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Japan
Network The fifth
conference of CEPR’s European Network on the Japanese Economy was held
jointly with the Istituto di Studi Economico-Sociali per l’Asia
Orientale (ISESAO) on 16/17 January 1998. The conference, which was
organized by Jenny Corbett
(Nissan Institute of Japanese Studies, Oxford, and CEPR) in conjunction
with ISESAO, concentrated on four major topics on the Japanese economy:
trade issues; foreign-exchange markets; regulation and industrial
structure; and institutions and the role of the state. Financial support
for the conference was received from the Keizai Koho Center in Tokyo and
the ESRC Resource Centre, which was established in 1993 to provide
networking, dissemination, support and training services to the UK
economics community. The
conference was opened by Tomoyoshi
Uranishi (Embassy of Japan, London), who stated that there was a gap
between domestic and overseas perceptions of the Japanese economy. The
Japanese people were more interested in the unemployment level and in
wages than in stock-price fluctuations. They were, however, also worried
about the future of the Japanese financial system, because Japanese
financial institutions had lost the confidence of depositors and
investors. Money had shifted slowly to the more stable financial
institutions, while the banks’ efforts to maintain their capital
ratios had led to a cut in loans to companies. The Japanese government
had therefore decided to use public money, amounting to 30 trillion yen,
in an attempt to stabilize the Japanese financial system, as a result of
which all deposits would be protected until March 2001. Five papers
were presented on trade issues. Rodolfo
Helg (Università Bocconi, Milano, and LIUC, Varese) presented ‘An
Analysis of Japanese Intra-industry Trade and of its Pattern of
Specialization in an East Asian Context’, in which he set out to
assess the possible allocative consequences of increasing regional
integration. After reviewing the evolution of the revealed comparative
advantages of the East Asian countries, he tested for intra-industry
trade (IIT) in the region and sought to identify some regularities
behind the trade flows. Andrea
Boltho (Magdalen College, Oxford) suggested that the paper’s
empirical results warranted further investigation, especially concerning
the rank correlations of RCAs among the regional countries. Boltho also
considered that the results of the application of the Davis-Weinstein
model to Japan seemed counter-intuitive, and that the
‘home-market-bias’ effect might well explain a good deal of
Europe’s international trade. Andras Nagy (Institute of Economics, Hungarian Academy of Sciences)
presented ‘Twenty Five Years of Japanese Trade with Europe’. The
paper employed a trade-flow model to investigate the long-term
structural changes in trade relations between Japan and three European
regions (Western Europe, Eastern Europe and the European CIS countries).
Nagy concluded that it was hard to say in what direction future trade
policies would move Japanese-West European trade: there was certainly a
possibility of increasing trade intensities, especially in those
products for which transportation costs were not important and where
hidden barriers had been used to restrain trading. Lucia Tajoli (Politecnico di Milano) commented on the instrument
Nagy used to measure the ‘proximity’ – or the relative degree of
integration in terms of trade flows – between Japan and other areas of
the world. The measure was used to understand the extent to which trade
between two areas differed from its ‘normal intensity’. The
definition of normality, however, was puzzling. By rearranging the terms
used to construct the indicator, this could be read as the ratio between
the market share of the exporter in a given market and the world market
share. In this way, any reference to a ‘normal’ flow of trade could
be avoided, and the indicator interpreted as a measure of the relative
importance of a given market for an exporter. Looking at these
indicators, it emerged that Japan had a surprisingly low trade intensity
towards Eastern Europe. A possible interpretation of this fact was that
other European countries had moved into Eastern European markets at an
earlier stage, leaving little room for Japanese goods. If this were
true, it did not seem likely that Japanese involvement in Eastern Europe
would change much, at least in the short run. Marcus Rebick (Nissan Institute of Japanese Studies, Oxford)
presented a paper on ‘Trade and the Wage Structure in the Presence of
Price Discrimination in the Product Market: The Japanese Labour Market
1965–90’. The paper offered an empirical analysis of the theoretical
proposition according to which international trade would be responsible
for some of the growing inequality and/or unemployment in the OECD
countries. In particular, the paper estimated the impact of domestic
demand and exports on industrial wages and employment dynamics in Japan,
within a model of price discrimination in the product market. The
evidence suggested that export growth had less of an impact on Japanese
workers’ compensation than the equivalent growth in domestic demand.
