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2 The Changing Japanese

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Political System
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3111 Japan’s political stability was shattered after the general election of July
4 1993 when the conservative Liberal Democratic Party’s thirty-eight year
5 domination ended in defeat. This book examines the impact the 1993
6 general election had on Japanese politics. Although the LDP regained the
7 position of a ruling party within a year, Hori questions whether the Japanese
8 political system has managed to maintain the same efficacy as it had prior
9 to 1993.
20111 Using institutional analysis, Hori argues that this fundamental change
1 caused three institutional transformations; a decline in the importance of LDP
2 organizations in the decision-making process of the government and the
3 Diet, weakened management of the LDP through factions, and detached atti-
4 tudes of LDP members to Ministry of Finance bureaucrats. Hori analyses
5 three cases, one prior and two after the 1993 election, illustrating just how
6 ineffective the close cooperation between MOF bureaucrats, LDP executives
7 and faction leaders became.
8 The general election of 1993 was epoch-making in Japanese politics. The
9 Changing Japanese Political System is a welcome addition to the current
30111 political and public administration literature, providing an illuminating
1 explanation of why Japanese politics has gone adrift.
2
3 Harumi Hori spent ten years as a government barrister and judge before
4 leaving to study politics at the London School of Economics and Political
5 Science. She gained her doctorate at the University of Oxford and is now
6 a researcher at the Japan Research Institute.
7
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The Nissan Institute/Routledge
Japanese Studies Series

Editorial Board
J. A. A. Stockwin, formerly Nissan Professor of Modern Japanese Studies
and former Director of the Nissan Institute of Japanese Studies, University
of Oxford, Emeritus Fellow, St Antony’s College; Teigo Yoshida, formerly
Professor of the University of Tokyo; Frank Langdon, Professor, Institute of
International Relations, University of British Columbia; Alan Rix, Executive
Dean, Faculty of Arts, The University of Queensland; Junji Banno, formerly
Professor of the University of Tokyo, now Professor, Chiba University;
Leonard Schoppa, Associate Professor, Department of Government and
Foreign Affairs, and Director of the East Asia Center, University of Virginia

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Peter Dale A portrait of rural life in Meiji Japan
Translated and with an introduction by
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Saionji Kinmochi and pre-war Japanese
politics Biotechnology in Japan
Lesley Connors Malcolm Brock
A History of Japanese Economic Britain’s Educational Reform
Thought A comparison with Japan
Tessa Morris-Suzuki Michael Howarth
The Establishment of the Japanese Language and the Modern State
Constitutional System The reform of written Japanese
Junji Banno, translated by J. A. A. Stockwin Nanette Twine
Industrial Relations in Japan Industrial Harmony in Modern
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Norma Chalmers The intervention of a tradition
Banking Policy in Japan W. Dean Kinzley
American efforts at reform during the Japanese Science Fiction
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William M. Tsutsui Robert Matthew
Educational Reform in Japan The Japanese Numbers Game
Leonard Schoppa The use and understanding of numbers
How the Japanese Learn to Work in modern Japan
Second edition Thomas Crump
Ronald P. Dore and Mari Sako Ideology and Practice in Modern Japan
Japanese Economic Development Edited by Roger Goodman and
Theory and practice: Second edition Kirsten Refsing
Penelope Francks
Technology and Industrial Development
Japan and Protection in Pre-war Japan
The growth of protectionist sentiment Mitsubishi Nagasaki shipyard,
and the Japanese response 1884–1934
Syed Javed Maswood Yukiko Fukasaku
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2 Andrew Fraser, R. H. P. Mason and
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4 Learning to be ladylike
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A political biography
8 Stephen S. Large Carolyn S. Stevens
9 The Dynamics of Japan’s Relations with
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1011 Beyond the end of history Africa
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society Noel Williams
4
Edited by Jan van Bremen and The Nature of the Japanese State
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6 Brian J. McVeigh
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7 Second edition Society and the State in Inter-war
8 Joy Hendry Japan
9 The Fantastic in Modern Japanese Edited by Elise K. Tipton
20111 Literature Japanese-Soviet/Russian Relations
1 The subversion of modernity since 1945
Susan J. Napier
2 A difficult peace
3 Militarization and Demilitarization in Kimie Hara
Contemporary Japan
4 Glenn D. Hook
Interpreting History in Sino-Japanese
5111 Relations
Growing a Japanese Science City A case study in political decision making
6 Communication in scientific research Caroline Rose
7 James W. Dearing
Endō Shūsaku
8 Architecture and Authority in Japan A literature of reconciliation
9 William H. Coaldrake Mark B. Williams
30111 Women’s Gidayū and the Japanese Green Politics in Japan
1 Theatre Tradition Lam Peng-Er
2 A. Kimi Coaldrake
The Japanese High School
3 Democracy in Post-war Japan Silence and resistance
4 Maruyama Masao and the search for Shoko Yoneyama
autonomy
5 Rikki Kersten Engineers in Japan and Britain
6 Education, training and employment
Treacherous Women of Imperial Kevin McCormick
7 Japan
8 Patriarchal fictions, patricidal fantasies The Politics of Agriculture in Japan
9 Hélène Bowen Raddeker Aurelia George Mulgan
40111 Japanese-German Business Relations Opposition Politics in Japan
1 Competition and rivalry in the inter-war Strategies under a one-party dominant
period regime
2 Akira Kudō Stephen Johnson
3
Japan, Race and Equality The Changing Face of Japanese Retail
44 The racial equality proposal of 1919 Working in a chain store
45111 Naoko Shimazu Louella Matsunaga
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Edited by Syed Javed Maswood Creating a new party system
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Globalizing Japan
Ethnography of the Japanese presence in The Japanese-Soviet Neutrality Pact
America, Asia and Europe A diplomatic history, 1941–1945
Edited by Harumi Befu and Boris Slavinsky, translated by
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Japan at Play Academic Nations in China and
The ludic and logic of power Japan
Edited by Joy Hendry and Massimo Raveri Framed by concepts of nature, culture
The Making of Urban Japan and the universal
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André Sorensen Biotechnology
Public Policy and Economic Competition Molecules, markets and the state in the
in Japan United States and Japan
Change and continuity in antimonopoly Steve W. Collins
policy, 1973–1995
Michael L. Beeman Institutions, Incentives and Electoral
Participation in Japan
Modern Japan Cross-level and cross-national
A social and political history perspectives
Elise K. Tipton Yusaku Horiuchi
Men and Masculinities in Contemporary Japan’s Interventionist State
Japan The role of the MAFF
Dislocating the salaryman doxa Aurelia George Mulgan
Edited by James E. Roberson and
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1940–2004
The Voluntary and Non-Profit Sector
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in Japan
Euan Graham
The challenge of change
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From balancing to bandwagoning The Liberal Democratic Party and the
Reinhard Drifte Ministry of Finance
Harumi Hori
Understanding Japanese Society
Third edition Japan’s Agricultural Policy Regime
Joy Hendry Aurelia George Mulgan
1111
2 The Changing Japanese
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4
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The Liberal Democratic Party and
8 the Ministry of Finance
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First published 2005
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
Simultaneously published in the USA and Canada
by Routledge
270 Madison Ave, New York, NY 10016
Routledge is an imprint of the Taylor & Francis Group
This edition published in the Taylor & Francis e-Library, 2005.

“To purchase your own copy of this or any of Taylor & Francis or Routledge’s
collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.”
© 2005 Harumi Hori
All rights reserved. No part of this book may be reprinted or
reproduced or utilized in any form or by any electronic,
mechanical, or other means, now known or hereafter
invented, including photocopying and recording, or in any
information storage or retrieval system, without permission in
writing from the publishers.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging in Publication Data
A catalog record for this book has been requested

ISBN 0–415–37241–0
1111
2 Contents
3
4
5111
6
7
8
9
1011
1
2
3111 List of figures ix
4 List of tables x
5 Acknowledgements xi
6 Abbreviations xii
7
8 1 Introduction 1
9
20111
1 2 The Japanese political system: a historical institutional
2 approach 6
3
4 Historical institutional approach 6
5111 Bureaucratic autonomy 14
6 Conclusion 18
7
8 3 The Japanese political system from the Meiji era to 1993 20
9 The Japanese political system under the Meiji Constitution 20
30111 Political reforms after the Second World War 36
1 The Japanese political system under LDP dominance 40
2
3
4 4 Changes in the Japanese political system since 1993 55
5 The background of political changes after 1993 55
6 Structural changes in the Japanese political system 59
7 Conclusion 74
8
9
5 Introduction of the consumption tax in 1989 77
40111
1 Details of the introduction of the consumption tax 79
2 The role of LDP organizations 85
3 The management of the LDP 88
44 Cooperation between the LDP and the MOF 90
45111 Conclusion 92
viii Contents
6 The financial crisis in Japan 1994–1998 94
Financial policy after 1945 95
The failure of two credit unions (Tøkyø Kyøwa
and Anzen) 99
The failure of two securities companies (Sanyø
and Kokusai) 100
The failure of the J¥sen 102
The failure of the Long-Term Credit Bank of Japan
(LTCBJ) 112
Conclusion 117

7 The reform of the Ministry of Finance 119

The first wave of MOF reform: the establishment
of the Financial Supervisory Agency 121
Analysis of the first wave of MOF reform 126
The second wave of MOF reform 130
Analysis of the second wave of MOF reform 132
Conclusion 133

8 Conclusion 135

Appendix: Chronology of Japanese politics 149

Notes 160
Bibliography 170
Index 181
1111
2 Figures
3
4
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6
7
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1
2
3111 2.1 Institutional changes in the second and third stages
4 of Pierson’s path dependency model 11
5 3.1 Appointment system of the Ordinance of 1893 24
6 3.2 Distribution of LDP members according to times
7 of winning an election 42
8 3.3 The totals of the difference between the proportion
9 of the number of factional members and the
20111 proportion of the number of ministerial posts 44
1 3.4 Organizations of the LDP 45
2 4.1 The decision-making process of the Hosokawa
3 Coalition Cabinet 62
4 4.2 The decision-making process of the Murayama
5111 Coalition Cabinet 63
6 4.3 The decision-making process of the Obuchi
7 Coalition Cabinet 65
8 4.4 Groups within factions under the Second
9 Hashimoto Cabinet 69
30111 4.5 Factions of the LDP since 1958 71
1 5.1 The rates of dependence of revenue on national bonds
2 (1975–1985) 81
3 5.2 The amounts of the issuance of deficit-covering bonds
4 (1975–1985) 81
5
6
7
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Tables

3.1 The House of Representatives of the Imperial Diet

from the First to the Third Session 21
3.2 Prime Ministers from 1906 to 1932 23
3.3 Administrative Vice Ministers of Finance
from 1903 to 1945 25
3.4 Directors General of the Local Administration
Bureau of the MHA from 1902 to 1945 30
3.5 The number of seats held by the LDP after the
general elections from 1958 to 1993 41
3.6 The difference between the proportion of the
number of factional members and the proportion
of the number of ministerial posts 43
3.7 The totals of the difference between the proportion
of the number of factional members and the proportion
of the number of Ministerial posts 44
3.8 The positions attained by the Tanaka faction from
the Fukuda Cabinet to the Miyazawa Cabinet 47
4.1 The result of the general election of 18 July 1993 60
4.2 The composition of cabinets after the Hosokawa Cabinet 61
4.3 Allocation of cabinet posts among parties 66
4.4 Groups formed across factions 68
5.1 The consumption tax proposals of the GTSRC,
the LDP TSRC and the Consumption Tax Bill 87
6.1 J¥sen housing loans to individuals from 1971 to 1994 103
6.2 The percentages of J¥sen housing loans to
individuals and loans to businesses 103
6.3 Bad loans of seven J¥sen (1991) 104
6.4 Bad loans of seven J¥sen (1995) 106
1111
2 Acknowledgements
3
4
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6
7
8
9
1011
1
2
3111 This book is based on my doctorate thesis, Changes in the Japanese Polit-
4 ical System after 1993: Incapacitated Cooperation between the Liberal
5 Democratic Party and the Ministry of Finance. It would not have been
6 completed without the kindness and help of some remarkable people, and
7 I would like to acknowledge them here.
8 My thanks go first and foremost to my parents for their unfailing support
9 and understanding.
20111 I wish to express my deep gratitude to my supervisors, Professor J. A. A.
1 Stockwin and Professor Desmond King. Professor Stockwin shared his deep
2 and vast knowledge of Japanese politics with me and patiently encouraged
3 and supported a student who had much to learn about political science.
4 Professor King gave me profound advice on theoretical arguments and per-
5111 sistently helped me to develop logical thinking.
6 I would especially like to thank the interviewees I met in Japan, although
7 I cannot mention their names here. Without their cooperation this book
8 would not have been possible, and they gave me inspiration and insight
9 in many respects.
30111 Last and not least, I am very grateful to the staff of the Bodleian Japanese
1 Library for their kind assistance.
2 This book is dedicated to my parents, who have always supported my
3 decisions.
4
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Abbreviations

