Marketcraft Japanese-Style: What Japan Tells Us about the Art of Making Markets

As the Japanese economy shifted from boom to bust after 1990, opinion leaders grew critical of the Japanese economic model, calling for a dramatic shift toward the liberal market model of the United States.  But what would it really take for Japan to “liberalize” its economy?  Here Japan provides a critical test case that illustrates what market development really entails.  According to the market liberal paradigm, the diagnosis and prescription for Japan would be simple: the government should just stop interfering and the free market would flourish.  In fact, however, the Japanese government would have to do more, not less, to enhance competition and to empower markets.  The government would have to build up the legal and regulatory infrastructure to support “real” capital markets, “real” labor markets, and more competitive product markets.  Likewise, for Japan to “liberalize,” Japanese firms, banks, and workers would not simply have to reject traditional practices, but to cultivate new ones.  Japanese firms would have to develop more competitive patterns of behavior, and the Japanese people would have to adopt more market-oriented norms.

An emerging consensus across multiple disciplines applies this institutionalist logic to the development of markets in developing countries and transition economies.  Scholars and practitioners have concluded that the challenge for these countries is more a constructive one of strengthening government capacity and building market institutions than a destructive one of withdrawing the state.  Japan is the critical case, however, as an advanced industrial country with the rule of law firmly in place. Yet even for Japan, liberalization does not mean liberation but rather the construction of market infrastructure.  The Japanese case illustrates the complex mix of laws, regulations, practices, and norms that sustain a modern market economy, and the range of measures required to enhance market competition. This paper briefly reviews the core features of Japan’s postwar model (1945-80) and then examines what it would take for it to transform into a liberal market economy.  The subsequent sections examine market reforms since 1980 in labor relations, finance, corporate governance, antitrust, sector-specific regulation, and intellectual property rights, demonstrating that the Japanese government and industry have enacted a wide range of reforms and yet Japan has not converged upon the liberal market model. 

The paper concludes with two case studies of Japanese government and industry attempts to adapt market institutions to the changing economic environment: 1) the effort to foster entrepreneurship on the Silicon Valley model, and 2) the effort to emulate a U.S.-style information revolution.  Superficially one might characterize these as attempts to liberalize the market, yet they are more accurately viewed as adventures in market re-design.  They involve coordinating multiple reforms across various legal and regulatory arenas, combined with complementary efforts from the private sector.  In both cases, Japanese government and industry have implemented an impressive array of reforms and yet the larger effort has faltered nonetheless.