Unmaking the Japanese Miracle: Macroeconomic Politics, 1985-2000

Recently I have read the following book. Its main points are:

Book title:  Grimes, William. 2001. Unmaking the Japanese Miracle: Macroeconomic Politics, 1985-2000. Ithaca and London: Cornell University Press.

Main points:

Ch. 6. - as Japan entered 1993, important new forces seemed poised to affect macroeconomic policy.(162) The Japanese economy did not seem to have been very stimulated by either of the discount rate cuts of 1992, or by the August fiscal stimulus plan. The stock market remained soft, land prices began to drop. More and more reports were surfacing concerning the bad loans. (162)

- prior to the July 1993 election, political pressure surely compounded the pressure on the Miyazawa administration for economic policy change. Subsequently, the non-LDP coalition government of Hosokawa Morihiro and Hata Tsutomu faced pressure to fix the problem of the economy. (163)

- in the period 1993-7, then, continuing economic problems and political uncertainty were intertwined. Bureaucrats in general and MOF officials in particular, became targets of political and media attacks alleging incompetence, even corruption. (163)

- following a successful vote of no confidence against PM Miyazawa’s administration on June 18, 1993, and the subsequent Lower House election on July 18,  Japan’s first non-LDP PM since 1955 Hosokawa Morihiro, was elected . He entered office as the head of a coalition of seven parties. (168)

- despite consistently strong citizen and market sentiment for fiscal stimulus, the year 1993-7 instead saw a stop-and-go approach to fiscal policy. For the most part, the policies of the increasingly unpopular MOF carried the day. (191)

-the overall strategy by LDP and other politicians to contain MOF included extremely heavy political pressure. As the next chapter demonstrates, by 1955, the MOF goal of maintain autonomy was under fire from a number of new directions. Following the catastrophic failure of the 1997 fiscal consolidation, the Ministry became the scapegoat, and contributed the fundamental structural change and a substantial weakening in its policy-making influence. (195)

-Ch. 7- by the mid-1990s, politicians were gaining a degree of power at the expenses of the MOF while playing within the existing rules of the game of macroeconomic politics. But by 1996, they were beginning to map out a new set of rules that would fundamentally change the game. (196)

- this chapter sticks closely to the themes of structural power and structural changes by focusing on personnel and organization changes. Following that, it turns to actual macroeconomic policies and to show how structural changes promoted policy changes. (197)

- in March 1998, there was finally a break in the old pattern when governor Matsushita and deputy governor Fukui were both forced to resign. The Hashimoto cabinet appointed Hayami Masaru as Governor, a long-retired BOJ OB. The cabinet appointed two deputy governors as well. For the first time since 1969, MOF retirees were excluded from the top ranks of the bank. (198)

- a final set of attacks on the personnel system of MOF could be seen in the forced resignation of two consecutive administrative vice-ministers in 1995.  In 1998, there was yet another forced resignation. (201)

- the attacks on MOF had multiple reasons. For one, the MOF was under fire for having protected weak and corrupt financial institutions. In addition to the scandals, the MOF was also tarred in the public eye with the label of incompetence and arrogance. At least some ruling party politicians were motivated by revenge for the slights of the non-LDP coalition period. With the element in place of widely recognized policy failure, public disapproval, a weakened relationship with ruling politician, and politician’s increased sensitivity to public opinion, the Ministry was vulnerable. (202)

-the reorganization ideas being floated by 1996 were extremely worrisome for the MOF. These included the reform and reduction of government financial institutions. Another idea that constituted an even more profound attack on MOF prerogative was a plan to move budgeting function to the PM office. (203)

-the most significant check on the MOF power in macroeconomic policy making was the revision of the Bank of Japan laws passed by the Diet in June, 1997.(204)

- along with the BOJ law revision, the cabinet also submitted bills to establish a new Financial Supervision Agency to take over MOF’s role as supervisor of the banking, security, and insurance sectors.(207)

- the changes in the macroeconomic policy-making structure seen were truly historic. It would have been nearly unimaginable in 1985, or even 1995, that the MOF would lose its preeminence in monetary policy, let alone be dismembered. BOJ was now largely autonomous. The Diet became the official overseer of the BOJ, it also took back the initiative in budgeting, and was the architect of the dismantling and reconstruction of Japan’s macroeconomic policy apparatus. (215)

Conclusion: over the previous seven chapters, the author has shown that the structures of power and information in Japanese macroeconomic policy making had fundamentally influenced the policies actually followed in japan. (218)

- this study has demonstrated the usefulness in using ‘the framework of institutional competition' in understanding an otherwise dauntingly confusing set of events and policies in the actual historical record. (219).

