"It's the institutions" (Noah Smith)

Hi! First, of course, to introduce myself. My name is Noah Smith, and I'm an economics PhD student at the University of Michigan in Ann Arbor (specialty: urban economics and macroeconomics). Between college and graduate school I lived in Osaka, Japan for 2.5 years, from 2003-2006, where I worked as an editor and also a research assistant at Osaka University in Suita. I've been interested in Japanese politics, economics, and society for a while now, so I was happy when Tobias asked me to be a guest contributor.

Tobias's primary focus is on Japan's electoral politics and foreign policy, two areas about which I know relatively little. Like Tobias and many here, I'm eagerly awaiting the shape of a Japanese political "realignment" that I think must be coming soon; the pressure is building inexorably. But I think there's a big question that should be on our minds: If and when that realignment occurs, how will the victors — the DPJ or some new party or coalition — use their mandate to change Japan?

That is the question I want to try to answer.

True political revolutions bring not just a change in the style of management, but reforms to the institutions that shape the day-to-day workings of a society. Economists have long studied the importance of institutions in developing countries (see Dani Rodrik and Daron Acemoglu for example), but I see no reason why they should not be of crucial importance in rich countries as well. If we look at Japan's history, we find that its periods of greatest advancement — the Meiji and Taisho periods, in particular — involved big, sweeping changes to the institutions that governed Japan's economy and society. Those changes befell not just the institutions most commonly studied by economists — the electoral system, courts, public schools, and the bureaucracy — but social institutions like religions and the family. And, of course, it included the military, an institution whose importance would grow to encompass nearly all of Japanese life during the 1930s, only to vanish almost completely after World War II.

Today, Japan faces the problems of the twenty-first century with institutions that, in large part, were developed in the nineteenth and early and mid twentieth centuries. As challenges shift, institutions must keep up — but, as economists often note, institutions are "sticky." They don't like to change. Which is why the coming post-LDP political realignment is such an important moment: it will give Japan's leaders what is probably a once-in-a-generation opportunity to revamp many of Japan's institutions.

How should Japan's institutions change?

Effective institutions are a mix of what worked in the past and what seems wise for the future. Japan needs a political system that gives people more confidence in the leaders they elect and the parties to which those leaders belong. It needs a court system that is more participatory, and that elevates the rule of law above informal patronage- and status-based relationships. It needs a bureaucracy less corrupted by conflicts of interest. It needs universities that are more independently funded and more focused on research and undergraduate education. It needs religious organizations to take more active roles in building communities and providing social services like child care. It needs families that have enough time to spend together, where fathers are not separated from their wives and children by the demands of work.

If the party and leaders who take power after Japan's "realignment" can make these changes, I think Japan will be one of the world's leading nations in the twenty-first century, as it was in the twentieth.

Of course, that's just my opinion and my guess. But in the end, opinions and guesses are the driving force behind political change. I hope that mine, combined with what modest expertise I possess, can add to the discussion here at Observing Japan.

- Noah Smith

"The state is less dependable than a convenience store"

Masuzoe Yoichi, minister of health, labor, and welfare and the LDP's resident political scientist, has an essay in the December issue of Chuo Koron in which he details the crisis of confidence in the Japanese state and calls for systemic change that will restore the confidence of the people in their government.

The title of his article — which I've borrowed for the title of this post — is based on the idea that somehow banks, post offices, and convenience stores manage to handle the transfer of funds without problems, but the national and local governments cannot transfer social security payments without embezzlement. In part one, he pins the blame squarely on bureaucrats.

"From old it is said, 'Kanson minpi [bureaucrats exalted, the people despised],' with the hidden premise being that bureaucrats are steadfast and the people terrible. However, now it is the exact opposite of that. Therefore, it is basically good to entrust "to the people that which the people can do."

In the second part, he discusses how the scandal-ridden Social Insurance Agency — part of his ministerial ambit — cultivates a culture of unaccountability for lower officials. As he writes, "In other words, since there are no orders from above and a lack of scrupulous oversight, it happens anyone can do whatever they want. The result is that this invites the occurrence of scandals like the sloppy management of records and embezzlement." He even goes so far as to suggest that the contemporary bureaucracy, as a system of irresponsibility, is "completely the same as the Japanese Imperial Army."

His solution is the implementation of a top-down system in which responsibility and accountability are clear.

