Japans Budget Politics: Balancing Domestic and International Interests 9781626373747

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JAPAN’S BUDGET POLITICS

A Study of the East Asian Institute, Columbia University The East Asian Institute is Columbia University’s center for research, publication, and teaching on modern East Asia. The Studies of the East Asian Institute were inaugurated in 1962 to bring to a wider public the results of significant new research on modern and contemporary East Asia.

JAPAN’S BUDGET POLITICS Balancing Domestic and International Interests

TAKAAKI SUZUKI

b o u l d e r l o n d o n

Published in the United States of America in 2000 by Lynne Rienner Publishers, Inc. 1800 30th Street, Boulder, Colorado 80301 www.rienner.com and in the United Kingdom by Lynne Rienner Publishers, Inc. 3 Henrietta Street, Covent Garden, London WC2E 8LU © 2000 by Lynne Rienner Publishers, Inc. All rights reserved

Library of Congress Cataloging-in-Publication Data Suzuki, Takaaki. Japan’s budget politics : balancing domestic and international interests / Takaaki Suzuki. p. cm. Includes bibliographical references and index. ISBN 1-55587-887-3 (hc. : alk. paper) 1. Budget—Japan. 2. Fiscal policy—Japan. I. Title HJ2169.S87 2000 336.3'0952—dc21 99-42365 CIP British Cataloguing in Publication Data A Cataloguing in Publication record for this book is available from the British Library.

Printed and bound in the United States of America

∞

The paper used in this publication meets the requirements of the American National Standard for Permanence of Paper for Printed Library Materials Z39.48-1984. 5 4 3 2 1

To Lynette Margaret Peck

Contents

ix xi

List of Tables Acknowledgments

Part One: Introduction 1

Overview

3

The International Context, 5 The Domestic Context, 10 The Two-Level Framework, 13 Organization of the Book, 17

2

The Two-Level Framework

23

The International Level: Embedded Liberalism and the Politics of Macroeconomic Coordination, 23 State, Society, and the Politics of Japanese Budgetary Policy, 32 Integrating the Two Levels, 54

Part Two: Policy in the 1970s

3

Introduction

67

Achieving International Cooperation

69

The Collapse of Bretton Woods and the Politics of Macroeconomic Coordination, 69 The Road to London and Bonn, 74

4

The Politics of Profligacy: Fiscal Crisis The Initial Setting: The LDP at a Crossroad, 89 The Budgetary Inroads of Tanaka Kakuei, 95 vii

89

viii

CONTENTS

“Mr. Clean” and the Budgetary Crisis, 102 The Fiscal Gambit of Fukuda Takeo, 107

5 Analysis: Assessing the Two-Level Hypothesis for the 1970s

121

Part Three: Policy in the 1980s Introduction 6 Failing Cooperation: Macroeconomic Coordination at a Standstill

133

135

The Rekindled Debate over Macroeconomic Coordination, 135 Bonn II and Tokyo II: Summits Without Success, 139 After Tokyo II: Renewed Pressures, Token Concessions, 146

7 The Politics of Budgetary Retrenchment

157

The Initial Setting: The Political Legacy of Deficit Financing, 157 The Birth of Gyozaisei Saiken (Administrative and Fiscal Reform), 160 The Rise of Nakasone and the Strengthening of the Fiscal Reform Movement, 173 Reconsidering Fiscal Reform, 184

8 Analysis: Assessing the Two-Level Hypothesis for the 1980s

195

Part Four: Policy After the Bubble 9 The Return of Deficit Financing

207

Locomotive Revisited, 207 Renewed Foreign Pressures and the Collapse of LDP Dominance, 216 Conclusion, 224

Part Five: Conclusions 10 Evaluating the Politics of Japanese Budgetary Policy

235

The International Politics of Japanese Budgetary Policy, 235 The Domestic Politics of Japanese Budgetary Policy, 240 Evaluating the Two-Level Hypotheses, 247

Bibliography Index About the Book Studies of the East Asian Institute

253 271 281 283

Tables

3.1 3.2 3.3 3.4

4.1 4.2 4.3 4.4 4.5

GDP of Four Nations as a Percentage of U.S. GDP, 1955–1975 Comparative Consumer Price Index, 1970–1980 Shift in Japan’s Current and Trade Account, July–December 1976 General and Central Government Surplus or Deficit as a Percentage of Nominal GDP

70 72 75 84

4.6

General Account Budget and GNE, 1955–1972 Average Yearly Change in Share, Japan and the United States Rural and Urban Population Employment Population by Industry Demographic Composition of LDP Votes and Lower House Seats Political Base of LDP Support by Occupation

95 105

5.1

Average Yearly Change in Budget Share, 1961–1980

127

6.1 6.2 6.3 6.4

Relative Share of GNP Among G-5 Nations, 1955–1980 Comparative Data of Inflation and GNP Growth Japan’s Trade Balance in Dollar and Yen Terms, 1986 Yen/Dollar Monthly Basis

136 137 143 145

7.1

General and Central Government Financial Balances Surplus or Deficit as a Percentage of Nominal GDP Tax Burden as a Percentage of National Income Change in the Share of Subsidies as a Percentage of the Budget Public Works Spending, 1981–1987

7.2 7.3 7.4

ix

91 92 93 94

158 179 180 181

x

TABLES

7.5 7.6

Food Account Subsidy, 1980–1986 General Account Budget, 1980–1989

182 186

8.1

Average Yearly Change in Budget Share, 1961–1990

201

9.1 9.2

1993 Lower House Election Japan’s Real GDP and Current Account Balance, 1990–1996 Fiscal Stimulus Packages, 1992–1995

218

9.3

225 226

Acknowledgments

In writing this book I incurred large debts to many institutions and individuals. My greatest intellectual debts go to my academic mentors. At Oberlin, Ron Dicenzo inspired me, along with countless others, to learn more about Japan. At Columbia, Gerald Curtis encouraged me throughout my graduate training and beyond, and he has taught me most of what I understand about Japanese politics. Mark Kesselman, James Morley, and John Ruggie broadened my theoretical and historical appreciation of politics. Hugh Patrick graciously reached out across the disciplinary divide in an effort to educate me on the Japanese economy, and in the process gave me sage advice laced with humor, wisdom, and kindness on broader matters. The Matsushita Postdoctoral Fellowship at Columbia University, the Japan Foundation, and the Social Science Research Council provided critical financial support. I enjoyed research affiliations with the East Asian Institute at Columbia University, the Institute of Fiscal and Monetary Policy at the Ministry of Finance, the Institute of Oriental Culture at the University of Tokyo, and the International Department at the Japan Development Bank. I am especially grateful to Masao Goto, Takashi Inoguchi, Yuichiro Nagatomi, Satoshi Ohka, Kisaburo Seno, and Hiroshi Tsukada for providing me with introductions and access to important research materials during my fieldwork in Japan. Many colleagues read various versions or parts of this manuscript and helped improve it. Robert Uriu read the manuscript from its inception and prodded me to develop my ideas more fully in his soft-spoken yet sharply insightful manner. William Heinrich gave detailed comments and editorial suggestions on several versions of the manuscript. Perhaps more important, both have been unwavering friends for many years. Others who provided valuable comments on earlier drafts or parts of the manuscript include Robert Bullock, Jennifer Dwyer, Anne Emig, John Gilliom, Hiroshi Ishida, Peter Johnson, Aki Miyashita, Frank Packer, and Sheila Smith. Special thanks go to Len Schoppa, who reviewed the entire manuscript for xi

xii

ACKNOWLEDGMENTS

publication and made many comments that helped improve it, and to John Campbell, who reviewed a shorter and somewhat different version of Chapter 7 titled “Administrative Reform and the Politics of Budgetary Retrenchment in Japan,” which was published in the October 1999 issue of Social Science Japan Journal. I am also grateful to Leanne Anderson, Dan Eades, and Shena Redmond of Lynne Rienner Publishers for guiding the manuscript through the editing and production process, and to Carol Gluck and Madge Huntington for arranging its inclusion in Columbia University’s Studies of the East Asian Institute. I am also indebted to the faculty and staff in the Department of Political Science at Ohio University. I would especially like to thank my senior colleagues Tom Walker and David Williams for their tremendous hospitality and collegiality since the day I arrived, and my contemporaries John Gilliom and Julie White, who have made life in Athens enjoyable and rewarding on matters both personal and professional. Finally, my greatest expression of gratitude goes to my family. My parents, Yasunosuke and Mieko Suzuki, offered endless support in so many ways. Most important, Lynette Peck and our children, Theo and Miyo, have been my greatest source of inspiration, and the numerous sacrifices they endured have made this all possible. Takaaki Suzuki

PART ONE

INTRODUCTION

1 Overview

Who gets what, how much, and by what process? These central questions have helped define the field of political science, and nowhere are they more relevant than in the study of a nation’s budgetary policy. An in-depth examination of this issue area provides crucial insights about the political dynamics not only within nation-states, but among them as well. All governments must wrestle with the problem of how to utilize their limited resources to satisfy a wide range of societal demands and national objectives. Under a representative democratic system, not only are budgetary policy decisions bound by macroeconomic constraints, but they must also follow the dictates of politics wherein general voters and interest groups often oppose tax increases yet demand greater government spending. The economic limitations of funding large sums of government spending through tax revenues, combined with the political pressure to expand government spending while keeping taxes down, have created a general tendency among advanced industrial democracies to spend beyond their means, most noticeably through deficit financing. In turn, the specter of large budget deficits has sparked a countertrend to rein in profligacy and establish a balanced budget, and the tension created by these contradictory forces has given rise to what scholars have termed “the contradiction of the modern welfare state.”1 Japan is no exception. Despite the common tendency to portray the nation’s political and economic institutions as unique and unchanging, a cursory glance at its budgetary policy over the past four decades reveals sharp variations in policy outcomes consistent with those found in other advanced industrial democracies. During the 1960s, a balanced budget was the norm and the overall size of the budget was kept below 20 percent of national income. In the 1970s, however, greater demands for public spending combined with political opposition to raising taxes forced the government to 3

4

INTRODUCTION

rely increasingly on deficit financing to cover vast increases in government programs and expenditures. Indeed, by the end of the decade, Japan’s budget deficit, measured as a percentage of the total budget, ranked among the highest of advanced industrial democracies, reaching almost 40 percent of the budget for 1979. 2 Then, in an abrupt reversal, the government adopted throughout the 1980s “zero ceiling” and “minus ceiling” policies whereby the major domestic spending items in Japan’s general account budget were first frozen from one year to the next, then cut in subsequent years. The government also suspended its practice of cutting taxes to keep tax rates constant and postponed various obligatory payments from the general account budget by using funds from other public accounts. By pursuing these strategies, the government was able to eliminate entirely by 1990 its reliance on deficit-financing bonds. In the 1990s, however, the pendulum has swung once again toward a heavy reliance on deficit financing, as the government adopted a series of pump-priming measures in the face of Japan’s worst economic recession in decades. Another important feature that Japan’s budgetary policy shares with those of other advanced Western economies is its growing politicization at the international level. The budgetary policies of major economic powers such as the United States, Japan, Germany, Great Britain, and France have become a key and often heated topic in negotiations among state leaders over macroeconomic policy coordination. Bargaining over these policies has now become institutionalized in economic summits, as well as in Organization for Economic Cooperation and Development (OECD) and interministerial meetings. With the decline of U.S. hegemony and the end of the U.S.-sponsored Bretton Woods system in the early 1970s, coordinating the macroeconomic policies of these nations has become a central pillar of the “embedded liberal” international economic system.3 Achieving international cooperation in this issue area can mean the difference between a steadily expanding world economy with declining trade imbalances and a prolonged global recession marked by growing trade imbalances that provoke protectionist responses. Consequently, in three key instances (1976–1978, 1985–1987, and 1992–1995), Japan’s economic partners abroad have adopted a range of strategies—diplomatic suasion, the threat of market closure, and currency depreciation—in an effort to pressure Japan to adopt budgetary policies consistent with those that sustain world economic growth and reduce its mounting trade surpluses. These two seemingly separate political concerns are in fact inextricably bound by both a common logic and a Janus-faced state that must reconcile them. The contradiction of the modern welfare state mirrors the inherent conflict between the “embedded” and “liberal” principles of the international economic system. Just as nations at home must strike an ongoing balance between the appropriate role of the market and that of the

OVERVIEW

5

state in determining how scarce resources are to be allocated, state leaders abroad must continually negotiate with their foreign counterparts to foster freer international markets while mitigating the social costs they entail through joint action over macroeconomic policy. States, therefore, are confronted with the challenge of devising economic policies that deal with these domestic and international concerns, often simultaneously. In this study I analyze how the Japanese government makes budgetary policy decisions in light of these concerns.4 In an effort to explicate why and in what manner these international and domestic political forces emerge, interact, and influence Japan’s budgetary policy outcomes, I advance a two-level approach that follows three distinct steps. First, I examine the issue of why Japan has repeatedly encountered international pressures to adopt budgetary policies that promote fiscal expansion and the manner in which Japan has responded to these pressures. Second, I identify the interests and objectives of all the relevant domestic political actors who compete over budgetary policy outcomes and analyze the institutional context through which they channel their demands into the overall domestic decisionmaking process. Third, I examine how and to what extent international and domestic political forces interact over time to shape the incentive structure of policymakers and influence policy outcomes. The time period I cover ranges from the beginning of the 1970s to the mid-1990s, a period in which Japan’s budgetary policy became increasingly politicized in both the international and domestic political arenas. Each of these three sets of questions is crucial in capturing the international and domestic politics of Japanese budgetary policy, but their importance is neither readily evident nor well understood. This two-level approach, which seeks to bridge the traditional gap between the fields of international relations and comparative politics into one coherent framework, will raise consternation among those who seek a parsimonious causal explanation of policy outcomes. For others, the relevance of these three sets of questions, taken both on their own and in relation to one another, may seem obscure and thereby obfuscate the central arguments of this study. It is therefore worth stating explicitly at the outset the relevance of these questions and giving a detailed account of the arguments I make in each.

The International Context Organizing the three sets of issues into one coherent framework is crucial in capturing the international and domestic politics of Japanese budgetary policy. I start this study with an international level of analysis in order to provide the broadest political context from which to observe Japan’s budgetary

6

INTRODUCTION

policy.5 Although I accord greater weight to domestic political variables, in particular the interest and interaction of the societal actors and political parties that make up Japan’s ruling coalition, to explain Japanese budgetary policy outcomes, I also stress the importance of including an international component in my analysis for two reasons. First, acknowledging the primacy of domestic politics on policy outcomes does not mean that the politics of Japanese budgetary policy takes place in an international vacuum. The international system has long been recognized as crucial in shaping Japan’s domestic politics and policymaking. Less apparent, however, is the extent to which the postwar changes in the distribution of economic power among nations have altered this arrangement and exerted new pressures and constraints on Japan’s domestic politics and policymaking. Although many studies of Japanese politics recognize the significant influence that the international system has had in postwar Japan, these influences are only implicitly recognized and generally presented in static, rather than dynamic, terms. Granted, the U.S.Japan alliance remains the single most important international factor influencing Japan’s domestic politics. However, by emphasizing the enduring importance of the alliance on Japanese domestic politics, one fails to capture what is perhaps the most crucial question being asked in the field of international relations, namely, whether Japan is willing and able to assume a greater leadership role within the alliance following the decline of U.S. hegemony. One important contribution of this study, therefore, is its explicit account of how changes in the international system influence Japan’s domestic politics. A second and related reason why I include an international component in this study is to contribute to the field of international relations. Many scholars of international relations have examined the relationship between changes in the distribution of power and international cooperation in the issue area of security, trade, and finance.6 However, very few have examined why a major economic power’s budgetary policy has become increasingly linked to the notion of international cooperation and burden sharing.7 Indeed, to the extent that this issue is addressed, the tendency has been to anticipate its declining importance, either as a result of the growing global capital market or because of the ideational shift from Keynesianism to monetarism.8 These predictions, however, remain unfounded. Just as freer markets have led to more, rather than less, regulatory rules,9 neither the growth of the global capital market nor the ideational shift from Keynesianism to monetarism has eliminated the need to coordinate the macroeconomic policies of the leading advanced industrialized nations. International negotiations over Japanese budgetary policy, which began in the mid-1970s, have persisted well into the 1990s. I explain not only why these negotiations

OVERVIEW

7

have persisted but also the varying manner in which Japan has responded to international pressures throughout these negotiations. I contend that at the most basic level the international politicization of Japanese budgetary policy can be traced to the changes in the distribution of power among states during the postwar period—most notably the decline of U.S. hegemony and the rise in Japan’s economic power relative to other nations. More specifically, I contend that in the postwar period the rise in the volume and speed of capital transactions and the greater legitimation of adopting economic policy for social purposes have elevated the importance of Japan’s budgetary policy in promoting stability in the international economic system for two reasons. First, budgetary policies that promote fiscal expansion play a crucial role in stimulating world economic growth. 10 This role is important for international economic stability because nations are more apt to resist the temptations of adopting protectionist policies when the world economy is growing and the welfare gains from following the rules of free trade are clear.11 Although free trade exposes domestic industries to international competition, a strong world economy provides a positive-sum environment wherein the economic benefits to be gained from free trade help ease the process of adjustment and encourage domestic interest groups to form strong coalitions that support a free trade system. Second, budgetary policies promote balance of payments adjustment.12 In theory market forces alone can restore balance of payments equilibrium for nations with trade surpluses if foreign exchange earnings are subsequently channeled into domestic spending. In practice, however, these earnings can and have been transferred into international capital markets and foreign direct investment. Although reducing trade and current account surpluses may not be necessary or desirable from the standpoint of economic efficiency, trade friction and political tension arise when a nation continues to mount trade surpluses and uses these funds to acquire an increasing amount of foreign property and financial assets. In turn, these problems, left unabated, generate greater protectionist pressures that threaten to undermine the stability of the international economic system. Japan’s budgetary policy, therefore, has become politicized at the international level not only because its economy is the second largest among the advanced industrialized nations but also because its trade and current account surpluses have been the largest in the world. By providing greater market opportunities for other nations’ exports, Japanese budgetary policies that promote fiscal expansion can help revitalize a sluggish world economy marred by growing protectionism. Furthermore, an expansionary fiscal policy would reduce Japan’s chronic trade surplus—a surplus that has caused resentment among its trading partners and has contributed to the growing threat of trade sanctions and retaliations.13

8

INTRODUCTION

The second question addressed at this level is how international pressures feed into the domestic decisionmaking process and the extent to which they influence actual policy outcomes. One of the most important debates in the field of international relations is the question of whether international pressures will induce economic powers such as Japan to adopt internationally cooperative policies that will help uphold the stability of the international economic system. Although many theoretical works have examined this question by using game theory, public goods theory, and regime analysis, they do not offer a sufficient explanation of how a major economic power’s decision to adopt cooperative policies can vary over time in the face of similar international conditions.14 A cursory look at the evidence reveals sharp differences in the extent to which the Japanese government has been willing to adopt a cooperative policy of fiscal expansion in the face of remarkably similar international pressures. In the London and Bonn summit meetings held in 1977 and 1978, Prime Minister Fukuda Takeo pledged to use fiscal policy to meet high growth targets and repeatedly implemented sharp increases in public works spending in an effort to uphold his commitment. Upon taking office in December 1976, the Fukuda administration promptly passed in the Diet an expansionary budget for fiscal year 1977, one that represented a 17.4 percent increase over the previous year’s budget and a 21.4 percent increase in public works spending. When it became apparent that this budget would fail to raise Japan’s real gross national product (GNP) growth to the 6.7 percent level Fukuda had promised at the summit, his administration introduced a 2 trillion yen supplementary budget in September and another in January that increased public works spending by 370 billion yen. In the 1978 budget, he further increased government spending by roughly 20 percent and public works by 34.5 percent. When this budget appeared to fall short of producing a 7.0 percent growth target for 1978, his cabinet adopted still another supplementary budget that amounted to 2.5 trillion yen. In contrast, when similar international pressures resurfaced in 1985, Prime Minister Nakasone Yasuhiro not only refused to expand budgetary spending to meet a specified growth target but also resisted for over two years international demands for Japan to increase its level of government spending. Instead, the settled budget for 1986 and the initial budget for 1987 represented the continuation of the budget austerity measures established earlier in the decade. In sharp contrast to the large increases in government spending made during the Fukuda administration, the 1986 budget raised overall government spending by a mere 3.0 percent from the previous year, and the initial budget for 1987 was only 0.02 percent larger than the initial budget of the previous year.15 It was only in May 1987 that Japan made any tangible concessions to expand government spending by introducing a 6 trillion yen supplementary package. Although this supplementary package was

OVERVIEW

9

sizeable, its macroeconomic impact was more symbolic than real. Given the large windfall of government tax revenues during this period, the supplementary budget merely made Japan’s fiscal policy less contractionary than it would have been in its absence. The manner in which Japan responded in the early 1990s falls somewhere between these two cases. By this time, bilateral negotiations between Japan and the United States over the issue of budgetary policy had become further institutionalized, first through the Structural Impediments Initiative (SII) and then in the framework talks. Faced with U.S. demands to remedy structural imbalances in bilateral trade, Japan’s initial response was cooperative in tone but ambiguous in content. In contrast to the 1970s case, no specific pledge was made to achieve a targeted level of economic growth or a reduction in its current account surplus. However, by the time the final report of the SII negotiations was issued in June 1990, Japan agreed to spend 430 trillion yen on public works within the next ten years. Although this agreement gave Japan enough flexibility to remain committed to a policy of fiscal austerity for the next two years, from August 1992 onward the government gradually began to adopt a series of large-scale spending packages in an attempt to generate fiscal stimulus through deficit financing. The inability of both neorealist and neoliberal scholars to explain these variations is due in part to the fact that these theories have addressed a slightly different question—namely, whether nations will or will not adopt cooperative economic policies rather than when and under what conditions nations will cooperate. Moreover, because they treat states as unitary rational actors, they cannot explain how international pressures affect different domestic actors within the state, nor can they explain variations in policy outcomes that are attributable to differences in social coalitions or state structure.16 The benefit of looking within the state, therefore, is not merely one of richness over rigor; it is an essential component in explaining variations in policy outcomes that otherwise cannot be explained by using an international level of analysis alone. This is not to suggest that international factors have no bearing on policy outcomes. Indeed, I treat the issue of whether and to what extent international influences affect policy outcome as an empirical question rather than a theoretical assumption. Instead I argue that a nation’s policy response to international pressures evolves from the interplay of two seemingly separate political spheres, the international and domestic. A general assessment of how state-society relations influence budgetary policy decisions in the domestic arena must be presented before the extent to which international forces influence policy outcomes can be identified and traced. Accordingly, my second aim in this book is to identify the interests and objectives of all the relevant domestic political actors who compete

10

INTRODUCTION

over favorable budgetary policy outcomes and analyze the institutional context through which these political actors channel their demands into the overall domestic decisionmaking process. I thereby seek to address not only the question of how international pressures feed into the domestic decisionmaking process to influence policy outcome but also a separate and often heated debate among Japan specialists regarding the extent to which policy outcomes are determined by Japan’s elite bureaucracies or dictated by a more pluralist political process.17

The Domestic Context The politics of Japanese budgetary policy provides a unique opportunity to fully explore the strengths and weaknesses of these rival views. Most scholars who have addressed this debate have examined industry-specific issue areas with a primary focus on the relationship between industry and bureaucracy.18 In contrast, budgetary policy decisions invite a wider range of political participants. To be sure, leaders of big business are key political players, but they are not the only players. General voters are directly affected by efforts to increase budget revenue through tax increases, yet they also expect to receive social welfare benefits such as pensions and medical care. Small shop owners seek generous concessionary loans without collateral and jealously guard sales disclosures that would reveal the preferential tax treatment they receive. Farmers actively lobby for government subsidies through existing political channels amid growing international pressures to liberalize the agricultural sector. Construction and transportation industries, aligned with local politicians, seek greater public works expenditures to bring pet projects to electoral districts. In short, the nature of this issue area provides both the motive and the opportunity for a wider range of state and societal actors to participate in the political process. Though the greater variety of political participants makes this issue area more complex, it allows for a more comprehensive assessment of state-society relations in Japan. I have selected to study Japan’s budgetary policy from the beginning of the 1970s to the mid-1990s, and my analysis of this period challenges both views of Japanese politics and offers a more nuanced understanding of Japanese politics and policymaking. This period marked a fundamental departure from the preceding two decades, when double-digit economic growth produced large yearly increases in government revenues. The question of who dictated policy outcomes in this high growth period is difficult to assess because the positive sum setting mitigated the conflict inherent in the competition for finite resources. In contrast, the period I examine is far more contentious because of scarcer resources to accommodate conflicting

OVERVIEW

11

claims. As budgetary politics becomes more overtly politicized, the task of identifying political winners and losers in the policymaking process is easier. Moreover, policy outcomes varied considerably in the time period covered in this study, and explaining these variations offers a unique opportunity to further our understanding not only of Japanese politics in general but of its budgetary politics and policymaking as well. Explanations of Japan’s budgetary politics are contested in much the same way as the broader question of who rules in Japanese politics. On one side are those who argue that budgetary policy outcomes, in terms of both how much is spent overall and how the budget is allocated, reflect the principles and decisionmaking norms of the Ministry of Finance (MOF), arguably the most powerful and prestigious ministry in Japan.19 Others maintain that policy outcomes are determined by the necessities of electoral politics that produce a spiraling pattern of political crisis and budgetary compensation.20 Neither of these views, however, can adequately explain the sharp variations in policy outcomes witnessed during the period under examination. Japan’s budgetary policy outcomes in the 1970s clearly contradicted MOF’s goal of keeping the overall size of the budget down and allocating expenditures evenly.21 Despite MOF’s repeated efforts to keep spending down, expenditures far exceeded tax revenues. Although the budget was roughly balanced at the beginning of the decade, deficit financing made up 34 percent of government revenues by 1979. Moreover, the manner in which the budget was allocated sharply contradicted what the MOF dominance model would expect. Instead of an equitable across-the-board increase in allocation, select areas such as social security and public works expenditure received the lion’s share. However, in contrast to what the “crisis and compensation” model would expect, the political party in power, despite facing serious challenges at the start of the 1980s, did not resort to budgetary compensation as it did in the 1970s. 22 Instead, it adopted zero ceiling and minus ceiling policies whereby the major domestic spending items in Japan’s general account budget were first frozen from one year to the next, then cut in subsequent years. It is noteworthy that these measures to reduce the size of the budget and the deficit took place without jeopardizing the long-standing party in power. Indeed, the Liberal Democratic Party (LDP) registered one of its most decisive victories in the 1986 national election following a three-year minus ceiling policy. By pursuing this strategy, the political party in power was able to eliminate deficit financing by 1990. In placing this study within the context of these rival claims, I argue that policy outcomes reflect fundamentally the interests and interaction of the societal actors and political party that compose Japan’s ruling coalition and the electoral challenges and opportunities they face in a democratic

12

INTRODUCTION

political system. When the relative strength and policy preferences of the ruling coalition members remain stable, budgetary policy outcomes will be stable and both the size and the distribution of the budget will reflect primarily the negotiated interests of the ruling coalition. Conversely, when the relative strength and policy preferences of the ruling coalition members are altered, budgetary policy outcomes will become more erratic and new negotiations will be conducted in response to this change. Once resolved, a new pattern of stable budgetary outcomes will emerge and reflect the terms of the new compromises made. I pay careful attention to how both the composition of the ruling coalition and the negotiated consensus that the coalition forges over budgetary policy outcomes take shape and change over time. Although a snapshot view will reveal that Japan’s budgetary policy outcomes at any given moment will reflect the negotiated interests of the ruling coalition, economic and demographic changes affect the relative strength and policy preferences of the ruling coalition members. Moreover, the political bargaining and compromises that are struck and become institutionalized in one period in turn produce unintended consequences over time that help shape and define the political setting upon which subsequent decisions are made. Accordingly, identifying changes in budgetary policy outcomes requires a careful empirical investigation of these path-dependent effects. Furthermore, against the backdrop of these general arguments, I specify in Chapter 2 how variations in Japan’s macroeconomic conditions affect the stability of the ruling coalition and shape the budgetary policy choices that are available. My argument, though generally sympathetic with those who call for a more pluralist interpretation of Japanese politics, differs from orthodox pluralist theory in two crucial ways. First, I do not argue that MOF is merely a passive register of societal demands, nor do I maintain that MOF is simply an agent of other principal actors.23 Instead, I argue that MOF is an autonomous political actor in its own right, one that actively utilizes its vast organizational resources to pursue its varied interests, albeit with mixed results.24 The question, therefore, is not simply whether MOF is a strong state or a passive register of societal demands but rather when and under what conditions MOF is best able to fulfill its interests. I contend that MOF will always be an autonomous political actor pursuing its varied interests but that its ability to do so will be contingent on the pattern in which the interests and interaction of Japan’s ruling coalition take shape. In moments when members of the ruling coalition are divided over budgetary policy outcomes, MOF can enter into the political arena and fulfill some of its key interests while sacrificing others during the negotiation process. However, when MOF’s interests run directly counter to those of the ruling coalition, MOF will be unable to implement its preferred policies.

OVERVIEW

13

Thus MOF is clearly not a strong state that can formulate and implement policy outcomes against the actual or potential opposition of the ruling coalition.25 Rather, MOF is an autonomous political actor whose ability to steer policy outcomes in its favor is determined by the political opportunities that unfold amid changes in the interest and interaction of the societal actors and the political party that make up Japan’s ruling coalition. Second, in contrast to orthodox pluralist scholars who adopt a rational choice perspective, I accord more explanatory weight to the historical pattern in which institutions develop and change over time. Not only do institutions shape the way in which political actors define their identities and interests, but the manner in which institutions change over time produces notable variations in policy outcomes. 26 Thus, despite various attempts by rational choice theorists to posit generalizable expectations of budgetary policy outcomes under a representative democratic system,27 I argue that such generalizations cannot be made because changes in institutional patterns produce different policy outcomes. However, in contrast to the bureaucratic dominance model, I give primacy not to the historical legacies of bureaucratic institutions, but rather to the institutional configuration in which the interest and interaction of Japan’s ruling coalition take shape and change over time.

The Two-Level Framework The third and final aim of this study is to bridge the traditional gap between the fields of comparative politics and international relations by examining how the interplay of two seemingly separate political spheres, the international and domestic, interact and influence policy outcomes. The need to examine both the international and the domestic political arena is nowhere more crucial than in the study of Japanese politics and policymaking. Japan has always been vulnerable to international pressures because its national interest has been intimately tied to the international environment in both economic and security areas. Japan has relied heavily on its alliance with the United States for its nuclear and conventional defense security. Moreover, because of its poor natural resource endowment, it has depended on imports for most of its supply of raw material needs. Exports have also played an important role in earning foreign exchange to purchase imports and providing a global market for Japan’s domestic manufacturing firms. In order to safeguard these interests, Japanese policymakers must be sensitive to and constrained by foreign pressures. Yet I am not suggesting that Japan has always yielded to foreign pressures or that its reliance on the international environment has remained constant throughout the postwar period. Although it is true that Japan was

14

INTRODUCTION

largely dependent on the international environment during the initial postwar period, the subsequent rapid growth of Japan’s economy has made the international environment dependent on Japan as well. When Japan was still a relatively small player in the world economy, it could not seriously affect the international system because it was not powerful enough to do so. However, Japan—now the second largest free market economy with the largest trade surplus and capital outflow in the world—cannot help but influence the global economy. What I am suggesting is that the rise in Japan’s economic power poses both new advantages and added responsibilities in dealing with its external environment. Foreign pressure will be greater because Japan’s influence on the world economy has grown. Although Japan has more bargaining power to negotiate with its economic partners, its rising economic influence in the world means that it must be more cautious of the impact its economic policies have on other nations as well as on the stability of the international economic system itself; these factors in turn affect Japan’s own interest in preserving an open and stable international economic system. As powerful as Japan has become, it still must be sensitive to foreign criticism and pressures because Japan remains heavily dependent on an international environment that requires greater Japanese participation and burden sharing. I identify three specific areas where foreign pressures converge on Japanese budgetary policy. First, as participants in interministerial, OECD, and economic summit meetings, Japan’s state leaders have encountered throughout the post–Bretton Woods era foreign demands for fiscal expansion. Although the primary responsibility of these leaders is often defined in terms of representing the interests of their domestic constituents, diplomatic suasion is also important; heads of state must demonstrate effective leadership in conducting and concluding international negotiations with their foreign counterparts. Second, U.S. initiatives to lower its trade deficit, most notably through dollar depreciation, influence Japanese policymakers’ cost-benefit calculation of adopting budgetary policies that promote fiscal expansion to the extent that the U.S. initiatives produce recessionary effects on the Japanese economy and hurt export-related industries. As unemployment rises and industries face recession, there will be greater domestic pressure placed on the Japanese government to increase budgetary spending and cut taxes in order to stimulate the economy. Third, the growing threat of protectionism that Japan faces based on the perception that it engages in export-led growth policies or unfair trade practices encourages Japanese decisionmakers to adopt budgetary policies that strengthen domestic demand. Although Japan’s first preference may be to continue with export-led growth, Japanese producers who are competitive in the world market will seek to avoid trade sanctions and closure by advocating domestic demand expansion.

OVERVIEW

15

I stress the importance of using an international level of analysis to explain why and in what manner Japan’s budgetary policy becomes politicized in the international arena, but I also contend that a strictly international level of analysis does not adequately explain variations in Japan’s policy outcomes in the face of similar international pressures. As significant as these foreign pressures are, budgetary policy decisions are formulated and implemented through the domestic legislative process. This process often follows political imperatives separate from those found in the international arena. Moreover, just as Japan’s rise as a major economic power produces dynamic changes in the international arena, rapid economic growth over time alters the fundamental characteristics of statesociety relations within Japan. Accordingly, efforts to assess the extent to which these foreign pressures influence policy outcomes require a twolevel approach. This approach must specify not only the political dynamics that operate in two separate political spheres but also the extent to which they interact and influence policy outcomes. This two-level approach differs from other recent attempts that seek to bridge international and domestic politics together into a single framework. Among Japan specialists, many attempts to explain Japanese foreign policy outcomes have focused primarily on state structure and state actors as the crucial variable. For example, Kent Calder and others have advanced a “reactive state” model, whereby characteristics inherent in Japan’s domestic political structure are seen to prevent Japan from responding to international pressures, even when doing so would serve its national interest.28 A similar emphasis can be seen in more general works in the fields of international relations and comparative politics where cross-national differences in state structure are examined to explain variations in policy outcomes in the face of similar international pressures.29 Although I acknowledge the importance of state structure, the approach I take differs in both emphasis and scope. An explication of state structure alone offers an insufficient basis to understand the domestic forces that shape a nation’s policy outcomes. Missing in this analysis is an account of how societal actors organize and channel their respective demands through existing political institutions to influence policy outcomes.30 My approach also differs from those studies that take as a given the international context and seek to identify cross-national variations in policy outcomes among cases where international pressures are of a similar kind. By holding constant international factors, these studies have the advantage of narrowing the field of causal variables to domestic factors, such as state structure or social organizations. Their potential drawback, however, is their inability to examine why international pressures emerge when they do and why that should matter. To be sure, such questions may be less relevant in other issue areas, but they constitute a crucial part of this book’s two-level approach. Despite the fact that Japanese budgetary policy

16

INTRODUCTION

has been a key topic of international negotiations for over two decades, there is yet no clear consensus on why it has remained politicized well into the 1990s nor on how and to what extent these pressures can influence policy outcomes. Consequently, I enlarge the analytic scope of this work to provide an explanation of when and why Japanese budgetary policy becomes politicized in the international arena, and the impact that foreign pressures have on budgetary policy outcomes. In emphasizing the international and domestic components that structure state leaders’ policy options, or “win sets,” the two-level approach I advance borrows heavily from Robert Putnam’s pioneering work and those who have subsequently extended it.31 However, in contrast to Putnam’s model, I frame my two-level approach to answer a more basic question. The focus of Putnam and others is primarily on how state leaders strategize and negotiate with their foreign counterparts within a given win-set. Although I examine this aspect of the policymaking process also, I place greater emphasis on explicating the international and domestic forces that emerge and interact over time to shape the basic parameters of the initial win-set, because the structure of the win-set will tell us more about whether Japan will adopt cooperative policies than the bargaining that takes places after the initial win-set is established. I argue that international forces are a crucial component that shape the incentive structure of Japanese policymakers. In general terms, these forces can be traced to the distribution of economic power among states and the manner in which it changes over time. In the early postwar period, when U.S. economic power far exceeded that of other advanced Western nations, the cost of creating and maintaining a stable international economic system rested largely on the shoulders of U.S. hegemony. Over time, however, the relative decline of U.S. hegemony and the rapid rise of Japan’s economic position in the world economy have brought increasing pressure on Japan to step up and assume a greater share of the leadership cost necessary to maintain international economic stability. As long as Japan remains a major economic power in an international economic system governed by the principles of embedded liberalism, foreign pressures for Japan to adopt budgetary policies that promote fiscal expansion will emerge whenever world economic growth is sluggish or Japan’s current account surplus is high. These pressures will take the form of diplomatic suasion, yen appreciation, and the threat to adopt protectionist trade policies against Japan. The question of whether Japan will adopt a cooperative fiscal policy, however, depends on the extent to which these foreign pressures coincide with or shift the interests of the domestic political actors who are powerful enough to push through such policies. Moreover, an explication of the domestic context must be presented in dynamic rather than static terms.

OVERVIEW

17

Changes in Japan’s position in the international arena have taken place alongside changes in the domestic arena. After two decades of rapid economic growth, not only have societal actors in Japan become more diverse, but they have also become more powerful in relation to state actors. Accordingly, I contend that it is not the bureaucrats but rather the societal actors and political parties that make up Japan’s ruling coalition who are the relevant domestic political actors responsible for shaping policy outcomes. Tracing the extent to which foreign pressures feed into the domestic decisionmaking process therefore requires close attention to the extent to which these pressures coincide with or alter the terms upon which members of the ruling coalition negotiated their agreement over budgetary policy outcomes. I argue that, on balance, as Japan’s position in the world economy rises, international pressures will grow but will have less power to move Japanese fiscal policy in a direction counter to where it would have gone in its absence.32 That is, these pressures will not alter fundamentally the contractionary or expansionary nature of Japanese fiscal policy already in place for purely domestic political reasons. I also argue that on a more modest level, international pressures will make a difference in terms of strengthening the expansionary course already in place or making Japanese fiscal policy less contractionary than it otherwise would have been in their absence.

Organization of the Book In Chapter 2 I draw out the theoretical foundations of this work. My twolevel approach requires a critical examination of three distinct theoretical concerns. In the first section of this chapter, I construct an international systemic–level explanation of why Japan’s budgetary policy has become increasingly linked to the notion of international cooperation and burden sharing by building on Charles Kindleberger’s classic study that details the political leadership requisites for international economic stability.33 I further demonstrate when and why a major economic nation’s budgetary policy plays a prominent role in promoting international economic stability, especially in the post–Bretton Woods era. In the second section, I build on existing theories in the field of comparative politics to explicate the domestic political dynamics that account for both Japanese politics in general and budgetary policy in particular. After illustrating the theoretical foundations and assumptions that underscore the existing debate in the study of Japanese politics, I construct a theoretically rigorous criterion for better assessing, rather than assuming, the primacy of either state or societal actors in shaping policy outcomes. Guided by these theoretical insights, I

18

INTRODUCTION

then examine various theories that specifically seek to explain the do mestic determinants of Japan’s budgetary policy. Finally, in the third section, I generate my two-level hypothesis based on the international- and domestic-level theories discussed in the preceding sections. Chapters 3 through 8 contain the case studies. In Chapters 3 and 4 I provide an account of the international and domestic politics of Japanese budgetary policy in the 1970s. In Chapter 3 I outline the general international setting Japan faced as it entered the 1970s. This period is of critical importance because it marks the onset of international negotiations over Japanese cooperation and leadership in the area of budgetary policy. The relative decline in U.S. hegemony and the rapid ascendancy of Japan’s economic position in the world economy produced greater international pressures for Japan to adopt policies that would contribute to the stability of the international economic system. More specifically, international pressures for Japan to adopt budgetary policies that promote domestic demandled growth emerged in 1976 as Japan began to mount persistent trade surpluses amid concern over the sustainability of a world economic recovery headed by the United States. I then document the various and repeated pressures Japanese state leaders faced and the responses they made throughout several rounds of negotiations. A crucial feature of these negotiations is the high level of willingness Japan showed in adopting internationally cooperative policies. At both the Bonn and London summit meetings held in 1977 and 1978, Prime Minister Fukuda not only pledged to use budgetary policy to meet specific growth targets and reduce Japan’s current account surplus but also repeatedly expanded the level of public works spending in an effort to fulfill this pledge. Although the Japanese response appears to support the neoliberal theory of international cooperation, it fails to answer sufficiently whether Fukuda’s decision to cooperate at the international level was based on his concern over the future stability of the international economic system or whether it merely coincided with the needs of his political party. To what extent would Japan have adopted these policies in the absence of international pressures? In what way did international pressures feed into the domestic decisionmaking process to influence policy outcomes? In Chapter 4 I seek to answer these and more domestic questions by examining the overall domestic political setting that emerged in the 1970s and the subsequent political negotiations that transpired over Japanese budgetary policy decisions throughout the decade. This period ushered in a political setting that was dramatically different from that of the preceding decade. The rapid economic growth of the 1950s and 1960s generated in its wake vast changes in Japan’s demography. The negative side effects of high economic growth also eroded the general public consensus concerning the government’s obsessive pursuit of ever higher economic growth

OVERVIEW

19

figures. These changes in turn created greater political demands on public spending at a time when yearly increases in tax revenues declined with slower economic growth. I then set out to provide a narrative of how and in what manner the interests and interaction of various state and societal actors influenced budgetary policy outcomes throughout the decade. In Chapter 5, I apply my two-level framework to the evidence presented in Chapters 3 and 4. After delineating both the international and domestic political forces that structured Japan’s budgetary policy decisions throughout the 1970s, I explain not only why foreign pressures emerged at the end of 1976, but also why these pressures were successful in eliciting Japanese cooperation. I argue that the answer to the latter is attributable primarily to the domestic political forces that shaped Japan’s win-set. Although foreign pressures undoubtedly made Japanese fiscal policy more expansionary than it would have in their absence, these pressures did not alter the basic fiscal policy stance that Japan had already established for purely domestic political reasons. By the time foreign pressures for Japanese fiscal expansion first emerged, the domestic politics of Japanese budgetary policy in the early 1970s ushered in a crucial break toward the extensive use of deficit financing. Hence, Japan’s decision to cooperate at the international level was predicated on the permissive structure created at the domestic level in favor of fiscal expansion. In Chapters 6 and 7 I examine the international and domestic politics of Japanese budgetary policy in the 1980s. I begin Chapter 6 by presenting the general international political setting Japan encountered during this period, one marked by the further decline of U.S. hegemony and the continued ascendancy of Japan’s economic power in the world. These changes led to greater international demands not only for Japan to assume a larger leadership role in general but also for Japan to adopt a policy of fiscal expansion when it began to mount persistent trade surpluses amid fears of a world recession. I then trace the various forms of international pressures that emerged during this period and Japan’s responses to them. A key feature of this period was the limited extent to which Japan adopted cooperative budgetary policies. In contrast to Fukuda, Prime Minister Nakasone Yasuhiro refused to pledge the use of fiscal policy to meet a specific growth target. In fact, he resisted raising the level of government spending to any significant extent for over two years. Moreover, when Japan finally adopted a supplementary budget after two years of international pressures, the measures did not alter the contractionary nature of Japanese fiscal policy; rather, they merely made it less contractionary than it would have been in the absence of international pressures. In contrast to the evidence I present in Chapter 3, the evidence in Chapter 6 appears to support the neorealist theory of international cooperation. However, a neorealist account also leaves unanswered the question

20

INTRODUCTION

of whether Japan’s response can be explained simply by highlighting the structural constraints and incentives the country faced in the international system. Was Japan’s response truly based on rational calculations to free ride, as neorealists would suggest, or was it based more on purely domestic political concerns? In Chapter 7 I seek to resolve this ambiguity, as well as address other domestic-level issues, by examining the domestic politics of Japanese budgetary policy in the 1980s. My examination of the politics of government spending during this period enters unexplored territories. Scholars from divergent backgrounds have sought to explain the spiraling level of budget deficits among advanced Western nations by focusing on the political dynamics that take place in a democratic system or on the relationship between a democratic political system and a free market economic system.34 Less attention has been paid to how a democratic free market nation will respond to its high level of budget deficit, yet this is precisely the political setting that Japan faced as it entered the 1980s. After I present a detailed account of the political setting of this period, I set out to document the extraordinary manner in which the interest and interaction of various political actors took shape throughout the 1980s to influence budgetary policy outcomes. At first glance the budgetary policy outcomes adopted during this decade appear to run directly counter to those that were adopted in the previous decade. Whereas the 1970s are commonly characterized as a period of excessive profligacy, the 1980s are often portrayed as a time of extreme austerity. The evidence I present in this chapter will not only help uncover the various political factors that account for this stark difference but also provide a more nuanced assessment of the differences and similarities of the politics of budgeting in these two decades. In Chapter 8, I draw on the evidence presented in Chapters 6 and 7 to further highlight the utility of my two-level framework. Although foreign pressures for Japanese fiscal expansion resurfaced in 1985 under conditions remarkably similar to those found in the 1970s, Japan’s response to these pressures in the 1980s varied significantly from that of the 1970s. By explicating both the international and domestic political forces that structured Japanese budgetary decisions in the 1980s, I show how my two-level approach explains not only why foreign pressures reemerged, despite predictions to the contrary, but also why these pressures failed to yield a cooperative response on the part of Japan. In Chapter 9 I examine the politics of Japanese budgetary policy from 1990 to 1995, a period when foreign pressures for greater Japanese fiscal stimulus reemerged, but under a domestic political setting that contrasted sharply with that of the 1980s. As in the case of the two earlier periods, international calls for Japan to adopt a policy of fiscal expansion resurfaced as Japan’s current account surplus rose sharply amid concerns of a

OVERVIEW

21

prolonged global recession. By 1992, international negotiations over Japanese fiscal policy not only commenced in various multilateral forums but also became more firmly entrenched in bilateral negotiations between Japan and the United States. At the domestic level, the early 1990s ushered in a period of severe economic recession and political turmoil, forcing into question the budgetary policy consensus established in the 1980s in favor of austerity and deficit reduction. From August 1992 to September 1995, the Japanese government abandoned its pursuit of fiscal consolidation and adopted five large-scale stimulus packages in an effort to pump-prime the economy. In this chapter I examine the international and domestic political forces that led to these decisions. In Chapter 10 I assess the explanatory strength of my two-level hypotheses and discuss the broader normative and theoretical implications of my findings.

Notes 1. For the classic study, see Offe (1984). 2. Ministry of Finance (1989a:134). 3. Ruggie (1982, 1991). 4. Although I address the politics of taxation, my primary focus is on the expenditure side of budgetary policy and its impact on fiscal policy. For an in-depth treatment of tax policy in Japan, see Kato (1994). 5. On this point, see Keohane (1989). 6. For a good review of the literature, see Milner (1992), Grieco (1995), Keohane (1989), Baldwin (1993). 7. Two notable exceptions are Putnam and Baynes (1987), Webb (1991), but these works differ from this project in both emphasis and scope. 8. For the former argument, see Cerny (1996), Schwartz (1994), Martin (1994), Kurzer (1993). For the latter, see Hall (1992), Haas (1992). 9. On this point, see Vogel (1996). 10. I do not mean that an expansive fiscal policy is always preferred by the international community. When world economic growth is robust, there is a general agreement to restrain fiscal policy for fear of inflation. Moreover, the optimum solution is not for all nations to adopt an expansionary fiscal policy during times of stagnant world economic growth, but rather for nations with real growth potentials to do so. I will discuss this point fully in Chapter 2. 11. Strange and Tooze (1981), Mckeown (1983), Gallarotti (1985). 12. “Balance of payments adjustment” is defined as the mechanism by which current account and trade imbalances are remedied through monetary and fiscal policy. For nations that record a current account surplus, this entails fiscal and monetary policies that promote expansion. The converse applies for nations faced with a current account deficit. I will discuss this point fully in Chapter 2. 13. I will discuss the arguments presented here, and the hypotheses derived from them, in more depth in Chapter 2. 14. For some prominent examples, see Keohane (1984), Axelrod (1984), Oye (1986), Jervis (1988), Krasner (1983), Kratochwil and Ruggie (1986), Haas (1992).

22

INTRODUCTION

15. Ministry of Finance (1988:106). 16. The classic study on state structure is Katzenstein (1978). For an excellent review of the literature on social coalition, see Gourevitch (1996). 17. For a stinging exchange, see Johnson and Keehn (1994) and Ramseyer (1994). 18. Uriu (1996), Okimoto (1989), Rosenbluth (1989), Samuels (1986). 19. Hartcher (1998), Wildavsky (1989), Rukstad (1988), Campbell (1977). 20. Calder (1988). For a related argument, see Noble and McCubbins (1995). 21. Campbell (1977), Wildavsky (1989). 22. I am referring to the crisis and compensation model developed by Calder (1988). 23. Downs (1960), Buchanan and Wagner (1977), Ramseyer and Rosenbluth (1993), Kernell (1991). 24. MOF’s interests and organizational resources are covered in depth in Chapter 2. 25. This is the most frequently used criterion to classify state strength. See for example Barkey and Parikh (1992), Migdal (1988), Skocpol (1985), Nordlinger (1981), Krasner (1978). I examined this issue in depth in Chapter 2. 26. For a similar argument, see Steinmo, Thelen, and Longstreth (1992), Hall (1986), Burger (1981). 27. For two notable examples that draw diametrically opposite predictions, see Downs (1960), Buchanan and Wagner (1977). 28. Calder (1988b), Rix (1989/1990), Van Wolferen (1989:25–49). 29. Krasner (1978), Katzenstein (1978), Mastanduno, Lake, and Ikenberry (1989), Evans (1989). 30. Gourevitch (1986), Milner (1988), Simmons (1994), Rosenbluth (1993), Cowhey (1993). 31. Putnam (1988). See also Evans, Jacobson, and Putnam (1993), Schoppa (1997). 32. In operational terms this means that if Japan had been adopting a contractionary fiscal policy prior to when international pressures began, it would not change course and adopt a policy of fiscal expansion. 33. Kindleberger (1973). 34. For some notable examples, see Olson (1982), Lowi (1979), Buchanan and Wagner (1977), O’Connor (1973), Offe (1984).

2 The Two-Level Framework The road to the free market was opened and kept open by an enormous increase in continuous, centrally organized and controlled intervention. . . . Thus even those who wished most ardently to free the state from all the unnecessary duties, and whose whole philosophy demanded the restriction of state activities, could not but entrust the self-same state with the new powers, organs, and instruments required for the establishment of laissez-faire. —Karl Polanyi, The Great Transformation The danger we face is not too much power in the international economy, but too little, not an excess of domination, but a superfluidity of would-be free-riders, unwilling to mind the store, and waiting for a storekeeper to appear. —Charles Kindleberger, “Dominance and Leadership in the International Economy” And so emerged the compromise of embedded liberalism, the grand domestic and international political bargaining on which the postwar economic regimes came to rest. . . . the broad expectation was held in governing circles at the dawn of the postwar era that the international economic order would be multilateral in form. Movement toward greater openness in the international economy, however, would be coupled with safeguards that acknowledged and even facilitated the interventionist character of the modern capitalist state. —John Gerald Ruggie, “Embedded Liberalism Revisited”

The International Level: Embedded Liberalism and the Politics of Macroeconomic Coordination Political Leadership and International Economic Stability The relationship between political leadership and international economic stability is one that is obscure and highly contested. The focus of classical liberal economists whose primary concern is to understand how market forces operate has centered on how factor endowments such as land, labor,

23

24

INTRODUCTION

and capital can be utilized most efficiently. They give scant attention to how a powerful state, by exercising political leadership, can contribute positively to the smooth functioning of the liberal international economic system. Indeed, looking at the welfare benefits to be gained by utilizing a nation’s comparative advantage through its participation in the free market system, these theorists have tended to look askance at the role of government intervention in the economy. The common wisdom is that when markets are allowed to operate free of government intervention, resources will be allocated to their most efficient use. This classical liberal view of politics and markets has recently claimed many new adherents. In its most declarative form, it is represented by those who proclaim that the end of the Cold War has ushered in the “End of History” and the “Triumph of Western Liberalism.”1 In a more modest form, others point to the emergence of a common normative framework among leaders of the advanced industrialized nations who have repudiated Keynesianism in favor of monetarist orthodoxy.2 Still others claim that the rapid globalization of the international capital market restricts the government’s ability to intervene in the economy; because financial investors deem governments with large budget deficits to be less creditworthy than those that have their fiscal house in order, the competition to attract global capital encourages governments to retrench and adopt more stringent budgets.3 Even in East Asia, where the developmental state model posed a serious challenge to classical liberal orthodoxy, the financial crisis that has plagued the region in the 1990s is now seen as evidence of the need to withdraw the visible hand of the state and adopt greater free market reforms.4 To be sure, these insights capture an important element of the profound changes that have taken place over the last decade. However, what is lost in all the attention paid to the global acceptance of free market principles are the insights provided by a wide range of scholars in the field of political science who have long recognized the important role that politics and political leadership play in fostering international economic stability. Indeed, despite their theoretical and normative differences, contemporary Marxist, liberal, and realist scholars in the field of international relations have demonstrated that the stability of a liberal international economic system is intimately linked to the underlying political power structure that sustains it. 5 At issue is not whether the existing international economic system is based on free market principles but the political forces that create and sustain such a system. Such principles may indeed be spreading throughout the globe, but as Karl Polanyi and Charles Kindleberger suggest, they do so in conjunction with, rather than in the absence of, efforts made by powerful states to exercise political leadership to promote this transition. The most forceful argument underscoring the link between political power and international economic stability has been presented by political

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25

scientists working in the realist tradition. The rationale behind this view stems from the notion that relations among states are conducted under conditions of anarchy.6 Because the international system is characterized by an absence of a central government authority with enforcement capabilities to regulate interstate activity, each state must operate under a system of “self-help.” Because there is no “monopoly on the legitimate use of force,”7 the stability or instability of a given international system is determined primarily by the distribution of power among states and how that distribution changes over time. Hence, as Kindleberger and others have argued, the stability of the international economic system depends upon the presence of a powerful state both willing and able to assume a leadership role in managing the stability of the international economic system.8 Viewed accordingly, the liberal international economic system that flourished during the nineteenth century did not emerge spontaneously as a result of market forces but as a result of the initiatives made under British hegemonic leadership. Similarly, the success of the postwar international economic system is attributed not to the fact that governments pursued a hands-off policy but rather because the United States was willing and able to play an active leadership role in the creation and maintenance of the liberal international economic system. It is interesting to note that in the late 1920s and early 1930s, when the United States was unwilling to play a leadership role when it possessed the power to do so, the world experienced its worst economic crisis.9 This realist conception of international economic stability has made an invaluable contribution to the field by demonstrating the need to analyze the underlying political power structure that is embedded in a given international economic system. It has shown that politics matter, even in an economic system based on liberal principles of laissez faire. At the same time, however, its predictive claims have been wrought with contention, generating a major debate concerning the question of whether international economic stability can be fostered jointly through international cooperation or whether it must be exercised by one leader, namely, that of a hegemon. Numerous theoretical studies have analyzed the prospects of cooperation using realist assumptions of anarchy and state as rational actors. These theoretical studies, based primarily on collective action and game theory analyses, have examined a wide range of exogenous factors that may sway a nation’s decision to cooperate. These include the absolute value of the game theoretical payoff matrix, reciprocity and other forms of strategic interaction, the shadow of the future, the size of the k-group, and the impact of regimes on information and transaction costs. 10 My purpose is not to provide an in-depth review of the theoretical debate over international cooperation. That debate is fully covered elsewhere. 11 Because I treat the issue of whether international cooperation is possible as an empirical question to be examined rather than as a theoretical assumption, I address the

26

INTRODUCTION

more relevant question of what the basic features of these public goods are and how fiscal policy fits into this overall schema. The International Politics of Fiscal Policy Kindleberger’s pioneering work on the Great Depression has served as the basis for subsequent studies on the relationship between political leadership and international economic stability.12 Although many international relations theorists have rightly challenged his contention that political leadership can be exercised by only one nation, most have agreed on his contention of the vital link between political leadership and international economic stability. In his classic study, Kindleberger argues that the stability of the liberal international economic system is contingent upon the willingness and ability of an international political leader to provide five essential “public goods”: 1. maintaining an active and open market for distress goods during times of stagnant world economic growth 2. providing countercyclical and long-term lending 3. acting as lender of last resort during financial panics 4. policing a relatively stable system of exchange rates 5. ensuring the coordination of macroeconomic policies13 Among these five categories, the fiscal policy of a powerful state plays two prominent roles in fostering international economic stability: namely, promoting macroeconomic coordination for balance of payments adjustment and maintaining an active and open market during times of stagnant world economic growth. I will show how these two aspects have come to play an increasingly important role in the liberal international economic system during the postwar period. Whereas Kindleberger’s classic work examines the public goods requirement for the prewar liberal international economic system, I seek to demonstrate that in the postwar period the rise in the volume and speed of capital transactions, together with the greater legitimation of adopting economic policy for social purposes, elevated the importance of a major economic power’s fiscal policy in promoting stability in the international economic system. Balance of Payments Adjustment, Macroeconomic Coordination, and Fiscal Policy Until the mid-1970s, the importance of macroeconomic coordination had been given scant attention compared to issues concerning international trade, finance, and exchange rates.14 This neglect should be attributed not

THE TWO-LEVEL FRAMEWORK

27

to the fact that macroeconomic coordination plays only a secondary role in fostering stability for the liberal international economic system but rather to the fact that it was not until the breakdown of the Bretton Woods system that the importance of macroeconomic coordination became increasingly clear. As nations such as Japan and West Germany continued to record persistent current account surpluses year to year under a flexible exchange rate system, the empirical evidence began to mount against the belief that the system had an automatic equilibrating mechanism to reduce nations’ current account deficits and surpluses.15 A nation’s willingness to undergo balance of payments adjustment through macroeconomic coordination has changed dramatically since the emergence of the liberal international economic system. Under the classical gold standard established during British hegemony, the automaticity of balance of payments adjustment through macroeconomic coordination was implicitly assumed. Because a nation’s money supply was tied at a fixed rate to its accumulation of gold reserves, in theory there was a selfregulating mechanism that moved nations with current account deficits or surpluses to equilibrium.16 That is, a nation that recorded a current account surplus increased its money supply to meet its rise in gold reserves. The rise in the money supply would in turn increase the level of imports and decrease the level of exports because both income and the price of domestic goods relative to foreign goods would rise. Under the Bretton Woods system, this notion of automaticity was revised to give greater leeway for nations to use fiscal and monetary policy to meet their domestic social and economic needs. Drawing lessons from the interwar period, marked by economic nationalism and beggar-thy-neighbor policies, the postwar international economic system was set up to embrace both the ideal of free trade liberalism and the political reality of states adopting domestic interventionist measures to cushion the social and economic effects of international adjustment. This attempt to reconcile the two contrasting views has been called the “embedded liberal” compromise.17 Following the breakdown of the Bretton Woods system, the implicit arrangement of macroeconomic coordination dissolved. Because the fixed exchange rate system and the convertibility to gold were abolished, any pretense of automaticity and discipline through macroeconomic coordination disappeared from the system. Although going off the gold exchange gave each nation greater flexibility to adopt macroeconomic policies without concern for the availability of its gold reserves, it allowed a nation greater irresponsibility and less international accountability for its own economic policy. Instead of balancing out a nation’s domestic concerns of economic and social stability with its international responsibility to uphold balance of payments adjustments through macroeconomic coordination, multilateralism has given way to bilateral and unilateral decisionmaking.18

28

INTRODUCTION

In turn, this inability of nations to adjust their macroeconomic policies for the purpose of balance of payments adjustment generates greater conflict in the international economic system. Coordinating macroeconomic policy is important for international economic stability because it induces nations to remedy their current account imbalances internally. It thereby stems the potential trade conflict that emerges when some nations consistently mount trade surpluses on a yearly basis. Although the initial choice for each nation may be to ignore its international commitments to balance of payments adjustment in favor of pursuing macroeconomic policies that address the nation’s immediate domestic needs, the consequence of each nation passing off its international responsibility to others is that each nation is worse off. It is in this context that the central importance of fiscal policy for macroeconomic coordination and balance of payments adjustment may be recognized. Increasing the level of government spending directly affects the current account balance by increasing domestic demand. When private savings exceed investments, the corresponding pressure toward current account surplus can be offset through expansionary fiscal policy.19 In contrast, monetary policy can have the inadvertent effect of encouraging capital outflow instead of stimulating domestic demand. This problem has become particularly acute with the greater economic sensitivity in the financial market.20 The rise in both the speed and volume of financial transactions across national borders has weakened the impact of monetary policy on balance of payments adjustment. Indeed, given the fact that international financial flows have come to outpace the flow of goods and services, an expansionary monetary policy, such as the lowering of the discount rate, may not lead to domestic demand expansion and smaller current account surpluses. Instead, capital outflow may increase in order to take advantage of higher interest rates abroad. As a result, an expansionary monetary policy can have the unintended consequence of increasing the nation’s current account surplus if large volumes of capital outflow lead to currency devaluation. In short, these two postwar developments—growing unilateralism in macroeconomic policies and greater economic sensitivity in the financial market—have accentuated the importance of fiscal policy in promoting balance of payments adjustment. The tendency of nations to emphasize the use of macroeconomic policy for domestic political and economic reasons has often come at the expense of ignoring their international obligations to remedy their current account imbalances. This in turn has caused greater potential conflict among states. International cooperation over macroeconomic policy has thus become a central concern as nations seek to stem the growing threat of protectionism caused by large and persistent current account imbalances. Moreover, with greater economic sensitivity in the capital

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market, remedying balance of payments imbalances through monetary policy alone has become increasingly ineffective, leading to greater emphasis on fiscal policy as a means to promote balance of payments adjustment. World Economic Downturns and the Role of Fiscal Policy A second public goods role that fiscal policy plays in fostering international economic stability is that of promoting an active and open market during times of stagnant world economic growth. Understanding how a major economic nation’s fiscal policy fulfills this function entails two steps. First, I must identify the relationship between the world business cycle and protectionism, and second, I need to demonstrate how fiscal policy can ease protectionist policies during world economic downturns. The relationship between the world business cycle and protectionist pressures is straightforward and commonly acknowledged. Indeed, despite predictive differences over the question of when protectionism will arise, there is remarkable similarity between hegemonic stability theorists and some of their strongest critics who stress the relationship between the world business cycle and protectionist pressures.21 The international economic system is considered more stable during times of prosperity than during recessions because the opportunity of deriving greater welfare benefits during times of prosperity helps ease the cost of adjustment stemming from international competition and strengthens interest group coalitions supporting free trade. In contrast, recessions generate stronger protectionist demands. With fewer potential benefits to ease the cost of adjustment and form ruling political coalitions that support free trade, the incentive to pass the cost onto other nations through protectionism becomes stronger.22 The protectionist pressures that build in the domestic arena during recessions in turn pose collective action problems at the international level. The first choice for a nation during times of economic distress is to pass the cost of adjustment to others. But one nation’s ability to do so is contingent upon others refraining from adopting the same strategy. When each nation independently pursues its narrow interest, the result will yield a collective outcome of spiraling tariffs that make all nations worse off than if they had cooperated and refrained from seeking to pass the cost to others.23 Whether nations can avert this collective action problem is a major point of contention among international relations scholars. Business-cycle theorists such as Timothy Mckeown and Giulio Galloratti argue that economic forces strictly determine the rise and fall of tariffs. Economic prosperity leads to lower tariffs and recessions usher in protectionism.24 Hegemonic stability theorists such as Kindleberger maintain that the collective action problem can be managed, but only under one condition: if there is a hegemon both willing and able to provide political leadership necessary

30

INTRODUCTION

to ease the protectionist pressures that build during world recessions. Still others argue that a small number of major economic powers can manage the problem jointly.25 Various empirical tests have been conducted to determine the predictive strengths of these competing theories, 26 but these tests have obfuscated the essential similarity in their causal analysis between world recessions and the buildup of protectionist pressures. In turn, this obfuscation has distorted discussions on the extent to which political leadership eases the ensuing collective action problem. The confusion stems in part from imposing a strictly structural framework on the theory of hegemonic stability. Proponents of this view believe that changes in the distribution of power alone determine the stability of the international economic system. Kindleberger’s central argument involves volition as well as capabilities. His argument is not, as Mckeown states, “that the hegemonic state has both the motive and the capability to create and maintain open regimes.”27 Rather, it is that the hegemon must be both willing and able to exercise leadership in order for the international economic system to be open. Hence, Kindleberger concludes that the cause of the Great Depression was British inability and U.S. unwillingness to assume responsibility for stabilizing the international economic system.28 Another source of confusion stems from equating the stabilizing function that a hegemon undertakes with the cooperative behavior of states that is expected to follow. As Duncan Snidal rightly points out, the interactive outcome of each nation seeking private interests cannot be considered a public good even if it yields mutual benefits, as in the case of free trade or collective losses, as a result of spiraling tariffs. 29 The public good in question is not whether nations will cooperate by reducing tariffs or defect by increasing them. Rather, it concerns whether a hegemon, or a group of leading economic nations, can assume responsibility for stabilizing the international economic system during recessions by maintaining an active and open market. The public good therefore entails altering the incentive structure conducive for nations to pursue free trade over protection. It is in this context that the public good function fiscal policy plays during world economic downturns may be understood. In general terms, providing an active and open market during recessions is important because it reduces the pressures during times of recessions for other nations to adopt protectionist policies that work toward the demise of the international economic system. In the postwar period, fiscal policy has become a major policy instrument to achieve this end. Just as demand management has become a contentious yet important policy instrument in stimulating a stagnant domestic economy, nations with real growth potentials adopting an expansionary fiscal policy during prolonged world recessions have come to serve an important stabilizing role for the world economy. Hence,

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the problem of comparing the explanatory strength of hegemonic stability theory and business cycle theory across a period of a century and a half is further compounded by the fact that the political leadership necessary to remedy the recession of the prewar period would have entailed the use of policy instruments not fully developed at the time. Testing whether a hegemon was able to exercise political leadership by adopting fiscal expansion during years prior to this period clearly fails to recognize the historically contingent basis of Kindleberger’s theory.30 In short, stimulating the world economy through fiscal expansion during recessions is important for international economic stability because nations are more apt to resist the temptations of adopting protectionist policies when the world economy is growing and the welfare gains from following the rules of free trade are clear. Although free trade exposes domestic industries to international competition, a strong world economy provides a positive-sum environment wherein the economic benefits to be gained from free trade help ease the process of adjustment and encourage domestic interest groups to form strong coalitions that support a free trade system. Viewed from the perspective of business-cycle theorists, fiscal expansion during world economic downturns can sway the political balance in a given nation between a free trade and a protectionist coalition. Viewed from an international systemic standpoint, fiscal expansion reduces the collective action pressure for each nation to defect in an attempt to pass the costs onto others. Deriving International-Level Generalizations and Hypotheses Generalization. The stability of the international economic system reflects the underlying power structure that sustains it. Hegemonic nations are able to create and maintain a stable international economic system that benefits their interest because they have the strength to enforce the rules and the resources to induce others to cooperate. In contrast, small nations are generally free riders and price takers in the international economic system. The constraints and opportunities they encounter differ from those of larger states. Although small states lack the economic power necessary to alter the terms of the international economic system to their advantage, their ability to free ride on the existing system is greater because their economic policies have little impact on the overall world economy.31 Hypothesis. Changes in the distribution of economic power among states will challenge the pre-existing arrangement created under hegemonic dominance and generate greater conflict over which states will bear the future costs needed to maintain a stable international economic system. The declining hegemon will become less willing and able to bear the cost alone,

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INTRODUCTION

and it will exert greater pressure on other nations to step up and assume a greater share of the burden. The economic policies of rising economic powers will grow increasingly politicized internationally, and these states will encounter greater foreign demands to assume a larger share of the burden in maintaining international economic stability. Generalization. In an international economic system governed by the principles of embedded liberalism, the fiscal policy of a major economic nation promotes international economic stability in two ways. First, as a means of redressing trade and current account imbalances, fiscal policy helps stem the threat of protectionism that rises when nations accumulate large and persistent trade imbalances. Second, during prolonged world recessions, fiscal expansion helps reduce protectionist pressures by providing an active and open market for distress goods. By stimulating a stagnant world economy, it provides a positive sum environment wherein the economic benefits to be gained from free trade help ease the process of adjustment and encourage domestic interest groups to form free trade coalitions. Hypothesis. Given changes in the distribution of economic power among states, the fiscal policy of rising economic powers will become increasingly politicized under two conditions: during times of world economic recessions and when rising economic powers accumulate persistent and rising current account surpluses from year to year.

