A complex interweaving of interests was a major force behind the remarkable success of the Japanese economy from the Meiji Restoration until the 1990s, but today this same system is a factor in the country’s difficulties in restarting the economic engine and better competing in the global economy, a leading U.S. academic contends.

Kent Calder, Director of the Reischauer Center for East Asian Studies at the Johns Hopkins School of Advanced International Studies in Washington and a former special advisor to the U.S. ambassador to Japan, has identified what he terms “circles of compensation” that have governed Japan’s economy in a number of critical areas. These include finance, agriculture and technology.

Speaking at a recent seminar held by the Institute of Contemporary Asian Studies of Temple University Japan, he described the 100 years of growth until the collapse of the Bubble Economy as a “remarkable story,” adding that “of course there are a series of economic parameters that are important, but I think there is also an important political dimension to that.”

In Calder’s view, Japan still faces a difficult time in an age of globalization. He terms this a puzzle since in many ways, Japan has shown a clear commitment to globalization. “There are few countries that are more supportive of the United Nations and in terms of ODA (Official Development Assistance) Japan has been one of the leaders worldwide from the 1960s on.”

But he says that in terms of economic globalization, Japan is lagging behind other economies in the region.

“I do believe that there is change happening, in agriculture and transportation and a whole series of other sectors, but the problem is that change is happening considerably faster in many other parts of the world,” he said.

In explaining why Japan seems less nimble than the competition, Calder looks to the “circles” that tend to look to the benefit of their members at the expense of outsiders.

“We have to understand the incentives that actual people have that motivate their behavior,” he said. “People behave and act in terms of the incentives that act among them.”

This translates into organizations as well, such as corporations and government. “Japanese organizations tend to internalize benefits and to externalize costs rather systematically,” he said.

As an example, Calder has looked at a number of sectors, such as banking. He finds that those best served by the system were the “insiders,” including banks that could deploy large levels of capital, helped by the increases in land values, indebted firms that had easy access to cash, and a government that was itself increasingly in debt.

On the other side were savers who saw little return on their deposits, consumers who did not have easy access to credit cards and the entire debt and equity capital markets that failed to develop any long-term economic growth.

Protectionism has been one reason for such circles, but not the only one, Calder contends, saying that stabilization and diffusion of risk also played a role in benefiting those within the circle.

Similarly, in food supply where farmers benefited from high prices and government policy and in turn supported the long-ruling Liberal Democratic Party of Japan. However, consumers had to pay the retail prices while foreign producers were largely shut out of the market.

Calder stressed that these circles had positive aspects as well. They have helped to promote economic growth, supported vulnerable sectors such as agriculture and encouraged investments in higher-risk large-scale industrial projects. In addition, by supporting small and medium enterprises, they helped to forestall the social unrest that might have resulted from a widespread and severe economic downturn.

He also noted that many of Japan’s current major players are not closely tied to these systems, identifying companies such as e-commerce group Rakuten, air conditioner firm Daikin, telecoms group Softbank and Uniqlo owner Fast Retailing as firms that have eschewed the “circles” approach to business.

For the future, Calder said that he believes that the circles of compensation system needs to be changed but not destroyed.

“It is precisely because circles of compensation are relatively well developed in Japan that there is an importance to international relationships that allow both Japan and its international partners to take advantage of their strengths. There are many strengths in the circles of compensation system but it needs to be supplemented by something else to avoid stagnation,” Calder concluded.

“A lot of this has to operate at the micro level, but disruption is a significant part of the total,” he said.

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