparency, take on a different coloring when placed in the context of Japanese-style credit ordering. Japanese industrial and financial systems offer hardly anything except “moral hazard” by accepted definitions.

REVERSE CONVERGENCE?

While we may exclude the possibility of Japan changing into a European or American style political economy, there are good reasons to consider a convergence the other way round. In that context the Japanese experience ought to become highly valued because it can tell us much of what is in store for the West if present trends continue.
     While the removal of obstacles to further “globalization” is presented in terms of “expanding free trade” (witness the mainstream response to the protesters in Seattle), the real agenda of globalization advocates in recent years consists of a push for international treaties aimed at a huge expansion of corporate rights. Japan constitutes a magnificent laboratory for the study of symbiosis between business empires and the political system. While Western governments have greater freedom than the putative government in Tokyo in determining their priorities, the identity of purpose between government and corporations in the United States and much of Europe is beginning to take on a Japanese coloring. The necessity for American politicians on the national level to please big business so as to cover the costs of getting elected already bears close comparison with what has determined Japanese elections since 1955.
     When ever-expanding bureaucratic entities of colossal size, and unaccountable power, gradually take over the public realm it is time to rethink common metaphors. The fact that gigantic business empires and financial organizations that operate on behalf of a relatively small number of parties exercise considerable power is nowadays generally acknowledged. But its justification remains couched in terms whose connotations date from the 19th century. Continuing to portray mega-merged business empires with imagery of entrepreneurship and risk-taking is absurd. A study of Japanese business could place them in a more satisfying perspective.
    Japan can furthermore provide much inspiration for political and economic thinkers who, in the post-Cold-War world, have been confronted with the sudden task of gaining perspective of the interplay between states and markets. What transnational businesses with a financial wherewithal comparable to or greater than many medium-sized countries can do to local markets deserves scrutiny with much improved conceptual tools.
     Perhaps the greatest threat represented by the recently strengthened concentrations of business power is their potential for diminishing the effect of true markets. Again, Japan provides us with chapter and verse of how markets can be controlled, and eliminated to a point where they no longer plague business with uncertainty.
     Privatization in some European economies has blurred the line between private and public sectors significantly. Further privatization may help diminish private and public sectors as politically relevant categories. Needless to say, Japan is the place to find out what kind of world that creates. The Japanese experience ought also be a warning to those practicing political science who present interest group representation as the most likely future form of democracy. If Japan is anything to go by, such “corporatism” will, in the long run, destroy the “public good”, since the various groups that make up a corporatist elite are not interested in such a thing. Constitutionally they can only be interested in their own “personal good”. The claim that everyone belongs to one group or another, and that it is possible to form a political system representing everyone by incorporating all these interest groups, is fallacious, as Japanese experience strongly suggests.

WHAT IS TO BE DONE?

A thorough overhaul of the conceptual apparatus with which we regard and interpret the economic reality of our world is obviously needed. Current orthodoxy and the vision of a globalized economic order ruled by unregulated markets assumes a homogeneity of economic motivation and future economic practice that does not and cannot exist. The neoliberal imagination that takes separate private and public sectors for granted, and comes with preconceived thought about the market as a singular abstraction — as a source of superior knowledge and of political judiciousness, as the best impartial judge we can have, and as a healer of sick economies — must be seen for what it is: an obstacle to knowledge. We require a much better intellectual basis for a policy discourse concerning economic development, and concerning forms of economic harmonization not detrimental to the well-being of local populations among a diversity of political economies.
     Indignation with economic systems that deviate from what international organizations and Western governments have rather recently decided as proper or healthy, and the moralistic tone that has characterized Western commentary on crisis countries, are out of place. The implication that industrial systems with endemic favoritism deviate from established standards that determine economic health begs the question of the validity of these standards. The search for causes of malfunctioning in irresponsible governmental attitudes and bad business habits, hinder the search for workable long term solutions.
     Western businesses normally develop a tacit understanding of, and accommodation with, the reality of political economies in other parts of the world; they must in order to be successful and to maintain their risks from regional involvement at manageable levels. This was illustrated by the fact that foreign lenders in the Asian crisis countries insisted on short-term lending, and subsequently were quick to pull out; they understood that they could not be part of local systems, and would not be protected through the advantages that these systems offer insiders.