State, Society, and the Politics of Japanese Budgetary Policy The State-Society Debate in Japanese Politics The importance of treating both state and societal actors as independent and interactive determinants of policy outcomes has become increasingly recognized in the fields of comparative politics and international relations, as well as among specialists of Japanese politics. But despite this growing convergence, forming a common basis from which one can conceptualize the dynamics of state-society relations is difficult because each field has evolved from a different and often incompatible set of assumptions. In many instances, these attempts have merely assumed the power, purpose, and primacy of the state over society without offering an adequate explanation of the basis on which these assumptions are made. For example, most theorists accept as a truism the characterization of Japan and France as “strong” or “hard” states and the United States and Great Britain as “weak” or “soft” states. 32 Moreover, the policies these states pursue are defined a priori or inferred from the strength of the state. The Japanese

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state is not only “strong,” but “developmental” or “mobilizing” in purpose. In contrast, the United States is “regulatory” or “extractive” as well as “weak.”33 My point is not whether these categories are useful. As typologies, they clearly offer important ways of distinguishing variations in statesociety relations and their impact on policy outcomes. The problem with these typologies is that they lack an explanation of the basis on which one can test the empirical accuracy of these categorizations as applied to specific nations over time. For example, it is difficult to assess the logical basis on which one arrives at, and hence can falsify, the assertion that France and Japan represent strong states.34 Moreover, it is also unclear how one can assess, rather than assert, the differences among states in the functions they perform and the goals they pursue. Whereas some states are seen to govern the economy at arm’s length through regulation, others are seen to intervene directly into the economy to promote economic development or to extract resources to enhance despotic state power. Variations in state functions and goals can be found not only between strong and weak states but among them as well.35 This is by no means a trivial problem. The inability to construct a common basis on which one can assess the power and purpose of a state has divided the study of Japanese politics between those who argue that Japan is a strong developmental state and those who posit that it is dictated by a more pluralist political process.36 The predominant view of Japan is that it is a strong developmental state, and state actors are conceptualized primarily in terms of elite bureaucrats who occupy the top central ministries: the Ministry of International Trade and Industry (MITI), the Ministry of Finance, and the Ministry of Foreign Affairs (MOFA).37 Emphasizing the historical timing in which Japan’s modern state was formed, proponents of this view argue that the structural and functional characteristics of the Japanese state have remained fundamentally different from those of most other advanced Western democracies and that these differences make Japanese politics and policymaking distinct.38 Clearly, the developmental state model has made an invaluable contribution not only to the understanding of Japanese politics and policymaking but also to the study of comparative politics. 39 But despite its many contributions, the model, as an explanation of contemporary Japanese politics and policymaking, is problematic for two reasons. First, although a descriptive account of state structure is an important starting point, by itself it fails to demonstrate whether a nation is in fact a strong state. To be sure, structural attributes such as the extent to which state authority is centralized or fragmented, the degree to which the state is insulated from society, and the presence or absence of strong network links between state and societal actors are crucial features of state structure that influence the

34

INTRODUCTION

state’s ability to enter into negotiations with other political actors and pursue their autonomously formed interests.40 Moreover, it is widely accepted that Japan’s state structure, when viewed from a comparative perspective, scores highly along these dimensions. However, what is descriptively true about the organizational structure of the Japanese state is analytically irrelevant in determining whether Japan is indeed a strong state. Among comparativists, the commonly accepted criterion of a strong state is a relational standard that measures the extent to which the state is capable of formulating and implementing policy outcomes against the potential or actual opposition of other powerful political actors.41 Thus, states can only be judged as strong or weak when competing interests between state and societal actors can be identified and an adequate criterion can be provided that demonstrates that policy outcomes reflect the interests of state over societal actors. Indeed, if all the bills drafted by Japan’s central ministries coincided with the vested interests of powerful social groups, the state might be competent in its technical ability to draft and secure legislative approval, but it would nonetheless be a weak state in relation to society. A second and related problem with the developmental state model is its reliance on a selective, snapshot view of history to explain contemporary Japanese politics and policymaking. Most historians agree that Japan’s vulnerable position in the international arena during the early Meiji period compelled the Meiji oligarchs to build a modern state both strong and developmental in character.42 What is unclear, however, is whether these prewar characteristics have remained largely unchanged in the postwar era, as proponents of the developmental state model claim.43 At issue is not whether the historical legacies of past institutions matter; clearly they do. One would be hard-pressed to explain why Japan’s central bureaucrats have enjoyed a high degree of prestige and legitimacy throughout the postwar period without taking into account Japan’s long administrative tradition that grew out of historical legacies dating back as far as the Tokugawa era.44 Rather, the crucial issue is the question of which elements count as significant historical institutions and, perhaps more important, which do not, such as the extensive social, parliamentary, and constitutional reforms conducted during the Occupation. The growing recognition of these problems have inspired some of the leading scholars of Japanese politics to revise or contest earlier claims concerning the strength and purpose of the Japanese state from a variety of different perspectives.45 But as important as these studies are in offering competing explanations for the determinants of policy outcome, it is difficult to find a common basis on which the strengths and weaknesses of these two approaches can be assessed and compared. The logic presented

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on both sides of the debate is often hard to refute. The strong state model merely assumes the primacy of the state based on the structural attributes of Japan’s central ministries. It thus largely dismisses the possibility that electoral politics and the dynamics of state-society relations that take place under a representative democratic system will change the strength and function of the Japanese state.46 Recent studies that acknowledge the importance of electoral politics and the legislative process in shaping policy decisions pose similar problems. In this analysis, a crucial distinction is made between the delegation and abdication of power.47 Elected government officials are seen to delegate the drafting and implementing of policy to the bureaucracy. Proponents of this view emphasize that this delegation is not to be confused with abdicating power to the bureaucracy. Even if elected government officials allow bureaucrats to draft or implement legislation, bureaucrats must nonetheless represent the interests of elected government officials in order to ensure the smooth passage of legislation in the Diet. This view suggests that societal actors have the recourse through electoral politics to ensure the representation of their interest in a given policy decision. Although this argument poses a cogent counterclaim to the notion of a strong and independent Japanese bureaucracy, it is just as difficult to falsify as the developmental state model it seeks to refute. If bureaucratic interests are defined as anticipating the demands of elected public officials so that bureaucrats can administer policy effectively, independent and competing interests between bureaucrats and politicians cannot be constructed. Because bureaucrats by definition are seen to accommodate the interests of legislators, the extent to which the bureaucracy is capable of formulating and implementing policies autonomously can only be asserted rather than assessed.48 Rival Theories of Budgetary Policy Theories of Japanese budgetary policy are contested in much the same way as the broader debate concerning the question of who rules in Japanese politics. On one side of the debate are those who stress to varying degrees the primacy of MOF in the budget-making process.49 Indeed, the most definitive and widely cited study to date is that of John Campbell, who argues that Japanese policymaking is characterized by “budget primacy,” wherein “a high proportion of decisions, compared with other nations, are made within the arena where the Finance Ministry is the leading actor.” In a more recent study, Peter Hartcher makes the point more forcefully, arguing that MOF “enjoys a greater concentration of powers, both formal and informal, than any other comparable body in any other industrial

36

INTRODUCTION

democracy” and that “in Japan, there is no institution with more power.” Though more modest in claim, Junko Kato similarly notes that “both the power to set the total budget size and the power to examine specific programs support the MOF’s ability to keep the total budget size within the range that it wants.”50 In general, those who stress the primacy of MOF emphasize the ministry’s organizational attributes and interests to explain Japanese budgetary policy outcomes. MOF enjoys a high degree of organizational autonomy. It is staffed by an elite corp of career bureaucrats, and with the exception of three political appointees whose tenure at the ministry is generally short, senior officials are selected almost exclusively from the pool of career officials who have advanced within the rank and file.51 The bureaucratic system of recruitment, career advancement, and retirement also provides the ministry with both an internal sense of coherence and strong network ties to politicians and business leaders.52 Furthermore, in contrast to the fragmented decisionmaking authority of the United States, budgetary appropriation and authorization in Japan are centrally coordinated by MOF, giving its bureaucrats an exclusive jurisdictional authority to compile the budget. Shortly after the start of a new fiscal year, MOF issues a basic guideline that establishes a ceiling on budgetary requests for the following fiscal year. Based on this guideline, all ministries and agencies seeking government funds must submit budgetary requests at the end of August to MOF. During the next three months, they meet continually with MOF officials to negotiate over the appropriateness of their policies and the size of budgetary allocation needed to fulfill them. Because all budget appeals must pass through this process—wherein MOF not only sets the overall size of the budget but also examines each ministry’s and agency’s requests—Campbell and others argue that budgetary policy outcomes are determined by the rules and norms that govern MOF’s decisionmaking process.53 From this framework, insights from incremental decisionmaking theory are incorporated to explain more precisely how MOF makes its decisions and the impact this has on both the overall size of the budget and how it is allocated to various ministries and agencies over time.54 According to this view, budgetary allocations are determined by MOF’s incremental decisionmaking process governed by the norm of baransu, or fair share. Allocative decisions are thus made primarily in terms of equity rather than merit or political pressure. For example, if one spending ministry receives a 10 percent increase from the previous year, then others are also expected to obtain a 10 percent increase. Similar observations of MOF control are made in regard to the total size of the budget, allegedly determined by MOF’s strict and enduring adherence to its budgetary principle known as the “20 percent rule”; “the long range prin-

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ciple in force for virtually the entire postwar era has been to maintain the government share of national income at around 20 percent.” By keeping the budget roughly balanced and limiting the tax rate to 20 percent of national income, MOF purportedly controls the overall size of the budget and political pressures are seen to exert only “marginal influence” on it.55 Although this approach presents a bold attempt to explain Japanese budgetary policy outcomes, it suffers from the same theoretical ambiguities raised earlier regarding the developmental state model. As noted above, state autonomy and capacity are relational concepts that cannot be derived from the organizational attributes of the state alone. In order to assert that MOF autonomously dictates budgetary policy outcomes, one must demonstrate that it is able to utilize these organizational advantages to formulate and implement autonomous policies over the opposition of other powerful political actors. At issue is not the question of whether MOF has the exclusive authority to compile the budget but whether the budget it compiles opposes the interests of powerful societal actors and the political party they support. If state autonomy is not treated as a relational concept, it is uncertain whether MOF genuinely dictates policy outcomes or merely follows the dictates of others. The latter is as equally plausible as the former. In a representative democratic system, the political party in power clearly has the opportunity and incentive to secure its interests. To the extent that government spending programs attract votes, the budget serves as a key instrument of political exchange between voters and political candidates seeking office. Moreover, the budget, whether compiled exclusively by a given bureaucracy or not, must secure the approval of the Diet. Incorporating bureaucratic decisionmaking theory further compounds this problem because it does not offer a satisfactory account of the political content embedded in policy outcomes. At best it only explains the yearly incremental pattern of budgetary allocations from a given base year and ignores the political determinants that established the initial basis upon which subsequent decisions were made incrementally. Equally problematic is its inability to account for change. 56 Indeed, to the extent that budgetary patterns change, the model’s causal explanation of budgetary policy outcomes is weakened. If either the overall size of the budget as a percentage of national income widely exceeds the 20 percent level or the percentage increase that different agencies and ministries receive over time varies significantly, then the rules and norms that govern MOF’s decisionmaking process become more an intervening than an independent variable that determines policy outcomes. In such cases, the more salient question is not whether MOF autonomy dictates policy outcomes, but under what political conditions MOF will be allowed to make decisions based on its operating rules and norms such as the 20 percent rule and baransu.

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INTRODUCTION

These theoretical problems suggest the need to examine alternative explanations based on a more careful analysis of how the political dynamics that accompany Japan’s representative democratic system influence budgetary policy outcomes. Unfortunately, these rival explanations of Japanese budgetary politics are not as fully developed as the MOF dominance model. For example, Gregory Noble and Mathew McCubbins advance a cogent theoretical and empirical critique of the MOF dominance model, but they do not construct an alternative model that seeks to explain budgetary policy outcomes. Similarly, Masaru Kohno and Yoshitaka Nishizawa offer a plausible account of how electoral politics influence the timing of public works spending, but the scope of their model is limited to only one spending category of the budget. Even Kent Calder’s more comprehensive crisis and compensation model, which examines a wider range of interest groups and spending categories, does not take into account how the very pattern of providing budgetary compensation in its aggregate can create a collective crisis for the ruling party that leads to budget retrenchment.57 These gaps, however, do not negate the general importance of examining how societal actors channel their demands through existing political institutions, nor do they validate the explanatory power of a statist approach. Rather, they illustrate the value of incorporating the insights gained from the broader comparative literature that address these concerns from a variety of different political traditions. For example, in James O’Connor’s own appraisal of his seminal Marxist analysis on the fiscal crisis of the state, he contends that his original explanation of budgetary policy outcomes must be expanded to include a more diverse range of societal actors who compete within a democratic system for government resources without any clear logic of the accumulation and legitimation functions of business. Along similar lines, Claus Offe cogently illustrates the complementary and antagonistic relationship between democracy and capitalism as manifested in the contradiction of the modern welfare state.58 Following the tradition of Alexander Gerschenkron and Barrington Moore, Peter Gourevitch presents a convincing account of how economic policies change as a result of the formation and dissolution of societal coalitions. Institutionalist and corporatist theorists have yielded similar insights by identifying variations in the organization of societal interests across nations to explain key differences in policy outcomes.59 Through a comprehensive theoretical analysis of the dialectical evolution of democracy and the free market, Theodore Lowi provides a cogent account of not only how pluralist theory misrepresents the significance of interest groups but also how this misrepresentation has contributed to the way in which interest groups create budgetary mismanagement under a democratic political system.60 These carefully crafted analyses have had an impact on studies that deal specifically with Japanese politics. For example, by incorporating

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Lowi’s analytical approach, Jiro Yamaguchi presents a historically detailed account of how interest group pressures led to the abandonment of a balanced budget and the adoption of deficit financing in the mid-1960s. Michio Muramatsu and Ellis Krauss’s concept of “patterned pluralism” and Calder’s notion of crisis and compensation parallel Gourevitch’s contention that policy outcomes must be viewed in terms of the challenges and opportunities that Japan’s conservative coalition faces within a democratic system. Though somewhat ambiguous, the term “corporatism without labor,” coined by T. J. Pempel and Kelichi Tsunekawa, reflects Peter Katzenstein’s emphasis on identifying the organization of societal interest as a means to explain policy outcomes.61 Similarly, the problematic aspects of the MOF dominance model do not invalidate a state-centric approach to the study of Japanese politics; rather, they call for a more nuanced appreciation of both the varied interests that the state pursues and the broader context in which the state negotiates with societal actors within the context of existing political institutions. For example, in his more recent work, Campbell has shown how political actors outside the bureaucracy can generate the “political energy” to shape welfare reform. In the case of industrial policy, Richard Samuels persuasively shows how MITI, in its negotiations with industry leaders, relinquished its primary goal of state ownership and control in return for maintaining its jurisdictional authority through a process of “reciprocal consent.” Along similar lines, both Frances Rosenbluth and Junko Kato reveal how MOF has sacrificed or modified key substantive policy interests in its effort to retain its jurisdictional authority in the issue areas of financial deregulation and the consumption tax.62 These studies provide important theoretical insights that have advanced the study of Japanese politics and policymaking. Still missing, however, is a more specific account of how these fruitful analytical concerns can be incorporated more specifically into the politics of Japanese budgetary policy. Resolving the Theoretical Impasse The strengths and weaknesses of these rival views of Japanese politics in general, and budgetary policy in particular, raise three central concerns. First and foremost is the crucial task of clearly specifying and separating out the interests of state actors from those of societal actors.63 Unless one starts from the initial premise that state and societal actors have separate and potentially conflicting interests, there is no basis to determine the extent to which policy outcomes reflect state or societal interests. This is not to suggest that the question of whether Japan is a strong developmental state can be judged simply by examining whether policy outcomes corre-

40

INTRODUCTION

spond to state interest. Undoubtedly state and societal actors have competing as well as common interests, and a given policy outcome may reflect a consensus forged through negotiation rather than a clear victory of the state to impose its interests over those of societal actors.64 But these caveats merely serve to illustrate the importance of identifying beforehand the interests of state and societal actors. Without prior knowledge of the interests at stake, one is neither able to demonstrate shared interests among political actors nor capable of forming any meaningful evaluation of the winners and losers that emerge from the political bargaining process. A second and related task is to provide a more inclusive account of the structural and institutional context through which these state and societal actors define and pursue their respective interests. In tangible terms, this entails explicating both the structural attributes of Japan’s central ministries and also the political institutions that shape Japan’s electoral and legislative processes. For state actors, the logic of electoral politics shapes and distinguishes not only the interests of elected state officials from those of bureaucratic state officials but also the basis of their interaction with societal actors.65 Moreover, the legislative process defines the basic parameters of the resources and opportunities available for these state actors to pursue their interests. I do not ignore the relevance of state structure, nor do I exclude by definition the question of whether state actors are capable of formulating and implementing policies autonomously. Rather, I ask the question of how and to what extent ministry officials pursue and define their autonomous interests given the constraints and dynamics that accompany Japan’s representative democratic system. These concerns are also important in situating societal actors. Societal actors must pursue their interests within the context of a representative democratic system that shapes the interaction both among societal actors and between societal and state actors. Elected state officials must gather enough votes to stay in office and societal actors must often organize and form coalitions to secure the representation of their interest. I do not advocate a return to the classical pluralist perspective of viewing political outcome as the pareto optimum result derived from the competition of individual voters within the democratic process. Although each voter possesses one vote, not all societal actors vote as individuals or possess the same degree of influence. Their influence in the democratic process can vary according to their organizational strength, the political resources they control, and the position they occupy in the economy and society. Nonetheless, these concerns do not diminish the importance of treating democratic politics as a distinct concern. Rather, they illustrate the need to more accurately portray the organization of societal interests, the political resources they bring to bear, and the compromises and coalitions they forge within the context of a representative democratic system.66

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The third task is to place the two concerns I have just raised explicitly within the context of the specific issue area examined. This is important for two reasons. First, state structure can vary even within the same nation depending on the issue area. By shaping the resources state actors can utilize to pursue and fulfill their interest, these variations will influence the assessment of state strength. For example, a comparison between the state structures of Japan and the United States undoubtedly will yield different assessments of state strength depending on whether one examines economic or security issues. Although the United States is often characterized as a weak state because of its fragmented state structure, the state, in the issue area of security, is generally able to fulfill its interests more readily than Japan.67 Second, the interests and interaction of state and societal actors vary according to issue areas. As collective action theorists and others rightly point out, the range of societal actors likely to participate in the policymaking process depends on the size of the constituency and the degree to which its interests are at stake in a given issue area. More specifically, a relatively small number of political actors with the largest stake over a given issue will organize and exercise the greatest influence over outcomes. Thus, in industry-specific issue areas, the industry directly influenced by a particular policy will be the single most important nonstate actor in the policymaking process, and generalized conclusions about state strength are drawn from observations of business-government relations. When policy outcomes are found to reflect the negotiated interests of big business and the central bureaucracy, these findings are presented as evidence to champion a less state-centric approach to the study of Japanese politics and policymaking.68 In contrast, entirely different conclusions would be reached if similar observations were found in the issue area of budgetary policy. To be sure, the interests of big business may figure prominently in Japanese budgetary policy outcomes. However, the representation of their interests alone or in conjunction with those of the central bureaucracy would not support the broader pluralist contention that policy outcomes are determined by the interest and interaction of a plurality of societal actors who pursue their demands through Japan’s representative democratic system. The encompassing scope of budgetary policy decisions necessarily invites a wider range of political participants, from general voters who oppose tax increases yet demand social welfare benefits to interest groups such as farmers and small businesses that actively lobby for government subsidies and preferential tax treatment. Consequently, budgetary policy outcomes that simply reflect the interests of big business and the central bureaucracy would coincide more with the earlier elitist model of Japanese politics, wherein state leaders are seen to formulate and implement policies autonomously with actors outside

42

INTRODUCTION

the elite circle who have little influence over policy outcomes. In short, these three central concerns are crucial in resolving the existing deadlock in the debate concerning the nature of Japanese politics and policymaking in general and budgetary policy in particular. By recognizing the importance of both state structure and political institutions, I seek to draw on the insights made by both sides of the debate rather than exclude one component at the expense of the other. Moreover, by presenting both state and societal actors as potential political players, each vested with the interest, opportunity, and resources to secure favorable policy outcomes, I avoid arguing by assumption the primacy of either state or societal actors. Instead, from this starting point, the issue of how and to what extent state and societal actors influence Japanese budgetary policy outcomes can be posed as a question to be assessed through a critical investigation of the empirical evidence. Identifying the Political Actors in Context Appointed state officials: The central ministry bureaucrats. At the broadest level of generality, appointed state officials are entrusted with the task of governing the national interest. Long before comparative theorists sought to “bring the state back in,” international relations scholars recognized the paramount role of the state in defining and defending the national interest.69 Working within this tradition, subsequent scholars have specified the state’s national interest more concretely by supplementing a deductively informed definition of national interest with empirical observations of the statement and behavior of state actors. These observations in turn are used to define the state’s national interest provided they meet two basic conditions: They must be related to the state’s general objectives, rather than the organizational or private career interest of the state actor, or the interests of powerful social groups; and they must endure over time.70 This approach serves two important purposes. First, these criteria help identify and distinguish the varied interests of state actors. As Graham Allison and others have illustrated, governing the national interest is not the only interest appointed state officials pursue. Their interests are also shaped by the organizational interests of the particular government office they occupy. In pursuing these interests, state actors may often compromise their national interest in order to expand their organization’s resources and jurisdiction. In addition, their actions may be constrained by the decisionmaking rules of their particular organization. Moreover, to the extent that their career advancement is determined by their organization, state actors may seek to facilitate policymaking in order to accomplish their jobs.71 Second, this approach also provides a basis for assessing state capacity. By omitting from the definition of national interest the behaviors

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and statements of state actors that reflect their organizational interests or those of powerful social groups, the degree of state strength can be gauged. For example, Stephen Krasner and others have identified the weakest states as those that serve specific interests rather than the national interest. A slightly stronger state is one that is able to resist societal pressures but unable to make societal actors follow policies that would further the state’s national interest. In contrast, the strongest states are those that are able not only to induce societal actors to follow policies that further the national interest but to change the socioeconomic structure itself over time.72 In the specific context of Japanese budgetary policy, the singular most important ministry is MOF. As an organization, MOF is divided internally into seven main bureaus: Budget, Tax, Finance, Customs, Banking, Securities, and International Finance. The Budget Bureau, in coordination with the Tax and Finance Bureaus, possesses a near exclusive jurisdiction over the drafting of the budget. In contrast to the United States, where budgetmaking authority is widely dispersed between and within the legislative and executive branches of the government, MOF’s Budget Bureau is the only government organization in charge of coordinating the various budget requests and compiling a draft of the budget.73 No other single government organization possesses its level of information and technical expertise in budget-related matters. In addition, it largely controls official tax revenue forecasts upon which spending guidelines for following years are set. Moreover, its revised budget (Hosei Yosan) is not subject to the same level of legislative scrutiny as the initial budget (Tosho Yosan). MOF’s national interest in budgetary policy is to maintain sound government finances.74 As the guardian of the national coffer, it seeks to draft and implement budgets that effectively utilize scarce resources to serve the collective, rather than the particularistic, interest of the nation. Placing this in more tangible terms requires a careful analysis of the statements and behavior of MOF officials from the early 1970s to the mid-1990s. It is not enough to simply assume that MOF’s national interest translates into drafting budgets that serve developmental goals. Such an approach is both unfruitful theoretically and unsound empirically. Promoting economic growth can hardly be considered the sole component of MOF’s national interest that endures over time. Accordingly, evaluating MOF’s capacity based on its ability to fulfill developmental goals provides a weak argument for a strong state. As both Yukio Noguchi and Calder succinctly illustrate, both the size and the composition of the budget over time run counter to the predictions of the developmental state model.75 Hence, a more appropriate method for defining MOF’s national interest tangibly is to supplement this broad and abstract definition of MOF’s national interest with empirical observations of the statements and behavior of MOF officials for the period in question. These observations in turn must correspond to MOF’s

44

INTRODUCTION

general interest of maintaining sound government finances rather than to the organizational or career interests of MOF officials or the interests of powerful societal actors. In contrast to MOF’s national interest, MOF’s organizational interests can be viewed in substantive and procedural terms. In substantive terms, its organizational interest is to minimize the size of the budget, irrespective of whether such budget austerity serves the national interest. This interest is determined largely by MOF’s distinctive organizational role in the budgetmaking process. Whereas MOF’s role is to protect the government purse strings, all other ministries seek to expand their organizations’ roles and resources by pressuring MOF for greater government funding. In procedural terms, MOF’s organizational interest is to protect its exclusive jurisdictional autonomy in compiling and drafting the budget and to ensure the smooth passage in the Diet of the budget it drafts. These two interests combined suggest a tradeoff; MOF must temper its substantive interest in minimizing the size of the budget in order to protect its jurisdictional autonomy in budgeting. MOF’s ability to achieve this tradeoff, however, represents a weaker case of MOF dominance than in cases where it is able to fulfill its stated goal of maintaining sound government finances.76 Elected state officials: The politicians. The political dynamics that accompany all representative democratic systems is a crucial factor that distinguishes the interests of elected state officials from those of appointed state officials. The primary concern for all political candidates in a representative democratic system, as opposed to that of appointed state officials, is to win elections and stay in power. Indeed, the failure to fulfill this fundamental interest erases their basic identity as elected state officials. Placed in the context of budgetary policy, their interest is to promote government spending packages that attract enough voter support in their district to secure electoral victory. This dynamic is readily observed in Japan. Frequent elections, universal suffrage, high voter turnout, and a competitive party system ensure that political candidates seeking public office must offer government spending packages that elicit voter approval. For most of the period covered in this book, the incentive to do so was further strengthened by the particular nature of Japan’s electoral system. 77 The lower house of the Diet, which legally possesses the ultimate legislative power over the budget,78 is based on an electoral system known as a medium-sized, multimember, single nontransferable vote system. In this system, there are generally three to five Diet seats for each electoral district, and each voter casts only one vote. Since a political party must field more than one candidate in the same district to secure a majority of seats in the Diet, voters rarely choose a particular candidate based on party label or party platform alone. Rather,

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the crucial distinction often rests in the candidate’s reputed ability to deliver favorable projects and subsidies from the national government budget to their voters’ district.79 The importance of this form of political exchange is further accentuated by the financial relationship between the national and local government budgets. Local government expenditures traditionally exceed local government tax revenues by over 40 percent. These deficits are covered by the national government’s local allocation tax grant and other transfers. Although a large portion of these transfers are calculated on a set formula, the significant size of discretionary transfers has given voters added incentive to choose candidates who can deliver favorable projects to local regions.80 The primacy of this interest, however, must not be viewed in an institutional vacuum. Rather, the individual interest of elected state officials must be placed in the context of the political party with which they are affiliated and the institutional dynamics of Japanese party politics. For the period I am assessing, this entails a particularly close look at the interest and interaction of Diet members of the Liberal Democratic Party. By virtue of their long-standing dominance in the Diet during this period, LDP Diet members have been the single most important politicians involved in the budget-making process. It is important to stress that the approach I am taking contrasts with earlier studies of Japanese politics, which treated the LDP as but one unit of a ruling triumvirate, together with the central bureaucracy and big business. Although there are important generalizations that can be derived by treating the LDP as one coherent unit, I start from the premise that LDP politicians also possess contrasting interests in budget-related matters according to their rank within the LDP. LDP backbenchers, policy experts, and party leaders all play different roles in the budget-making process.81 Although they may all share a broad-based conservative policy line that distinguishes them from the opposition parties and exercise intraparty discipline in the Diet, consensus is forged only after negotiations are held and compromises struck over potentially conflicting interests among its members. The basis source of contention stems from the potential conflict between the interest of individual LDP politicians to win elections and the party’s interest in maintaining its control over the Diet. LDP backbenchers are eager to provide as much government largess as possible to their constituents because they have yet to establish a solid base of support. After several terms in office, greater policy expertise and a more secure support base allow them to be more selective in their demands for government funding. However, as they progress still further up the ranks, they become increasingly concerned about circumscribing the collective demands of backbenchers, particularly when they threaten the party’s dominant posi-

46

INTRODUCTION

tion in the Diet. The select few who become party leaders are generally those most secure in their support base and best able to play the role of a political “broker” and “entrepreneur.”82 In addition to forging compromises within the party to avoid the problems of collective action, they seek to initiate changes within the party in order to respond to the broad social, economic, and demographic changes that threaten the long-term interest of the LDP. Accordingly, examining the extent to which LDP politicians have been able to influence budgetary policy outcomes requires a careful analysis of the interests and interaction of various ranking Diet members. Assessing the LDP’s influence over policy outcomes must not be based simply in terms of whether they reflect the ability of each individual Diet member to secure government largess for their local constituents. Instead, they must reflect the varying conditions upon which compromises were forged within the LDP among various ranking Diet members. This in turn requires a careful analysis of the social, economic, and demographic changes of the time period under investigation. Peak associations. The structure of Japan’s peak associations is characterized by the presence of a strong peak association in business and the absence of a comparable peak association in labor.83 From a comparative standpoint, labor is far less organized in Japan than in most other advanced industrial nations. In terms of its degree of centralization, labor is fragmented horizontally between, as well as within, its public and private sector unions and vertically as a result of the strong presence of enterprise as opposed to trade unions.84 Furthermore, in terms of concentration, Japan’s unionization rate is the second lowest among the advanced industrial nations.85 Despite labor’s mixed successes in industry-specific negotiations with business, its comparatively low level of concentration and high level of internal fragmentation have excluded labor from effective representation over an extended period of time in economic policymaking at the national level.86 In contrast, the organization of business in Japan closely approximates the corporatists’ definition of a peak association. It is composed of four major suborganizations, each possessing separate yet overlapping functions as well as membership.87 Together they represent not only the interests of all major industry groupings and the corporations they comprise but also the interests of a large portion of small business enterprises. Moreover, unlike labor, these suborganizations possess network linkages patterned over time that allow active participation in the economic policymaking process. The point is not that labor is totally excluded from the policymaking process; nor am I trying to revive the argument developed in earlier studies on Japanese politics that viewed business as an entirely unified orga-

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nization whose interests were hardly distinguishable from those of the LDP and the central bureaucracies. As Muramatsu and Krauss demonstrate, labor is often able to voice its demands through opposition parties despite the patterned political relationship among members of the ruling conservative coalition.88 Gerald Curtis and others have shown that interests can diverge not only among big business, the LDP, and the central bureaucracies but also within big business itself. 89 Rather, I am seeking to highlight the disparity in the institutional power between the organization of business and the organization of labor and to illustrate how this disparity shapes the respective interests of business and labor as well as the resources they can bring to bear on the policymaking process. From a corporatist’s framework, the presence of both labor and business peak associations is crucial in understanding how an encompassing array of societal interests are organized and represented in the political process.90 In part, this is due to the fact that labor peak associations in democratic corporatist nations not only reflect but also promote the interests of a large majority of workers. In Japan, however, labor is both fragmented and unconcentrated. It represents a less encompassing number of workers and its interests are defined more narrowly.91 Hence, although labor may support progressive issues once they become politicized among the general electorate, labor must still compete with the conservative coalition to co-opt these issues and secure the support of the electorate. Moreover, although labor is not excluded from the policymaking process, it is clearly not an equal participant alongside business in shaping the content of policies. The organizational weakness of labor limits its role to voicing protests against policies formulated by others.92 In contrast, the organization of business in Japan possesses a more advantageous position in the policymaking process for two reasons. First, as Charles Lindblom and others rightly point out, business enjoys a privileged position in all market-based nations regardless of whether it is organized or not.93 To the extent that investment decisions, economic growth, and tax revenues all hinge on business success, both elected and appointed state officials can never neglect the interest of business as readily as they can the interest of labor.94 In Japan the privileged position of business is further enhanced by the institutional disparity between the organization of business and the organization of labor. By utilizing its organizational strength, business is able to exercise its leverage over politicians more directly by coordinating large sums of financial contributions during elections.95 For these reasons, Katzenstein and others have argued that Japan cannot be viewed in the same democratic corporatist framework as other nations.96 Instead, the task of appropriately identifying the interests and interaction of Japan’s peak associations entails identifying the interests of business but not those of labor.

48

INTRODUCTION

The interests of business are straightforward. The broad-range political interests of big business, which is motivated primarily by their concerns over profit and market share, is to ensure the continuation of a pro-business, conservative rule under the LDP. However, this is not to be taken as a reformulation of the view that the LDP and business share an intrinsically harmonious relationship. To the extent that consensus exists, it is forged through negotiation and compromise. Business must balance its basic economic interest over profit and market share with its political interest of supporting government spending packages that bolster continued LDP rule. Ceteris paribus, the way in which these interests are balanced in turn will vary according to the business cycle. During periods of economic growth, when the rate of tax revenue increases automatically at a rate higher than the rate of economic growth, business will tacitly support the growth in government spending necessary to sustain LDP rule despite some criticism toward specific spending items. This tacit support, however, will be weakened when higher spending generates the potential threat of increasing corporate taxes or raising the cost of capital because of crowding out.97 In periods of prolonged recessions, business will seek to encourage a mix of expansionary fiscal and monetary policies at the macroeconomic level and direct subsidies at the industry level. Interest groups. As in all representative democratic systems, interest groups in Japan are a key political player in the issue area of budgetary policy.98 In this study interest groups are classified separately from the organization of business in order to contribute more effectively to the literature on Japanese politics. Whereas business has always been considered a member of the ruling triumvirate, the surge in the study of Japanese interest groups has focused on groups outside this elite circle.99 The extent to which these interest groups are able to secure their interests in policy outcomes is seen as evidence of less statist or elitist forms of politics. Instead, it is seen to indicate the presence of a greater plurality of societal actors who are able to have their interests represented through the democratic political process.100 Treating business separately from other interest groups is also important because of the differences in both the scope of their interests and the way they seek to exercise their respective influences.101 Business is a peak association that not only occupies a privileged position regardless of whether it is organized but also exercises its influence directly through financial contributions. Moreover, in the context of budgetary policy, its interest is generally framed in broad terms and less focused on specific spending items. In contrast, interest groups lobby more forcefully on specific items of the budget pertaining directly to their narrow interests. Although they also provide financial contributions, their principal form of political exchange involves their ability to mobilize votes.102

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This form of political exchange is particularly important given the nature of Japan’s electoral system. Because political candidates from the same party often compete with one another in the same district, they must actively forge their own base of support and cannot rely on party label or party platform. Moreover, this competition takes place in electoral districts where only a small number of voters can make the difference between the three to five candidates who get elected and others who do not. As a result, political candidates have a strong incentive to accommodate interest groups that can mobilize a large number of votes. Despite the electoral reform passed in 1993, the single district seats that have replaced this system remain small enough for interest groups to still yield considerable clout. Interest groups that traditionally have supported the LDP—namely agriculture, small business, and construction—figure prominently in this process. Together, these interest groups represent a substantial portion of the electorate. They also possess various networks, patterned over time, that link their demands to the policymaking process.103 For instance, a large concentration of LDP politicians are members of policy tribes that deal specifically with these interest groups. 104 Moreover, these interest groups regularly consult with central ministry officials whose jurisdictional authority coincides directly with their activities. In some instances their members are able to secure Diet seats.105 By utilizing these political resources, these interest groups, without exception, create upward pressures on the size of both the budget and the deficit. On the revenue side of the budget, they seek tax breaks and jealously guard full disclosure of their income. On the expenditure side, they exercise their voice to demand government assistance in the form of subsidies, concessionary loans, and public work projects to sustain their market presence.106 This is not to suggest that agriculture, small business, and construction are the only relevant interest groups in Japan, nor is it meant to imply that their political importance is fixed over time. Rapid economic growth has generated major demographical changes and altered the political landscape of interest groups in Japan. The political weight of these three interest groups has fallen. The drop has been especially dramatic in the case of agriculture despite the continued misapportionment of Diet seats. Moreover, new interest groups have emerged, many of which actively lobby for specific spending items that favor their own narrow interests.107 In order to capture these changes, I will identify in each of the case studies the changing landscape of interest groups in Japan. In addition to analyzing how the interests and interaction of traditional LDP supporters influence budgetary policy outcomes, I will examine whether and to what extent other interest groups emerge over time and enter into competition for favorable policy outcomes. General voters. The term general voters used in this study refers to the

50

INTRODUCTION

large number of societal actors who seek to exercise their political influence more as individual voters than as members of a given interest group or peak association.108 In the comparative literature, the importance placed on identifying these societal actors as potential political participants has diminished considerably over time. In past studies, classical pluralist theorists have focused on the preferences of individual voters as the basic unit for analyzing policy outcomes. 109 Subsequent studies, however, have largely discredited this approach because of its inability to account for the presence as well as the greater importance of interest groups and peak associations in the policymaking process.110 Diffuse and poorly organized, general voters are rightly seen to be less capable than interest groups and peak associations in articulating their interests and mobilizing their political resources effectively. Although I largely agree with those scholars who focus primarily on interest groups and peak associations, I do not discount the potential for general voters to influence policy outcomes. Instead, I take their political disadvantage as a given but recognize the possibility that they may overcome their disadvantage to influence policy outcomes. I will analyze two factors in particular, namely, the extent to which tacit popular support for the ruling political party changes over time and the extent to which demographic changes that increase the relative size of nonpartisan voters influence political party dynamics. Maintaining tacit popular support is often a necessary precondition for any ruling political party to retain its control in the Diet.111 Granted, individual Diet members are generally less concerned about maintaining popular support for their political party and more receptive to meeting the demands of specific interest groups that are part of their constituency. Because the interests of general voters are not as tangible and specific as those of interest groups, their ties to a given legislator are less established. Moreover, since they are less organized, they offer smaller political returns in terms of votes. However, party leaders who are responsible for managing the overall, long-term interest of the party must be more careful of maintaining tacit popular support for their political party. They must effectively gauge the degree to which a particular issue becomes highly politicized among general voters. At a minimum, they must take measures to avoid any public backlash that may incite general voters to vote against their political party. Demographic changes can also elevate the political influence of general voters. Over time, most advanced industrial nations have witnessed a demographic shift characterized by greater urbanization coupled with the growth of middle-class voters less tied to traditional political organizations. Japan is no exception. From the 1970s onward, there has emerged an in-

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creasingly large number of voters who are only loosely aligned to any particular political party. Moreover, this increase has taken place alongside a decline in the relative number of organized societal actors actively engaged in supporting a particular political party. As a result, the turnout rate at the polls can play a major role in shaping the composition of political parties represented in the Diet, both when voters vote and when they do not.112 I am not offering an elaborate theory of how and when general voters become an articulate, organized force in the political process. Although the two factors noted above will undoubtedly affect the degree to which general voters influence policy outcomes, a fuller account requires detailed empirical investigation. The more relevant point is the importance of starting from the premise that voters have the potential to become key political actors. From this basis, I seek to examine empirically whether and to what extent they have been able to mobilize their individual demands into a collective force and have their interests represented in budgetary policy outcomes. Deriving Domestic-Level Generalizations and Hypotheses Generalization. Japan’s budgetary policy outcomes are determined neither by the national nor by organizational interests of an autonomous state, but by the political dynamics that accompany all representative democratic systems. More specifically, they reflect fundamentally the interests and interaction of the societal actors and political parties that make up Japan’s ruling coalition and the electoral challenges and opportunities they face in a democratic political system. Hypothesis. When the relative strength and policy preferences of the members who make up the ruling coalition remain stable, budgetary policy outcomes will be stable and both the size and the distribution of the budget will reflect primarily the negotiated interests of the ruling coalition. Conversely, when the relative strength and policy preferences of the ruling coalition members are altered, budgetary policy outcomes will become more erratic and new negotiations will be conducted in response to this change. Once the situation is resolved, a new pattern of stable budgetary outcomes will emerge and reflect the terms of the new compromises made. As in all democratic systems with regularly held elections, the interests and interaction of political actors are never frozen in time. Although a snapshot view will reveal that Japan’s budgetary policy outcome at any given moment reflects the negotiated interests of the ruling coalition, the relative strength and policy preferences of the members of this coalition are bound to change over time and produce new budgetary policy outcomes. Moreover, the political bargaining and compromises that are struck

52

INTRODUCTION

among members of the ruling coalition in one period will help define the political setting in which subsequent decisions about budgetary policy are made. Accordingly, analyzing the impact of democratic politics on budgetary policy outcomes must be placed within the context of these concerns. In operational terms, this entails a careful delineation of the relative strength and policy preferences of the three main categories of societal actors. Among these three, the interests of big business figure prominently in my analysis. By virtue of its place in the economy and its vast organizational resources and linkages to the ruling political party since the early postwar period, big business, more than any other societal actor, possesses the ability to be the senior partner in a ruling coalition and the incentive to steer that coalition in a conservative direction. However, within the parameters of this conservative coalition, budgetary policy outcomes can vary considerably, and the extent to which they do so will depend not only on how big business demands change, but also on the relative strength and policy preferences of the other societal members of the ruling coalition. Despite its economic and political clout, big business alone cannot deliver the votes necessary to secure a legislative majority in the Japanese Diet. Interest groups and general voters thus also have the ability to influence policy outcomes by supporting the ruling party in exchange for budgetary concessions. Consequently, investigating the precise manner in which the relative strength and policy preferences of general voters and interest groups change over time will also be an important component in explaining variations in budgetary policy outcomes. The impact of these changes on budgetary policy outcomes cannot be derived entirely on an a priori basis. To be sure, economic and demographic changes will generate predictable changes in the relative strength and policy preferences of societal actors, but these changes must be analyzed within the context of the existing institutional arrangements. Once established, the composition of the ruling coalition and the budgetary policies it initiates become institutionalized and help define the political setting in which subsequent decisions are made. For example, a budgetary consensus in support of deficit financing reached among members of the ruling coalition in one period can later produce a fiscal crisis that threatens to undermine the stability of the ruling coalition. Conversely, a consensus established in favor of budgetary austerity can subsequently generate internal dissent if such a policy contributes to a prolonged recession. Accordingly, identifying changes in policy preferences requires a careful empirical investigation of these path-dependent effects that cannot be derived strictly on an a priori basis. The argument I present contrasts sharply with statist explanations of policy outcomes in general and the MOF dominance model of Japanese budgetary policy outcomes in particular. By placing primary emphasis on the in-

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terests and interaction of the societal actors and political parties of Japan’s ruling coalition, my analysis is more closely aligned with societal-based explanations of policy outcomes. I am not arguing, however, that MOF is entirely powerless or that none of its interests will be reflected in policy outcomes. MOF possesses various interests, and some will converge and others conflict with Japan’s ruling coalition. Moreover, by utilizing its state structural advantages, MOF will be able to sway policy outcomes provided it has the support of some of the members of the ruling coalition. But these caveats in no way suggest a strong state. I contend that MOF will not be able to formulate and implement budgetary policies that reflect the national interest over the potential or actual opposition of the ruling coalition. Indeed, I posit an opposite causal direction. That is, the interest and interaction of Japan’s ruling coalition will dictate policy outcomes despite the potential or actual opposition of MOF. The potential range of MOF’s influence is a derivative of the interests and interaction of Japan’s ruling coalition. Falsifying this hypothesis entails finding cases in which budgetary policy outcomes remained unchanged when the stability of the ruling coalition was challenged or when policy outcomes changed despite the fact that the political coalition in power was secure. In either case, the strong state claim is supported when policy outcomes reflect MOF’s national interest in maintaining sound public financing. Cases in which MOF is able to maintain its organizational interest in minimizing the size of the budget over the opposition of the ruling coalition are considered evidence of a slightly weaker form of a strong state. Those in which MOF sacrifices both of these interests in order to retain its organizational principles and rules that govern its decisionmaking process are considered evidence of a negotiated state. MOF is considered a neutral state if the evidence reveals that it sacrificed the above interests in order to safeguard its jurisdictional autonomy over budgeting. Finally, MOF is viewed as a weak state in instances when it is forced to relinquish its jurisdictional autonomy over budgeting. I anticipate MOF’s level of state strength, based on this typology, to range between that of a neutral and negotiated state. This does not preclude the possibility that policy outcomes may coincide with MOF’s national interest or its organizational interest in minimizing the size of the budget. However, I maintain that these outcomes will emerge only to the extent that they reflect changes in the interests and interaction of the members of Japan’s ruling coalition and the electoral challenges and opportunities they face in a representative democratic system. Generalization. Macroeconomic changes not only weaken the ability of the ruling coalition to maintain its negotiated consensus over budgetary policy outcomes but also shape the budgetary policy choices available in

54

INTRODUCTION

order to respond to such changes. The single most important macroeconomic determinant is the rate of economic growth. Hypothesis. Although the composition of the budget will reflect primarily the interests and interaction of the ruling coalition, large yearly increases in government revenues generated through high economic growth allow a wide range of political actors outside the ruling coalition to receive their fair share of budgetary increases from one year to the next. When budget politics is conducted under this positive sum setting, decisionmakers will be able to avoid making the politically difficult choice of prioritizing allocations that favor one group at the expense of alienating or antagonizing another. Ceteris paribus, the potential conflict inherent in the political competition for finite resources will be masked by generous and equitable allocation of resources to a wide range of political actors on a year-to-year basis. To the extent that the stability of the ruling coalition is threatened during this period, expenditure increases from one year to the next will continue to be high, but the composition of the budget will shift until a new pattern of baransu emerges. Hypothesis. During periods of low to moderate economic growth, budgetary spending will become more overtly politicized as demands for government expenditures outpace revenues. In this economic setting, three options are available: issue deficit-financing bonds, increase taxes, or cut government expenditures. All three options entail greater competition and potential conflict among political actors both within and outside the ruling coalition.113 The actual choice made among these options will depend on the relative strength and policy preferences of the members of the ruling coalition. In turn, the extent to which government spending increases from one year to the next will depend on which option is selected. However, whichever option is chosen, budgetary allocations will be patterned less by the norm of baransu or fair share than during the high growth period. Hypothesis. During periods of recession, budgetary spending will rise as a wide range of political actors both within and outside the ruling coalition converge in their demand for greater public expenditures to stimulate the economy.

Integrating the Two Levels In this section of the chapter, I seek to integrate the international- and domestic-level analyses I have presented into a two-level framework. The two-level framework I advance follows three distinct analytic steps. The

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first is to explicate the political dynamics inherent at the international level that account for when and why Japanese budgetary policy becomes politicized and linked to notions of international cooperation, leadership, and burden sharing. The second is to draw on the strengths and weaknesses of rival theories of Japanese politics and derive generalizations and hypotheses about the domestic determinants of Japanese budgetary policy outcomes. The third step is to derive generalizations and hypotheses that illustrate how the interplay of these two seemingly separate political spheres interact and influence policy outcomes. Generalization. Japan’s rise as a major economic power will be accompanied by both international and domestic political changes that alter the constraints and opportunities that structure the policy options available to its state leaders. Hypothesis. As Japan’s economic power rises, its state leaders will encounter greater international pressures for it to adopt policies that assume a greater leadership role in upholding the stability of the international system, but their ability to respond to these pressures autonomously in the domestic political arena will weaken. Given Japan’s rise as a major economic power, international pressures for Japan to adopt a policy of fiscal expansion will arise when Japan accumulates persistent current account surpluses or when world economic growth remains sluggish. Variations in Japan’s response to these pressures will be shaped at the domestic level by the extent to which these pressures coincide or conflict with the interests and interaction of the societal actors and political parties of Japan’s ruling coalition. Japan’s rise as a major economic power will generate both internationaland domestic-level changes that will reduce the ability of Japan’s state actors to formulate and implement autonomously their preferred policies. At the international level, Japan’s rise as a major economic power increases the impact that its policies have on the world, and this in turn raises the level of international attention and foreign pressure directed at Japan. Although Japan has more bargaining power to negotiate with its economic partners, its rising economic influence in the world means that it must be more cautious of the impact that its economic policies have on other nations and on the stability of the international economic system itself because these affect Japan’s own interest in preserving an open and stable international economic system. As powerful as Japan has become, it still must be sensitive to foreign criticism and pressures because the nation remains heavily dependent on an international environment that requires greater Japanese participation and burden sharing in maintaining the stability of the international economic system.114 Within the specific context

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INTRODUCTION

of Japanese budgetary policy, I expect international pressures for Japanese fiscal expansion to emerge when Japan mounts large trade surpluses or when the world economy enters a prolonged downturn. At the domestic level, rapid economic growth will be accompanied by transformations in the relationship between state and society. In Japan the very success of the developmental state will usher in its own demise.115 After a sustained period of rapid economic growth, the relative strength of the state will weaken as societal actors become less dependent on the state and more powerful in their ability to press their demands on the state. Moreover, as wealth expands, both the composition and the interests of societal actors will become more diverse, and societal actors will be less united in supporting the developmental state’s overarching goal of pursuing an ever higher GNP at all costs. In a representative democratic system, this means that policy outcomes at the domestic level will reflect the interests and interaction of Japan’s ruling coalition. In short, these international and domestic political changes taken together mean that although international pressures on the Japanese state will increase, the ability of the state to respond autonomously to those pressures will weaken. Instead, its response will hinge on the manner in which they coincide or conflict with the negotiated interests of Japan’s ruling coalition. To the extent that greater government spending coincides with or does not upset the terms upon which the stability of the ruling coalition is maintained, then state leaders in Japan will be able to accommodate foreign pressures to adopt a policy of fiscal expansion. However, if adopting a cooperative policy runs against the negotiated interest of the ruling coalition, international pressures will be less effective in yielding a cooperative response from Japan. Generalization. Within the opportunities and constraints shaped by international and domestic political dynamics, international pressures have the potential to feed into the domestic political arena and influence policy outcomes. The extent to which they do so will depend on the extent to which such pressures alter and mobilize the interests of the societal actors and political parties of Japan’s ruling coalition. Hypothesis. On balance, as Japan’s position in the world economy rises, international pressures will grow but be less able to feed into the domestic political arena and move Japan’s fiscal policy in a direction counter to where it would have gone in its absence. 116 That is, these pressures will not alter fundamentally the contractionary or expansionary nature of Japanese fiscal policy already in place for purely domestic political reasons. On a more subtle level, however, international pressures will make

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a difference in terms of strengthening the expansionary course already in place or making Japanese fiscal policy less contractionary than it otherwise would have been in its absence. International pressures for Japan to adopt a policy of fiscal expansion can be expected whenever Japan accumulates persistent and rising current account surpluses or when the world economy suffers from a prolonged downturn. Under these conditions, I anticipate that Japan will face three different forms of international pressures that have the potential to feed into the domestic arena to influence Japan’s budgetary and fiscal policy outcomes: diplomatic suasion, yen appreciation, and the threat to adopt protectionist policies against Japan.117 First, international negotiations among state leaders of advanced industrial nations have become institutionalized in various forums such as the interministerial (originally Group of Five and, later, Group of Seven), OECD, and the economic summit meetings. The diplomatic suasion that Japan’s state leaders face during these international negotiations has the potential to influence their domestic incentive structure. State leaders’ ability to demonstrate skillful political leadership in negotiating with their foreign counterparts can enhance their reputation at home and bolster their domestic political base of support. The incentive to demonstrate competent leadership in steering international negotiations to a successful conclusion can be particularly strong when these negotiations attract a wide domestic audience, such as when international tensions flare or when Japan hosts the economic summit. In order to effectively capture the extent to which diplomatic suasion influences policy outcomes in this manner, it is essential to look beyond the assumption that the state acts as if it is a unitary rational actor. The willingness of Japanese state leaders to respond favorably to diplomatic suasion will vary according to the extent to which such policy decisions are directly related to their domestic political interests. In general, they will be more likely to adopt a cooperative policy if doing so does not threaten the stability of Japan’s ruling coalition. In some instances, however, diplomatic suasion may offer state leaders the opportunity to adopt cooperative policies that are strongly opposed by one of the key members of the ruling coalition. Provided that such policies reflect the overall interest of the ruling coalition, diplomatic suasion may give state leaders greater legitimacy to make tough political decisions at home. The two other forms of international pressure—yen appreciation and the threat of protectionism—have the potential to feed into the domestic political process and influence policy outcomes by altering the incentive structure of key societal actors. For instance, both forms of pressure may hurt many of the firms represented in Japan’s peak business associations

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INTRODUCTION

whose export earnings are a significant share of their total revenues. Indirectly, protectionist threats will also affect the interests of those who produce primarily for Japan’s domestic market, such as farmers, when such pressures are justified on the grounds that these domestic producers are protected by market barriers themselves. Moreover, to the extent that a higher yen pushes Japan’s economy into a recession, it may directly influence the pocketbook interests of Japan’s new middle mass and strengthen its call for fiscal expansion. As capable as these three forms of international pressure are in feeding into the domestic political process to influence policy outcome, a careful consideration of the two-level dynamics suggests that these pressures will not alter fundamentally the contractionary or expansionary nature of Japanese fiscal policy already in place for purely domestic political reasons. As Japan becomes more powerful relative to other nations, foreign pressure on Japan to assume a greater leadership role will rise, but so, too, will Japan’s bargaining power to resist such pressures. Moreover, once domestic political compromises are struck among members of Japan’s ruling coalition, the agreement becomes institutionalized and difficult to unravel. That is, once a consensus is reached among members of Japan’s ruling coalition over the question of whether Japan’s fiscal policy orientation should be expansionary or contractionary, then subsequent policy considerations, whether stemming from domestic or international political pressures, must be defined in terms of how they relate to the policy consensus already in place. Even when these three forms of foreign pressures significantly alter the domestic incentive structure, the result need not produce a cooperative response. For example, in the face of protectionist threats against Japanese exports, an alternative to adopting a policy of fiscal expansion can be that of challenging protectionism through the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization. Similarly, a high yen may simply encourage the adoption of a more cost-efficient way to produce export goods. Moreover, diplomatic suasion may be countered by pleading domestic constraints or stressing the reluctance of foreign counterparts to uphold their side of the bargain. Even in the case where a higher yen does throw Japan’s economy into a recession, a monetary response, such as the lowering of the official discount rate, remains a viable alternative to the adoption of a policy of fiscal expansion. In this chapter I have examined the complexity as well as the importance of carefully constructing a two-level analysis. In explicating how international and domestic political forces operate and interact over time to influence policy outcomes, I have not only addressed two separate and critical debates in the field of international relations and comparative politics but also offered a way to bridge the traditional gap between these two

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fields. I now turn to the case studies in Part 2 and provide an empirical investigation of the international and domestic politics of Japanese budgetary policy from the early 1970s to the mid-1990s.

Notes 1. For the original article which triggered a wide range of responses, see Fukuyama (1989). 2. Krugman (1996), Hall (1992), Haas (1992). 3. Cerny (1996), Schwartz (1994), Martin (1994), Kurzer (1993). For an excellent review, see Cohen (1996). 4. On this point, see Krugman (1994), Mallaby (1998). 5. For a realist view of this relationship, see Waltz (1979), Krasner (1976). For a liberal view, see Keohane (1984), Rosecrance (1986). For a Marxist interpretation see Wallerstein (1979). 6. On the issue of anarchy, see Bull (1966), Jervis (1978), Oye (1986), Grieco (1988), Milner (1991). 7. Waltz (1979:88). The term is derived from Weber (1947:154). 8. Kindleberger (1973), Krasner (1976), Gilpin (1975). 9. For an in-depth historical account, see Polanyi (1957), Kindleberger (1973), Gardner (1969). 10. For some prominent examples, see Keohane (1984), Axelrod (1984), Oye ed. (1986), Jervis (1988), Krasner (1983), Kratochwil and Ruggie (1986), Haas (1992). 11. Milner (1992), Grieco (1988, 1995), Keohane (1989a), Baldwin (1993). 12. For some notable examples, see Gilpin (1975), Krasner (1976), Waltz (1979), Gilpin (1981), Gowa (1983). 13. Kindleberger (1973:286). 14. The notable exception is Cooper (1968). 15. For the breakdown of Bretton Woods, see Odell (1982), Gowa (1983), Block (1977). 16. For further details, see Cohen (1977). It should be noted that in practice, the classical international economic system was not as impersonal or automatic as it was in theory. At times central banks temporarily used discretion to cushion the effect on the domestic economy, and Great Britain was able to manipulate gold flows through its discount rate policies. On this pont, see Ruggie (1982). 17. Ruggie (1982, 1991). 18. For the general argument, see Strange (1983). See also Bhagwati and Patrick (1990). For the specific argument dealing with macroeconomic coordination, see Bergsten and Cline (1985), Webb (1991). 19. This can be demonstrated by using a simple macroeconomic equation based on expenditure and income components of the national account. Let G = government spending, C = consumption, T = taxes, I = private investment, S = private savings, X = exports, and M = imports. Because national expenditure equals national income, G + C + I + M = T + C + S + X, C can be dropped from both sides of the equation to yield (G – T) + (I – S) = (X – M), where the government account plus the private savings and investment balance equal the current account. 20. For a similar argument, see Webb (1991). Note that Webb also argues that exchange rate policies become ineffective as a result of this rise in the financial

60

INTRODUCTION

market. 21. For the latter, see Mckeown (1984), Gallarotti (1985), Strange and Tooze (1981), Strange (1979). 22. For further refinement of this argument based on a market exchange model between legislators and various types of producers, see Mckeown (1984) and Gallarotti (1985). 23. It is this collective action dynamic that leads Kindleberger to argue that the Great Depression was not merely caused by the policies of any one country but was a systemic problem arising from the interaction of each nation. It is important to note that business cycle theorists do not recognize the systemic influence of rising tariffs. Tariffs are seen solely in terms of domestic responses to economic downturns, and the aggregate level of world tariffs is measured additively as the sum of each nation’s tariff schedule. 24. The converse also holds true; greater economic growth will induce lower levels of tariff. 25. Lake (1983), Keohane (1984), Inoguchi (1986a), Milner (1992). 26. For some notable examples, see Mckeown (1984), Gallarotti (1985), Lake (1983), Krasner (1976). 27. Mckeown (1983). 28. Kindleberger (1973:289). 29. Snidal (1985). 30. On the historical evolution of Keynesianism, see Ruggie (1982, 1991), Hall (1989), Burley (1993). 31. Lake (1983), Inoguchi (1986a), Gosovic and Ruggie (1976), Hirschman (1981a), Katzenstein (1985, 1986). 32. Katzenstein (1978), Krasner (1978), Mastanduno, Lake, and Ikenberry (1989). 33. The “developmental” versus “regulatory” distinction is made by Johnson (1982), and the “mobilizing” versus “extractive” by Mastanduno, Lake, and Ikenberry (1989). 34. For studies that challenge this depiction of the French state, see Hayward (1987), Milner (1988), Gourevitch (1986), Suleiman (1987). The Japanese case is discussed later. 35. Evans (1989). 36. For an overview of the literature, see Fukui (1977), Pempel (1987). 37. Johnson (1982). 38. On this point, see Johnson (1989b). For a related argument, see Gershenkron (1962). 39. For an extension of this model to other East Asian nations, see Woo (1991), Amsden (1989), Deyo (1987). 40. Evans (1989), Okimoto (1989), Nordlinger (1981), Krasner (1978), Katzenstein (1978). 41. On this point, see Barkey and Parikh (1992), Migdal (1988), Skocpol (1985), Nordlinger (1981). 42. For an excellent historical account of this transition, see Jansen and Rozman (1986). 43. On this point, see Johnson (1982:307–308). For a related argument, see Noguchi (1995). 44. For the Tokugawa era’s legacy, see Craig (1986). 45. Pempel (1987, 1990), Muramatsu (1981, 1990), Curtis (1988), Sato and Matsuzaki (1986), Inoguchi and Iwato (1987), Aoki (1988), Samuels (1983, 1986),

THE TWO-LEVEL FRAMEWORK

61

Calder (1988, 1990). 46. For an extended discussion on this point, see McKean (1993). 47. For this approach, see Cowhey and McCubbins (1995), Ramseyer and Rosenbluth (1993), Kernell (1991), Rosenbluth (1989), Haley (1987). For a stinging exchange regarding this approach, see Johnson and Keehn (1994), Ramseyer (1994). 48. For a related argument, see Gownder and Pekkanen (1996). 49. Campbell (1977), Rukstad (1988), Wildavsky (1989), Hartcher (1998). 50. Their respective statements are quoted from Campbell (1977:283), Hartcher (1998:2), Kato (1994:63). 51. The three political appointees are the minister and two parliamentary vice ministers. In general, cabinet posts are frequently reshuffled in order to place into these coveted positions a high number of qualified LDP politicians. For details, see Curtis (1988), Sato and Matsuzaki (1986). It should be noted that there are accounts of LDP politicians influencing the career paths of bureaucrats. For an account of how former prime minister Tanaka Kakuei allegedly hand-picked the administrative vice minister of MOF and MITI, see Ebato (1987:18–21), Itagaki (1987:85–87). For the theoretical argument, see Ramseyer and Rosenbluth (1993). 52. On the issue of why MOF bureaucrats translate their personal interests into the interests of the organization, see Kato (1994:54–61). On network ties, see Johnson (1974, 1978), Blumenthal (1985), Keehn (1990). 53. For further details of this process, see Campbell (1977:71–98). 54. For the general theory, see Simon (1972). For its application to Japanese budgeting, see Campbell (1977:72–78). See also Ishi (1995), Wildavsky (1989), Noguchi (1978). 55. Quotes are from Campbell (1977:77, 139). 56. On this point, see Campbell (1977:277, 1992:i). 57. For their respective works, see Noble and McCubbins (1995), Kohno and Nishizawa (1990), Calder (1988a). 58. O’Connor (1973, 1981), Offe (1984). 59. Gourevitch (1986), Berger (1981), Katzenstein (1985, 1988), Hall (1986). 60. Lowi (1979). 61. Yamaguchi (1987), Calder (1988a), Muramatsu and Krauss (1987), Pempel and Tsunekawa (1979). 62. Campbell (1992), Samuels (1986), Rosenbluth (1989), Kato (1994). 63. On this point, see Barkey and Parikh (1992), Migdal (1988), Skocpol (1985), Nordlinger (1981). 64. On this general point, see Katzenstein (1985a), Przeworski (1985), Evans (1989). For its specific application to Japanese industrial policy, see Samuels (1986). 65. The recognition of these concerns has led some of the leading proponents of “bringing the state back in” to place greater focus on bringing Congress back in. See for example Skocpol (1993), Katznelson, Griger, and Kryder (1993). 66. For some outstanding examples, see Berger (1981) Gourevitch (1986), Hall (1986). 67. On this point, see Hooks (1990), Katzenstein and Okawara (1993). 68. See for example Samuels (1986), Rosenbluth (1989), Uriu (1996). 69. Morgenthau (1967), Gilpin (1975), Waltz (1979). See also Tilly (1992). 70. Krasner (1978), Ikenberry (1988). 71. Allison (1971), Niskanen (1971), Halperin (1974), Wilson (1980). 72. Krasner (1978:55–90). For a similar tripartite distinction, see Nordlinger (1981).

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INTRODUCTION

73. For a good comparative account, see Wildavsky (1989). 74. For a fuller treatment, see Campbell (1977:43–114). See also Noble and McCubbins (1995). 75. Noguchi (1981b), Calder (1990). 76. On this point, see Kato (1994:56–71). For a related analysis in a different context, see Rosenbluth (1989). 77. The electoral reform passed in 1993 abolished the multimember, single nontransferable system and replaced it with a combination of a proportional representative system and a single member district. The significance of this electoral change is discussed in Chapter 10. See also Suzuki and Uriu (1994). 78. Japan’s Public Finance Law (Articles 83 and 86) stipulates that the MOFdrafted budget bill must be approved by the cabinet and passed in the Diet by a majority of votes in the lower and upper houses to become an effective bill. For a discussion on the legal underpinnings of budget making, see Miyajima (1988: 2–18). 79. For an in-depth treatment, see Flanagan et al. (1991), Rochon (1981). 80. Miyake (1987), Hirose (1981), Sakakibara (1991). 81. The distinction I lay out does not seek to impose a rigid and inclusive classification of all LDP politicians. Rather, it should be viewed as a heuristically useful but loosely defined typology from which any one politician can be placed in a broad continuum. For a similar classification, see Inoguchi and Iwai (1987:153– 164), Sato and Matsuzaki (1986:39), Curtis (1988:86). 82. Campbell (1977), Curtis (1988), Sato and Matsuzaki (1986), Inoguchi and Iwai (1987). 83. Katzenstein (1988), Pempel and Tsunekawa (1979). 84. Traditionally, Japan’s major public union (Sohyo) has been divided internally along ideological and factional lines, and its major private union (Domei) has been unable to effectively control the plethora of individual enterprise unions. On this point, see Curtis (1988) and Shirai (1983). It should be noted, however, that in 1990, Sohyo became a member of Rengo, an umbrella group that has sought to reunify most unions into one organization. But the crucial question of whether Rengo will be able to consolidate its power and articulate the encompassed interests of all labor workers in a central body remains open. For details, see Carlile (1994). 85. Among the advanced Western democracies, only the United States has a lower unionization rate than Japan. Moreover, despite labor’s recent attempt in Japan to consolidate its organization, the unionization rate has continued to fall, from 28.9 percent in 1985 to 23.8 percent in 1995. Ministry of Labor (1996). 86. Shimada (1983). 87. The four major suborganizations are Keidanren (the Federation of Economic Organization), Keizai Doyukai (the Japan Committee for Economic Development), Nippon Shoko Kaigaisha (commonly abridged as “Nissho,” the Japan Chamber of Commerce and Industry), and Nikkeiren (the Federation of Business Managers). Traditionally, Nikkeiren has been the key business organization dealing with labor-management relations, Nissho with small-business enterprises, and Keidanren with government-business relations. 88. On this point see Muramatsu and Krauss (1987), Muramatsu (1990). 89. See for example, Curtis (1975), Fukushima (1989). 90. Katzenstein (1985, 1988). 91. On this point, see Shonfield (1984), Sato and Matsuzaki (1986:170–171). 92. Muramatsu and Krauss (1987).

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63

93. Lindblom (1977), Przeworski (1985a), Block (1987), Offe (1984). 94. For an empirical study of how the business cycle influences voting behavior in Japan, see Inoguchi (1986b). 95. For two detailed studies, see Hirose (1989), Mainichi Shinbun Seijibu (1990). 96. Katzenstein (1988). See also Pempel and Tsunekawa (1979). 97. Ishi (1988). 98. For several pioneering studies that detail in general the major impact that interest groups have on budgetary outcomes under a democratic political system, see Olson (1982), Lowi (1979), Buchanan and Wagner eds. (1977). 99. The ruling triumvirate refers to bureaucrats, politicians, and business. The classic study is Yanaga (1968). For a good review of this literature, see Fukui (1977). 100. For some notable examples, see Muramatsu, Ito, and Tsujinaka (1986), Inoguchi and Iwai (1987), Itagaki (1987). 101. On this point, see Campbell (1977:165–168). 102. Kickbacks are particularly large in the case of the construction industry and are seen to rival financial contributions from big business. On this point, see Goto, Uchida, and Ishikawa (1982), Woodall (1996), Schlesinger (1997). 103. Muramatsu and Krauss (1987), Muramatsu (1990). 104. Muramatsu et al. (1986), Inoguchi and Iwai (1987), Sato and Matsuzaki (1986). 105. For an excellent elaboration of these various channels of influence, see George (1988). 106. On this point, see Hirschman (1981b:209–284). For two studies that show how small business in Japan exercises “voice” over “exit,” see Calder (1988), Hirose (1981). For an alternative view, see Friedman (1988). 107. Tsujinaka (1988:144–148), Muramatsu, Ito, and Tsujinaka (1986:102). 108. For an in-depth treatment of these political actors in Japanese politics, see Murakami (1982), Muramatsu and Krauss (1987). 109. Downs (1965, 1960). 110. For a rational choice critique of classical pluralism, see Olson (1965), Moe (1980). For a historical institutionalist critique of both pluralism and rational choice, see Berger (1981), Steinmo, Thelen, and Longstreth (1992). 111. Interestingly, the importance of securing broad-based societal consensus is recognized even by those who adopt a strong state approach. See for example Johnson (1982:22). 112. Murakami (1982). 113. For instance, within the ruling coalition, big business will favor expenditure cuts over deficit financing because it generally does not receive direct benefits from greater government spending. Moreover, business will vehemently oppose tax increases, such as corporate tax hikes or tax on retirement payment, if they threaten the level of profit or market share for business. In contrast, interest groups such as farmers and construction companies that have traditionally supported the LDP will favor deficit financing in order to secure the continuation of government largess and disperse the cost onto others. 114. This, of course, is predicated on the assumption that these changes take place within the existing international economic system rather than that a fundamental change from one system to another will occur. More specifically, my hypothesis is contingent upon the fact that the United States remains the preeminent global power committed to the embedded liberal international economic system.

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INTRODUCTION

115. This point is even recognized by Evans (1989:575), a leading proponent of the developmental state model, who argues that the developmental state is “its own gravedigger.” 116. In operational terms, this means that if Japan had been adopting a contractionary fiscal policy prior to when international pressures began, it will not change course and adopt a policy of fiscal expansion. 117. Among the foreign nations that will pressure Japan to adopt cooperative macroeconomic policies, the most important source of pressure will come from the most powerful state in the international system, the United States. As long as the United States retains its position of primacy, it will have the greatest ability to influence other economic powers such as Japan to adopt cooperative policies that help maintain the stability of the international economic system.

Introduction

The purpose of the next two chapters is to examine the international and domestic politics of Japanese budgetary policy in the 1970s, a period marked by a greater level of politicization over the issue of Japanese fiscal policy both at home and abroad. At the international level, the politicization of Japanese fiscal policy can be traced in broad terms to the rise in Japan’s economic power and status following almost two decades of doubledigit growth in its GNP. Although the rapid rise in Japan’s economic position in the world fulfilled its long-cherished goal of “catching up to the west” and becoming a full-fledged member of the advanced Western nations,1 it also brought with it greater international attention and expectation concerning Japan’s role and responsibility in the international economic system. As the second largest free market economy in the world, its economic influence on other nations could no longer be as readily ignored as in the past. Given the large benefits Japan derived from the international economic system, greater international pressures emerged for Japan to raise its share of the political leadership costs necessary to maintain an open and stable international economic system. The emergence in the 1970s of international pressures for greater Japanese economic leadership can be seen in a wide range of issue areas, including exchange rates, trade liberalization, export restraints, and foreign aid.2 Of particular importance to my analysis is the rise in the degree of international politicization in Japanese fiscal policy. Indeed, in the second half of the 1970s, the issue of Japan’s fiscal policy became one of the most important topics of negotiations among the advanced industrial nations. International pressures for greater Japanese fiscal spending began to surface in various international forums as Japan’s current account surplus began to rise to record levels amid uncertainty over the prospect of world economic recovery following the oil crisis. At the economic summit meetings held in London and Bonn in 1977 and 1978, these pressures culminated in Prime Minister Fukuda Takeo’s pledge to expand public works expenditures. The central objective of Chapter 3 is to trace how these international negotiations evolved and analyze to what extent these foreign demands on Japanese fiscal policy fed into the domestic decisionmaking process to affect policy outcome. 67

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POLICY IN THE 1970S

The 1970s also ushered in a new era of domestic politics marked by fundamental changes in state-society relations that generated greater electoral challenges for the ruling political party. The transition from a period of high and steady rate of economic growth in the 1950s and 1960s to a period of slower growth and greater economic uncertainty in the 1970s was accompanied by new and greater societal demand for government spending. Although rapid economic growth raised real wages and generated a renewed sense of national self-esteem, it also brought in its wake rapid demographic changes, environmental disruption, and social tension. For the party in power, these changes produced a political setting far more difficult to manage. With rapid demographic changes, the LDP could no longer count on the electoral strength of its traditional supporters to maintain its position as the party in power. In addition, the negative repercussions of high economic growth eroded the public’s broad-based support for government policies that placed an overarching emphasis on achieving ever higher GNP figures. As the economy moved from a positive to a zero sum setting, the LDP was confronted with greater societal demands to increase government spending in social welfare– and social capital–related expenses at a time when yearly increases in tax revenues declined with slower economic growth. Providing a narrative of how the LDP responded to these challenges and the extent to which they influenced overall decisions over government spending policies is the central objective of Chapter 4. In Chapter 5, I then place the evidence presented in Chapters 3 and 4 into my twolevel framework to analyze the interplay of the international and domestic political forces that shaped Japanese budgetary policy outcomes during the 1970s.

Notes 1. As early as 1955, Japan was admitted as a contracting member of GATT through the political support of the United States. In 1963, Japan applied and was accepted as a member of the OECD and in the following year became an IMF Article 8 member. 2. Angel (1991), Destler and Sato (1982), Maswood (1989), Orr (1990), Rix (1980).