In addition, he suggests that other checks on administration are needed, pointing to the example of the ombudsmen in Scandinavian countries. And he suggests that rather than viewing the nejire kokkai as a bad thing, it might be a good thing for accountability in Japanese governance. (Indeed, it was for this very reason that I think that a grand coalition would be a bad thing.)

In the third part, he explores the Japanese policy agenda, looking at the implications of the faulty social welfare system for the Japanese economy as a whole. He argues that consumer spending is low due to fears of inadequate care in old age. Ergo, if the Japanese government can alleviate insecurities about retirement, it can get people to spend more, jump-starting the Japanese economy. He suggests that an increase in the consumption tax rate from 5 to 10% is necessary, with the difference alloted to maintaining the social welfare system. Accordingly, the more people the spend, the better funded the welfare system. (This proposal strikes me as too good to be true — and it's not entirely clear to me why people wouldn't react to a consumption tax hike by spending less.)

Mr. Masuzoe concludes by calling for radical restructuring of Japanese sub-national governance, reorganizing prefectures into larger regions with radical subsidiarity, reducing the central government to nothing more than the cabinet office and the foreign, defense, justice, and finance ministries.

Mr. Masuzoe's heart is in the right place, so to speak. In particular, longtime readers of this blog will be aware of my belief in the importance of systems of accountability both inside and outside of government. Mr. Masuzoe clearly recognizes that Japan is missing the institutional checks present in other democracies that ferret out and punish wrongdoing by legislators and bureaucrats. Its courts are weak, its prosecutors face a standard of evidence that keeps many cases from going to trial, its agencies lack ombudsmen and inspectors general, its journalists and media outlets have all-too-cozy relationships with those in power (without a tradition of investigative journalism), and the political parties and the Diet, thanks to the LDP's nearly uninterrupted hold on power, are enablers of bureaucratic incompetence and corruption rather than a check on administrative abuses. NGOs are a recent arrival, and many depend on the government for funding.

In other words, this is where Mr. Masuzoe and other reformers should focus their attention. Regular alternation of ruling parties will help too, of course, but barring that reformers should push for the creation of accountability systems throughout the Japanese government.

Meanwhile regional subsidiarity strikes me as a scheme that would, if anything, ensure that certain rural regions that are already dying would have even less chance of reversing their fortunes. As MTC notes in the post linked to above, the central bureaucracy has much to answer for as far as the decimation of the Japanese countryside is concerned. But it is not altogether clear to me how removing impoverished regions from the hands of the central government and putting them into the hands of cash-strapped regional governments will make them any more likely to thrive. As a matter of principle, subsidiarity is great — after all, as students of the American progressive movement know, states can be the laboratories of democracy. But moving government closer to the people is no guarantee of good governance; I think it's just as likely that the mega-regional governments in Mr. Masuzoe's scheme could be just as prone to profligacy and venality as Tokyo has been.

In short, I agree with Mr. Masuzoe's diagnosis, but I don't think he paid nearly enough attention to the cure.

What would a liberal Japan actually look like?

Project Syndicate has posted an essay based on a speech by Joseph Nye in Tokyo last month, in which he foresees the rise of a "liberal" Japan.

Calling attention to Asahi's series of twenty-one editorials [series available at Japan Focus] outlining a vision for Japan, Nye argues on its behalf, observing that Asahi's vision provides a path for "Japan to become a world power as a provider and coordinator of global public goods from which all peoples can benefit and none can be excluded, such as freedom of the seas or a stable international monetary system. This would be a way for Japan to escape its reputation for insularity, avoid the mistakes of its military history, improve its relations with Asian neighbors who still remember the 1930’s, and increase Japan’s 'soft' or attractive power."

Nye foresees Japan carrying a greater burden in a variety of ways, but few that would require the use of force.

This is all well and good, but it is not entirely clear how to get there, because in the quotation above there is a chicken-and-the-egg problem: will a more international role lead to Japan escape its reputation for insularity, or can Japan only embrace a more international role after it lowers its psychological walls and becomes far more willing to interact with the world?

Then, of course, there is the larger question of whether this is the role the Japanese people want their country to play in the world. Arguably, Abe Shinzo and other nationalists of a more Gaullist streak are not alone in desiring a foreign policy rooted in the defense of Japan's pride and the assertion of Japanese interests, particularly in relations with North Korea and China. And while the Japanese people are hardly clamoring for Japan to become more belligerent, content to see the JSDF play little more than a supporting role in multilateral missions abroad, they also support the government's misplaced emphasis on the abductions issue (as opposed to focusing on a mix of issues, with abductions but one among several).