    But the continued emphasis among international organizations and Western officials on moral hazard, on transparency, and so on, prevents the policy discourse from moving in a more profitable direction.
Even if relevant local laws were passed, in political cultures lacking the institutional infrastructure to support them such laws are meaningless. The wished for transparency will require reliable indigenous ratings agencies, which now do not exist, and large numbers of registered accountants who can feel safe in the knowledge that their profession is protected. After some 120 years of industrial development Japan has not produced an institution that functions like the CPAs in the West. It is highly unlikely that such a category can be trained in the Asian crisis countries within even a couple of generations.
     For the well-being of local populations it is necessary that policy makers and international organizations develop an explicit understanding of discrepancies that are part of unalterable reality. Only then can policy aims be formulated to help prevent the process of globalization to cause major economic dislocations and distortions.

There is one objective that could and should draw together the elites of “emerging markets”, less developed economies, Western governments and international organizations, for formulating a practical policy discussion. That objective is the fostering of an economically strong and politically significant middle class. Without losing from sight the need for fundamental assistance to the desperately poor in countries negatively affected by globalization, economic policies aimed at lifting the recently poor and less poor into an enlarged middle class with money to spend, and with political aspirations, would seem to be the best hope for all developmental areas of the world.
     Such a class, strongly motivated to help engender further development, can have a very significant psychological and moral impact as it demonstrates that all people can gradually gain an ability to help shape their destiny.
That priority makes immediate sense from an economic development point of view. The great weakness of the type of economy inspired by Japanese example, in which investments are made for industrial strength rather than profit, is that after a period of rapid growth a major liability emerges when foreign markets are no longer able to absorb what the pumped up production apparatus delivers. At the outset of the high growth periods, attractive investment opportunities exceed available capital. But when available capital increases rapidly, the economic system pioneered by Japan becomes problematic. Japan has been burdenen by this for a couple of decades, but has never addressed the problem because it lacks the political mechanism to do so, and has thus not provided any example of how the other political economies it inspired could proceed to make adjustments.
     A middle class with the means to buy consumer products will make the Asian economies less dependent on exports, and therefore less vulnerable to external vicissitudes. Before its crisis, Indonesia had drawn attention because of its growing economic prosperity, and had received applause because its distrubution of wealth was beginning significantly to help the growth of a lower middle-class. Aside from bringing potentially disastrous political instability, the misguided handling of the crisis there (and elsewhere) pushed tens of millions of people below the poverty line. More often than not, a policy to counter that particular outcome of the financial crisis demands Keynesian type programs, and therefore much more government spending than is believed to be responsible in current conventional thinking about the relationship of states and markets.
Support for small and medium-sized businesses would be an obvious choice in the context of such a policy. Large numbers of small entrepreneurs are most likely to provide solid employment prospects to the lower echelons of society.

Finally, a huge problem deserves everyone’s attention: How to preserve a large measure of economic self-determination for newly developed countries. Globalization has so far significantly increased the dependence of economic entities in less developed countries on foreign interests. Exploitation, the potential for which comes with the greater reach of international investors, is a built-in threat for these countries.
     To see this in proper perspective, one must forget arguments implying ill-intent on the part of foreign economic interest, but rather conceive of exploitation as following from the logic of international economic processes.
     A substantial danger for the long term is the transformation of countries with promising economic prospects into subcontracting positions for more powerful political economies. While a subcontracting function of part of a developing industry can be conducive to growth and a limited degree of technology transfer, accompanying infrastructural developments may in the long run serve the foreign investor more than they do the domestic economy. The relationship between the SouthEast Asian economies and Japan is a telling case in point.
     While acknowledging the fact of economic interdependence and its benefits, policies that ensure a high degree of self-determination are ultimately desirable.

The study of Japanese political and economic affairs should be enriched with a special subcategory for scandals. Not because Japanese people produce more, or juicier, scandals than others. Some other countries are pretty good at it as well. But there is a need for systematic analysis of Japanese scandals because of their important function of keeping the Japanese power system running smoothly. The current security brokerage scandal is, again, a wonderful example of this.