3 Achieving International Cooperation

The Collapse of Bretton Woods and the Politics of Macroeconomic Coordination Entering the decade of the 1970s, Japan confronted an international political setting considerably different from that which it encountered only a decade earlier. The fundamental difference can be attributed to the vast changes that had taken place in the distribution of economic power among the leading advanced industrial nations in the first two decades of the postwar period. Japan was buoyed by almost two decades of double-digit growth in real gross domestic product (GDP) during the 1950s and 1960s, and its position in the world advanced rapidly. As Table 3.1 illustrates, Japan’s GDP in 1955 was the smallest among the five leading advanced industrial nations and less than 6 percent of that of the United States. By 1968, however, Japan’s GDP had risen rapidly and surpassed that of West Germany, and Japan became the second largest free market economy in the world. Moreover, from 1955 to 1970, Japan’s GDP as a percentage of U.S. GDP more than tripled, from 5.7 percent to 20.3 percent. This trend would continue into the 1970s, and by 1975, Japan’s GDP as a percentage of U.S. GDP leaped to 30.7 percent. In conjunction with Japan’s economic ascent, this period was accompanied by a decline in the size of the U.S. economy relative to that of other advanced Western nations. West Germany’s GDP rose from 10.6 percent of that of the U.S. in 1955 to 16.3 percent ten years later and to 24.7 percent by 1975. Moreover, whereas the combined GDP of France, West Germany, Japan, and the United Kingdom stood at only 41.8 percent of that of the United States in 1955, their combined GDP jumped to 65.1 percent in 1970 and to 89.6 percent by 1975. These changes in the distribution of economic power among the advanced industrial nations were accompanied by changes in both the nature 69

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POLICY IN THE 1970s

Table 3.1

1955 1960 1965 1970 1975

GDP of Four Nations as a Percentage of U.S. GDP, 1955–1975 France

FRG

Japan

UK

12.1 11.8 14.0 14.2 20.7

10.6 14.1 16.3 18.3 24.7

5.7 8.7 13.0 20.3 30.7

13.4 14.1 14.4 12.3 13.5

Source: Figures adapted from OECD (1992).

of the international economic system and the expectations that rising economic powers faced in relation to it. With the relative decline in the economic power of the United States, the Bretton Woods system, created and maintained largely through U.S. leadership during the early postwar period, began to break down in the early 1970s. In December 1971 the official link between the dollar and gold was severed, and in February 1973 the fixed exchange rate system was abandoned.1 Amid these changes, rising economic powers such as Japan and West Germany began to face greater international pressures to assume a larger share of the leadership role necessary to maintain international economic stability. With the rise in Japan’s economic power and the collapse of the Bretton Woods system, Japan’s fiscal policy took on greater international importance than it had in the two preceding decades. There are two reasons why a rising economic nation’s fiscal policy becomes increasingly politicized in the international arena: to prevent the widening of trade and current account imbalances and to foster world economic growth during times of slow world growth. Both these factors played an important role in generating greater international pressures on Japanese fiscal policy. The initial impetus can be traced to the current account imbalances that emerged among the leading economic nations following the breakdown of the Bretton Woods system. With its collapse the issue of whether the international economic system could remedy the balance of payments imbalance was thrown into question both in theory and in fact. In theory, the Bretton Woods system was predicated on the assumption that the United States would adjust its macroeconomic policies to stabilize international prices. In turn, all other nations were expected to adjust their macroeconomic policies to maintain balance of payments equilibrium at a given rate of fixed exchange. This changed, however, with the shift from fixed exchange rates to a system of flexible exchange rates. Although exchange rate flexibility offered greater freedom for nations to insulate their countries from foreign shocks and pursue domestic goals more independently, it also led to a collective action dilemma given the absence of an

ACHIEVING INTERNATIONAL COOPERATION

71

international commitment to honor a fixed level of exchange.2 Although evidence deviated somewhat from theory during the Bretton Woods era,3 the difference was not great enough to undermine the system until the early 1970s. During the Bretton Woods era, Japan was firmly committed to the fixed exchange parity of 360 yen to the dollar. Moreover, foreign exchange requirements provided Japan with the incentive to adopt contractionary policies when the balance of payments was in deficit.4 Although the incentives to adjust were weaker when there was a balance of payments surplus,5 Japan’s surplus was not as contentious during the 1950s and 1960s as in the 1970s because of differences in both the size and the nature of the Japanese economy. Until the 1960s, Japan’s economic growth was fueled primarily by domestic demand expansion.6 As a general pattern, peaks in the business cycle were accompanied by current account deficits, and the government responded by adopting contractionary macroeconomic policies designed to address Japan’s balance of payments constraints.7 The 1970s presents a different picture. In the early 1970s, trade frictions emerged as Japan began to accumulate large current account surpluses. In 1970 Japan’s current account surplus rose to $2.0 billion, or 1 percent of GNP. The following year, the surplus rose sharply to $5.8 billion, or 2.5 percent of GNP, and remained at a high $6.6 billion (2.3 percent of GNP). Although the trend was interrupted temporarily by the sharp appreciation of the yen following the Nixon decision in 1971 to suspend gold convertibility and the breakdown of the Bretton Woods system, it resurfaced shortly after the oil crisis of 1973 and the devaluation of the yen. After registering a current account deficit in 1973 and 1974, the account became roughly balanced in 1975, and in 1976 Japan posted a $3.7 billion (0.6 percent of GNP) surplus.8 The immediate background that generated the need for macroeconomic coordination in general and Japanese fiscal expansion in particular can be traced to the economic distress caused by the oil crisis and the separate policies each nation adopted in response to the crisis. As oil prices quadrupled in 1973–1974, oil-importing nations faced rapid inflationary pressures as well as current account deficits. In 1974 the OECD countries pledged to eschew protectionist measures to reduce their current account deficits.9 But despite these general agreements to resist protectionist policies, tangible solutions were difficult to forge. Although each nation agreed in principle to maintain economic policies consistent with the principles and rules of the liberal international economic system, these agreements left unspecified the concrete measures that would be needed in order to safeguard the stability of the system. No mention was made of the domestic cost each nation would be willing and able to bear. Instead, each nation sought to remedy the adverse effects of the oil crisis separately. In turn, these separate responses not only generated a growing current account

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imbalance among the top economic nations but also raised doubts concerning the prospects for world economic recovery. Both West Germany’s and Japan’s initial responses to the oil crisis were to adopt stringent macroeconomic policies designed to fight rampant inflation.10 In Japan prices had already begun to rise in 1972 as a result of various factors, but they rose at an even sharper rate following the oil crisis. 11 As seen in Table 3.2, Japan’s consumer price index (CPI) in 1972 rose by a modest 4.9 percent from the previous year. In 1973 the CPI rose by 11.7 percent, and it continued to soar the following year, posting a 23.2 percent increase in 1974. Although all nations faced inflationary pressures following the oil crisis, Japan’s rate of inflation was by far the highest among the top five advanced industrial nations, surpassing that of the United Kingdom, the second highest, by over 7 percent in 1974. The Japanese government adopted stringent macroeconomic policies in order to combat this high rate of inflation. In a period of six months, the official discount rate (ODR) more than doubled from 4.25 percent in April 1973 to 7.0 percent in October 1973 and 9.0 percent by December 1973.12 In the third quarter of 1973, the government postponed 8 percent of public works spending and public investment finance to the following fiscal year.13 Moreover, in 1974 the government sought to keep the general account budget to a nominal increase of 14.4 percent from the previous year at a time when nominal GNE (gross national expenditure) was expected to rise by 18.4 percent. Although this effort fell short, the government successfully kept budget growth (which increased 9.2 percent from the previous year) below that of nominal GNE growth (10.2 percent) in the subsequent year.14 In addition to these macroeconomic measures, the government

Table 3.2

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

Comparative Consumer Price Index, 1970–1980 Japan

U.S.

FRG

UK

France

7.7 6.3 4.9 11.7 23.2 11.7 9.4 8.1 4.2 3.7 7.7

5.7 4.4 3.2 6.2 11.0 9.1 5.8 6.5 7.6 11.3 13.5

3.6 5.1 5.6 6.9 6.9 5.9 4.3 3.7 2.7 4.1 5.5

6.3 9.4 7.3 9.1 16.0 24.2 16.5 15.9 8.2 13.5 18.0

5.2 5.5 6.2 7.2 13.8 11.8 9.7 9.3 9.1 10.8 13.5

Source: Kubota (1990:363–373). Figures based on 1985 prices.

ACHIEVING INTERNATIONAL COOPERATION

73

implemented a series of window guidance measures that restricted commercial bank lending.15 These measures succeeded in reducing inflation. The yearly rise in Japan’s consumer price index was cut by roughly half in 1975 to 11.7 percent and fell still further in 1976 to 9.4 percent (see Table 3.2). However, these measures also had the unintended consequence of weakening Japan’s economic recovery. During this period, GNE growth in real terms was at a rate far lower than in previous years. Moreover, economic growth relied more heavily on exports than in previous years. In the five-year period prior to the oil crisis, Japan’s economy grew at an annual average rate of 9.7 percent in real terms. In 1974, however, Japan registered its first negative annual growth rate in the postwar period, a 0.4 percent decline in real terms from the preceding year. In the following year, GNE rose by a modest 3.9 percent, less than half the rate prior to the oil crisis.16 Moreover, in contrast to the pre–oil crisis years, a larger percentage of Japan’s economic growth was attributable to exports. Japan’s current account surplus rose by 0.5 percent of GNE in fiscal year 1975 from the previous year and by 0.8 percent the following year. Furthermore, exports as a ratio of GNE rose from 11.5 percent in 1970 to 14.9 percent in 1974 and 13.7 percent in 1975.17 In contrast, gross domestic capital formation, which had led the way for domestic demand expansion during the high growth period, dropped from 38.7 percent of GNE in 1970 to 35.6 percent in 1974 and 32.7 percent in 1975, primarily as a result of reduced corporate investment in plant and equipment.18 The United States also adopted stringent macroeconomic policies during the onset of the oil crisis. In fact, the Nixon administration had already adopted a series of anti-inflationary measures prior to the oil crisis, reducing discretionary spending and slowing down money supply growth in early 1973.19 With these policies in place, in 1973 the United States posted the lowest level of inflation among the top five economic nations. As Table 3.2 indicates, in 1973 the consumer price index (CPI) in the United States was 6.2 percent, almost half that of Japan’s 11.7 percent. Although the CPI in the United States rose to 11.0 percent the following year, it was still less than half the rate of Japan’s 23.2 percent. In contrast to Japan, however, the United States, less hampered by the fear of inflation, was swifter in relaxing its contractionary macroeconomic policies and paved the way for a U.S.-led world economic recovery. Although the United States registered on a semiannual basis a –4.3 percent growth in real GNP in the first half of 1975, the economy grew by 6.8 percent in the second half of 1975 and 6.1 percent in the first half of 1976.20 This recovery, however, had the unintended consequence of shifting the U.S. current account from a surplus to a deficit. Domestic demand expansion in the United States increased its level of imports and decreased its

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level of exports. As a result, the U.S. current account balance shifted from a record surplus of $18.3 billion in 1975 to a modest $4.4 billion in 1976 and a deficit of $5.7 billion for the first half of 1977.21 Moreover, this current account deficit was accompanied by a widening deficit in the government budget.22 These contrasting and uncoordinated responses to the oil crisis created greater potential conflict among the major economic powers. Although all the leading economic powers could agree on the general importance of avoiding protectionist policies, they failed to address specifically the responsibility and cost each nation would have to bear in order to maintain the stability of the international economic system. Instead, their separate attempts to remedy the domestic turmoil caused by the oil crisis created the potential for greater international conflict. In the process of reducing their level of inflation, West Germany and Japan began to accumulate current account surpluses, whereas the United States, Britain, and France registered deficits.23 Moreover, given the twin deficits in the United States and the slowdown in the U.S. economy in the second half of 1976, the issue of whether world economic recovery could be sustained was thrown into question.24 With the accumulation of current account imbalances and the uncertainty over the prospect of world economic recovery, the issue of coordinating the macroeconomic policies of the leading advanced industrial nations became an increasingly politicized topic of international negotiations in the years following the oil crisis.

The Road to London and Bonn International negotiations over macroeconomic policy coordination in general and Japanese fiscal policy in particular became increasingly politicized in the second half of the 1970s. Initially, in late 1975 and early 1976, the importance of achieving macroeconomic coordination was stated in general terms without mention of specific policy measures each nation would need to adopt in order to promote greater international economic stability. For instance, in the first economic summit meeting held in Rambouillet, France, in November 1975, macroeconomic policy coordination was a major topic of discussion. However, although the participants collectively eschewed protectionism and agreed on the importance of macroeconomic coordination, no specific measures were discussed, in part because world economic recovery appeared well under way. 25 Similarly, at the Puerto Rico summit held in June 1976, the importance of coordinating macroeconomic policy was reiterated, but no concrete policy proposals were put forth. Instead, the participants expressed their “renewed confidence in the future” and stated that their “objective now is to manage

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effectively a transition to expansion which will be sustainable, which will reduce the high level of unemployment which persists in many countries and will not jeopardize our common aim of avoiding a new wave of inflation.”26 President Gerald Ford’s position at the Puerto Rico summit indicated both the general agreement among state leaders concerning the importance of macroeconomic coordination as well as their uncertainty over the appropriate policy mix. Ford stressed the importance of keeping fiscal and monetary policy in line with controlling inflation, but he also argued that countries with large trade surpluses should allow their external balance to fall. Although both West Germany and Japan agreed on the importance of the former, they disagreed on that of the latter.27 Japanese leaders argued that the world economic recovery was under way and remained reluctant to yield to foreign pressure for fiscal expansion. Prime Minister Miki Takeo expressed confidence that a world recovery was in sight, and Foreign Minister Miyazawa Kiichi expressed only limited interest in using Japanese fiscal policy to reduce Japan’s current account surplus.28 On a more strident note, MOF minister Ohira Masayoshi argued that there was no need for fiscal policy measures to address international concerns.29 In the second half of 1976, however, negotiations over macroeconomic policy became more focused as prospects for world economic recovery grew uncertain and as West Germany and Japan’s current account surpluses continued to grow unabated (see Table 3.3). Specific policy proposals were now being raised in various international forums. For example, the OECD, after adopting a “Strategy for Sustained Economic Expansion” at an OECD ministerial meeting in June 1976, followed up with a proposal calling on the three leading industrial nations—the United States, West Germany, and Japan—to adopt expansionary macroeconomic policies in order to “keep protectionist pressures in check.”30 Similar proposals were put forth by an

Table 3.3

July August September October November December

Shift in Japan’s Current and Trade Account, July–December 1976 Current Account

Trade Account

Exports (% rise)

Imports (% rise)

410 13 560 637 40 1,188

998 557 1,160 1,129 518 1,672

23.0 22.0 34.3 26.2 27.6 24.6

13.7 23.3 19.4 10.1 28.9 18.5

Source: Adapted from Ministry of Finance (1988:254, 256). Notes: Trade and current account figures in millions of dollars. Export and import percentage rise represents percentage change from previous month.

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international panel of experts assembled by the Brookings Institution31 as well as by members of the Trilateral Commission.32 The issues raised in these multilateral forums were further reinforced by bilateral negotiations between Japan and the United States. Upon winning the U.S. presidential election over the incumbent Ford, Jimmy Carter immediately took steps to encourage greater Japanese cooperation. On January 13, 1977, a week after taking office, Carter phoned newly elected Prime Minister Fukuda Takeo and discussed the need to coordinate their respective economic policies to counter the slowdown in the world economy.33 Roughly two weeks later, Carter sent Vice President Walter Mondale to meet with both Japanese and German leaders in an effort to secure their cooperation.34 Until mid-1976, Japan’s response to these international pressures was modest. In June 1976, both MITI and MOF officials held to the position that the current account imbalance was only temporary and that their primary concern was inflation.35 However, as Japan confronted stronger and more focused international pressures in the second half of 1976, its government leaders began to express greater willingness to cooperate in their use of fiscal policy to stimulate world economic recovery and reduce the nation’s mounting current account surplus. Within six months after the Puerto Rico summit, state leaders in Japan would come to a different assessment of both the international economic environment as well as the economic policy measures Japan needed to adopt in response to it. In December 1976, after returning home from an OECD ministerial meeting, Vice Finance Minister Matsukawa Michiya warned newly elected Prime Minister Fukuda Takeo of mounting international criticism directed at Japan and the need to address it through greater fiscal stimulus.36 This warning was clearly heeded by those previously reluctant to adopt a policy of fiscal expansion. In contrast to statements made just six months earlier by officials representing Japan’s two powerful economic ministries, both Finance Minister Bo Hideo and MITI Minister Tanaka Tatsuo began to acknowledge publicly the importance of adopting greater fiscal stimulus.37 Perhaps most surprisingly, this new position was vigorously supported by Prime Minister Fukuda. Upon taking office in December 1976, Fukuda, a former career MOF official and a proponent of fiscal conservatism who three years earlier as MOF minister sought to put a brake on government spending, immediately set to work on the 1977 budget with the intention of stimulating economic growth and reducing Japan’s current account surplus.38 At a cabinet meeting held on January 20, he urged fellow cabinet members to pass promptly in the Diet an expansionary budget that represented a 17.4 percent increase over the previous year’s budget and a 21.4 percent increase in public works spending.39 This measure was soon followed by a cut in the official discount rate from 6.5 to 6.0 percent.40

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77

In addition to adopting these measures, Fukuda expressed a willingness to offer specific targets that he expected to achieve. With these measures in place, Fukuda announced in early February that the Japanese economy would achieve a GNP growth rate of 6.7 percent in real terms for fiscal year 1977, surpassing the projected growth rate of the United States and other major economic nations.41 Moreover, he contended that the increase in domestic demand generated by fiscal expansion would reverse Japan’s trend of accumulating current account surpluses and generate a deficit of $700 million.42 Thus by the time of Mondale’s arrival on January 30, Fukuda was able to demonstrate his commitment to adopting a policy of fiscal expansion in order to both revitalize the world economy and reduce Japan’s mounting trade surplus.43 In contrast, West Germany initially showed less receptiveness to international pressures in general and U.S. pressures in particular. In fact, Chancellor Helmut Schmidt of West Germany considered Mondale’s proposal for greater German expansion to be self-serving because it failed to address the need for the United States to put its own house in order. He further maintained that German expansion would have only a minimal impact in stimulating the world economy but a strong impact on German inflation.44 In the ensuing months, Fukuda continued to stress in various international forums Japan’s commitment in the face of growing international pressures. In late March 1977, Fukuda arrived in Washington for a U.S.Japan summit talk amid mounting tension over the dramatic rise in Japan’s exports to the United States.45 Although Fukuda argued that it was not necessary to adopt further fiscal measures for the time being, he reaffirmed Japan’s commitment to act as a “locomotive” of global economic growth and reduce its current account surplus.46 Fukuda and Carter issued at the conclusion of their meeting a joint statement acknowledging their commitment to free trade and the need to establish world economic stability through sustained economic growth.47 Japan continued to draw intense international pressures at the economic summit meeting held in London in early May 1977. France, Great Britain, and Italy, faced with large deficits and high unemployment, were sharply critical of Japan and its large trade surplus. Both Valéry Giscard d’Estaing of France and Great Britain’s Chancellor of the Exchequer Denis Healey allegedly threatened to adopt protectionist policies if Japan and West Germany did not redouble their efforts to reflate their economies.48 Moreover, although Fukuda was able to arrive at an agreement with the United States during his visit in late March, matters were coming to a head in U.S.-Japan relations over the issue of Japan’s manufacturing exports and agricultural imports.49 Confronted by strengthened international criticism, Fukuda was forced to recognize the international importance as well as the difficulty of achiev-

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ing a specified target. In London Fukuda reiterated Japan’s commitment to reduce its trade imbalance and achieve a 6.7 percent real growth in GNP.50 But as the figures of each new economic indicator would increasingly reveal, Fukuda was failing to achieve his stated target. In June the United States announced that in the first four months of calendar year 1977, its trade deficit had risen sharply, from $1.7 billion in January to $2.6 billion in April. The deficit for these four months alone, totaling $8.5 billion, already exceeded the previous year’s total deficit of $5.8 billion and was expected to reach some $20 billion by the end of the year. The trade balance between Japan and the United States for the first five months of calendar year 1977 totaled almost $2.5 billion and was expected to surpass the previous year’s bilateral deficit of $5.2 billion.51 Given these figures, Japan was singled out for criticism in various international forums such as the OECD and the IMF. At an OECD economic policy committee held in Paris in mid-June, Vice Minister for International Finance Matsukawa Michiya faced widespread skepticism about the accuracy of his government’s 6.7 percent growth projection.52 Several days later, at an OECD ministerial council meeting, Foreign Minister Hatoyama Iichiro and Economic Planning Agency (EPA) Director General Kuranari Tadashi reported that the United States and Great Britain were sharply critical of the rapid rise in Japan’s exports.53 Moreover, at an International Monetary Fund (IMF) meeting, U.S. treasury secretary Michael Blumenthal announced one of the first of a series of comments suggesting the need to drive the dollar down against the yen because of Japan’s sluggish domestic demand and persistent current account surplus.54 Although the direct impact of his comments on the exchange rate are difficult to assess, they nonetheless raised concern among Japanese leaders, who saw the yen drop from 290 to the dollar at the beginning of the year to below 270 by mid-year.55 This marked the highest level of yen-dollar exchange since the oil crisis. Although the appreciation of the yen contributed to the reduction in the volume of Japan’s exports by the summer of 1977, it failed to alter the fundamental trend in the growth of Japan’s current account surplus. Although export growth began to slow down in volume terms, it did not translate directly into a dollar decline in exports given the sharp appreciation of the yen. In addition, imports fell sharply. The figures released in July indicated that Japan’s current account surplus had risen to $2.2 billion for the April–June period.56 Moreover, for fiscal year 1977 the OECD secretariat projected a $7 billion current account surplus for Japan, a $2.5 billion West German surplus, and a U.S. deficit of $14 billion.57 By August, even Japan’s EPA acknowledged in its official revised forecast a $6 billion surplus and maintained that a 6.7 percent real growth could be achieved only if the government substantially increased government spending.58 These figures clearly ran counter to Fukuda’s initial projections. Short

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of taking additional measures, there was little chance that his commitment to reduce Japan’s current account deficit would be met. Time was short and patience thin. Arrangements were being made to hold a seven-nation conference at the end of September to examine whether participating nations had made sufficient progress since the London summit.59 Moreover, a symposium of Japan-U.S. national assembly members was scheduled at the end of November to discuss the issue of Japan’s growing trade imbalance.60 Hence, in keeping with his pledge both at home and abroad to take any additional measures necessary based on the economic indicators presented at the end of August, Fukuda announced in early September the adoption of a comprehensive economic plan to reduce Japan’s current account surplus and stimulate its domestic demand. On September 3, Japan lowered its ODR to 4.25 percent, and a day later, Fukuda announced a stimulus package of over 2 trillion yen.61 This was followed on September 20 by the adoption of measures to reduce Japan’s current account surplus through accelerated importation of crude oil, uranium, and feed grains.62 These measures temporarily helped smooth high-level government negotiations between Japan and the United States; at a meeting headed by U.S. Undersecretary of State Richard Cooper and Japan’s Deputy Vice Foreign Minister Yoshino Bunroku held in mid-September, Cooper acknowledged that Japan had taken appropriate action measures to honor its pledge of 6.7 percent growth.63 These measures, however, had failed to produce any substantive change in the direction of the Japanese economy. In early October, the EPA issued a revised forecast; the real GNP growth for 1977 was still projected at an optimistic 6.7 percent, but the current account surplus was revised upward from $6 billion to $6.5 billion. 64 The figure reported by the United States was even more alarming. At a press conference held in Tokyo on September 27, U.S. Secretary of Commerce Juanita Kreps predicted that Japan’s current account surplus would be $7.6 billion.65 This prediction touched off a new round of international criticism leveled at Japan. At an IMF meeting held in Washington on September 29, Chancellor of the Exchequer Healey severely criticized Japan’s surplus, and IMF Managing Director Johannes Witteveen called for Japan to adopt additional stimulus measures. Moreover, U.S. Treasury Secretary Blumenthal announced that the yen needed to rise, and the following day the yen fell below the 265-yen-to-the-dollar level for the first time in four months. 66 Two weeks later, on October 12, Blumenthal once again declared that the yen was undervalued. This time, the yen rose by 2.4 yen to the dollar the next day and by October 14 rose to a postwar high of 253.67 Matters also came to a head between Japan and the United States over a wide range of other issues, including macroeconomic and industryspecific trade issues ranging from Japan’s export of iron and steel to its

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agricultural imports and distribution system. 68 On November 17, a U.S. mission headed by Special Trade Representative General Counsel Richard Rivers arrived in Tokyo to conduct negotiations over these issues. For Japanese negotiators the timing of his arrival proved inopportune. On the first day of negotiations, MOF announced that for the month of October, Japan registered a $1.85 billion trade surplus and a $1.36 billion current account surplus.69 This meant that the yearly total of Japan’s current account surplus to date was already $6.9 billion. In contrast to Fukuda’s initial projection of a $700 million deficit, Japan’s current account surplus was now predicted to exceed $10 billion by the end of the year.70 Fueled by these figures and faced with rising protectionist demands in Congress, U.S. negotiators forcefully pressed Japan to adopt a comprehensive range of policies by December, including measures to increase the import of agricultural and manufacturing goods as well as policies designed to achieve an 8 percent GNP growth for fiscal year 1978 and a current account deficit within a specified time period.71 Fukuda met these renewed international pressures with prompt action. In anticipation of Minister of External Economic Affairs Ushiba Nobu hiko’s scheduled visit to Washington in January to reach a bilateral economic agreement with the United States, Fukuda reshuffled his cabinet on November 28 and immediately set to work on the budget.72 The figures proved daunting. As 1977 drew to a close, Fukuda realized that his initial projections concerning both Japan’s current account balance and economic growth rate were far off target. As the yen appreciated to a postwar high of 240 yen to the dollar on December 1, business investments remained sluggish and the number of bankruptcy cases continued to post record highs.73 GNP growth in real terms was now estimated at 5.3 percent and not 6.7 percent as promised at the London summit.74 Other figures proved equally disheartening. Although net exports to GNP turned negative by the end of 1977, Japan’s current account surplus in nominal terms continued to grow.75 MITI predicted that Japan’s current account surplus could reach as high as $20 billion in the next fiscal year if present trends continued.76 Moreover, although these current account and economic growth figures revealed the need to adopt greater government spending, the government was already close to exceeding MOF’s target for the deficit/expenditure ratio. In the face of these conflicting concerns, MOF’s effort to keep the deficit below 30 percent of government spending proved futile as pressures for greater government spending continued to mount. In January 1977, Fukuda adopted a second revised budget for 1977, which increased public works expenditures by another 370 billion yen. As a result, the rate of increase in public works over the 1976 budget was close to 31.4 percent. Moreover, in an unprecedented move, the 1977 revised budget was

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passed together with the fiscal year budget. In the 1978 budget, public works spending was increased by 34.5 percent from the previous year’s initial budget, representing the highest percentage yearly increase in public works in the postwar period.77 The bond-dependence ratio consequently climbed to 32.8 percent (10.6 trillion yen), breaching the 30 percent norm established by MOF in 1975.78 With these new initiatives in place, Japan was able to arrive at a mutual agreement with the United States. On January 13, 1978, Ushiba and Special Trade Representative Robert Strauss issued a joint statement wherein Japan announced its commitment to a 7 percent real growth target for fiscal year 1978. In this statement, Ushiba also acknowledged that Japan’s current account surplus was unacceptable and assured government action in order to reduce it. He stated that for 1979 the government would aim at equilibrium and would accept a deficit. Moreover, in an effort to stimulate imports, he announced that Japan would agree to lower tariffs, expand agricultural imports of beef and citrus, and liberalize foreign exchange. The United States, for its part, agreed to adopt substantial noninflationary growth, including efforts to curb its high level of oil consumption.79 Despite the agreement reached between Japan and the United States, Japan’s reprieve from international pressures proved only temporary. In the ensuing months, the figures failed to show any sign of tangible improvement. In 1977, the United States posted a $26.7 billion trade deficit, of which roughly one-third was due to its trade imbalance with Japan. Japan’s trade surplus with the European Community (EC) also rose by $1 billion in 1977 to $5 billion.80 In the first quarter of calendar year 1978, Japan’s current account surplus was estimated at $14 billion for fiscal year 1978.81 Japan faced both criticism and doubt regarding its commitment to stimulating the world economy and reducing its current account surpluses. While EC Directorate head Benedict Meynell expressed his appreciation of Fukuda’s recent measures, he stressed that tangible results, rather than promises, were needed to stem the mounting protectionist sentiment against Japan.82 Similarly, OECD Secretary General Jonkheer Van Lennep expressed doubt that the economic situation in Japan would change much given present policies and hinted that additional measures were needed for Japan to attain its target.83 Fukuda encountered similar doubts directly during his visit to Washington for a second visit with Carter. At this meeting, Fukuda stood firm amidst growing doubt concerning Japan’s resolve to honor its earlier commitment. In a meeting held on May 2 with high-ranking congressional leaders, Fukuda affirmed his continued commitment to both the 7 percent target and a reduction in Japan’s current account surplus but also argued that Japan’s ability to meet its commitment depended in part on the ability of the United States to control the dollar and adopt an effective energy

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policy.84 When asked by Senator John Glenn whether he was considering additional measures, Fukuda replied that he was confident that the target would be met without them but that he would consider new measures if it became apparent that Japan would not be able to meet its target.85 Fukuda reiterated his commitment some two months later at the fourth summit meeting, held in Bonn on July 16–17, 1978. After prior consultation with West German chancellor Schmidt to resist any unrealistic demands for expansion, Fukuda acknowledged that nations with a current account surplus were responsible for expanding domestic demand, restraining exports, and contributing to official development assistance.86 Accordingly, he promised to raise Japan’s rate of economic growth by 1.5 percent from the previous year and agreed to take additional measures if necessary by September in order to honor Japan’s commitment. In addition, he pledged to hold the volume of Japan’s exports constant, spend $4 billion on an emergency import program, and double its development assistance within the next three years.87 Other nations expressed a similar willingness to cooperate. Although Schmidt refused to offer a growth target, he agreed to adopt an additional stimulus package equivalent to 1 percent of GNP, and the United States agreed to take measures against inflation.88 Despite the cooperative agreements reached at Bonn, one issue of contention remained unresolved, namely the stabilization of the dollar. Both the yen and deutsche mark had appreciated sharply over the past year. By March 2, the dollar had fallen 20 percent in one year against the deutsche mark and broke the DM 2.00 level. The appreciation of the yen was even more dramatic. From the end of 1976 to November 1978, the yen appreciated 60 percent against the dollar and 46 percent on an effective basis from the end of 1976 to November 1978.89 Fukuda argued that without a stable exchange rate system, domestic expansion was undesirable and achieving world economic stability improbable.90 But the statement issued at the end of the summit did not mention the need to stabilize exchange rates. Rather, following the U.S. position, it read that “exchange rate stability can only be achieved by attacking the fundamental problems which have contributed to the present large balance of payments deficits and surpluses instability was caused by the current account imbalances.”91 Ironically, the failure to reach an agreement over exchange rate stabilization would prove to illustrate the difficulties of reaching a suitable settlement over macroeconomic coordination despite concrete and cooperative action taken to achieve it. Although the appreciation of the yen against the dollar presented the United States with additional leverage to encourage further fiscal stimulus on the part of Japan, it also made it more difficult for Japan to meet its stated target. By summer 1978, Japan’s domestic demand had recovered strongly, posting a 10 percent annual rate of increase in the second quarter.92 These gains, however, were partially offset by the continued decline in the volume of net exports despite the persistence of a large cur-

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rent account surplus that was due to the sharp appreciation of the yen.93 In short, Japan’s current account surplus in dollar terms failed to decline and real GNP growth lagged below target, touching off strong protectionist pressures against Japan.94 By fall 1978, it was clear that the stimulus measures contained in the second supplementary budget for 1977 and the initial budget for 1978 fell short of fulfilling Fukuda’s stated targets. After a cabinet meeting held on September 18, the government officially issued a revised forecast for 1978 that projected a current account surplus exceeding $13 billion.95 Given these figures and the pledge made at Bonn, the Fukuda cabinet adopted in October a package of economic measures amounting to 1.3 percent of GNP, including a 2.5 trillion yen supplementary budget and an emergency import program.96 West Germany and the United States also followed up with their commitments made at Bonn. The West German federal government introduced in September 1978 a DM 12.5 billion pump-priming program, and in October, the U.S. Congress passed an energy package, albeit a weakened version of Carter’s original proposal.97 Even these additional measures, however, failed to achieve the intended target despite the fact that the Japanese government had now far exceeded the 30 percent debt burden set by MOF. Indeed, as Table 3.4 illustrates, by 1978 Japan had the highest ratio of government bond to government expenditure among the top Western nations. Despite this comparatively large level of deficit financing, however, its impact on Japan’s current account balance in dollar terms appeared weak. Although the volume of Japan’s exports in December 1978 was more than 4 percent below that of a year earlier, and imports were over 10 percent higher, the continued appreciation of the yen offset any chance of reducing Japan’s current account surplus in dollar figures.98 Instead of declining, Japan’s current account surplus for calendar year 1978 posted a record high of $17.5 billion, and Japan’s trade imbalance with the United States swelled to $11.5 billion.99 Japan was frustrated by its inability to achieve the initial targets and resentful of continued U.S. pressures, and by the end of calendar year 1978, its position shifted with the change in Japan’s political leadership. After beating out Fukuda for the post of LDP president and prime minister of Japan in early December, Ohira Masayoshi acknowledged the importance of Japanese cooperation in the area of fiscal policy but repudiated Fukuda’s commitment to achieving a specific target. Instead, Ohira argued that Japan had taken adequate measures to honor its international commitment and that in a market-based economy the government could not control economic outcomes.100 In a similar vein, Finance Minister Kaneko Ippei rebutted U.S. calls for greater fiscal expansion and argued that a Keynesian solution was now difficult to accept.101 These statements were initially seen by the United States and others as a breach of Fukuda’s earlier pledge. 102 But tensions were eased when a

84 Table 3.4

POLICY IN THE 1970s

General and Central Government Surplus or Deficit as a Percentage of Nominal GDP General Government

United Statesa Japana West Germany France UK

Central Government

1975

1976

1977

1978

1975

1976

1977

1978

–4.2 –2.8 –5.7 –2.2 –4.6

–2.1 –3.8 –3.4 –0.5 –4.9

–0.9 –3.8 –2.4 –0.8 –3.2

0.0 –5.9 –2.5 –1.9 –4.2

–4.5 –4.2 –3.0 –1.9 –2.3

–3.1 –4.5 –2.3 –0.1 –3.4

–2.4 –5.5 –1.5 –0.7 –2.0

–1.4 –6.2 –1.6 –1.3 –3.2

Source: OECD (1983:21). Note: a. As a percentage of nominal GNP. Figures are standard national accounts basis, except U.S. and UK figures, which are on a national income account basis.

U.S. mission composed of members from the Treasury Department, State Department, Council of Economic Advisers, and the Federal Reserve arrived in Japan in January 1979 and confirmed that Japan had indeed honored its international commitment in good faith. In testimony before the U.S. Senate Subcommittee on International Economic Policy, U.S. Special Representative Henry Owens summarized the mission’s findings, noting that “it is our view that Japan made a good-faith effort to achieve its Bonn target. It adopted an additional stimulus budget in September, after the summit, and we believe that the Japanese Government has taken the actions that are prudent and that are within its power to achieve a satisfactory growth rate.”103 The figures reported in early 1979 further dispelled tension. Japan’s domestic demand, which had strengthened since the second quarter of 1978, continued to rise, and with the dollar now stabilized, its current account moved into deficit with surprising speed in the first quarter of 1979. From December 1978 to January 1979, Japan’s current account surplus on a monthly basis fell from $895 million to $326 million. In February, it dropped still further to $265 million and in March posted a deficit of $186 million.104 These figures finally helped quell international pressures on Japanese fiscal policy. With domestic demand rising and current account surplus falling, Carter and Ohira issued a joint communique on May 2, 1979, expressing their satisfaction with current policies and their continued commitment to redressing the current account imbalances of both nations.105 By the time of the Tokyo summit meeting, the issue of Japanese fiscal policy was placed on the back burner as a result of the second oil crisis triggered by the Iranian revolution in December 1978. As oil prices soared, nations now turned their attention to formulating stringent fiscal and mon-

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85

etary policies in an effort to fight inflation.

Notes 1. For three in-depth studies, see Gowa (1983), Odell, (1982), Block (1977). 2. For an in-depth treatment of the difference between the two systems, see Fischer (1988). 3. For different interpretations concerning the extent to which practice deviated from the rule, see Ruggie (1982), Strange (1983), Keohane (1985:78–104). 4. On this point see Hamada and Patrick (1988:108–137). 5. Hamada and Patrick (1988:113). 6. Komiya and Itoh (1988:186–198), Patrick and Rosovsky (1976:14–24), Lincoln (1988:69–129). 7. On this point, see Ackley and Ishi (1976:153–247), Noguchi (1987:186– 222), Noguchi (1982). 8. Figures are from Hamada and Patrick (1988:121). 9. The OECD pledge reported in the New York Times, May 31, 1974. 10. For Germany’s response, see Kloten, Ketterer, and Vollmer (1985:353– 402), Allen (1989:263–289), Gourevitch (1986:181–217). 11. On the causes of Japan’s inflation, see Ishikawa (1984:89–90), Nakamura (1981:219–227). 12. Ministry of Finance (1988:212–227). 13. Weatherford and Fukui (1989:591–596). 14. Keizai Kikakucho (1989:32–39), MOF (1989b:56–57). 15. Nakamura (1981:224–234). 16. Keizai Kikakucho (1989:47). 17. Keizai Kikakucho (1989:36–41). 18. For an excellent overview of this macroeconomic transition, see Lincoln (1988:14–68). 19. OECD (1973:86–88), Weatherford and Fukui (1989:591–596). 20. OECD (1981:132). Figures represent change from previous half year, seasonally adjusted at annual rates. 21. OECD (1981:143). 22. The U.S. government deficit, as a percentage of GDP, rose from 1.0 percent in 1974 to 2.9 percent in 1976. OECD (1981:138–139). 23. From the second half of 1976 to the first half of 1977, the current account surplus of Japan rose from $1.0 billion to $4.6 billion and that of West Germany rose from $1.3 billion to $2.2 billion. In contrast, the current account for the United States, the UK,and France, respectively, went from $0.1 billion to $–5.7 billion, $–1.2 billion to $–1.3 billion, and $–10.0 to $–2.9 billion. OECD (1981:143). 24. In the second half of 1975 and the first half of 1976, the United States posted, respectively, a 6.8 percent and 6.1 percent GNP growth in real terms, but in the second half of 1976 real GNP growth fell to 2.8 percent. OECD (1981:132). 25. In the joint declaration issued at Rambouillet the participants agreed that “the most urgent task is to assure the recovery of our economies” but that “we are confident that our present policies are compatible and complementary and that recovery is under way.” Hajnal (1989:5–6). 26. Hajnal (1989:15–16). 27. Putnam and Bayne (1987:43).

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28. Miki’s position reported in Mainichi Shinbun (June 28, 1976), Miyazawa’s in Tokyo Shinbun (June 27, 1976). 29. Ohira’s statement on fiscal policy reported in Nihon Keizai Shinbun (evening edition, June 25, 1976). 30. OECD (1976:11–12), OECD (1988:36). 31. Brookings Institution (1977). 32. For an account of how the commission became increasingly institutionalized during the Carter administration, see Menil and Solomon (1983). 33. Hirano (1980:24–26). For Fukuda’s personal account, see Tokyo Shinbun (evening edition, January 13, 1977). 34. Evidently, Carter proposed to adopt a $30 billion domestic stimulus package with the understanding that West Germany and Japan would follow suit. Putnam and Bayne (1987:64), Hirano (1980:26). 35. Nihon Keizai Shinbun (June 27, 1976), Yomiuri Shinbun (June 29, 1976). 36. Yomiuri Shinbun (December 28, 1976). 37. Yomiuri Shinbun (December 29, 1976). 38. For Fukuda’s early statement expressing this position, see Yomiuri Shinbun (December 29, 1976). 39. Mainichi Shinbun (evening edition, January 20, 1977). 40. New York Times (March 12, 1977). 41. Nihon Keizai Shinbun (February 1, 1977), Asahi Shinbun (February 2, 1977). 42. Nihon Keizai Shinbu (February 1, 1977), Asahi Shinbun (February 1, 1977). 43. Although Mondale and Fukuda differed in the policy instrument (Mondale favored tax reduction, whereas Fukuda proposed spending increase), both leaders recognized that each country was demonstrating its commitment to world economic stability. Their meeting reported in Asahi Shinbun (February 1, 1972), Nihon Keizai Shinbun (February 1, 1977), Asahi Shinbun (February 2, 1977). 44. Washington Post (May 26, 1977). See also Schmidt’s remarks in Martin Feldstein (1988:64–77). 45. In calendar year 1976, the U.S. posted a $5.8 billion trade deficit, of which roughly 90 percent ($5.3 billion) was due to its trade imbalance with Japan. Mainichi Shinbun (January 30, 1977). See also Sato and Hodin (1982). 46. Nihon Keizai Shinbun (March 23, 1977). See also Kiyomiya (1984:108). 47. Asahi Shinbun (March 24, 1977), Yomiuri Shinbun (March 24, 1977). 48. Mainichi Shinbun (May 10, 1977), Nihon Keizai Shinbun (May 10, 1977). See also Kiyomiya (1984:108). 49. Asahi Shinbun (evening edition, June 25, 1977), Nihon Keizai Shinbun (July 16, 1977). 50. Hajnal, ed. (1989:5–6). Although no specific targets were mentioned at the summit, it was generally acknowledged that Japan would achieve its initial forecast for a 6.7 percent real growth in GNP, West Germany a 5 percent growth, and the United States a 6 percent growth. Nihon Keizai Shinbun (evening edition, May 6, 1977). 51. Asahi Shinbun (June 29, 1977), Hirano (1980:144). 52. Matsukawa’s account of this meeting reported in Yomiuri Shinbun (June 21, 1977). 53. Nihon Keizai Shinbun (June 26, 1977), Yomiuri Shinbun (evening edition, June 27, 1977). 54. Hirano (1980:148). 55. Both MOF officials and business leaders expressed their concern over the yen’s appreciation. For MOF’s position, see Nihon Keizai Shinbun (June 26, 1977). For business leaders, see Nihon Keizai Shinbun (evening edition, June 29, 1977).

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87

56. For a good overview of the macroeconomic changes during this period, see OECD (1988:35–44). 57. OECD (1977:10, 72). Similar figures reported in Asahi Shinbun (June 29, 1977). 58. EPA forecast reported in Nihon Keizai Shinbun (August 23, 1977). 59. Nihon Keizai Shinbun (evening edition, July 29, 1977). 60. Nihon Keizai Shinbun (evening edition, July 28, 1977). 61. Kiyomiya (1984:136). 62. Nihon Keizai Shinbun (evening edition, September 20, 1977), Destler and Mitsuyu (1982:251). 63. The agreement was reported in Nihon Keizai Shinbun (September 13, 1977). 64. Hirano (1980:202). 65. His announcement was reported in Yomiuri Shinbun (September 28, 1977). 66. Nihon Keizai Shinbun (October 1 and 2, 1977). 67. Asahi Shinbun (October 15, 1977), Nihon Keizai Shinbun (October 15, 1977). 68. Nihon Keizai Shinbun (November 12 and 13, 1977). 69. Hirano (1980:203). 70. Asahi Shinbun (evening edition, November 17, 1977). 71. Destler (1979). For Fukuda’s personal account of his shock at the 8 percent request, see Fukuda (1986). 72. Ushiba allegedly told Fukuda that if negotiations failed, the United States would pass legislation for import restrictions from Japan. His account reported in Nihon Keizai Shinbun (December 20, 1977). 73. Mainichi Shinbun (February 11, 1978). 74. This was announced officially by the government following consultation among MOF, MITI, and EPA officials. Nihon Keizai Shinbun (December 11, 1977). 75. OECD (1988:38). 76. Asahi Shinbun (December 8, 1977). 77. Nihon Keizai Shinbun (November 6, 1978). 78. For a good overview, see Noguchi (1991:119–144). 79. Nihon Keizai Shinbun (evening edition, January 13, 1978), New York Times (June 14, 1978). 80. Mainichi Shinbun (February 4, 1978), Nihon Keizai Shinbun (February 8, 1978). 81. Yomiuri Shinbun (April 8, 1978), Mainichi Shinbun (April 16, 1978). 82. Reported in an interview in Nihon Keizai Shinbun (February 12, 1978). 83. Van Lennep’s remark reported in Nihon Keizai Shinbun (May 22, 1978). 84. Reported in Mainichi Shinbun (May 3, 1978), Nihon Keizai Shinbun (evening edition, May 4, 1978). 85. A summary of the question-and-answer session reported in Asahi Shinbun (May 4, 1978). 86. For a detailed account see Kiyomiya (1984:187–190), Putnam and Bayne (1987:73–92). 87. Hajnal (1989:49), Nihon Keizai Shinbun (evening edition, July 18, 1978). 88. Hajnal (1989:48–50), Destler and Mitsuyu (1982:256–257), Putnam and Bayne (1987:85–86). 89. OECD (1988:39). 90. Nihon Keizai Shinbun (evening edition, July 18, 1978). 91. Hajnal (1989:56). For Blumenthal’s position, see Asahi Shinbun (evening edition, June 22, 1978). 92. Nihon Keizai Shinbun (evening edition, September 8, 1978), OECD (1988: 38–40). 93. According to an EPA report, the volume of exports fell by 9.0 percent in

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April and rose by 1.0 percent in May, and imports rose by 5.6 percent in April and 8.5 percent in May. In contrast, the current account registered a surplus of $1.27 billion in April and $1.44 billion in May. Nihon Keizai Shinbun (evening edition, July 11, 1978). 94. Citing strong congressional demands for protection, both Cooper and Strauss urged Japan to produce tangible results quickly. Their positions reported, respectively, in Mainichi Shinbun (August 10, 1978), Asahi Shinbun (August 15, 1978). 95. Nihon Keizai Shinbun (September 19, 1978). 96. For details, see Nihon Keizai Shinbun (September 2, 1978), Sankei Shinbun (September 3, 1978). 97. Putnam and Bayne (1987:89). 98. The EPA’s monthly report covered by Nihon Keizai Shinbun (evening edition, February 9, 1979). 99. Figures reported in Tokyo Shinbun (February 4, 1979), Mainichi Shinbun (February 4, 1979). 100. Nihon Keizai Shinbun (December 9, 1978); Tokyo Shinbun (December 9, 1978). 101. Nihon Keizai Shinbun (evening edition, January 26, 1979). 102. Carter’s and Blumenthal’s dissatisfaction with Ohira’s statement reported, respectively, in Yomiuri Shinbun (February 6, 1979), Tokyo Shinbun (evening edition, January 22, 1979). 103. Owens testimony printed in U.S. Congress (1979:139). 104. The figures are taken from various EPA monthly reports covered by Nihon Keizai Shinbun. 105. Nihon Keizai Shinbun (May 4, 1979).

4 The Politics of Profligacy: Fiscal Crisis

The Initial Setting: The LDP at a Crossroad The 1970s ushered in a period of domestic economic difficulties and political challenges for all advanced nations. As oil prices quadrupled in 1973–1974, inflationary spirals, together with high unemployment, created a period of economic distress unrivaled since the Great Depression. Throughout this period, these economic difficulties exacted heavy tolls on various political parties in power. In France, the declining economy led voters to cast their votes in favor of the leftist opposition parties and paved the way for the Socialist victory in 1981. In the years following the oil crisis, the Communist Party in Italy made spectacular advances against the Christian Democrats in the 1975 regional and local elections and the 1976 national election. In West Germany, the ruling Social Democratic Party suffered continual setbacks in the 1970s and the opposition Christian Democratic Union and Christian Socialist Union Parties won a near majority of the party list votes. Even the Swedish Social Democratic Party, the longest-standing party in power at the time, was forced into opposition in 1976 for the first time in forty-four years as the economy moved from a positive to a zero sum setting.1 Similarly in Japan, the long-standing political party in power, the Liberal Democratic Party, faced in the 1970s a political setting far more challenging than in previous decades. In the two prior decades, politics in Japan was conducted under a positive sum setting; the economy grew at a real average annual rate of over 10 percent from 1955 to 1972. As a general pattern, this growth was generated primarily by a high and rising rate of private investment in plant and equipment. Real gross domestic investment grew at an annual average rate of 12.9 percent during 1952–1973.2 Given this high level of private investment, economic growth was maintained by 89

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keeping taxes low and minimizing government spending, particularly in areas such as welfare, social insurance programs, and social overhead capital. Low government spending, together with a high rate of household savings, thus generated the financial resources necessary to sustain economic growth led by private investment.3 This pattern of high economic growth clearly benefited the LDP. With rapid economic growth came yearly increases in both personal income and government revenues. As the political party in power during this period, the LDP could take credit for the rapid rise in personal income. Moreover, given the rapid rise in government tax revenues that accompanied high economic growth, the LDP did not have to make the politically difficult choice of allocating government funds under a zero sum setting. Providing government assistance to one group did not take away from others because an expanding government pie generated enough resources to meet the demands of a wide range of societal actors. Instead, through generous public works spending and subsidies, the LDP could afford to lavish government funds on its traditional interest group supporters, such as farmers and other rural constituents, who made up a large share of organized voters. At the same time, the LDP was able to redistribute funds to less developed regions to maintain a fairly equitable level of income among various regions and offer large tax cuts, often prior to important elections, to bolster public support for the LDP.4 Moreover, given rapid economic growth, all this could take place without increasing the level of taxes or the share of government spending as a percentage of GNP. This favorable setting also provided clear advantages for the central bureaucracy in charge of the government budget, namely the Ministry of Finance. With rapid economic growth, LDP politicians could provide government largess to its supporters without threatening the varied interests of MOF. MOF’s interest, in terms of budgetary policy outcomes, has centered on minimizing the overall size of the budget and allocating expenditures according to its principle of fair share. In the case of the former, MOF has sought to limit growth on spending by shunning deficit spending and by abiding by the 20 percent rule, whereby government tax revenues are held below 20 percent of national income. In the case of the latter, the principle of fair share was designed to provide relatively equitable distribution of government funds from one year to the next. During the high growth period, MOF was by and large able to promote budgetary policy outcomes that reflected these interests. As Table 4.1 illustrates, the general account budget, despite growing rapidly between 1955 and 1972, continued to be a small percentage of gross national expenditure because of an equally rapid growth in nominal GNE. Whereas the general account budget as a percentage of GNE in 1955 was 11.5 percent, the ratio was a mere 0.1 percent higher in 1972 and 0.9 percent

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higher the following year. Moreover, as the last column of Table 4.1 illustrates, the tax burden as a percentage of national income (NI) never breached the 20 percent mark during the 1955–1972 period. Throughout the high growth period, MOF was also successful in protecting its decisionmaking norm of allocating government spending according to the baransu norm. As seen in Table 4.2, the government budget of Japan was allocated on a far more equitable basis to various spending ministries than was that of the United States. The following decade, however, presents an entirely different scenario. With the slowdown in the economy, the transition from a positive to a more zero sum political setting took place at a time when the LDP faced stronger societal pressures to increase government spending. These pressures may be attributed to two factors: rapid demographic change and the breakdown in the popular consensus over government policies that singlemindedly pursued high economic growth. In the late 1960s and early 1970s, the LDP began to encounter largescale public protest over the negative effects created by high economic growth. Although rapid economic growth raised Japan’s standing in the world and brought higher wages at home, minimal government spending perpetuated deficiencies in areas such as social welfare services and social overhead capital.5 Rapid growth also spawned one of the most serious problems of pollution in the world during that time.6 As a result, popular support for government policies that placed the highest priority on achieving rapid economic growth began to wane. Instead, voters began to demand more forcefully greater government spending to improve social welfare

Table 4.1

General Account Budget and GNE, 1955–1972 (in billion yen) GNE (A)

1955 1958 1961 1964 1967 1970 1971 1972

GA Budget (B)

Amount

% rise

Amount

% rise

B/A (%)

Tax Burden (% NI)

8,864.6 11,785.0 19,852.8 29,661.9 46,239.4 75,152.0 82,806.3 96,539.1

13.3 32.9 68.5 49.4 55.9 15.8 10.2 16.6

1,018.2 1,311.6 2,063.5 3,311.0 5,113.0 8,187.6 9,561.1 11,932.1

–0.0 28.8 57.3 60.5 54.4 60.1 16.8 24.8

11.5 11.1 10.4 11.2 11.1 10.9 11.5 12.4

18.1 18.0 19.9 19.5 17.7 18.9 19.2 19.8

Source: Keizai Kikakucho (1989:32–39), Ministry of Finance (1989b:54–57). Note: GNE figures are based on current prices, fiscal year; budget figures based on settled accounts.

Table 4.2

Average Yearly Change in Share, Japan and United States Japan, 1961–1970

Agency Transport Education Prime minister’s office Home affairs Courts Health and welfare Construction Justice Foreign affairs Post and telecommunications Diet Labor

United States, 1959–1968

Average

Average (highest excluded)

Share (1970)

2.3 2.5 2.9 3.0 4.1 4.2 4.3 4.6 4.6 5.0 6.2 6.8

1.8 2.3 1.9 2.6 3.3 3.4 3.1 3.9 4.0 4.4 5.4 6.2

2.3 10.6 15.4 21.2 0.6 11.2 11.2 1.2 0.6 0.1 0.2 1.5

Agency Defense (military) Commerce Justice Treasury Veteran’s Administration Judiciary Atomic Energy Commission Legislative General services Defense (civil) Agriculture Health, etc.

Average

Average (highest excluded)

Share (1968)

3.1 4.9 5.5 5.9 6.3 6.4 7.0 7.5 7.9 8.2 9.2 9.8

2.5 3.9 5.1 5.1 5.8 4.7 5.6 6.5 4.4 6.7 8.0 7.6

53.4 1.3 0.3 11.2 4.5 0.2 1.7 0.2 0.5 1.1 4.5 8.7

Source: Campbell (1977:96–97). Note: These agencies were the twelve most stable in their respective countries during the time period examined.

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programs and began to elect in key local elections progressive candidates who championed such causes.7 In the seventh unified local elections held in April 1971, the LDP suffered a heavy defeat when its candidate, Hatano Akira, lost in the Tokyo gubernatorial election to progressive candidate Minobe Ryokichi. Progressive candidates were also victorious in local elections held in Osaka, Yokohama, and Kawasaki.8 LDP losses were also evident in the national election of the upper house. In the ninth upper house election held on June 27, 1971, The LDP won only 62 seats, or just half the 125 seats up for election. This was seven fewer seats than those won by the LDP in the upper house election six years earlier, and nine seats fewer than in the election held three years previously.9 Vast changes in Japan’s demographic landscape, another major challenge the LDP faced entering into the 1970s, were also a by-product of the rapid economic growth it had so avidly pursued. As can be seen in Table 4.3, only 38 percent of the total 83.2 million people in Japan resided in urban regions in 1950. Ten years later, the percentage of those living in urban regions soared to 65 percent, and a decade later reached 71 percent, almost double that of twenty years earlier. The impact of rapid economic growth on demographic change can also be seen in terms of changes in employment patterns. As Table 4.4 illustrates, in 1955, 41.0 percent of the population was employed in the primary sector, outnumbering those in either the secondary or tertiary sector. However, in a span of just ten years, the percentage of those employed in the primary sector fell by 16.3 percent and continued to fall another 10.8 percent over the next ten years. As a result, the percentage of those employed in the primary sector fell below the percentage in both the secondary and tertiary sectors by 1965, and that share continued to drop significantly entering into the 1970s. For the political party in power, these demographic changes meant that the LDP could not rely as heavily on its loyal rural supporters as it had

Table 4.3

1920 1930 1940 1950 1960 1970

Rural and Urban Population (1,000) Total (T)

Rural (R)

Urban (U)

U/T (%)

55,391 63,872 72,540 83,200 93,419 103,674

45,371 48,509 45,054 51,996 33,014 30,265

10,020 15,364 27,594 31,203 60,405 73,409

18 24 38 38 65 71

Source: Shibata (1986:10).

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Table 4.4

Employment Population by Industry (in percent)

Primary sector Agriculture Secondary sector Construction Manufacturing Tertiary sector Distribution Service industry

1955

1965

1975

41.0 37.9 23.5 4.5 17.6 35.5 13.9 11.3

24.7 22.8 32.3 7.1 24.5 43.0 17.8 13.0

13.9 12.6 34.1 8.9 24.9 51.7 21.3 16.4

Source: Fukutake (1982:86).

in the past. Throughout the high growth period, the number of both parttime and full-time farmers diminished rapidly. Although the misapportionment of Diet seats helped soften the decline in the political power of farmers, some LDP leaders recognized by the early 1960s the inevitability of expanding their societal base of support in order to maintain their control of the Diet.10 Table 4.5 illustrates the LDP’s situation and reveals two important points. First, throughout the postwar period, the LDP consistently obtained a higher percentage of Diet seats in less urban regions. Between 1955 and 1972 the LDP obtained an average of 74.6 percent seats in nonurban regions, 67.7 percent in local cities, 61.9 percent in cities, and 45.3 percent in major cities. Second, the degree to which the LDP obtained a particular percentage of seats in a given region varied far more in urban regions than in nonurban regions. In nonurban regions the difference between the highest and lowest percentage of seats obtained by the LDP between the years 1955 and 1972 was a mere 4.8 percent. In contrast, in major cities, the difference was 18.6 percent. The LDP could thus no longer rely on its traditional rural base of support. In order to remain in power, the LDP had to chart new territories and attract the support of the growing number of urban voters who were not only more volatile but generally less supportive of the LDP. In short, heading into the 1970s, the LDP clearly faced new challenges and greater electoral competition than it had during the high growth period. Both the breakdown in the popular consensus over high economic growth and rapid demographic changes generated stronger societal pressures for greater public spending at a time when yearly increases in tax revenues declined with slower economic growth. In order to stem its electoral decline and retain its position as the political party in power, the LDP needed to address the rise in popular demands for better public services. Moreover, although the LDP needed to maintain its ties to traditional

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Table 4.5

Demographic Composition of LDP Votes and Lower House Seats Percentage of Vote Absolute Relative

1955 1958 1960 1963 1967 1969 1972

47.65 46.75 42.92 40.66 37.95 34.37 35.30

63.38 61.16 59.00 57.78 51.98 50.66 49.67

Percentage of Lower House Seats Total Nonurban Local Cities Cities Major Cities 64.0 63.8 64.2 63.0 58.6 62.3 57.8

75.6 74.4 74.4 73.2 72.0 75.6 76.8

70.2 65.5 68.5 69.6 65.5 69.0 65.5

62.7 64.4 62.7 60.2 60.2 65.3 57.7

51.5 52.5 51.5 47.5 39.0 41.5 33.9

Source: Adapted from Ishikawa and Hirose (1989:77).

supporters such as big business, farmers, and other rural constituents, rapid demographic change necessitated an expansion of its societal base of support.

The Budgetary Inroads of Tanaka Kakuei It is precisely at this moment that Tanaka Kakuei, one of the most intriguing and controversial political figures in postwar Japan, emerged in the political spotlight in the early 1970s. By consolidating the support of 80 percent of his colleagues from the former Sato faction, Tanaka announced the formation of his own faction on May 9, 1972. Then, at the twenty-seventh LDP convention held at Hibiya Public Hall on July 5, Tanaka beat out his former faction rival Fukuda Takeo to become the president of the LDP and the prime minister of Japan.11 In retrospect, Tanaka has come to represent all that is corrupt about Japanese politics. At the time of his appointment, however, he enjoyed wide public support. Indeed, according to a poll conducted by Asahi Shinbun, Tanaka’s public approval rating at the start of his tenure was 62 percent, surpassing that of Yoshida Shigeru’s previous postwar high of 58 percent.12 In part, Tanaka’s popularity stemmed from the youthful image he presented in contrast to previous LDP prime ministers. At the age of fiftyfour, he was the youngest prime minister chosen to date. Moreover, unlike many of his predecessors, Tanaka was not a retired public official from a prestigious central bureaucracy, nor did he possess a noteworthy educational background.13 Instead, he had risen to political power through his success in the local construction business.14 He had a reputation for absorbing and processing information like a computer, and many felt that he was not only a people’s prime minister but that he would also be able to get things done.15

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Another reason for his popularity undoubtedly rested on his ability to gauge the political climate and formulate a popular response to the growing wave of criticism targeted at the LDP. A month prior to his rise as prime minister, Tanaka published a national bestseller titled Building a New Japan: A Plan to Restructure the Japanese Archipelago.16 In this book, Tanaka proposed a bold plan calling for large increases in government spending in order to shift industry from urban to rural areas and to enhance Japan’s social overhead capital, which lagged well behind that of other advanced industrial nations.17 Not only did this plan appeal to the growing number of urban voters demanding better public services and social infrastructure; it also benefited the LDP’s rural constituents who would profit greatly from public works projects in their regions. Under Tanaka’s leadership, the LDP sought to halt its continued defeat in local elections by incorporating into its party platform a more generous welfare policy that had been originally proposed by the progressive opposition. Fully aware of the public’s growing discontent over the ruling party’s handling of welfare policy, the LDP formulated in 1972 a new party line, billed under the grand title of “the birthyear of welfare” (fukushi gannen), illustrating the party’s commitment to improve government services in welfare.18 The party announced that it would shift its emphasis from a near compulsive striving for high economic growth to the pursuit of better social conditions through an upgraded public pension system and expanded low-cost health care under the national health insurance system. Predictably, all these proposals went against MOF’s long-standing interest in keeping government spending down and reducing the size of the deficit. Even during the high growth era, when government revenues were plentiful, MOF initiated a series of unsuccessful attempts to reduce government spending. In 1963, it commissioned a study that called for a 20 percent reduction in subsidies.19 In 1965, MOF desperately sought to reduce government spending in an effort to uphold a balanced budget.20 In 1967, it called for the reduction of bond dependence to below 5 percent.21 The following year, MOF launched a large-scale public relations campaign under the slogan “break fiscal rigidities movement” (zaisei kochokuka dakai undo) under the leadership of Budget Bureau Director Murakami Kotaro.22 Given these persistent efforts to reduce budget spending, it comes as no surprise that MOF opposed Tanaka’s proposals that entailed greater government spending even if it meant raising the level of government deficits.23 MOF’s efforts to keep spending down, however, proved futile in the face of Tanaka’s resolve to counter the LDP’s decline through large-scale government spending. In anticipation of a general election, Tanaka immediately set to work implementing his proposals. In July 1972, Tanaka

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called for a 15 trillion yen budget for 1973, a 31 percent increase from the previous year’s budget, and he appointed his faction member Ueki Koshiro as finance minister to ensure that his word was obeyed at MOF.24 In turn, Ueki promptly announced that all ministries could request up to a 30 percent increase, rather than the usual 25 percent, over their previous year’s allocation. As a more immediate measure, Tanaka also demanded a large supplementary budget for fiscal year 1972, against the opposition of MOF. In August, MOF officials argued that an additional 180 billion yen would be an appropriate size for the supplementary budget. Tanaka disagreed and in the following month called MOF Budget Director Aizawa Hideyuki and Fiscal Investment and Loan Program (FILP) director Hashiguchi Osamu to demand an astonishing 1.5 trillion yen supplementary budget, over eight times the amount proposed by MOF.25 Tanaka’s demand won out. In October, a 1.5 trillion yen package was formed from various government accounts. For the first time in MOF’s history, its officials were placed in the embarrassing position of telling the Construction Ministry that it had to come up with more spending requests.26 After the supplementary budget was passed in the lower house on November 20, Tanaka quickly dissolved the Diet and called for general elections to be held on December 10. In the thirty-third general elections, the LDP hoped to capitalize on the wave of Tanaka’s high public approval rating, but the results proved to be disappointing. Although popular votes cast for the LDP rose by roughly 2.2 million, the gain primarily benefited those candidates already secure in their electoral districts. It did not help sway the balance of LDP candidates in hotly contested metropolitan districts.27 Instead, the election results revealed continued LDP weakness in the urban districts. For example, in the sixteen electoral districts in Tokyo and Osaka, ten of the top vote getters were Japan Communist Party (JCP) candidates, whereas the LDP and Komeito only had two top vote getters.28 In total, the LDP’s share of Diet seats fell from 288 to an all-time low of 271.29 The LDP’s setback reinforced the urgency of incorporating the bold measures proposed by Tanaka in the General Account Budget for 1973. Tanaka responded swiftly. In the following month, the government passed a budget that clearly reflected his influence. The 1973 budget was raised by 24.6 percent over the previous year’s budget, representing the largest yearly increase in the postwar period. The increase in public works expenditures was even more impressive, up 32 percent from the previous year.30 The 1973 budget also revealed vast improvements in the area of welfare-related spending. During the high growth period, the state-operated Employees’ Pension covered only employees. Farmers and the selfemployed were excluded until 1961, when the National Pension system was established. But under the latter scheme, full pensions were not provided to

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potential beneficiaries who had not paid contributions for the required number of years. In addition, the medical insurance program covered only 50 percent of costs in the case of self-employed. All this changed with the 1973 budget, in which the government roughly doubled pension benefits and introduced a cost-of-living adjustment indexed to inflation. Moreover, medical insurance coverage was raised from 50 percent to 70 percent and an annual ceiling was set on the maximum amount the patient needed to pay for medical costs. In addition, a free health care system for the aged was introduced.31 Much to the chagrin of the opposition parties, Tanaka’s influence could also be seen in the budget passed for the Fiscal Investment and Loan Program. Up to this point, FILP spending had been determined solely by MOF in consultation with various government financial institutions. In the hope of gaining greater control over FILP, the opposition parties, after years of pressure, pushed the government in 1973 to alter the decisionmaking process governing FILP by securing for it the same legislative oversight that governed the General Account Budget.32 However, the unintended consequence of their action was to give a strong LDP leader such as Tanaka greater access to use FILP resources for LDP gains. The clearest example of this is Tanaka’s use of FILP resources to strengthen the small business sector’s support of the LDP. Tanaka attributed the recent electoral victories of the JCP in large part to the growing membership of Minsho (short for Zenkoku Shoko Dantai Rengo Kai, or National Commercial Association Cooperative Movement), a JCP organization made up of small businesses. In an effort to lure small business away from the JCP, Tanaka, together with MITI Minister Nakasone Yasuhiro, initiated in the fiscal-year 1973 FILP budget the creation of lowinterest loans to small business requiring no collateral or guarantee. The funds were to be disbursed through the government-run People’s Finance Corporation (Kokumin Kinyu Koko) in conjunction with Nissho, a proLDP business organization.33 Although Tanaka had politically compelling reasons to increase government spending sharply, the 1973 budget proved to be ill timed. His spending programs were implemented not only at a time when the rise in government revenues was declining as a result of the slowdown in the economy but also amid great inflationary pressures. To be sure, inflation existed even during the high growth period. But the consumer price index during the high growth period generally stood around 4 to 6 percent per annum and the wholesale price index rose by an annual average rate of only 1.3 percent between 1961 and 1969. In the first year of the Tanaka administration (1973), however, the consumer price index rose by 11.7 percent, followed by a 23.2 percent rise the following year.34 In the major metropolitan regions, land prices rose by 42.5 percent in 1973, over twice

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the rate during the peak of the high growth period. Retail prices also soared to 15.9 percent in 1973 and 32.3 percent in 1974.35 This posed a serious problem for Tanaka and the LDP. On the one hand, the LDP needed to broaden its societal base of support, and for this purpose the government budget served as a key instrument of political exchange. On the other hand, the Tanaka cabinet’s public approval rating was falling dramatically, from 62 percent at the start of his prime ministership to 27 percent by April of the following year. Over the same period, his disapproval rating rose from 10 percent to 44 percent, and by November 1974 it rose still higher to 60 percent.36 Concern over inflation was clearly one of the major factors that contributed to the decline in Tanaka’s public approval rating. In a poll taken by Mainichi Shinbun in May 1973, 75 percent stated that the government should place its highest priority on stabilizing prices.37 In a Yomiuri Shinbun poll conducted in November 1973, 76 percent of those surveyed stated that they would prefer stabilized prices over higher income, whereas only 7 percent stated the opposite.38 Given this political setting, Tanaka was forced to address two potentially conflicting issues: fighting inflation and increasing government spending. Although reducing government spending would undoubtedly help ease inflationary pressures, the LDP could not readily renege on its vast spending commitments made just a year earlier. To the contrary, the party still needed to take measures to broaden its constituent base. This was made vividly clear in elections held in 1973. In April 1973, the LDP suffered another defeat when voters in Nagoya elected as governor Socialist- and Communist-backed candidate Motoyama Masao over LDP candidate Sugito Kiyoshi. Several months later, LDP candidate Sunada Shigetami lost to opposition candidate Miyazaki Tatsuo in the Kobe gubernatorial election. These losses meant that Japan’s six largest cities—Tokyo, Yokohama, Nagoya, Kyoto, Osaka, and Kobe— were now under the control of local opposition leaders.39 Moreover, LDP weakness in urban regions was further confirmed by a public opinion poll conducted in November that showed that Tanaka’s disapproval rating in the ten largest cities was over 70 percent.40 The conflicting issues confronting the LDP were reflected in budgetary policy outcomes for the revised 1973 budget passed in November 1973 and the initial budget passed for 1974. Through frantic efforts that literally cost MOF Minister Aichi Kiichi his life, a large supplementary budget for 1973 was approved by the cabinet on November 22. In this supplementary budget, the LDP set out to reward farmers before the elections by successfully raising the producer price for rice by 16 percent and wheat by 14 percent in the face of MOF opposition. Overall the 1973 supplementary budget represented the largest supplementary budget in the postwar period in terms of

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funds allocated from the general account budget.41 Despite this trend toward greater spending, however, there were also signs pointing in the opposite direction. With the vacated finance minister post and the sharp drop in Tanaka’s approval rating, Tanaka was forced to appoint his arch rival and a strong proponent of fiscal austerity, Fukuda Takeo, as the new finance minister. As quid pro quo for taking this post, Fukuda received Tanaka’s assurance that he would leave budgetary and other economic matters to Fukuda.42 With former MOF bureaucrat Fukuda at the helm, MOF gained a strong ally in its effort to reduce government spending and restore budget discipline. At a press conference held on November 25, 1973, Fukuda immediately set out to disclaim Tanaka’s earlier commitments, stating that the archipelago plan was Tanaka’s personal idea and did not reflect the official position of the government.43 Fukuda’s impact was also felt within MOF. Upon assuming his post as finance minister, Fukuda assembled senior staff members in an effort to assess the possibilities of reducing the size of the budget. When told by Budget Bureau Director Hashiguchi Osamu that the 1974 budget could be kept down only to a 24 percent increase from the previous year, Fukuda pressed to keep the overall increase below 20 percent. Moreover, when Administrative Vice Minister Aizawa Hideyuki reported that public works spending would rise by 11 percent automatically, given the government’s five-year plan, Fukuda urged Aizawa to keep public works spending at the same level as the previous year.44 Once set in motion, however, the pressures for greater government spending proved hard to suppress. Given vastly improved services in social welfare programs, budgetary spending would increase automatically with the provision of free medical care for the aged and as greater numbers of retirees claimed pension. Indexation would also raise spending in this area as a result of a high rate of inflation. Moreover, the LDP still faced electoral challenges that made it difficult to make an abrupt break in spending. In both local and national elections, the opposition parties were gaining at the expense of the LDP, raising doubts as to whether the LDP would continue to hold a majority in the Diet. Faced with these pressures, Fukuda achieved only modest results in his effort to impose greater budgetary discipline. To be sure, Fukuda was able to reduce the size of the budget below what it would have been in the absence of his initiatives. But the net effect was marginal. Although MOF proclaimed the 1974 budget to be tight, it nonetheless rose by 19.7 percent from the previous year. Moreover, part of the strategy employed to reduce government spending figures was merely illusionary. MOF not only transferred funds between the general account budget and local government accounts but also placed into the 1973 supplementary budget spending items earmarked for the initial 1974 budget.45

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Fukuda was also unsuccessful in eradicating Tanaka’s influence over the budget. Tanaka’s earlier initiatives to expand the LDP’s constituent base through government spending could still be seen in a wide range of areas. To demonstrate the LDP’s continued commitment to social welfare programs, spending in this area rose by an astonishing 36.7 percent. In the FILP budget, the government also continued to allocate large increases in loans to small business, and the no-collateral loans that were initiated in the previous year quadrupled in size, from 30 billion to 120 billion yen.46 Moreover, despite Fukuda’s resistance, an ill and bedridden Tanaka was able to coerce high-ranking MOF officials to carry through with the 2 trillion yen tax cut he had promised in a campaign speech made months earlier.47 These budgetary policy decisions revealed MOF’s ineffectiveness in reducing government spending significantly. There were politically compelling reasons why MOF was unable to impose greater budgetary discipline. The tenth election of the upper house was scheduled for July 7, 1974. A strong showing was important for the LDP in order to stem further LDP decline. Indeed, as a result of the previous upper house election, the LDP retained only a small majority, and many political analysts at the time predicted a conservative-progressive turnaround.48 An LDP victory was also important for the personal political fortunes of Tanaka. By the time of the elections, he would have already served two years as the president of the LDP and the prime minister of Japan. In order to bolster his chances for reelection to the top party post, a strong LDP showing was essential. As a result, Tanaka spent vast sums of money recruiting mass media celebrities to run as national constituency candidates and sought to assign a quota of assured votes to large enterprises.49 This strategy backfired. As the opposition parties’ criticism of Tanaka’s “money-power elections” (kinken senkyo) and “company-co-opted elections” (kigyogurumi senkyo) gained popular support, voters cast their disapproval of the LDP. Although a conservative-progressive turnabout did not occur, only sixty-two out of ninety-five LDP candidates were elected. It was only by enticing an independent to join the party after the elections that the LDP was able to retain a slim one-seat majority.50 Tanaka’s election tactics also fractured internal LDP cohesion. Several days after the election, Vice Prime Minister Miki Takeo resigned as director general of the Environmental Agency in protest against Tanaka’s money-power election tactics. This was followed by the resignations of Finance Minister Fukuda and Chief Cabinet Secretary Hori Shigeru.51 As a result Tanaka had to contend not only with declining LDP power in the Diet but also with powerful intraparty opposition led by both Fukuda and Miki, two LDP faction leaders who represented almost half the party’s strength. Despite efforts at damage control, the events that unfolded several months after the elections proved to seal Tanaka’s political fate. On October

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9, a leading Japanese journal, Bungei Shunju, published an article titled “Studies on Tanaka Kakuei: His Money Network and His People Network,” exposing Tanaka’s egregious money-making schemes. Faced with only a 10.6 percent approval rate and a 64.3 percent disapproval rate, Tanaka was forced to resign in late November, and the LDP appointed Miki Takeo as the new president of the LDP and prime minister of Japan.52

“Mr. Clean” and the Budgetary Crisis The change in political leadership was clearly an effort to present a new public image of the LDP, one removed from the extravagant money-wielding practices of the previous administration. Miki was popularly known as “Mr. Clean,” and his earlier criticism of Tanaka’s election strategy added legitimacy to this claim. Moreover, the selection of Ohira Masayoshi, a former MOF official, to the finance minister post signaled greater LDP resolve to address the growing gap between government expenditures and revenue. The change in political leadership, however, did not remove the political pressures on government spending. The government had already committed itself in July 1974 to a 37.4 percent increase on the price of rice paid to producers, and the National Personnel Authority presented a directive calling for a 29.6 percent increase in salaries for public employees.53 Given spending increases such as these and the political difficulties of raising additional government revenues through public fee hikes or higher taxes, the notion of restoring budgetary discipline was easier to proclaim in rhetoric than it was to put into practice. This was evident in both the supplementary budget for 1974 and the initial budget for 1975. The 1974 supplementary budget, approved by the cabinet on November 26, 1974, called for an increase in spending of more than 2 trillion yen from the initial budget set at 17 trillion yen. Thus, despite Fukuda’s concerted effort to keep the 1974 budget below 20 percent, the revised budget figures revealed a 25.7 percent increase from the 1973 initial budget. Similarly, the initial budget for fiscal year 1975 fell far short of meeting MOF leaders’ expectation of imposing budget austerity. Although Finance Minister Ohira Masayoshi proclaimed the initial budget for 1975 as a “neutral budget,” the evidence suggested otherwise.54 On January 11, 1975, the government approved a 1975 budget totaling 21.3 trillion yen. This represented a 24.5 percent increase from the previous year’s budget and only a 0.1 percent smaller increase than the massive 1973 budget approved under the Tanaka cabinet. Much of the increase could be seen as a continuation of the spending programs initiated under the Tanaka cabinet to broaden the LDP constituent base through government largess.

