Midterm Examination

Japanese Economic System

Ryoichi Imai

November 22, 2005

January 31, 2006

Questions and Answers

1. Describe the reforms to democratize the Japanese economy in each of the following categories. (20)

   1. Anti-Trust measures

      Zaibatsu owners were forced to sell their shares to public by auction.

   2. Land reforms

      Land was confiscated from absentee landlords with little compensation and resold to tenant farmers at bargain prices.

   3. employer-employee relationships

      Workers were granted the rights to organize in unions and to engage in collective bargaining by the Union Law of 1946.

   4. education

      The education system was reformed on the American model, with all children required to attend elementary school for 6 years and junior-high school for 3 years.

      Coeducation was introduced throughout the public schools.

   5. political institutions

      The emperor (“Ten-noh”) became a "symbol" of the nation.

      Military forces were permanently banned by the Constitution.

2. Explain the following facts, which are important in the relationships of Japan with the global economy. (10)

   1. The Bretton-Woods System

      Under the system, each currency was exchanged with the US dollar at a fixed rate. The US maintained the US dollar convertible to gold at a fixed rate.

   2. Nixon Shock

      In August 1971, President Nixon announced to stop the gold convertibility of the US dollar, which means the end of the Bretton-Woods System.

3. Answer to the following questions regarding the "Bad loan" problem in the 1990s. (20)

   1. Why did the crash of the land prices make the banking sector problems so serious?

      Land has been extensively used as collateral for loans. The decline in land prices resulted in the recent crisis of the banking sector.

   2. Describe the policies taken by the government to fix the problems.

      Bank of Japan increased money supply and lowered the interest rates.

      The government increased budget deficits to create excess demand through public projects, and reduced tax rates.

      The government repeatedly delayed the deposit insurance reform to limit its coverage, in order to support insolvent borrowers.

   3. What are the properties of Japanese financial sectors which are not shared by those of other advanced countries?

      The interest margin is very low, and the banks heavily depend on lending revenue.

   4. The presence of government-sponsored institutions hurts the profitability of Japan's banking sectors. Explain.

      The Postal Saving System has a huge network and provides a very competitive service.

      Government-sponsored institutions are competitive in home mortgage loans and financial services to small and medium-sized firms.

4. How can we reconcile the conflicts between the Corporate Nominalism and the Corporate Realism? (5)

   The Corporate Nominalism views a corporation as a thing, while the Corporate Realism views it as a person. However, a corporation owns its assets as a person, and is owned by the shareholders as a thing. This duality reconciles the conflicts.

5. Today's capitalism is characterized by the fragmentation of ownerships and threats of takeovers. How do these characteristics contribute to the conflicts between the Corporate Nominalism and the Corporate Realism? (5)

   In this stage, the Corporate Realism wins because no single shareholder cannot obtain the dominant control on the corporation due to their limited shares.

6. How is the pyramidal system of corporate ownership used to eliminate the personality of corporation? Find the examples of the pyramidal system in today's corporate ownership. (5)

   Through multiple tiers of ownerships, the owners on the upper tier can take a full control of a corporation, even if they have limited shares. The examples are:

   – The prewar Japanese zaibatsu.

   – The present-day Italian family enterprises

   – Korean chaebols.

7. How can we eliminate the thingness of the corporation? (5)

   We can eliminate the thingness of a corporation by cross-shareholding to exclude the outside shareholders' control on the corporation. 

8. Explain the story about Horiemon (Livedoor) and the Fuji TV in the viewpoint of the conflicts between the Corporate Nominalism and the Corporate Realism. (10)

   The Fuji TV was founded by the Shikanai family, who was the largest shareholder of the corporation since then. The Fuji manager excluded the family out of the management by issuing new shares by large amount to other shareholders. This is victory of the Corporate Realism. Recently, however, Horiemon bought a large number of shares of the holding company (Nippon Radio) of the Fuji TV and became the dominant shareholder. This is the return of the Corporate Nominalism.

9. The types of competition which is prevalent in Japan are much different from competition that prevails in the global economy in the following four categories. Explain them. (20)

   1. corporate goals

      Japanese firms rank size, growth, and market share, ahead of profitability.

   2. imitation

      The corporate priority does not rest on creating new products and services, but on imitating others' ones.

   3. internal diversification and Me-Too entry

      Japanese firms enter a new market if other firms are already there, even if they have no competitive advantage.

   4. barriers to exit

      Weak and inefficient firms can stay in a market, supported by financial institutions and the government.