Japan - The Economy the Role of Government and Business

Industrial Policy

After World War II and especially in the 1950s and 1960s, the Japanese government devised a complicated system of policies to promote industrial development, and it cooperated closely for this purpose with private firms. The objective of industrial policy was to shift resources to specific industries in order to gain international competitive advantage for Japan. These policies and methods were used primarily to increase the productivity of inputs and to influence, directly or indirectly, industrial investment.

Administrative guidance (gyosei shido) is a principal instrument of enforcement used extensively throughout the Japanese government to support a wide range of policies. Influence, prestige, advice, and persuasion are used to encourage both corporations and individuals to work in directions judged desirable. The persuasion is exerted and the advice is given by public officials, who often have the power to provide or to withhold loans, grants, subsidies, licenses, tax concessions, government contracts, import permits, foreign exchange, and approval of cartel arrangements. The Japanese use administrative guidance to buffer market swings, anticipate market developments, and enhance market competition.

Mechanisms used by the Japanese government to affect the economy typically relate to trade, labor markets, competition, and tax incentives. They include a broad range of trade protection measures, subsidies, de jure and de facto exemptions from antitrust statutes, labor market adjustments, and industry-specific assistance to enhance the use of new technology. Rather than producing a broad range of goods, the Japanese selecte a few areas in which they can develop high-quality goods that they can produce in vast quantities at competitive prices. A good example is the camera industry, which since the 1960s has been dominated by Japan.

Historically, there have been three main elements in Japanese industrial development. The first was the development of a highly competitive manufacturing sector. The second was the deliberate restructuring of industry toward higher value-added, highproductivity industries. In the late 1980s, these were mainly knowledge-intensive tertiary industries. The third element was aggressive domestic and international business strategies.

Japan has few natural resources and depends on massive imports of raw materials. It must export to pay for its imports, and manufacturing and the sales of its services, such as banking and finance, were its principal means of doing so. For these reasons, the careful development of the producing sector has been a key concern of both government and industry throughout most of the twentieth century. Government and business leaders generally agree that the composition of Japan's output must continually shift if living standards are to rise. Government plays an active role in making these shifts, often anticipating economic developments rather than reacting to them.

After World War II, the initial industries that policy makers and the general public felt Japan should have were iron and steel, shipbuilding, the merchant marine, machine industries in general, heavy electrical equipment, and chemicals. Later they added the automobile industry, petrochemicals, and nuclear power and, in the 1980s, such industries as computers and semiconductors. Since the late 1970s, the government has strongly encouraged the development of knowledge-intensive industries. Government support for research and development grew rapidly in the 1980s, and large joint government-industry development projects in computers and robotics were started. At the same time, government promoted the managed decline of competitively troubled industries, including textiles, shipbuilding, and chemical fertilizers through such measures as tax breaks for corporations that retrained workers to work at other tasks.

Although industrial policy remained important in Japan in the 1970s and 1980s, thinking began to change. Government seemed to intervene less and become more respectful of price mechanisms in guiding future development. During this period, trade and direct foreign investment were liberalized, tariff and nontariff trade barriers were lowered, and the economies of the advanced nations became more integrated, as the result of the growth of international trade and international corporations. In the late 1980s, knowledge-intensive and high-technology industries became prominent. The government showed little inclination to promote such booming parts of the economy as fashion design, advertising, and management consulting. The question at the end of the 1980s was whether the government would become involved in such new developments or whether it would let them progress on their own.

Monetary and Fiscal Policy

Monetary policy pertains to the regulation, availability, and cost of credit, while fiscal policy deals with government expenditures, taxes, and debt. Through management of these areas, the Ministry of Finance regulated the allocation of resources in the economy, affected the distribution of income and wealth among the citizenry, stabilized the level of economic activities, and promoted economic growth and welfare.

The Ministry of Finance played an important role in Japan's postwar economic growth. It advocated a "growth first" approach, with a high proportion of government spending going to capital accumulation, and minimum government spending overall, which kept both taxes and deficit spending down, making more money available for private investment. Most Japanese put money into savings accounts.