BOJ Bank of Japan (Nippon Ginkø)

CAR Council on Administrative Reform (Gyøsei Kaikaku Kaigi)
CGP Clean Government Party (Kømeitø)
CP Conservative Party (Hoshutø)
CPB Cabinet Planning Board
DP Democratic Party (Minshutø)
DRP Democratic Reform League (Minshu Kaikaku Rengø)
DSP Democratic Socialist Party (Minshatø)
EC Executive Council (Sømukai)
FA Financial Agency (Kin’y¥chø’)
FRC Financial Reconstruction Commission
FSA Financial Supervisory Agency (Kin’y¥ Kantokuchø)
FTC Fair Trade Commission (Køsei Torihiki Iinkai)
G-2 Military Intelligence of the GHQ
GDP Gross domestic product
GHQ General Headquarters’ Office
GS Government Section of the GHQ
GTSRC Government Tax System Research Council (Seifu Zeisei
Chøsakai)
HC House of Councillors (Sangiin)
HOAR Headquarters’ Office on Administrative Reform of the LDP
(Jimintø Gyøsei Kaikaku Honbu)
HR House of Representatives (Sh¥giin)
JCP Japanese Communist Party
JNP Japan New Party (Nihonshintø)
JRP Japan Renewal Party (Shinseitø)
LDP Liberal Democratic Party (Jiy¥minshutø)
LDP TSRC Tax System Research Council of the LDP (Jimintø Zeisei
Chøsakai)
LP Liberal Party (Jiy¥tø)
LTCBJ Long-Term Credit Bank of Japan (Nihon Chøki Shin’yø
Ginkø)
 Abbreviations xiii
1111 MAFF Ministry of Agriculture, Forestry and Fisheries (Nørin
2 Suisanshø)
3 MCI Ministry of Commerce and Industry
4 MHA Ministry of Home Affairs (Naimushø)
5111 MITI Ministry of International Trade and Industry (Ts¥shø
6 Sangyøshø)
7 MOF Ministry of Finance (Økurashø)
8 NCB Nihon Credit Bank (Nihon Saiken Shin’yø Ginkø)
9 NFP New Frontier Party (Shinshintø)
1011 NHP New Harbinger Party (Shintø Sakigake)
1 ODA official development assistance
2 PARC Policy Affairs Research Council (Seimu Chøsakai)
3111 PMO Prime Minister’s Office (Sørifu)
4 PR Peace and Reform (Heiwa Kaikaku)
5 RCB Resolution and Collection Bank
6 SESC Securities and Exchange Surveillance Commission
7 SDL Social Democratic League (Shakai Minshu Rengø)
8 SCAP Supreme Command for the Allied Powers
9 TSRC Tax System Research Council
20111 VAT value-added tax
1
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1111
2 1 Introduction
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6
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1011
1
2
3111 Japan has maintained political stability since 1955. The Liberal Democratic
4 Party (LDP) has dominated the Diet, monopolizing the position of a ruling
5 party since its foundation in 1955. Political processes in the Diet and admin-
6 istration were established on the basis of the single party dominance by
7 the LDP, and for more than 30 years they did not suffer from fundamental
8 changes. Japanese politics gave ‘the impression of stultifying immobilism’
9 (Stockwin 1988: 325). Such stability, however, was shattered after the
20111 general election of July 1993.
1 On 18 June 1993, opposition parties called for a no-confidence resolu-
2 tion against the Miyazawa Cabinet; 39 out of 274 LDP members voted for
3 this no-confidence resolution, and 18 LDP members abstained. The no-
4 confidence resolution passed the House of Representatives (HR), and a
5111 general election was held on 18 July 1993. The LDP gained 223 seats out
6 of 511. As a result, and for the first time since its foundation in 1955, it
7 could not maintain its majority in the HR. On 30 July 1993, eight parties1
8 reached an agreement that they would vote for the leader of the Japan New
9 Party (JNP), Hosokawa Morihiro, as the next Prime Minister. On 9 August
30111 1993, the Hosokawa Coalition Cabinet was established, and the LDP
1 became an opposition party for the first time since its foundation in 1955.
2 This event, the formation of a coalition cabinet excluding the LDP, was
3 epoch-making in Japanese politics.
4 The leading article of the Asahi Shinbun of 30 July 1993 described the
5 establishment of the Hosokawa Coalition Cabinet as ‘the third large-scale
6 change following the Meiji Restoration (1868) and the defeat in the
7 Second World War’ and as ‘an epoch-making event in Japanese history’
8 (Asahi Shinbun, 30 July 1993). The Hosokawa Coalition Cabinet, how-
9 ever, did not last one year. On 8 April 1994, Prime Minister Hosokawa
40111 suddenly announced his resignation and, on 25 April 1994, the Hosokawa
1 Coalition Cabinet resigned en masse. On 30 June 1994, the Murayama
2 Coalition Cabinet, which consisted of the LDP, the Japan Socialist
3 Party (JSP) and the New Harbinger Party (NHP), was established, and the
44 LDP regained the position of a ruling party. The result of an opinion poll
45111 conducted by the Asahi Shinbun after the establishment of the Murayama
2 Introduction
Cabinet showed that 67 per cent of respondents answered that Japanese
politics would not change (Asahi Shinbun, 20 July 1994).
Did the result of the general election of July 1993 bring about import-
ant effects on Japanese politics? And, if it did affect Japanese politics, to
what extent and how has the Japanese political system changed? Although
the LDP regained the position of a ruling party within a year, does a polit-
ical system that functioned under LDP dominance still maintain the same
efficacy it had under LDP dominance?
These are questions which I explore in this book. I argue that the result
of the July 1993 general election brought about a fundamental change in
Japanese politics, including the end of LDP hegemony in the Diet. This
fundamental change caused institutional changes in the weight of LDP
organizations in the decision-making process of the government, the
management system of the LDP and the relationship between LDP politi-
cians and bureaucrats, especially those of the Ministry of Finance (MOF).
The Asahi Shinbun reported these events in the following terms:

[the series of political events (the approval of the no-confidence vote

and the dissolution of the HR)] has clearly divided the LDP. It is an
epoch-making event, which has ended one-party dominance by the
LDP which has persisted since its foundation in 1955. From now on,
it can be said that Japanese politics will become unstable. A new era
of Japanese politics will begin, in which fundamental reorganisations
of the Japanese political system will occur.
(Asahi Shinbun, 19 June 1993)

On the one hand, the fundamental change created by the ending of LDP
dominance brought about coalition cabinets, which enabled other political
parties to expand their influence on political processes. On the other hand,
it caused political confusion. Under LDP dominance, an issue settling
system based on close cooperation between LDP executives, faction leaders
and bureaucrats had existed, and had successfully dealt with political and
economic issues. The effectiveness of this issue settling system, however,
significantly declined because of institutional changes after 1993. The issue
settling system was supported by three factors: the important positions of
LDP organizations in the decision-making process of the government; the
strict management system of the LDP through factions; and the close rela-
tionships between LDP politicians and bureaucrats. The collapse of the
hegemony of the LDP in the Diet after 1993 brought about changes in
these three factors. The importance of LDP organizations in the decision-
making process of the government was reduced. Factional control over
LDP members was weakened. The attitudes of LDP politicians towards
bureaucrats, especially MOF bureaucrats, became detached. Consequently,
close cooperation between LDP executives, faction leaders and bureau-
crats did not function as it had functioned under LDP dominance and, as
 Introduction 3
1111 a result, the issue settling system became ineffective. The decline in the
2 importance of LDP organizations and the weakened management system
3 of the LDP had effects on all policy areas. Accordingly, the malfunction
4 of the issue settling system can be observed ubiquitously in all policy areas.
5111 The change in the relationship between LDP politicians and bureaucrats,
6 however, is particularly significant regarding MOF bureaucrats, and polit-
7 ical confusion was especially conspicuous regarding the MOF because the
8 MOF had been regarded as the most competent and powerful ministry.
9 I therefore limit my argument about the malfunction of the issue settling
1011 system to the administration of the MOF.
1 I adopt a historical institutional approach to analyse the above argument.
2 Analysing Japanese politics in terms of institutions and institutional relation-
3111 ships gives us a clear understanding of the structure of Japanese politics. In
4 a political field, individuals’ behaviour and propensity are affected by insti-
5 tutions in which they are incorporated, and decision-making processes con-
6 sist of interactions of institutions. A historical aspect is important because
7 institutions and institutional relationships in Japanese politics, such as the
8 Diet, the cabinet system, the bureaucracy and the political party system, were
9 established in the Meiji era (1868–1912), and they have maintained their
20111 structure, characteristics and dispositions in spite of political changes.
1 Accordingly, it is crucial to explore the original political settings of those
2 institutions and institutional relationships in order to achieve a precise
3 understanding of present Japanese politics.
4 From the viewpoint of historical institutionalism, I expound my argu-
5111 ment by examining the Japanese bureaucracy and its relationship with
6 party politicians from the Meiji era to the present. The characteristic of
7 the relationships between LDP politicians and bureaucrats – whereby
8 bureaucrats planned policies and used party politicians to put those poli-
9 cies into practice and politicians delegated policy-making to bureaucrats –
30111 was observed not only under LDP dominance. A mechanism based on such
1 roles of bureaucrats and party politicians was consolidated in the Meiji
2 era, and has been maintained, adapting itself by incremental adjustment to
3 political circumstances. These include the Taishø Democracy (from the
4 1910s to the beginning of the 1930s), political reforms after the Second
5 World War and LDP dominance after 1955. The issue settling system under
6 LDP dominance, based on close cooperation between LDP executives,
7 faction leaders and bureaucrats, is the result of such adaptation of the mech-
8 anism to the monopolization of the ruling position in the Diet by the
9 LDP after 1955. The mechanism functioned effectively by adapting itself
40111 to political changes; however, it has not been able to adjust to the new
1 political circumstances manifest since 1993.
2 Three cases are analysed: one before 1993 (the introduction of the con-
3 sumption tax) and two after 1993 (financial crises and MOF reform in the
44 latter half of the 1990s), to illustrate the issue settling system under LDP
45111 dominance worked successfully before 1993 and inefficiently after 1993.
4 Introduction
The MOF has tightly controlled financial institutions by issuing direc-
tives and executing administrative guidance, and it was proud of having
allowed no financial institution to fail since 1945. LDP politicians have
safely put financial policies into the hands of the MOF and refrained from
intervening in this policy area. MOF bureaucrats and LDP politicians have
thus maintained a smooth relationship regarding financial policies. It there-
fore seemed most unlikely that cooperation between MOF bureaucrats,
LDP executives and faction leaders should not have functioned effectively
and that political confusion should have been brought about in this policy
area. However, regarding the failure of the J¥sen and the Long-Term
Credit Bank of Japan (LTCBJ), LDP politicians did intervene in the
processes of making liquidation plans for the J¥sen and the LTCBJ, and
those processes were thrown into political turmoil because of severe
conflicts and lack of control in the LDP. Although the MOF relied on
the issue settling system, it could not put its original liquidation plans into
practice, and the liquidation processes were significantly delayed because
of the political confusion.
Regarding MOF reform, LDP politicians had refrained from intervening
in organizational and personnel matters of the MOF bureaucrats. From the
1950s to the beginning of the 1960s, LDP politicians had attempted to
reform the MOF, and all such attempts had failed. Since then no signifi-
cant plan for MOF reform had been put on the political agenda. LDP
politicians had preferred to obtain beneficial treatments in budget com-
pilation by cooperating with MOF bureaucrats, and they left organizational
and personnel matters, which would affect the interests of MOF bureau-
crats directly, in the hands of the MOF bureaucrats themselves. As a result,
close cooperation between LDP politicians and MOF bureaucrats had been
maintained, and both LDP politicians and MOF bureaucrats had obtained
benefits from this cooperation. MOF bureaucrats put their plans into
practice efficiently, and LDP politicians secured their seats in the Diet by
distributing public works and subsidies among their supporters.
It therefore seemed highly unlikely that LDP politicians would harm
such a profitable relationship by intervening in organizational and personnel
matters of the MOF. Nevertheless, in 1998 the jurisdiction of the inspec-
tion and supervision of financial institutions was split away from the MOF,
and the Financial Supervisory Agency (FSA) and Financial Reconstruction
Commission (FRC) were established. The MOF exerted its influence on
legislation processes through the issue settling system by drafting bills and
negotiating LDP politicians and faction leaders over those drafts. The legis-
lation process relating to MOF reform was supposed to follow the same
procedure. MOF bureaucrats attempted to shift the movement of MOF
reform in a direction more favourable to themselves through the issue
settling system, as it had done in the past under LDP dominance. The MOF
made drafts of the bills and negotiated with LDP executives and faction
leaders. However, the main venue of government decision-making had
 Introduction 5
1111 shifted from LDP organizations to organizations consisting of ruling
2 coalition parties, and in those organizations, the LDP was forced to change
3 its decisions and make compromises with other ruling coalition parties.
4 Furthermore, regarding the establishment of the FRC, the ‘new policy-
5111 oriented’ politicians of the LDP, who were actually in charge of revising
6 the Financial Revitalization Bill, did not seek support from the MOF with
7 regard to creating the draft Bill, and the MOF was also excluded from the
8 revising process. Thus, in the case of MOF reform, the political processes
9 followed a different procedure from that followed under LDP dominance
1011 in which the issue settling system fully functioned. Consequently, the
1 MOF lost its means of exerting influence on the process of legislating
2 the above law. The Financial Revitalization Bill was created to rescue the
3111 Japanese financial intitutions that had serious financial difficulties and to
4 restore the Japanese financial systems. The legislative process of this law
5 will be explained in Chapter 6.
6 As well as the above two cases, I chose the introduction of the consump-
7 tion tax case in 1989 to confirm the effectiveness of the issue settling
8 system before 1993. The introduction of a new tax system, the consump-
9 tion tax, was supposed to affect Japanese taxpayers as a whole. This policy
20111 was extremely unpopular among the Japanese electorate and difficult to
1 put into practice, and it was therefore expected that LDP politicians would
2 have an extremely strong interest and would be willing to intervene. Tax
3 system reform had been executed immediately after the Second World War
4 following the Shoup Proposals of 1949,2 and no substantial tax reform had
5111 been executed since then until the introduction of the consumption tax in
6 1989. Therefore, it was highly unlikely to introduce a new tax that would
7 be imposed on the whole Japanese taxpayers. Nevertheless, the MOF
8 succeeded in legislating the consumption tax plan by fully exploiting the
9 issue settling system, which confirms the proposition that the issue settling
30111 system functioned effectively before 1993.
1
2
3
4
5
6
7
8
9
40111
1
2
3
44
45111
2 The Japanese political
system
A historical institutional approach