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As in the two previous years, spending for social welfare programs continued to rise sharply, up 35.8 percent from the previous year to 3.9 trillion yen. The LDP also continued to lure small business; no-collateral loans to this group doubled in one year to 240 billion yen and increased 800 percent in just two years.55 To the complete surprise of Ministry of Agriculture bureaucrats, Agricultural Minister Abe Shintaro pushed through a 3 billion yen subsidy for food production.56 Moreover, although the increase in public works spending was kept down for the second straight year, this was accomplished by increasing local government bonds by 50 percent to cover improvements to the sewage system.57 A further indication of the new cabinet’s ineffectiveness in restoring budgetary discipline was revealed during Diet deliberations held in April 1975 to settle the 1974 budget. On April 15, Finance Minister Ohira announced that tax revenues for the 1974 budget were roughly 800 billion yen short of the original estimate. Because of the shortfall, the government decided to take revenues earmarked for the 1975 budget and redesignate them as 1974 revenues. Thus, in an effort to deal with the immediate issue of settling the 1974 budget, the government delayed and compounded the difficult decisions necessary to restore budgetary discipline for the future.58 Realizing the trade-offs involved in this decision, Ohira stressed the urgency of altering fundamentally the budgetary spending practices of previous years. In order to deal with an inevitably smaller revenue base for 1975, Ohira argued against issuing more government bonds. Instead, he called for large cuts in expenditures as well as measures to increase revenues through higher government fees and taxes on select commodities.59 The impending shortfall in the 1975 budget and its implications were spelled out more forcefully three months later when the MOF-sponsored Financial System Advisory Council presented its interim report on the state of the economy and the national budget.60 According to the report, societal demands on government spending were far outpacing the ability of the government to raise revenues, especially given the slowdown in economic growth. The report made econometric projections based on current trends of the impact that a shortfall of 1 trillion yen, 2 trillion yen, and 3 trillion yen would have on subsequent budgets. The projections revealed that in the worst-case scenario, a 3 trillion yen shortfall would produce in a period of five years a 28.8 percent reliance on public debt to finance the budget. The shortfall proved even larger than the council’s worst-case scenario. On October 9, during Diet deliberations over the 1975 supplementary budget, MOF announced that the shortfall in tax revenues would be 3.48 trillion yen.61 Because the issuance of construction bonds was legally restricted to public works projects totaling 1.19 trillion yen for that year, there was a 2.29 trillion yen gap in the 1975 budget beyond the amount

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legally admissible under Japan’s existing Finance Law.62 The government was faced with three options: abruptly halt the profligate spending pattern that began during the Tanaka administration, raise taxes, or modify existing laws governing government finance. Much to MOF’s disapproval, the last was chosen. On November 7, the LDP unilaterally passed in the Diet a special provision to the Finance Law that paved the way for the issuance of Japan’s first deficit-financing bonds in the postwar period.63 As these events unfolded, MOF redoubled its effort to reduce government spending for the upcoming 1976 budget by seeking to raise additional revenues and cut existing expenditures. In the absence of adequate political support, however, MOF’s effort to impose greater budget discipline failed. In terms of revenue increases, Tax Bureau Director Ohkura Masataka sought to introduce a large-scale consumption tax for 1976 but later retracted the plan because of the lack of political backing.64 Even a modest proposal to raise liquor and tobacco taxes failed to pass the Diet on time, marking the first time in postwar history that an MOF-sponsored bill was defeated in the Diet.65 MOF proposals to cut spending were also modified in the absence of full political support. On July 21, MOF Budget Bureau Director Yoshise Shigeya sought to set the tone early by announcing that all ministries without exception must limit their initial requests to a 10–15 percent increase over the previous year’s budget.66 But several days later, the cabinet approved a 15 percent ceiling on requests and exempted two large spending items, pensions and public employee salary, from the ceiling.67 By this time, MOF was clearly hard-pressed to find any powerful political ally that supported its position. Even big business leaders, who in the past had generally favored budgetary discipline, found MOF’s proposals unpalatable given the sharp slowdown in the economy. Keidanren Chairman Doko Toshio, who five years later would come to symbolize across the nation the virtues of austerity, began the first in a series of aggressive campaigns seeking to raise government spending beyond MOF’s stringent proposals.68 In mid-December, he, together with Nikkeiren head Sakurada Takeshi, met with LDP Secretary General Nakasone Yasuhiro and other top LDP leaders, promising to resume corporate financial contributions to the LDP in exchange for a higher level of government spending than that proposed by MOF. MOF was seeking to keep overall spending to a 13 percent increase from the previous year and public works spending to a 16.6 percent increase; Doko called for an overall increase of 15 percent and a 20 percent increase in public works spending. 69 When MOF conceded to a 20 percent increase in public works and a 14.1 percent increase in the overall budget, Doko not only lifted the suspension on corporate contributions to the LDP but also agreed to shoulder half of the LDP’s previously incurred debts totaling 10 billion yen. 70 As a result of

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these concessions, MOF was forced to raise the general account budget’s overall dependence on public borrowing from 26.3 percent in 1975 to 29.9 percent in 1976.71 With these compromises made in the 1976 budget, the LDP began to prepare for two crucial national elections scheduled in the upcoming months. By December 1976, the four-year term for the lower house would expire and upper house elections were slated for mid-1977. Given continued LDP decline in both houses, a strong LDP showing was essential in order for the party to retain its position in power. This is not to suggest, however, that the LDP faced the same concerns that it had in the late 1960s and early 1970s. Although the LDP’s control over the Diet continued to be threatened, the political setting had changed in several important ways since that time. Surveys revealed that the LDP was steadily succeeding in expanding its electoral base in line with demographic changes. As can be seen in Table 4.6, the sharp drop in the number of farmers was accompanied by a reduction in their share of total LDP support. Whereas farmers made up 44 percent of the LDP’s electoral base in 1955, their share had dropped to 19 percent by 1975. The share of LDP support of those in small business remained at roughly 25 percent. In contrast, as the number of white- and blue-collar workers grew, their share of the LDP’s electoral base expanded from 12 percent to 27 percent and 15 percent to 25 percent, respectively. As a result, these groups, which together represented only 27 percent of the LDP’s electoral base in 1955, made up more than half of the LDP’s electoral base in 1975. Although these figures provided some reassurance for the LDP, there was also cause for concern. The LDP’s expanded electoral base required balancing a larger number of societal interests at a time when government spending was far outpacing revenues. Although legislative responsibility for managing the budget rested with the political party in power, imposing budget austerity under these circumstances was politically difficult.

Table 4.6

1955 1965 1975

Political Base of LDP Support by Occupation White Collar

Blue Collar

Small Business

Farmers

Other

12 (16) 20 (19) 27 (30)

15 (20) 18 (25) 25 (33)

24 (19) 26 (20) 25 (19)

44 (41) 33 (33) 19 (14)

4 (4) 4 (3) 4 (4)

Source: Asahi Shinbunsha (1976:105, 122, 144). Note: Figures represent percentage of total LDP support; figures in parentheses represent percentage of given occupational group from the total.

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Business leaders now joined others in calling for greater government spending. Moreover, with the steady decline in the LDP’s share of Diet seats in the past few elections, the LDP needed to extend benefits to their loyal rural supporters. At the same time, the party still needed to make continued efforts to appeal to its new supporters and to the large and growing number of voters with no party preference.72 Although social welfare spending made up the largest share of increase in the budget since 1973, the LDP could not readily renege on its earlier commitments for fear of losing its new supporters. Indeed, given the large number of both new supporters and nonpartisan voters, the LDP needed to take all measures necessary to limit the possibility of antagonizing these potential swing voters. This last concern was immediately put to test. On February 6, Lockheed’s vice president Archibald C. Kotchian revealed before the U.S. Senate Foreign Relations Committee that he had given $2 million to highranking officials in the Japanese government in an effort to sell Tristar jets to All Nippon Airways. This touched off a series of investigations in Japan that would lead to the arrest of Tanaka Kakuei on July 27. Tanaka’s arrest threw the LDP into turmoil. In the absence of prompt LDP action, it threatened to ignite a public backlash against the LDP in the upcoming lower house election. Yet internal LDP politics restricted the party’s ability to act effectively; Tanaka still headed the most powerful faction within the LDP and his influence over LDP Diet members outside his faction remained formidable. Prime Minister Miki was firmly committed to investigating the charges fully, but a majority of LDP Diet members fell in line in support of Tanaka and organized an association known as Kyotokyo (short for Kento Taisei Kakuritsu Kyogikai, or Liaison Council for Establishing a Party-Unity System) in an effort to bring down the Miki cabinet before the December elections.73 However, by threatening to exercise the prime minister’s authority in dissolving the Diet, Miki retained power and the lower house election was held under the Miki cabinet amid great political turmoil.74 In the thirty-fourth lower house general election held on December 5, 1976, the LDP recorded its worst showing in party history. The lower house Diet seats, having been reapportioned, now totaled 511. The LDP won only 249 of those seats, and for the first time since the party was formed in 1955, it failed to secure over half the total number of seats, falling seven seats short of a majority.75 In light of this poor performance, Miki announced his decision to step down as prime minister roughly two weeks after the elections, and LDP leaders began to stage backroom negotiations in an effort to select a new LDP president. In an alleged deal struck between Ohira and Fukuda, Fukuda was selected as the new LDP president with the understanding that Ohira would assume the post two years later. 76 On December 23, 1976,

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Fukuda was formally chosen as the new LDP president, and by a margin of one vote in the Diet, he was elected as the prime minister of Japan.

The Fiscal Gambit of Fukuda Takeo Soon after taking office, Fukuda reiterated his earlier position on the need to impose budget austerity. On January 27, at a speech at the Japan Press Club, Fukuda acknowledged that Japan still lagged far behind its Western counterparts in the area of social infrastructure but that the nation was on the verge of a fiscal crisis and renewed inflation. As a result, he and Finance Minister Bo Hideo argued against implementing economic recovery measures through the aggressive use of government spending.77 Moreover, Fukuda argued against a large tax cut despite the LDP’s customary practice of approving such a measure prior to important elections. Instead, Fukuda proposed a modest 353 billion yen cut in income tax in the face of an upcoming election in the upper house.78 Fukuda’s call for budgetary restraint came at a time when his cabinet faced major political challenges that would make difficult any efforts to stem the growing disparity between government spending and revenues. International pressure was mounting on Japan to reduce its current account surplus and revitalize world economic growth through fiscal expansion. Issues at home that required immediate attention also entailed a continued level of both high spending and large deficits. An upper house election was slated for mid-1977. With the LDP’s slim one-seat majority, imposing higher taxes or curtailing previous spending commitments risked a conservative-progressive turnaround, particularly given the large percentage of floating voters. Moreover, the economy was still in a slowdown, and big business leaders, led by Keidanren Chairman Doko, repeatedly voiced their demands for greater spending on public works projects.79 As a result, the initial budget passed for 1977 was more a continuation of than a break with the pattern of high spending established in earlier budgets. The initial budget for 1977 rose by 17.4 percent, representing a higher percentage increase than that of the previous year’s budget. Social welfare spending rose 18.4 percent, from 4.8 trillion yen to 5.7 trillion yen, despite Finance Minister Bo’s call to “scrap and build” anew spending in this area. 80 Farmers were given a hefty 23.4 percent increase for land improvement projects. Small business interests were also well represented, as both eligibility and lending volume were expanded for the no-collateral loan program.81 Moreover, as a result of strong pressure from big business leaders, public works spending increased 20.7 percent, from 3.2 trillion yen to 3.9 trillion yen, outpacing that of social welfare spending for the first time in three years.82

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Budget making in 1977 was also made more difficult because the LDP no longer possessed a stable majority in either house of the Diet. After the election the LDP was able to raise its share of lower house seats to 261 by inducting into the party twelve members who had won as independents, but this was not enough to secure a stable majority in Japan’s parliamentary system. As a result, greater caution was now required in both interparty and intraparty negotiations. With a weakened position in the Diet, it was imperative to hold dissent within the party to a minimum. Moreover, given the near parity in seats, the LDP would have to compromise with the opposition in the Diet in order to pass bills smoothly. The reason for this need to compromise requires a brief explanation. In order to control all the legislative committees in the Diet, a ruling party must secure more than a simple majority of Diet seats. It needs to have an additional number of seats above a simple majority to appoint its party members to the nonvoting chairmanship position of each committee. Although the LDP had already lost its stable majority in the upper house as early as 1968 and in the lower house in 1972, the impact was limited; the LDP merely relinquished the chairmanships of several special committees.83 In contrast, the lower house general election proved more damaging to the LDP. In addition to losing the chairmanships of four of the sixteen standing committees and seven of the nine special committees, the LDP lost its majority in seven standing committees, including the Budget Committee.84 The lower house Budget Committee was now composed of twenty-five LDP members and twenty-five opposition party members. Because the nonvoting chairman of the committee was from the LDP, the LDP held a voting minority. This meant that an organized opposition could reject the budget bill endorsed by the ruling party and delay the passage of the budget bill if the committee’s decision to reject the bill was ignored and submitted to the lower house plenary session.85 Given the LDP’s bare majority, forced passage of the bill was still possible, but it would antagonize and arouse the opposition parties to organize against the LDP in passing other important bills. As a result, there was greater pressure on the LDP to enter into negotiations and accommodate the demands of the opposition parties.86 This was evident in the 1977 budget. Shortly after assuming office, Fukuda proposed a modest 353 billion yen cut in income tax in the face of an upcoming election in the upper house, where the LDP held a slim oneseat majority. His proposal was immediately challenged by the opposition parties, who instead demanded a 1 trillion yen tax cut and a greater level of spending for social welfare programs than that proposed by the government.87 Although Fukuda held firm to his position and argued that a 1 trillion yen tax cut was inflationary,88 his party’s weaknesses in the Diet gave the opposition a stronger bargaining position to negotiate a compromise

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with the LDP. On March 9, 1977, the LDP and opposition parties agreed to increase welfare-related spending in the supplementary budget and settled upon a 716 billion yen tax cut, almost double the amount of Fukuda’s original proposal. This represented the first time in postwar history that a government budget draft was modified as a result of opposition pressure.89 Upon passage of the budget, the LDP turned its immediate focus on the eleventh upper house election, scheduled to take place in three months. Various polls taken prior to the election left the LDP with room for both hope and concern. The LDP’s electoral base was clearly broadening, and public opinion polls showed LDP support in general to be rising. However, the Fukuda cabinet faced the lowest public approval rating in postwar history at the time of its establishment.90 Moreover, polls also revealed that a growing number of voters—between 25 percent and 40 percent, depending on the survey—had no party preference.91 The LDP’s concern was further compounded by the fact that the party possessed only a one-seat majority in the upper house. The seats of sixty-five incumbent LDP Diet members were up for election, in contrast to fifty-eight for the opposition party. Unless the LDP was able to retain the same number of seats, it would lose its majority control in the upper house. The election held on July 10, 1977, produced a modest victory for the LDP. Despite predictions of a conservative-progressive turnaround, the LDP won forty-five seats in the regional election and eighteen in the national election. Although this was two seats fewer than the number of seats held prior to the election, the LDP was able to retain its majority by inducting into the party three additional winners in the election who originally had not run as LDP candidates. As a result, the LDP secured a total of sixty-six seats, one more than it held before the election.92 LDP victories were repeated in other elections held during the year. In the Tokyo metropolitan election held on the same day as the upper house election, the conservatives successfully lured voters away from their rivals, winning thirteen more seats than in the previous election. The LDP also won two elections to replace vacant seats in the upper house (in Niigata and Kumamoto prefectures) and swept all seven elections for prefectural governors.93 For the LDP, these electoral victories undoubtedly eased some of the pressures the party had been facing since the early 1970s to increase government spending. By stemming its decline in national elections and recapturing some of the seats lost in previous local elections, the urgency of further increasing government spending had abated. Moreover, given a considerably lower rate of inflation, spending items adjusted for inflation would not rise as rapidly as they had just a few years earlier.94 But these factors did not provide the incentive to impose budget austerity or to reestablish a small and balanced budget as in the high growth period.

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Although the budget deficit was reaching crisis proportions, very few outside MOF favored budget cuts, and even fewer favored large-scale tax increases. Short of reneging on the LDP’s 1973 commitment to upgrade social welfare services, spending in this area would rise automatically under existing programs. Moreover, pressures to increase spending in other areas still remained. Farmers continued to demand and receive a high level of government subsidies. Although the producer price for rice was raised by only 4.6 percent, due to the large rice surplus, farm subsidies were raised in other areas in order to either increase agricultural productivity or convert production from rice to other crops.95 In addition, in response to the continued slowdown in the economy, business groups’ demands for greater government spending intensified.96 Fukuda’s initial response was to deflect the call for greater government spending with optimistic forecasts for the economy. In April he predicted that the economy would recover in two to three months, and in a campaign speech in June, he announced that the recovery was on its way.97 A month later, at a press conference held shortly after the upper house election, Fukuda predicted that real GNP growth rate would be 6.7 percent.98 This position was echoed by Administrative Vice Finance Minister Yoshise, who stated that MOF had no intention of compiling a supplementary budget and argued against such a measure in light of the high level of government debt. Moreover, he suggested a 200–300 billion yen supplementary budget at most if such measures proved necessary in the future.99 Yoshise’s hypothetical future came to pass roughly a month and a half later, but his policy recommendation went unheeded. With no signs of an economic recovery, Fukuda announced on September 4 his plan to adopt a 2 trillion yen package of stimulatory measures, raising the bond dependence ratio to 29.94 percent, a mere 0.06 percent lower than the ceiling set by MOF two years earlier. 100 A month later, business leaders once again called for a fiscal stimulus, seeking not only a large initial budget for 1978 but also a sizable second supplementary budget for 1977.101 Predictably, their proposal was met by MOF opposition. In a lower house Budget Committee meeting held on October 11, Finance Minister Bo insisted on abiding by the 30 percent bond dependency ratio, and on October 25 he stated that MOF had no intention of taking additional measures to stimulate the economy. 102 However, with the continued slowdown in the economy, MOF’s concern over the rising budget deficit commanded less attention than the demand for greater government spending. At the close of the Diet session, Fukuda announced that he would reshuffle the cabinet on November 26, 1977, and immediately set to work in formulating a stimulatory budget.103 On December 29, the new Fukuda cabinet finalized the government draft budget for 1978 and, in an unprecedented

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move, submitted it with a second supplementary budget for 1976. The two budgets that were passed by the Diet after another round of negotiation and compromise with the opposition parties revealed a continued trend toward higher spending and a total disregard of MOF’s concern over the deficit.104 The second supplementary budget for 1977 called for an additional 562.2 billion yen to be spent from the general account budget, of which 366 billion yen was earmarked for public works spending. With this second supplementary budget, the 1977 revised budget was now 20.8 percent higher than the initial budget for 1976 instead of 17.4 percent as originally planned in the 1977 initial budget. The rise in public works spending was even sharper, up an astonishing 40.9 percent from the initial budget for 1976.105 The initial budget for 1978 was similarly expansive. The total size of the budget was raised 20.3 percent from the previous year’s initial budget, and public works spending increased by 34.5 percent. Not only did this surpass the increase in public works spending made during the Tanaka cabinet, it also represented the highest rate of increase for the entire postwar period. Moreover, the gap between overall expenditure and revenues widened even further, and in order to cover partially a 37 percent shortfall, MOF took 2 trillion yen of March 1979 corporate tax revenue earmarked for the 1979 budget and used it to cover the shortfall in the 1978 budget.106 The pattern of political events witnessed in the second half of 1977 extended into the following year. Throughout 1978, the LDP continued to show signs of resurgence. Although national elections were not held during this year, LDP gains could be seen in various local elections. In March the LDP-backed candidate Hirabayashi Kozo defeated Socialist candidate Endo Takashi for the Tottori governorship. In April the LDP scored a major victory when its candidate Hayashida Yukio won the election for the governorship of Kyoto to replace twenty-eight-year Japan Socialist Party (JSP) incumbent Ninagawa Torazo. These victories continued throughout the year. Indeed, by the end of 1978, candidates backed either by the LDP alone or in conjunction with other parties secured all ten of the governorship elections held throughout the year.107 Various polls taken during this time revealed that the LDP was continuing to broaden its electoral base and expand its popular support. According to a survey conducted by Asahi Shinbun, 46 percent of industrial workers supported the LDP and only 24 percent supported the JSP. This was a complete reversal from the late 1950s, when the JSP enjoyed 50 percent of that support and the LDP 25 percent.108 These trends were further confirmed in public approval ratings, which showed a 46 percent approval rating for the LDP in June 1978 and a 50 percent approval rating three months later, marking the first time since the height of Tanaka’s popularity in August 1972 that the LDP reached the 50 percent threshold.109

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These combined signs of LDP resurgence still did not remove entirely the political pressure to increase government spending. The economy, though showing signs of steady improvement, continued to lag behind Fukuda’s optimistic expectations. This prompted business leaders to demand further increases in spending in the face of MOF opposition and alarm over the deficit. In June 1978, Keidanren Chairman Doko stated that although the economy had picked up following the last stimulus package, additional measures were required because the rapid appreciation of the yen weakened the chances of attaining a sustained full recovery.110 In the following month, Doko met with LDP Secretary-General Ohira Masayoshi and demanded another large-scale supplementary budget.111 Although MOF Budget Bureau Director Nagaoka Minoru countered that the economy was recovering and that he would not consider additional budgetary measures to stimulate the economy, his position received little political support outside MOF.112 Indeed, MITI Minister Komoto Toshio similarly called for large-scale measures to assist business recovery, and other LDP politicans called for a 3 trillion yen supplementary budget.113 Faced with these pressures, MOF backed down from its position and conceded to another 2.5 trillion yen worth of additional measures, raising the bond dependence ratio to 37.6 percent.114 MOF Administrative Vice Minister Ohkura Masataka perhaps best summarized his bureaucracy’s weakness in the absence of outside political support. When asked about MOF’s inability to halt the rising level of government debt, he replied: “This is a parliamentary democracy. Our country is not the Imperial Rule Assistance Association Diet nor a bureaucratic authoritarian country.”115 After these measures were taken, demands to stimulate the economy through government spending finally subsided, as the economy finally appeared to show signs of a full recovery. MOF then went on the offensive. Shortly after the supplementary budget was adopted, Finance Minister Murayama Tatsuo stated three central objectives of his ministry: lowering the rate of growth in spending, reducing the size of the deficit, and introducing new taxes.116 In the area of spending, the call to scrap and build social welfare–related spending anew was raised once again.117 In terms of taxes, MOF announced in late September its intention of quickly introducing a general consumption tax set at 7–8 percent.118 By and large these announcements did not meet strong opposition at the time. On the contrary, they received support from some of the top leaders in the LDP, including the newly elected LDP President Ohira Masayoshi. On November 27, the LDP held its first election among party members to determine the next LDP president. After Fukuda withdrew his candidacy following his loss to Ohira in the primary, Ohira was then elected by the Diet as the new prime minister of Japan on December 7.119 Sensing the urgency of restoring budget discipline, Ohira announced

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shortly after the LDP election that the existing pattern of expenditures and revenues must be halted and new taxes must be introduced in order to restore sound budgeting.120 Given the subsidence in the demands for large spending increases and the political support of the new prime minister, MOF was able to achieve modest yet significant results. On January 11, 1979, the MOF budget draft for 1979 was presented and approved by the cabinet. The proposed amount was 12.6 percent higher than that of the previous year. Clearly this represented a significantly lower rate of increase than in recent years. It did not, however, indicate a fundamental change from previous budgets. Actual spending cuts were few. With the sharp drop in inflation (the consumer index fell from 8.1 percent in 1977 to 4.2 percent in 1978), spending items indexed for inflation naturally declined and public works projects increased by 20.0 percent even in the absence of strong business demand. The revision of the health insurance system was left unresolved as a result of the resistance by opposition parties, the Japan Medical Association, and members within the LDP.121 Patronage to farmers also continued, as Agriculture Minister Watanabe Michio initiated a new public works spending category for farmers in anticipation of an upcoming election.122 The 1979 budget also revealed MOF’s inability to fulfill its two other central objectives: introducing new taxes and reducing the bond dependence ratio. Efforts to introduce a consumption tax with the 1979 budget were postponed, and the government instead introduced more modest selective tax increases (sentaku teki zozei) for automobiles and gasoline to raise additional revenue. Given only these modest achievements in restoring budget discipline, the bond dependence ratio soared to 39.6 percent. With these figures in mind, both Prime Minister Ohira and Finance Minister Kaneko called for the implementation of a general consumption tax at the earliest possible date.123 After the passage of the 1979 budget, tentativeness over introducing new taxes gradually hardened into resolve as the LDP continued to score gains in 1979. In early April, unified local elections were held for fifteen gubernatorial positions. In every case, candidates who were either directly or jointly sponsored by the LDP were elected. In Tokyo the party succeeded in electing its endorsed candidate, Suzuki Shunichi, over opposition candidate Ohta Kaoru, ending the opposition’s twelve-year reign in a city that carried 10 percent of Japan’s entire population. Similarly, in Osaka, LDP-endorsed candidate Kishi Sakae defeated Communist Party– endorsed Kuroda Ryoichi. With these victories, the LDP was able to regain all the governorships lost in the six largest cities.124 Encouraged by these results, Ohira sought to reestablish LDP dominance and restore budget discipline in one bold strategy. On September 7, he exercised his authority to dissolve the Diet and called for national elections

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to be held on October 7, roughly three months prior to the date that the initial budget for 1980 would be submitted to the Diet. Moreover, in contrast to the LDP’s practice of announcing tax reductions prior to elections, Ohira instead suggested that both spending cuts and a general consumption tax were needed in order to restore fiscal health.125 The election results, however, dissipated whatever hope Ohira had of reestablishing LDP control in the lower house and reducing the budget deficit through tax increases. Hoping to win back a majority, the LDP fielded a total of 322 candidates but secured only 248 seats, one fewer seat than it had won in the previous election, when the LDP suffered its worst defeat. Only by adding ten nonaligned conservative winners did the LDP secure a slim majority of Diet seats.126 As a result, the Ohira cabinet was able to continue making inroads in reducing the rate of government spending for the 1980 budget as it had in the 1979 budget, but it was unable to institute a new pattern of budgetary practices to combat the high level of government deficits accumulated throughout the 1970s. The 1979 election and the budget passed shortly in its wake would not only mark the culmination of the budgetary spending patterns that evolved in the 1970s but also shape the interest and interaction of the various political actors in their bargaining over the budget in the 1980s. By the end of the 1970s, the LDP’s political incentive to increase budget spending at the expense of incurring large deficits had clearly waned. The party now enjoyed a broader electoral base, one more in line with the rapid demographic changes that had taken place since the high growth period. Moreover, by incorporating many of the social welfare programs originally promoted by the opposition parties, the LDP was able to quell the sharp public criticism it encountered in the late 1960s and early 1970s. Indeed, by 1979, public demands for greater government spending had weakened as the national media began to document numerous cases of government waste and fraud.127 The LDP’s success in broadening its electoral base and recapturing seats lost in earlier elections did not, however, signal a return to the same pattern of political dominance enjoyed by the LDP during the high growth period. Instead, the very factors that contributed to the LDP’s success created new political challenges for the coming decade. No longer able to rely as heavily on the waning strength of their traditional supporters, such as big business and farmers, the LDP now needed to maintain its broad base of societal support forged in the 1970s. At the same time, the LDP, as the long-standing party in power, now faced the legislative responsibility of resolving the massive government deficit it had created. The 1979 lower house election results set the tone for the political bargaining that was to take shape in the next decade. Although the LDP’s electoral setback has been attributed to a variety of factors, taxes were

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clearly the single most important policy-related issue that contributed to its defeat.128 Reintroducing new taxes was thus an option that entailed too high a political cost to attempt in the near future. Instead, the LDP needed to forge an effective compromise among its various supporters on an alternative plan to cut the deficit while there was still momentum following the party’s victories in 1978 and 1979. The question of whether and in what way the party would be successful in achieving such a compromise will be examined in Chapter 7.

Notes 1. For an outstanding comparative study of this period, see Gourevitch (1986:181–217). See also Hall (1986), Hibbs and Vasilatos (1981), Tarrow (1990), Esping-Anderson (1990:33–57). 2. For an excellent macroeconomic overview, see Lincoln (1988:69–129). 3. Ackley and Ishi (1976:153–247), Noguchi (1987:186–222), Noguchi (1982). 4. On the importance that the government placed on equality, see Curtis (1988:61), Noguchi and Sakakibara (1977:104–113), McKean (1989:201–224). On tax cuts prior to a national election, see former MOF Budget Bureau director account in Hashiguchi (1977:68). 5. For details, see Maruo (1979), Lincoln (1986), Bronfenbrenner and Yasuba (1987). 6. McKean (1981). 7. Campbell (1979), MacDougall (1980), Campbell (1992:105–180). 8. Masumi (1988:188–189). For an interesting account of the LDP’s strategy to recapture these local government positions, see Tahara (1988:320–343). 9. Ishikawa (1984:232–234). 10. See for example Ishida (1963). 11. For details, see Masumi (1985:199–234), Ishikawa (1984:81–89), Ito (1982:46–47). 12. Asahi Shinbun (September 18, 1972). 13. For an extended analysis of the different career tracks of LDP leaders, see Calder (1982). 14. For Tanaka’s background, see Tachibana (1976), Nakano (1982), Johnson (1986), Schlesinger (1997:17–90). 15. In a survey reported by Asahi Shinbun (September 18, 1972), 31 percent of those polled supported Tanaka because they thought he was the people’s prime minister, and 36 percent supported him because they thought he could get things done. 16. Tanaka (1973). The origins of this plan first took shape when Tanaka was serving as minister of MITI under the third Sato cabinet in 1971. In drafting this plan, Tanaka allegedly relied heavily on Konaga Keiichi, a midlevel MITI bureaucrat who until then had been placed in the ministry’s slow track but afterward was rewarded heavily by Tanaka and given the ministry’s premier post of administrative vice minister in 1984. Itagaki (1987:86–87). 17. Tanaka (1973:68). 18. In a survey reported by Yomiuri Shinbun (November 12, 1972), 62 percent of those polled stated that the government should place its highest priority in improving social welfare; 21 percent emphasized economic growth.

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19. Nihon Keizai Shinbun (September 9, 1979). 20. For an in-depth study of this failed attempt, see Yamaguchi (1987). 21. Shindo (1989:29). 22. Murakami (1967), Amano (1969). For an MOF Budget Bureau official’s account of how LDP pressures led to the eventual failure of this campaign, see Iwao (1985). 23. As noted in his book: “Instead of trying to balance the budget each fiscal year, there should be planned, positive bond flotations in accordance with longterm fiscal plans to facilitate the accumulation of social overhead capital for the prosperity of future generations” (Tanaka 1973:70). 24. Tanaka’s initial call for a 15 trillion yen budget reported in Mainichi Shinbun (June 24, 1972). 25. For their personal accounts of their meeting, see Aizawa (1985), Hashiguchi (1987). 26. For MOF officials’ frank admission on this point, see Hashiguchi (1987), Hatoyama (1985). 27. Ishikawa (1984:86–87). 28. Hirose (1981:50). 29. Shortly after the elections, thirteen Diet members who had run as independents joined the LDP, thereby raising the party’s total number of seats to 284. Masumi (1985:227–228), Ishikawa (1984:87). 30. Ministry of Finance (1989b:233–234). 31. For the definitive study of these policy changes, see Campbell (1992). See also Collick (1988). For an analysis of how changes in welfare policy affected budget spending, see Noguchi (1981b). 32. Henceforth the FILP budget was submitted to the Diet along with the general account budget for legislative approval. For an excellent overview of FILP, see Takehara (1980:227–247). See also Johnson (1978:61–100). 33. For further details, see Hirose (1981:39–50), Calder (1988a:312–348). 34. Ministry of Finance (1991:363). 35. Lincoln (1988:26–28), Nakamura (1981:219–227), Ishikawa (1984:89–90). 36. Asahi Shinbunsha (1974:669). 37. Mainichi Shinbun (May 3, 1972). 38. Yomiuri Shinbun (November 12, 1972). 39. Asahi Shinbunsha (1974:259). 40. Jiji Tsushinsha (1981:318). 41. Shiota (1985:42). 42. The agreement between Tanaka and Fukuda reported in Nihon Keizai Shinbun (November 11, 1973). 43. Fukuda’s statement reported in Nihon Keizai Shinbun (November 27, 1973). 44. For their personal accounts of their meeting with Fukuda, see Hashiguchi (1987), Aizawa (1985). 45. For the MOF Budget Bureau director’s frank admission of this ploy, see Hashiguchi (1987). 46. Asahi Shinbunsha (1975:303). 47. Shiota (1985:64–70). For MOF officials’ personal accounts, see Hashiguchi (1987), Takagi (1985a). 48. Before the elections, the LDP held 135 seats, 71 of which were to be contested. A loss of more than 9 seats would have put the party below 50 percent of total upper house seats. Asahi Shinbunsha (1975:224). 49. For an excellent account, see Curtis (1976:45–80). 50. For an in-depth analysis of this election, see Blaker (1976).

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51. Asahi Shinbun (evening edition, July 12, 1974; July 17, 1974). 52. Asahi Shinbun (November 26, 1974; December 2, 1974). 53. Asahi Shinbunsha (1975:348). 54. Nihon Keizai Shinbun (January 4, 1975). Presumably the word “neutral” (churitsu) was used because the growth in the budget corresponded with Ohira’s overly optimistic projection of nominal GNP growth for that year. 55. Asahi Shinbun (evening edition, January 4, 1975). 56. Agriculture bureaucrats’ surprise reported in Asahi Shinbun (evening edition, January 10, 1975). 57. Asahi Shinbun (evening edition, January 4, 1975). 58. For a frank admission of this point by MOF’s administrative vice minister at the time, see Takagi (1985b). 59. Sato, Koyama, and Shumpei (1990:345). 60. Reported in Asahi Shinbun (July 22, 1975). 61. Asahi Shinbun (evening edition, October 9, 1975). 62. Article 4 of Japan’s Finance Law states that “with the exception of financing construction investments, the government will not borrow but use resources limited to taxes and other revenues collected during the fiscal year.” For further details, see Takashi (1974). 63. This was passed with the explicit provision that the debt would be paid back in full by 1985. For details, see Miyajima (1988). 64. For his personal account, see Ohkura (1986). 65. Sato, Koyama, and Shumpei (1990:348–350). 66. Nihon Keizai Shinbun (evening edition, July 21, 1975). 67. Nihon Keizai Shinbun (evening edition, July 29, 1975). 68. For Fukuda’s amusing account of Doko’s relentless lobbying efforts, see Fukuda (1986). 69. Nihon Keizai Shinbun (evening edition, December 18, 1975). 70. Doko’s announcement to shoulder LDP debts reported in Asahi Shinbun (December 25, 1975). 71. Shindo (1989:31). 72. Depending on the survey taken during this time, the number of nonpartisan voters ranged between 25 and 40 percent of total voters. For a good overview of the political setting during this time, see Blaker (1979). 73. For two excellent accounts of this internal LDP struggle, see Ito (1982: 240–272), Sato, Koyama, and Shumpei (1990:356–371). 74. Masumi (1988:251–298), Ito (1982:240–272). 75. Whereas the main opposition party, the JSP, was able to gain only 5 additional seats, Komeito raised its share from 29 to 56 seats, and the New Liberal Club (NLC), which was formed by former LDP members in the wake of the Tanaka scandal, won 18 seats. Ishikawa (1984:97–98), Masumi (1988:297–298). 76. For an excellent account of this negotiation that documents a written agreement signed by LDP leaders Fukuda, Ohira, Sonoda Sunao, and Suzuki, see Nakano (1982:45–46). See also Sato, Koyama, and Shumpei (1990:372–379). 77. Bo’s position reported in Yomiuri Shinbun (January 5, 1977). For Fukuda’s statement, see Kiyomiya (1984:86). 78. Kiyomiya (1984:83). 79. Nihon Keizai Shinbun (December 27, 1976). 80. Bo’s statement reported in Nihon Keizai Shinbun (December 28, 1976). 81. Nihon Keizai Shinbun (evening edition, February 15, 1977). See also Hirose (1981:40–49). 82. Ministry of Finance (1989b:206–207).

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83. On this point, see Curtis (1988:37–40), Baerwald (1986:96–109). 84. Asahi Shinbun (December 24, 1976). See also Passin (1979:163–166). 85. Since the new fiscal year begins in April, the budget bill must be passed by late March or else a provisional budget would have to be compiled. 86. For an in-depth analysis, see Sato and Matsuzaki (1986:121–135). For an amusing account of how such negotiations went so far as to lead to a staged physical confrontation in the Diet between LDP Diet member Kuno Chuji and JSP Diet member Ataka Tsunehiko, see Ishikawa and Hirose (1989:43–44). 87. The opposition parties’ respective demands reported in Mainichi Shinbun (evening edition, January 20, 1977). 88. Sankei Shinbun (January 30, 1977). This position was also adopted by Finance Minister Bo. Yomiuri Shinbun (January 22, 1977). 89. For the administrative vice minister of MOF’s frank admission of how MOF officials unsuccessfully sought to avoid modifying the budget, see Takeuchi (1986). 90. According to a poll conducted by Mainichi Shinbun (June 23, 1977), 50 percent responded that they were either satisfied or somewhat satisfied with the LDP, but only 27 percent supported the Fukuda cabinet. 91. Blaker (1979:13–14). 92. Ishikawa (1984:238). 93. Asahi Shinbunsha (1978:265–266). 94. The consumer price index fell steadily from a high of 23.2 percent in 1974 to 8.1 percent in 1977. 95. For a detailed account of the various subsidies given to farmers, see Hirose (1981:115–166). 96. After the election, Keidanren Chairman Doko immediately called on LDP leaders to adopt a supplementary budget of roughly 1.5 trillion yen in order to stimulate the economy. Tokyo Shinbun (July 12, 1977). 97. Kiyomiya (1984:135). 98. Asahi Shinbun (July 13, 1977). 99. Nikkan Kogyo (July 13, 1977). 100. Nihon Keizai Shinbun (September 4, 1977). 101. Nihon Keizai Shinbun (evening edition, October 31, 1977). 102. Yomiuri Shinbun (October 12, 1977), Mainichi Shinbun (October 26, 1977). 103. Kiyomiya (1984:140). 104. For details of the interparty negotiations over the budget, see Sato, Koyama, and Shumpei (1990:413), Kiyomiya (1984:150–151). 105. Ministry of Finance (1989b:206–207). 106. Nihon Keizai Shinbun (November 6, 1978). 107. The ten governorship elections held during the year included Nagasaki, Tottori, Kyoto, Niigata, Shizuoka, Kagawa, Shiga, Hyogo, Ibaragi, and Okinawa. Asahi Shinbunsha (1979:266–267). 108. Asahi Shinbun (October 22, 1978). See also Sato, Koyama, and Shumpei (1990:455). 109. Asahi Shinbun (July 9, 1978, October 22, 1978). 110. Nihon Keizai Shinbun (evening edition, June 12, 1978). 111. Mainichi Shinbun (evening edition, July 21, 1978). 112. Nagaoka’s statement reported in Nihon Keizai Shinbun (June 14, 1978). 113. Komoto’s position reported in Nihon Keizai Shinbun (evening edition, July 25, 1978). The call for a 3 trillion yen supplementary budget reported in Nihon Keizai Shinbun (August 29, 1978).

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114. Nihon Keizai Shinbun (September 2, 1978). 115. Ohkura’s interview reported in Tokyo Shinbun (June 18, 1978). 116. Sankei Shinbun (September 3, 1978), Nihon Keizai Shinbun (evening edition, September 20, 1978). 117. Asahi Shinbun (October 13, 1978). 118. Mainichi Shinbun (September 23, 1978). 119. For a detailed account of the election, see Kiyomiya (1984:277–293). 120. Yomiuri Shinbun (November 29, 1978). 121. JMA Chairman Takemi Taro stated that fifty LDP candidates would fall in the next lower house election if the pending bill to revise the health insurance system passed. Yomiuri Shinbun (September 24, 1978). In response, Welfare Minister Hashimoto stated that he wanted to avoid a war with JMA and would not necessarily stick to the present bill. Nihon Keizai Shinbun (December 13, 1978). 122. Hirose (1981:94–95). 123. Nihon Keizai Shinbun (evening edition, January 25, 1979). 124. Asahi Shinbunsha (1980:267–269). 125. Asahi Shinbun (September 3, 1979). For further details, see Sato, Koyama, and Shumpei (1990:479–488). 126. The biggest winner was the JCP, which raised its total from 17 to 39 seats. The JSP dropped 16 seats. Asahi Shinbunsha (1980:266). 127. This point is discussed more fully in Chapter 7. 128. On this point, see Ishikawa (1984:196–204).

5 Analysis: Assessing the Two-Level Hypothesis for the 1970s

The evidence presented in the preceding two chapters confirms the utility of the two-level approach I advance in this study. As expected, international pressures for Japan to adopt a policy of fiscal expansion emerged as Japan began to mount persistent trade surpluses. After registering a current account deficit of $682 million in 1975, Japan posted a $3.7 billion surplus in 1976, followed by an $11.0 billion surplus in 1977 and a $16.5 billion surplus in 1978.1 These surpluses occurred at a time when world economic recovery from the oil crisis appeared uncertain. The world economy showed initial signs of recovery in the first half of 1976, but the recovery had come to a halt by the end of the year, and unemployment in the industrial West reached a postwar high of 15.6 million by the summer of 1977. Predictably, these conditions generated intense international pressures on Japanese budgetary policy. The postwar international economic system, guided by the principles of embedded liberalism, requires distinct forms of political leadership under specific circumstances. Given Japan’s mounting trade surplus and the fear of a prolonged downturn in the world economy, a budgetary policy that promotes fiscal expansion helps foster international economic stability in two ways. First, as a means of redressing balance of payments adjustment, such a policy helps stem the threat of protectionism that rises when nations accumulate large and persistent trade imbalances. Second, during times of prolonged world recessions, fiscal expansion helps reduce protectionist pressures by providing an active and open market for distress goods. By stimulating a stagnant world economy, it provides a positive sum environment whereby the economic benefits to be gained from free trade help ease the process of adjustment and encourage domestic interest groups to form free-trade coalitions. International pressures for greater Japanese fiscal expansion took shape in three forms: diplomatic suasion, protectionist pressures, and the 121

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threat of yen appreciation. As macroeconomic policy coordination became a top-priority agenda from late 1976 onward, Japanese state leaders encountered strong diplomatic pressures in various international forums—the OECD, IMF, and interministerial and economic summit meetings—to adopt a policy of fiscal expansion. These pressures were accompanied by the rise of protectionism against Japanese exports and the threat of yen appreciation. The latter two were clearly linked to the first. In the absence of Japanese efforts to stimulate its domestic economy, both protectionist pressures and the value of the yen would rise in response to Japan’s mounting trade surplus. Indeed, in his repeated efforts to talk the dollar down against the yen, U.S. Treasury Secretary Michael Blumenthal consistently pointed to Japan’s sluggish domestic demand and persistent trade imbalances to justify his position. In the face of these international pressures, Japan adopted a series of budgetary initiatives that were highly cooperative. Throughout his negotiations with his foreign counterparts, Prime Minister Fukuda Takeo pledged to use fiscal policy to meet high growth targets and remedy Japan’s current account imbalance, and he repeatedly implemented public works spending in an effort to uphold his commitment. Upon taking office in December 1976, the Fukuda administration promptly passed in the Diet an expansionary budget for 1977, one that represented a 17.4 percent increase over the previous year’s budget and a 21.4 percent increase in public works spending. When it became apparent that this budget would fail to raise Japan’s GNP to the 6.7 percent level Fukuda had promised at the London summit, his administration introduced a 2 trillion yen supplementary budget in September 1977 and another supplementary budget that increased public works spending by 370 billion yen in January 1978. In the 1978 budget, he further increased government spending by roughly 20 percent and public works by 34.5 percent with the explicit objective of achieving a 7 percent real growth in GNP and a substantial reduction of Japan’s current account surplus. Moreover, when this budget appeared to fall short of its aims, his cabinet adopted yet another supplementary budget that amounted to 2.5 trillion yen. All told, these measures clearly demonstrated a strong willingness on the part of Japan to adopt cooperative policies. 2 Not only did Fukuda repeatedly back up his commitment to cooperate with concrete contributions, but his administration incurred huge costs along the way. On a personal level, Fukuda, a former MOF official who espoused fiscal conservatism prior to assuming the prime ministership, drew sharp criticism for endorsing the “locomotive theory.” Although he had agreed in late 1973 to fill the vacated finance minister post under the condition that he would be given free rein to curtail the pork barrel excesses of the Tanaka cabinet,

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public works projects under the Fukuda administration rose at an even faster pace than during the Tanaka era. All told, the aggressive use of deficit financing forced the government to rely on government bonds to finance almost 40 percent of the entire budget for 1979. Japan was thus financing a greater portion of its budget than any other major advanced Western nation at the time. Given the cooperative stance Japan adopted throughout this period, it is tempting to suggest that gaiatsu (foreign pressure) was a decisive factor in shaping Japanese budgetary policy outcomes.3 Alternatively, one could argue that Japan, by virtue of its size and productivity, had become a “supporter” rather than a “spoiler” nation.4 Such explanations, however, neither explain why international demands for greater Japanese fiscal expansion emerged when they did nor adequately capture the reasons behind Japan’s decision to cooperate. Gaiatsu, though important, needs to be explained rather than simply posited. Acknowledging its presence is different from explaining the international factors that give rise to it. Moreover, the argument that Japanese budgetary policy outcomes during this period were determined primarily by international, as opposed to domestic, factors needs to be demonstrated empirically rather than assumed theoretically. It is in this context that the utility of my two-level framework becomes apparent. By delineating both the international and domestic political forces that structure Japanese budgetary policy decisions, not only does the twolevel framework explain why and in what manner Japanese budgetary policy became increasingly politicized both abroad and at home during the 1970s; it also clearly reveals that international pressures on balance did not alter fundamentally the expansionary nature of Japanese budgetary policy that was already in place for purely domestic reasons. The early 1970s marks an important watershed in Japanese budgetary policy. The shift from a balanced budget to deficit financing began in this period as the LDP confronted two serious challenges that threatened to undermine its position as the political party in power. First, rapid demographic changes from rural to urban regions and from primary to secondary and tertiary sector employment meant that the LDP could no longer rely as heavily on the support of its traditional rural supporters as it had in the past. By the 1970s, the voting strength of farmers had declined precipitously; whereas 38 percent of the population was employed in agriculture in 1955, ten years later, the figure had dropped to 23 percent, and by 1975 to 13 percent. Second, tacit public support for government policies that pursued ever higher GNP figures gave way to greater demand for better public services in social welfare–related programs.5 By the early 1970s the LDP had already lost key local elections in major cities to opposition candidates whose platform was to improve the government’s provision of

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social welfare services. The LDP also suffered a setback in the June 1971 upper house election and the party’s support base in the lower house was steadily declining. The LDP was able to stem its electoral losses and remain in power by vastly expanding the level of government spending at a time when the rate at which government revenues rose from year to year was declining because of slower economic growth. By abandoning its position of fiscal conservatism adopted since the 1950s and co-opting large spending programs originally proposed by the opposition parties, the LDP broadened its support base and become a near catch-all party by attracting a growing number of new though less committed middle-class voters situated primarily in the urban regions. Moreover, in an effort to maintain the support of its traditional supporters, the LDP continued to provide generous benefits to farmers and other rural constituents through large subsidies.6 To keep deficits down, these large increases in government spending could have been offset by introducing higher taxes, but such measures were clearly not in the LDP’s interest. Throughout the 1960s the LDP was accustomed to implementing large-scale tax reductions to attract voter support. As economic growth waned and inflation rose in the early 1970s, Prime Minister Tanaka Kakuei predictably favored a tax reduction rather than an increase. Unable to introduce higher taxes but faced with greater demands on government spending, the LDP was forced to issue large volumes of debt in an effort to retain its position as the political party in power. In 1971, only 4.6 percent of the budget was financed through government bonds. By 1976, however, the figure rose to 29.9 percent and stood at 39.6 percent in 1979.7 Deficit financing, therefore, was already well in place by the time international pressures for fiscal expansion surfaced in late 1976. On a domestic note, these findings clearly refute the conventional wisdom about the power of Japan’s central bureaucracies and their ability to dictate policy outcomes.8 According to this view, Japanese policymaking in general is characterized by “budget primacy,” where “a high proportion of decisions, compared with other nations, are made within the arena where the Finance Ministry is the leading actor.”9 More specifically, with respect to budgetary policy outcomes, proponents of this view argue that MOF, with its organizational autonomy and exclusive jurisdictional authority to compile the budget, controls both the overall size of the budget and how it is allocated to various spending ministries. As the guardian of the national coffer, MOF seeks to minimize the size of the budget by eschewing deficit financing and promoting the 20 percent rule, whereby the budget, as a percentage of national income, is maintained at roughly 20 percent.10 Viewed from this perspective, political pressures are seen to exert only “marginal influence” on the total size of the budget.11 Furthermore, proponents argue

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that budgetary outlays to various spending ministries remain stable over time because such decisions are determined by MOF’s decisionmaking norm of baransu, or fair share. If one spending ministry receives a 10 percent increase, then others are expected to obtain a 10 percent increase as well. The central flaw of this explanation is its failure to provide an adequate criterion to assess, rather than simply assume, the primacy of MOF in dictating policy outcomes. At issue is not whether MOF enjoys greater organizational autonomy and jurisdictional authority to compile the budget than do similar government agencies in other advanced industrial nations. Clearly it does, but the generally accepted criterion of a strong state is one whereby the state is able to formulate and implement policies against the actual or potential opposition of other powerful political actors.12 Accordingly, what is descriptively true about the decisionmaking process may be analytically irrelevant in demonstrating MOF primacy. Given MOF’s organizational autonomy and jurisdictional authority to compile the budget, it plausibly may be adopting policies that reflect the interests of others more efficiently than it would otherwise be able to do if other government agencies were involved in the budget compilation process. This ambiguity is further compounded by the fact that the conventional view of MOF dominance is based on evidence gathered during the high economic growth era prior to the 1970s, when competing interests were difficult to discern. As Japan entered the 1970s, there were clearly conflicting interests at stake. The electoral incentives for the LDP were clear; if it were to remain as the political party in power in the 1970s, the LDP needed to utilize government spending more ambitiously as a key instrument of political exchange precisely at a time when government revenue growth was slowing. In contrast, MOF recognized by the late 1960s that if it were to uphold its long-standing interest in keeping government spending down and the budget balanced, it needed to launch a movement to reduce rather than expand government spending, with its built-in rigidities in spending increases. In the face of these conflicting interests, the budgetary policy outcomes that were adopted throughout the 1970s clearly demonstrated the LDP’s ability to push through policies that conflicted with MOF’s interests. During the early part of the decade, MOF stood helpless as Prime Minister Tanaka launched ambitious new spending programs in an effort to expand the LDP’s constituent base and stem the party’s recent losses at the polls. Indeed, even in the sacred area of career advancement within MOF, Tanaka was able to place in senior positions MOF officials who were willing to implement his proposals. No wonder, then, that even after the Lockheed scandal broke out, Tanaka continued to outpoll his rivals in the Niigata third district. Campaigning for the 1979 lower house election, Tanaka guaranteed to his constituents that his prefecture’s economic growth rate

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would double that of Japan as a whole throughout the next ten years.13 As public works projects continued to flow into Niigata, Tanaka repeatedly secured landslide victories well into the 1980s.14 Matters were no better for MOF in the second half of the decade, even when Fukuda, a former MOF official, assumed the prime ministership; public works spending during his tenure surpassed the prolific rate recorded during the Tanaka administration. These outcomes clearly refute the notion that MOF is able to utilize its network ties with the LDP and other political elites to dictate policy outcomes. The evidence in fact suggests the opposite causal direction. On behalf of the LDP, Fukuda used his network ties with MOF to override the ministry’s opposition to increasing government spending through deficit financing.15 All told, the LDP’s heavy use of the government coffers as a key instrument of political exchange meant that budgetary policy outcomes during the 1970s would depart radically from the preceding two decades. Abiding by the 20 percent rule was no longer an effective tool to curb the overall size of the budget; the LDP was relying heavily on deficit financing to keep up with spending. Recognizing that the budget could no longer be constrained by the 20 percent rule, MOF switched tactics and sought to establish a new rule in 1977, that of keeping the level of government borrowing below 30 percent of the total budget. But this, too, failed. In the following year, government bonds amounted to 32 percent of the total budget and stood at 39.6 percent in 1979.16 As deficits soared, the overall size of the budget rose from 10.9 percent of GNP in 1970 to 17.7 percent by 1980.17 Considering the fact that prior to the 1970s, the size of the budget as a percentage of GNP had remained relatively unaltered for fifteen years, the 70 percent increase witnessed in the 1970s clearly represents a sharp break from the earlier period upon which claims of MOF dominance were made. The same holds true in terms of the manner in which budget outlays were allocated to various spending ministries. Using the same criteria as those who contend that budget allocations are determined by MOF’s decisionmaking norm of baransu, in Table 5.1 I illustrate the average yearly change in the share of the budget each spending ministry received in two time periods, from 1961 to 1970 and from 1971 to 1980. These figures are calculated by averaging over a ten-year period the extent to which each spending ministry’s share of the total budget changed from year to year. Hence smaller variations represent greater stability and baransu. The contention that budget outlays are determined by MOF’s baransu norm has been made by looking only at the figures for the earlier period, when indeed the variations in the percentage share of the budget each spending ministry received remained small. In the 1970s, however, this stable pattern eroded significantly as the LDP selectively increased spending in

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Table 5.1

Average Yearly Change in Budget Share, 1961–1980

Transport Education Prime minister’s office Home affairs Courts Health and welfare Construction Justice Foreign affairs Post and telecommunications Diet Labor Agriculture and forestry MITI

1971–1980

1961–1970

10.66 4.11 3.69 5.15 5.54 5.52 8.27 6.70 4.68 9.61 5.41 13.04 4.58 9.80

2.32 2.54 2.91 3.00 4.12 4.21 4.29 4.58 4.61 5.02 6.17 6.83 8.80 4.57

Source: Ministry of Finance (1989b).

areas that served its electoral needs. Whereas the average deviation figures for the 1961–1970 period were mostly in the 2 to 5 percent range, the figures for the 1971–1980 period were predominantly in the 5 to 9 percent range. These findings clearly repudiate the notion that Japan’s central bureaucracies, either alone or in conjunction with big business and the LDP, dictate policy outcomes. Thus stated, however, the refutation of the strong state thesis does not thereby vindicate corporatist or classical pluralist theories of Japanese politics. A corporatist framework is inapplicable because Japan lacks a peak association in labor,18 and classical pluralism fails to recognize the importance of interest groups and their institutional ties maintained over time to specific political parties. But what the evidence does suggest is that the politics of Japanese budgetary policy during the 1970s was far more receptive to a wider array of societal actors than that suggested by the MOF dominance view. As in all democracies, societal actors in Japan who were well organized had a distinct advantage over those who were not, and interest groups such as farmers and construction companies that had forged institutional ties with the party in power more readily received greater budgetary favors than those such as labor that supported the opposition parties. Moreover, the political incentive to privilege organized interest was especially acute during this period on account of Japan’s multimember electoral system, which placed a high premium on securing organized votes. But less organized societal actors, in particular the new middle

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mass, also made a significant impact on budgetary policy outcomes. Given the sheer voting strength of this new middle mass, the LDP could not ignore its vocal demands for better social welfare programs. In fact, funds earmarked for social security programs not only increased more than any other general expenditure item on the budget during the 1970s but also received the largest share of the general account budget in 1980.19 In short, budgetary policy outcomes were driven by the interest and interaction of the societal actors and political parties that made up Japan’s ruling coalition and the electoral challenges they faced with the emergence of a strong and vocal new middle mass. Upon examining both the international and domestic politics of Japanese budgetary policy, the utility of my two-level framework becomes clear. By explicating both the international and domestic factors that structure the win-set upon which Japanese budgetary decisions were made in the 1970s, this approach explains not only why foreign pressures emerged at the end of 1976 but also why these pressures were successful in eliciting Japanese cooperation. As Japan became a major economic power, foreign pressures for greater Japanese fiscal expansion predictably emerged when Japan began to mount persistent trade surpluses amid fears of a global recession. These foreign pressures—diplomatic suasion, yen appreciation, and the threat of protectionism—however, were not the crucial factors behind Japan’s decision to cooperate. To be sure, foreign pressures were a contributing factor in making Japanese fiscal policy more expansionary than it would have been in their absence. In both bilateral and multilateral forums, Japanese state leaders whose political fortunes rested in part on their ability to negotiate successfully with their foreign counterparts were well aware of the intense international criticism that would be leveled at them if they failed to stimulate Japan’s domestic economy through fiscal expansion. Moreover, credible threats to close off Japan’s access to both the U.S. and EC markets and to prolong Japan’s economic recession through dollar devaluation worried not only big business leaders but also LDP politicians, whose constituents were concerned about pocketbook issues.20 But these factors did not alter the trend toward heavy deficit financing that had already been in place for purely domestic political reasons. By the time international pressures for Japanese fiscal expansion emerged in late 1976, the domestic politics of Japanese budgetary policy in the early 1970s had initiated the crucial break away from the small and balanced budgets adopted throughout the 1960s and toward the extensive use of deficit financing. This context confirms one of the central arguments posited in this study: That is, international pressures will either strengthen the expansionary course already in place or make Japanese fiscal policy less contractionary than it would otherwise have been in their absence, but they

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will not alter the contractionary or expansionary course of Japanese fiscal policy already in place for purely domestic political reasons. Japan’s decision to cooperate, therefore, can be explained by the convergence of international and domestic pressures on Japanese budgetary policy. To test whether the counterfactual argument holds true, I will examine in the next two chapters the politics of Japanese budgetary policy in the 1980s, a period when similar international pressures emerged for greater Japanese fiscal expansion but under an entirely different domestic political setting.

Notes 1. As a percentage of GNP, Japan’s current account rose from –0.1 percent in 1975 to 0.6 percent, 1.7 percent, and 1.9 percent over the next three years. Figures taken from Hamada and Patrick (1988:121). 2. Indeed, according to Putnam and Bayne’s (1987) seminal work on the summits, the London and Bonn summits are considered the most successful instances of international cooperation in summit history. 3. Calder (1988b). For an alternative conception of gaiatsu, see Schoppa (1997). 4. On this point, see Lake (1983), Inoguchi (1986a). 5. Campbell (1992), MacDougall (1980). 6. Pempel (1990), Curtis (1988), Muramatsu and Krause (1987). 7. The corresponding figures for total outstanding bond as a percentage of GNP were 27.5 percent for the United States, 43.4 percent for Great Britain, 18.4 percent for West Germany, and 6.9 percent for France. Figures taken from Ministry of Finance (1989b:18–19). 8. Campbell (1977), Rukstad (1988:299–331), Hartcher (1998) 9. Campbell (1977:283). 10. Campbell (1977:77). 11. Campbell (1977:139). 12. Barkey and Parikh (1992), Migdal (1988), Skocpol (1985), Nordlinger (1981). 13. Hirose (1981:53). 14. In the 1979 election, Tanaka garnered 141,285 votes; his closest competitor won only 59,321. In his final election held in 1986, Tanaka secured 179,062 votes; the second-place finisher tallied 72,729 votes. Figures taken from Asahi Shinbun Senkyobu (1990:375). 15. For Fukuda’s frank assessment of this period, see Fukuda (1986). 16. Figures are based on initial budget figures and taken from Ministry of Finance (1982:99). 17. GNP figures taken from Keizai Kikaucho (1989:32–39), budget figures from MOF (1989b). 18. On this point, see Katzenstein (1988). 19. Social security–related expenditures rose from 12 trillion yen, or roughly 14 percent of the budget, in 1970 to 8.3 trillion yen, or 19 percent of the budget, in 1980. In contrast, public works–related expenditures rose from 1.4 trillion to 6.8 trillion yen over the same period. MOF (1995:206–213). 20. On this point, see Inoguchi (1986).

Introduction

In Chapters 6 and 7 I examine the international and domestic politics of Japanese government spending in the 1980s, a period marked by renewed pressures for fiscal expansion abroad but within a domestic political context entirely different from that of the previous decade. At the international level, foreign demand for Japanese fiscal expansion receded for several years as advanced Western nations struggled to counter the inflationary impact created by the second oil crisis in 1979. However, after fading into the background in the first half of the 1980s, international pressures for Japanese fiscal expansion resumed from mid1985 onward under similar international conditions as in the previous decade. As they had in the 1970s, international pressures over Japanese fiscal policy emerged in the 1980s as Japan began to mount large and persistent current account surpluses amid growing uncertainty over the sustainability of a U.S.-led world economic growth. Moreover, the form in which these international pressures took shape was strikingly similar to that of the previous decade: mounting diplomatic suasion combined with the threat of protectionism and yen appreciation. Japan’s response to these international pressures in the 1980s differed significantly. Whereas in the 1970s Japan was willing to set specific growth targets and adopt government spending policies deemed necessary to meet its international commitment at the expense of running a massive budget deficit, in the 1980s Japan expressed weaker resolve, in both words and deeds, in its willingness to use fiscal policy for the purpose of international cooperation. In Chapter 6 I provide a narrative of how these international pressures evolved and the responses Japan made over time. I contend that the marked difference in Japan’s response to similar international pressures can be traced to differences in domestic politics. In the 1980s, the domestic political setting and the negotiations and compromises that were forged in this period differed profoundly from those of the previous decade. To a large extent, the political setting that emerged in the 1980s can be viewed as a direct and unintended consequence of the measures taken in the previous decade. The LDP, faced with rapid demographic changes and slower economic growth, increased the level of government 133

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spending substantially in an effort to transform itself into a near catch-all party. In so doing, the government, by the end of the 1970s, had accumulated a massive budget deficit that greatly shaped the parameters upon which various state and societal actors would pursue their respective interests in the 1980s. Accordingly, in Chapter 7 I document how the domestic politics of Japanese budgetary policy emerged from this setting and trace how the interest and interaction of various state and societal actors influenced policy outcomes throughout the 1980s. In Chapter 8, I then place the evidence presented in Chapters 6 and 7 into my two-level framework to analyze the interplay of the international and domestic political forces that shaped Japanese budgetary policy outcomes during the 1980s.

6 Failing Cooperation: Macroeconomic Coordination at a Standstill In his book on the Great Depression, economic historian Charles Kindleberger attributes one of its principle causes to the failure of international economic leadership in the 1920s. . . . I do not believe we share, in the 1980s, all of the same circumstances as the 1920s— but I do accept Professor Kindleberger’s judgement about the necessity of leadership. And in the 1980s, I believe that means the necessity of both American and Japanese leadership. —James A. Baker III Japan can only survive through free trade. There can be no prosperity for Japan unless there is global prosperity. . . . An economic superpower accounting for one-tenth of world GNP, Japan has the responsibility to contribute positively to the revitalization of the world economy. —Prime Minister Yasuhiro Nakasone 109th extraordinary Diet session

The Rekindled Debate over Macroeconomic Coordination In the 1980s international pressures for greater Japanese world leadership took on even greater force than they had at the start of the previous decade. The fundamental source of these pressures can be attributed to the continued increase in Japan’s economic power and the steady decline of U.S. economic power relative to other nations. Although Japan’s economic growth rate in the 1970s dropped considerably from the double-digit growth witnessed in the 1950s and 1960s, its economy continued to outperform other advanced industrial nations. Japan’s economy grew at an average annual rate of 5.2 percent in real terms during the 1970s.1 Although this was roughly half the rate at which the economy had grown from 1951 to 1970, it was still faster than that of

135

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other leading economic nations. As a result, Japan’s GNP as a share of the combined GNP of Group of Five (G-5) nations continued to rise, from 12.2 percent in 1970 to 20.2 percent in 1980 (see Table 6.1). In contrast, the United States registered an average annual growth rate of 2.8 percent, the lowest among the top five advanced Western nations. (During the same period, West Germany posted an average annual growth rate of 3.1 percent; France, 4.0 percent; and the UK, 2.3 percent.)2 Accordingly, the relative size of the U.S. economy as a share of the combined GNP of G-5 nations dropped from 60.7 percent in 1970 to 46.8 percent in 1980. As Japan’s economic power continued to rise in the midst of U.S. hegemonic decline, so, too, did international pressures for Japan to assume a larger share of the responsibility in managing the stability of the international system. Against this international setting, international pressures for Japan to assume a greater leadership role in the area of macroeconomic policy in general and fiscal expansion in particular resurfaced in the mid1980s under circumstances in many ways similar to those in the previous decade. After the 1978 Bonn summit meeting, leaders of the advanced Western nations abandoned for several years the call to revitalize world economic growth through fiscal expansion and instead sought to contain the inflationary pressures caused by the second oil crisis in 1979. Hence, from 1979 to 1985, to the extent that macroeconomic policy issues were prescribed, summit leaders advocated contractionary rather than expansionary monetary and fiscal policies.3 Although the precise content of the policies adopted by the leading economic powers during this period differed, the overall impact of their policies clearly succeeded in helping to reduce the rate of inflation. As Table 6.2 shows, the weighted average rate of inflation for industrial nations dropped from 9.4 percent in 1980 to 5.0 percent in 1983, and to 3.8 percent by 1985. But the unintended consequence of their policies was the

Table 6.1

1955 1960 1965 1970 1975 1980

Relative Share of GNP Among G-5 Nations, 1955–1980 (in percentage terms)

France

West Germany

Japan

United Kingdom

United States

8.5 7.9 8.9 8.6 10.9 10.7

7.5 9.5 10.3 11.1 13.0 12.9

4.0 5.8 8.1 12.2 16.1 20.2

9.5 9.5 9.2 7.5 7.2 9.4

70.5 67.3 63.5 60.7 52.9 46.8

Source: IMF (1994).

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creation of a new set of problems. By 1982 their concerted efforts reduced the overall level of inflation among industrial nations below the average level of inflation in the 1970s. However, these measures taken together stunted world economic growth and prolonged the recession. Whereas world output rose at an annual average rate of 4.1 percent in real terms during the 1970s, world output grew by a mere 0.5 percent in 1982 and in fact fell by –0.3 percent among the industrial countries.4 Moreover, in the process of coming out of the recession, the divergent policies adopted by the leading Western nations created a disparity in the level of domestic economic growth and current account balances. The pattern that emerged resembled that of the previous decade. Among the top three leading economic nations, the United States once again paved the way for a world economic recovery. After adopting a tight monetary policy and posting a 2.5 percent decline in real GNP growth in 1982, the economy, aided by an expansive budget, recorded a 3.6 percent growth in real GNP in 1983 and 6.8 percent in 1984. Given the large size of the U.S. economy, the recovery clearly aided the world economy. As the U.S. economy rebounded, world economic growth rose from 0.5 percent in 1982 to 2.6 percent in 1983 and 4.5 percent in 1984. In the process of pulling the world economy out of a global recession, however, the United States accumulated mounting deficits in both its current account and the federal budget. Despite Ronald Reagan’s campaign pledge to restore a balanced budget through expenditure cuts, both the level of government spending and the budget deficit swelled. Although Reagan’s initial forecast projected a balanced budget by 1984 and a surplus thereafter, the deficit stood at $183 billion in 1984 and rose to $223

Table 6.2

Comparative Data of Inflation and GNP Growth Average 1970–1979

Inflation Averagea United States Japan West Germany Real GNP World United States Japan West Germany

1980

1981

1982

1983

1984

1985

8.1 7.0 8.0 5.6

9.4 9.1 3.8 4.8

8.8 9.6 3.2 4.0

7.2 6.4 1.9 4.4

5.0 3.8 0.7 3.2

4.2 3.7 1.2 2.0

3.8 3.2 1.4 2.2

4.1 2.8 5.2 3.1

2.1 –0.2 4.3 1.5

1.7 1.9 3.7 —

0.5 –2.5 3.1 –1.0

2.6 3.6 3.2 1.9

4.5 6.8 5.1 3.3

3.2 3.0 4.9 2.0

Source: IMF (1988:111, 119). Note: a. Weighted average of their respective GNP in U.S. dollar value.

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billion the following year.5 As a result, although the saving-investment balance in the private sector recorded a surplus from 1980 to 1984, the overall level of domestic savings over investment registered growing deficits during this period.6 Moreover, in seeking to attract external funds to finance the deficit, both interest rates and the value of the dollar climbed rapidly.7 Under these conditions, the United States predictably began to generate greater current account deficits. Whereas the United States posted an $8.2 billion surplus in 1981, the balance turned negative the following year and climbed to an astonishing $104.2 billion deficit by 1984.8 In turn, the rising level of deficit in both the current account and the federal budget generated growing protectionist sentiments at home and doubts abroad as to the sustainability of a U.S.-led world economic recovery. The policies adopted by Japan during the same period contrasted sharply with those of the United States. Whereas the United States shifted from a contractionary to an expansionary fiscal policy, Japan continued to adopt contractionary policies. As I will document more fully in Chapter 7, the budgets adopted for 1983 and 1984 marked the early phase of administrative and fiscal reform. Given the heavy reliance on deficit financing in the 1970s, the government had begun to adopt since the 1982 budget every measure possible in the national budget in an effort to eliminate deficit financing by 1985. Moreover, in contrast to the United States, Japan refused to lower its discount rate from 1982 to 1985.9 These measures produced noticeable results. Japan’s level of deficit financing began to taper off beginning in 1979. The issuance of government bonds, as a percentage of total budgetary spending, dropped from 39.9 percent in 1979 to 25.0 percent by 1984.10 Moreover, as shown in Table 6.2, prices in Japan remained stable after the second oil crisis, rising by a mere 0.7 percent in 1983 and 1.2 percent in 1984. In the process of keeping prices down, however, a new set of problems emerged. When Japan’s economy began to recover in 1984, the growth was generated largely through exports rather than through domestic demand. After posting a current account deficit in 1979, Japan’s current account turned positive in 1981 and began to rise steadily, from $6.9 billion in 1982 to $20.8 billion in 1983 and $35 billion in 1984. Japan’s current account surplus as a percentage of GNP also rose rapidly, from 0.6 percent in 1982 to 1.3 percent in 1983 and 2.8 percent in 1984. 11 In turn, Japan began to draw international criticism not only from the United States but from nations in the European Community and Southeast Asia, all of which had registered sizable current account deficits with Japan.12 Although the precise cause of the imbalance was subject to debate, Japan had to face the growing perception abroad that it was unwilling to play the role of a world economic leader and was instead enjoying a relatively high level of economic prosperity at home at the expense of its trading partners.13

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The international setting from 1985 onward thus greatly resembled the dilemma documented in the previous decade. World economic growth was recovering through U.S.-led expansion, but the sustainability of this recovery was in serious doubt as a result of the mounting level of its deficit in both the current account and the federal budget. This in turned posed a problem of collective action: The United States could unilaterally seek to deal with its mounting deficits by throwing its economy into a recession, adopting protectionist policies, or allowing prices to rise. Moreover, Japan, together with West Germany, could continue on a contractionary course in its effort to fight inflation, reduce deficit financing, and enjoy export-led growth. These independent courses of action, however, were clearly less beneficial collectively than pursuing a strategy of coordinating respective macroeconomic policies that would simultaneously encourage budgetary deficit reduction in the United States and macroeconomic expansion by Japan and West Germany. A higher level of domestic demand–driven growth in West Germany and Japan could help raise the level of U.S. exports and counter the recessionary impact of fiscal contraction on the part of the United States. Moreover, this coordinated approach by the three leading advanced industrial nations would help reduce the current account imbalance and ease the growing protectionist sentiment. In short, the stage was set for another round of negotiations among the leaders of the advanced Western nations to pursue a strategy of macroeconomic coordination to foster stability in the international economic system. International pressure for Japan to assume a greater leadership role would predictably mount with its continued rise as an economic power. Moreover, as Japan’s current account surplus continued to climb, international pressures for Japan to adopt a policy of fiscal expansion would reemerge in 1985.