     The major, central, role of the Japanese scandal is to help curb excess. Excess in any kind of behaviour that is otherwise considered normal. For example, it is considered normal in Japan that the astronomical amounts of money politicians spend to get re-elected is provided by corporations. But there are limits to this normality. It is not considered a good thing that one politician gets ten times more than he needs to get re-elected. Conversely, it is not considered a good thing that one single company funds every well-known politician. In either case there is the risk of producing a threat to the way things are done. This threat may turn into an instrument causing the breakdown of the way things are done. Let us use the term “System” interchangeably with the way things are done to make it easier to talk about this phenomenon.
     The most important characteristic of the System is that it is “extra-legal”; it operates outside the framework of what is permitted and not permitted as determined by law. Behaviour within the context of the System is sometimes illegal, sometimes not. It keeps to certain rules, to be sure. But these rules are informal rules; they are, to use a term commonly used in European languages, “unwritten rules”. In other words, the System is not ultimately regulated by rules that all of us can appeal to. The rules were not made to protect or give advantage to ordinary people. They serve a minority — the political elite. Let us call the people who decide the way things are done “the members of the System”. They are the most active among the political elite.
     Japanese scandals are more than useful in helping to prevent destructive excess. They are probably indispensable. It is not difficult to see why. Any system, whether informal or highly legal, transparent or opaque, must have some mechanism to keep members in line. In a system governed by laws, an outsider supervisory body is necessary to ensure that these laws are obeyed. In a system governed by the way things are done such a check cannot exist, which means that the chances are pretty good that occasionally things may get out of hand. The System is prone to excess for the very reason that it is not ultimately regulated by law. Because a trend in the way things are done that brings advantages to some members of the System is difficult to stop as long as it doesn’t bring great disadvantage to other members of the System. In an informal political system with unwritten rules scandals must, at least to some extent, play the role that courts of law and supervisory agencies play in a system governed by the rule of law.
     By preventing destructive excess, Japanese scandals make it possible for the System to survive. This is where Japanese scandals differ most from normal scandals in the United States and in Europe, which tend to bring about a purge, a “cleansing” of practices to a point where the conditions that facilitated illegal or improper behavior no longer exist. Cozy, extralegal ways of doing things develop among political elites anywhere in the world. Scandals in Europe or the United States tend to destroy them. Scandals in Japan ensure the future of such informal relationships.
     Besides protecting the System by curbing the threat of excess, Japanese scandals generally benefit private interests of powerful organizations within the System. Scandal time in Japan is a time during which various power groups try very hard to accomplish their own goals. Things are in a flux during scandal time, and many goals cannot be achieved when things are static.
     Japanese scandals also teach us that whereas the members of the System often cannot control processes, they generally do control outcomes. (I think the same is the case with control over the Japanese economy: the focus of bureaucratic management is on outcomes; there is seldom an attempt to direct the details). Japanese scandals are managed to a high degree, but still a lot that is unexpected can happen, including developments unpleasant to those who participate in the managing of the scandal. Scandals may bring anguish and pain for important members of the elite. At times scandals may give the impression of not being under control. My favorite comparison is with a garden hose. If you turn on the water before you get hold of the nozzle, the hose may flap about and drench bystanders who were not expecting to get wet. The Recruit case was a good example. While it was being used by various groups like the Keidanren, the Ministry of Post and Telecommunications, the enemies of Nakasone, and by Takeshita, all for their own ends, the scandal went temporarily out of control and forced the resignation of Takeshita (largely because of the wrong choice for justice minister when he reshuffled his cabinet).
The security brokerage scandal began when the tax bureau of the Ministry of Finance, under a new administrator, decided that the securities industry should not be allowed to get away with subtracting the now infamous compensations from their taxes — in the way they are allowed to subtract their entertainment expenses. The next phase is blurred, but once the scandal got going it became abundantly clear that it was providing wonderful opportunities for officials in the Ministry of Finance.- Their purposes have so far been well-served, because two elements were brought back to what is in their eyes “the right order”. One is Nomura, and the other their own securities bureau.