Historical institutional approach

Historical institutionalists analyse structural consistencies behind the
persistence of particular patterns of policy by focusing on institutions and
institutional relationships (Hall 1986: 18). They examine institutions
and institutional relationships, exploring their political and economic devel-
opment in historical context. Therefore historical institutionalism can
explain why a specific pattern of institutional configuration persists in a
particular political area by examining the process of its development.
For example, Kathleen Thelen studied the resilience of wage bargaining
organizations in advanced industrial countries to the pressures of global-
ization in the 1980s, which divided the bargaining power of skilled
workers from that of unskilled workers (Thelen 1999: 398–9). She explains
that wage bargaining institutions in Denmark and Sweden experienced sub-
stantial reconfiguration in the 1980s whereas in Germany such pressures
did not bring about significant changes in those institutions. She explores
the difference between the Danish and Swedish cases and the German
case by examining how ‘ideological and material foundations sustained
these institutions prior to the onset of these new pressures’ (Thelen 1999:
398). Danish and Swedish models, she argues, were characterized by a
high degree of egalitarianism. Denmark and Sweden had overarching
national wage bargaining institutions, and, facing the above change in
labour markets in the 1980s, those egalitarian institutions were significantly
subverted. On the other hand, the German system, which accommodated
the diversity of labour markets such as the skilled worker market and the
unskilled worker market, had accepted the inequalities between different
labour markets. As a result, contrary to the Danish and Swedish cases, the
German system did not experience significant changes (Thelen 1999: 399).
This example shows how political and social circumstances determine the
structure of institutions and institutional relationships that shapes the reac-
tions of institutions. A historical aspect is therefore essential to clarify the
reactions of institutions and institutional arrangements.
 A historical institutional approach 7
1111 The institutional aspect of historical institutionalism
2
Historical institutionalism offers two arguments regarding institutions.
3
The first is that institutional factors shape the objectives of political
4
actors. The individual is a satisficer who is motivated by ‘satisficing’ values
5111
expressed in rules, routines or established procedures. Individuals have
6
7 incomplete and fragmented knowledge, and their attention is limited.
8 Therefore individuals cannot select the best behaviour, comparing all the
9 alternatives that are available for them, nor can they precisely predict
1011 the outcome of their decisions (Parsons 1995: 278). Under such ‘bounded
1 rationality’, individuals behave according to rules, routines or established
2 procedures given by institutions in which they are incorporated. Thus,
3111 institutions provide individuals with an interpretation of their interests
4 or a direction of their action through rules, routines or established pro-
5 cedures (Hall and Taylor 1996: 939). In other words, individuals form the
6 goals and preferences of their political activities through education and
7 experiences that are based on the formal or informal rules and systems of
8 institutions in which they are incorporated. For instance, with respect to
9 the Japanese bureaucracy, bureaucrats are promoted within the ministry in
20111 which they are first employed, and they accumulate expertise and learn
1 formal and informal rules through on-the-job training. As a result, bureau-
2 crats achieve loyalty to their ministry and the pattern of behaviour and
3 preferences that is unique to their ministry. This pattern of behaviour
4 and preferences constrains their future behaviour. Individuals can behave
5111 rationally and strategically. However, institutions limit choices that indi-
6 viduals can select by moulding the patterns of individuals’ behaviour and
7 purposes. Thus individuals’ rational or strategic behaviour is limited by
8 institutional circumstances.
9 The other argument offered by historical institutionalism is that institu-
30111 tional relations and interactions structure the distribution of power among
1 political actors (Thelen and Steinmo 1992: 3). For instance, Peter Hall
2 explains the direction of British economic policy by analysing the distri-
3 bution of power in political economy in terms of institutional relationships.
4 In order to explain the course of the nation’s economic policy, he presents
5 five sets of structural variables – the organizations of labour, capital, the
6 state, the political system and the structural position of the country within
7 the international economy – and he argues that these factors interact with
8 each other (Hall 1992: 259–61). He argues that the power of the trade
9 unions peaked in 1974–1975, and from 1976 to 1977 pressure from the
40111 financial market was intensified, which urged the Thatcher government to
1 take up policies of monetarism (Hall 1992: 100).
2 As for the concept of institutions, institutions constrain not only the
3 strategies of individuals but also their goals and preferences through educa-
44 tion and experiences. In this context, the concept of institutions includes
45111 not only formal organizations but also those that structure the relationship
8 A historical institutional approach
between political actors and constitute education and experiences, such
as formal rules, compliance procedures and standard operating practices
(Hall 1986: 18–19).