Bonn II and Tokyo II: Summits Without Success International negotiations over macroeconomic coordination in general and Japanese fiscal policy in particular resurfaced in 1985 after being on the back burner since 1979. These negotiations emerged as Japan began to mount current account surpluses with growing current account deficits registered by the United States. Together, these imbalances not only rekindled the specter of protectionism but also generated greater doubt as to the sustainability of a U.S.-led world economic recovery. In view of the growing bilateral imbalance between Japan and the United States, the first international calls for greater Japanese stimulus came, predictably, from U.S. leaders. One of the first to raise the call was Secretary of State George Shultz. In a speech delivered at Princeton University on April

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11, 1985, Shultz called for a policy change in both nations that would feature U.S. deficit reduction with Japanese domestic demand expansion.14 During Foreign Minister Abe Shintaro’s visit to Washington on April 13, Shultz reiterated his proposal, arguing that such measures were a necessary response to the rising protectionist sentiment in the United States.15 Similarly, in late April, Treasury Secretary James Baker declared that Japan needed to pick up greater slack to compensate for the slowdown in the U.S. economy; this position was also expressed by U.S. Federal Reserve Board Chairman Paul Volcker.16 Stressing the threat of protectionism was by no means a mere diplomatic ploy to encourage greater Japanese cooperation. Although Shultz was personally opposed to protectionism, the threat to impose restrictions on Japanese exports gained momentum in the U.S. Congress as the U.S. trade deficit with Japan continued to swell.17 For example, in March 1985, the Senate passed by 92 to 0 a resolution introduced by Senator John Danforth (R-Missouri) calling on the United States to tie continued restraint on autos with access to Japanese market in other areas.18 Another bill, introduced by Senator Slade Gordon (R-Washington), sought to “impose a 20 percent surcharge on all imports from Japan without exception. . . . The surcharge on Japanese goods would drop automatically by 1 percent for every $1 billion by which the 1984 trade deficit is reduced.”19 The need to respond to these international pressures was not lost on Japan’s political leaders. Prime Minister Nakasone clearly recognized the potential conflict that Japan’s export surplus could generate with its trade partners and publicly acknowledged the need to resolve it in front of both international and domestic audiences. In a meeting with President Reagan on January 2, 1985, Nakasone issued a statement confirming Japan’s responsibility “for sustainable growth of the world economy” and to “carry out policies to facilitate economic development mainly led by domestic demand.”20 At home, when Nakasone delivered his opening remarks at the 102nd ordinary Diet session, he indicated the need for Japan to play a more aggressive role in adding vitality to the world economy.21 Moreover, in anticipation of the Bonn summit scheduled for early May 1985, Nakasone went on national television twice in the preceding month in an effort to encourage people to purchase more on foreign imports.22 In all these forums, however, Nakasone fell short of pledging to adopt a policy of fiscal expansion. Although he openly and consistently acknowledged the need for Japan to face its international responsibilities, he made no mention of expanding the government budget as a way of stimulating domestic demand and lowering Japan’s current account surplus. Although the option of adopting a budgetary policy that promoted fiscal stimulus was considered, it was ultimately rejected owing to a lack of consensus among the top members of the Nakasone cabinet. 23 Instead, the

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cabinet chose to adopt an “Action Program” that advocated greater liberalization of Japan’s market and the lowering of interest rates as the two main measures to promote domestic demand expansion.24 The Action Program, despite its intentions, clearly fell short of reducing Japan’s current account surplus. Rather than showing any signs of decline, Japan’s current account surplus continued to record large gains in the first half of calendar year 1985. The Action Program did, however, aid Nakasone in scoring a diplomatic coup at the Bonn summit. To be sure, some leaders, such as Prime Minister Margaret Thatcher, criticized Nakasone’s selective use of statistics to defend his position on fiscal policy.25 However, by arguing that Japan’s budget deficit was 4.6 percent of GNP, a level even higher than that of the United States, Nakasone was able to defend Japan’s position and dissuade summit leaders from issuing in the joint declaration a call for greater Japanese fiscal expansion. Instead, the declaration recognized that “the Japanese Government considers it essential to preserve with its policy of budgetary discipline and strengthening market functions, particularly with a view to fostering investment.”26 Several plausible reasons can be given for Nakasone’s diplomatic success. First, macroeconomic coordination was not the only policy issue of importance at the Bonn summit. Discussions over the Strategic Defense Initiative and the setting of a new GATT round also occupied the agenda, diverting attention from the issue of macroeconomic coordination. Second, and perhaps more important, Nakasone arrived in Bonn with strong support from key state leaders. Because West Germany faced the same predicament as Japan, Helmut Kohl found less fault with Japan’s existing policies than with those of the United States.27 In addition, Nakasone deserves credit for securing what was perhaps the best working relationship in postwar history between the leaders of Japan and the United States. In what would be dubbed the “Ron-Yasu” relationship, Nakasone, by the time of this meeting, had already consolidated a close personal friendship with Reagan.28 Third and finally, part of the explanation undoubtedly rested in the fact that Japan was now negotiating with a predominantly conservative group of foreign leaders more sympathetic to keeping a stringent lid on government spending. These mitigating factors, however, would give Nakasone only a temporary reprieve. The economic figures released over the following months would reveal that something more than the Action Program was needed to stimulate Japan’s domestic demand and reduce its current account surplus. In early July, MOF reported that Japan’s current account balance for the first half of calendar year 1985 rose despite a slight drop in exports as imports fell at an even faster rate.29 As Japan’s current account surplus continued to rise unabated, international pressures for Japanese fiscal expansion strengthened. Moreover,

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as Japan’s bilateral trade surplus with the United States swelled, the threat of protectionism continued to grow in Congress. A bill introduced in midJuly 1985 by Senator Lloyd Bentsen (D-Texas) and Representatives Dan Rostenkowski (D-Illinois) and Richard Gephardt (D-Missouri) sought to impose a 25 percent surcharge on nations with “excessive” trade surpluses with the United States.30 Hence, by the summer of 1985, the Reagan government was placed in the awkward position of championing the conservative platform for a smaller government at home while pressuring Japan to promote greater government spending. Faced with these renewed international pressures, the Nakasone cabinet responded by adopting a series of new measures designed to reduce Japan’s current account surplus but continued to resist calls for Japanese fiscal expansion. One such measure entailed a 3.1 trillion yen package to spur domestic demand growth. This package, which was approved by the cabinet on October 15, 1985, offered little in terms of direct increases in budgetary spending. Instead, it relied heavily on increasing the lending activity of the Housing Loan Corporation and the selling of public land to private developers to spur domestic demand.31 Another area in which Japan offered cooperation was exchange rates. On September 22, 1985, the finance ministers representing Japan, West Germany, France, Great Britain, and the United States met at the Plaza Hotel in New York and reached an agreement to adjust exchange rates through coordinated government action. Although the volume of private trading in the capital market far exceeded the central banks’ ability to purchase enough foreign exchange to alter directly the exchange rate on a sustainable basis, the finance ministers’ willingness to adopt joint leadership in exchange rate realignment encouraged the capital market to push down the overvalued dollar. Thus, the dollar, which was priced at approximately 236 yen during September 1985, would steadily fall in the ensuing months and break the 200 yen barrier by February 1986.32 A third area in which Japan demonstrated a willingness to arrive at a negotiated settlement with the United States was market liberalization. Since the start of 1985, Japan and the United States had been engaged in a series of negotiations to liberalize key sectors of the Japanese economy. These market-oriented, sector-specific negotiations, popularly known as the “MOSS Talks,” were scheduled to be concluded on January 1986, with the understanding that Japan, in principle, would open up its markets in four hitherto disputed sectors: wood and paper products, medical equipment and pharmaceuticals, electronics, and telecommunications. Moreover, in seeking to make more sweeping changes away from an export-driven economy, Nakasone commissioned on October 15, 1985, a blue-ribbon panel, the Advisory Group on Economic Structural Adjustment for International Harmony. Chaired by former Bank of Japan (BOJ) Governor Maekawa Haruo,

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this commission was given the mandate to examine and make sweeping recommendations to move Japan toward a more domestic demand–driven economy. All these measures taken together would again help deflate foreign pressure for Japanese fiscal expansion, but only temporarily. Despite the steady decline of the dollar relative to the yen, exchange rate adjustment alone failed to produce tangible results. In a cabinet meeting held in late January 1986, EPA Director General Hiraizumi Wataru reported that Japan’s exports measured in dollar terms had not declined despite the appreciation of the yen.33 This trend would continue in the subsequent months. As Table 6.3 illustrates, Japan’s exports in yen terms began to drop steadily in 1986, but imports fell at a far larger pace, causing the surplus to expand. Moreover, when measured in dollar terms, Japan’s exports continued to rise steadily and growth in imports recorded a net decline in the first five months of calendar year 1986. As a consequence of the tenacious rise in Japan’s current account surplus, Japan encountered renewed international pressures to take greater action in late 1985 and early 1986. For example, on December 19, 1985, the OECD published a report stating that the exchange rate adjustment threatened to fuel inflationary pressures in the United States unless Japan took additional steps to stimulate its economy by channeling its high rate of savings into domestic demand expansion.34 Similarly, during an official visit to Japan in late January, EC President Jacques Delors met with Japanese officials and stressed the importance of reducing the EC-Japan trade imbalance through greater Japanese domestic demand expansion.35 Moreover, officials from the U.S. Commerce Department and Office of the U.S.

Table 6.3

January February March April May June July August September October

Japan’s Trade Balance in Dollar and Yen Terms, 1986 (percent change) Dollar Exports

Dollar Imports

Yen Exports

Yen Imports

15.7 16.6 21.5 19.4 24.1 21.1 23.5 21.4 29.1 19.4

2.9 5.2 –3.2 –6.1 –6.1 7.5 0.0 –9.8 –0.7 –2.6

–7.6 –12.3 –16.0 –16.1 –17.7 –18.2 –18.2 –20.9 –16.6 –17.1

–17.5 –20.7 –33.1 –34.1 –37.6 –27.3 –33.7 –41.2 –35.8 –32.2

Source: JEI Report, September 4, 1987. Note: Figures represent percent change from the same month in 1985.

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Trade Representative (USTR) warned of a further appreciation of the yen resulting from Japan’s persistent trade surplus and the lack of progress made in the MOSS negotiations.36 Japan’s initial response to these renewed pressures was to remain firm on its position on fiscal policy. For instance, in a fiscal policy speech made in late January, Finance Minister Takeshita Noboru announced the government’s plan to uphold its policy of fiscal austerity. Similarly, in the prime minister’s opening statement made at the start of the 104th ordinary Diet session, Nakasone continued to affirm publicly his commitment to adopt a stringent budgetary policy in keeping with his earlier pledge to eliminate deficit financing by 1990.37 In seeking to consolidate this position abroad, Foreign Minister Abe Shintaro met with his West German counterpart and secured an agreement to reject any international calls for Japan and West Germany to act as a locomotive for world economic growth.38 The need to respond became more urgent, however, as the Tokyo summit, scheduled for early May 1986, drew closer. By April 1986, it was clear that the measures adopted by Japan had failed to reduce its current account surplus. In fact, as shown in Table 6.3, Japan’s exports in March and April continued to grow by roughly 20 percent, whereas imports actually fell in dollar terms. Japanese officials encountered renewed international pressures to take greater action. Moreover, as in the previous decade, these international pressures began to take shape in the form of diplomatic suasion as well as the threat to appreciate the yen appreciation or to adopt protectionist policies against Japanese exports in the absence of Japanese fiscal stimulus. At an OECD meeting held in April, U.S. Treasury Secretary Baker announced that the $100 billion deficit was politically unsustainable and that “there was only two fundamental ways the imbalance can be reduced to sustainable levels”: additional exchange rate adjustment that further appreciated the value of the yen or “reversing the growth gap.” The latter course or action, according to Baker, would entail Japan playing a “greater locomotive role.”39 Japanese leaders were clearly fearful of a further appreciation of the yen. As Table 6.4 illustrates, the yen had dropped dramatically since the Plaza Accord. The monthly average value of the yen stood at 236.9 to the dollar in September 1985, and it rose to roughly 200 yen to the dollar in January 1986 and stood at the 170s range by April 1986. Given the economy’s heavy reliance on export as an engine of growth, a stronger yen would weaken overall economic growth. Moreover, as was the case in the late 1970s, although Japanese exports dropped in terms of volume and yen denomination, the crucial dollar figures of Japan’s current account surplus would rise in the short term as a result of the J curve effect.40 In the face of these figures and in the absence of any new measures to stimulate

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Table 6.4

Yen/Dollar Monthly Basis Sept. 1985 Oct. 1985 Nov. 1985 Dec. 1985 Jan. 1986 Feb. 1986 Mar. 1986 Apr. 1986 May 1986 June 1986 July 1986 Aug. 1986 Sept. 1986

236.95 214.73 203.72 202.82 200.07 184.64 178.93 175.62 166.83 167.95 158.60 154.00 154.72

–3.4 –13.0 –16.3 –18.2 –21.3 –29.1 –30.8 –30.2 –33.7 –32.5 –34.4 –35.1 –34.7

Source: Nikkei Data Retrieval, Main Economic Indicators. Note: Figures in the right-hand column represent percent change from same month previous year.

domestic demand, Nakasone failed to secure Reagan’s cooperation on exchange rates.41 In addition to these international pressures, the need to take greater action grew stronger at home. Nakasone had a clear incentive to host a successful summit to bolster his public image as an effective world leader. As the prospect of holding a double national election in Japan grew stronger, Nakasone needed to bolster public support for his cabinet and party at a time when economic conditions at home had begun to falter. Japan’s exports in both volume and yen terms were dropping despite the fact that Japan’s current account figures in dollar terms continued to climb. Given the economy’s reliance on export-led growth, this began to produce a recessionary effect on the economy, and the unemployment rate rose to 2.9 percent, a level unmatched since 1953 when the labor force surveys were first conducted.42 With these troubles both at home and abroad, Nakasone finally began to show signs of wavering from his long-held adherence to a policy of fiscal stringency. One of the first signs of potential change came when the private advisory group commissioned by Nakasone and headed by former Bank of Japan Chairman Maekawa Haruo submitted its final report to the prime minister in early April 1986. The commission’s report, which became popularly known as the “Maekawa Report,” called on the government to “implement drastic policies for structural adjustment that will transform the Japanese economic structure into one oriented toward international coordination.” Moreover, the original draft version of the report specifically recommended the use of stimulating domestic demand through

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fiscal expansion at a time when Japan was pursuing a course of fiscal austerity set back in 1981.43 Another sign of potential change could be seen in the agreement reached at the Tokyo summit. In the months preceding the summit, U.S. Treasury Secretary Baker had already begun to call for the adoption of a multilateral surveillance system.44 The system involved a joint review of forecasts and objectives based on ten indicators: GNP growth, inflation, interest rate, unemployment, fiscal deficits, trade and current account balances, money growth, reserves, and exchange rates. Member nations would be obliged to accept more international responsibility in preparing macroeconomic policies based on these indicators. For Japan, this would entail an obligation to adopt a more expansionary macroeconomic policy if it continued to post large current account surpluses at a low level of inflation. When the issue of multilateral surveillance was raised at the Tokyo summit, Finance Minister Takeshita predictably expressed reservations.45 The indicators used under this system would point to the need for Japan to alter the present course of its fiscal policy. However, given Japan’s growing current account surplus and the strong international criticism it produced, Takeshita reluctantly accepted Baker’s proposal provided that it did not lead to mandatory policy goals.46 In the final declaration released at the conclusion of the summit, the leaders agreed to adopt the multilateral surveillance system.47

After Tokyo II: Renewed Pressures, Token Concessions Although the agreement to accept a multilateral surveillance system temporarily eased international scrutiny of Japan’s fiscal policy, it would also create added pressure for Japan to adopt a policy of fiscal expansion if its current account surplus failed to drop. Predictably, this hypothetical situation would soon become a reality. The figures released in the months following the Tokyo summit showed no signs of improvement. Exports in yen terms continued to drop significantly, but not in dollar terms. In dollar terms, Japanese exports rose by over 20 percent and imports fell. As a result, Japan faced renewed international calls for greater fiscal expansion. In early June 1986, the semiannual report released by the OECD called on both Japan and West Germany for fiscal expansion.48 Similarly, EC representatives such as Willy De Clercq urged Japan to adopt measures to expand its domestic demand in the face of growing Japanese exports. 49 Moreover, as leverage to encourage fiscal expansion in Japan, the United States once again threatened to drive the dollar down further against the yen. Throughout the months of June and July, Baker repeatedly expressed his displeasure over the persistent rise in Japan’s current account surplus

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and argued for greater Japanese monetary and fiscal stimulus to avert protectionism.50 This position was echoed by Reagan and Volcker.51 The threat to further appreciate the value of the yen against the dollar clearly raised concern among Japanese state leaders for both political and economic reasons. At the economic level, the value of the yen relative to the dollar continued to soar. By May 1986 the yen climbed to the 160s range to the dollar (see Table 6.4). Given the economy’s reliance on export as an engine of growth, a stronger yen would weaken overall economic growth. Even though Japan’s current account surplus continued to rise in dollar terms, exports fell in terms of volume and when denominated in yen. In the absence of strong domestic demand, this export drop in both volume and yen terms threatened to push the economy into a recession. At the political level, Nakasone’s inability to reach an agreement with the United States over exchange rate stabilization created political dissension among LDP leaders. Senior LDP leader Miyazawa Kiichi was extremely critical of Nakasone’s inability to hammer out an agreement on the exchange rate during his meeting with Reagan and called for a more aggressive fiscal policy aimed at playing a locomotive role.52 Miyazawa’s position was supported by Policy Affairs Research Council (PARC) Chairman Fujio Masayuki as well as LDP faction leader Komoto Toshio.53 Among Japan’s central bureaucrats, MOF officials, predictably, supported Nakasone’s earlier pledge to eliminate deficit financing by 1990; both MITI and EPA officials supported the change to a policy of fiscal expansion.54 Moreover, prominent leaders representing big business interests also began to demand greater fiscal stimulus. Whereas former Keidanren Chairman Inayama Yoshihiro just a year earlier had expressed strong disapproval of any government initiative to expand domestic demand, his successor, Saito Eishiro, began to press the government to adopt greater fiscal expansion.55 In response to these renewed pressures, Nakasone began to show signs of shifting his position on fiscal policy. After leading his party to a resounding victory in the July 6 national election, Nakasone replaced Takeshita and appointed Miyazawa as the new finance minister. Miyazawa was far more critical of Japan’s existing fiscal policy and had advocated the use of fiscal stimulus as early as 1984.56 Shortly after Miyazawa’s appointment, the Japanese government announced its plan to adopt a 2.5 trillion yen supplementary budget bill and revised its GNP forecast for 1986 from 3.0 to 4.0 percent.57 Roughly two weeks later the package was expanded to 3.6 trillion yen, including 3 trillion yen in additional public investment and measures to stimulate private sector economic vitality.58 Following the announcement of this plan, the EPA estimated that the additional expenditures would increase Japan’s GNP by 4.9 trillion yen within a year.59 This new Japanese initiative drew mixed responses from the United States. On a positive note, Baker recognized this gesture as a step in the

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right direction. It was the first time since 1981 that the Japanese government had broken away from its rigid commitment to the strict ceiling placed on government spending. Moreover, with the appointment of Miyazawa, Baker found a Japanese counterpart more forthcoming in his desire to adopt a larger fiscal stimulus. Consequently, with these new measures and a pledge by Miyazawa to take additional measures in the following year, Japan was finally able to reach an agreement with the United States on exchange rate cooperation. After a series of negotiations between Baker and Miyazawa, the two leaders released a joint communique on October 31, in which the United States agreed to keep the dollar at the prevailing level in exchange for stimulus measures by Japan.60 Although the agreement on exchange rate cooperation was significant, it did not fully dissipate U.S. concerns over Japan’s fiscal policy. Questions still remained over the actual impact of these new measures as well as Japan’s commitment to adopt future measures if necessary. The Japanese government estimated that with this new package the economy would grow by 4 percent in 1986, but this forecast was regarded as overly optimistic both at home and abroad.61 Hence, even after the Japanese government announced its plan to adopt a supplementary budget, Baker warned that “if Japan does not adopt additional stimulus measures before April, protectionism in the U.S. Congress could no longer be held in check.”62 Furthermore, Baker remarked that if Japan and West Germany failed to take additional measures to stimulate their economies, the dollar would continue to depreciate.63 U.S. officials were also justifiably concerned over the extent to which Japan would continue to adopt fiscal stimulus measures in the future. In fact, three months prior to the accord, the Nakasone cabinet outlined its proposed budget for 1987, which called for a 10 percent cut in general operating expenditures and a 5 percent reduction in investment-related programs. When the cabinet’s budget proposal was firmed up in December 1986, the total amount approved (54.1 trillion yen) was only 0.02 percent greater than the previous year’s initial budget.64 Consequently, one senior U.S. Treasury official expressed his disappointment with what he considered a “lack of growth element” in the Japanese budget and considered it a breach of the earlier accord between Miyazawa and Baker.65 Moreover, when the LDP announced in the same month its tax reform plan designed in part to stimulate domestic demand, another senior U.S. Treasury official called it a “pathetic” response, arguing that the overall impact of the reform would boost GNP by only 0.1 percent.66 International negotiations over Japanese fiscal policy remained openended in the early months of 1987. When the finance ministers met at the Louvre in late February, Japan was able to secure tacit U.S. support for exchange rate stability. In a joint statement issued at the conclusion of the

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meeting, the participants “agreed that the substantial exchange rate changes since the Plaza Agreement . . . have now brought their currencies within ranges broadly consistent with underlying economic fundamentals” and that “further substantial exchange rate shifts among the currencies could damage growth and adjustment prospects in their countries.” However, the joint statement also made clear that exchange rate cooperation would take place under the assumption that “the Japanese government will follow monetary and fiscal policies which will help to expand domestic demand and thereby contribute to reducing the domestic surplus.”67 In essence, future U.S. cooperation over exchange rates would depend on whether Japan would take additional stimulatory measures if its current account surplus persisted.68 In the months following the Louvre Accord, economic trends failed to show any significant improvement in the global imbalance. Figures released by the Japanese government in the early months of 1987 showed that the measures adopted in October 1986 had produced no tangible results in reducing Japan’s overall current account surplus or its bilateral imbalance with the United States. Instead, the U.S. current account deficit rose from $116.4 billion or 3.3 percent of GNP in 1985 to $141.4 billion or 3.6 percent of GNP, in 1986. In contrast, Japan’s current account figures rose from $49.2 billion in 1985 to $85.8 billion in 1986. Japan’s current account surplus as a percentage of GNP during this period rose from 3.7 percent to 4.3 percent.69 The stage was thus set for another round of negotiations among Japanese leaders to devise an appropriate fiscal policy response to the pressures that would resurface both abroad and at home. At the international level, one such pressure that reemerged was the threat of yen appreciation. Despite the Louvre Accord, the yen continued to appreciate rapidly against the dollar in the face of Japan’s mounting current account surplus. In part, this reflected the currency markets’ overwhelming power to override massive purchases of the dollar by the Bank of Japan.70 Moreover, despite the fact that the finance ministers repeatedly reiterated their commitment to exchange rate stability, other political leaders were less hesitant to use the threat of further yen appreciation to encourage Japan to address its trade imbalance. For example, the link between the yen and Japan’s current account surplus was made explicitly clear by Lloyd Bentsen, chairman of the U.S. Senate Finance Committee. In late February 1987, Bentsen stated that if Japan failed to reverse its rising current account surplus and become a greater source of world economic growth, the dollar would drop further against the yen.71 In the face of Japan’s persistent trade surplus with the United States, the threat to close off Japanese exports also grew stronger in the U.S. Congress. On January 6, 1987, the House of Representatives presented an

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omnibus trade bill calling for trade sanctions against nations whose exports were more than 1.75 times larger than imports from the United States.72 On April 29, after several months of deliberations, the House of Representatives passed the Gephardt amendment to the pending trade bill. The amendment, which passed by a vote of 218 to 214, called for the restriction of imports from countries defined as having “excessive trade surplus” with the United States.73 Moreover, protectionist sentiments in Congress were behind the U.S. decision to impose a sanction against $300 million worth of Japanese products for the violation of a semiconductor agreement.74 Troubles also continued to grow at home. In March, the government announced that the jobless rate in Japan had risen to 3 percent in January, once again setting a new record since the government began reporting in 1953.75 Moreover, as the yen continued to appreciate against the dollar, the number of bankruptcy cases among Japanese exporting firms rose dramatically.76 At the macroeconomic level, as 1986 had drawn to a close, it was clear that economic growth in Japan would be well below the 4 percent level forecasted by the government. Given these economic woes, political dissension among the LDP leadership continued to grow. In a direct challenge to the budgetary policies adopted since the early 1980s, Finance Minister Miyazawa Kiichi stated that the policy of cutting the general expenditure in the nation’s budget every year should be reexamined. Similarly, LDP leaders Nikaido Susumu, Abe Shintaro, and Takeshita Noboru called for a reexamination of Japan’s austere fiscal policy, arguing that it was necessary to stimulate domestic demand and meet international commitment for Japanese economic growth.77 With pressure building up both at home and abroad, the Nakasone cabinet once again set to work in drafting new measures to stimulate domestic demand through fiscal policy before the next summit meeting in Venice. In seeking to honor his agreement with U.S. Treasury Secretary Baker, Finance Minister Miyazawa set to work on a supplementary budget for 1987. After urging the Diet to promptly pass the initial budget for 1987, Miyazawa unveiled in early April a new stimulus package totaling 5 trillion yen, and by late May the figures were increased to 6 trillion. 78 With these new measures in place, Japanese leaders were now in a position to offer tangible proof of Japan’s commitment to cooperate with its international economic partners. At the Venice summit held in early June, the stimulus package adopted by Japan helped deflate mounting international calls for Japan to reduce its large current account surplus through domestic demand expansion. Indeed, among the G-5 participants, Japan was the only nation to offer any new major proposals.79 These new measures came at a politically opportune moment. On July 21, the U.S. Senate passed the omnibus trade bill by a margin of 71–27.

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The bill, which called for a “super 301” investigation of countries identified by the USTR as maintaining trade barriers with the United States, would allow the United States to bypass multilateral procedures and unilaterally retaliate under section 301 of the 1974 trade act.80 By taking a strong initiative prior to the summit meeting, Japan was able to buy time in the hope that trade frictions would ease as Japan’s current account surplus declined. Moreover, given signs that Japan’s economy was heading into a recession, these new measures would help quell the growing demands at home for the Nakasone cabinet to relax its rigid pursuit of budget austerity.81 The new 6 trillion yen stimulus package clearly had an important political impact in placating both international and domestic demands for greater Japanese fiscal policy. But the extent to which these measures actually helped stimulate domestic demand expansion in Japan should not be overestimated. To be sure, several months after the package was adopted, Japan’s domestic demand finally began to pick up. On December 4, 1987, the EPA reported that during the period from June to September, the Japanese economy, led by domestic demand growth, grew at a real annual rate of 8.4 percent.82 On a year-to-year basis, domestic demand in Japan had risen in real terms from 1.8 percent in 1983 to 3.8 percent in 1984, 4.0 percent in 1985, 4.1 percent in 1986, and 5.2 percent in 1987. This trend would continue into the next year, with domestic demand rising by 7.7 percent in 1988.83 It would be a mistake, however, to suggest that this shift was due to a change in fiscal policy. With the large and unexpected tax revenue surplus recorded in the 1987 budget, the net effect of the supplementary budget merely made the 1987 budget less contractionary than it would otherwise have been in the absence of such measures.84 According to IMF figures, Japan’s fiscal impulse was –1.3 percent of GDP for 1987 and –0.4 percent in 1988, indicating that for both of these years Japan’s fiscal policy was contractionary.85 Indeed, the 1988 budget guidelines approved by the cabinet on July 31, 1987, called for a 10 percent reduction in current operating expenditures and no increase for capital outlays. Although the Japanese government did honor its international pledge to keep public works spending at a level no less than that of the revised 1987 budget, in total the 1988 budget guidelines increased the national budget by a mere 1.2 percent from the previous year.86 The turnaround in Japan’s domestic demand was thus created not because of, but rather in spite of, Japan’s fiscal policy. Nevertheless, the turnaround in the economy did ease the political pressure that was building at home and abroad for greater Japanese government spending. At home, fears about a prolonged recession dissipated as the economy entered into what would become the longest sustained period of economic growth in the postwar era. In addition, as the economy

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picked up, the unemployment rate finally began to fall after reaching a high of 3.2 percent in May 1987. Hence, with the economy growing and unemployment falling, the domestic political demands for fiscal stimulus lost momentum.87 The turnaround in the economy also eased Japan away from its reliance on export-led growth. Whereas Japan’s current account surplus as a percentage of GNP stood at 3.7 percent in 1985 and 4.3 percent in 1986, the percentage fell to 3.6 percent in 1987 and to 2.8 percent in 1988.88 Moreover, given the sharp rise in domestic demand, overall economic growth rose from 2.6 percent in 1986 to 4.3 percent in 1987 and 6.2 percent in 1988.89 As a result of these changes, international pressure for greater Japanese fiscal stimulus finally receded into the background. By mid-July 1988, Secretary of State Shultz announced that Japan and the United States had “turned the corner” in their efforts to reverse the spiraling bilateral deficit and praised Japan for moving away from export-led to domestic demand growth. Accordingly, Shultz further remarked that the U.S.-Japan relationship was now “as good and healthy as it has ever been in my observation of it.”90 By the time of the next summit meeting held in Toronto, the summit leaders had shifted their attention away from the issue of macroeconomic coordination and instead focused on the need to restore market confidence following the stock market crash in October 1987.

Notes 1. IMF (1988:12). 2. IMF (1988:12). 3. The call to combat inflation through stringent budgetary policies was made explicitly in the joint declaration at both the London (1984) and Bonn (1985) summits. For details, see Hajnal (1989:260, 288). For a good overview, see Putnam and Bayne (1987:188–208), Dobson (1992:7–17). 4. IMF (1988:119). 5. For an interesting insider’s account of how the Reagan administration intentionally obscured the actual deficit figures, see Stockman (1986:396). 6. The overall level of the saving-investment balance grew steadily from 0.1 percent in 1981 to 2.4 percent in 1984. Bergsten and Cline (1985:26–27). 7. In 1984, both the long- and short-term interest rates in the United States (12.4 and 10.4 percent, respectively) were over 4 percent higher than those of Japan (7.3 and 6.3 percent) and West Germany (7.8 and 6.0). IMF (1988:126). In terms of exchange rate, using 1980 as the benchmark, the dollar rose by 20 percent against the yen by 1982 and remained at that level in 1984. Bergsten and Cline (1985:42). 8. IMF (1989:105). 9. The rate remained at 5 percent from 1982 to 1985. In contrast, the United States lowered its rate from 8.5 to 7.5 percent, while West Germany’s rate fell from 5.0 to 4.0 percent. Economic Planning Agency (1986). 10. Based on initial budget figures. MOF (1989a:134).

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11. IMF (1989:105). 12.On a custom clearance basis, Japan’s trade balance with the United States rose from $7.5 billion in 1980 to $33.8 billion in 1984. The balance with Southeast Asia rose from $60 million to $4.9 billion and with the EC from $9.7 billion to $10.0 billion over the same period. Economic Planning Agency (1985:24). 13. For contrasting interpretations among economists as to the cause of the imbalance, see Yoshitomi (1987), Shinohara (1985), Marris (1987), Bergsten and Cline (1985). 14. USIS (1985). 15. Asahi Shinbun (April 15, 1985), Nihon Keizai Shinbun (April 15, 1985). 16. Baker’s remark reported in Nihon Keizai Shinbun (April 26, 1985), Financial Times (April 26, 1985). Volcker’s position reported in Nihon Keizai Shinbun (evening edition, April 19, 1985), Asahi Shinbun (April 20, 1985). 17. For Shultz’s account of this period, see Shultz (1993:172–195). 18. In Danforth’s own words: “The theory of the resolution is that it focuses on results rather than promises. . . . If the Japanese are going to be shipping x number of dollars of additional cars into markets, we are going to have at least x numbers of dollars of additional sales into the Japanese markets. Failing that, the resolution calls on the United States to retaliate.” U.S. Congress, Congressional Record–Senate (March 28, 1985:S3557). 19. U.S. Congress, Congressional Record–Senate (April 16, 1985:S4192). 20. Mainichi Shinbun (January 4, 1985), New York Times (January 3, 1985). 21. The full text of Nakasone’s speech reported in Asahi Shinbun (evening edition, January 25, 1985). 22. Maki (1988:449), Dahlby (1985). 23. For details of the internal division over fiscal expansion, see Maki (1988: 449), Asahi Shinbun (April 16, 1985), Nihon Keizai Shinbun (April 16, 1985). 24. Mainichi Shinbun (April 23, 1985). 25. Nihon Keizai Shinbun (May 4, 1985), Asahi Shinbun (May 5, 1985). 26. Hajnal (1989:286–289). 27. Maki (1988:469) In a similar vein, Japanese Foreign Minister Abe secured West German Foreign Minister Hans-Dietrich Genscher’s support to resist calls to play a locomotive role. Nihon Keizai Shinbun (May 3, 1985). 28. For Nakasone’s personal account of his friendship with Reagan, see Nakasone (1992:314–316) For Reagan’s account, see Reagan (1986:449, 460). 29. Exports declined by $237 million (03 percent), and imports fell by $4.4 billion (6.4 percent). Reported in Nihon Keizai Shinbun (July 10, 1985). 30. For details, see U.S. Congress, Congressional Record–Senate (July 17, 1985:S9630–9637). See also Bergsten and Cline (1985:15). 31. Nihon Keizai Shinbun (October 16, 1985). 32. For a detailed account, see Funabashi (1988). 33. Nihon Keizai Shinbun (January 24, 1986). 34. Nihon Keizai Shinbun (December 20, 1985). 35. Nihon Keizai Shinbun (January 21, 1986; January 24, 1986). 36. Nihon Keizai Shinbun (January 24, 1986; January 28, 1986). 37. Both speeches reported in Nihon Keizai Shinbun (evening edition, January 27, 1985). 38. Their meeting reported in Nihon Keizai Shinbun (January 23, 1986). 39. Baker’s remarks quoted in Financial Times (April 18, 1986). 40. On this point, see Destler and Henning (1989:46–47). 41. Funabashi (1988:154), Nihon Keizai Shinbun (evening edition, April 14, 1986).

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42. Unemployment figures reported in Nihon Keizai Shinbun (December 27, 1985). 43. In the final and official version issued in early April, the call for fiscal policy expansion was omitted as a result of MOF objections. The original draft version reported in Nihon Keizai Shinbun (evening edition, March 27, 1985). For an account of the political battle that took place among members of the Maekawa commission over this issue, see Asahi Shinbun (March 18, 1985). See also Noguchi (1991:138). 44. Nihon Keizai Shinbun (April 10, 1986). See also Putnam and Bayne (1987: 216–219). 45. Takeshita’s position against Japan playing a locomotive role reported in Yomiuri Shinbun (April 23, 1986). Predictably, this position was later echoed by Vice Finance Minister Ohba (Mainichi Shinbun, May 10, 1986). 46. Financial Times (April 29, 1986). 47. For details, see Hajnal (1989:312–313). 48. Japan Economic Journal (June 6, 1986). 49. Nihon Keizai Shinbun (June 18, 1986; July 6, 1986. 50. Newspaper coverage of Baker’s position reported in Nihon Keizai Shinbun (June 4, 1986; June 7, 1986; June 21, 1986). 51. Reagan’s position reported in Nihon Keizai Shinbun (June 23, 1986). For Volcker’s position, see Nihon Keizai Shinbun (June 7, 1986; July 17, 1986; July 24, 1986). 52. Asahi Shinbun (May 28, 1986). See also Kaminishi (1986), Funabashi (1988:99). 53. Fujio’s position reported in Sankei Shinbun (June 5, 1986). 54. For MOF’s position, see Yomiuri Shinbun (April 8, 1986). For EPA’s position, see Sasaki (1985:43). For a good overview of the ministerial division, see Asahi Shinbun (March 18, 1986). 55. Kuribayashi (1988:45–48). 56. Tahara (1984:78–102), Kato (1984:176–181), Hamada (1984:168–176). 57. Nihon Keizai Shinbun (September 3, 1986). 58. For details, see Nihon Keizai Shinbun (evening edition, September 18, 1986). 59. Nihon Keizai Shinbun (September 19, 1986). 60. For details and commentary, see Nihon Keizai Shinbun (November 1, 1986). 61. The IMF predicted a 2.7 percent growth for both 1986 and 1987. Nihon Keizai Shinbun (September 27, 1986). The Nomura Research Institute forecasted a 2.5 percent growth for 1986. Funabashi (1988:159). 62. Nihon Keizai Shinbun (October 1, 1986). 63. Nihon Keizai Shinbun (September 18, 1986; September 27, 1986). 64. Nihon Keizai Shinbun (December 31, 1986). For an analysis of the 1987 budget, see Miyajima (1987:52–53). 65. Asahi Shinbun (evening edition, December 23, 1986), Funabashi (1988: 193). 66. Reported in Asahi Shinbun (evening edition, December 23, 1986). 67. Excerpts of the joint communique reprinted in New York Times (February 23, 1987). 68. On this point, see Funabashi (1988:177–192), Destler and Henning (1989: 60–62). 69. Figures taken from IMF (1988:144).

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70. The dollar plunged to new lows against the yen just one day after the United States and its economic allies pledged to stabilize exchange rates, and despite the fact that the BOJ allegedly spent $1 billion to try to prop up the price of dollar. New York Times (April 10, 1987), Nihon Keizai Shinbun (April 9, 1987). 71. Nihon Keizai Shinbun (February 27, 1987). 72. Nihon Keizai Shinbun (January 8, 1987). 73. New York Times (April 30, 1987). 74. New York Times (March 27, 1987), Nihon Keizai Shinbun (March 28, 1987). 75. The jobless rate reported in Nihon Keizai Shinbun (March 3, 1987). 76. For a detailed breakdown, see Nihon Keizai Shinbun (April 9, 1986). 77. The dissension within the LDP reported in Yomiuri Shinbun (February 25, 1987). 78. For a detailed breakdown of the package, see Nihon Keizai Shinbun (evening edition, May 29, 1987). For an interesting account of how Miyazawa enlisted the help of LDP cabinet secretary Gotoda Masaharu and PARC chairman Ito Masayoshin to push through this supplementary budget against the strong opposition of MOF, see Funabashi (1988:100). 79. Hajnal (1989:332–344). 80. Nihon Keizai Shinbun (evening edition, July 22, 1987). See also Bhagwati and Patrick (1990). 81. For EPA’s announcement of a looming recession, see Nihon Keizai Shinbun (evening edition, June 17, 1987). 82. The EPA report was issued on December 4 and reported by Nihon Keizai Shinbun (December 5, 1987). 83. Figures taken from IMF (1989:74). 84. Since the 1987 tax revenue estimates were based on the underestimated revenue figures for the 1986 initial budget, the question was over just how large the tax revenue surplus would be for 1987. According to Funabashi (1988:104), Nakasone allegedly agreed to a stimulus package because he had secretly been informed that there would be a large tax surplus for 1986. 85. IMF (1994:139). For a similar assessment, see Noguchi (1991:139). 86. Details of the budget guideline reported in Nihon Keizai Shinbun (August 1, 1987). 87. This point will be discussed in full in Chapter 7. 88. IMF (1989:105). 89. Figures represent yearly growth of GNP at 1985 constant prices. JEI Report (September 13, 1991). 90. Shultz’s remark made during a July 18–20 trip to Japan and reported in JEI Report (July 29, 1988).

7 The Politics of Budgetary Retrenchment

The Initial Setting: The Political Legacy of Deficit Financing The political setting of the 1980s was largely created by the social, economic, and political changes that emerged in the late 1960s and early 1970s and the political responses to these changes made by the LDP throughout the 1970s. The LDP faced a number of serious challenges in the late 1960s and early 1970s that threatened to undermine its position as the political party in power. As the tempo of economic growth began to drop from the doubledigit growth rate of the 1950s and 1960s, two accompanying changes forced the ruling party into action. First, a rapid demographic change from rural to urban regions and from primary- to secondary- and tertiary-sector employment meant that the LDP could not rely as heavily on the support of its traditional rural supporters as it had in the past. Second, tacit public support for government policies that pursued ever higher GNP figures gave way to greater demand for better public services in social welfare–related programs. In response to these challenges, the LDP was able to stem its electoral losses and remain in power in part by vastly expanding the level of government spending at a time when the rate at which government revenues rose from year to year declined because of slower economic growth. By abandoning its position of fiscal conservatism adopted since the 1950s and co-opting large spending programs originally proposed by the opposition parties, the LDP was able to broaden its constituent base and attract a growing number of new, though less committed, supporters, especially in the urban regions. Moreover, in an effort to maintain the support of its traditional supporters, the LDP continued to provide generous benefits to farmers and other rural constituents through large subsidies. These measures provided the LDP with the means to address the political exigencies of the time. However, by the beginning of the 1980s, 157

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they also produced new problems that threatened to undermine the LDP’s position as the political party in power. As in all democratic political systems with regularly scheduled elections, the interests and interactions of political actors are never frozen in time. The political bargaining and compromises struck in one period shape and help define the political setting in which subsequent decisions are made. In the case of Japan, large budgetary compensations made in response to an LDP crisis in the 1970s created its own sense of crisis, one that brought to the attention of LDP leaders the limits of following a “crisis and compensation” pattern.1 By the end of the 1970s, the LDP could no longer rely on utilizing the government coffer as the key instrument of political exchange to broaden its constituent base. By rapidly expanding government spending without adopting corresponding measures to increase taxes, the level of deficit financing soared in the 1970s. In 1971, only 4.6 percent of the budget was financed through government bonds. By 1976, that figure had risen to 29.9 percent and stood at 39.6 percent in 1979. With the yearly rise in new bond issuance, total outstanding government bond reached 41 percent of GNP in 1982.2 Despite the fact that many of the advanced Western nations faced a growing budgetary deficit during the 1970s, the rate at which Japan’s deficit rose during this period was significantly greater than that of other nations. As can be seen in Table 7.1, in less than a decade, the Japanese government’s dependence on deficit financing during the 1970s rose at a far faster pace than that of other nations. These figures clearly demonstrate the serious political dilemma the LDP faced at the beginning of the 1980s. As the long-standing party in

Table 7.1

General and Central Government Financial Balances Surplus or Deficit (–) as a Percentage of Nominal GDP General Government Financial Balance

United States Japan West Germany France United Kingdom

Central Government Financial Balance

1971

1979

1973

1979

–1.7 1.4 –0.1 0.7 1.5

–1.3 –4.5 –3.2 0.3 –3.3

–0.4 0.0 0.0 1.2 0.1

–0.7 –5.6 –1.5 –0.8 –2.1

Source: OECD (1983:15, 21). Note: On standard national accounts basis except for United States and the UK, which are on a national income account basis. The United States and Japan as a percentage of GNP. General government financial balances represented as percentage of nominal GDP at market prices.

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power, the LDP had only itself to blame for the spiraling budget deficit it now confronted. In contrast to the conservative administrations that came to power in the United States and Great Britain in the 1980s, the LDP could not claim to have inherited a large budget deficit from its rival political parties. Instead, the LDP now needed to temper its use of providing government largess as a key instrument of political exchange with its legislative responsibility of managing the national budget more responsibly. The LDP’s concern over the budget was shared by MOF. As the central ministry in charge of administering the budget, the rapid rate at which deficit financing had grown from the mid-1970s onward clearly ran against MOF’s interest. MOF consistently opposed the rapid expansion of both government spending and deficit financing. Moreover, in the early 1980s, the pressure to impose fiscal austerity grew even stronger as private banks began to demonstrate less willingness to absorb MOF-administered government bonds below market rates and at huge losses.3 This is not to suggest that the LDP, in conjunction with MOF, was the only political actor seeking change. Some of the strongest proponents of high government spending in the 1970s were the first to oppose such spending. For instance, as local governments faced large revenue shortfalls in their budget, progressive government leaders who championed increased social welfare–related spending in the late 1960s and early 1970s began to voice the need to impose greater fiscal restraint in the late 1970s.4 In addition, big business leaders, who had called on the government to adopt stimulative budgets in 1977–1978, withdrew their demands as the economy gained momentum in 1979.5 Instead, in light of the failure of the Ohira administration to introduce a general consumption tax, their concerns now were focused on the need to address the budget deficit before measures were taken to adopt either higher corporate or income taxes.6 Public opinion also began to change. In the late 1960s and early 1970s, the public vocally demanded greater government spending on welfare-related issues and went to the polls to vote against the ruling party. Moreover, in the second half of the 1970s, public opinion polls showed strong public support for economic stimulus measures.7 However, by the end of the decade this support waned, in part due to the major national newspapers’ coverage of the causes and consequences of the spiraling budget deficit.8 What began as a single report on the false billing records of travel costs and overtime in the government-run national railway soon expanded into a widespread coverage of numerous incidences of government waste and fraud that undermined the efficacy of the national budget.9 Although public opinion polls conducted during this time continued to reveal strong public support for social welfare–related expenditures, the spending category that received the largest increase during the 1970s, they also showed that a majority believed that the national budget was being used

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improperly and that the government should move promptly to eliminate the deficit. Moreover, a majority of those polled favored the reduction of government spending without recourse to tax increases as a means to resolve the deficit problem.10 Given these concerns over the large government deficit accumulated throughout the 1970s, the LDP had two options: raise taxes or cut government spending. The option of raising taxes clearly had some appeal. Generating greater government revenues through tax increases would allow the party in power to continue dispensing budgetary favors while reducing the size of the deficit. Furthermore, given Japan’s relatively low rate of taxation and high rate of household savings, the large spending patterns established during the 1970s conceivably could have continued without incurring higher debt or inflation provided that matching revenues could be raised.11 The advantages of this option, however, were clearly outweighed by its potential costs. After the Ohira cabinet suffered a major setback in the 1979 election, the LDP lacked both the political will and the legislative strength to risk reintroducing another tax bill. Thus, as it entered the 1980s, the party needed to wait for the opportunity to devise and launch its second option, that of tackling the deficit by cutting back on government spending.

The Birth of Gyozaisei Saiken (Administrative and Fiscal Reform) The LDP’s opportunity to launch the second option came quickly, sparked by events that soon followed the party’s defeat in the 1979 lower house election. After the elections, a rift within the LDP emerged over the issue of whether Ohira Masayoshi should take personal responsibility for his party’s defeat by resigning from his post as prime minister.12 Although a majority of party members in the LDP still supported Ohira, the division within the LDP meant that Ohira supporters were now a minority in the Diet. Thus, when the JSP submitted a vote of no-confidence on May 16, 1980, in an effort to make further headway in the Diet, the absence of members from the Fukuda and Miki factions in the Diet resulted in a vote of 243 to 187 against Ohira. Accordingly, the Diet was dissolved on May 19, and the nation’s first postwar double elections were scheduled for June 22.13 In a dramatic turn of events, the opposition parties’ strategy to ride the momentum of its previous year’s victory backfired. On May 30, Ohira collapsed as a result of a heart ailment and died on June 12. When the elections were held several days later, the LDP scored its biggest victory in eight years.14 The party ran 310 candidates; with an impressive 92 percent success rate, the LDP secured 284 seats, 36 more seats than in the previous

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election. Moreover, by drawing three other winners into the party after the election, the LDP had a total of 287 seats, well above the number needed to secure a legislative majority in the 512-seat lower house. In addition, the LDP scored a victory in the upper house, winning 21 seats in the national election, and 48 in the local election.15 Having gained strength in the Diet, the LDP was now in the position to launch a new initiative to restore budget discipline. The new prime minister chosen by the LDP, however, was clearly not the strong political leader one would expect to head this task. On July 15, 1980, Ohira faction member Suzuki Zenko, with the support of LDP faction leaders Tanaka and Fukuda, was officially chosen to replace Ohira as Japan’s new prime minister. Judging from Suzuki’s political background, his selection was undoubtedly meant to reduce internal LDP friction rather than install a political leader capable of initiating major policy change. Suzuki had little prior experience in posts generally regarded as stepping-stones to the party’s highest post. He had never occupied the post of LDP secretarygeneral nor the ministership of either MOF or the Ministry of Foreign Affairs.16 Despite these shortcomings, Suzuki would nonetheless come to play an important role in fundamentally altering the budgetary spending practices of the 1970s by publicly staking his political life on implementing proposals initiated by others, in particular, those initiated by LDP faction leader Nakasone Yasuhiro and his handpicked members of the Second Administrative Reform Council.17 Nakasone had coveted the prime minister post but lost to Ohira in the LDP election in 1978. Eager to improve his credentials for another bid for the party’s top post, Nakasone sought to turn his minor appointment in the new Suzuki cabinet as the director general of the Administrative Management Agency into an important post by launching an ambitious new policy for administrative reform.18 For this purpose, Nakasone obtained the legislative approval for the Second Provisional Administrative Reform Commission (Dai Niji Rinji Gyosei Chosakai, hereafter referred to as “Rincho”) at an upper house plenary session on November 20, 1980. 19 The Provisional Commission on Administrative Reform Establishment Law (law no. 103) was promulgated on December 5, 1980, and scheduled to take effect on March 16, 1981.20 The importance of Rincho did not rest in any inherent legal power of authority. Indeed, its official legal status was equivalent to the roughly 200 other government advisory commissions (shingikai) existing at the time; namely, one that submitted policy recommendations that required legislative approval for enactment. There were, however, several distinct features of Rincho suggesting that it would have greater potential success than other commissions in having its policy recommendations implemented by the government.

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First, when Nakasone enlisted the help of Keidanren Chairman Doko Toshio, Doko agreed to chair the commission provided that Suzuki would publicly state his willingness to stake his political life on implementing Rincho’s recommendations. Although this quid pro quo may have had the effect of softening policy recommendations that were politically too contentious, it also generated the incentive for Suzuki to establish the necessary support among LDP leaders to pass the proposals in a Diet controlled by the LDP.21 Moreover, by establishing a liaison cabinet committee titled Gyokaku Tsuishin Honbu (Joint Administrative Reform Promotion Headquarters) headed by Suzuki to coordinate policy formulation with Rincho, the commission gained direct and formal access to ascertain what was politically possible.22 Another important factor that contributed to Rincho’s potential success was the composition and procedural rules of the commission. An additional condition for Doko’s accepting the chairmanship of the commission was that among the nine members appointed, three would be selected from the business community instead of two, as Nakasone had originally planned.23 Two members representing labor were also selected, one from the more moderate private sector union Domei; the JSP thus had only one constituent representative. Given the procedural rules of the commission, this effectively left the leading opposition party out of the decisionmaking process. Although the commission in principle sought to gain unanimous approval before submitting its proposals, it was determined that in practice only a two-thirds majority was needed to form a decision.24 A third and final factor that distinguished Rincho from other advisory councils was the technical support it received. Although Rincho could be expected to receive political backing from LDP and business leaders, as well as some public support in view of widespread concern over government waste and corruption, the commission by itself lacked the necessary technical knowledge to draft concrete and detailed policy recommendations. Bureaucrats from the central ministries who did possess such technical expertise were initially reluctant to support an advisory commission that clearly encroached on their jurisdictional domain. 25 After it became evident that Rincho enjoyed strong political backing from the LDP leadership, however, central bureaucrats, including those from MOF, soon offered their assistance to provide technical expertise and joined the commission as councillors, with duties equivalent to those of expert members.26 Given these conditions, Rincho clearly possessed a far greater chance to succeed than other government advisory commissions with the same legal status. The members chosen for the council were far less tied to maintaining the status quo and more willing to recommend major policy change than members of other advisory councils, who were generally selected by one particular ministry. Moreover, by securing the political support

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of LDP leaders and the technical support of central ministry officials, the council had a far greater chance of securing Diet approval of their recommendations. The commission’s autonomous power to spur change, however, should not be exaggerated. Rincho on its own could not formulate and implement detailed policies without the political support of the LDP and the technical support of central bureaucrats. These constraints would undoubtedly provide the opportunity for political actors outside the commission to pursue their respective interests and negotiate the details of the commission’s policy recommendations.27 Instead, the importance of Rincho rested more on its ability to secure enough outside political support to forge a broad public consensus on the basic policy direction of the administrative and fiscal policy reform movement that was to take place over the next years. Once such support was established, however, the specific content of the policies adopted would invariably be modified to reflect the interest of LDP supporters. The basic policy direction of Rincho could easily be deduced from the evidence available at the time. The growing alarm over the rising budget deficit coupled with the political reluctance to introduce new taxes after the LDP’s electoral defeat in 1979 meant that fiscal reform would have to rely heavily on expenditure cuts rather than revenue increases. Indeed, in 1980, a year prior to the formation of Rincho, Suzuki had already committed himself to reducing the deficit by publicly pledging to eliminate deficit financing by 1984.28 His intent on matching words with deed was apparent in the compilation process for the 1981 fiscal year budget. After gaining the approval of key LDP leaders, Finance Minister Watanabe Michio, Secretary General Nikaido Susumu, and Chief Cabinet Secretary Miyazawa Kiichi,29 the Suzuki cabinet imposed a stricter ceiling on the amount each spending ministry could request for the upcoming fiscal year.30 As a result, the initial budget for 1981 was kept to a 9.9 percent increase from last year’s budget, the first time in twenty-two years that budget growth was held to single-digit figures.31 Moreover, these initial budget figures revealed a 2 trillion yen reduction in the amount of deficitfinancing bonds issued in contrast to the previous year. Provided Suzuki could maintain this level of reduction in the three subsequent years, he could fulfill his public pledge of eliminating deficit financing by 1984. Doko clearly supported Suzuki’s efforts. Though Doko had been one of the most vocal advocates of large-scale government spending in the late 1970s, he became its strongest critic in the early 1980s. In an abrupt reversal of his earlier position, Doko stated in the early 1980s that the expansionary fiscal policy measures undertaken during the 1970s were inexcusable because the private sector had “retrenched its operation and made great sacrifices,” whereas the public sector wasted money on unnecessary expenditures such as free medical care and other subsidies.32 The need to

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cut spending was made acutely clear to Doko when the government decided to increase corporate taxes by 2 percent at the end of 1980 to cover unexpected revenue shortfalls in the 1981 budget and announced its intent to raise corporate taxes for the following year.33 Given this agreement on the general policy direction, it comes as no surprise that LDP leaders were willing to accept Doko’s four conditions in exchange for accepting the chairmanship of the commission. At a breakfast meeting held at the Okura Hotel prior to the commission’s first formal meeting, Doko met with LDP leaders Suzuki, Nakasone, and Miyazawa and presented his terms. First, the party in power had to publicly express its resolve to carry out the commission’s proposals. Second, the general framework would be to seek a small government based on the principle of “fiscal reconstruction without tax increases” (zozei naki zaisei saiken). Third, reform measures would cover not only the three most contentious government accounts (known in Japan as the three k’s: kome [rice], kokutetsu [national railways], and kokumin hoken [welfare], but all government accounts. Fourth, the reform would cover central as well as local government accounts.34 Suzuki accepted these terms. On the opening day of the commission held on March 16, 1981, Suzuki stated that fiscal reconstruction without tax increases would be the main pillar of administrative reform. Two days later, Suzuki publicly announced that he would stake his political life in implementing the commission’s recommendations.35 With Rincho firmly established, Suzuki immediately began laying the groundwork for reducing the government deficit through spending cuts in the 1982 budget. On the opening day of Rincho, Suzuki requested the commission to submit its first report by the summer of 1981 and prior to the budget compilation process so that Rincho’s recommendations could be implemented in the upcoming budget. Seeking to set the tone early in this manner was clearly a good strategy in light of the political difficulty of cutting government spending. Although a consensus was forming on the need to restore budget discipline without recourse to new taxes, interests were clearly divided on where the actual cuts should be made in order to achieve it. Although the LDP now enjoyed a stable legislative majority in the Diet, it could not return to the budgetary practices established during the high economic growth period when it enjoyed similar control over the Diet. Although farmers and big business still remained an important supporter of the LDP, the party now faced additional concerns because of its need to uphold a broader constituent base. Cutting spending overtly in one area without making similar cuts in other areas threatened to upset the fragile balance formed throughout the 1970s among the LDP’s varied group of supporters. Setting the tone early would also be important in consolidating the divided interests of various state actors. Competing interests could be

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expected both within and between members of the LDP and the central ministries. The competing interests of the LDP politicians stemmed from the dynamics all political parties in power face in a democratic system. A key interest of all politicians is to win elections and stay in office. For this purpose, the politician’s ability to provide generous government services and subsidies to his constituents is an important instrument of political exchange. Although this holds true in all representative democracies, this form of political exchange was especially important in Japan during this period because of its electoral system.36 However, the political party in power must also well manage the policies it sponsors and shoulder the responsibility of past policy failures made during its time in office. This situation creates a potential rift between LDP leaders and backbenchers. Established LDP leaders, more secure in their electoral district and faced with greater responsibility in representing the collective interest of the party, would be more willing and able to bear the cost of imposing spending cuts than junior LDP Diet members. Within the central ministries, bureaucrats had clearly recognized in the late 1970s the budgetary difficulty of sustaining existing policies under their jurisdiction. Although government spending continued to rise rapidly throughout the 1970s, the call to reform and restrain spending programs began to emerge even in some of the most politically contentious ministries such as agriculture and welfare. Rincho’s proposal to reduce government spending thus provided the ministries with the opportunity to implement changes already under consideration. However, Rincho had a broad, sweeping mandate to streamline the government and encroach on policy issues previously under the jurisdictional authority of central ministries, and bureaucrats could not readily accept the policy recommendations issued by the commission. Given these divided interests among both elected and appointed state officials, Suzuki’s request to have Rincho submit its first report at an early date would undoubtedly facilitate the politically difficult task of implementing budgetary spending cuts. Indeed, because all the major political players were now involved with the preparatory process of drafting the first report, they would need to consolidate their positions prior to the actual submission of the report.37 In keeping with the commission’s tenet of “fiscal reconstruction without tax increases,” the commission, even prior to the first official report, sought to set the agenda by stating in an “emergency declaration” that the need to cut government spending for the upcoming year was one of the commission’s central aims. 38 The commission’s cue in turn was quickly picked up by both the LDP and MOF. In anticipation of the first report, MOF announced on May 23, 1981, that with some minor exceptions— such as pensions, defense, official development assistance, and energy measures—all spending categories within the basic budget of the general

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account budget would be kept at the same level as the previous year.39 Roughly a week later, on June 5, 1981, this general framework was approved by the cabinet. This was the first time since the LDP was formed in 1955 that the party in power had accepted in principle a zero percent increase in budget spending from the previous year.40 The content of the first report, together with that of the third report submitted in July 1982, would prove to embody the two most substantive proposals for reducing the massive budgetary deficit accumulated during the 1970s.41 After reiterating the need to establish fiscal stability through expenditure cuts, the first report targeted a wide range of areas for reform. In addition to calling for a general reduction in subsidies by 10 percent, the report targeted specific spending items, such as government personnel expenses, national health insurance, child care, public pensions, education, public works projects, and farm subsidies. Accompanying these recommendations was a call to revise any existing laws necessary in order to carry through with these proposals.42 The report touched off a series of political responses and negotiations leading to budgetary policy outcomes that would in many ways be repeated throughout most of the decade. In the absence of countervailing demands, a public consensus on the need to reduce government spending would provide LDP leaders with the opportunity to support in general the recommendations made by Rincho without fear of a public backlash.43 This in turn would spark negotiations within the LDP as well as with political actors outside the party to determine who would bear what share of the costs necessary to cut spending. The bargains struck would invariably reveal both real cuts as well as superficial changes in accounting practices as a result of the various compromises and concessions made to reduce spending in the general account budget. The initial budget for 1982 that was approved by the cabinet on December 28, 1981, clearly confirmed Suzuki’s commitment to reduce the size of the budget as well as the deficit. In total, the general account budget was raised by a mere 6.2 percent from the previous year’s budget to 49.7 trillion yen. This represented a significant slowdown in spending. For example, the budgets passed by the three preceding cabinets—those of Miki, Fukuda, and Ohira—grew at an average annual rate of 19.3 percent, 18.9 percent, and 11.5 percent, respectively, and the basic budget rose by 21.0 percent, 16.9 percent, and 9.5 percent. In contrast, the two budgets passed under the Suzuki cabinet grew at an average rate of 8.1 percent and the basic budget by 3.1 percent (4.3 percent in 1981 and 1.8 percent in 1982).44 The slowdown in the pace of spending clearly had an impact on the amount of new bonds issued to cover revenue shortfall. The total amount of bonds fell by 1.8 trillion yen to total 10.4 trillion yen and deficit bonds were reduced by 1.6 trillion yen to 3.9 trillion yen. The bond

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dependence ratio went down from 26.2 percent in 1981 to 21.0 percent in 1982.45 As impressive as these figures were, however, they did not represent a clear victory for either Rincho or MOF. To be sure, a strict ceiling on spending established the basic parameters within which spending requests would be made, but it did not eliminate the political imperative of providing government funds to those who supported the LDP, even though such funds were deemed wasteful by Rincho. Government spending was allocated for farm subsidies, pensions, and medical care, a clear example of Rincho’s proposals being modified in response to political opposition. In the case of rice subsidy, Rincho advocated a freeze in the government purchase price of rice, but in both 1981 and 1982 the purchase price was raised as a result of intense pressure from Nokyo (nogyo kyodo kumiai; agricultural cooperatives) and its supporters within the LDP.46 In the case of pensions, Rincho sought to reduce the share of government subsidies by increasing the eligibility age and raising the share paid by insurance carriers.47 After a series of intense negotiations, the reform bill that was approved not only failed to raise the eligibility age but also reduced the scale of the burden that was to be shifted to the insurance carriers. Instead, a significant portion of the reduction in spending was achieved by establishing a temporary provision to withhold 25 percent of the government’s contribution to the pension fund for three years.48 Similarly, in the case of medical care, the Health Care for the Aged Bill (Rojin Hokenho), which was approved in the lower house in November 1981 and enacted in August 1982, reduced the share of government spending largely by spreading the cost to private insurance carriers.49 Given these modifications, it comes as no surprise that Doko publicly expressed strong dissatisfaction with the 1982 budget and threatened to withhold business support to any LDP Diet member who opposed Rincho’s recommendation in the future.50 For MOF, the political process and decisions that were embodied in the 1982 budget also represented more of a trade-off than a clear victory. To be sure, establishing a strict ceiling and reducing the rate of government spending suggested a real coup on the part of MOF. For years MOF had sought to put an end to the rapid pace at which government spending exceeded revenues. Establishing a strict ceiling on spending requests imposed at the outset a limit on the amount each ministry could request at the beginning of the budget negotiation process. This was clearly a strategy that MOF had designed even prior to the creation of Rincho. In 1979 MOF had already set out to create a strict ceiling on requests by categorizing the general account budget into three groups—debt repayment, local allocation tax grant, and the basic budget—with the ceiling targeted at the last category.51 By organizing the general account budget in this manner, MOF undoubtedly sought to force cuts in spending items that were far more

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difficult to achieve politically than were debt repayment and local allocation tax grants, which were determined by a set formula under existing law or policy.52 The fact that the ceiling was accepted in principle and applied to politically contentious spending items previously favored by the LDP clearly represented the fulfillment of a key objective long pursued by MOF.53 Moreover, MOF successfully extracted a concession from Suzuki to set the amount allocated to those spending items within the basic budget that had been excluded from the ceiling—defense, ODA, energy measures, and social welfare—early on in the budget compilation process in order to limit the ability of the cabinet to approve large spending increases at the end of the year.54 Although these results were clear victories for MOF, the budgetary outcome taken as a whole did not represent a return to MOF dominance. MOF was by no means empowered to formulate and implement budgetary policy over the opposition of other powerful political actors. A steady consensus was already forming among LDP and business leaders on the need to cut spending, and this position received wide public support. Although MOF’s position had remained fairly consistent since the late 1960s, spending cuts were only realized after political actors outside MOF joined in on the chorus to reduce government spending. The timing of the spending cuts thus refutes the simplistic notion that MOF dictated these policy outcomes. Instead, it suggests that MOF was finally able to secure its longheld goal of reducing the rate of government spending only because this goal now coincided with those of other politically powerful actors.55 A second reason why it would be a mistake to argue that this budget represented a return of MOF dominance is that the adoption of a strict ceiling was achieved at the expense of other cherished goals held by MOF. When Rincho was first established, MOF discredited the commission despite its call to restore budget discipline through spending cuts. MOF officials publicly claimed that their opposition was based on the fact that Rincho possessed an inadequate level of technical knowledge to offer tangible recommendations.56 Several months later, however, when it became apparent that Rincho enjoyed strong political backing from the LDP leadership, MOF changed its position and threw in its support for Rincho.57 It is doubtful that MOF’s change of heart was due to the fact that Rincho members suddenly acquired expertise on budgeting. Instead, the evidence suggests that MOF’s initial reluctance to support Rincho stemmed from jurisdictional concerns as well as key differences over policy. Until the early 1980s, MOF had held exclusive jurisdictional authority in compiling the budget. Although politicians and interest groups were clearly able to influence budgetary policy outcomes, the budget compilation process was centrally coordinated by MOF. Under Rincho, this authority was now seriously threatened. Given the strong political backing

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Rincho enjoyed, MOF officials risked being excluded from major policy decisions over budgeting if they continued to oppose Rincho. In supporting Rincho, however, MOF could participate in the decisionmaking process and seek to steer policy outcomes in its favor. The result would rarely represent a complete victory for MOF but rather a negotiated compromise whereby MOF would be able to secure some of its interests at the expense of others. The adoption of the ceiling provides an excellent case in point. MOF clearly favored the establishment of a ceiling even prior to Rincho. But MOF’s victory in having the ceiling adopted came at the price of relinquishing its exclusive jurisdictional authority in compiling the budget. In addition to Rincho’s entry into the budget-making process, each spending ministry was now granted greater authority to compile its own budget. Instead of starting out the budget compilation process with low estimates and granting concessions later on, MOF would early on set a stringent limit on the total amount each ministry could request and allow it to adjust expenditures accordingly.58 Moreover, in accepting Rincho’s proposal to apply an across-the-board cut in subsidies, MOF abandoned its hope of targeting and eliminating wasteful subsidies.59 Although this compromise was presumably based on the expectation that MOF would be able to cut at least 160 billion yen worth of subsidies in the 1982 budget, the actual figures reveal that subsidies instead rose by 500 billion yen.60 Another concession MOF made in supporting Rincho was its position on taxes. MOF continued to advocate the introduction of a general consumption tax even after the LDP withdrew its support following its electoral defeat in 1979.61 Thus, when Doko obtained a public pledge from LDP leaders to faithfully abide by Rincho’s basic tenet of fiscal reconstruction without tax increases, MOF was well aware of the compromise entailed in supporting Rincho. By aiding Rincho, MOF would gain a strong political ally in its pursuit of cutting government spending. At the same time, however, MOF would weaken its chances of introducing new taxes by supporting and strengthening the hand of those most vehemently opposed to such measures.62 Although the first budget passed after Rincho was established made substantial inroads in reducing both the size of the deficit and the rate of overall budgetary spending, neither MOF nor Rincho was able to dictate policy outcomes in the direction it favored. Concessions and compromises would have to be made to accommodate the divergent interests of various societal actors who supported the LDP. The actual budgetary outcome, in turn, would reflect the terms upon which this compromise was forged among the various state and societal actors who supported the ruling coalition. Indeed, even on matters in which the interests of LDP leaders, Rincho members, and MOF members coincided, their commonly shared

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pursuit of cutting government waste and eliminating deficit financing would often be modified in the process of negotiation. This was apparent in the measures that were adopted soon after the initial budget for 1982 was passed, measures that would be repeatedly used throughout the rest of the decade. In early April 1982, Finance Minister Watanabe Michio announced in a lower house Finance Committee meeting that there would be a 2 trillion yen shortfall for the 1981 budget.63 Two and a half months later, on June 25, MOF announced before the Budget Committee that the shortfall for the 1981 budget was now estimated at 3 trillion yen. When the 1981 budget account was finally settled on July 31, MOF announced that the shortfall was 3.88 trillion yen.64 This shortfall posed a serious obstacle for those seeking to eliminate deficit financing by 1984. Since the amount of tax revenues estimated for any given year’s budget is based on the previous year’s forecast, this meant that there would also be a serious shortfall in tax revenues for the 1982 budget. The question of how much the shortfall would be was made clear a month later. Originally, when the shortfall in the 1981 budget was announced, Finance Minister Watanabe projected a 3 trillion yen deficit for the 1982 budget.65 Only four months later, however, Watanabe announced that the shortfall in the 1982 budget would be twice that amount, roughly 6 trillion yen.66 The Suzuki cabinet faced two options: increase additional revenues through either taxes or bonds or make additional cuts in spending. Although MOF’s preference to raise taxes was not entirely ruled out, such measures risked unraveling the fragile consensus reached on Rincho’s stance on fiscal policy.67 Issuing additional bonds also entailed potentially high political costs. In addition to the question of whether the market could absorb this amount of bonds, an additional 6 trillion yen worth of government bonds for the 1982 budget would make it virtually impossible for Suzuki to fulfill his pledge to eliminate deficit financing by 1984. Moreover, the stringent ceiling imposed on the basic budget made further spending cuts in this area difficult. In rhetoric Suzuki opted to reconfirm his pledge to eliminate deficit financing by 1984 and to abide by the recommendations issued by Rincho to the fullest.68 In reality, however, the measures adopted deviated considerably from his stated pledge. To be sure, Suzuki was able to make further cuts in the basic budget. In April 1982 he announced his intent to make the ceiling on spending requests for 1983 even stricter than the previous year.69 This plan was later delineated and approved by the cabinet on July 9. Instead of a “zero ceiling,” a “minus ceiling” was put into effect, whereby spending requests within the basic budget would be cut by 5 percent from the previous year.70 Admittedly, Suzuki was able to produce some tangible results in line with his stated objectives. Despite vehement opposition from labor leaders

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as well as from members within the LDP, Suzuki chose to ignore the National Personnel Authority’s recommendation for a 4.5 percent salary increase for public employees.71 Instead, Suzuki held a press conference on September 16 declaring his intent to adopt a salary freeze in view of the current state of fiscal crisis, and his cabinet formally approved the freeze a week later.72 In addition, over 130 billion yen worth of subsidies allocated for health care, social security, education, and farmers were cut in the 1983 budget.73 As difficult as it may have been to push through these measures, their combined impact clearly fell short of enabling Suzuki to honor his pledge to eliminate deficit financing by 1984. In total, the salary freeze and subsidy cuts merely reduced the size of the basic budget by 600 billion yen, and these cuts were largely offset by increases in other basic budget expenditures. As a result, the amount of deficit-financing bonds issued for 1983 still amounted to 6.98 trillion yen.74 Moreover, these measures dealt only with the initial budget for 1983 and failed to address the huge revenue shortfall in the revised budget for 1982. In order to cover this shortfall, the Suzuki cabinet was forced to adopt additional measures that clearly ran counter to his stated objectives. When the 1982 revised budget was approved by the cabinet on October 29, 1982, the measures taken to cover the shortfall revealed the limits of relying solely on expenditure cuts to offset the deficit. New taxes were not introduced; thus, part of the revenue shortfall was offset by issuing an additional 3.4 trillion yen worth of government bonds. For Suzuki to honor his pledge, the government would now need to reduce spending or increase revenues in the next two years by 7.3 trillion yen instead of 3.9 trillion yen as originally assumed based on the initial figures for the 1982 budget.75 This large increase in deficit financing covered only slightly more than half of the total shortfall. In order to cover the remaining deficit, the government adopted a series of questionable measures that would be repeatedly used in subsequent years. Instead of trimming the size of the budget by targeting and cutting waste in the basic budget, the government postponed various obligatory payments from the general account budget by borrowing funds from other government accounts tied to FILP and Japan’s Postal Savings System. Debt repayment and local government transfers are two clear examples. Under Article 4 of Japan’s Public Finance Law, the government was required to pay from the general account budget an amount equal to onesixtieth of the previous year’s total outstanding government bonds, as well as no less than one half the settlement surplus from the year before, to the Special Account for the National Debt Consolidation Fund (Kokusai Seiri Kikin Tokubetsu Kaikei). However, by establishing a “provisional law” that postponed this obligatory payment for the 1982 revised budget, the government was able to cut 1.2 trillion yen from the general account budget.76

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In the initial budget for 1983, this allowed the government to trim 1.4 trillion yen, or roughly 2.8 percent, from the entire budget for that year.77 Similarly, under the Local Allocation Tax Grant System, the central government was obligated to transfer to local governments 32 percent of its revenues collected from income, corporate, and liquor taxes.78 By postponing these and other obligatory payments to the local governments, the national government was able to slash an additional 1.6 trillion yen from the initial budget for 1982.79 An even more questionable method for reducing general account budget expenditures can be seen in the way in which the government reduced its health care costs. In the revised 1982 budget, the government eliminated one month’s worth of payment by simply changing the months included in a given fiscal year. Originally, payment was made each year from the general account budget to cover health insurance costs from April to March. Thus, in the 1981 budget, the general account budget covered health insurance costs from April 1981 to March 1982. However, the months included for the 1982 budget were changed from April 1982– March 1983 to March 1982—February 1983. This meant that because payment for March 1982 was already covered by the 1981 budget, the 1982 budget needed to pay for only an eleven-month period, thereby allowing the government to reduce expenditures by 180 billion yen.80 These measures significantly reduced the total amount of general account budget expenditures recorded in the revised 1982 budget. But these large reductions were made without cutting costs or eliminating government programs that were targeted by Rincho. Instead, through the questionable accounting measures described above, the government was able to slash a total of roughly 3 trillion yen from the initial budget, or roughly 6.3 percent of the entire budget for that year. Similarly, in preparing the initial budget for 1983, MOF recognized that a large portion of the spending cuts would have to come from postponing obligatory payments from the general account budget. Postponing payments to the debt consolidation fund, the local allocation tax fund, and the pension fund would total 2.4 trillion yen, or roughly 4.8 percent of the entire amount earmarked for the 1982 initial budget. 81 Hence, if these obligatory spending items were actually paid from the general account budget instead of through funds transferred from other government accounts, the actual increase in the 1983 budget would have been 6.2 percent rather than 1.4 percent. Although these measures were considered “provisional,” such tactics would continue to be adopted throughout the 1980s. Indeed, a large share of the general account budget cuts made during the 1980s—by MOF’s own account over 26 trillion yen—were achieved through this “hidden debt.”82 In short, although the Suzuki cabinet was able to halt the profligate spending patterns of the 1970s, the assorted measures adopted to reduce

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government spending in the budgets for fiscal years 1982 and 1983 raised serious questions about the future course of Japanese budgetary policy. To be sure, the practice of establishing a strict ceiling on budgetary requests was now firmly in place, and this imposed an overall restraint on basic budget expenditures. However, given that a large portion of the reductions were made by postponing obligatory payments and borrowing from other government accounts, the future of administrative and fiscal reform was uncertain. In addition to these questionable measures, subsequent budgets would contain more substantive and qualitative reductions in government spending. Suzuki’s successor would ask for more aggressive deficit reduction measures marked by more genuine cuts in government spending.