So how can Japan actually become the liberal power outlined by Nye?

Well, first, as eloquently argued in this post by MTC, it requires vision on the part of the Japanese government as to what role it can actually play as a leader in the region and the world. Arguably, a broader vision of Japan's role is inconsistent with the kind of "standing up for Japan's pride at all costs" thinking that has motivated Japan's response to the comfort women resolution in the US Congress, the whaling issue, and historical feuds with South Korea and China. It's time to grow up. The of a serious great power capable of taking the lead on an issue — the environment, African development, etc. — is the ability to not let petty issues undermine national focus. Is Tokyo serious about protecting the environment? Marshal its resources, line up allies, force others to make commitments, and avoid stupid, avoidable mistakes and comments that give other countries can excuse not to follow your lead.

The other change is what Japan looks like at home. What happens at home matters incredibly abroad. Just ask Washington, which has found it hard to make allies follow its lead on a host of issues due to perceived human rights failures at home. Japan, of course, is free to do what it wants at home: approve textbooks with questionable interpretations of the war, emphasize patriotism in education over other skills that might serve Japanese children better, railroad those accused of crimes straight to prison, and prevent women from rising to positions of prominence. But it cannot do so and then turn to the world and proclaim that Japan intends to be a liberal great power. For Japan to be a liberal great power means building an international position largely upon how other countries view Japanese society. If Japan is respected for its domestic governance, its counsel will be welcomed by others, and so its power will grow.

For all the rhetoric, does the Japanese government truly appreciate what it will take to become this kind of global power?

Atlas shrugs in Japan?

This afternoon one of the local DPJ politicians supported by my boss was in the office, resting, and he asked whether I have read "Einrando." After some initial confusion, I finally figured out that he was asking about Ayn Rand — because he's in the process of reading Atlas Shrugged in Japanese (there are few books for which "in the process" is as apt as Atlas Shrugged).

We then proceeded to discuss the various "philosophers of liberty" — Hayek, Hume, Locke, Smith, Popper, Oakeshott — and he insisted upon the need for more liberty and smaller government in Japan.

I was taken aback, not necessarily because of his admiration, but because I had been discussing the applicability of Atlas Shrugged to Japan with Colonel Sturgeon just the other day. My point wasn't so much about Japan's needing smaller government and less exploitation of the government for private ends — it does — but the applicability of the novel's mood.

In the novel, the various sectors of society and economy fail, like a body wracked with disease that systematically attacks different organs. There is a pervasive gloom, with the action of the plot punctuated by news reports about one industrial sector after another failing. As I have watched reports of massive corruption in corporations in every sector of the Japanese economy — the latest example being NOVA, the leading English conversation school — and throughout the government, I cannot help but recall the atmosphere in Ayn Rand's dystopian America. While Japan might not be experiencing serial organ failure, it is suffering from a pervasive infection that has weakened every sector of the body politic.

Now, no one should construe this post as an unqualified endorsement of Ayn Rand. I consider my youthful infatuation with her thinking as one of those things that people should grow out of, like wearing velcro sneakers. As Stephen Fry said in an episode of A Bit of Fry and Laurie, "I don't believe in market forces. I used to, of course, when I was a child, but like everybody else, when I grew older, I discovered it was all made up." Now I would not go quite so far as that, but I did grow out of Rand: the world is far too complicated to be divided neatly into craven collectivists and heroic individualists.

But the discussion of the applicability of liberal (in the old sense, or the current sense for Europeans) thought to Japan is interesting. As I have written before, I have a hard time with importing Western political concepts into the Japanese context. Modern Japan has never known liberalism — it has had liberals, but never liberalism. Its institutions and political culture is steeped in constant interaction between state, economy, and society. Some would say that it is so as a function of Japanese culture, and is thus impervious to change. To me, that is neither here nor there. As far as I am concerned, it is a function of political culture, which while being slightly more susceptible to change is still a function of unique conditions in a given polity. As an Oakeshottian, I am content to let political culture be. Political culture grows over time, and is resistant to attempts by outsiders to change it. (Imagine what the New Dealers who came over to Japan with SCAP would think about what they wrought.) Would more liberalism in a political sense, with greater respect for the individual and a more dynamic civil society be enormously welcome in Japan? Absolutely. Would more economic liberalism, with more risk-taking, more dynamic enterprises, and less collusion among bureaucrats, politicians, and corporations be welcome? I must answer again in the affirmative.

