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Squaring the Iron Triangle: The Fate of Economic and Political Reform in Japan

January 19, 2010 // 2:30pm4:30pm
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Patricia Maclachlan, University of Texas at Austin; Ulrike Schaede, University of California at San Diego; Matthew Carlson, University of Vermont

Japan's new government, led by the Democratic Party of Japan (DPJ), is implementing sweeping new changes in the conduct of politics in Tokyo. Bureaucrats, once seen as an impervious elite, have been hauled before public committees to justify their expenditures line by line. Meanwhile, observers have noted that the "iron triangle"—the ties that bind the state, individual politicians, and industry together—has been corroding since the 1990s, when governments engaged in reform of the economy and instituted new political funding practices.

How do the DPJ's efforts to reform government and the economy differ from changes during the 1990s and beyond, most notably championed by the former Liberal Democratic Party (LDP) prime minister, Jun'ichiro Koizumi (2001-2006)? And what is the fate of structural economic and political reform in Japan?

The main focus of political reform in Japan over the past decade has been the privatization of Japan's post office, which in addition to delivering the mail, has traditionally offered a variety of financial services, such as banking and insurance. According to Patricia Maclachlan, associate professor of government and Asian studies, and director of the Center for East Asian Studies at the University of Texas at Austin, many in Japan saw postal reform as a solution to the challenge of increasing productivity without increasing government spending. Postal reform would lead to a diversification of products and services previously offered by the post office at the same time as shrinking the role of the government. Most importantly perhaps, funds tied up in postal savings accounts, previously used to fund the government's wasteful public works projects, could instead be loaned to private investors.

However, several factors are inhibiting the planned privatization of the postal service into four separate companies. One of the parties in coalition with the DPJ split from the LDP in 2005 specifically to oppose Koizumi's reforms, and its leader, Shizuka Kamei, seems intent on exercising political revenge by reversing the privatization process. Rather than relying on the market to guide investment, the new government has meanwhile exempted postal savings from banking regulation in an effort to funnel investment to small and medium enterprises. Far from the market model that Koizumi envisioned, the future of postal reform is unclear.

According to Ulrike Schaede, professor of Japanese business at the School of International Relations and Pacific Studies at the University of California, San Diego, the 1990s were not a "lost decade" for Japan as is often assumed. Economic and social pressures that followed the bursting of Japan's bubble economy in 1989 led to a raft of reforms. Japan's regulatory environment is now more transparent, and bankruptcy legislation has allowed players in the marketplace to engage in more risk. A new commercial code, meanwhile, has encouraged stock restructuring away from traditional Japanese cross-shareholding patterns to a more profit-driven system.

Schaede argued that the new government needs to avoid counter-reforms and implement a social safety net to allow greater labor mobility. She warned that without further reform the next decade may well prove to be "lost." However, she did note that Japanese business is a lot more resilient than is usually assumed. Instead of continuing old patterns of high diversification, Japanese companies have become leaner, now preferring to "choose and focus," or concentrate on core areas of business.

While financial and regulatory reform may have brought about change in Japanese economic patterns, Matthew Carlson, assistant professor of political science at Vermont University, is less certain that political finance reforms have had much effect on electoral outcomes. Although the Political Funds Control Law, first enacted in 1948, was revised in 1975, 1992, and 1994, Carlson is skeptical that the changes were enough to sufficiently eliminate corruption, traditionally an endemic feature of the Japanese political system.

However, money is no longer as important a factor in winning Japanese elections as has traditionally been the case. The DPJ's income of US$110 million per year is less than half that of the LDP's US$247 million, and yet the former won a landslide victory in the August 2009 election. With changes in the electoral system meaning that parties have to appeal to a broader sector of the public, old-style LDP tactics of "buying off" sectionalized interests will no longer work. The ability of parties to generate income is also mitigated somewhat by a subsidy system, in place since 1994, that allocates taxpayer funds to parties that qualify.

By Bryce Wakefield
Robert M. Hathaway, Director, Asia Program
 

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