The Rise of Nakasone and the Strengthening of the Fiscal Reform Movement The administrative reform movement’s effort to impose fiscal stringency entered into a new phase after the 1983 budget. To be sure, the accounting measures described earlier would continue to be used in an effort to limit the overall size of the general account budget. Moreover, the specific reforms recommended by Rincho would still be modified in the course of negotiations. However, in contrast to the cuts made in the first two budgets (1982 and 1983) passed after the formation of Rincho, a greater share of the cuts made in the next three budgets (1984–1986) would be based on more authentic spending reductions. Despite the emergence of serious political challenges that threatened to undermine the fiscal reform movement, these new cuts would be achieved through legislative revisions that produced real changes in the level of government services and subsidies. The government’s ability to enact these changes was by no means a foregone conclusion. In fact, the fate of fiscal reform was thrown into question two weeks after the government announced the framework of the 1983 budget. 83 On October 12, 1982, four days prior to the nomination deadline for candidates seeking to run for the LDP presidency, Suzuki made a surprise announcement that he would not seek another term.84 This decision clearly jeopardized Rincho. With Suzuki’s resignation, the administrative reform movement lost one of its strongest supporters, a prime minister willing to stake his political life in fulfilling the commission’s recommendations. The resignation would inspire key political figures both within and outside the LDP to express their opposition to continuing to follow Rincho’s position after the dissolution of the Suzuki cabinet.85 Rincho’s loss, however, was more than offset by the LDP leader chosen to replace Suzuki. After a series of aborted attempts to appoint a new prime minister through negotiations among LDP factional leaders, an LDP election

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was held on November 24, 1982, to determine Suzuki’s replacement.86 Four LDP leaders competed in the runoff election: Nakasone Yasuhiro, Abe Shintaro, Komoto Toshio, and Nakagawa Ichiro. The preliminary results were overwhelmingly in Nakasone’s favor. With the help of Tanaka Kakuei, Nakasone secured 559,673 votes, or 57.6 percent of the total votes cast, forcing his competitors to withdraw their nominations and concede victory to him.87 Hence, with Nakasone as the new prime minister, the administrative reform movement now found its strongest LDP supporter placed in the nation’s highest political post. In his inaugural speech before the Diet on December 3, 1982, Nakasone quickly dispelled any doubts concerning his commitment to follow through on Rincho’s recommendations.88 Learning from his predecessor’s mistake, Nakasone predictably abandoned Suzuki’s position of staking his political career on eliminating deficit financing by 1984. He did, however, emphatically state his support for Rincho’s basic position of fiscal reconstruction without tax increases and promised to eliminate deficit financing at the earliest possible date.89 Moreover, he reiterated this position many times throughout the year, and by September 1983, Nakasone publicly pledged to eliminate deficit financing by 1990.90 Nakasone’s selection as the new prime minister, however, did not ensure the success of the fiscal reform movement. Despite Nakasone’s support, upholding Rincho’s recommendation was difficult for a variety of reasons. Figures released during early 1983 provided little assurance that Nakasone would be able to keep the fiscal reform movement going. Each new budgetary estimate revealed the difficulties of making tangible headway on eliminating deficit finance solely by reducing spending items within the basic budget. Moreover, public opinion polls taken shortly after Nakasone’s inauguration indicated that his cabinet received weak public support. According to a poll reported by Asahi Shinbun on December 5, 1982, the Nakasone cabinet obtained a public approval rating of 37 percent and a disapproval rating of 37 percent.91 A Mainichi poll released on December 8 offered only slightly better figures, a 39 percent public approval rating and a disapproval rating of 31 percent.92 Compounding the problem was the uncertainty surrounding both the political future of Nakasone and that of the party he represented. Nakasone was the leader of one of the smallest factions within the LDP. His faction clearly lacked the numerical strength to remain in power without the support of both the Tanaka and Suzuki factions. Maintaining their support while pursuing the policies recommended by Rincho thus required skillful handling of the disgruntled voices raised in opposition to the reform movement by members within the party.93 Moreover, in order to secure his position as prime minister as well as to retain legislative control of the Diet, Nakasone needed to ensure the LDP’s continued success in national elections.

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The political events that soon unfolded substantiated these hypothetical concerns. Before the end of Nakasone’s first full year in office, the LDP would face a serious setback in the lower house election held in late 1983. Although the party fared adequately in both the unified local elections and the upper house election held in the first half of the year, the political turmoil that erupted in the latter half of 1983 threatened to jeopardize the personal political fortunes of Nakasone as well as his party’s position in the Diet.94 The impetus came from the verdict reached by the Tokyo District Court in October 1983 over Tanaka’s alleged complicity in the Lockheed scandal. As expected, the court ruled him guilty, setting off the opposition’s demand for Tanaka Kakuei’s resignation from the Diet.95 Nakasone was clearly placed in a quandary. Accepting the opposition’s demand to proceed with legislative action to oust Tanaka clearly threatened to undermine Nakasone’s main pillar of support within his party. However, legislative inaction on this issue would seriously delay the passage of other legislative bills in the Diet. Hence, in an effort to break the opposition parties’ legislative boycott in the face of Nakasone’s reluctance to pursue Tanaka’s expulsion from the Diet, Nakasone dissolved the Diet on December 3, 1983, and called for a national election to be held on December 18. The election results threw the future of the fiscal reform movement in further jeopardy. The LDP’s share of Diet seats dropped from 286 to 250, falling 7 seats short of a bare majority and 12 seats short of the stable majority necessary to control the crucial Budget Committee in the Diet.96 The political party in power no longer had the legislative strength necessary to push through the council’s recommendations on its own. In addition, the election results also raised doubts about the future of the council’s strongest supporter. The LDP’s defeat provided the opportunity for Nakasone’s rivals within the party to stage backroom negotiations in an effort to remove him from the prime minister post.97 In light of these severe obstacles, it would not have been surprising if the government hadd shelved its efforts to achieve fiscal reconstruction without tax increases. Indeed, the LDP’s strategy throughout the postwar period was to offer large compensation in the form of government largess in the wake of electoral defeat in an effort to attract greater political support. The puzzling fact that the Nakasone administration was able to avoid this pattern and carry through even more aggressively with Rincho’s recommendation than had the previous administration thus requires explanation. Three reasons can be given for this apparent anomaly. First and foremost, the political setting in which budgetary decisions were now made differed sharply from that of the previous decade. By the time Nakasone came to power, a fairly strong and stable public consensus had already formed on the need to tackle the government deficit without recourse to

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new taxes. A public opinion poll conducted by Yomiuri Shinbun in November 1980 showed an overwhelmingly large number of respondents favoring Rincho’s basic guideline of fiscal reconstruction without tax increases. When a similar poll was conducted two years later at the start of the Nakasone administration, the figures remained largely the same.98 Moreover, this position continued to be supported by big business leaders, who justifiably feared MOF’s relentless efforts to introduce a new largescale tax.99 The second, related reason undoubtedly rested in Nakasone’s leadership style, which contrasted sharply with that of his predecessor. In contrast to Suzuki, Nakasone adopted a political strategy of bypassing zoku (policy tribe) members and appealing directly to the public for a political endorsement of his policies.100 During his term in office, Nakasone would repeatedly urge in various public forums policy recommendations that coincided with public opinion but still faced opposition from interest groups that had traditionally supported the LDP. As the public approval rating for Nakasone steadily rose over time, he could use his rising popularity as evidence of a public mandate to pursue his policies.101 The third factor that contributed to Nakasone’s success in strengthening the reform movement rests in the manner by which he skillfully managed both interparty and intraparty relations following the Lockheed crisis. The fallout resulting from the LDP’s loss in the lower house election was quickly contained through negotiations with opposition parties. Although the LDP lost a bare majority in the Diet, the party was soon able to muster the additional seats necessary to maintain a stable majority. It inducted into the party election winners who had run as independents and formed a coalition with the New Liberal Club (NLC), a conservative party that had originally splintered from the LDP. When the LDP-NLC coalition was officially announced on December 26, 1983, both parties expressed their agreement on the need to uphold the recommendations proposed by Rincho.102 The LDP’s ability to maintain control of the legislative process necessary to pass Rincho’s recommendations was further enhanced by both the growing willingness on the part of centrist political parties to cooperate with the LDP and the inability of the leading opposition party, the JSP, to offer an alternative blueprint. Although the JSP gained five seats in the elections, this merely halted temporarily its long-term decline since the 1970s. The real winners were the centrist parties.103 Among them, the Democratic Socialist Party (DSP) in particular began to express greater willingness to support LDP-sponsored policies in the Diet. In contrast, the JSP continued to oppose what it perceived as Rincho’s excessive and unconstitutional authority to shape legislation. However, given the wide public support of Rincho’s basic position the leading opposition party could not propose alternative policies that protected the interest of its public sector

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supporters without incurring a public backlash. Indeed, opposition party leaders made statements agreeing with Rincho’s basic tenet of reconstructing public finance without tax increases.104 The intraparty events that unfolded after the election also consolidated Nakasone’s hold of the prime ministership. A day after the results were announced, Nakasone dispelled any notion of resigning, stating publicly that he would stay in power. In response to his rivals’ call to take responsibility and step down, Nakasone argued that the party’s poor performance was not due to voter displeasure over the Nakasone cabinet or its endorsement of Rincho’s recommendations.105 Instead, Nakasone contended that if there was any single issue that had contributed to the LDP’s defeat, it was the Diet gridlock over Tanaka.106 Thus, Nakasone could deflect intraparty criticism by arguing that the loss was due to Tanaka, but he could also count on Tanaka’s support because of his own resistance to proceed with legislative action to oust Tanaka from the Diet.107 With this turn of events, not only was the Nakasone cabinet able to sustain the course set by Suzuki in the two budgets compiled prior to the lower house election, but it was also able to make progressively deeper and more genuine spending cuts in subsequent budgets. In the first budget (1984) compiled under the Nakasone cabinet, further inroads were made in restraining government spending largely by strengthening the cost-cutting measures initiated under the Suzuki cabinet. For instance, the government once again relied heavily on the practice of postponing general account budget payment by borrowing the necessary funds from other government accounts.108 In addition, the practice of establishing a strict ceiling on spending requests was made even stricter for the 1984 budget. In preparation of the 1984 budget, Nakasone publicly announced three months after assuming office that the government needed to adopt an even stricter ceiling.109 Nakasone’s cue would be followed up by others.110 In contrast, the next two budgets compiled under the Nakasone cabinet (1985 and 1986) would make qualitatively more genuine cuts in general account budget expenditures. To be sure, accounting devices would continue to play a large role in reducing the size of the general account budget. In the 1985 and 1986 budgets, the total amount of general account budget payments that were merely postponed continued to rise considerably, and by the end of the decade, the total amount of hidden debt accumulated as a result of these questionable accounting practices would equal an astonishing 26.8 trillion yen.111 However, in addition to these measures, the government would make greater progress in instituting cuts more in line with the proposals recommended by Rincho.112 Whereas the cuts made in the 1982–1984 budgets were basically temporary measures that required few legal revisions, those made in the 1985–1986 budgets entailed longterm measures requiring legislative approval over a wide range of issue

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areas, including public works, agriculture, pensions, health care, and the privatization of public corporations. Given the sweeping range of reforms recommended by Rincho, the council predictably faced opposition from a variety of political actors. The leading opposition party, the JSP, continued to protest what it perceived as Rincho’s unconstitutional authority to formulate government policies. In addition, junior-ranking LDP Diet members, less secure in their electoral districts, continued to seek shelter from reforms that threatened their interest group supporters. Moreover, several prominent LDP leaders, such as Kanemaru Shin, Miyazawa Kiichi, and Komoto Toshio, opposed Rincho’s proposal to halt government spending.113 Even MOF began publicly to express dissatisfaction with Rincho’s policy stance of establishing fiscal stability without a tax increase. In early 1983, MOF directed the Tax System Research Council to begin deliberations regarding the introduction of large-scale indirect taxes for fiscal year 1984 and beyond.114 These voices of opposition, however, simply lacked the coherence and momentum to override the course set by Rincho. With the economy picking up, both big business leaders and the general public would remain supportive of keeping government spending down.115 Moreover, Rincho still enjoyed Nakasone’s full support. As the public approval rating for his cabinet grew stronger, Nakasone was able to retain his position as prime minister and exercise his political authority to stand behind Rincho’s recommendations. Indeed, after Nakasone was chosen by LDP leaders in late 1984 to serve a second term, the composition of the members selected to his new cabinet signaled the continuation of existing policies.116 I am not suggesting, however, that the measures taken by the second Nakasone administration to reduce general account budget spending coincided neatly with Rincho’s recommendations. Instead, I am suggesting that once the guideline over a given policy issue was established by Rincho, there was some room to arrive at a negotiated compromise, especially in cases that involved LDP supporters. As a general rule, although tangible progress would be made in reducing the size of the general account budget through legislative revisions, the precise content of the legislative cut would be tailored to accommodate LDP interests whenever possible. Moreover, among the various societal actors who opposed Rincho’s recommendations, those whose support the LDP needed would more likely receive greater concessions during the negotiation process. Although Rincho’s efforts would help establish the framework upon which significant reforms would be made, the content of the reform would reflect the interest and interaction of a wide range of societal actors who formed the basis of the LDP’s status as a near catch-all party. The vast reductions made in the volume of deficit financing provide an excellent case in point. The level of deficit-financing bonds issued

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during the second half of the 1980s dropped significantly. Indeed, by the time Nakasone relinquished his post as prime minister in 1987, his successors would be able to ride on his accomplishments and fulfill his pledge of eliminating deficit financing by 1990. Though this achievement was by no means trivial, a close look at the evidence reveals that a large portion of the reduction was made by violating Rincho’s basic tenet of fiscal reconstruction without tax increases as well as MOF’s key decisionmaking principle, the 20 percent rule.117 The evidence presented in Table 7.2 below clearly supports this assessment. Despite the Nakasone administration’s alleged commitment to Rincho’s guideline, the first half of the 1980s witnessed a steep rise in the tax burden ratio (the ratio of taxes to national income). Although no major tax bills were introduced during this period, the tax burden ratio nonetheless increased significantly because the government refused to make tax cuts to offset the automatic rise in the level of income tax that was a result of bracket creep. Consequently, the tax burden ratio under the Nakasone administration rose dramatically and consistently breached the 20 percent rule upheld by MOF until the late 1970s. Hence, a large portion of the reductions made in the budget deficit was accomplished not by following Rincho’s basic tenet or by cutting programs targeted by MOF, but rather by letting the tax burden ratio rise automatically to offset government expenditures. Another example of how the measures adopted by the second Nakasone administration deviated from the recommendations of both MOF and Rincho can be seen in how cuts were made in government subsidies. Subsidies in Japan have traditionally made up a proportionately larger share of the total budget then they have in other advanced industrial nations.118 This is due in part to the relationship between the national and local governments. Although most public services are legislated by the national government, the actual operation of the services is handled by local governments. In order to cover a portion of the operating costs, the national government provides local governments with a set rate of subsidies and other transfers from the general account budget.119 In keeping with Rincho’s recommendation to lower the amount of subsidies in the general account budget, the government reduced national government subsidies from

Table 7.2

Tax Burden as a Percentage of National Income

1965

1970

1975

1980

1981

1982

1983

1984

1985

1986

18.3

18.9

18.3

22.2

23.0

23.3

23.7

24.3

24.5

25.5

Source: MOF (1989b:15).

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80 percent to 70 percent in the 1985 budget. In the following year, the government further reduced the level of subsidies to 50 percent.120 These measures were more substantive than those made in earlier years when the government merely postponed general account budget spending and borrowed the necessary funds from other government accounts. Real cuts were now being made to reduce the total amount of subsidies in the general account budget on a more permanent basis. As Table 7.3 shows, subsidies as a share of total general account budget spending ranged from 34 percent to 31 percent between the years 1975 and 1983. However, by 1986, the level of subsidies as a share of the budget fell to 28.3 percent. Moreover, these cuts included reductions in subsidies and transfers allocated to agriculture and public works spending, two spending items that have traditionally been closely tied to LDP interest group supporters. But to suggest that the cuts were made along MOF or Rincho lines at the expense of traditional LDP interest group supporters would be inaccurate for several reasons. First and foremost, in principle, subsidy cuts were supposed to be made across the board; but, again, Rincho’s basic recommendation was modified to serve the interest of the LDP’s societal base of support. A disproportionately large share of the cuts made were in subsidy items mandated by law under a fixed formula rather than in areas where LDP politicians could exercise discretion over allocation.121 Moreover, although the cuts that were made did reduce the spending pressure on the general account budget, the reduction came largely as a result of increasing the

Table 7.3

Change in the Share of Subsidies as a Percentage of the Budget (in billion yen) Subsidies (S)

1960 1965 1970 1975 1978 1980 1981 1982 1983 1984 1985 1986 1987

464.0 1,067.8 2,256.5 7,081.2 11,617.3 14,127.8 15,047.2 15,548.2 15,770.3 15,404.0 15,407.4 15,235.6 15,507.3

Budget (B)

% S/B

1,765.2 3,744.7 8,213.1 20,837.2 34,440.0 43,681.4 47,125.4 47,562.1 50,839.4 51,513.4 53,222.9 53,824.8 58,214.2

26.3 28.5 27.5 34.0 33.7 32.3 31.9 32.7 31.0 29.9 28.9 28.3 26.6

Source: MOF (1989b); based on revised budget figures.

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amount that local governments would need to pay rather than at the expense of the beneficiaries of the various government subsidies and services. Reducing the subsidy rate from 80 percent to 50 percent in effect meant that local governments now paid 30 percent more of the cost entailed in a given government program.122 A clear example can be seen in the case of subsidies allocated for public works spending, in which the primary beneficiary was the construction industry, an important longtime supporter of the LDP. As Table 7.4 illustrates, the initial general account budget spending for public works declined even in absolute terms between 1981 and 1987. Whereas the initial general account budget figure allocated for public works was 6.3 trillion yen in 1981, the figure dropped to 6.0 trillion in 1987. In contrast, the total amount of government spending (“total initial” and “total revised”) on public works during this period continued to rise. The total initial figures rose from 12.6 trillion in 1981 to 14.2 trillion in 1987, and the revised figures rose even higher, from 12.6 trillion in 1981 to 16.7 trillion in 1987. These figures reveal that the subsidy cuts that were made in the general account budget were more than offset by giving local governments greater leeway to issue their own deficit and construction bonds to finance public work projects.123 The reduction in general account budget subsidies paid out to farmers provides another example. Government subsidies to the food management account clearly represented one of the most politically contentious spending items targeted by Rincho for reduction. As Table 7.5 illustrates, from 1980 to 1986, the government successfully reduced the amount of general account budget subsidies paid out to the food management account. In 1981, the government allocated 1.01 trillion yen to the food management account. Two years later, the amount dropped to 917 billion yen and in 1986 fell even further to 613 billion yen. This represents not merely a relative decline in the share of government spending devoted to farm subsidies but also a decline in the absolute amount. As impressive as these figures are, it would be a mistake to suggest that the reduction took place entirely along Rincho lines. The government

Table 7.4

Public Works Spending, 1981–1987 (in billion yen)

Total initial Initial GAB Total revised Revised GAB

1981

1982

1983

1984

1985

12,623 6,371 12,623 6,371

12,445 6,370 12,845 6,370

12,465 6,371 12,915 6,371

12,523 6,314 12,823 6,314

12,984 6,208 13,584 6,208

Source: Miyajima (1988:176).

1986

1987

13,547 14,258 6,136 6,017 14,397 16,708 6,270 7,217

182 Table 7.5

POLICY IN THE 1980s

Food Account Subsidy, 1980–1986 Food Nokyo MAFFa Govt. Account Demand Recom. Purchase Percent Subsidy Price Price Price Change

1980 1981 1982 1983 1984 1985 1986

955.5 1,014.1 1,005.5 917.2 808.6 695.2 613.8

329.5 341.6 304.2 311.3 323.1 321.8 306.6

294.6 294.6 295.9 304.4 308.9 311.1 299.4

294.6 295.9 299.2 304.4 311.1 311.1 311.1

n.a. 0.4 1.1 1.7 2.2 0.0 0.0

Govt. Selling Price

Percent Change

264.9 273.2 283.9 283.9 294.6 305.5 310.0

n.a. 3.1 3.9 0.0 3.8 3.7 1.5

Sources: ABARE (1988:106–108), MOF (1989b:208–214). Note: Figures for food account subsidy in billion yen, others in yen/kg. a. Ministry of Agriculture, Forestry, and Fisheries.

raised the purchase price of rice in 1981 as a result of strong pressure from farmers despite Doko’s and Suzuki’s opposition. Farmers received an even greater raise the following year, sparking rumors that Doko would resign in protest.124 Even when the purchase price was held constant in 1986, the price that was set represented more of a negotiated compromise than a Rincho victory. Given the fact that the cost for producing rice fell by 6.6 percent because of cheaper input prices resulting from yen appreciation, the government initially sought to lower the purchase price by 3.8 percent. Although this initial offer was already viewed as a political compromise, Nakasone was forced to accept a price freeze rather than a price cut in the face of intense pressure from farmers and their political supporters within the LDP.125 In light of these political concessions, the real reduction made in the amount of general account budget subsidies paid to the food management account was accomplished not only by holding down the government purchase price of rice but by raising the consumer price of rice. Between 1981 and 1986, the government purchase price rose by a total of 5.4 percent, or an average annual rate of 0.9 percent, a considerable accomplishment in contrast to previous years. In the preceding six-year period (1975–1980), the purchase price had risen from 259.5 to 294.6 yen per kilogram for a 13.5 percent increase.126 But the real gains made in reducing the deficit in the food management account during the 1981–1986 period came from increasing the consumer price of rice by 16 percent, a rate of increase almost three times that of the producer price. In short, a substantial amount of the reduction made in the general account budget subsidy to agriculture was achieved not by cutting the benefits farmers received but by transferring the cost from taxpayers to consumers of rice.

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The contrast between the settlements reached in the privatization of Japan Nation Railway (JNR) and Nippon Telephone and Telegraph (NTT) also illustrates the advantages that accrue to those who possess close political ties to the conservative party in power. In the case of JNR, the privatization of the national railways was preceded by decades of bitter antagonism between management and labor. Distrustful of management and mired by internal conflicts, the fragmented though largely anticonservative labor unions representing JNR workers were largely excluded from the reform process, and the privatization measures adopted resulted in a drastic reduction in the workforce.127 In contrast, the settlement reached in the privatization of NTT represented the culmination of a long-term cooperative relationship between management and Zendentsu, the labor union representing NTT workers. During the planning phase, Zendentsu was actively involved in the negotiation process. By accepting Rincho’s proposal to modernize and rationalize production, the labor union won shorter working hours, higher wages, and job security. In addition, NTT was given greater freedom to offer financial contributions to the LDP and the sale of NTT stocks would provide additional revenues for the national treasury.128 These examples, however, tell only part of the story. The LDP’s willingness to compromise over the specific content of reform in a given area was not limited to its well-organized interest group supporters at the expense of the general public. The demographic change toward a more urban population clearly posed a serious challenge to the LDP. In order to secure the continued support of these floating voters, the LDP would also need to accommodate their interests even if it entailed sacrifices on the part of its more organized supporters. The reform measures adopted in medical care present a case in point. The LDP in the early 1970s was forced to adopt more generous welfare-related programs, such as free medical care for the aged, in an effort to retain its control as the party in power. Indeed, the single largest spending category that increased during the profligate 1970s was in welfare-related programs. Although substantial reductions were achieved in social welfare expenditures in the 1980s, the cuts made by no means signaled a return to the pre-1970s era of conservative neglect. Patients shouldered only a modest share of the cost of medical care, whereas health insurance carriers assumed the largest share of the burden.129 Similarly, in the case of pensions, while future beneficiaries would receive fewer benefits than under the previous system, the reforms enacted also secured a basic pension covering the entire population at fairly generous levels.130 In short, the 1985 and 1986 budgets passed during Nakasone’s second term as prime minister signaled a new phase in Japanese budgetary policy. In contrast to the preceding budgets, there would now be more genuine cuts in line with Rincho’s basic guidelines. Although questionable accounting practices that merely postponed obligatory payments from the

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general account budget would continue, the Nakasone administration would also begin to pass legislative bills that would reduce government expenditures on a more lasting basis. However, the genuine cuts that were made should not be viewed as a complete victory for either Rincho or MOF. Looking across the range of legislative bills that were passed during this period—whether they applied to subsidy cuts, the privatization of JNR and NTT, or welfare reforms—one finds that the content of the cuts reflected less the decisionmaking fiat of Rincho or MOF than it did the negotiated compromise struck between the LDP and its varied societal base of political support.

Reconsidering Fiscal Reform After these measures were implemented, Nakasone began to waver in his public commitment to uphold Rincho’s tenet of fiscal reconstruction without tax increases. Although it is difficult to uncover fully the reasons behind Nakasone’s waning support, two plausible explanations can be deduced from the evidence present at the time. First, after the 1985 and 1986 budgets were passed, the basic mechanisms for reducing the deficit in the general account budget were firmly established. By this time, the practice of establishing a strict ceiling on budgetary requests was set and the general account budget’s share allocated to subsidies was reduced. Moreover, the various reform bills passed in the Diet ensured immediate as well as future cuts in spending. Hence Nakasone’s waning commitment can be attributed in part to the fact that most legislative bills related to Rincho’s recommendations had already been implemented. Another reason, however, can undoubtedly be attributed to the way in which the political setting began to change from this period onward. Significant changes were now taking place both at home and abroad. Nakasone began to face growing international pressure for Japanese fiscal expansion from 1986 onward. As the head of state, Nakasone frequently expressed at various international forums his resolve to represent a new Japan, one that was more willing and able to provide greater international leadership. Moreover, because his high public approval rating at home was closely tied to his image as a skillful negotiator, Nakasone clearly felt the need to back his words with deeds.131 From 1986 onward, the political setting also began to shift at home. To a large extent, this shift can be attributed to the rapid appreciation of the yen following the Plaza Accord in September 1985 and the subsequent downturn in the economy the following year. From September 1985 to September 1986 the yen appreciated by roughly 35 percent, from a monthly average of 237 yen to the dollar to 155 yen to the dollar. Moreover, the

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yearly rate of economic growth was cut by almost half in 1986 from that of the past two years.132 These two factors combined—the passage of legislative bills related to spending cuts and the decline of the economy following the rapid appreciation of the yen—considerably altered the domestic setting in which the politics of budgeting would now be conducted. Prior to this change, both general public opinion and big business support clearly aided Nakasone’s effort to push through fiscal reconstruction without tax increases; after the shift, these two pillars of support no longer identified as strongly with this objective. For example, in a public opinion poll conducted by Asahi Shinbun shortly after the Plaza Accord, only 4 percent of the respondents cited administrative reform as an important policy issue.133 Similarly, in a survey taken by Mainichi Shinbun in June 1986, administrative reform was ranked as a relatively low-priority issue compared with other economic issues such as tax reduction, economic recovery, and price control.134 A similar shift occurred among big business leaders. In the first half of the decade, former Keidanren chairman Doko was able to consolidate big business support in favor of administrative reform. During these years, achieving a consensus among business leaders proved to be a relatively easy task given their collective fear of higher corporate taxes. However, with the rapid appreciation of the yen and the slowdown in the economy, big business leaders’ support for administrative reform receded into the background and several prominent business leaders began to demand greater government spending to restore economic growth.135 In addition, small business leaders, championed by MITI, began to demand greater public spending to offset the recessionary impact created by the high yen.136 Taken together, these changes altered the political setting upon which budgetary policy decisions were made for the remaining three budgets passed in this decade (1987, 1988, and 1989). Until this point, Nakasone had been able to contain interest group pressures for greater government spending by appealing directly to the public. This strategy was now less effective because of the public’s growing concern over other economic issues. Moreover, as the position of business leaders on administrative reform wavered in the face of economic decline, Nakasone lost another key ally who actively backed his effort to keep government spending down. The extent to which these changes produced qualitative changes in actual policy outcomes, however, should not be exaggerated. To be sure, Nakasone and his successors, as leaders of the political party in power, would need to modify budgetary policies with these changes in mind. But the sum total of their responses would not fundamentally alter many of the basic mechanisms and laws established in the preceding years to contain the level of government spending. Although the overall level of government spending would rise, the amount and the nature of this increase

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would coincide more with the budgetary policies adopted in the first half of the 1980s than those of the profligate 1970s. At first glance, the figures for the 1987–1989 budgets appear to contradict this assessment and instead signal a radical departure from the preceding years. From 1987 to 1989, the general account budget rose by an average annual rate of roughly 7.0 percent (see Table 7.6). This represents over three times the average yearly increase in the 1984–1986 budgets. Upon closer inspection, however, one finds that the 1987–1989 budgets did not represent a fundamental departure from the budgetary practices and policies adopted in the preceding years for several reasons. First, the contractionary nature of the budget continued despite the fact that the overall level of spending increased significantly.137 The government did not increase expenditures to stimulate the economy; rather, it was forced to increase expenditures to balance its ledger after MOF substantially and, according to some, intentionally underestimated the amount of tax revenues for 1987.138 In order to balance expenditures with revenues, a significant portion of the revenues was used to reduce the amount of bond issuance originally allocated in the initial budget.139 Second, the two largest spending items that increased during this period were expenditures allocated for the Local Allocation Tax Grant and debt repayment. The increases in these two items did not reflect a shift in policy from the practice of imposing a strict ceiling on spending; they were never part of the ceiling category. Moreover, the unusually large yearly increases these two categories received did not represent a deliberate shift in budgetary policy priority. Rather, these increases were made as a result of tax revenue miscalculation. The government is required by law to allocate a fixed share of national tax revenues to local governments. Hence, the sharp rise in budget outlays for the Local Allocation Tax Grant was simply a function of the large and unexpected increase in tax revenues.140 A similar example can be seen in the case of government spending earmarked for debt repayment. During this period, government spending for this category increased more than any other spending category in the budget. These funds were used not

Table 7.6

General Account Budget, 1980–1989

Amount Percentage rise

1980 1981 1982 1983 1984 1985 1986

1987 1988 1989

43.4 46.9 11.9 8.1

57.7 7.6

47.2 50.6 0.7 7.2

51.5 1.7

53.0 3.0

53.6 1.2

Source: MOF (1995). Note: Budget figures in trillion yen and based on settled accounts.

61.5 65.9 6.5 7.1

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to pump prime the economy but rather to pay back the obligatory payments that were postponed in earlier years to the Debt Consolidation Fund. The amount allocated for these two spending categories from 1987 onward were far greater than the increases made to all other spending categories in the budget. Third, although some expenditure items in the ceiling category did increase, their net effect on the overall budget was marginal. In the budget compilation process, business proceeded as usual, with a strict ceiling imposed on the basic budget for the remaining decade.141 For example, the budget guideline estimates that were approved by the cabinet at the start of the budget compilation process for 1987 called for a 10 percent reduction in current expenditure and a 5 percent reduction in investment expenditure. For the 1988–1990 budgets, investment expenditures were held flat and current expenditures continued to be targeted for a 10 percent reduction.142 All of these conditions meant that the total amount earmarked for the items in the ceiling category—namely, the basic budget—as a share of total government spending continued to drop considerably even after 1986. In turn, given the government’s continued commitment to the budgetary reform measures initiated in the first half of the decade, the government was able to uphold the basic course laid down by Nakasone and fulfill his pledge to eliminate deficit financing by 1990.

Notes 1. I am here referring to the “crisis and compensation” model developed by Calder (1988a). 2. Figures taken from MOF (1989b:18–19). 3. For details, see Rosenbluth (1989:44–45). 4. As early as 1975, progressive local leaders such as Yokohama Mayor Asukata Ichio and Kanagawa Governor Nagasu Kazuji called for greater fiscal restraint and the need to reevaluate existing welfare services provided by the government. Curtis (1988:74), Campbell (1992:213). 5. For Keidanren Chairman Doko’s early calls for administrative reform, see Nihon Keizai Shinbun (November 14, 1979), Asahi Shinbun (December 16, 1979). Note that just a year earlier, as detailed in Chapter 6, Doko was still calling for fiscal expansion through deficit financing. 6. MOF argued that from a comparative standpoint, corporate taxes in Japan (49.5 percent) were lower than those in West Germany (56.5 percent), England (52.0 percent) , and the United States (50.9 percent). According to Keidanren’s calculations, which include resident tax, corporate business tax, and other taxes, the corporate business tax in Japan (51.1 percent) was higher than that in West Germany (46.7 percent) and the United States (40.7 percent). For details, see Nihon Keizai Shinbun (September 29, 1980), Ishi (1988:97–120). 7. Naikaku Sori Daijin Kanbo (1978:527; 1979:499–500). 8. For two LDP leaders’ accounts of how national press coverage of government waste and the resulting shift in public opinion influenced LDP leaders’

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perceptions concerning the need to tackle the large budget deficit, see Gotoda (1989:64). See also Ito (1982:508). 9. For the initial report, see Asahi Shinbun (September 8, 1979). Subsequently, both Asahi Shinbun and Yomiuri Shinbun published during this year a special series documenting some of the most egregious cases of government fraud and waste. For the single best book-length account, see Hirose (1981). 10. In a survey conducted by Asahi Shinbun in July 1980, 60 percent of respondents favored rectifying the budget deficit immediately, and only 22 percent disagreed. Naikaku Sori Daijin Kanbo (1981:523). According to a poll taken by Yomiuri in November 1980, 61.8 percent stated that the budget was not being used properly, and 24.1 percent stated that it was being used properly. Moreover, 69.5 percent favored carrying out the reduction of expenditures and administrative reform without tax increases. Yomiuri Shinbun (evening edition, November 5, 1980). 11. On this point, see Uchida (1981:4–27), Noguchi (1980, 1981a). 12. LDP faction leaders Fukuda and Miki were the most vocal critics, calling on Ohira to resign from his post as prime minister. For details, see Ito (1982:509– 541), Sato, Kayama, and Shumpei (1990:489–503). 13. Ishikawa (1984:105–106). 14. According to a poll taken by Asahi shortly after the elections, the three most widely cited reasons for why voters chose LDP candidates were sympathy for Ohira (29 percent), uneasiness about the opposition’s ability to take charge (29 percent), and the need for a stable government to tackle fiscal reconstruction (13 percent). For a breakdown of these figures, see Asahi Shinbun (July 29, 1980). See also Ishikawa (1984:107–108). 15. For a detailed breakdown, see Sato and Matsuzaki (1986:363), Asahi Shinbun Senkyobu (1990:318–323). 16. Ishikawa (1984:110). On the typical career pattern of LDP prime ministers during this period, see Sato and Matsuzaki (1986). 17. For an insider’s account of how Nakasone handpicked the members, see Kato and Sando (1983:21–22). See also Muramatsu (1988:320). For his personal account, see Nakasone (1992:300–306). 18. Allegedly, Nakasone requested either the post of finance minister or vice prime minister, but Suzuki instead placed him in the Administrative Management Agency, arguing that another faction leader, Komoto, was placed in the EPA (Maki 1988:33). 19. Uji (1983:98–99). The first Rincho was formed in 1962 under the Ikeda cabinet. For an insightful comparison between the first and second administration reform councils, see Ito (1989). 20. Ito (1989). 21. On this general point, see Kato and Sando (1983:26). For Suzuki’s ability to secure Tanaka Kakuei’s support for Rincho, see Yomiuri Shinbun (June 21, 1981), Nihon Keizai Shinbun (July 24, 1981). 22. Sasaki (1985:13), Ito (1989:82), Uji (1983:103). 23. For Nakasone concession, see Maki (1988:36–37; 1982:63), Ito (1989: 91). 24. Kato and Sando (1983:22), Ito (1989:82). 25. Kato and Sando (1983:31). 26. In addition to the nine “core members,” twenty-one members were designated as “expert members,” of whom seven were selected from the big business community. Moreover, three out of the four subcommittees were headed by business leaders. Kumon (1984:143–165), Ito (1989:90).

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27. For example, in the context of budgetary policy, one LDP leader acknowledged that LDP PARC members and bureaucrats met secretly to see which subsidies could be cut prior to Rincho’s proposals (Gotoda 1989:74). 28. The announcement was first made at a cabinet meeting held on September 8, 1980, and reiterated on subsequent occasions. Uji (1983:93), Shiota (1985: 230). 29. For press coverage of Suzuki’s consultation with these LDP leaders see Asahi Shinbun (December 2, 1980). 30. For example, from 1968 to 1975 the budget request guideline was set at a generous 25 percent increase from the previous year. In 1980, the request guideline was reduced to 10 percent, with the exception of general administrative expenses, which were held frozen from the previous year. In 1981, general administrative expenses were frozen once again, and the remaining expenditure categories were set at 7.5 percent. MOF (1986:85). 31. Uji (1983:92–94). 32. Doko (1981a:30). In a similar vein, Sejima Ryuzo, who served as one of the business representatives to Rincho, referred to the budget as a form of “diabetes.” Sejima (1983:129–135). 33. MOF first announced an outline to review corporate taxes on June 25, 1980. Yomiuri Shinbun (June 26, 1980). For Doko’s opposition, see Doko (1981a: 30–33). See also Kumon (1984:151), Uji (1983:270). 34. Kumon (1984:146), Uji (1983:37), Sasaki (1985:12), Maki (1988:100–101). 35. This pledge would be reiterated often on subsequent occasions. Uji (1983: 103), Sasaki (1985:13). 36. On this point, see Chapter 2. 37. On this general point, see Ito (1989), Gotoda (1989:74). For an in-depth study that reveals this basic pattern in the case of welfare policy for the aged, see Campbell (1992). 38. Nihon Keizai Shinbun (April 18, 1981). 39. The only spending items placed outside the basic budget framework were debt repayment and local allocation tax grants. Nihon Keizai Shinbun (May 24, 1981). The political relevance of this will be addressed later. 40. Nihon Keizai Shinbun (evening edition, June 5, 1981). 41. In total, Rincho submitted five reports. For details of these reports, see Nihon Gyosei Gakkai (1985). 42. Yomiuri Shinbun (July 9, 1981). 43. This pattern could be seen immediately after the first report was issued, as Suzuki quickly threw his political support behind Rincho and repeatedly stated his commitment to achieving its recommendations. Nihon Keizai Shinbun (June 5, 1981), Nihon Keizai Shinbun (evening edition, September 28, 1981). See also Uji (1983:121). 44. Nihon Keizai Shinbun (December 29, 1981). 45. MOF (1984:101). 46. Tokyo Shinbun (April 3, 1981), Mainichi Shinbun (evening edition, July 18, 1981), Uji (1983:117). 47. Rinji Gyosei Chosakai (1981:20). 48. In principle this was defined as a temporary “special measure,” to be enacted from fiscal year 1982 to 1984. For details of the bill, see MOF (1982:334), Miyajima (1988:169), Campbell (1992:283–293). 49. For an exellent account that details this change, see Campbell (1992:283– 293).

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50. Doko’s position reported in Mainichi Shinbun (December 29, 1981), Asahi Shinbun (September 4, 1981). 51. Ozaki (1979:37), Fujii (1980), Miyajima (1988:169). 52. The laws pertaining to debt repayment and the local allocation tax grant are addressed in the latter part of this chapter. 53. Indeed, the spending items included in the ceiling, such as food management, public works, and medical expenses, were precisely those that were targeted by MOF during the “break structural rigidities campaign” in the late 1960s. 54. Suzuki’s concession reported in Kinyu Zaisei Jijo (June 26, 1981). 55. For then–MOF Budget Director Matsushita Yasuo’s frank admission of this point, see his interview in Ando (1987:224). 56. This position was succinctly stated by one MOF official who quipped, “What can those Rincho committee amateurs achieve when they know nothing about budgeting?” Quoted in MOF (1981a). 57. It was not until the end of May that MOF changed its position and offered Rincho its full technical support. Ito (1989:97), Kato and Sando (1983:29–30). 58. MOF had already recognized this and asked each ministry to deal with budget compilation themselves. MOF (1981b:11), Ito (1989:98). 59. For instance, MOF’s plan was to rate subsidies according to importance and cut or abolish those subsidies with low grades. In contrast, the plan proposed by Rincho and formally adopted by the cabinet called for a 10 percent across-theboard reduction in subsidies paid by the general account budget, a proposal that merely transferred the cost to local governments. MOF’s plan reported in Nihon Keizai Shinbun (April 2, 1981), and that of Rincho’s in Yomiuri Shinbun (July 9, 1981). 60. For MOF’s position, see Budget Bureau Director Matsushita Yasuo’s interview in Matsushita (1981:35). For the actual figures, see MOF (1989b:267). 61. For MOF’s position, see Miyajima (1988:5–18), Ito (1989:96). 62. For Doko’s vehement opposition to raising taxes, see Nihon Keizai Shinbun (December 30, 1980). A year later, when Finance Minister Watanabe hinted at the possibility of raising taxes, Doko again rejected the proposal outright. Asahi Shinbun (October 18, 1981). 63. Nihon Keizai Shinbun (April 8, 1982). 64. For a good narrative account, see Ebato (1987:2–21), Shiota (1985:231). 65. Nihon Keizai Shinbun (evening edition, April 30, 1982). 66. Nihon Keizai Shinbun (evening edition, August 31, 1982). 67. For instance, LDP leader Noboru Takeshita hinted that a tax increase might be introduced, but this was flatly rejected by Doko. Mainichi Shinbun (September 27, 1982). 68. Suzuki pledge reported in Nihon Keizai Shinbun (April 18, 1982), Nihon Keizai Shinbun (July 31, 1982). 69. Nihon Keizai Shinbun (evening edition, April 30, 1982). 70. Nihon Keizai Shinbun (evening edition, July 9, 1982). 71. Within the party, Administrative Affairs Director Tanabe and Labor Minister Shomura opposed a salary freeze and called for a full pay raise. Uji (1983: 302). For Sohyo’s position, see Kato and Sando (1983:44). 72. Nihon Keizai Shinbun (September 17, 1982), Asahi Shinbun (evening edition, September 24, 1982). 73. Noguchi (1983). 74. Tokyo Shinbun (evening edition, January 24, 1983). 75. Nihon Keizai Shinbun (evening edition, December 3, 1982). 76. For a comprehensive analysis, see Miyajima (1988:19–39).

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77. MOF (1989c). 78. This is done by transferring funds from the general account budget to the Special Account for the Allotment of Local Allocation Tax and Local Transfer Tax (Kofuzei Oyobi Joyozei Haifukin Tokubetsu Kaikei). 79. Nihon Keizai Shinbun (October 5, 1982). 80. Shinozawa (1982:30), Miyajima (1988:163–164). 81. MOF (1989c:14). 82. Figures are from Mitsubishi Bank (1989), MOF (1989c). 83. MOF’s announcement of the fiscal year 1983 budget reported by Nihon Keizai Shinbun (September 28, 1982). 84. Yomiuri Shinbun (evening edition, October 12, 1982), Nihon Keizai Shinbun (October 13, 1982). 85. For example, MOF announced in late October its intent to introduce a new tax increase. Mainichi Shinbun (October 29, 1982). Similarly, LDP leader Takeshita called for a reexamination of the existing tax system and hinted at the possibility of a tax increase. Mainichi Shinbun (November 28, 1982). 86. For a good account of the intense backstage negotiations to select the next LDP president, see Maki (1988:12–46). 87. Komoto finished second with 27.3 percent of the vote; Abe and Nakagawa secured 8.3 and 6.8 percent, respectively. Nihon Keizai Shinbun (November 25, 1982). 88. Upon securing his position as the new prime minister, Nakasone immediately pledged to uphold Rincho’s recommendation to the fullest. Nihon Keizai Shinbun (November 26, 1982). 89. Nihon Keizai Shinbun (evening edition, December 3, 1982). Note by this time, Finance Minister Takeshita announced during a financial policy speech that the 1982 supplementary budget would register a shortfall of 6.1 trillion yen and need an additional 3.4 trillion yen worth of bonds to cover the gap. 90. Yomiuri Shinbun (evening edition, September 10, 1983), Maki (1988:155– 156). 91. The poll further showed that 26 percent were undecided in their support of the Nakasone cabinet but 53 percent supported the LDP. Survey reported in Asahi Shinbun (December 5, 1982). 92. Maki (1988:55). 93. For example, in compiling the 1984 budget, various LDP leaders—Construction Minister Utsumi Hideo, Foreign Minister Abe Shintaro, and Labor Minister Ohno Akira—expressed their dissatisfaction with Nakasone’s effort to impose an even stricter ceiling than in 1983 and called for a separate ceiling on spending for their respective ministries. Tokyo Shinbun (evening edition, July 12, 1983). 94. The unified local elections were held in April 1983. Although the LDP won eleven out of thirteen governorship seats, the election results were not considered a major victory given the fact that ten of the thirteen seats were considered sure victories for the LDP. Accordingly, Nakasone called the results “so-so.” Asahi Shinbun (April 13, 1983). The upper house elections were held on June 26, 1983, and the LDP gained three more seats. Nihon Keizai Shinbun (June 28, 1983). 95. Nihon Keizai Shinbun (evening edition, October 12, 1983). 96. The biggest gain went to the Komeito party, which increased its share of seats from thirty-three to fifty-eight. The DSP and the JSP gained six and five seats, respectively. Figures taken from Asahi Shinbun Senkyobu (1990:319). 97. The call within the LDP for Nakasone’s resignation was voiced in varying degrees by Fukuda, Miki, and Komoto. Tokyo Shinbun (December 22, 1983), Asahi Shinbun (December 24, 1983).

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98. In a poll reported by Yomiuri Shinbun (December 19, 1982), 66.3 percent favored fiscal reform through expenditure cuts without recourse to tax, and only 18.9 percent replied that they opposed stringent budget cuts. 99. Keidanren’s position reported in Nihon Keizai Shinbun (November 2, 1982). For MOF and Doko’s opposing positions, see Mainichi Shinbun (October 29, 1982), Asahi Shinbun (December 28, 1982). 100. For an insider’s account of how Nakasone would use his popular political appeal to remain committed to administrative reform in the face of strong zoku pressure, see Gotoda (1989:63–86). 101. In a span of roughly one year, both the LDP and the Nakasone cabinet would witness a dramatic rise in their public approval ratings. In a survey reported by Asahi Shinbun (May 14, 1983), 51 percent supported the LDP, whereas 36 percent supported the opposition parties. In a poll published by Mainichi Shinbun (June 9, 1983) the public approval rating for the Nakasone cabinet rose from 34 percent in March 1983 to 40 percent in June 1983. The three top reasons cited for supporting the cabinet were foreign policy (38 percent), commitment to gyozaisei (27 percent), and leadership skill (27 percent). 102. Nihon Keizai Shinbun (December 27, 1983). 103. Although the JSP gained five more seats in comparison to the previous election held in 1980, the party’s share of total Diet seats was roughly 22 percent, well below the 30 percent level recorded during the 1960s. In contrast, the Komeito party and the DSP gained twenty-five and six seats, respectively. Asahi Shinbun Senkyobu (1990:319). 104. For a public declaration of their respective positions, see Nihon Keizai Shinbun (December 4, 1983). 105. Polls taken during this time vindicated his position. Among those who did not support the LDP, only 8 percent responded that it was due to their dissatisfaction with Nakasone. Asahi Shinbun (December 5, 1983). Moreover, the public approval rating for the Nakasone cabinet rose from 34.5 percent in February 1983 to 43.7 percent in February 1984. Yomiuri Shinbun (February 1, 1984). 106. In seeking to project in the public’s mind a greater distance between himself and Tanaka, Nakasone stated on December 24, 1983, that the electoral defeat was due to Tanaka, and thus he would reduce the Tanaka faction’s influence. Nakasone’s remark reported in Nihon Keizai Shinbun (December 24, 1983). 107. Indeed, through Tanaka’s intervention, Nikaido withdrew his candidacy for the prime minister post, thereby securing Nakasone’s extended tenure as prime minister. Maki (1988:342–364). 108. Postponing general account budget payments to debt repayment, local government transfers, and social security–related expenditures alone amounted to 2.3 trillion yen. Miyajima (1988:150–151). 109. Nihon Keizai Shinbun (March 13, 1983). 110. For example, in mid-June, MOF announced a 7 percent minus ceiling for the 1984 budget. Nihon Keizai Shinbun (June 19, 1983). A month later, Finance Minister Takeshita would call for a 10 percent minus ceiling. Mainichi Shinbun (July 13, 1983). 111. Mitsubishi Bank (1989:1158), MOF (1989c:14), Muramatsu and Ono (1989:50–55). 112. By this time, the Administrative Reform Council itself had been dissolved as scheduled. But this did not spell the end of its influence over budgetary policy decisions for the 1985 and 1986 budgets. In its place, a committee titled Gyokakushin was formally established to oversee the implementation phase of

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Rincho’s recommendation, and Nakasone convinced Doko once again to head this committee. 113. Kanemaru argued that the concept of a minus ceiling was MOF’s idea that needed to be replaced by an alternative goal sponsored by the LDP, whereas Komoto argued for a plus ceiling rather than a minus ceiling. Nihon Keizai Shinbun (May 30, 1984). Miyazawa advocated a “Shisan Baizo Keikaku,” which called for an increase in the basic budget over the next ten-year period in areas such as housing, parks, and sewage. Nihon Keizai Shinbun (June 7, 1984). For a good overview of the dissension within the LDP leadership see Shiota (1985:250). 114. MOF’s announcement reported in Mainichi Shinbun (April 26, 1983). 115. On December 22, the government announced its official forecast for 1985, predicting a 4.6 percent real growth in GNP. Nihon Keizai Shinbun (December 23, 1984). For Doko’s position, which firmly rejected calls for greater government spending, see Nihon Keizai Shinbun (June 2, 1984). 116. At a press conference held on November 1, 1984, Nakasone stated that with this new cabinet, he would continue to uphold his policy of fiscal reconstruction without tax increase, and escape deficit financing by 1990. Nihon Keizai Shinbun (evening edition, November 1, 1984), Yomiuri Shinbun (November 2, 1984). 117. As detailed in Chapter 2, the 20 percent rule refers to MOF’s decisionmaking norm of keeping taxes as a percentage of national income to below the 20 percent level in order to place a lid on the overall level of spending. 118. For the best political analysis of subsidies in Japan, see Hirose (1981). For an excellent follow-up to this study, see Miyamoto (1990). 119. Sakakibara (1991:50–79), Miyamoto (1990:78–83). 120. The original proposal came from a cabinet committee established in March 1985 as well as a subsidies problem discussion group (Hojokin Mondai Kentokai) to further reduce national subsidies. For press coverage of this committee, see Nihon Keizai Shinbun (February 24, 1985). 121. On this point, see Ishikawa and Hirose (1989:152–160), Calder (1988a: 160). 122. Although local government officials voiced strong protest to these measures, opinions differ as to whether their protest was a mere formality or a genuine opposition. For the former view, see Campbell (1992:231). For the latter, see Ebato (1987:5), Tahara (1988:321–323). 123. For details, see Miyajima (1988:171–192). 124. Yomiuri Shinbun (July 24, 1982). See also Maki (1988:294). 125. For an excellent firsthand account as told by the cabinet director at the time, see Gotoda (1989:84–86). 126. ABARE (1988:106). 127. Kusano (1989), Mochizuki (1993) 128. On this point, see Johnson (1989b:217–218). 129. Campbell (1992:282–312). 130. For two somewhat contrasting views on the extent to which the pension reforms were a scaleback or a consolidation, see Campbell (1992:313–351), Kato (1991:100–126). 131. In a poll taken by Asahi Shinbun on March 1986, Nakasone’s foreign policy stance was cited most often as the most positive aspect of his cabinet. Naikaku Soridaijin Kanbo Kohoshutsuhen (1986:498–499). 132. The economy grew at a yearly rate of 5.1 percent and 4.9 percent in 1984 and 1985 respectively. IMF (1989:73). 133. Naikaku Soridaijin Kanbo Kohoshutsuhen (1986:488).

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134. The poll specifically asked respondents to identify the top three issues they wanted the government to pursue most actively. In descending order, the results were as follows: tax reduction (58 percent), economic recovery (51 percent), price control (50 percent), welfare improvement (36 percent), education (22 percent), and administrative reform (21 percent). Naikaku Sori Daijin Kanbo (1987:475–478). 135. By this period prominent leaders representing big business interests began to demand greater fiscal stimulus. Whereas Keidanren Chairman Inayama in 1985 expressed strong disapproval of any government initiative to expand domestic demand, his successor, Saito Eishiro, just one year later began to press the government to adopt greater fiscal expansion. Inayama’s position reported by Asahi Shinbun (April 18, 1985). For Saito’s position, see Kuribayashi (1988:45–48). 136. Yomiuri Shinbun (January 28, 1986). 137. Based on IMF calculations, Japan’s fiscal policy was contractionary between 1987 and 1989, with the fiscal impulse at –1.3 percent of GDP in 1987, –0.4 percent in 1988, and –0.9 percent in 1989. IMF (1994:139). 138. On July 30, 1988, MOF announced the settlement budget for 1987, which revealed a 3.7 trillion yen tax surplus from the revised budget and a 5.6 trillion yen surplus from the initial budget estimate. If the 1.8 trillion yen tax cut that was made during this period is included, the initial miscalculation totaled 7.4 trillion yen. 139. Noguchi (1991). 140. MOF (1987:59). 141. The one notable exception was public works spending. But the manner in which public works spending rose is telling of how the pattern established in the early phase of Rincho persisted in the latter part of the decade. Public works spending rose, but only after a separate category outside the ceiling was created to accommodate the increase so that the general ceiling framework would not be disrupted. Moreover, the additional amount needed to cover this increase did not come from general tax revenues or by issuing more government bonds. Instead, the government utilized the proceeds from the stock sales of the newly privatized NTT corporation. 142. MOF (1993:118).

8 Analysis: Assessing the Two-Level Hypothesis for the 1980s

The evidence presented in the preceding two chapters once again confirms the utility of the two-level approach I advance in this book. As expected, international pressures for Japan to adopt a policy of fiscal expansion resurfaced as Japan began to mount persistent trade surpluses. As in the 1970s, Japan’s current account surplus rose steadily, from $6.9 billion in 1982, to $20.8 billion in 1983, $35 billion in 1984, and $49.2 billion in 1985.1 This period was also marked by growing concerns about whether the U.S.-led world economic recovery from the second oil shock was sustainable in view of the growing budget and current account deficits of the United States. Given Japan’s mounting trade surplus and the prospect of a global recession, Japan predictably began to encounter international pressures to adopt a policy of fiscal expansion. After U.S. Secretary of State George Shultz first called on Japan to adopt budgetary policies that would stimulate the nation’s domestic demand in April 1985, Japan repeatedly faced intense diplomatic pressures to expand its level of government spending for the next two years. Although reputed anti-Keynesians at home, officials serving in the Thatcher and Reagan administrations were quick to call on Japan to adopt Keynesian remedies in order to boost world economic growth and remedy Japan’s current account imbalance. As in the earlier period, these diplomatic initiatives were accompanied by the rising threat of protectionism against Japanese exports and the sharp appreciation of the yen against the dollar. In contrast to the previous decade, however, Japan in the 1980s exhibited far less willingness to cooperate. Whereas Fukuda Takeo pledged specific targets and implemented public works projects to uphold his commitments, Prime Minister Nakasone Yasuhiro not only refused to use fiscal policy to achieve a specified growth target but also resisted international 195

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demands for Japan to increase its level of government spending for over two years. Instead, the fiscal-year 1986 budget and the initial budget for fiscal year 1987 represented the continuation of the budget austerity measures established earlier in the decade. In sharp contrast to the large increases in government spending made during the Fukuda administration, in fiscal year 1986 overall government spending was raised by a mere 3.0 percent from the previous year, and the initial budget for fiscal year 1987 was only 0.02 percent larger than the initial budget of the previous year.2 Only in May 1987 did Japan make any substantial concessions to expand government spending by introducing a 6 trillion yen supplementary package. Although this supplementary package was sizable, its macroeconomic impact was more symbolic than real. Given the large windfall of government tax revenues during this period, the supplementary budget did not produce a fiscal stimulus but merely made Japan’s fiscal policy less contractionary than it would have been in the absence of these international pressures.3 These contrasting results further underscore the importance of the two-level framework. Only by explicating both the international and domestic political forces that structure Japanese budgetary decisions is it possible to explain not only why international pressures for greater Japanese fiscal expansion resurfaced in 1985 but also why they failed to yield a cooperative response on the part of Japan. Political leadership matters even in an international economic system governed by free market principles because nations are apt to adopt protectionist policies when trade imbalances mount or when the world economy heads into a recession. Such unilateral decisions may seem like the rational choice to make under these conditions, but when taken collectively they will leave each nation worse off in the form of spiraling protectionism and the collapse of free trade. No wonder, then, that despite the strident repudiation of Keynesian policy prescriptions among some of the top leaders of the advanced industrial nations, these same leaders championed Keynesian prescriptions in the international forum by pressuring Japan to adopt a policy of fiscal expansion. In doing so, they were explicitly appealing to the need for greater Japanese leadership in order to alleviate this collective action dilemma. Japanese fiscal expansion would not only reduce its trade imbalance but also counter the recessionary impact in the event of slower economic growth in the United States. The international factors behind the politicization of Japanese fiscal policy thus parallel those found in the 1970s. But Japan’s response in the 1980s varied sharply from its response in the earlier period, and explaining this variation requires a two-level analysis. The crucial difference lies in the domestic political setting that predated international calls for greater Japanese fiscal expansion. In the 1970s, deficit financing was well in place when foreign pressures for fiscal expansion surfaced in late 1976. In the

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1980s, however, the domestic political trend was moving in the opposite direction. By the time Secretary of State Shultz first proclaimed the need for greater Japanese fiscal expansion, the fiscal reform movement, which sought to eliminate rather than expand deficit financing, was already in its fourth year and gaining greater momentum under the Nakasone administration. Thus, whereas international and domestic forces in the 1970s case converged toward a policy of fiscal expansion, these two forces in the 1980s case were moving in opposite directions. What, then, accounts for this key difference at the domestic level? Scholars from divergent backgrounds have sought to explain the spiraling level of budget deficits among advanced Western nations by focusing on the political dynamics that take place in a democratic system or on the relationship between a democratic political system and a free market economic system.4 Less attention has been paid to how a democratic free market nation will respond to a high level of budget deficit. Yet this is precisely the basic political setting that Japan faced as it entered the 1980s. In the early 1980s, the LDP clearly faced a number of political challenges, but they did not lead to the pattern of providing an ever-increasing amount of government largess occurred in the 1970s. Instead, the very pattern of crisis and compensation in the 1970s created its own sense of crisis that was ironed out through political negotiations between the LDP and the various societal groups that supported that party in power. Although the final policy outcome that emerged from these negotiations continued to favor those who supported the LDP, it did so in a way that can be understood only by taking into account the manner in which the interest and interaction of the LDP and its supporters shaped the overall framework that rejected further deficit financing. In the face of a budget crisis, the three key political actors that helped shape the overall framework were big business leaders, LDP leaders, and the “new middle mass.” As documented in Chapter 7, big business leaders recognized that they could no longer demand greater government spending given their fear of higher corporate taxes. As members of the long-standing political party in power, LDP leaders recognized that they were the party responsible for the deterioration of the budget. The legislative task of managing the national budget more responsibly fell squarely on their shoulders. Moreover, the new middle mass shifted its attention away from demanding the greater government services it had supported in the late 1960s and early 1970s. Given the widespread media coverage exposing numerous instances of government waste and fraud, its demands were now focused on the need to tackle the deficit by trimming government spending without recourse to tax increases. The embodiment of these three forces took shape in the form of Rincho. After Rincho established in 1981 its basic guideline to pursue fiscal

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reconstruction without tax increase, the overall setting upon which the politics of budgetary policy would take place for the remainder of the decade was firmly set. Reducing the level of deficit financing would be the main priority, but new taxes would not be introduced to achieve this goal. After this broad consensus was reached, however, Rincho’s specific recommendations were often modified, and sometimes even ignored, when the interests of LDP supporters were threatened. Accordingly, the LDP would endorse any measures that would reduce the deficit without imposing real cuts by postponing obligatory payments from the general account budget and borrowing the necessary funds from other government accounts. By the end of the decade, the total amount of hidden debt accumulated as a result of these questionable accounting practices would equal an astonishing 26.8 trillion yen, well over one-third the entire size of the 1990 budget, which totaled 69.3 trillion yen.5 The LDP would also reduce a substantial portion of the deficit by simply allowing revenues from income tax to rise automatically as wage earners entered higher tax brackets.6 Furthermore, when real cuts were made, those who supported the LDP, such as farmers and construction companies, fared better than those who did not. Once this basic pattern was firmly entrenched, dislodging it in favor of Keynesian deficit financing would have required far greater political pressure for change than was evident in the second half of the 1980s. To be sure, the rapid appreciation of the yen gave the leaders of both big business and the LDP cause for concern. But the appreciation of the yen was largely expected and accepted as a necessary measure to drive down Japan’s trade surplus. Statements made by these leaders during this period suggest that their concern was more over the unpredictable pace at which the yen appreciated rather than over appreciation itself. In addition, big business leaders were less strident in their demand for greater fiscal stimulus given the fact that the economic downturn created by the rapid appreciation of the yen was fairly brief. Indeed, for the first few months after the Plaza Accord, the export-led economy continued to record large gains due to the J curve effect. By 1987, the economy posted a sizable growth, and Japan would enjoy the longest sustained period of economic growth in the postwar period. Lacking also were societal pressures strong enough to counter the political consensus reached in the early 1980s concerning the importance of achieving fiscal reconstruction without tax increases. To be sure, by 1986 the public no longer viewed administrative reform as an urgent priority, but this by no means signaled a repudiation of Rincho’s basic aim of slashing the deficit. In fact, public opinion continued to support the government’s effort to reduce the budget, albeit to a lesser extent than in the early 1980s. This point highlights a key difference in the political setting between this period and the early 1970s. In the early 1970s, the surge in

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public demand for greater welfare services altered the course of budgetary policy and paved the way for greater government spending for the rest of the decade. Fiscal conservatism was abandoned and budgetary expenditures, led by social welfare spending, far outpaced budget revenues. In contrast, in the political setting that emerged after 1986, there is little evidence to suggest that the public actively protested existing budgetary policies. Indeed, in stark contrast to the early 1970s, when voters went to the polls to vote against the LDP, Nakasone secured a resounding victory in the double elections held in 1986. Under these conditions, the ruling party had little incentive to expand budgetary spending. Not only did the LDP face fewer societal pressures to expand the budget, but the party in power was also less threatened by the leading opposition party. Throughout the 1980s the JSP failed to offer any alternative policy platform that would challenge LDP-sponsored policies or attract new voters. Instead, it continued to rely heavily on labor unions despite the fact that labor union membership, as a percentage of total workers, continued to decline.7 Moreover, by 1986, the JSP had been dealt a series of crushing blows. Once passed, the reform measures proposed by Rincho seriously weakened the JSP’s organizational base of support. Privatization weakened the Council of Government and Workers Union, and educational reforms humbled the teachers union. These findings further substantiate the domestic-level argument I make in this study; namely, that budgetary policy outcomes reflect the interest and interaction of the societal actors and political parties that compose Japan’s ruling coalition. Moreover, by comparing the 1970s with the 1980s, it is clear that policy outcomes are not simply additive, as the crisis and compensation model presented by Calder suggests, but rather interactive and historically contingent. As in all democratic political systems with regularly scheduled elections, the interests and interactions of political actors are never frozen in time. The political bargaining and compromises that are struck and become institutionalized in one period produce unintended consequences over time that alter the political setting upon which actors subsequently redefine their policy interests. Although members of the ruling coalition clearly favored a policy of crisis and compensation in the 1970s, this policy consensus created its own form of crisis by the end of the decade. As the fiscal crisis threatened to spiral out of control, the ruling coalition forged a new consensus in the early 1980s in favor of fiscal reconstruction without tax increases. The evidence I present in Chapter 7 also provides a more nuanced appreciation of the role and power of MOF that conforms to neither the strong state model nor the classical pluralist conception of the state. Judged according to the common criteria of a strong state—namely, a state that is able to formulate and implement policies against the actual or

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potential opposition of other political actors—this period fails to validate the strong state claim. This is not to belittle the two key victories MOF did achieve: halting the pace of government spending and eliminating deficit financing by 1990. But these two goals were also strongly favored by members of the LDP, big business, and the new middle class; to claim that these accomplishments were made against the opposition of other powerful political actors would therefore be false. Moreover, in the process of achieving these two goals, MOF also forced to sacrifice other substantive and organizational interests, such as the early introduction of a general consumption tax, upholding the 20 percent rule, and maintaining its exclusive jurisdiction authority to compile the budget. More important, a close look at where the budget was cut and where it was not reveals the political constraints MOF faced in its effort to cut government waste and eliminate deficit financing. In fact, a substantial portion of the cuts made in the budget was through the hidden debt, in which the government postponed various obligatory payments from the general account budget and borrowed the necessary funds from other accounts. By the end of the decade, the hidden debt totaled 26.8 trillion yen. Moreover, although lowering the ceiling on subsidies did achieve more genuine cuts in the general account budget, this was achieved primarily by increasing the amount local governments had to pay. Reducing the general account budget’s subsidy rate from 80 to 50 percent meant, in effect, that local governments now paid 30 percent more of the cost of a given program. Just these two measures alone accounted for over 80 percent of the deficitfinancing bonds that would have been issued had the bond dependency ratio (government bond issues as a percentage of total expenditures) remained at the 1982 level (29.7 percent).8 MOF’s ability to maintain its incremental decisionmaking norm of baransu also continued to deteriorate during this period. Table 8.1 illustrates the average yearly change in the share of the budget each spending ministry received in three time periods (1961–1970, 1971–1980, 1981– 1990). These figures were calculated by averaging over a ten-year period the extent to which each spending ministry’s share of the total budget changed from year to year; hence, smaller variations reveal greater baransu. Like the 1970s, the 1980s continued to witness less baransu than did the high economic growth era of the 1960s. In fact, when the deviations in budget shares for all the spending ministries are averaged out by decade, the figure for the 1980s surpasses even that for the 1970s by a full percentage point. The evidence also demonstrates, however, that MOF was not the passive registrar of societal or LDP demands. After an initial period of opposition, MOF became an active participant in the Rincho movement. By occupying a central role in gathering information and providing technical

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Table 8.1

Average Yearly Change in Budget Share, 1961–1990

Transport Education Prime minister’s office Home affairs Courts Health and welfare Construction Justice Foreign affairs Post and telecommunications Diet Labor Agriculture and forestry MITI Total Average

1971–1980

1981–1990

1961–1970

10.66 4.11 3.69 5.15 5.54 5.52 8.27 6.70 4.68 9.61 5.41 13.04 4.58 9.80 6.21

16.46 3.10 2.43 6.26 2.99 4.01 6.13 2.80 30.71 7.77 4.05 7.45 6.77 8.18 7.21

2.32 2.54 2.91 3.00 4.12 4.21 4.29 4.58 4.61 5.02 6.17 6.83 8.80 4.57 4.24

Source: MOF (1995); based on settled account.

and legal expertise on matters related to the budget, MOF was often able to steer the agenda more in line with its own interest than it would have been able to do if it had remained an outsider. Moreover, when critics of fiscal reform emerged from 1986 onward, MOF was able to keep budgetary policy on a deficit reduction course for the remainder of the decade. MOF, therefore, was not merely an agent of other principal actors; instead, it was an autonomous political actor in its own right, actively utilizing its organizational resources to pursue its varied interests, albeit with mixed results. The crucial question is not whether MOF is a strong or weak state, but when and under what conditions MOF is better able to fulfill its interests. What the evidence reveals is that MOF will always be an autonomous political actor pursuing its varied interests but that its ability to do so will be contingent upon the pattern in which the interests and interaction of Japan’s ruling coalition take shape. When MOF’s interests run directly counter to those of the ruling coalition, as they did in the 1970s, MOF will be least able to implement its preferred policies. However, when members of the ruling coalition share similar goals with those of MOF, or when they are divided over budgetary policy outcomes, MOF can enter into the political arena during the negotiation process and fulfill more of its key interests. This two-level analysis provides important insights that help anticipate the politics of Japanese budgetary policy in the 1990s in a manner distinct from those generated by other perspectives. Various observers

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have noted that the 1980s marks an important watershed in the political economy of advanced industrial democracies. Both the globalization of the international capital market and the ideational change from Keynesianism to monetarism that emerged in this period are seen to have ushered in a new era, one whereby both international and domestic pressures are expected to discourage a policy of fiscal expansion.9 In contrast, my twolevel analysis suggests that the growth of the global capital market may actually strengthen the need to coordinate the macroeconomic policies of major economic powers. An ever efficient global capital market can more readily allow nations with large trade surpluses to channel their foreign exchange earnings to acquire an increasing amount of foreign property and financial assets. Moreover, just as freer international trade has led to greater rather than less government spending, freer international capital can have the same effect by elevating the social costs of economic dislocation spawned by economic liberalization.10 My analysis also raises serious doubt about the impact of ideational changes on policy outcomes. In the international arena, conservative leaders who championed monetarist orthodoxy at home showed little hesitancy in advocating Keynesian prescriptions in their negotiations with their foreign counterparts. The same inconsistency can be found in Japanese domestic politics. To be sure, the Rincho consensus in rhetoric repudiated Keynesian prescriptions in favor of monetarist remedies. In practice, however, the actual measures that were adopted deviated considerably from Rincho’s recommendations. In large part, the LDP’s ability to remain in power during the 1980s rested precisely in its willingness to sacrifice monetarist orthodoxy for the sake of political expediency. However, I do not mean to downplay the monetarist component that did contribute to the LDP’s success in remaining in power. By reducing the size of the deficit and lowering interest rates, the LDP fostered an economic climate that produced one of the longest sustained periods of economic growth in the postwar era. However, the durability of this policy hinges not on the epistemic endurance of monetarist ideas per se but on the extent to which the combination of a balanced budget and a low interest rate policy can sustain economic growth and thereby continue to satisfy the interests of the societal actors and political parties that make up Japan’s ruling coalition.

