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The Political Economy of the Japanese Financial Big BangInstitutional Change in Finance and Public Policymaking$

Tetsuro Toya and Jennifer A. Amyx

Print publication date: 2006

Print ISBN-13: 9780199292394

Published to Oxford Scholarship Online: May 2006

DOI: 10.1093/0199292396.001.0001

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A Rational Actor Approach

A Rational Actor Approach

Chapter:
(p.23) 2 A Rational Actor Approach
Source:
The Political Economy of the Japanese Financial Big Bang
Author(s):

Tetsuro Toya

Jennifer Amyx (Contributor Webpage)

Publisher:
Oxford University Press
DOI:10.1093/0199292396.003.0002

Abstract and Keywords

This chapter begins with an overview of existing literature on Japanese politics, focusing on Japanese financial politics in the 1990s. It identifies three issues of contention in the various approaches to Japanese politics, and explains how these debates help inform the study’s research design. It suggests five alternative explanations for the emergence of the Big Bang reforms, against which the explanation in later chapters will be weighed.

Keywords:   Japan, financial politics, Big Bang, economic reform, financial reform

This chapter expounds upon ideas introduced in Chapter 1 and begins to lay a more formidable theoretical groundwork for the empirical analysis contained in Part II. The chapter first provides an overview of the existing literature on Japanese politics, with our case of interest—Japanese financial politics in the 1990s—in mind. We identify three issues of contention in the various approaches to Japanese politics and explain how these debates help inform the study's research design. We then provide a brief review of the literature that focuses more specifically on Japanese financial politics and the Big Bang financial reforms, noting five sets of concerns or questions that emerge from these studies. These help to further inform the present study's methodological approach. The chapter closes by suggesting five alternative explanations for the emergence of the Big Bang reforms, against which we weigh our explanation in later chapters.

Three Contentious Issues in Japanese Politics

Three main issues of contention may be identified in the various approaches to the study of Japanese politics. First, the literature reveals a tension between actor-oriented and institution-oriented studies; second, the literature reveals a tension between those studies focused on change and those focused on stability; and, third, the literature reveals a tension between those studies that emphasize dominance and those that emphasize interaction of a less hierarchical nature.

Actor-oriented vs. Institution-oriented Studies

Studies of institutions in the social science literature typically begin analysis at the level of individual actors (an actor-oriented approach) or begin (p.24) instead with the analysis of institutional structures (an institution-oriented approach).1 In actor-oriented approaches, the actors and their preferences are considered beyond the scope of explanation, and the social scientist seeks to explain the institutions that shape human behavior. This methodological orientation, dominant in the study of economics, can be seen in the rational choice analysis of political institutions: the emphasis is on how the institutions reflect actors' interests and structure their incentives and strategies, while the preference of actors is taken as given.2 In institution-oriented approaches, on the other hand, the institutional structures are what explain the actors and their behavior. Historical institutionalism in political science adopts this latter position, often shared in sociological studies. Here the emphasis is on how institutional structures shape actors' preferences and constrain their behavior.3

In the study of Japanese politics, the latter approach has traditionally dominated. Many theorists place historically developed institutional structures at the center of their explanatory frameworks (Johnson 1982; Samuels 1987; Calder 1988).4 Typically, these scholars put forward an analytical concept that summarizes the essence of the complex set of institutional structures (e.g. Johnson's “developmental state” or Samuels' “reciprocal consent”). A typology of possible arrangements, such as Johnson's “plan rational” and “market rational” categorizations is also sometimes offered. Then, a detailed process tracing of the historical development of one or more cases is used to establish the validity of such conceptualizations. The emphasis in such studies is on delving into causal complexity rather than on determining a single cause for the observed outcome. Thus, the analytical orientation is more inductive than deductive.5

The principal strength of such an approach lies in its empirical accuracy: the methodology dictates that the researcher grasps his/her cases very thoroughly in making theoretical assertions. This attention to historical, (p.25) social, cultural, and other contexts reduces the risk of making erroneous assertions based on false empirical data: the reliance on extensive archival research and interviews protects against significant deviation from empirical realities. Nonetheless, this approach has several weaknesses. First, because the emphasis is on detailed case studies and the analysis is inductive in nature, the theoretical findings are often applicable only to the specific case at hand and have little potential for generalization to other cases. Second, while the theoretical findings may indeed provide a realistic image of how things evolved to the present, the causal mechanism and the micro-level incentive structures are often left unclear because of the very emphasis on causal complexity. The inductive nature of the theory may also mean the scholar fails to clearly specify the causal mechanism, making the findings less amenable to verification by others. Behavioral assumptions about actor objectives and their incentive structures under strategic settings are often ill-defined, making them vulnerable to post hoc explanation. Third, a corollary of vagueness in the causal mechanism is that such studies often have little potential to provide the basis for predictions about future outcomes or behavior. Prediction is a difficult task for all social scientists; nonetheless, prediction does enable the academic to have more relevance to the policy world.

Actor-oriented approaches in the study of Japanese politics first appeared in the 1990s, in the form of rational choice analysis (Ramseyer and Rosenbluth 1993; Cowhey and McCubbins 1995; Kohno 1997).6 Applying the principal-agent framework developed in transaction cost economics and the rational choice analysis of American politics, theorists would seek to explain such topics as electoral politics, postwar party politics (Kohno 1997), and the legislative control over the bureaucracy and/or the judiciary in public policymaking (Ramseyer and Rosenbluth 1993; Cowhey and McCubbins 1995). The theoretical emphasis is on the individual actors' incentive structures, which are derived from behavioral assumptions such as that politicians pursue reelection in strategic settings, which are defined by the formal and informal institutions that comprise the “rules of the game.” These institutions include laws, constitutions, (p.26) seniority rule and so forth.7 The orientation of this approach is deductive: the behavioral assumptions and the constraints set by the institutions lead the theorist to deduce a set of hypotheses, which are confirmed (or disconfirmed) via a narrative of empirical cases. In this approach, such causal factors as electoral rules (e.g. single-versus multi-member districts—SMD versus MMD), regime types (presidential or parliamentary), or the veto power of legislators over bureaucrats is purported to explain the political outcomes. These “rules of the game,” which actors try to manipulate to pursue their own goals, define the incentive structures of these actors. In this way, the rules of the game determine the outcomes of strategic interaction.

