Political Economy of Japan - Case Study Example

Running Head: Political Economy of Japan Student name: Name of Institution: Course Code: Name of Supervisor: Date of Submission: Introduction Political economy refers to a perspective drawn upon economics of a certain country or region, legal environment, and political orientations to elaborate how economic systems such as capitalist, socialist, or the mix of the two influence each other and the Foreign Direct Investment (FDI) (Hill, 2007). This implies that political economy incorporates the mix of political, systems, legal systems, and economic systems in order to bring about a generalized system that ensures growth and development (Hill, 2007). Thus, it is difficult to define political economy while overlooking aspects of economic system, political system, and legal systems as they all play a key role in determining the course of the economy. Economic system of a country refers to how the government allocates resources and has a close relationship with the adopted political system. Political systems for instance that are of totalitarianism nature values an economic system controlled by single and like-minded government elite while democratic political system value shared decision-making and control between the government and the corporate world as opposed to a socialist political system that incorporates the two economies (Cavulish et al. 2012). On the other hand, any legal system installed by the government serves the purpose of setting out the laws to govern economic activities in order to meet certain objectives. Therefore, the three elements of political economy mentioned above, jointly work together to provide a force to reckon for investors to make decisions on whether to invest in certain environments or not. To understand how these elements of political economy work, this paper seeks to analyze the case of the Japanese political economy with more perspective on the country FDI. Political Japan’s political system is that of democracy with one political party (the Liberal Democratic Party) having been in power for over 50 years. As with most democracies, the Japanese political system consists of the executive branch, the legislative branch, and the judicial branch that all form the three organs of the government. Although LDP has the backing of Japanese conservatives, the party’s economic policies are those of free trade, free market, and competition. The system also values the ideology of cooperation with business partners across the world to facilitate its economic growth (Deseatnicov, 2009). The general administrative goals carried out by the Japanese government as concerns economic sector include privatization of state owned enterprises (SOE), adoption of measures that include tax reforms, and internationalization of the country’s economy. The government carries out its agenda through liberalization and heightened promotion of domestic demand. To promote growth of its FDI, the Japanese government formed the Japan External Trade Organization (JETRO) as a non-profit government organization judged with the responsibility of promoting Japan’s exports. The government has been at the forefront in funding more than half of JETRO’s budget to ensure increased FDI. Additionally, the Japanese government also formed the Japan Investment Council (JIC) as one of its aggressive measures to boost the country’s FDI growth through allowing JIC to provide government with the right advice on how to increase the FDI. This aggressive move is pure democratic in the sense that the government appreciates the fact for every individual’s contribution to economic growth is welcome (Cieślik & Ryan, 2004). It is also with the government’s perspective of FDI as an essential means to introduce new technologies, employment opportunities and innovative management and financial techniques in Japan. However, although Japan’s Inward FDI Potential Index is high, its Performance Index is low. The argument that the political system in Japan plays a key role in its economic influence is evident with the system containing three parts, usually referred to as the ‘iron triangle’. The Japanese ‘iron triangle’ includes the Government, the Bureaucracy, and the Business. Although the relationship of these three parts is so close to bring about ambiguity, they rely on each other for their benefits. This resulted in the recent collapse of the Japanese economy. Bureaucrats use the power bestowed on them to leverage and control the business. Even after they retired, the bureaucrats still maintain close relationships with the Government (Poter, 2001). The result of such relationship among the ‘iron triangle’ causes a non-competitive and non-conducive business environment that leads small firms to lack the confidence to invest and thus the poor realization of FDI. Economic The Japanese economic system is one of the most successful economies of the post WW II era. Rising from the ashes of wartime and later the 2008/2009 global financial crisis, the Japanese boast today of being the among the largest economy after U.S (Strobel & Zielenziger, 2001). Given this success, the role of Japanese government in economic policymaking is of considerable interest. After the WW II, the Japanese economy had experienced a reduction by less than a third of its original state before the war (OECD, 2013). However, by 1950, the country had recovered its production levels to see the country’s GDP increase by 24 times by 1990. The country’s magnificent performance in industries such as steel and iron, machinery, automobiles, and electronics played a key role in improving the economy and consequent improvement of FDI (Deseatnicov, 2001). However, the 2007/2008 GFC hit the Japanese economy so hard. For instance, Japan’s real GDP dropped by 6% in 2009 alone while at the same time leading the country’s banks and consumers to accumulate large amounts of debt. Additionally, the crisis led to collapse of the Tokyo Stock Market. The overall impact of the GFC in japan is devastating as the economy shrunk by 3.3 percent between April 2008 and March 2009. The result of the GFC was a devastating decline in FDI in Japan (Naoyuki, 2013). However, thereafter, the country embarked on a serious recovery process to improve their production in the steel and iron, machinery, automobiles, and electronics industries that saw its FDI increase steadily. Legal systems Japan’s legal system is quite diverse and differs sharply from what other world economies like the US use. For example, the country did not value the use of legal consultants to offer legal advice until in 1986. However, after the 1994 signing of Amendments to the Foreign Attorney Law, the use of legal consultants ceased. This therefore implies that prefectures and municipalities in Japan have the authority to create business laws and regulations independently if they do not contradict national laws. This implies that all the 47 prefectures across the country may have different requirements for conducting business, say different views of paper work for instance (Cieślik & Ryan, 2004). Additionally, Japanese contracts differ from other nations as they are based on trust and not to be binding. This indicates a poor legal system that can easily scare away investors and reduced FDI. The legal system of Japan also valued liberalization, amendment of the Foreign Exchange law to simplify the procedure for foreign direct investment in Japan, and cutting down taxes on exports to improve the level of exports and thus increasing FDI. Furthermore, the country implemented Import and Inward Investment Promotion Law to promote exports. All these reforms in the Japanese legal system results in increased FDI growth. Conclusion The past discussed and demonstrated the role of political economy in influencing Japanese FDI and general economy. It indicates that the political system orientation towards democracy and government intervention through JETRO and JIC played a significant role in promoting growth of FDI. The paper also explores such legal reforms to enhance the promotion of exports and economic recovery after the GFC of 2009. The paper therefore concludes that political system, economic system, and the legal system are the main factors of political economy that shape the course of FDI. Reference Cavusgil, S. T., Knight, G., Riesenberger. J. R., Rammal, H. G., & Freeman, S. (2012). International business: The new realities. Frenchs Forest, NSW: Pearson Australia. Cieślik, A. and Ryan, M. (2004). Explaining Japanese Direct Investment Flows into an Enlarged Europe: A Comparison of Gravity and Economic Potential Approaches. Journal of the Japanese and International Economies, 18(1), 12-37. Deseatnicov, I. (2009). Theoretical approaches to FDI determinants and Japanese FDI specifics. Economica Academy of Economic Studies of Moldova, 5(69), 81-91. Hill, C. (2007). International Business: Competing in the Global Marketplace 6/e. New York: McGraw-Hill Irwin. Naoyuki, S. (2013). The Financial Crisis, Capital Flows, and Global Liquidity. IMF speech. Accessed 8th July 2013, http://www.imf.org/external/np/speeches/2013/060313.htm OECD. (2013). Economic Surveys: JAPAN. Accessed 8th July 2013, http://www.oecd.org/eco/surveys/Overview%20Japan%202013%20English.pdf Porter, M. (2001). Japan: What went wrong? The Wall Street Journal, March 21, 2001 Strobel, W. and Zielenziger, M. (2001). U.S. and Japan pledge economic growth. The Philadelphia Inquirer, March 2001. Read More