This result was quite different from those of similar studies for the
United States, and was consistent with the view that price
discrimination between the domestic and export product markets was
greater in Japan. Giorgio
Brunello (Università degli Studi di Udine) noted that import
penetration had led to higher inequality in the United States and higher
unemployment in Europe, but that there seemed to be no evidence of
similar changes in Japan. He wondered whether this could be construed as
evidence that import penetration in Japan was not causing changes in the
distribution of wages. Jean-Pascal Bassino (Paul Valéry Université (CEAE), Nimes, and
CEFI-CNRS, Paris) presented a paper on ‘Japanese FDI in East Asia and
Job Destruction in Japan’s Manufacturing’. The author argued that
the effects of Japan’s direct investments in East Asia on the level of
domestic employment appeared to have changed dramatically after 1991.
Uniquely among OECD countries, Japan had enjoyed steady economic growth,
combined with massive FDI, flows towards both East Asian and other
developed countries and net job creation in most branches of
manufacturing. During the 1990s recession, however, the persistence of
FDI flows was associated with a decline in employment in almost all
manufacturing sectors. The optimistic view was that Japan’s industrial
structure would adapt smoothly in the coming decade, and that job
creation in services would compensate for job destruction in
manufacturing. The latter phenomenon was seen as a necessity, allowing
domestic firms to keep up with the pace of technological change and
productivity growth in other countries, while expanding the production
of their overseas subsidiaries. Under these circumstances, Japanese
manufacturing would remain strongly competitive and diversified even if
the domestic labour force was severely reduced. These changes in
industrial structure did not imply that Japan would face mass
unemployment (as had happened in Europe), since market forces would
facilitate the transfer of manpower to the new service industries. The
increase in unemployment in the mid-1990s should therefore be seen as a
transitional phenomenon occasioned, not by a shortage of new
opportunities, but rather by temporary rigidities, including the
reluctance of middle-aged workers to accept lower-quality jobs in
services. Joop Stam (Erasmus Universiteit Rotterdam) questioned the hypothesis
that the changing structure of employment in the 1990s was the result of
major changes in the investment strategies of Japanese companies.
Employment erosion had been concentrated in low-value-added sectors and
in component manufacturing, and had a strong regional character. Thus
semi-industrialized rural areas in Japan’s northern and western
prefectures had witnessed an exodus of industries and an increase in
unemployment. To facilitate a soft landing in employment terms, Shimada
Haruo had proposed a combination of structural reforms, industrial
deregulation and more open domestic markets to improve competitiveness
and domestic investment, while at the same time increasing public
investment in (re)training and infrastructure. ‘Anti-dumping
and Tariff Jumping: Japanese Firms’ FDI in the European Union and the
United States’ was the subject of a paper presented by René
Belderbos (Maastricht University). This paper developed a
microeconometric model to establish the extent to which EU and US
anti-dumping measures had induced tariff-jumping inward investments.