The strengths of the rational choice approach are the weakness of the historical institutionalist approach and vice versa. The first strength of the rational choice approach is that its theoretical frameworks are better suited to generalization across cases. The universalistic behavioral assumptions and micro-level analysis of individual incentives (e.g. politicians pursue reelection, which can be expected to hold across democracies), with little emphasis on country-specific historical, social, or cultural context, make the findings from the analysis easier to connect to cases in other countries (but this can be a weakness as well: see later). For example, if the behavioral assumptions do not vary significantly across cases, then, the variations in political outcomes could be attributed to variation in political institutions. Second, rational choice analysis excels in theoretical rigor and clarity. The assumptions, as well as the process of deriving the hypotheses through deductive logic, are well delineated: this makes it easier for others to check the theory's validity. The causal mechanism is often made clear: for example, one can easily see that “electoral rules” and “regime type” are the two explanatory factors of various outcomes in Cowhey and McCubbins (1995). Third, because the causal mechanism is made clear, this approach is well suited to offer predictions: for example, if “electoral rules” are shown to matter, then the change of electoral rules would likely alter outcomes.

There are also shortcomings to rational choice analysis, however. First, the behavioral assumptions of actors are often problematic. In rational choice, “the trick is in defining the preferences in general, ex ante to a particular application” (Levi 1997: 24). However, without knowing for sure what the actors are pursuing, one cannot offer a plausible explanation of the strategic interaction. How accurate is the assumption that politicians (p.27) seek reelection? This problem becomes all the more acute for the bureaucrats, as their behavioral goals are much less clear: what do they pursue?8

Second, this ambiguity about the veracity of the assumptions, combined with the minimal attention to historical, social, and cultural contexts and emphasis on deductive logic, increases the risk of theorists making inaccurate claims.9 Because empirical cases tend to be used merely to “confirm” rather than to test hypotheses, there tends to be less contribution to “theory-building” and empirical research need not be as extensive as in historical institutionalism. Many studies employing the rational choice approach fail to provide detailed empirical evidence to support arguments. This aspect leads to a greater risk of making inaccurate (or misleading) statements, which more extensive empirical research might prevent. For example, erroneous assertions such as “the Supreme Court only includes recent LDP appointees” (Ramseyer and Rosenbluth 1993: Chapter 8) are less likely to emerge from other approaches with more emphasis on detailed case studies and less emphasis on the application of theories developed elsewhere.10

We have given an overview of the two different approaches to institutions in Japanese politics. This difference in focus need not be viewed as a dichotomy, and the two approaches might instead be seen as complementary.11 The weaknesses mentioned previously are not inherent in the approaches and therefore may be avoided if the researcher proceeds with caution. For (p.28) example, generalizability and theoretical clarity may be strengthened in historical institutionalism by making more explicit the assumptions, nature of incentive structures, and causal mechanisms. Similarly, rational choice analysis may achieve greater empirical accuracy by paying more attention to contexts other than the formal “rules of the game,” such as constitutions and electoral laws.

Keeping the strengths and weaknesses of the two approaches in mind, we adopt the actor-oriented approach in this study. This deliberate choice reflects our belief that works of political science on current issues ought to aim for greater policy relevance, if they are to be of greater use to society.12 Unfortunately, the presence of political scientists in the policy debates on issues of political economy is minimal, especially in the Japanese context.13 In our view, this state in part reflects the way academic works of political science are presented to policymakers. If, as in studies of economics (which invariably adopt an actor-oriented approach), research findings link particular causal factors with particular outcomes, then researchers are able to develop more helpful policy recommendations. On the other hand, if, as in numerous past studies of Japanese politics, the academic shows that the Japanese system is complex with interacting causal factors and that the historical (or socio-cultural) development of the basic institutions make things hard to change, what are the policymakers to do? While analyses telling us how complex the world is contribute to our understanding of politics, we aim in this study for more by adopting a rational-actor approach, constructing a framework that enables us to identify the causal factors that provide clues to prediction and policy recommendations.

The aforementioned discussion on the weaknesses of rational choice analysis points us in the way to proceed. We will strive for empirical accuracy while operating within the rational choice paradigm by paying attention to aspects of the policy context other than the formal “rules of the game” and by developing more realistic assumptions.

Stability vs. Change

The second issue of contention in the study of Japanese politics is one between analytical frameworks of “stability” and “change.” Reflecting the (p.29) apparent stability of the postwar political economy, many works of Japanese politics, particularly those that appeared through the 1980s, have sought to explain the perceived stability of bureaucratic dominance, LDP one-party dominance, or patterns of interaction between the public and private sectors (Johnson 1982; Sato and Matsuzaki 1986; Muramatsu and Krauss 1987; Samuels 1987; Okimoto 1989). One common strategy for theorists was to characterize the Japanese state, or the arrangement that governs the interplay of politics, economics, and society, with a single phrase, such as the “developmental state” (Johnson 1982), “societal state” (Okimoto 1989), or “patterned pluralism” (Muramatsu and Krauss 1987).

This attention to stability was warranted up until the early 1990s. LDP rule collapsed in 1993, however. How are the theorists to deal with these developments? In the face of the seemingly unstable political reality of the 1990s, there are those who continue to stress the continuity from the past and stability in the political system, arguing that little has changed in Japanese politics in the 1990s (Curtis 1999; Vogel 1999). According to this view, there is a large gap between the reform rhetoric of Japanese political leaders and the reform policies of the Japanese government: in the decade, little has been achieved by the numerous attempts to reform the political system and the public policymaking process. If policy change occurs, these scholars believe it will be incremental, rather than radical.14

On the other hand, there are those scholars who argue that change is taking place in Japan. As Kohno (1997) suggests, the stable aspects of the postwar era such as LDP one-party dominance had the potential to change at any moment (as was the case in 1993). In this way, the image of stability may be misleading in that it gives the false image that things were predestined to be stable from the start. Pempel (1998) argues from an institutions-oriented approach that a significant public policy redirection and coalitional adjustment occurred in Japan in the 1990s (compared to that of the 1960s), just short of a complete “regime shift.”15 As we will see later, some works on Japanese finance, such as Amyx (2000 [and 2004]) and Rosenbluth and Thies (1999), also suggest that there was a significant departure from the traditional patterns of policymaking in finance in the 1990s.16

(p.30) The single-phrase characterizations of the Japanese political system, common in past studies (as mentioned previously), have a shortcoming in the sense that they are based on assumptions of stability, or of continuity and non-change. By adopting analytical strategies focused on explaining a stable system at work, these scholars find it hard to identify signs of change until well after that change takes place. Of course, change is a relative concept, and one can easily find evidence at any time for both change and continuity. Determining which is the more salient dynamic requires weighing the primacy of each against empirical reality at a given point in time.

