As we slog into the third decade of the Lost Decade, the enigma of Japan is why, given dire developments, change and reform happen so slowly, if at all.
The process of transformation is fitful and incremental, zigzagging and backtracking while bypassing many eddies of continuity.
In this important new book, Walter Hatch offers an original and convincing explanation for some of this stasis, examining how regionalization strategies sustained Japan’s model of capitalism well past its sell-by date.
By replicating their distinctive economic model in Asia, one Hatch terms “selective relationalism,” and transplanting practices, patterns and relationships in regional economies, Japan’s business elites with extensive support from the government, managed to postpone adjustments at home.
This is a fascinating story of how Japan managed globalization, and resisted its impulses temporarily through a strategy of regionalization.
Drawing on the flying geese metaphor, Hatch explains how the lead goose, Japan, deployed its capital, technology and norms to the Asian flock, thereby bolstering its system even as it was becoming increasingly dysfunctional.
While Japan Inc. dithered, its problems festered precisely because the benefits of regionalization masked the underlying predicaments. As a result, there was no sense of urgency as elites clung to their system, and the benefits it conferred, hoping they had seized on a sustainable strategy. Alas, they were blindsided by the economic crisis of 1997-98 that battered regional economies.
The other game changing development challenging this strategy has been the meteoric rise of China and its emergence as a key global economy, one that has now overtaken Japan in terms of GDP.
Japanese elites clung to their system because of the advantages it conferred. Due to what Hatch calls “positional power” within their networks, elites could leverage their gate-keeping role, especially over information, but also capital, labor and technology, to maximize their interests and clout.
He constructs a complex model to shed light on Japan’s institutional characteristics and how they influence its political economy and help explain the paradox of slow change amid prolonged difficulties. A system that worked well during the catch-up phase of development until the early 1970s “did not begin to undergo a major transformation until the very late 1990s.”
Hatch argues that it is the institutions and actors that have the most to lose from reforms who use their power to stall, distort and inflict damage. He discusses how the Ministry of Finance resisted deregulation and became paralyzed by its focus on retaining power, thus “allowing a string of financial setbacks to spread steadily into a systemwide financial crisis.”
In the process of establishing export platforms in Asia to overcome high production costs at home and ease trade frictions, Japanese firms brought their embedded network ties and relational inclinations with them. The problem is that these are exclusive patterns that have given Japanese firms a bad image in Asia as local staff are not promoted into key positions and some of the more “democratic” management practices at home are not part of the deal.
Nevertheless, Hatch argues that Japanese elites “acted as agents of a remarkably informal, extralegal form of regional integration occupying central nodes in an integrated structure of administrative and production networks linking political and economic actors in the region.” In doing so they acquired “positional power.”
Yet, the Asian financial crisis at the end of the 1990s undermined the Japanese role as pivotal players in regional production and distribution networks even as “the fundamental networks of selective relationalism — government-business cooperation, interfirm cooperation and labor-management cooperation — remained intact at home.”
Japan responded generously to Asia’s plight by pledging a $80 billion, 10-year bailout package. This dramatic gesture, Hatch argues, was self-serving as much of it was tied to purchases from Japanese suppliers and the package included significant financing for Japanese firms operating in the region.
Moreover, the project also paid for the dispatch of Japanese experts who provided administrative guidance and helped embed Japanese practices and norms.
However, Hatch asserts that “the longer Japanese elites used desperate measures to rescue the flying geese pattern of regionalization and thereby preserve the solid ties of relationalism at home, the longer it would take for Japan to rediscover its own wings.”
In Hatch’s view, rescuing relationalism in Asia was exactly the wrong medicine for what ails Japan, prolonging an unsustainable system and postponing the reckoning of structural adjustments. He also suggests that the sun is setting on regionalization, but perhaps it is only evolving and remains a useful strategy.
And while Hatch’s model is very good at explaining why change has been slow, he attributes the change that is happening mostly to unexpected exogenous developments.
There are signs of overdue structural changes and Hatch is heartened by some of the “hollowing out” of the economy others lament, but an unanticipated external jolt — the Lehman Shock — has made globalization look far less appealing.
Whither Japan, Hatch maintains, depends a lot on dismantling existing networks and recasting positional power, but as this fine book shows, the vested interests are not going down without a fight.
Jeff Kingston is director of Asian Studies, Temple University, Japan.