Since Japan had been the most important single target of such
anti-dumping actions, and since the electronics industry had been one of
those most frequently involved, the analysis focused on the investment
decisions of Japanese electronics firms. The empirical results suggested
that both anti-dumping and other trade-policy measures substantially
increased the incidence of inward investment by Japanese electronics
firms in the two regions. The relatively large number of plants set up
in the EU was partly attributable to the higher tariff walls, which
provided greater incentives for tariff jumping than in the United
States. The results suggested that anti-dumping measures were
ineffective in combating potential anti-competitive behaviour by foreign
firms and could even result in increased market concentration. Corrado Molteni (ISESAO, Università Bocconi, Milano) was impressed
by Belderbos’s database, which had been built up from industrial
associations’ data – the best available sources. He also pointed out
that FDI was not the only available mode of entry into a market –
joint ventures were another possibility. This raised the question of
whether antidumping measures had implications for modes of entry,
ownership patterns and location decisions. Moreover, although protection
was a relevant factor in determining FDI, other firm- and
sector-specific determinants were also likely to play an important role. Three papers
dealt with foreign-exchange market issues. Eric
Girardin (LARE–Université Montesquieu-Bordeaux IV) presented a
paper on ‘The Neglect of the Yen in East Asian Exchange Rate Pegs:
Some Evidence on the Roots of Recent Currency Crises’. In this paper,
which was written with Velayoudom Marimoutou, the authors examined the
common movements between each of ten East Asian currencies and either
the US dollar or the Japanese yen, using monthly data over the period
1980–97. The common movements were either in the trend (level or
slope) or in the cyclical part of the series. The results were
unambiguous. The co-movements with the US dollar were overwhelming:
almost all cases exhibited unit correlation in both the trend and the
cyclical components. The implication was twofold: not only had the East
Asian countries set themselves a target of pegging to the dollar in the
long run, but they had also deprived themselves of any flexibility by
following the movements of the dollar even in the short run. In
contrast, there was no evidence of a common trend component with the
Japanese yen and only occasional evidence of a common cycle. In the
Korean and Thai cases, however, even this common cycle appeared to mimic
that between the dollar and the yen. Beate Reszat (HWWA, Institut fur Wirtschaftsforschung, Hamburg)
presented ‘Japan’s Big Bang Stage One: Risks and Prospects of
Foreign Exchange Market Liberalization’. The paper compared the
characteristics of the Tokyo foreign-exchange market with those of
London and New York, and analysed the nature of risks looming ahead for
the Japanese market with financial liberalization. This process was due
to start without the accompanying regulatory strengthening which seemed
an indispensable prerequisite for success. The dangers were twofold.
First, it seemed almost certain that the banks’ situation would
deteriorate further as a direct consequence of increasing competitive
pressures. This would encourage them to take higher risks in search of
profits, particularly in a market where their activities remained widely
unnoticed and unreported and where the turbulence associated with
periods of change would make it difficult to judge them from outside.
Second, firms that had only limited experience of access to the market
also could be tempted to take excessive risks in currency trading to
compensate for a poor performance in their core business. Both dangers
might result in new failures and uncertainties, which would add
unnecessarily to existing – and unresolved – financial sector
strains. Reszat concluded that Japan was embarking on its ‘big bang’
at a most unfavourable moment, and that liberalization would present an
extraordinary challenge to both the Japanese authorities and the
international financial community. The ‘big
bang’ was also the subject of a paper by Mikayo
Suda (Nissan Institute of Japanese Studies, Oxford, and Gakushuin
University), entitled ‘Japan’s Big Bang and the Foreign Exchange
Policy’. Suda noted that the prime minister had characterized the
three underlying principles of the structural reform as being ‘free,
fair and global’. The implication was that the reforms were intended
to liberalize entry, products and prices; to clarify and enhance the
transparency of rules and to protect investors’ interests; and to
establish legal, accounting and supervisory systems consistent with
globalization. The Bank of Japan (BOJ) Law was being revised at the same
time as the Foreign Exchange Law, in order to strengthen the
independence of the BOJ: the BOJ’s main purpose was specified as price
stability; the policy board was being strengthened; and the factors
suggesting subordination to the government eliminated. This revision of
the law had resulted from the widespread perception that one of the
reasons for the emergence of the ‘bubble economy’ had been the
failure of monetary policy which, in turn, was owing to the BOJ’s lack
of independence from government. One of Suda’s major conclusions was
that future reforms would increase both capital inflows and capital
outflows, but with the latter predominating at first. Moreno Bertoldi (Delegation of the European Commission in Japan and
ISESAO, Università Bocconi, Milano) was concerned about the timetable
for the reforms, noting that even with sound institutions and
appropriate skills for coping with liberalization, poor timing would
create the risk that the totality of virtuous, but uncoordinated,
actions could become a problem in itself. Two of the
conference papers dealt with regulation and industrial structure. Danes Brzica (Institute of Economics, Slovak Academy of Sciences)
presented ‘Japanese Model of Corporate Governance and Horizontal and
Vertical Keiretsu Structures:
Are there any Features of them in Slovakia or in the Czech Republic?’.