Many actor-oriented approaches also tend to focus on explaining equilibrium states (Green and Shapiro 1994). Yet, stability is merely one of the many possible outcomes of strategic interaction among actors. While an equilibrium state may provide actors with disincentives to shift their strategies, changes in the environment may induce actors to adopt different strategies, thus disrupting “stability.” Thus, we adopt the actor-oriented perspective but use it to question the appearance of stability.17 We utilize a framework of “institutional change,” developed in the next chapter, to challenge the findings of those who argue for the prevalence of stability and the absence of change. We show that “change” indeed best characterizes developments in the Japanese political economy since 1995. In the areas of finance and public policymaking, Japanese politics has departed from the past patterns of gradualism and status quo maintenance.

Dominance vs. Interaction

A third issue of contention in the literature on Japanese politics may be whether one focuses on the dominance of one set of actors (e.g. bureaucrats, politicians, or interest groups) over others or, instead, focuses on the patterns of interaction among actors.18 Among those who fall into the former camp are those who assert the dominance of bureaucrats over other actors (p.31) (Johnson 1982).19 A bureaucratic dominance approach posits the primacy of a “pilot agency” (be it MITI or MOF) over that of politicians or interest groups. In contrast, other scholars argue for the dominance of interest groups in the political economy. From an actor-oriented point-of-view, financial institutions would be expected to dominate Japanese finance (Rosenbluth 1989); or, from a more institutions-oriented perspective, long-term credit banks and keiretsu enterprise groups might be seen as key to Japan's “strategic capitalism” strategy of economic development (Calder 1993). A third group of scholars stresses the dominance of politicians over the bureaucracy by adopting a rational choice approach (Ramseyer and Rosenbluth 1993; McCubbins and Noble 1995), or by adopting a framework of pluralism, adding such adjectives as “patterned” (Muramatsu and Krauss 1987) and “compartmentalized” (Sato and Matsuzaki 1986).20

On the other side of the spectrum, there are those who deemphasize dominance and focus instead on less hierarchical forms of interaction among actors. Okimoto (1989) and Amyx (1998 [and 2004]) focus on the relational networks linking the actors by delving into their informal interaction patterns. They show how such networks enabled or constrained the state's ability to pursue economic goals. In a similar vein, Samuels (1987) found that “reciprocal consent” was the dominant interaction pattern between the state and the private sector in the transformation of the industrial structure in the energy sector.

Needless to say, one's theoretical focus is often determined largely by the state of academic discourse when research is undertaken. Given the large impact of the bureaucratic dominance view (largely to the credit of Chalmers Johnson), many works that appeared in the 1980s naturally focused on the question of dominance. However, in the end, as Curtis (1999: 60) notes, there has been an increasing convergence regarding the state-society relationship among theorists, towards an image of “an activist state interacting with strong social institutions.”21 We endorse this view. Some models stressing dominance are set up to determine the pattern of dominance even before testing the theory with reality.22 If one (p.32) a priori defines the policymaking model so as to incorporate the preeminence of a “pilot agency” in the political system, how can one account for the loss of bureaucratic dominance? The pattern of dominance may or may not be stable over time, and thus it may be more fruitful to search for a trend in which the pattern of domination evolves, rather than to try to identify a permanently dominant actor.

Similarly, some works adopting the rational choice approach contain an a priori assumption of dominance by politicians over bureaucrats. The mechanism of political control has been portrayed in a number of different ways. Some depict control as veto power “over anything bureaucrats do” or as control over the promotion of bureaucrats within their respective organizations (Ramseyer and Rosenbluth 1993). Others have depicted it with the metaphor of “fire-alarm” oversight (McCubbins and Schwartz 1984), wherein interest groups report to the politicians when actions taken by the bureaucracy fail to support their interests. And, still others have asserted the thesis of dominance by rebutting the hypothesis that politicians abdicate power to bureaucrats (McCubbins and Noble 1995).

Two factors undermine the validity of such theories as explanations for Japanese policy outcomes. First, some lack sufficient grounding in empirical evidence. For example, some pointing to the mechanism of “fire-alarm” oversight by politicians of bureaucrats mistakenly claim that deliberative councils serve the information needs of the LDP (McCubbins and Noble 1995: 70).23 Second, excessive attention to the formal “rules of the game” leads these scholars at times to confuse theory with practice. Consider the “veto power” argument. In theory, the Japanese Constitution guarantees the primacy of the legislative branch, legal statutes assure cabinet ministers of their leadership positions, and the ruling party can always veto the bureaucrats' proposals. If we assume that theory translated directly into practice, however, then we have trouble explaining the extreme frustration by many politicians over how difficult it is to overcome bureaucratic resistance.24

The “veto power” supposedly held by the LDP fails to work as predicted by theory. One can skirt the issue by choosing to define abdication by politicians as a situation in which “the agent has complete discretion over policy choices and the principal has no control,” asserting that “relative (p.33) amounts of abdication imply that the principal is able to influence the agent's choices to at least some extent” (McCubbins and Noble 1995: 74). However, the creation of a dichotomy between “abdication = zero control” and “control = some control” obfuscates the crucial question. Whether or not politicians have some control over the issues is not the subject of contention; rather, the point at question is how much substantive control they have.25 To help bridge the gap between theory and reality, we must pay attention to constraints extending beyond the formal “rules of the game” that set the outer limits of bureaucratic behavior, to include informal patterns of interaction, digging into the substance of the relationship between politicians and bureaucrats. While we do not dismiss the relevance of the search for “dominance” per se, we reject theories with built-in dominance assumptions.

In sum, the examination of three issues of contention in the current literature on Japanese politics leads us to adopt an actor-oriented approach to institutional analysis, which seeks to account for—as well as to establish—that change has occurred in the Japanese political economy since 1995. To do this, we focus on the patterns of interaction between actors rather than on the dominance of a particular set of actors. Moreover, we extend our scope of analysis beyond formal “rules of the game” to include informal patterns of actor interaction.

