Page 203 - Global Political Economy_Understanding The International Economic Order

CHA PTER S EVEN
place. Younger Japanese have become much more entrepreneurial.
Throughout the economy, an increasing emphasis on return to equity
has caused firms to decrease their former concern with market share.
The pressure for profitability and reform will increase as pension
funds demand greater returns to support the growing population of
the aged. High wages, production costs, and an overvalued yen are
forcing Japanese firms to produce more and more goods in overseas
plants.
The core of the Japanese industrial economy is the “main bank
system.” In the early postwar years, this system was very effective in
collecting national savings and funneling them to the industrial mem-
bers of the keiretsu. However, this system resulted in overly close
banking-industry ties and led to major inefficiencies, corruption, and
other abuses. The main bank system that once pumped capital into
keiretsu regardless of risk has failed; it was this system that led to the
colossal misallocation of capital that culminated in Japan’s bubble
economy. Largely as a consequence of the collapse of the bubble and
the ensuing financial crisis, the main bank system has been under
strain and has been undergoing major reforms. In addition, financial
reforms of the late 1990s have increased competition, especially from
American and other financial institutions, and have been forcing Jap-
anese banks to become more prudent lenders and more profit-
oriented in their practices. Nevertheless, powerful banks and the
Ministry of Finance can be expected to remain major forces in the
Japanese financial system.
Despite these impressive changes in Japan’s political economy,
there has been no significant alteration in such fundamental aspects
of the economy as the political domination of the country by a con-
servative political, business, and bureaucratic elite; Japan’s neomer-
cantilist export-led growth strategy has not changed nor has the
closed nature of the keiretsu been altered. Fundamental change will
succeed only when and if Japan moves decisively in the direction of a
more market-oriented economy. Such a transformation would require
greatly expanded deregulation of the economy, and the Japanese
economy is still the most regulated among industrialized countries.
The overregulation of the economy by government bureaucracies has
stifled innovation, discouraged entrepreneurship, and caused gross in-
efficiencies. Deregulation of the economy would stimulate entrepre-
neurship and increase productivity; it would also be an important
step toward opening the Japanese market to imports, and this would
further increase overall efficiency.
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