The historical aspect of historical institutionalism

Historical institutionalism emphasizes the origins of institutions and insti-
tutional relationships. It ‘sees institutions as the legacy of concrete histori-
cal process’ (Thelen 1999: 382). In other words, institutions preserve a
persistent character, which is embedded and developed in specific circum-
stances (Hall and Taylor 1996: 940–1). Institutions and institutional arrange-
ments adopt a set of paths when they are formed and then evolve along
those paths, so a historical aspect is crucial to understanding their reactions
and behaviour. Accordingly, institutions and institutional arrangements are
path-dependent and evolve by incremental changes, and such path depen-
dency and incremental changes are intelligible in terms of historical analy-
sis (North 1990: 95–6), therefore ‘preceding steps in a particular direction
induce further movement in the same direction’ (Pierson 2000a: 252).
Path dependency originates from the study of economics, and Douglass
C. North argues that this concept can be applied to institutions and insti-
tutional relationships. According to him, the factors of path dependency,
large set-up costs, learning effects, coordination effects and adaptive expec-
tations can be applied to institutions and institutional relationships in a
political field (North 1990: 95). Large set-up costs are necessary to create
new political institutions. In a political field, actors ‘constantly adjust their
behaviour in the light of how they expect others to act’ (Pierson 2000a:
258). Therefore whether political actors join a new political institution or
contribute their resources to a potential institution depends ‘to a consid-
erable degree on their confidence that a large number of other people will
do the same’ (Pierson 2000a: 258). In order to attract a large number of
potential members, a new institution requires a high level of resources.
As for learning effects, individual members of institutions are constrained
by the rules of the institutions in which they are incorporated, and insti-
tutions themselves are constrained by the rules that regulate institutional
relationships. They therefore invest in achieving the specialized skills
that are required by such rules and develop an identity that is unique to
that institution or institutional relationship. As a result, transaction costs
from existing rules to hypothetical alternatives become quite high, and the
attractiveness of existing institutional arrangements increases. Conse-
quently the constraint of existing rules on individuals and institutions is
reproduced or strengthened. Furthermore, such constraints promote coor-
dination between individuals and institutions according to existing formal
and informal rules. About adaptive expectations, complexity and opacity,
which are intrinsic characteristics of politics, result in individuals and
institutions adhering to established mind-sets and understandings presented
 A historical institutional approach 9
1111 by existing rules and institutional arrangements (North 1990: 95, Pierson
2 2000a: 257–60).
3 Furthermore, Paul Pierson argues that characteristics of political institu-
4 tions such as the absence or weakness of efficiency-enhancing mechanisms
5111 of competition and learning, the shorter time horizons of political actors
6 and the strong status quo bias built into institutions strengthen the path
7 dependency of institutions and institutional relationships in a political
8 field (Pierson 2000a: 257). Contrary to economic markets, ‘Political insti-
9 tutions rarely confront a dense environment of competing institutions that
1011 will instantly capitalize on inefficient performance’ (Pierson 2000a: 261).
1 In economic markets, because of fierce competition, inefficient perfor-
2 mances are replaced by more efficient ones. On the other hand, in political
3111 fields, such fierce competition does not usually happen, and although a
4 particular set of paths may become less effective, it will not be replaced
5 by a new set immediately.
6 Once a particular path is consolidated, switching costs from the existing
7 path to alternatives are borne in the short term while the benefits of
8 such change will generally materialize in the long term. Political actors,
9 especially politicians, are generally interested in the short-term consequences
20111 of their behaviour; therefore, once a particular path is established, polit-
1 ical actors have a strong propensity to choose an existing path (Pierson
2 2000a: 261). In addition, those who establish institutions or institutional
3 arrangements tend to create rules and arrangements in order to protect the
4 existing institutions or institutional arrangements they have consolidated,
5111 which results in the status quo bias of political institutions (Pierson 2000a:
6 262).
7 These factors bring about the increase in transaction costs from existing
8 arrangements to new alternatives, which result in path-dependent behav-
9 iour. Consequently, ‘some original ordering moment triggered particular
30111 patterns, and the activity is continuously reproduced even though the
1 original event no longer occurs’ (Pierson 2000a: 263).
2 The path dependency of institutions and institutional arrangements does
3 not mean that they permanently react by following a particular path selected
4 at the first stage: they follow an evolving process. Pierson divided this
5 process into three stages. According to him, institutions and institutional
6 arrangements follow a path-dependent process that consists of three
7 stages in a temporal sequence: the initial critical juncture; the period of
8 reproduction; and the end of the path (Pierson 2000b: 76).
9 In the initial critical juncture, ‘events trigger movement toward a partic-
40111 ular “path” or trajectory out of two or more possible ones’ (Pierson 2000b:
1 76), and a particular set of paths is selected. The political setting of
2 the initial stage in which a particular institutional arrangement is selected
3 determines the structure of the arrangement that constitutes its repro-
44 duction mechanism. For example, when the Japanese bureaucracy was
45111 established in the Meiji era, political circumstances were highly unstable,
10 A historical institutional approach
and those who executed the Meiji Restoration faced strong demands for
political participation in the decision-making processes from those who
were excluded from the Meiji government. Such political circumstances
affected the structure of the Japanese bureaucracy, which had a highly
autonomous meritocratic career system that was supposed to protect the
vulnerable government by strengthening autonomy and enhancing the
competence of administrative organizations. And this structure determined
the reproduction mechanism of the Japanese bureaucracy, which reinforced
its precedents and the current systems and reproduced its monopolization
of information and expertise in policy-making.
In the second stage, the period of reproduction, positive feedback rein-
forces the path initiated in the first stage. This explanation, however, does
not imply that an institution is permanently locked in to a particular path
following a self-reinforcing sequence. Institutions experience changes, but
they are bounded, incremental changes. The experiential learning processes
of an institution take place within its ‘pre-established patterns of moral and
causal beliefs, behavioral routines, structural capabilities, and resources’
(Olsen and Peters 1996: 12) that were determined by the historical back-
ground of the institution. Therefore institutions ‘tend to refine existing
paradigms, technologies, and competences rather than to fundamentally
re-examine them’ (Olsen and Peters 1996: 9–10). Responding to new
information, institutions evolve by continuing such incremental changes in
a trial-and-error fashion (Olsen and Peters 1996: 69). If the initial response
of an institution to a particular event is inadequate, it searches other means
and adapts itself to a new situation. Thus institutions produce continuous
incremental changes by learning within an established set of core beliefs,
behaviours and structures. Institutions continue such incremental adjust-
ments. Some events, however, may disrupt the reproduction mechanism
and trigger institutional breakdown, which leads to the third stage, the end
of the path.
In the third stage, a long-lasting equilibrium is dislodged (Pierson 2000b:
76), and a new institutional equilibrium is consolidated. The reproduction
mechanism of institutions is disrupted, and institutional breakdown occurs,
which triggers a shift to a new institutional equilibrium.
Historical institutionalism is criticized on the ground that its model
is too static and has difficulties in explaining political changes. Such
criticism places too much emphasis on only one side of path dependency,
its reproducing processes.
In Figure 2.1, I illustrate two kinds of reactions of institutions, incre-
mental adjustments in the second stage and institutional innovation in the
third stage of the process of path dependency. Criticism of historical insti-
tutionalism pays attention only to the second stage of path-dependent
processes, the period of reproduction, and overlooks dynamic institutional
innovation that causes a disruption of an existing institutional equilibrium
and a shift to a new one in the third stage, the end of the path. For example,
 A historical institutional approach 11
1111
2 Incremental adjustment through
= The period of reproduction
learning processes (the second stage)
3
New
4 events
5111
6 Institutional innovation The end of the path
7 a long-lasting equilibrium is (the third stage)
disrupted
8 =
9
1011 a shift to a new institutional equilibrium

1
2 Figure 2.1 Institutional changes in the second and third stages of Pierson’s path
3111 dependency model
4
5
6 the defeat of the Tokugawa Bakufu in the Boshin War (1868) against the
7 Chøsh¥ and Satsuma han (fief) decisively injured the prestige of the
8 Tokugawa Bakufu and the Tokugawa Shogun. The base of the reproduc-
9 tion mechanism of the Tokugawa Bakufu administration system that had
20111 been maintained more than 250 years, namely that the Tokugawa Shogun
1 governed the daimyø (feudal lords) as their master, was broken down. As
2 a result, the Tokugawa Bakufu was replaced by a new political system,
3 the Meiji government, which had the Emperor as a sovereign.
4 Not only in the third stage but also in the second stage, institutions are
5111 not constantly locked in to the same pattern. They evolve themselves
6 by repeated incremental changes. The mechanism established in the Meiji
7 era, which was based on the bureaucrats’ superiority regarding policy-
8 making and the cooperation between bureaucrats and party politicians,
9 adapted to new political circumstances after 1955, namely LDP dominance
30111 in the Japanese political process, by establishing close connections with
1 LDP organizations and politicians. Thus path dependency explains ‘both
2 continuity and (structured) change’ of institutions (Thelen 1999: 384).
3 Some criticize historical institutionalism by suggesting that its substan-
4 tive argument is not really different from conventional wisdom. Such
5 criticism, however, overlooks the merits of historical institutionalism in
6 presenting a framework to explain the differences in the reactions of insti-
7 tutions and to understand institutional changes in their evolving processes.
8
9
Japanese politics and historical institutionalism
40111
1 A historical aspect is essential for understanding the Japanese political
2 system. Political institutions, especially the Japanese bureaucracy, have
3 preserved their structure and characteristics since the Meiji era. For
44 instance, the employment system and promotion system of the Japanese
45111 bureaucracy (a qualifying examination, a closed career system, a seniority
12 A historical institutional approach
rule and on-the-job training) have hardly been changed since the Meiji era.
The first qualifying examination was held in 1894. Since then, the quali-
fying examination has been held every year (except from 1944 to 1946).
Each ministry has used its own discretion in employing applicants who
passed the qualifying examination. Furthermore, if the academic know-
ledge required for the qualifying examinations before and after the Second
World War are compared, the requirements have scarcely changed. The
Higher Civil Officials’ Examination (after 1918, the administrative field
of the Higher Examination) was held as a qualifying examination for
career officials before the Second World War. After the Second World
War, from 1948, the Higher Class of the National Civil Servants’ Exam-
ination has been held as a qualifying examination. Comparing subjects in
the Higher Civil Officials’ Examination with subjects in the Higher Class
of National Civil Servants’ Examination (in the law field, which has mainly
supplied career officials for non-technical work), it is apparent that there
is no significant difference between them. Although a multiple-choice
paper was added to the latter examination, the same subjects – constitu-
tional law, administration law, civil law, international law, criminal law,
commercial law and economics – constitute both examinations, so it is
clear that both examinations require the same academic knowledge.
After being hired, bureaucrats are promoted in the ministry that first
employs them, based on a seniority rule. As for the training system, in the
MOF, the training system for newly employed officials has not funda-
mentally changed since the Meiji era. In the Meiji era, they had an
apprentice training in the first year. They were assigned to the Counsellor’s
Office of the Minister’s Secretariat as an apprentice. Their task as an
apprentice was to observe senior colleagues’ work. While they were reading
and copying drafts that their senior colleagues had created, they were
supposed to understand the unique atmosphere of the MOF and its way
of dealing with tasks. This training system has been maintained to the
present. Newly employed officials are assigned as an apprentice to the
Secretarial Division or the Overall Coordination Division of the Minister’s
Secretariat or the Coordination Division of each bureau (Naiseishi
Kenky¥kai 1971: 3, Sakakibara 1977: 41).
Such continuity can be understood when viewed within the context of
the path dependency of the Japanese bureaucracy. The structure of the
Japanese bureaucracy reinforced its path-dependent characteristics. The
closed career system and on-the-job training system has allowed bureau-
crats to monopolize information and the expertise of policy-making.
Through those systems, their monopoly of information and expertise has
been reproduced and strengthened, which has brought about further expan-
sion of, and strength to, the existing structure of the Japanese bureaucracy.
Early commitment is required of applicants for career official positions
because of the competitive qualifying examination system and the closed
career system. Bureaucrats have accumulated the knowledge of existing
 A historical institutional approach 13
1111 rules and precedents through on-the-job training and the promotion system
2 within one ministry. They have also developed loyalty to their ministry
3 through the closed career system and promotion system. The strict seniority
4 rule and the closed career system have made them cooperate with each
5111 other in following existing rules and precedents. Thus early commitment,
6 learning effects, strong loyalty and mutual cooperation have increased
7 the transaction costs for bureaucrats to move from existing rules and pre-
8 cedents to new hypothetical alternatives. For bureaucrats, following the
9 existing rules and precedents has been cost-effective; therefore existing
1011 institutional arrangements have been reproduced and strengthened.
1 Not only the Japanese bureaucracy but also the mechanism of the
2 Japanese political system has maintained path-dependent characteristics.
3111 In Japanese politics, a mechanism in which bureaucrats initiated and created
4 policies and cooperated with party politicians in the legislative process was
5 consolidated in the Meiji era. Both bureaucrats and party politicians
6 obtained benefit from this mechanism. Bureaucrats could bring into effect
7 their policy plans and budgets effectively by cooperating with party politi-
8 cians. Party politicians could concentrate on their election campaigns
9 because bureaucrats undertook policy-making. Thus bureaucrats and party
20111 politicians have regarded this mechanism as effective, and as a result it
1 has been reproduced, using repeated incremental adjustments to react to
2 new political circumstances. During the Taishø Democracy (from the 1910s
3 to the beginning of the 1930s), some bureaucrats became members of a
4 political party, the Seiy¥kai. Nevertheless, their organizational autonomy
5111 and relationships with party politicians regarding policy-making – bureau-
6 crats’ superiority in policy-making and cooperation between bureaucrats
7 and party politicians in the legislative process – did not experience signifi-
8 cant change.
9 After the Second World War, in spite of political reforms conducted by
30111 the General Headquarters’ Office (GHQ), this mechanism survived,
1 adjusting itself incrementally. The GHQ required the system of the Japan-
2 ese bureaucracy and the cooperation of the bureaucrats to implement its
3 reform plans. Furthermore, after the GHQ executed a massive purge of
4 politicians, military officers and business leaders from their public posi-
5 tion, only bureaucrats remained in the Japanese political system. The
6 Japanese bureaucracy succeeded in preserving its organizations, employ-
7 ment system and personnel system. Thus, it preserved its monopoly of
8 expertise and information and secured its autonomous organizations.
9 Bureaucrats strengthened their relationship with political parties in order
40111 to put their policies into legislation under the Constitution of 1946, which
1 provided that the Diet should monopolize authority over legislation. Under
2 LDP dominance after 1955, bureaucrats adapted this mechanism to a new
3 political circumstance – the monopoly of the ruling position in the Diet
44 by the LDP – by concentrating on establishing close connections with LDP
45111 executives and faction leaders while they maintained their superiority in
14 A historical institutional approach
policy-making and organizational autonomy. Thus, under LDP dominance,
the issue settling system (whereby bureaucrats planned policies and nego-
tiated with LDP executives and faction leaders to submit their plans as
bills in the Diet, while LDP executives negotiated with opposition parties
to let those bills pass the Diet smoothly) was established, and this system
dealt with political issues successfully.
The confusion of Japanese politics after 1993 may be described as the
third stage of the path dependent process of this mechanism. The end of
LDP dominance and the beginning of the era of coalition cabinets impaired
the effectiveness of the issue settling system. Close cooperation between
LDP executives, faction leaders and bureaucrats could not bring about
immediate settlement of political and economic issues, and this eroded the
reproduction process of the issue settling system. Nevertheless, coopera-
tion between LDP politicians and bureaucrats was so firmly institu-
tionalized that the mechanism could not adjust itself to a new political
circumstance, the era of coalition cabinets, by incremental adjustment. The
long-lasting institutional equilibrium was dislodged, and a new institutional
equilibrium – a decision-making system that can replace the issue settling
system – has not been established. This issue, the mechanism in the third
stage after 1993, is examined in detail in Chapter 8, Conclusion.