Works on Japanese Financial Politics and the Big Bang

We now turn to the works on the specific field of our interest within the Japanese political economy, financial politics (or the political process of the public policymaking concerning private finance), and the Big Bang. In the study of financial politics, many analysts have emphasized the gradual nature in which reforms take place (Rosenbluth 1989; Vogel 1996; Amyx 1998). Thus, such works would have difficulty coping with the Big Bang. In comparison to the 1991–93 reforms, the planning was much quicker, the content was much more far-reaching (i.e. creating obvious losers), and the schedule of implementation was largely pre-fixed by the reform initiative (instead of being left to later negotiations).

(p.34) Work by economists on financial reforms, while important, tends to focus on the gap between the most desirable policies that might be pursued from an economic standpoint and actual policies implemented, but offer little insight on the political interaction among actors which gives rise to such a gap. More often than not, MOF or the LDP—whichever actor is assumed to be in charge of financial policymaking—is simply blamed for this failure (Ikeo 1995; Horiuchi 1999; Hoshi and Kashyap 1999). If there are optimal economic policies, what hinders them from being adopted?

This question leads us to consider the validity of a view held by many analysts of Japanese politics of the bureaucracy/ MOF/ and/or the ruling party, LDP, as actors that hinder or forestall much needed economic deregulation when they promote organizational interests over those of the nation (Vogel 1996; Keehn 1998; Pempel 1998; Curtis 1999).26 If so, who brought about the Big Bang? Is it that some other actors who benefit from financial reforms (e.g. domestic or foreign financial institutions) pushed for it, overriding MOF and/or the LDP? Or, is it that MOF and/or the LDP somehow decided to change their minds and actively push for the reforms? Were the “entrenched actors” (the LDP and MOF) as “entrenched” as was typically believed?

Certainly there are numerous accounts of the Big Bang that tell us what it contains and what the expected economic consequences were, and some such works include valuable narratives of the interplay of actors (Tahara 1998; Otake 1999).27 Nevertheless, few works systematically treat the political process of the Big Bang in the context of the accompanying changes in financial politics. How can we understand such diverse developments in finance as the breakup of MOF (Mabuchi 1997), the Housing Loan Affair (Rosenbluth and Thies 1999), and the Financial Diet of 1998 that represented the first aggressive response by the government to the bad debt problem in the banking sector (Amyx 2000 [and 2004]), and the Big Bang financial reforms? What is the relationship between these developments? Is there a framework that gives us a sense of the causal mechanism at work across cases?

In analyzing the relationship between the actors in financial politics, scholars tend to stress either the dominance of MOF (Vogel 1996; (p.35) Keehn 1998), dominance of financial institutions (Rosenbluth 1989), or the paralysis of MOF bound by its relational networks with the banking sector (Amyx 1998 [and 2004]). In the financial politics of 1995–96, as we will see in Chapter 5, MOF and the LDP cooperated in the Housing Loan Affair (related to the bad debt problem), competed in the planning of the Big Bang, and confronted each other on issues of MOF reform. How can we possibly grasp such a complex situation by utilizing a framework of dominance? If we focus on interaction, what type of explanatory framework can satisfactorily explain the fact that the bad debt problem remained unresolved in the late 1990s, as Amyx suggests, while financial reforms, that worked against the interests of many financial institutions, were introduced suddenly in 1996? If the relational ties prevented state actors from taking action, why was this effect seen in banking reforms but not in the Big Bang?

Lastly, we may note that the role of the public is unclear in many works on financial politics (as well as works on Japanese politics in general), despite the fact that Japan is a liberal democracy, where the public is assumed to be “ultimately” in charge.28 Works tend to focus on the interplay of such elite actors as politicians, bureaucrats, and interest groups, paying little attention to the role of the public. An exception to this generalization is work in the rational choice vein which incorporates the voting public as the ultimate principal in chains of principal-agent relationships leading first to the politicians and then to bureaucrats.29 Empirically-based studies such as Kabashima (1986) suggest, however, that not only politicians but also other elite actors (bureaucrats and interest groups) are influenced by public opinion, largely via the mass media.30 What is the public's role in Japanese politics? Might the change of government in 1993 have given a greater role to the voting public? While voting provides the public with an avenue for influence over politicians, are there not other means of policymaking influence by the public? How might the public influence the behavior of bureaucrats and interest groups?

(p.36) The Study's Methodological Approach and Research Design

To address the concerns raised previously, the present study adopts the following three-pronged approach, introduced briefly in the previous chapter (See Table 2.1).

Rational Actor Approach Focusing on the Nature of Strategic Interaction Among Actors

We begin our analysis with the assumption that actors are rational in their pursuit of goals. Our analysis proceeds at the level of organizational and sub-organizational groups. The relevant actors are political parties, bureaucratic agencies, and firms and interest groups, as well as the public. Clearly, how the incentive structures within the organizational actors work vis-à-vis their individual members also needs to be taken into account. Organizations can utilize both formal and informal reward and punishment to ensure compliance with organizational policy, as decided

Table 2.1 Response to five concerns identified in existing works on Japanese financial politics and the Big Bang

Q1) What happened to the gradualism in the financial reforms of the past? Does this gradualism persist? Why did the pattern of financial reforms change between 1991–93 and 1996?

• Adopt a framework of “change”

• Carry out a comparison of cases of financial reforms

Q2) Who brought about the reforms? Financial institutions? MOF and/or the LDP?

• Adopt an actor-oriented approach

• Make better behavioral assumptions

• Utilize the logic of organizational survival

• Develop a typology of financial reforms

Q3) How can we establish a link between the Big Bang and other parallel developments in finance?

• Utilize a framework of institutional change

Q4) Does dominance or a less hierarchical form of interaction best capture the nature of the relationship among actors?

• Adopt a model of less hierarchical interaction among actors

• Adopt a rational actor approach

• Employ the logic of organizational survival

Q5) What is the public's role in Japanese politics? How has the change of government in 1993 changed this role? Are there means of public influence over policy other than that exercised through elections?

