Spending Without Taxation: FILP and the Politics of Public Finance in Japan 9780804777667

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Spending without Taxation

Studies of the Walter H. Shorenstein Asia-Pacific Research Center Andrew G. Walder, General Editor The Walter H. Shorenstein Asia-Pacific Research Center in the Freeman Spogli Institute for International Studies at Stanford University sponsors interdisciplinary research on the politics, economies, and societies of contemporary Asia. This monograph series features academic and policy-oriented research by Stanford faculty and other scholars associated with the Center.

also published in the shorenstein asia-pacific research center series One Alliance, Two Lenses: U.S.-Korea Relations in a New Era Gi-Wook Shin (2010) Collective Resistance in China: Why Popular Protests Succeed or Fail Yongshun Cai (2010) The Chinese Cultural Revolution as History Edited by Joseph W. Esherick, Paul G. Pickowicz, and Andrew G. Walder (2006) Ethnic Nationalism in Korea: Genealogy, Politics, and Legacy Gi-Wook Shin (2006) Prospects for Peace in South Asia Edited by Rafiq Dossani and Henry S. Rowen (2005)

Spending without Taxation filp and the politics of pu bl ic f i n a nc e i n ja pa n

Gene Park

Stanford University Press Stanford, California

Stanford University Press Stanford, California © 2011 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, or in any information storage or retrieval system without the prior written permission of Stanford University Press. Printed in the United States of America on acid-free, archival-quality paper Library of Congress Cataloging-in-Publication Data Park, Gene, author.    Spending without taxation : FILP and the politics of public finance in Japan / Gene Park.      pages  cm. — (Studies of the Walter H. Shorenstein Asia-Pacific Research Center)    Includes bibliographical references and index.    ISBN 978-0-8047-7330-0 (cloth : alk. paper)    1.  Fiscal policy—Japan—History.  2.  Finance, Public—Japan—History.  3.  Japan—Appropriations and expenditures—History.  4.  Taxation—Japan— History.  5.  Japan—Politics and government—1945–  I.  Title.  II.  Series: Studies of the Walter H. Shorenstein Asia-Pacific Research Center. HJ1394.P37    2011 336.52—dc22 2010043067 Typeset by Thompson Type in 11/14 Adobe Garamond

Contents

Figures and Tables

ix

Acknowledgments

xiii

1 Introduction 2 Understanding the FILP System

1 25

Pa rt I: FILP a nd t he Post wa r Sett lement 3 The Common Origins of Budget Restraint and FILP, 1945–1953

55

4 Balancing Fiscal Policy, Industrialization, and Distributive Politics, 1953–1970

90

5 The Electoral Logic of FILP Allocations, 1960–1993

122

Pa rt II: The Limits of FILP 6 Pushing the Limits of the FILP Compromise, 1970–1990

141

7 The Politics of FILP Reform, 1990–2001

177

8 The Koizumi Reforms and the Legacy of FILP, 2001 and After

217

9 Conclusion

247

Notes

267

Bibliography

297

Index

311

Figures and Tables

Figures 1.1 Government Outlays as a Percentage of GDP for All OECD Countries, 1960 and 1970

8

1.2 Government Receipts as a Percentage of GDP for All OECD Countries, 1960 and 1970

9

2.1 The Old FILP System

26

2.2 The New FILP System

32

2.3 Growth of FILP, 1953–2001

33

2.4 FILP relative to the General Account Budget, 1953–2000

34

2.5 Public Fixed Capital Investment and Government Receipts, 1970

42

2.6 Public Fixed Capital Investment, 1999

43

3.1 Factors behind the Establishment of FILP

57

4.1 Change in Budget and FILP Plan during Revival Budget Negotiations, 1954–1965

107

4.2 Interest Rates, 1951–1970

109

4.3 Change in Supplementary Budget and FILP Plan during Negotiations, 1954–1965

110

4.4 The Structure of FILP

116

4.5 Considering a Counterfactual: Options If FILP Did Not Exist

118

5.1 Testing the Causal Pathways

123

x  Figures and Tables 5.2 The FILP Variables

125

6.1 Budget Spending as a Share of GDP, 1970–1989

145

6.2 Bond Dependency Ratio, 1967–1989

145

6.3 Road Financing, 1954–2005

153

6.4 TFBF Lending to the Local Fiscal Allocation Special Account, 1970–1990

158

6.5 Repayment Burden for Lending to Local Allocation Special Account, 1975–1990

159

6.6 Total Local Government Bonds in the Local Government Debt Plan, 1970–1990

160

6.7 TFBF and JFCME Purchase of Local Government Bonds, 1970–1990

161

6.8 Absorption of Local Government Bonds Using Public Funds, 1970–1990

162

6.9 TFBF and Postal Savings Share of New Government Bond Issues, 1970–1990

163

6.10 TFBF and Postal Savings Purchase of Government Bonds, 1970–1990

163

6.11 Interest Rates, 1970–1990

171

7.1 Postal Savings Deposits as a Share of Total Household Savings, 1990–1999

179

7.2 TFBF and JFCME Purchase of Local Government Bonds, 1990–2000

182

7.3 TFBF and Postal Savings Purchase of Government Bonds, 1990–2000

183

7.4 TFBF and Postal Savings Share of New Government Bond Issues, 1990–2000

183

7.5 FILP Allocations, 1990–2001

215

8.1 Declining Size of the FILP Plan, 2000–2009

221

9.1 Relative size of budget and policy finance, 2004

254

Figures and Tables  xi

Tables 1.1 Government Outlays and Receipts, G-7 plus Sweden

10

1.2 Social Security Transfers as a Share of GDP, G-7 plus Sweden

11

2.1 FILP Funds by Source, 1960–1999

27

2.2 FILP Agencies

29

2.3 FILP Plan Allocations by Policy Area, 1953–2000

35

2.4 Budget Expenditures by Purpose, 1960–2003

37

2.5 Policy Finance in the G-5, Outstanding Government Loan Balance, 2003–2004

39

2.6 Comparison of Budget and FILP

45

2.7 Public Finance Goals of Key Actors

47

3.1 Industrial Capital Investment

59

3.2 RFB Financing Balance, 1947

59

3.3 Counterpart Fund, FY 1949–1952

72

3.4 Establishment of Various FILP Exit Institutions

74

3.5 Requests from Business Groups

78

4.1 Estimated Annual Tax Reductions, 1954–1970

98

4.2 Paying for the National Income Doubling Plan

104

4.3 Social Security Transfers as a Share of GDP

105

5.1 Regression Results for Seat Share of LDP in the Lower House

130

5.2 Dependent Variables for Models 3–6

133

5.3 Ruling Party Variables

133

5.4 Control Variables and Expected Sign

134

5.5 Regression Results for FILP Variables

136

7.1 Influence of Amakudari

203

7.2 Special Corporation Reform

209

7.3 Special Corporation Reform

211

7.4 Special Corporation Reform

212

8.1 Reform of the Government Financial Institutions

234

8.2 Budget Transfers to the Government Financial Institutions, 2006

237

Acknowledgments

In completing this project, I have incurred many debts to people and institutions that were critical to making it possible. I owe the greatest debt to my former advisors at Berkeley, who helped shape and guide the project from its inception. I initially went to Berkeley to work with Steven Vogel, who provided intellectual guidance and support from my first day of graduate school. I had the great fortune to work with Jonah Levy and T. J. Pempel, who generously read numerous drafts and shaped my ideas at critical junctures. Jonah first suggested the title of this book, which nicely captures the essence of the project. Kevin O’Brien and AnnaLee Saxenian provided advice in the early stages of the project. I am also appreciative of the many people who helped me with my research. Many individuals in Japan generously offered their time. This work would not have been possible without the many interviews and meetings I had with numerous government officials. Kagehide Kaku provided several key introductions. Mao Guirong helped me navigate the Japanese literature. Iris Hui offered helpful advice on my statistical analysis. Many others provided input at various stages, including John Ciorciari, Eisaku Ide, and Ed Fogarty. The anonymous reviewers will notice the significant contribution they made in improving the manuscript. This project would not have been possible without institutional and financial support. Thanks to Fulbright IIE I was able to spend more than a year in Japan conducting research. The Blakemore Foundation funded my language training. The Japanese Ministry of Finance’s Policy Research Institute (PRI) hosted me for two years. I am very grateful to the Shorenstein Asia-Pacific Research xiii

x iv  Acknowledgments

Center (APARC) at Stanford University for providing funding and a very congenial environment to work on my project. Finally, I would like to thank my family. My parents have always encouraged me to pursue my intellectual interests, and my brother has been a great lifelong friend. Emily Chung made the last several years very happy ones, and she is also a great editor.

Spending without Taxation

one

Introduction

Everyone likes spending, although no one likes to pay. Governments are the same. While they would like to deliver popular goods and benefits to voters, paying for such spending requires unpleasant choices, levying taxes or running budget deficits. Because they cannot have high spending, low taxes, and balanced budgets, they have to make difficult political choices. Governments, thus, face a “fiscal trilemma.” But what would happen if a government found a means of spending without taxation? This book contends that this is precisely what Japan did. The ruling party, the Liberal Democratic Party (LDP), used a system of public finance that did not rely on taxes—the Fiscal Investment Loan Program (FILP)—and allowed it to do the seemingly impossible: keep taxes low and budgets balanced, all without having to restrain public spending. This combination was at the core of a distinctive postwar political bargain: one that eschewed high budget spending and taxation, expansion of the welfare state, and Keynesian-inspired fiscal stimulus. By doing so, though, it was striking a Faustian bargain that eventually undermined the political settlement that it helped underwrite. By focusing on FILP, this study presents several novel findings. First, it demonstrates that a financial mechanism, FILP, enabled the Japanese government to run a distinctive neoclassical fiscal policy based on low budget spending from the end of the 1940s through 1970. This ran directly counter to the postwar trend in other industrial democracies, where governments increased budget spending and taxation to finance the expansion of the welfare state and in many cases employed fiscal stimulus to maintain full employment. Second, it shows that the government’s policy of budget restraint 

2  Introduction

and pork barrel spending were two sides of the FILP coin. This finding resolves the contradiction between the view that the LDP has stayed in power through profligate public spending and the reality of low budget spending in Japan. Third, this study reveals that, while the government’s early commitment to budget restraint initially delivered economic benefits, it came at a very high long-term cost: heavy state intervention in finance, deferred fiscal burden, and the political challenge of reforming the mechanism that made it all possible. In comparative perspective, the Japanese case illustrates a larger point about the politics of public spending. While most comparative studies focus on budget spending, taxation, and budget deficits, the experience of Japan demonstrates that governments can finance their activities not only through taxes but also through the allocation of credit and other financial mechanisms. Ignoring the role of such “policy finance” comes at the risk of underestimating or mischaracterizing the size and scope of the state, a point often overlooked by studies focused on explaining fiscal outcomes. Comparing Japan’s experience with several minor cases, this study finds that three factors contribute to extensive use of policy finance: external budget restraint, strong domestic political support for policy finance, and the centralization of policy finance within the budget-making apparatus.

Fiscal Choices and Policy Finance Public spending choices are at the heart of how governments attempt to reconcile the competing demands of democratic politics and the market system. After the Great Depression and continuing after World War II, higher taxes, higher spending, and, in many cases, fiscal stimulus through deficit financing were central features of the postwar political settlement throughout the industrialized democracies. The expansion of welfare programs led to a larger and more redistributive state, and Keynesianism-inspired fiscal stimulus dampened the effects of cyclical economic downturns by maintaining employment. Along with the Bretton Woods institutions and a new trading and financial regime, these changes established the foundation for what Shonfield called “modern capitalism” and what Gourevitch and Hall observed served as an historic compromise between capital and labor.1 The expansion of the state and Keynesianism were defining features of postwar political economy across the industrialized democracies.

Introduction  

This bargain was not without political trade-offs and costs. Deficits strained budgetary resources, and, as taxation rose, so did opposition to it. Since the 1970s, the renegotiation of the terms of the postwar settlement has been one of the central political dramas unfolding throughout the industrialized world. A new economic orthodoxy challenged the utility of fiscal stimulus and called for reductions in public spending, including retrenchment of the welfare state. Since the 1990s, the acceleration of economic globalization has sharpened the fiscal trade-offs confronting governments. Global financial integration has increased the costs of deficits and certain forms of taxation. This has not, however, eliminated government choices. As Carles Boix has argued, governments can still choose between two supplyside economic strategies, a public investment strategy and a private investment strategy. Governments run by left parties favor the former in an “attempt to raise directly the productivity of capital and labor through more expenditure on infrastructures and education and, sometimes, through the creation of a public business sector.”2 By contrast, right parties attempt to lower taxes to increase savings and private investment, that is, the private investment strategy. Each strategy, though, creates distinct electoral dilemmas. Excessive spending cuts may alienate many middle-class voters. On the other hand, high public investment requires high taxes, which may lead to a political backlash. This formulation, while parsimonious and useful, overlooks that governments can finance public investment not only through taxes or borrowing but also through financial mechanisms to steer credit and investment, what this study calls policy finance.3 Policy finance is the use of credit and other financial mechanisms to achieve public policy purposes. In a deliberate attempt to avoid making difficult fiscal choices, the Japanese government mobilized and deployed a system of policy finance—the FILP—that did not rely on taxes, providing the government, at least initially, with a form of “spending without taxation.” While often overlooked, policy finance is an important component of many states’ systems of public finance. Comparatively, though, the size of Japan’s system of policy finance and its structure have given it a particular salience in Japan’s political economy. Until reforms that took effect in 2001, the state-run postal savings system, public pensions, and several other smaller sources provided funds to FILP. Established in 1953, FILP grew rapidly; at its peak, FILP drew on approximately four trillion dollars of funds, and annual allocations reached 80 percent of

4  Introduction

the size of annual general account budget expenditures. None of the other major industrial countries have had a policy finance system nearly as large nor one as closely connected to the management of the formal budget (see the next chapter for specific comparisons).

The Argument This study contends that the state’s mobilization of policy finance was central to the postwar political bargain in Japan, first by enabling the ruling party to forge a political settlement that delivered economic growth and political stability and then by sowing the seeds of its own unraveling. Initially, FILP allowed the government to maintain budget restraint without having to sacrifice spending. This combination of otherwise contradictory policies was vital to the ruling party. Low budget spending was a pillar of the government’s economic growth strategy, allowing the government to keep taxes low and budgets balanced through the start of the 1970s. Low taxes would promote savings and private investment. A small public sector would unleash the dynamism of the private sector. Suppressing budget spending would enable the government to maintain a balanced budget, which in turn would prevent private sector crowding out,4 help stabilize Japan’s international balance of payments, curb inflation, and allow the government to run a more activist monetary policy.5 Limiting budget spending also meant that the Japanese government could deliver popular tax cuts, an often-overlooked yet significant pillar of the ruling LDP’s political strategy, without running up deficits. Yet contrary to the view that Japan’s fiscal conservatism reflected the social coalition or ideological orientation of the political party, budget restraint was unpopular within the conservative camp and conflicted with its political strategy of delivering political pork to its constituents. FILP allowed the government to square the circle. The Japanese government established and then deployed FILP as a means to limit budget spending and to pay for the priorities of the ruling coalition. FILP not only helped finance the government’s industrialization policies but also kept the ruling party in power and the conservative coalition unified. FILP financed the government’s economic development priorities by providing credit to strategic industries and funds for critical economic infrastructure. The ruling Liberal Democratic Party also used FILP along with the budget to provide

Introduction  

generous material compensation to its supporters, channeling funds to its conservative base—farmers, small and medium-size enterprises (SMEs), rural areas, and big business—and over time to new constituencies.6 These allocations via FILP translated into electoral support for the LDP, as the statistical analysis presented in this study demonstrates. By serving as a supplement to the budget, FILP also helped keep budget expenditures down, allowing the government to deliver tax cuts and extend tax exemptions to supporters (small business and agriculture and rural workers) without sacrificing budget balance.7 FILP thus linked the government’s fiscal policy, industrialization strategy, and the ruling party’s political strategy. Although FILP helped forge Japan’s stable postwar political settlement, it also embodied the limitations of this arrangement. The government could use FILP to broker a larger political settlement because it is a financial system, which drew on the nation’s large pool of savings rather than taxes. Yet precisely because FILP is a financial system, it could not sustain this compromise over the long term. Unlike the budget, FILP allocates finance capital in the form of loans and investments that must be repaid. The government, however, subordinated the financial management of FILP to two competing goals, minimizing budget spending and funding the LDP’s political strategy. This practice intensified from the 1970s as political pressure on the LDP mounted, the budget fell into deficit, and industrialization declined as a national priority. During the 1980s, the government restored budget discipline by pushing items that should have been funded by the budget onto FILP. While exploiting FILP helped the LDP stay in power and solved the political problem of balancing competing interests in the conservative camp, it weakened the finances of FILP as the quality of its investments and loans deteriorated. Over time, FILP’s capacity to paper over differences between fiscal hawks and the pork-barrel wing in the LDP deteriorated. The government was forced to use budget funds to cover losses from failed FILP-financed projects. Moreover, reform of the FILP system emerged as a highly divisive issue within the ruling party. The expansion of FILP conflicted with the government’s goal of financial liberalization and drew opposition from private banks that argued that the system competed with them. The rapid growth of FILP also fed into the perception of a state apparatus that had grown out of control. Finally, failures of FILP-financed projects and stories of mismanagement and corruption increased public opposition, leading to

6  Introduction

calls for reform. In short, the features of FILP that had made it so useful to the ruling coalition caused FILP to become a political liability over time. The issue of FILP reform came to a head with Prime Minister Koizumi, who launched an attack on the entire FILP apparatus after coming to office in 2001. Battling opposition from his own party and the bureaucracy, Koizumi passed numerous reforms by, among other methods, even expelling members of his own party. Despite the political drama, the reforms are relatively modest in aim, rationalizing the FILP system rather than abolish it. Reforms have limited abuse of the FILP system by making it harder for the government to use FILP as a substitute for the budget. As a result, the reform will force the government to confront its fiscal trade-offs more squarely. In the end, FILP ironically exacerbated the fiscal options confronting the government. FILP not only has left behind significant debt, but it has created powerful constituents that rely on public largesse. Balancing Japan’s need for fiscal reconstruction, budget spending, and taxes will be one of the central constraints as political parties, both the DPJ and LDP, attempt to build an alternative to the postwar settlement that FILP had made possible.

Public Spending and Japanese Political Economy This book clarifies several issues central to understanding Japan’s political economy. First, by focusing on the role of FILP, it helps resolve a central debate in the study of Japanese political economy: how the economic and political sides of Japanese political economy fit together. On the one hand, liberal public spending is widely cited as one of the primary means by which the ruling LDP has stayed in power.8 The LDP is often portrayed as a pork-barrel machine that lavishes spending on its supporters, an image bolstered by its high level of spending on public works, which was five times higher than other Organisation for Economic Co-operation and Development (OECD) countries.9 Yet this has never squared well with the reality of low budget spending in Japan, which formed a critical element of its economic growth strategy. Even in recent years, despite large deficits, Japanese spending has remained low despite very high public investment and increasing welfare commitments. The role of public spending is also tied to two very different views of the nature of Japanese politics. In the work on the developmental state, the Ministry of Finance (MOF), along with the former Ministry of International

Introduction  

Trade and Industry (MITI),10 is cited as the paradigm of state autonomy, and MOF’s supposed ironlike grip over the budget and ability to limit budget spending one of the best expressions of this autonomy.11 Yet those focusing on the clientelist aspects of Japanese politics have pointed to the ruling party’s liberal use of state spending to reward supporters and extend their political base.12 According to Scheiner, pork-barrel spending combined with clientelist politics and high fiscal centralization undermines the development of a viable opposition and thus supports ruling party domination. Others have pointed out how under Japan’s former single non-transferable vote electoral system (SNTV), the LDP used pork-barrel spending to split the vote share in electoral districts allowing them to win a higher number of seats.13 As this book shows, FILP was the critical link between the developmental and clientelist sides of Japan’s political economy that made it possible for the LDP to spend liberally and restrain budget outlays. Second, this book helps better situate Japan’s spending choices in comparative perspective. Japan has long stood out among the advanced industrial democracies for its low budget spending, a point noted and commented on by others.14 Japan’s budget restraint was particularly striking until the early 1970s. During this time the government kept budget spending and taxes low, and with only minor exception budgets balanced. In 1960, Japan’s government outlays were the second lowest in the OECD. Only Switzerland, whose constitution imposes limits on the government’s power to tax, had lower outlays.15 By 1970 Japan had the lowest level of taxation and budget outlays of all OECD countries, including countries at a lower level of economic development as well nondemocratic ones (see Figures 1.1 and 1.2). The government deliberately suppressed budget spending as part of a distinctive economic growth strategy. By contrast, governments of other advanced industrial democracies embraced higher taxes and higher public spending; many governments also employed fiscal stimulus to maintain full employment. More than just a fiscal policy, a larger and more activist state represented a political accommodation that helped balance the competing demands of the market system and democratic demands for social protections.16 The Japanese government, however, eschewed the expansion of the state and activist fiscal policy. To keep spending low, the government limited welfare spending until the early 1970s, which helped it keep taxes low and budgets balanced (see Tables 1.1 and 1.2).

Netherlands Sweden Norway Denmark Ireland United Kingdom Austria France Germany Belgium Canada Italy Luxembourg United States Finland Iceland Australia Greece Spain Turkey

1970

Portugal

1960

Switzerland Japan 0

5

10

15

20

25

30

35

40

45

50

f igu r e 1.1. Government outlays as a percentage of GDP for all OECD countries, 1960 and 1970. s ou rc e : OECD.

Sweden Netherlands Norway Denmark United Kingdom Austria France Germany Ireland Belgium Canada Luxembourg Finland OECD Average Iceland Italy United States Australia Greece Switzerland Portugal

1970

Turkey

1960

Spain Japan 0

10

20

30

40

f igu r e 1.2. Government receipts as a percentage of GDP for all OECD countries, 1960 and 1970. s ou rc e : OECD.

50

19.6 28.7 32.5 37.8 37.7 31.6 38.8 45.7 30.5

19.2 30.3 34.2 39.1 39.3 34.7 40.3 42.8 31.7

1968

16.4 17.9 24.3 28.4 25.7 26.8 28.2 27

18.4 21.1 31.6 35.5 33.8 31.7 35.5 39.1

23.6 25.6 36.4 41 39.7 35 35.6 44.6

24.5 30.3 38.2 42.8 39.6 30.6 38.4 48.8 32.9

24.5 31.7 38.3 44.6 44.8 37.9 39.3 48.1 34.5

1974

31.7 29.9 44.5 44.2 38 48.6 46.9 57

32.5 31.7 40.4 44.7 40.2 39.4 47.3 61.8 37.1

32.7 36.3 46.6 47.3 42.9 50.8 50.9 59.4 40.9

1987

s ou rc e : OECD and Stockholm International Peace Research Institute (SIPRI)

Japan US Canada Germany UK Italy France Sweden

NON-DEFENSE GOVERNMENT OUTLAYS

Japan US Canada Germany UK Italy France Sweden OECD Average

18.8 26.4 25.7 35 29.9 28.8 34.9 32.1 27.7

17.5 26.8 28.6 32.4 32.2 30.1 34.6 31.0 28.0

Japan US Canada Germany UK Italy France Sweden OECD Average

GOVERNMENT RECEIPTS

1960



GOVERNMENT OUTLAYS

table 1.1 Government Outlays and Receipts, G-7 plus Sweden

30.6 32.9 50.9 46.3 38.7 51.8 47.1 60.3

33.8 32.2 43.5 44.5 39.1 43.4 46.5 59.9 37.7

31.5 37.6 52.8 48.5 42.8 53.9 50.5 62.8 41.9

1991

35.3 31.9 47.6 55.5 42.2 50.6 51.4 64.5

32 31.9 42.7 46.3 38.5 44.8 46.9 57.4 37.1

36.3 35.7 49.2 57.1 45.2 52.3 54.4 66.8 42.4

1995

37.6 31.3 41.5 46.7 37 46.2 49.9 58

31.2 35.2 44.3 46.7 39.8 46.5 50.8 61.4 39

38.6 34.3 42.7 48.2 39.4 48.2 52.6 60.0 39.9

1999

37.4 33 40 47 40.3 46.3 50.7 56.6

30.5 31.9 41.1 44.4 38.7 44.7 49.1 54.8 37

38.4 36.8 41.1 48.4 42.8 48.3 53.3 58.3 41.2

2003

35.6 33.4 37.4 43 42.2 46.6 50.7 52.4

33.5 34.5 40.7 43.9 41.4 46.4 49.6 55.1 38.8

36.5 37.4 38.6 44.3 44.6 48.4 53.0 53.8 40.6

2007

34.4 33.1 39.8 43.9 42.6 46 49.3 54.4 38.2

36.5 37.6 38.5 43.7 44.8 48.1 52.7 53.2 40.6

2008

Introduction  11 table 1.2 Social Security Transfers as a Share of GDP, G-7 plus Sweden Country

1960

1968

1974

1987

1991

1995

1998

Japan US UK Canada Sweden Italy Germany France OECD Average

3.8 5.1 6.8 7.9 8.0 9.8 12.0 13.5 6.9

4.5 6.4 8.7 5.8 10.6 12.6 13.7 17.0 8.5

6.2 9.5 9.7 7.8 14.3 13.7 14.6 15.5 10.5

11.6 10.7 13.3 10.9 18.7 15.0 16.2 17.2 13.4

7.1 12.2 13.9 13.2 21.1 15.6 15.7 17.3 14.3

8.6 13.0 15.3 13.1 21.3 16.7 18.1 18.5 15.1

9.4 — 13.6 12.4 19.3 17.0 19.0 18.4 14.2

s ou rc e : OECD

Perhaps even more striking, the LDP, despite limiting budget spending, managed to forge a lasting and stable political coalition. Since the 1970s, both public debt and budget spending have grown, but Japan’s budget spending remains below the OECD average, even accounting for Japan’s low defense spending and special account budgets (see nondefense outlays in Table 1.1).17 In comparative terms, the combination of low budget spending and the LDP’s political dominance are remarkable. The LDP ruled virtually without interruption from its formation in 1955 until 2009. Among the advanced industrial democracies, parties with long periods of dominance have used generous budget spending to build political coalitions. Sweden’s Social Democrats (SAP) and Italy’s Christian Democratic party (DC) both increased budgetary spending sharply after World War II and embraced Keynesian stimulus. Although they had very different political economies, both quickly became big spenders. In Sweden, the SAP built on its Red-Green alliance by winning over white-collar voters through the expansion of its universalist welfare state.18 Italy’s conservative DC, an ideologically diverse catchall party with similarities to the LDP, used patronage and pork-barrel spending to win support and enhance its electoral appeal. By the end of SAP’s period of electoral dominance, Sweden had become the highest-spending country in the OECD as measured by government outlays as a share of GDP. By the same measure, at the time of the DC’s collapse in the mid-1990s, Italy was the highest-spending of the G-7 countries and the fourth highest in the OECD; only Sweden, Finland, and Denmark were higher. Japan’s experience is only exceptional, however, if one ignores

12  Introduction

Japan’s heavy reliance on policy finance. The characterization of Japan as a low spender, as this study shows, is incorrect. Rather, Japan supplemented its formal budget with liberal use of policy finance, a choice that proved to be highly consequential. Third, the book illuminates why an otherwise esoteric institution— FILP—was the center of such divisive contemporary political battles in Japan. On the face of it, Japan’s efforts at cutting spending and virtually constant administrative reform since the 1990s seem puzzling. Japan’s level of budget spending is low, and its state apparatus is trim. Much of what became targeted for reform, though, was part of a sprawling extrabudgetary, parastate apparatus. Many of the most contentious and high-profile reforms centered around various parts of the FILP system from the post office, which provided funds to FILP, to the panoply of institutions that lent and invested FILP funds, including the infamous “Road Corporation.” Scholars have analyzed the politics of many of these reforms.19 Several studies have suggested that electoral reform, passed in 1994, pushed reform onto the agenda by forcing political parties to attend less to particularistic concerns and more to broader national issues.20 While electoral reform certainly accelerated the reform agenda, what is missing is a discussion of why FILP itself came into existence and how it was embedded in a larger political bargain. As this study will show, although electoral reform clearly mattered, the issue of reforming FILP had deeper, partly endogenous origins.

Explanations in the Literature Both comparativists and Japan specialists have noted Japan’s pattern of low budget spending, and some have offered explanations that differ from the argument this book presents. While these alternative arguments offer plausible or at least partial explanations, none alone are fully satisfactory. This section reviews these arguments, while the following chapter discusses the existing literature on FILP. the economic growth argument

Several scholars have argued that rapid economic growth allowed the ruling party to keep budget spending low while also attending to its political needs. The argument is as follows. Rapid economic growth increased tax revenues. Thus, increases in budgetary spending could be financed through

Introduction  13

natural tax revenue growth rather than an increase in tax burden or government debt, allowing the government to avoid difficult trade-offs. Gerald Curtis, who argues that the LDP’s control over budget resources was the single most powerful tool for perpetuating its dominance, explains how growth ameliorated the need for hard political choices: “A rapidly growing economic pie made possible the steady expansion of the national budget, enabling the LDP to respond to public demands without making any hard choices about priorities.”21 Yasusuke Murakami similarly points to the role of growth in holding together the LDP’s coalition: “Especially the LDP and the bureaucracy obtained, thanks to rapid economic growth, sufficient funds to subsidize agriculture and other declining industries liberally so as to appease potential discontent in these sectors.”22 In a slight variation on this argument, Richard Katz contends that Japan could grow more rapidly during its phase of industrial catch-up and that this growth allowed the government to promote winners and compensate losers; he writes, “The government didn’t choose between these two options. It did both.”23 An increase in the supply of tax revenues from rapid economic growth, however, shapes the context in which choices are made, not the actual choices made. Although growth is correlated with budget balance, there is no clear evidence that increased economic growth actually leads to lower levels of public spending or lower tax burden. Wagner’s Law in fact posits that increased wealth leads to higher levels of public spending, although empirical studies have reached contradictory findings.24 During the long boom of thirty years of rapid economic growth after World War II, governments in advanced industrialized democracies increased state spending and taxation, often more rapidly than the rate of economic growth. Consequently, both increased relative to GDP. Economic growth, thus, did not correspond to lower levels of state spending and taxation relative to the size of the economy, although it did make it easier for most governments to limit budget deficits. Thus, while growth certainly eased the choices confronting the government by increasing revenues, it is not a sufficient explanation of how the Japanese government managed the political challenge of limiting budget spending. A government must have the intent to limit spending and the political ability to enforce it. The Japanese government, at least through the early 1970s, has been singular in both regards. Yet there has been inadequate consideration of the emergence of the goal of fiscal discipline or

14  Introduction

how the ruling party reconciled this goal with its other priorities. Fiscal hawks faced the challenge of pursuing their goals without alienating other parts of the coalition, particularly pork-oriented politicians within the ruling LDP. Growth helped alleviate the conflict, but unless fiscal hawks were in a strong enough position to enforce their preferences or accommodate others in the coalition, it is doubtful that growth alone would have sufficed to limit spending growth. Moreover, although economic growth generates growing tax revenues, it also has the effect of creating additional demand for public investment. This is precisely what happened during Japan’s socalled high-speed growth years; growth led to surging demand for expensive industrialization-related infrastructure. the conservative coalition and partisan politics arguments

Other scholars have pointed to the nature of the ruling party’s social coalition and government’s dominance by a conservative party to explain Japan’s high level of budget restraint. T. J. Pempel argues that the LDP forged a conservative social coalition between big business and the less competitive sectors such as small business and farmers.25 The exclusion of labor allowed the LDP to avoid an expansion of welfare spending, thereby keeping budget spending low. This argument follows the research in comparative political economy that shows that conservative governments spend less than left ones.26 According to this partisan politics argument, low budget spending is the consequence of the dominance of the Japanese government by the conservative LDP, which ruled from 1955 until 2009 with only a brief spell out of power. At first glance the conservative coalition and partisan politics arguments seem persuasive. In Japan, labor was excluded from the ruling coalition; welfare spending was suppressed, at least until the 1970s; and a center-right party governed virtually without interruption. Nonetheless, there are several reasons why neither explanation is fully satisfactory. First, a conservative coalition does not necessarily make it possible for a government to limit public spending. As other scholars have noted, France’s conservative postwar parties, which dominated the presidency until 1981, relied on the support of a very similar social coalition that excluded labor and included farmers, small business, and big business.27 Yet the French government oversaw a very large expansion of the state after World War II and also presided over large periodic budget deficits.28 Likewise, Italy’s DC party

Introduction  15

relied on the support of a similar social coalition, but its government also exhibited little budget restraint. Second, it is problematic to assume that Japan’s conservative coalition actually had a preference for low spending and fiscal balance. Japan’s prewar and wartime coalitions were essentially the same as the postwar coalition, yet the government exercised little of the same postwar budget restraint.29 In fact, budget spending in Japan in 1913 and 1938 was higher than in the United States, the United Kingdom, or France.30 Even after the war, there was no clear dominant preference within the conservative coalition for limiting spending, and the government ran large budget deficits. It was the occupying U.S. military authorities who imposed budget restraint. Within the conservative coalition there was deep resistance to it, and, after the Americans departed, opponents, including conservative ones, denounced it as a legacy of political subjugation and demanded that the policy be abandoned. Thus, rather than assuming a preference for budget restraint, it is necessary to explain its emergence and how the government could make it palatable to the broader conservative coalition. As Curtis has noted, this postwar coalition was fragile.31 Budget restraint only made it more difficult to hold together the conservative coalition.32 Even between the ministries that oversaw economic policy, particularly the Ministry of International Trade and Industry (MITI) and the Ministry of Finance (MOF), there were deep tensions over priorities, with MITI emphasizing the need for rapid industrialization over budget restraint. Third, with regard to the partisan politics argument, the record of the LDP suggests that it was a party that successfully oversaw both extreme budget restraint and rapid increases in spending and government debt after 1970. While the partisan politics argument might seem to apply to the period prior to 1970, it does little to explain the subsequent increase in spending, upgrading of welfare policies, and rising government debt afterward. As Calder, Woodall, and others have shown, in the face of growing electoral pressure the LDP often responded by using compensatory spending to solidify support and broaden its appeal.33 During the very brief period when the LDP was voted out of power from 1993 to 1994, the nominally left-center coalition voted to decrease taxes. Moreover, while many left parties have responded to the decline of Keynesianism and the new pressures of globalization by embracing the goal of budget balance, the center-right LDP has presided over massive growth in public debt. While the partisan

16  Introduction

politics argument may describe dominant trends, it does not explain the Japanese case. japanese-style welfare

Japan has provided welfare through a variety of measures not typically included as a part of welfare spending or formal welfare programs. One implication of this type of “Japanese-style welfare” is that by limiting formal welfare programs, the government could limit state spending. Pempel makes precisely this argument. He correctly points out that “tight fiscal policy” and “small government” were key pillars of the government’s economic strategy, or what he calls the conservative regime’s “policy profile.”34 To maintain this policy, the LDP used various nonbudgetary means to deliver social protection and preferential treatment to supporters. The state suppressed welfare spending through policies that would privatize welfare; it also used trade protection and other regulations to buffer weaker sectors from competition.35 Protectionist policies, for instance, kept agricultural prices high providing an effective subsidy to farmers paid for by consumers.36 Along similar lines, Gao argues that cartels the government organized to avoid layoffs and unemployment during the Great Depression helped the government maintain its policy of “total employment” during the postwar years, which in turn obviated the need for developed unemployment programs.37 Scholars of public finance have noted that such regulatory measures can be an important part of the activity of governments that fall outside the budget.38 Echoing similar arguments, a growing revisionist movement has contended that Japan is not a welfare laggard. Kasza has pointed out Japan’s welfare spending was lower through the 1970s in part because of its low percentage of older persons, who make higher demands on the welfare system.39 Others have demonstrated that the Japanese state provided welfare through measures typically not included as part of the welfare state. Deborah Milly, Mari Miura, and Margarita Estévez-Abe have each addressed in their own way the paradox of Japan’s relatively meager welfare commitments but relatively low level of poverty and inequality.40 These scholars have pointed to how regulations, labor policy, industrial policy, and numerous other measures have been elements of a Japanese style of welfare, providing what Estévez-Abe describes as “functional equivalents” for formal welfare spending. The arguments presented by these welfare revisionists

Introduction  17

address an important puzzle and provide a compelling argument. As this literature substantiates, Japan did rely on a set of measures typically not considered welfare to provide social protection. Japanese-style welfare spending, however, does not obviate the need for public spending. While formal welfare spending was kept low, most acknowledge that other types of spending, such as public works spending or support for farmers, served as functional substitutes.41 Thus, Japanese-style welfare is not necessarily cheap, a point Estévez-Abe makes. In a similar vein to this book, Estévez-Abe points to how a broad and deep pool of funds outside of the budget but under government control (including FILP) served as an important part of Japan’s system of welfare, what she calls “savings-oriented protection.”42 There is much that Estévez-Abe’s argument has in common with this book. The key difference is focus. Estévez-Abe’s argument emphasizes how structural factors, in particular the electoral system until 1994, created incentives for the government to provide particularistic compensation to supporters rather than universalistic welfare policies. This study focuses on the issue of why the government used a nonbudgetary means, specifically FILP, to pay for these compensatory policies. In this regard, this book should be seen as presenting a complementary argument, but one that emphasizes the political significance of FILP as a system of policy finance outside of the budget.43 the developmental state argument

One common argument is that a strong autonomous state made it possible for the state to keep spending low. According to the developmental state view, first articulated by Chalmers Johnson, state autonomy provided the critical political insulation that allowed the government to successfully steer industrialization and limit demands on the budget.44 As one writer observed: “The [Japanese] system also included a relatively autonomous and a generally considered effective and powerful bureaucracy . . . Thereby policy­makers seemed to reflect a desire to promote the countries’ [sic] overall welfare (rather than the welfare of selected special interests) and to keep government lean and efficient.”45 MOF’s budget autonomy exemplified the power of the bureaucracy. Subsequently, however, state autonomy declined as the relative power of politicians, particularly so-called zoku (“tribe”) Diet members with substantive policy expertise, increased and that of Japan’s elite civil service declined.46 LDP politicians channeled the resources of the

18  Introduction

state, particularly in the form of political pork, to the political clients who supported them, giving rise to the clientelist state. This view captures important aspects of the evolution of Japanese politics, and the pattern of public spending provides some support for this view. Budget spending as a share of GDP and budget deficits increased significantly during the 1970s. Still, the view that Japan was a lean developmental state but became clientelist over time suffers from two problems, one logical and one empirical. First, if the state were more developmental prior to the 1970s, it begs the question of the state’s basis of autonomy. Although MOF’s budget restraint may seem an outstanding example of state autonomy, it was also one that was deeply unpopular. The assertion of state autonomy assumes the problem away rather than explains it. Second, while the power of the LDP arguably did increase, it is not obvious that it always came at the expense of MOF because MOF’s and the LDP’s preferences have not always been at odds. Rather, as Amyx has shown, the LDP and MOF have had a reciprocal relationship via policy networks that both have cultivated.47 During the 1980s, the LDP worked closely with MOF to pursue fiscal reconstruction to reign in expenditures and shrink deficits, and throughout the decade budget spending stayed well below the OECD average. Even during the 1990s, the government was reluctant to fully embrace fiscal stimulus despite serious economic malaise. Indeed, some have argued that the government’s tightfistedness actually prolonged Japan’s economic stagnation.48 If pork-barrel politicians did gain the upper hand beginning in the 1970s, why was the government still relatively parsimonious in its budget spending?

Financing the State In contrast to these explanations, this study underscores the Japanese government’s use of the policy finance, that is, FILP, to limit formal budget spending and by doing so resolves the inconsistencies and puzzles enumerated in the preceding pages. Although this study focuses on Japan, there are several broader implications for the study of the politics of public spending. First, this study suggests the need to broaden the scope of public finance to include policy finance—financial mechanisms to steer credit and investments to serve public policy ends. The case of Japan is a clear illustration of this point. While Japan’s level of budget spending has been relatively mod-

Introduction  19

est, the Japanese government has mobilized policy finance through FILP on a massive scale. Japan’s budget spending alone belies a much larger and more activist state. More generally, limiting one’s analysis to the budget may underestimate the scope of the government’s effort because policy finance may be an important part of that effort. Christopher Howard makes a similar point regarding tax expenditures, tax breaks targeted to specific public policy goals.49 Howard shows that tax expenditures comprise a “hidden welfare state” in the United States. The “visible welfare state,” that is, actual expenditures on welfare, captures only a part of U.S. social policy. Although focusing on tax expenditures, Howard notes that policies to direct credit can also be viewed in a similar light, an approach that the Japanese case clearly illustrates.50 Neglecting to consider the role of policy finance can lead to an inaccurate measurement of cross-national levels of public spending; in the case of Japan, FILP allocations are excluded from the OECD’s comparative statistics on government spending. In addition to being an additional source of public finance, policy finance can also influence more narrowly fiscal outcomes, such as levels of taxation, budget spending, and budget deficits, an area of comparative political economy and economics that has received widespread attention. For a contemporary illustration of how an off-budget policy finance system can influence fiscal outcomes, one can think of the recent losses at Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs) vital to the provision of housing credit. Their role in feeding the housing bubble and subsequent collapse, which left the taxpayers with a large bill, serves as a reminder of how such financial mechanisms also can have large fiscal ramifications. The numerous comparative studies on public finance, however, focus nearly exclusively on the budget and budget outcomes, ignoring the role of policy finance.51 Other literature in comparative political economy has made the role of the state in finance a central theme, with the extent of such intervention serving as the basis for typological distinctions. State intervention in finance is one of the defining features of what scholars have labeled variously: statism, dirigisme, and the developmental state.52 These studies, however, have been primarily interested in how such state involvement in finance has influenced the process of industrial transformation and adjustment. Accordingly, such studies have focused on the government’s relationship with the banking sector, as well as the state’s more direct control of financial resources. The issue of how

20  Introduction

policy finance shapes the politics of public spending more generally has been largely in the background. It is understandable why policy finance has not figured as prominently in the study of the politics of spending. Not only is there a lack of good comparative data, but budgets—outlays, taxes, deficits—have been at the center stage in battles over economic policy and distribution. Finance in the form of credit or investment has natural limitations that do not apply to tax revenues. Unlike budget allocations, credit must be repaid, and investments imply a form of ownership. Thus the range of areas in which governments have mobilized finance for state ends has tended to be relatively narrow. While policy finance might be appropriate for lending to small businesses or to promote home ownership, it is not well suited for many other policy areas, such as welfare spending, which accounts for the largest budget share in most advanced industrialized countries. Yet while there are limits to what state activities can be financed via credit or other financial mechanisms rather than fiscal revenues, such mechanisms are in fact an important source of public finance, not only in Japan but also in many other states. In addition to disbursing funds in the form of budget expenditures, governments use various mechanisms to steer credit to the housing sector, provide loans to designated businesses, finance infrastructure, subsidize sunrise or sunset industries, and fund a host of other policy goals. To do so, governments may draw on an array of financial resources other than general tax revenues—public pension funds, sovereign wealth funds, governmental and quasi-governmental financial institutions, and so forth. Governments can also use loan guarantees and other methods such as private finance initiative (PFI) to leverage private capital for public ends. Not all policies that shape the allocation of capital, though, qualify as policy finance. Fiscal measures such as tax expenditures, which have received considerable attention, are excluded from the definition.53 Second, this book shows that policy finance can also change the nature of the fiscal choices confronting governments, shaping political and coalitional possibilities. All governments face trade-offs in choosing among taxes, budgetary spending, and budget balance. Increasing taxes generates higher revenues, which can help preserve budget balance and finance programs, but such increases tend to be politically unpopular and may reduce private savings and investment. Higher levels of spending can help parties

Introduction  21

win political support and also enable them to make needed public investments but, unless balanced with higher taxes, will lead to higher budget deficits. Budget deficits allow governments to pay for their activities without raising taxes but increase debt-servicing costs and lead to other adverse consequences. In relatively closed economies, while deficits can stimulate employment, budget deficits generate inflationary pressures, crowd out the private sector, and may worsen a country’s current account. With increasing global economic integration, the effectiveness of fiscal stimulus is reduced. Spending leaks out of the domestic economy, and under floating exchange rate regimes import prices rise. High deficits can also of course lead to political backlash, as they did in the United States after the 2008 recession. In the case of Japan, the government’s use of policy finance allowed it to avoid these trade-offs, at least for a while. Discussed more systematically in the next chapter, policy finance can have the advantage of not relying on unpopular taxes, thus providing governments with a seemingly “free” form of public spending, or at least one with lower visibility costs. Yet because loans and investments must be recouped, policy finance also may carry long-term costs unless invested in ways that are financially prudent. These financial considerations, however, may conflict with the public policy goals that such finance is used to achieve. Because using policy finance may have low short-term costs but high long-term ones, in the form of bad loans or investments that require tax payer funds, policy finance is particularly susceptible to moral hazard because the actors making the decision to use policy finance may not bear the consequences. Third, this study suggests some of the factors that make it more likely that a government will use policy finance extensively. Comparing Japan’s experience with several minor cases, this study finds that three factors explain Japan’s extensive use of policy finance: (1) commitment to budget restraint; (2) a domestic political situation that shields the system of policy finance from political opponents, such as private financial institutions; and (3) an institutional structure that centralizes and embeds the system of policy making within the budget-making apparatus. Each of these is discussed in detail in the conclusion. As this study largely focuses on Japan, these findings are propositions in need of further testing, but they should serve as a useful starting point for future comparative research.

22  Introduction

Plan of the Book Chapter Two introduces the FILP system—explaining what it is, how it works, and how it compares to policy finance systems in other countries. After this overview, the chapter turns to the analytic framework for the study. The central argument of the book is developed in two subsequent parts. The first part of the book—Chapter Three through Chapter Five—shows how FILP facilitated a political settlement around its fiscal policy of keeping taxes low, budgetary spending low, and budgets balanced. Covering the period between 1945 and 1953, the year FILP was established, Chapter Three explores the common origins of FILP and fiscal austerity. After World War II, the government’s policies for rebuilding industry generated rampant inflation. To quell this inflation, the occupying U.S. military authorities imposed a draconian fiscal retrenchment, inflicting severe hardship on the population. To mitigate the effects of fiscal austerity, the Japanese government established FILP in 1953 as an alternative source of public finance. Thus, from its inception, FILP served as a means of supplementing limited budgetary resources. Chapter Three also considers why three other countries—Italy, West Germany, and France—each pursued courses different from the Japanese one. Chapter Four covers 1953 to 1970, the period during which the Japanese government embraced the budget restraint that had been imposed by the American Occupation and then deployed FILP to make it more palatable to the members of its conservative coalition. First, it examines how the government envisaged tapping FILP to make its political strategy consistent with its goal of limiting budget spending. The government limited welfare commitments and creatively tapped FILP to pay for its own version of “social security” that channeled compensation to its conservative base, for example, economically weak regions, rural areas, and small businesses. Second, it analyzes how the Ministry of Finance (MOF) used FILP during the annual process of budget negotiations to limit budget outlays and to keep the budget balanced. Third, the chapter considers a counterfactual: What would have happened if FILP had not been created? The chapter ends in 1970 because several economic and political developments beginning that decade led to significant shifts in the use and management of the FILP system, discussed in Chapter Six. Chapter Five builds on the argument that FILP bridged interests within the LDP developed in the previous chapter. The argument that FILP har-

Introduction  23

monized the interests of fiscal hawks with the pork-barrel wing of the LDP will be strongest if it can be shown that FILP allocations provided the LDP with an effective form of political compensation, that is, that it helped the ruling party stay in power. Chapter Five presents the results of statistical analyses that substantiate this claim. The findings are based on a dataset of measures of FILP allocations compiled by the author that cover the period from 1960 to 1993. The second part of the book—Chapters Six through Eight—explains the gradual breakdown of the political settlement that had formed around FILP. Chapter Six covers the 1970s through the 1980s, the critical period that led to the accumulation of problems in the FILP system. As political pressure on the LDP increased and the economy suffered several economic shocks, Japan’s budget situation deteriorated significantly. The chapter explains how the government, in particular MOF, increasingly relied on FILP to fill in budget gaps and to deflect pressure on the budget. MOF pushed budgetary requests onto FILP, often without sufficient consideration of the financial risk of such decisions. By the 1980s, this strategy succeeded in restoring a degree of budget discipline and helped bridge the gap between fiscal hawks and the pork-barrel wing in the ruling coalition, but it did so at expense of the FILP system. As a consequence of subordinating FILP to fiscal and political ends, bad loans and project failures accumulated over the long term. Chapter Seven covers the emergence of FILP reform as a political issue and the first serious attempts at FILP reform over the course of the 1990s. Ironically, the factors that had made FILP so useful to the government contributed to pressure for reform. The abuse of FILP to limit budget spending and fund pork barrel projects generated financial problems that fed into calls for reform. Moreover, the rapid growth of the system generated opposition from the private sector, advocates of financial liberalization, and the public. Yet FILP continued to serve as a useful tool for the ruling coalition, and entrenched interests succeeded in blocking or limiting the most sensitive reforms. Chapter Eight elaborates the conditions that led Koizumi Junichirō, who became prime minister in 2001 to partially overcome these vested interests, pointing to his leadership and particularly his willingness to renegotiate the postwar settlement by expelling members of his own party. This chapter also evaluates the future political consequences of FILP. Reforms

24  Introduction

have not resolved the fundamental problem of low budget revenues, and the government may continue to be tempted to turn to FILP as parties in power attempt to build their political coalitions. Finally, the conclusion discusses what this study of FILP reveals about the nature of Japanese political economy and the larger theoretical implications for the study of the politics of public finance.

two

Understanding the FILP system

The Fiscal Investment Loan Program (FILP) is a government-run financial system that mobilizes and allocates savings in the form of investments and loans that serve public policy purposes. As discussed in more detail in the next chapter, the Japanese government built the FILP system over a number of years using preexisting government programs, including the postal savings program that dates back to the nineteenth century. During this time, the government added new sources of funds and made critical structural changes that centralized and expanded the funds available at its disposal and changed how these funds could be used. FILP is used as a term of convenience, but it actually refers to an amalgam of distinct but interrelated institutions. These component parts, governed by different laws, evolved into the FILP system; thus, there is no one specific piece of legislation that created FILP per se. Nonetheless, FILP functions as an integrated financial system. This chapter provides an overview of the FILP system: what it is, how it has functioned, how it has changed, and what existing research has illuminated about it. The chapter then compares the FILP system to policy finance systems in other countries. Finally, the chapter lays out the analytic framework for the remainder of the study.

The FILP System FILP is commonly described as having three parts: entrance, intermediary, and exit (see Figure 2.1). The entrance refers to the various sources of funds for the FILP system; the intermediary centralizes the government’s management 

26  Understanding the FILP System Entrance

Intermediary

Postal savings

Trust Fund Bureau Fund (TFBF)

Pension reserves

Postal insurance, etc. Government-owned corporations— dividends, etc.

Industrial investment special account

Banks, etc.

