Japan's Industrial Policy: Cross-ministerial approach is needed in policy planning and implementation
Faculty Fellow, RIETI
There is hardly any other policy over which experts' views are so divided or the reputation of which swings so blatantly with changing times as industrial policy. Japan's industrial policy, which received international acclaim in the 1980s as the key driver behind the successful postwar economic recovery, fell into disrepute in the 1990s amid the rising tide of neoliberalism, and some critics went so far as to call it "nothing but useless." However, in the wake of the global financial crisis in 2008, not only the United States and Europe but also emerging economies have begun to tout industrial policy.
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In postwar occupied Japan, there were two major policy stances concerning the direction of its industries.
One was that Japan should expand the ways to create a self-sustaining economic cycle by focusing efforts on developing domestic natural resources and enlarging the domestic market, based on critical reflection of how the underlying motive to secure natural resources drove the country to launch a military invasion. The purpose of policy measures based on this stance was to promote the restructuring of industries and thereby facilitate the rationalization of specific industries and the upgrading of the overall industrial structure so as to enable Japanese companies to capitalize on economies of scale. Traditionally, those referred to as "industrial policy" belong to this type.
The other stance was that resource-scarce Japan would have no choice but to build industries centered on international trade, as had been the case in the prewar period. Typical measures implemented based on this stance include the liberalization of trade and capital flows. It was expected that natural selection through the resulting mechanism of competition would make Japanese industries leaner and stronger, whereby the nation's industrial structure would be self-adjusting.
During the high growth period, Japan had abundant labor but scarce capital. Employing various policy tools such as subsidies and policy guidance, the government encouraged labor-intensive industries--particularly the textile and machinery industries that played a major role in the postwar reconstruction of the economy--to introduce advanced technologies and accumulate capital, while at the same time promoting a shift in the workforce from those industries to newly emerging ones. By so doing, the government sought to upgrade the nation's industrial structure.
At the time, government policy for specific industries was observed in such forms as infant industry protection and rationalization cartels (disposition of excess facilities). Even today, the government offers various support measures, for instance, in the form of the law for the enhancement of industrial competitiveness (Act No. 98 of 2013), under which packages of measures designed to help enhance the competitiveness of the oil refinery and metallic materials industries are now being considered.
Once the industrial structure was upgraded to a satisfactory extent and domestic capital accumulation reached a level close to those in the United State and Europe, the focus of Japan's industrial policy shifted to deregulation and public sector privatization. That was an attempt to create new growth by increasing the utilization of the accumulated capital at a time when Japan was entering what would eventually become the lost two decades and the private sector was haunted by the burden of excess capacity.
Specifically, the government embarked on deregulating the airline and telecommunications industries, where competition had been insufficient, and privatized the Japanese National Railways (JNR) and Japan Post. As strengthening the market mechanism and providing a pro-competitive environment became the task of the government, traditional industrial policy schemes vanished from sight and some even declared the "death of industrial policy."
It was not until the breakout of the global financial crisis in fall 2008 that industrial policy once again came under the spotlight. Japan, the United States, and European countries alike devised various support programs to prevent businesses from being thrown into crisis by an unanticipated external demand shock. Examples of such measures include those designed to boost domestic demand for specific industrial sectors such as subsidies for the purchase of environmentally-friendly cars in Japan, and support to specific businesses such as the bailout of General Motors Company (GM) in the United States.
Most of those measures were temporary. However, the move to acquire U.S. and European companies by state-owned or heavily government-subsidized enterprises in China and other emerging countries continued even after the crisis subsided, and so did their practice of dumping their exports. Japan is also supporting Japanese companies' operations--including those overseas--through a series of public-private funds.
A 2013 report published by the Organisation for Economic Co-operation and Development (OECD) defines "industrial policy" as any government initiative or effort intended to improve the environment for businesses. It seems that industrial policy is now embraced as a program that cannot be contained within the boundaries of any single government agency.
