The Political Economy of the Japanese Financial Big Bang : Institutional Change in Finance and Public Policymaking

## Abstract This book is a case study of structural reform in the Japanese financial sector. It adopts a novel approach, combining rational choice analysis from the field of political science with comparative institutional analysis from the field of economics. Its central hypothesis is that Japanese politics and policymaking have changed due to a combination of policy failures and scandals, as well as the emergence of the possibility of a change in government after 37 years of uninterrupted Liberal Democratic Party (LDP) rule. These factors are likely to affect other policy areas, meaning that decay in the financial policymaking process may lead to changes throughout the political economy. In making this argument, the book attempts to provide a realistic image of post-1995 financial politics by improving on existing behavioral assumptions of actors. It demonstrates that the Big Bang can be best understood as an outcome of the strategic interaction of state actors. More specifically, the Big Bang is the product of interaction between the LDP and Ministry of Finance, each pursuing organizational survival through cooperation, competition, and confrontation. The book is divided into three parts. Part I discusses the conceptual tools and background information in preparation for later analysis. Part II provides an empirical analysis of financial politics. Part III attempts to make sense of the developments analyzed in Part II by returning to the analytical frameworks developed in Part I. Contents......Page 14 List of Figures......Page 17 List of Tables......Page 18 List of Abbreviations......Page 19 Change or Continuity?......Page 22 Research Puzzles......Page 28 Methodological Approach and Theoretical Framework......Page 31 Argument in Brief......Page 34 Structure of the Book......Page 39 Part I. Analytical Framework......Page 42 Three Contentious Issues in Japanese Politics......Page 44 Works on Japanese Financial Politics and the Big Bang......Page 54 The Study’s Methodological Approach and Research Design......Page 57 Possible Alternative Explanations......Page 63 Introduction of conceptual tools for institutional analysis......Page 67 A Theoretical Framework for Institutional Change......Page 72 The Dynamics of Organizational Survival......Page 79 State Actors (1)—Political Parties......Page 81 State Actors (2)—Bureaucratic Agencies......Page 84 Societal Actors (1)—Firms and Interest Groups......Page 89 Societal Actors (2)—The Public......Page 92 Institutions in Japanese Financial Politics (1)—Bureaupluralism in Public Policymaking......Page 96 Institutions in Japanese Financial Politics (2)—The Financial “Convoy”......Page 108 Scenarios of Financial Reform......Page 116 Background to the Big Bang Plan......Page 123 Basic Concepts of the Financial Big Bang Plan: Principles, Pace, and Sequence......Page 139 Concrete Policies Included in the Financial Big Bang......Page 142 Expected Economic Consequences of the Big Bang......Page 149 “Winners” and “Losers” of the Big Bang......Page 153 Conclusion......Page 168 Part II. Analysis of Financial Politics......Page 172 5 A Political Analysis of the Emergence of the Big Bang Initiative......Page 174 Balancing the Interests of Support Constituents and the General Public......Page 175 Who Brought about the Big Bang?......Page 177 Developments within MOF related to the “Big Bang”......Page 188 Developments within the LDP related to the Big Bang......Page 192 Summary: Who Brought about the Big Bang?......Page 197 Organizational Level Evaluation......Page 198 Integrating the Suborganizational and Organizational Levels of Analysis......Page 203 Assessment against Competing Explanations......Page 204 Conclusion......Page 208 6. The Financial Industry and the Big Bang......Page 210 Two political paths to economic reform......Page 211 Developments following the Prime Minister’s Initiative......Page 212 Summarizing the Narrative......Page 223 Three Previous Cases of Financial Reform......Page 227 Comparing the Financial Big Bang to Past Financial Reforms......Page 233 Why was the Financial Industry Unable to Stop the Big Bang?......Page 235 Conclusion: The Big Bang as a Victory by the “Political Winners”......Page 240 7. New Developments in Bureaupluralism: Comparing and Contrasting the Big Bang to the 1998 “Financial Diet”......Page 241 New Developments in Bureaupluralism emerging out of the Financial Big Bang......Page 242 Comparing and Contrasting the Big Bang with the Fall 1998 “Financial Diet”......Page 245 New Patterns in Financial Policymaking......Page 254 Public Support as a Determinant in Financial Politics......Page 255 Comparison with Alternative Explanations......Page 263 Conclusion......Page 268 Part III. The Meaning