Governmentguaranteed bonds

Exit FILP Plan FILP Agencies public corporations, governmental financial institutions, special accounts, etc. Local governments

f igu r e 2.1. The old FILP system.

of the funds; and the exit refers to the governmental and quasi-governmental institutions that use the FILP funds. This structure of the FILP system had been relatively stable, staying more or less intact for nearly fifty years, although reforms led to a restructuring of the system in 2001. The restructured FILP system is discussed later in this section. The key to the FILP system is mobilizing savings to feed the system. In this regard, Japan’s high savings rate was vital to FILP. A number of factors contributed to this high savings rate, including fairly low pension benefits until the 1970s, the lack of consumer finance, tax incentives, and a number of other factors.1 FILP’s entrance ensured that these funds flowed into the FILP system. For the period until the 2001 reform, the entrance included several sources of funds: the postal saving system, postal life insurance, public pensions, and funds from several other smaller sources indicated in Figure 2.1. The postal savings system, the largest source of funds for FILP, is a deposit program run out of the post office. A variety of tax benefits, competitive interest rates, and an extensive network of branches helped the system attract a large and growing share of funds. Although the government ended

Understanding the FILP System  27 table 2.1 FILP Funds by Source, 1960–1999

1960 1965 1970 1975 1980 1985 1990 1995 1999

Postal Savings 24% 26% 37% 44% 43% 30% 12% 31%   9% National and   Postal Pensions 15% 21% 27% 19% 21% 18% 18% 15% 10% Postal Life Insurance 19%   6% 11%   9%   8%   9% 16% 14% 14% Industrial Investment   Special Account   6%   2%   3%   1%   0%   0%   0%   0%   0% Bonds and Bond   Guarantees Reabsorbed Funds

19% 25% 13%   4%   7% 11%   5%   6%   6% 17% 20%   9% 23% 20% 33% 49% 35% 61%

source: MOF

the tax benefit, an exemption on capital gains, in 1988, postal savings continued to attract a growing share of funds, a trend that accelerated during the 1990s in part because postal savings were perceived as safer than private institutions during Japan’s period of financial instability. By the late 1990s, the postal saving system accounted for 34 percent of household savings. In 2001 deposits totaled the equivalent of two trillion dollars, making it larger than any bank in the world. The post office also sells life insurance, and insurance premiums were also transferred into the FILP system. Reserves from the public pension system also provided a large and growing source of funds until the 2001 reform. Table 2.1 shows the relative contribution of each of these sources of funds to FILP (reabsorbed funds are discussed further in the following discussion). The intermediary refers to the institutions that centralize the management of the funds. The largest one, prior to reform, was the Trust Fund Bureau Fund, which pooled funds from the postal savings, postal insurance, and public pensions.2 The Industrial Investment Special Account pooled funds from various sources, including state enterprises, and government guaranteed bonds were issued and sold on the market to raise additional funds. The exit of FILP includes local governments and a range of governmental and quasi-governmental entities, known as “FILP agencies,” that use FILP funds. Local governments borrow funds from FILP to finance local government debt. FILP agencies is an inclusive term that refers to a variety of state and parastate entities. Table 2.1 lists the FILP agencies in 2000, prior to a

28  Understanding the FILP System

series of reforms that restructured many of the FILP agencies (discussed in Chapters Seven and Eight). The two largest types of FILP agency are “government financial institutions” and “public corporations.” The government financial institutions use the funds they borrow to provide loans, typically to firms that the government deems important to the public interest. Examples include the Development Bank of Japan (formerly the Japan Development Bank) and the National Life Finance Corporation (formerly the People’s Finance Corporation and recently merged into the Japan Finance Corporation). The Development Bank of Japan provides funds for industrial and regional development; its predecessor, the Japan Development Bank (JDB), was one of the most important instruments of Japan’s industrial policy. The National Life Finance Corporation, one of the largest of the FILP agencies, provided funds to small business. Public corporations, a subset of the “other governmental bodies” listed in Table 2.2, typically invest directly in a variety of public works projects such as roads, railroads, dams, and cultural amenities. Investments by these public corporations are counted in national statistics as public investment, which explains Japan’s high level of public investment despite its low level of taxes. One of the best-known former public corporations is the Japan Highway Public Corporation (now in the process of privatization), which in Japan became virtually synonymous with pork-barrel spending. Because the FILP agencies are not formally part of the government, the employees are not civil servants, although they are overseen and controlled by one or more ministries that have jurisdiction over them. Typically, bureaucrats from these ministries occupy the key managerial posts, giving them powerful influence. There were twenty FILP agencies in 1955, and in 1991 the number peaked at sixty-seven. Collectively they have employed hundreds of thousands of people. Management of FILP funds was and remains centralized with MOF having authority over FILP allocations.3 Each year MOF, specifically its Financial Bureau, draws up the FILP Plan in parallel with the budget to determine how the collective FILP funds will be used. As with the budget process, ministries prepare annual requests and then negotiate with MOF over funding levels. (The FILP Plan still exists under the new system, but it relies on a separate source of funds. See the following discussion.) The FILP Plan, which has ranged from about 30 to 80 percent the size of the general account budget, specifies the level of funding for FILP agencies and local

Understanding the FILP System  29 table 2.2 FILP agencies Government financial institutions Housing Loan Corporation Japan Finance Corporation for Small Business Agriculture, Forestry and Fisheries Finance Corporation Development Bank of Japan Japan Bank for International Cooperation Other semigovernmental bodies Urban Developmental Corporation Pension Welfare Service Public Corporation Japan Environment Corporation Teito Rapid Transit Authority Japan Regional Developmental Corporation Japan Sewer Works Agency Social Welfare and Medical Service Corporation Organization for Pharmaceutical Safety and Research Promotion and Mutual Aid Corporation for Private Schools of Japan Japan Scholarship Foundation Japan Green Resources Corporation Bio-oriented Technology Research Advancement Institution Japan Highway Public Corporation Metropolitan Expressway Public Corporation Hanshin Expressway Public Corporation Honshu-Shikoku Bridge Authority Japan Railway Construction Public Corporation New Tokyo International Airport Authority Corporation for Advanced Transport and Technology Water Resources Development Public Corporation Fund for the Promotion and Development of the Amami Islands Metal Mining Agency of Japan Japan National Oil Corporation Japan Science and Technology Corporation Information-Technology Promotion Agency, Japan Japan Key Technology Center Postal Life Insurance Welfare Corporation Special corporations Shoko Chukin Bank Kansai International Airport Co., Ltd. Central Japan International Airport Co., Ltd. Organization for Promoting Urban Development Electric Power Development Company, Ltd.

governments, the “exit” of the FILP system. In addition to the FILP Plan, the Ministry of Finance has used funds in the FILP system to purchase central government bonds. Such purchases became particularly prominent during the 1990s, during Japan’s period of economic malaise and growing

30  Understanding the FILP System

budget deficits. Although such funds are outside of the FILP Plan, they are still considered part of the FILP system.4 While the FILP Plan resembles the formal budget in some ways, there are a number of crucial differences. First, compared to the budget, the government has had a high degree of administrative discretion. Prior to 1973, the FILP Plan was outside of the control of the Diet. The government did submit the FILP Plan to the Diet but only as reference material. In response to criticism of the lack of Diet control, a reform in 1973 required the government to submit the FILP Plan to the Diet for approval. This reform, however, did little in practice to increase Diet authority or reduce the government’s latitude in making adjustments to the FILP Plan approved by the Diet. The reform allows the government to increase or decrease allocations by 50 percent of the amount specified in the FILP Plan. The high degree of administrative control over FILP has cut in two opposing ways. On the one hand, discretion has depoliticized some investments, but, on the other hand, the discretion has also allowed the government to use FILP allocations to channel spending in ways that advance its political goals. The factors determining how the government used FILP are addressed later in the book. Second, in contrast to the budget, FILP allocates financial capital in the form of loans and investments that must be returned to the system, both for the pre- and postreform FILP. FILP relies primarily on funds that are borrowed. Under the prereform FILP, funds from postal savings, the public pension system, and other sources were lent to the FILP system. Funds were first transferred to the Trust Fund Bureau Fund, then to the exit institutions, which might lend or invest the borrowed funds. Because these funds ultimately belonged to depositors and the various public pension schemes, all loans had to be repaid and investments had to be recouped. Thus, in some ways FILP functioned similarly to a private financial institution, except for the key difference that the government controlled the allocation of capital. The repayment requirement limits the range of policy areas that FILP can finance, but it also means that the system is largely “self­financing,” at least in principle. Because funds are returned to the system, they can be recycled into additional loans and investments. As one can see looking back at Table 2.1, these repaid funds, listed as “reabsorbed funds,” have accounted for a larger share of FILP funds as the system matured.

Understanding the FILP System  31

In contrast to private funds, the capital provided via FILP contained a built-in interest subsidy. The subsidy was quite large during the 1950s and 1960s, allowing the government to provide below-commercial interest rates, which were already low under Japan’s system of controlled interest rates designed to transfer resources from savers to industry. The government could offer lower interest rates through FILP because its entrance institutions provided the system with low-cost capital. The postal savings system was able to attract deposits at relatively low interest rates because of the tax exemptions on interest earnings, one of the reasons that the postal savings system helped boost Japan’s savings rate.5 FILP could also lend funds at a lower interest rate than commercial banks because FILP did not have to produce profits.6 As commercial rates declined and Japan deregulated its financial sector, the interest subsidy declined and by the 1980s was negligible, a development that had serious consequences for the FILP system.

The New FILP System Over the course of the 1990s and into the new century, the government passed numerous reforms aimed at the FILP system. Reforms increased transparency and eliminated, merged, or privatized many of the FILP agencies. The largest structural change occurred in 2001 when the financing mechanism for FILP was changed. Until 2001, funds from postal savings and reserves from various public pension schemes were required by law to be transferred into the FILP system—the so-called yotaku system—overseen by the Ministry of Finance. The 2001 reform, however, severed this link. Postal savings and pension reserves were no longer required to be transferred into the FILP system; instead, each would be managed independently. In place of these funds, special bonds—FILP agency bonds and FILP bonds— would be used to raise funds on the private market (see Figure 2.2). FILP agency bonds are issued directly by the FILP agencies themselves; this reform was intended to subject the individual FILP agencies to the discipline of the market. By contrast, the central government issues FILP bonds, which carry an implicit government guarantee. The funds raised from the sale of the FILP bonds are transferred to the Fiscal Investment Loan Fund (FILF), which replaced the Trust Fund Bureau Fund, and then allocated to the FILP agencies. Postal savings and pension reserves, while no longer

32  Understanding the FILP System Entrance

Intermediary

Postal savings

FILP Agency Bonds

FILP Bonds Pension reserves

Exit

Financial market

Private financial institutions

Fiscal Investment Loan Fund (FILF) Industrial Investment Special Account Governmentguaranteed bonds

FILP Agencies public corporations, governmental financial institutions, special accounts, etc.

Local governments

f igu r e 2.2. The new FILP system.

legally required to finance the FILP system, still, however, make their way back into the system through purchases of both types of FILP bonds.

FILP Trends FILP has played a significant role in the government’s choices about spending and taxation in part because it is such a large system. At its peak in the 1990s, the FILP Plan reached nearly 80 percent the size of the general account budget, reaching nearly 70 trillion yen, just prior to systematic efforts to restructure and shrink it (see Figure 2.3). FILP, though, was not always so large. Indeed, in the early years after its creation there was a constant shortage of funds. To cope with a shortage of public finance, the government changed the system to draw more funds into it, adding a variety of new funding sources. Such changes, along with rapid economic growth and preferential treatment for deposits in the postal savings system, led to a rapid expansion of FILP as Figure 2.4 shows. Structural features also account for FILP’s rapid growth. Because reserves from postal savings and public pensions were required to be transferred into FILP, as these funds increased so FILP did automatically as well. As pension reserves and postal savings deposits grew, the relative size of FILP to the formal general account

Yen (billions)

56

58

60 62

64 66

source: MOF.

f igu r e 2.3. Growth of FILP, 1953–2001.

0 53 54

10,000

20,000

30,000

40,000

50,000

60,000

70,000

68

70

72 74

76

78

80

82

84 86

88

90

92

94

96 98

00

01

56

58

60 62

64 66

68

70

72 74

source: MOF.

f igu r e 2.4. FILP relative to the General Account Budget, 1953–2000.

0% 53 54

10%

20%

30%

40%

50%

60%

70%

80%

90%

76

78

80

82

84 86

88

90

92

94

96 98

00

5.2 7.8 1.6 4.5 7.9 11.2 14 3.7 11.3 3.7 29.1 0

Housing Living environment Social welfare Education Small and medium-sized business Agriculture, forestry, and fisheries National land preservation and disaster reconstruction Road construction Transportation/communications Regional development Industry/technology Trade/economic cooperation

s ou rc e : MOF.

1953

13.8 7.7 2.1 4.5 8.1 8.9 7.7 3.7 12.2 8.5 15.8 7

1955

table 2.3 FILP Plan Allocations by Policy Area, 1953–2000 (Percentage) 1960 12.8 9.3 1.8 3.5 12.7 7.1 6.5 3.6 14.1 7.1 13.6 7.9

1965 13.9 12.4 3.6 3.1 12.6 7.2 3.1 7.9 13.9 7 7.8 7.5

1970 18.1 11.7 2.7 2 17.2 4.7 1.5 8.1 13.4 4.1 5.8 10.7

21.4 16.7 3.4 2.9 15.6 4.1 1.2 8 12.7 3.3 3 7.7

1975

1980 26.2 14.1 3.5 4.4 18.7 4.9 1.7 5.7 9.6 2.6 3 5.6

1985 25.4 15.7 2.8 3.6 18 4.3 2.3 8.8 8.4 2.4 2.9 5.4

1990 30.3 15.3 3.1 2 15.7 3.2 1.2 9.8 8.3 2.5 2.9 5.8

35.3 16.4 4 2 15.3 2.9 1.3 7.8 4.6 2.6 3.1 4.7

1995

34.1 17.8 4.2 2.3 16.7 2.4 1.9 9.3 1.8 2.9 1.8 4.9

2000

36  Understanding the FILP System

budget grew consistently until the late 1990s, providing the government with an expanding source of public finance. As Table 2.3 shows, the government’s use of FILP has shifted over time. Soon after the establishment of FILP, allocation patterns reflected the government’s priority on industrialization, with 29.1 percent of the FILP Plan financing “industry/technology.” One should bear in mind, however, that this share is still relatively small and that other categories related to the government’s political-redistributive goals collectively surpass this figure. In particular, the following types of categories reflected these considerations: “housing”; “living environment”; “small and medium-sized business”; “agriculture, forestry, and fisheries”; “national land preservation and disaster reconstruction”; and “transportation.” Over time, the total share going to industrialization decreased, reflecting the very large increases in other categories. Again, the areas with the largest increases were areas that helped the LDP respond to new political pressures or solidify its traditional bases of support, for example, “housing,” “living environment,” “small and medium-sized business,” and “road construction.” Comparison of budget and FILP allocation patterns is difficult because the government does not use the same set of policy area categories. Nonetheless, Tables 2.3 and 2.4 indicate several broad differences and similarities. The budget covers formal social security spending, such as pensions, disability insurance, and national health care. Social security spending was relatively low through the beginning 1970s, a point discussed in more detail in Chapter Four, but it now occupies the largest share of the total budget. Defense spending is also borne by the formal budget rather than FILP. Given the nature of defense and social security spending, this pattern is not surprising because such policies cannot be financed by FILP. Education is also largely financed through the budget, but in some cases FILP has played a minor role by, for instance, providing financing to localities for the construction of schools. The government’s primary instrument for small and medium enterprises (SMEs) and housing has been FILP, one of the largest FILP policy areas. SMEs have been a key base of support for the LDP, and the party expanded housing finance to broaden its base of support to urban areas. The budget has also been used to provide subsidies for these policy areas, although this figure is a relatively small share of budget expenditures. “Small enterprise assistance” is about 1 percent or less of the budget; housing is not listed.

Understanding the FILP System  37 table 2.4 Budget Expenditures by Purpose, 1960–2003 (Percentage)

1960 1970 1980 1990 2000 2001 2002 2003

Social Security, etc. 14 14 Local government finance 23 22 Bond expenditure   2   4 Public works 23 18 Culture, education,   and science promotion 16 12

19 18 13 16

17 23 21 10

20 18 24 13

23 20 19 13

23 20 19 11

24 21 19 11

11   8   8   8   8   8

National defense 11   7   5   6   5   6   6   6 Economic cooperation   0   1   1   1   1   1   1   1 Measures for staple food supply   2   6   2   1   0   1   1   1 Small enterprise assistance   0   1   1   0   1   1   1   0 Other   9 16 15 14 10 10 11   9 Source: MOF.

The government has used both FILP and the budget to pay for various forms of political pork. “Public works” has been one of the largest budget categories, although it has declined over the years. While there is no corresponding category for the FILP Plan, many of the categories have a strong public works component: “living environment”; “agriculture, forestry, and fisheries”; “national land preservation and disaster reconstruction”; “road construction”; “transportation”; and “regional development.”

Perspectives on FILP Scholars of Japanese politics and economics have recognized that FILP is a significant institution. Chalmers Johnson claims that FILP contributed more than virtually any other institution to the Japanese economic miracle.7 Noguchi Yukio, a Japanese economist, notes that “FILP has given the Japanese government a powerful policy tool not possessed by other countries.”8 The existing literature has focused on FILP from a wide variety of perspectives. Early work on FILP analyzed the policy areas that the system financed. Chalmers Johnson focused on FILP’s role in promoting industrialization, while Kent Calder analyzed FILP’s welfare-enhancing and redistributive roles.9 Economists have also studied how FILP altered patterns of investment and debated whether FILP was, in aggregate, welfare enhancing. Noguchi, for instance, finds that, during FILP’s early years, FILP contributed to

38  Understanding the FILP System

economic development by channeling subsidized funds to key industries and needed infrastructure projects but that the system shifted in the late 1960s to low-productivity sectors and infrastructure to improve quality of life.10 Cargill and Yoshino’s detailed study confirms these findings and also provides other econometric analyses.11 Turning to contemporary politics, scholars have also studied the process of reforming the FILP system or various components of it. Greg Noble’s work examines reform of the FILP system.12 Patricia MacLachlan sheds light on FILP by explaining the close link between the post office, which through its postal savings program provided FILP funds, and the Liberal Democratic Party.13 Mabuchi Masaru, Maurice Wright, and Yamaguchi Jirō have drawn the critical connection between FILP and the budget.14 All of this research has made significant contributions to understanding FILP, and this book is indebted to these studies. The key difference with previous studies is focus and scope. This study analyzes FILP from the perspective of how it structured the fiscal options facing the government creating specific political possibilities and also, eventually, limitations.

FILP in Comparative Perspective For other countries as well, policy finance is an important yet often underappreciated part of the public sector, but the extensive use of FILP in Japan has given it a significantly larger weight in its economy. Due to the lack of data, broad statistical comparison is difficult, but of the G-5 countries (United States, United Kingdom, Germany, France, and Japan), Japan’s provision of policy loans and investments via FILP is by far the largest.15 In 2004, the balance on government loans from FILP in Japan was about $3.3 trillion, even after a sustained effort to shrink the system. By comparison, the balance was $1.65 trillion for the United States and much smaller for the remaining countries (see Table 2.5). In terms of the balance on government loans in relation to the size of the economy, Japan has no equal. The balance on government loans in Japan is 90 percent the size of its GDP, while the figure is only 14 percent in the United States. The United States is the only other G-5 country to have a unified and centralized system of policy finance like FILP. The U.S. Federal Credit Program provides credit and credit subsidies, the total of which is calculated each year. In addition to being much smaller than FILP, there are a number of sig-

Understanding the FILP System  39 table 2.5 Policy Finance in the G-5, Outstanding Government Loan Balance, 2003–2004

US

UK

Germany

France

Japan

Loan Balance (trillions, USD) Balance as share of GDP

1.65 14%

0.13 7%

0.07 3%

0.03 2%

3.33 90%

*Data for England, Germany, France for 2003; Others are for 2004. source: Japanese Ministry of Finance, OECD

nificant differences with FILP. First, the Federal Credit Program primarily provides loan guarantees rather than direct loans. In 2008, loan guarantees accounted for 90 percent, while direct loans accounted for the remainder of the Federal Credit Program.16 With loan guarantees, the government provides guarantees on loans made typically by private financial institutions. Housing is the largest policy area under the Federal Credit Program. With direct loans, which account for 10 percent of the Federal Credit Program, the government disburses the loans. Second, the Federal Credit Program has had a different relationship to the budget. Unlike FILP, the Federal Credit Program is integrated into the budget. Until 1990, direct loans were classified as budget outlays, as were defaults on loans that the government guaranteed and that had to be covered with budget funds. With the Federal Credit Reform Act of 1990, the Federal Credit Program switched from a cash to a subsidy basis. Under the new system, only the expected subsidy, including the expected cost of default, but not the full amount of the direct loans is tabulated as a budget outlay, thus reducing the perceived cost of the program. In addition to the Federal Credit Program, the U.S. government also encourages credit to flow to the housing sector through two governmentsponsored enterprises (GSEs)—Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC), known as Fannie Mae and Freddie Mac, respectively. Both purchase and securitize mortgages on a massive scale. Together they own or guarantee mortgages worth about 14.5 trillion dollars, or 37 percent of GDP. The policy finance figures from Table 2.5 do not include the loan obligations of either agency. To give a sense of the relative size of FILP, even if Fannie Mae and Freddie Mac’s portfolio were included, Japan’s level of policy finance would be fortynine percentage points higher. Still, both are vital to the provision of housing finance, although the role of the government was indirect until the financial

40  Understanding the FILP System

crisis of 2008. Both were private corporations with publicly traded shares, and the government did not have a direct financial stake in either. Both, however, had implicit government backing, allowing them access to low-cost capital. After their balance sheets deteriorated in 2008, the government nationalized them, and their fate is now being debated in Congress. Although the French system of policy finance is now relatively small, prior to financial liberalization beginning in the 1980s the French state had a much more extensive and direct role in allocating credit and loans though a network of public and semipublic financial institutions. The state also controlled several nationalized banks, although lending via these banks does not qualify as policy finance because they did not serve as a source of public finance, and the banks operated at arm’s length from the government.17 The Economic and Social Development Fund (FDES) is another public financial institution in France that helped finance reconstruction and development and has been well noted in the literature on French political economy, but in contrast to FILP it draws mainly on funds directly from the treasury and thus has not really functioned as an alternative source of public finance. There are several differences between France’s system of policy finance and FILP. France’s system of policy of finance is not centralized but rather operates through a number of separate entities such as Banque du Development des PME (BDPME), Agence Française de Development (AFD), and Caisse des Dépôts et Consignations (CDC). The BDPME provides lending to small and medium enterprises, and the AFD offers trade and foreign aid. The most significant French policy finance institution is the CDC. The CDC is the largest policy finance institution and oversees funds from several sources. The sources include the National Savings Bank, which operates through the post office; other savings banks; various pension funds; and mutual provident associations. The CDC lends and invests these funds either directly or through intermediary bodies. The funds are used to provide loans to local authorities, housing associations, and public enterprises. The CDC also has provided finance to other public and quasi-public financial institutions through bond subscriptions and directly financed national debt. Unlike FILP, the CDC also maintains a large portfolio of investments, taking equity positions in private companies and purchasing a wide variety of bonds; its role as an investor is now one of the CDC’s main activities. While comparisons of size are difficult, France’s system of policy finance never reached the size of FILP. Even prior to the financial liberal-

Understanding the FILP System  41

ization of the 1980s, the CDC was still significantly smaller than FILP. At the end of 1975, the CDC accounted for 16 percent of all loans and other claims to the nonfinancial sector.18 In Japan, by the end of the 1990s, FILP accounted for about 47 percent of all obligations.19 Italy also has a similar system, Cassa Depositi e Prestiti (CDP), which was originally modeled on the CDC, although for reasons discussed in more detail at the end of the next chapter it never evolved into a major instrument of public finance as did FILP or even CDC. Another key difference is the relationship between policy finance and management of the budget. The French government has not used policy finance as deliberately as an extension of the budget or as a means to limit budget spending. While Japan’s FILP is a centralized system run in parallel with the budget, the CDC is at least officially an autonomous and independent entity. Although the Ministry of Finance’s Trésor has exerted influence, there is nothing comparable to the FILP Plan. That is not to suggest, however, that the French government has not used policy finance to manage its fiscal policy. To the contrary, the CDC and other governmental financial institutions have been vital instruments for managing the government’s finances; however, the government has used such levers in a wider variety of ways, with more focus on managing government debt and less focus on limiting budget spending (discussed at the end of the next chapter). The CDC also maintains a large investment portfolio, which includes bonds and equity stakes in private firms. Due to the lack of data, further comparison is difficult, but Figure 2.5 gives some indication of the impact of Japan’s massive FILP system.20 The vertical axis represents the level of government outlays as a share of GDP; the horizontal axis is the share of public investment as a share of GDP. The points on the chart represent all of the OECD countries for which there is data in 1970, and the two axes cross each other at the OECD averages. Public investment closely follows both the levels of government receipts and outlays. Higher government revenues enable higher government outlays, which in turn allow the government to boost public investment. Indeed, as the scatter plot shows, there is clear correlation.21 Yet, in the case of Japan, because the government has been able to draw on the FILP so extensively it has been able to keep public investment high despite low budget outlays. FILP is not included in the data for government outlays; some, although not all, FILP-financed investments, however, are

42  Understanding the FILP System 50%

Government outlays as share of GDP

45% 40% 35% 30% 25% Japan

20% 15% 10% 1%

2% 3% 4% 5% Public fixed capital investment as share of GDP

6%

f igu r e 2.5. Public fixed capital investment and government receipts, 1970. source: OECD.

included in the data on public investment.22 Despite having the lowest level of government outlays, Japan’s level of public investment in 1970 (4.6 percent of GDP) was significantly above the OECD average (3.9 percent). Only the highest-taxing countries at the time, such as Austria, Denmark, Netherlands, Sweden, and the United Kingdom had higher levels of public fixed capital investment, and many of the other high-tax countries had significantly lower levels of public investment than Japan. Starting in the 1970s, Japanese government spending increased, but a similar pattern persisted. Although Japan no longer remained one of the lowest budget spenders, it stayed below the OECD average. Yet its level of public investment remained very high. As Figure 2.6 shows, in 1999, the year before the government began to shrink the size of FILP, Japan had the highest public investment as a share of GDP in the OECD, and throughout the 1990s Japan’s level was near the top of the OECD countries.

Understanding the FILP System  43 Japan South Korea Iceland Luxembourg Portugal Poland Norway Spain Czech Sweden Ireland Netherlands France Slovak Republic Finland New Zealand Switzerland United States Australia Italy Canada Belgium Germany Austria Denmark Mexico United Kingdom 0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

f igu r e 2.6. Public fixed capital investment, 1999. source: OECD.

Appproach and Framework The framework for this study draws on historical institutionalism and the growing literature on institutional change.23 Borrowing from the work on historical institutionalism, this study begins with the premise that institutions

4 4  Understanding the FILP System

(1) structure choices and (2) influence relations among actors. To move beyond this relatively static view of the effect of institutions, this study incorporates insights from the more recent work on institutional change. As Thelen has noted, earlier work in the historical institutionalist vein sees institutional effects as relatively static or stable.24 Institutions can lock in path dependence, but this view offers little insight into changes over time. Comparative statics, as Steinmo has pointed out, borders on institutional determination, assuming that institutional effects are relatively invariant.25 This view, however, discounts the role of actors and how they interact with institutions. While institutions may shape actor preferences, such preferences are not reducible to institutional context. As actors change, as well as their ideas and preferences, they not only respond differently to their institutional context, they also attempt to change it. On the opposite extreme, scholars have suggested that, when change occurs, it can occur rapidly and dramatically during moments of “punctuated equilibrium” or at “critical junctures” followed by periods of stability. Much of the change in social life, however, exists between these two poles. As Thelen argues, institutional changes are often relatively minor and can cumulate over time, leading to significant changes that follow neither the path dependence nor punctuated equilibrium models.26 This study applies four general insights from this literature on the forces that shape institutional change: actor discontinuity, time lags, endogenous mechanisms, and positive and negative feedbacks. Each of these is discussed in more detail later in the chapter. After a brief comparison between FILP and the formal budget, the sections that follow explain how this approach is applied in this study. filp versus the budget

While governments can finance their activities using budgetary or financial means, the two are not interchangeable. Each presents a different set of trade-offs—see Table 2.6. The budget in Japan relies primarily on taxes and social insurance contributions (which for the sake of convenience will be considered a form of taxation in this study). Levying taxes or raising them tends to be politically unpopular. Because taxpayers provide the funds for budget outlays, the use of these funds is typically monitored closely by politicians, bureaucrats, the media, and of course taxpayers. FILP, prior to reform, did partly draw on social insurance contributions (pension reserves), but it borrowed these funds with the promise to repay them. The FILP

Understanding the FILP System  45 table 2.6 Comparison of Budget and FILP

Budget

Source of funds Taxes Who pays Taxpayer How funds can be used Wide range of uses Visibility High Issues of management Minimal need to manage risk or monitor investments

FILP Postal savings, pension reserves, etc. Savers / users Narrow range of uses Generally lower Manage risk, monitor investments

system also borrowed from the postal saving system funds made by voluntary deposits from savers. Thus, unlike the budget FILP did not make any obvious demands on the taxpayer. FILP did, however, transfer the costs to citizens in other ways. First, by providing below-market interest rates to the FILP system, the public pension system and postal savings bore part of the cost. Depositors received lower interest rates, although this “cost” was offset by tax advantages for postal savings accounts and also partly obscured by Japan’s controlled financial system that kept interest rates low. Taxpayers also indirectly absorbed an opportunity cost on the pension reserves because low returns paid by FILP ultimately need to be offset by higher taxpayer contributions or reduced future benefits. Second, the FILP system, under the old and new FILP, can also absorb costs by providing cross-subsidies. FILP agencies, for instance, can subsidize or cover losses from bad investments from revenue generated by sound loans and investments. By way of example, the Development Bank of Japan has covered a number of large losses from bad projects in this way and thus has not had to turn to budgetary funds.27 Similarly, public corporations have also subsidized construction of roads. Such cross-subsidies may constitute a subtle form of cost to the extent that such cross-subsidization leads to an inefficient use of capital; of course whether the use is “inefficient” or not is an open empirical question. All of the preceding types of costs already elaborated have far lower visibility than direct taxes. In other cases, however, FILP’s costs may be more visible and borne directly by users. Because FILP funds must be recouped, the government can levy fees to cover the repayment of FILP loans, for example by charging for tolls on roads or

46  Understanding the FILP System

bridges. While not popular, such user fees link the payer directly with specific services and tend to be less unpopular than taxes. In Japan, though, the perception that high road tolls have fed a wasteful and corrupt pork-barrel machine have in fact led to a recent political backlash, a clear legacy of the FILP system. Interestingly, the DPJ government promised to make many roads free as part of the platform that helped it win power in 2009. Tax revenues provide more flexibility to governments than FILP funds. Governments can use taxes to pay for virtually all of their activities from defense to welfare spending. By contrast, the government’s use of FILP funds is limited to areas where the loans and investments can be recouped. Thus, while FILP might be suitable for loans to small business or the construction of infrastructure, it is harder and in some cases impossible for a government to use FILP to finance other areas such as social security payments or education. The management of the budget and FILP present different challenges. Because FILP is a financial system, unlike the budget, it requires a system for managing risk and monitoring investments. In contrast to a private financial institution, it does not attempt to maximize profit but rather serves public purposes, however vaguely defined they may be. There is a potential but not unavoidable tension between the goal of maintaining a sound financial system and that of serving public ends. Whether this tension becomes problematic depends on the management and use of the funds. Government intervention in finance can potentially help solve market failures. This was the rationale for using FILP to finance critical economic infrastructure and key industries. Sound public investments can and did enhance economic growth while providing safe returns on government investments and loans, although the quality of investments declined for reasons discussed later in the book.28 In other cases, what the government deems a legitimate public function, such as economic redistribution, may conflict with the financial system’s need to ensure repayment of loans. structuring choices

In principle governments can finance a policy using tax revenues or financial mechanisms, but the choices actually confronting governments and other actors involved are limited by what institutional capacities they have. In the case of Japan, FILP has powerfully structured the options of various actors involved in the politics of public spending for several reasons.

Understanding the FILP System  47 table 2.7 Public Finance Goals of Key Actors Actor

Government Leadership (until 1970) MOF

Goals

budget restraint, budget expand get and/or rapid restraint projects stay elected industrialization, and policies political and electoral support

compensation and preferential treatment

Taxes Budget FILP

low taxes limit spending, no debt maximize FILP allocations

low taxes maximize spending maximize FILP allocations

low taxes limit spending, no debt moderate FILP allocations

Spending Ministries

N/A maximize spending maximize FILP allocations

Politicians

low taxes maximize spending maximize FILP allocations

Electorate

First, the FILP system has been set up as a supplement to the formal budget. In fact, as discussed in the next chapter, the government first established FILP because of a shortage of budget funds. Second, the FILP Plan, despite its differences, also shares much in common with the budget. The same ministry, MOF, is responsible for drafting the FILP Plan; the processes of drafting the FILP Plan and budget are contemporaneous, and the process involves many of the same actors. Specifically, FILP has had several institutional effects, which have been highlighted in the literature on institutionalism.29 First, FILP aligned preferences that otherwise would have come into conflict. Second, FILP served as a power resource for the Ministry of Finance, which used the system to defend the budget during budget negotiations. Third, FILP channeled interests making the use and expansion of FILP an alternative to other options. Table 2.7 illustrates how FILP created possibilities for compromise among otherwise competing interests. To simplify, one can think of five sets of actors: the electorate, politicians, spending ministries, MOF, and the government. These actors refer to the Japanese context, although the challenge governments face in balancing the interests of these actors is not unique to Japan. While institutions do not determine preferences, they do shape the ordering of preferences, the relative influence of actors, and possibilities for compromise. The electorate, apart from ideological demands, wants economic growth as well as various kinds of compensation and preferential policy treatment.

48  Understanding the FILP System

In Japan, small businesses and farmers have demanded subsidies, and labor and other groups have pushed for social security spending. Big business also lobbied for investment capital and industrial infrastructure after the end of World War II. Yet, at the same time, the electorate wants to minimize its tax burden. Sven Steinmo describes the problematic demands of the electorate: “Citizens have a virtually insatiable desire for increased public spending, yet they hate to pay taxes.”30 Backbench politicians want funds to bolster their electoral chances, which can be done by delivering both collective goods, such as economic growth, and selective ones that respond to the demands of their constituencies. In the Japanese context, as Estévez-Abe and others have shown, Japan’s electoral system until 1994, the single non-transferrable vote (SNTV), created incentives for politicians to deliver particularistic goods, such as pork-barrel spending, rather than more universalistic welfare programs.31 Regardless of the type of spending, politicians typically want to avoid passing on the costs of such spending in the form of higher taxes, which are unpopular with the electorate. Where possible, politicians in Japan have attempted to deliver tax cuts or favorable tax treatment. Spending ministries in Japan, and elsewhere, maneuver to procure funds to carry out projects, to expand their resources and power, and to respond to the requests of constituencies that fall under their jurisdiction.32 On the other hand, the Ministry of Finance in Japan, as in many countries, wants to control budget expenditures. In Japan, MOF also wanted to keep taxes low and budgets balanced until the 1970s (the evolution of this preference is discussed in the next chapter). The government is in the position of mediating these competing preferences. Different administrations bring with them specific ideas and preferences that they attempt to reconcile with other parties that are part of the process. Through the start of the 1970s, the government leadership was committed to budget restraint, keeping taxes low, spending low, and budgets balanced. This fiscal stance, as discussed in Chapter Three, was forged under the leadership of Prime Minister Ikeda Hayato and was critical to the postwar fiscal bargain. After the 1970s, the government commitment to budget restraint weakened, although it was not abandoned, and in fact it made a comeback during the 1980s. Until the 1970s, the LDP-controlled government largely backed MOF’s fiscal goals, as part of its larger economic strategy. Low taxes promoted savings and capital investment; balanced

Understanding the FILP System  49

budgets prevented crowding out and, through the 1960s, helped stabilize the country’s international balance of payments; low government expenditures helped keep taxes low and the budget balanced. But the government was also committed to aggressive industrialization and also to helping the ruling party stay in power, the prerequisite to both of these policies. The challenge for the government was how to reconcile these conflicting goals. As the bottom row of Table 2.7 illustrates, FILP created the possibility of reconciling these goals. To the extent that projects and policies could be financed by FILP, it served as an alternative to the budget for the spending ministries, politicians, and various interest groups. MOF objected less to using FILP to finance policy priorities because the system did not make demands on the budget. MOF initially took a slightly more conservative approach toward FILP than spending ministries and backbench LDP politicians, particularly during periods when the international balance of payments turned negative. During FILP’s early years, when funds were relatively limited, MOF was forced to ration funds, although these shortages ultimately led to measures to increase the amount of funds available in the FILP system. Later, as the funds flowing into FILP grew, MOF actively promoted the use of FILP. FILP’s second institutional effect was its role as a power resource for MOF. While FILP created the possibility of aligning interests, MOF made sure that budget restraint was a part of the compromise by drawing on FILP. To limit budget growth, MOF deployed FILP as a negotiating instrument, offering FILP funds in lieu of increases in budget allocations for spending ministries during annual budget negotiations. FILP, thus, served as a strategic political resource that MOF marshaled to control budget outlays. By providing a non–tax-based, alternative source of public finance, the government was able to make choices that partly ameliorated the trade-off between budget spending, taxes, and budget balance. These choices, however, are only part of the picture.

Time Considerations The trade-offs and preferences I have described are not constant. The actors and the nature of the trade-offs change over time. Thus it is necessary to consider temporal factors. Four in particular are relevant to the study of FILP: actor discontinuity, time lags, endogenous sources of change, and feedbacks.

50  Understanding the FILP System actor discontinuity

Actors are not constant, but perpetually change leading to what Pierson has called actor discontinuity.33 Politicians retire and are replaced by new politicians, new cohorts enter the bureaucracy, entirely new actors emerge, and so forth. Actors, their preferences, and the power relationship among them all shift over time. New actors can adapt institutions and use them in ways not envisioned by those that designed the institution in the first place, a process Thelen has called layering.34 In the context of Japan, although the LDP was in power virtually without interruption from its formation in 1955 until 2009, the goals of the LDP, and by extension the government, changed significantly. Until the 1970s, the government’s commitment to budget restraint determined the nature of the fiscal bargain and how FILP was used. During the 1970s the government’s commitment to budget restraint weakened. As Japan’s economy matured, the government’s focus on promoting industrialization declined. The relationship between LDP politicians and bureaucrats shifted as well, as career politicians exerted greater influence through the cultivation of networks within the bureaucracy. Actor discontinuity in Japan is particularly relevant to FILP because, unlike the budget, the management of FILP requires carefully balancing the financial stability of the system with the public goals for which the government uses FILP. A change in actors alters this balance. time lags

Cause and effect do not necessarily unfold in quick temporal succession. As Pierson has observed, the consequences of choices or actions may cumulate over time or may not be revealed until a significant amount of time elapses.35 Consideration of time lags is germane to the study of FILP, as well as other similar financial systems, because the choice to use FILP to finance something is separated in time from the process of recovering the loan or investment. FILP loans and investments can span very long periods of time, in some cases up to thirty years. Thus, while FILP might structure choices at a specific period during budget negotiations, the consequences of these choices, specifically financing something via FILP, may not be known until many years later. Poor choices for FILP investments might have negative consequences for FILP, although this might not become apparent until a significant amount of time has elapsed. This time lag can exacerbate a moral hazard problem because the government may not bear the conse-

Understanding the FILP System  51

quences of its actions. Given that FILP funds are a nontax source of capital, there may be the temptation to use FILP funds without adequate regard to the long-term consequences. endogenous change

Once created, institutions can take on lives of their own. Institutions may evolve due to endogenous factors such as institutional design; as they evolve, they can generate dynamic effects that change over time. FILP prior to the 2001 reform produced such a dynamic effect through its rapid growth, which created an ever-larger source of funds that the government could use to finance various priorities. On one level, the LDP systematically expanded the FILP system by adding new funding sources and ensuring that existing ones grew. On another level, specific structural features also contributed to FILP’s rapid growth. Funds from postal savings and the pension system were linked to the FILP by a legal requirement that they be transferred to the Trust Fund Bureau Fund. As both sources of funds grew, they automatically channeled more capital into FILP. Thus the amount of funds flowing into the system determined the size of FILP rather than an assessment by the government of how much funding was necessary. Under the current FILP system, the link was broken, and now the government begins with calculations of the overall level of finance required and then uses bonds to raise the funds. feedbacks

Institutions also change because actors make revisions to them. How actors attempt to preserve or change institutions is influenced by both positive and negative feedbacks.36 Beneficiaries from a specific institution may become a salient political constituency, bolstering the continuance of the institution or encouraging its expansion. Conversely, institutions can create opponents or losers that mobilize for change.37 In the case of FILP, powerful vested interests have a stake in preserving or expanding it. FILP has served as a useful conduit for channeling support to LDP constituents, which have become a large user base. MOF has jealously guarded its control over the FILP system, and numerous other ministries that have jurisdiction over various FILP agencies have used them as a vehicle for placing retired senior bureaucrats. The growth of FILP has also fueled negative feedbacks by generating opponents to the system. The growth of FILP has spurred opposition from

52  Understanding the FILP System

private financial institutions that have viewed parts of FILP as a competitor, and FILP’s size fueled calls for reform. conclusion

The chapters that follow apply this framework to understanding how FILP has structured government choices over time and how these choices have influenced the development of FILP. First, the next chapter explains why the FILP system was originally created and why other countries in comparable circumstances made different choices.

three

The Common Origins of Budget Restraint and FILP, 1945–1953

In retrospect, it is easy to attribute a degree of foresight and intentionality to the government’s policy of budget restraint that became so central to its postwar economic strategy. Budget restraint, however, was the product neither of an autonomous forward-looking Japanese bureaucracy (that is, developmental state) nor conservative political party: The occupying U.S. military authority imposed it on the government after World War II. Prior to U.S. Occupation, the Japanese government had not had a balanced budget for fifty years, and during the war the finance minister, Takahashi Korekiyo, had used deficit financing to pull Japan out of the Great Depression.1 Takahashi’s activist fiscal policy predated the publication of Keynes’s General Theory, a phenomenon that Charles Kindlerberger called “Keynesianism without Keynes.”2 Not only was there no general conservative or bureaucratic preference for budget restraint, there was active opposition to it. Budget restraint limited the Japanese government’s ability to rebuild industry and deliver policies that would ameliorate the harsh postwar social and economic conditions facing the population. Although there were certainly advocates of budget restraint, particularly in the Liberal Party, one of the two parties that would merge to form the conservative Liberal Democratic Party (LDP) in 1955, the conservative camp was a diverse lot that included critics as well. Ishibashi Tanzan of the Liberal Party, one of the architects of Japan’s industrial reconstruction strategy, advocated prioritizing industrial reconstruction at the expense of budget restraint and the inflation that it would engender. A sizeable camp within the Democratic Party, the other main conservative party that would merge with the 

56  FILP and the Postwar Settlement

Liberals, envisioned a reformed capitalism that would spread benefits and protections to weaker groups in society. The Democratic Party was viewed as a possible “third force” between the left and right camps, and it briefly formed a coalition government with the Socialists.3 Wide support for budget restraint could not be found in the bureaucracy either, within neither MOF nor the economic planning bureaucracy.4 To the contrary, virtually every ministry wanted more public funds. The Ministry of Commerce and Industry (MCI), the predecessor to MITI that already accounted for one of the largest shares of the budget, argued that rebuilding industry was paramount, revealing the early tension between the goal of industrial reconstruction and the budget restraint imposed by the Americans.5 In sum, there was no consensus on the need for budget restraint. To the contrary, budget restraint along with tight monetary policy posed a problem for the Japanese government: how to finance industrial reconstruction and deliver social stability in the wake of wartime devastation. While monetary policy would be relaxed, a tight budget policy would eventually evolve into an enduring element of the conservative regime’s policy profile. As this chapter shows, however, after the war it severely limited the options of the government. FILP emerged as the solution that would allow the government to partly overcome the constraints imposed by the U.S. Occupation. This chapter proceeds in four steps. First, it begins with the postwar government’s experiment with industrial reconstruction, which set in motion the chain of events that led to the construction of the FILP system—see Figure 3.1. Through a policy called priority production, the government channeled capital and other resources to industries critical to rebuild Japan’s economic base. The primary instruments for financing industrial reconstruction were a governmental financial institution—the Reconstruction Finance Bank (RFB)—and direct subsidies from the budget. Although the RFB and subsidies financed by deficit spending successfully jump-started production, both also triggered runaway inflation. Second, this chapter shows how the experiment with priority production led to the imposition of fiscal and monetary restraint. RFB-induced inflation led the U.S. Occupation to impose a draconian fiscal and financial tightening known as the Dodge Line in the late 1940s. While the Dodge Line brought inflation under control, it unleashed a wave of opposition both inside and outside the government. Third, this chapter analyzes how the political pressures created by the Dodge Line led the government to

Budget BudgetRestraint Restraintand andFILP  FILP  57 E Inflation Industrial reconstruction RFB

Fiscal and financial retrenchment dodge line

Political pressure Construction of FILP

f igu r e 3.1. Factors behind the establishment of FILP.

construct the FILP system. Finally, the chapter considers why other countries also occupied by the U.S. military—West Germany and Italy—did not commit to low budget spending or create a system like FILP.

The Industrialization–Inflation Trade-Off: Priority Production and the Reconstruction Finance Bank The Japanese government’s industrial reconstruction plan after the war reflected priorities that differed sharply with those of the Occupation, and the attempt to reconcile these priorities led to the establishment of FILP. Even before the Dodge Line, the Supreme Commander of the Allied Powers (SCAP) placed priority on controlling inflation through deflationary fiscal and monetary policy. By contrast, for Japanese economic planners the highest priority was rebuilding industry even at the expense of inflation. The government’s “priority production” strategy launched in 1946, which grew out of wartime experiments with industrial planning, centered on pouring investment and channeling raw materials to basic industries, in particular the energy sector.6 The architects of the plan were Aritomo Hiromi, a Socialist economist, and Ishibashi Tanzan, a Keynesian. Both recognized that their plan would have short-term inflationary effects, but they argued that only an increase in supply would eliminate the root cause of inflation. The deflationary policies of the Occupation authorities, they believed, would not stabilize the economy.7 Revealing the wide gap between industrial planners and SCAP, Ishibashi was purged in 1947 because he was viewed as too tolerant of inflation, although he would reemerge in the 1950s as a political figure after the end of the Occupation.8 Nonetheless, the Japanese government, controlled by the conservative Liberal Party, implemented its ambitious priority production program.

58  FILP and the Postwar Settlement

To stimulate production, the government poured capital into targeted industries, in particular energy production because it was deemed a critical input for other key industries. After the Socialist Party and Democratic Party formed a coalition government in 1948, this investment accelerated. Katayama Tetsu, one of only two Socialist prime ministers in Japanese history, established a price subsidy system that would transfer subsidies from the budget to producers in key industries. The government also channeled capital to industry through the government-operated Reconstruction Finance Bank (RFB), which provided long-term credit for investment, something the war-hobbled private financial sector could not provide at the time. As Table 3.1 shows, the RFB financed 72 percent of all capital investment in 1947 and 65 percent in 1948. The majority of this investment was concentrated in mining, indicating the government’s emphasis on increasing coal production (Table 3.2). Lending from the RFB increased sharply from 4 billion yen in January 1947 to 131 billion yen in March 1949.9 Priority production succeeded in helping rebuild Japan’s economic base. In 1947 industrial production was only 40 percent of the level of the period 1930–1934. Just one year later, industrial production had crossed the 50 percent threshold.10 Priority production did not, however, bring down inflation but rather ignited it. In April 1949, compared to the prewar base from 1934 to 1936, wages and retail prices were up 168 times and 220 times respectively.11 The causes were both fiscal and monetary. Subsidies were financed through deficit financing, which increased from 150 billion yen in mid-1945 to 531 billion yen in mid-1949.12 The RFB was the primary monetary cause of inflation. Although it played a central role in the qualified success of priority production, the RFB sparked inflation because it was financed through a mechanism that increased the money supply. The government funded the RFB through the issuance of bonds, the majority of which the Bank of Japan (BOJ), Japan’s central bank, purchased. 13 In 1946, the BOJ purchased 94 percent of all RFB bonds, the following year 76 percent, and then 64 percent in 1948.14 The resulting inflation became known as “RFB inflation.” The U.S. government directly intervened (overriding the command of SCAP) to bring inflation under control, and the operations of the RFB were suspended in 1949; three years later the RFB was formally abolished. Although short lived, priority production and the RFB had lasting implications. First, the RFB served as an institutional template for the creation of

Budget Restraint and FILP  59 table 3.1 Industrial Capital Investment 1946 1947

RFB

All banks

Stocks and bonds

72.0% 65.0%

10.2% 15.1%

17.8% 19.9%

source: “Fukko kinyū kinko chōsa” (RFB Study) as cited by Endō Shōkichi in Zaisei Tōyūshi, Table 5, p. 84.

table 3.2 RFB Financing Balance, 1947 Industrty Mining Metalworking Chemicals Electricity Machine Tools Agriculture and Forestry Fisheries Textiles Public Corporations Other Total

Amount (million yen)

Percentage

21,941 2,122 5,155 2,807 2,806 48 2,839 711 18,199 2,835 59,463

36.9% 3.6% 8.7% 4.7% 4.7% 0.1% 4.8% 1.2% 30.6% 4.8% 100.0%

source: “Fukko kinyū kinko chōsa” (RFB Study) as cited by Endō Shōkichi in Zaisei Tōyūshi, Table 6, p. 84.

FILP. Although the financing mechanism was different, the RFB, like FILP, allocated finance capital to private corporations as well as public ones that carried out its specific policy goals. The RFB was also the direct predecessor to the Japan Development Bank (JDB), a government financial institution created in 1952. The JDB would become one of the first FILP agencies and also one of the government’s central instruments of industrial policy. Second, priority production was viewed by its advocates as a success that vindicated the strategy of targeting industries despite the inflation created by the RFB. Even after the experiment with the RFB, Ishibashi—a self-proclaimed Keynesian15 who served jointly as the minister of finance and director of the Economic Stabilization Board (predecessor of the Economic Planning Agency) and as prime minister from 1956 to 1957—continued to advocate

60  FILP and the Postwar Settlement

increasing public investment in industry to accelerate economic growth. The experience with priority production also prefigured Japan’s later industrial policy, although it also indicated some of the key problems that would need to be overcome. The government would have to figure out how to balance boosting investment with the goal of limiting inflation and budget outlays. It would also have to devise a way to ensure that channeling resources to industry did not come at the expense of social groups that would later be central to the conservative base of the LDP. Third and most importantly, the inflation caused by the RFB led directly to intervention from the U.S. government and the imposition of the Dodge Line. The Dodge Line’s draconian deflationary policies sparked the opposition that eventually led to the creation of FILP and also helped entrench the goal of budget discipline.

