What a great way to start the day. I wake-up and read that China has sold $34.2 billion worth of US treasury bonds. This means that Japan is once again the largest holder of US debt! It is way better to have our debt in the hands of a trusted ally rather then a power-hungry adversary. That is just international relations 101.

China had sold off these assets in December and Japan has recently purchased even more US debt. Japan’s total is now $768.8 billion while China fell to $755.4 billion.  But, take this news as a grain of salt, because the problem is still vast.

The US still has a ton of debt and it is held by many different countries. This is dramatically worse then even 10 years ago.

The US has a huge trade deficit that has propelled the country into debt. China has a vast trade surplus that has led to a monetary surplus. Currently they hold more then $2 trillion in foreign reserves.

According to the Economist:

America’s monthly trade deficit rose to $40.2 billion in December from $36.4 billion a month earlier. Imports rose by 4.8%, faster than exports, which grew by 3.3%.

China’s exports on a customs basis grew by 21% in the twelve months to January. But its imports soared by 85.5% and its trade surplus shrank to $14.2 billion from $18.4 billion in December. According to the OECD’s latest economic survey of China, its current-account surplus will decline to 5.4% of GDP in 2010, from 11% in 2007 and 9.8% in 2008.

In honor of Japan now reclaiming their #1 ranking of the list of holders of US debt I would like to talk a little bit about Japan. They are a country that has close ties with business and has had one party make most of these economic decisions.

The strength of the LDP lies in its rural and business constituents.  Since World War Two, Japanese corporations involved in Keiretsu have grown and amassed a great deal of wealth and power.  The LDP maintains so much influence and power that they have controlled the Japanese government for every year except 1993-1996. After a half-century of rule it is safe to assume that the LDP and the institution of Keiretsu are here to stay.

Keiretsu is a connection of select corporations based on the need to restrict hostile takeovers and to facilitate horizontal expansion. The corporations involved are:   Mitsubishi, Mitsui, Sumitomo, Fuyo, Dai-Ichi Kangyo and Sanwa. The organization and connections are completed by the companies holding roughly equal shares in each others company. This makes it very difficult for any of the companies to act in a manner that would be detrimental to the rest.  This cooperation along with the powerful backing from Japan’s largest banks has allowed all the corporations within Keiretsu to flourish.

There are many reasons for allowing a keiretsu system to exist.  One of the best reasons is that it has created strong national corporations within Japan that are based on a strong national banking system.  These corporations are constantly expanded into other markets and into other means of production.  The backbone of the keiretsu system lies in the financial strength of the respected banks.  Up until the year the 1990’s the keiretsu system had shown few flaws.  The recession in Japan during that time had a tremendous impact on the integrity of the banking system.

As the recession worsened many loans went bad and were unable to be paid off.  “Bank loans expanded against the expectation of robust growth, a stable price level, and an expansionary monetary policy. Bank loans were concentrated in wholesale and retail trade, real estate, finance and insurance, and construction, with real estate as collateral. Corporate borrowers in these sectors became highly indebted and exposed to risks of declines in the collateral value” (Kawai 2004). The banks were then losing so much money that many were forced to either merge with another bank or shutdown (Miwa and Ramseyer 2002).

The keiretsu system has encouraged corporations to expand horizontally to control all of the means of production for their products. But this expansion has had profound effects on the corporations as they try to recover from the recession.  The banking system has recovered and it has changed quite a bit as Sumitomo Bank and Mitsui Bank merged to become Sumitomo Mitsui Banking and Sanwa Bank became part of Bank of Tokyo-Mitsubishi (Kawai 2004).

The recession and the banking crisis of the 1990’s has had a profound and lasting impact on the business and banking structure in Japan.  Politicians have since tried various banking reforms aimed at curbing overexpansion, most of which have failed. One of the first attempts to bailout the struggling banking system involved the government pumping public funds in excess of 680 billion yen into specialized housing loan companies; all this did was make the Japanese public wary about wasting more public money.  The government did have eventual success though.  Troubled banks were helped with emergency liquidity assistance and money and incentives were made available to encourage banks to merge with one another.  The Deposit Insurance Corporation received generous government funding aimed at furthering the banking restructuring.  The Financial Supervisory Agency and the Financial Reconstruction Agency were created as a means to monitor, administer and look over the banking reconstruction and the 9 trillion yen that was being put towards the reconstruction (Kawai 2004).