• Role of the unorganized public in politics (in the model of interaction among actors)

• Patterns of financial reforms

• Role of public support in the analysis of organizational survival and financial reforms

(p.37) by internal decision-making bodies.31 Thus, we do not offer an extensive scrutiny at the individual level, but instead assume that organizations such as political parties and firms have incentive structures that make it rational for individuals to go along with the organizational policy observable from outside.32 However, we allow for possibilities that some groups of individuals within the organization compete for control over the organizational policy, thus operating at the suborganizational level.

Our analysis is organized from the rational choice perspective, assuming the actors to be rational (in the sense of means-end efficiency) in the pursuit of their goals, however these goals are defined. We view actors as having bounded rationality in that they face constraints regarding their reasoning ability and available information, but are rational in intent, or “subjective rational.”33 In the discussion of institutional change in Chapter 3, we will see that the institutions in fact help the actors understand how the world works, conveying information in compressed forms to the subjectively rational actors. While we base our analysis on the rational choices made by actors ex ante, we do not contend that these choices alone produced institutional change. The existence of multiple equilibria makes the analysis of historical information necessary; random events, mistakes, and unintentional fits, as well as ex post rationality (or the rationalization by actors, after events take place) are also important in the process of institutional change.34

With regard to actor goals, we start from a simple assumption that organizations seek survival. There may be many other goals but this is the ultimate goal—the goal that overrides all others. We introduce a rank ordering of goals between the ultimate goal, the pursuit of survival, and other ceteris paribus goals. The latter includes such goals as budget, profit and power maximization.35 The assumption of survival as the ultimate (p.38) goal is not uncommon in other fields. For example, the assumption that nation-states prioritize survival above all else is widely accepted in the study of international relation.36 To avoid tautology, we refer to the Japanese political economy in general in deriving our behavioral assumptions, rather than limiting our scope to Japanese financial politics. In so doing, we see how this assumption of survival fits the observed empirical regularities concerning the goals pursued by political parties, bureaucratic agencies, and firms.

With regard to the nature of interaction among actors, we adopt a stance that the strategic interaction among actors does not necessarily result in the dominance of one actor over the others. However, we recognize that there is a distinction between state actors—that is, the political parties and the bureaucratic agencies—and other actors such as firms, interest groups, and the general public. The former have direct access to governmental power, while the latter enjoy only indirect access through influencing the former. Put simply, politicians can make laws, and bureaucrats can make administrative decisions, but firms, interest groups, and the public cannot wield governmental power by themselves: they have to influence state actors through inducement, coercion, and other means. Thus, in our world of politics, there are two state actors: politicians and bureaucrats. And, there are two societal actors: firms and interest groups, and the public.37 Each state actor is supported by two sets of societal actors: constituencies (firms and interest groups) and the public. For state actors to pursue their ultimate goal of survival, they have to rely on the resources provided by these societal actors.

While a common theory of deregulation assumes that interest groups drive politics,38 thereby focusing on the need for state actors to rely on the resources provided by constituents, organized groups need not determine the politics of regulation. State actors may also promote deregulation, as a means for vying for the support of the unorganized public, and independently of any inducement from organized interests—especially if survival is at stake.

(p.39) Focusing on Change: Institutional Change, Organizational Survival, and Patterns of Reform and Public Support

We focus on patterns of interaction among actors rather than on the dominance of any one set of actors, and on explaining change rather than stability. To this end, we utilize a theoretical framework of institutional change and organizational survival. Chapter 3 develops and discusses this framework in detail. In the discussion that follows, therefore, we provide only a brief introduction.

Dissatisfied with the existing rational actor literature on Japanese politics, which focuses too much on “rules of the game”—especially formal rules such as the constitution, electoral rules, and veto points—we adopt a view on institutions developed on the comparative institutional analysis (CIA) perspective.39 We reach beyond the emphasis on “the rules of the games” to adopt a view of institutions as “equilibria” and concentrate more on explaining the formation of these institutions. Moving beyond the exclusive attention on formal rules, and learning from other approaches with more attention to context, we include an examination of informal patterns of interaction among actors. We also ask what factors give rise to these patterns and rules? Here, we find that institutions are best represented in terms of shared expectations, as the fact that actors collectively believe such institutions are in place is what fundamentally supports the existence of these institutions.40

Following Aoki (2001), we define institutions as shared, stable, summarized expectations about how the world works, which may not be unique, developed via a feedback mechanism between the shared expectations and the validation of such expectations by objective reality. Our study analyzes institutions at four levels: players, formal rules, informal interaction patterns, and the shared expectations that reinforce, and are reinforced by, the other three levels.

We build our framework of institutional change, linking Aoki's framework to politics, or the distributional conflicts among actors, of the economic reforms. In our framework, institutional change is essentially a shift in shared perceptions about how the world works through a collective (p.40) learning process based on the evolutionary selection mechanism of strategies. This change is caused by the gap between the faster pace of environmental changes and the slower pace of adaptation in domestic political and economic institutions. This gap appears in the form of “failures,” or “performance failures and scandals,” which lead the actors to question the taken for granted aspect of the institutions. “Nature”—that is, environmental changes in technology or institutional environment—eventually determines the outcome of the competition between institutions by rewarding actors' strategies: the successful strategies will increase their share in the population. Yet, a political struggle takes place between those actors who see the process as “resilience” of the institutions and/or have stakes in preserving the status quo on one hand, and those actors who see “change” taking place and/or see their interests as being enhanced by the new institutions. This political struggle is facilitated by symbols derived from such sources as history, foreign practice, ideology, and leadership. In the process, “reformers” may displace “conservatives,” either via a “counter-coalition” (from the outside) or via “defection” (from within). When a critical mass of the agents shifts their views about how the world works and the new institutions become taken for granted, “institutional change” results.

Upon this backdrop, we derive the logic of organizational survival. While all individuals in the organization may start from the same goals (survival), their views about the future and/or the stakes they have in the status quo may differ. This may lead to a split within the organization: a competition for the control of the organization may result. Eventually, “nature” rewards one group over the others: observing this, the “losing” groups revise their strategies. As long as all the individuals share the ultimate goal of survival, eventually, the group that calls for an organizational strategy that seems the most promising for organizational survival will control the organizational policy.

