Japan Remodeled: How Government and Industry are Reforming Japanese Capitalism (review)

The most important intellectual challenge facing social scientists studying contemporary Japan is to figure what is, and is not, happening as a consequence of the economic problems of the 1990s. A society that had finished the 1980s with an average annual economic growth rate of five per cent (1987–91) and had looked forward confidently to more of the same was shocked by the ensuing decade of near stagnation, deflation, collapsing banks, and assorted bureaucratic scandals. These problems were all the more dismaying because many believed that economic success had been the result of a unique "Japanese" economic model: a kinder, gentler, and more successful model of capitalism than that which prevails in the United States. Indeed, much that we think we know about the Japan of the last half century—running the gamut of economics, politics, and social behavior—is under profound pressure for change. But what change is occurring? Why? How successfully?

Steven Vogel tackles these critical questions in this book—a task that he acknowledges at the outset as being tricky and difficult. Others will undoubtedly weigh in with further studies in years to come—and if you are an economist, political scientist, sociologist, or anthropologist and are not contemplating doing so yourself, it is high time to join this intellectual enterprise. My own contribution to this subject (Arthritic Japan: The Slow Pace of Economic Reform [Brookings, 2001]) was probably too early, though I am gratified to see that my own conclusions largely match Vogel's (that is, the process is a slow evolutionary one, and Japan is not converging on the American version of market capitalism). But much remains to be studied, and the process of gradual reform continues to alter the overall picture.

The difficulty and shifting nature of this subject notwithstanding, Vogel's book is a very important contribution that should stand up well for a number of years. His approach is careful, nuanced, appropriately eclectic, somewhat skeptical, and very readable. I believe he successfully explains why economic reform is not causing a convergence between the Japanese version of capitalism and that of the United States (puncturing a belief that was popular among Wall Street investors in the late 1990s). He also provides convincing arguments about the uncertain impact of much of the reform effort.

The opening chapter of this book lays out the basic issues and a framework for analyzing them. Vogel adopts a broad, encompassing approach that pulls in market forces, institutions, and broader social factors, summarized in his use of "three circles of rationality" facing business and government as they approach reform: simple market-based responses to economic pressures, institutional costs and benefits, and broader social and reputational costs and benefits. He applies these different levels of analysis to both the behavior of firms and the policy decisions of the government.

Although this is a book about present and future structural reform, the second chapter provides a necessary review of what went wrong in Japan in the 1990s. A debate has raged among economists over the question of whether flaws in the economic system or macroeconomic policy failures were the primary cause of Japan's "lost decade." Vogel sides largely with the policy failure approach (while acknowledging that the structural flaws and policy failures are intractably interrelated). Further, he reaches the critically important conclusion that the evidence on the strengths and weaknesses of various aspects of the Japanese economic system is ambiguous. Thus, reforms do not appear to be a straightforward response to obvious structural failures (and, therefore, we do not know whether the changes improve or worsen economic outcomes).

Chapter three lays out a summary of the reform process—the actors involved and the political process in which they interact—and compares it to both the United States and Germany, bringing in a useful comparative framework. After all, Japan is hardly the only society to have faced serious economic problems...