The Dodge Line and the Ensuing Backlash The U.S. government’s direct intervention mooted the debate between SCAP and the Japanese government over the relative priority that should be given to industrialization or deflationary fiscal and monetary policies. With the onset of the Cold War, the United States took renewed interest in Japan. Washington grew increasingly alarmed with Japan’s spiraling inflation. To stabilize Japan’s economic situation, the U.S. government dispatched an American banker, Joseph Dodge, who had worked on German currency reform. Dodge, bypassing SCAP, implemented a nine-point stabilization package16 that became known as the Dodge Line to bring down inflation. Despite fierce opposition, Dodge immediately suspended the activities of the RFB and imposed draconian deflationary fiscal and monetary policies, ending the government’s experiment with priority production. Soon after the end of the war, even prior to the Dodge Line, SCAP had imposed fiscal limitations on the Japanese government. SCAP viewed fiscal discipline as a means of combating inflation and also believed that forbidding the issuance of debt would limit Japan’s future war-making potential because Japan’s wartime militarism had been funded by heavy borrowing.17 The principle of “healthy public finance” (kenzen zaisei shugi) was codified in the Public Finance Law’s Article 4 and Article 5. Article 4 requires that budget expenditures be equal to revenues excluding funds from bonds or lending. In other words, debt is in principle prohibited. Article 4, though, contains an important exception: “Notwithstanding these provisions,

Budget Restraint and FILP  61

bonds may be issued and money may be borrowed up to a ceiling approved by vote of the Diet when said monies are used for public works, investments, or loans.”18 This escape clause provided the opening that allowed future administrations to issue bonds while maintaining the fiction of the “balanced budget” principle. Article 5 forbids the Japanese central bank from financing government debt, thus preventing the government from using a financing mechanism like that employed by the RFB. Article 5 clearly states: “No bond issues may be underwritten by the Bank of Japan, nor may any borrowings be made from the Bank of Japan except in special cases and within limits determined by vote of the Diet.”19 Immediately after the war, however, SCAP recognized that reconstruction and reparations required substantial budget resources and allowed exceptions to both articles. Until the Dodge Line, the government ran what were in fact large budget deficits. The balanced budget requirement was interpreted as applying only to the general account budget (hereafter budget). The Japanese government used various special accounts, the RFB being the most outstanding example, to issue debt while maintaining at least the form of the balanced budget principle. With the onset of inflation, the United States hardened its stance. The United States removed Ishibashi Tanzan as finance minister and then six more finance ministers during a two-year period.20 The Dodge Line mandated a far stricter interpretation and enforcement of Japan’s public finance laws. The balanced budget requirements specified in Article 4 of the Public Finance Law were also extended to local governments, special accounts, and government-affiliated institutions. Debt payments were included as expenditures that would have to be covered to balance the budget. The occupying authorities also became more vigilant in enforcing Article 5 of the Public Finance Law to block any measures that might rekindle inflation. Dodge immediately prohibited the issuance of RFB bonds, and the operations of the RFB were wound down; the bank was later abolished in 1952.21 The Dodge Line also shifted the principle of balanced budgets to a stricter “superbalancing policy,” in which the budget was not only balanced but a surplus was set aside to cover hidden governmental debt, principally the repayment of RFB bonds. These measures effectively removed Keynesian fiscal stimulus as an option and marked the end of the priority production experiment.22 Both the Yoshida government and the opposition expressed displeasure with the Dodge Line. Yoshida not only opposed fiscal austerity, he actually

62  FILP and the Postwar Settlement

supported Keynesian deficit spending.23 Many within even SCAP, including General MacArthur, worried that the plan would be socially and politically destabilizing. The head of SCAP’s Labor Bureau argued that the plan would radicalize the labor movement.24 When it came time to draft the 1949 budget, the first under the new stricter rules, both SCAP and the Japanese government appealed for concessions. Dodge, however, ignored petitions from the Japanese government. Anticipating how unpopular the budget would be, the ruling coalition composed of the Democrats and Yoshida’s Liberal Party postponed formally drafting it because of an impending election. The eventual draft budget, directed by Dodge, went directly against the campaign promises made earlier in the year by the Liberal Party. The combination of budget cuts in public works, employment policies, and higher taxes was expected to fall disproportionately on workers, small and medium enterprises, and those with low incomes.25 The Japanese government had little choice but to accept the Dodge budget, but the episode marked a significant turning point for MOF. The Dodge Line accelerated the Occupation’s reliance on MOF, increasing its stature, and also completed its realignment with its own fiscal goals by empowering fiscal hawks within the Ministry.26 Prior to the Occupation, MOF’s fiscal policy was Keynesian in orientation. Ikeda Hayato, the minister of finance at the time and former MOF bureaucrat, actually endorsed the budget, arguing that it would restore economic stability and growth.27 This marked a sharp departure from former Minister of Finance Ishibashi who had advocated an active fiscal and financial policy to promote industrial reconstruction and was removed by the U.S. authorities. Ikeda’s ideas and leadership, as will be discussed more fully in the next chapter, profoundly influenced Japan’s postwar economic strategy, and he more than any other individual laid the foundations for the subsequent policy of budget restraint. At the time, however, Ikeda’s stance was deeply unpopular. In discussions over Dodge’s nine-point economic stabilization program, MOF was the only group inside Japan to look on the plan positively.28 Moreover, Ikeda’s embrace of the budget proposal created such fierce opposition from the Democrats, the Liberal Party’s coalition partner, that he offered to resign as minister of finance. But Prime Minister Yoshida, who reportedly knew little about economics, trusted Minister Ikeda’s assessment, and, despite his own preferences, he backed Ikeda by asking him to stay on as

Budget Restraint and FILP  63

finance minister. Eventually the Dodge budget was submitted as the government’s budget with virtually no revisions.29 While Dodge was unwavering in his budget policy, he did not completely ignore the political consequences of the economic hardship that would be caused by deflation. Three main policies were used to ease the pain. First, price subsidies were reduced more slowly than originally intended. Second, the tax burden was reduced slightly.30 And finally and most importantly, the United States provided new financial aid, modeled on the Marshall Plan in Europe, to mitigate the effects of the Dodge Line. In exchange for the aid, the United States ordered the Japanese government to create a consolidated account under the authority of MOF for managing the new funds as well as previous aid that had been disbursed under other programs.31 The account, called the Counterpart Fund, was used primarily to help retire government bonds when it was first created in 1949. As will be discussed later in this chapter, after 1949 the government allocated a larger share to industry and public enterprises, and eventually the Counterpart Fund was reorganized as a component of FILP, the Industrial Investment Special Account.32 backlash against the dodge line: the government’s dilemma

While the Dodge Line brought down inflation, it inflicted severe hardship on the population and business, igniting a backlash. The backlash represented two simultaneous problems confronting the Japanese government: how to pursue industrialization and how to provide social stability by mitigating the effects of the Dodge Line. Regarding industrialization, the Dodge Line represented a severe blow to economic planners and big business. With the suspension of the RFB, economic planners lost a key instrument for guiding industrial reconstruction. The imposition of tight credit and tight fiscal policies further limited their ability to increase the flow of capital to industry. These policies had a severe impact on big business as well. Big business had never liked the government’s restrictive fiscal policies. Indeed, even before the 1949 Dodge budget, Keidanren, the lobby group for big business, had criticized the government’s budget policy, which it derided as “healthy public finance first-ism” (kenzen zaisei dai ichi shugi), indicating displeasure with the sacrifice of other economic goals to this principle.33 The Dodge Line imposed much more stringent fiscal restrictions and at the same time ended the government’s loose monetary policy. The suspension of RFB lending also dramatically curtailed big business’s

64  FILP and the Postwar Settlement

access to long-term credit. In response to the Dodge Line, Keidanren forcefully conveyed its grievances to MOF and SCAP.34 The second problem confronting the government was how to ameliorate the wider effects of the Dodge Line on the population. The transition to democracy, the rise of labor, and the organization of political interests created a volatile political situation for the government after the end of the war. The Dodge Line intensified pressure on the government by unleashing a swell of opposition as unemployment rose and incomes declined. In 1949, the number of those seeking employment increased eight times.35 To reduce public spending, the Yoshida cabinet reduced the number of public administrative personnel from 1.65 million to 1.41 million. In July of 1949, the number of employees at Japan National Railways alone was reduced by 95,000 employees, leading to a series of protest actions by labor.36 In all, Dodge’s 1949 budget put an estimated one million people out of work.37 Small and medium enterprises (SMEs) and farmers, which accounted for the majority of the population, also faced a dire economic situation. According to a government survey in the early postwar era, 98 percent of workers in services worked for firms with twenty-nine employees or fewer; 97 percent of workers in manufacturing worked for firms with twenty-nine employees or fewer; and 97.3 percent of workers in commerce worked in firms with forty-nine employees or fewer.38 Farmers accounted for roughly half of Japan’s labor force in 1950.39 In 1949, the income of farmers dropped by 3.8 percent, and their disposable income dropped by 7.0 percent from the previous year.40 The drop was the result of a combination of Dodge Line policies, but the budget cuts had the most direct impact because they reduced agricultural subsidies. Cuts in public works also hit farmers because rural projects generated income for farmers. For SMEs the credit crunch and drop in demand pushed many companies into bankruptcy or to the brink of bankruptcy. The 1949 Economic White Paper summed up the situation facing SMEs and agriculture as follows: Agriculture and SMEs are facing a crisis caused by the deflationary economic policies . . . the strengthening of the economic stability policies, mainly enterprise rationalization, fiscal balance, and the promotion of exports, are exposing agriculture and SMEs to danger.41

Although SMEs and farmers would become key pillars of the postwar conservative coalition, at the time, political ties to the conservatives were more fluid.42 Land reform had changed the class structure dramatically in

Budget Restraint and FILP  65

the countryside, and the political control over small business weakened after democratization. Left-wing parties and unions made significant inroads gaining the support of both farmers and small business. Union organizers built alliances with both farmers and small business. While rural support was higher for the conservative parties, the Liberals and the Democrats, in the later 1940s the Japan Socialist Party’s (JSP) primary support base was farmers, not labor.43 The JSP and Communists also moved to organize the SME sector. The left parties recruited Ninagawa Torazō, one of the most vocal advocates of SMEs, to run as a candidate for the governorship of Kyōto supported by the Japan Socialist Party (JSP), Japan Communist Party (JCP), and Labor-Farmer Party Coalition. Ninagawa won the election and would establish Kyōto as one of the centers of innovative SME policy.44 In response to the Dodge Line, a growing number of interest groups began to form, and various groups petitioned the government for relief. Beyond small business and labor, other petition campaigns and interest groups transmitted the frustrations of the population. One of the most serious issues at the time was a massive housing shortage. A combination of wartime destruction and the return of Japanese nationals from former colonies created an acute housing crunch. While the government had launched a series of initiatives to stimulate housing supply even before the Dodge Line, the efforts made only a small dent in the housing crisis. The Dodge Line only exacerbated the situation. Out of growing frustration and desperation, citizen groups submitted petitions directly to the government, and the left attempted to capitalize on the issue by making calls for increasing housing investment.

The Path toward FILP The Dodge Line created a situation virtually no one found tolerable. Yet despite the backlash, the hands of the Japanese government were tied because neither budgetary spending nor monetary policies could be used to alleviate the political and economic consequences of the Dodge Line. As the remainder of this chapter will show, the government responded by creating FILP. FILP, though, did not come together all at once. In fact, the government had no clear plan initially to establish the FILP system. Rather, there were two parallel sets of developments that eventually converged, leading to the creation of FILP. One involved the issue of increasing public funds while avoiding excessive inflation and adhering to the fiscal restrictions imposed

66  FILP and the Postwar Settlement

by the United States. This process involved the Japanese government, often acting in response to other ministries’ requests, negotiating with the Americans to open up the two existing sources of funds—the Deposit Bureau and the Counterpart Fund—whose use SCAP had strictly limited. These negotiations ultimately led to the Trust Fund Bureau Fund (TFBF) and the Industrial Investment Special Account (IISA), which were formed respectively from the Deposit Bureau and Counterpart Fund. Both became central elements of FILP’s financing mechanism that critically did not rely on the budget or generate inflation as the RFB had. A second process led to the creation of the exit institutions, or FILP agencies, that would eventually use these funds. The government created these in response to requests from specific ministries and groups that petitioned the government, such as for access to credit for SMEs, long-term credit for big business, housing, and the like. The Dodge Line played a direct role in the creation of these FILP agencies by intensifying the need of these specific groups for relief. In this sense, their establishment represented the government’s response to the political backlash against the Dodge Line. The government established these exit institutions, however, in many cases without resolving the issue of how they would be financed. This issue fell to MOF, which eventually linked the new institutions (as well as old ones) to the TFBF and the IISA, thereby completing the establishment of the FILP system. Both of these processes and how they eventually merged are discussed in the following pages. unlocking financial resources: the creation of the trust fund   bureau fund and the industrial investment special account

To supply capital to industry and respond to the surging requests for public finance, MOF turned to two existing sources of funds, the Deposit Bureau and the Counterpart Fund. The Deposit Bureau, the predecessor to the Trust Fund Bureau Fund, pooled funds from the postal savings system, postal life insurance, and postal pension programs (they are referred together as kanpō) and several other smaller sources.45 The Counterpart Fund consolidated funds from postwar U.S. aid and was used mainly to retire government bonds. The problem for MOF, however, was that SCAP restricted how the funds from both the Deposit Bureau and Counterpart Fund could be used. With the Dodge Line, MOF launched an intensive campaign that eventually removed many of these restrictions and paved the

Budget Restraint and FILP  67

way for the creation of the Trust Fund Bureau Fund and Industrial Investment Special Account. From Deposit Bureau to the Trust Fund Bureau Fund

The Deposit Bureau was established in 1925 as a way to rationalize the management of the postal savings system and kanpō (postal pensions and postal life insurance). Prior to its establishment, the government had used these funds primarily to finance government debt but also to channel funds from these sources to special-purpose banks with a close relationship with the government (such as Kangyō Bank, Chōsen Bank, and so on). This latter use in some ways foreshadowed the development of FILP, although the policy-oriented lending never reached the same level of FILP. In fact, the Deposit Bureau was initially conceived as a way to safeguard the postal savings system and kanpō after loans to banks generated large losses, leading to calls for reform and a retreat from policy-oriented lending. From its establishment to the end of World War II, Deposit Bureau funds shifted even further to the purchase of government bonds, a trend that accelerated, as the government needed ways to finance its war effort.46 One key difference with the Trust Fund Bureau Fund is that funds from the postal savings system and kanpō were not required by law to be transferred to the Deposit Bureau and that the use of the funds that were transferred to the Deposit Bureau were restricted. The management of the funds had been a constant source of tension, with various ministries vying for control, and in reality management of the funds remained fragmented.47 Just months after the end of the war, SCAP moved quickly to restrict the use of the funds. SCAP issued a memorandum that limited the use of postal savings funds to the short-term financing of national or local government through direct lending or the purchase of bonds (national and local). Then, just a month later, SCAP clarified its position further. First, SCAP insisted on clear MOF authority over the management of both postal savings and kanpō. Under the prewar regime, the Ministry of Communication had used kanpō funds to directly finance local governments and private corporations, but SCAP explicitly forbid separate management for the kanpō funds.48 Second, SCAP specified how the funds could be used. Surplus funds could be used to absorb new national or local bonds, but lending to government corporations was explicitly prohibited. The Japanese government could invest in special-purpose banks, that is, those designated by the state to provide

68  FILP and the Postwar Settlement

specialized lending, but only with the permission of SCAP and only if there were excess funds after the purchase of local and national government bonds. In practice, however, despite requests from MOF, SCAP sharply limited the investment of funds in financial institutions. Collectively these restrictions effectively prevented the government from using the funds for postwar reconstruction.49 MOF’s effort to tap the Deposit Bureau predates the Dodge Line. Soon after the war, MOF organized the Financial System Investigative Committee (kinyū chōsa seido chōsa kai) to review the entire financial system. During these discussions, MOF indicated a need to review the use of Deposit Bureau funds. But following the orders of SCAP, the discussions focused on “democratization” of the management of the funds, which to SCAP meant taking them out of the hands of bureaucrats.50 In the end, this effort failed completely because bureaucrats eventually gained control over the funds. With the start of the Dodge Line, pressure to open up the Deposit Bureau grew stronger. MOF focused on the Deposit Bureau for several reasons. First, business directly lobbied MOF to open it up. Two business groups, Keidanren and Nisankyō, issued statements requesting the use of Deposit Bureau funds for long-term finance. Both groups also communicated their requests in a series of meetings with MOF, which was largely sympathetic to their concerns.51 Second, the supply of funds in the Deposit Bureau increased. The main sources of the Deposit Bureau funds were voluntary deposits into the postal savings system and purchases of postal life insurance and pension policies. Immediately after the war, the amount of funds declined, which is why MOF initially took such a passive stance on the use of the funds. After this brief period of decline, though, the funds flowing into the Deposit Bureau began to grow. Ironically, the fiscal discipline imposed by the United States contributed to increased surpluses. Because the Dodge Line not only balanced the budget but also generated surpluses, Deposit Bureau funds did not need to be used to provide finance to the national and local government. Consequently, idle Deposit Bureau funds began to accumulate.52 Thus the Dodge Line created two simultaneous effects that created an incentive for MOF to lobby to open up the funds: On the one hand it created both financial and fiscal scarcity, and on the other it contributed to Deposit Bureau surpluses.53 The cabinet, politicians, and local government officials also stepped up their calls to remove the restrictions on the funds. They focused on kanpō

Budget Restraint and FILP  69

funds in particular because the Ministry of Communication had used the funds prior to the war to provide local government finance, distress finance for local firms, and a host of other more politically motivated ends.54 Even prior to the Dodge Line, local governments had begun to lobby the government to open up kanpō. They were aided by the politically powerful postmasters and left-wing postal workers’ union.55 In 1947, the Prefectural Governors’ Conference issued a statement, “Request to Re-open Postal Pension and Life-insurance Funds for Local Government,” and directly submitted this request to GHQ. Subsequently, the All National Prefectural Assembly Chairpersons’ Conference, All National Mayors’ Conference, and the All National Town and Village Chiefs’ Conference all started submitting requests and petitions to the Diet, Ministries, and military administration. With the start of the Dodge Line, the urgent requests of the local governments found a more sympathetic audience.56 Responding to their demands, in 1949 the cabinet passed a resolution requesting that SCAP allow the funds to be used for promoting economic welfare and stability.57 MOF’s Banking Bureau wanted to use funds left over from national and local debt purchases to ease the impact of the fiscal and financial crunch caused by the Dodge Line. MOF was guided by several aims. MOF wanted to relieve the general financial crunch by providing capital to financial institutions, and it wanted to provide long-term capital to promote industrialization. Furthermore, MOF hoped to use Deposit Bureau funds to achieve public policy goals such as building infrastructure and providing relief to SMEs and the agricultural sector. MOF expected that the funds could help compensate for projected budget shortfalls reflecting its desire to use the financial resources it controlled to circumvent budget constraints, a strategy that would become better articulated with the establishment of FILP.58 In 1948 MOF requested permission from SCAP to use surplus Deposit Bureau funds. Initially, MOF wanted to use the surplus funds to buy RFB bonds to restart the operations of the RFB. MOF also lobbied to use the Deposit Bureau funds to purchase bonds from private financial institutions and to provide finance for infrastructure, SMEs and agriculture. SCAP, however, rejected these requests, and the surplus funds remained idle. But as the effects of the Dodge Line grew more severe, MOF stepped up its campaign to open up the funds throughout 1949. In May 1949, Minister of Finance Ikeda submitted a formal request entitled “Proposal for the Management of the Deposit Bureau” to SCAP. The proposal argued that funds

70  FILP and the Postwar Settlement

from the Deposit Bureau were needed to provide finance to key industries, agriculture, forestry and fisheries, and SMEs. On this basis, MOF requested once more permission to buy financial and corporate bonds. SCAP, however, refused to change its stance. It asserted that because the Deposit Bureau funds were public, security of the investment should be paramount. Thus, higher-risk private financing should not be allowed. Responding to this reaffirmation of SCAP’s position, MOF requested permission to use the funds to finance public corporations (kōdan). MOF also refused to drop the issue of private financing, arguing that investment in private institutions could be done safely and in a way that promoted the national welfare. In response to this request, SCAP decided to allow funds to be used to finance public corporations, interpreting them as part of the national government, a move that allowed it to avoid revising the original memorandum limiting Deposit Bureau investments. On the issue of providing finance to the private sector, though, SCAP remained firm and rejected the government’s request.59 In 1950, the same pattern began to repeat itself: MOF made requests to allow funds to be allocated to the private sector, and SCAP initially refused. With the outbreak of the Korean War, however, the U.S. position changed. The United States realized that Japan would be a strategic source of procurements for the war on the Korean peninsula. Meeting U.S. procurement needs would require additional investment capital, which Dodge believed the Deposit Bureau might be able to provide.60 In a sharp about-face, Dodge indicated to the Japanese side that they could use the funds more actively, and the United States finally permitted the government to use the Deposit Bureau to purchase bonds of financial institutions.61 As a condition for allowing the government to use the funds more freely, Dodge demanded a thorough reorganization of the Deposit Bureau. The government complied by reorganizing the Deposit Bureau into the Trust Fund Bureau Fund. The Trust Fund Bureau Law passed in 1951 established its basic features. The Trust Fund Bureau Fund (TFBF) replaced the Deposit Bureau, consolidated management of these funds with the Counterpart Funds, and centralized MOF authority over the management of these funds. The funds from all of these sources would be mandatorily transferred to the Trust Fund Bureau Fund, through what is known in Japanese as the yotaku system.62 The yotaku in retrospect was a feature with lasting implications that no one at the time could fully appreciate. Because the funds were automatically transferred, when deposits in the postal savings system or purchase of postal

Budget Restraint and FILP  71

pensions increased, so did funds in the TFBF. Thus the size of FILP was determined largely by the supply of funds rather than the specific need for such funds. As Japan’s economy entered its period of high-speed growth in the later 1950s, funds flowing into the Trust Fund Bureau Fund increased rapidly, providing MOF with a ready source of public finance and at the same time inadvertently expanding the state’s role in allocating finance. The law, as MOF had wanted, allowed the purchase of bonds of financial institutions, but it also included restrictions that were included at the insistence of SCAP. Although the TFBF could purchase bonds of private institutions, it could purchase only up to 50 percent of the bonds in a bond issue. The holdings of bonds of financial institutions also could not exceed one-third of the portfolio, and direct lending to financial institutions was prohibited. Additionally, many types of investments in the private sector required Diet approval or special designation by the government.63 The limitation on lending to private institutions created an incentive for the government to create new public ones to circumvent these restrictions. Soon after the creation of TFBF, the number of public institutions financed by it (which would become the FILP Agencies) increased dramatically. From Counterpart Fund to Industrial Investment Special Account

Parallel to the creation of the Trust Fund Bureau Fund, MOF also lobbied for permission to use another fund to relieve the need for financing: the Counterpart Fund. The Counterpart Fund centralized U.S. aid, which the United States had increased to mitigate the harsh effects of the Dodge Line. When it was first created, the United States required that the Japanese government use the largest share of the funds to retire government bonds, including RFB bonds, reflecting the strong priority placed on restoring fiscal balance.64 As Table 3.3 shows, 48 percent of the funds were used for debt repayment in 1949. Dodge did allow the Japanese government to use some funds to finance private firms, unlike the Deposit Bureau, but as Table 3.3 shows, only 19 percent were allocated for this purpose in 1949. The public sector was allotted 22 percent. Reflecting the Japanese government and SCAP’s different priorities, though, big business and the Japanese government wanted to reduce the amount of funds used for bond retirement and to increase the share going to finance industry. Both were concerned that the suspension of RFB lending, combined with the Dodge Line’s financial and fiscal tightening, would

72  FILP and the Postwar Settlement table 3.3 Counterpart Fund, FY 1949–1952 (100 Million Yen)

1949



Amount Share Debt   repayment   624 Public sector   270 Private sector   246 Other   152 Total

1950 Amount Share

1951

1952

Amount Share

Amount Share

51%    0   0%   494 41%    0   0% 22% 382 48%   233 19% 250 36% 20% 338 42%   483 40% 333 49% 12%   80 10%     8   1% 102 15%

1292

800

1218



685

source: ōkurashō, mikaesi kiroku as cited by Endō Shōkichi in Zaisei Tōyūshi, Figure 11, p. 105.

take a severe toll on private industry by dampening demand and limiting access to credit. Keidanren and Nisankyō lobbied for opening up the Counterpart Fund, just as they did for the Deposit Bureau. But in 1949, SCAP was resolute, forcing the Japanese government to use the bulk of the funds for debt repayment. The U.S. position toward the Counterpart Fund, however, softened with the outbreak of the Korean War just as its stance toward the Deposit Bureau had. In 1950, SCAP allowed a significantly larger share of the funds to be used to buy financial and corporate bonds and also to fund other public enterprises. As Table 3.3 shows, in 1950 and 1952 none of the funds was used for debt repayment. During those years, the largest share went to the private and public sectors. During this time, Finance Minister Ikeda developed a plan to reorganize the Counterpart Fund into a special account for promoting industrialization. Prior to the Ikeda plan, MOF itself had not pushed to open up the Counterpart Fund. Instead, MOF had envisioned a division of labor between the Counterpart Fund and the Deposit Bureau. The government would continue to use the Counterpart Fund for bond repayment, but it would use the Deposit Bureau to provide finance to industry. Ikeda’s plan by contrast placed greater relative priority on restoring finance to industry.65 Ikeda lobbied for permission to reorganize the Counterpart Fund into a new special industrialization account. Dodge, while agreeing to the creation of the Trust Fund Bureau Fund in 1950, deferred his decision on Ikeda’s proposal. With the passage of the Trust Fund Bureau Law in 1951, the management of Counterpart Fund was consolidated under the Trust Fund Bureau

Budget Restraint and FILP  73

Fund. The Japanese government, however, later revived the idea of a special industrial account, and, on August 1, 1953, it finally passed legislation that would establish one: the Industrial Investment Special Account Law.66 the creation of the exit: the filp agencies

While the creation of the Trust Fund Bureau Fund (TFBF) and Industrial Investment Special Account (IISA) was the government’s response to the general problem of insufficient funds, the completion of the other half of the FILP system involved the creation of FILP Agencies, or FILP’s “exit,” that would use these funds. In the wake of the Dodge Line, the government faced two broad problems: (1) how to provide social stability and respond to political pressure and (2) how to accelerate industrialization. The Japanese government confronted each problem with a common solution: establishing new specialized government entities that would eventually be linked to TFBF and IISA, finally completing the FILP system. This section examines this process by focusing on one set of FILP agencies, the government financial institutions (kōko). These institutions, which are specialized state-run financial institutions, were central to the establishment of the FILP system. They were the first and also the largest set of FILP agencies (they are still the largest recipients of FILP funds). There are other types of FILP agencies. For instance, public corporations (kōdan) directly carry out national projects such as building roads and other infrastructure. They are also the second-largest group of FILP agencies. These are not covered here, however, because they were added after FILP was already largely established. Providing Social Stability

The process that led to the formation of the FILP agencies that promoted social stability started immediately after the war. The Japanese state had long used targeted financing to increase the flow of capital to specific groups and sectors that were the conservative base of support for the government, for example, farmers and small businesses.67 Indeed, this state role in financing was essentially the flip side of Japan’s private financial system, which focused on big business. An array of special-purpose banks had been created to serve these constituencies, but after the war SCAP ordered the Japanese government to rationalize these special financial entities. At the request of SCAP, MOF established the basic priorities that would guide the reorganization. The following areas were the targets of future

74  FILP and the Postwar Settlement table 3.4 Establishment of Various FILP Exit Institutions Exit Institution

Function

Date Legislation Passed

People's Finance Corporation Housing Loan Corporation Agriculture, Forestry and   Fisheries Finance Corporation Japan Finance Corporation

Small-scale lending, SMEs Housing finance

May 2, 1949 May 6, 1950

Ag., forestry & fishery finance SME finance

December 29, 1952 August 1, 1953

policy finance: the stabilization of people’s livelihood (minsei antei), SMEs, housing, education, and agriculture, forestry, and fishing. MOF also reiterated that the purpose of policy finance was to provide finance to sectors that would otherwise not be able to obtain finance from the market. Thus, it was clear from the outset that the purpose of such policy finance was broadly redistributive.68 The MOF-led efforts, however, receded as the government shifted priority to industrial reconstruction. The government not only temporarily shelved its plans to reorganize the special-purpose banks, it also implemented priority production, which channeled capital to industry, inflicting hardship on the weaker sectors and populations that had been served by these institutions. No reorganizations of the special-purpose banks occurred during this time. The Dodge Line ended priority production, but it also increased social instability, as discussed earlier. In response to the wave of opposition and demands for relief, the government revived the issue and, in the wake of the Dodge Line, established four new entities—see Table3.4. While MOF took the lead in reorganizing Japan’s system of policy finance, the creation of the individual FILP agencies grew out of specific political pressure and the initiative of individual ministries. In the case of the People’s Finance Corporation (PFC), which provided credit to SMEs, MOF played the central role. Soon after the war, MOF planned to reorganize and rationalize the Public Employee’s Pension Bank and the Common People’s Bank, which were both under its jurisdiction. MOF, however, did not act until political pressures and concerns for “social stability” pushed it to revive its plans, leading to the creation of the PFC. Similarly, the Dodge

Budget Restraint and FILP  75

Line provided the impetus for the creation of the Housing Loan Corporation. In early 1949, the Ministry of Construction proposed creating a corporation to provide housing finance in response to public demands to increase the supply of housing with the onset of the Dodge Line. Although that specific proposal died because of a lack of budget funds, the Ministry of Construction drafted a new proposal that became the basis for discussions with MOF, and eventually the government passed legislation establishing the Housing Loan Corporation later in the year. In the case of the Japan Finance Corporation, political pressures played the decisive role in its creation. In a Diet session on November 27, 1952, Ikeda, who had been appointed the minister of International Trade and Industry (MITI) in Yoshida’s fourth cabinet in October, remarked that the policy of maintaining economic stability would regrettably but unavoidably cause some small businesses to go bankrupt and their owners to commit suicide. To Chalmers Johnson this comment indicates Ikeda’s, and by extension MITI’s, singular commitment to economic development. In reality, however, the comment created a major political storm that led to increased governmental support for SMEs and to the creation of a new public finance corporation for the SME sector, the Japan Finance Corporation (JFC). Indeed, the establishment of the JFC underscores how the leadership behind the push for industrialization always had to make peace with politicians who needed the political support of weak economic sectors. In the wake of the Ikeda incident, in December 1952 both houses of the Diet passed resolutions urging the government to increase support for SMEs. The resolutions declared that it was the responsibility of the government to help SMEs. More concretely, the resolutions called for a SME financing law and the creation of a special account for financing SMEs.69 At the request of the Diet, the government took up the issue, and early the next year a cabinet decision laid out the plans for the creation of a new government financial institution for SMEs.70 In response to the draft bill, lobby groups representing SMEs lodged complaints and pressured for changes. Despite different positions among these groups, in the end three interest groups—Japan Small Business Organizations League (Nihon chūshō kigyō seiji renmei), All Japan Small and Medium Business Council (Zen nihon chūshō kigyō kyōgi kai), and the Tōkyō Chamber of Industry and Commerce (Tōkyō shōkō)— were able to win concessions. For the new JFC, the concessions included limiting financing to only SME corporations, an increase in the number of

76  FILP and the Postwar Settlement

the SME representatives on the committee overseeing the management of the new corporation, and lower interest rates on loans. Other concessions included steps to help organize the SME sector.71 At the level of party politics, there was no significant resistance to the creation of the redistributive, relief-oriented public entities that would eventually become FILP agencies. Everyone, aside from the occupying authorities, wanted the government to provide relief from the severe hardship imposed by the Dodge Line. The left-wing parties supported the proposals because they would provide relief to the weaker segments of the economy and society whose support they sought. If there was any disagreement, it was over the level of funding. The Socialists and Communists pushed, usually unsuccessfully, for more funding from the budget for the new public entities, something that backbenchers of the conservative parties did as well. Left Diet members also called for more concessionary terms for policy finance through higher subsidies so that lower income groups could take advantage of housing finance. Promoting Industrialization

The second problem confronting the Japanese government was how to promote industrialization. The government’s efforts to address this issue followed an entirely separate process than the reorganization of the special policy finance banks already discussed, although the immediate impetus was the same: the Dodge Line. The suspension of RFB lending eliminated one of the government’s key instruments for guiding industrialization. This, along with the tight fiscal policy and monetary policy of the Dodge Line, generated a powerful backlash from big business, which demanded better access to capital. Both big business and government were concerned about two issues central to promoting industrialization, promoting exports and financing strategic industries. Ultimately, it created two new state entities to address both: the Japan Export Bank and the Japan Development Bank. Exports not only stimulated demand for Japan’s industrial goods, they were also critical to maintaining a positive balance of payments. After the war, export markets in Southeast Asia and other developing countries began to grow, particularly the market for large-scale projects (infrastructure, industrial plants, and the like), but business lacked access to export financing. To win international bids, exporters had to line up long-term financing for the purchasers of the exports, in particular foreign governments.

Budget Restraint and FILP  77

Japanese exporters complained that they were at a disadvantage because their cost of capital was higher and long-term financing was virtually nonexistent. Big business, through the national business federation Keidanren, requested that MITI take up the issue. Subsequent discussions between MITI and Keidanren led to an agreement to create a new means of providing specialized export financing. While a number of options were considered, MITI proposed creating a new state-run financial institution. After a series of negotiations and compromises with MOF and SCAP, the Japan Export Bank was established at the end of 1950.72 The creation of the Japan Development Bank (JDB) was linked more directly to the suspension of the RFB. The winding down of RFB lending cut off an important source of long-term finance for strategic industries. As part of a policy to ameliorate the effects of the Dodge Line, including large government spending cuts, the Bank of Japan intervened to revitalize the financial system. The Bank of Japan lent directly to financial institutions and repurchased RFB bonds and national bonds from them to provide additional liquidity. Because banks were concerned about the deterioration of the value of their assets and the stability of their borrowers, though, they remained conservative in their lending. Moreover, despite the partial reconstruction of the financial system, banks provided only working capital, not the type of long-term industrial capital provided by the now defunct RFB. The typical term for a corporate loan at the time did not exceed five years.73 Faced with a lack of financing for capital investment, business increased pressure on the government and SCAP to deploy public funds to fill this gap. As Table 3.5 shows, the leading business groups made formal requests to this effect.74 Responding to these requests, MITI and MOF both advocated the use of public funds for industrial financing. SCAP was suspicious of the idea of a development bank because it sounded similar to the inflation-generating RFB. SCAP, however, reluctantly approved the plan but imposed several conditions. The new bank would have to be limited in its operations, and it could not issue bonds or borrow funds to finance its operations. The latter provision would ensure that the new bank did not contribute to inflation, although it left the critical issue of how it would be funded unresolved, particularly since the fiscal constraint imposed by the United States would limit the use of budgetary funds (the actual funding scheme decided on is discussed in the following pages).75 Despite opposition to these conditions, Finance Minister Ikeda

78  FILP and the Postwar Settlement table 3.5 Requests from Business Groups Date

Organization

March 16, 1949

July 24, 1949 November 18, 1949

Nisankyō Request for Emergency Measures Regarding the Current Industrial Finance Blockage Keidanren Views on Overcoming the Pressure for Long-Term Industrial Finance Dōyūkai Emergency Measures for the Current Recession Dōyūkai Requests for Mr. Dodge

February 20, 1950

Keidanren

May 27, 1949

Title

Views on Obtaining Long-Term Finance

and MOF recognized that SCAP would not compromise on the issue and had little choice but to accept them.76 Acceding to these conditions, the government passed legislation in March of 1951 establishing the Japan Development Bank (JDB). The preceding discussion has focused on the reasons behind the creation of the government financial institutions that would become the first FILP agencies. But why did the government decide to create new public institutions? Other options were seriously considered. Indeed, as part of the reorganization of the special banks, MOF originally envisioned creating only one separate government financial institution, the one that would become the People’s Finance Corporation. MOF planned to finance housing and agricultural needs through private banks (Kangyo and Industrial Bank of Japan) or existing institutions such as the Norinchukin Bank.77 MOF also objected to the Ministry of Construction’s initial proposal for a housing loan corporation, arguing that it would interfere with the functioning of the financial system, invite political interference, and ultimately ignore the will of SCAP. As an alternative, MOF suggested using existing financial channels.78 Moreover, many of the groups lobbying for specialized finance did not call specifically for a new public corporate entity. For instance, Dōyūkai, a lobby group for big business, requested long-term industrial finance, but its proposal would provide such finance though the private financial system.79 Similarly, Keidanren’s initial proposal for supplying export finance envisioned using private banks. MOF also supported this position, although MITI proposed a state-run financial institution.80 In some cases private financial institutions and the interest groups representing them actually

Budget Restraint and FILP  79

opposed the creation of public financial institutions, fearing competition with the private sector. For example, a preexisting financial cooperative— Norinchukin Bank—opposed outright the creation of the Agriculture, Forestry, and Fisheries Corporation, fearing competition from the new institution. Some Japanese economists also argued that priority should be given to reconstructing the private financial sector, which was also part of the aim of the Dodge Line, rather than allowing the state to expand its control over the financial system. There are several reasons why the choice of public institutions prevailed. First, there was a perception of market failure in the financial system among many bureaucrats and politicians. Public entities would, thus, be better at providing public goods such as enhancing the general welfare and promoting long-term industrialization. Second, bureaucrats viewed public entities as a means for exerting more direct control over the economy and as a means to expand their power.81 Third, institutional experimentation and mimesis played a role in the choice of public entities. As discussed earlier, despite the inflationary effects of the RFB, many viewed the RFB as a success; this success in turn validated the use of a state institution, a point not lost on the ministries pushing for their own governmental corporations. Indeed, the RFB was referred to directly as a model. The Ministry of Agriculture, Forestry, and Fisheries, joined by the farmers, called for their own equivalent of the RFB. Once the idea of a government financial institution gained credibility, individual ministries began calling for their own. Fourth, the groups requesting specialized finance did not put up much of a fight because, in the final analysis, they were getting what they wanted. Fifth, MOF’s proposals to use private financial institutions did not prevail in part because SCAP opposed lending directly to private financial institutions. The creation of public institutions would circumvent this restraint. Ironically, the more liberal SCAP encouraged the expansion of Japan’s statist apparatus. completing filp: linking the parts

The final step in constructing FILP was the linkage of the Trust Fund Bureau Fund and the Industrial Investment Special Account with the newly created exit institutions, the future FILP agencies. At the time, the government did not have a systematic plan to create the FILP system. As already described, the establishment of the entrance and exit of FILP were largely parallel processes. The government also considered a number of alternative options

80  FILP and the Postwar Settlement

for financing the government financial institutions that it established. The United States, however, exercised veto power over the proposals and forced the Japanese government to limit its choice to ones consistent with its objectives, namely budget restraint and low inflation. There were at least six proposed funding sources: (1) the budget, (2) bonds, (3) special accounts, (4) the RFB, (5) the Counterpart Fund, and (6) the Deposit Bureau. The budget was the least objectionable option to SCAP initially. With the imposition of the Dodge Line, however, budget austerity became a priority, and access to budgetary funds was sharply reduced. By way of example, MOF had approved a proposal for the creation of a housing corporation, an idea that directly preceded the Housing Loan Corporation. The corporation was slated to receive two billion yen from the general account for the 1949 fiscal year. With the imposition of Dodge’s deflationary budget, however, the plans were abandoned. In negotiations with MOF, Dodge removed the budget item and the housing corporation proposal died, although it was later reincarnated as the Housing Loan Corporation.82 Bonds were another option that the government considered seriously. Soon after the war, MOF wanted to use bonds as source of policy finance. SCAP, however, expressed reservations even prior to the Dodge Line. Although the Dodge Line hardened the U.S. stance, the Japanese government continued to petition for the right to use bonds. It raised the bond issue numerous times and in a variety of settings, particularly as it worked out the details of how to fund the new public entities and as it drafted the legislation establishing each. One by one, SCAP struck them down. MOF also considered creating a new centralized special account to provide all of the specialized policy finance under discussion. The special account could be funded by the transfers from the general budget and/or the issuance of bonds. The former, however, SCAP argued, would be no different from using the general account, while the latter was vigorously opposed by SCAP. The Japanese government also proposed expanding the function of the RFB to include a wider range of policy areas, but SCAP was strongly opposed. This issue was fully put to rest when the Dodge Line led to a suspension of RFB operations.83 The Counterpart Fund and the Deposit Bureau, the remaining options that were considered, could both potentially be used without compromising the two key U.S. goals. First, the funds did not strain the budget or jeopardize the principle of balanced budgets because the funds were external to

Budget Restraint and FILP  81

the budget. Second, the funds did not create inflationary pressure. Unlike the RFB, which was funded by RFB bonds purchased largely by the central bank, neither fund would increase the money supply. Indeed, harnessing both sources of funds could serve as a solution to the defects of the RFB. As discussed earlier, though, the United States played the pivotal role, at first restricting how the government could use both the Counterpart Fund and the Deposit Bureau. The government’s proposals to open up the Deposit Bureau and the Counterpart Fund, which had proceeded along a largely separate track, eventually converged with the establishment of the future FILP Agencies. The outbreak of the Korean War shifted the U.S. stance toward how the government could use both funds, but the concrete issue of how to fund the proposed new state financial institutions drove the Japanese government to negotiate with the Americans. The campaign to open up the Counterpart Fund, which had been unsuccessful in 1948 and 1949, gained momentum with the government’s proposal for a new export finance bank and industrial bank (which would become the Japan Export Bank and JDB, respectively). Eventually, with approval from SCAP, MOF agreed that the Counterpart Fund could be used for both of the new government institutions. As the Counterpart Fund moved away from bond repayments to funding government institutions and the private sector, it evolved into a de facto part of the nascent FILP system. To codify the new role of the funds, the government reorganized the fund into the Industrial Investment Special Account in 1953, and the new account became a formal source of financing for the FILP system. Similarly, the campaign to open up the Deposit Bureau converged with the government’s effort to find a source of funds for the new government financial institutions it wanted to establish. The idea of using the Deposit Bureau funds for specialized policy finance for SMEs and agriculture came up at least as early as January 1948, although at the time it was not linked to the idea of providing finance through government financial institutions. But even prior to the Dodge Line, SCAP had argued that funds from the Deposit Bureau should not be used for providing relief.84 While MOF and other ministries wanted to tap the Deposit Bureau funds, the first sustained argument that MOF and the government presented for opening up the funds was in conjunction with the creation of the Japan Export Bank. In May 1950, Prime Minister Yoshida dispatched Finance Minister Ikeda to

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Washington, D.C., to negotiate concessions for removing some of the constraints imposed by the Dodge Line. Yoshida expected this trip, which was prior to upcoming Diet elections, to provide an electoral boost by showing that he was sticking up to the Americans who were imposing such draconian economic policies on Japan.85 During this trip, Finance Minister Ikeda raised the issue of a shortage of export financing and proposed using the Deposit Bureau to solve the problem.86 In negotiations later in the year, Minister Ikeda also requested permission to use the Deposit Bureau funds for housing. These negotiations eventually led to a compromise on the use of Deposit Bureau and its reorganization into the Trust Fund Bureau Fund. Eventually all of the exit institutions were connected to the Trust Fund Bureau Fund and the Industrial Investment Special Account, completing the construction of FILP. The basic structure of FILP had already been created with the establishment of the Trust Fund Bureau Fund in 1951, and there was no additional legislation that created FILP. For the 1952 budget the government included supplementary materials that mentioned the fiscal loan program. FILP, though, is generally regarded as having been established in 1953, the year that the first “FILP Plan”87 was submitted to the Diet. The FILP Plan provided a consolidated account of the specific allocations for the fiscal year and was submitted as supporting reference materials for the government’s draft budget proposal, underscoring the link FILP shared with the budget.

The Experience of Other Countries In Japan, the government’s policy of budget restraint and the development of FILP share common origins. Given that budget restraint was a policy largely imposed from the outside by the occupying U.S. military authorities, it is worth considering why two other countries occupied by the United States at the end of World War II—Italy and West Germany— pursued a different course. France, by contrast, was not occupied by Allied military authorities at the end of the war. France did, however, possess a well-developed system of policy finance although the government used it to achieve different ends. This section considers the experience of these three countries, highlighting why the postwar governments made different choices from Japan.

Budget Restraint and FILP  83 italy

As with Japan, Italy suffered from high inflation at the end of World War II. Inflation resulted from a combination of scarcity from war devastation, excessive credit (Italy had no reserve requirement for banks), and budget deficits financed by the central bank. In response, the Italian government implemented a deflationary stabilization plan known as the Einaudi Line, named after Luigi Einaudi. Like Ikeda, Einaudi took a conservative line toward fiscal policy and served in key economic posts, including governor of the Bank of Italy and budget minister during the postwar era; he also later became president of the republic. The Einaudi Line, however, did not include drastic cuts in budget spending and in this regard differed from the deflationary measures taken as part of the Dodge Line. Shrinking credit, raising interest rates, ending central bank financing of government deficits, and other monetary measures were the primary mechanisms for stabilizing the economy. Although the government did not slash budget expenditures, deflationary fiscal measures were an option on the table. In fact Einaudi, with support from the U.S. embassy, wanted to cut budget expenditures, and as budget minister he wielded powers to do so, including a line-item veto for appropriations over one billion lira. The expulsion of the left parties from the ruling coalition in 1947 had made such an option more likely, but opposition from within the conservative coalition ultimately forced Einaudi to retreat. Prime Minister De Gasperi and others in the Christian Democratic Party (DC), who were much more attuned to the political consequences of such a policy, blocked sharp budget cuts.88 As one scholar noted, the political realities of the time prevented the government from pursuing the fiscal option to deflate the economy: First, it might have striven to create a very large cash surplus in its budget, slashing expenditures and raising taxes drastically. This approach would have imposed new and politically intolerable hardships.89

Although Einaudi failed in slashing expenditures, the government did commit to maintaining budget balance. Italy’s constitution, which came into force in 1948, included a provision, Article 81, which requires that the government provide the means to pay for new or increased expenditures as well as banning the central bank from financing the treasury. Einaudi, as a member of the Constitutional Assembly, had actively supported the article.

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Unlike in Japan, Einaudi and other fiscal hawks could not rely on the support of the United States. U.S. influence over Italian economic policy had been relatively weak in comparison to its influence over Japan. In any event, the Allied Occupation had ended at the beginning of 1947, prior to the stabilization plan. Most critically, though, what influence the United States did have was used to pressure the Italian government to ease off its deflationary policy, exactly opposite to the position the United States took in Japan. Even though the Einaudi Line eschewed deflationary fiscal policy, the stabilization plan created a great deal of societal hardship that alienated a large swath of the population as well as business. The United States was deeply concerned about the political consequences of the government’s stabilization policy as elections approached in 1948. Of course, so were many within the ruling party. The architects of the plan (Einaudi and Menichella, governor of the Bank of Italy) and its political sponsor, Prime Minister De Gasperi, came under withering criticism from the DC. Months before the election, the United States increased aid to alleviate the effects of the stabilization plan and also announced the European Recovery Program (the Marshall Plan) promising generous aid. The United States also made it clear that if the Italian Communist Party (PCI) won, it would withhold aid. With heavy backing from the United States, the DC won a large victory.90 As in Japan, the Italian government also drew on its postal saving system to help stabilize its economy after the war. In Italy, postal savings as well as funds from the purchase of postal bonds have been transferred to the Cassa Depositi e Prestiti (CDP), a public entity based on the Caisse des Dépôts et Consignations (CDC) in France. The CDP, created in the nineteenth century, primarily provided financing to local governments for public investments, such as roads, schools, sewage systems, and so forth. With the rise of Fascism, the Ministry of Finance’s control over the CDP increased and, during the war, the government used the CDP to finance government deficits. At the end of World War II, the Treasury retained control over the CDP, which it used as an instrument of stabilization. To reduce inflation, the government used the CDP to finance government deficits, a method that would replace the inflationary purchase of government debt by the Bank of Italy. This stands in sharp contrast to the Japanese authorities, which used FILP to avoid deficits. The CDP also financed economic reconstruction through loans and the purchase of bonds and securities of state-

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owned companies, such as the Consorzio di Credito per le Opere Pubbliche (CREDIOP) and Istituto per la Ricostruzione Industriale (IRI). Despite these similarities, there are a number of critical differences with how the Japanese government used FILP. While the government used the CDP as a tool of public finance, the connection between the CDP and budget was more indirect. The government did transfer funds to the treasury, but these funds were used to finance government deficits, while in Japan FILP funds were used to avoid budget deficits. The funds not transferred to the treasury were used by the CDP to finance local governments and national reconstruction but not as a means of limiting budget expenditures. Even this more activist role for the CDP declined beginning in the 1950s, as the CDP returned to its statutory role of providing finance to local governments for public investment. Most significantly, though, the role of the CDP was deliberately limited by a coalition of interests opposed to a larger CDP—private banks, liberals in the government, and the Bank of Italy, which wanted to occupy the central role in overseeing the monetary and financial system. In 1953, the government lowered interest rates on postal deposits to slow down the growth of postal finance, setting the stage for a slow decline of postal savings and the CDP.91 By contrast, as discussed in the next chapter, the ruling party in Japan moved to expand FILP. west germany

In West Germany, the Allied Occupation, which lasted until 1952, also pushed through a draconian stabilization package to combat runaway inflation at the end of World War II. The critical difference with Japan, however, was that the deflationary plan focused on currency reform with fiscal policy playing a more peripheral role. After the end of the war, the reichsmark had virtually ceased to function as a medium of exchange because of massive inflation stemming from an excessive circulation of notes, pent-up demand from the wartime, and widespread scarcity. To stem inflation, the Occupation military authorities imposed a historic currency reform in 1948. The architects of the plan were Gerhard Colm, Joseph Dodge (who had established the Dodge Line in Japan), and Raymond Goldsmith. The reform introduced a new currency, the deutschmark, and effectively removed 93.5 percent of the currency in circulation.92 The reform redistributed wealth on a massive scale. Citizens were given a fixed amount of the new deutschmarks, essentially equalizing income. Savers, however, were

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punished severely with deposit accounts being largely wiped out, including postal savings, which partly accounts for the minor role of the system in the early postwar years. The reform also eliminated the public obligations of the government that had exploded during wartime. The currency reform succeeded in restoring confidence in the currency, and goods quickly appeared on shop shelves. Because it was imposed externally, it also had the effect of limiting domestic political polarization; any stabilization plan pushed through by an independent government would have severely exacerbated distributional struggles over who would bear the greatest burden. Unlike Japan, West Germany was not forced to embrace a “small state” approach predicated on slashing budget expenditures. Not only was there no equivalent to the infamous Dodge budget in Japan, but, to the extent that the Allied Occupation authorities did intervene in fiscal policy, they pressured the Germans to increase taxes rather than slash budget expenditures to improve budget balance. In 1946, the Allies introduced the highest income tax in German history, and until 1955 there was a general trend toward higher taxes.93 In the absence of a powerful external check on budget spending as in Japan, domestic politics drove increases in budgetary expenditures as West Germany’s “social market economy” evolved. Conceived as a third way between laissez-faire and socialism, the concept of the “social market economy” initially had early liberal influences, dating back to the Freiburg School of economists that resisted Nazism and war planning. Müller-Armack, the first articulator of the term and influential economic policy maker in the early postwar, emphasized the role of competition and a relatively limited role for the state. A large welfare state was to be avoided, and welfare policies were to be limited to those incapable of helping themselves. Ludwig Erhard, who like Italy’s Einaudi and Japan’s Ikeda played a central role in shaping economic policy, shared this view. Erhard was a liberal who served as director of the bizonal economic administration (1948–1949), minister of economic affairs (1949–1963), and then chancellor of the FDR (1963–1969). He not only opposed a large expansion of welfare but also French-style dirigisme. Liberalism, however, had to be reconciled with the “social” component of the social market economy, a side that his own Christian Democratic Party (CDU) and chancellor emphasized. Konrad Adenauer and the CDU increased public spending. The ruling coalition sharply raised public investment in housing, and like Japan’s LDP also channeled support to farmers in the form of agricultural studies as well

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as the Mittelstand (small and medium-sized enterprise sector). Beginning in the 1950s, the government also enriched the country’s welfare system, which in comparison to Japan was already more developed. The role of fiscal policy in the social market economy was an ongoing point of contention. Müller-Armack, in defining the social market economy, suggested a limited role for fiscal policy to complement the use of monetary policy, which was a departure from the more traditionally liberal Freiburg School. Erhard and others though took a more hawkish position toward budget deficits. Economic and political realities, however, made it very difficult to maintain budget balance, and there were frequent budget deficits between 1948 and 1950. Eventually, the government imposed budget discipline under the guidance of Finance Minister Fritz Schaeffer, who produced consistent budget surpluses from 1952–1956. The government, however, could maintain this policy line because the Allied military authorities did not use all of the funds set aside for defense expenditures, and, subsequently, fiscal discipline weakened. france

France, like Japan, has had a long history of intervention in finance, and the government controlled a variety of public and semipublic financial institutions that provided policy finance. Unlike Japan, it has not used these instruments as a means to limit spending and manage its formal budget, at least directly. Lowering budget expenditures and maintaining balanced budgets were not priorities at the end of the war. Instead, the French government, reflecting the preferences of economic planners and numerous political considerations, focused on rebuilding industry. As with Japan, the thrust was increasing production even if it came at the expense of inflation and budget deficits. This approach had both an economic and political logic. An expansionary monetary policy and fiscal policy would stimulate production while avoiding the political backlash that a deflationary stabilization plan might produce. Indeed, Japan might have pursued a similar course had it not been occupied. The French government recognized that large budget deficits and monetary policy were a key cause of inflation. Politics, however, made stabilization an elusive goal. The numerous plans to bring down budget deficits— the “Hatchet Committee” (1946), the “Guillotine Committee” (1947), and later a “Law of Maxima” to constrain the Parliament—were all relatively

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unsuccessful.94 From the end of the war until the Fifth Republic, public spending grew, and government faced persistent budget deficits. A currency reform was also considered, although opposition from peasants caused the government to abandon the plan.95 France did eventually implement a currency reform, essentially two note exchanges, but it amounted to little more than a token gesture. In the end, lacking external pressure, the French government never implemented an effective stabilization plan along the lines of Italy, West Germany, and of course Japan. As a result, France was the last country in Western Europe to bring inflation under control. Given the aims of the French government, its public and semipublic financial institutions played a different public finance role than FILP did in Japan. The government used policy finance to rebuild housing, provide finance to the agricultural sector and SMEs, and for many other ends. Unlike in Japan, though, policy finance was not a means for keeping budget expenditures down. In fact, France’s public and semipublic financial institutions allowed the government to increase budget expenditures by making up for revenue shortages that could not easily be financed by the relatively undeveloped private market. Thus, France’s policy finance institutions were an instrument of budget indiscipline. Between 1945 and 1948, the Caisse des Dépôts et Consignations (CDC) and other bodies provided financing to the treasury equal to all short-term, medium-term, and longterm borrowing.96

Conclusion The postwar path leading to the creation of FILP vividly illustrates the difficult trade-offs the Japanese government faced as it attempted to recover from wartime devastation. Priority production privileged the sectors critical for economic reconstruction. Although it helped industry recover, it did so at the expense of other sectors of the economy and the short-term welfare of the population by channeling capital and raw materials to industry. Worst of all, it also generated runaway inflation, which prompted heavy-handed U.S. intervention. The Dodge Line ended priority production and imposed a draconian fiscal and financial tightening, sharply limiting the Japanese government’s options. It is within this constraint that the Japanese government established the FILP system piecemeal to increase the flow of capital to industry and to provide relief to the population.

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The role of the U.S. authorities was pivotal. As with Italy and West Germany, occupying military authorities forced through painful stabilization plans that would have been unthinkable without an external power to impose them. Unlike Italy and Germany, however, the Dodge Line targeted budget expenditures. Without the Occupation, Japan would not have followed the course it eventually did. Within Japan, there was no conservative consensus for fiscal or financial austerity. Prior to the Dodge Line, the government ran large deficits and oversaw an inflationary expansion of the monetary supply. The United States was the key enforcer of budget restraint and anti-inflationary policies, which aroused widespread opposition from within the Japanese government and the society at large. As the government took measures to alleviate the deflationary policies imposed on it, the United States occupied a position that allowed it to dictate how the FILP system would take shape, vetoing proposals by the Japanese government to revive the RFB, to issue bonds, and to raise funds in a variety of other ways that it found objectionable. FILP grew directly out of the restrictive fiscal and monetary policy imposed on Japan. Without this pressure, the Japanese government would not have created FILP, and the preexisting Deposit Bureau would have in all likelihood have persisted, functioning perhaps like Italy’s CDP. The establishment of FILP helped the government overcome its limitations. Still, no conservative coalition had yet coalesced around a political settlement that incorporated budget restraint. The Liberals and Democrats had yet to merge into the LDP, and there was only tenuous support for budget restraint within the government and widespread opposition. Moreover, with the return to political sovereignty in 1952, the key defender of fiscal austerity–the Occupation forces–departed, and new democratic pressures unleashed demands on the government. As inflation slowed and the economy recovered, the Japanese government eased the financial tightening of the Occupation period. Loose monetary policy eventually evolved into one of the government’s policies for accelerating growth. The government also could have relaxed budget discipline, yet it did not. With the creation of FILP, the government had, at its disposal, a powerful new instrument, one with the potential to lower the political and economic costs of a fiscal policy based on suppressing budget spending and keeping budgets balanced. In the coming years, this potential was exercised allowing a conservative coalition to balance its diverse and competing goals.

four

Balancing Fiscal Policy, Industrialization, and Distributive Politics, 1953–1970

When Japan regained independence in 1952, the government faced an outpouring of new political pressure. It could easily have chosen to abandon the policy of budget restraint imposed by the United States, given the government’s other objectives and the need for public funds to achieve them. Yet the government not only reaffirmed support for balanced budgets, it also embraced a policy of lowering taxes, limiting budget funds even further as part of its economic growth strategy. This chapter explains why the government chose to pursue a fiscal strategy based on low budget spending, low taxes, and balanced budgets. It then elaborates FILP’s role in making this strategy consistent with the ruling coalition’s other primary objectives—promoting industrialization and staying in power. Specifically, it analyzes three institutional effects: how FILP aligned interests in the conservative camp; how MOF used FILP as a power resource; and how FILP channeled interests allowing the government to strike compromises that balanced competing claims. A separate section explains how FILP’s development over time, much of which was inadvertent, dynamically shaped the context in which the government made its choices. Finally, the chapter concludes with consideration of a counterfactual: What would have happened had FILP not existed?