     In the past ten years or so Nomura has become extraordinarily powerful. In fact, there is nothing like Nomura in the world. It is roughly 25 times bigger than the biggest American securities firm. This segment of the Japanese financial industry is run by a de facto cartel, composed of the four big securities houses. All the smaller ones are, as it were, subcontractors operating under the protection and in accordance to the unwritten rules provided by the cartel. The undisputed leader of this entire apparatus is Nomura. Even though the three other big firms are powers in their own right, they take their cues from Nomura in important matters. This set up is an excellent illustration of oligarchic power verging on monopolistic power. With the one important restriction that ultimately the whole arrangement can only function under the wings of the Ministry of Finance.
     The incredibly fast development of Japan’s financial institutions during the 1980s, along with the massive inflation in capital assets (real estate and stocks), produced major power re-alignments within Japanese business, which for example made Keidanren and the banks relatively less important vis-a-vis the securities industry, construction and real estate companies. And, as always with such rapid power re-alignments, this stimulated an uncomfortable sense among the members of the System that normalcy had been disturbed, requiring at least some adjustment. In the 1980s, the security houses gained a measure of influence and prestige they had never had before. And it was reasonable to expect that it would only be a matter of time before they would be forced to undergo an experience intended to cool down their zealousness, restrain their arrogance, and remind them of the proper relationships within the Japanese System. This has just happened, and for Nomura, as the leader of the cartel, it has been, of course, the most unpleasant.
     Similarly, Ministry of Finance officials appear to have decided that the time had come to cut the securities bureau within their own organization down to size. Until it began to reflect the new importance of the the securities industry in the 1980s, this bureau had been relatively insignificant when compared with the tax, banking and budget bureaus. The old internal balance in the Ministry of Finance can, at least to some extent, now be restored.
     But these forced adjustments among the components of the Japanese power system may even have been relatively minor goals of the Ministry of Finance. Something else has happened that has been critically important for the Japanese economy as a whole. Although the securities companies appear to be the main sufferers in the current scandal, they are, ironically also its main beneficiaries. One way to interprete recent events is to see them as one gigantic rescue operation for the securities industry cartel. And that can be considered part of an even larger operation that has been going on for over a year and a half: the restraining of the so-called “bubble economy”.
     I do not believe that there ever was a real bubble economy, in the sense of a speculative bubble that could burst. There was always too much control — informal control — for any “bursting” to be a likely result of the wild, but managed, inflation of capital assets that took place in the second half of the 1980s. But the absurd increase in the nominal value of Japanese real estate and stocks did create considerable distortions in the economy and, very worrisome to the Ministry of Finance, it had brought into being fairly strong and opportunistic “bubble companies” that were not part of the informal networks to which members of the System belong. The dramatic plunge of the stockmarket a year and a half ago may not have been started by the Ministry of Finance. But once the downturn began, the ministry monitored and controlled it, and was ultimately able to use it to accomplish its goal of reducing the excesses of the “bubble economy”, and bring all elements of the financial system back in better order. Indeed it was able to use the downturn to expand its area of control to elements such as non-bank financial institutions.
     But this stockmarket downturn created major losses for firms which had always played the game according to the unwritten rules blessed by the bureaucrats. And compensations for these losses seemed very appropriate if you look at it from the inside of Japan’s “miraculous” financial system. The amounts that the big investors expected to be paid were, however, much larger than ever before. They were so huge that if the securities firms had continued paying them, they would probably have sunk into deep trouble. And this would also have caused a further depression of the stockmarket.
     To recapitulate: the recent threat of excess to the way things are done consisted of excessively large amounts of money and the recently excessive prominence of the securities industry. Both have now been taken care of.
     In the Recruit scandal the threat of excess also consisted of massive amounts of money as well as large-scale use of new and less easily controllable methods of securing protection and influencing bureaucratic decision-making. Again, in the scandals involving Tanaka Kakuei (his money making methods and Lockheed), excess consisted of the very systematic use of huge amounts. Other than that, Tanaka Kakuei and Ezoe Hiromasa did what others also did and still continue to do. Their sin was that they were better at it than other members of the System. They knew how to exploit the opportunities for self-advancement offered by System much more effectively. They were geniuses. And the members of the System are scared of geniuses of that kind, because the latter threaten to dominate the way things are done, thus endangering the internal balance.