Unmaking the Japanese Miracle: Macroeconomic Politics, 1985-2000

Recently I have read the following book. Its main points are:

Book title:  Grimes, William. 2001. Unmaking the Japanese Miracle: Macroeconomic Politics, 1985-2000. Ithaca and London: Cornell University Press.

Main points:

Ch. 3- this chapter begins with fiscal policy, then turns to monetary policy, and finally to exchange rate management. The central contention in fiscal policy was the national budget. The first step in understanding Japan’s fiscal policy is to consider the general account budget. (74)

- the tools of the BOJ are essentially the same as those available to other central banks. They include manipulation of the discount rate, interbank market and reserves policies. (94) The basic operational goal of the BOJ included stable prices, sustainable economic growth, stable currency, the integrity of the financial system, and organizational autonomy. (98)

Ch. 4.-in the name of reducing international imbalance, the Japanese government was pressured to allow the yen to appreciate rapidly and to promote domestic demand. It responded with a policy mix that was fundamentally unsound and set the stage for the bubble burst. (108) To understand that response, we had to look at the domestic policy-making structure. The period could be broken down into four phases. From spring 1985 to the year end it emphasized on lowering the level of dollars through foreign exchange market intervention. Second, from January to June 1986, ad hoc monetary policy emerged as the centerpiece of international coordination effort.  From July 1986 before the Louvre Accord in February 1987, more bilateral US-Japan coordination began. From the Louver Accord until the end of 1987, there was a shift to coordination of domestic demand management. (108)

- in November 1980 voters in the US elected Ronald Regan on a platform of tax cut. The experiment, known as Reaganomics, began with unprecedented tax cuts accompanied by increased in government spending.  Coupled with the anti-inflationary program, the result was high interest rate drawing massive foreign investment and raised the value of the dollar. (109)

- analysts of the Plaza-Louvre period (1985-87) had used a variety of theoretical perspective to explain Japan’s action in the period. Each of this perspective offered some insight, but no satisfactory explanation could be made without considering the structure of Japanese macroeconomic policy making. Only by combining domestic structure with internal and external pressure were we able to come up with a consistently satisfactory explanation (127).

- the primary problem facing policy makers in 1985 were ‘bring down superdollar’. Recognizing that the US dollar was much overvalued, a cheaper dollar was needed to reduce current account imbalance. (127)

- looking at events from a two-level perspective suggested that the ultimate failure of the Louver strategy was that international-level commitments exceeded what domestic actors were willing to accepted. (134) On the Japanese side, we again saw the reluctance of MOF to use the fiscal policy tool, and its ability to block politician from using it. (135)

Ch. 5.-the year 1988 opened with a weak dollar and a lack of consensus among the G-7 countries on questions of coordinated action. 1988 saw a stabilized dollar against the yen. (136)

- much of the prosperity of the late 1980s was based on a speculative bubble. The bubble was fueled by rapid increase in the money supply caused by the continuation of BOJ’s low interest rate policy until May 1989, at least a year beyond the point at which it had ceased to be economic justifiable (an over-short).(137)

-monetary policy both encouraged and ended the bubble, but it was not able to put the economy back on track. This chapter examines both the economic policies that caused prosperity and then led to disaster, and the macroeconomic policies behind them. (137)

- in December 1989, governor Sumita of BOJ ended his term; he was replaced by his deputy Mieno Yasushi. Mieno was a BOJ careerist. Almost immediate, he acted to raise interest rate for the third time in seven months. (142) Mieno’s proposal angered the powerful Finance Minister, Hashimto Ryutaro, who exercised his legal prerogative to postpone any change in the discount rate. But the market situation forced Hashimato to drop his position. BOJ under Mieno would raise interest rate twice more. The last of the rate hikes was striking, coming as it did in the middle of a rapid decrease in stock prices on August 30, 1990; the Nikkei has fallen to 26,000 from the level of over 33,000 in early June. (142) These rapid rate rises were the monetary equivalent of driving a truck into a brick wall. (143)

- despite the BOJ’s aggressive reversal of its bubble-bursting policies of 1989-90, the growing financial mess proved difficult to reverse. The fall of asset prices had led to a large increase in bankruptcies. (148)

- politicians were increasingly frustrated, one sign of this was LDP kingmaker Kanemaru Shin’s widely reported comments in February 1992 to the effect that “the discount rate should be lowered even if it means the PM firing the governor of the BOJ”. (149-150)

(to be continued)

Unmaking the Japanese Miracle: Macroeconomic Politics, 1985-2000

Recently I have read the following book. Its main points are:

Book title:  Grimes, William. 2001. Unmaking the Japanese Miracle: Macroeconomic Politics, 1985-2000. Ithaca and London: Cornell University Press.