The New Context: Challenges to Budget Restraint The policy of budget restraint came under enormous strain with the return of sovereignty. The departure of the occupying military authorities, which had imposed and enforced it, removed an external constraint on the Japa90

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nese government. Within MOF and in other quarters, many acknowledged that Dodge’s policies had restored economic stability, but nothing comparable to the United States could enforce such a policy with the same degree of authority. Moreover, there was no clear consensus that the government should do so. While the Dodge Line worked as an emergency stabilization measure, there was less agreement that continuing such a restrictive budget policy would be the best course for Japan. The view that restraining spending and taxes would fuel long-term economic growth, which would emerge later, was far from hegemonic. There were of course advocates of keeping taxes low and budgets balanced, especially within the Liberal Party, which campaigned on a promise to lower taxes. Still, many within even the conservative parties argued for the need to increase spending to fund other priorities, such as industrialization and social welfare, although not necessarily advocating the creation of a European-style welfare state. With no external actor to impose budget restraint, the Japanese leadership would have to build a consensus for enforcing it. In the new context, though, making the case for budget restraint was more difficult. The return to independence spurred an explosion of new pressures on the budget. The number of special interest groups skyrocketed, and many demanded a larger share of public funds.1 Within the government, as well, the spending ministries pressured MOF to increase their annual budget allocations. The Ministry of International Trade and Industry (MITI), Ministry of Construction (MOC), and Ministry of Transportation (MOT) continually clashed with MOF over funding levels. Budget restraint, viewed by many as a vestige of Japan’s former subjugation, came under explicit public attack. Indeed, the so-called independence budget, the first budget after Japan regained sovereignty, took on enormous symbolic significance. Politicians and other groups called for the end of “balanced budgetism,” equating such a step with the removal of shackles the United States had imposed.2 The following speech in the Diet by a Socialist member vividly captures the mood at the time: As the representative of both factions of the Socialists, I will explain the gist of the revision to the supplemental budget for 1952 that we along with the Reform Party (Kaishintō) propose. The budget for fiscal year 1952 was drafted under occupation during a time of absolutely no autonomy. This supplemental bill for 1952 will be the first that we have freely drafted. Yet if we look at the government’s official draft of the

92  FILP and the Postwar Settlement supplemental budget, it is no different than as if we followed the Dodge Line, Dodge, and Ikeda-style administration; this is truly regrettable and lamentable. [applause] If we were truly to draft our own supplemental budget, I believe it would have to be one that responded to our needs and that lifted us out of recession and provided stability for the people, which would require the courage and resolve to revise the Dodge Line and abandon the Dodge and Ikeda-style policies that were imposed on us during the Occupation. The super-balancing fiscal policy of Dodge does not match the needs of our country after independence in so many ways. First, central and local government finances are extremely unbalanced. Second, small business owners, farmers, and workers need greater stability through policies specialized to meet their needs. Third, we should be funding industrial production through bonds and finance, but because of the policy of balanced budgets we rely only on tax revenues. Fourth, because we are pursuing capitalist and economic rationality, we have completely ignored “social rationality” and suppressed expenses related to social protection. [applause]3

The preceding speech illustrates the deep animosity toward budget restraint as well as its association with the Occupation. There are several points worth noting. First, as the speaker acknowledges, the Reform Party supported the alternative supplementary bill, which was ultimately voted down. The Reform Party was a right-center party formed in 1952 from various conservative splinter groups that later merged into the LDP.4 Its support for the opposition supplementary budget bill indicates the diversity of positions toward the budget within the conservative camp. Second, the speaker criticizes the sacrifice of industry and social welfare for budget restraint. The debate over the priority of these goals was repeated within the LDP after it was formed in 1955, and FILP played a major role in an eventual compromise, a point developed in the rest of the chapter. Third, the speaker calls for assistance to SMEs, farmers, and workers. The former two constituents would become key supporters of the conservative coalition, and the LDP used FILP to provide support to both. Fourth, the speech directly attacks Ikeda Hayato. Ikeda, who served in numerous cabinet portfolios under the Occupation, emerged as the key postindependence figure that committed the government to low taxes, low spending, and balanced budgets. He also played the pivotal role in reconciling this policy line with the other competing goals in the conservative camp.

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From Fiscal Straightjacket to Economic Virtue Despite pressure to spend more and to loosen budget discipline, the conservative parties and MOF began to view fiscal conservatism as an economic virtue. Immediately after the war, MOF reaffirmed its commitment to a balanced budget, despite criticism from politicians in both conservative and left parties. The political leadership of the Liberal Party, the most fiscally conservative of the right parties, also reaffirmed its support in the face of backbench opposition. In 1952, soon after regaining independence, despite widespread calls to increase expenditures and to issue bonds, the ruling Liberal Party announced a ten-point political program that reasserted the principle of balanced budgetism after dissolving the Lower House and calling for elections.5 The Liberal Party leadership again backed MOF during budget negotiations over the 1954 budget. The lingering memory of rampant inflation prior to the Dodge Line influenced both MOF’s and the political leadership’s preference for budget discipline. Japan’s international balance of payments situation provided another compelling justification for budget restraint. Japan’s currency peg of 360 yen to the dollar supported the government’s export-oriented growth strategy, but maintaining the peg posed a difficult challenge. Economic growth would stimulate imports, leading to a negative balance of payments, which would draw down the nation’s foreign reserves. The government responded by tightening the money supply and reducing and/or deferring budget outlays. This limit to how rapidly the government could let the economy grow became known as the “balance of payment ceiling.” This external constraint provided MOF with a powerful justification for maintaining balanced budgets, although this argument would lose some of its force during the 1960s as Japan’s balance of payments improved. Yet while there was considerable conservative support for keeping the budget balanced, there was less agreement that the government should limit taxes. On the one hand, the Liberal Party proposed lowering taxes after independence and influential figures like Ikeda Hayato argued that lowering taxes would encourage savings and private capital investment, which would accelerate economic growth.6 On the other hand, there was also opposition to lowering taxes because it would reduce the amount of already limited budgetary funds. Many within the conservative camp, particularly the Reform Party and the Democrats before the LDP merger, argued explicitly that the government should spend more on social welfare and industrialization

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rather than lower taxes.7 Okinori Kaya, a vocal advocate of social security, was one who made this argument. Okinori, a member of the LDP and a former finance minister during the war, later authored an influential but ultimately unsuccessful welfare plan.8 Party backbenchers also took a dim view of tax cuts, worrying that such cuts would limit spending and thus the goods that they could deliver to their supporters.9 Within the bureaucracy, there was opposition as well. The Ministry of Health and Welfare argued that the government should spend more on social security, and the Home Affairs Ministry opposed tax cuts because they would reduce central government transfers to local governments.10 MOF was the one exception. With the Dodge Line, MOF had focused on securing adequate tax revenue and limiting spending to balance the budget. As tax revenue began to grow, MOF gradually shifted its stance and began to view tax cuts as a way to limit revenue and therefore wasteful central and local government spending.11

Making Small Government Compatible with Other Goals The challenge for the political leadership was making a small government policy compatible with the interests within the broader coalition. Kishi Nobusuke and Ikeda Hayato were the key figures who bridged the gap between the government’s policy of budget restraint and wider interests in the conservative camp. Kishi, who served as prime minister from 1957 to 1960, supported a conservative fiscal policy, but he was also deeply critical of the sacrifices that it had entailed. Kishi, a former wartime economic planner, believed that the economic policies under Prime Minister Yoshida had ignored industrial planning and social welfare, both policies that he ardently supported. After being acquitted of war crimes and released from prison, Kishi led an anti-Yoshida movement that rejected what he believed to be Yoshida’s laissez-faire economic policies, inattention to social welfare, and emphasis on exporting labor-intensive goods.12 Kishi, who was more attuned to the need for building a lasting political base, advocated economic planning and development of social welfare policies as a form of state paternalism. Kishi immediately set out to overturn Yoshida’s policies after becoming prime minister in 1957, following the resignation of Ishibashi Tanzan (the second prime minister of the newly formed LDP and the architect of the priority production who advocated active fiscal policy). Kishi de-

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veloped a five-year economic plan, the New Long-Range Economic Plan (NLEP), and he passed key legislation to bolster Japan’s welfare policies, although his policies would not take effect under his administration. Kishi also shrewdly increased support for the core of the nascent conservative base–SMEs, farmers, and voters in economically poor regions. Kishi’s industrialization strategy and his distributive politics increased demand for public funds. His industrialization strategy, outlined in the NLEP, required an infusion of public investment. It called for heavy investment in strategic industries, energy, and infrastructure.13 The government set the target of raising public investment to 5.2 percent of GDP by 1962. Kishi’s targeted support to specific conservative constituencies–economically stagnant regions, farmers, and SMES–similarly required an increase in public funds. Finally, his welfare policies, while still modest, would eventually increase the burden on the budget, although not under his administration. Yet, at the same time, Kishi’s NLEP called for limiting budget spending and taxes to tap the dynamism of the private sector. The plan called specifically for reducing overall tax burden (revenues as a share of GDP) from the already low 19.5 percent to 18 percent. Low individual taxes were intended to stimulate personal savings and encourage investment.14 The Kishi administration’s solution to the dilemma of increasing spending while limiting taxes and keeping budgets balanced was to rely on FILP to the greatest extent possible. By using FILP to promote industrialization and to redistribute resources to the LDP’s conservative base, Kishi’s administration could increase public spending while restraining both budget outlays and taxes. FILP would serve as a key instrument in making a high private and high public investment strategy possible. Kishi’s plan highlights the special role of FILP as a key fiscal and financial instrument: “Regarding the basic areas essential for the plan, we have high hopes that FILP and other instruments will help us realize the plan.”15 Kishi’s social and economic policies sought to integrate diverse interests, but his right-wing anticommunist policies proved extremely divisive and ultimately brought down his administration. In response to his plan to centralize police powers, three cabinet members, including Ikeda, resigned in protest. Kishi’s hawkish approach to foreign affairs, in sharp contrast to Yoshida or Ikeda, who would follow as prime minister, also proved polarizing. A fervent advocate of remilitarization, Kishi passed legislation allowing Japan to build up military defense capabilities. His immediate downfall, though,

96  FILP and the Postwar Settlement

was the result of his renewal of the U.S.–Japan Security Treaty in 1960. Opposition was widespread and violent. After passage of the security treaty in the Diet, which involved physical confrontation, Kishi finally resigned. ikeda’s low posture and the new policies

After the turmoil of the Kishi administration, Ikeda, by contrast, established a “low posture” that emphasized economic growth over foreign policy. This formula was part of Ikeda’s lasting legacy that focused the LDP on a common national goal: economic growth. A crucial part of his legacy was Ikeda’s ability to forge a conservative political compromise around three goals: budget restraint, industrialization, and liberal political compensation to supporters. Ikeda was the most influential figure in establishing budget restraint as a priority. Ikeda, prime minister from 1960 to 1964, provided both the intellectual defense for a conservative fiscal policy and the political leadership that embedded it as a core economic policy. As may be recalled, during the Occupation Ikeda had aligned with the United States by supporting the Dodge Line, and, in the minds of many, he had become associated with a policy of radical budget restraint. Ikeda, however, did not back the Dodge Line out of mere political calculation; he firmly believed that restrained fiscal balance would promote economic growth. In 1952, the year Japan gained its independence, he published a book entitled Balanced Fiscal Policy (kinkō zaisei) that presented his case for low taxes, low budget spending, and balanced budgets. Balanced budgets would help control inflation and, in the event of a trade deficit, dampen domestic demand. The core element of his fiscal strategy, though, was low taxes, which would promote savings and private capital investment and thus drive economic growth. Reflecting Ikeda’s deep interest in tax issues, Ikeda reportedly recalled that his happiest time at MOF was when he worked in the Tax Bureau.16 The key to making this strategy work was limiting budget expenditures because this would allow the government to keep taxes low and budgets balanced. Ikeda occupied positions that allowed him to influence the debate and shape policy. Before becoming prime minister, Ikeda, a former MOF bureaucrat, rose to the highest career position in the ministry (administrative vice minister), and then served as politically appointed finance minister three times, including serving in Kishi’s first cabinet. He also served as Kishi’s minister of international trade and industry. Ikeda was also able to

Balancing Fiscal Policy  97

develop and disseminate his ideas through a “brain trust.” Members of his brain trust helped him write Balanced Fiscal Policy.17 Shimomura Osamu, a member of this loose-knit group, was a key architect of the concept of “high-speed growth” that provided the foundation for his later economic plan—the National Income Doubling Plan (NIDP). As prime minister, Ikeda’s priorities reflected his economic worldview with budget restraint a top priority. As the head of the government and the LDP, though, he also faced the challenge of how to build wider political support from a party and public with rising expectations. Ikeda’s new campaign platform illustrates the broad support he was attempting to marshal. Soon after becoming prime minister, in preparation for elections in the Lower House in 1960, Ikeda announced his platform, the “New Policies.” His New Policies had three pillars: low taxes, public investment, and social security. Not only would low taxes support his private investment strategy, but tax cuts would also win popular support from taxpayers, individuals, and business. From the latter half of the 1950s, tax cuts had already begun to evolve into a vital element of the LDP’s political strategy.18 After the announcement of the New Policies, Ikeda followed through on his promise by delivering regular tax cuts, and subsequent administrations followed suit, increasing the size of such tax cuts during the latter half of the 1960s (see Table 4.1). Reflecting the political importance of tax cuts and tax policy to the LDP, the LDP’s Tax System Research Council, dating back to the late 1950s, took the lead in determining specific tax rates, with MOF playing a subsidiary role, and in later years, with the rise of the policy zoku, the number affiliated with the “tax tribe” exceeded half of all LDP Diet members.19 Such tax cuts, Ikeda’s New Policies indicated, would not come at the expense of industrial development and social welfare. A commitment to high levels of public investment signaled the government’s commitment to economic growth and support of industry, which required investment, infrastructure, and other public works projects. Such investment would appease those in the conservative coalition who viewed industrialization as the government’s top priority, as well as the ministries that would oversee this investment—for example, MITI, the Ministry of Construction (MOC), and the Ministry of Transportation (MOT). Finally, the emphasis on social security would appeal to those inside the party and in the electorate calling for enhanced social protections. Ikeda’s New Policies, in short, attempted to bridge differences within the LDP and broaden the party’s

53

31

s ou rc e : MOF

1955

1954

23

1956

110

1957

6

1958 23

1959 0

1960

table 4.1 Estimated Annual Tax Reductions, 1954–1970 (Billion Yen) 56

1961 50

1962 67

1963 75

1964 65

1965

158

1966

93

1967

125

1968

183

1969

289

1970

Balancing Fiscal Policy  99

base. As already discussed, these differences came to the fore as the government entertained and passed tax cuts during the 1950s, with those in the conservative parties debating the relative priority that should be placed on fiscal policy, industrialization, and social welfare. While the New Policies were intended to build a larger conservative consensus, Ikeda’s successful campaign platform also suggested the challenge of attempting to do so. The platform contained underlying tensions that reflected the constraints of the fiscal trilemma. How could Ikeda deliver a seemingly impossible combination of policies that required low taxes, high spending, and balanced budgets? More concretely, how could a rise in social security and public investment be balanced with tax cuts as well as Ikeda’s and MOF’s commitment to balanced budgets and small government? The answer lies with FILP, which as a nonbudgetary source of public finance opened the possibility of overcoming the constraints of the fiscal trilemma. Ikeda’s New Policies specifically cited the active use FILP as a tool for realizing its mix of policies.20 But it was Ikeda’s National Income Doubling Plan (NIDP), a ten-year national economic plan for the period 1960 to 1970, that fully expressed the role that FILP would play in aligning these goals. the national income doubling plan (nidp):   social security as public investment

Using FILP to increase public investment for industrialization was relatively straightforward. A number of FILP agencies existed for channeling funds to promote industrialization, including the Japan Development Bank, the Japan Export-Import Bank, and public corporations responsible for building infrastructure. Moreover, such activities were amendable to being financed by FILP, that is, through subsidized loans rather than subsidies from the budget. Infrastructure investments, for instance, could be recouped through user fees or other revenues generated from the investments, allowing FILP loans to be repaid. Paying for social security, however, posed a more difficult problem for the government because formal welfare programs rely on budgetary spending that is paid for by taxes or social security contributions.21 Kishi’s modest expansion of social security, especially pensions and health care, which took effect under Ikeda’s tenure, already promised to add to Japan’s fiscal burden over the course of the NIDP. The challenge for the government was to deliver social protections while limiting their budgetary impact.

100  FILP and the Postwar Settlement

The government resolved this problem by creatively redefining social security in a way that would minimize the need for formal welfare policies and thus funding via the formal budget. This approach was clearly spelled out in the NIDP. Instead of a large expansion of social security, the government called for “balanced growth” that would include interventions that would limit the need for welfare policies in the first place. In the words of Deborah Milly, the NIDP “integrated social protections with economic management.”22 The first paragraph of the introduction to the NIDP supports this interpretation: While rapidly doubling the national income and achieving full employment through rapid job growth, the NIDP must focus on widely raising the standard of living. Accordingly, it must work toward minimizing gaps between agricultural and non-agricultural sectors, big and small firms, and incomes and standards of living between social classes and regions through balanced development of the economy and standard of living.23

In essence, social equity and poverty were reinterpreted within the larger framework of economic transformation. Rather than focusing on welfare policies that compensate for the negative social consequences of markets, the government would attempt to use policy to avoid or correct for the underlying economic conditions that gave rise to such problems. Rather than, for instance, a developed system of unemployment insurance, the NIDP promised to address the “dual structure problem,” a Japanese term that refers to inequities between large firms and SMEs, between agriculture and industry, and between regions. The problem then was not poverty, for instance, but underemployment or low wages that resulted from being stuck at the wrong end of the dual structure. Diagnosed as such, the remedy for the dual structure problem was aid to agriculture, SMEs, and economically backward regions.24 Not surprisingly, these were also the key bases of support for the LDP. This way of conceptualizing social problems would take root in Japan and has had lasting impact on the political discourse in Japan; in fact, the term gap (kakusa) has made a comeback since Koizumi Junichirō’s administration as anxieties over inequality and economic security have grown. The government explicitly redefined social security to limit its fiscal impact. The government anticipated that social security and fiscal goals might conflict significantly during the drafting of the plan. To limit the fiscal impact of the government’s social security policies, the Economic Planning Agency (EPA) created a committee structure for drafting the plan with

Balancing Fiscal Policy  101

clear mandates. The Social Security Subcommittee was given the mandate of exploring ways for “reducing the dual structure problem and securing social stability,” which was one of six sets of goals that had been established for the NIDP; social security per se was not mentioned as one of the goals. The government and EPA were able to set the agenda by interpreting social security as a broad issue related to the structure of the economy and industry rather than a commitment to formal welfare policies. The subcommittee also had clear instructions to minimize budget impact, a mandate that was front and center in their discussions. Indeed, the chair of the Social Security Subcommittee was a former MOF official, and the issue of limited fiscal resources was taken up in the subcommittee’s first session.25 In the end, the subcommittee, which was under tight oversight by MOF and the separate Fiscal and Financial Subcommittee, took a minimalist approach to social security. Formal social security policies would be limited to the truly indigent and those unable to care for themselves. Moreover, public investment and tax relief would be interpreted as social security measures. It should be mentioned that during the drafting to the NIDP two parallel plans for social security emerged from within the LDP. The LDP’s Social Security Research Group, led by Okinori Kaya, proposed a more ambitious expansion of social security. The committee’s final report called for a fivefold increase in income of the lowest income group by 1970 and requested a large increase in social security spending. Others within the LDP urged caution and a less fiscally onerous plan for social security. A competing group within the Policy Affairs Research Council of the LDP, the Social Problems Committee, advocated a more limited approach to social security. This ultimately won the backing of MOF and the government, serving a basis for discussions in the Social Security Subcommittee.26 The redefinition of social security that emerged through the process of drafting the NIDP, while partly systematic, also reflected the LDP’s efforts to broaden political support and to co-opt issues from the opposition. In 1960, a massive strike at the Miike coal mine made clear to LDP leaders that they needed to address the issue of labor and social security. Promoting greater equality and reducing poverty would also undercut support for the Japan Socialist Party and other leftist groups.27 The preface to the NIDP cited earlier is a good example that captures the political hue of the NIDP. This preface was included directly as a result of political pressures from LDP members.28 In response to criticisms that the NIDP did not pay adequate attention to

102  FILP and the Postwar Settlement

income inequality and agriculture, the LDP’s Economic Research Group drafted a document that highlighted the need to address these issues. The cabinet resolved to include this document as a preface to the NIDP.29 Similarly, the incorporation of “dual structure” into the NIDP was in part a response to leftist critiques. The concept of the “dual structure” grew out of criticism that growth would generate economic distortions and exacerbate disparities. Aritomo Hiromi, Socialist economist and architect of priority production, first coined the term to refer to wage disparities across sectors, firm size, and occupations. The use of the term spread widely and took on larger political significance as a critique of the government’s economic development policy. Wada Hirō, a former director of Economic Stabilization Board and a Socialist, argued that focusing on aggregate growth would mask disparities, and thus income distribution should also be considered.30 The Socialist Party also took up the term, arguing for measures similar to those included in the NIDP, such as aid to SMEs and agriculture as a means of correcting for it.31 The NIDP’s incorporation of the term social capital similarly reflected the plan’s attention to sensitive political issues. Prior to the NIDP, the government did not use the term.32 The NIDP incorporated the concept and listed enriching social capital as one of the most important roles of the government. Such investments would focus on “strengthening the economic base, social stability (minsei antei), and efficient land usage and conservation.”33 By incorporating such social and political considerations, the NIDP departed from the narrow economic focus of the government’s prior economic plan, the New Long-Term Economic Plan (NLEP), which did not include either the term dual structure or social capital. Highlighting this difference, the NIDP itself notes that “in contrast to plans that have focused mainly on industry and trade, this plan places importance on social capital, education and social security.”34 filp and the nidp

While the government limited formal welfare commitments, the government’s own version of social security still required massive public investment, as did the government’s plans for accelerating industrialization. Increasing public investment was one of the centerpieces of the NIDP, and the plan targeted a more rapid increase in public investment than in private investment. To pay for this investment, which was central to the ruling

Balancing Fiscal Policy  103

party’s industrialization and political strategies, the government envisioned relying heavily on FILP to limit budget expenditures, the key element of the government’s strategy for promoting private investment. These expectations that FILP would take on an expanded role were reflected clearly in the NIDP. The Fiscal and Financial Subcommittee’s final report included a special section on FILP entitled “The Appropriate Management of FILP” that called for expanding FILP and ensuring that adequate funds could be secured. The report also stated that FILP funding should focus on public works projects, agricultural modernization, SMEs, and the development of low-income areas.35 In other words, FILP would shift from industrialization to addressing more politically sensitive problem areas such as poor regions, housing, social capital, SMEs, and agriculture. This theme was reiterated in the main body of the NIDP. As the NIDP notes: In the last few years, FILP financing to the industrial sector has declined. As industry recovers FILP’s priority will shift to roads, railroads, housing, the enrichment of socially oriented public investment such as water and sewage, modernization of agriculture, the nurturing of SMEs, and the development of low income areas.36

A table compiled by MOF in 1960 shows more concretely how the government conceived of FILP as a supplement to the budget under the NIDP (see Table 4.2). This table shows the government’s plans for financing the NIDP over the following three years. It lists specific policy areas and the amount that would be financed by FILP and the budget. As the table illustrates, the government planned for FILP to play a large role in financing both industrial development and its more politically oriented “social security.” Regarding the former, the government would use FILP to pay for nearly all of its policies under the headings “Inducing Capital to Advanced Industries” and “Trade and Economic Cooperation Promotion.” Regarding the latter, FILP would fund a significant share of items that fell under the Japanese government’s reinterpretation of social security discussed earlier— “Social Capital Enrichment” and “Easing the Dual Structure Problem and Securing Social Stability.” Both categories also conveniently doubled as selective compensation to key political supporters, targeting groups such as SMEs, agriculture, and economically backward regions (see for example “SME modernization,” “Agriculture, Farm and Fisheries Production,” and “Measures to Correct for Regional Disparities and Industrial Location”). Percentage-wise the budget bears most of the financing burden, but in

104  FILP and the Postwar Settlement table 4.2 Paying for the National Income Doubling Plan Summary of Income Doubling Plan Allocations by Key Area     1961     1962     1963 (Yen 100,000,000) Yen Percent Yen Percent Yen Percent Social Capital Enrichment   Industrial Base   Enrichment of    Standard of Living

Budget FILP Budget FILP

1863 3735 197 1169

33% 67% 14% 86%

2650 5199 242 1811

34% 3279 66% 5986 12%   326 88% 2280

35% 65% 13% 87%

  Strengthening of    Land Preservation

Budget FILP

1314 215

86% 14%

1368 160

90% 10%

1728 167

91% 9%

3375 5119

40% 60%

4260 7170

37% 63%

5334 8433

39% 61%

Subtotal Inducing Capital to   Advanced Industries

Budget FILP

13 885

1% 99%

27 920

3% 97%

41 937

4% 96%

Trade and Economic   Cooperation Promotion

Budget FILP

93 865

10% 90%

125 1120

10% 90%

155 1450

10% 90%

Enhancing Human Resources Budget   and Promoting Science FILP   and Technology

1005 9

99% 1%

1272 30

98% 2%

1564 50

97% 3%

Easing the Dual Structure Problem and Securing Social Stability   Social Security and    Social Welfare    Improvement   SME Modernization     Agriculture, Farm and    Fisheries Promotion   Measures to Correct for    Regional Disparities    and Industrial Location

Budget 5448 100% FILP 20 0%

6414 270

96% 4%

7444 319

96% 4%

Budget FILP Budget FILP Budget FILP

27 1803 923 500 407 231

1% 99% 65% 35% 64% 36%

47 2121 1423 557 69 387

2% 98% 72% 28% 15% 85%

94 2503 1901 638 115 454

4% 96% 75% 25% 20% 80%

Other  

Budget FILP

86 80

52% 48%

86 80

52% 48%

140 100

58% 42%

6891 2634

72% 28%

7881 3416

70% 30%

9480 4014

70% 30%

Subtotal

source: Kuni no yosan, Shōwa 36, p. 27, Kuni no yosan, Shōwa 37, p. 27.

absolute terms FILP funds allocated for “social security” are far higher than for promoting industrialization. The government turned to FILP to overcome the limits of the fiscal trilemma, allowing it to pursue high public investment, low taxes, and high private capital investment. This strategy, as well as FILP’s role in support of

Balancing Fiscal Policy  105 table 4.3 Social Security Transfers as a Share of GDP (Percentage) Country Japan US UK Canada Sweden Italy Germany France Total OECD

1960

1968

3.8 5.1 6.8 7.9 8 9.8

4.5 6.4 8.7 5.8 10.6 12.6

12 13.5 6.9

13.7 17 8.5

source: OECD

it, was clearly and explicitly articulated in the NIDP. By conceptualizing and framing social issues such as equity, poverty, and underemployment as issues of economic structure, the NIDP partially fused economic and political goals. High public investment would promote industrialization by overcoming bottlenecks (airō) in critical areas such as energy and infrastructure. Public investment would also help solidify the ruling party’s support base delivering “social security” to economically weak regions, SMEs, and farmers. By using FILP to finance this investment, the government could limit formal welfare spending, which, as Table 4.3 shows, was below the other major industrialized economies as well as the OECD average. Suppressing budget spending allowed the government to maintain low taxes and balanced budgets. Under this formula, FILP aligned interests within the LDP and the constituencies it represented and, as the next chapter shows, also helped the party win elections.

Managing the Public Purse While the NIDP provided a snapshot of how the government expected FILP to align competing interests in the conservative coalition, the management of public spending was a political battle played out every year over the course of the annual budget cycle. FILP had two additional institutional effects enabling the government to successfully maintain its policy of budget restraint that came under intense pressure despite growing tax

106  FILP and the Postwar Settlement

revenues. First, FILP served as a power resource for MOF during its annual budget negotiations. Second, FILP channeled interests. Various actors did not look on FILP as an immutable institution but rather viewed it as an instrument that could be altered for their gain. Changes to FILP itself, in particular measures to expand the FILP system, became a means of brokering compromises that allowed the government to preserve its policy of restraint toward the budget. the budget process: filp as a power resource

The budget process began with spending ministries submitting budget and FILP requests for the coming fiscal year (April 1 to March 31 of the following year) to MOF. From 1961, this step was preceded by a budget request guideline that set limits on the requests made by the spending ministries. On the basis of these requests and projections of revenue, MOF would announce a preliminary target for the budget and FILP Plan total. This total, which was invariably below the total of the spending ministries’ requests, served as the basis for negotiations that led to a draft budget, known as the “MOF budget proposal.” Using the MOF budget proposal as a baseline, the government, LDP (after its formation in 1955), and various spending ministries entered into so-called revival negotiations to decide on the final government budget.37 After the revival negotiations, the cabinet approved the budget, known as the “government budget,” and then submitted it to the Diet for approval, which during this period was largely a formality as the ruling party had a majority and the Diet seldom made any modification. Throughout the period until the final cabinet approval of the government budget, the spending ministries and politicians lobbied to increase their budget allocations; in some cases, these disputes with MOF became acrimonious, requiring negotiation with the party leadership. Conflicts with MITI were particularly common, underscoring that MOF’s preferences for budget restraint clashed with the goal of promoting rapid industrialization. As Maurice Wright has observed, MOF strategically deployed FILP as a means to limit formal budget spending throughout the budget process.38 At the early stages, MOF could signal to the key parties—the spending ministries and the LDP backbenchers—that they should limit budget requests and rely more heavily on FILP. This strategy of using FILP to limit budget spending was quite explicit. In the case of the 1963 budget, for instance, the government wanted to adopt a more aggressive posture toward public spending, but

Balancing Fiscal Policy  107

Percent change after revival negotiations

budget funds were expected to be insufficient to cover an increase in spending. MOF announced its strategy to compensate for the shortage of budget funds: An aggressive FILP policy would complement a more disciplined budget.39 Tanaka Kakuei, minister of finance at the time and later prime minister, stated candidly during these budget discussions, “Funds for the next year’s general account are quite tight, so we should strengthen our measures for increasing FILP funds and expanding public investment.”40 MOF also offered concessions vis-à-vis FILP to those demanding greater budget funding as it compiled the draft budget, known as the “MOF budget.” MOF’s use of FILP extended all the way through the revival negotiations. After the MOF budget was completed, a final round of negotiations, the so-called revival negotiations, preceded the cabinet’s approval of the budget, typically in December. During these negotiations, spending ministries and LDP backbenchers maneuvered to increase their funding. The revival negotiations have been described as part political theater because MOF set aside a specific amount of funds in advance for these negotiations and the key parties often knew this. This view, however, ignores the significant concessions that the government made during the revival negotiations in FILP allocations. Figure 4.1 illustrates the pattern. From 1955 onward,

10% 9%

Budget

8%

FILP Plan

7% 6% 5% 4% 3% 2% 1% 0% –1% 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965

f igu r e 4.1. Change in budget and FILP Plan during revival budget negotiations, 1954–1965. source: Compiled from Shōwa zaisei shi, Shōwa 27-48 nendo, Vol. 8.

108  FILP and the Postwar Settlement

when funds flowing into the FILP system increased, MOF increased FILP allocations while limiting budget increases during the revival negotiations. The resulting government budgets adhered very closely to MOF’s budget proposals with only occasional minor changes in budget totals. In most cases, the government shifted existing allocations to appease specific politicians or constituents without changing the total size of the budget. FILP funds were particularly useful as a negotiating instrument for MOF, not only because they provided capital but also because the funds contained a built-in interest subsidy that made the funds attractive to the spending ministries. For instance, the Ministry of Construction and Ministry of Transportation could carry out public works projects at lower cost through their public corporations, and MITI and others could pass on their low costs to borrowers via their government financial institutions, for example, SMEs. Figure 4.2 shows the degree of interest subsidy. The TFBF rate is the interest rate that the Trust Fund Bureau Fund (part of FILP’s intermediary) pays on the funds that it borrows from the entrance institutions, for example, postal savings. This rate served as the basis for the lending rate offered by FILP’s exit institutions, which in most cases was the same as the TFBF rate or slightly higher. As Figure 4.2 shows, the spread between the TFBF rate and long-term prime rate was very large through 1970, indicating a large interest subsidy. This spread declined sharply during the 1980s, though, with profound consequences on the politics of spending, a point returned to later. MOF and the government often faced pressure to pass midyear supplementary budgets if funds for specific projects were insufficient or more rapid than expected growth generated additional tax revenues. Tax revenues did often exceed projections in part because MOF deliberately kept estimates low to control spending growth. To limit the size of supplementary budgets as well, MOF used relatively large FILP increases to help respond to demands for additional funds. As Figure 4.3 shows, increases in FILP during the supplementary budget negotiations were consistently higher than for the budget. In comparison to the budget, though, the government did accept larger increases for the supplementary budget during these negotiations. MOF had a free hand in making midyear FILP increases because such increases did not require Diet approval. In fact, not even the original FILP Plan required approval, even though it was submitted along with the budget to the Diet.

Balancing Fiscal Policy  109 12%

TFB lending rate Long-term prime rate

10%

8%

6%

4%

2%

0%

51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70

f igu r e 4.2. Interest rates, 1951–1970. source: Yūbin chokin shikin unyō no gaisetsū, Table 28.

Reflecting the interests of the ruling coalition, the concessions made during both revival negotiations and the drafting of supplementary budgets tended to be in areas either related to industrialization or that would bolster the ruling party’s political support. Over time, the overall use of FILP shifted toward more politically important areas and focused on addressing issues such as “imbalances” (hizumi) and “the dual structure problem.” During revival negotiations and debates over midyear FILP supplemental increases, funding was consistently added for SMEs, for instance. SMEs were and remain a critical political constituency. The LDP has relied heavily on SME support, but the left parties continually attempted to win their support, in some cases with moderate success. Politicians were also able to win concessions in areas for housing, agriculture, and public works projects. These concessions, it should be noted, were made in the context of already large annual increases in funding to these areas. Many of the public works projects doubled as both economic development projects and

110  FILP and the Postwar Settlement 40% 35% 30%

Budget FILP

25% 20% 15% 10% 5% 0% –5% 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 f igu r e 4.3. Changes in supplementary budget and FILP Plan during negotiations, 1954–1965. source: Compiled from Shōwa zaiseishi. Shōwa 27—48-nendo, 20 vols., vol. 8.

pork-barrel spending. Transportation is perhaps the best example. Roads and railroad projects expanded the nation’s overall national economic infrastructure, but such projects also brought a tangible benefit to outlying and remote regions by connecting them to more economically vibrant ­areas and by creating jobs. The construction firms that benefited from these contracts evolved into a powerful supporter of the LDP contributing funds generously to the party. A few concrete examples illustrate how the government deployed FILP. During the revival negotiations for the 1957 fiscal year, politicians and ministries were able to secure only a 0.3 percent increase in the general account budget, yet they managed to win an 8.7 percent increase in the FILP Plan. Regarding the FILP Plan, they secured the following increases: 8 billion yen for the Japan Development Bank (JDB), 4 billion yen for the Electric Power Development Corporation (EPDC), 3 billion yen for the People’s Finance Corporation (PFC), 3 billion yen for Japan Finance Corporation (JFC), and 3 billion yen for the Agricultural Finance Corporation (AFC). In other words, the big winners were the coalitions pushing for industrialization and those pushing for compensation to critical political constituencies. The industrial coalition won concessions for JDB and the Electric Power Devel-

Balancing Fiscal Policy  111

opment Corporation (EPDC), while the more politically minded groups secured financing concessions for SMEs (PFC and JFC) and agriculture (AFC).41 Similarly, for fiscal 1960, while the general account budget was kept at the level of MOF’s draft proposal, 74.3 billion yen was added to the FILP Plan during revival negotiations.42 These additions were split between the JDB, AFC, PFC, and Export-Import Bank. These increases again reflect the dual priorities of promoting industrialization (JDB and Export Import Bank) and redistributing to politically critical areas such as agriculture (AFC) and SMEs (PFC). Moreover, during the course of the fiscal year, supplemental additions were made to two of the three financial institutions focusing on SMEs (PFC and JFC) as well as the Export-Import Bank and local governments. Ministries and politicians were able to secure supplementary increases for the 1961 fiscal year in the exact same areas. In later years, there were large supplementary increases in housing and especially roads. In particular, the Japan Highway Public Corporation (or “Road Corporation”),43 which became virtually synonymous with pork-barrel spending, consistently secured large supplemental increases. channeling interests: expanding filp as a compromise solution

For FILP to serve as an effective supplement to the budget, it required sufficient funds. Soon after FILP’s establishment in 1953, though, demands for FILP funds from spending ministries and politicians chronically exceeded the supply of FILP funds. The demand for funds was not driven only by MOF’s desire to finance policies using FILP but also by the presence of the institution in the first place. Various actors looked to FILP as a way of funding their policies and projects. The presence of FILP thus had a powerful but subtle institutional effect: creating the possibility of altering FILP itself as an option. The government effectively used this option at strategic moments to preserve its policy of budget restraint. Offering measures to expand FILP played an instrumental role in preserving the government’s balanced budget policy. This policy had been under attack ever since the return of Japan’s sovereignty as groups within and outside the government called for issuing debt to finance increases in public spending. This option, though, ran directly counter to both the government’s larger macroeconomic strategy and MOF’s preferences; both had in fact reasserted their commitment to balanced budgetism after the end of the Occupation. To blunt opposition to this policy, the government and

112  FILP and the Postwar Settlement

MOF made compromises vis-à-vis FILP. The government revised the principle of balanced budgetism so that it would only apply to the budget not the FILP agencies. While budget deficits were still to be avoided, several FILP agencies were allowed to issue government-guaranteed bonds. As will be recalled, after World War II SCAP imposed a legal framework that imposed sharp restrictions on the issuance of public debt that extended to various public entities. The Law Regarding Government Financial Support of Corporations (Law 24, passed on September 25, 1946) banned national and local governments from guaranteeing the debt of firms and other corporate entities. With a shortage of funds and increased pressure on the government in the wake of independence, political pressure increased to revise the limits on the issuance of government guaranteed bonds. The demand for funds for industrial investment provided the impetus to revise Law 24. The Liberal Party agreed with MOF on August 5, 1952, on more active industrial investment at a joint conference. Then on October 1, 1952, before the general election, the party announced that the state would invest more actively in industry. After the election, MOF and the government moved to circumvent Law 24 by allowing the issuance of governmentguaranteed bonds by government corporations while affirming the principle of avoiding budget deficits. In December 1952, MOF inserted a provision in its budget draft that called for the issuance of 10 billion yen in government backed bonds for Japan National Railways (JR) and Nippon Telegraph and Telephone (NTT), both FILP agencies (that is, they received funding from FILP). Then, in the middle of 1953, the Diet passed a special law that allowed JR and NTT to remove some of the restrictions on issuing long-term government guaranteed bonds.44 This precedent essentially established a two-tiered system: The budget would adhere to the principle of balanced budgetism, but FILP would use bonds to make up for the lack of funds for industrial financing and other public investment.45 Expanding FILP thus served as a compromise that underwrote the government’s balanced budget policy. This two-tiered system grew increasingly codified within the government. After the joint Liberal Party–MOF conference previously mentioned, MOF drafted a policy document, “Future Fiscal and Economic Policies,” which stated that FILP would be used to expand investment and promote economic development, while balanced budgetism would be observed vis-à-vis the budget. MOF further articulated this shift in documents and announcements such as “Balanced

Balancing Fiscal Policy  113

Fiscal Policy” and “Speech on the Gist of the Explanation of Basic Fiscal Problems,” which revised the principle of balanced budgetism to “general balanced budgetism,” connoting that the new principle would apply only to the budget.46 Soon after allowing JR and NTT bonds, a wider range of FILP agencies was allowed to issue bonds, including the Japan Highway Public Corporation and two FILP agencies that promoted regional development (Hokkaidō Development Bank and the Tōhoku Corporation). Although MOF preferred government-guaranteed bonds for the FILP agencies over a budget deficit, MOF still attempted to limit the quantity of such bonds. But, as the demands for funds from the LDP and ministries grew, MOF was forced to allow larger amounts of government-guaranteed bond issues, and from 1957 to 1960 the share of bonds as a source of overall FILP Plan funds rose from 11 percent to 19 percent.47 Other changes followed. In 1962, the Diet began to consider revising the Industrial Investment Special Account (IISA), a source of funds for FILP, to allow overseas bonds to raise funds for the account, a move supported by MITI. Later in the year, a bill was passed allowing the issue of “Industrial Investment Special Account Bonds” (santo sai), and $6 million of bonds were issued in the United States for the 1963 fiscal year.48 Other changes also increased the flow of funds into the FILP system. The government raised the contributions to the Employee Pension Insurance (EPI) scheme, which covers workers in the private sector. The government also established the National Pension (NP) system in 1961 to expand pension coverage to those not covered by the Employee Pension Insurance (EPI) scheme or other public pensions, such as individual proprietors. The reserves from the newly created National Pension system were, as with the EPI, linked to the Trust Fund Bureau Fund (TFBF). With a large population of young workers making contributions, the reserves from the pension system grew very rapidly and became a significant source of funds for FILP. The plan to transfer reserves into the FILP system, however, was not accepted without contestation. The Ministry of Welfare (now the Ministry of Health, Labor, and Welfare) wanted to control the management of the reserve funds. MOF, however, viewed the funds as a cheap source of capital that would increase needed FILP funds. In the end, demand for capital took priority, and MOF’s proposal triumphed with a few minor compromises, although the MHLW did finally wrest control from MOF in 2001 as

114  FILP and the Postwar Settlement

a part of FILP reform.49 The disagreement between the Ministry of Welfare and MOF points to an important trade-off: If funds were used as a cheap source of capital, then returns on the reserves would be low, but, if returns were high, then the funds could not be used as a low cost source of capital. The government chose the former, but doing so carried long-term costs because low returns would need to be offset by either higher contributions or transfers from the budget to maintain a specific benefit level. MOF’s strategy of expanding FILP to maintain budget balance was clear and explicit. During the drafting of the NIDP, the Fiscal and Financial Subcommittee determined how the plan would be financed. The subcommittee, heavily influenced by MOF, committed to keeping taxes low and budgets balanced. In response to dissenting opinions, MOF directly offered the expansion of FILP as an alternative to using debt to finance budget spending. The Economic Planning Agency, which was more in tune with the political dimension of the plan, suggested that bonds as well as loans should be used given how much need there was for public investment. MOF responded: “We should approach this problem by expanding FILP.”50 The LDP also played a key role in the expansion of FILP. Not only did the LDP back MOF’s takeover of the pension reserves, the ruling party took steps to enlarge the postal savings system. From the mid-1950s, the LDP rapidly expanded the national network of post offices and postmasters. While the LDP was partly motivated by the possibility of increasing postal deposits, the primary aim was to build up a powerful political machine. Virtually ever since the postal saving system was established in the nineteenth century, it has been a key source of mobilizing the vote. Postmasters were traditionally recruited from the elite, village leaders, and the gentry, who played a critical role in providing support for political candidates. This system spread beginning in the 1880s when the Home Ministry set up a system to increase postal savings deposits by offering tax exemptions and commissions to postmasters who increased deposits, leading to the spread of the postmaster activities in the community. Tanaka Kakuei, who became minister of Posts and Telecommunications in 1957, expanded the political power of the postmasters. Tanaka sharply increased the number of postmasters and aligned them closely to the LDP. Tanaka increased the number of “special” or commissioned post offices (tokutei yūbinkyoku). In 1957, there were only 1,150 commissioned post offices. Tanaka tripled the number in 1958 alone.51 Commissioned post offices,

Balancing Fiscal Policy  115

which operated like franchises, were the means for Tanaka to channel political perks to postmasters, who would in turn provide campaign support for LDP candidates. Perks included providing high fees for postmasters who might use their own property for postal functions. Additionally, special postmasters were exempted from the national bureaucracy examination requirements. Appointments, therefore, could be used as a form of political patronage. Postmasters became a formidable political force, and, prior to the Koizumi reforms, commissioned post offices accounted for about 80 percent of nearly 25,000 post offices in Japan. The ruling party also created incentives so that postal savings funds would attract deposits. Compared to banks, postal savings were attractive because interest earned on deposits was exempt from tax. The tax exemption was introduced during the war to help raise mobilize funds for the war effort. The change led to a sharp spike in deposits, but the devastation after the war led to a drop in the share of postal deposits. After Japan’s economy recovered, postal deposits once again accumulated very quickly. Postal savings accounts were also popular because they could be used for tax evasion; depositors could easily open multiple accounts to avoid deposit limits. The tight political link that developed between the LDP and the Ministry of Posts and Telecommunications played a key role in preserving this preferential treatment. Private banks argued that postal savings had unfair advantages, such as the wide network of postal offices that lowered overhead costs and tax advantages on interest income, and the Japanese Bankers Association had pushed for reforms to level the playing field. The Ministry of Finance’s former Banking Bureau supported the banks’ position. The LDP, given its close ties to the MPT, however, supported the preferential treatment of postal savings, helping pave the way for the accumulation of postal deposits.

The Institutional Development of FILP From its establishment in 1953 until 1970, FILP expanded very rapidly. Annual FILP allocations grew by a factor of ten over this period. This growth was both deliberate and inadvertent. Initially, because FILP funds were inadequate, the government actually transferred funds from the budget to FILP until 1956. To increase funds, the government expanded the use of government-guaranteed bonds. Changes to the pension system also increased

116  FILP and the Postwar Settlement Entrance

Intermediary

Postal savings

Trust Fund Bureau Fund (TFBF)

Pension reserves

Postal insurance, etc. Government-owned corporations— dividends, etc.

Industrial investment special account

Banks, etc.

Governmentguaranteed bonds

Exit FILP Plan

FILP Agencies public corporations, governmental financial institutions, special accounts, etc. Local governments

f igu r e 4.4. The structure of FILP.

reserves, as just discussed. Figure 4.4 illustrates how these changes altered the structure of FILP (new sources outlined in bold). While deliberate changes added new components to the structure of FILP, the government did not fully control the amount of funds that both the new and original sources provided to FILP. In the case of pensions, for instance, the amount of reserves that were transferred to FILP depended on the level of pension contributions and payouts. Because the system was very young and there was a large working age population, reserves accumulated very quickly. While this worked to the advantage of the Japanese government, the inevitable decline of reserves in the future eventually posed a very serious problem to the viability of FILP. In the case of postal savings, although the expansion of the post office network contributed to higher levels of postal savings deposits, economic growth also drove its expansion. As the economy grew, so did household savings, a share of which the population deposited into the postal savings system, which were then, as required by law, transferred to FILP’s Trust Fund Bureau Fund.

Balancing Fiscal Policy  117

In sum, while the government took deliberate measures to expand FILP, the government did not directly control the amount of funds flowing into the FILP system on an annual basis. Thus, the size of FILP was not exclusively a function of what the government deemed it required but also driven by the amount of funds in the FILP system. In later years, as the sums flowing into FILP grew tremendously, critics argued that supply rather than need drove FILP loans and investments. This aspect of FILP had profound consequences for the development of the system because supply predisposed the government to use the funds and also contributed to weakening financial discipline over FILP loans and investments. Growth of the FILP Plan outstripped that of the budget as the government drew on the everexpanding flow of funds to finance its priorities. During the 1950s FILP was about 30 to 35 percent of the size of the general account budget. By the end of 1960s, FILP’s relative size reached 50 percent. The increase in funds funneling through the entrance of the FILP system also led to an increase in the number of FILP agencies that used these funds as the spending ministries lobbied for the creation of new FILP agencies. The new institutions not only expanded their power and jurisdiction, but they also provided the ministries with convenient posts for placing their retired bureaucrats. Ruling party backbenchers looked favorably on the creation of such agencies, many of which could help them deliver goods to their constituencies. MOF did try to minimize the creation of new FILP agencies, in some cases attempting to force ministries to abandon their plans. But as long as FILP funds were growing, neither MOF’s nor the cabinet’s resistance was very active. The result was a sharp increase in the number of the FILP exit institutions. Between 1955 and 1970, the number of FILP agencies increased 150 percent, from twenty to fifty.

What if FILP Had Not Existed? Before concluding this chapter, it is worth considering a counterfactual: What might have happened had FILP not existed? FILP played a facilitating role in helping suppress budget expenditures and ward off pressures on the government to issue government bonds, but what if FILP had not existed? Several possible scenarios are conceivable. Figure 4.5 illustrates in simplified fashion some of the various options that governments would have faced. First, governments would have faced a choice between two main

118  FILP and the Postwar Settlement Maintain balanced budgets option 1A Increase budget expenditures option 1 Allow budget deficits option 1B

Lower budget expenditures option 2

No NIDP alternative

f igu r e 4.5. Considering a counterfactual: Options if FILP did not exist.

courses: Increase budget expenditures in an attempt to maintain the same level of public spending and investment (Option 1), or lower budget expenditures to maintain balanced budgets (Option 2). These options are of course hypothetical ones relative to the actual level of budget expenditures when the government had access to FILP (Figure 4.5). If the government pursued Option 1 (increasing budget expenditures), the government would have faced two other possible choices. If the government chose to maintain balanced budgets (Option 1A), then additional tax revenues would have been needed to cover higher expenditures. This would have meant that the government would not have been able to implement as aggressively its private investment supply-side fiscal policy. On the political side, it would not have been able to deliver popular tax cuts. If the government, however, chose to issue bonds earlier (Option 1B), then it would have had to have abandoned its policy of balanced budgetism. This might have had several consequences. First, the rhetorical power of balanced budgetism would have lost its force and might have led to more rapid erosion of MOF control over the budget. Also, debt servicing would have started to consume a larger share of the budget at an earlier stage. Finally, government control over interest rates might have come under greater pressure. The lack of a developed primary and secondary bond market helped governments maintain a controlled interest rate system until its eventual liberalization.

Balancing Fiscal Policy  119

If governments chose to lower budget expenditures to keep budgets balanced and to keep taxes low (Option 2), the ruling party’s economic policy and the political strategy would have varied significantly. On the economic side, the government would have had to modify or abandon the NIDP. The NIDP required heavy public investment, yet this would have conflicted sharply with the goal of balanced budgetism and low taxes if FILP had not existed. The government would have had to settle for lower public investment. Lower rates of public investment for industrialization (industrial finance, industrial-related infrastructure, and the like), would have translated into slower growth. Because, as discussed earlier, heavy public investment also served the LDP’s political strategy, an alternative political strategy would have been required as well, a task that would have been made difficult by a scarcity of public funds. Of course the options are not mutually exclusive, and it is likely that some combination of the options would have been the equilibrium outcome. Ultimately, the outcome would have been determined by the balance of forces between various actors. This balance of forces, however, would also most likely have been different if FILP did not exist. As this chapter has shown, FILP structured and channeled the preferences of actors. For MOF, FILP served as a powerful instrument for managing the budget. MOF could draw on funds to protect the principle of balanced budgetism and deflect pressures to issue government debt. But, without FILP, it is likely that MOF would not have been able to maintain as much autonomy as it did over the budget. MOF would have been forced to make more concessions vis-à-vis the budget, pushing the outcome toward some combination of higher budget expenditures, higher deficits, and/or higher taxes. Given the centrality of public spending and low taxes to the ruling coalition, both in terms of its economic and political goals, the most likely resulting compromise would likely have involved earlier use of deficit financing to cover budget shortfalls. The government might have also tapped the postal savings and public pension funds to finance these debts. This would have reinforced the primacy of the budget, leading to higher budget spending and growing debt. In this scenario, postal savings would have come to play a role similar to Italy’s postal savings program, the Cassa Depositi e Prestiti (CDP). One of the most significant differences in outcome, though, would have been the absence of FILP. FILP not only made possible a specific fiscal compromise, but over time FILP rapidly expanded dynamically structuring the

120  FILP and the Postwar Settlement

preferences in the ruling coalition. The government’s use of FILP in turn shaped the development of FILP in a mutually constitutive process that set Japan’s political economy on a long and distinctive institutional trajectory.

