Spending without Taxation: FILP and the Politics of Public Finance in Japan (review)

As Japan struggles to overcome two decades of sluggish economic performance and, more recently, the tragic events of March 2011, it is difficult to recall that the country was once widely renowned as a model of economic growth and innovation. Indeed, for many of us, the scores of studies published during the 1980s and 1990s that sought to uncover the secrets of Japan’s industrial prowess read more like chronicles of a now-distant past than an evolving body of political-economic theory. But as Gene Park reminds us in his excellent new book on the Fiscal Investment and Loan Program (FILP), we still have much to learn about Japan’s economic glory days and their profound and enduring impact on contemporary politics and economics.

Park’s study appears nearly a decade after Thomas Cargill and Naoyuki Yoshino published a highly regarded volume on the FILP.¹ While Cargill and Yoshino dwelt on the economics of the linkages between the FILP and the postal savings system and the FILP’s impact on industrialization, Park situates his study in a deeper historical and political context and has much more to say about the FILP’s effects on Japan’s system of public finance more broadly. In so doing, he convinces us that by understanding the origins and functions of the FILP, we are better positioned to explain Japan’s ability before the early 1970s to simultaneously achieve economic growth and social and political stability without incurring significant tax increases or government debt.

As a “government-run financial system that mobilizes and allocates savings in the form of investments and loans that serve public policy purposes” (p. 25), the FILP exemplifies what Park terms “policy finance”: the use of credit and other financial institutions—as opposed to taxation and budgetary expenditures—to fulfill public policy objectives. As such, the FILP before a series of 2001 reforms functioned as a complex, three-tiered network of financial institutions. The so-called “entrance institutions” supplied funds to the FILP; some, like the postal savings and insurance systems, were established well before World War II. By the early 1950s, these funds wound their way into the Trust Fund Bureau Fund of the Ministry of Finance (MOF), the successor to the prewar Deposit Bureau, which then channeled them according to an annual FILP Plan into governmental financial organs and other “exit institutions.” The exit institutions would then issue low-interest loans to recipients that had been singled out by the government for investment: export industries, cash-strapped local governments, public corporations that provided social welfare benefits to ordinary Japanese, and the like. Since the loans eventually had to be repaid, the FILP theoretically operated as a self-sustaining financial system that alleviated pressures on the general account budget.

There was nothing inevitable about the government’s penchant for fiscal conservatism and the FILP’s establishment and subsequent evolution; to the contrary, much depended on historical accident and the well-timed actions of enterprising actors. In part 1 of the book, Park cogently illustrates how occupation policy in general and the Dodge Line in particular imposed the principles of budgetary restraint and anti-inflationary policies onto reluctant bureaucrats and politicians who had long been accustomed to deficit financing as a means for achieving public policy goals; several years had to pass before fiscal conservatism jelled into the financial orthodoxy we now associate with MOF officials and a number of conservative politicians. Park goes on to explain how politicians embarked on an almost frantic quest for alternative sources of funds as postwar governments strived to rebuild industry and, by the administration of Ikeda Hayato (1960–64), to put Japan on the road toward rapid growth. It was the likes of Ikeda, and before him, Ishibashi Tanzan and Kishi Nobusuke, who knit together the eclectic array of institutions into the FILP network in their efforts to...