This paper contained partial results from broader research on the
relationships between corporate groupings and governance structures.
Using a selection from the 100 biggest firms in the Czech Republic,
Japan and Slovakia, Brzica found that several features of the Japanese
model of corporate governance were present in both the Czech Republic
and Slovakia. This was evident in the growing number of keiretsu-type
corporate groupings, especially in industry; the nature of the
relationships between banks and companies; and the weakness of capital
markets. The Czech Republic and Slovakia differed, however, in terms of
ownership structure, structure of corporate financing and regulation
issues. Eva Osvald (Institute of Economics, Hungarian Academy of Sciences)
noted that, in Hungary, the German model of corporate governance was
followed (i.e. a structure which was still dominated by insiders). In
her view, however, the Japanese experience was completely different from
that of the Czech Republic, which seemed not to have imitated the
Japanese tendency towards strong competition among different groups. Paolo
Piacentini (Università di Cagliari) suggested that a
‘dyachronic’ comparison between industrial organization and
governance structure would be complementary to the ‘synchronic’ (a
now-to-now comparison) approach adopted in the paper. This might perhaps
have suggested more similarities in the problems of national industrial
restructuring. The current problems of Eastern and Central Europe, for
example, might look more like those faced in earlier phases of Asian
economic development (e.g. Japan after the war, Korea in the 1960s).
Piacentini also suggested a more useful comparison could be made, if a
much clearer distinction were drawn between vertical and horizontal keiretsu. Klaus Wallner (SITE, Stockholm School of Economics) presented
‘Implicit Contracts between Regulator and Firms: The Case of Japanese
Casualty Insurance’. Wallner developed a dynamic model of regulatory
protection, in which the regulator grants the industry rents in exchange
for cooperation in an asymmetric environment as part of an implicit
contract enforced by a trigger strategy. At a corner solution, this
contract may be stable under gradual changes of society’s preference
parameters, whereas beyond a threshold level further changes may result
in extreme deregulation. Both predictions were found to hold in the case
of Ministry of Finance regulation in the Japanese casualty insurance
industry. Adrian van Rixtel (De Nederlandsche Bank) emphasised that the
relationship between financial regulators and regulated institutions was
highly pertinent in Japan, and that the problems of the Japanese banking
industry could be partly explained by the ineffectiveness of informal
levels of regulation and too-close relationships between supervisors and
banks (which presented moral hazard problems). Yet the paper seemed not
to pay attention to intragroup differences, i.e. to firm-specific
characteristics which could have important consequences for the level of
cooperation among firms. Van Rixtel also cast some doubt on the
appropriateness of a Stackelberg game (which assumes passive behaviour
on the part of the follower, who can only react to the strategy of the
leader) for describing the process of trade-off between regulatory
protection and industry expectation in Japan. First, Japanese financial
institutions had exerted great influence on financial deregulation,
often determining the direction and outcome of the process. Second,
since the Japanese state was not characterized by a weak bureaucracy, an
increasing number of studies were departing from the perception that, in
political economy terms, Japan represented a ‘neutral’ state. This
raised the question of who (i.e. which actor) was really determining the
course of the regulatory process. The last
three papers concerned institutions and the role of the state. Yishay
Yafeh (The Hebrew University, Jerusalem) presented ‘Institutions
and Country Risk: Evidence from Japanese Government Debt in the Meiji
Period’, which was written with Nathan Sussman. The authors set out to
examine the effect of the establishment of modern state institutions on
the risk premium associated with government debt, drawing on the
Japanese experience in the Meiji period. If institutions matter for
country risk, then interest rates should decline in response to the
establishment of institutions that protect property rights, establish
the rule of the law, etc. Using hitherto unexplored monthly data on
sovereign debt traded in London between 1870 and 1914, the paper
investigated the impact of major reforms on the yields of Japanese
government debt. It showed that the risk premium on Japanese debt did
decline during the period, and that the amount of debt issued increased.