Conclusion This chapter has shown how the government first came to embrace the goal of budget restraint and then how it used FILP to reconcile this policy with its other goals. By deploying FILP, the government squared the circle: It combined budget restraint with heavy public investment to fund industrialization and its own version of social security that doubled as compensation to political supporters. This mix of policies provided something for everyone in the conservative coalition. FILP alone, of course, was not sufficient for maintaining budget restraint. Economic growth certainly helped by driving revenue growth. Most critically, the government leadership’s support was indispensable. Without the political will to maintain such discipline, fiscal policy would have quickly succumbed to the many demands on the public finance system. But once the government committed to such a policy, FILP played a key role in maintaining it. FILP’s effect was neither passive nor static. Although the government established FILP and altered it to meet its needs, the growth of FILP took on a life of its own. FILP rapidly accumulated funds, which in turn shaped the environment in which the government made its choices. Given the ruling coalition’s voracious appetite for funds (and the goal of fiscal discipline), the choice was an easy one. The government increased the number of FILP agencies and drew on FILP to fund an expanding array of state activities. This interplay created a virtuous cycle for the ruling coalition, allowing the government to have its cake and eat it too. As the second part of this book shows, though, the government’s use of FILP contained inherent limitations. The combination of low taxes, low budget spending, and heavy public investment that FILP made possible eased difficult political choices and created stability within the conservative camp. In the case of West Germany, Ludwig Erhard was in a position similar to Ikeda to shape the postwar political economy, having served as bizonal economic administrator (1948–1949), minister of economic affairs (1949–1963), and chancellor (1963–1969). Erhard, however, was committed to a different vision. While he was partly a liberal and committed to budget balance, Erhard’s social market economy

Balancing Fiscal Policy  121

required an expansion of the state. The conservative Christian Democratic Union–led coalition increased subsidies to farmers, the Mittelstand (small and medium-sized enterprises), and the housing sector, as in Japan, but it also expanded formal welfare programs from the mid-1950s onward. Paying for the policies that made the social market economy actually “social,” however, eventually created a rift in the conservative camp, and the conservative coalition fell apart after the Free Democratic Party bolted after a proposed tax increase in 1966, eventually paving the way for the Grand Coalition between the CDU and the left-of-center Social Democratic Party; this political transition led to a decisive shift away from the government’s prior preference for budget balance, and budget outlays, which were already high, increased sharply over the next decade.

five

The Electoral Logic of FILP Allocations, 1960–1993

Thus far, the preceding chapters have revealed FILP’s role in bridging otherwise diverse interests within the ruling coalition. The analysis has been at the level of elite politics, mainly looking at the relations between and within the ruling party, the government in power, the spending ministries, and MOF. The analysis has focused on, among other things, the negotiations leading to the creation of FILP, the development of long-range economic plans, budget negotiations, and the general management of public finances. These chapters have shown that FILP, as a nonbudgetary source of public finance, helped smooth tensions among three key goals: industrialization, staying in power, and budget restraint. The claim that FILP bridged interests, however, will be even stronger if it can be demonstrated that FILP actually provided a useful alternative or supplement to budgetary spending. If it did not, then spending ministries and the LDP would presumably be less willing to accept FILP allocations in lieu of budgetary funds. Taken to the logical extreme, this would suggest that FILP was in fact a poor instrument for brokering compromises. While the previous chapters have already demonstrated that FILP was in fact a useful tool for bridging interests, this chapter focuses on analyzing how FILP actually advanced the LDP’s electoral interests. This chapter moves down a level of analysis to examine whether in fact FILP provided a useful resource for the LDP. The thin arrows represent the focus of the previous chapters, while the bold arrows in Figure 5.1 illustrate the central concern of this chapter. This chapter addresses two specific questions. First, did FILP help the ruling Liberal Democratic Party (LDP) win elections (Arrow 1)? Second, did the ruling party steer FILP distribu122

The Electoral Logic of FILP Allocations  123 Budget Voters

LDP

Government FILP

f igu r e 5.1. Testing the causal pathways.

tions to its political supporters (Arrow 2)? If it can be shown that this were the case, it would provide stronger evidence that FILP bridged the interests between the pork-barrel wing of the LDP and the government’s goal of budget restraint. This chapter does not consider FILP’s role in promoting industrialization because this subject has been debated elsewhere.1 The results of the empirical tests reported in this chapter confirm that FILP distributions have in fact helped the ruling party during elections and that the ruling party rewarded its supporters with distributions from FILP. The following sections discuss the data, model, and results.

Did FILP Help the LDP Win Elections? To test whether or not FILP had an outcome on elections, a database composed of cross-sectional time-series data was constructed from a variety of government sources2 and a Japanese elections data set.3 The database includes all of Japan’s prefectures excluding Okinawa (forty-six out of a total of forty-seven prefectures) for the period between 1960 and 1993. Okinawa was excluded because of its unique historical circumstances. Okinawa did not revert to Japanese control until 1972 and has since received significant public support to encourage economic development and also as compensation for the burden it plays in hosting the U.S. military. The concentrated presence of the U.S. military in Okinawa has generated deep antipathy toward the Japanese government. A fixed effects regression model (time was fixed to take out the time trend) was then used to see if FILP allocations influenced the level of LDP support. The variables included in the model are described in the following pages, followed by a discussion of the results.

124  FILP and the Postwar Settlement dependent variable: ldp seat share (lsshr)

Because the question of interest is whether FILP allocations helped the LDP win elections, the dependent variable is LDP performance in elections. More specifically, the dependent variable is the LDP’s seat share in the Lower House (LSSHR) for each of Japan’s prefectures.4 This study focuses only on elections for the Lower House. On theoretical grounds this choice is justified because Japan’s Lower House, the House of Representatives, is the more powerful of the two bodies. The Lower House chooses the prime minister, and it wields authority over the budget.5 More pragmatically, as all of the Lower House elections are at the subnational district, using Lower House data provides a large number of cross-sectional observations conducive for regression analysis. The data set includes the LSSHR from the elections covering 1960 to 1993. Until 1993, the LDP held a simple majority in the lower house, so LSSHR includes only LDP and LDP-affiliated candidates.6 Elections prior to 1960 were not included because key independent variables were not available. The elections after 1993 were excluded because of an electoral change introduced in 1994, which would make pooling the data problematic. Until 1994 Lower House elections were carried out under the single non-transferable vote electoral system (SNTV). Under SNTV, candidates compete for multiple seats within a given district, that is, multimember districts (MMD). Electoral reform in 1994 introduced a mixed system that combines proportional representation (PR) with single-member districts (SMD), in which only one candidate wins a seat per district. This study analyzes only elections under SNTV. The electoral districts under SNTV were geographically smaller than prefectures. The electoral results, therefore, have been aggregated to the prefecture level because there is no data for the independent variable available at the level of electoral district. filp variables

The purpose of these empirical tests is to determine whether FILP allocations actually helped the ruling party win elections. If it can be shown that higher levels of FILP allocations result in a higher LDP seat share (LSSHR), this would provide additional and relatively strong support that FILP allocations helped bridge the gap between MOF’s goal of budget restraint and the LDP’s political goals. Accordingly, FILP is the key independent variable of interest.

Industrial investment special account Governmentguaranteed bonds

Banks, etc.

Trust Fund Bureau Fund (TFBF)

Intermediary

Government-owned corporations— dividends, etc.

Postal insurance, etc.

Pension reserves

Postal savings

Entrance FILP Plan

Public corporations

Local governments

Public investment, national (PIN) FILP local government lending (FLL)

Government finance index (GFIND)

Indicator

Government financial institutions

Exit

The Electoral Logic of FILP Allocations  125

f igu r e 5.2. The FILP variables.

As discussed in earlier chapters and illustrated in Figure 5.2, there are several kinds of FILP allocations that correspond to the different types of “exit” institutions in the FILP system. The public corporations directly execute

126  FILP and the Postwar Settlement

government projects, planning and building infrastructure and other public works projects. Some of the biggest corporations (and most notorious in Japan) are those associated with the construction of roads and highways, although there are many others. Government financial institutions are financial institutions that primarily lend to the private sector although in some cases for public sector projects as well. The government financial institutions in some ways resemble commercial banks, but they are public institutions that focus on sectors or firms that would have difficulty obtaining financing from the private market. The largest lending areas are SME finance and housing; other areas include agriculture and regional development. Finally, FILP also lends to local governments at the prefectural, metropolitan, town and village levels. Three separate indicators have been used to capture each of these types of FILP allocations. They are, as indicated in Figure 5.2: Government Finance Index (GFIND); Public Investment, National (PIN); and FILP Local Government Lending (FLL). Because the model tests for the effect of the FILP variables on the dependent variable, all of the FILP variables have been lagged. The values are for the year prior to the election year of the dependent variable, LSSHR. The values for the variables are in millions of yen per person to facilitate the reporting of the results. All of the values were adjusted for inflation using deflators. Each is explained in more detail in the following paragraphs.7 Government Finance Index (GFIND)

The Government Finance Index is the total loans and discounts outstanding of the major government financial institutions (kōko) per person in each prefecture. The institutions included in GFIND, unfortunately, do not include all of the government financial institutions. It does include the main, that is, largest, government financial institutions, and thus it can reasonably be expected to serve as a good measure of the lending of government financial institutions. Specifically GFIND is an index of the three following FILP government financial institutions: Japan Development Bank (JDB), People’s Finance Corporation (PFC), and Japan Finance Corporation for Small Business (JFCSB). The JDB (later reorganized into the Development Bank of Japan) was the successor to the reconstruction finance bank. Its mission was initially to promote industrialization, although over time its focus has shifted to other areas such as regional development. The latter

The Electoral Logic of FILP Allocations  127

two—the PFC and JFCSB—focused on lending to SMEs. The index was compiled from data from the Bank of Japan (BOJ).8 Public Investment, National (PIN)

The second indicator, PIN is a proxy for public corporation (kōdan) investment. PIN represents the amount of public investment (gyōsei tōshi) that is provided by the national government for nationally directed public projects per person in each prefecture. Part of the financing for national projects is financed by local governments, and there are other projects that are carried out by other levels of government (prefectural, metropolitan, town, and village). These figures have been excluded from PIN and added as separate control variables (explained in more detail in the following discussion) to help isolate the public corporation portion of public investment. PIN includes many of the largest public corporations, but it does not include all of them. Moreover, it also includes some investment from the budget that is not associated with the public corporations. Despite these drawbacks, PIN is the best proxy for public corporation spending. FILP Local Government Lending (FLL)

FLL, the third indicator, is the amount of per capita local government financing that governments have borrowed via FILP in each prefecture. As described in previous chapters, local governments often finance part of their debt using FILP. The central government—the Ministry of Finance (MOF) and the former Ministry of Home Affairs (MHA)—determines how much will be financed via FILP. Such financing has two benefits. First, it can provide lower interest rates than what local governments would have to pay on the private market. Second, in some cases it allows small and fiscally weak regions to raise funds that they could not on the private market. Conversely, such financing may represent the central government shifting responsibility for funding projects from the national level to the local level, and thus result in a loss of support for the ruling party. There is no available FLL data prior to 1972. control variables

As with the FILP variables, the control variables have been lagged so that the values are for the year prior to the election year for the dependent variable. One exception is Gross Prefectural Product Growth (GPPG), which

128  FILP and the Postwar Settlement

covers the period from the previous election until the election year of the dependent variable (see the following discussion). Public Investment—Locally Funded National Projects (PILN)

The first control variable, PILN, covers the portion of national projects that are funded by local governments. As with the next variable, it has been included to control for the effects that non-FILP public spending might have on elections. PILN is in millions of yen per person in each prefecture. Public Investment, Residual (PIR)

PIR is a variable that represents all of the remaining public investment that is not included in PIN or PILN. Specifically, PIR covers public investment for projects entirely financed by local government. PIR is in millions of yen per person in each prefecture. Area of Prefecture (AREA)

Each prefecture’s share of the total area of Japan is the Area of Prefecture. Larger prefectures should require larger amounts of public investment. This term has been included to subtract out these effects from PIN, PILN, and PIR. Prefectural Income Per Person (PI)

PI is a general proxy for the socioeconomic conditions of each prefecture. Poorer, backward regions have been seen as important bases of LDP support, and one would also expect that the wealthier the region, the lower the share of LDP seats. PI is in millions of yen per person in each prefecture. Gross Prefectural Product Growth (GPPG)

The real growth of the prefectural economy for the period between elections—the year after the prior election year until the year just prior to the election year of the independent variable—is GPPG. The growth rate has been annualized. It is expected that the electorate would reward the ruling party if economic growth is robust or punish them if growth is relatively stagnant or negative.

The Electoral Logic of FILP Allocations  129

Population Density (POPDEN)

The number of persons per square kilometer is POPDEN. It has been included as a proxy for how rural or urban each prefecture is. It is widely recognized that the LDP conservative coalition is partly based in rural regions; thus one would expect that regions with lower population densities would have higher shares of LDP seats. Fiscal Health Index (FHI)

FHI is an indicator published by the Japanese government that estimates the fiscal health of each prefecture. The figure represents the ratio of local revenues to expenditure needs. A higher value indicates better fiscal health. Higher prefectures should have greater autonomy from the central government and therefore should have more political independence. Conversely, weaker regions are more dependent on the central government and are thus more likely to bandwagon with the ruling party, according to Scheiner.9 results

Table 5.1 reports the results from two fixed effects regression models. Model 1 includes all of the elections between 1960 and 1993, which yield 552 observations. Because data for FILP Local Government Lending (FLL) is not available prior to 1972, this FILP variable was omitted from Model 1. Model 2 includes the FILP Local Government Lending (FLL) variable. Because data for FLL prior to 1972 is not available, this model includes observations only for the elections between 1974 and 1993 (322 observations in total). The results from Model 1 and Model 2 provide very strong support for the claim that FILP allocations have bolstered support for the ruling party. The results from Model 1 show that GFIND and PIN both have positive and statistically significant coefficients. To make these coefficients more concrete, the coefficient for GFIND in Model 1 suggests that an increase of 1,000 yen per person in government finance would result in just under half a percentage point (0.43) increase in the LDP’s seat share. The same increase in FILP-financed public investment, that is, PIN, would yield just under three-quarters of a percentage point (0.72) increase in the LDP’s seat share. These findings are also supported by Model 2, which includes the FILP Local Government Lending (FLL) variable. Model 2 generates slightly larger coefficients for GFIND (0.45) and PIN (0.78).

130  FILP and the Postwar Settlement table 5.1 Regression results for seat share of LDP in the Lower House FILP Variables   Government finance (GFIND)   Public investment, national (PIN)   FILP Local Government Lending (FLL) Control Variables   Public investment, locally-funded national projects (PILN)   Public investment, remainder (PIR)   Area (AREA)   Prefectural income per capita (PI)   Gross prefectural product growth (GPPG)   Population density (POPDEN)   Fiscal health index (FHI) R-squared Adjusted R-squared N

(1)

(2)

0.43*** (0.10) 0.72*** (0.26) — —

0.45** (0.11) 0.78*** (0.29) 0.11 (1.15)

4.30* (2.19) –0.48** (0.22) –0.79*** (0.18) –0.03 (0.00) 0.67** (0.27) –46.00*** (8.57) –0.16*** (0.04)

2.97 (2.75) –0.67** (0.33) –0.69** (0.27) 0.03 (0.05) 0.64* (0.37) –52.27*** (11.90) –0.25** (0.10)

0.36

0.34

552

322

Significance levels: ***

**not a FILP-institution **not a government financial institution

the reform of which had generated so much opposition during the Murayama administration, and eleven were FILP Agencies. Hashimoto’s cabinet and the LDP’s Headquarters again faced similar opposition, but this time the government accommodated opponents in order to deliver a reform package. The result was a package that appeared impressive, at least in comparison to the Murayama administration, but on closer inspection committed the government to fairly superficial reforms. While it was announced that twelve corporations would be reformed, the total number would only be reduced by four. The second set of reforms also recycled the one proposal that had been decided under the Murayama administration, the merger of the Export-Import Bank of Japan and Overseas Economic Cooperation Fund.85 If this merger is excluded, the new set of reforms would only reduce the total by three. The relatively modest reduction was due to the fact that the reforms focused on merging some special public financial corporations, replacing abol-

The Politics of FILP Reform  213

ished ones with new ones and in some cases just clarifying their functions. For instance, the People’s Finance Corporation (PFC) and Environmental Sanitation Business Corporation would both be abolished, but both would be merged into a new corporation (eventually the National Life Finance Corporation). This measure, moreover, represented an expedient compromise that the government brokered after a host of other proposals to rationalize SME lending died due to opposition.86 The merger itself was fairly uncontroversial because the MHW, which had jurisdiction over the Environmental Sanitation Business Corporation, actually supported the merger.87 In the case of the Shokochukin Bank, the reform called vaguely for improving efficiency and using private capital more, a stark contrast to the Headquarter’s original proposal to privatize the entity that the zoku Diet members, MITI, and the SME lobby had defeated earlier.88 Similarly, proposals had also surfaced to privatize the Housing Loan Corporation, but the cabinet decision agreed only to limit the use of the HLC for economic stimulus and to promote the securitization of home loans. Hashimoto’s third phase of special corporation reform had two primary foci: (1) dealing with the rest of the special corporations that were to be reviewed for reform and (2) recommending broad reforms generally applicable to all of the special corporations. The remainder of the special corporations were listed in a cabinet decision in August 1997, but unlike the prior two cabinet decisions this one did not lay out concrete plans to abolish or merge any of them. Instead, the cabinet decision focused on rationalization of operation, improving efficiency, delimiting the scope of work, and studying the possibility of future restructuring or elimination. Thus, in effect, the final cabinet decision served as a catchall for dealing with all of the special corporations that would not be restructured or abolished. The third-phase cabinet decision also provided a convenient way of offering a reform that, in effect, postponed more sweeping reform of the special corporations useful to the LDP, including the enormous “Road Corporation”—the Japan Highway Public Corporation. The cabinet decision also articulated more general reforms for the special corporations. To deal with growing criticisms of amakudari, caps were set on the executive compensation at special corporations and a provision was included for reducing the number of executive positions that the government could appointment. To improve transparency, the cabinet decision called for better information disclosure.

214  The Limits of FILP assessing reform of the special corporations

After Hashimoto stepped down as prime minister in mid-1998, the momentum for reform of the special corporations slowed. Hashimoto’s successors, prime ministers Obuchi and Mori, were LDP politicians from the old guard and did not share Hashimoto’s zeal for reform. Moreover, the LDP’s biggest political rival, the reformist New Frontier Party, splintered and then ceased to exist. Reform also slowed in part because the Murayama and Hashimoto administrations had succeeded in passing reforms, indeed more far-reaching ones than any previous administration. Their reforms reduced the number of special corporations, including numerous FILP agencies, and mandated greater transparency. These changes would have real, if politically oversold, consequences. The reduction in the number of amakudari posts was a loss for the bureaucracy, and the increase in transparency would limit the ability of the government to hide financial mismanagement. Where core LDP interests were at stake, though, with the LDP at the helm of the ruling coalition, the government was able to avoid reforms that would undermine its interests. The government, for instance, kept the road-related special corporations largely off the agenda, made significant compromises on the politically sensitive government financial institutions, and established new special corporations to compensate potential losers. Moreover, the government made no effort to restrain the size of the FILP Plan. As Figure 7.5 shows, FILP allocations actually increased through the 1990s just as the government was pushing through reform of the entire FILP system. These allocations even increased under the period of most intense reform during Hashimoto’s administration, in part because of measures taken to pull the economy out of recession. During the latter half of the 1990s, the government assembled a large fiscal stimulus package to stimulate the economy. MOF, as it always had, turned to FILP to respond to political pressures to increase the flow of public funds. Padding the stimulus package with FILP allocations, MOF and the government could demonstrate their commitment to using fiscal stimulus and a break with MOF’s orthodoxy of budget restraint that had come under heavy political attack.89 Although the government lowered FILP allocations from fiscal year 2000 onward, the large drop after 1999 was partly due to an accounting change.90 As will be discussed in the following chapter, however, Prime Minister Koizumi did manage to make meaningful and substantial cuts to FILP allocations.

The Politics of FILP Reform  215 60,000 50,000 40,000 30,000 20,000 10,000 0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

f igu r e 7.5. FILP allocations, 1990–2001 (billions of yen). source: MOF.

Conclusion The factors that had made FILP such a useful instrument to the ruling LDP ultimately drew the system into the sights of reformers: rapid growth in the amount of funds in FILP, a proliferation of FILP agencies, the use of the system for fiscal and political ends, and a proliferation of various public institutions that used FILP funds. Economic malaise, the loss of LDP power, and the new dynamics of coalition governments propelled administrative reform and caused every part of the FILP system to be swept up in this tide. Ironically, the process of reforming the FILP system, which had been so critical to holding together the LDP’s political coalition, divided the party and increasingly brought it into conflict with the bureaucracy with which it had had a long and cooperative relationship. As pressure to deliver reform increased, the government was forced to take on the bureaucrats and politicians with vested interests in FILP. For the two administrations that excluded the LDP, the task was in principle easier because these interests had traditionally been aligned with the LDP, not the new parties. Once the LDP had managed to come back into power in 1994, though, it was confronted with the dilemma of trying to deliver reform without alienating its allies and supporters. This dynamic played

216  The Limits of FILP

out through all of the reforms related to the FILP system. As the preceding analysis of FILP reform showed, powerful political interests limited the scope of “FILP reform.” The final reform ultimately would sustain the system by providing a more reliable funding mechanism. The politically charged issue of post office reform, which was tied intimately to powerful LDP interests, was soundly defeated. Finally, in the case of the FILP agencies, the government delivered reform but avoided or compromised on the ones critical to the LDP’s interests, such as those associated with roads and government finance. The collective result of the various reforms was a partial rationalization and preservation of the existing system. Although real and significant changes were introduced, the FILP system as a whole would continue to function as always. Indeed, during the 1990s, FILP allocations continued to grow in size. The fragmented process of reform, though, left open unresolved issues. Reformers continued to press for reform of the postal saving system and additional rationalization of the special corporations. The next chapter takes up these issues, focusing on how Prime Minister Koizumi, an ardent reformer from the LDP, was able to overcome opposition to deliver reform that had eluded his predecessors.

eight

The Koizumi Reforms and the Legacy of FILP, 2001 and After

Despite a decade of reforms targeted at FILP, reform did not fade from the political agenda. To the contrary, Koizumi Junichirō, one of the most popular postwar prime ministers, came into office in 2001 promising to deliver radical reforms not only to restore economic growth but also to take on the vested interests in his own party. Koizumi vowed to “destroy the LDP to save it” and to deliver “reform with no sacred cows.” Koizumi, who had long had an interest in FILP reform, set his sights on postal savings and the FILP system, making both issues central to his larger reform agenda. This chapter explains what Koizumi accomplished and why Koizumi succeeded where others failed; it then concludes with an assessment of the legacy of FILP— what it has left behind and how it has shaped what will come in the future.

Koizumi and Reform Koizumi was a zealous reformer because reform allowed him to pursue two simultaneous goals. First, Koizumi attempted to use structural reforms to create a leaner, more efficient, and less intrusive state that would promote more vigorous market competition. Second, and arguably even more important, Koizumi exploited reform as a battering ram to transform his political party. Koizumi wanted to break up political factions within the LDP, centralize decision making, reduce the party’s dependence on political pork, and realign its base of support from rural areas and laggard economic sector to urban voters and more dynamic sectors. Koizumi, whose base was 

218  The Limits of FILP

in urbanized Kanagawa prefecture, in fact set out to do exactly what he stated in his campaign slogan: destroy the LDP to save it. Koizumi specifically set out to destroy the Tanaka faction, which since the 1970s had become one of the dominant forces within the LDP. The Tanaka faction played the role of kingmaker, often wielding influence over the selection of the prime minister. The Tanaka faction1 was particularly strong through the 1980s, but even well into the 1990s it was a significant political force; both Hashimoto and Obuchi were from the Tanaka faction. Under the influence of the Tanaka faction, the LDP perfected porkbarrel and money politics, and the party lavished public spending on its core supporters—such as rural areas, farmers, small businesses—as well as new constituencies. Policy making also grew increasingly decentralized with many policy and spending decisions decided by the LDP’s Policy Affairs Research Council rather than the government. Koizumi was not alone in his opposition to the Tanaka faction. An anti– Tanaka faction coalition developed within the LDP. Yamasaki Taku, Koichi Katō, and Koizumi Junichirō formed a cross-factional coalition to move the party in a more reformist direction. The so-called YKK group, led by relatively younger members in the party, pushed for fiscal reform during the 1990s. As its influence grew, the YKK group increasingly clashed with the Tanaka faction. Although in separate factions, each of the three attempted to push the direction of its own along more reformist lines. The YKK group, however, lost influence after two of its members—Yamasaki Taku and Koichi Katō—led an aborted attempt to unseat Prime Minister Mori. As prime minister, Koizumi pursued policies that would weaken the Tanaka faction, promote competitive markets, and streamline the state. Koizumi reduced spending on public works, which fed the political machine, and attempted to dismantle parts of the state apparatus. Koizumi targeted the FILP system because he understood how the sprawling system was at the heart of Japan’s pork-barrel spending machine. Koizumi specifically included in his party’s manifesto a commitment to privatize the postal system, which continued to supply the FILP system with funds and to reform the FILP agencies handling road construction. Even before becoming prime minister, Koizumi had committed himself to reforming the entire FILP system, even though the issue initially had little resonance with voters. In a book that he had edited with another author, Koizumi presented an excoriating critique of FILP that enumerated political and economic

The The Koizumi Koizumi Reforms Reforms and and thethe Legacy Legacy of of FILP  FILP 219 E

ills that he believed stemmed from it.2 Postal savings provided low returns and competed with banks; bureaucrats abused FILP by using it to place outgoing civil servants (amakudari); the FILP system allocated capital inefficiently; the FILP agencies encroached on the private sector; and the entire system masked large debt that taxpayers would ultimately have to cover. In his two prior unsuccessful bids for the LDP presidency, Koizumi campaigned on the issue of FILP, staking out more radical positions than his rivals. Then, once in office, he immediately engaged opponents in a heated showdown over reforms. Earlier reforms had altered the FILP system in many ways, but Koizumi advocated more far-reaching reforms. Although FILP reform had officially delinked postal savings from FILP, it had created a loophole that would allow the funds to flow back into the system, and, more fundamentally, the reform had not relinquished state control over the investment of postal savings and insurance. Reform of the special corporations skirted the issue of what to do with the largest and most politically sensitive ones, like the corporations related to road construction and the government financial institutions. Prior FILP reform, in short, left many issues unresolved. Immediately on arriving in office, Koizumi put FILP reform at the center of his agenda. During his five years as prime minister from 2001 to 2006, he succeeded in pushing through reforms that had eluded previous administrations. These reforms, while not an unqualified success from a substantive standpoint, represented a major political achievement, one central to Koizumi’s legacy as a political leader.

Koizumi’s Accomplishments Although his reforms included numerous political compromises, in comparison to his predecessors Koizumi pushed through more far-reaching reforms. First, Koizumi finally resolved the issue of what to do with the former entrance to FILP—postal savings and postal insurance. As discussed in the previous chapter, Hashimoto’s FILP reform ended the legal requirement that postal savings funds be transferred to the FILP system, although subsequently both have indirectly provided funds to FILP through the purchase of bonds (FILP bonds and FILP agency bonds). Opponents, however, succeeded in killing proposals that would have privatized postal savings and insurance, thus leaving the funds under government control. Koizumi,

220  The Limits of FILP

though, passed a bill that broke up the post office into four separate entities, two of which are postal savings and postal insurance, and committed the government to fully privatizing them by 2017. Second, Koizumi sharply reduced the number of FILP agencies. During his administration, he abolished sixteen and privatized thirty-six special corporations, including many of the most politically controversial FILP agencies. While powerful opposition forced previous administrations to retreat from meaningful reform of the government financial institutions (all FILP agencies), Koizumi succeeded in passing legislation that would reduce their number from eight to one. Koizumi also battled his own party over reform of the special corporations related to road construction, an issue that was particularly sensitive because of the LDP’s dependence on the political support of construction companies and the regions that benefited from road construction. Koizumi privatized four of the road corporations, although his reform did include major concessions to opponents. Third, while not a structural reform, Koizumi managed to make steep cuts to the funds allocated via the FILP system. Despite various reforms related to the FILP system, throughout the 1990s FILP allocations actually grew to record highs, peaking in fiscal year 1999. From 1999 until 2001, the FILP Plan shrank, but partly due to accounting changes.3 Koizumi slashed FILP allocations across the board after becoming prime minister in 2001 (see Figure 8.1). The biggest cuts were in housing, the largest FILP spending category. From fiscal year 2001 to 2004, allocations to housing dropped 84 percent, accounting for 68 percent of the total decline in the FILP Plan. Koizumi managed to make cuts in FILP allocations, even in areas critical to the LDP such as government finance for SMEs and road construction, which between the fiscal year 2001 and 2003 dropped 20 percent and 10 percent, respectively. He also reduced subsidies from the formal budget to the FILP agencies.4

The Political Dynamics of Reform Each of these political feats involved different actors in different political arenas, but two common factors explain why Koizumi was able to deliver more extensive reform: institutional changes designed to empower the prime minister and his cabinet and, more importantly, Koizumi’s political leadership, particularly his willingness to confront opposition from

The Koizumi Reforms and the Legacy of FILP  221 50,000 45,000

Yen (billions)

40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

f igu r e 8.1. Declining size of the FILP Plan, 2000–2009. source: MOF.

his own political party. Koizumi entered office at a moment when he was able to benefit from reforms that Hashimoto’s administration had passed. Hashimoto’s landmark administrative reform bill, which had also set the framework for FILP reform, included several measures to give more power to the prime minister and cabinet. These reforms collectively legitimized the primacy of the prime minister over other actors vying to influence the agenda, such as rank-and-file LDP politicians and individual ministries, who in the past had been successful in undermining reforms related to the FILP system. Prior to the reform legislation, the prime minister’s powers were relatively ambiguous, and the cabinet’s primary function had been to coordinate between the policies of specific ministries and agencies. The Hashimoto reforms clarified the role of the prime minister as the head of the cabinet and specified his right to submit proposals to the cabinet. The prime minister was also given more flexibility to appoint special advisors, increase the number of his secretaries, and to appoint ministers without portfolio to handle special issues. Additionally, a strengthened Cabinet Secretariat, which provides support to the prime minister, was vested with clear rights to carry out “planning and drafting” functions, measures that were intended to allow for more centralized policy making.5 The reforms

222  The Limits of FILP

also allowed for the creation of special councils within the Cabinet Office empowered to plan and draft policy. The best-known council and one most relevant to the FILP reforms is the former Council for Economic and Fiscal Policy (CEFP),6 entrusted with setting the government’s overall economic and fiscal policy. During his administration, Koizumi headed the CEFP, which included all of the key ministers related to economic policy and several outside private members.7 The second critical factor was Koizumi’s political leadership. Although a strengthened office gave Koizumi the potential for more autonomy and independence in policy making, first, he had to exercise it, and, second, he still had to confront opponents in his own party. His predecessor, the shortlived Prime Minister Mori Yoshihirō, had also benefited from Hashimoto’s reforms, but Mori did little to utilize the new opportunities they provided. Koizumi deftly exploited the reforms to assert his right as prime minister in setting policy. Still, Koizumi confronted powerful opposition at nearly every step of the way—opposition that had the potential to scuttle his reform plans—but Koizumi waged war with opponents in his own party to pursue his reform agenda. He broke with LDP tradition, asserted the primacy of the prime minister, and eventually took actions that split his own political party. It was this willingness to transform his own party embodied in his campaign slogan, “change the LDP, change Japan,” that allowed him to push through reform. The sections that follow show how these two factors—new institutional structures and Koizumi’s leadership—drove reform in two areas, privatization of postal savings and reform of the FILP agencies. postal privatization

The issue of what to do with the postal savings and postal insurance system was wrapped up with the issue of reforming the entire postal system. Hashimoto’s Administrative Reform Council (ARC) had proposed breaking up the postal system by privatizing both postal savings and postal insurance, as well as reorganizing the mail delivery service. As described in the last chapter, the bureaucrats from the former Ministry of Posts and Telecommunications (MPT)8 and affiliated members of the LDP postal lobby (yūsei zoku) opposed all of the proposed reforms and managed to defeat proposals that would break up the postal system. The Hashimoto’s administration one minor victory was passing legislation that mandated

The Koizumi Reforms and the Legacy of FILP  223

the reorganization of the postal system into a public corporation by 2003. In contrast, Koizumi succeeded both in splitting up the postal system and passing legislation to privatize it. Koizumi entered office with a deep commitment to privatizing the postal system. Koizumi advocated postal reform during his tenure as minister of posts and telecommunications (1992 to 1993), and, as mentioned earlier, he wrote a book on the subject—Privatization of the Post Office: The Key Reform to Revitalize Japan.9 On coming to office, Koizumi announced his intention to privatize the postal system and quickly formed a study group to investigate the issue. This group, like ARC, was merely an advisory body and ultimately played a peripheral role in the political process of reforming the postal system. In response to these early exploratory moves, the postal lobby mobilized opposition. In the House of Councilors, over half of the members initiated a cross-partisan movement to oppose Koizumi’s postal privatization proposal.10 Within the LDP, many of the key executives and other heavyweights publicly went on the record as opposing reform or calling for the government to proceed slowly. LDP Diet members also launched separate study groups and panels intended to forestall postal privatization. A confrontation between Koizumi and his party quickly ensued over a bill that the government had to pass to reorganize the postal system by 2003, which Hashimoto’s framework administrative reform law from 1998 had mandated. Koizumi wanted to use the opportunity to allow competition in mail delivery and publicly commented that his government’s reform package was the first step toward privatization. This comment, along with the prospect of competition that might weaken the postal office’s monopoly over mail delivery, ignited powerful opposition. Koizumi, rather than backing down, threatened to dissolve the Diet and call for elections to win a mandate for reform if his own party watered down his reform bill, a threat that he would repeat when faced with opposition over other reforms and that he would follow through with in 2005. Under intense pressure from Koizumi, the LDP General Council agreed to support the submission of the government’s reform bill, although without backing its specific contents.11 After submission to the Diet, Koizumi once again threatened to dissolve the Diet if his bill were altered. Eventually Koizumi’s high-stakes confrontation succeeded, and the bills were passed in July 2002. This episode, however, was merely a skirmish leading up to the actual political battle over privatization.

224  The Limits of FILP

Recognizing the opposition he would encounter in trying to privatize the postal system, Koizumi went on the political offensive. In the leadup to the contest for the presidency of the LDP, Koizumi’s campaign for reelection centered on a new public promise to privatize all postal services by 2007. He vowed to stand up to opposition within his own party. In a portent of the coming battle, Nonaka Hiromu, a former secretary general of the LDP, commented, “There is no way such a bill [to privatize postal services] will pass the Diet.”12 Aoki Mikio, another LDP heavyweight, resolved, “We will do whatever we can to block such a bill.”13 Koizumi intensified the pressure on his own party by pushing to add postal privatization to the party’s campaign platform, or “manifesto” as it is called in Japan, for Lower House elections at the end of 2003. Opponents managed to weaken the pledge to a statement committing the LDP only to considering the possibility of privatization, but Koizumi seized on the manifesto to hold his party accountable, declaring, “The postal privatization has become a pledge of the party. It’s not [just] Koizumi’s opinion any more.”14 While Koizumi attempted to build up political momentum for postal privatization, in 2003 he delegated responsibility for setting postal privatization policy to the Council on Economic and Fiscal Policy (CEFP). In contrast to Hashimoto’s Administrative Reform Council (ARC), the CEFP was not merely an advisory group but the government’s central vehicle housed within the Cabinet Office for setting economic policy. The CEFP, headed by Koizumi, included members from the key ministers related to economic policy and several nongovernmental members. The CEFP thus conferred legitimacy on the direction of the policy it articulated and served as a means for Koizumi to bypass the LDP’s traditional policy-making process.15 Prior to Koizumi, the LDP and its various policy subcommittees reviewed government proposals before voting on a cabinet resolution. An informal LDP rule of reaching consensus before approving proposals also provided potential opponents, such as zoku Diet members, an effective means of vetoing reform proposals. Koizumi, however, bypassed this process. He ordered the CEFP to draft a policy proposal and, with the CEFP’s recommendations, submitted a proposal, which called for breaking up and privatizing the post office, for a cabinet resolution vote without prior consultation with the LDP. By bypassing LDP channels, Koizumi in effect asserted his right as prime minister and head of the cabinet over that of his party. Without the CEFP, such a move would have been far more difficult

The Koizumi Reforms and the Legacy of FILP  225

for Koizumi. Hashimoto, in contrast, relied on the Administrative Reform Council (ARC), but this body was merely advisory and conferred no legal authority, which made its proposals more vulnerable to opposition. By presenting the CEFP’s basic policy on postal privatization to the cabinet for a vote, Koizumi could also focus greater pressure on his cabinet members. The process of prior consultation essentially made cabinet decisions a rubber stamp because the political process of negotiation took place within the LDP beforehand. This process lacked transparency and shielded it from public scrutiny. By presenting the CEFP policy recommendations directly to the cabinet, not only were the cabinet minister’s actions brought into the open, but Koizumi could also put direct pressure on them. Koizumi, as with all prime ministers in Japan, not only appointed his cabinet members, but he could also remove them through a cabinet reshuffle. In fact, prior to the cabinet’s decision, Koizumi announced that he would reshuffle his cabinet, making it clear that only those who supported postal privatization would retain their jobs. In the end, despite intense opposition within the LDP, his cabinet did pass a resolution backing the CEFP’s policy framework. In the same month Koizumi followed through with his promise to reshuffle the cabinet to prepare for the coming battle: drafting a bill based on the CEFP policy framework and then passing it. To better control the process of drafting legislation, Koizumi also established a special office within the Cabinet Office in April 2004: Office for the Preparation of Postal Privatization. Although this office allowed him temporarily to insulate the process of drafting legislation from external interference, Koizumi still needed to win support from his own party members to pass the legislation in the Diet. Having a draft of his postal privatization bill in hand provided Koizumi with additional leverage. Koizumi threatened to submit the six bills related to postal privatization despite opposition and then to sanction his own party members if they opposed the bills. Koizumi also held out the possibility that he would dissolve the Lower House and call elections to win a mandate for reform if opponents killed his bill. While applying strong pressure tactics, Koizumi did compromise with the opponents in his party. The government draft bills would break up Japan Post, the public corporation created as part of the earlier Hashimoto reform. A holding company would be created along with four new entities for each of the postal services: the network of post offices, mail delivery, postal savings, and postal insurance. The newly spun-off postal savings and postal insurance

226  The Limits of FILP

businesses would then be fully privatized by 2017. To partially accommodate opposition, Koizumi made several concessions. While the holding company would be required to sell its shares of the postal savings and postal insurance operations, cross-holdings of shares between the new entities would be allowed. The government also agreed to create a one trillion yen fund (about 100 billion dollars) to subsidize the operation of the postal financial services (for example, postal savings and insurance) in rural regions; it also agreed not to prevent these financial services from being offered through the post office beyond 2017. Additionally, the government guaranteed that workers even in the privatized entity would retain publiclike status. Despite these compromises, there was still strong opposition in the party to the postal privatization bills, but the LDP leadership finally agreed to support the bills’ submission to the Diet. The LDP leadership, however, left open the possibility of amendment in the Diet. Some LDP backbenchers vowed that amendments would be made in the Diet, while others threatened to vote against the bill. After submission to the Diet, the LDP did in fact propose additional amendments, which Koizumi accepted. The holding company would be permitted to buy back shares of the postal financial operations after privatization and the amount of funds for subsidizing services in rural areas was doubled from one trillion to two trillion yen (approximately ten to twenty billion dollars). Even with these amendments, a number of LDP members defected during the vote on the bills, and the bill barely managed to pass the House of Representatives vote. In the House of Councilors, Japan’s upper house, where the ruling coalition held a smaller majority, several LDP members voted against the bill, and several others abstained. With the largest opposition party, the Democratic Party of Japan (DPJ), voting against the privatization bills, they failed to pass. After opposition in the House of Councilors killed Koizumi’s package of postal privatization bills, Koizumi resorted to a drastic measure to confront opponents in his own party: dissolving the Lower House and calling for elections. Immediately after the postal privatization was voted down, Koizumi finally carried through on a threat that had been his nuclear option, one that he had brandished not only over postal privatization but also over reform of the special corporations. Koizumi dissolved the Lower House (the prime minister cannot dissolve the Upper House) and called for elections in the hopes that a victory would provide him a mandate for reform and isolate his opponents, particularly those from his own party.

The Koizumi Reforms and the Legacy of FILP  227

In the lead-up to the election, Koizumi did everything possible to make the Lower House election a single issue: a referendum on postal privatization. While the largest opposition party, the Democrats (DPJ), tried to broaden the scope of the debate to include other domestic issues, Koizumi presented voters a clear choice: reform or not. In doing so, he enhanced his reputation as reformer, which appealed to the large number of unaligned and urban voters, and distinguished himself from his political opponents. The Democrats had opportunistically voted against the bills in the Upper House, hoping that Koizumi would then follow through with his threat to dissolve the Diet, which would give them a chance to win control of it. Koizumi lambasted the Democrats for their vote and depicted the opposition party as incapable of delivering critical reform. More to the point, Koizumi expelled those members of his own party who had voted against the bill, forcing thirty-three former LDP members to run as independents or join one of several new parties formed after the rebels were expelled. He then handpicked candidates, many of them first-time ones, and several wellknown celebrities to run against them. The media dubbed these candidates as “assassins.” These actions powerfully reinforced his image as a leader not afraid to take on self-serving interests. Koizumi’s gamble paid off tremendously. The LDP gained eighty-three seats, winning 296 out of 480 seats, making it the largest margin of victory in forty years. Even more importantly, Koizumi demonstrated that the LDP could transform its support base away from rural regions and economically stagnant sectors. The LDP did well among independent voters and in urban areas. The LDP won twenty-four of twenty-five seats in Tōkyō, and overall, the LDP won seventy-two seats in urban areas, up from merely thirty-three from the previous election just two years earlier.16 With a clear mandate for reform, the postal privatization bills were resubmitted, and they passed easily in October of 2005. This episode, one of the most dramatic showdowns between the prime minister and the LDP in Japanese postwar history, amply illustrates how powerful the forces of opposition to postal privatization were. Reforms that enhanced the power of the prime minister and cabinet certainly provided Koizumi with new means of controlling the policy process and exerting pressure on his own party. LDP opposition, however, still blocked postal privatization, just as it had killed the Administrative Reform Council’s (ARC) postal reform proposal during the Hashimoto administration. Only

228  The Limits of FILP

by winning a wider national mandate for his administration and expelling opponents from within his own party could Koizumi overrun the deeply rooted vested interests aligned against reform. In short, privatizing the postal system required nothing short of a partial realignment of the LDP’s support base. Of course, Koizumi himself was partly a product of his party. Koizumi represented the urban and reformist wing of his party. He was elected from a district in a very urban prefecture, Kanagawa, and he tapped into the growing frustration about the LDP’s bias toward rural areas. While Koizumi threatened the old guard within the LDP, the party needed Koizumi, who was widely popular, to serve as prime minister to maintain its tenuous hold on power. Recognizing this, prior to Koizumi’s final and successful bid for becoming party president, the party leadership altered the rules for electing the party president, which paved the way for Koizumi to become prime minister. Responding to pressure from its members, the LDP leadership opened up the vote for the election of the party president. In addition to LDP Diet members, each of the LDP prefectural chapters was given three votes. Electoral changes made in 1994 also increased pressure on the LDP to respond more to wider popular opinion rather than narrower special interests. By shifting the electoral system from a single non-transferable vote (SNTV) to a system that mixed proportional representation (PR) and first-past-thepost, the LDP had to appeal to a broader constituency.17 It would be an overstatement, though, to say that a reformist LDP prime minister like Koizumi was inevitable. A more moderate reformer along the lines of Hashimoto was entirely conceivable. It is also doubtful that another reformist LDP prime minister would have expended all of his or her political capital on privatization of the post office, given that the issue had little to do with Japan’s economic malaise and was not deemed a high priority by the electorate initially. filp agencies

As with postal privatization, Koizumi was able to draw on new institutional structures in pushing for reform of the FILP Agencies. These new structures, which were intended to strengthen the hand of the prime minister and cabinet, helped Koizumi manage the reform process, but again it was Koizumi’s leadership and his willingness to take on opponents from within his own party that played a decisive role in his reform drive.

The Koizumi Reforms and the Legacy of FILP  229

Koizumi began his efforts to reform the special corporations (FILP agencies are a subset of these) with several new institutional structures. In 2000, the Mori administration (LDP) passed a bill that would create a new body within the Cabinet Office specifically for overseeing reform of the special corporations: Headquarters for the Promotion of Reform of Special Corporations (hereafter “Special Corporation Reform Headquarters”). The new body, however, did not first convene until after the start of the Koizumi administration in 2001. During the Koizumi administration, the Special Corporation Reform Headquarters, headed by the prime minister and composed of all the cabinet ministers, oversaw the process of reform, setting the overall direction of policy. Another newly created office under the Cabinet Secretariat—Office for the Promotion of Administrative Reform—handled the drafting of reform proposals. In principle, these new institutional structures were intended to allow for a more top-down approach to policy making. Koizumi and his cabinet could set the direction of reform through the Special Corporation Reform Headquarters, which, in order to mute bureaucratic influence, excluded civil servants. His cabinet ministers could then bring pressure to bear on their ministries to push through reforms likely to be resisted. The Office of Administrative and Regulatory Reform would then hammer out concrete reform proposals. This process represented a significant shift in the government’s approach to reform. During the Murayama and Hashimoto administrations, the political parties in the ruling coalition, not the government, took the lead on reform of the special corporations, as discussed in the previous chapter. As a result, the process was more exposed to political pressure from within the LDP from the outset. Bureaucrats could also make their influence felt through zoku Diet members. The new institutional structures and policy process, though, provided a means of insulating the government from political and bureaucratic interference. Recognizing the threat this insulation posed, one of the executives of the LDP and opponents of reform, Asō Tarō, pushed for taking up special corporation reform within the LDP, specifically the Policy Research Council (PRC).18 The PRC, with its host of policy committees, has been one of the key spots where zoku Diet members have exerted influence; such members have been aided by the informal rule that each reviewing committee reaches consensus on a proposal. Koizumi, however, did not yield control to the party, and his head of the Office of

230  The Limits of FILP

Administrative and Regulatory Reform declared that his office, not PRC, would take the lead on special corporations reform.19 Although the new structures to strengthen the cabinet gave the prime minister a more central role and a temporary means of shielding the process from opposition, Koizumi still had to confront the reality of powerful political and bureaucratic opposition. The Special Corporation Reform Headquarters ordered a thorough review of the operations of the special corporations, and Koizumi specifically requested that reform should proceed on the assumption that the special corporations should all be either abolished or privatized. If a ministry or agency did not believe either was possible, it was obligated to provide a compelling reason. The ministries and agencies, not surprisingly, responded to this request by drafting proposals that largely provided justification for maintaining the special corporations under their jurisdiction.20 For the next phase, the Special Corporation Reform Headquarters and Office of Administrative and Regulatory Reform proactively shaped the reform agenda enumerating which special corporations should be reformed. To block the proposed reforms and to mobilize opposition, zoku Diet members aired their grievances directly through various committees in the LDP. Opposition within the LDP spread widely. The largest faction within the party—the Hashimoto faction—and several of the LDP’s executives also criticized reform proposals.21 Even the LDP’s Headquarters for the Promotion of Administrative Reform, which had led the previous adminsitrations’ reform effort, struck a critical tone.22 Despite such internal opposition, by departing with informal conventions and threatening his own party, Koizumi was able to pass a reform package that included more special corporations than those of his predecessors. In the face of opposition, Koizumi resorted to a number of strong-arm tactics, which until that point had been anathema to the LDP. In the leadup to decision on a reform package that would specify which special corporations to abolish or privatize, Koizumi threatened to form an alliance with opposition parties to pass his reform bills in the Diet if there was excessive opposition from his own party.23 He also threatened to break with LDP tradition by submitting a bill without obtaining prior approval from the party.24 While these measures alienated many of his fellow party members, such actions had the effect of making reform an issue that clearly pitted him against the antireformist elements in his own party, a strategy that played well politically and that he eventually capitalized on when he dissolved the

The Koizumi Reforms and the Legacy of FILP  231

Lower House over postal privatization. Koizumi’s tactics largely worked. In December 2001, his cabinet agreed to a reform package that would abolish seventeen and privatize forty-five of the special corporations, although later opposition did lead to compromises on some of the specific entities. Koizumi’s reform package, however, also clearly illustrated the continuing limitations to reform. Two of the most controversial issues and ones important to Koizumi himself—the restructuring of the four road corporations and the government financial institutions (GFIs)—were both postponed due to political opposition. All of these are FILP agencies and, as discussed in earlier chapters, they also have been critical conduits for mobilizing political support for the LDP. For precisely these reasons, Koizumi aggressively pursued their reform in his bid to realign his party and push through reforms that would liberalize the economy. Initially, Koizumi seemed to have scored an early victory by forging an agreement with his coalition partners to reform four of the road corporations despite opposition from his own party members. Internal LDP opposition, however, succeeded in blocking the reform less than two months later. The issue of reforming the government financial institutions, as discussed in the previous chapter, had eluded previous administrations, and Koizumi, too, faced powerful opposition from the outset that led to continual postponement of reform. The opponents to reform were aided by Japan’s ongoing financial crisis; opponents argued that because banks were refraining from lending because of the poor state of their balance sheets, there was a greater need than ever for lending via the government financial institutions. The government financial institutions and their supporters also began to argue that such lending shielded firms from bankruptcy and served as a social “safety net.” Despite defeat Koizumi did not give up on either issue. To deal with the opposition, Koizumi shifted the formation of policy to different forums. He created a government panel with members whom he appointed to take up the issue of reforming the four road corporations. The Council for Economic and Fiscal Policy (CEFP) within the Cabinet Office took over reform of the government financial institutions. Koizumi’s administration did eventually agree on reform of the road corporations and the government financial institutions, but the varying outcomes show the consequences of Koizumi’s political risk taking. Koizumi’s road reform had to include major concessions to the opposition and followed a familiar reform pattern. The government’s road corporation panel

232  The Limits of FILP

included many outspoken advocates of aggressive reform, but the recommendations it made were strongly opposed by many within the LDP. As political pressure mounted, the government road panel, which had been intended to formulate concrete policy, not just to propose recommendations, became increasingly irrelevant to the process of deciding policy as Koizumi was forced to confront opponents within his party. Two of the seven members of the panel, dubbed the “seven samurai,” even resigned in protest. As the scene of the political battle shifted away from the panel, the showdown between Koizumi and his party intensified, and the issue of road corporation reform became one of the most heated domestic political issues. Koizumi even publicly entertained the idea of calling snap elections as a referendum on his reform agenda at the end of 2003, as he would later do in 2005 over postal privatization. In this case, however, Koizumi backed down, and the end result was a reform package that contained numerous concessions to the opponents of reform. Road reform fell far short of Koizumi’s goals. The reform called for merging the operations of all four of the road-related corporations, splitting the entity into six regional bodies that would be privatized. These companies would lease the roads from an independent administrative organization that would be responsible for paying back the tremendous debt that the road corporations had collected. The companies would make payments to the leasing company from the tolls they collected. The reform, however, did not address one of the main objectives of reform: limiting the construction of unneeded and politically motivated roads. Soon after becoming prime minister, Koizumi announced a review of all new road construction and proposed freezing all projects underway, but he was forced to retreat after opponents mobilized against him. The final reform proposal amply allowed for new road construction. One member of the LDP tied to the road lobby acknowledged his approval, commenting that “this plan is perfectly all right,” after the government agreed to 2,100 kilometers of new highway construction.25 The final plan allowed for 2,300 kilometers of new highway construction. Originally, the government panel had recommended slowing down new construction and using toll revenues for debt repayment. The final plan, however, created openings for new construction. First, it offered government guarantees for bond issues, thus providing the entities with a new source of funds for new highway construction. Second, it left the decision over debt repayment up to the leasing organization. If the leasing

The Koizumi Reforms and the Legacy of FILP  233

organization stipulated slower repayment, that would free up funds for the construction of new roads by the new road entities. Moreover, because the government would own a minimum of one-third of the shares of the leasing company, it would be open to political influence. Although a target of forty-five years was set for the leasing organization to collect enough funds to retire all of the debt, this target was not binding. In the case of the government financial institutions, Koizumi was better able to deal with his opponents. As already mentioned, the CEFP took over the reform of government financial institutions, but this had little effect. Initially there was even less progress made than with the road corporations. The reform effort ground to a halt due to opposition at the end of 2002, and the government agreed to postpone a decision yet again, this time until 2005. Reform would likely have been defeated or postponed once again, but Koizumi’s political gambit over postal privatization finally gave him enough momentum to push through reform. Soon after his landslide political victory, Koizumi announced his intention to reduce the number of government financial institutions from eight to one. The CEFP reopened the issue of the government financial institutions less than a month after the Lower House elections. With a clear mandate to deliver reform and his party purged of the most obstreperous opponents, Koizumi was finally able to pass a final administrative reform package in May 2006 that clearly set out numerical targets for the reform of the government financial institutions. The bill, as Koizumi wanted, reduced the number of government financial institutions to one. It called for merging five of the government financial institutions, privatizing two and abolishing one (see Table 8.1). The bill marked a fitting end for Koizumi, as his administration chose reform of the special corporations as one of its first major political battles. After the departure of Koizumi, the reforms were partly implemented as specified in his reform bill. The government passed legislation in May 2007 to create the Japan Finance Corporation (JFC), which launched operations in October 2008 merging four of the government financial institutions, with plans to integrate a fifth, the Okinawa Development Finance Corporation, by fiscal year 2012. There were, however, two exceptions or loopholes to the Koizumi reforms. First, the government halted the privatization of the Development Bank of Japan and Shokochukin Bank with the onset of the global recession in the fall of 2008. The government argued that both were vital to responding to the recession. Second, the Japan

234  The Limits of FILP table 8.1 Reform of the Government Financial Institutions Government Financial Institution

Reform

National Life Finance Corporation Japan Finance Corporation for Small Business Agriculture, Forestry and Fisheries Finance Corporation Okinawa Development Finance Corporation Japan Bank for International Corporation Development Bank of Japan

merge merge merge merge merge privatize

Shokochukin Bank Japan Finance Corporation for Municipal Enterprises

privatize abolish

Finance Corporation for Municipal Enterprises was not truly abolished, but rather its operations were transferred to a new organization, the Japan Finance Organization for Municipalities (JFM), which is owned by local governments and continues to receive FILP funds.

