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Home > Books & Journals > Book Review Last Updated: 14:22 03/09/2007
Book Review #19: February 25, 2002

"Japan's Economic Dilemma: The Institutional Origins of Prosperity and Stagnation"

by Bai Gao

Reviewed by Takahiro Miyao

Title: Japan's Economic Dilemma: The Institutional Origins of Prosperity and Stagnation
Author: Bai Gao
Publisher: Cambridge University Press
Date/Time: 2001
Pages: English text 300 pages (Paperback)


In this book, the author tries to explain Japan's past economic success as well as its recent failure at the same time. After reviewing three representative studies of Japan's political economy in the postwar period, such as Robert Brenner's overcapacity hypothesis, Richard Katz's structural maturity hypothesis, and T. J. Pempel's political regime shift hypothesis, Gao maintains that Japan's successes including the bubble era in the 1980s and its sudden failures in the 1990s can be better understood by focusing not only on production and trade, as in the previous studies, but also on Japan's financial and monetary systems.

The author's argument can be summarized, in his own words, as follows. "Economic growth in postwar Japan was sustained by two major mechanisms: that of excessive competition, in which strong coordination but weak control and monitoring ensured the supply of capital for corporate investments, and that of total employment, in which the practice of keeping everyone in business and providing everyone with a job ensured consumer spending by maintaining the confidence of consumers in their future income. As long as these two mechanisms remained intact, increased government spending during a recession should lead to an increase in both corporate investment and consumer spending, thus leading to an economic recovery. What has happened in the 1990s reforms, however, has been a reversion of the institutional logic in both the mechanism of excessive competition and the mechanism of total employment." Then, the author talks about the "big bang reform" in the financial market and increasing fluidity in the labor market in the mid-1990s, which he regards as a "reversion of the institutional logic," leading to Japan's stagnation.

While the author's emphasis on financial and monetary aspects surely complements the previous studies that have focused on non-monetary aspects, it is unfortunate that he does not provide any analysis of the process of the bursting of the bubble including government policies in the early 1990s. In a sense, the negative impacts of reforms in the financial and labor markets may not be a cause, but rather a result of the stagnant economy. The author could have applied his approach to analyze a shift in financial and monetary policies to curb the bubble in the early 90s, leading to the sudden reversal of Japan's economic performance.

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