Bureaucratic autonomy
The mechanism by which bureaucrats initiated and created policies and
cooperated with party politicians in the legislative process of those policies
has determined the responses of the government to political and economic
issues in Japan. This mechanism is based on autonomous bureaucracy.
Since the Meiji era, the Japanese bureaucracy has exerted overwhelming
power in policy-making by monopolizing information and expertise. There-
fore exploring bureaucratic autonomy is essential to any analysis of this
mechanism and of the Japanese political system.

The historical aspect of bureaucratic autonomy

Exploring the original institutional setting of the Japanese bureaucracy in
the Meiji era is essential to understanding bureaucratic autonomy in Japan
because it determined the structure of Japanese bureaucracy that has been
inherited by the present bureaucracy. As Bernard S. Silberman describes,
the political circumstances following the Meiji Restoration (1868) were
characterized as those of high uncertainty. Leaders of the Meiji Restoration
had to consolidate an administrative system to replace the Tokugawa
Bakufu administration system, which had ruled Japan for more than
250 years. Lower rank samurai (military men) of four han (feudal clans;
Satsuma, Chøsh¥, Tosa, Hizen) that played a main role in the Meiji
Restoration dominated the political process at that time. Therefore former
 A historical institutional approach 15
1111 samurai and daimyø (feudal lords) of other han accumulated dissatisfac-
2 tion with the leaders of the Meiji Restoration. Such dissatisfaction broke
3 out in rebellions, such as the Seinan Rebellion in 1877, and, later, in a
4 political movement, the Jiy¥minken undø (the People’s Rights Movement),
5111 whose members demanded participation in the political process. Under
6 such uncertain political circumstances, the leaders of the Meiji Restor-
7 ation had to establish ‘the organizationally oriented pattern of bureaucratic
8 organization’ in which the leaders’ status and power were provided in
9 organizational rules and the autonomy of the administrative role was
1011 preserved in order to protect the leaders from the volatility of political
1 circumstances (Silberman 1993: 46–64). They established administrative
2 organizations and the system of bureaucracy by Imperial Ordinance, such
3111 as the Imperial Ordinance on the Ministry System (1886), and the Imperial
4 Ordinance on Civil Officials Employment (1893). Furthermore, the leaders
5 had to establish some criteria in order to legitimize their leadership and to
6 centralize expertise in policy-making on administrative organizations
7 responding to a political movement that demanded participation in the
8 political process. They established a criterion ‘based on the ability to
9 achieve high standards of some measurable characteristics’ (Silberman
20111 1993: 51) and the system to keep expertise in policy-making with admin-
1 istrative organizations. They established Tøkyø Imperial University as
2 an institution to educate applicants for career officials, and introduced
3 a closed career system based on a competitive qualifying examination.
4 On the other hand, those who were dissatisfied with the administration of
5111 the leaders of the Meiji Restoration formed political parties as opponents
6 of the government. As a result, when political parties were formed, party
7 politicians could not participate in the policy-making process of the
8 government. Thus historical circumstances determined the structure of
9 the Japanese bureaucracy and its relationship with party politicians; in other
30111 words, it was highly autonomous and superior to politicians in policy-
1 making. The present Japanese bureaucracy inherited this institutional
2 structure – the closed career system based on a qualifying examination
3 system, the personnel system consisted of a seniority rule and on-the-job
4 training. The institutional relationship between bureaucrats and politi-
5 cians, in which bureaucrats take initiatives to create policies, has also been
6 inherited by the present Japanese bureaucracy.
7
8
The factors of bureaucratic autonomy
9
40111
The organizational factors of bureaucratic autonomy
1
2 An autonomous social entity ‘not only acts on its preferences, in addition,
3 its preferences are internally or self-generated’ (Nordlinger 1981: 25). The
44 characteristic of the autonomy of a social entity lies in independence in
45111 forming and acting on its own preferences.
16 A historical institutional approach
Considering the above definition of autonomy, I argue that two organ-
izational factors are required for achieving bureaucratic autonomy in the
Japanese setting. One is organizational integrity. The preferences of a
bureaucratic agency should be self-generated and unique to the agency.
In order to have such self-generated unique preferences, bureaucratic
organization should be differentiated from other political actors and obtain
patterns of preference or behaviour that are unique to the organization.
The other is organizational ability. The bureaucratic agency should be
capable of forming and implementing policies according to its own
preferences.
The Japanese bureaucracy retained organizational integrity and ability
from the beginning. Regarding organizational integrity, bureaucrats have
achieved patterns of preferences and behaviour that are unique to their
ministry through on-the-job training based on the closed career system.
Most career officials have been graduates of the Law Faculty of Tøkyø
Imperial University, which was established by the government as an insti-
tute to educate applicants for bureaucratic careers. Therefore career officials
have shared the same academic background. Additionally, their promotion
has been based on a strict seniority rule in the ministry that first employed
them; this has generated a strong loyalty to their ministry. Thus the
employment system and the personnel system of the Japanese bureaucracy
has brought about homogeneous and integrated bureaucrats who are loyal
to their ministry and who have achieved the patterns of preferences and
behaviour unique to their ministry. For instance, career officials of the
Ministry of Home Affairs, especially the Local Administration Bureau,
had the motivation to be Bokuminkan, local administrative officials who
commit themselves to the welfare of subjects in their administrative
jurisdiction (Mizutani 1999: 203).1 With regard to organizational ability,
the highly competitive qualifying examination system and closed career
system created competent bureaucrats who monopolized the expertise of
policy-making.

The relational factors of bureaucratic autonomy

Bureaucratic autonomy should be explored from the viewpoint of not
only the structures of bureaucracy but also the relationships of bureaucracy
with other political actors. The essential issues of bureaucratic autonomy
– to what extent and in what ways bureaucrats realize their preferences
regardless of other political actors’ preferences – are determined by the
relationships between bureaucracy and other political actors such as
political parties, interest groups and the electorate.
My argument focuses on the relationship between party politicians and
bureaucrats; I therefore limit the argument of the relational factors in this
book to the relationship between bureaucrats and party politicians. In demo-
cratic countries, the authority of legislation belongs to a parliament that
 A historical institutional approach 17
1111 consists of elected politicians. In order to put their preferences into practice,
2 bureaucrats therefore need deference from politicians with regard to policy-
3 making. The questions to what extent and in what ways bureaucrats put their
4 preferences into practice determine the degree and content of the autonomy
5111 of bureaucracy. These questions can be investigated by exploring the
6 balance of ability to plan policies and the closeness (cooperation with and
7 infiltration into each other) between bureaucrats and party politicians. For
8 instance, according to Daniel P. Carpenter, in America, the Congress exer-
9 cises overwhelming power over the bureaucracy. ‘Bureaucracies are created,
1011 empowered, and founded by the legislature; they owe their existence to the
1 Congress.’ (Carpenter 2001a: 14–16). The American bureaucracy has had to
2 construct from scratch its reputation for planning policies. In addition, the
3111 Republican Party and the Democratic Party have competed for the position
4 of ruling party in the Congress, and presidents have been elected from both
5 parties. Therefore in order to obtain trust from politicians with regard to its
6 ability to plan policies, the American bureaucracy has constructed multiple
7 and diverse networks that ‘enhance the agency’s appearance of neutrality’
8 (Carpenter 2001a: 365). Contrary to the American case, the Japanese bureau-
9
cracy was created and empowered by Imperial Ordinances that did not
20111
require the approval of the Imperial Diet, and bureaucrats obtained their
1
ability and established their autonomy from the beginning. There was there-
2
fore no necessity for the Japanese bureaucracy to form multiple and diverse
3
networks in order to achieve bureaucratic autonomy.
4
5111
6 Path dependency and the factors of bureaucratic autonomy
7
8 In the analysis of the organizational and relational factors of bureaucratic
9 autonomy, the aspect of path dependency, which I argued as a particular
30111 characteristic of institutions, is essential. In the previous section, I explained
1 that the structure of the Japanese bureaucracy, which has supported the two
2 organizational factors (organizational integrity and organizational ability),
3 reinforced the path-dependent characteristics of the Japanese bureaucracy.
4 The relational factor is also path dependent. I argue that two indicators
5 constitute the relational factor of the autonomy of the Japanese bureau-
6 cracy: bureaucrats’ superiority in policy-making compared to party poli-
7 ticians; and cooperation between bureaucrats and party politicians. I also
8 argue that they are path dependent. The monopoly of expertise and infor-
9 mation about policy-making by bureaucrats has been reproduced through
40111 the personnel and employment systems of the Japanese bureaucracy.
1 The expertise in and information about policy-making were inherited by
2 junior officials from senior officials within ministries through on-the-job
3 training systems. The meritocratic closed career system, whereby every
44 year each ministry employed new officials from those who had passed the
45111 highly competitive qualifying examination, not only maintained the high
18 A historical institutional approach
competence of bureaucrats but also excluded non-bureaucrats from taking
positions in ministries, and this enabled the Japanese bureaucrats to
keep their expertise and knowledge to themselves. Compared with the
American bureaucracy, in which many executives of administrative organ-
izations are politically appointed and private organizations supply human
resources capable of planning policies to party politicians and admin-
istrative organizations, the Japanese bureaucracy has reproduced a mon-
opoly on information and expertise much more easily. The strict seniority
rule and the promotion system (bureaucrats have, in general, been promoted
within the ministry that first employed them) brought about bureaucrats’
loyalty to their ministry, thus strengthening their unity and the monopoly
on expertise. In this way, the superiority in policy-making of bureaucrats
over party politicians has been reproduced. As for cooperation between
bureaucrats and party politicians, both bureaucrats and party politicians
have regarded such cooperation as effective to achieve the benefits they
want. By such cooperation bureaucrats have been able to put their plans
and budgets into legislation efficiently. Meanwhile, party politicians have
been able to concentrate on election campaigning because bureaucrats
were undertaking the policy-making. Consequently, cooperation between
bureaucrats and party politicians in the legislative process has been repro-
duced since the Meiji era.