Assessing the Legacy of FILP For all of Koizumi’s and his predecessor’s reforms, FILP still has a lasting legacy. FILP, as a system for mobilizing and then channeling financial resources, endures, as do the constituent parts that have been broken off from the system—postal savings system and pension reserves. The legacy of FILP is deeply ridden with contradictions. The government first created FILP as a means to supplement a fiscal policy based on budget restraint. Doing so not only helped the government limit budget spending, it ameliorated divisions within the conservative camp, which coalesced around three otherwise conflicting goals through the 1960s: budget restraint, industrialization, and liberal compensation to political supporters. In the end, however, FILP actually undermined budget restraint and proved to be divisive to the ruling coalition. the fiscal legacy

The Japanese government established and then used FILP as a means to avoid budget deficits, but ultimately FILP has left behind significant debt, much of which will need to be covered using taxpayer money. It is impos-

The Koizumi Reforms and the Legacy of FILP  235

sible to know the exact extent of the debt, but the evidence that exists suggests that it is substantial. Two Japanese economists have estimated that nearly 75 percent of all FILP loans could be bad, losses in the range of 15 percent of GDP.26 This estimate is likely to be on the high side, however, because it classifies some of the lending to local governments as bad. Although local governments are unlikely to default, resolving this problem will require increasing tax revenues. Anecdotal evidence also supports the view that FILP has produced a large financial burden. For instance, during the late 1980s, the government began to clear up the mountain of debt from FILP lending to Japan Railways (JR) as part of the privatization of the national railroad company. The debt totaled 25.6 trillion yen (approximately 25.6 billion dollars), a sum that was about half the size of the entire 1987 budget.27 To pay off the debt, the government issued special government bonds, which are still being paid off; as of the 2007 budget, 19 trillion yen (about 190 billion dollars) remained in debt. The Honshu-Shikoku Bridge Authority, a FILP agency that manages a bridge connecting two of Japan’s main islands (Honshu and Shikoku), also accumulated debt that was covered by the budget. The revenue generated from tolls turned out to be far lower than expected and therefore proved inadequate for covering the costs of the bridge. To clear the debt, the government committed 1.47 trillion yen (approximately 14.7 billion dollars) from the budget to be paid over five years, beginning in 2003. Other similar examples abound, including the Kansai International Airport, which in addition to failing to produce the projected revenue also suffers from design problems, causing it to sink gradually into the ocean. Significant debt also resides in the government financial institutions and special accounts. The government financial institutions that provide SME financing likely have a significant share of bad loans because the LDP has often pressured these FILP agencies to provide lending in spite of the financial risks. The government has also used the FILP system to lend money to itself via a variety of special accounts. According to one former official, much of the lending to the special accounts is an accounting trick that hides what is in effect government debt.28 Some of the newly merged and privatized public corporations that were once part of FILP also inherited significant debt. The leasing company for the newly privatized road corporation, for instance, took over 40 trillion yen in debt (about 400 billion dollars) to be paid over forty-five years (although

236  The Limits of FILP

this time period may be extended). In the case of the new road corporation, much of this debt is recoverable if it continues to levy tolls. While levying tolls was not particularly controversial a generation ago, the high tolls of many of the most heavily traveled routes, which subsidized construction of other highways, and the reports of wasteful and corrupt spending on road construction have created strong public opposition. The DPJ capitalized on this anger by promising to eliminate the tolls in the lead up to their electoral landside in August 2009. While scoring a political victory, however, eliminating tolls will transfer the burden of debt repayment back to the budget, and it will also shift the burden of financing new construction onto the budget. The DPJ, confronting this reality, backed partly away from its promise, and the issue has become a major fault line within the party between Minister of Land, Infrastructure, and Transportation (MLIT) Maehara Seiji and party boss Ozawa Ichirō. Although the government deployed FILP to keep budgets balanced through the mid-1960s, over the long term FILP also contributed indirectly to the loss of fiscal discipline. The tolerance for growing budget deficits originated with the political leadership. As the ruling LDP responded to growing pressure from its opposition, it abandoned its commitment to balanced budgets, and annual budget deficits evolved into a recurring aspect of the government’s fiscal policy. The FILP system lowered the cost of the government’s declining fiscal discipline, thereby indirectly exacerbating the problem.29 The government tapped the Trust Fund Bureau Fund (TFBF) and the self-managed postal savings funds to absorb a large volume of Japanese government bonds (JGBs), keeping interest rates down by augmenting demand. Without these public funds, the government’s absorption of large bond issues would have posed more of a challenge. Similarly, public funds helped finance growing local government debt. By using the TFBF and FILP Plan to finance the debt that it passed onto the local governments, the government eased the political backlash from them, sustaining the increasingly fragile fiscal finances of many local governments. In yet another ironic twist, some FILP agencies have become a drain on the budget. The FILP Plan itself does not rely on transfers from the budget. Prior to the 2001 reform, the FILP Plan used funds from the entrance (for example, postal savings and pensions reserves), and currently FILP funds are raised through the issuance of FILP bonds and FILP agency bonds. Several FILP agencies, however, receive direct transfers from the budget

The Koizumi Reforms and the Legacy of FILP  237 table 8.2 Budget Transfers to the Government Financial Institutions, 2006 Government Financial Institution National Life Finance Corporation Housing Loan Corporation Agriculture, Forestry, and Fisheries Finance Corporation Japan Finance Corporation for Small Business Japan Finance Corporation for Municipal Enterprise Okinawa Finance Development Corporation Development Bank of Japan Japan Bank for International Corporation TOTAL

Transfer from Budget (Yen, 000s) 5,283,275 331,000,000 41,928,000 7,753,445 — 4,650,010 30,000,000 34,650,010 455,264,740

Source: MOF.

outside of the framework of the FILP Plan. As discussed previously, these transfers increased as the built-in interest subsidy provided by cheap FILP funds declined. In the case of SME lending, for instance, the government increased budget transfers so that the FILP agencies could provide belowmarket lending. Thus, while the FILP agencies were established over the early postwar period as a means of limiting budget spending, some have become a significant burden on the budget. Table 8.2 illustrates the transfer of budget funds to the government financial institutions, which were 455 billion yen in 2006 (about 4.5 billion dollars at 100 yen to the dollar) even after the steep cutbacks from the Koizumi years. These figures provide only a partial picture of the true cost of support for the government financial institutions (GFIs) because the government also incurs large opportunity costs. The GFIs do not pay corporate taxes, and the government provides interest-free capital and loans from the budget. One economist estimates that the true cost between 1995 and 2004 was about one trillion yen per year.30 Even these higher estimates, though, only capture a part of the cost of the FILP agencies; they cover only the GFIs, not all of the FILP agencies. the political legacy

FILP has left two main political legacies. First, FILP ironically has complicated the politics of fiscal discipline and fiscal reconstruction. Although

238  The Limits of FILP

FILP initially helped the Japanese government avoid difficult fiscal choices by serving as a supplement to the budget, the long-term exploitation of FILP has now narrowed the government’s room for maneuver. As previously discussed, FILP has exacerbated the fiscal choices the government faces by leaving behind bad loans, unresolved deferred debt problems, and a system, specifically the FILP agencies, that draws on limited budgetary resources. By creating a large user base accustomed to subsidies and preferential treatment, the FILP system also contributed to the rise of powerful vested interests that have and will continue to oppose expenditure cuts. Pork-barrel spending has given rise to pork-barrel politics. With large and powerful constituencies reliant on government largess—such as SMEs, rural regions, construction firms, and so forth—the political task of trimming spending will be difficult, regardless of which party is in power, a reality that is already confronting the new DPJ government. The perception of wasteful pork-barrel spending also has made it more difficult to justify increasing revenue through higher taxes. This problem has plagued the government, which has largely avoided the issue because of its political sensitivity. Both the LDP and DPJ have recognized this problem and attempted to resolve it by proposing that revenue from tax hikes be earmarked for social security spending, thus ensuring that it will not be diverted to wasteful pork-barrel spending. Such proposals, however, have not overcome the opposition to tax increases. FILP reform has partly rationalized the system. The abolition in 2001 of the yotaku system ends the mechanism that drove the automatic accumulation of funds into FILP via the former entrance institutions. Its replacement with FILP bonds and FILP agency bonds, in principle, should limit fund raising to what is deemed necessary for the FILP Plan. Although postal savings funds still flow into FILP, through the purchase of bonds, the privatization of postal savings, if it is ever completed, could weaken the link with FILP. Moreover, the reforms requiring better reporting of financial information, particularly for the FILP agencies, open the system to greater scrutiny. The new accounting requirements, for instance, make the level of subsidy provided by the budget more explicit, thus clarifying the relationship between budget and FILP. This reform can reduce the shortterm benefit of pushing spending from the budget onto FILP because budget subsidies will now need to be made more explicit. Still, there will be temptation to continue to rely on FILP. FILP continues to lie at the nexus of Japan’s weak extractive capacity, large budget

The Koizumi Reforms and the Legacy of FILP  239

deficits, and growing public expenditures. The challenge for all political parties will be to forge a coalition that can balance the need to fix Japan’s finances with the demands for public funds. This is and will continue to be one of the defining constraints on future governments. It is also a dilemma that will likely lead to greater political instability, as shifting political coalitions attempt to grapple with it. To the extent that the government does not rely on the FILP as it has in the past, the government will be forced to confront even harder political trade-offs over its fiscal choices. But given the political challenge of budget spending cuts and increasing taxes, the government may not be able to resist turning to FILP. While FILP reform partly rationalized the system, it did not address the more fundamental question of how FILP was managed and the appropriate size of FILP, thus leaving future administrations discretion in how they choose to use FILP. As discussed further in the following pages, the government can increase the size of FILP, as the DPJ did, and FILP agency loans and investments are still subject to political pressure. For a while, it appeared that the government was committed to reducing its reliance on FILP. Koizumi shrank the FILP Plan sharply, as mentioned earlier. While less focused on reform, prime ministers Abe Shinzō and Fukuda Yasuo continued to reduce the size of the FILP Plan (look again at Figure 8.1). One needs, though, to exercise some degree of caution in interpreting these figures because a very large share was a reduction in housing, which reflected the promotion of private housing finance as well as the recovery of the private banking sector. Moreover, the funds that FILP agencies raise through the issuance of FILP agency bonds are not included in the FILP Plan. Koizumi, however, unleashed a backlash. Not only did his postal reform fragment the party, Koizumi’s expenditure cuts and other “structural” reforms created a powerful political response. Seven years of Koizumi’s policies, many of which were popular in urban areas and among big business, had gradually eroded the LDP’s bases of support. His landslide victory in the House of Representatives was followed by growing dissatisfaction among many of the LDP’s traditional supporters, severe losses in subsequent elections, and a turn away from Koizumi’s policies within the LDP. Prime Minister Abe Shinzō symbolized the beginning of the turn away from Koizumi. After coming to office, Prime Minister Abe invited the Diet members whom Koizumi had expelled back into the party. As the criticism of Koizumi’s

240  The Limits of FILP

neoliberal policies increased and the LDP suffered large seat losses in Upper House elections, the LDP moved even further away from the Koizumi agenda. With the onset of the Great Recession, the Asō administration abandoned fiscal restraint, passing three stimulus packages, which as before relied heavily on FILP, between October 2008 and April 2009. Initial FILP allocations for fiscal year 2009 increased 14.4 percent over the previous year, and at midyear the government increased allocations even further. While many factors were at play, including numerous missteps by the Abe, Fukuda, and the Asō administrations, the DPJ was able to seize political momentum by promising greater public support for many of the LDP’s traditional supporters, including farmers, rural regions, and SMEs. The DPJ also tapped into the growing popular dissatisfaction with pork-barrel construction spending and the fees, such as highway tolls, that helped finance Japan’s construction state. The DPJ gained a large number of seats in the 2007 House of Councilors election, reducing the LDP to a minority party in the upper chamber. Then, in August 2009, the DPJ rode to power by winning a landslide victory in the House of Representatives. After the DPJ’s historic victory, there was a breakdown in the LDP’s consensus over fiscal policy as members bolted from the party, creating a new fluidity in Japan’s party system. Just after Prime Minister Asō dissolved the Lower House, Watanabe Yoshimi and several other LDP members left the party to form a new party, Your Party (minna no tō), with members of a small opposition group, the Kaikaku Club. Your Party advocated slashing the number civil servants by nearly one-third, reducing the number of Diet members, and lowering taxes (corporate tax reduction and no increase of the consumption tax). Your Party recruited candidates from the corporate sector. It succeeded in attracting business support and scored a minor victory in the Upper House election in July 2010, winning ten out of 121 seats. Another splinter party, Sunrise Party (tachiagare nippon), was formed by five former senior LDP Diet members, an independent, and the governor of Japan, Ishihara Shintarō. The Sunrise Party advocated increasing the consumption tax by 3 percent and then gradually increasing it by 4 to 7 percent. The tax hike would be offset partially by a reduction in income tax, and corporate taxes would also be lowered. Masuzoe Yōichi, a former LDP cabinet minister and popular politician that some considered a candidate to be prime minister, also left the LDP to form a new party, the New Renaissance Party (shintō kaikaku). In the run-up to the Upper House elec-

The Koizumi Reforms and the Legacy of FILP  241

tions, the New Renaissance Party’s platform called for lowering corporate taxes but doubling the consumption tax to 10 percent by 2020. Neither the Sunrise party nor the New Renaissance Party did well in the Upper House election, and their future is uncertain. With Tanigaki Sadakazu as president, the LDP embraced a position of fiscal responsibility, departing from the LDP’s old formula of fiscal reconstruction without a tax hike. The LDP advocated raising the consumption tax from 5 to 10 percent and lowering the corporate tax rate while reducing exemptions. The DPJ has faced the same fiscal dilemma of how to balance spending, taxes, and the need for fiscal reconstruction. The first administration, under Prime Minister Hatoyama Yukio, came to power on a platform based on a fiscal impossibility: higher welfare spending, a commitment to fiscal consolidation, and a promise by Hatoyama that he would not raise the consumption tax for four years. The DPJ confronted a particularly difficult environment since it came to power in the midst of the global financial crisis that began in 2008. To enhance the country’s welfare system, the Hatoyama administration created a monthly childcare allowance of 13,000 yen per child and promised to double the allowance for the 2011 fiscal year. The new program was expected to cost over two trillion dollars in the first year. The new government also promised to provide support for many of the traditional constituencies of the LDP, such as farmers and SMEs. At the same time, the government also promised various cuts in revenue, including tax cuts for SMEs, and an elimination of a provisional gasoline tax (which had in practice been permanent), which would reduce revenue by 200 billion yen for the coming fiscal year. The Hatoyama administration, responding to the backlash against FILP-financed road construction, also campaigned on the elimination of road tolls, which if fully implemented would have reduced revenue by 100 billion yen for fiscal year 2010. The Hatoyama administration planned to finance these initiatives without raising other taxes. Instead, the government attempted to free up revenue by reducing wasteful spending. To this end, the government created the Government Revitalization Unit (GRU) to vet public projects and eliminate unnecessary ones or trim their budgets. The government also poured over the maze of Japan’s special accounts to uncover state assets “buried treasures” that could produce revenue for the government. The fiscal limitations of the Hatoyama administration’s strategy quickly became apparent.

242  The Limits of FILP

Many prefectures and local lobbies protested the GRU’s cuts, the hidden revenues have proven to be relatively modest, and the GRU’s project review, while initially very popular, did not free up significant budgetary funds. Since then, the DPJ has taken a more practical approach. Facing very low public support, Hatoyama stepped down prior to Upper House elections in July 2010. Kan Naoto, who replaced Hatoyama, began to accelerate the reorientation of the party’s policies away from the large spending commitments that the DPJ had promised in 2009. Notably, Prime Minister Kan indicated that the government might not raise the monthly child allowance from 13,000 to 26,000 yen per child as Hatoyama had promised. The DPJ also backtracked on its promise to make highways free, instead starting a pilot project. Most dramatically, in the run-up to the Upper House elections in 2010, Prime Minister Kan announced, somewhat suddenly, that he would raise the consumption tax, intimating that it might even be doubled from 5 to 10 percent. To some extent, this reflected a response to the LDP, which, as mentioned earlier, proposed doubling the consumption tax, but Kan embraced the goal of fiscal consolidation, a position that evolved during his brief stint as minister of finance. His attempt to seize the high ground in dealing with Japan’s budget deficits and public debt was met with a sound defeat in the Upper House election. Despite the media reports, the results of the Upper House election were not solely a referendum on Kan’s stance on taxes, but, given the widespread perception that it was, momentum for increasing taxes slowed considerably. After the election, a power struggle ensued as the kingmaker, Ozawa Ichirō, contested the leadership election for the president of the DPJ in September 2010. Ozawa Ichirō had been highly critical of Kan’s proposal to increase taxes. Kan advocated not raising the consumption tax at all, large income tax reduction, and increasing public spending to stimulate the economy. Kan managed to stave off Ozawa’s bid, primarily with support from rank-and-file party members and local assembly members, but the contest also revealed that Ozawa still had strong support from DPJ Diet members, although his indictment in a political financing scandal is likely to reduce his influence in the party. Given the constraints and problems that have confronted the DPJ, it is not surprising that the DPJ continued to rely on FILP. In drafting its first full FILP Plan for 2010, the DPJ increased FILP allocations, and the party has also indicated that FILP will be an important component in pursuing

The Koizumi Reforms and the Legacy of FILP  243

its economic growth strategy. While the DPJ has been much more transparent in terms of its budget policy—providing better public data, taking a fuller and more realistic approach to the budget, taking the scalpel to Japan’s byzantine special accounts, and so forth—it is less clear that the DPJ has operated FILP with sounder financial management than the LDP did. By way of example, as Japan Airlines (JAL) headed toward bankruptcy, the government ordered a FILP agency, the Development Bank of Japan (DBJ), to extend loans to the airline. The move not only underscores the lack of independence of the FILP agencies but also suggests that they may continue to make politically motivated and poor financial decisions. In this case, using FILP allowed the government to keep costs off budget, but in reality the costs have been passed on to the DBJ, which saw spike in its bad loans as a result of lending to JAL, and the issue of recovering the loans has not been fully settled.31 This is precisely the kind of moral hazard that created problems in the first place. The second political legacy of FILP is the unresolved issue of FILP reform. The decade of reforms is far from the final chapter. Reforms have actually multiplied the number of political issues to resolve for the state, which has not truly ceded control over its financial resources. On the contrary, FILP reform expanded the state’s role in finance by creating a new source of revenue for FILP—FILP bonds and FILP agency bonds. Moreover, the former sources of FILP funds, the pension and postal savings system, still remain under effective state control. Given the state’s indebtedness and need to absorb future debt issues, the state has a powerful motivation to avoid ceding full control over these resources. Postal privatization might seemingly limit state influence over the management of public funds, but the implementation period is very long and will not be completed until 2017, presenting ample time for its opponents to regroup and to water the reforms down. The DPJ made reviewing privatization a part of its policy platform, and, to build a majority in the House of Councilors, the DPJ aligned with parties that had splintered with the LDP over the postal privatization issue. Prime Minister Yukio Hatoyama of the DPJ even appointed the head of one of these parties, Kamei Shizuka of the People’s New Party, to the post of state minister in charge of postal services and financial affairs. The DPJ and Kamei vowed to freeze the privatization process, but the government was not able to push through a bill that would do so prior to the Upper House election in July 2010. As a result, minister

244  The Limits of FILP

Kamei resigned in protest. With the election, the DPJ lost seats in the Upper House and thus needed the support of other coalition partners more than even before. The People’s New Party retained control of the minister of postal reform with the appointment of one of their party members. At the time of this writing, the Kan administration was preparing legislation that would not only freeze postal privatization but also increase the ceiling on postal savings deposits, which would increase the flow of funds into the system. At the moment, the government still holds 100 percent of the shares of the holding company controlling the postal services, including postal insurance and postal savings. One of the key issues is how much pressure, if any, the government will be able to put on the postal savings and postal institutions. In the past, the government has been able to influence investment decisions of funds that were supposed to be managed independently. During the 1990s, for instance, it used postal savings to make purchases of bank stocks to prop up their stock prices to avoid a financial crisis. Given the country’s large deficits, staggering public debt, and seeming inability to raise taxes, using postal funds surely will be a temptation. The government has also maintained control and discretion over how to invest pension reserves. The FILP reform that became effective in 2001 freed the pension reserves from the FILP system. The same year the government established a new public entity to oversee the investment of the pension reserves, the Government Pension Investment Fund (GPIF).32 The law establishing the GPIF gave the government significant control over it, for instance, by allowing the minister of health, labor, and welfare the right to appoint the chairman and remove executives. In 2006, as part of the government’s special corporation reform, the GPIF was reorganized as an Independent Administrative Agency (dokuritsu gyōsei hōjin). Even as an “independent” entity, the government retains channels for exercising influence over GPIF. The minister of health, labor, and welfare sets midrange goals and appoints the members of the Investment Advisory Committee. Underscoring the lack of true independence, the government’s current statement of its management objectives includes a provision that allows the minister of health, labor, and welfare to instruct the GPIF to purchase FILP bonds, effectively allowing funds from the pension reserves to continue to flow into the FILP system. The establishment law also provides that in situations the minister deems necessary; he or she can make direct requests to the GPIF. Furthermore, the law also allows MOF input, stipulating that the minister

The Koizumi Reforms and the Legacy of FILP  245

of health, labor, and welfare must confer with the minister of finance on specific topics.33 While the law no longer specifies the appointment of top executive posts by the government to preserve the appearance of autonomy, it does not specify how the posts will be occupied, thus allowing the continuation of bureaucratic influence. As of 2008, the president was a former Bank of Japan official and the executive managing director was a former bureaucrat from MHLW. Although the government may be tempted to draw on postal savings and pension reserves to meet its fiscal needs, as with FILP, there are built-in limitations. As the population declines, so too will the funds in each. Thus, while both may provide a temporary crutch for financing government debt, these instruments, as with FILP, will be at best limited. One critical question is whether the government will be able to stabilize its financial footing before the funds in both decline.

Conclusion Measures to strengthen the prime minister and cabinet not only gave Koizumi a degree of legitimacy in pursuing more top-down style reforms, they provided him with specific instruments for sharpening pressure on his own cabinet members and fellow LDP party members. With policy-making and bill drafting apparatus at hand, Koizumi could develop policy in relative isolation from political and bureaucratic pressures and present them to the cabinet and party not merely as recommendations of an advisory council but as government policy. Yet despite all of the pressure Koizumi brought to bear on his own party, the interests opposing reform of the FILP agencies and postal privatization proved to be so entrenched that for the first several years of his administration they managed to block many of his key reforms. Reform of the road corporations contained major concessions that undermined its substance; reform of the government financial institutions appeared to be delayed indefinitely; and a set of bills to privatize the post office that already contained numerous concessions was voted down. Only Koizumi’s political leadership allowed him to overcome his opposition. By calling for elections, partially realigning his party by expelling opponents of reform, and winning a popular mandate, Koizumi masterfully marginalized his opponents. After a landslide victory, Koizumi finally pushed through postal privatization and then reform of the most politically controversial FILP agencies.

246  The Limits of FILP

Yet for all of Koizumi’s reform efforts, the FILP system persists. FILP is a streamlined institution, but it will continue to structure the government’s fiscal choices. On the one hand, it has made these choices more difficult. FILP has left behind high levels of bad debt and weakened fiscal discipline and has created powerful vested interests from those who rely on FILP. In this regard, FILP has sharpened Japan’s fiscal trade-offs, polarizing fiscal hawks and those who support higher spending, both pork-barrel spending as well as expanded welfare programs. But on the other hand, FILP remains a powerful public finance tool, one that has not been fully diminished by the FILP reform. As shifting political coalitions attempt to balance the need for fiscal consolidation, their spending needs, and the thorny issue of taxation, they are likely to continue to turn to FILP. The manner in which they do so will, as in the past, have significant ramifications for how the FILP system continues to evolve. FILP reform also leaves behind the difficult political issue of how to manage the former entrance institutions that were detached from FILP—postal savings and pension reserves. Going forward, this will be a pressing issue given Japan’s dependence on these funds to absorb the government’s debt.

nine

Conclusion

Public finance is a realm where politics meet economics. Through systems of public finance governments attempt to balance the competing imperatives of democracy and the market economy. As this book shows, governments can do so not only through budgetary means but also by using financial mechanisms to allocate credit and investment, that is, policy finance. After the end of World War II, the Japanese government constructed and deployed a massive system of policy finance, FILP, to supplement its budget. A large FILP has been the flip side of Japan’s relatively small budget, and this combination has had profound consequences for Japan’s political economy. This concluding chapter draws out the significance of this study’s findings for the study of Japanese politics and politics more generally.

Summary This study shows that FILP was a critical component of the postwar political settlement that tied together the government’s fiscal policy, industrialization strategy, and the ruling party’s political strategy. By making it possible for the government to keep formal budget spending low and public investment high, the LDP was able to square the circle. The ruling party used FILP to suppress budget spending, which allowed it to deliver popular tax cuts without sacrificing budget balance or spending. This fiscal policy also formed a key component of the government’s larger economic growth strategy. Low taxes boosted private savings and investment, and, by keeping budget spending low, the government, helped by rapid economic growth, 

248  Conclusion

could also maintain budget discipline. Balanced budgets not only allowed the government to use monetary policy more aggressively, they also prevented private sector crowding out and helped the government manage its international balance of payments. By relying on FILP, the government’s policy of budget restraint did not come at the expense of its other policy priorities or the ruling party’s political goals. FILP provided the state with a large and growing pool of financial resources around which the government built a sprawling parastate apparatus that it used to channel investment to accelerate industrialization and to finance the ruling party’s political strategy. At the same time, the LDP could also deliver tax cuts and preferential tax treatment to its supporters. FILP not only helped keep together the conservative coalition; as this study shows, it also helped the LDP stay in power. This political settlement that developed around FILP, however, ultimately unraveled. The government found FILP so useful because it is a financial system that does not draw on tax revenues, allowing the government to “spend without taxation.” As the ruling party used FILP increasingly to substitute for budget expenditures and to pay for political compensation and as the economy stagnated during the 1990s, problems accumulated in the FILP system, such as bad loans and failed projects. The rapid expansion of FILP—both funds flowing into the system and the number of FILP agencies—also generated political opposition, and pressure for reform grew as the government struggled to pull the country out of economic stagnation. As the government attempted to reform various parts of the FILP system, the ruling camp grew increasingly divided. Within the LDP, the most aggressive reformer of all, Koizumi, targeted the entire FILP apparatus. His reforms aimed not only to revamp the system but also to reorient his party by dismantling the pork-barrel apparatus on which it had become so reliant. Given the interests tied to the FILP system, this was a monumental undertaking. Koizumi expelled members of his own political party to overcome internal opposition and pass his reforms. While Koizumi’s reforms were a major political triumph, there are obvious limits to his achievements. Ultimately, he did not succeed in realigning his party, many of his reforms were watered down, and much of the FILP system remains intact. While FILP reform has partly rationalized the system, the issue of the state’s role in finance has still not been settled, and how the state does or does not exert influence over its tremendous financial resources will continue to be a contentious political issue. In fact, the DPJ and its minor

Conclusion  Conclusion 249 E

coalition partner committed to freezing the process of privatizing the post office. Although it lost the votes to pass such a measure, the eventual fate of postal savings and postal insurance is still unclear. Within the DPJ coalition government, there have even been discussions of enlarging FILP, and, in its first years in office, the DPJ did not hesitate in using FILP. FILP has also ironically complicated Japan’s prospects for fiscal reconstruction. Not only has it left behind significant debt, but FILP agencies also make demands on limited budget resources. Politically speaking, the large FILP user base, which has benefited from public largesse, has evolved into a powerful set of entrenched interests. All future governments, regardless of the party in control, will be caught on the horns of a difficult fiscal trilemma: the need to lower the budget deficit, the unpopularity of taxes, and the difficulty of cutting spending. In this context, the government, regardless of which party or parties control it, may still be drawn to FILP, a decision that would be highly consequential for the development of FILP. Depending on how future administrations use it, FILP and its former constituent parts could continue to rack up bad debts, lower the efficiency of capital allocation, and weaken the incentive to address Japan’s fiscal crisis.

FILP and the Study of Japanese Politics What does this study reveal about Japanese politics? First, this study shows that FILP linked the developmental and clientelist sides of Japan’s political economy. On the one hand, as many have observed, the Japanese government has used generous compensation as part of its clientelist pork-barrel political strategy. On the other hand, budget spending has been historically low, particularly until the 1970s, although even today budget spending remains below the OECD average. According to Johnson, Japan’s low budget spending, which was central to the government’s economic strategy, exemplified a powerful and autonomous state.1 According to this developmental state view, MOF, the paragon of state power, stood insulated from societal interests, kept tight guard over the budget, and steered the economy to rapid growth; more recent accounts, such as that of Grimes, have argued that, even through the mid-1990s, MOF exerted powerful control over the budget.2 Yet this view conflicts with studies focusing on electoral politics that have emphasized the primacy of the LDP and their liberal use of porkbarrel spending to stay in power.

250  Conclusion

As this study shows, whether the state spends a lot or a little and whether Japan’s pattern of public spending illustrates state autonomy or a politically motivated clientelism are questions that make little sense without consideration of FILP. The government’s use of FILP explains why a political party that relied so heavily on public spending to stay in power could also embrace a policy of budget restraint. Contrary to the developmental state view, this policy did not reflect the primacy of MOF or an autonomous state insulated from political pressure, nor did the government’s seeming stinginess reflect a conservative ideology. The government leadership for much of the postwar period actively embraced budget restraint and made this policy compatible with the broader needs of its coalition by supplementing the budget with generous FILP allocations. Central to this coalition were politicians in the LDP who relied on the distribution of public funds to their constituencies, that is, the clientelist side. FILP also provided a mechanism for the government to channel funds into investments that would accelerate industrialization, helping smooth over the frequently sharp tensions between those arguing over the relative merits of higher public investment and budget restraint. By providing an off-budget source of funds that could finance the party’s priorities, FILP also aligned the interests of MOF with that of the LDP. During annual budget negotiations, MOF used FILP to deflect pressure on the budget by pushing spending requests onto the FILP system. FILP mediated the relationship among a set of actors whose priorities otherwise would have come much more directly into conflict. The government did abandon budget restraint in the 1970s, but this did not mark a neat shift from an autonomous developmental state to a clientelist one. In fact, for much of the period after the 1970s, the government reasserted its goal of fiscal discipline. The LDP did begin to exert greater influence on the bureaucracy through the cultivation of networks within the ministries and agencies. Tanaka Kakuei and the LDP established ties with MOF alumni and exercised more direct influence on MOF promotions. Nonetheless, an ever-expanding FILP continued to dampen the tension between the fiscal goals of MOF and the LDP’s ever-growing demand for public funds. After the 1970s, the government, still controlled by the porkbarrel LDP, pursued a relatively restrained budget policy by using the old formula of relying on FILP. During the 1980s, LDP administrations with active support from MOF pursued a fiscal reconstruction agenda. MOF leaned heavily on FILP to help restore budgetary balance. As the economy

Conclusion  251

stagnated in the 1990s with a series of recessions and a full-blown financial crisis, the government came under increasing pressure to use fiscal policy to stimulate the economy. To combat economic malaise, the government announced impressive-sounding stimulus packages, but in reality the government used the FILP system to pad the numbers.3 Some have argued in fact that the reluctance to use fiscal stimulus, reflecting MOF’s concern over budget deficits, prolonged Japan’s economic stagnation.4 Second, this study helps explain the nature of the Japanese government’s redistributive political strategy. A growing revisionist literature has increasingly challenged the notion that Japan was a welfare laggard.5 Despite Japan’s low level of welfare effort (as measured by formal welfare spending), the country has had relatively low levels of inequality and poverty.6 The revisionist literature explains this anomaly by focusing on the different repertoire of measures to provide social protection. As Estévez-Abe aptly notes: “Just as Sweden uses social policy as a form of industrial policy, Japan uses industrial policy as a form of social policy.”7 Regulation, trade protections, benefits provided by corporations, labor market protections, and public spending traditionally outside of the definition of welfare spending (for example, public works or support for SMEs) were all part of Japanese-style welfare. Estévez-Abe’s recent path-breaking work explains why the Japanese government used targeted, particularistic policies rather than developing a universalistic welfare state.8 She argues that structural factors, in particular the single non-transferrable vote (SNTV) electoral system, created incentives for politicians to deliver this form of social protection. This study, while agreeing with Estévez-Abe’s “structural logic” argument, helps fill out the explanation of the government’s choices by focusing on its fiscal choices. In addition to the electoral system, the government’s fiscal goals also heavily shaped its choice of redistributive social protection. These fiscal goals—low budgets, low taxes, and balanced budgets—were forged under the U.S. military Occupation and then under the leadership of Ikeda Hayato. Indeed, the budget restraint that was imposed on Japan is one of the reasons that the government created FILP in the first place. The goal of budget restraint provided a powerful restraint to increasing formal welfare commitments. During the 1960s, the government actively sought to redefine “social security” in a manner that limited the demands on the formal budget. This study’s focus on fiscal choices thus also clarifies why the government relied on FILP so heavily, as well as other measures that did not

252  Conclusion

require budget expenditures. While Japan’s old electoral system, SNTV, did create incentives to deliver targeted distributive policies, such compensation could in principle have been financed through the budget and deficit spending. In the case of Italy, which also had an electoral system that encouraged targeted spending, an open-list PR system until 1994, the government had no reservations using the budget.9 While Italy did have a postal savings system, the government did not use the funds to restrain budget spending but, on the contrary, actually used postal savings to finance budget deficits, which is also how Japan used its postal savings funds before the end of World War II. In thinking about Japanese welfare, as well as the politics of spending more generally, it is critical to bear in mind that such programs took place in the larger context of Japan’s economic growth strategy. As this study shows, the goal of keeping budget spending low is one of the reasons, in addition to structural-institutional factors, why traditional welfare programs were avoided in the first place and why the government relied so heavily on FILP to pay for its distinctive version of social security. Third, this study helps explain the crisis and partial breakdown of the postwar conservative coalition. A number of studies explain the growing crisis within the LDP as arising from changing electoral incentives.10 The shift away from SNTV to a mixed electoral system that combines SMD and PR changed the dynamic of political competition by making party labels more important and forcing parties to compete on the basis of broader policies. Such incentives were a critical factor that accelerated the reform agenda, a point also emphasized in this book. The electoral reform argument provides less leverage in explaining why FILP specifically became the target of reform and why the politics of reform proved to be so divisive. The various reforms related to FILP—reform of the special corporations, including the “Road Corporation”; the privatization of the post office; the rationalization of the government financial institutions; and so forth—have been hotly contested, if not defining, issues in contemporary Japanese politics, a state of affairs that must seem strange to the outside observer. As this study shows, there were additional factors that propelled FILP onto the political agenda, ones that originate in how FILP developed over the course of the postwar. FILP was successful in helping hold together the various interests in the conservative coalition because it could be used as a partial substitute for the budget and also because of its rapid growth that provided the government with a growing source of public finance. Both of

Conclusion  253

these features, however, contributed to the eventual need for FILP reform. The government’s exploitation of FILP to pay for pork and to deflect pressure on the budget led to poor investments, failed projects, and bad loans. Corruption and mismanagement, the by-product of the politicization of the FILP agencies, also generated calls for reform. The growth of FILP, which made it such a convenient instrument for the government, increased opposition from private financial institutions. Thus, the system that had been such a powerful political asset for so long became a political liability. Electoral reform generated momentum for reform and sharpened the cleavage between reformers and the old guard in the LDP, and institutional changes designed to strengthen the executive helped the government deliver reform. But the seeds of the problem were embedded deeper in the postwar bargain. Reform of FILP proved so divisive because of the vested interested that had developed around the system. The sprawling FILP system provided something for nearly everyone. For MOF, FILP provided a supplementary source of public funds. For the bureaucracy, FILP agencies provided ministries and agencies with vehicles for carrying out projects, and their proliferation of FILP agencies created lucrative postretirement sinecures. For the LDP, FILP served as a useful tool for channeling material compensation to supporters and one that did not rely on unpopular taxes. Ironically, however, the success of this formula contributed to its own demise. As this study vividly shows, institutions not only align and configure interests, they can structure the conditions that shape their development, as Pierson, Thelen, and others have argued.11

The Politics of Spending: Japan’s Experience in Comparative Perspective In comparative perspective, Japan’s pattern of public finance is distinctive in three regards: its extensive use of FILP, its use of FILP to limit the budget, and the political problems stemming from the preceding two. Figure 9.1 illustrates Japan’s distinctive pattern. Japan’s use of policy finance, as measured by its size relative to GDP, is greater than the other G-5 countries, while its budget outlays as a share of GDP (minus defense expenditures) are below the G-5 and OECD average. As this study argues, the Japanese government built a distinctive political economy around low-budget spending and active use of FILP. By contrast, governments in other advanced industrial democracies rapidly increased

254  Conclusion

Non-defense budget outlays as share of GDP

55% France

50%

Germany

45%

UK 40% Japan

35% US 30% 0%

20%

40%

60%

80%

100%

Policy loans outstanding as share of GDP f igu r e 9.1. Relative size of budget and policy finance, 2004; data for the United Kingdom, France, and Germany from the end of 2003. source: MOF and OECD.

their levels of budget spending and taxes after the end of the war. The expansion of the state, in particular welfare spending, and the adoption by many countries of Keynesian fiscal stimulus were pillars of the postwar compromise between capitalism and democracy. In Japan, the ruling party built a stable political coalition around limited budget spending through the expansion of its role in mobilizing and directly allocating credit and investment. The FILP solution allowed the government to spend liberally while keeping taxes low, avoiding the difficult electoral trade-offs among taxation, budget spending, and budget deficits. The government deliberately limited welfare spending increases through the 1960s to limit demands on the budget. Instead, as discussed in Chapter Four, the government conveniently redefined selective compensation to supporters, such as SMEs, agriculture and rural regions, and low taxes as “social security,” blurring the ideological line between pork-barrel spending and social protection. To finance its priorities, the government drew heavily on FILP to supplement the budget. Beginning in the 1970s, the Japanese government increased budget spending and its formal welfare

Conclusion  255

commitments, but Japan’s still comparatively low level of government outlays belied the true extent of public spending. When one considers the role of FILP, Japan’s experience in one sense seems less exceptional. The Japanese government did not keep spending unusually low, avoid redistributive policies, or forgo commitments to social protection. Nor did the ruling LDP miraculously keep together a broad coalition and stay in power while spending relatively little. Like Sweden’s Social Democrats (SAP) and Italy’s Christian Democrats (DC), the LDP spent heavily to build political support and win elections. In the case of Japan, though, the Japanese government used not only the budget but also an ever-expanding FILP, which helped keep the LDP in power, as the statistical analysis presented in Chapter Five shows. When one considers the role of FILP, it is clear that Japan is emphatically not a low spender. The FILP solution, though, also had the added benefit of not drawing on taxes, at least temporarily, which allowed the government to avoid many of the difficult electoral dilemmas of its choices underwriting its longevity and stability. FILP has been more than a functional substitute for budget spending, and the Japanese government’s choice to establish and use FILP as a supplement to the budget has had lasting consequences. The difference between policy finance and taxes proved to be crucial. The government’s control over finance via FILP not only allowed the government to run a distinct fiscal policy, it also led to greater state involvement in the allocation of finance. During Japan’s period of high-speed growth, the government used FILP to overcome key bottlenecks to industrialization and target strategic industries during Japan’s period of high-speed growth, but over the long-term FILP proved to have very high costs. The government has not only had to pick up the tab for bad projects, FILP also dragged down the efficiency of capital allocation as funds were increasingly used for fiscal and political ends while developmental priorities receded. This trend grew even more pronounced as FILP grew dramatically in size, increasing the state’s role in allocating finance. The high long-term costs of Japan’s use of policy finance casts doubt on the supposed superiority of its restrained fiscal policy through the 1970s. The World Bank and others have cited the fiscal restraint of Japan and other East Asian NICs as a factor that promoted rapid economic growth and have drawn the policy lesson that state spending should be kept to a minimum and budgets balanced.12 Others have offered support for this argument.13 But such economic choices are not made in a political vacuum.

256  Conclusion

In the context of democratic politics, governments are inescapably subject to pressures for redistribution and social protection. From this perspective, the question should not be narrowly about economic efficiency but about how states reconcile the demands of politics and the market. The solution after World War II for many states was a larger and more redistributive state, driven in part by the expansion of welfare programs. The Japanese government, however, established a different kind of fiscal bargain, based on a restrained budget and heavy intervention in the allocation of finance. Ironically, as this study shows, this political bargain proved to be penny wise but pound foolish. choosing policy finance

The case of Japan begs the question of why other countries have not taken similar paths. Although the use of policy finance created many long-term problems, the Japanese government used FILP so extensively in conjunction with its budget because it had the advantage of not relying on limited budgetary resources. As discussed in Chapter Two, FILP does not rely on unpopular taxes, and because FILP loans and investments are repaid the system is, in principle, also self-financing. A confluence of factors explains why Japan used policy finance so extensively in conjunction with its budget while other countries did not. First, externally imposed budget restraint explains why Japan established FILP as a system run in parallel with the budget. The harsh deflationary Dodge Line imposed draconian budget cuts and forced the Japanese government to balance its budget. To alleviate the hardship imposed on Japanese society and to overcome its fiscal constraints, the Japanese government established the FILP system. The U.S. Occupation also influenced the construction of FILP by facilitating centralized MOF control because the Occupation authorities viewed MOF as a dependable and competent ministry. Because the Occupation forbade the use of deficit financing, FILP did not evolve into a mechanism to finance budget deficits but rather developed into a centralized system of public finance that mirrored the budget. This structure, with an annual FILP Plan that acted as a “second budget,” facilitated the use of FILP as an extension of the budget. As discussed in Chapter Three, the Allies also occupied both Italy and West Germany, but the Occupation authorities’ fiscal measures did not focus on cutting budget expenditures as in Japan but rather on raising rev-

Conclusion  257

enues; budget deficits were also tolerated to a much greater degree. Postwar stabilization focused primarily on other policies: reduction of credit in Italy and currency reform in West Germany. Consequently, the governments of Italy and West Germany never faced anything comparable to the budget restraint imposed on Japan that had created the conditions that gave rise to the FILP system. While Italy already had a system of policy finance in place at the end of World War II, the Cassa Depositi e Prestiti (CDP), the government’s specific fiscal priorities led to a very different usage of the system. Unlike in Japan, the government did not embrace budget restraint. Far from using the CDP to limit spending, the government relied on the CDP, among other things, to help sustain higher budget expenditures by financing current budget expenditures not covered by tax revenues. Thus, the CDP actually reinforced budget primacy. France had a more elaborate and extensive system of policy finance than did Italy. Even more than the Italian case, the French one illustrates the importance of the government’s fiscal goals. In France, the government, unencumbered by external constraints and thus more exposed to domestic political pressures, avoided painful stabilization measures to rein in inflation—both monetary and fiscal. The French government ran up large budget deficits after the war and used the Caisse des Dépôts et Consignations (CDC) and other public and semipublic financial institutions to finance them in a noninflationary manner. When the government did commit to greater fiscal discipline in the 1960s, the French government began to use the financial resources it controlled to limit budget expansion. Much as the Japanese government used FILP to bear more of the budget burden, that is, “FILP dumping,” the French government shifted spending to the CDC and other entities, a process of débudgétisation, discussed in Chapter Six.14 Second, domestic politics supported the Japanese government’s use and expansion of FILP. With the return to independence, the pressures to abandon fiscal discipline increased sharply, but the political leadership of Prime Minister Ikeda Hayato proved pivotal to maintaining the government’s commitment to budget restraint. With FILP already established as a parallel source of public finance, Ikeda turned to the system to help the government manage its fiscal goals. The government deliberately built up the FILP system so that it could play a larger and more active role. The government added the National Pension system reserves to the FILP system in the 1960s. The government, specifically Tanaka Kakuei as minister of post and

258  Conclusion

telecommunications, also launched an expansion of the post office network from the latter half of the 1950s, which dramatically increased the reach of the postal savings network, as discussed in Chapter Four. The close relationship that developed between the LDP and the Ministry of Posts and Telecommunications (now subsumed under the Ministry of Internal Affairs and Communications) provided the postal savings system a powerful political ally. This shielded the postal saving system from opposition from the Bank of Japan and the private financial institutions that competed with the system, and by doing so it enabled the MPT to maintain preferential treatment for postal savings accounts, helping fuel the rapid growth of the system and funds flowing into FILP. By contrast, in Italy the postal savings system, which provided funds for the CDP, had far weaker political support. Consequently, the Bank of Italy and private financial institutions succeeded in blocking the expansion of the postal savings system in the early 1950s, which limited the growth of the CDP. In the case of France, the legacy of dirgisme, as in Japan, has legitimated the state’s heavy use of policy finance. Still, there was nothing comparable to the same degree of support of the MPT in Japan. Third, institutional factors have contributed to the Japanese government’s use of FILP. More than in any other systems of policy finance, Japan’s FILP system has a structure that has facilitated its use in conjunction with the budget. The FILP Plan is essentially a centralized annual plan for the allocation of policy finance, and the process of negotiating the FILP Plan takes place in parallel with the formal budget. The Ministry of Finance manages both the FILP Plan and its budget. Because the Budget Bureau in MOF has been more powerful than the Financial Bureau, which oversees FILP, the management of FILP has in practice reflected budgetary priorities. Another key institutional feature, at least until the 2001 reform, was the yotaku system, which required that funds from postal savings, pensions, and other sources be transferred into the FILP system. This ensured that funds flowed automatically into FILP, providing the government with a supply of finance that it had to invest or lend. The growing source of funds and FILP’s embeddedness within the budgetmaking apparatus powerfully shaped the choices of the government. FILP’s continual and rapid growth from its inception in the mid-1950s to through the 1990s created reinforcing effects. FILP did more than statically structure the choices available to actors; FILP’s growth dynamically changed actors’

Conclusion  259

calculations over time. The most important effect was to lower the short-term cost of using FILP because using the funds did not require any action on the part of the government. Given MOF’s preference for limiting spending and the LDP’s demand for public spending, the government’s use of FILP to bear the burden of financing various state activities was virtually inevitable. The U.S. Federal Credit Program shares with FILP a centralized structure, but there are a number of important differences. First, the Federal Credit Program is not used to control the size of the actual budget. The Federal Credit Program as well as Fannie Mae and Freddie Mac almost certainly have reduced the need for some budget outlays to achieve specific policy goals. In the case of housing, for instance, the indirect subsidy from lower interest rates reduced the need for budget outlays to pay for the government’s housing policy, at least prior to the financial collapse of Fannie Mae and Freddie Mac. The effect on the size of the budget, however, has been indirect, whereas, in the case of Japan, the government used FILP deliberately to manage overall spending levels. It is still interesting to note, however, that, as with Japan, the United States has relatively low budget spending and a higher use of policy finance compared to other countries, a phenomenon worth further investigation. Second, unlike FILP, the Federal Credit Program does not draw on an automatically accumulating source of funds. Rather, it relies primarily on funds from private financial institutions and uses the budget to provide subsidies, which cover defaults on government loan guarantees and concessionary interest rates. The reliance on the budget to cover subsidies provides a natural brake to the growth of policy finance. FILP agencies also receive subsidies, but there is a crucial difference. Because FILP agencies are governmental institutions, the government has more latitude in using them to provide indirect subsidies that do not draw on budgetary funds. As public institutions, the government, for instance, can use FILP agencies to provide such subsidies through the absorption of losses. In the case of the Development Bank of Japan, for instance, healthy and profitable lines of business have effectively subsidized more politically motivated lending. In France and Italy, as well as a number of other countries, policy finance systems draw on funds that flow into them, but the link is seldom as tight as under FILP’s yotaku system. In the case of Italy’s CDP, the Treasury has determined the amount of funds from the postal system that it transfers into the CDP. Similar to the situation in France, the Trésor had discretion

260  Conclusion

in the volume of funds flowing into the Caisse des Dépôts et Consignations (CDC). More importantly, neither country has an equivalent to the centralized FILP Plan. Thus policy finance has not been structured as a “second” or “shadow” budget that operated in parallel with the formal budget. The governments of both have used policy finance more as a general source of public finance, and the specific usage has fluctuated more with the government’s changing priorities. At the end of the war, the French and Italian governments used the CDC and CDP not as alternatives to budget spending, like the FILP Plan, but as a noninflationary means of financing budget deficits. In both cases, the concern was reducing inflationary pressure without having to cut budget expenditures. When fiscal discipline became a priority, the French government did begin to use the CDC to cut budget expenditures. Still the fiscal goals of the government have never been as central to the management of either. Both institutions serve a variety of other functions, including managing investment portfolios that include a variety of bonds and equity stakes in private firms. This study focuses on Japan, but the preceding comparisons are an initial attempt to develop a set of propositions about the circumstances under which it is likely for countries to use policy finance extensively as an alternative to budget spending. To reiterate, these comparisons suggest the following relevant factors: (1) strong commitment to budget restraint; (2) powerful political support that backs the mobilization and use of support of policy finance; and (3) centralized management of policy finance, coordination with the budget, and dedicated funds. The imposition of budget restraint not only can lead governments to pursue an alternative to the budget but also can influence the connection between the budget and policy finance. In the context of economic globalization, there is now a stronger case for restraining budget spending, taxes, and deficits. Whether such fiscal constraints translate into government’s embracing the type of fiscal policy as Japan, however, is an open question. Political support for the mobilization of policy finance is also critical because its use encroaches on other interests, in particular private financial institutions. Such opposition is likely to be particularly strong in countries with strong liberal traditions and a powerful financial sector, while countries with statist legacies may be less averse to expanding policy finance. In the case of Japan, support for policy finance was particularly high because of the power nexus that developed between the LDP and MPT. Finally, the structure of policy finance matters. Centralized

Conclusion  261

management of policy finance, a budgetlike structure, and a supply of automatically accumulating funds make it more likely that the government will use policy finance as a means of substituting for budget spending. These propositions, however, are only a starting point. The comparisons here need to be deepened and broadened to better test these propositions and understand what factors contribute to the mix of budgetary resources and policy finance that governments use.

Public Finance and Politics Although this study focuses on Japan’s experience, it makes a more general point: Policy finance matters. Public finance lies at the critical nexus between democratic politics and market economies, and all governments must make difficult trade-offs in balancing their political and economic priorities. Indeed, the expansion of the state as governments responded to democratic pressures has been one of the defining features of modern capitalism, and more recent attempts at retrenchment one of the ongoing political dramas. Thus, it is no surprise that the study of public finance has occupied such an important place in the study of politics and economics. A well-developed body of literature has analyzed how various political factors have shaped public finance outcomes and how public finance choices also constrain political options. For the most part, such studies pay scant attention to an important source of public finance—financial mechanisms employed by the state to allocate credit and investment. Comparative studies in particular focus more narrowly on fiscal outcomes such as the level of government expenditures and budget deficits. Given the lack of good comparative data, this trend is not surprising. As this study shows, policy finance can be an important means of financing public goals and constitutes a part of the larger “public effort.” In the case of Japan, while the government has kept budget spending relatively modest, this is only a part of the picture because it has also relied very heavily on FILP. The budget alone does not capture the true extent of the state’s activities or the full nature of the politics around public spending. In making cross-national comparisons, analysts should be sensitive to these kinds of variations because excluding policy finance can lead to a mischaracterization of a nation’s public finance effort. The growing literature on tax expenditures has already shed light on this problem from a different angle.15

262  Conclusion

As Howard has argued, the U.S. government has developed a “hidden” welfare state that relies on tax credits to provide social protection. Thus, expenditures alone do not accurately characterize welfare effort. This study reiterates the point that budget expenditures alone can be a problematic measure of public effort. Policy finance also matters because it presents governments with a potential means of dealing with one the most enduring political problems: revenue extraction. Taxation has been the primary source of revenue in most states. The disadvantage of taxation is that the costs are highly visible, although governments often try to disguise these costs. Levying taxes is thus a profound political challenge for governments, one eased typically by only extreme circumstances such as war. Policy finance, however, pre­ sents governments with a potentially different set of possibilities, with very significant political implications. Governments can use policy finance to lower the visibility of the costs of their spending and reduce the transaction costs associated with raising public funds. With policy finance, funds might be borrowed, as was the case with FILP prior to reform, thus not imposing any direct cost to voters. Policy finance also has lower transaction costs because there is no need for enforcing compliance, which can raise the cost of revenue extraction.16 Of course, policy finance is not truly free. There are costs, but they tend to have low political visibility. If governments allocate policy finance to less productive areas, they may reduce the efficiency of capital allocation, with losses to aggregate welfare, but this is not necessarily apparent to the electorate. In the case of FILP, the interest rates were kept below commercial rates through the 1980s. This imposed costs on taxpayers because low returns on pension reserves needed to be offset by taxpayer funds. Here too, though, the costs were largely invisible to voters. Bad loans and investments also generate costs, but, for much of FILP’s existence, the government could hide the true extent of these costs. If a government can lower the visibility of its costs, it can also strike different kinds of fiscal bargains. In the case of Japan, the government used FILP to strike a bargain around low taxes and high public spending, which proved to be a winning combination, at least over the medium term. There are limits to policy finance, though, because of the underlying tension between the policy and financial functions. Policy finance is useful to governments because it can achieve specific policy goals. These policy

Conclusion  263

goals, however, must be balanced against the need for sound financial management. While governments are in principle constrained by financial risk, there is a potential moral hazard because governments may have incentives to push spending from the budget onto policy finance, as happened in Japan, precisely because the short-term political costs are lower. This moral hazard may be exacerbated by the fact that the consequences of such actions might not be apparent until much later. If financial management deteriorates, financial losses can accrue and may need to be covered by tax revenues, which in turn can generate political backlash, as happened with the bailout of Freddie Mac and Fannie Mae. In conclusion, this study highlights the need to take policy finance seriously. Unfortunately there is little systematic comparative data on policy finance. It is clear, though, that, with greater financial integration, governments now have stronger incentives to find alternatives to taxation and deficit financing. Given the proliferation of pools of finance that they might draw on, such as oil revenues or sovereign wealth funds, policy finance may be an increasingly appealing option to governments around the world.