Main points:

Introduction: the major puzzle facing observers of the Japanese economy in the 1990s had been a straightforward one:  ‘What went wrong?’, or “why did it go wrong?” To understand the ‘why’ question, we must turn to politics. In this book, the author argues that the structure of power in macroeconomic policy making was largely responsible for the policy failures since the mid-1980s. (xvii)

- the story began with the Plaza Agreement in September 1985 which marked the beginning of international economic policy coordination among the (then) G5 countries to increase the values of the yen and other currencies to the dollar. (xviii)

- this book addresses Japan’s macroeconomic policy making in a logical progression. Ch.1 lays out the structure of the macroeconomic politics. Chapter 2-3 offer more detailed analysis of the each institution.(xx) The central premise was that the way policy were made had an important effect on the shape of the policies themselves. (xx)

Ch. 1. - this chapter describes the structures. The subsequent chapters will demonstrate how it contributed to the expansion, and eventually bursting of the bubble, and show how changes in policy-making structure had altered the available policy choices. (1)

- a variety of explanation had appeared in recent years to account for both specific Japanese macroeconomic policy; yet more explanation focused on the problem of exchange rate, international power and the failures of the bureaucracy etc.(1)

- Japanese macroeconomic and the exchange rate policy making were essentially a game among the three official actors – the Ministry of Finance, the Bank of Japan and the leadership of the Diet.(11) Policy making was a game played on two levels: the individual and the institutional. In the case of macroeconomic policy in Japan, we had to first ask ourselves what incentives were facing the individuals in the Ministry of Finance, the Bank of Japan, and the political parties. These were primarily a function of career path of the officials/politicians. (13)

-to make sense of the collective action, we began at the level of individual. What incentive did the individual member of organization face? The individual would pursue his goal subject to the environment. The author assumes that the main goal for the individual was power and prestige.  The bureaucrat joined the agency not for amassing wealth. They entered their career through a sense of duty, or commitment to ideals. The best way to advance these ideals was to advance one’s own personal position in an agency, i.e. the mission was consonant with one’s own goal: seeking power and prestige. For the politicians, they looked for re-election. (14)

- there would be no conflict if the Bank of Japan (BOJ) and the Ministry of Finance (MOF) had identical objectives. The bank’s overriding objective had been price stability; they would be blamed for inflationary mistakes. The Bank rejected the possibility of a trade-off between growth and inflation. (21)

- there were three political actors. Until the BOJ law revision in 1998, the MOF was the central actor in Japanese macroeconomic policy making due to its broad legal jurisdiction and effective manage of information. It was responsible for fiscal policy and exchange rate management and was answerable to the Diet. (23)

- BOJ was responsible for making monetary policy. It had two objectives: to ensure low inflation, and improve autonomy in the conduct of monetary policy. The third actor was the Diet which had the authority to direct the Ministry in serving the nation. (24)

- in 1998 a number of key structural variable changed, leading to a major change in the game of macroeconomic politics. A quick summary was that there was a major structural-legal change in 1998. It was the implementation of a revised Bank of Japan laws and the establishment of the Financial Supervision Agency (FSA) that constituted changes that were important in reducing the power and network of the MOF. (28)

-Ch. 2- this chapter fleshes out the previous schematic description of the institutional actors and examines the resources and constraint under which these three parties had to operate. Career path and information managements pattern were central to an understanding the organization’s power. (30)

- the MOF had a degree of authority over macroeconomic policy making and implementation. Tax policy and collection, budget making etc. all been centralized in the Ministry. (30) The main counterpart to the MOF in macroeconomic and exchange rate policy was the BOJ. (39)

- the Diet had a variety of roles that impinged directly and indirectly on the policy-making process. In the areas of fiscal policy and exchange rate management, MOF was legally answerable to the Diet, or specifically to the Cabinet. (56)

- the Japanese macroeconomic policy-making system tended to limit the short-term option of political leaders for having a meaningful effect on policies. The overall picture had been one of a highly pork-barrel-oriented political party with little expertise and only sporadic interest in macroeconomic impacts. (71)

(to be continued)