Conclusion
Analysing the temporal sequence of institutions and institutional relation-
ships is important to understand changes in them, and historical institu-
tionalism provides a suitable framework for such an analysis. A historical
institutional approach is also the most appropriate to analyse the Japanese
political system. The mechanism based on autonomous bureaucracy and
cooperation between bureaucrats and party politicians has followed a
path-dependent process since its establishment in the Meiji era. Therefore
a historical perspective, exploring its original political settings and
following its incremental adaptation, is crucial in order to examine whether
the mechanism has been dislodged since 1993 and if so, why such a disrup-
tion happened. The basis of the mechanism, bureaucratic autonomy, can
be analysed by focusing on organizational and relational factors. Therefore
in order to explore bureaucratic autonomy, an institutional perspective,
examining the institutional structure of bureaucratic organizations and
institutional relationships between bureaucrats and politicians, is essential.
These institutional structures of the Japanese bureaucracy and institutional
relationships between bureaucrats and politicians are historically embedded
in the Japanese political system. Their structure and characteristics have
been preserved in the present Japanese bureaucracy and its relationship
with politicians. Because of such path-dependent characteristics, in order
to understand the autonomy of the present Japanese bureaucracy and its
 A historical institutional approach 19
1111 relationship with politicians, a historical approach, exploring the political
2 backgrounds in the beginning of the Meiji era and the process of their
3 incremental adjustment, is crucial. A historical institutional approach can
4 appropriately explain the structure of the present Japanese political system
5111 and the disruption of the mechanism after 1993.
6
7
8
9
1011
1
2
3111
4
5
6
7
8
9
20111
1
2
3
4
5111
6
7
8
9
30111
1
2
3
4
5
6
7
8
9
40111
1
2
3
44
45111
3 The Japanese political
system from the Meiji era
to 1993

The Japanese political system under the Meiji

Constitution

Political parties under the Meiji Constitution

After the Meiji Revolution, in the 1870s and the 1880s, while the Hanbatsu1
government controlled the Japanese political system, a political movement
that demanded a parliamentary system grew up. The Hanbatsu government
could not neglect the surge of such public demands, and in 1882, an
Imperial Mandate was promulgated that proclaimed that the Imperial Diet
would be established in 1890. Responding to this Mandate, two political
parties, Jiy¥tø and Rikken Kaishintø, were formed in 1882. The two parties
were known as ‘Mintø’ (People’s Parties, as distinct from Government
Parties), and they confronted the Hanbatsu government.
Table 3.1 shows the number of seats held by each political party in the
First, Second and Third Sessions of the HR. When the first election of the
HR was held in July 1890, two parties, Jiy¥tø and Rikken Kaishintø,
between them obtained a majority in the HR (174 seats out of 300). There
were political parties that supported the Hanbatsu government, such as
Taiseikai and Ch¥økøshøbu, which were called ‘Ritø (Government’s
Party)’; however, they were overwhelmed by the Mintø in the HR.
As Table 3.1 shows, from the beginning the Mintø took the majority of
the HR, and they challenged the Hanbatsu government. For instance, in the
First Session of the HR, the Mintø strongly opposed the budget of the 1891
fiscal year (83 million yen), and the Hanbatsu government was forced to
slash the budget by 6.310 million yen. In the Second Session (opened on 21
November 1891), the confrontation between the Mintø and the Hanbatsu
government was so severe that the HR was dissolved on 25 December 1891
and the budget of the 1892 fiscal year was shelved. In February 1893, a
bill to impeach the second Itø Cabinet passed the HR. While the Mintø
were confronting the Hanbatsu government in the HR, leaders of the Mintø
sought a compromise with the Hanbatsu government. For example, Økuma
Shigenobu, the actual leader of Rikken Kaishintø, obtained the post of
 The political system from the Meiji era to 1993 21
1111 Table 3.1 The House of Representatives of the
2 Imperial Diet from the First to the
3 Third Session
4 The First Session
5111
6 Political party Number of seats
7
Jiy¥tø 131
8 Rikken Kaishintø 43
9 Taiseikai 85
1011 Others 41
1 Total 300
2
3111
4 The Second Session
5
Political party Number of seats
6
7 Jiy¥tø 90
8 Rikken Kaishintø 43
9 Jiy¥ Club 33
20111 Dokuritsu Club 20
Tomoe Kurabu 17
1 Taiseikai 46
2 Tøhoku Dømeikai 5
3 Others 5
4 Vacancy 1
5111 Total 260
6
7
8 The Third Session
9 Political party Number of seats
30111
1 Jiy¥tø 92
2 Rikken Kaishintø 38
3 Dokuritsu Club 25
Ch¥økøshøbu 84
4 Tøhoku Døshikai 9
5 Others 52
6
Total 300
7
8 Source: Sh¥giin and Sangiin eds, 1990.
9
40111
1 Foreign Minister in the Kuroda Cabinet (1888). Also, the Hanbatsu govern-
2 ment realized that it could not ignore the importance of political parties.
3 Some Hanbatsu politicians, such as Itø Hirobumi, sought to form a political
44 party in which Hanbatsu politicians could take the initiative, and he formed
45111 Rikken Seiy¥kai (Seiy¥kai) in 1890.
22 The political system from the Meiji era to 1993
Although political parties were formed as opponents to the Hanbatsu
government in the 1890s, changes in their membership and strategies had
occurred by the 1910s. Young enthusiasts who predominated among party
members in the 1890s were replaced by those who had successful careers
in business, journalism and bureaucracy (Duus 1968: 12–13). For instance,
the number of the leaders of Seiy¥kai who had experience of business
steadily increased from 38 (1900–1904) to 50 (1917–1920), whereas the
numbers of those from local politics declined from 77 (1900–1904) to 24
(1917–1920) (Duus 1968: 14).
As the membership of political parties changed, the strategies of
political parties also changed. They tried to participate in the decision-
making of the government and to obtain posts in administrative organ-
izations by cooperating with the Hanbatsu government. For example, in
1898 the Kenseitø supported the Yamagata Cabinet legislative programme
in the Diet in return for the government’s financial support for the expan-
sion of Kenseitø’s local strength. However, the cooperation broke down
after the Diet session was over, and the Yamagata Cabinet issued an
Imperial Order that reduced the accessibility of party members to the higher
positions of administrative ministries, such as the Ministry of Home Affairs
(Duus 1968: 10).
During the Taishø Democracy, from the beginning of the Taishø era
(1912) to the 15th May Event2 in 1932, the president of a ruling party in
the HR was generally appointed as the Prime Minister. Table 3.2 shows
the names of the Prime Ministers and their political parties from 1906 to
1932. However, the era of party politics lasted for only a short period.
After the 15th May Event in 1932, in which the then Prime Minister Inukai
Tsuyoshi was assassinated by a group of junior military officials, the era
of party cabinets ended and all political parties were dissolved in 1940.

Japanese bureaucracy under the Meiji Constitution

The Japanese bureaucracy was gradually systematized in the 1870s and
the 1880s. Immediately after the Meiji Restoration, Chøshi (those recruited
by the Hanbatsu government from each han (fief)) and Køshi (those
seconded from each han) were engaged in the administration of the
Hanbatsu government. Since an administration system was not fully orga-
nized and a parliamentary system had not been introduced, administrative
officials in the early stage of the Meiji era had characteristics both of politi-
cians and of bureaucrats. For instance, influential politicians, such as
Yamagata Aritomo, Itø Hirobumi, and Inoue Kaoru, were actually engaged
in practical administration as bureaucrats (Sasaki 2000: 105).3
The Ordinance of 1869 provided for the organization of an administra-
tive system (Dajøkansei; the administrative system of two offices and six
ministries), and classified bureaucrats into three categories, Chokujukan,
Søjukan and Hanjukan (later renamed Chokunin-kan, Sønin-kan and
 The political system from the Meiji era to 1993 23
1111 Table 3.2 Prime Ministers from 1906 to 1932
2
No Prime Minister Term Political party
3
4 12 Saionji Kinmochi 07.01.1906 to 14.07.1908 Rikken Seiy¥kai
5111 13 Katsura Tarø 14.07.1908 to 30.08.1911
6 14 Saionji Kinmochi 30.08.1911 to 21.12.1912 Rikken Seiy¥kai
15 Katsura Tarø 21.12.1912 to 20.02.1913
7 16 Yamamoto Gonnohyøe 20.02.1913 to 16.04.1914
8 17 Økuma Shigenobu 16.04.1914 to 09.10.1916
9 18 Terauchi Masatake 09.10.1916 to 29.09.1918
1011 19 Hara Kei 29.09.1918 to 04.11.19211 Rikken Seiy¥kai
1 20 Takahashi Korekiyo 13.11.1921 to 12.06.1922 Rikken Seiy¥kai
21 Katø Tomosaburø 12.06.1922 to 25.08.19232
2 22 Yamamoto Gonnohyøe 02.09.1923 to 07.01.1924
3111 23 Kiyoura Keigo 07.01.1924 to 11.06.1924
4 24 Katø Takaaki 11.06.1924 to 28.01.19263 Kenseikai
5 25 Wakatsuki Reijirø 30.01.1926 to 20.04.1927 Kenseikai
6 26 Tanaka Giichi 20.04.1927 to 02.07.1929 Rikken Seiy¥kai
27 Hamaguchi Osachi 02.07.1929 to 14.04.19314 Rikken Seiy¥kai
7 28 Wakatsuki Reijirø 14.04.1931 to 13.12.1931 Rikken Seiy¥kai
8 29 Inukai Tsuyoshi 13.12.1931 to 16.05.19325 Rikken Seiy¥kai
9
20111 1 Uchida Y¥ya (temporary): 4.11.1921–13.11.1921 (Hara Kei was assassinated on 4.11.1921)
2 Uchida Y¥ya (temporary): 25.8.1923–2.9.1923
1 3 Wakatsuki Reijirø (temporary): 26.1.1926–30.1.1926
2 4 Shidehara Kij¥rø (temporary): 15.11.1930–9.3.1931
3 5 Takahashi Korekiyo (temporary): 16.5.1932–26.5.1932 (Inukai Tsuyoshi was assassinated
on 15.5.1932)
4
5111
6 Han’nin-kan respectively). In 1886, a cabinet system was introduced, and
7 the administrative system was reorganized into 10 ministries: Imperial
8 Household, Foreign Affairs, Home Affairs, Finance, Army, Navy, Justice,
9 Education, Agriculture and Commerce, and Post and Communication. In
30111 1886, the ministry system was systematized and the Administrative Vice
1 Minister, the Secretary, the Directors and the Councillors were inaugurated
2 in each ministry.
3 As the ministry system was organized, the employment system of career
4 officials changed from free appointment to a qualifying examination sys-
5 tem. As explained above, civil officials were classified into 3 categories,
6 Chokunin-kan, Sønin and Hannin, according to their grades. The classifica-
7 tion consisted of 15 grades, and Chokunin-kan, the highest rank (the Admini-
8 strative Vice Ministers or the Directors General) was above third grade,
9 Sønin (career officials lower than the Chiefs of a division) was from seventh
40111 to fourth grade, and Hannin, the lowest rank, was from fifteenth to eighth
1 grade. At first, officials were freely recruited and appointed by each
2 ministry. However, the Hanbatsu government realized the necessity of a
3 recruiting system of career officials (Sønin level) based on a qualifying exam-
44 ination, in order always to be able to employ competent officials. In 1886,
45111 the Imperial University (later renamed Tøkyø Imperial University) was
24 The political system from the Meiji era to 1993
established in order to educate candidates for career officials, and the first
Civil Officials’ Examination (Bunkan Shiho Saiyø Shiken) was held in 1888.
After the discontinuation of this examination in 1891, the Civil Officials’
Appointment Ordinance (Bunkan Nin’yørei) of 1893 established a new
appointment system based on a new qualifying examination. The first
Higher Civil Officials’ Examination (Bunkan Nin’yø Køtø Shiken) was held
in 1894, and the examination was subsequently held once a year until 1942.
Figure 3.1 shows the appointment system based on the Ordinance of 1893.
As the examination system became fully established, the percentage
of career officials who passed the examination increased. The percentage
of Directors General of Bureaux who were examination-qualified rapidly
increased from 33 per cent in 1910 to 82 per cent in 1920. From 1918
to 1945 every Vice Minister in every ministry was examination-qualified
(Spaulding Jr 1971: 41).
The personnel system of career officials was also organized. Since the
Higher Civil Officials’ Examination was a qualifying examination, each
ministry maintained its right to employ new officials from those who passed
the examination. Each ministry employed new officials once a year from
new university graduates (most of them were graduates of the Law faculty
of Tøkyø Imperial University) who passed the examination (a closed-career
system). And each ministry also had the right to promote its officials. The

Present and former officials

1) former so-ninkan with 3 years’ service
2) present and former judges and
So-nin officials
prosecutors with 3 years’ service
3) diplomats and consuls with 2 years’
service