Reference Matter

Notes

Notes to Chapter One 1.  Peter Alexis Gourevitch, Politics in Hard Times: Comparative Responses to International Economic Crises, Cornell Studies in Political Economy (Ithaca, NY: Cornell University Press, 1986); Peter A. Hall, The Political Power of Economic Ideas: Keynesianism across Nations (Princeton, NJ: Princeton University Press, 1989); Andrew Shonfield, Modern Capitalism: The Changing Balance of Public and Private Power (London and New York: Oxford University Press, 1966). 2.  Carles Boix, Political Parties, Growth and Equality: Conservative and Social Democratic Economic Strategies in the World Economy, Cambridge Studies in Comparative Politics (Cambridge, UK, and New York: Cambridge University Press, 1998), 11. 3.  Interestingly, this is why Japan is an outlier in the data Boix presents. 4.  Japan’s fiscal policy prevented private sector crowding out on the budget side. In terms of the government’s use of non-tax-based public finance via the FILP, the public sector did partly crowd out private investment, although this was mitigated by a high savings rate, which in turn FILP helped support. An anonymous reviewer raised this important distinction. 5.  Gardner Ackley and Hiromitsu Ishi, “Fiscal, Monetary, and Related Policies,” in Hugh Patrick and Henry Rosovsky, eds., Asia’s New Giant: How the Japanese Economy Works (Washington, DC: Brookings Institute, 1976). 6.  Kent E. Calder, Crisis and Compensation: Public Policy and Political Stability in Japan, 1949–1986 (Princeton, NJ: Princeton University Press, 1988); T. J. Pempel, Regime Shift: Comparative Dynamics of the Japanese Political Economy (Ithaca, NY: Cornell University Press, 1998).



   Notes to Chapter One 7.  Regarding preferential tax treatment see: Eisaku Ide and Sven Steinmo, “The End of the Strong State? On the Evolution of Japanese Tax Policy,” in Isaac William Martin, Ajay K. Mehotra, and Monica Prasad, eds., The New Fiscal Sociology, Taxation in Comparative Perspective (New York: Cambridge University Press, 2009). 8.  Calder, 1988; Takayoshi Igarashi, Zukai Kōkyō Jigyō No Ura Mo Omote Mo Wakaru (Tōkyō: Tōyō Keizai Shimbunsha, 2002); Richard Katz, Japan, the System That Soured: The Rise and Fall of the Japanese Economic Miracle (Armonk, NY: M. E. Sharpe, 1998); Brian Woodall, Japan under Construction: Corruption, Politics, and Public Works (Berkeley: University of California Press, 1996). 9.  Maurice Wright, Japan’s Fiscal Crisis: The Ministry of Finance and the Politics of Public Spending, 1975–2000 (New York: Oxford University Press, 2002), 421. 10.  The new name is the Ministry of Economy Trade and Industry (METI). 11.  Chalmers A. Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925–1975 (Stanford, CA: Stanford University Press, 1982). 12.  Kent E. Calder, Strategic Capitalism: Private Business and Public Purpose in Japanese Industrial Finance (Princeton, NJ: Princeton University Press, 1993); Gerald L. Curtis, The Japanese Way of Politics, Studies of the East Asian Institute (New York: Columbia University Press, 1988). 13.  Gary W. Cox and Frances Rosenbluth, “Factional Competition for the Party Endorsement: The Case of Japan’s Liberal Democratic Party,” British Journal of Political Science, 26, 2 (1996): 259; Gary W. Cox, Frances McCall Rosenbluth, and Michael F. Thies, “Electoral Reform and the Fate of Factions: The Case of Japan’s Liberal Democratic Party,” British Journal of Political Science, 29, 1 (1999): 33; Cheol Hee Park, “Factional Dynamics in Japan’s LDP since Political Reform: Continuity and Change,” Asian Survey 41, 3 (2001). 14.  Ackley and Ishi, 1976; Vito Tanzi and Ludger Schuknecht, Public Spending in the 20th Century: A Global Perspective (Cambridge, UK, and New York: Cambridge University Press, 2000). 15.  Items such as the definition of the tax base, maximum tax rates, size of taxfree income, and size deductions are regulated by the constitution. There is a very high bar to enact changes. Changes must be supported by the majority of voters across the country as well as by a majority in twenty-six of Switzerland’s Cantons. 16.  Gourevitch, 1986; Hall, 1989; Shonfield, 1966. 17.  Recently in Japan’s public discourse, growing attention has focused on “special accounts.” Special accounts, created by the Diet, typically rely on dedicated sources of funds (for example, social insurance contributions or revenues from government enterprises), rather than general revenues and are set up to serve specific functions, such as providing social security or carrying out specific public works. Given the size and quantity of special accounts, currently at

Notes to Chapter One    thirty-one, special accounts have fed into the public image that public spending is extremely high. Considering the special accounts, the general account budget does understate total budget spending. The special accounts, however, do not change the picture when making international comparisons because the OECD standardizes the reporting of government accounts. One of the largest groups of special accounts are for social insurance, such as pensions, and the Japanese government reports these figures as part of its budget outlays, in accordance with the System of National Accounts (SNA). Japan’s single largest special account handles the repayment of the national debt. These debt repayments are not included in Japan’s budget outlays, nor are they included for other countries in OECD data. 18.  Gosta Esping-Andersen, “Single Party Dominance in Sweden: The Saga of Social Democracy,” in T. J. Pempel, ed., Uncommon Democracies: The OneParty Dominant Regimes (Ithaca, NY: Cornell University Press, 1990). 19.  Greg Noble, “Front Door, Back Door, the Reform of Postal Savings and Loans in Japan,” The Japanese Economy 33, 1 (2005); Patricia L. MacLachlan, “Post Office Politics in Modern Japan: The Postmasters, Iron Triangles, and the Limits of Reform,” Journal of Japanese Studies 30, 2 (2004). 20.  Margarita Estévez-Abe, Welfare and Capitalism in Postwar Japan, Cambridge Studies in Comparative Politics (Cambridge, UK, and New York: Cambridge University Press, 2008); Frances McCall Rosenbluth and Michael F. Thies, Japan Transformed: Political Change and Economic Restructuring (Princeton, NJ: Princeton University Press, 2010). 21.  Curtis, 1988: 46. 22.  Yasusuke Murakami, “The Japanese Model of Political Economy,” in Yasusuke Murakami, Hugh T. Patrick, and Kōzō Yamamura, eds., The Political Economy of Japan (Stanford, CA: Stanford University Press, 1987). 23.  Katz, 1998. 24.  Tsangyao Chang, “An Econometric Test of Wagner’s Law for Six Countries Based on Cointegration and Error-Correction Modelling Techniques,” Applied Economics 34, 9 (2002); Norman Gremmell, “Wagner’s Law and Musgrave’s Hypothesis,” in Norman Gremmell, ed., The Growth of the Public Sector: Theories and International Evidence (Brookfield, VT: Edward Elgar, 1993). 25.  Pempel, 1998. 26.  Boix, 1998; Geoffrey Garrett, Partisan Politics in the Global Economy, Cambridge Studies in Comparative Politics (Cambridge, UK, and New York: Cambridge University Press, 1998); Douglas A. Hibbs, “Political Parties and Macroeconomic Policy,” The American Political Science Review 71, 4 (1977); David Cameron, “The Expansion of the Public Economy: A Comparative Analysis,” American Political Science Review 72, 4 (1978).

   Notes to Chapter One 27.  John Zysman, Governments, Markets, and Growth: Financial Systems and the Politics of Industrial Change, Cornell Studies in Political Economy (Ithaca, NY: Cornell University Press, 1983); Harold L. Wilensky, Rich Democracies: Political Economy, Public Policy, and Performance (Berkeley: University of California Press, 2002). 28.  Stephen S. Cohen, Modern Capitalist Planning: The French Model (Berkeley: University of California Press, 1977); Wilensky, 2002. 29.  Naohiko Jinno, Shisutemu Kaikaku No Seiji Keizaigaku, Shiriizu Gendai No Keizai (Tōkyō: Iwanami Shoten, 1998). On budget deficits, see: Jerome B. Cohen, “Fiscal Policy in Japan,” The Journal of Finance 5, 1 (1950). 30.  Giorgio Brosio and Marchese Carla, “The Growth of Public Expenditure in Italy since the Second World War,” in Johan A. Lybeck and Magnus Henrek­ son, eds., Explaining the Growth of Government (Amsterdam and New York: North-Holland, 1988), 189. 31.  Curtis, 1988. 32.  Hideo Ōtake, “Katayama—Kishi Ni Okeru ‘Chiisai Seifu’ Ron,” Seijigaku nenpō (1991). 33.  Calder, 1988; Woodall, 1996. 34.  Pempel, 1998: 58. 35.  Toshimitsu Shinkawa and T. J. Pempel, “Occupational Welfare and the Japanese Experience,” in Michael Shalev, ed., The Privatization of Social Policy? Occupational Welfare and the Welfare State in America, Scandinavia and Japan (Basingstoke, Hampshire, UK: Palgrave Macmillan, 1996). 36.  This important point was made by an anonymous reviewer. 37.  Bai Gao, Japan’s Economic Dilemma: The Institutional Origin of Prosperity and Stagnation (New York: Cambridge University Press, 2001). 38.  Bruno Frey, “Explaining the Growth of Government: International Perspectives,” in Johan A. Lybeck and Magnus Henrekson, eds., Explaining the Growth of Government (Amsterdam and New York: North-Holland, 1988). 39.  Gregory James Kasza, One World of Welfare: Japan in Comparative Perspective, Cornell Studies in Political Economy (Ithaca, NY: Cornell University Press, 2006). 40.  Deborah J. Milly, Poverty, Equality, and Growth: The Politics of Economic Need in Postwar Japan, Harvard East Asian Monographs; 174 (Cambridge, MA: Harvard University Asia Center; Distributed by Harvard University Press, 1999): Mari Miura, “From Welfare through Work to Lean Work: The Politics of Labor Market Reform in Japan” (PhD dissertation, University of California, Berkeley, 2002); Estévez-Abe, 2008. One contrary view is that of Gregory Kasza. In One World of Welfare: Japan in Comparative Perspective, he argues that Japan’s welfare system is not unique but by most measures is very similar to that of other countries at a similar level of economic development.

Notes to Chapter One   41.  Estévez-Abe, 2008; Kasza, 2006; Milly, 1999. 42.  Estévez-Abe includes an even broader array of financial resources under what she calls “savings-oriented social protection,” including the funds of private life insurance, private pensions and so forth. This study takes a narrower approach focusing on policy finance and FILP, funds over which the government exercised direct control. 43.  Again, this comparison with Estévez-Abe’s work was suggested by an anonymous reviewer. 44.  Johnson, 1982. 45.  Tanzi and Schuknecht, 2000: 21–22. 46.  Takashi Inoguchi and Tomoaki Iwai, “Zokugiin” No Kenkyū: Jimintō Seiken O Gyūjiru Shuyakutachi, 1-han. ed. (Tōkyō: Nihon Keizai Shinbunsha, 1987); Seizaburo Satō and Tetsuhisa Matsuzaki, Jimintō Seiken, Shohan. ed. (Tōkyō: Chūō Kōronsha, 1986); Leonard J. Schoppa, Education Reform in Japan: A Case of Immobilist Politics, Nissan Institute/Routledge Japanese Studies Series (London and New York: Routledge, 1993). 47.  Jennnifer A. Amyx, Japan’s Financial Crisis, Institutional Rigidity and Reluctant Change (Princeton, NJ: Princeton University Press, 2004), 49–55. 48.  William W. Grimes, Unmaking the Japanese Miracle: Macroeconomic Politics, 1985–2000 (Ithaca, NY: Cornell University Press, 2001). 49.  Christopher Howard, The Hidden Welfare State: Tax Expenditures and Social Policy in the United States, Princeton Studies in American Politics (Prince­ ton, NJ: Princeton University Press, 1997). 50.  Ibid., 5. 51.  Alberto Alesina, Ricardo Hausmann, and Rudolf Hommes, “Budget Institutions and Fiscal Performance in Latin America,” Journal of Development Economics 59, 2 (1999); Alberto Alesina and Roberto Perotti, “Fiscal Discipline and the Budget Process,” American Economic Review 86, 2 (1996); Alberto Alesina and Roberto Perotti, “The Political Economy of Budget Deficits,” SSRN Working Paper Series; Rochester (2000); Stefania Fabrizio, Ashoka Mody, and Stefania Fabrizio, “Can Budget Institutions Counteract Political Indiscipline?” Economic Policy 21, 48 (2006); Sung Deuk Hahm, Mark S. Kamlet, and Sung Deuk Hahm, “The Political Economy of Deficit Spending in Nine Industrialized Parliamentary Democracies,” Comparative Political Studies (1996); Roberto Perotti and Alberto Alesina, “Reducing Budget Deficits,” Swedish Economic Policy Review, Spring, 3 (1996) 113–134; Roberto Perotti and Yianos Kontopoulos, “Government Fragmentation and Fiscal Policy Outcomes: Evidence from OECD Countries,” in James M. Poterba and Jurgen von Hagen, eds., Fiscal Institutions and Fiscal Performance (Chicago: University of Chicago Press, 1999); James M. Poterba and Jurgen von Hagen, Fiscal Institutions and Fiscal Performance, ed. Anonymous, A National Bureau of Economic Research Conference Report. (Chicago: University of Chicago

  Notes to Chapter Two Press, 1999); Nouriel Roubini and Jeffrey D. Sachs, “Government Spending and Budget Deficits in the Industrial Countries,” Economic Policy 4, 1 (1989); Jurgen von Hagen and Ian J. Harden, “Budget Processes and Commitment to Fiscal Discipline,” European Economic Review 39, 3 (1995). 52.  Michael Maurice Loriaux, Capital Ungoverned: Liberalizing Finance in Interventionist States (Ithaca, NY: Cornell University Press, 1997); Meredith Woo-Cumings, The Developmental State, Cornell Studies in Political Economy (Ithaca, NY: Cornell University Press, 1999); John Zysman, 1983. 53.  Publicly controlled banks are a gray area. Banks that have been nationalized or partly nationalized, yet retain independent management, are not included. Even in cases where the government does exert influence and even uses the banks to achieve policy ends, if the banks are not used as by the government as a source of public finance they would fall outside the definition. By this standard, most banks would fall outside of policy finance, although there are some cases, such as China, where a case can be made for including them because the state has to some degree used state banks as an extension of the public purse.

Notes to Chapter Two 1.  For an overview of these arguments, see Stephen J. Anderson, “The Political Economy of Japanese Saving: How Postal Savings and Public Pensions Support High Rates of Household Saving in Japan,” Journal of Japanese Studies 16, 1 (1990). 2.  Reserves from a variety of public pension schemes were transferred to FILP. The largest is the Employee Pension Insurance (EPI), which is funded by employer and employee contributions. The next largest is the National Pension (NP), which provides basic universal coverage. 3.  While the Trust Fund Bureau Fund, which pooled pension reserves and postal saving deposit reserves, was officially overseen by a deliberation council of experts, the Ministry of Finance exerted effective control. 4.  Purchases of short-term Japanese government bonds (JGB) are not included even under the broader definition of the FILP system. 5.  Anderson, 1990. 6.  Yukio Noguchi, “The Role of the Fiscal Investment and Loan Program in Postwar Japanese Economic Growth,” in Hyung-Ki, Michio Muramatsu Kim, T. J. Pempel, and KozoYamamura, eds., The Japanese Civil Service and Economic Development: Catalysts of Change. (New York: Oxford University Press, 1995b), 277. 7.  On the importance of FILP and the JBD, Johnson lists the unique Japanese institutions that contributed to Japan’s economic miracle, concluding that “perhaps most important of all, the government controlled financial institutions,

Notes to Chapter Two   particularly the Japan Development Bank and the ‘second,’ or investment, budget (the Fiscal Investment Loan Program)” ( Johnson, 1982). 8.  Noguchi, 1995b, 261. 9.  Kent E. Calder, “Linking Welfare and the Development State: Postal Savings in Japan,” Journal of Japanese Studies 16, 1 (1990); Chalmers A. Johnson, Japan’s Public Policy Companies, AEI-Hoover Policy Studies; 24 (Washington, DC: American Enterprise Institute for Public Policy Research, 1978). 10.  Noguchi, 1995b. 11.  Thomas F. Cargill and Naoyuki Yoshino, Postal Savings and Fiscal Investment in Japan: The PSS and the FILP (Oxford, UK, and New York: Oxford University Press, 2003). 12.  Noble, 2005. 13.  Patricia L MacLachlan, “Storming the Castle: The Battle for Postal Reform,” Social Science Japan Journal 9, 1 (2006). 14.  Wright, 2002; Jirō Yamaguchi, Ōkūrashō Kanryō Shihai No Shūen (Tōkyō: Iwanami Shoten, 1987); Masaru Mabuchi, Ōkūrashō Tōsei No Seiji Keizaigaku (Tōkyō: Chūō Kōronsha, 1994). 15.  There is a framework for collecting data, as specified by the SNA93, that would illustrate more clearly the impact of government loans, but unfortunately hardly any countries report the data so that it is broken down in this manner. 16.  Calculated from figures from the U.S. Treasury. 17.  Inter-Bank Research Organisation et al., Banking Systems Abroad: The Role of Large Deposit Banks in the Financial Systems of Germany, France, Italy, the Netherlands, Switzerland, Sweden, Japan, and the United States (London: Inter-Bank Research Organisation, 1980), 123. 18.  Ibid., 129. 19.  These numbers are compiled from data from the Bank of Japan and author calculations. 20.  There is a framework for collecting data, as specified by the SNA93, that would illustrate more clearly the impact of government loans, but unfortunately hardly any countries report the data so that it is broken down in this manner. 21.  For the OECD countries for which there is data, public fixed capital investment and government receipts (both as a share of GDP) in 1970 have a 0.60 correlation. If Japan, a clear outlier, is excluded, the correlation is 0.79. The correlation between public fixed capital investment and government outlays is 0.51 and 0.73 if Japan is excluded. Predictably the correlation between the level of government receipts and government outlays is even higher: 0.95 and 0.93 (excluding Japan). 22.  The figures on public investment, however, actually understate the impact of FILP because not all FILP-financed activities are considered “public investment.”

  Notes to Chapter Three 23.  Sven Steinmo and Kathleen Ann Thelen, “Historical Instititutionalism in Comparative Politics,” in Sven Steinmo, Kathleen Ann Thelen, and Frank Longstreth, eds., Structuring Politics: Historical Institutionalism in Comparative Analysis. Cambridge Studies in Comparative Politics (Cambridge, UK, and New York: Cambridge University Press, 1992); Theda Skocpol, “Bringing the State Back In: Strategies of Analysis in Current Research,” in Peter B. Evans, Dietrich Rueschemeyer, and Theda Skocpol, eds., Bringing the State Back In (Cambridge, UK, and New York: Cambridge University Press, 1985); Paul Pierson, “When Cause Becomes Effect: Policy Feedback and Political Change,” World Politics 48, 2 (1993); Paul Pierson, Politics in Time: History, Institutions, and Social Analysis (Princeton, NJ: Princeton University Press, 2004); Kathleen Ann Thelen, How Institutions Evolve: The Political Economy of Skills in Germany, Britain, the United States, and Japan. Cambridge Studies in Comparative Politics (Cambridge, UK, and New York: Cambridge University Press, 2004). 24.  Thelen, 2004. 25.  Sven Steinmo, Taxation and Democracy: Swedish, British, and American Approaches to Financing the Modern State (New Haven, CT: Yale University Press, 1993). 26.  Thelen, 2004. 27.  Official from the Development Bank of Japan, February 21, 2008. 28.  See Nogochi (1995b) on the changing effectiveness of FILP investments. 29.  Steinmo and Thelen, 1992. 30.  Steinmo, 1993, 17. 31.  Estévez-Abe, 2008. 32.  William A. Niskanen, Bureaucracy and Representative Government (Chicago: Aldine, 1971). 33.  Pierson, 1993. 34.  Thelen, 2004. 35.  Pierson, 2004, 15. 36.  Pierson, 1993, 2004: Thelen, 2004. 37.  Pierson, 2004, 134.

Notes to Chapter Three 1.  James Savage, “The Origins of Budgetary Preferences, the Dodge Line and the Balanced Budget Norm in Japan,” Administration and Society 34, 3 (2002): 264. 2.  Charles Poor Kindleberger, The World in Depression, 1929–1939, revised and enlarged edition, History of the World Economy in the Twentieth Century (Berkeley: University of California Press, 1986). 3.  Robert A. Scalapino and Junnosuke Masumi, Parties and Politics in Contemporary Japan (Berkeley: University of California Press, 1962), 55.

Notes to Chapter Three   4.  By way of example, MOF issued a statement (“A Critique of Dodge’s Statement” on November 29, 1951) that among other things criticized his imposition of tight budgets and deflationary policies. The Economic Stabilization Board was also headed at various times by Socialist economists, such as Wada Hirō. 5.  Johnson, 1982, 176. 6.  Bai Gao, Economic Ideology and Japanese Industrial Policy: Developmentalism from 1931 to 1965 (Cambridge, UK, and New York: Cambridge University Press, 1997); Johnson, 1982; Yukio Noguchi, 1940-Nen Taisei: Saraba “Senji Keizai” (Tōkyō: Tōyō Keizai Shinpōsha, 1995a). 7.  Shokichi Endō, Zaisei Tōyūshi (Tōkyō: Iwanami Shoten, 1966), 79–80. 8.  Johnson, 1982, 183. 9.  Cohen, 1950. 10.  Zaiseishishitsu Ōkūrashō, Shōwa Zaiseishi: Shūsen Kara Kōwa Made, vol. 3 (Tōkyō: Tōyō Keizai Shinpōsha, 1976c), 391. 11.  Cohen, 1950. 12.  Ibid. 13.  The bonds were actually purchased indirectly by the Bank of Japan through the postal savings fund. The latter is described in more detail later in the chapter. 14.  Endō, 1966, 89. 15.  Gao, 1997, 421. 16.  Reflecting the importance of budget restraint, budget balance was the first of the nine-point stabilization package. The others were: (2) strengthen tax system, (3) tighten credit, (4) stabilize wages, (5) price controls, (6) pegged exchange rate, (7) promotion of exports, (8) increase output, and (9) improve food production and distribution system. 17.  Mabuchi, 1994, 167–168; Yamaguchi, 1987, 124. 18.  As translated by Ryūichirō Tachi, The Contemporary Japanese Economy: An Overview (Tōkyō: University of Tōkyō Press, 1993), 108. 19.  Ibid. 20.  Savage, 2002, 267. 21.  Zaiseishishitsu Ōkūrashō, Shōwa Zaiseishi: Shūsen Kara Kōwa Made, vol. 4 (Tōkyō: Tōyō Keizai Shinpōsha, 1976d), 416–417; Endō, 1966, 98–99. 22.  Monetary policy was another potential means of Keynesian stimulus, but the MOF’s worries about inflation and balance of payments meant that it was not used as such. Noguchi, Tachi, and others have argued that Keynesianism was never used after the Dodge Line. 23.  Eiji Takemae, Robert Ricketts, and Sebastian Swann, Inside GHQ: The Allied Occupation of Japan and Its Legacy (New York: Continuum, 2002), 468. 24.  Ōkūrashō, 1976d, 421.

  Notes to Chapter Three 25.  Indeed, Washington worried about SCAP cooperation and took steps to ensure it. See Ōkūrashō, 1976d, 391–443. 26.  James Savage, “The Origins of Budgetary Preferences, the Dodge Line and the Balanced Budget Norm in Japan,” Administration and Society 34, 3 (2002). 27.  Ōkūrashō, 1976d, 418–419. 28.  Ibid., 415. 29.  Ibid. 30.  Ibid., 420–425. 31.  The two programs were GARIOA (Government and Relief in Occupied Areas) and EROA (Economic Rehabilitation in Occupied Areas). The United States gave the Japanese government commodities that were then sold. The proceeds were then transferred to the Foreign Trade Fund Special Account. 32.  In addition to providing domestic relief, the aid had a political function as well. The Japanese economy at the time was highly dependent on aid, and the Occupation authorities used aid as an instrument to get the Japanese government to do what it wanted. In this case, it was to get the government on board with the Dodge Line. 33.  Keizai dantai rengō, Keizai Dantai Rengō Kaigōjyū Nen Shi, vol. 2 (Tōkyō: Keizai dantai rengō, 1963), 727. 34.  Ibid. 35.  Endō, 1966, 102. 36.  Kazuyoshi Kōshiro, Sengo 50nen Sangyō Koyō Rōdō Shi (Tōkyō: Nihon rōdō kenkyū kikō, 1995), 19. 37.  Takemae et al., 2002, 470. 38.  Kokumin kinyū kikō, Kokumin Kinyū Kōko Jyū Nen Shi (Tōkyō: Kokumin kinyū kikō, 1959), 115–116. 39.  Kazushi Ōhkawa and Henry Rosovsky, “Japanese Economic Growth: Trend Acceleration in the Twentieth Century” (Stanford, CA: Stanford University Press, 1973), 57, as cited by Pempel, 1998, 97. 40.  Nōrin gyogyō kinyū kikō, Nōrin Gyogyō Kinyū Kōko Ni Jyū Nen Shi (Tōkyō: Nōrin gyogyō kinyū kikō, 1965), 13. 41.  Quoted from Kokumin kinyū kikō, 1959, 123–124. 42.  Calder, 1988; Jinno, 1998: Pempel, 1998; Garon Sheldon and Mike Mochizuki, “Negotiating Social Contracts,” in Andrew Gordon, ed., Postwar Japan as History (Berkeley: University of California Press, 1993). 43.  Pempel, 1998, 89. 44.  Calder, 1988, 337–338. 45.  For a brief overview of the history Deposit Bureau, see Junichi Terai, “Zaimushō Konjyaku Monogatari,” Fainansu March 2004.

Notes to Chapter Three   46.  Masaharu Nakagawa, Fumio Inui, and Yūzo Harada, Zaisei Tōyōshi (Tōkyō: ōkura zaimu kyōkai, 1994), 81–88. 47.  Ōkūrashō, Shikin Unyōbu Shikin Nitsuite (Tōkyō: Ōkūrashō bunkō, 1986), 2–17; Katalin Ferber, “ ‘Run the State Like a Business’: The Origin of the Deposit Fund in Meiji Japan,” Japanese Politics 22, 2 (2002). 48.  Zaiseishishitsu Ōkūrashō, Showa Zaisei Shi, Shusen Kara Kowa Made, vol. 10 (Tōkyō: Tōyō Keizai Shinpōsha, 1976j), 887–894. 49.  Zaiseishishitsu Ōkūrashō, Shōwa Zaiseishi. Shōwa 27—48-Nendo, 20 vols., vol. 8 (Tōkyō: Tōyō Keizai Shinpōsha, 1990b), 5–6; Ōkūrashō, 1976j. 50.  The means of democratization would be the establishment of deliberation councils with private sector members who would oversee the overall policy of lending. Deliberation councils would evolve into a key means of incorporating actors into the process and would give them a voice in discussion of policy finance. They did not lead to any meaningful democratization, however. 51.  For details of both business groups lobbying activity and cooperation with MOF, see Keizai dantai rengō, 1963, 726–740. 52.  Ōkūrashō, 1976j, 825–827. 53.  Under the Dodge Line, the Counterpart Fund was used to buy back government loans held by the Deposit Bureau. This also increased funds in the Deposit Bureau (Ibid., 850–856). 54.  Ōkūrashō, 1986, 2–17. 55.  See Calder, 1990, and MacLachlan, 2004. 56.  Examples include requests from the Prefectural Governments’ Conference (Feb. 1947), All National Governor’s Conference (November 1947), and All National Prefectural Assembly Chairperson’s Conference (May 1948). See Ōkūrashō, 1976j, 887–894. 57.  “Kani Seimei Hōken Oyobi Yūbin Nenkin Tsumitatekin No Unyō Nitsuite,” www.ndl.go.jp/horei_jp/kakugi/txt/txt00994. 58.  On May 25, 1949, Ikeda submitted a formal request to open up the Deposit Bureau funds. The memo begins by pointing out the surplus in Deposit Bureau funds above and beyond what will be used for governmental financing, then mentions the budget gap. It is clear from the memo that the Japanese government wanted to fill in budget gaps with Deposit Bureau funds. This is an important role that FILP would play. For the text of the memo, see Ōkūrashō, 1976j, 812–814. 59.  Ibid., 812–849. 60.  Prior to Minister Ikeda’s visit to the United States in 1950, Dodge sent a letter, dated March 28, 1950. He directly requested information on the Deposit Bureau and Counterpart Fund. He wrote:

  Notes to Chapter Three There are some things that are particularly needed here and would be especially helpful if you could bring along. We would like to have current information on the various elements that have to be considered in connection with the operation of fiscal controls. Information on the status of the Counterpart Fund and the progress of the various loaning projects and debt retirement under the Counterpart Fund will be particularly important. Also we would like to discuss the Deposit Bureau problem and recent facts pertinent to that will be helpful. The letter is in Zaimushō, n.d., 56. 61.  Beginning in February 1950, at the request of Minister Ikeda, Dodge promised to reconsider the issue of the Deposit Bureau. He passed on materials to U.S. agencies for review. See letter dated February 1, 1950, from Dodge to Ikeda. Dodge also requested an economist at Rutgers University, Audley Stephan, to review Japan’s economic situation. In Professor Stephan’s reply, on May 11, 1950, he advocated letting the government use the Deposit Bureau Funds, writing, “In regard to the 95 billion or more you estimated to be available in the Deposit Bureau I repeat, these funds ought to be invested so as to increase Japan’s productivity. The need appears to be not funds but channeling facilities” (Ibid., 17, 84). 62.  Dodge originally suggested a different mechanism. He suggested that the various funds—postal savings, postal pensions and life insurance—purchase deposit certificates. The Deposit Bureau would then pay interest on these certificates and would handle management of these funds. MOF, however, suggested a simple cash transfer. As long as the security of the deposits was clarified and strengthened, Dodge was willingly to go with this plan. It is not completely clear how this might have changed the evolution of the system. It seems unlikely that this would have made a significant difference. One feature that would have made a difference would have been if the funds were not transferred automatically to the Trust Fund Bureau because it is this feature that caused funds to pile up automatically. The so-called yotaku system, the automatic transfer of funds, was abolished, effective April 2001, as part of FILP reforms. 63.  Ōkūrashō, 1976j, 884–887. 64.  The use of the Counterpart Fund partly relieved pressure on the budget because it meant that, under the new policy of superbalancing, a smaller budget surplus would be need to be set aside for debt servicing and debt retirement. But because many of the bonds were held by the central bank, debt retirement had the effect of reducing the money supply. 65.  Ōkūrashō, 1990b, 20–22. 66.  Ibid. 67.  On the conservative coalition prior to the end of the war see Jinno, 1998.

Notes to Chapter Three   68.  Zaiseishishitsu Ōkūrashō, Shōwa Zaiseishi: Shūsen Kara Kōwa Made, vol. 12 (Tōkyō: Tōyō Keizai Shinpōsha, 1976l), 745–481. 69.  Chūshō kigyō kinyū kōko,, Chūshō Kigyō Kinyū Kōko Jyū Nen Shi (Tōkyō: Chūshō kigyō kinyū kōko, 1964), 170–173. 70.  The government came up with the idea for a new public finance corporation. Originally, there were other ideas in circulation at the time. One was for the creation of a special account, and another was for expanding the functions of an existing institution: Central Cooperative Bank for Commerce and Industry (shōkō chūkin). MOF investigated both options and identified problems with both. The problem of using Central Cooperative Bank for Commerce and Industry was that it was a cooperative and as such had a number of restrictions, such as limiting lending to member firms. MOF also believed that the Public Finance Law restricted the flexibility of any special accounts. Both industry groups and finance groups wanted either existing institutions to be used or the creation of a new special account, so that there would be no competition with the private sector. They also opposed the use of any new institutions or the revision of the law governing Central Cooperative Bank for Commerce and Industry. Both MOF and METI operated with the assumption that no new institutions would be created, but, once the cabinet took up the issue after the Ikeda controversy, the idea for a new institution gained momentum because of limitations with the other approaches. See Ibid., 163–175. 71.  Ibid., 175. 72.  Zaiseishishitsu Ōkūrashō, Shōwa Zaiseishi: Shūsen Kara Kōwa Made, vol. 13 (Tōkyō: Tōyō Keizai Shinpōsha, 1976m), 3–22. 73.  Cohen, 1950. 74.  Nihon kaihatsu ginkō, Nihon Kaihatsu Ginkō Jyū Nen Shi (Tōkyō: Nihon kaihatsu ginkō, 1963), 19–20. 75.  Ibid., 34–35. 76.  Ibid. 77.  See Ōkūrashō, 1976l, 767. 78.  See Ibid., 771. Ultimately, the reason MOC won this battle is that the massive housing shortage persisted, and greater state intervention was seen as the only way out of the problem. 79.  Nihon kaihatsu ginkō, 1963, 20. 80.  Ōkūrashō, 1976m, 10. 81.  Johnson, 1978. 82.  Jūtaku kinyū kōko, Jūtaku Kinyū Kōko Jyū Nen Shi (Tōkyō: Jutaku kinyu koko, 1960), 28–29. 83.  Ōkūrashō, 1976l, 745–781. 84.  Ibid., 751.

  Notes to Chapter Four 85.  The political benefits were minimal because the prime minister could not trump up his trip as it was seen by GHQ as an attempt by the Japanese government to undermine its authority by going over their head directly to Washington. But as an indication of how unpopular the Dodge Line was, Washington and GHQ even discussed a secret plan to educate the public of the need for such draconian measures. They were worried that it would tarnish their image and undermine their credibility. 86.  Memo from the Department of the Army to Joseph Dodge, April 29, 1950, and memo written by Dodge dated May 3, 1950, “Personal Conferences of Mr. Dodge with Minister Ikeda” in Zaimushō, n.d., 95–106. 87.  The first FILP Plan, though, was actually called the Fisal Investment Program Plan (zaisei tōshi keikaku hyō), but the name was changed for fiscal year to 1954 (zaisei tōyūshi keikaku hyō). 88.  John Lamberton Harper, America and the Reconstruction of Italy, 1945–1948 (New York: Cambridge University Press, 1986), 141–158. 89.  George Herbert Hildebrand, Growth and Structure in the Economy of Modern Italy (Cambridge, MA: Harvard University Press, 1965). 90.  Harper, 1986, 141–158. 91.  Paola Menale and Monica Tamisari, Cassa Depositi E Prestiti: Its Local Authority and Treasury Funding Roles (Rome: Cassa depositi e prestiti, 2002), 4–14. 92.  Alan Kramer, The West German Economy: 1945–1955 (New York: St. Martin’s Press, 1991), 135. 93.  E. Owen Smith, The West German Economy (New York: St. Martin’s Press, 1983), 72; Hans-Joachim Braun, The German Economy in the Twentieth Century, Contemporary Economic History of Europe Series (London and New York: Routledge, 1990). 94.  Warren C. Baum, The French Economy and the State, ed. Anonymous (Princeton, NJ: Princeton University Press, 1958), 51–52. 95.  Ibid., 59–60. 96.  Ibid., 55.

Notes to Chapter Four 1.  Michio Muramatsu, Mitsutoshi Itō, and Yutaka Tsujinaka, Sengo Nihon No Atsuryoku Dantai (Tōkyō: Tōyō Keizai Shinpōsha, 1986), 72–86. 2.  The San Francisco Peace Treaty, which restored Japanese Independence, took affect in April 1952. The 1952 supplementary budget was the first budget under independence, but the fiscal 1953 budget is also referred to as an “independence budget.” In either case there were high expectations for both. 3.  “[004/086] Shū - Honkaigi - 15 Gō,” [December 20, 2004], www.ndl.go.jp/.

Notes to Chapter Four   4.  Kaishintō merged in 1954 with Hatoyama’s Japan Liberal Party, which was itself a breakaway from the Liberal Party. Eventually the parties merged to form the LDP. 5.  Ōkūrashō, 1990b, 68. 6.  Hayato Ikeda, Kinkō Zaisei (Tōkyō: Chuo Koron, 1952). 7.  Ōtake, 1991. 8.  Professor Ide Eisaku kindly pointed out Okinori’s former position as finance minister. 9.  Ōtake, 1991. 10.  Ibid. 11.  Ibid., 172–176. 12.  Fumio Fukunaga, “Kishi Nobusuke to Jimintō Seiken,” in Takafusa Nakamura and Masayasu Miyazaki, eds., Kishi Nobusuke Seiken to Kōdo Seichō (Tōkyō: Tōyō Keizai Shinpōsha, 2003). 13.  Shin Chōki Keizai Keikaku (Tōkyō: Keizei kikaku chō, 1957), 21. 14.  Ibid. 15.  Ibid., 11. 16.  Itō Masaya, Ikeda Hayato to Sono Jidai (Tōkyō: Asahi Shimbunsha, 1985), 63. 17.  Interview with Shimomura Osamu in “Seichō Taisaku No Seika,” in Kōdo Seichō Ki He No Shōgen (Tōkyō: Nihon keizai hyōron, 1999). 18.  Ōtake, 1991. 19.  Wright, 2002, 191. 20.  Zaiseishishitsu Zaimusho Zaimu Sogo Seisaku Kenkyūjo, Showa Zaisei Shi, Showa 27-48 Nendo, vol. 8 (Tōkyō: Tōyō Keizai Shinpōsha, 1999), 257. 21.  Physical infrastructure related to social security did not face this same constraint. Hospitals or nursing homes, for example, could be financed by FILP, and, in fact, the government did use FILP to pay for such facilities. 22.  Milly, 1999, 172–183. 23.  Keizai kikaku chō. Kokumin Shotoku Baizo Keikaku, ed. keizai kikaku chō (Tōkyō: 1961), 8. 24.  For example, the plan highlights “problems requiring special attention and appropriate measures” and lists the following: (1) promoting the modernization of agriculture, (2) the modernization of SMEs, (3) the promoting the development of backward areas, (4) the promotion of appropriate industrial location and the regional distribution of public investment, and (5) cooperation in global economic development. 25.  The chair of the Social Security Committee, Imai, refers to the fiscal limits in his opening statements. See Sōgō kenkyū kaihatsu kikō, Kokumin Shotoku Baizō Keikaku Shiryō, ed. Sōgō kenkyū kaihatsu kikō, vol. 36 (Tōkyō: Nihon keizai hyōronsha, 2000a).

  Notes to Chapter Four 26.  Milly, 1999, 184–186. 27.  Ibid., 183. 28.  Ōkita Saburō recalls, “There were all kinds of requests from various LDP groups. They demanded promotion of agriculture modernization, modernization of SMEs, promotion of the development of backward regions, and so forth. Just like with the Tokaido Industrial Belt, there was a political backlash. That’s why the preface was included” (“Itsutsu No Seisaku Mokuhyōni Jyūten,” in Kōdo Seichō Ki He No Shōgen [Tōkyō: Nihon keizai hyōron, 1999], 39). 29.  Milly, 1999, 181. 30.  See interview with Ōkita Saburō, “Itsutsu No Seisaku Mokuhyōni Jyūten,” in Kōdo Seichō Ki He No Shōgen (Tōkyō: Nihon keizai hyōron, 1999). Wada was actually arrested in 1941 as a subversive, as were many Socialist economists who in the postwar would become influential in policy circles. See Laura Elizabeth Hein, Reasonable Men, Powerful Words: Political Culture and Expertise in TwentiethCentury Japan, Twentieth-Century Japan; 16 (Washington, DC, and Berkeley: Woodrow Wilson Center Press and University of California Press, 2004). 31.  Seisaku kenkyū daigakuin daigaku. Miyazaki Yū—Ōraru Hisutori, ed. seisaku kenkyū daigakuin daigaku, C.O.E. Ōraru Hisutori—Seisaku Kenkyū Purojekuto (Tōkyō: seisaku kenkyū daigakuin daigaku, 2003), 144. 32.  Interview with Ōkita Saburō. “Itsutsu No Seisaku Mokuhyōni Jyūten,” in Kōdo Seichō Ki He No Shōgen (Tōkyō: nihon keizai hyōron, 1999), 37–39. 33.  Kokumin Shotoku Baizō Keikaku, (Tōkyō: Keizai kikaku chō), 24. 34.  Ibid., 9. 35.  Ibid., 162. 36.  Ibid., 44. 37.  In most cases the government budget passes the Diet unaltered, but in some rare cases revision are made. 38.  Wright’s analysis focuses on the period from the 1970s onward, but this observation applies earlier as well (Wright, 2002, 346–363). 39.  Ōkūrashō, 1990b, 291–295. 40.  Ibid., 292. 41.  Ibid., 158. 42.  Ibid., 224. 43.  The Road Corporation is now well known in Japan as a massive public corporation at the heart of numerous political scandals, including bid rigging and kickbacks. 44.  Ōkūrashō, 1990b, 39. 45.  Yamaguchi, 1987, 308–309. 46.  Ōkūrashō, 1990b, 54–56. 47.  Ibid., 228.

Notes to Chapter Five   48.  Ibid., 296. 49.  Three committees, often referred to as “deliberation councils” (shingikai) in the English-language literature, took up the issue of the investment of reserves from that national pension system: National Pension Council, Social Insurance Council, and the Trust Fund Bureau Council. The Social Insurance Council (incidentally headed by Aritomo Hiromi, the architect of priority production and prominent Socialist economist, represented the Ministry of Health and Welfare [MHW]). This council recommended allowing some transfer of funds to the Trust Fund Bureau but did not mandate this requirement. It also wanted the funds invested in areas that would be related to enhancing social security. In the end, the pension reserves were required to be transferred to the Trust Fund Bureau Fund, and a new public corporation was created to invest in areas related to social security, the Pension Welfare Finance Corporation (Nenkin fukushi kikō). For details see Ibid., 240–246. 50.  Fourth Meeting of the Fiscal and Financial Subcommittee. See Sōgō kenkyū kaihatsu kikō, Kokumin Shotoku Baizō Keikaku Shiryō, ed. Sōgō kenkyū kaihatsu kikō, vol. 37 (Tōkyō: Nihon keizai hyōronsha, 2000b), 12, 260–261. 51.  Calder, 1990, 45–49.

Notes to Chapter Five 1.  This has been a controversial and long-debated topic. Some scholars have found that FILP initially spurred economic development, but over time FILP shifted to lower productivity sectors. Others, such as Beason and Weinstein (1996), have found that sectors that the sectors that received greater financing via the Japan Development Bank (JDB) had slower productivity growth even during Japan’s period of rapid growth. For arguments in the former camp see: Cargill and Yoshino, 2003: Johnson, 1978; Noguchi, 1995b. For views skeptical of the contribution of FILP financing, see Richard Beason and David Weinstein, “Growth, Economies of Scale and Targeting in Japan (1955–1990),” Review of Economics and Statistics 78, 2 (1996). 2.  The Cabinet Office, MOF, Bank of Japan, and Ministry of Internal Affairs and Communications. 3.  Professor Steven Reed compiled the data set and kindly shared it with the author. 4.  From 1955 to 1993, the LDP has ruled continuously. For a brief period, though, in the 1970s, the LDP cooperated with a former breakaway faction, the New Liberal Club. 5.  In cases when the Upper House does not pass budget bills that have passed the Lower House, the budget bills will automatically become law after a certain period of time elapses.

  Notes to Chapter Six 6.  One exception is prior to the 1993 election, when two groups of LDP members bolted the party, leaving the LDP without a majority. Prime Minister Miyazawa promptly dissolved the Diet and called for elections. 7.  A composite variable that contained all three of the FILP variables was created and included in the regression analysis. This interactive variable did not produce any independent statistically significant effect, nor did it change the significance of the individual FILP coefficients, so it was removed. The results are not presented. 8.  The raw data contain what the BOJ deems the most important of the government financial institutions. Unfortunately, this varies over time. The three comprising the index were the only ones that were included for all of the years. 9.  Ethan Scheiner, Democracy without Competition in Japan: Opposition Failure in a One-Party Dominant State (Cambridge, UK, and New York: Cambridge University Press, 2006). 10.  In contrast to Models 1 and 2, the unit is simply yen (that is, 1 = 1 yen), not in millions of yen, to make the interpretation of the regression results easier. 11.  Calder, 1993. 12.  Scheiner, 2006; Pempel, 1998.

Notes to Chapter Six 1.  See Pempel, 1998, 187. 2.  Quoted in Curtis, 1988, 65. 3.  In principle, because public works leave behind a tangible asset that can also be used by future generations, there is an argument that deficits to finance such public works are better justified than debts to cover budget deficits. This is a distinction that the Japanese government has made. Initially, the government limited the issuance of debt for such purposes, issuing only construction bonds. This was the last and falling defense of MOF’s attempt to preserve the balanced budget principle. This distinction between deficits to finance public works and structural deficits by the 1970s became largely meaningless. 4.  Wright, 2002, 433–434. 5.  Kei Tanaka, personal interview, January 13, 2006. 6.  Igarashi, 2002, 161. 7.  Noguchi, 1995b, 281. 8.  Curtis, 1988, 67–68. 9.  Official from the Development Bank of Japan, personal interview, February 21, 2008. 10.  Former MOF Finance Bureau Section Chief, personal interview, April 1, 2005.

Notes to Chapter Six   11.  Kiichi Watanabe, personal interview, January 12, 2006. 12.  Shigeki Morinobu, personal interview, February 7, 2006. 13.  Former MOF Administrative Vice Minister for International Affairs, personal interview, February 24, 2006. 14.  Kiichi Watanabe, personal interview, January 12, 2006; Kei Tanaka, personal Interview, January 13, 2006; former MOF Finance Bureau section chief, personal interview, April 1, 2005. 15.  Former MOF Finance Bureau section chief, personal interview, April 1, 2005; Kei Tanaka, personal interview, January 13, 2006; Kiichi Watanabe, personal interview, January 12, 2006. 16.  One former high-level official recounted a joke to capture the Financial Bureau’s position, calling it the “the bureau that is always opposing [requests from the Budget Bureau]” (itsumo hantai rizai kyoku) (former MOF administrative vice minister for international affairs, personal interview, February 24, 2006). Another former official, when asked in an interview why the Financial Bureau took on requests from the Budget Bureau, bluntly commented that it was simply because the Budget Bureau was far more powerful (attoteki ni tsuyoi). Former MOF Finance Bureau section chief, personal interview, April 1, 2005. 17.  Former MOF Finance Bureau section chief, personal interview, April 1, 2005. 18.  One former high-level official from the Financial Bureau not only confirmed that this happened but actually pointed out specific areas where this had occurred (Ibid.). 19.  Ibid. 20.  Official from the Development Bank of Japan, personal interview, February 21, 2008; MOF official, June 27, 2008. 21.  Former MOF Finance Bureau section chief, personal interview, April 1, 2005. 22.  Former MOF Finance Bureau section chief, personal interview, April 1, 2005. 23.  Previously called MITI. 24.  Yō Takeuchi, personal interview, July 19, 2006. 25.  For most of period after World War II, the Ministry of Home Affairs (MHA) oversaw local government finance, in conjunction with MOF. In 2001, the MHA was reorganized as the Home Affairs Agency and then finally as the Ministry of Internal Affairs and Communications (MIAC). 26.  The fiscal equalization system is not unique to Japan. Germany has a similar system. 27.  The five taxes and their respective share that is transferred to the Fiscal Equalization Special Account are: income tax (32 percent); alcohol tax (32 percent);

  Notes to Chapter Six corporate tax (32 percent); consumption tax (29.5 percent); and tobacco tax (25 percent). 28.  The central government also sets the upper limits on the amount of debt that local governments can issue. 29.  As discussed earlier, there have been major reforms to the FILP system. The TFBF has been restructured. 30.  “Jichishō, 53 Nendo Jyūten Shisaku Kettei,” Nikkei Shimbun, August 24, 1977. 31.  For instance, during revival negotiations over the 1977 budget, MOF agreed to increase local government financing in the FILP Plan. MOF agreed to increase direct local financing by 200 billion yen to 1.8 trillion yen and to increase FILP financing to the Japan Finance Corporation for Municipal Enterprises allocation by 50 billion to 450 billion yen (“Ōkura Jichishō No Chizai Taisaku Katamaru,” Nikkei Shimbun, January 18, 1977). 32.  This was a way to circumvent the Public Finance Law, which required bonds to be sold via private placement. 33.  Robert Alan Feldman, Japanese Financial Markets: Deficits, Dilemmas, and Deregulation (Cambridge, MA: MIT Press, 1986), 48–59. 34.  Kei Tanaka, personal interview, January 13, 2006. 35.  Takaaki Suzuki, Japan’s Budget Politics: Balancing Domestic and Inter­ national Interests, Studies of the East Asian Institute (Boulder, CO, and London: Lynne Rienner Publishers, 2000), 104. 36.  MOF could have focused on raising income tax rather than consumption or value-added taxes. For a good account of why MOF preferred consumption and the VAT over income taxes, see Junko Kato, The Problem of Bureaucratic Rationality: Tax Politics in Japan (Princeton, NJ: Princeton University Press, 1994). 37.  For a detailed description of this reform effort, see Ibid. and Suzuki, 2000. 38.  Gerald L. Curtis, The Logic of Japanese Politics: Leaders, Institutions, and the Limits of Change, Studies of the East Asian Institute (New York: Columbia University Press, 1999), 208– 12. 39.  On how MOF formulates and pursues its agenda, see Kato, 1994. 40.  The MPT has been reorganized extensively. In 2001, it was merged with the Ministry of Public Management, Home Affairs, Posts, and Telecommunications (Sōmushō) with the Postal Services Agency (Yūsei Jigyōchō) overseeing the post office system. In April 2003, the Postal Services became a public corporation called Japan Post (Yūsei Kōsha). 41.  For details on the advantages on postal savings see Anderson, 1990; Shinichi Gotō, Yūcho Mineikaro: Yūcho, Ginkō Ronsōshi, Shohan, ed. (Tōkyō: Yūhikaku, 1987). 42.  See MacLachlan, 2004.

Notes to Chapter Seven   43.  Inoguchi and Iwai, 1987, 202–205. 44.  From 1947 to 1970, the MPT minister post has been held by five faction leaders, four of whom became prime minister—Miki Takeo, Satō Eisaku, Tanaka Kakuei, Suzuki Zenkō. 45.  Kei Tanaka, personal interview, January 13, 2006. 46.  Former MOF Finance Bureau section chief, personal interview, April 1, 2005. 47.  Former MOF Finance Bureau section chief, personal Interview, January 13, 2006. 48.  Menale and Tamisari, 2002, 14–43. 49.  Ibid., 28–30. 50.  Michael Maurice Loriaux, France after Hegemony: International Change and Financial Reform, Cornell Studies in Political Economy (Ithaca, NY: Cornell University Press, 1991), 171; Andrew Knapp and Vincent Wright, The Government and Politics of France, 5th ed. (London and New York: Routledge, 2006), 151. 51.  Loriaux, 1991, 146–152. 52.  Ibid., 174–175.

Notes to Chapter Seven 1.  One important exception was the issue of “self-management” discussed in the previous chapter, although the reform that resulted did not alter the system very significantly. 2.  Keizai Dōyūkai, “‘Kōteki Kinyū—Zaisei Tōyōshi’ No Kaikaku Ni Muke,” [July 23, 1996], Retrieved on December 11, 2000, from: www.doyukai.or.jp/ database/teigen/960723.htm. 3.  There are no consolidated employment figures. This estimate is based on a reference material collected in conjunction with a initiative to reform the special corporations—Tokushuhōjin setsuritsu nengappi—konkyohō—yakushokuin ichiran from 2002. There were 261,451 employees and, of these, 619 were in the management class. Not all of these, however, are FILP agencies, although the majority are, including most of the large ones. On the other hand, there were more FILP agencies during 1990s; as already mentioned in the text, the number peaked in 1994. 4.  Ministry of Land, Infrastructure, and Transportation (MLIT), “Kokutetsu Chōkisaimu Nado No Shori,” [n.d.]; retrieved on January 10, 2008, from: www .mlit.go.jp/hakusyo/transport/shouwa63/ind000302/001.html. 5.  For example: Atsushi Miyawaki, Zaisei Tōyūshi No Kaikaku: Kōteki Kinyū Hidaika No Jittai (Tōkyō: Tōyō Keizai Shinpōsha, 1995). 6.  Takero Doi and Takeo Hoshi, “Paying for FILP,” NBER Working Paper, no. 9385 (2002).

