RIETI Report July 2003

The Future of Japan <RIETI Featured Fellow> AOKI Masahiko - Special Interview

This month's featured article

The Future of Japan <RIETI Featured Fellow> AOKI Masahiko - Special Interview

AOKI Masahiko President , RIETI

Greetings from RIETI

In Japan, we celebrate "tanabata" (Festival of the Weaver) on July 7 every year by decorating bamboo branches with colorful paper strips and making wishes. It is also known as the legendary once-a-year rendezvous of two stars, "Orihime" (Vega) and "Hikoboshi" (Altair), in the Milkyway. It is said that the customs of tanabata originated from a mixtureof Old Chinese folktales and unique ancient Japanese religions. Various events for tanabata are celebrated all across Japan. In this way, Japan has a long history of embracing diversity. The new Japan may also beone in which we welcome diverse things. RIETI Report interviewed Masahiko Aoki, president and chief research officer of RIETI, on the changes confronting Japan and the country's future model. (AK)

RIETI FELLOWS NOW

AOKI Masahiko
Dr. Masahiko Aoki has been president and chief research officer of RIETI since April 2001. He served as director general of the Ministry of International Trade and Industry's Research Institute (MITI/RI), the predecessor of RIETI, from 1997. After receiving an MA in Economics from the University of Tokyo in 1964 and a Ph.D. in Economics from the University of Minnesota, he served as assistant professor at Stanford University and Harvard University. He was also a professor at Kyoto University from 1977 to 1991. He has also continually been Henri and Tomoye Takahashi Professor of Japanese Studies in Economics from 1984 to present. His expertise is comparative institutional analysis, corporate governance, the theory of the firm, and the Japanese economy. His publications include: "T owards a Comparative Institutional Analysis" (MIT Press, 2001) and "Information, Corporate Governance, and Institutional Diversity: Japan, US, and Transitional Economies in Comparative Perspective" (Oxford University Press, 2000)

For his detailed biography [PDF: 114KB], click here

For his recent activities at RIETI, click here

Interview

Changes confronting Japan and the country's future model

RIETI Report: You have been emphasizing the importance of a trans-disciplinary approach in public policy research. Is the ongoing RIETI project on fiscal system reform also based on such a comprehensive approach?

Aoki: Yes. In fact, the project team comprises RIETI fellows specialized in public finance, incentive and information theory, political science, social system design, econometrics, as well as researchers from the Ministry of Finance's Policy Research Institute and officials from the Ministry of Economy, Trade and Industry, so that we can work on fiscal issues in a comprehensive and integrated manner. We are taking up various fiscal issues, such as those concerning local finance and political mechanism. Given the need to fix the now-distorted incentive structure for bureaucrats, it is important to incorporate what we call an incentive theory in economics, as well as the viewpoint of political science. We are also studying fiscal reforms in the United States as our project team includes a fellow knowledgeable on the US budgetary process. Reform measures implemented on budgetary processes under the parliamentary system, such as those in Britain and New Zealand, are being examined too.

Current political economy debates in Japan are focusing on expansionary fiscal expenditures vs. the adoption of an inflation targeting scheme to counter deflation. But these measures would not provide a final solution to the economic problems confronting Japan. I would think it irresponsible for the current generation to keep on pursuing a fiscal policy which would pass the heavy fiscal burden on to the future generation. It is essential to cut down the scale of the government and streamline public expenditures.

To alter the, "form of a country," we must change the budgetary mechanism of the country. Japan is plagued by what I call, "bureau pluralism. "Under this institution of political economy, industrial associations representing various vested interests hold close ties with relevant government ministries. Budgetary proposals submitted by ministries reflect those vested interests. Then, officials at the MOF's Budget Bureau are supposed to scrutinize these proposals and compile a draft budget for the next year. No matter how motivated and capable those bureaucrats at the Budget Bureau are, however, it is impossible for them to conduct detailed assessments from scratch. So in practice the current year's appropriations serve as a platform and negotiations between Budget Bureau officials and those from each requesting ministry center on incremental changes for each given item of budgetary request. This makes the level and proportion of fiscal expenditures very rigid. In Britain, the draft budget that the chancellor of the exchequer submits to the Parliament consists of no more than 200 pages. But in Japan, budgetary documents of a few thousand pages are submitted to the Diet. Under such a scheme it is impossible to make public expenditures efficient, as expansive inertia is built in. This system must be reformed. Instead, the Cabinet should set policy priorities and create an overall budgetary framework, within which respective ministries act with greater discretion over use of the allocated budget. In return for this, however, a strict ex post assessment should be conducted. Namely, emphasis should be shifted greatly from ineffective ex ante assessment of proposed budget to ex post assessment of the effectiveness of actual expenditures.

The highly complicated tax system is another problem. 25% of Japanese people pay no income taxes, while those paying income taxes to an amount of no more than 10% of their income account for three quarters of the population. Japan's tax revenue has posted no increase in the past 15years. Unless we expand the scope of those shouldering tax burdens and increase tax revenue, the burden on the young generation will become unbearably large.

Finally, the central government should transfer more authority to local governments over the implementation of public works projects. This way, the actual results of projects will become more visible to the public.

RR: Do you think the younger generation in Japan is capable of carrying out institutional reforms?

Aoki: In a sense, today's young Japanese people are not interested much in politics, but they are bringing about a new cultural revolution. They demonstrate their best capacities in, "otaku culture," or in, "geeky fields," so to speak, such as animation, graphic novels, and 'characters'. Asia is advancing ahead of the US and EU in implementation of broadband networks and cellular phone technologies. These trends may have impacts on Asian consumer markets such as fashion, entertainment, tourism and soon. In this regard, I think Japan is in a very fascinating phase now.

RR: If young Japanese people do seem to have little interest in politics, do you not think this is a factor that might prevent a change of political regime?

Aoki: Looking back at the history of the 20th century, the ideological confrontation between Communism and Capitalism continued up until the collapse the Communist regime of the Soviet Union. In those years, Japan too, had a clear internal political division between the Right and the Left. At that time, the points of political conflict were clear-cut and simple. But today, Japan has become a far more diversified society and contentious points are neither necessarily clear nor obvious. For instance, should we give priority to ensuring long-term employment, or implement more measures to increase labor mobility? Such problems cannot be answered and solved overnight. The only way to arrive at a better solution is though trial and error. Trial and error in the public domain requires the mechanism of government change between parties with different platforms or programs.

The points of contention among political parties are not distinct in Japan. Although these parties contest in elections, the system is very opaque as they often make policy trade-offs in order to form a coalition. I think a driving force to change this situation can be found in some local regions. For one thing, a governor is at least elected through direct elections. Also, many young people are actively engaged in the reform of local institutions. So, we do not have to be over pessimistic.

Moreover, the Internet has been bringing changes to the way young people and volunteers create and develop their network. There is a good possibility that a new regime of politics, which is suitable to the era of the Internet and completely different from the politics in the past, will emerge in Japan.

RR: Do you think Japanese people should adopt an, "independent thinking model," in the future?

Aoki: The Japanese culture, by nature, is tolerant to diversity. I think we need a model that is not fundamentalism. Fundamentalist ideas, such as neo-conservatism in the US, may cause a clash of civilizations. We need a model in which we respect diversity and harmonious coexistence. Some people say that Japanese people are group-minded, but each individual has his/her own personality. I think that the Japanese society is moving toward a model in which each individual may express their individuality more. The so-called, "groupism," is the product of institutions such as life-time employment. As these institutions begin to erode, so will the ways in which people interact also change, and vice versa. Institutions and individual propensity co-evolve.

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