But these will result only from long-term structural change; Japan will not change overnight. And as it changes, it will necessarily reflect Japanese conditions: for example, a more active civil society, but one that cooperates with the government and more risk-taking, but a strong safety net to protect people from getting too hurt. And with more than a quarter of Japan's population set to be over sixty-five in a few decades' time, there is a floor below which the Japanese welfare state will not recede. An aged society is necessarily a society in which the state will have an active role.

Nevertheless, the question of whether and how Japan will become more liberal is a fascinating one, that will only grow more interesting with time.

What manner of constitution debate will Japan have?

In the wake of yesterday's passage of the national referendum bill, each major daily unsurprisingly featured an editorial looking forward to the next three years of debate on revision.

In the left-wing Asahi Shimbun, the mood was, unsurprisingly, despondent about the passage of the bill. At the same time, though, the tone was defiant, taking up the prime minister's challenge to make the July Upper House elections about constitution revision.

The issue of most concern seems to be that in the LDP's draft constitution produced last year, the second clause of Article 9 says, in lieu of the prohibition on the maintenance of armed forces for aggressive war and the renunciation of the right of belligerency, "To ensure the peace and independence, as well as the security, of our country, the prime minister shall be the commander-in-chief and a self-defense 'army' shall be maintained." [The draft uses 自衛軍 instead of 自衛隊, indicating the elevation of the JSDF — which currently use the nominally more modest-sounding "force" — into a proper military.]

Lamenting the lack of debate heretofore, Asahi argues that this proposed change should be the basis for a popular debate on revision.

The right-of-center Yomiuri Shimbun, meanwhile, criticizes the DPJ for its opposition, in spite of the fact that "not a small number of members" believe strongly in revision. Echoing the prime minister, Yomiuri argues, "The international situation and Japan's security environment have been dramatically transfigured, Japan's economic system is changing fundamentally, and there are conditions at home and abroad that could not even be imagined at the time the constitution was created. Furthermore, [Japan] must weather more waves of great change to come." Yomiuri also argues that it is imperative for the DPJ and Komeito to make their own draft revisions quickly.

The right-wing Sankei Shimbun, similar to the Yomiuri, criticized the DPJ and Komeito for heretofore failing to draft substantive revision, and laments the superficial character of the constitution revision debate thus far, which is odd, considering that unlike the Asahi and Yomiuri editorials, the Sankei editorial does not even hint at what the major points of discussion ought to be.

Obviously readers will note that one common thread running through these editorials is concern about the quality of debate thus far, and calls for a widespread debate on revision in the Diet and among the Japanese people at large. Interestingly, when discussing the issues involved in revision, the editorials talked solely about Article 9. While Article 9 is fundamental — the constitution is, after all, often described as "Japan's pacifist constitution" — it seems that the debate is as much about what kind of country Japan should be in the twenty-first century; Japan's security posture is but one part of that debate, and it is imperative that other parties to the debate begin to take in the same terms as Abe. To date, it seems that Abe alone has talked, however vaguely, about the Japan as it ought to be, essentially having the field to himself.

It is long past due for Abe's opponents to present their own, preferably more concrete, visions for Japan's future, and to challenge the assumptions made by the prime minister that constitution revision is a necessary step to a better future for Japan. The burden of proof is on advocates of revision, not on those who are skeptical about or in outright opposition to revision: Abe and company have to demonstrate, concretely, how the system designed by the constitution has failed, and how revision will enable the Japanese state and people to better cope with future challenges and ensure continuing prosperity.

It is also time that opinion leaders begin questioning the government's assumption that constitution revision is a necessary condition for creating a "beautiful country." I strongly disagree with Yomiuri's argument that because aspects of the world today were not envisioned sixty years ago, the constitution must be reformed. Statements like that must be backed up with solid demonstrations of what makes them so.

Has the modern world fatally undermined the relevance of Japan's postwar constitution? How so?

When Abe talks about discarding the postwar regime, what does that mean? What part of the regime? Just the security bits? Or the whole bloody mess? If so, why isn't Abe talking about destroying the LDP, which has played an outsized role — arguably a more significant role than the constitution — in shaping postwar Japan?