  Notes to Chapter Seven 7.  They include in their calculations local government debt. Although local governments face very real obstacles to repaying their FILP loans, they are not strictly bad loans. 8.  Grimes, 2001. 9.  The author would like to thank Ide Eisaku of Keio University for pointing out this critical point. 10.  See the following for detailed accounts on the restructuring of MOF: Ibid.; Amyx, 2004. 11.  Curtis, 1999. 12.  Scheiner presents a good overview of the effect of SNTV, although he also argues that SNTV does not fully explain the failure of the opposition (and by extension success of the LDP) (Scheiner, 2006, 56–59). 13.  “Prime Minister Hosokawa’s Policy Speech before Diet,” Japan Economic Newswire, March 4, 1994. 14.  “The Hosokawa Government: Coalition Takes Power,” The Nikkei Weekly, August 16, 1993. 15.  The NFP captured thirty seats to the LDP’s twenty-nine seats, while the JSP captured nine and Sakigake only two. Murayama, despite having called for administrative and political reform, interpreted the ruling coalition’s poor results as a public call for more administrative reform. 16.  “Murayama Vows Reform Effort in Wake of Election Setback,” Japan Economic Newswire, July 26, 1995. 17.  “Administrative Reform Key to Election Win: LDP Lawmaker,” Japan Economic Newswire, September 3, 1996. 18.  Hideo Ōtake, “Forces for Political Reform, the Liberal Democratic Party’s Young Reformers and Ozawa Ichirō,” Journal of Japanese Studies 22, 2 (Summer 1996). 19.  “Administrative Reform Study Group Urges Expense Cuts,” Japan Economic Newswire, August 1, 1996. 20.  In January 1996, the Japan Social Party ( JSP) renamed itself the Social Democratic Party (SDP). 21.  “Premier Endorses Agreement with Coalition Leaders,” Mainichi Daily News, November 1, 1996. 22.  Sakigake was founded partly in opposition to Ozawa Ichiro, another young former LDP member who founded the NFP. Both were reformist parties but with different stances toward electoral reform, security, and foreign policy. 23.  See Keizai Dōyūkai. 24.  “Yūseichokin Kyokuchō, Yūcho Minaoshi, Giron Sezu Ni –Zaitōken De Kensei,” Nikkei Kinyū Shimbun, June 13, 1995. 25.  MacLachlan, 2006.

Notes to Chapter Seven   26.  Rizaikyoku, “Zaiseitōyōshi No Shōrai” (June 1995). 27.  Keimei Kaizuka, Personal interview, April 17, 2006. 28.  The four areas listed include: areas where there are specific beneficiaries who should pay; areas that promote “self-help,” such as SME finance; areas that will not be served by markets; and areas that encourage or promote or supplement private economic activity. 29.  Interestingly the only mention of using bonds is in a section that addresses criticisms directed toward FILP. Most of these responses, though, are more justifications than the concrete steps for reform. Moreover, the report inserted the lack of sustainable funds as a criticism. More than a criticism, this reflected MOF’s interest in securing funds for FILP in anticipation of a decline that would accompany a flow of funds out of postal savings and the maturation of pension funds. 30.  Keimei Kaizuka, personal interview, April 17, 2006. 31.  Keimei Kaizuka, personal interview, April 26, 2006. 32.  “Hyōryū Suru Zaitō Kaikaku –Jimintō, Yatto Koshiageru “ Nikkei Keizai Shimbun, July 27, 1997. 33.  Hashimoto won. Although Koizumi and Hashimoto both agreed on the need for FILP reform, Koizumi took a more radical position arguing for the privatization of the postal savings. 34.  Keimei Kaizuka, personal interview, April 26, 2006. The following also notes MOF control: “Tsuyosugiru [Yūcho—Shūkan Bigguban Dai 3 Gō— [Kanzen] Jishu Unyō De Yūcho Ha Kawaru,” Shūkan Tōyō Keizai, July 12, 1997. 35.  See “Zaitō mitōshi e hihanha kiyō—Temporin, Nakanishi, Ikeo no 3 shi—shikinunyōshingikai,” Asahi Shimbun, p. 11, February 4, 1997. 36.  Keimei Kaizuka, personal interview, April 26, 2006. 37.  Ibid. 38.  Ibid. 39.  Former MOF Finance Bureau section chief, personal interview, April 15, 2005. 40.  Ibid. 41.  See, for instance, “MOF Still Clings to Bloated Projects,” The Nikkei Weekly, November 15, 1999. 42.  This prediction turned out to be incorrect. Total postal savings deposits did not drop drastically. This was in all probability partly due to Japan’s financial crisis at the time and the perceived safety of the postal savings system. 43.  Keimei Kaizuka, personal interview, April 26, 2006. 44.  Ibid. 45.  “Jimintō No Zaitō Kaikakuan, Jikkōseiha Tobosiku ‘Seijitekina Apeeru’ Ni Kikan Sai No Hakkō,” Mainichi Shimbun, October 18, 1997.

  Notes to Chapter Seven 46.  Kiyoshi Mizuno, personal interview, May 19, 2006. 47.  Keimei Kaizuka, personal interview, April 26, 2006. 48.  The practical consequence has been that FILP agency bonds have been essentially treated by the market as bonds backed by an implicit government guarantee, although they trade at an interest rate slightly higher than FILP bonds. 49.  Interview with Mizuno Kiyoshi in Toshiyuki Masujima and Hidenori Kobayashi, eds., Gyōkaku Wo Sasaeru Mekanizumu Hashimoto No Kaikaku Suimenka Mekanizumu (Tōkyō: Kyōsei, 2004). 50.  Mishima Ko, “The Changing Relationship between Japan’s LDP and the Bureaucracy: Hashimoto’s Administrative Reform Effort and Its Politics,” Asian Survey 38, 10 (1998): 6. 51.  “Kōteki Nenkin Tsumitatekin, Shikin Unyō Bu Tōsazu Unyō–Kentōkai Hōkokuan, Shinhōshiki Wo Teigen,” Nikkei Keizai Shimbun, July 13, 1995. 52.  Special corporations are not a legal designation. Rather, the term refers to a variety of types of public and quasi-public entities. The government and media, however, have treated the special corporations as a group. Although special corporations are not limited to the FILP agencies, FILP funding has accounted for about half of total funding, and the largest special corporations are FILP agencies. 53.  “Mutsu No Kaikaku Nitsuite No Yūshikisha Ankeeto Chōsa,” (Prime Minister’s Office, March 1996). 54.  Takenori Inoki, “Japanese Bureaucrats at Retirement: The Mobility of Human Resources from Central Government to Public Corporations,” as cited by Amyx, 2004, 81. 55.  “Seifukanren 65 Hōjin, 93 Nenban Hakusho, Amakurdari Yakuin 4 Nin Naka 3 Nin,” Nikkei Keizai Shimbun, August 13, 1993. 56.  “Gyōkaku Ga Chūkan Hōkoku, Seifu Jigyō Ni Mesu, Shōchōto No Kōbō Tenkai He,” Nikkei Keizai Shimbun, April 11, 1993. 57.  “Kanryō No Teikō De Miokurareta Tokushuhōjin Kaikaku,” Nihon Keizai Shimbun, October, 28, 1993. 58.  “Gyōkakushi Ni Ososugita ‘Oikaze’ Saishū Tōshin Made Ikka Getsu,” Asahi Shimbun, September 17, 1993. 59.  “Law Needed to Check Bureaucrats,” The Daily Yomiuri, June 5, 1994. 60.  “Gyōkakusin Saishū Tōshin, Gyōkaku, Jikkō Matta Nashi—Suzuki Eiji Ni Ku, Bunken, Nawabari Arasoi Sake Yo,” Nikkei Keizai Shimbun, October, 28, 1993. 61.  “Kanryō to No Taiketsu, Shushō No Deban Da,” Asahi Shimbun, October 28, 1993. 62.  “Gyōkakushi Ni Ososugita “Oikaze” Saishū Tōshin Made Ikka Getsu,” Asahi Shimbun, September 17, 1993.

Notes to Chapter Seven   63.  Masahiko Tatebayashi, “The Reform of the Public Corporations,” in Hideo Otake, ed., Power Shuffles and Policy Processes: Coalition Government in Japan in the 1990s (Tōkyō: Japan Center for International Exchange, 2000), 58. 64.  Hosokawa publicly committed to reforming the special corporations. By the time Hosokawa became prime minister, however, it was too late for him to shape the outcome of the final report, which at that time had already been stripped by the zoku Diet members and bureaucrats of any concrete proposals. The Hosokawa administration did, however, launch the Administrative Reform Advisory Council (gyōseikaikaku iinkai), with a mandate to come up with a standard for determining the appropriate roles of government and the private sector. This standard would then be applied to determine if special corporations should be eliminated or restructured. But, in the end, the Hosokawa administration was too short lived to accomplish anything concrete. 65.  It is somewhat puzzling why Murayama asked the ministries and agencies themselves to conduct a review because the outcome was predictable: Bureaucrats would drag their feet. According to one of the rotating chairs of the project team on special corporation reform, the main consideration was time. Mizuno Kiyoshi, in an interview, told the author that they were worried about bureaucratic foot dragging but believed they had no other choice because of time to meet Mura­ yama’s deadline. 66.  “5:Tōkyō,” The Daily Yomiuri, September 8, 1994. 67.  “EPA Chief Calls for Targets on Public Corporation Overhauls,” Japan Economic Newswire, December 16, 1994. 68.  “Independent Body Considered for Administrative Reform,” Japan Economic Newswire, January 20, 1995. 69.  Sakigake proposed privatizing the Japan Development Bank ( JDB) and the Housing Loan Corporation and merging the Export-Import Bank and the Overseas Economic Cooperation Fund (OECF), which handles overseas development assistance (ODA). 70.  A merger of the Japan Development Bank and the Export-Import Bank. 71.  Hokkaidō-Tōhoku Development Corporation. 72.  People’s Finance Corporation (PFC), Japan Finance Corporation for Small Business, and the Environmental Sanitation Business Corporation. 73.  Kiyoshi Mizuno, personal interview, May 19, 2006. 74.  As described earlier, not all special corporations are FILP agencies, and, of those that are not, many receive funds from the budget. Even many FILP agencies over the years have drawn increasingly large subsidies from the budget as well. As the built-in interest subsidy declined as the spread between market interest rates and FILP interest rates converged (see Chapter Four), the government transferred increasing funds from the budget to maintain an effective interest subsidy. MOF

  Notes to Chapter Seven has wanted to suppress funding to the special corporations, though, in the name of fiscal discipline. 75.  Amyx, 2004, 81. 76.  “Seifukanren 65 Hōjin, 93 Nenban Hakusho, Amakurdari Yakuin 4 Nin Naka 3 Nin,” Nikkei Keizai Shimbun, August 13, 1993. The top two were MAFF and MITI. 77.  “Internecine Battles Rage on Administrative Reform,” The Daily Yomiuri, February 12, 1995. 78.  “14 Public Corporations to Be Reorganized or Dismantled,” Japan Economic Newswire, February 8, 1995. 79.  “Tokushuhōjin kaikakuan tsukuri e—yōtō, karamu omowaku,” Nikkei Keizai Shimbun, p. 2, March 3, 1997. 80.  “Tokushuhōjin Ha Kontei Kara Minaosi Wo,” Yomiuri Shimbun, April 1, 1997. 81.  “Tokushuhōjin, Shōchō Dokuji Kaikaku No Ugoki, Satō Kōkō Gyōkaku Honbuchō Ga Hihan,” Tōkyō Yomiuri Shimbun, February 2, 2005. 82.  See “[Iitai Kikitai] Dengenkaihatsu Shachō- Sugiyama Hiroshi 64 Sōki Mineika De Ikinokori,” Tōkyō Yomiuri Shimbun, May 27, 1997. 83.  “Jūtaku Kōdan, Bunjō Kara Tettai, Gyōmu Shukushō E Kadai Yamazumi,” Nikkei Keizai Shimbun, January 1, 1997. 84.  “[Na] Tori [Jitsu] Ushinau Osore Jimintō Gyōkaku Honbu Ga 11 Hōjin Kaiakuan Teishutsu,” Asahi Shimbun, March 28, 1997. 85.  Although the Murayama cabinet had agreed on this merger, reformers in the ruling coalition continued to push for a merger that would involve the Export-Import Bank and JDB, both under the jurisdiction of MOF. MOF was concerned about losing amakudari positions and eventually was able to defeat the proposal again. See “Kaigin [Haishi] De Sumasuna [Gyōzaisei Kaikaku No Shiten],” Asahi Shimbun, July 2, 1997. 86.  “Seifukeikinyū Kikan Kaikaku, Konshū, Ōtsume Housei, Jimin Honbuu—Shōkō Chūkin,” Nihon Keizai Shimbun, April, 19, 1997. 87.  “Kōsei Jikan, Kankyō Eisei Kikō Tōgō Ni Maemuki,” Nikkei Keizai Shimbun, July 4, 1997. 88.  “Chūshō Kigyō, Kuni Ga Sasae No Shōkōchūkin,” Asahi Shimbun, March 20, 1997. 89.  Grimes, 2001, 88–92. 90.  Self-managed funds were included until 1999 but were excluded from 2000 onward (from personal communication from MOF official, March 2008). If one excludes self-managed funds, then the size of the FILP Plan actually increased in 2000 and then declined slightly in 2001, although it still remained higher than in 1999.

Notes to Chapter Eight  

Notes to Chapter Eight 1.  Leadership of the Tanaka faction passed on to others, such as Take­shita and Obuchi. Sometimes the Tanaka faction is referred to by the name of the leader, for example, Takeshita faction, Obuchi faction, and so on. 2.  The title of his book in English is Privatization of the Post Office: The Key Reform to Revitalize Japan; the book, however, critiques the totality of the FILP system (Junichirō Koizumi and Shigefumi Matsuzawa, Yūsei Mineikaron: Nihon Saisei No Daikaikaku!, Dai 1-han. ed. [Tōkyō: PHP Kenkyūjo, 1999]). 3.  Specifically, the funds that had been “self-managed” by the Ministry of Posts and Telecommunications and Ministry of Health and Welfare were wound down in preparation for the 2001 FILP reform, which gave each ministry control over the funds that had been transferred to the FILP system. 4.  He reduced subsidies by 1.5 trillion yen, about 8.3 billion dollars, for all the special corporations. Separate figures for the subset of FILP agencies are not available. 5.  The government had long been criticized for policy making fragmented among different ministries, a kind of bottom-up system with no central coordination (tatewari gyōsei). The reforms were intended to allow more top-down, centralized policy making. 6.  The CEFP is now largely defunct. After coming to power in 2009, the DPJ has set up alternative institutions, such as the Administrative Renovation Council and a National Policy Unit. 7.  CEFP included the following ministers: minister of state for economic and fiscal policy; minister of finance; minister of economy, trade, and industry; minister of internal affairs and communication. The governor of the Bank of Japan and several other private sector experts were also included. 8.  MPT became part of Ministry of Internal Affairs and Communication in 2002. 9.  Koizumi and Matsuzawa, 1999. 10.  “146 Lawmakers Launch Campaign against Postal Privatization,” Japan Economic Newswire, December 5, 2001. 11.  Hiromi Murakami, “Postal Privatization: Comparison of Japanese PartyPolitical Regimes in 1997 and 2005,” in International Political Science Association (IPSA) XX World Congress (Fukuoka, Japan: July 9, 2006). 12.  “Postal Privatization to Star in Polls,” Nikkei Weekly, August 4, 2003. 13.  Ibid. 14.  “Koizumi Defends Posts Privatization in LDP Manifesto,” Japan Economic Newswire, October 14, 2003.

  Notes to Chapter Eight 15.  Hiromi Murakami argues that this top-down policy-making process reduced the number of veto points allowing Koizumi to pass privatization (Murukami 2006). 16.  Scheiner, 2006. 17.  Estévez-Abe argues that Koizumi was partly a product of structural changes, in particular the change in the electoral system (Margarita Estévez-Abe, “Japan’s Shift toward a Westminster System,” Asian Survey 46, 4 [2006]). 18.  The Policy Research Council (PRC) is the new name for the Policy Affairs and Research Council (PARC) (“Tokushuhōjin Jigyō Minaoshian, Dankō Vs Teikō, Kōbō Honkakuka Shōchō to Zokugiin Ikki Ni Hanpatsu,” Yomiuri Shimbun, August 11, 2001). 19.  “Sekiyukōdan Haishi De Shudōken Arasoi,” Tōkyō Yomiuri Shimbun, August 1, 2001. 20.  “Kangyō Kiru Tokushuhōjin Kōbō Zenshōsen (2)—‘Kōeiki’ ‘Senmon’ Katai Tate—Deikinai Riyū Kuchiguchi Ni,” Nihon Keizei Shimbun, August 15, 2001. 21.  For instance, the chairman of the Executive Council, Horiuchi Mitsuo. 22.  “Kangyō Kiru Tokushuhōjin Kōbō Zenshōsen (3) Tsuyomaru Teikō No Ashioto—Jimintō Nai, Jojo Ni Honne,” Nihon Keizai Shimbun, August 16, 2001. One former chairman of the executive council and member of the Hashimoto faction, Nonaka Hiromu, exclaimed, “Whether to abolish or privatize [the special corporations] isn’t an issue that can be decided so quickly” (“Tokushuhōjin Kaikaku, Sayāte Suimenka De—Shushō—Tōgai to No Kyōryoku Mo, Hashi­ moto Ha—Mazu Jigyō Seisa Wo,” Nihon Keizai Shimbun, August 25, 2001). 23.  “Yatō No Kyōryoku Etemo Tokushuhōjin Kaikaku Dankō, Koizumi Shushō Ga Jimintō Kanjichō Ni Ishi” Tōkyō Yomiuri Shimbun, August 25, 2001. 24.  “Koizumi Shushō—Aoki Shi—Mori Zen Shushō ‘Sankakugata’ De Isi Sotsū [Kaikaku],” Tōkyō Yomiuri Shimbun, August 28, 2001. 25.  “Koizumi Gives Green Light to Roads Plan,” Asahi News Service, December 22, 2003. 26.  Doi and Hoshi, 2002. 27.  The government created the Japan National Railway Settlement Corporation to inherit the debt. The original plan was to pay off much of the debt by selling land and other assets, but with land prices declining after the collapse of the bubble the plan failed. Interest on the debt actually caused the debt to expand before the JNR settlement was dissolved in 1998, and the debt was effectively transferred to the budget (MLIT). 28.  Former MOF Finance Bureau section chief, personal interview, April 15, 2005.

Notes to Chapter Nine   29.  This is a point made by Mabuchi. Mabuchi argues that Japan has high debt because MOF has had oversight over banking and budgeting, which has allowed the government to ensure that it could finance its own debt. Mabuchi looks at financial control broadly, including FILP and private banks (Mabuchi, 1994). 30.  Mitsuhiro Fukao, “Seifukei Kinyū Kikan to Ryōteki Kanwa Kaijo No Eikyō, Kinyū Kenkyū Hōkoku,” Kinyū kenkyū hōkoku 14 (2006). 31.  “DBJ Hit by Bad Loan Increase,” Jiji Press Ticker Service, May 26, 2010. 32.  As may be recalled the Public Welfare Services Corporation (PWSC), a FILP agency, invested a portion of the reserves that it borrowed from the TFBF, under the compromise between MHW and MOF made during the mid-1980s. PWSC actually accumulated large losses in part because of the high rate at which it borrowed funds from the TFBF and also because of the decline of the stock market. GPIF replaced the PWSC. 33.  This is specified in Article 29, which mandates conferral with the finance minister on topics further specified in Articles 21, 24, and 25 of the law.

Notes to Chapter Nine 1.  Johnson, 1982. 2.  Grimes, 2001. 3.  Ibid. 4.  Ibid. Also see Posen on macroeconomic policy mistakes (Adam Simon Posen, Restoring Japan’s Economic Growth, ed. Anonymous. Policy Analyses in International Economics [Washington, DC: Institute for International Economics, 1998]). 5.  Milly, 1999; Estévez-Abe, 2008; Kasza, 2006. 6.  Milly, 1999; Estévez-Abe, 2008. 7.  Estévez-Abe, 2008, 1. 8.  Ibid. 9.  The author would like to thank the anonymous reviewer who made this point. See also Miriam Golden and Eric Chang, “Competitive Corruption, Factional Conflict and Political Malfeasance in Postwar Italian Christian Democracy,” World Politics 53 (2001); Bruce E. Cain, John A. Ferejohn, and Morris P. Fiorina, The Personal Vote: Constituency Service and Electoral Independence (Cambridge, MA: Harvard University Press, 1987). 10.  Estévez-Abe, 2008, 282–283; Rosenbluth and Thies, 2010. 11.  Pierson, 2004; Wolfgang Streeck and Kathleen Ann Thelen, Beyond Continuity: Institutional Change in Advanced Political Economies (Oxford, UK, and New York: Oxford University Press, 2005). 12.  World Bank, Research Institute of Development Assistance, The World Bank’s East Asian Miracle Report: Its Strengths and Limitations, OECF Discussion

  Notes to Chapter Nine Papers; No. 7 (Tōkyō: Research Institute of Development Assistance [RIDA], Overseas Economic Cooperation Fund [OECF], 1995). 13.  John Page, “The East Asian Miracle: Four Lessons for Development Policy,” The American Political Science Review 9 (1994); Stanley Fischer, “The Role of Macroeconomic Factors in Growth,” NBER Working Paper 4565 (1994). 14.  Loriaux, 1991, 171–172. 15.  Christopher Howard, The Hidden Welfare State: Tax Expenditures and Social Policy in the United States, Princeton Studies in American Politics (Prince­ton, NJ: Princeton University Press, 1997); Jacob S. Hacker, The Divided Welfare State: The Battle over Public and Private Social Benefits in the United States (New York: Cambridge University Press, 2002); Stanley S. Surrey and Paul R. McDaniel, Tax Expenditures (Cambridge, MA: Harvard University Press, 1985). 16.  Margaret Levi, Of Rule and Revenue. California Series on Social Choice and Political Economy; 9 (Berkeley: University of California Press, 1988).

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Index

Note: Figures and tables are indicated by f or t, respectively, following the page number Abe Shinzō, 239–40 Actor discontinuity, 50 Adenauer, Konrad, 86 Ad Hoc Council for Administrative Reform, 187 Administrative reform, 166, 186–88, 201–14, 217–34 Administrative Reform Advisory Council, 291n64 Administrative Reform Council (ARC), 191, 198–99, 222, 224, 227 AFC. See Agricultural Finance Corporation Agence Française de Development (AFD), 40 Agricultural Finance Corporation (AFC), 110–11 Agricultural lobby, 185 Agriculture, Forestry, and Fisheries Corporation, 79 Allied Occupation, 84–86, 256–57. See also U.S. Occupation All Japan Small and Medium Business Council, 75 All National Mayors’ Conference, 69

All National Prefectural Assembly Chairpersons’ Conference, 69 All National Town and Village Chiefs’ Conference, 69 Amakudari (“descent from heaven;” bureaucratic job placement), 202, 203t, 207, 213, 214, 219 Amyx, Jennifer A., 18 Aoki Mikio, 224 Area of Prefecture (AREA), 128 Arisawa Hiromi, 169 Aritomo Hiromi, 57, 102, 283n49 Asō Tarō, 229, 240 Backlash: antibureaucratic, 184–85; against Dodge Line, 63–65 Balanced budgetism, 91, 93, 111–13, 144. See also Budget restraint Balance of payments, 93 Bank of Italy, 174, 258 Bank of Japan (BOJ), 58, 77, 161, 169, 185, 258 Banks, 73–74, 272n53 Banque du Development des PME (BDPME), 40 Basic Law on the Administrative Reform of the Central Government, 195–96 Bill for the Amendment to the Trust Fund Bureau Act and Others, 196



  Index Boix, Carles, 3 BOJ. See Bank of Japan Bonds: dependency ratio, 145f ; FILP and FILP agency, 31, 193–97, 219, 238, 290n48; government, 80, 112–13, 161–62, 164, 182, 184, 236; issuance of new, for FILP, 190–94; local government, 158, 160–62f, 182f ; TFBF and postal savings share of, 163f, 183f Bretton Woods system, 144 Budget: expenditures by purpose, 37t; FILP compared to, 30, 34f, 36, 44–46, 45t, 47, 112; FILP used for management of, 150–54; MOF management of, 150–51; process of setting, 106–8; public debt management, 160–64 Budget restraint: aligning political goals with, 94–105; challenges to, 90–92; comparative perspective on, 7; costs of, 2; effects of, 4; embrace of, 22, 93–94; explanations of Japanese, 12–18; FILP and, 4, 55–89, 120; Ikeda and, 96–97; opposition to, 55–56, 91–92, 144; and policy finance, 2; U.S. imposition of, 15, 22, 55, 56, 58, 60–65, 71–72, 80–81, 89 Bureaucracy and bureaucrats, 202–4, 206 Business groups, financing requests from, 77, 78t Cabinet, political reforms favoring, 220–22 Cabinet Office: Headquarters for the Promotion of Reform of Special Corporations, 229–30; Office for the Preparation of Postal Privatization in, 225; Office of Administrative and Regulatory Reform, 229–30 Cabinet Secretariat, 221; Office for the Promotion of Administrative Reform, 229–30 Caisse des Dépôts et Consignations (CDC), 40–41, 84, 88, 175–76, 257, 260 Calder, Kent, 15, 37, 133 Cargill, Thomas F., 38

Cassa Depositi e Prestiti (CDP), 41, 84–85, 119, 174–75, 257–60 CDC. See Caisse des Dépôts et Consignations CDP. See Cassa Depositi e Prestiti Central Cooperative Bank for Commerce and Industry, 279n70 Change, factors in, 49–52 Christian Democratic party (DC; Italy), 11, 14–15, 83, 84, 255 Christian Democratic Union (CDU; West Germany), 86, 121 Clientelism, 7, 18, 249, 250 Coalition governments, 186–88, 206–8 Colm, Gerhard, 85 Commissioned post offices, 114–15 Common People’s Bank, 74 Communist Party. See Japan Communist Party Conservatism: and budget policy, 14–15, 55–56, 89, 91–94; FILP and, 4–5, 22, 89; other policy goals of, 94–105; policies designed to appeal to, 60, 73, 96–97, 99; SMEs and farmers and, 64, 95. See also Budget restraint Consorzio di Credito per le Opere Pubbliche (CREDIOP), 85 Consumption tax, 165, 166 Corruption, 184–85 Council on Economic and Fiscal Policy (CEFP), 222, 224–25, 231, 233, 293n6, 293n7 Counterpart Fund, 63, 66, 70–73, 72t, 80–81, 277n53 Cross-subsidies, 45 Curtis, Gerald, 13, 15 Débudgétisation, 175, 257 De Gasperi, Alcide, 83, 84 De Gaulle, Charles, 175 Deliberation councils, 277n50, 283n49 Democratic Party, 55–56, 58, 62, 93 Democratic Party of Japan (DPJ), 188, 226–27, 236, 238, 240–44, 249 Democratic Socialist Party of Japan (DSPJ), 210

Index   Deposit Bureau, 66–70, 72, 80–82, 89, 277n53 Developmental state view of public spending, 17–18 Development Bank of Japan (DBJ), 28, 126, 233, 243, 259. See also Japan Development Bank Diet: and budget, 106; Communications Committee, 168; and FILP Plan, 30; and SMEs, 75; zoku in, 17, 144, 148, 152, 203, 204, 210, 213, 224, 229, 230 Dōyūkai, 78 Dodge, Joseph, 60–63, 70, 72, 85 Dodge Line, 56, 60–66, 68–69, 71, 74–77, 79–82, 89, 91, 256, 275n16, 280n85 Doi, Takero, 181 Doko Toshio, 166 DSPJ. See Democratic Socialist Party of Japan Dual structure problem, 100, 102, 109 Economic and Social Development Fund (FDES), 40 Economic growth, 12–14 Economic Planning Agency (EPA), 59, 100–101, 206; Fiscal and Financial Subcommittee, 101, 103, 114; Social Security Subcommittee, 101 Economic Stabilization Board, 59 Economy, problems in, 144, 146, 179–80, 184 Eiji Suzuki, 187 Einaudi, Luigi, 83–84 Einaudi Line, 83–84 Elections, FILP’s effect on, 123–31 Electoral reform, 124, 186, 228, 252 Electric Power Development Corporation (EPDC), 110–11, 211 Employee Pension Insurance (EPI), 113, 272n2 Employment Promotion Corporation, 211 Environmental Sanitation Business Corporation, 213 Erhard, Ludwig, 86, 120 Estévez-Abe, Margarita, 16–17, 48 European Recovery Program (Marshall Plan), 84

Export-Import Bank. See Japan ExportImport Bank Export market, 76–77 Fannie Mae. See Federal National Mortgage Association Farmers, 5, 14, 16–17, 48, 64–65, 92, 95, 143 Federal Credit Program (United States), 39, 259 Federal Credit Reform Act (United States; 1990), 39 Federal Home Loan Mortgage Corporation (FHLMC; Freddie Mac), 19, 39, 39–40, 259, 263 Federal National Mortgage Association (FNMA; Fannie Mae), 19, 39–40, 259, 263 Feedback, 51–52 FHI. See Fiscal Health Index FILP. See Fiscal Investment Loan Program FILP agencies: bonds issued by, 112, 196 (see also FILP agency bonds); creation of, 66, 73–76, 74t, 81; as financial drain, 236–37; growth of, 71, 117, 180; Koizumi and, 228–34; linkage of, to FILP system, 79; list of, 29t; overview of, 27–28; reform of, 189, 201–14, 220, 228–34; special corporations as, 290n52; types of, 73 FILP agency bonds, 31, 193–97, 219, 238, 290n48 FILP bonds, 31, 193–97, 219, 238, 290n48 FILP dumping, 151, 175, 176, 181, 194, 257 FILP Local Government Lending (FLL), 126, 127, 129–31, 135, 137 FILP Plan, 28–30, 82, 106, 107f, 108, 110–11, 150–55, 157, 159–60, 167, 176, 182, 220, 221f, 236–37, 239, 242, 258, 260, 280n87 Financial mechanisms: fiscal ramifications of, 19; Japanese use of, 2; for public policy purposes, 3 Financial System Investigative Committee, 67

  Index First-past-the-post voting, 228 Fiscal conservatism. See Budget restraint Fiscal discipline, 13–14 Fiscal Equalization Special Account, 285n27 Fiscal Health Index (FHI), 129, 131, 136–37 Fiscal Investment Loan Fund (FILF), 31 Fiscal Investment Loan Program (FILP), 148–49; allocations of, 23, 28, 35t, 107–8, 115, 122–38, 147–48, 150–51, 176, 181–82, 190, 214, 215t, 220, 221f, 240, 242; background for, 55–65; budget compared to, 30, 34f, 36, 44–46, 45t, 47; and budget restraint, 4, 55–89, 120; in comparative perspective, 38–42, 253–63; costs of, 45; counterfactual scenarios concerning, 117–20, 118f ; criticisms of, 5–6, 51–52, 178–81, 190, 218–19; distributions of, to political supporters, 132–37; economic factors affecting, 144, 146, 184; electoral strategy in allocations by, 122–31, 123f, 125f, 130t, 143; entrance to, 25–27, 167, 189, 197–201 (see also Postal savings system; Public pension system); exit from, 26–28, 73, 74t, 82, 125–26, 189 (see also FILP agencies); expansion and growth of, 111–17, 146, 167–74, 178–80, 179–80, 182; factors affecting, 141–46; factors influencing change in, 49–52; financial problems of, 180–84, 234–35; fiscal legacy of, 234–37; and fiscal trilemma, 1, 4, 21–22, 48–49, 95–96, 99, 104–5; government discretion over, 30; government’s use of, 1–2, 4–5, 22–23, 36, 46, 85, 95, 106–11, 120, 122–37, 141–42, 147–49, 180, 238–40, 247–55; growth of, 3–4, 32, 33f, 36; how it works, 30; institutional development of, 115–17; interest subsidy in, 31; intermediary of, 25–27, 27; Koizumi and, 218–20, 228–34, 245–46; legacy of, 234–46; limitations and shortcomings of, 5–6, 23, 30, 137–38, 141–74, 176, 178–88, 234–45; and local government fi-

nances, 154–60; new system of, 31–32; NIDP and, 102–5; origins of, 22, 57f, 65–82, 89; overview of, 1–2, 25–52; political effects of, 4–5; political factors affecting, 142–44, 184–88; political legacy of, 237–45; politicization of, 148–49; as power resource, 106–11; and public debt management, 160–64; and public spending management, 105–15; and public works, 152; reforms of, 5–6, 12, 23–24, 30, 31, 177–216, 218–20, 238–39, 243–45, 252–53; research on, 37; size of, 32, 71; sources of, 27t, 80–81; spending choices as structured by, 46–49; structure of, 116; and study of Japanese politics, 249–53; supporters and opponents of, 51–52; system of, 25–31, 26f, 32f, 66, 79–82; time considerations in, 49–52; trends in, 32–37; use of, for budget management, 149–64. See also entries beginning with FILP Fiscal reform, 165–66 Fiscal trilemma, 1, 20–21, 95–96, 99, 104–5 FLL. See FILP Local Government Lending France, 14, 40–41, 83, 87–88, 175–76, 257–60 Freddie Mac. See Federal Home Loan Mortgage Corporation Free Democratic Party (West Germany), 121 Freiburg School, 86 Fukuda Yasuo, 239–40 Future of FILP Research Group, 189–91 Gao, Bai, 16 Gap, 100 Germany. See West Germany GFIND. See Government Finance Index Giscard d’Estaing, Valéry, 175 Goldsmith, Raymond, 85 Gourevitch, Peter Alexis, 2 Government bonds, 80, 112–13, 161–62, 163f, 164, 182, 184, 236. See also Local government bonds

Index   Government Finance Index (GFIND), 126–27, 129, 134–37 Government financial institutions, 28, 73, 126, 207–8, 211–12, 220, 231, 233–34, 234t, 235–37 Government outlays, 8f, 10t, 41–42, 42f Government Pension Investment Fund (GPIF), 201, 244 Government receipts, 9f, 10t Government Revitalization Unit (GRU), 241–42 Green Pia resort complex, 200–201 Grimes, William W., 249 Gross Prefectural Product (GPP), 136 Gross Prefectural Product Growth (GPPG), 127–28, 131 Hall, Peter A., 2 Hashimoto Ryūtarō, 166–67, 187, 188, 190–92, 195, 197–99, 201, 202, 204, 208–14, 218, 219, 221, 222, 229 Hatoyama Yukio, 241–42 High-speed growth, 97 Historical institutionalism, 43–44 Hokkaidō Development Bank, 113 Hokkaidō-Tōhoku Development Corporation, 208 Home Affairs Ministry, 94, 285n25 Home Ministry, 114 Honshu-Shikoku Bridge Authority, 209, 235 Hoshi, Takeo, 181 Hosokawa Morihiro, 186–88, 291n64 Housing and Urban Development Corporation, 211 Housing Finance Loan Corporation, 169 Housing Loan Corporation, 75, 80, 213, 291n69 Housing shortage, 65, 75 Howard, Christopher, 19, 262 IISA. See Industrial Investment Special Account Ikeda Hayato, 48, 62, 69, 72, 75, 77–78, 81–82, 92–97, 99, 257; Balanced Fiscal Policy, 96–97

Imbalances, 109 Industrial Bank of Japan, 78 Industrial Investment Special Account (IISA), 27, 63, 66, 73, 79, 81, 82, 113 Industrial Investment Special Account Law, 73 Industrialization and industrial reconstruction, 55–60, 62, 74, 76–78, 99 Inflation, 56, 58, 60–61, 83 Institutional change, 44 Interest rates, 31, 45, 108, 109f, 161, 169–72, 171f, 193 Ishibashi Tanzan, 55, 57, 59, 62, 94 Ishihara Shintarō, 240 Istituto per la Ricostruzione Industriale (IRI), 85 Italian Communist Party (PCI), 84 Italy, 11, 14–15, 41, 83–85, 119, 174–75, 252, 255–60 Izui Junichi, 184 Japan Airlines (JAL), 243 Japan Bankers Association, 178 Japan Communist Party (JCP), 65, 142 Japan Corporation for Municipal Enterprises (JFCME), 182 Japan Development Bank (JDB), 28, 59, 76–78, 99, 110, 126, 207–8, 291n69. See also Development Bank of Japan Japanese Bankers Association, 115 Japanese government bonds (JGBs). See Government bonds Japan Export Bank, 76–77 Japan Export-Import Bank (EXIM), 99, 207–9, 212, 291n69 Japan Federation of Employers’ Associations, 204 Japan Finance Corporation (JFC), 28, 75, 110, 233 Japan Finance Corporation for Municipal Enterprises (JFCME), 157–58, 160, 234 Japan Finance Corporation for Small Business (JFCSB), 126–27 Japan Finance Organization for Municipalities (JFM), 234

  Index Japan Highway Public Corporation, 28, 111, 113, 204, 213. See also Road Corporation Japan Liberal Party, 281n4 Japan National Railways (JR), 64, 112–13, 180, 235, 294n27 Japan Small Business Organizations League, 75 Japan Socialist Party (JSP), 56, 58, 65, 101–2, 142, 187, 188 JDB. See Japan Development Bank JFC. See Japan Finance Corporation Johnson, Chalmers, 17, 37, 75, 249 JR. See Japan National Railways Jusen (home mortgage lending institutions), 185, 193 Kaikaku Club, 240 Kaishinto, 281n4 Kaizuka Keimei, 191 Kamei Shizuka, 211, 243–44 Kangyo Bank, 78 Kan Naoto, 242, 244 Kanpō (postal pensions and postal life insurance), 67–69. See also Postal life insurance Kansai International Airport, 180–81, 235 Katayama Tetsu, 58 Katz, Richard, 13 Keidanren, 63–64, 68, 72, 77, 78, 166, 179 Keizai Dōyūkai, 179, 189, 190, 191 Keynesianism, 2, 55, 59, 61–62, 254, 275n22 Kindlerberger, Charles, 55 Kishi Nobusuke, 94–96, 99 Koichi Katō, 218 Koizumi Junichirō, 6, 23, 100, 167, 187, 188, 190, 192, 198, 200–201, 214, 216–34, 239, 245, 248; accomplishments of, 219–20; and FILP reform, 218–20, 228–34; and LDP reform, 217–18, 222; leadership of, 222; and politics of reform, 220–34; and postal system reform, 218–20, 222–28; Privatization of the Post Office, 223, 293n2 Komura Masahiko, 206 Korean War, 70, 81

Labor, 14 Labor-Farmer Party Coalition, 65 Law Regarding Government Financial Support of Corporations, 112 LDP. See Liberal Democratic Party Legislation, for FILP reform, 195–96 Liberal Democratic Party (LDP): and administrative reform, 207–10; and coalition government, 186–88, 208–10; Communications Bureau, 168; and conservative social coalition, 14–15; dominance of, 11, 13, 137, 283n4; Economic Research Group, 102; and FILP reform, 194–95; FILP’s use by, 1–2, 4–5, 22–23, 36, 114, 122–37, 141–42, 148–49, 180, 247–51, 255; formation of, 55–56, 92, 94, 281n4; goals of, 50; Hashimoto faction in, 230; Headquarters for the Promotion of Administrative Reform, 210–11; Koizumi and, 217–18, 222–34, 239–40; and local government finances, 154, 157; loss of power by, 186; and MOF, 18; Policy Affairs Research Council (PARC), 101, 168, 204, 218; Policy Research Council (PRC), 229; and pork-barrel reform, 238; and postal system, 114–15, 168, 196, 258; and public spending, 6, 144; in recent years, 239–45; redistributive politics of, 186; as reform opponent, 202–3; Social Problems Committee, 101; Social Security Research Group, 101; supporters of, 5–7, 15–18, 36, 92, 96, 100–101, 103, 105, 115, 123, 128–37, 142–43, 147–48, 218; Tanaka faction in, 142, 144, 168, 218, 293n1; Tax System Research Council, 97; Telecommunications Division, 199; YKK group in, 218 Liberal Party, 55, 57, 62, 91, 93, 281n4 Local Allocation Special Account, 154–57, 158f, 159f, 165, 176, 182 Local allocation taxes, 154–57, 165 Local Allocation Tax Law, 157 Local Fiscal Plan, 154–55 Local government bonds, 158, 160–62f, 182f

Index   Local Government Debt Plan, 160f Local government finances, 127, 130–31, 154–60, 182 Lower House, 124, 226–27 Lower House seat share (LSSHR), 124, 130t, 132, 135 LSSHR. See Lower House Mabuchi Masaru, 38 MacArthur, Douglas, 62 MacLachlan, Patricia, 38, 168 Magara Eikichi, 204 Management and Coordination Agency (MCA), 206 Marshall Plan. See European Recovery Program Masuzoe Yōichi, 240 Menichella, Donato, 84 MHLW. See Ministry of Health, Labor, and Welfare MHW. See Ministry of Health and Welfare Miki Takeo, 287n44 Milly, Deborah, 16, 100 Ministry of Agriculture, Forestry, and Fisheries, 79 Ministry of Commerce and Industry (MCI), 56 Ministry of Communication, 67, 69 Ministry of Construction (MOC), 75, 78, 91, 97 Ministry of Economy, Trade, and Industry (METI), 153 Ministry of Finance (MOF): autonomy of, 6–7, 17–18; backlash against, 185; Banking Bureau of, 115, 169; Budget Bureau of, 150–51, 258; and budget restraint, 56, 62–64, 93–94; corruption in, 184–85; and Counterpart Fund, 71–73; and Deposit Bureau, 66–71; and FILP, 22–23, 28–30, 47, 49, 73–74, 103, 106–15, 117, 119, 127, 147–64, 176, 181–82, 214, 249–50; and FILP reform, 188–96; Financial Bureau of, 28, 150–52, 169, 185, 189–90, 192–94, 258; Future of FILP Research Group, 189–91; and local

government finances, 154–60; objectives of, 48, 73–74; and postal system, 169; and postwar financing, 77–80, 91, 167–74, 279n70; priorities of, 15; and public debt management, 160–64; and special corporations, 207; and taxes, 164–67; Trust Fund Bureau Subcommittee of, 191–95; and welfare spending, 143 Ministry of Health, Labor, and Welfare (MHLW), 113, 211, 244–45 Ministry of Health and Welfare (MHW), 94, 173, 184, 190, 193, 196, 199–200, 211, 213, 283n49 Ministry of Home Affairs (MHA), 127, 154–60, 285n25 Ministry of Internal Affairs and Communications (MIAC), 285n25, 293n8 Ministry of International Trade and Industry (MITI), 6–7, 15, 75, 77, 91, 97, 113, 184, 211, 213 Ministry of Labor (MOL), 211 Ministry of Land, Infrastructure, and Transportation (MLIT), 236 Ministry of Posts and Telecommunications (MPT), 146, 167–73, 189, 190, 193, 196, 198–99, 222, 258, 286n40, 293n8 Ministry of Public Management, Home Affairs, Posts, and Telecommunications, 286n40 Ministry of Transportation (MOT), 91, 97 Ministry of Welfare, 113–14 MITI. See Ministry of International Trade and Industry Miura, Mari, 16 Miyazawa Kiichi, 186, 204 Mizuno Kiyoshi, 207 MOF. See Ministry of Finance Monetary policy, 275n22 Mori Yoshirō, 214, 218, 222, 229 MPT. See Ministry of Posts and Telecommunications Müller-Armack, Alfred, 86, 87 Multimember districts (MMDs), 124 Murayama Tatsuo, 165

  Index Murayama Tomiichi, 187, 198, 205–9, 212, 214, 229, 291n65 Nakasone Yasuhiro, 146, 165, 166, 168 National Income Doubling Plan (NIDP), 95–96, 97, 99–105, 104t, 143, 168 National Life Finance Corporation, 28, 213 National Pension (NP), 113, 272n2 National Pension Council, 283n49 National Savings Bank, 40 New Frontier Party (NFP), 187, 198, 214, 288n22 New Liberal Club, 283n4 New Long-Range Economic Plan (NLEP), 95, 102 New Policies, 97, 99 New Renaissance Party, 240–41 Ninagawa Torazō, 65 Nippon Telegraph and Telephone (NTT), 112–13 Nisankyō, 68, 72 Nixon, Richard, 144 Nixon Shock, 144, 150, 151 Noble, Greg, 38 Noguchi Yukio, 37 Nonaka Hiromu, 224 Norinchukin Bank, 78, 79 Northern Territories Association, 206 NTT. See Nippon Telegraph and Telephone Ōhira Masayoshi, 146 Ōkura Masataka, 165 Obuchi Keizo, 142, 214, 218 Occupation. See Allied Occupation; U.S. Occupation Oil Shocks, 144, 150 Okinawa, 123 Okinawa Development Finance Corporation, 233 Okinori Kaya, 94, 101 Organisation for Economic Co-operation and Development (OECD), 6, 7 Overseas development assistance (ODA), 152, 291n69

Overseas Economic Cooperation Fund (OECF), 208, 209, 212, 291n69 Ozawa Ichirō, 198, 236, 242, 288n22 Pempel, T. J., 14, 16 Pension reserves, 31, 172, 199–201, 244–45. See also Public pension system Pension Welfare Finance Corporation, 283n49 Pension Welfare Service Public Corporation, 211 People’s Finance Corporation (PFC), 28, 74, 78, 110–11, 126–27, 169, 213 People’s New Party, 244 PFC. See People’s Finance Corporation Pierson, Paul, 50 PIN. See Public Investment, National PIR. See Public Investment, Residual Policy finance: banks and, 272n53; comparative perspective on, 38–42, 39t, 253, 253–63, 254f ; defined, 3; factors contributing to use of, 2, 21, 255–61; in France, 40–41, 83, 87–88, 257–60; in Italy, 83–85, 255–60; limitations of, 20, 262–63; need for study of, 18–20, 261–63; political effects of, 20–21; in United States, 38–40, 259; unquestioning acceptance of, 197; uses of, 2, 19–21, 262–63; in West Germany, 83, 85–87. See also Fiscal Investment Loan Program Political legacy of FILP, 237–45 POPDEN. See Population Density Population Density (POPDEN), 129, 135 Pork-barrel spending, 6, 7, 18, 28, 48, 141–42, 218, 238 Postal life insurance, 27. See also Kanpō Postal pensions. See Kanpō Postal savings system: advantages of, for investors, 31; criticisms of, 178–79, 218–19; as entrance to FILP, 26–27; expansion and growth of, 114–16, 167, 257–58; and FILP bonds, 196; FILP’s legal tie to, 51, 181, 190, 192–93, 219; government use of, in early twentieth century, 67; in Italy, 84; Koizumi and,

Index   218–20, 222–28; LDP and, 114–15, 168, 196; MPT and, 168–73, 189, 193, 196, 198–99; private contributions to, 45, 146, 179f ; reform of, 189, 191, 198–99, 219–20, 222–28, 243–44; tax exemption connected to, 26–27; use of, for budget management, 162, 163f Postal Services Agency, 286n40 Post offices and postmasters, 114–15, 168 Poverty, 100 PR. See Proportional representation Prefectural Governors’ Conference, 69 Prefectural Income Per Person (PI), 128, 131 Prime minister, political reforms favoring, 220–22 Priority production, 55–61, 74, 94 Proportional representation (PR), 124, 228, 252 Public corporation investment, 127 Public corporations, 28, 73, 125–26, 235–36 Public debt management, 160–64 Public Employee’s Pension Bank, 74 Public Finance Law, 60–61 Public investment, 28, 41–42, 42f, 43f, 99–102, 127 Public Investment, Locally Funded National Projects (PILN), 128, 134 Public Investment, National (PIN), 126, 127, 129, 134–37 Public Investment, Residual (PIR), 128, 131, 134 Public pension system, 27, 45, 51, 172–73, 181, 190, 193, 199–201, 244–45, 272n2 Public spending: comparative perspective on, 253–61; explanations of Japanese, 12–18; FILP and, 1–2, 4; in France, 175–76; goals of key actors, 47t; Ikeda and, 97; increases in, 145f, 147–48; increases in (1970s), 143, 144; in Italy, 174–75; Japanese political economy and, 6–7, 11–12; management of, 105–15; partisan politics and, 14–16; postwar trends in, 2–4; time considerations in, 49–52. See also Budget restraint

Public Welfare Services Corporation (PWSC), 173, 200–201, 295n32 Public works, 37, 144, 152, 284n3 Reconstruction Finance Bank (RFB), 56, 58–61, 59t, 63, 69, 77, 79 Reform Party, 91–93 Regional Banks Association of Japan, 179 Research Group. See Future of FILP Research Group Revival negotiations, 106, 107, 107f RFB. See Reconstruction Finance Bank Rinchō (administrative reform council), 166 Road Corporation, 12, 213, 282n43. See also Japan Highway Public Corporation Road corporations, 231–32, 235–36 Roads and road construction, 152, 153f, 220, 232–33 Sakigake, 187, 188, 207, 208, 210, 288n22, 291n69 San Francisco Peace Treaty (1952), 280n2 Satō Kōkō, 211 Satō Eisaku, 287n44 Savings, household, 27 Savings rate, 26 SCAP. See Supreme Commander of the Allied Powers Schaeffer, Fritz, 87 Scheiner, Ethan, 7, 129, 131 Second Ad Hoc Commission for Administrative Reform. See Rinchō Seiji, Maehara, 236 Self-management, 170, 172, 173, 200, 211 Shimomura Osamu, 97 Shokochukin Bank, 213, 233 Shonfield, Andrew, 2 Single-member districts (SMDs), 124, 252 Single non-transferrable vote (SNTV), 48, 124, 186, 228, 252 Small and medium enterprises (SMEs), 5, 14, 36, 48, 64–65, 74–76, 92, 95, 109, 143 Small government, 94–105 SMDs. See Single-member districts

  Index SMEs. See Small and medium enterprises SNTV. See Single non-transferrable vote Social capital, 102 Social Democratic Party (SAP; Sweden), 11, 255 Social Democratic Party (SDP), 188, 210 Social Democratic Party (West Germany), 121 Social Insurance Council, 283n49 Socialist Party. See Japan Socialist Party Social market economy, 86–87 Social security, 99–102 Social security transfers, 11t, 105t Social stability, 56, 63, 73–76 Special accounts, 268n17 Special Corporation Reform Council, 210 Special corporations, reform of, 201–14, 209t, 211t, 212t, 228–34, 290n52, 291n64 Special-purpose banks, 73–74 Spending. See Public spending Stabilization package. See Dodge Line State, financial role of, 19–20 Steinmo, Sven, 44, 48 Subcommittee. See Trust Fund Bureau Subcommittee Sunrise Party, 240–41 Supreme Commander of the Allied Powers (SCAP), 57, 60–62, 64, 66–73, 77–81, 112 Suzuki Eiji, 204 Suzuki Zenkō, 146, 165, 287n44 Sweden, 11, 173, 255 Takahashi Korekiyo, 55 Takemura Masayoshi, 188, 189, 208 Takeshita Noboru, 142, 146, 166, 208 Tanaka Kakuei, 107, 114–15, 142–44, 168, 250, 257, 287n44; Plan to Remodel the Japanese Archipelago, 143 Tanaka Kei, 147 Tanaka Makiko, 206 Tanaka Shusei, 188 Tanigaki Sadakazu, 241 Tani Hiroshi, 189 Taxes: changes in (1954–1970), 98t; consumption, 165, 166; debates over,

93–94; exemptions from, for postal savings accounts, 115, 171–72; government desire to maintain low, 3, 4, 95–97, 164–67; Ikeda and, 96–97; local allocation, 154–57, 165; opposition to, 21, 44, 48, 165–67 Tax expenditures, 19 Temporin Susumu, 191 TFBF. See Trust Fund Bureau Fund Thelen, Kathleen Anne, 44, 50 Third Provisional Council on Administrative Reform, 186–87, 203–5 Third Reform Council. See Third Provisional Council on Administrative Reform Time lags, 50–51 Tōhoku Corporation, 113 Tōkyō Chamber of Industry and Commerce, 75 Toll roads, 152, 236 Trust Fund Bureau Council, 283n49 Trust Fund Bureau Fund (TFBF), 27, 30, 31, 66–67, 70–73, 79, 82, 108, 113, 116, 150, 154–55, 157, 158f, 159–60, 162, 163f, 164, 167, 170–73, 176, 182, 236, 272n3 Trust Fund Bureau Law, 70, 72 Trust Fund Bureau Subcommittee, 191–95 Unemployment, 64 United States: budget restraint imposed by, 15, 22, 55, 56, 58, 60–65, 71–72, 80–81, 89; Federal Credit Program of, 39, 259; and Italy, 84; policy finance in, 38–40, 259; tax expenditures in, 19; welfare in, 262; and West Germany, 85. See also U.S. Occupation User fees, 45–46 U.S.–Japan Security Treaty (1960), 95 U.S. Occupation, 22, 55–57, 62, 92, 96, 256. See also Allied Occupation Wada Hirō, 102 Wagner’s Law, 13 Watanabe Yoshimi, 240 Welfare, 2, 16–17, 143, 262

Index   West Germany, 83, 85–87, 120–21, 256–57 Woodall, Brian, 15 Wright, Maurice, 38, 106 Yamaguchi Jirō, 38 Yamasaki Taku, 218 Yasusuke Murakami, 13 Year 2000 Problem, 193 Yoshida Shigeru, 61–62, 64, 75, 81–82, 94, 95

Yoshino, Naoyuki, 38 Yotaku system (FILP funds transfer system), 31, 70, 173, 174, 190, 192–95, 199, 201, 238, 258, 259, 278n62 Your Party, 240 Yūchokon, 169–70 Yukio Hatoyama, 243 Zoku (policy tribe): Diet, 17, 144, 148, 152, 203, 204, 210, 213, 224, 229, 230; postal, 168; tax, 97