All of this reform resulted in banks restructuring, at first branches were closed; loan classification was tightened and general consolidation occurred. Supply networks were reorganized, internationalized and loosened when necessary; corporate boards reformed, stock options introduced and a sell-off of cross-held shares occurred. The banking system also had to make adjustments by restraining wage increases, shifting the ‘lifetime’ employment guarantee and collaborating with labor to raise productivity. After all of this reform it seems as if Japan is trying to go to economies-of-scale styled economy, such as that of the U.S., which is based on the interests of large mega-corporations. It is important to remember that there are similar systems to that of keiretsu that operate within the United States.  Not on the degree to which keiretsu operations and not with the powerful backing of their own banking institutions.

News Corporation is an example of a corporation that deals heavily within the United States that is similar to the Japanese example.  News Corp. controls a vast empire of media, controlling radio stations, book publishers, magazine publishers, TV stations, TV networks, satellite TV provider, cable TV provider, Film, Newspapers, sports venues, sports teams and even Myspace.com.  The product that is sold by News Corp. is their vast audience, the consumer of this product are the advertisers who pay big money to have their products sold.  This is similar to a keiretsu system because of the techniques used by News Corp. in expanding their empire.  News Corp. has their product, and they decided to expand into new markets, but with the same product, this is horizontal market expansion.  This is a marketing technique used that builds audiences.  Instead of creating a whole new product, just increase the use of an existing product, like a radio show, and expand it into another market.  Even though News Corp. is a different organization than any of the Japanese corporations involved in a keiretsu system it is still one of the best examples of use of a horizontal expansion technique that is similar to that of the Japanese corporations (http://www.cjr.org/tools/owners/newscorp.asp).

Many other institutions, besides Keiretsu, have played huge roles in the reconstruction of Japan since the end of World War Two.  The Confucian attitude towards family unity and cooperation has made a tremendous impact on Japan.  The old Zaibatsu corporations were controlled by families until they were dismantled during U.S. occupation. The family unity allowed many relationships inside and outside of the family to flourish.

The informal institution of Kankei has played a large role in forming modern Japan.  Kankei is a system of interpersonal connections that influence each other in business, politics and many other factors of life.  This system is comparable to the Chinese network of Guanxi (Pye 71).  The two systems have many similarities; one striking difference is that the kankei system allows many more relationships to occur on a much more personal level, while the guanxi system is tied in to personal connections, such as birthplace, education, family or same social strata (Pye 71).

Even though Kankei plays a vital role in the network of relationships and influence within Japan, there are many more other important networks of influence that are great in size and in strength.  The institution of Amakudari has played a role of enormous importance in breaching the gap between the world of business and government.

Amakudari is the name for the practice of government bureaucrats retiring early and switching into the private sector, thus making more money.  This is known as a system that benefits those that are involved.  Amakudari encourages many well-educated individuals to start careers in the public sector by giving them a chance to still make good money in the private sector.  “Amakudari is part of a labyrinth of informal relations, processes, and decision making that fuses government and business operations” (Colignon & Usui 2005).  Amakudari is really just a system of rewards for high-ranking public officials.  This system is commonplace in many modern nations.  In the U.S. it is very common for legislators, secretaries, under secretaries and other bureaucrats to work in the private sector.  Lobbying is the primary occupation for former bureaucrats in the U.S.

Unlike the U.S. system, the Amakudari system has been difficult to legislate. When restrictions were placed on public officials retiring early and transferring to a private corporation, they instead went to a public corporation (Yokosuberi).  Then after being at a public corporation for awhile the individual would then transfer into the private sector (Wafantori).  Instead of dealing with public officials retiring early and transfering to different sectors, the government now had to watch over the exchange of labor in this system.  All of this reform was intended to weaken the bond between the bureaucrats, politicians and business interests.  Like many of the institutions that have been set-up in post-war Japan Amakudari and its associates are here to stay.  “Amakudari is a set of practices that are understood as the way things are done and entails a certain taken-for-grandtedness” (Colignon & Usui 2005).

