The Japanese Economic System and Its Historical Origins

Author: Okazaki, Tetsuji : Okuno-Fujiwara, Masahiro

Reviewer: Frankl, Jennifer

Published by EH.NET (August 1, 2000)

Tetsuji Okazaki and Masahiro Okuno-Fujiwara, editors, The Japanese Economic System and Its Historical Origins. Oxford: Oxford University Press, 1999. x + 294 pp. $78 (cloth), ISBN: 0-19-828901-4

Reviewed for EH.NET by Jennifer Frankl, Department of Economics, Williams College.

This book is the result of a joint research project to examine the historical forces that caused the emergence of the current Japanese Economic System, which is so different from the U.S. or British economic systems. The theory advocated in this book is that many major elements of the system were deliberately created during the Pacific War years (1930-45) as part of the war effort.

The authors contrast this theory with cultural explanations, which claim that the Japanese system grew out of traditional elements of Japanese culture from the prewar years. This distinction provides important insight to those interested in reforming the Japanese economic system and for those trying to imitate all or pieces of the system in other countries.

Historical Origins contains nine chapters by eight different Japanese economic historians. Chapter One (Okazaki and Okuno-Fujiwara) thoroughly summarizes the book, showing the way that various features of the economic system were introduced by the wartime government and evolved during the post-war recovery. This chapter also lays out a definition of the "Japanese Economic System," which is used throughout the book. Chapter Two (Kazuo Ueda) shows how various regulations led to the intertwining of government and private financial institutions to provide long term funds. It emphasizes the role of discretionary control by bureaucrats versus regulation by rule in the Japanese system. Chapter Three (Juro Teranishi) traces the main bank system to the voluntary joint financing of the wartime period. It makes clear the interdependence between changes in the financial regulation, financial institutions, and corporate governance that brought about a stable post-war system that encouraged economic growth. Chapter Four (Tetsuji Okazaki) focuses on how wartime regulations and institutions changed the Japanese system of corporate governance away from its prewar focus on shareholders towards the postwar focus on employees and main banks. This chapter emphasizes the adjustments made to the economic system during the postwar recovery in response to the Occupation and a return to capitalism from a command economy. Chapter Five (Konosuke Odaka) shows how Japanese-style labor relations can be traced to 1920s manufacturers as well as to government efforts to smooth labor relations and increase production during the war. Odaka emphasizes the free market nature of labor markets in Japan prior to the 1920s. Chapter Six (Sei-ichiro Yoneyama) explores the origins of industrial associations in the control associations of the war period. These associations encourage the exchange of information between government and corporations, which allows bureaucrats to be effective participants in the Japanese economic system. Chapter Seven (Naohiko Jin-no) traces the current Japanese tax system back to the "full mobilization" tax and fiscal system of the wartime era. Chapter Eight (Toshihiko Kawagoe) explores the process by which the wartime food-control system evolved into the current system of food-control and associations of agricultural cooperatives (Nokyo). Chapter Nine (Masahiro Okuno-Fujiwara) gives a theoretical account of the interdependence of these pieces of the current Japanese economic system. He shows how the mutual complementarity of the institutions and practices make for a stable system, which would be difficult to replicate piecemeal.

This book contains many carefully researched accounts of the evolution of the Japanese economy. Although there is little formal econometrics, there is a great deal of carefully gathered empirical evidence to trace these institutions from the 1920's to the present day. This careful documentation shows a movement from a free market economy in the prewar to the extensive intertwining of government, corporations, financial institutions and "associations" that makes up the current Japanese system. However, the issue of the role of Japanese culture in the formation of the Japanese economic system still remains. Did the choice of wartime regulations and the acceptance of these kinds of wartime regulations reflect elements in Japanese culture? Could the introduction of life-time employment by corporations and discretionary control by the legislature in the 1920s have been signals that the Japanese economy would have evolved very differently than the West even without the Pacific War? Of course, these are questions that cannot be answered simply by looking at the historical record. They do, however, have a direct bearing on the issues of reform of the current Japanese economy or the ability of other economies to adopt a Japanese-style system. The final chapter of the book demonstrates that the authors are already focused on the complexity of these issues. Chapter Nine makes an excellent theoretical case that the mutual dependence of the parts of the Japanese system make institutional reform a difficult process that must encompass an entire economic system.

Jennifer L. Frankl is author of "An Analysis of Corporate Structure in Japan, 1915-1937," Journal of Economic History, 59 (December 1999).