A businessman looks at share prices displayed outside a brokerage in Tokyo, December 11, 2009.
A businessman looks at share prices displayed outside a brokerage in Tokyo, December 11, 2009.
Yuriko Nakao / Courtesy Reuters

In a recent Foreign Affairs article, Noah Smith outlines a bleak future for Japan if the Abe government fails to introduce neoliberal reforms. “Many features of the Japanese economy that are commonly attributed to culture,” he writes, “are, in fact, the result of Japan trying to run a modern economy without neoliberal reform.”

Smith is not wrong about the Japanese economy. Indeed, it would benefit from lifting regulations, liberalizing its labor market, and opening its market to more foreign goods, capital, and workers. But that does not mean that it will. For 30 years, prime ministers have solemnly declared their ambitions to reform the Japanese economy for the twenty-first century. All have largely failed to deliver structural reform. Even Junichiro Koizumi, the premier who rode his pledge of “structural reform without sanctuary” to rock star–like popularity, had more success with cleaning up bank balance sheets -- a policy ultimately aimed at improving macroeconomic performance -- than with transforming Japan’s postwar economic institutions.

In turn, there are three reasons why Prime Minister Shinzo Abe will not be a neoliberal reformer either.

First, as Smith recognizes, neoliberalism has been met with “stiff public resistance.” For every reform proposed, there are those, usually with allies in the bureaucracy and the Liberal Democratic Party (LDP), who are prepared to water down, stall, and block initiatives. The fate of Abe’s “third arrow,” which Smith believes could deliver neoliberal reform, at the autumn extraordinary session of the Diet, has provided plenty of evidence that politicians are still plenty capable of blocking reform. Neoliberalism is particularly handicapped in Japan because the country has a weak tradition of liberal political and economic thought; the state’s prominent role in industrializing and then rebuilding the economy after World War II has left Japan with a strong legacy of statism that few are ready to abandon.

That includes Abe himself, who does not seem particularly disposed toward neoliberalism. Like his LDP predecessors, Abe has signaled that his goal is “growth at any cost,” since robust economic growth is the only way that Japan will be able to retain a leadership position in East Asia. The Abe cabinet’s third arrow reflects the state-centered priorities of the Ministry of Economy, Trade, and Industry, the heir of the powerful Ministry of International Trade and Industry, which spearheaded Japan’s postwar industrial policies. Meanwhile, labor-market reforms have been postponed, Abe’s rhetorical commitment to Womenomics has never been translated into policy, and there have been few signs that Abe wants to shake up the protected service sector.

The second, and perhaps most significant, reason that Japan is unlikely to shift to neoliberalism is that such an economic overhaul may be virtually impossible. For two decades, political scientists and sociologists have sought to show why some countries, Japan among them, have had durable nonliberal capitalist institutions, usually featuring bank-centered corporate financing, extensive coordination between competing producers and producers and their suppliers, and cooperative relationships between management and labor. Much of this literature has sought to explain how these systems came to be and why they continuously frustrate those who predict reformation.

Among the explanations is the idea of institutional complementarities. Basically, every capitalist regime, whether liberal or nonliberal, is a cluster of interlocking institutions that make up a coherent system. For example, in Japan’s case, it does not just have lifetime employment and seniority pay: it has an education and training system in which firms invest considerable resources in training new hires on the assumption that they will stay with the firm until retirement. Post-secondary education institutions are focused less on developing human capital than on social capital, the school ties that help graduates land jobs and move up the promotion ladder. For structural economic reform to succeed in such a system, it would have to proceed along multiple tracks. Piecemeal reform could leave the economy worse off, as happened when the Koizumi cabinet deregulated some types of labor. However, since the costs of structural reform are concentrated among protected sectors of the economy (often located in depressed peripheral regions overrepresented in the Diet), whereas the benefits are spread to everyone, piecemeal structural reform might be the only option. 

Finally, it is worth remembering that Japan’s first two major economic overhauls did not occur under democracy. The Meiji Restoration was a “revolution from above,” and its protagonists did not hesitate to use the full power of the state to achieve their ends. Meanwhile, as economist Yukio Noguchi argues, the postwar economic regime coalesced under the militarist regime in the 1930s and was cemented by the Japanese bureaucracy under U.S. military rule. For all his political clout, Abe’s power pales in comparison to these predecessors, who had coercive power and the opportunity of postwar and post-revolution reconstruction to use it.

Simply put, is unreasonable to expect Japanese-style shock therapy from Abe. Although Abenomics may have salutary effects on Japan’s macroeconomic performance and may encourage more gradual institutional change, Abe will not leave behind a neoliberal Japan.

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  • TOBIAS HARRIS is a Washington, D.C.-based analyst of Japanese politics and economics at Teneo Intelligence.
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