Significantly, however, the establishment of modern, Western-style
institutions – such as a central bank and a constitution – had no
impact on debt yields. The only event that significantly reduced the
perceived risk on Japanese bonds was the adoption of the gold standard
in 1897. Other reforms that may have had some impact on yields were the
agrarian reform of the early 1870s, and the introduction of
convertible-to-silver notes in 1886. Political events, such as the wars
with China and with Russia, affected yields in the short run, whereas
the Anglo-Japanese Treaty and the war with Russia seemed to have
improved Japan’s longer-run ‘credit rating’. Marco Da Rin (IGIER, Università Bocconi, Milano) thought that, in
contrast with the authors’ own conclusion, the evidence they had
gathered suggested that institutions did matter. First, the fact that
the institutional reforms did not have an impact on yields, whereas the
adoption of the gold standard did, was consistent with the results of
studies of currency crises. These showed that small, incremental changes
in fundamentals do not have an effect on prices until a ‘critical
threshold’ is reached. The gold standard would naturally seem to play
the role of such a threshold. Second, adoption of the gold standard was
itself an institutional reform. Costas
Lapavitsas (School of Oriental and African Studies, London)
presented ‘State and Finance in Economic Development: Analytical
Issues Relevant to the East Asian Miracle’. The paper, which was
written with Sedat Aybar and Ben Fine, examined the main claims of two
different currents in the literature: the ‘bank-based’ versus the
‘market-based’ financial systems approaches. The paper claimed that,
though both currents had contributed significant insights, the lack of
recognition of the broader context within which financial systems
operate was a serious weakness of the contemporary literature. It
suggested that the ‘radical political economy’ approach afforded
further insight by treating the financial system as a system of
supplying finance to the economy that arises spontaneously on
foundations provided by the economy itself. The theoretical distinction
between bank-based and market-based systems was incapable of capturing
this process. Moreover, the financial system itself developed as the
demands made upon it changed in the course of economic development.
Finally, analysis of state intervention, and of the conflicts of
interest generated both within the financial system and between finance
and industry/trade, ought explicitly to acknowledge the broader
political and social context within which economic activity takes place. Jenny Corbett (Nissan Institute of Japanese Studies, Oxford, and
CEPR) presented ‘Japan’s Banking Crisis in International
Perspective’, in which she sought to assess the view that the scale of
the Japanese crisis, and the extent of the consequent moral hazard, was
particularly large. Corbett made explicit international comparisons
between certain features of the most pronounced financial crisis of the
1980s and the early 1990s. Although no formal tests were presented, the
paper concluded that the Japanese banking crisis was in the middle of
the range of international experience, and had not been as severe as
that experienced in the Nordic countries, when measured in terms of the
impact on profits and the probable scale of non-performing loans. The
attempt to construct internationally comparable data, however,
highlighted the fact that there was remarkably little consistency in the
presentation of banking statistics, and that the range of data collected
by the international agencies was limited. At the macroeconomic level,
the scale of the credit crunch which followed the crisis, although large
relative to Japan’s past experience, was also not extreme by
international standards. The Japanese system had been marked by a
relatively smooth, slow response to the development of a quite extreme
asset-price cycle. Gabriella Chiesa (Università di Bologna) pointed out that, though data on asset prices was reliable, the same was not true of data on loan provisions and bad loans and, hence, on bank profits. It was likely that governance issues were involved, on account of managers’ incentives. With a utilitarian ‘bank objective function’, bank shareholders wanted managers to maximize overall profits, and this was likely to cause a dangerous over-lending bias. |