     The routine compensation payments by Nomura and the others has not come as a surprise to anyone who is familiar with the workings of Japan’s financial system. It has not been much of a surprise, either, to those who may know little about the financial world, but who have a generally good idea of how Japan is run. The security houses were doing what they were expected to do. Just like, in the Recruit scandal, the other main victims Shinto Hisashi and Miyazawa Kiichi had been doing exactly what was expected of them. All of these organizations and persons have been conforming to the way things are done.
     Even more than staying well within the conventions of the System, the security companies were helping to make the System run more smoothly. They were helping to sustain conditions ensuring the collaboration of big corporations in large-scale pool efforts for creating and controlling a vast expansion of Japan’s asset base (stocks and real estate), allowing for vast increases in Japanese productive capacity. They were crucial in helping to reduce the cost of capital for Japan’s large companies to almost nothing, thus enabling Japan’s corporations to make the investments necessary to be competitive notwithstanding the high value of the Yen from the mid 1980s onward.
     The most important question to ask therefore is why there is a scandal to begin with. What, actually, is the scandal all about?
As in the case of the Recruit scandal, nothing much illegal took place. The Ministry of Finance has confirmed that compensation is only illegal if it has been previously promised. And even though the compensations were expected as a matter of course, everyone can easily say that such promises were never made. So, there is no legal case.
     But after years of agreeing with the practice of compensations, the Ministry of Finance has now decided that what the security industry did was improper. If that is true, the next question we must ask is: improper by whose standards? Did the security houses violate, in a major way, the rules of Japanese social convention? This question brings us to a subtle, and most interesting point. For the answer is both yes and no. Yes, in the sense that many ordinary Japanese think that something is wrong and unfair if only large investors get guarantees in a market in which the public also participates. But the answer must be “no” if we measure the behaviour of the security houses by the conventions of the world in which they operate. After all, their behaviour lived up to the way things are done.
     It is rather clear that the Japanese political elite and Japan’s ordinary people use different standards for judging what is appropriate and inappropriate conduct. What is very special about this situation is that while the common people have a fairly good idea of their own standards, they really do not know much about the standards of the elite that main-tains the Japanese System. And the members of the System are not at all honest about their own standards when they present their views to the public. Ordinary Japanese have but a vague idea of how their country is really governed. This difference between what the elite knows and what the ordinary Japanese know is a vital characteristic of the Japanese political system, and of Japanese society generally.
     The division is traditional. In Tokugawa days the relevant phrase was: “people must not be informed, but made dependent upon the authority of the government” (tami wa shirashimu bekarazu, yorashimu beshi). And still today, there are two classes of Japanese: one small minority of “knowers”, of people who are clued in, and the large mass of political innocents, of people who may suspect that there is a different honne behind many a tatemae, but who cannot quite put their fingers on it.
     If I had to choose the biggest villain in the various Japanese scandals that I have looked at closely, I would take the press. This choice my sound strange, since the Japanese press normally receives a good amount of applause for the revelations it provides in times of scandal. But it doesn’t deserve this applause. Japanese newspapers help perpetuate the division between the minority of “people in the know” and the majority of political innocents. They never consistently and seriously analyse the way things are done in Japan. They do not explain to the Japanese public what it ought to know about how the country is governed. They could make the point, but do not, that …. yes, it strikes one as improper that the securities houses lent 36 billion yen to a boss in the Inagawa-kai, but that Japanese big companies and politicians and the police have been doing business with the gangsters as a matter of routine. They could point out that… yes, protecting big investors at the expense of small investors is discriminatory, but that the Japanese financial system has a long history of discriminating against the small saver and the small borrower. Japanese have normally had meager returns on their savings (for long periods even less than the inflation rate), which were channeled directly into big industry. And consumer credit remains, even now, fairly primitive. All this has been important to realize the “economic miracle”.