To-dai law graduates Main examination

All other candidates* Preliminary

examination
Hannin officials

Figure 3.1 Appointment system of the Ordinance of 1893

* After 1918, graduates of Køtø Gakkø (High Schools) and Daigaku Yoka (Preparatory Course
of Private Universities) were exempted from taking the preliminary examination.
Source: Spaulding Jr 1967: 104.
 The political system from the Meiji era to 1993 25
1111 promotion of career officials was generally based on a seniority rule. They
2 were promoted according to the year in which they were first employed.
3 Table 3.3 shows the names of Administrative Vice Ministers of Finance
4 and the years when they were first employed by the MOF. It shows that
5111 a seniority rule was strictly followed in the MOF, and the order of the
6 years of employment shows that, in general, a new Administrative Vice
7 Minister would be appointed from officials who were employed later than
8 his predecessor.4
9 As stated above, the structure of the Japanese bureaucracy, its organ-
1011 ization (ten ministries and the ministry system) and its personnel system
1 (the qualifying examination system, the closed career system and a
2
3111
4 Table 3.3 Administrative Vice Ministers of Finance from 1903 to 1945
5 Name Date of appointment Year of employment
6
7 Sakatani Yoshirø 05.12.1903 1884
8 Wakatsuki Reijirø 08.01.1906 1892
Mizumachi Kesaroku 13.04.1907 1891
9 Sakurai Tetsutarø 03.06.1908 not known
20111 Wakatsuki Reijirø 17.07.1908 1892
1 Hashimoto Keizaburø 08.09.1911 18971
2 Shøda Kazue 21.12.1912 1895
3 Hamaguchi Osachi 16.04.1914 1895
Sugawara Michitoshi 02.07.1915 1895
4 Shøda Kazue 09.10.1916 1895
5111 Ichiki Otohiko 16.12.1916 1896
6 Kanno Katsunosuke 02.10.1918 1896
7 Nishino Gen 14.06.1922 1902
8 Ono Giichi 11.06.1924 1903
Den Akira 12.08.1924 1904
9 Kuroda Hideo 22.03.1927 1905
30111 Kawada Isaoi 04.07.1929 1908
1 Kuroda Hideo 14.12.1931 1905
2 Fujii Sadanobu 21.05.1934 1909
3 Tsushima Juichi 10.07.1934 1912
Kawagoe Takeo 13.03.1936 1910
4 Kaya Okinori 02.02.1937 1917
5 Ishiwata Søtarø 05.06.1937 1916
6 Øno Ry¥ta 06.01.1939 1917
7 Hirose Toyosaku 22.07.1940 1917
8 Taniguchi Tsuneji 25.07.1941 1919
Matsukuma Hideo 24.03.1944 1921
9 Tanaka Yutaka 23.02.1945 not known
40111 Yamagiwa Masamichi 13.04.1945 1925
1
Notes: Date of appointment: the date of appointment as an Administrative Vice Minister of
2 Finance
3 Date of employment: the date of first employment as an official of MOF
44 1 Appointed an assistant officer of the Cabinet Legislation Bureau in 1890
45111 Sources: Økurashø Zaisei Shitsu 1998: 454; Hata and Senzenki Kantyøsei kenky¥kai 1981.
26 The political system from the Meiji era to 1993
seniority rule) was established by the 1900s. As a result of this, the Japanese
bureaucracy fulfilled two organizational prerequisites for bureaucratic
autonomy: organizational integrity and organizational ability.
With regard to organizational integrity, independent administrative organ-
izations were systematized and the homogeneity of bureaucrats who shared
the same quality, academic backgrounds, inclination and behavioural pat-
terns were produced. The administrative organizations (which consisted of
ten ministries) and the ministry system were established by an Imperial
Ordinance, which did not require the approval of the Imperial Diet. Therefore
the Japanese bureaucracy did not owe its establishment and its existence to
the Imperial Diet. The personnel system and the employment system accen-
tuated the homogeneity of bureaucrats. Each ministry employed new offcials
only from applicants who had passed the Higher Civil Officials’ Exam-
ination. New officials who passed this examination were almost all gradu-
ates of the Law Faculty of Tøkyø Imperial University, and the proportion of
graduates of the Law faculty who passed the examination from 1894 to 1943
was about 60 per cent (Hata 1983: 17). Bureaucrats were generally promoted
in the ministry that had originally employed them, and they accumulated
expertise through on-the-job training. As a result, they achieved the pattern
of thinking and behaving that was unique to their ministry. The educational
background, the closed career system and the on-the-job training system
brought about a unique culture and homogeneity in each ministry.
Concerning organizational ability, the highly competitive examination
and the monopolization of expertise gave bureaucrats an outstanding ability
to plan policies. The Higher Civil Officials’ Examination was a formidable
barrier. Almost every year about 90 per cent of applicants failed the exam-
ination (Spaulding Jr 1971: 41). Furthermore, a closed career system based
on the competitive qualifying examination and on-the-job training enabled
bureaucrats to keep the expertise and information of policy-making to
themselves, which definitely distinguished bureaucrats from other political
actors in terms of their ability to plan policies.

The relationship between politicians and bureaucrats

under the Meiji Constitution

Bureaucrats’ attitude towards politicians: transcendentalism

When the Imperial Diet was established and the Mintø obtained a majority
in the HR, bureaucrats took on an independent attitude towards party politi-
cians. Such an attitude was called ‘transcendentalism’. Transcendentalism
originated from a speech that Prime Minister Kuroda Kiyotaka presented
to prefectural governors in 1890. He addressed them as follows: ‘The Gov-
ernment must always steadfastly transcend and stand apart from the politi-
cal parties and thus follow the path of righteousness’ (Banno 1971: 9). Later,
the meaning of transcendentalism expanded from the denying of party
 The political system from the Meiji era to 1993 27
1111 cabinets to the ‘ignoring of the legislature by the executive’ (Banno 1971:
2 31). Tsuzuki Keiroku, an official of the Ministry of Home Affairs (MHA)
3 at that time, insisted in his article ‘Transcendentalism’ (1892) that govern-
4 ment officials were responsible only to the Sovereign and not to the Diet
5111 or the people, so that they should execute the ‘national interest’. It was an
6 outspoken declaration of the ‘absolute superiority of the executive to the
7 legislature’ (Banno 1971: 32).
8 The highly competent self-image and reputation based on a qualifying
9 examination system, a closed-career system and an independent personnel
1011 system (as explained in the previous section) constituted the bureaucrats’
1 privileged status and strengthened ‘transcendentalism’. Bureaucrats consid-
2 ered that only they themselves represented national interests as the Emperor’s
3111 servants. Tsuzuki Keiroku openly declared in his essay ‘Minseiron’ (Civil
4 Government) that the members of the House of Representatives had no
5 expertise to deal with national political issues, and that they followed
6 public opinion blindly (Banno 1971: 34–5).
7
8
From confrontation to cooperation – the establishment
9
of the mechanism
20111
1 From the 1890s to the beginning of the 1900s, the political parties, which
2 were excluded from the decision-making process of the government, and
3 the Hanbatsu government fiercely confronted each other. Bureaucrats took
4 a transcendental attitude towards political parties, and they did not seek
5111 party politicians’ cooperation in legislation during this period. On the other
6 hand, through severe confrontation between political parties and the
7 Hanbatsu government in the House of Representatives of the Imperial Diet,
8 some Hanbatsu politicians began to accept political parties as an inevitable
9 part of the political process. The establishment of the Seiy¥kai in 1900 by
30111 Itø Hirobumi, a prominent Hanbatsu politician, reflected such a change in
1 the attitude of Hanbatsu politicians.
2 The increase of military expenditure due to the Sino-Japanese War
3 (1894–1895) and the Russo-Japanese War (1904–1905) forced the Han-
4 batsu government to compromise with political parties. Under the Meiji
5 Constitution, the government could execute the previous fiscal year’s
6 budget when the House of Representatives did not pass the budget (Article
7 71 of the Meiji Constitution). Nevertheless, the budget of the previous
8 fiscal year was not enough to cover the increasing military expenditure. It
9 was necessary for the Hanbatsu government to pass the current year’s
40111 budget. As for political parties, by the 1910s, their membership and strat-
1 egies had changed. The young enthusiasts who had been the party members
2 in the 1890s were replaced by party members who had successful careers
3 in business, journalism and bureaucracy. Those who had experience in the
44 government as career officials or in a business field took over the party
45111 leadership (Duus 1968: 12–15). As the composition of party membership
28 The political system from the Meiji era to 1993
changed, the strategies of political parties also changed from confronting
the Hanbatsu government to participating in the decision-making process
of the government. On the one hand, bureaucrats had to compromise with
party politicians in order to implement the budget that covered increasing
military expenditure; on the other hand, party politicians sought to coop-
erate with bureaucrats in order to participate in the decision-making process
of the government and to obtain some positions of ministries. Thus a mech-
anism was consolidated in which bureaucrats initiated and created policies
and cooperated with party politicians to put those policies into legislation.

