For Western economists and journalists, the most distinctive facet of the post-war Japanese business world has been the keiretsu, or the insular business alliances among powerful corporations. Within keiretsu groups, argue these observers, firms preferentially trade, lend money, take and receive technical and financial assistance, and cement their ties through cross-shareholding agreements. In The Fable of the Keiretsu, Yoshiro Miwa and J. Mark Ramseyer demonstrate that all this talk is really just urban legend.
In their insightful analysis, the authors show that the very idea of the keiretsu was created and propagated by Marxist scholars in post-war Japan. Western scholars merely repatriated the legend to show the culturally contingent nature of modern economic analysis. Laying waste to the notion of keiretsu, the authors debunk several related “facts” as well: that Japanese firms maintain special arrangements with a “main bank,” that firms are systematically poorly managed, and that the Japanese government guided post-war growth. In demolishing these long-held assumptions, they offer one of the few reliable chronicles of the realities of Japanese business.
Using micro-level data (from tax records) on attorney incomes in
2004, we reconstruct the industrial organization of the Japanese legal services industry.
These data suggest a bifurcated bar. The most talented would-be lawyers (those with the
highest opportunity costs) pass the bar-exam equivalent on one of their first tries or
abandon the effort. If they pass, they then opt for careers in Tokyo that involve complex
litigation and business transactions. The work places a premium on their talent, and
from it they earn appropriately high incomes. The less talented face lower opportunity
costs, and willingly spend many years studying for the exam. If they eventually pass,
they tend to forego the many amenities available to professional families in Tokyo and
disproportionately opt for careers in the under-lawyered provinces. There, they earn
monopoly rents not available in the far more competitive Tokyo market.
Also John M. Olin Center for Law, Economics, and Business, Working Paper no. 559. Download PDF
By juxtaposing at-will employment with corporate
fiduciary duties, Jordan v. Duff & Phelps creates something of a
classroom brain-twister. Yet the exchange between Frank Easterbrook
(writing for the majority) and Richard Posner (dissenting) also illustrates
two fundamental but seldom recognized principles of real-world courts.
First, the bench is properly a place for honest jurists of moderate talent
(ideally, monitored for their work). It is not a place for men and women
with the independence and sophistication of Posner and Easterbrook.
Such judges can muddy the law by trying to fix bad precedent, and worsen
the law by setting interventionist examples for their far less talented peers.
Second, by basic second-best principles, the right legal rule for a
substantial fraction of contractual disputes is not a rule designed to
facilitate efficient deals. It is a rule that dismisses a plaintiff’s claim
forthright. We live in a world with imperfect judges, costly and dishonest
attorneys, and only moderately intelligent juries. As Posner implicitly
recognizes in Jordan (but other judges rarely do), many cases are simply
beyond the capacity of such real-world courts to handle cost-effectively.
Also John M. Olin Center for Law, Economics, and Business, Working Paper no. 557. Download PDF
Many Americans picture the Allied (i.e., U.S.) Occupation of Japan
(1945-52) as the quintessentially good occupation: elaborately planned in advance,
idealistically administered until derailed by anti-Communist indeologues in its later
years, it laid the foundation for Japan’s post-War democracy and prosperity. In fact, the
Americans—especially those Americans celebrated as most "idealist"—did not plan a
Japanese recovery, and for the first several years did not work for one. Instead, they
mostly just planned retribution: whom to hang, and which firms to shutter. Economic
issues they entrusted to Japanese bureaucrats, and those bureaucrats merely manipulated
the controls they had used to disastrous effect during the War. Coming from a New Deal
background in Washington, the Americans enthusiastically urged them on.
Although the Japanese economy did grow, it did not grow because of the
Occupation. It grew in spite of it. In early 1949, Japanese voters overwhelmingly
rejected the political parties offering economic controls. In their stead, they elected
center-right politicians offering a non-interventionist platform. These politicians then
dismantled the controls, and (despite strong opposition from New Deal bureaucrats in the
Occupation) imposed a largely non-interventionist framework. As a result of that choice—and not as result of anything the Occupation did—the Japanese economy grew.
Also John M. Olin Center for Law, Economics, and Business, Working Paper no. 514. Download PDF
Firms in modern developed economies can choose to borrow from
banks or from trade partners. Using first-difference and difference-in-differences
regressions on Japanese manufacturing data, we explore the way they make that choice.
Whether small or large, they do borrow from their trade partners heavily, and apparently
at implicit rates that track the explicit rates banks would charge them. Nonetheless, they
do not treat bank loans and trade credit interchangeably. Disproportionately, they borrow
from banks when they anticipate needing money for relatively long periods, and turn to
trade partners when they face short-term exigencies they did not expect.
This contrast in the term structures of bank loans and trade credit follows from
the fundamentally different way bankers and trade partners reduce the default risks they
face. Because bankers seldom know their borrowers’ industries first-hand, they rely on
guarantees and security interests. Because trade partners know those industries well, they
instead monitor their borrowers closely. Because the costs to creating security interests
are heavily front-loaded, bankers focus on long-term debt. Because the costs of
monitoring debtors are on-going, trade creditors do not. Despite the enormous theoretical
literature on bank monitoring, banks apparently monitor very little.
Also John M. Olin Center for Law, Economics, and Business, Working Paper no. 527. Download PDF
In many ways, the current financial distress in Japan traces itself
to the limited range of non-bank financial intermediaries available. That limited
availability is itself a creature of regulation. By examining the recent deregulation
of commercial paper issues by financial intermediaries, we explore the dynamics of
the regulatory process that originally contributed to—if not caused—the current
We also use this case study to explore the dynamics of the Japanese
legislative and regulatory process more generally. We characterize deregulation as a
bargain between banks and the newer non-bank intermediaries: the banks
acquiesced to commercial paper issues by non-banks, while the non-banks agreed to
the regulatory jurisdiction of the Ministry of Finance. The non-banks obtained a
cost-effective way to raise additional funds; the banks brought their new competitors
within their regulatorily enforced cartel. At a specific level, the dynamics illustrate
the classic Stiglerian theory of regulation; at a more general level, they illustrate the
trans-national economic logic to the Japanese legislative and regulatory process.
Also John M. Olin Center for Law, Economics, and Business, Working Paper no. 373. Download PDF