Japan has a history, since WWII, of making a choice and sticking to it.  The Labor Democratic Party (LDP) of Japan has been in control of the Japanese government for every year except those of 1993-1996. The LDP has retained control over the government for many reasons, one of which is its strength in courting the rural, business and bureaucrat vote.  The conservative platform of the LDP is very business friendly and over represents the rural population in its decision making.  Overall the characteristics of the LDP seem to be broad and cover a wide range of viewpoints. The LDP has been the party of cooperation with the U.S. and export-led economic growth.  However firm these values may seem they are comprised from a party that is completely factional.

The Machimura faction has been one of the more powerful factions recently, both former Prime Minister Junichiro Koizumi and current Prime Minister Shinzo Abe belonged to this faction. Other factions that currently are important or historically are important are the Tsushima faction, Kono faction, Nikai faction, Ibuki faction, Koga faction, Tanigaki faction, Yamasaki faction and the Komura faction.  As long as their votes are relatively secure, the majority of these factions will remain within the LDP.  How the LDP handles the economy and the military question will determine how well and for how long it will govern (Economist 2006).

The GDP is steadily increasing at 2.3% over the past quarter, and with an unemployment rate around 4%, their economy is starting to look healthy. (a GDP over that last quarter of 2.3% is very slow growth, for 2007 as a whole, the GDP is 5.5%)  Japan comprises 6.3% of the world’s total GDP, compared to that of 19.7% for the U.S., 15.1% for China, 14.7% for Europe and 6.3% for India. Of course Japan’s economy is superior to that of India; India comprises 17.4% of the world’s population compared to Japan’s 2% (Economist, 2007).  Japan has a positive trade balance and its workers are efficient, comparable to only that of the U.S. and Germany.

The current LDP government needs to get the growth rate to sustain itself at around 5%; Japan cannot afford another decade of growth hovering around 1.5%.  The best way to do this is to strengthen the Japanese market.  Even though the Nikkei has grown at a faster rate than that of the DJIA, it is still not as valuable.  It would be a welcomed sight to many investors to increase the importance of the Nikkei in Japan and reform toward a market economy (Economist 2006).

Japan has the third largest economy in the world, trailing only the U.S. and China.  Both of these economic powerhouses are also the world’s two most powerful nations, in terms of military might.  The average Japanese citizen does not want his/her country to have an offensive military force or to possess nuclear weapons. There has been pressure from various factions within Japan to amend the constitution to allow the creation of nuclear weapons.

However unlikely this scenario is, it remains a serious topic.  With North Korea now a nuclear power, Japan feels more and more threatened with each passing day.  It is important for the LDP to maintain the pacifism that has grown strong within Japan.  Any militaristic move or aggressive decision could lead to an anti-war or pacifist party to gain a substantial amount of support.

Works Cited

Colignon, and Usui. Amakudari: the Hidden Fabric of Japan’s Economy. New York: The Journal of Japanese Studies, 2005.

“Economic and Financial Indicators.” The Economist 21 Apr. 2007: 109-110.

“Japan’s Economy.” The Economist. 20 July-Aug. 2006. The Economist. 15 Apr. 2007

<http://www.economist.com/finance/displaystory.cfm?story_id=E1_STRJVRP>.

Kawai, Masahiro, comp. Reform of the Japanese Banking System. 21 Oct. 2004. Institute of Social Sciences, University of Tokyo. 10 Apr. 2007 <http://www.fordschool.umich.edu/rsie/Conferences/CGP/Oct2004Papers/Kawai.pdf>.

Miwa, and Ramseyer. The Fable of the Keiretsu. New York, 2002.

“News Corp.” Who Owns What? Colombia Journalism Review. 15 Apr. 2007 <http://www.cjr.org/tools/owners/newscorp.asp>.

Pye, and Pye. Sian Power and Politics: the Cultural Dimensions of Authority. New York: Belknap P, 1985. 55-89.

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