Evolution of the Economic System in Japan
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Book Review Evolution of the Economic System in Japan Juro Teranishi. Cheltenham: Edward Elgar, 2005, 360pp. Comparative Economic Studies (2007) 49, 313–316. doi:10.1057/palgrave.ces.8100187
One of the popular myths about the Japanese economy is that its systemic characteristics are old. Industrial paternalism and the close government– business relationship, for example, are sometimes taken as offshoots of Japan’s pre-modern socio-economic order and institutions. Actually, as demonstrated in Teranishi’s book about Japan’s economic systems since 1868, contemporary Japanese economic institutions are modern in their origins. There was a discontinuity in the Japanese economic system around WWII. The preceding system was, in fact characterized by high labour mobility and a non-interventionist government – closer to Anglo-Saxon classical capitalism. An economic system, defined by Teranishi as a set of rules that constrain the behaviour and interactions of economic agents, has three subsystems: (a) the division of labour between the government and the private sector, (b) the private sector institutions whose core is the employment, financial, production, and corporate governance systems, and (c) the mode of the government-private sector interaction and its impact on income distribution. An economic system’s coherence depends on the complementarity across and within these subsystems. Insofar as economic agents accept and abide by the rules, the incumbent economic system lasts. If old rules become obsolete in the face of an environmental change, a system declines and is replaced by another. Teranishi identifies the two systems as the ‘Meiji-Taisho’ and ‘highgrowth-period’ economic systems. The Meiji-Taisho capitalist system (1868 to 1926) emerged around 1900 after the government laid the institutional foundation, and new transportation and communications networks and modern legal and currency systems integrated the national economy. By then Japan’s modern sector was expanding but still relatively small, agriculture was the economy’s mainstay, and industrialization proceeded from light industry. The Meiji-Taisho system enabled Japan to tap the entrepreneurship and accumulated wealth of local elites, landlords and merchants, who became the shareholders of large modern companies and borrowers from banks to invest in small businesses. This earlier
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economic system was decidedly more market-based than the high-growthperiod system. In terms of Teranishi’s three subsystems, the government’s role in the Meiji-Taisho system was largely confined to public goods provision centred on infrastructure investment and national defence, and government’s intervention in private business activities was kept to a minimum. An overwhelming majority of workers were low-skilled, the firm’s labour turnover was high, and Japan’s income distribution was highly skewed. Large shareholders controlled modern firms, share ownership was concentrated, and the traditional sector relied on bank financing. As the
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