In the postwar period, the government's fiscal policy centers on the formulation of the national budget, which is the responsibility of the Ministry of Finance. The ministry's Budget Bureau prepares expenditure budgets for each fiscal year (FY) based on the requests from government ministries and affiliated agencies. The ministry's Tax Bureau is responsible for adjusting the tax schedules and estimating revenues. The ministry also issues government bonds, controls government borrowing, and administers the Fiscal Investment and Loan Program, which is sometimes referred to as the "second budget."

Three types of budgets are prepared for review by the National Diet each year. The general account budget includes most of the basic expenditures for current government operations. Special account budgets, of which there are about forty, are designed for special government programs or institutions where close accounting of revenues and expenditures is essential: for public enterprises, state pension funds, and public works projects financed from special taxes. Finally, there are the budgets for the major affiliated agencies, including public service corporations, loan and finance institutions, and the special public banks. Although these budgets are usually approved before the start of each fiscal year, they are usually revised with supplemental budgets in the fall. Local jurisdiction budgets depend heavily on transfers from the central government.

Government fixed investments in infrastructure and loans to public and private enterprises are about 15 percent of GNP. Loans from the Fiscal Investment and Loan Program, which are outside the general budget and funded primarily from postal savings, represent more than 20 percent of the general account budget, but their total effect on economic investment is not completely accounted for in the national income statistics. Government spending, representing about 15 percent of GNP in 1991, was low compared with that in other developed economies. Taxes provided 84.7 percent of revenues in 1993. Income taxes are graduated and progressive. The principal structural feature of the tax system is the tremendous elasticity of the individual income tax. Because inheritance and property taxes are low, there is a slowly increasing concentration of wealth in the upper tax brackets. In 1989 the government introduced a major tax reform, including a 3 percent consumer tax.

The role of government and business

Although Japan's economic development is primarily the product of private entrepreneurship, the government has directly contributed to the nation's prosperity. Its actions have helped initiate new industries, cushion the effects of economic depression, create a sound economic infrastructure, and protect the living standards of the citizenry. Indeed, so pervasive has government influence in the economy seemed that many foreign observers have popularized the term "Japan Inc." to describe its alliance of business and government interests. Whether Japan in the mid-1990s actually fit this picture seems questionable, but there is little doubt that government agencies continue to influence the economy through a variety of policies.

Japanese attitudes towards government have historically been shaped by Confucianism. Japan often has been defined as a Confucian country, but one in which loyalty is more important than benevolence. Leadership stemmed from the government and authority in general, and business looked to government for guidance. These attitudes, coupled with the view of the nation as a family, allowed government to influence business, and businesses worked hard not only for their own profits but also for national well-being. There was a national consensus that Japan must be an economic power and that the duty of all Japanese was to sacrifice themselves for this national goal. Thus, the relationship between government and business was as collaborators rather than as mutually suspicious adversaries.

Government-business relations are conducted in many ways and through numerous channels. The most important conduits in the postwar period are the economic ministries: the Ministry of Finance and the Ministry of International Trade and Industry, known as MITI. The Ministry of Finance has operational responsibilities for all fiscal affairs, including the preparation of the national budget. It initiates fiscal policies and, through its indirect control over the Bank of Japan, the central bank, is responsible for monetary policy as well. The Ministry of Finance allocates public investment, formulates tax policies, collectes taxes, and regulates foreign exchange.

The Ministry of Finance establishes low interest rates and, by thus reducing the cost of investment funds to corporations, promotes industrial expansion. MITI is responsible for the regulation of production and the distribution of goods and services. It is the "steward" of the Japanese economy, developing plans concerning the structure of Japanese industry. MITI has several special functions: controlling Japan's foreign trade and supervising international commerce; ensuring the smooth flow of goods in the national economy; promoting the development of manufacturing, mining, and distribution industries; and supervising the procurement of a reliable supply of raw materials and energy resources.

The Ministry of Transportation is responsible for oversight of all land, sea, and air transport. The Ministry of Construction is charged with supervising all construction in Japan and Japanesesupported construction abroad. Its responsibilities also include land acquisition for public use and environmental protection as it related to construction. The Ministry of Health and Welfare is responsible for supervising and coordinating all health and welfare services, and the Ministry of Posts and Telecommunications is responsible for the postal service and electronic communications.

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