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It is no easy task to evaluate, from the perspective of economics, industrial policy over the past 70 years since the end of the war. Theoretically, industrial policy is justified when economic benefits derived from preventing market failure as a result of policy implementation exceed the cost of government failure. However, the form of market failure varies significantly depending on each specific case. Therefore, the starting point is to evaluate the potential magnitude of adversity that could be caused by market dysfunction for each and every specific case.
It would be ideal to develop an index that measures the extent of market failure. However, even with the state-of-the-art economic theories, it remains impossible to develop such an index that is sufficiently reliable. Thus, the reality is that ex post facto evaluation of industrial policy remains a rarity throughout the world.
Without fear of jeopardizing the rigor of academic work, I would like to propose two possible evaluation criteria to test the validity of industrial policy: 1) whether it is capable of producing permanent effects by implementing temporary measures, and 2) whether it is capable of generating favorable spillover effects that cannot be provided by the market.
Let's examine the effects of the Act on Temporary Measures to Facilitate Financing for Small and Medium-sized Enterprises, etc., which was in effect from December 2009 through March 2013, using the above two criteria. Based on the first criterion, we can probably justify support provided to those small and medium-sized enterprises (SMEs) that were experiencing temporary cash flow problems in the aftermath of enormous external shocks such as the Great East Japan Earthquake. However, it is disputable whether those SMEs that were not affected by the quake or any other external shock should have been included as subject to the support under the law. Meanwhile, we can expect favorable spillover effects from SME policy measures specifically designed to support start-ups because such measures would work to accelerate the growth of entrepreneurs and the supply of venture capital, both of which remains underdeveloped in Japan.
However, according to case studies in the United States, agility in exit decisions--rather than the supply of funds--is the key to promoting the development and growth of start-ups, and venture capitalists are better positioned to fulfill this role. In this sense, public-private funds are counted on to serve as a cradle for future venture capitalists and thereby expand the hitherto small base of investors of this kind. In any event, how to create an environment that enables businesses to maximize the outcome of their activities is the challenge for industrial policy.
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In accordance with changes in the surrounding economic and social environments, Japan's industrial policy will continue to evolve in the future. I would like to raise two points that should be kept in mind in considering future industrial policy.
The first is the importance of planning and implementing industrial policy in a cross-ministerial approach. As the world economy becomes increasingly globalized, more competitive countries will attract more people, money, goods, and information to add even more impetus to industries. Today, cities around the world are competing with each other to attract businesses and investments. If Japan wants to be chosen as a place of doing business, including the launch of new businesses, it is important to develop social infrastructure--including not only energy and telecommunications facilities but also institutional infrastructure such as labor market systems and healthcare programs--in an integrated manner.
What is needed is to reconsolidate the existing regulatory silos to create a new regulatory system to serve as an integrated social system. This perspective should be also useful in considering Japan's exports including that of infrastructure.
The second is the importance of policy evaluation. Under the current policy evaluation system, in principle, each ministry is responsible for monitoring and analyzing the effects of policy measures under its jurisdiction. Because of this, the evaluation system has been unable to achieve its intended goal, i.e., the feedback of evaluation results into policymaking, limiting its functions to those of a self-evaluation mechanism.
The result is the repetition of policy measures similar to those implemented in the past without regard to the results of evaluation on the effects of past policy measures, as has been the case with demand boosting measures such as the Eco Point Program, a government-sponsored consumer rebate program for energy-efficient products, and subsidies for the purchase of environmentally-friendly vehicles. The Diet's involvement in policy evaluation should be strengthened to change this situation and also for the purpose of accumulating and making efficient use of knowledge on industrial policy.
The White Paper on International Economy and Trade 2015, released earlier this month, points out that Japanese multinationals compare poorly to their foreign counterparts, based on an analysis of financial data from 2006 onward. We must not forget that businesses are the main engine of economic growth, and the role of industrial policy is limited to giving a boost to this engine.
* Translated by RIETI.
July 16, 2015 Nihon Keizai Shimbun
September 29, 2015
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