After deriving the actors and their behavioral assumptions from observed regularities, we construct a typology of financial reforms from our framework of institutional change. Based on the patterns of coalition evolution and on the interaction patterns between state and societal actors, we arrive at a four-by-two typology that we later use in Part II to guide the empirical analysis. Throughout the discussion of organizational survival and patterns of financial reforms presented in our empirical analysis in Part II, we emphasize the role of the public. We will see that in both dimensions, public support is a critical factor that constrains not only the politicians who face elections, but also the bureaucrats and the financial (p.41) industries in terms of the political influence they command. In a liberal democracy, no single actor can sustain itself while being labeled as “public enemy,” due to the accompanying loss of public support. If an actor finds itself in the situation of “public enemy” as a result of “failures,” that actor has strong incentives to recover the lost support to ensure survival.

Improving the Link between Theory and Empirical Validation: Longitudinal Comparison, Analytic Narratives, and Alternative Explanations

We seek to cure the shortcomings of rational actor approaches by adopting the following three strategies that improve the link between theory and empirical validity in Part II: longitudinal comparison, analytic narratives, and the use of alternative explanations.

As we saw in Chapter 1, our first empirical objective is to show a realistic picture of the Big Bang, including what and who brought it about. In order to strengthen our approach, we rely on a comparison with the past cases of financial reforms. While a thorough comparison by John Stuart Mill's Method of Difference is impossible in this complex world, we seek to assimilate this method by trying to select cases with the most commonalities—those that essentially share the same set of actors, the same political and economic settings, and the same fields of reform. In this sense, we carry out a longitudinal comparison.41 Our analysis is about the politics of the regulatory reforms in finance with particular focus on their distributional effects. Thus, we are interested in past cases of financial reforms, which had many similarities with the Big Bang, but different results. Contrasting our case against these past cases raises the plausibility of our thesis stressing “change.”

Second, we seek to improve our rational actor analysis by learning from the “analytic narrative” approach, developed by rational choice theorists (Bates et al. 1998). This approach advocates an iterative process between theory and empirical data in theory building, recognizing that theories are shaped by case materials, departing from a conventional notion of hypothesis testing of deductive theories and blurring the line between deduction and induction.42 We find this approach attractive, as it helps us cure the conventional ills of actor-oriented approaches—namely, insufficient attention to context. Thus, we seek to build an analytic narrative, (p.42) based on an understanding of “the actors” preferences, their perceptions, their evaluation of alternatives, the information they possess, the expectations they form, the strategies they adopt, and the constraints that limit their actions (Bates et al. 1997: 11).

Yet, by adopting this approach, empirical validation of the theory becomes problematic and another means of confirmation is needed. Thus, the third component of our research design tests our explanation against alternative explanations to increase the plausibility of our account.43 While there may be multiple explanations for a single observed phenomenon, one may assess the strength of one explanation relative to another (Kohno 1997).

Table 2.1 summarizes how our methodology responds to the five concerns identified in the previous section as emerging from the existing literature.

Possible Alternative Explanations

We close this chapter by suggesting possible alternative explanations to our main argument. We derive these explanations from the existing literature surveyed earlier and weigh the robustness of these explanations with our own in Part II of the book.44 While the diversity of the literature cannot be captured in its entirety, we organize the alternative explanations along the lines of “dominance” as our main concern regarding the Big Bang (as identified in Chapter 1) is to ask the essentially political question of who brought these reforms about. We obtain five different views. The first three derive from explanations based on common “dominance” views, while the other two represent two more nuanced explanatory paradigms.45

First, one might imagine that a single bureaucratic agency, be it MITI or MOF, was the mastermind of the Big Bang, as the literature of bureaucratic dominance might suggest. In this scheme, MITI as the pilot agency of the economy (Johnson 1982) or MOF as the regulator of finance (Vogel 1996) would plan and coordinate the process, while pursuing the enhancement of its own goals, or the maximization of regulatory power over the financial industries. If MITI or MOF, acting as a single unitary actor, can be (p.43) shown to have gotten its way in interaction with politicians and the private sector, this explanation would hold.

Second, studies positing the dominance of financial firms in financial politics (Rosenbluth 1989; Calder 1993) suggest that perhaps domestic financial institutions drove reforms by influencing politicians or bureaucrats. Such firms could be banks, including the city banks around which keiretsu centered, or long-term credit banks that played a key role in postwar industrial finance. Alternately, these firms might be securities firms that might gain from an accelerated shift away from indirect toward direct financing that would result from financial deregulation. Or, the insurance industry—especially the life insurance firms that bought up assets all over the world with their financial might in the 1980s—might be seen as the main drivers of reforms. Finally, we might posit that the political source of deregulation emerged out of the rise of new interest groups, such as foreign financial firms and Japanese non-financial firms seeking to enter the financial industry. Perhaps these “financial outsiders” displaced the “financial insiders,” to control the political process. The formation of a coalition involving the financial firms (“insiders” or “outsiders”) on the one hand and state actors on the other hand, to induce the latter to work for the benefit of the former, would confirm this line of explanation.

Third, studies that emphasize the dominance of politicians over bureaucrats in Japanese politics (Sato and Matsuzaki 1986; Muramatsu and Krauss 1987), suggest that the Big Bang might have been the politicians' victory over the bureaucrats. After all, the Big Bang initiative to deregulate was announced by Prime Minister Hashimoto, who was also the President of the LDP. Might we find that politicians, pursuing deregulation for some reason, emerged triumphant over the bureaucrats, who naturally resisted such reforms encroaching on their bureaucratic power? Or, we might adopt the rational choice perspective (Ramseyer and Rosenbluth 1993) and stipulate that the bureaucrats anticipated their political masters' wishes. If this was the case, then we would not expect to see much conflict between politicians and bureaucrats across issues in financial politics.

We may add two other possible explanations for the question of who brought about the Big Bang by combining the previously cited reasons. A fourth explanation might be that a counter-coalition formed outside of finance, as the theory of regulation might lead us to predict (Noll 1989). Non-financial firms, seeking better financial services, might have spearheaded the drive for deregulation in alliance with MITI, which was happy to encroach onto MOF's jurisdiction over finance in its pursuit of bureaucratic power. Was the Big Bang essentially an interest-group dominance (p.44) story coupled with a bureaucratic turf war? The formation of a counter-coalition and the struggle between the two coalitions would confirm this explanation.

