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)