Notes 1. As a percentage of GNP, this represented a jump from 0.6 percent in 1982 to 3.7 percent by 1985. IMF (1988:144). 2. MOF (1988:106). 3. The IMF’s fiscal impulse data, which measure the extent to which a country’s fiscal policy is expansionary or contractionary, reveal that Japanese fiscal

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policy remained contractionary throughout this period. As a percentage of GNP, Japan’s fiscal impulse was –0.3 in 1985, –0.8 in 1986, and –0.9 in 1987. IMF (1990:139). 4. See, for example, Olson (1982), Lowi (1979), Buchanan and Wagner (1977), O’Connor (1973), Offe (1984). 5. Mitsubishi Bank (1989:1158), MOF (1989c:14), Muramatsu and Ono (1989). 6. In 1990, Japan’s national income totaled 343 trillion yen. Had the 20 percent rule remained in effect, budget revenues derived from income tax would have amounted to 68.6 trillion yen, rather than the 96.2 trillion yen that was actually collected. Hence, the additional 27.6 trillion yen collected by breaching the 20 percent rule represents well over a third of the entire size of the 1990 budget. Figures taken from MOF (1995:15). 7. The unionization rate in Japan dropped significantly, from 35.4 percent in 1970 to 30.8 percent in 1980 and 25.2 percent in 1990. Ministry of Labor (1994). 8. For further details, see Suzuki (1999). 9. For the former argument, see Cerny (1996), Martin (1994), Kurzer (1993). For the latter, see Haas (1992), Hall (1992). 10. On this point, see Cameron (1978).

9 The Return of Deficit Financing

In this chapter I examine the politics of Japanese budgetary policy from 1990 to 1995, a period in which foreign pressures for greater Japanese fiscal stimulus reemerged, but under a domestic political setting that contrasted sharply with that of the 1980s. As in the 1970s and 1980s, international calls for Japan to adopt a policy of fiscal expansion resurfaced as Japan’s current account surplus rose sharply amid concerns of a prolonged global recession. By 1992, not only did international negotiations over Japanese fiscal policy resume in various multilateral forums, but they also became more firmly entrenched in bilateral negotiations between Japan and the United States. At the domestic level, the early 1990s ushered in a period of severe economic recession and political turmoil, forcing into question the budgetary consensus established in the 1980s in favor of austerity and deficit reduction. From August 1992 to September 1995, the Japanese government abandoned its pursuit of fiscal consolidation and adopted five sizable fiscal stimulus packages in an effort to pump prime the economy. The purpose of this chapter will be to examine the international and domestic political forces that led to those decisions.

Locomotive Revisited At the start of the 1990s, international negotiations over Japanese fiscal policy remained dormant as Japan’s economy, driven by domestic demand, continued to grow briskly. From 1988 to 1991, Japan’s real GNP grew at an annual average rate of 5 percent, surpassing the rate recorded by all other Group of Seven (G-7) nations during this period. Although Japanese fiscal policy remained contractionary during these years, total domestic demand, spurred by the private sector, rose sharply at an annual average 207

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rate of 5.3 percent. This robust growth led by domestic demand in turn had a positive effect on reducing Japan’s current account surplus, which stood at $87 billion, or 3.6 percent of GDP in 1987. Over the next three years, the surplus declined sharply, falling to $35.8 billion, or 1.2 percent of GDP in 1990.1 Under these conditions, international negotiations over macroeconomic policy predictably made no reference to the need for Japanese fiscal expansion. The final declaration issued at the London summit, held in July 1991, stated that the overarching objective was to maintain the “mediumterm strategy endorsed by earlier summits” and adopt macroeconomic policies that promoted “sustained recovery and price stability.” The member nations thus renewed their commitment “to implement fiscal and monetary policies which, while reflecting the different situations in our countries, provide the basis for lower interest rates”; the “continued progress in reducing budget deficits” was deemed “essential.”2 Given the course set in Japan prior to the London summit to further reduce Japan’s budget deficit, the summit was seen by Japanese negotiators as an endorsement of their existing policies. The fiscal-year 1992 budget that was approved by the cabinet in late December 1991 was set at 72.2 trillion yen, a scant 2.3 percent increase from the initial budget of the previous year and the smallest increase since 1987.3 Despite the depoliticization of Japanese fiscal policy during this period, there remained long-standing concerns about Japan’s tendency to amass large trade surpluses. In July 1989, President George Bush and Prime Minister Uno Sosuke launched the Structural Impediments Initiative. The stated objective of SII was to “identify and solve structural problems in both countries that stand as impediments to trade and balance of payments adjustment with the goal of contributing to the reduction of payments imbalances.” In light of the positive trends noted earlier, U.S. negotiators, in particular U.S. Treasury Undersecretary Charles Dallara, agreed to omit any explicit discussion about Japanese fiscal policy at the behest of his Japanese counterpart Utsumi Makoto, vice finance minister for international affairs.4 But within the broad mandate of SII, both sides agreed to discuss measures that would remedy the savings and investment imbalance in their respective countries. Hence, although the SII mandate technically precluded negotiations over macroeconomic coordination, heated negotiations were conducted over Japanese public works spending and produced a Japanese commitment to spend 430 trillion yen in public works over the next ten years.5 The significance of these talks went beyond the 430 trillion yen in public works that Japan agreed to spend. Although the agreement was sizable, there was enough ambiguity in it to allow Japan to maintain its established course to reduce the budget deficit.6 The more significant aspect

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209

of SII was that it further institutionalized bilateral negotiations between Japan and the United States over Japanese budgetary policy and set the stage for renewed international pressures in the event that Japan’s favorable macroeconomic trends began to falter. Although the likelihood of such a change seemed remote at the start of SII, it was no longer so within a year after the final report was issued. In the second half of 1991, Japan’s longest sustained period of economic growth since the start of the postwar era was drawing to a close. Although the severity of the oncoming recession was yet unclear, there was no question that domestic demand–led growth was beginning to stall in the wake of the stock market collapse. After posting an all-time high of 38,915 yen in December 1989, the Nikkei Average plummeted by almost 50 percent in nine months, hovering slightly above 20,000 yen in early October 1990.7 To be sure, most analysts initially welcomed the slowdown in Japan’s economy. In its semiannual economic forecast issued in July 1991, the OECD predicted that Japan’s economic growth would be “easing back to more sustainable rates,” rising by 3.5 percent in real terms for calendar years 1991 and 1992.8 In a follow-up report issued in December 1991, the OECD actually revised its 1991 GNP forecast for Japan to 4.5 percent. Moreover, the organization projected Japan’s real GNP to grow by 2.4 percent in 1992 and 3.5 percent in 1993 and predicted that Japan’s current account surplus would remain “largely unchanged” over the next two years. Forecasts made by the Japanese government were equally optimistic, projecting real GNP to rise by 3.5 percent in fiscal year 1992 and the current account surplus to remain flat at $72.5 billion in 1991 and $71 billion in 1992.9 These initial forecasts proved far off the mark. By mid-1992, a more pessimistic outlook began to prevail as the Japanese economy continued to slide further into a recession. In March 1992, The Economic Planning Agency announced that Japan’s GNP growth for the third quarter of fiscal year 1991 (October–December) had decreased by 0.046 percent from the previous quarter. In the following month, the agency reported that the economy was still in “an adjustment stage,” as personal spending and private capital investment remained weak. 10 Matters were no better on the trade front. In mid-April 1992, MOF announced that Japan’s trade surplus for fiscal year 1991, which ended on March 31, 1992, had reached $88.4 billion, or roughly 2.2 percent of GDP. 11 Moreover, despite the OECD’s prediction that Japan’s current account surplus for calendar year 1992 would total $69.8 billion, the surplus had already risen to $56.4 billion in only the first six months of 1992.12 By mid-1992, therefore, Japanese negotiators were confronted with renewed international pressures to adopt a policy of fiscal expansion. The U.S. Treasury Department was among the first to raise the call. On April 7, 1992, U.S. Treasury Undersecretary David Mulford expressed

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concern at the rise of Japan’s trade surplus and urged Japan to adopt a supplementary budget in order to stimulate its slackening domestic economy. Three days later, Treasury Secretary Nicholas Brady announced that “while economic growth is improving in several major industrial countries, it remains slow in Germany and Japan” and called on both countries to take stimulus measures to support the global economic recovery.13 Others would soon join the chorus. At a G-7 meeting held in late April, the final communique expressed “concern that aggregate G-7 economic activity this year would be below potential and growth would be inadequate to achieve a reduction in unemployment.” Although the statement made no reference to problems in specific countries, it did note that “in those countries with large surpluses and declining growth, policymakers should be mindful of the possibilities of strengthening domestic demand through appropriate measures.”14 In a meeting with MITI Minister Watanabe Kozo, Finance Minister Michel Sipan of France was more blunt, calling on Japan to adopt a supplementary budget for the current fiscal year to help revitalize domestic demand. Similar views were echoed at the annual OECD meeting held in mid-May, as U.S. Commerce Secretary Barbara Franklin urged Japan to adopt fiscal measures to help promote global economic growth.15 Japan’s initial response to these renewed foreign pressures was modest. In anticipation of the April G-7 meeting, the Miyazawa administration implemented at the end of March an “emergency economic package,” which front-loaded 75 percent of public works spending in the first half of the fiscal year, together with other measures.16 In addition, the BOJ on April 1 cut the official discount rate by 0.75 percentage points to 3.75 percent. But these measures did little more than provide a repartee and respite for Japanese negotiators reluctant to do more. After the emergency package was adopted, Finance Minister Hata Tsutomu optimistically announced that Japan would achieve the government’s earlier forecast of a 3.5 percent growth in real GNP for fiscal year 1992, even though he left unanswered the question of what would happen in the second half of the fiscal year when only 25 percent of public works remained to be spent.17 Loath to relinquish their new goal of reducing construction bonds to 5 percent of the budget by 1995, MOF officials were adamantly opposed to implementing a supplementary budget to stimulate the economy.18 BOJ Governor Mieno Yasushi was equally dismissive, arguing that “such a locomotive theory has failed in the past and brought about inflation.”19 Inflation, however, was the least of Japan’s economic problems. The more immediate concern was the absence of any indication that the economy was recovering. Neither the lowering of the discount rate nor the emergency economic package was producing results that would vindicate the government’s optimistic prognosis of the economy. The EPA’s long-term economic

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plan published in early June 1992 predicted that over the next five years Japan’s GNP would grow annually by 3.5 percent, and domestic demand by 3.75 percent, and that the net contribution from external demand would be negative.20 The evidence available at the time, however, suggested otherwise. In the same month that the long-term economic plan was published, the Bank of Japan announced in its quarterly tankan, a survey of business sentiment, that the business confidence diffusion index had fallen to minus 24, down 19 points from the previous survey released in February. Moreover, the Nikkei Average continued to plummet, falling by over 500 points to 16,445.80 in mid-June.21 Given the downward trend, the OECD revised its estimate of Japan’s GNP growth for fiscal year 1992 to 2.25 percent, and the IMF predicted that Japan’s trade surplus in 1992 would soar to a record $113.4 billion.22 In the face of these trends, Japanese policymakers began to consider additional measures to stimulate the economy in anticipation of the upcoming economic summit in Munich. Consistent with their earlier position, MOF and BOJ officials opposed taking further measures. Both Finance Minister Hata and BOJ Governor Mieno argued that the emergency economic package had not been given enough time to revive the economy effectively. Vice Finance Minister Yasuda Hiroshi remarked that Japan was already doing its utmost to expand domestic demand.23 But pressures to do more were mounting both at home and abroad. In a meeting held with President Bush in early June, LDP Vice President Kanemaru Shin promised to rectify Japan’s growing trade imbalance by increasing domestic demand.24 Several days later, U.S. officials reportedly pressed Japan to issue a supplementary budget of $47.2 billion or more to boost domestic demand.25 Voices calling for a supplementary budget were also gaining momentum at home. As the July upper house elections drew near, LDP leaders scrambled to draft a policy platform that centered on promoting economic recovery for the upcoming election campaign. 26 On June 4, LDP Policy Affairs Research Council Chairman Mori Yoshiro pressed for the adoption of a 3–5 trillion yen supplementary budget; Kanemaru advocated a 7–8 trillion yen package.27 Given the continued slump in the corporate sector, calls for a large-scale supplementary budget were also made by MITI Minister Watanabe Kozo, and business leaders such as Keidanren Chairman Hiraiwa Gaishi and Japan Chamber of Commerce and Industry Chairman Ishikawa Rokuro.28 Swayed by these concerns, Prime Minister Miyazawa formally instructed government officials on June 22 to compile a largescale supplementary budget.29 With this decision in hand, Japanese negotiators were now prepared to offer at the international bargaining table tangible evidence of Japan’s commitment to remedy its growing trade surplus and promote global

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economic recovery through the use of fiscal stimulus. In talks held with President Bush in early July, Prime Minister Miyazawa expressed his cabinet’s commitment to draft a large-scale supplementary budget by August and secured the president’s recognition that Japan was making a “serious effort” to boost economic growth.30 The supplementary budget was also welcomed by Treasury Secretary Brady, who called it a “very strong step” that would help spur economic growth in Japan and have a “significant bearing” on Japan’s trade surplus.31 The following day, the prime minister traveled to London and conveyed a similar message in his meeting with Prime Minister John Major and EC Commissioner Jacques Delors.32 Hence, by the time Miyazawa departed from London on July 5 to attend the Munich summit, Japanese negotiators were able to secure the approval of their foreign counterparts and circumvent the criticism of Japan’s rising trade surplus by presenting the new stimulus package as Japan’s chief contribution to the summit.33 This new measure was considerable larger than the first. After several months of deliberation, the sum total of the supplementary budget was set in August at 10.7 trillion yen and was hailed as the largest package ever compiled in Japanese history. However, just as was the case in 1987, the net impact of this supplementary budget was less stimulatory than the overall figures suggested. In fact, a large percentage of this package consisted of using funds from FILP to offset cuts in spending from the general account budget. The details of the revised budget that was passed to accommodate this new measure reveal that the total size of the initial budget for fiscal year 1992 was actually reduced by 728 billion yen to 71.5 trillion yen.34 On a year-to-year basis, the revised budget for 1992 represented a mere 1.2 percent increase from the previous year’s budget, and the public sector’s fiscal stimulus was limited to a low 0.5 percent of GNP.35 Given these limitations, the new package would provide Japanese negotiators with only a temporary respite from foreign criticism. In the same month that the revised budget was formally passed in the Diet, the government was forced to come to terms with both the flagging economy and the unabated rise in Japan’s trade surplus. On December 20, 1992, the EPA announced that its earlier GNP growth forecast for fiscal year 1992 would be cut from 3.5 percent to 1.6 percent and Japan’s trade surplus would be revised from $96.5 billion to $136 billion. 36 Moreover, the quarterly Tankan released by BOJ revealed that business confidence among the major manufacturers was at its lowest level since the first oil crisis in the mid-1970s.37 Forecasts made by those outside the Japanese economic ministries for the following fiscal year were equally discouraging. Although the EPA optimistically projected real GNP for fiscal year 1993 to grow by 3.3 percent, the OECD revised downward its earlier prediction to 2.3 percent and anticipated no appreciable decline in Japan’s large trade surplus.38

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In light of these trends, Japanese negotiators would soon encounter renewed foreign pressures to adopt further budgetary measures, and U.S. negotiators would once again be at the forefront. Although the transition in the United States from a Republican to a Democratic presidency provided a brief hiatus, the Clinton administration soon turned its attention to the mounting bilateral trade imbalance between Japan and the United States. In mid-February 1993, the U.S. Commerce Department reported that the U.S. trade deficit had risen from $65.4 billion in 1991 to $84.3 billion in 1992. Furthermore, over half the deficit was due to the bilateral trade deficit with Japan, which totaled $49.9 billion.39 Much has been made of the shift in U.S. negotiating strategy toward Japan in the changeover from the Bush to the Clinton administration. To be sure, the Clinton administration emphasized a more “results oriented” or “revisionist” strategy than did the Bush administration in industry-specific negotiations.40 But in talks over macroeconomic policy, there was a remarkable consistency in both the ends that were sought and the means deemed appropriate to achieve them. Indeed, just as the change from the Carter to the Reagan administration produced no tangible difference in the Keynesian prescriptions that were advocated to remedy Japan’s mounting trade surplus, officials in the Clinton administration continued to advocate the same macroeconomic strategy that was favored by the Bush administration. Within weeks after the Clinton administration assumed office, a Japanese delegation headed by Finance Minister Hayashi Yoshiro and Foreign Minister Watanabe Michio was sent to Washington to hold preliminary talks with the new administration. In separate meetings held with topranking U.S. officials from the Departments of Treasury, Commerce, and State, the Japanese delegates repeatedly heard the same message: Japan needed to adopt additional stimulus measures in response to its rising trade surplus and sluggish domestic demand. 41 Less than two weeks later, on February 27, Japanese officials would face similar calls at the broader G-7 forum held in London.42 Diplomatic suasion was accompanied by both a sharp appreciation of the yen and the threat of protectionism against Japanese exports. As the currency market gradually began to move the yen higher against the dollar in early 1993, the stage was now set for U.S. negotiators to use dollar diplomacy as a further incentive to encourage Japan to adopt additional stimulus measures. On February 19, U.S. Treasury Secretary Lloyd Bentsen remarked that he would “like to see a stronger yen” in view of Japan’s large bilateral trade surplus with the United States. Within hours of his statement, the market responded by pushing the yen to a postwar high of 118.23 yen to the dollar by the end of trading in New York.43 Although Japanese officials quickly voiced their disapproval of the sharp appreciation of the yen for fear that it would further dampen the prospect of an

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economic recovery, the currency market, in the absence of foreign support for the Japanese position, continued to favor a stronger yen in the days following Bentsen’s remark.44 Japan’s large trade surplus also elevated the potential threat of trade sanctions against Japanese exports. For U.S. Trade Representative Mickey Kantor, “the 1992 trade results threw four years of improvement in U.S.Japan trade out the window.” As a means of rectifying this imbalance, Kantor advocated a results-oriented policy that contained specific references to quantitative and qualitative measures.45 With Clinton’s backing, the USTR was at the forefront of seeking to renew super 301 legislation that would allow the United States to bypass the multilateral GATT forum and unilaterally impose trade sanctions against trading partners that were deemed to be engaged in “unfair practices.” Moreover, by appointing Laura Tyson to head the Council of Economic Advisors, Clinton was viewed by Japanese officials to be ushering in a more “revisionist” administration that favored a “managed trade” solution to the growing trade imbalance between Japan and the United States.46 Within Japan, opinions were divided over the issue of whether to adopt further budgetary stimulus measures in response to these renewed foreign pressures. Consistent with MOF’s earlier position, Finance Minister Hayashi argued that the latest call for Japan to expand domestic demand was made only in general terms without reference to any specific measures.47 Rather than adopting another stimulus package, Hayashi argued that the fiscal 1993 budget was all that was needed to help prop up the economy and achieve a 3.3 percent growth for the 1993 fiscal year.48 BOJ Chairman Mieno took a similar position, arguing that the G-7 meeting held in London revealed “no need” for an additional set of economic measures to stimulate the economy.49 In contrast, prominent leaders within the LDP were far less optimistic about the future prospect of the economy and more receptive to the idea of compiling an additional stimulus package to help boost the faltering economy. Upon hearing the 3.3 percent forecast for fiscal year 1993, Mitsuzuka Hiroshi, chairman of the LDP’s Policy Affairs Research Council, exclaimed, “It sounds like you are talking about some other country, not our own.” 50 Skeptical of the economic ministries’ forecast for the upcoming year, the Policy Affairs Research Council launched in January a special task force to map out additional measures to stimulate the economy. By late February the task force was prepared to submit a large-scale supplementary package that would exceed the previous 10.7 trillion yen package immediately after the passage of the fiscal 1993 budget.51 Confronted with these opposing positions, Miyazawa once again threw his weight in support of those who favored fiscal stimulus. In anticipation of his first meeting with President Clinton scheduled for mid-April

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and the Tokyo summit slated for early July, Miyazawa clearly recognized that the reduction of Japan’s large trade surplus would be a key topic of international negotiations in the upcoming months. At home, the continued slowdown in the economy was generating renewed calls for fiscal stimulus not only from big business leaders such as Keidanren Chairman Hiraiwa Gaishi and Nissho Chairman Ishikawa Rokuro but from LDP leaders who were anticipating a crucial lower house election to be held later in the year.52 Given the confluence of these international and domestic political concerns, Miyazawa endorsed in late March LDP Secretary General Kajiyama Seiroku’s call to enact a supplementary budget together with the initial budget for fiscal year 1993 during the same Diet session.53 The new stimulus measure was formally approved by the cabinet on April 13, 1993, and passed the upper house Diet on June 9. In total, the new spending package amounted to 13.2 trillion yen, of which 10.6 trillion was earmarked for various public works projects and government-backed loans to boost housing construction.54 Given the sheer size of this new package, equivalent to 2.8 percent of Japan’s GNP for fiscal year 1992, both Finance Minister Hayashi and EPA Director General Funada Hajime stated immediately after the new package was announced that the Japanese economy would achieve a 3.3 percent growth rate for fiscal year 1993. This time, LDP leader Mitsuzuka Hiroshi concurred, stating that the stimulus package would “make certain” that Japan would achieve its growth target of 3.3 percent.55 U.S. officials, however, gave a more cautious response. In his April meeting with Miyazawa, Clinton stated that the stimulus package was a “very good first step toward stronger domestic growth” but that “it must be part of a continued and sustained effort.” Reminiscent of the views expressed during the Carter era, Clinton urged Japan to “lead the way to global economic growth” and “become one of the engines of growth that creates jobs not only in Japan, but throughout the world.”56 Treasury Secretary Bentsen expressed similar reservations about the new stimulus package, noting that it was a “good first step, but Japan has to make a continuing effort to increase demand within its own country.” Treasury Undersecretary Lawrence Summers was more blunt, testifying before the Senate International Finance and Monetary Subcommittee that he “would have liked to see larger Japanese action to provide fiscal stimulus.”57 The rationale behind their statements is not difficult to discern. In the same month that the Miyazawa cabinet announced the 13.2 trillion yen package, BOJ announced that Japan’s overall trade surplus for March 1993 had risen by 26 percent from March 1992 and that bilateral surplus with the United States had increased by over 30 percent to $4.4 billion over the same period.58 Moreover, the amount of fresh spending in the new stimulus package, or what the Japanese term mamizu (pure water), was estimated at

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around 5 to 7 trillion yen; the remainder was simply a reclassification of existing spending or loans that could otherwise be raised in the private capital market.59

Renewed Foreign Pressures and the Collapse of LDP Dominance Given these limitations, the new stimulus measure would provide an even shorter period of respite from foreign pressure than the earlier package. In early July, within a month of the formal approval of the stimulus package, Japanese negotiators were again confronted with renewed calls for greater fiscal stimulus at the Tokyo summit. The prevailing consensus among the summit leaders from the United States and the European Community was that Japan needed to adopt additional measures to boost domestic demand in order to help combat global unemployment and reduce Japan’s sizable trade surplus. 60 With unemployment among the G-7 nations reaching 23 million, both Prime Minister Miyazawa and Foreign Minister Muto Kabun acknowledged that Japan’s large surplus was “an embarrassment,” and Miyazawa pledged to take fresh steps to stimulate the economy if Japan’s economy failed to recover.61 Despite Miyazawa’s pledge, the issue of when and under what conditions the new stimulus package would be adopted remained unclear. In the economic declaration announced at the conclusion of the summit, Japanese negotiators agreed to reduce the nation’s trade imbalance by implementing “fiscal and monetary measures as necessary, to ensure sustained noninflationary growth led by strong domestic demand.”62 Several days later, in a joint statement on “the United States–Japan Framework for a New Economic Partnership,” Japan struck a similar agreement with the United States, pledging to “actively pursue the medium-term objectives of promoting strong and sustainable domestic demand-led growth . . . intended to achieve over the medium term a highly significant decrease in its current account.”63 Although the general tone of these agreements was clear, neither specified a concrete timetable upon which Japan would adopt further stimulus measures. Indeed, given the wording of these statements, the question of whether the agreements actually committed Japan to adopt another stimulus package in the near future was subject to contrasting interpretations. Predictably, MOF officials were adamantly opposed to the idea of adopting another stimulus package. Several days before the summit meeting, MOF budget planners gathered to reaffirm the importance of adopting an austere budget for the next fiscal year. Anticipating a renewed call for fiscal stimulus, MOF Budget Bureau Director Shinozawa Kyosuke reportedly told his colleagues to “make every possible effort” to curb fiscal

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spending on the grounds that the slowdown in the economy was creating large revenue shortfalls. Even after the accord was reached between Japan and the United States, Saito Jiro, administrative vice minister for finance, remarked that “regardless of the framework agreement, we will just continue the policy stance we have taken in the past.” According to Saito, “even if Japan’s surplus swells further over the short term, we will not necessarily be required to take new stimulus measures” because “the framework just sets medium term objectives.”64 Further compounding the uncertainty of whether Japan would soon adopt additional stimulus measures were the profound changes taking place in Japanese domestic politics. Riveted by a series of high-profile scandals and internal discord, the LDP’s position as the long-term party in power was no longer secure. Although allegations of corruption involving LDP politicians were hardly new, the most recent scandals, such as Recruit, Kyowa, Sagawa Kyubin, and Nihon Kominto, had effectively weakened the power of senior LDP politicians most capable of keeping the party together.65 Faced with the worst recession in Japanese postwar history, tension among the 275 LDP Diet members over scarce financial resources and prized government posts rose precisely at the moment when political leadership was most needed but least available. With Takeshita Noboru and Kanemaru Shin no longer in control of the crucial Tanaka faction, Ozawa Ichiro and Hata Tsutomu announced in late October 1992 that they would form a “study group” titled “Reform Forum 21,” made up of thirty-six former Tanaka faction members. By June 1993, this group not only was instrumental in passing a vote of no-confidence against the Miyazawa cabinet but, shortly after the motion was passed, broke away from the LDP to form the Japan Renewal Party (Shinseito). Their defection from the LDP was accompanied by others; Takemura Masayoshi and nine other former LDP members announced the formation of a new political party called Sakigake (Harbinger).66 In the ensuing turmoil, the question of which political parties would assume power and what budgetary policies they would adopt was thrown into doubt. Although the remaining members of the LDP fared well in the lower house election held in July 1993, a month after the no-confidence motion was passed, the party simply lacked the numbers to secure a legislative majority in the Diet.67 With the electoral breakdown, presented in Table 9.1, no single party could hold a majority on its own, a situation that prompted the political leaders from the various parties to explore the possibility of forming a new coalition government in the immediate aftermath of the election. After a series of intense negotiations and political maneuvering, a seven-party coalition—the JSP,68 Shinseito, Komeito, Japan New Party, the DSP, Sakigake, and Shaminren—was forged on August 8, ushering in the end of the LDP’s thirty-eight years of dominance.69

218 Table 9.1

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1993 Lower House Election 40th General Election (July 18, 1993)

LDP JSP Shinseito Komeito Nihon Shinto DSP JCP Sakigake Shaminren Others

39th General Election (February 19, 1990)

# of seats

% of votes

# of seats

% of votes

223 (222) 70 (134) 55 (36) 51 (45) 35 (0) 15 (13) 15 (16) 13 (10) 4 (4) 30 (12)

36.6 15.4 10.1 8.1 8.0 3.5 7.7 2.6 0.7 7.1

275 136 — 45 — 14 16 — 4 22

46.1 24.4 — 8.0 — 4.8 8.0 — 0.9 7.8

Source: Asahi Shinbun, July 19, 1993. Note: Figures in parentheses indicate the preelection strength of each party.

With the LDP weakened and excluded from the governing coalition, Japanese domestic politics entered into a new era of greater uncertainty, but elements of continuity remained. No matter which coalition government came to power, the need to address the severe recession would still be a top economic priority. Moreover, despite the LDP’s fall from power, it still held the single largest share of Diet seats, and the election did not represent a voter realignment in favor of the JSP, the long-standing progressive opposition. In fact, the election strengthened, rather than weakened, the number of conservative politicians in the Diet at the expense of the Socialists. Whereas the JSP’s share of lower house seats fell by almost 50 percent, from 134 to 70, the two splinter parties—the Japan Renewal Party and Sakigake—together with the LDP held a combined total of 291 seats. Furthermore, the Japan New Party (Nihon Shinto), which secured 35 seats, was led by Hosokawa Morihiro, a former LDP politician who had served twelve years in the upper house under the sponsorship of Tanaka Kakuei prior to his tenure as the governor of Kumamoto prefecture.70 The one crucial difference, however, was the internal fragility of the various ruling coalitions that would come to power and the opportunity this weakness would provide MOF officials to more actively pursue their budgetary policy objectives. Although an overwhelming majority in the lower house Diet were now conservative politicians, the possibility of forming a grand conservative coalition was unlikely with the widening rift among the conservative party leaders following the breakup of the LDP. Instead, various coalition governments made up of a patchwork of political parties with

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significant differences in ideology and policy platform would alternate in power. Within eight months, the seven-party coalition led by Hosokawa Morihiro would collapse following allegations that Hosokawa had received illegal contributions. The fate of the next coalition government, led by Hata Tsutomu, was even more tenuous; given the exclusion of the Socialists, it was a minority government susceptible to a vote of no-confidence. After ten weeks, it would hand over control to an LDP-JSP-Sakigake coalition, bringing together the two main parties that had clashed for over four decades on issues of foreign and domestic policy. In the midst of this turbulent domestic political setting, Japan would continue to register slow economic growth and large trade surpluses. In September 1993, a month after the first coalition government was formed, the IMF issued a revised forecast, predicting a 0.1 percent decline in real GNP growth for fiscal year 1993. The revised forecast also projected Japan’s current account surplus to rise from $118 billion in 1992 to $137 billion in 1993 and $141 billion in 1994; the current account deficit of the United States was estimated to rise from $66 billion in 1992 to $112 billion in 1993 and $130 billion in 1994. By December 1993, the OECD projected a 0.5 percent decline in real GNP for 1993 and a mere 0.5 percent growth for the following year.71 The internal fragility of the Hosokawa-led coalition did not prevent it from passing two stimulus packages, but these packages were seen as either insufficient or too mired in contradiction to generate a sustained economic recovery. Less than six weeks after the coalition government assumed power, in anticipation of Hosokawa’s first meeting with President Clinton, his cabinet hastily put together its first set of stimulus measures. On September 16, the Japanese government announced a 6.2 trillion yen package consisting of increased public works spending and low-interest loans together with ninety-four deregulation proposals designed to increase consumer spending. Several days later, the Bank of Japan cut its official discount rate by 0.75 percentage points to 1.75 percent, marking the seventh rate reduction since July 1991.72 These new measures, however, were seen as a watered-down version of earlier packages that had failed to produce a domestic demand–led recovery. The overall size of the new stimulus package was less than half that of the previous package, and the official discount rate even prior to the most recent cut was already at a postwar low and well below comparable rates in the United States and Germany.73 The second stimulus package, though considerably larger than the first, was also met with skepticism. With much fanfare, the Hosokawa cabinet announced on February 8, 1994, a 15.3 trillion yen package touted to raise Japan’s GNP by 2.2 percent. The centerpiece of the new package consisted of a 5.9 trillion yen cut in income and other taxes in conjunction

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with an additional 9.4 trillion yen in new government spending on public works projects, land purchases, and loans to home purchasers and small businesses.74 Despite the record-breaking size and the introduction of tax cuts, the package was seen as only a “modest step” by U.S. Treasury Secretary Lloyd Bentsen, and U.S. Secretary of State Warren Christopher remarked that he was “disappointed” with it.75 In part, Bentsen’s and Christopher’s remarks reflected a broader frustration among U.S. officials in their efforts to secure a tangible reduction in Japan’s current account surplus. A day prior to the announcement of the new package, the Japanese government reported that the nation’s current account surplus in 1993 had posted a record $131 billion, defying the framework agreement reached the previous July to achieve “a highly significant decrease in its current account.”76 Moreover, negotiations between Japan and the United States over industry-specific trade were growing more divisive, with the United States threatening to impose trade sanctions in response to Japan’s refusal to agree to a measurable increase in the market share of foreign products. Another source of contention was over the stimulus package itself. As with the previous packages, the 15.3 trillion yen package included the reclassification of existing spending programs as opposed to fresh spending and government loans that simply replaced private bank lending.77 Even tax cuts, a measure that was strongly endorsed by U.S. government officials, were marked by political controversy and compromises and thus offered little reassurance that they would foster a sustained economic recovery. The events leading up to the tax cuts provide a telling example of how MOF officials were able to define and pursue their autonomous interests by taking advantage of the political instability within the coalition government. At a predawn press conference on February 3, 1994, Hosokawa announced his intention to abolish the existing 3 percent consumption tax and introduce in its place a new “national welfare tax” of 7 percent starting April 1, 1997. The motivating force behind his announcement can be directly traced to MOF. Although Hosokawa personally favored cutting income tax as the means to stimulate the economy, MOF Administrative Vice Minister Saito Jiro argued that any decisions about tax cuts must be made within the broader context of a comprehensive tax reform that entailed raising the consumption tax to offset any reductions in the income tax. Saito reportedly threatened to delay the drafting of the budget if this offsetting increase was not implemented.78 Hosokawa’s statement immediately drew sharp dissent within the coalition. The Socialists, who had vehemently opposed the initial 3 percent consumption tax adopted in 1989, threatened to pull out of the coalition unless Hosokawa dropped his proposal. Even politicians from the Japan New Party and Sakigake were troubled by what they perceived as a backroom

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deal between Hosokawa, MOF officials, and the leaders of Shinseito (Ozawa Ichiro) and Komeito (Ichikawa Yuichi).79 Faced with the prospect of running a minority government, Hosokawa acquiesced to these demands, issuing a public apology over his handling of the tax issue. The coalition parties agreed to set up by the end of the calendar year a committee that would discuss how to make up for the revenues lost as a result of the tax cut. With the proposal to increase taxes placed on the back burner, Hosokawa was able to announce the 15.3 trillion yen stimulus package with the full support of the coalition parties, but by this point the damage was already done. Hosokawa had not only weakened his personal credibility and fueled greater divisiveness among the coalition parties, but his handling of the tax issue raised serious doubts that it would generate a significantly higher level of consumer spending and domestic demand. The tax cut, which represented a 20 percent across-the-board cut in national and local income taxes, was a significant departure from previous packages that focused chiefly on achieving fiscal stimulus through higher levels of government spending. But with the severity of the recession, a tax cut billed as only a temporary one-year measure that would be offset by a corresponding tax increase in the future offered little incentive for wage earners to spend rather than save the additional income. In an effort to address this shortcoming, the LDP-JSP-Sakigake coalition that came to power in late June 1994 immediately set to work on promoting greater fiscal stimulus through further tax cuts. The tax reform package that was approved by the new coalition government provides another example of how MOF officials were able to enter into the decisionmaking process and pursue their policy objectives. Though by no means a clear victory for MOF, the tax reform plan that was approved by the Murayama cabinet represented a scaled-back version of MOF’s earlier plan to treat tax cuts and the consumption tax hike as a single reform package.80 The tax reform plan, announced on September 22, 1994, consisted of a permanent 15 percent reduction in income tax along with an additional 2 trillion yen cut for 1995 and 1996. To offset these tax cuts, the consumption tax would be raised from 3 to 5 percent, but its implementation would be delayed until April 1997 in an effort to promote a sustained economic recovery.81 Although tax cuts were extended for two additional years and the consumption tax was raised to 5 percent instead of the 7 percent that was originally planned during the Hosokawa administration, MOF could nonetheless claim partial victory in having raised the controversial consumption tax above the existing rate. These concerns notwithstanding, this tax reform package drew a far more favorable response than the one sponsored by the Hosokawa cabinet. With the world economy showing signs of a full recovery and Japan

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committed to adopting a stimulus package that would cut taxes for two consecutive years, the economic trends were finally moving in the right direction. In its semiannual report released in late September 1994, the IMF declared that the prolonged downturn in the world economy had finally come to an end; world output was expected to rise by 3.1 percent in 1994 and by 3.6 percent in 1995. The report also stated that the Japanese economy had moved out of recession during the first quarter of 1994, would gain greater momentum throughout the second half of the year, and would post a 2.5 percent growth in 1995.82 Given these favorable trends, Treasury Secretary Bentsen remarked that he was “pleased” with Japan’s new tax reform package, noting that the “delay in the consumption tax will continue the stimulus to Japan’s recovery.”83 Similar views were expressed at a G-7 meeting held in Madrid a week after the tax plan was announced. At the conclusion of their meeting, the top financial officials of the G-7 nations issued a summary statement announcing that “all G-7 countries are now on the path of expansion” and economic conditions in the major industrial countries were “better than they have been for some time.”84 This turnaround in the world economy would provide Japanese negotiators with a longer period of reprieve from foreign criticism than they had hitherto enjoyed. Although negotiations over industry-specific trade would become more divisive in the following months, international demands for greater Japanese fiscal stimulus would diminish as Japan’s trade surplus continued to fall. From October to December 1994, the surplus fell by 1.5 percent from the same period in 1993, marking the second straight quarterly drop in calendar year 1994. Over the next three months, the surplus declined by an even sharper rate, falling by 9.2 percent to $28 billion, with imports rising almost twice as fast as exports. With three consecutive quarters of decline, Japan’s trade surplus for fiscal year 1994, which ended on March 31, 1995, dropped for the first time in four years, down 3.2 percent from the previous year.85 Less encouraging, however, were the quarterly figures for Japan’s GDP growth. After posting an impressive 3.7 percent annualized rate of growth in the third quarter of calendar year 1994, real GDP contracted in the fourth quarter by 3.4 percent on an annualized basis.86 Moreover, in light of the devastating earthquake that hit the Kansai region on January 17, 1995, and the sharp appreciation of the yen in the early months of that year, earlier predictions about a full recovery in 1995 were thrown into doubt. Predictably, MOF officials were adamantly opposed to the idea of adopting any further stimulus packages to help boost the slumping economy. Although a supplementary budget would have to be drawn up to help reconstruct areas devastated by the earthquake, MOF’s initial plan was to limit the overall size of the package to under 1 trillion yen and utilize the surplus reserved from the fiscal-year 1994 budget together with construction bonds

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to finance the new expenditures.87 When these revenues proved insufficient, MOF switched tactics, calling for either a tax increase or cuts in other government expenditures.88 These proposals, however, were neither feasible nor politically viable. Deficit-financing bonds would be required even without any additional spending because the sharper than expected slowdown in the economy produced a 600 billion yen shortfall in tax revenues for fiscal year 1994. Moreover, with a growing number of voters expressing strong dissatisfaction with established political parties, the coalition government was committed to adopting a stimulus package prior to the upper house elections slated for July.89 Hence, in late February, a 1.02 trillion yen supplementary budget for earthquake relief measures was promptly passed in the lower house Diet; 810.6 billion yen of the total amount was financed through the issuance of deficit-financing bonds.90 Six weeks later, the Murayama cabinet approved an emergency stimulus package that would combine further spending for the quake-devastated Kansai region together with additional budgetary measures and a 0.75 percent reduction in the official discount rate in an effort to counter the recessionary impact of a stronger yen. Although the overall size of this stimulus package, totaling 2.7 trillion yen, was considerably smaller than the previous packages, the leaders of the ruling coalition parties vowed to adopt a more substantial package by fall if the pace of economic recovery fell further.91 The economic and political trends that followed pointed to another large-scale stimulus package. Although MOF officials remained opposed to increasing expenditures through deficit financing, their concerns were overshadowed by the continued downturn in the economy and its political impact on the ruling coalition.92 In each of the monthly economic reports issued by the EPA from July to September, the agency announced that the economic recovery had clearly stalled, and the BOJ’s quarterly tankan revealed that business confidence had fallen for the first time since November 1993.93 In the face of these trends, the IMF in late August revised its forecast for Japan’s economic growth to a mere 0.4 percent for the year.94 For the ruling coalition, the political implications were clear. In the upper house election held on July 23, the ruling coalition parties suffered a heavy setback; party leaders attributed the poor showing to the public’s demand for stronger policy measures to stimulate the economy. Moreover, big business leaders such as Keidanren Chairman Toyoda Shoichiro and Keizai Doyukai Chairman Ushio Jiro were also vocal advocates of a large-scale stimulus package.95 Hence, in a notable display of unanimity, Socialist Prime Minister Murayama Tomiichi, MOF Minister and Sakigake leader Takemura Masayoshi, and LDP leaders such as Secretary General Mitsuzuka Hiroshi and MITI Minister Hashimoto Ryutaro pledged to adopt a large-scale stimulus package financed by the issuance of deficit bonds.96

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With much fanfare, the Murayama cabinet unveiled on September 20 a 14.2 trillion yen stimulus package, of which a record-breaking 12.8 trillion was earmarked for public works projects. Moreover, in contrast to previous packages, this one was touted to contain a higher percentage of “pure water” spending, roughly 8 trillion yen of direct disbursements from the central and local governments that were expected to generate real demand within the fiscal year. All told, the package totaled roughly 3.3 percent of GNP, and the government predicted that the stimulus measures, combined with the lowering of the Official Discount Rate from 1.00 percent to 0.50 percent, would push nominal GNP to 2.2 percent.97 Although many private forecasters were less optimistic about the growth potential of Japan’s economy, the package nonetheless drew considerable praise both at home and abroad.98 The large-scale stimulus package was the fifth such package Japan had adopted since August 1992; the nation would not adopt another for over two years. In the two quarters following the announcement of the stimulus package, Japan’s economy showed distinct signs of a recovery. After registering a 4.8 percent growth in the October–December 1995 period, the seasonally adjusted GDP growth for the January–March 1996 period jumped 12.7 percent on an annualized basis, a rate of expansion greater than the previous eight quarters combined. Equally heartening were the quarterly figures for Japan’s current account surplus, which in yen terms fell respectively by a seasonally adjusted 94.1 percent and 97.4 percent over the same two quarters.99 Furthermore, both the reduction in Japan’s current account surplus and the recovery led by domestic demand growth would extend into the following year. As can be seen in Table 9.2, although the surplus would drop precipitously from $111.4 billion in 1995 to $65.8 billion in 1996, real domestic demand would rise from 2.3 percent to 4.8 percent and real GDP from 1.5 percent to 3.9 percent in the same period. Accordingly, with the current account surplus down and domestic demand–led recovery in full swing, Japanese policymakers turned their attention to the task of combating the massive debt that had accrued over the last three years.

Conclusion The evidence I present in this chapter again confirms the strength of this book’s two-level hypothesis. I argued in Chapter 2 that the postwar international economic system, guided by the principles of embedded liberalism, requires distinct forms of political leadership. In contrast to those who posit that international negotiations over fiscal policy will dissipate either as a result of the growing globalization of the international capital

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Table 9.2

Japan’s Real GDP and Current Account Balance, 1990–1996

Current account ($ billion) Current account (% GDP) Real GDP Real domestic demand

1990

1991

1992

1993

1994

1995

1996

43.9 1.5 5.1 5.2

68.4 2.0 3.8 2.9

112.3 132.0 3.0 3.1 1.0 0.3 0.4 0.1

130.6 2.8 0.6 1.0

111.4 2.2 1.5 2.3

65.8 1.4 3.9 4.8

Source: IMF (1998:146, 182). Note: Figures for real GDP and real domestic demand represent annual percent change.

market or because of the ideational change from Keynesianism to monetarism, I argued that Japan’s fiscal policy will remain directly linked to issues of international cooperation and burden sharing for two reasons. First, as a means of redressing balance of payment imbalances, Japanese budgetary policies that promote fiscal expansion help stem the threat of protectionism that arises when Japan accumulates large and persistent trade surpluses. Second, during times of prolonged world recessions, fiscal expansion helps reduce protectionist pressures by providing an active and open market for distressed goods. By stimulating a stagnant world economy, it provides a positive-sum environment in which the economic benefits to be gained from free trade help ease the process of adjustment and encourage domestic interest groups to form free-trade coalitions. Accordingly, I predicted that international pressures for greater Japanese fiscal expansion emerge whenever Japan begins to mount large and persistent trade surpluses or when the world economy enters into a prolonged downturn. Both of these conditions were evident in the early 1990s. In 1991 Japan registered its first increase in its current account surplus after four consecutive years of surplus reduction. Although the surplus was a mere $35.8 billion, or 1.2 percent of GDP, in 1990, it jumped to $72.9 billion, or 2.2 percent of GDP, in 1991. The following year, the surplus rose by over 60 percent to $117.6 billion, or 3.2 percent of GDP. These changes occurred at a time when concerns about a prolonged world economic downturn and its impact on unemployment were rising among the leaders of the advanced industrial countries. Whereas GDP growth for the industrial countries averaged 3.6 percent from 1988 to 1990, it fell to a mere 0.8 percent in 1991 and remained at a low 1.3 percent in 1993.100 Consistent with my hypothesis, the emergence of these two conditions—Japan’s mounting trade surplus and a prolonged downturn in the world economy—sparked renewed international pressures on Japanese fiscal policy. International negotiations over Japanese fiscal policy not only resumed in various multilateral forums such as the G-7 and economic sum-

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mits but also became more firmly entrenched in bilateral negotiations between Japan and the United States. Moreover, diplomatic suasion was accompanied by both the threat of market closure against Japanese exports and the sharp appreciation of the yen. From April 1992 to April 1995, the yen-dollar exchange rate rose from a monthly average of 133.6 to 83.7 yen to the dollar, and the sharp appreciation of the yen was viewed by Japanese policymakers as both a direct market response to Japan’s mounting trade surplus and an inducement to adopt a large-scale stimulus package.101 In the face of these international pressures, Japan adopted a series of budgetary initiatives that were far more cooperative than in the previous decade. As I detailed in Chapter 6, Japanese negotiators in the 1980s resisted international demands for Japan to increase its level of government spending for more than two years. When they finally responded with a 6 trillion yen package in May 1987, its macroeconomic impact was only marginal; rather than produce a fiscal stimulus, the package merely made Japan’s fiscal policy less contractionary. In contrast, Japanese policymakers responded in the 1990s in a far more cooperative manner, adopting five large-scale stimulus packages between August 1992 and September 1995. As can be seen in Table 9.3, these five packages totaled 59.4 trillion yen, or 12.6 percent of GDP. To be sure, the actual fiscal impact of each stimulus package was smaller than the announced figures, but the sizable “pure water” content contained in each package ensured that Japanese budgetary policy would produce a genuine fiscal stimulus during this period.102 What accounts for this contrasting response? The crucial difference lies in domestic politics. Whereas international pressures for greater Japanese fiscal expansion in the 1980s took place at a time when Japan’s ruling coalition was already committed to a policy of deficit reduction through fiscal austerity, that commitment had eroded in the early 1990s as Japan entered into a prolonged recession. As the recession deepened, big business leaders, who had thrown their weight in support of the administrative and

Table 9.3

Fiscal Stimulus Packages, 1992–1995

August 1992 April 1993 September 1993 February 1994 September 1995 Total Source: IMF (1998:115).

Amount (in trillions of yen)

Percent of GDP

10.7 13.2 6.0 15.3 14.2 59.4

2.3 2.8 1.3 3.2 3.0 12.6

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227

fiscal reform (Rincho) movement in the early 1980s, became vocal advocates of fiscal expansion from 1992 onward. Moreover, the new middle mass voters who had tacitly supported the Rincho movement during the 1980s were now also supporters of fiscal expansion. The only significant political actor that remained committed to pursuing fiscal austerity was MOF. Given these policy preferences, the political incentive for the LDP, as well as for the various coalition parties that came to power, clearly favored the adoption of budgetary policies that promoted fiscal stimulus through deficit financing. This is not to suggest, however, that MOF was merely a passive register of the ruling coalition’s demands or that it was simply an agent of other principal actors. MOF was an autonomous actor that vigorously pursued its interest, and the political instability that emerged after the collapse of LDP dominance gave MOF officials such as Administrative Vice Minister Saito Jiro the opportunity to pursue MOF’s interests more forcefully, as seen in the controversy over the consumption tax during the Hosokawa administration. The evidence presented in this chapter, however, in no way supports the contention that MOF was a strong state capable of dictating policy outcomes against the opposition of the ruling coalition. After successfully eliminating the issuance of deficit-financing bonds in 1990, MOF’s major objective, as enunciated in its “Zaisei Saiken no Shin Mokuhyo” (New Goal for Fiscal Reconstruction), was to reduce the issuance of construction bonds and lower the overall bond dependence ratio from 8.5 percent in 1990 to 5.0 percent by 1995. But given the overwhelming support for fiscal expansion, the government began to reissue deficit-financing bonds and construction bonds, and the bond dependence ratio soared to 28.2 percent by 1995. Moreover, in an effort to keep overall spending down, MOF was again forced to rely heavily on hidden debt, postponing over 40 trillion yen worth of various obligatory payments from the general account budget and borrowing the necessary funds from other government accounts.103 Once the economy began to show signs of a recovery, posting a real GDP growth of 1.5 percent in 1995 and 3.9 percent in 1996, the Hashimoto administration temporarily turned its attention to the task of reducing the sizable deficit incurred in the first half of the decade. The bond dependence ratio, which stood at a low 9.5 percent in 1991, climbed to 28.2 percent by 1995.104 Accordingly, the government not only adopted a stringent budget for fiscal year 1997 but also phased in as scheduled a consumption tax increase from 3 to 5 percent. Moreover, in November 1997 the Hashimoto administration enacted the Fiscal Reform Law, which called for the elimination of deficit finance bonds by the end of fiscal year 2003 and the reduction of the combined budget deficit of national and local governments to 3 percent of GDP or less.105

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However, within less than a year from the enactment of the bill, the government would be forced to reverse course as the economy slid back into a serious recession. In April 1998, the Hashimoto administration unveiled a new stimulus package worth over 16 trillion yen. Although the pure water content of this package was once again smaller than the government proclaimed, the tax cuts and public works spending contained within it would enlarge the deficit and force the government to push back the target year of the Fiscal Reform Law to 2005.106 Seven months later, with no recovery in sight, the government announced an even bigger stimulus package, worth 24 trillion yen. With this package, the government suspended the Fiscal Reform Law, as the bond dependence ratio soared to a record-high 38.6 percent.107

Notes 1. Broken down in yearly figures, Japan’s real GNP grew by 6.2 percent in 1988, 4.7 percent in 1989, 4.8 percent in 1990, and 4.3 percent in 1991. Real total domestic demand rose by 7.6 percent in 1988, 5.8 percent in 1989, 5.0 percent in 1990, and 2.9 percent in 1991. Figures taken from IMF (1994:119, 152). 2. Excerpts of the London summit reported in Financial Times (July 18, 1991). 3. Asahi News Service (December 30, 1991), Japan Economic Newswire (December 28, 1991). 4. Janot (1994:67), Schoppa (1997:129–132). 5. The full text of the final SII agreement reported in Daily Yomiuri (June 29, 1990). 6. Missing in the agreement was any mention of where the revenues for public works spending would come from, nor was there any mention of adjusting the overall figures for inflation. 7. For an economic analysis of the bubble economy and its collapse, see Hamada (1995:263–286), Cargill, Hutchison, and Ito (1997:91–116), Noguchi (1994). 8. Reported in Japan Economic Newswire (July 4, 1991). 9. Jiji Press Ticket Service (December 20, 1991). 10. Japan Economic Newswire (March 21, 1992), Japan Economic Newswire (April 24, 1992). 11. MOF figures reported in Daily Yomiuri (April 19, 1992), GDP figures are from IMF (1994:119). 12. Figures complied from BOJ and MOF statistics and reported in JEI Report (September 17, 1993:14). 13. Mulford’s and Brady’s remarks reported respectively in Jiji Press Ticker Service (April 8, 1992; April 13, 1992). 14. The full text of the G-7 statement reported in Jiji Press Ticker Service (April 27, 1992). 15. Sapin’s remark reported in Japan Economic Newswire (May 18, 1992), Jiji Press Ticker Service (May 18, 1992). Franklin’s reported in Japan Economic Newswire (May 18, 1992), Daily Yomiuri (May 21, 1992).

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16. Japan Economic Newswire (March 31, 1992). 17. Hata’s remark reported in Times (April 1, 1992). 18. This new goal, titled “Zaisei Saiken no Shin Mokuhyo,” was announced by MOF in February 1990. Asahi Shinbunsha (1991:136). 19. Journal of Commerce (April 30, 1992). 20. Financial Times (June 5, 1992). 21. Jiji Press Ticker Service (June 12, 1992), Reuter Library Club (June 17, 1992). 22. Journal of Commerce (June 17, 1992). 23. Journal of Commerce (June 22, 1992; June 23, 1992). 24. Daily Yomiuri (June 7, 1992). 25. Japan Economic Newswire (June 10, 1992), Journal of Commerce (June 11, 1992). 26. Daily Yomiuri (June 23, 1992). 27. Nikkei Weekly (June 13, 1992). 28. Japan Economic Newswire (June 10, 1992), Asahi News Service (19 June 1992). 29. Daily Yomiuri (June 23, 1992), Japan Economic Newswire (June 23, 1992). 30. New York Times (July 2, 1992), Daily Yomiuri (July 3, 1992). 31. Jiji Press Ticker Service (July 1, 1992). 32. Financial Times (July 6, 1992). 33. Nikkei Weekly (July 11, 1992). 34. Ministry of Finance (1995:59). 35. The fiscal impulse data taken from IMF (1994:139). 36. Financial Times (December 21, 1992). 37. Japan Economic Newswire (December 11, 1992). 38. The OECD forecast reported in Japan Economic Newswire (December 17, 1992). The EPA’s estimate reported in Financial Times (December 21, 1992). 39. Daily Yomiuri (February 20, 1993). 40. For an in-depth treatment, see Schoppa (1997). 41. These meetings included talks with Treasury Secretary Lloyd Bentsen, Secretary of State Warren Christopher, Commerce Secretary Ron Brown, and Deputy Treasury Secretary Roger Altman and were reported in Daily Yomiuri (14 February 1993), Washington Post (February 14, 1993), Japan Economic Newswire (February 11, 1993). 42. Asahi News Service (March 5, 1993), Daily Yomiuri (March 1, 1993). 43. Bentsen’s remark reported in Daily Yomiuri (February 21, 1993), Financial Times (February 20, 1993). 44. For Miyazawa’s response, see Jiji Press Ticker Service (February 26, 1993). For BOJ Governor Mieno’s response, see Jiji Press Ticker Service (April 7, 1993). For MOF’s position, see Jiji Press Ticker Service (March 4, 1993). 45. Kantor’s remark reported in Daily Yomiuri (February 20, 1993). 46. The Japanese government’s concern about a shift to “managed trade” reported in New York Times (April 20, 1993), Asahi News Service (April 22, 1993), Daily Yomiuri (April 28, 1993). 47. Hayashi’s statement following the Washington meeting reported in Jiji Press Ticker Service (February 15, 1993). His remarks after the G-7 meeting reported in Jiji Press Ticker Service (March 1, 1993). 48. Daily Yomiuri (February 14, 1993), Asahi News Service (March 5, 1993). 49. Jiji Press Ticker Service (March 1, 1993), Asahi News Service (March 5, 1993).

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50. Mitsuzuka’s remark reported in Financial Times (December 21, 1992). 51. Daily Yomiuri (February 24, 1993). 52. Jiji Press Ticker Service (January 5, 1993; March 16, 1993), Asahi News Service (March 5, 1993). 53. Jiji Press Ticker Service (March 22, 1993). 54. The details of the package reported in Nikkei Weekly (June 21, 1993). 55. Jiji Press Ticker Service (April 13, 1993), Los Angeles Times (April 14, 1993). 56. Jiji Press Ticker Service (April 19, 1993), Nikkei Weekly (April 19, 1993). 57. Bentsen’s and Summers’s remark reported respectively in Japan Economic Newswire (April 30, 1993; May 26, 1993). 58. Los Angeles Times (April 13, 1993), Associated Press (April 13, 1993). 59. Economist (April 17, 1993), Japan Economic Newswire (April 13, 1993), Los Angeles Times (April 14, 1993). 60. British Prime Minister John Major and U.S. Treasury Secretary Bentsen’s call for additional Japanese stimulus reported in Japan Times (July 8, 1993). A similar statement made by EC Economic Affairs Commissioner Henning Christopher reported in Japan Economic Newswire (July 6, 1993), Jiji Press Ticker Service (July 9, 1993). 61. Japan Times (July 7, 1993), Japan Economic Newswire (July 9, 1993). 62. Agence Europe (July 11, 1993), Daily Yomiuri (July 10, 1993), Federal News Service (July 9, 1993). 63. The full text reported in Daily Yomiuri (July 11, 1993). 64. Shinozawa’s and Saito’s remark reported in Nikkei Weekly (July 19, 1993). 65. For two contrasting accounts of political corruption and the breakup of the LDP, see Johnson (1995:212–234), Schlesinger (1997:231–285). 66. Daily Yomiuri (June 22, 1993), Asahi News Service (June 22, 1993). 67. Roughly 80 percent of the LDP incumbents were reelected, and the total seats held by the party rose from 222 prior to the election to 223. Figures reported in Asahi Shinbun (July 19, 1993). 68. At a party convention held in February 1991, the Japan Socialist Party changed its official English name to the Social Democratic Party of Japan, and in January 1996 changed its Japanese name to Shakai Minshuto. However, to avoid confusion and to remain consistent with the terminology used throughout this book, I will continue to use the term JSP for the remainder of this chapter. 69. For an in-depth account of the negotiations that took place in forming the new coalition government, see Akasaka (1993:182–190). 70. Ando and Angel (1994:24). 71. The IMF’s forecast reported in Japan Economic Newswire (September 24, 1993); the OECD’s forecast reported in Daily Yomiuri (December 21, 1993). 72. New York Times (September 17, 1993), Japan Economic Newswire (September 17, 1993). 73. The comparable rate in the United States was 3 percent, and Germany’s was set at 6.25 percent. Facts on File World News Digest (September 23, 1993), Daily Yomiuri (September 22, 1993). 74. Associated Press (February 8, 1994), Japan Economic Newswire (February 8, 1994). 75. Bentsen’s and Christopher’s statements reported respectively in the Washington Post (February 9, 1994), Japan Economic Newswire (February 11, 1994). 76. Japan Economic Newswire (February 8, 1994). 77. Washington Post (February 9, 1994), JEI Report (July 8, 1994).

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231

78. Toshikawa (1995:29–33), Igarashi (1995:23–31), Hartcher (1998:205–208). 79. Among the Socialists, Construction Minister Igarashi Kozo accused Hosokawa of being “intoxicated with his own popularity,” and SDP Vice Chairman Oide Shun remarked that “he is nothing but a feudal lord after all.” Though more tempered, even Sakigake leader Takemura Masayoshi remarked that Hosokawa’s abrupt decision over the tax increase was “an error.” Their remarks reported in Nikkei Weekly (February 7, 1994), Daily Yomiuri (February 8, 1994), Asahi News Service (February 8, 1994). 80. For an insider’s account, see Igarashi (1995:71–79). See also Toshikawa (1995:184–196). 81. Daily Yomiuri (September 23, 1994), Nikkei Weekly (September 26, 1994). 82. Financial Times (September 29, 1994), Nikkei Weekly (October 3, 1994). 83. International Herald Tribune (September 23, 1994), Nikkei Weekly (September 26, 1994). 84. The G-7 statement reported in Jiji Press Ticker Service (October 3, 1994). 85. Quarterly trade figures taken from JEI Report (May 5, 1995). Fiscal 1994 trade figures were announced by MOF and reported in Daily Yomiuri (April 15, 1995). 86. Jiji Press Ticker Service (March 17, 1995), JEI Report (March 24, 1995). 87. Japan Economic Newswire (January 27, 1995), Japan Weekly Monitor (January 30, 1995). 88. The initial call for such measures was made in late February by Nagaoka Minoru, a former MOF career official who was serving as acting chairman of the Fiscal System Council, an MOF-sponsored advisory body. By early May MOF issued its formal recommendation, calling for a 5 percent freeze on public works spending and a 15 percent cut in administrative expenses. Nagaoka’s statement reported in Japan Weekly Monitor (February 20, 1995), Japan Economic Newswire (February 24, 1995). MOF’s formal recommendation reported in Japan Weekly Monitor (March 6, 1995). 89. In two local elections held in early April, independent candidates Aoshima Yukio and “Knokku” Yokoyama won the Tokyo and Osaka gubernatorial elections respectively. Seventy percent of those who voted for Aoshima and 54 percent for Yokoyama stated that they did not support any political party. Moreover, in an Asahi poll conducted prior to the upper house election, 56.7 percent stated that they did not like any political party (“suki na seito nashi”). Asahi Shinbunsha (1996:234). 90. Daily Yomiuri (February 28, 1995), Japan Weekly Monitor (February 27, 1995). 91. In late June, the LDP, the Socialists, and the Sakigake coalition issued a joint policy proposal calling for a “large-scale, effective” second supplementary budget that would actively use public bonds to stimulate the economy. The ruling coalition’s new policy platform reported in Reuters World Service (June 30, 1995). 92. MOF officials’ position reported in Japan Economic Newswire (August 31, 1995), Nikkei Weekly (September 4, 1995). 93. The EPA’s monthly reports covered in Reuters World Service (July 11, 1995), Daily Yomiuri (August 9, 1995), Jiji Press Ticker Service (September 11, 1995). The BOJ tankan reported in Jiji Press Ticker Service (September 8, 1995), Daily Yomiuri (September 9, 1995). 94. Reuters World Service (August 28, 1995). 95. Jiji Press Ticker Service (July 24, 1995; August 8, 1995). 96. Murayama and Takemura’s statements reported respectively in Jiji Press Ticker Service (August 8, 1995), Daily Yomiuri (August 10, 1995). Mitsuzuka’s

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and Hashimoto’s reported in Japan Economic Newswire (August 15, 1995), Japan Weekly Monitor (August 28, 1995). 97. The content of the stimulus package reported in Jiji Press Ticker Service (September 20, 1995), Daily Yomiuri (September 21, 1995). 98. Immediately after the package was announced, big business leaders such as Keidanren Chairman Toyoda Shoichiro, Nikkeiren President Nemoto Jiro, and Nissho Chairman Inaba Kosaku all praised the larger than expected package and called for its early enactment in the Diet. Jiji Press Ticker Service (September 20, 1995). Laura Tyson, the head of the U.S. National Economic Council, called it “a significant effort in the right direction.” Jiji Press Ticker Service (September 21, 1995). U.S. Treasury Secretary Robert Rubin stated that “the Japanese authorities have taken a series of constructive policy action in keeping with the cooperative strategy for growth and the adjustment of external balances.” Jiji Press Ticker Service (September 20, 1995). 99. Figures are from the Economic Planning Agency and reported in JEI Report (June 28, 1996). 100. Figures taken from IMF (1994:119, 152). 101. The exchange rate figures taken from JEI Report (January 19, 1996). 102. According to OECD estimates, the stimulus packages raised output by roughly 4 percent and reduced the scale of the recession by about half. OECD (1996:21). According to the IMF’s fiscal impulse data, which measures the extent to which a nation’s fiscal policy is contractionary or expansionary, Japan’s fiscal policy during the 1992–1995 period was expansionary, with the fiscal impulse averaging 0.95 percent of GDP. IMF (1996:137). 103. The bond dependence ratio taken from Tamura (1996:303). The size of the hidden debt reported in Japan Weekly Monitor (November 20, 1995). 104. Ministry of Finance (1998:9). 105. IMF (1998:116–117). 106. Jiji Press Ticker Service (April 24, 1998). See also Posen (1998:51–54). 107. Japan Weekly Monitor (November 30, 1998).

10 Evaluating the Politics of Japanese Budgetary Policy

Japanese budgetary policy has become highly politicized both at home and abroad since the early 1970s. In an effort to answer why this is so and how international and domestic politics interact and influence policy outcomes, I presented in Part 1 a two-level theoretical framework that follows three distinct steps. The first is to examine why Japan has encountered international pressures to adopt budgetary policies that promote fiscal expansion and the manner in which Japan has responded to these pressures. I then identify the interests and objectives of all the relevant domestic political actors who compete over budgetary policy outcomes and analyze the institutional context through which these political actors channel their demands into the overall domestic decisionmaking process. Finally, I uncover how and to what extent international and domestic political forces interact over time to shape the incentive structure of policymakers and influence policy outcomes. In this concluding chapter, I examine the explanatory strength of the hypotheses stated in Part 1 in light of the empirical evidence presented in the case study chapters, and I draw out the broader theoretical and policy implications of my findings.

The International Politics of Japanese Budgetary Policy Why has Japan repeatedly faced strong international pressures to adopt budgetary policies that promote fiscal expansion since the 1970s, and how has Japan responded to these pressures? In Chapter 2, I argued that the stability of the international economic system reflects the underlying power structure that sustains it. Politics matter, even in an international economic system based on laissez-faire principles, because its stability depends upon the presence of a powerful state both willing and able to provide the 235

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political leadership necessary for its maintenance. Changes in the distribution of power among the major states will thus generate conflict and spark negotiations among the major powers over who will bear the cost of political leadership in the future. I further argued that in a postwar international economic system governed by the principles of embedded liberalism, the budgetary policy of a powerful nation serves two important leadership functions. First, as a means of redressing balance of payments adjustment, budgetary policies that promote fiscal expansion help stem the threat of protectionism that rises when nations accumulate large and persistent trade imbalances. While remedying trade imbalances may not be necessary or desirable from the standpoint of economic efficiency, trade friction and political tension arise when a nation continues to mount large trade surpluses and uses these funds to acquire an increasing amount of foreign assets. Second, during times of prolonged world recessions, fiscal expansion helps reduce protectionist pressures by providing an active and open market for distress goods. By stimulating a stagnant world economy, it provides a positivesum environment wherein the economic benefits to be gained from free trade help ease the process of adjustment and encourage domestic interest groups to form free-trade coalitions. Hence, given the relative decline of U.S. economic power and the economic ascendancy of Japan, my hypothesis predicts that international pressures on Japan to adopt an expansionary fiscal policy will emerge under two conditions: when there are world economic recessions and when Japan accumulates persistent and rising current account surpluses from year to year. The evidence presented in the case studies of the 1970s, 1980s, and 1990s confirm this hypothesis with remarkable consistency. In all three cases, international demands for Japan to adopt budgetary policies that promoted fiscal expansion emerged when Japan began to mount persistent current account surpluses amid fear of a global recession. In the 1970s case, Japan’s current account, as a percentage of GNP, rose steadily from –0.1 percent in 1975 to 1.9 percent by 1978. Moreover, this period was also a time when world economic recovery from the oil shock appeared uncertain. After showing initials signs of recovery in the first half of 1976, the recovery had come to a halt by the end of the year, and unemployment in the industrial West reached record levels by the summer of 1977. In the 1980s case, international pressures for greater Japanese fiscal expansion resurfaced in 1985 as Japan steadily began to accumulate large trade surpluses. Although Japan’s current account surplus in 1982 was a mere $6.9 billion, or 0.6 percent of GNP, by 1985 the surplus had risen to $49.5 billion, or 3.7 percent of GNP. Moreover, given the growing budget and current account deficits of the United States, this period was also marked by growing concerns about the sustainability of the U.S.-led world economic

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recovery following the second oil crisis. In the 1990s case, international pressures reemerged as Japan’s current account surplus rose sharply from 1.2 percent in 1990 to 3.1 percent in 1993. By 1992, international negotiations over Japan’s fiscal policy not only resurfaced in multilateral forums, such as the economic summit meetings, but became further institutionalized after a series of bilateral negotiations were conducted between Japan and the United States during the SII and the framework talks. The significance of these findings goes well beyond a simple confirmation of my hypothesis. Arguably, no question in the field of international political economy has received greater attention than that of how the international system will unfold in response to the relative decline of U.S. economic power from the early postwar era. The issue of whether other economic powers such as Japan will step up and assume a greater share of the leadership burden has spawned a rich debate between neorealist and neoliberal theorists. In addressing this debate, however, these scholars have focused primarily on the issue area of international trade and finance but have paid little attention to budgetary policy despite its persistent importance in international negotiations since the mid-1970s. Moreover, to the extent that such studies have been conducted, their explanations and predictions contrast sharply with those I present here. One alternative explanation is made by scholars who stress the importance of ideas and ideational changes. As prevailing ideas wane and new ideas emerge and become institutionalized, policy outcomes are also expected to change. In the context of this study, the most relevant ideational change cited by proponents of this view is the transition from Keynesianism to monetarism in the early 1980s.1 Among the major advanced industrial nations, the 1980s ushered in conservative leaders such as Ronald Reagan, Nakasone Yasuhiro, and Margaret Thatcher who repudiated Keynesianism and championed a return to monetarist orthodoxy. Under these conditions, explanations that stress the importance of ideas generate an entirely different hypothesis from the one I present; namely, that international pressure for Japan to adopt a policy of fiscal expansion would dissipate as these new ideas became embedded in conservative administrations that collectively repudiated Keynesian policy prescriptions. Both the hypothesis and the findings of this study, however, refute this argument. The ascendancy of monetarism in the domestic political realm did not alter the way in which state leaders perceived and pursued their interests in the international arena. Rather, these state leaders modified their monetarist ideas in the face of the international constraints I have identified. As Japan began to mount rising current account surpluses amid concerns of a sluggish world economy, members of both the Thatcher and Reagan administrations began to call on Japan to increase public works spending in order to stimulate domestic demand–led growth. In the two U.S.