Fifth and last, we might consider an explanation that questions the assumption of the continuation of the “producer economy,” wherein producer groups see their interests better represented than consumers, who tend to be less well-organized (an assumption common to all of the previously given explanations). Rational choice explanations focusing on formal electoral rules (which we will refer to as “electoral rational choice” to distinguish from our rational actor explanation) might see the Big Bang as a victory of consumers, brought about by the introduction of the single-member electoral district in 1994 (Ramseyer and Rosenbluth 1993; Rosenbluth and Thies 1999).46 Perhaps the LDP shifted from its bank-coddling practice to pursue a victory for the consumers, as has been suggested was the case in the resolution of the Housing Loan Affair of 1995 (Rosenbluth and Thies 1999). If so, then the Big Bang initiative, announced weeks after the first election following the 1994 electoral reforms might be attributed to electoral reform. This line of explanation places emphasis on the principal-agent relationship linking consumers, LDP backbenchers, and the LDP leadership to explain a rise, at last, in consumerism.

Table 2.2 lists the five alternative explanations, which correspond to the empirical puzzles introduced in Chapter 1. Note that the “dominance” view may lead to conclusions in favor of either change or stability, depending

Table 2.2 Five alternative explanations for the Big Bang and related developments

a) A pre-designed and coordinated initiative by a single bureaucracy (MOF or MITI)

• Bureaucratic dominance (Johnson 1982; Vogel 1996)

b) The result of the domination of financial institutions (“insiders” or “outsiders”)

• Interest group dominance (Rosenbluth 1989; Calder 1993; theory of regulation)

c) The result of politicians overriding bureaucrats

• Political dominance (Muramatsu and Krauss 1987; Ramseyer and Rosenbluth 1993)

d) The result of the non-financial firms and MITI gaining the upper hand of financial industries and MOF

• A variant of interest group dominance (theory of regulation)

e) An achievement by LDP backbenchers promoting consumerism as a result of 1994 electoral reforms that introduced a single-member district

• Electoral rational choice (Ramseyer and Rosenbluth 1993; Rosenbluth and Thies 1999)

(p.45) on how one evaluates the significance of the Big Bang. Our account of the emergence of the Big Bang as well as our general observation about financial politics since 1995 will be weighed against these alternative explanations in Part II. Before moving on to this component of the analysis, however, we first develop our theoretical framework in Chapter 3.

Notes:

(1) For the distinction between the two approaches, see Steinmo, Thelen, and Longstreth (1992), Scott (1995), Bates et al. (1998), and Krasner (1999).

(2) For a rational choice analysis, see for example, essays in Alt and Shepsle (1990). Levi (1997) provides a summary of this methodology's strengths and weaknesses. In economics, the actor-oriented neoclassical approach has dominated the field for a long time. See Scott (1995: Chapter 1).

(3) For historical institutionalism in general, see for example, Steinmo, Thelen, and Longstreth (1992), Katzenstein (1978), Skocpol (1985), and Karl (1997). The new institutionalism in sociology shares this institutions-oriented approach. See, for example, essays by Meyer and Rowan, and DiMaggio and Powell, collected in Powell and DiMaggio (1991).

(4) See also Calder (1993), Woodall (1994), Vogel (1996), Pempel (1998), Katzenstein (1978), and Zysman (1983).

(5) For example, Samuels (1987: 285) rejects mono-causal explanations and argues that multi-causal explanations “predict little but explain much.”

(6) In economic analyses of the Japanese political economy, the actor-oriented approach is, of course, the norm. Economic studies of Japanese finance include, for example (in English) Hamada and Horiuchi (1987), Aoki (1988), Aoki and Patrick (1994), Aoki, Kim, and Okuno-Fujiwara (1997), and Hoshi and Kashyap (1999); (in Japanese), studies include Ikeo (1995), Ueda and Fukao (1996), and Horiuchi (1999). However, relatively little attention has been placed on the political struggle between actors. In other words, the politics of distributional conflict is largely absent from all but a few. Exceptions include Aoki, Kim and Okuno-Fujiwara (1997).

(7) This view of institutions is strongly influenced by the new institutionalism in economics. North (1990: 1), for example, defines institutions as “the rules of the game in a society,” or “the humanly devised constraints that shape human interaction.”

(8) Of course, it depends on what the theorist seeks to explain. Career advancement (Tullock 1965), budget maximization (Niskanen 1971), and discretionary power (Kato 1994) are examples of plausible assumptions. However, these works fall short of explaining the principal case of interest in our study, the Big Bang financial reforms, where MOF willingly shed its regulatory power.

(9) Levi (1997: 21) states, “rationalists are almost always willing to sacrifice nuance for generalizability, detail for logic, a forfeiture most other comparativists would decline.” This point seems to be central to criticisms of rational choice studies of Japanese politics. See Johnson and Keehn (1994) and Curtis (1999).

(10) The assertion that the LDP remains in ultimate control because it appoints the Supreme Court justices must also be more closely scrutinized. Justices selected from the bar are typically those who have managed the highly independent Japanese Bar Association, whose progressive policies lie far from the conservatism of the LDP. The LDP may control the cabinet, which appoints the justices, but whether the LDP has a say in the appointment process must be explored and confirmed through deeper empirical research, rather than assumed. Merely asserting the existence of a control mechanism based on deductive logic is insufficient for making a persuasive case. Scholars err by simply projecting the partisan practice of judiciary appointment in the United States onto the Japanese polity.

(11) Proponents of rational choice and historical institutionalism alike seem to be increasingly aware of this fact. See Steinmo, Thelen, and Longstreth (1992) and Thelen (1999) for the historical institutionalist view on this point, and Levi (1997) and Bates et al. (1998) for the rational choice viewpoint.

(12) This, we believe, contributes to the advancement of social science, as more resources are likely to be invested in efforts that have greater relevance to what is happening in the “real world.”

(13) This may also be true in international organizations dealing with political economy issues. Note, for example, how few political scientists the International Monetary Fund (IMF) employs.

(14) See Curtis (1999: 234–42).

(15) Pempel (1998) distinguishes between different types of “regime shifts.” According to Pempel, a “third-order” regime shift occurs when socioeconomic coalitions, political institutions, and the public policy profile (which together comprise a “regime”) shift en masse. Pempel contrasts this with the “second-order regime shift” observed in Japan in the 1990s.

