Japan, the System That Soured

Over more than a decade, Japan has baffled not only its citizens but also foreigners with its inability to sort the mess out. They call it the Heisei depression. What¡¯s the problem of Japan? It¡¯s been a daunting question. There have been numerous explanations. Those could be grouped into three camps in my view:1. the problem is the financial macroeconomics not the fundamental disease of Japanese economy. Once the bad loans are cleared up, Japanese economy would be on the right track as before. (Posen at IIE: Cargill and his colleagues)2. Japan is on the bad point at its long-term cycle. Each economy has its own long-term cycle of investment, determined by the level of sunk capital. In this view, ascendance of Japan and Germany over the States in ¡®70s and 80s could be attributed to this dynamic of cycle. In other words, the US was in a bad point at the time. Now Japan is on its own bad point. (Robert Brenner)3. Depression or liquidity trap must be serious problems. But those are not the cause but the symptom of deep-seated malady. So-called Japanese miracle was propelled socioeconomic regime of ¡¯55 system, in Pempel¡¯s words. It was the key to Japan¡¯s epic story. But now it¡¯s the curse to Japanese economy. The vested interests of the regime¡¯s alliance, or iron triangle, has hamstrung the overall competitiveness of economy. (Pempel, Tilton, Porter, Bai Gao, Brookings Institute, OECD, and The Economist)Richard Katz is on the side of the third camp. His argument is like this: Infamous industrial policy fostered various industries with policy pair of promotion/protection. But not all sectors succeeded in world market. Those sectors should be liquidated to free resources up to competitive sectors in the view of rational policy makers. But such massive exit or restructuring is not of political rationale. The first oil shock exacerbated things around exit options. Such an attempt would be political suicide. So Japanese government prop them up. But uncompetitive sectors have taxed out competitive sectors and consumers with artificially high prices far above international market prices. It has resulted in weakening competitiveness and aggregate demand in economy-wide. To make up for weak domestic demand, export-drive set in motion. Up to mid-1980s, competitive Japan like electronics, automobile industry could feed up uncompetitive Japan like petrochemicals, steel, service sector at the expense of overseas competitors¡¯ market share. But overdependence on overseas market invited super-strong yen in 1985. So export-drive hurts its very condition. There was 2 consequences: Competitive sectors responded with FDI, so-called the problem of ¡®hollowing out¡¯;s Now overseas market couldn¡¯t make up for the feeble domestic demand. So there should be alternative demand in domestic side. Government boosted the demand with pouring down money. Buddle swelled. At last bubble busted. The problem of Japan is not financial mess but the political economy of two Japan

...This is a thoroughly researched book backed by an extensive list of references, compiled over extensive period of time. "Useless" is not a fair adjective to qualify this book. Even disregarding all the author's argument about the state of Japan economy as related to its need to adjust its "investment-led economy", the body of research and the related references and bibliographies about Japan post-war economy is amazing and could be used as a starting point for anyone doing a research thesis for its PhD program. While I am not a Japan specialist, I have learned a great deal not only about trade policies in Japan, but also about those policies elsewhere. So in a nutshell, this book is not just about "how the Japan economic system soured", but also about trade policies and productivities (author emphasizes the Total Factor Productivity) in any economy. This should be a must-read for any aspiring economist that want to learn about trade policies: what to do and what not do do.This book can also be used as a self-contained textbook for any graduate course on Japan and NIC economies. The reference section summaries some of the arguments presented in the main body of the book (Appendix A: Why Industrial Policy Only Works in the Catch-Up Era), some of technical skills need to get the most out of the book (Appendix B: Reading the Econometric Tables), economic growth model (Appendix D: From Superstar to Laggard: The Growth Model), actual trade data (Appendix F: Japan¡¦s Peculiar Trade).Any negative? Too much information packed into this 463-page well-researched book, so this is not your typical bed-time story book. Yet if you want a book from an "ivory-tower economist" looks elsewhere, but how about one from a down to earth journalist publishing daily article on Japanese economic affairs?

Richard Katz, a senior editor at The Oriental Economist shows his grasp of the Japanese economy in an excellent text. He shows why the system that helped Japan to become the great maufacturing power, became a liability. Taking into account the writings of both traditional economists and the views of political scientists, this book is a must-read for intelligent Japan watchers.

Mr. Katz has been amazingly accurate in his assessment of the Japanese economy. His command of prose makes this book most interesting and informative, especially for those people whose knowledge of Japan is lacking. His theory makes good sense. I enjoyed this book immensely.

I had to read the book for a class that I was taking. It was actually taught by Mr. Katz and I found it to be an interesting read, not your run-of-the-mill textbook. The book is incredibly easy to understand for regular people with interest in Japan or your everyday economics major. It explains many issues and clarifies many myths that the everyday person has about Japan. It's probably the best book I've read about economics EVER.