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administrations that followed—the Bush and Clinton administrations—the trend has been to try to strengthen, not weaken, Japan’s commitment to adopt Keynesian prescriptions, as witnessed throughout the SII and framework negotiations. I am not arguing, however, that ideas are irrelevant. Clearly, without taking into consideration the role of ideas, one is hard-pressed to explain the change from monetarism to Keynesianism after the Great Depression, as well as the corresponding change from the liberal to the embedded liberal international economic system in the postwar era.2 Rather, it demonstrates the importance of more clearly delineating the relationship between structural and ideational factors that interact and shape the international system. Within the time frame covered in this book, the ideational change from Keynesianism to monetarism that took place at the domestic level simply did not alter the “embedded liberal” character of the international economic system.3 Party label and party platform washed away at the water’s edge; Republican and Democrat, Labour and Tory administrations were united in calling on Japan to adopt a policy of fiscal expansion whenever Japan began to mount persistent trade imbalances amid concerns of a prolonged world recession. Moreover, they did so precisely for the reasons I have specified; under these conditions, fiscal expansion was uniformly seen as the appropriate contribution that Japan could make as one of the world’s prominent leaders to promote international economic stability. Another alternative explanation that has recently gained prominence stresses the rapid globalization of the international capital market and its impact on fiscal policy. Given the sheer volume and the rapid pace in which money now flows across national borders, governments are seen to have lost the ability to carve out national economic strategies. In a world of mobile capital, the financial market acts as a disciplining force on governments to adopt a policy of fiscal austerity. Since financial investors deem governments with large budget deficits to be less creditworthy than those that have their fiscal house in order, the competition to attract global capital will require governments to adopt stringent budgets.4 The findings of this study, however, clearly refute this argument as well. Although capital mobility in Japan has risen dramatically since the early 1980s, there have been no corresponding pressures on Japan to adopt austere budgets. Indeed, international pressures, whether in the form of diplomatic suasion, exchange rate appreciation, or the threat of market closure, continued to encourage Japan to adopt a policy of fiscal expansion rather than contraction. To be sure, these international forces did not generate the same level of Japanese cooperation in the 1980s as they did in the 1970s. However, as shown in Chapter 9, Japan’s willingness to adopt a policy of fiscal expansion in the face of similar international pressures was markedly greater in the 1990s than in the 1980s, despite the fact that

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global capital continued to move more rapidly and in larger volumes across its national borders. The crucial difference between this argument and the one I present in this book is the tendency of the former to emphasize more heavily the economic incentives that accompany the globalization of capital at the expense of the political imperatives that state leaders must address on two levels. At the international level, deregulation and liberalization of the capital market can intensify, rather than weaken, the political importance of coordinating fiscal policy as monetary policy becomes less effective in stimulating domestic demand and remedying current account imbalances. In a world of mobile capital, an expansionary monetary policy can have the inadvertent effect of encouraging capital outflows that lead to currency devaluation and greater trade surpluses. At the domestic level, state leaders must respond to the political demands of powerful societal actors. In a democratic system, politicians have no incentive to adopt policies that simply conform to international capital movements if such policies undermine their electoral basis of support. Just as freer trade has led to greater, not less, public spending, more rapid and voluminous capital movements need not force states to adopt uniformly more stringent government budgets as long as politicians remain entrusted with the responsibility of fostering a baseline level of social stability through economic management.5 The evidence presented in the case studies also confirms my argument concerning the importance of adopting a two-level approach to explain Japan’s response to international pressures. Whereas my hypothesis drawn at the international level parsimoniously explains when and why Japan’s budgetary policy will become politicized in the international arena, I argued in Chapter 2 that an international level of analysis by itself cannot generate any conclusive answers as to whether Japan will step up and assume a greater leadership role in fostering international economic stability. Despite similar international pressures, Japan’s response has varied significantly from case to case. The evidence presented in Chapter 3 illustrates the strongest case of cooperation. Not only did Prime Minister Fukuda Takeo repeatedly back up his international pledge to use fiscal policy to meet high-growth targets and remedy Japan’s current account imbalance with concrete contributions, but his government incurred huge costs in doing so. All told, the aggressive use of deficit financing forced the government to rely on government bonds to finance almost 40 percent of the entire budget for 1979, a figure higher than that of any other major advanced Western nation at the time. In contrast, the findings I presented in Chapter 6 exemplify a case of very little cooperation. Prime Minister Nakasone not only refused to use fiscal policy to achieve a specified growth target but also resisted international demands for Japan to increase its level of government spending for

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over two years. When his administration finally did respond in May 1987 by adopting a 6 trillion yen supplementary package, its macroeconomic impact was more symbolic than real. Given the large windfall of government tax revenues during this period, the supplementary budget merely made Japan’s fiscal policy less contractionary than it would have been in its absence. The findings I presented in Chapter 9 fall somewhere between these two earlier cases. In contrast to the Fukuda period, in the 1990s Japan did not make any concrete commitment to achieve a specific growth target. But in contrast to the Nakasone administration, the government did agree at the end of the SII talks to expand public works spending by 430 trillion yen over the next ten years. Moreover, although this initial pledge left crucial details vague, the Miyazawa and the Hosokawa administrations subsequently adopted several concrete, large-scale measures to stimulate the economy through deficit financing. Indeed, after the government finally achieved its decade-long goal of eliminating deficit financing in 1990, it subsequently adopted five sizable stimulus packages that raised the bond dependence ratio to almost 30 percent by 1995. These variations underscore the importance of adopting a two-level framework. An international level of analysis—whether it is based on neoliberal or neorealist foundations—cannot explain the varying degree to which Japan was willing and able to adopt cooperative policies in the face of similar international pressures. Thus, the benefit of looking within the state is not merely one of richness over rigor; it is an essential component in explaining variations in policy outcomes that otherwise can not be explained by using exclusively an international level of analysis that treats states as unitary rational actors. I am not suggesting that international pressures have no influence on policy outcomes. Rather, I am pointing to the need to address first and foremost the question of who the relevant domestic actors are and how their interests and interaction influenced policy outcomes before turning to the question of how and to what extent international pressures fed into and helped shape the domestic political arena.

The Domestic Politics of Japanese Budgetary Policy My argument at the domestic level is a straightforward one: Japanese budgetary policy outcomes reflect the interests and interaction of the societal actors and political parties that make up Japan’s ruling coalition. When the relative strength and policy preferences of the ruling coalition members remain stable, budgetary policy outcomes will be stable and both the size and the distribution of the budget will reflect primarily the negotiated interests of the ruling coalition. Conversely, when the relative strength and policy preferences of the ruling coalition members are altered, budgetary

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policy outcomes will become more erratic and new negotiations will be conducted in response to this change. Once resolved, a new pattern of stable budgetary outcomes will emerge and reflect the terms of the new compromises made. The interests and interaction of the members of Japan’s ruling coalition are never frozen in time. Although a snapshot view will reveal that Japan’s budgetary policy outcome at any given moment will reflect the negotiated interests of the ruling coalition, economic and demographic changes will generate changes in both the relative strength and the policy preferences of the ruling coalition members. Moreover, the political bargaining and compromises that are struck and become institutionalized in one period in turn produce unintended consequences over time that help shape and define the political setting upon which subsequent decisions are made. Accordingly, identifying changes in budgetary policy outcomes requires a careful empirical investigation of these path-dependent institutional effects. This argument challenges not only the popular notion of Japan as a strong state, but also our prevailing understanding of Japanese budgetary policy, which emphasizes MOF’s ability to dictate policy outcomes.6 According to this prevailing view, Japanese policymaking in general is characterized by “budget primacy,” in which “a high proportion of decisions, compared with other nations, are made within the arena where the Finance Ministry is the leading actor.”7 Moreover, within the specific context of Japanese budgetary policy, proponents argue that budgetary policy outcomes, in terms of both the overall size of the budget and how it is allocated to various spending ministries, are determined by the decisionmaking rules of MOF. Entrusted with the task of managing the government budget, MOF is reputedly able to keep a tight rein on the overall level of public spending by eschewing deficit financing and by keeping the government’s share of national income at roughly 20 percent. Moreover, budgetary allocations are allegedly determined by MOF’s incremental decisionmaking norm known as baransu, whereby each spending ministry receives the same yearly percentage increase as others.8 This account bears little resemblance to both the argument and evidence presented in the case studies. I argued in Chapter 2 that on a theoretical level, a central flaw of the MOF dominance model is its failure to provide an adequate criterion to assess, rather than simply assume, the primacy of MOF in dictating policy outcomes. The commonly accepted criterion of a strong state is that the state is able to formulate and implement policies against the actual or potential opposition of other powerful political actors. Based on this criterion, what is descriptively true about the decisionmaking process may be analytically irrelevant in demonstrating MOF primacy. Although this study recognizes that from a comparative

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standpoint MOF enjoys a high level of organizational autonomy and jurisdictional authority to compile the budget, such factors offer no conclusive evidence that MOF was able to utilize these advantages to formulate and implement its preferred policies against the opposition of other powerful political actors. Moreover, the theoretical ambiguity of the MOF dominance model is further compounded by the fact that its argument rests largely on evidence originally gathered during the period of high economic growth (pre-1970s), when competing interests between MOF and the ruling coalition were difficult to discern. It is for these reasons that the evidence presented in the case study chapters is crucial. It is clear that from the early 1970s onward, conflicting interests emerged between MOF and the ruling party. As the economy moved away from this positive-sum setting, the LDP faced an array of societal pressures to expand the size of government spending. Rapid demographic change from rural to urban regions, and from primary- to secondary- and tertiary-sector employment, meant that the LDP could not rely as heavily on the support of its traditional rural supporters as it had in the past. In addition, tacit public support for government policies that pursued an ever higher GNP gave way to greater demands for better public services in social welfare–related programs at a time when the government revenues were shrinking. Under these conditions, the interests of MOF and those of the ruling party collided. Consistent with its long-standing position as the guardian of the national budget, MOF continually sought to reduce, rather than expand, government spending. In contrast, the LDP recognized that it needed to utilize government spending more ambitiously as a key instrument of political exchange in order to address these changes and preserve its position as the political party in power. In the face of these conflicting interests, the budgetary policy outcomes that were adopted throughout the 1970s clearly demonstrated the LDP’s ability to push through policies that MOF stridently opposed. During the early part of the decade, MOF stood helpless as Prime Minister Tanaka Kakuei launched ambitious new spending programs in an effort to prop up the economy and strengthen the LDP’s constituent base. Matters were no better for MOF in the second half of the decade, even when Fukuda, a career MOF bureaucrat, assumed the prime ministership. In the face of growing pressures both at home and abroad to stimulate the economy, government spending on public works projects surpassed even the lavish amount recorded during the Tanaka administration. Within a span of a decade, these measures radically altered the characteristics of Japanese budgetary policy. Whereas the budget was small and roughly balanced in the early 1970s, by the end of the decade the government’s reliance on deficit financing, as a percentage of the total budget, had risen to a level that surpassed that of all other advanced industrial democracies. Moreover,

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the allocative norm of baransu deteriorated as the LDP selectively increased spending in areas that served its electoral needs. This new pattern of Japanese budgetary policy that had become institutionalized in the 1970s in turn played a crucial role in setting the political stage for the next decade. In the 1980s, the LDP continued to face a number of political challenges, but these challenges did not lead to the same pattern of providing an ever-increasing amount of government largess. Instead, the very pattern of crisis and compensation established in the 1970s created its own sense of crisis in the form of a massive deficit that altered the policy preferences of key members of the ruling coalition and required the forging of a new consensus over budgetary policy outcomes. The three key political actors whose policy preferences changed in the early 1980s were LDP leaders, big business, and the new middle mass. Although many LDP backbenchers continued to endorse large-scale porkbarrel spending, the party’s political leaders clearly recognized that the legislative responsibility of managing the national budget more responsibly fell on them as members of the long-standing party in power. Given their fear of higher corporate taxes, big business leaders such as Doko Toshio retracted their demands made in the late 1970s for greater government spending and championed instead deficit reduction through spending cuts. Moreover, the new middle mass shifted its attention away from demanding greater government services as it had in the late 1960s and early 1970s. In response to the widespread media coverage exposing numerous instances of government waste and fraud, they similarly focused on the need to tackle the deficit by trimming government spending without recourse to tax increases. The new budgetary consensus that was established in the early 1980s was spearheaded by big business through the forum of Rincho, but there were other interests represented in the budgetary policy outcomes that were adopted throughout the decade. To be sure, after Rincho set its general guideline to pursue fiscal reconstruction without tax increase, the overall setting upon which the politics of budgetary policy would take place for the remainder of the decade was firmly established. Reducing the level of deficit financing would be the main priority, and new taxes would not be introduced to achieve this goal. Within this general constraint, however, there was considerable leeway for other members of the ruling coalition to voice their demands and modify the specific proposals outlined by Rincho. Accordingly, although the government was able to eliminate entirely the use of deficit financing bonds by 1990, this dramatic turnaround was not brought about through the strict adherence to Rincho’s proposals. Instead, the LDP endorsed any measures that would reduce the deficit without imposing real cuts by postponing obligatory payments from the general account budget and borrowing the necessary funds from other

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government accounts. Huge tax revenues would be amassed without introducing new taxes by simply allowing revenues from income tax to rise automatically as wage earners entered higher tax brackets. Moreover, to the extent that real cuts were made, interest groups that supported the LDP, such as farmers and construction companies, fared better than those that did not, as in the case of the various labor unions that supported the opposition parties. By pursuing this budgetary course throughout the 1980s, the LDP fostered an economic climate that produced in the second half of the decade one of the longest sustained periods of economic growth in the postwar era. However, the durability of this policy hinged on the extent to which the combination of a balanced budget and a low interest rate policy could sustain economic growth and thereby continue to satisfy the interests of the societal actors and political parties that made up Japan’s ruling coalition. But just as the profligate spending patterns of the 1970s created a fiscal crisis that helped usher in the movement toward budgetary retrenchment in the 1980s, the monetarist strategy of promoting economic growth by lowering interest rates and keeping the government budget small and balanced contributed to the untenable rise in the stock and real estate markets. The consensus reached in the early 1980s unraveled in the 1990s as the economic boom turned to bust following the collapse of the bubble economy. As the economy moved into a sharp and prolonged recession, the LDP, as well as the coalition parties that briefly came to power, predictably adopted large-scale stimulus packages through deficit financing despite strong opposition from MOF. After five such packages were adopted between August 1992 and September 1995, the government budget’s bond dependence ratio soared to 28.2 percent. All of the evidence presented in these case studies clearly reveals that Japanese budgetary policy outcomes have reflected primarily the interest and interaction of the societal actors and political parties of Japan’s ruling coalition. When the policy preferences and the relative strength of the ruling coalition members changed, then budgetary policy outcomes changed accordingly. I am not suggesting, however, that MOF was merely a passive register of the ruling coalition’s demands or an agent of other principal actors.9 During the three periods examined in this study, MOF was always an autonomous actor that consistently pursued its own interests, and these interests remained remarkably stable from the 1970s to the 1990s. MOF never took the lead in advocating a Keynesian policy of fiscal expansion; among the political elites, that role was adopted at different instances by LDP politicians, business leaders, and bureaucrats from MITI and EPA. Instead, MOF invariably sought to limit deficit spending whenever possible. However, its ability to fulfill this policy objective was clearly contingent upon how the interests of the ruling coalition took shape.

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MOF was best able to secure its major policy objectives when key members of the ruling coalition shared similar goals, or were divided over budgetary policy outcomes, as was the case in the 1980s. But even in these circumstances, MOF, in the process of securing its goal of deficit reduction, was forced to relinquish other interests, such as the introduction of new taxes, the 20 percent rule, and the ability to maintain its exclusive jurisdictional authority to compile the budget. In seeking to minimize the size of the deficit, MOF also amassed a hidden debt of 26.8 trillion yen by postponing various obligatory payments from the general account budget and borrowing heavily from other public accounts to pay for these expenses. Moreover, when MOF’s major policy goal of reducing both the overall size of the budget and the deficit collided with that of the ruling coalition, which occurred in the 1970s and the first half of the 1990s, MOF was unable to prevent the party in power from legislating large-scale spending packages that utilized deficit financing extensively. The significance of these findings goes well beyond the Japanese context. Many recent studies suggest a growing convergence among advanced industrial democracies to repudiate the Keynesian prescription of deficit financing in favor of monetarist orthodoxy, as a result of either ideational changes or the globalization of the international capital market. But these explanations offer at best only a partial account of the forces that shape policy decisions at the domestic level. Just as state leaders abroad must continually negotiate with their foreign counterparts to foster freer international markets through joint action over macroeconomic policy, so, too, in the domestic realm they must strike an ongoing balance between the appropriate role of the market and that of the state in determining how scarce resources are to be allocated. Although an excessive reliance on the state to make allocative decisions based on social and political considerations may indeed generate a fiscal crisis that threatens the vitality of the free market system, market forces can also create their own form of crisis that compels the state to assume a greater allocative role. This relationship between the state and the market is clearly evident in the cyclical manner in which Japanese budgetary policy outcomes changed throughout the periods examined in the case studies. By the early 1970s, the conservative strategy of maintaining easy credit by keeping the budget small and balanced gave way to large-scale deficit financing as the economy slowed and societal demands for greater welfare-related services rose. Within a decade, the fiscal crisis that emerged from this Keynesian strategy provoked a conservative backlash designed to eliminate deficit financing and promote economic growth through lower interest rates. In turn, the low interest rate policy of the 1980s provided easy credit that helped fuel the speculative rise and eventual collapse of the bubble economy. Under these conditions, monetarist orthodoxy failed to revive the

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economy; even as the official discount rate set by the Bank of Japan was lowered to a mere 0.5 percent, the economy continued to falter, prompting the government to rely once again on Keynesian strategies to promote economic growth. These findings therefore seriously challenge the teleological connotations that accompany claims of a convergence among the advanced industrial democracies toward monetarist orthodoxy. Instead, they suggest an enduring tension between the state and the market that reflects what Claus Offe and others have termed “the contradiction of the modern welfare state.”10 This tension between the role of the state and that of the market is never resolved conclusively. Economic and demographic changes continue to alter the policy preferences and relative strength of the ruling coalition, and the budgetary consensus that is reached and becomes institutionalized in one period later generates unintended consequences that spark new negotiations over budgetary policy. Hence, although the politics of Japanese budgetary policy reveals the same dilemma that all advanced industrialized democracies face, understanding the precise manner in which this dilemma unfolds requires a careful delineation of the historical process through which political institutions emerge and evolve over time. In the case of Japan, the ruling coalition that was formed during the high economic growth era was conservative and composed primarily of big business and farmers who supported the LDP. The demographic and economic changes that subsequently surfaced in the early 1970s—the rise of the new middle mass and the slowdown in economic growth—took place within an institutional context whereby the conservative coalition was able to remain in power by attracting the support of the new middle mass through greater levels of government spending on social welfare–related expenditures. Hence, the near catch-all party that emerged was one that expanded, rather than replaced, the earlier conservative coalition. From this period onward, Japanese budgetary policy outcomes would reflect the negotiated interests of this enlarged conservative coalition. The changes in budgetary policy outcomes were not brought about by a political realignment in favor of the progressive opposition. Rather they took place within the context of a near catch-all conservative coalition that was responding to cyclical changes in the economy and the unintended consequences created by its earlier decisions over budgetary policy. Given this historical trajectory, it is highly unlikely that Japan will follow in the footsteps of other advanced industrial nations such as Great Britain, France, and Germany, all of which have ushered into power progressive governments in the 1990s. Decades of conservative rule have virtually eliminated the prospects of the Socialists forming a cross-class alliance between its traditional labor union supporters and the new middle mass.11 Instead, any future predictions about the course of budgetary policy

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must be placed within the context of how members of the ruling conservative coalition will respond to further demographic and economic changes down the road. This is not to suggest that socioeconomic conditions alone determine policy outcomes. As seen throughout this book, members of the ruling coalition are political agents who possess options within the structural constraints they encounter, and the choices they make help shape the subsequent setting upon which they formulate and pursue their interests.12 Hence, any predictions about the future of Japanese politics and budgetary policy can be stated only in probabilistic terms. However, a careful delineation of the historical process through which the politics of Japanese budgetary policy has evolved thus far provides crucial insights about the basic parameters upon which subsequent decisions will be made. Undoubtedly, severe downturns in the economy are likely to generate demands for greater fiscal stimulus, but the conservative orientation of the ruling coalition will continue to keep the size of Japan’s government budget as a share of GNP well below that of other advanced industrial democracies. Although social welfare–related spending will continue to rise and occupy the largest share of the budget as a result of Japan’s aging society, the Japanese welfare state from a comparative standpoint will remain less comprehensive in its coverage than in those nations where labor unions and progressive parties are more capable of being the senior partner in a ruling coalition.

Evaluating the Two-Level Hypothesis How do these international and domestic political forces interact over time to shape the incentive structure of Japanese policymakers and influence policy outcomes? In Chapter 2, I argued that Japan’s rise as a major economic power will be accompanied by both international and domestic political changes that alter the constraints and opportunities that structure the policy options available to its state leaders. As Japan’s economic power rises, its state leaders will encounter greater international pressures to adopt policies that assume a greater leadership role in upholding the stability of the international system. Within the specific context of Japanese budgetary policy, I expect international pressures for Japanese fiscal expansion to emerge when Japan mounts large trade surpluses and when the world economy enters a prolonged downturn. However, the state leaders’ ability to respond to these pressures autonomously in the domestic political arena will weaken as societal actors become less dependent on the state and more powerful in their ability to press their demands on the state. Against the backdrop of these opportunities and constraints, I further argued that international pressures have the potential to feed into the

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domestic political arena and influence policy outcomes. The extent to which they do so will depend on the extent to which such pressures alter and mobilize the interests of the societal actors and political parties that make up Japan’s ruling coalition. I predicted that, on balance, as Japan’s position in the world economy rises, international pressures will grow but be less able to feed into the domestic political arena and move Japan’s fiscal policy in a direction counter to where it would have gone in their absence. That is, these pressures will not alter fundamentally the contractionary or expansionary nature of Japanese fiscal policy already in place for purely domestic political reasons. On a more modest level, however, international pressures will make a difference in terms of strengthening the expansionary course already in place or making Japanese fiscal policy less contractionary. These arguments are consistent with the evidence presented in the case studies. In all three periods, international pressures for Japan to adopt a policy of fiscal expansion emerged as Japan began to mount persistent current account surpluses amid fears of a global recession. Moreover, the manner in which these international pressures took shape was strikingly similar: diplomatic suasion in various international forums, yen appreciation, and the threat to adopt protectionist policies against Japan’s exports. In the face of these similar forms of pressures, however, Japan’s response varied significantly from decade to decade. Whereas Japan responded cooperatively in both the 1970s and the 1990s by adopting budgetary policies that promoted fiscal expansion through deficit financing, it rejected these foreign demands in favor of fiscal austerity in the 1980s. Given these variations in the face of similar international pressures, the question of whether Japan will adopt cooperative policies can be explained only by adopting a two-level framework that looks within the state and identifies the negotiated consensus forged by members of Japan’s ruling coalition over budgetary policy outcomes. Viewed from this two-level framework, it is clear that international pressures were not strong enough to move Japanese fiscal policy outcomes in a counter direction. Rather, these fiscal policy outcomes represented a baseline continuity of the policies that either were already in place or were in the process of changing for purely domestic political reasons. For example, Fukuda’s decision to adopt a policy of fiscal expansion at the London and Bonn summit meetings did not represent a sharp break from past budgetary decisions but simply endorsed the prevailing practice of using deficit financing, which had begun five years earlier during the Tanaka administration. Similarly, Nakasone’s hesitancy to adopt a policy of fiscal expansion from 1985 to 1987 was consistent with the contractionary course put in place at the start of the decade under Rincho. In the 1990s, the turn toward deficit financing emerged with the collapse of the bubble economy, as members of the ruling coalition endorsed large-scale spend-

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ing packages to stimulate the flagging economy. On balance, therefore, international pressures did not fundamentally alter the contractionary or expansionary nature of Japanese fiscal policy that was adopted for purely domestic political reasons. International pressures did make a difference, however, in either strengthening the expansionary course already in place or making Japanese fiscal policy less contractionary than it otherwise would have been in the absence of these pressures. For instance, the intense diplomatic pressures that Japanese negotiators faced in both bilateral and multilateral forums created a setting in which they could enhance their reputation at home and bolster their domestic political bases of support provided they could demonstrate skillful political leadership in steering international negotiations to a successful conclusion. Hence, even in the less cooperative 1980s, Nakasone adopted a number of small conciliatory measures in response to foreign pressures. Granted, these measures did not alter the contractionary nature of Japanese fiscal policy, but in light of Nakasone’s stated position on budgetary policy, it is doubtful that he would have made as large a concession as he did had he not been concerned about hosting a successful Tokyo summit in 1986. Given the weakness of his faction within the LDP, Nakasone’s personal political fortunes at home relied far more heavily than those of other faction leaders on his ability to project an image of being an effective international leader. Moreover, both the Fukuda administration in the 1970s and the various administrations that came to power in the first half of the 1990s bolstered their justification to adopt stimulus packages by citing Japan’s commitment to international leadership. These findings are consistent with other recent two-level approaches that challenge conventional explanations of when and why nations cooperate. Although an international level of analysis provides a parsimonious explanation for when and why Japanese fiscal policy becomes linked to notions of international cooperation and burden sharing, neither a neoliberal or neorealist model that treats states as unitary rational actors can explain variations in Japan’s response to similar international pressures. In contrast to neorealist explanations that stress the difficulty of securing cooperation in an anarchic world dominated by relative gains concern, the evidence reveals that cooperation can be attained more readily than neorealists suggest, as seen in both the 1970s and 1990s.13 Moreover, in tracing the domestic political process through which Japan decided not to cooperate in the 1980s, nowhere is there evidence that this decision was based on relative gains concern. Instead, this decision reflected the consensus reached by members of the ruling coalition in the earlier part of the decade to reduce deficit financing in the face of a fiscal crisis. Neoliberal explanations that treat states as unitary rational actors suffer similar limitations. To be sure, international cooperation can be enhanced

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even under conditions of anarchy when mutual gains are accentuated through existing regimes. Given the institutionalized setting in which state leaders frequently negotiate macroeconomic policy, defection will not readily devolve into a tit-for-tat strategy provided that defectors are able to justify their decisions based on domestic political constraints. Iterated negotiations in forums such as the G-7 and the economic summits not only lengthen the “shadow of the future” but also reduce the level of distrust by allowing state leaders to clarify the intent behind their decisions.14 But these mitigating factors do not ensure that cooperation will be achieved. Indeed, they may create a more permissive setting for nations to defect rather than cooperate. Moreover, to the extent that these negotiations entail discussions about domestic politics, understanding why nations cooperate or defect hinges on relaxing the unitary rational actor assumption in favor of a two-level analysis that identifies the political opportunities and constraints that are shaped within the state. Finally, the two-level approach I advance offers important insights that can serve as the basis for future theory development. In examining how Japanese state leaders strategize and negotiate with their foreign counterparts within a given win-set, I have borrowed heavily from Putnam’s pioneering work and those who have subsequently extended it. However, in contrast to their model, I have placed greater emphasis on answering a more basic question: namely, what are the international and domestic political forces that emerge and interact over time to structure the parameters of the win-set upon which state leaders negotiate? By framing my two-level approach along these broader concerns, I provide not only a better understanding of why Japanese budgetary policy has become highly politicized both at home and abroad since the early 1970s but also a more nuanced appreciation of when and in what manner foreign pressures, or gaiatsu, matter. Foreign pressures can make a difference in terms of making Japanese fiscal policy outcomes less contractionary or more expansionary than they would have been in the absence of these pressures, but gaiatsu will not induce Japanese state leaders to adopt cooperative policies when they run counter to the negotiated interests of the ruling coalition. Hence, identifying the international and domestic political forces that shape the structure of the initial win-set tells us more about whether Japan will adopt cooperative policies than does the subsequent bargaining that takes place once the initial win-set is established. More specifically, the domestic political forces that structure Japanese budgetary policy decisions will play the decisive role in determining whether Japanese negotiators will cooperate with their foreign counterparts in the subsequent bargaining process. Viewed accordingly, foreign pressure is not a panacea, but a doubleedged sword. International appeals for greater Japanese cooperation and

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burden sharing are useful in reminding Japanese state officials that their economic fortunes depend on a stable international economic system that requires Japanese participation and leadership. Moreover, international pressures for greater Japanese fiscal stimulus can make a difference in making Japanese fiscal policy more expansionary or less contractionary. But ultimately, if Japan decides to accept or reject calls for international cooperation, the decision will not hinge on Japan’s prominent position in the world economy, nor will it depend on the presence of international pressures, as some suggest. Instead, that decision will ultimately be determined by the domestic political forces that shape Japan’s budgetary policy decisions. When the negotiated consensus reached by members of Japan’s ruling coalition favors a policy of budgetary restraint, intensifying foreign demands for greater Japanese fiscal stimulus will not generate a more cooperative response; they will more likely breed greater resentment and a sense of isolation. The domestic basis of Japan’s decision is attributable not to its alleged neomercantilist or developmental policies, as is often claimed, but rather to the precise manner in which Japan’s ruling coalition has temporarily reconciled the same dilemma that all advanced industrial democracies confront in seeking to find an appropriate balance between the role of the state and that of the market.

Notes 1. For the general argument, see Goldstein (1993), Sikkink (1991), Yee (1996). For its specific application to international policy coordination, see Haas (1992). See also Hall (1992). 2. For the domestic story behind this change, see Hall (1989), Burley (1993). For the international side, see Ruggie (1982, 1991). 3. For an even stronger critique that argues that the rise of conservatism in the 1980s produced only minor changes in domestic economic policies, see Pierson (1996). 4. Cerny (1996), Schwartz (1994), Martin (1994), Kurzer (1993). 5. For the relationship between free trade and government spending, see Cameron (1978). 6. For some notable examples, see Hartcher (1998), Rukstad (1988), Campbell (1977). 7. Campbell (1977:283). 8. Campbell (1977) 9. For this argument, see Ramseyer and Rosenbluth (1993), Kernell (1991). 10. Offe (1984). 11. For earlier speculations about this possibility, see Ishida (1963). 12. On this point, see Karl and Schmitter (1991). For its application to Japanese politics, see Suzuki and Uriu (1994). 13. For the neorealist argument, see Grieco (1988), Mastanduno (1991). 14. On this point, see Ruggie (1982), Kratochwil and Ruggie (1986), Keohane (1988).

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Index

Abe, Shintaro, 103, 140, 144, 150, 153(n27), 174, 191(nn 87, 93) Administrative Management Agency, 161 Administrative reform, 160, 161, 173–174, 185, 194(n134). See also Fiscal reform Administrative Reform Commission, Second Provisional. See Rincho Administrative Reform Council, Second, 161 Administrative Reform Establishment Law, Provisional Commission on (Law No. 103), 161 Administrative Reform Promotion Headquarters, Joint, 162 Advisory Group on Economic Structural Adjustment for International Harmony, 142 Aged, 98, 100, 167, 183 Agriculture, 103, 178, 180; imports of, 77, 79, 80, 81; as sector in employment, 94(table), 123. See also Farmers; Food subsidies; Rice prices Agriculture, Ministry of, 103 Aichi, Kiichi, 99 Aizawa, Hideyuki, 97, 100 Allison, Graham, 42 Archipelago plan (Tanaka), 96, 100 Asahi Shinbun, 95, 111, 174, 185 Austerity measures, 8, 9, 44, 107, 227, 238; during 1980s, 144, 146, 150, 151, 159, 216 Automobiles, 113, 140, 153(n18) Baker, James, 135, 140, 144, 146, 147–148, 150 Balance of payments adjustment, 7, 21(n12), 27, 28–29, 59(n16); automaticity of, 27, 59(n16); during 1970s, 70, 71, 82, 121. See also Current account balance

Bank of Japan (BOJ), 149, 155(n70), 210, 211, 212, 214, 219, 223 Bankruptcy, 80, 150 Baransu (fair share budget allocations), 36, 54, 90–91, 125, 126, 200, 241, 243 Bentsen, Lloyd, 142, 149, 213, 215, 222, 228, 228(n41) Bilateral relations. See under United States Blumenthal, Michael, 78, 79, 122 Bo, Hideo, 76, 107, 110 Bond dependence ratio, 81, 110, 113, 166–167, 227, 228, 240, 244 Bond/expenditure ratio, 83, 84(table) Bonds, government: during 1970s, 103, 104, 123, 124, 126, 129(n7), 158; during 1980s, 138, 170, 171 Bonn economic summit (1978), 8, 67, 82, 83, 84, 122(n2), 136, 141, 152(n3) Borrowing, public, 105, 126, 171 Brady, Nicholas, 210, 212 Bretton Woods system, 27, 70, 71 Brookings Institution, 76 Budget allocations: during 1960s–1980s, 91, 92(table), 126–127, 200–201. See also Baransu Budget deficits, 3, 4; during 1970s, 80, 81, 96, 107, 110, 112, 114, 115, 134, 141, 159; during 1980s, 159–160, 164, 166, 197; during 1990–1995, 208. See also Deficit financing Budget drafting and passage, 35, 44, 62(n78), 168–169, 190(n58) Budget fraud and waste, 159–160 Budget policy, 3–4, 124, 246; domestic forces on, 6, 9–13, 15, 16–17, 18, 51–58, 239; international forces on, 4, 6, 7, 8, 14–15, 16, 55–56, 236–237, 247–251; theories of, 35–42; “twenty percent rule” in, 36–37, 90, 124, 126, 179, 193(n117),

271

272

INDEX

203(n6); two-level approach to, 16, 123, 128, 239–240, 247–251. See also Budget policy outcomes; Fiscal policy; General account budget Budget policy outcomes, 37–42, 51–54, 123; and change, 12, 13, 52, 237, 245–246; crisis and compensation pattern of, 11, 38, 158, 197, 199; ruling coalitions in, 11–12, 13, 17, 51–54, 56, 57, 199, 240–241, 244, 247, 248, 250, 251; societal actors in, 51, 52–53, 56, 199, 240–241, 244, 247–248. See also Budget policy Budgets: for 1971, 124; for 1972, 97; for 1973, 97–100; for 1974, 99, 100, 102, 103; for 1975, 102, 103, 117(n54); for 1976, 104, 105, 111; for 1977, 8, 76, 80, 83, 107–111, 118(n96), 122; for 1978, 8, 80–81, 83, 110–111, 112, 122; for 1979, 113, 114, 123; for 1980, 189(n30); for 1981, 163, 166, 170, 172, 189(n30); for 1982, 155–156, 164, 167, 170, 171, 172, 177, 189(n39), 191(n89); for 1983, 171, 172, 177; for 1984, 177, 191(n93), 192(n110); for 1985, 8, 177–178, 180, 183; for 1986, 8, 147, 177–178, 180, 183, 196; for 1987, 8–9, 148, 150, 151, 155(n78), 185, 186, 194(n138), 196; for 1988, 151, 185, 186, 187; for 1989, 185, 186, 187; for 1992, 208, 210, 211, 212; for 1993, 214, 215; for 1995, 223, 231(n91); for 1997, 227 Bungei Shunju (journal), 102 Bureaucracy, 13, 33, 34, 35, 37, 63(n99); of central ministries, 42–44, 124, 127; elite, 10, 33, 41; of MOF, 36, 61(n51); and Rincho, 162, 165 Bush, George, 208, 211, 212, 213, 237–238 Business confidence diffusion index, 211, 212, 223 Business cycle theory, 29, 31, 60(n23) Business interests, 41, 46–48, 52, 57, 62(n87), 63(n99); during 1970s, 106, 107, 110, 112, 114; during 1980s, 147, 159, 162, 167, 176, 185, 188(n26), 194(n135), 197; during 1990–1995, 215. See also Small business interests Calder, Kent, 15, 38, 39, 43, 199 Campbell, John, 35, 36, 39 Capital formation, gross domestic, 73 Capital market, global, 6, 24, 202, 238–239 Capital outflow, 14, 28 Carter, Jimmy, 76, 77, 81, 83, 84, 86(n34) Ceilings on spending. See Government spending, ceilings on Christopher, Warren, 220, 229(n41)

Clinton, Bill, 213, 214, 215, 237–238 Collective action theory, 41 Conservative political participation, 48, 218, 237, 245, 246–247 Construction industry, 10, 49, 63(n102), 94(table), 127, 181, 215 Consumer price index (CPI), during 1970s, 72, 73, 98, 113, 118(n94) Consumer spending. See Domestic demand Contractionary fiscal policy, 56, 58, 63(n116), 128, 136, 151, 186, 194(n137), 202(n3), 207. See also Expansionary fiscal policy Cooper, Richard, 79, 88(n94) Cooperative economic policy, 6, 8, 9, 16, 17, 25, 57, 58, 64(n117), 249–250; during 1970s–1980s, 122–123, 128–129, 133. See also Hegemonic leadership; International economic stability; Macroeconomic policy coordination “Corporatism without labor,” 39, 127 Corruption, 95, 217 Council of Government, 199 CPI. See Consumer price index Currency appreciation/devaluation. See Exchange rates; Yen appreciation; Yen devaluation Current account balance, 28, 32, 59(n19), 75, 225(table). See also Current account deficits; Current account surpluses Current account deficits, 27; during 1970s, 71, 77, 79, 80, 84, 85(n23), 121 Current account surpluses, 7, 27, 28, 32, 55, 57; during 1970s, 67, 71, 73–83, 85(n23), 87(n93), 107, 121, 122, 129(n1), 236; during 1980s, 133, 138, 139–144, 146, 147, 149, 150, 152, 195; during 1990–1995, 207, 208, 209, 216, 219, 220, 224, 225, 237 Curtis, Gerald, 47 Dallara, Charles, 208 Danforth, John, 140, 153(n18) Debt, public, during 1970s–1980s, 83, 103, 110, 124, 198 Debt repayment, during 1980s, 167, 171, 172, 173, 177, 186–187, 189(n39), 192(n108), 198, 227, 243–244 De Clerq, Willy, 146 Deficit/expenditure ratio, during 1970s, 80 Deficit financing, 3, 4, 9, 11, 54, 63(n113), 197, 248; during 1970s, 83, 104, 123, 124, 126, 128, 158, 239; during 1980s, 138, 144, 147, 159, 163, 170, 171, 174, 178–179, 187(n5), 189(n28), 193(n116), 197, 198; during 1990–1995, 223, 227. See also Budget deficits; Fiscal reform

INDEX

Delors, Jacques, 143, 212 Demand management. See Domestic demand Democratic Socialist Party (DSP), 176, 191(n96), 192(n103), 217, 218(table) Democratic tradition, 40, 112, 239, 251 Demographic change, 12, 50; during 1970s, 91, 93, 105, 123, 157, 246 Depression, 25. See also Great Depression; Recessions Developmental state model, 33–34, 37, 43, 56, 63(n115) Development assistance, in 1970s, 82 Diet, 44, 45, 49, 50, 52, 62(n78); during 1970s, 93, 94, 97, 104, 106, 108, 111, 116(n29); during 1990–1995, 217–218 Diplomatic suasion, 4, 14, 16, 57, 58; during 1970s, 121, 128, 133; during 1980s, 144, 195, 249; during 1990–1995, 213, 226 Discount rates, 138, 152(n9), 210, 219, 223, 230(n73) Doko, Toshio, 104, 107, 112, 118(n96), 162, 163, 164, 167, 169, 182, 185, 187(n5), 190(nn 62, 67), 192(n112), 243 Dollar. See Yen-dollar exchange rates Domei (private union), 62(n84), 162 Domestic demand, 14, 28, 30, 237; during 1970s, 71, 73, 77, 82, 84, 122; during 1980s, 138, 140, 141, 142, 143, 145, 147–152, 194(n135), 195; during 1990–1995, 207, 209, 210, 211, 213, 214, 215, 216, 219, 224, 225(table), 228(n1) Domestic politics. See Budget policy, domestic forces on Domestic spending. See Government spending DSP. See Democratic Socialist Party Earthquake (1995), 222, 223 EC. See European Community Economic downturns, 26, 29–31, 57, 70 Economic growth rate, 53–54; during 1970s, 73, 79, 80, 84, 89, 90–91, 135–136, 157; during 1980s, 137, 150, 151, 185, 193(n132); during 1990–1995, 209, 212, 215, 219, 223; targets of, 81, 82 Economic leadership, 6, 7, 14, 16, 55–57, 63(n114), 67, 70, 135, 136; and economic power distribution, 23, 24, 25, 31–32, 69–70; hegemonic, 6, 25, 27, 29–32. See also International economic stability Economic Planning Agency (EPA), 78, 79, 147, 151, 209, 210, 212, 223 Economic stability. See International economic stability Economic stimulus measures, 14, 251; during 1970s, 79, 82, 83, 84, 86(n34),

273

110, 112; during 1980s, 140, 147, 148, 149, 151, 152, 185; during 1990–1995, 207, 210, 212, 213, 214, 215, 216, 219–220, 221, 222–224, 226, 228, 231(n88), 232(n98), 232(n102) Economic summits, 8, 57, 67, 74–75, 84, 144, 148–149, 150, 152, 208, 211, 215, 250. See also individual summits Education, 166, 171, 194(n134), 199 Elections, gubernatorial: during 1970s, 93, 99, 109, 111, 113, 118(n107); during 1980s, 191(n94); during 1990–1995, 231(n89) Elections, local: during 1970s, 93, 96, 100, 109, 111, 113, 123–124; during 1980s, 175, 191(n94); during 1990–1995, 231(n89) Elections, national: during 1970s, 94–95, 97, 100, 101, 105, 106, 107, 108, 109, 114, 116(nn 29, 48); during 1980s, 11, 147, 160–161, 175, 188(n14), 191(n94), 199; during 1990–1995, 217, 218(table), 223, 230(n67) Electoral politics, 35, 38, 40, 44–46, 48–51; general voters in, 48–51; nonpartisan voters in, 50, 51, 106, 107, 117(n72); nonvoters in, 51. See also Business interests; Diet; Interest groups; Peak associations Electoral system, 44, 62(nn 77, 78), 127 Embedded liberal international economic system, 4, 16, 23, 25, 27, 32, 121, 238 Emergency economic packages (1992, 1995), 210–211, 223 Employees, public, 102, 104, 171, 190(n71) Employment sectors, 93, 94(table), 123, 157 Endo, Takashi, 111 EPA. See Economic Planning Agency European Community (EC), 81, 143, 146, 212 Exchange rate policy, 59(n20), 70–71 Exchange rates, 26, 27. See also Yen-dollar exchange rates Expansionary fiscal policy, 5, 8, 14, 16, 17, 21(n10), 22(n32), 28, 30, 31, 55, 56, 57, 58, 59(n19), 236, 238, 247, 248; during 1970s, 75, 76, 77, 83–84, 107, 121, 122, 123, 128; during 1980s, 133, 136, 140, 141, 142, 146, 147, 154(n43), 163, 187(n5), 194(n135), 195, 196, 202(n3), 236; during 1990–1995, 207, 208, 209, 225, 227, 232(n102). See also Contradictionary fiscal policy Exports, 13, 14, 59(n19); iron/steel, 79; manufacturing, 77; during 1970s, 73, 75(table), 77, 78, 79, 80, 82, 83, 87(n93); during 1980s, 138, 140, 143, 144, 146,

274

INDEX

147, 149, 152, 198; during 1990–1995, 213. See also Current account balance Fair share budget allocations. See Baransu Farmers, 10, 49, 57–58, 94; during 1970s, 97, 99, 105, 107, 110, 113, 114, 123, 124, 127 Farm subsidies, 110, 166, 167, 171, 181 FILP. See Fiscal Investment and Loan Program Finance, Ministry of (MOF), 11, 12–13, 35–37, 39, 43–44, 52–53, 112, 241–242, 244–245; Budget Bureau of, 43, 100; bureaucracy of, 36, 61(n51); Fiscal System Council of, 231(n88); during 1970s, 76, 80, 90, 96–97, 100, 101, 104–105, 110, 111, 112, 113, 124–126; during 1980s, 147, 159, 165, 167–170, 186, 200–201; during 1990–1995, 210, 211, 216–218, 220, 221, 222, 227; and Rincho, 168–169, 178, 190(nn 56, 57), 200–201; Tax Bureau of, 104 Finance Law, Public, 62(n78), 104, 117(n62), 171 Financial System Advisory Council, 103 Fiscal contraction/expansion. See Contractionary fiscal policy; Expansionary fiscal policy Fiscal impulse, 151, 202(n3), 232(n102) Fiscal Investment and Loan Program (FILP), 97, 98, 101, 116(n32), 171, 212 Fiscal policy, 17, 22(n32). See also Budget policy; Contractionary fiscal policy; Cooperative economic policy; Expansionary fiscal policy; International economic stability; Macroeconomic policy coordination Fiscal reform, 160, 164, 188(n14), 227. See also Administrative reform; Rincho Fiscal Reform Law (1997), 227, 228 Food subsidies, 103, 181–182, 190(n53) Ford, Gerald, 75 Foreign Affairs, Ministry of (MOFA), 33 France, 32, 69, 70(table), 72(table), 74, 77, 85(n23), 136 Franklin, Barbara, 210 Free markets, 5, 23, 24 Free trade, 7, 29, 30, 31, 32, 135, 225; during 1970s, 77, 121 Fujio, Masayuki, 147 Fukuda, Takeo: as finance minister, 100–101; in LDP, 95, 101, 106–107, 108, 110, 112, 118(n90), 161, 188(n12), 191(n97); as prime minister, 8, 67, 76, 77–83, 86(n43), 112, 122–123, 239 Fukushi gannen, 96 Funada, Hajime, 215

Gaiatsu, 123, 250 Galloratti, Giulio, 29 GATT. See General Agreement on Tariffs and Trade GDP. See Gross domestic product General account budget: during 1970s, 11, 72, 90–91, 97, 100, 105, 111, 128; during 1980s, 166, 167, 171, 172, 177, 178, 180, 181, 184, 186, 192(n108), 198; during 1990–1995, 212 General Agreement on Tariffs and Trade (GATT), 58, 68(n1) Gephardt, Richard, 142 Gephardt amendment (1987), 150 Germany, West, 69, 70(table), 72(table), 74, 75, 77, 82, 83, 85(n23), 86(n34), 136 Gerschenkron, Alexander, 38 G-5. See Group of Five G-7. See Group of Seven Giscard d’Estaing, Valéry, 77 Glenn, John, 81 GNE. See Gross national expenditure GNP. See Gross national product Gold standard, 27, 70, 71 Gordon, Slade, 140 Gourevitch, Peter, 38, 39 Government fraud/waste, 159, 197 Government largess, 44, 45, 90, 102, 159, 175 Government spending, 3, 4, 28, 54, 56, 59(n19), 63(n113), 242, 246; “break fiscal rigidities” movement in, 96, 190(n53); ceilings on, 167, 168, 169, 170, 174, 177, 184, 187, 190(n53), 192(n110), 193(n113), 200; under Fukuda, 8, 78, 80, 100, 101, 107, 110, 112, 122; under Hosokawa, 220, 221; under Miki, 102, 104, 109; under Nakasone, 141, 142, 148, 151, 174, 177, 178, 183–184, 185, 187, 193(n113), 196, 239–240; during 1970s, 68, 90, 91, 92(table), 125, 158; during 1980s, 159–160, 189(n32), 195; during 1990–1995, 226; under Ohira, 113, 114; under Suzuki, 163, 164, 165, 166, 167, 172, 173; under Tanaka, 96–100. See also Budget allocations; General account budget; Public works spending; Social welfare spending Great Britain, 25, 27, 30, 32; during 1970s, 69, 70(table), 72(table), 74, 77, 85(n23), 136; during 1990–1995, 212 Great Depression, 26, 30, 60(n23), 135 Gross domestic capital formation, during 1970s, 73 Gross domestic product (GDP): during 1970s, 69, 70(table), 84(table); during

INDEX

1980s, 151; during 1990–1995, 209, 222, 224, 225, 227 Gross national expenditure (GNE), during 1970s, 72, 73, 90, 91(table) Gross national product (GNP), 8; during 1970s, 67, 68, 71, 77, 78, 79, 80, 83, 86(n50), 110, 122, 126, 136; during 1980s, 137, 138, 147, 148, 149, 193(n115), 202(n1), 202(n3); during 1990–1995, 207, 209, 210, 211, 212, 224, 228(n1) Group of Five (G-5), 57, 136 Group of Seven (G-7), 57, 207, 210, 213, 214, 216, 222, 250 Growth rate. See Economic growth rate Gyokaku Tsuishin Honbu (Joint Administrative Reform Promotion Headquarters), 162 Gyozaisei Saiken, 160 Hartcher, Peter, 35 Hashiguchi, Osamu, 97, 100 Hashimoto, Ryutaro, 223, 227, 228 Hatano, Akira, 93 Hata, Tsutomu, 210, 211, 217, 219 Hatoyama, Iichiro, 78 Hayashida, Yukio, 111 Hayashi, Yoshiro, 213, 214, 215 Health care: during 1970s, 96, 98, 100; during 1980s, 163, 167, 171, 172, 178, 183, 190(n53) Health Care for the Aged Bill (Rojin Hokenho, 1982), 167 Health insurance, 96, 98, 113, 119(n121), 166, 183 Healy, Denis, 77, 79 Hegemonic leadership, 6, 25, 27, 29–32 Hirabayashi, Kozo, 111 Hiraiwa, Gaishi, 211, 215 Hiraizumi, Wataru, 143 Home purchase loans, 220 Hori, Shigeru, 101 Hosei Yosan, 43 Hosokawa, Morihiro, 218–221, 231(n79), 240 Housing construction, 215 Housing Loan Corporation, 142 Ichikawa, Yuichi, 221 IMF. See International Monetary Fund Imports, 13, 59(n19); agriculture, 77, 79, 80, 81; electronic, 142; medical equipment, 142; during 1970s, 75(table), 77–81, 83, 87(n93); during 1980s, 140, 142, 143, 144, 150; paper products, 142; pharmaceutical, 142; surcharge on, 140; telecommunications, 142; wood, 142

275

Inayama, Yoshihiro, 147, 194(n135) Income: national, 91; personal, 90; and tax ratio, 179. See also under Taxes Incremental decisionmaking theory, 36 Independent political participation, 116(n29), 231(n89) Indexation, 100 Industry, 39, 41, 46, 96; sectors of, 93, 94(table), 123, 157 Inflation: during 1970s, 72, 73, 75, 76, 82, 84, 98, 99, 100, 107, 109, 113, 124; during 1980s, 133, 136–137, 143, 152(n3); during 1990–1995, 210, 228(n6) Institutional development, 13 Interest groups, 10, 38, 40, 48–49, 52, 63(n102), 127, 176. See also Business interests; Labor; Peak associations Interest rates, 141, 208, 244 International cooperation. See Cooperative economic policy; Macroeconomic policy coordination International economic stability, 7, 17, 23–26, 29–32, 235, 251; and distribution of economic power, 23, 24, 25, 31–32, 69–70; during 1970s–1980s, 70, 74, 77, 136; political leadership in, 23–26, 30; and public goods, 26, 29, 30. See also Cooperative economic policy; Economic leadership, hegemonic International economic system, 4, 8, 23, 27, 29, 31, 236–238; economic power distribution in, 23, 24, 25, 31–32, 69–70. See also Cooperative economic policy; Diplomatic suasion; Economic leadership; Embedded liberal international economic system; International economic stability; Liberal international economic system International financial flow. See Capital outflow International Monetary Fund (IMF), 68(n1), 78, 79, 151, 211, 222, 223 International system, 6, 25. See also Cooperative economic policy; Diplomatic suasion; International economic system International Trade and Industry, Ministry of (MITI), 33, 39; during 1970s, 76, 80, 98; during 1980s, 147, 185 Interventionist character of modern capitalist state, 23, 27 Investment, 28, 59(n19), 208; corporate, 73, 89; domestic, 89; during 1970s–1980s, 80, 141; private, 89, 90, 209 Ishikawa, Rokuro, 211, 215 Ito, Masayoshi, 155(n78) Japan Chamber of Commerce and Industry, 211

276

INDEX

Japan Communist Party (JCP), 97, 98, 113, 119(n126), 218(table) Japan Medical Association, 113, 119(n121) Japan Nation Railway (JNR), 183 Japan New Party (Nihon Shinto), 217, 218, 220 Japan Press Club, 107 Japan Renewal Party (Shinseito), 217, 218, 221 Japan Socialist Party (JSP): during 1970s, 111, 117(n75), 119(n126); during 1980s, 160, 162, 176, 178, 191(n96), 192(n103), 199; during 1990–1995, 217, 218, 219, 220, 221, 230(n68), 231(n91) JCP. See Japan Communist Party JNR. See Japan Nation Railway JSP. See Japan Socialist Party Kajiyama, Seiroku, 215 Kaneko, Ippei, 83 Kanemaru, Shin, 178, 193(n113), 211, 217 Kantor, Mickey, 214 Kato, Junko, 35–36, 39 Katzenstein, Peter, 39, 47 Keidanren: during 1970s, 104, 107, 110, 112, 147, 162, 187(n5), 194(n135); during 1980s, 211, 215, 223, 232(n98) Keizai, Doyukai, 223 Keynesianism, 6, 24, 83, 195, 196, 202, 237, 238, 245, 246 Kigyogurumi senkyo, 101 Kindleberger, Charles, 17, 23, 24, 25, 26, 29, 30, 31, 135 Kinken senkyo, 101 Kishi, Sakae, 113 Kohl, Helmut, 141 Kohno, Masaru, 38 Komeito party, 97, 106, 191(n96), 192(n103), 217, 218(table), 221 Komoto, Toshio, 112, 147, 174, 178, 191(nn 87, 97), 193(n113) Kotchian, Archibald C., 106 Krasner, Stephen, 42–43 Krauss, Ellis, 39, 46–47 Kreps, Juanita, 79 Kuranari, Tadashi, 78 Kuroda, Ryoichi, 113 Kyotokyo (Liaison Council for Establishing a Party-Unity System), 106 Labor, 46–47, 62(nn 84, 85), 127, 162, 183, 199. See also Unions Land prices and sales, 98, 142, 220 LDP. See Liberal Democratic Party Legislative process, 35, 40, 61(n65). See also Diet; Electoral politics Lending, 26, 73, 107, 142

Liberal Democratic Party (LDP), 45, 62(n81), 242; electoral base of, 105–106, 114, 123, 124, 157, 183, 242; and interest groups, 45–46, 48, 49, 178, 180, 183; during 1970s, 89–91, 99, 101, 104, 108–109, 111, 118(nn 85, 86), 123, 124, 125, 126, 157–158; during 1980s, 147, 150, 160, 161, 165, 166, 176, 178, 197, 199, 202, 243–244; during 1990–1995, 211, 214, 215, 217, 219, 221, 223, 231(n91); and Rincho, 162, 164–169, 173, 174, 175, 176, 178, 180, 198 Liberal international economic system, 25, 26, 27, 59(n16); power distribution in, 23, 24, 25. See also Embedded liberal international economic system Liberalism, classical, 23–24 Lindblom, Charles, 47 Local allocations tax transfers, 45, 100, 159, 164, 167, 171, 172, 181, 186, 189(n39), 191(n78), 193(n122) Lockheed Tristar jet sales, 106, 175 Locomotive role, 122, 144, 147, 153(n27), 210 London economic summit: (1977), 8, 67, 77–78, 122, 129(n2), 152(n3); (1991), 208 Louvre Accord, 148–149 Lowi, Theodore, 38 Macroeconomic change, 53–54 Macroeconomic policy coordination, 4, 26–28, 59(n19), 64(n117); during 1970s, 71, 74–76, 82; during 1980s, 136, 139, 145, 202; during 1990–1995, 208 Maekawa, Haruo, 142, 145 Maekawa Report, 145 Mainichi Shinbun, 99, 185 Major, John, 212 Mamizu (pure water) spending, 215, 224, 226, 228 Manufacturing, 77, 80, 94(table) Market closure. See Protectionism Market liberalization, 26, 29, 30, 141, 142. See also Free markets; Free trade Matsukawa, Michiya, 76, 78 McCubbins, Mathew, 38 Mckeown, Timothy, 29, 30 Medical care. See Health care Medical insurance. See Health insurance Meiji period, 34 Meynell, Benedict, 81 Middle class, 50, 124 Middle mass, 127–128, 197, 227, 243, 246 Mieno, Yasushi, 210, 211, 214 Miki, Takeo, 75, 102, 106, 188(n12), 191(n97)

INDEX

Minobe, Ryokichi, 93 Minsho (National Commercial Association Cooperative Movement), 98 MITI. See International Trade and Industry, Ministry of Mitsuzuka, Hiroshi, 214, 215, 223 Miyazawa, Kiichi: in LDP, 75, 147, 148, 150, 163, 178, 193(n113), 537; as prime minister, 210, 211, 212, 214–215, 216, 217 Miyazaki, Tatsuo, 99 MOF. See Finance, Ministry of MOFA. See Foreign Affairs, Ministry of Mondale, Walter, 76, 77, 86(n43) Monetarism, 6, 24, 202, 237, 238, 244, 245 Moore, Barrington, 38 Mori, Yoshiro, 211 MOSS (market-oriented sector-specific) talks, 142, 144 Motoyama, Masao, 99 Mulford, David, 209–210 Multilateral relations, 23, 27, 76, 128. See also Economic summits; Group of Seven; Organization for Economic Cooperation and Development Multilateral surveillance system, 146 Munich economic summit (1992), 211, 212 Murakami, Kotaro, 96 Muramatsu, Michio, 39, 46–47 Murayama, Tatsuo, 112 Murayama, Tomiichi, 221, 223, 224 Muto, Kabun, 216 Nagaoka, Minoru, 112, 231(n88) Nagasu, Kazuji, 187(n4) Nakagawa, Ichiro, 174, 191(n87) Nakasone, Yasuhiro: in LDP, 98, 104, 161, 162, 188(n18); as prime minister, 8, 135, 140, 141, 142, 144, 145, 147, 148, 150, 151, 174, 176, 177, 178, 184, 191(nn 91, 97), 192(nn 100, 101, 105), 193(nn 116, 131), 195–196, 239, 249 National income (NI), 91 National interest, and state, 42–43 National Personnel Authority, 102, 171 Natural resources, 13 Neoliberalism, 249 Neorealism, 249 New Liberal Club (NLC), 117(n75), 176 NI. See National income Nihon Shinto party, 218 Nikaido, Susumu, 150, 163, 192(n107) Nikkei Average, 209, 211 Nikkeiren, 104, 232(n98) Ninagawa, Torazo, 111 Nippon Telephone and Telegraph (NTT), 183

277

Nishizawa, Yoshitaka, 38 Nissho (business organization), 98, 215, 232(n98) Nixon, Richard, 71, 73 NLC. See New Liberal Club Noble, Gregory, 38 Noguchi, Yukio, 43 Nokyo (nogyo kyoda kumiai), 167 NTT. See Nippon Telephone and Telegraph O’Connor, James, 38 ODR. See Official Discount Rate OECD. See Organization for Economic Cooperation and Development Offe, Claus, 38, 246 Official Discount Rate (ODR), 72, 76, 79, 224 Ohira, Masayoshi, 75, 83, 84, 102, 103, 106, 112, 160; as prime minister, 112–113, 114 Ohkura, Masataka, 104, 112 Ohta, Kaoru, 113 Oil crises (1973, 1979), 71–72, 73, 74, 81, 84, 133, 136, 138 Okura Hotel meeting, 164 Open markets. See Market liberalization Opinion polls: during 1970s, 95, 99, 109, 111, 115(n15), 118(n90), 159–160; during 1980s, 159–160, 174, 175–176, 185, 188(nn 10, 14), 191(n91), 192(nn 98, 101, 105), 194(n134), 198; during 1990–1995, 231(n89) Opposition parties: during 1970s, 99, 100, 101, 108, 109, 113, 117(n75), 123–124, 127, 157; during 1980s, 160, 176–177; during 1990–1995, 217–218 Organization for Economic Cooperation and Development (OECD), 57, 68(n1); during 1970s, 71, 75, 78, 81; during 1980s, 143, 144, 146; during 1990–1995, 209, 210, 212 Owens, Henry, 84 Ozawa, Ichiro, 217, 221 PARC. See Policy Affairs Research Council Peak associations, 46–48, 57, 62(n87), 127 Pempel, T. J., 39 Pensions: during 1970s, 96, 97–98, 100, 104; during 1980s, 166, 167, 172, 178, 183, 189(n48) People’s Finance Corporation (Kokumin Kinyu Koko), 98 Plaza Accord, 142, 144, 185, 198 Pluralist political process, 10, 12, 33, 40, 50; and interest groups, 38–39, 48, 127; patterned, 39 Polanyi, Karl, 23, 24

278

INDEX

Policy Affairs Research Council (PARC), 147, 155(n78), 189(n27), 214 Political actors, 17, 42–51, 201. See also Ruling coalitions; Societal actors; State actors Popular support, 63(n111), 505 Population, rural/urban, during 1970s, 93 Press, 159, 188(n9) Prices, 98–99, 194(n134); of rice, 99, 102, 110, 167, 182. See also Consumer price index Private sector: during 1980s, 163; during 1990–1995, 207 Privatization of corporations, 178, 183, 199 Progressive politics, 93, 96, 107, 159, 218 Protectionism, 7, 14, 16, 28, 57–58; during 1970s, 71, 74, 75, 77, 80, 81, 83, 88(n94), 121, 122, 128; during 1980s, 133, 138, 139, 140, 142, 144, 150, 195; during 1990–1995, 213, 226; and world business cycle, 29–30, 31, 32, 60(n23) Public Finance Law. See Finance Law Public goods, and economic leadership, 26, 29, 30 Public services, 96, 157 Public spending. See Government spending Public works spending, 3, 8, 9, 11, 38, 237, 240; during 1970s, 67, 72, 76, 80–81, 90, 96, 97, 100, 103, 104, 107, 111, 113, 122, 123, 128; during 1980s, 151, 166, 178, 180, 181, 190(n53), 194(n141); during 1990–1995, 208, 210, 215, 219, 220, 224, 228, 228(n6), 231(n88) Puerto Rico economic summit, 74–75 Pure water (mamizu) spending, 215, 224, 226, 228 Putnam, Robert, 16, 250 Railways, privatization of, 183 Rambouillet economic summit (1975), 74, 85(n25) Rational actors, 9, 25, 249–250 Rational choice theory, 13 Reactive state model, 15 Reagan, Ronald, 137, 140, 141, 142, 145, 147, 195, 237 Real growth target. See Economic growth rate, targets of Realist tradition, 25–26 Recessions, 14, 29–30, 32, 54; during 1980s, 137, 145, 147, 151; during 1990–1995, 207, 209, 217, 218, 221, 222, 226–227, 228, 232(n102) Reform Forum 21, 217 Rengo (umbrella union group), 62(n84) Rice prices, 99, 102, 110, 167, 182

Rincho, 161–164, 197–198, 200, 202, 227, 243; under Nakasone, 174–179, 184, 191(n88), 192(n112); under Suzuki, 161–170, 173, 188(nn 19, 26), 189(n27), 190(nn 56, 57) Rivers, Richard, 80 Rosenbluth, Frances, 39 Rostenkowski, Dan, 142 Ruggie, John Gerald, 23 Ruling coalitions, 55, 246; and MOF, 12–13, 53, 242, 245; during 1990–1995, 218– 219, 220, 221, 223. See also Budget policy outcomes, ruling coalitions in Rural population, 93(table), 94, 96, 106, 123, 124, 157 Saito, Eishiro, 147, 194(n135) Saito, Jiro, 217, 220, 227 Sakigake (Harbinger) party, 217–221, 223, 231(nn 79, 91) Sakurada, Takeshi, 104 Salaries. See Wages Samuels, Richard, 39 Savings, 208; household, 90; private, 28, 59(n19) Schmidt, Helmut, 77, 82 SDP. See Social Democratic Party of Japan Sentaku teki zozei, 113 Shaminren party, 217, 218(table) Shingikai, 161 Shinozawa, Kyosuke, 216–217 Shinseito. See Japan Renewal Party Shultz, George, 139–140, 152, 195 SII. See Structural Impediments Initiative Sipan, Michel, 210 Small business interests, 10, 46, 49, 98, 101, 103, 105, 107, 185, 220 Snidal, Duncan, 30 Social Democratic Party of Japan (SDP), 230(n68), 231(n79) Social overhead capital, 68; during 1970s, 90, 91, 96, 116(n23) Social security, 11, 128, 129(n19), 171, 192(n108) Social welfare spending: during 1970s, 7, 68, 90, 91–92, 96, 97, 100, 101, 103, 106–112, 114, 115(n18), 123, 124, 128, 157, 242; during 1980s, 183, 194(n134), 199 Societal actors, 17, 35; in budget theory, 37–42; and Rincho, 169–170, 178, 184; and state strength, 43, 56. See also Interest groups; State-society relations; Voters Societal consensus, 50, 63(n111) Sohyo (public union), 62(n84)

INDEX

Stagnant economic conditions, 26, 29–31, 57, 70 State, and national interest, 42–43 State actors, 15, 17, 56, 61(n65), 239, 247; in budget theory, 33, 39–40, 41, 42; and national interests, 42–43; popular support of, 50, 63(n111). See also State officials; State-society relations State and market, 5, 246 State officials, 42–46 State-society relations, 10, 15, 32–35, 39–42, 61(n65). See also Political actors; Societal actors; State actors State strength, 15, 32–35, 40–43, 53, 56, 125, 127, 199–200, 241 Stimulus measures. See Economic stimulus measures Stock market collapse (1990), 209 Strauss, Robert, 81, 88(n94) Structural adjustment, 145 Structural Impediments Initiative (SII), 9, 208–209, 228(n6), 240 Subsidies: child care, 166; farm, 110, 166, 167, 171, 181; food, 103, 181–182, 190(n53); during 1970s, 90, 96, 103, 110, 124; during 1980s, 166, 167, 169, 171, 179–182, 184, 190(n59), 193(n120), 200. See also Local allocations tax transfers Sugito, Kiyoshi, 99 Summers, Lawrence, 215 Sunada, Shigetami, 99 Suzuki, Shunichi, 113 Suzuki, Zenko, as prime minister, 161, 162, 163, 164, 166, 168, 170–174, 182, 189(n43) Takemura, Masayoshi, 217, 223, 231(n79) Takeshita, Noboru, 144, 146, 147, 150, 190(n67), 191(n89), 217 Tanaka, Kakuei: in LDP, 106, 115(n16), 161, 174, 175, 177, 192(nn 106, 107), 217, 218; as prime minister, 95–102, 115(n15), 124–126, 129(n14), 242 Tanaka, Tatsuo, 76 Tankan (business survey), 211, 212, 223 Tariffs, 29, 30, 60(nn 23, 24), 81 Tax burden, 91, 179 Taxes, 3, 4, 37, 54, 59(n19), 63(n113); consumption, 112, 113, 159, 169, 220, 221, 222, 227; corporate, 159, 164, 187(n6), 189(n33); gasoline, 113; income, 108, 159, 219, 220, 221; indirect, 178; national welfare, 220; during 1970s, 68, 90, 101, 103, 104, 107, 108, 112, 113, 114–115, 124; during 1980s, 4, 148, 151, 155(n84), 159–160, 170, 173, 178, 179, 188(n10), 190(nn 62, 67), 193(n113),

279

194(n134), 240; during 1990–1995, 219–220, 221, 228, 231(n79); and Rincho, 164, 169, 174, 176 Tax System Research Council, 178 Thatcher, Margaret, 141, 195, 237 Tokugawa era, 34 Tokyo economic summit: (1979), 84; (1986), 144, 145, 146; (1993), 215, 216 Toronto economic summit (1987), 152 Tosho Yosan, 43 Toyoda, Shoichiro, 223, 232(n98) Trade accounts. See Balance of payments adjustment; Current account balance Trade balance, 4, 6, 9, 14, 28, 32, 55, 70, 71; during 1970s, 70, 71, 75, 77–81; during 1980s, 142, 143, 144, 150, 153(n12), 195; in 1986 dollar-yen terms, 143; during 1990–1995, 9, 208, 209, 211–216, 219, 222, 225 Trade investigations (super 301), 151, 214 Trade sanctions, 150, 214, 220 Trade surcharges, 142 Trade surpluses. See Trade balance Trilateral Commission, 76 Tsunekawa, Kelichi, 39 Twenty-percent rule (tax rate), 36–37, 90, 124, 126, 179, 193(n117), 203(n6) Tyson, Laura, 214, 232(n98) Ueki, Koshiro, 97 Unemployment, 14; during 1970s, 75; during 1980s, 145, 150, 152; during 1990–1995, 210, 216 Unfair trade practices, 14. See also Protectionism Unilateral decisionmaking, 27, 28 Unions, 62(n84), 162, 183, 199, 203(n7) United Kingdom. See Great Britain United States, 13, 32–33, 91, 92(table); economic position of, 6, 7, 25, 30, 64(n117), 69–70, 72(table), 73–74, 83(nn 20, 22, 23, 24), 136, 137–138, 152(nn 6, 7), 219; and Lockheed Tristar jet sales, 106; and 1970s bilateral relations, 76, 77, 79–81, 84, 87(n72), 106; and 1980s bilateral relations, 139–153; and 1990–1995 bilateral relations, 208–209, 211, 213–214–217, 220, 222; and “super 301” trade investigations, 151, 214; Trade Representative (USTR), 144, 151. See also Economic summits; Multilateral relations; individual presidents United States–Japan Framework for a New Economic Partnership, 216 Uno, Sosuke, 208 Urban population, 50, 93–94, 96, 99, 123, 124, 157

280

INDEX

Ushiba, Nobuhiko, 80, 81, 87(n72) Ushio, Jiro, 223 Utsumi, Makoto, 208 Van Lennep, Jonkheer, 81 Venice economic summit (1987), 150 Volcker, Paul, 140, 147 Voters: general, 49–51, 52; nonpartisan, 50, 51, 106, 107, 117(n72) Wages, of public employees, 102, 104, 171, 190(n71) Watanabe, Kozo, 210, 211 Watanabe, Michio, 113, 163, 170, 190(n62), 213 Welfare spending. See Social welfare spending Welfare state, modern, contradiction of, 3, 38, 246 Wholesale price index, 98 Witteveen, Johannes, 79 Workers, 105 Workers Union, 199 World business cycle, 29–30, 31, 32, 60(n23) World Trade Organization, 58

Yamaguchi, Jiro, 38 Yasuda, Hiroshi, 211 Yen appreciation, 16, 57–58; during 1970s, 71, 78, 79, 80, 82, 83, 86(n55), 122, 128; during 1980s, 133, 143, 144, 147, 149, 184–185, 195, 198; during 1990–1995, 213–214, 222, 226 Yen devaluation: during 1970s, 71, 78, 79; during 1980s, 144 Yen-dollar exchange rates: during 1970s, 78, 79, 82; during 1980s, 78, 79, 142, 143, 144, 145(table), 146, 147, 148–149, 150, 155(n70); during 1990–1995, 213, 226 Yomiuri Shinbun, 99, 176 Yoshida, Shigeru, 95 Yoshino, Bunroku, 79 Yoshise, Shigeya, 104, 110 Zaisei kochokuka dakai undo (break fiscal rigidities movement), 96, 190(n53) Zaisei Saiken no Shin Mokuhyo (new goal for fiscal reconstruction), 227 Zendentsu, 183 Zoku, 176, 192(n100) Zozei naki zaisei saiken, 164

About the Book

What is the source of the increasing politicization of Japan’s budgetary policy? Takaaki Suzuki explores this question, finding the answer in the interplay of domestic and international politics from the early 1970s through the 1990s. Suzuki points out that, just as modern state leaders must strike a balance between the appropriate roles of the market and the state in determining how scarce resources are to be allocated internally, so must they continually negotiate with their foreign counterparts to foster freer international markets while mitigating the social costs they entail. States are confronted with the challenge of devising budgetary policies that accommodate both domestic and international concerns; Suzuki offers a cogent account of how the Japanese state has responded to this challenge. Takaaki Suzuki is assistant professor of political science at Ohio University.

281

Studies of the East Asian Institute

Selected Titles The Logic of Japanese Politics: Leaders, Institutions, and the Limits of Change, by Gerald L. Curtis. New York: Columbia University Press, 1999. Trans-Pacific Racisms and the U.S. Occupation of Japan, by Yukiko Koshiro. New York: Columbia University Press, 1999. Bicycle Citizens: The Political World of the Japanese Housewife, by Robin LeBlanc. Berkeley: University of California Press, 1999. Alignment Despite Antagonism: The United States, Japan, and Korea, by Victor Cha. Stanford: Stanford University Press, 1999. Contesting Citizenship in Urban China: Peasant Migrants, the State and Logic of the Market, by Dorothy Solinger. Berkeley: University of California Press, 1999. Order and Chaos in the Works of Natsume So¯seki, by Angela Yiu. Honolulu: University of Hawaii Press, 1998. Driven by Growth: Political Change in the Asia-Pacific Region, 2nd edition, edited by James W. Morley. Armonk: M. E. Sharpe, 1998. Japan’s Total Empire: Manchuria and the Culture of Wartime Imperialism, by Louise Young. Berkeley: University of California Press, 1997. From Imitation to Innovation: The Dynamics of Korea’s Technological Learning, by Linsu Kim. Boston: Harvard Business School Press (Management of Innovation and Change Series), 1997. Honorable Merchants: Commerce and Self-Cultivation in Late Imperial China, by Richard Lufrano. Honolulu: University of Hawaii Press, 1997. Troubled Industries: Confronting Economic Change in Japan, by Robert Uriu. Ithaca: Cornell University Press, 1996. Tokugawa Confucian Education: The Kangien Academy of Hirose Tanso¯ (1782– 1856), by Marleen Kassel. Albany: State University of New York Press, February 1996. The Dilemma of the Modern in Japanese Fiction, by Dennis C. Washburn. New Haven: Yale University Press, 1995. The Final Confrontation: Japan’s Negotiations with the United States, 1941, edited by James W. Morley. New York: Columbia University Press, 1994.

283

284

STUDIES OF THE EAST ASIAN INSTITUTE

Landownership Under Colonial Rule: Korea’s Japanese Experience, 1900–1935, by Edwin H. Gragert. Honolulu: University of Hawaii Press, 1994. Japan’s Foreign Policy After the Cold War: Coping with Change, edited by Gerald L. Curtis. Armonk: M. E. Sharpe, 1993. The Writings of Ko¯da Aya, a Japanese Literary Daughter, by Alan Tansman. New Haven: Yale University Press, 1993. Managing Indonesia: The Modern Political Economy, by John Bresnan. New York: Columbia University Press, 1993. The Poetry and Poetics of Nishiwaki Junzaburo¯: Modernism in Translation, by Hosea Hirata. Princeton: Princeton University Press, 1993. Social Mobility in Contemporary Japan, by Hiroshi Ishida. Stanford: Stanford University Press, 1993. Sowing the Seeds of Change: Chinese Students, Japanese Teachers, 1895–1905, by Paula S. Harrell. Stanford: Stanford University Press, 1992. Explaining Economic Policy Failure: Japan and the 1969–1971 International Monetary Crisis, by Robert Angel. New York: Columbia University Press, 1991. Race to the Swift: State and Finance in Korean Industrialization, by Jung-en Woo. New York: Columbia University Press, 1991. Financial Politics in Contemporary Japan, by Frances Rosenbluth. Ithaca: Cornell University Press, 1989.