(16) Note that the aforementioned division between actor-oriented and institutions-oriented approaches does not necessarily coincide with this division. Both can generate theories of “stability” and theories of “change.” For example, while rational choice approaches have tended to center on the analysis of equilibrium states (see Levi (1997) or Green and Shapiro (1994)), others have shown that this approach can apply to the question of institutional change (see, for example, North (1990)). As we will see later, Aoki (2001) grapples extensively with this question of institutional change. Select works in the historical institutionalist tradition have sought to deal with change, such as those on social revolutions or democratic transition. See, for example, Skocpol (1979) and O'Donnell and Schmitter (1986).

(17) In this respect, our approach resonates with that taken by Kohno (1997) in his study of Japanese political parties.

(18) The triumvirate or “Japan Inc.” view and the Marxist approach are additional perspectives but have become more peripheral to debates in the field of Japanese politics in recent years.

(19) See also Zysman (1983) and Vogel (1996).

(20) Reference here to the concept of pluralism is to the conceptualization developed by Dahl (1971). Note that this concept of pluralism can also be used to stress the dominance of the bureaucracy, as was done by Inoguchi and Iwai (1987).

(21) Curtis calls this more activist state a “refractive state” and cites “patterned pluralism” as one characterization that represents this growing consensus (see later).

(22) Thus, we do not find fault with some theories of pluralism that assert dominance based on the results of empirical analysis (Muramatsu and Krauss 1987; Inoguchi and Iwai 1987), although our actor-oriented approach diverges from these institution-oriented approaches.

(23) The writer's interviews with LDP and bureaucratic officials suggest that there is little evidence that the LDP obtains information from the deliberative councils.

(24) For example, Masaharu Gotoda, chief cabinet secretary under the Nakasone government in the 1980s, spoke of his difficulties in moving forward with administrative reforms as a result of bureaucratic resistance in Otake (1997a).

(25) The “rules of the game” certainly matter, as bureaucratic initiatives cannot become laws unless they are in the “win-set” of legislators. Consider, however, a case in which the bureaucratic agent negotiates with interest groups, drafts the bills, informs the legislators in the broadest terms, and in this way enjoys a large amount of discretion in choosing policy outcomes, as well as in setting the timing, scope, and schedule of the initiatives.

(26) This view is held by those who embrace the “revisionist” view of the Japanese state, including van Wolferen (1990), Johnson and Keehn (1994), and Hartcher (1998).

(27) For economic analyses, see for example, Dekle (1997), IMF (1997), and OECD (1997). For journalistic accounts, see for example, Asahi Shimbun (1997), Nihon Keizai Shimbun (1997), and Mainichi Shimbun (1997).

(28) For example, see such representative works on financial politics of the 1980s and 1990s as Rosenbluth (1989), Calder (1993), Vogel (1996), Mabuchi (1997), and Amyx (1998). See also representative works on politics in other sectors of the economy, such as Johnson (1982), Okimoto (1989), Samuels (1987), and Calder (1988).

(29) For works that address the role of the public in the rational choice vein, see Ramseyer and Rosenbluth (1993), Cowhey and McCubbins (1995); for those that deal with financial politics, in particular, see Rosenbluth and Thies (1999).

(30) See also Muramatsu, Ito, and Tsujinaka (1992) on this point.

(31) For example, a firm can demote (or fire) individuals who do not comply with organizational policy decided by the steering board. Or, a firm's president may utilize the threat of demotion or the promise of promotion to ensure support of his or her views. Political parties can expel or place other sanctions on members who do not comply with party policy, as decided by such bodies as the LDP's Executive Council. The LDP's political leaders can utilize the threat of demotion (or the withholding of funds) or the promise of positions within the party or the government to ensure compliance. The same holds for the bureaucracy, although the law protects bureaucrats from being fired at will.

(32) Because our behavioral assumptions about bureaucrats depart from conventional wisdom, we delve more extensively into the individual incentive structures of this set of actors.

(33) See Simon (1979) on bounded rationality. In the study of Japanese politics, our definition of rationality is very similar to that used by Kato (1994).

(34) See Aoki (2001). See also Fujimoto (1997), where the behavioral patterns surrounding the emergence of a new system are analyzed in a study of the Toyota production system.

(35) This is not to deny the likelihood that such factors are subject to the law of diminishing returns or other laws. The point here is to distinguish “ultimate” from “ceteris paribus” objectives.

(36) Here, we refer to the so-called neo-realist literature that followed Waltz (1979), as well as to such neoliberal perspectives as those introduced by Keohane (1984) that share the “survival” assumption.

(37) In this way, we extend the framework of “bureaupluralism” provided by Aoki (1988) to state actors in general. This interpretive paradigm holds that bureaucrats seek to cater to both “jurisdictional constituents” and public interest but politicians simultaneously pursue these two sets of interests as well.

(38) See Peltzman (1998) and Noll (1989) for this approach. Rosenbluth (1989) and Noll and Rosenbluth (1995) provide examples of the application of this approach to Japanese politics.

(39) See Aoki (2001) for a delineation of this approach.

(40) Even if there are formal rules or the accumulation of informal patterns of interaction, “institutions” that shape and constrain human behavior do not emerge if the actors collectively believe that these rules or interaction patterns are irrelevant. Imagine that there is a widely accepted practice by all actors, such as the wining and dining of officials. While it was known that laws and past court decisions treated this practice as bribery, it was only after collective beliefs shifted from seeing the practice as “acceptable” to “unacceptable,” that such practices began to be punished as prescribed by law.

(41) See Ragin (1987) for a discussion of comparative methods, including longitudinal comparison. This method is similar to one adopted by Skocpol (1979) in her contrast of the success of the Russian Revolution of 1917 to the failure of 1905. In her study, as well, similar settings produced different results.

(42) See Bates et al. (1998: 13–18).

(43) See Bates et al. (1998). Note that this strategy is hardly limited to the analytic narrative perspectives. See Kohno (1997) for an example of such a methodology in Japanese politics.

(44) The alternative explanations as presented here should be understood more as counterfactuals, as we ask how each theory might have explained the observed outcome, rather than engaging in a criticism of the theories themselves.

(45) There are likely many other variations of possible explanations than these five, but we limit the alternative explanations to this number to keep the analysis manageable.

(46) Also, see Cowhey and McCubbins (1995).