of Change......Page 270 8. Two Institutional Changes......Page 272 Review: Conceptualizing Institutions and Characteristics of Two Key institutions in Japanese Finance......Page 273 What Drives “Institutional Change”? Reexamining the Context of Japanese Financial Politics......Page 276 Relating the Big Bang to Broader Changes in Finance......Page 285 Institutional Change in Finance: Collapse of the Financial Convoy......Page 295 Institutional Change in Public Policymaking: The Decay of Bureaupluralism......Page 297 Conclusion......Page 304 9. Conclusion......Page 307 Insights into Regulatory Reform in Other Contexts......Page 311 Implications for Economic Reforms in Other Policy Areas......Page 312 Policy Implications......Page 325 Further Issues......Page 330 Appendix......Page 332 References......Page 333 B......Page 344 F......Page 345 I......Page 346 M......Page 347 S......Page 348 Z......Page 349 In 1996, the Japanese government introduced a policy package initiating massive deregulation and liberalization in the nation's financial sector, referred to as Japan's financial'Big Bang.'This book argues that the emergence of the Big Bang Initiative poses numerous challenges to conventional interpretations of Japanese politics and represents a clear case of institutional change in Japanese finance. Whereas many observers stress continuity in Japanese politics, this book argues that the emergence in the 1990s of performance failures and scandals attributed to the bureaucracy, as well as the increase in the likelihood of a change in government in this period, led policymaking patterns surrounding the Big Bang to differ radically from those dominating public policymaking in the past. These developments led to change in the nature of the alliance between the ruling Liberal Democratic Party (LDP) and the Ministry of Finance (MOF), to a shift in priorities within the MOF, and to a heightened role for the public in policymaking. The result was that the MOF, long perceived as'entrenched'and seeking to maximize tangible tokens of organizational power, became more than willing to launch the Big Bang, despite the fact that these reforms would strip the ministry of many of its regulatory tools and sever the ministry's close ties with the financial sector. The book also argues that these new developments prevented financial industry actors from forestalling these reforms, as they had done in the past with other reforms similarly threatening the viability of weaker firms. The findings reveal that not only politicians, but also bureaucrats and interest groups, have reasons to pursue public support to enhance their respective political influence. Consequently, well-organized groups do not always prevail over the unorganized public. "In 1966, the Japanese government passed a policy package to initiate massive deregulation and liberalization in the nation's financial sector, referred to as Japan's financial 'Big Bang'. This book argues that the emergence of the Big Bang Initiative poses numerous challenges to conventional interpretations of Japanese politics and represents a clear case of institutional change in Japanese finance. Whereas many observers stress continuity in Japanese politics, this book argues that the emergence in the 1990s of performance failures and scandals attributed to the bureaucracy, as well as the increase in the likelihood of change in government in this period, led policymaking patterns surrounding the Big Bang to differ radically from those dominating public policymaking in the past. The findings reveal that not only politicians, but also bureaucrats and interest groups, have reasons to pursue public support to enhance their respective political influence. Consequently, well-organized groups do not always prevail over the unorganized public."--Jacket Did Japanese politics change in the 1990s? -- A rational actor approach -- How do systems change? : Actors, preferences, strategies, and institutions in financial politics -- Expected economic implications of the big bang -- A political analysis of the emergence of the big bang initiative -- The financial industry and the big bang -- New developments in bureaupluralism : comparing and contrasting the big bang to the 1998 "Financial diet"--Two institutional changes -- Conclusion

This book emphasizes change over continuity in Japanese policymaking. It argues that Japan's Big Bang financial reforms emerged out of a policymaking process that deviated radically from past patterns. Performance failures, scandals and fluidity in party politics led the Ministry of Finance to promote reforms that otherwise would have been opposed.

Toya Tetsuro emphasises change over continuity in Japanese policymaking. The text argues that Japan's Big Bang financial reforms emerged out of a policymaking process that deviated from past patterns