     The newspapers assume a critical attitude once in a while, especially during scandals, but this attitude is phony. Editors and journalists help the bureaucrats in what I call the “management of reality”. Reality is generally an elusive thing in Japan because there are too few Japanese intellectuals or journalists who relentlessly separate fact from convenient and politically expedient fiction. Again, in the current security brokerage scandal the newspapers are not engaged in pointing out the contradictions.
     Without the press there would not be Japanese scandals. And Japanese scandals help keep the Japanese press under control too. Big scandals generally cause a firestorm that rages through the media world. Almost nothing else seems to exist for the time that they last. Scandals are wonderful opportunities for the media to blow off steam, to become very indignant, and to give journalists and editors, all worked up by faked indignation, a sense that they are doing their duty of protecting Japanese society by exposing wrongdoing. But all they do is protect the System, of which they are, of course, a part.
     The press helps the Ministry of Finance to accomplish its aims by upholding the fiction of public outrage. Without an impression of public outrage there would, of course, be no scandal. This is one of the most subtle forms of manipulation of the “innocents” in the Japanese political system. Editors along with the bureaucrats in Japan are not in the habit of reflecting, or responding to, public opinion. They manufacture public opinion, simply by repeatedly telling newspaper readers the same things about what they believe the public thinks or should think, after which the reader begins to believe that this is what his or her opinion ought to be.
     The Japanese public of today is considerably less innocent than in the Tokugawa or Meiji periods. In my experience Japanese who use their heads have a pretty good idea about how power is exercised in their own immediate environment, and they display a healthy cynicism about what the authorities in the central government and the big business world are up to. But the public has too much good sense to become outraged. Lacking the means to throw out the government, to change the System, or to express themselves in any other way besides joining a few hundred likeminded people for a snakedance down the street, most intelligent Japanese know that what they think makes no difference in any way.
     To portray Japanese scandals as signs of “Japanese democracy at work” is unwholesome and an insult to the dignity of the Japanese individual. Scandals help prevent the realization of Japanese democracy by protecting, and thus strengthening, the system of informal relationships ruled by the way things are done over which the public has no influence at all. To make it appear as if the current security brokerage scandal is going to change the way business is done in Japan demonstrates either dishonesty or ignorance. Only those who look at the world from an unhistorical perspective can believe that the current scandal is bringing Japan a step closer to genuine legal rather than bureaucratic control.
     There is talk of new legislation, and it has been suggested that Japan create its own Securities and Exchange Commission (SEC) after the American example. But what significance can that possibly have? Any new or amended laws will be administered by the officials of the Ministry of Finance. And they are accountable to no one. They can enforce or refrain from applying the law as they themselves see fit. Such bureaucratic discretion is crucial to the survival of the Japanese System. As for a Japanese SEC, if it were to come into being it will be manned and directed by amakudari bureaucrats from the Ministry of Finance, and will have wonderful relations with the securities industry cartel.
     There is a growing number of serious observers, here and abroad, who believe that the real rulers of Japan, the cockpit of the state as it were, is the Ministry of Finance. I do not think so, because I do not believe there is a cockpit. But the current security brokerage scandal demonstrates once again just how powerful the Ministry of Finance is compared with the other members of the System. And I think that although it does not constitute a center of political accountability, the Ministry of Finance may well be, for all practical purposes, the single most powerful among the groups that share power in Japan. It therefore deserves to be studied more.
     Japan’s Ministry of Finance is in many ways a good ministry, and a capable ministry. It certainly knows how to preside over economic expansion. But it does not represent the Japanese people. Whatever new regulations and legislation it may now introduce, none of it will be designed to protect the majority against behaviour serving the vested interests of a business minority. And none of it will be used for such a purpose.
     There is an urgent need for the class of “people in the know” to expand. If the “knowers” included a growing multitude of serious and concerned citizens who are not part of the System, Japan would get the intelligent general political discourse it so desperately needs. The advantage of a systematic study of Japanese scandals, as part of such a discourse, is that it throws much light on the relations among the various groups that share power in Japan. There is another, more subtle, advantage of thoroughly analysing Japanese scandals. If a proper analysis became widely known among Japanese people, the scandals would perhaps no longer fulfill the function of protecting the structure of informal relationships and informal transactions. It might help to give Japanese democracy a chance.