Vestiges of the 1955 system, which has long distorted policy by placing sectional and local interests above national interests, remain. Why isn't Abe turning his attention to this significant piece of the "postwar regime"?

And what about the assumption that because Japan's security environment is changing, it must revise its constitution? Why revise, if re-interpretation will suffice?

And, above all, what exactly do the Japanese people want?

On these questions, it seems that Abe and other advocates of revision have been given a free pass.

Ultimately, I think constitution revision is useless without political reform. Japan's problem is not its constitution, but rather the parasitic policy making system — the alliance between the LDP and the bureaucracy — that has no constitutional standing whatsoever, and has perverted Japan's institutions to selfish ends. Changing the constitution without changing the policy making process, which necessarily means destroying the LDP as it exists, is futile.

Japan's governance problem

John Plender, columnist in the FT, has a column (subscription only) in Wednesday's edition talking about the "accountability gap" in Japanese corporate governance.

He wrote:

...There is a corporate governance vacuum. Before the economic bubble burst in the early 1990s, the postwar model of capitalism known as “Japan Inc” incorporated governance disciplines based on a main bank that monitored corporate performance, removed underperforming managers and choreographed turnrounds at ailing companies. This relationship system was buttressed by cross-shareholdings, which also had the effect of protecting companies from hostile takeovers. Lifetime employment was the norm in large corporations and the state provided a guiding hand. Boards rarely had outside directors and were largely ceremonial.

Since Japan’s banking crisis, main bank cross-shareholdings have been run down and the lifetime employment system has eroded. Now that the country is no longer in catch-up mode and the economy has matured, the state’s guiding role has become less effective. In some parts of industry and commerce there has been a greater focus on profits rather than market share, though not to the point where aggregate returns have risen to anywhere near US levels. Dividend pay-out ratios remain low even in mature industries.

I think there is great wisdom in Plender's analysis, but, at the same time, I think it's important to look beyond the Japanese corporate environment to Japanese society at large.

In recent months, Japanese newspapers have reported massive governance failures in every sector of Japanese life. The Abe Cabinet has been riddled with reports of corruption from ministers -- most recently Matsuoka Toshikatsu -- and poor management of the policy agenda. The opposition, too, has had its problems, most notably the improprieties of former Upper House Vice President Tsunoda (discussed here), DPJ President Ozawa's shady real estate development scheme, and now reports that DPJ member Nakai Hiroshi misreported funds in a manner similar to Matsuoka.

Of course, the long-standing relationships between bureaucracy and industry, via amakudari and bid-rigging, persist, even as authorities try to limit these practices.

Meanwhile, in recent months there have been reports of major cover ups across Japanese society: food (Fujiya), baseball (the Seibu Lions), securities (Nikko Cordial), and nuclear power (Tohoku Electric Power).

The problem is not that cover ups and inappropriate relationships between public and private sectors exist; no country is free of corruption and the misuse of power. What's different in Japan, however, is the lack of mechanisms to ferret out wrongdoing, to deter others from doing the same, and to create the impression that laws are not, in fact, made to be broken. In Japan, it seems that only real crime is getting caught; interestingly in all of the above-mentioned scandals, it seems that the illegal practices for which the guilty party is under fire are widespread in the industry concerned.

Japan is woefully lacking in the kinds of institutions and actors dedicated to exposing these misdeeds. Inspectors general, ombudsmen, NGOs, activist shareholders, and even investigative journalists backed by large media organizations: Japan is woefully lacking all of these means of keeping large, powerful institutions honest and accountable, and exposing their failures to the light of public scrutiny. (See Transparency International's excellent report on Japan's National Integrity Systems -- available for download here.)

Accordingly, for all the reports of Japan's economic recovery and greater assertiveness abroad, the foundations of the state are weak and crumbling. In this atmosphere of massive, persistent institutional failures, the Abe Cabinet's push to restructure the postwar institutions -- especially the constitution -- looks misplaced. Under Abe, Japan, flush with cash for the first time in a while, has decided to install a new kitchen and refurbish the facade, rather than focus on the crumbling foundation, the institutions of Japanese society whose persistent cover ups, fraud, and outright criminality have gravely damaged public trust and raise serious concerns about the ability of Japan to remain prosperous and growing in light of Japan's demographic problems and the changing regional and global environment.