Session 127: Industrial Policy Revisited: The State of Japan in the Twenty-First Century

Organizer: Saadia M. Pekkanen, University of Washington

Chair: Richard J. Samuels, Massachusetts Institute of Technology

Discussant: Edward J. Lincoln, Council on Foreign Relations

Is the era of Japanese industrial policy—the state guidance of specific industries—over? The conventional wisdom suggests that Japan definitively lost its industrial policy during the 1990s. By this is meant that the Japanese state had no intention to guide industry in the first place and that, moreover, it had no regulatory tools with which to conduct direct or administrative guidance of Japanese industry as a whole. But the empirical basis for such wisdom is shaky. This panel takes a fresh look at industrial policy, with a view to assessing its processes and shapes during one of the most tumultuous economic periods in Japan. The goal is to gauge the substance and extent of the Japanese government’s, particularly METI’s, attempts to allocate resources to specific sectors. T. J. Pempel assesses the evolution and remarkable flexibility of the developmental state model from its origins in the postwar period to the present day. Mark Tilton examines the evolution of METI’s role in structuring the radical changes in the Japanese steel industry, through comparisons with the United States and the European Union. Saadia Pekkanen explores the Japanese government’s actions in a newly emergent field, namely intellectual property, which arose largely out of concerns with the global competitiveness of Japanese industry. Ulrike Schaede assesses the progression of METI’s role in the creation of startup firms and venture capital in Japan, showing how it differs in intent and effect from U.S. policies.

Revisiting the Japanese Developmental State

T. J. Pempel, University of California, Berkeley

This paper delineates the key components of Japan’s developmental state model, long held to be a singular source of success for the Japanese economy but subsequently considered among the major reasons for the decade-long economic downturn. The paper pays particular attention to how the model has changed over time and to its respective strengths and weaknesses under different international conditions. Through an examination of the trends and changes in the Japanese political economy, it demonstrates the continued relevance of the conceptual model presented by the "developmental state" despite major structural shakeups in the Japanese economy over the past decade. One of the key theoretical contributions of the model is its focus on the importance of political choice in setting economic priorities and creating economic institutions. A clear conclusion that emerges from this analysis is that, contrary to all predictions of doom and gloom, the developmental state model has proven to be remarkably flexible in adapting to both endogenous and exogenous sources of change.

The Shift from Industrial Policy to "Self-Regulation" in the Japanese Steel Industry and Its Effect on International Trade

Mark Tilton, Purdue University

During its heyday, a hallmark of Japanese industrial policy was that the state, while providing low levels of direct state subsidies, worked to channel private funds to favored sectors. One way of doing this was by encouraging lending on preferential terms by private banks; another was by supporting cartels to keep prices high and stable. Several forces are currently said to work against the use of old-style market manipulation in contemporary Japan. Japanese firms have been forced to cut costs amidst the rigors of a long depressed economy, METI says it no longer encourages cartels, and Prime Minister Koizumi says he favors a strong competition policy. The steel industry was long a prime example of an industry in which a state-supported cartel both kept prices high at home and pressured buyers not to buy imports. In recent years the structure of Japan’s steel industry has radically changed. In 1998 prices collapsed and the old cartel of five major firms is being replaced by a duopoly of two groups. This paper will look at METI’s role in this transition and ask how recent changes are affecting Japan’s role in international steel markets. The paper will put Japan in context through comparisons with the European Union and the United States.

Assessing the Role of Industrial Policy in Japan’s New Intellectual Property Agenda

Saadia Pekkanen, University of Washington

Since at least the end of the 1990s, the Japanese government has devoted a great deal of resources—legislative, institutional, human, and capital—to an expansive field collectively known as intellectual property. The efforts by the Japanese government highlight a particularly interesting combination of the new legalized trade diplomacy centered on the World Trade Organization (WTO), which oversees the first-ever multilateral intellectual property treaty in the global trading system, and good old-fashioned domestic industrial policy. This paper examines the staggering scope and impact of intellectual property concerns in Japan today, and focuses on assessing the reasons for the ongoing concentration of resources. In large measure, it shows how the singular emphasis on intellectual property can be traced to competitiveness concerns about manufacturing and high-technology industries in the Japanese government and especially business world.

Venture Capital as Industrial Policy

Ulrike Schaede, University of California, San Diego

Japan has long engaged in proactive small-firm policies, in particular through specialized legislation and subsidized financing. For most of the postwar period, these policies were aimed to compensate small firms for the disadvantages created by aggressive large-firm-centered, export-oriented industrial policies. During the oil crisis of the 1970s, METI (the ministry in charge of trade) established a new division in charge of proactive growth policies for startup firms, and in the 1990s these new policies materialized into a torrent of new laws and regulations aimed at creating, nurturing and sustaining startup firms and venture capital in Japan. Interestingly, while many of the policy measures resemble U.S. policies, as a package both intent and effect are quite different in Japan: rather than creating market parameters, Japan’s government is, once again, attempting to influence the allocation of resources in its growing industries.