Politicians’ intervention in bureaucrats’ personnel matters

during the era of party cabinets
Although the Japanese bureaucracy established its independent personnel
system, party politicians tried to intervene in the bureaucrats’ personnel mat-
ters in order to expand their political power. During the Taishø Democracy
(from the beginning of the 1910s to the beginning of the 1930s), ruling par-
ties frequently intervened in personnel matters of the Ministry of Home
Affairs (MHA). The jurisdiction of the MHA included regulation of elec-
tion campaigns and the allocation of public works, areas closely related to
politicians’ interests. The Police and Security Bureau of the MHA had
authority in the personnel matters of the Chief of the Police Headquarters
in each prefecture, and the Chiefs of Police Headquarters in each prefec-
ture who were responsible for the regulation of election campaigns. The
Public Construction Bureau and the governor of each prefecture, who was
appointed by the MHA, had the authority to decide on public works and
contractors. Therefore ruling parties tried to intervene in the appointments
of the Director General of Police and Security Bureau, the Superintendent
General of the Metropolitan Police and governors of a prefecture, in order
to win the next election (Mizutani 1999: 173). For example, Hara Kei
(Seiy¥kai) was appointed the Minister of Home Affairs three times – in the
First and the Second Saionji Cabinet (1906–1908, 1911–1913) and the First
Yamamoto Cabinet (1913–1914) – and he promoted MHA officials who
had been ordered to take leave of absence or who had been relegated under
anti-Seiy¥kai cabinets. Suzuki Kisaburø, Minister of Home Affairs of the
Tanaka Cabinet (1927–1929), dismissed or ordered to take leave of absence
17 governors who were regarded as anti-Seiy¥kai. Adachi Kenzø, Minister
of Home Affairs of the Hamaguchi Cabinet (Minseitø, 1929–1931) gave 12
officials leave of absence, dismissed 16 officials and relegated 39 officials
(Mizutani 1999: 191–3). In order to protect their positions or their promo-
tion, some MHA officials voluntarily cooperated with the Seiy¥kai and
became its members. However, many MHA officials and some governors
resisted excessive intervention by the Seiy¥kai. They formed anti-Seiy¥kai
groups in order to protect bureaucrats’ autonomy.
 The political system from the Meiji era to 1993 29
1111 The several revisions of the Civil Officials’ Appointment Ordinance
2 reflect the conflicts between bureaucrats and party politicians over the
3 MHA’s personnel matters. In 1898 the second Yamagata Cabinet revised
4 the Ordinance and abolished free appointment with respect to the posts of
5111 Director General of Police and Security and the Superintendent General of
6 the Metropolitan Police, in order to protect these posts from intervention by
7 politicians. In 1913, the First Yamamoto Cabinet revised the Ordinance and
8 increased the number of posts of free appointment. In 1914, after the First
9 Yamamoto Cabinet resigned following a political scandal, the Ordinance
1011 was revised again, and free appointment was abolished for the posts of
1 Director General of Police and Security and the Superintendent General of
2 the Metropolitan Police. In 1920, the first substantial party cabinet, the Hara
3111 Cabinet (Seiy¥kai), revised the Ordinance and the two posts became free
4 appointment posts. However, after the 15th May Event in 1932, which ended
5 the era of party cabinets, the Ordinance was revised yet again and free
6 appointment was abolished for the two posts.
7 Unlike the MHA, the MOF avoided such interventions. MOF officials
8 were regarded as cautious about having contacts or cooperating with party
9
politicians publicly (Mizutani 1999: 193). The personnel system of the
20111
MOF was based on the results of university examinations and the Higher
1
Civil Officials’ Examination, and it was operated on a strict seniority rule.
2
In addition, budget compilation was regarded as highly technical. Therefore
3
party politicians lacked a strong motive to intervene in the personnel
4
5111 matters of the MOF (Mizutani 1999: 196).5
6 Although party politicians intervened in the personnel matters of the
7 MHA, such intervention occurred only in a limited period from 1906 to
8 1932. As the details of the revision of the Civil Officials’ Appointment
9 Ordinance illustrates, intervention by politicians faced resistance from
30111 bureaucrats determined to protect their autonomy in their personnel matters.
1 Furthermore, the area of such intervention was limited to particular posi-
2 tions in the MHA, such as the governor of each prefecture or the Director
3 General of the Police and Security Bureau, and other ministries succeeded
4 in protecting their independence from party politicians.6
5 Therefore, in general, until 1945 bureaucrats maintained autonomy in
6 their personnel matters. Table 3.4 shows the names of Directors General
7 of the Local Administration Bureau of the MHA and the years when they
8 were first employed. Although politicians’ interventions in personnel
9 matters of the MHA were the most frequent and conspicuous compared
40111 with other ministries, the appointment of the Director General of the Local
1 Administration Bureau, one of the key posts of the MHA, was generally
2 based on a seniority rule. Table 3.4 shows that, in general, each new
3 Director General of the Local Administration Bureau was appointed from
44 the group of officials who were first employed later than that Director
45111 General’s predecessor.
30 The political system from the Meiji era to 1993
Table 3.4 Directors General of the Local Administration Bureau of the MHA from
1902 to 1945
Name Date of appointment Year of employment
Yoshihara Saburø 08.02.1902 18891
Tokonami Takejirø 17.01.1906 18902
Mizuno Rentarø 04.09.1911 18933
Yuasa Kurahei 22.12.1912 1898
Kobayashi Ichita 01.06.1913 1898
Watanabe Shøzaburø 28.04.1914 1897
Soeda Keiichirø 17.12.1917 1898
Kobashi Ichita 05.10.1920 1898
Tsukamoto Seiji 09.10.1920 1904
Tsukamoto Seiji 21.04.1921 1904
Ushio Shigenosuke 01.11.1922 1908
Ushio Shigenosuke 16.05.1928 1908
Sagami Shin’ichi 25.05.1928 1911
Tsugita Daizaburø 05.07.1929 1910
Minabe Chøji 15.04.1931 1911
Øno Rokuichirø 18.12.1931 1913
Kawarada Kakichi 29.01.1932 1910
Yasui Eiji 04.03.1932 1916
Okada Sh¥zø 15.01.1935 1915
Ømura Seiichi 13.03.1936 1918
Saka Chiaki 10.02.1937 1919
Hazama Shigeru 17.04.1939 1920
Tomeoka Yukio 24.07.1940 1919
Narita Ichirø 20.10.1941 not known
Furui Yoshimi 15.06.1942 1925
Arai Zentarø 01.07.1943 1923
Nadao Hirokichi 18.04.1944 1924
Irie Seiichirø 09.04.1945 1926
Note: Date of appointment: the date of appointment as Director General of Local Adminis-
tration Bureau
Year of employment: the year of first being employed by the MHA
1 employed by Provisional Secretariat of the Imperial Diet
2 employed by the MOF
3 employed by the Ministry of Agriculture and Commerce
Source: Hata and Senzenki Kanryøsei Keny¥kai 1981.

Bureaucrats’ superiority in policy-making

Bureaucrats monopolized policy-making expertise from the beginning of
the Meiji era. Immediately after the Meiji Restoration, many bureaucrats
were also politicians and they executed political and economic reforms.
Bureaucrats inherited the characteristic of a politician as a policy-maker.
Bureaucratic systems were structured to protect the vulnerable government
from pressure from outside, especially from political parties, which were
demanding political participation. Expertise and information about policy-
 The political system from the Meiji era to 1993 31
1111 making was centralized in administrative organizations by adopting a
2 closed career system and an on-the-job training system. The independence
3 of administrative organizations from the Imperial Diet was preserved by
4 the Meiji Constitution, which provided that the Emperor had the authority
5111 to determine the organizations of administrations and to appoint and
6 dismiss officials (Article 9). As a result, the Japanese bureaucracy secured
7 its independence from political parties, and their monopoly of expertise
8 and information was reinforced through a closed career system based on a
9 competitive qualifying examination.
1011 On the other hand, party politicians generally lacked experience and
1 expertise in policy-making. When the Imperial Diet was established, politi-
2 cal parties were formed as opponents to the Hanbatsu government. Although
3111 political parties demanded their participation in policy-making processes,
4 they were excluded from the decision-making process of the government.
5 During the Taishø Democracy, party politics flourished; however, its dura-
6 tion was relatively short (from the beginning of the 1910s to 1932), and the
7 areas in which party politicians were interested – such as public works, public
8 security and police works – were ones that affected the results of elections
9 and were also limited. Many party politicians were regarded as representing
20111 the interests of particular influential groups in their constituencies.7
1 In general, party politicians did not commit themselves to initiating
2 policy innovation.8 For example, bills submitted by the government were
3 usually drafted by bureaucrats and then approved by the cabinet to submit
4 to the Imperial Diet. The proportion of bills submitted by members of the
5111 HR that were passed by the Imperial Diet during the Taishø Democracy
6 (from the 30th to the 60th session) remained remarkably low – 6.21 per cent
7 – compared with the proportion of bills submitted by the cabinet (mostly
8 created by bureaucrats) that were passed by the Imperial Diet – 80.22
9 per cent. Furthermore, this proportion is lower than both that of previous
30111 sessions (from the 1st to the 29th sessions, 13.5 per cent) and the average
1 rate (9.26 per cent).
2 Bureaucrats’ superiority in policy-making was also reflected in the
3 appointment of Ministers. It was not unusual for ex-career officials to be
4 appointed as Ministers. For instance, with regard to the past Ministers of
5 Finance from 1885 to 1945, 25 out of 51 Ministers were ex-MOF officials.
6 Following Sakatani Yoshirø (from 7 January 1906 to 14 January 1908),
7 all Ministers of Finance who were ex-MOF officials had had experience
8 in the position of Administrative Vice Minister of Finance.
9 While bureaucrats prided themselves that they were the only actors
40111 who were pursuing the national interest and who had the ability to plan
1 policies, party politicians were criticized as corrupt and representing a
2 particular interest group, zaibatsu (big business groups). As the franchise
3 was extended, the cost of election campaigns rapidly increased from
44 4,976,672 yen in 1915 to 21,910,689 yen in 1924 (Duus 1968: 19). Because
45111 of this inflation of election costs, the ability to fundraise became important
32 The political system from the Meiji era to 1993
for party leaders, and they increasingly depended on big business groups –
such as the Seiy¥kai and Mitsui zaibatsu, and the Minseitø and Mitsubishi
zaibatsu – for political funds. Such dependence on zaibatsu caused criti-
cism among the public that political parties represented the interests of
zaibatsu. First Lieutenant Koga Kiyoshi, one of the leaders of the 15th May
Event, accused party politicians: ‘Japan now faces a serious circumstance.
Politicians should implement reforms. However, they are absorbed in
pursuing their own benefits by cooperating with the zaibatsu. Politicians
ignore their duties . . .’ (Hayashi and Tsuji 1981: 281).
After the 15th May Event in 1932, the era of party cabinets ended and
bureaucrats came to the fore of Japanese politics. Gordon Mark Berger
argues that the main cause for the decline of party power and prestige in
the 1930s was that the ability of party politicians to deal with sophisti-
cated policies, such as the control of the national economy, was widely
questioned (Berger 1977: 59). For instance, Minobe Tatsukichi, a distin-
guished professor of the Law Faculty of Tøkyø Imperial University, was
a highly respected intellectual and his theory of the Meiji Constitution
supported the growth of party politics from the 1920s to the beginning of
the 1930s; however, he publicly questioned the ability of party politicians
in an article published in 1934:

The Imperial Diet has, in general, dealt with political issues, such as
the freedom of assembly and speech or the extension of the franchise.
. . . Only common sense was required to decide issues which the
Imperial Diet has dealt with. Therefore, party politicians, who have
had training and obtained common sense through discussion in the
Imperial Diet, could manage to decide national policies. . . . However,
political and economic circumstances have changed. The control on
finance, production, and labour has become the most important national
issue. . . . Such economic issues, especially control of economic activ-
ities can be decided appropriately only by those who have specialised
knowledge not by those who have plain common sense. The deliber-
ation in the Imperial Diet, which consists of several hundreds of
politicians who are ‘amateur’ regarding economic issues, is not an
appropriate way to decide such economic issues, and party politicians,
who have only plain common sense, are not qualified to deal with
those issues.
(Minobe 1934: 10–11)

Although party politicians in general had not committed themselves to

planning policies since the Meiji era, the capacity of party politicians to
engage in policy-making was publicly questioned when the Japanese
economy experienced the serious depression and the financial crisis that
began in 1927.
 The political system from the Meiji era to 1993 33
1111 Conclusion: the relationship between politicians and
2 bureaucrats under the Meiji Constitution
3
From the beginning of the Meiji era the Japanese bureaucracy achieved the
4
two organizational factors of bureaucratic autonomy: organizational integ-
5111
rity and organizational ability. Its structure – the closed career system based
6
on the competitive qualifying examination and the independent personnel
7
system, established in the early Meiji era – enhanced and reproduced its
8
integrity and ability. Japanese bureaucrats under the Meiji Constitution
9
committed themselves to initiating and planning policy innovation, regard-
1011
ing themselves as the only actors to pursue the national interest. Bureaucrats
1
maintained their superiority over party politicians in policy-making. Never-
2
theless, under the parliamentary system, the cooperation of party politicians
3111
was indispensable to putting plans and budgets drafted by bureaucrats
4
into effect. On the other hand, party politicians could not get the oppor-
5
tunity to accumulate experience and expertise to plan policies since
6
political parties were formed in opposition to the government. Accordingly,
7
the mechanism – based on bureaucrats’ superiority in policy-making and
8
cooperation between bureaucrats and party politicians in the legislative
9
process of policies created by bureaucrats – was consolidated. Although
20111
party politics were put into practice during the Taishø Democracy and party
1
politicians intervened in the personnel matters of bureaucrats, party politi-
2
cians in general did not commit themselves to initiating and planning
3
policies. Thus the mechanism was maintained under party cabinets during
4
the Taishø Democracy.
5111
6
7
The Japanese bureaucracy after the 15th May Event
8
9 Immediately after the 15th May Event in 1932, which ended the era of party
30111 cabinets, the army did not intend to assume the political power of the
1 parties. As a result, there was ‘a power vacuum into which career bureau-
2 crats soon moved’ (Spaulding Jr 1970: 53). For example, under the Okada
3 Cabinet (from July 1934 to March 1936), led by the Minister of Home
4 Affairs, Gotø Fumio, who had been a prominent bureaucrat, Committees
5 on Election Campaign Discipline were established in each town, village
6 and prefecture. Through these committees, control by the MHA penetrated
7 into the smallest unit of association in every town and village (Hashikawa
8 1965: 254). After the 26th February Event9 in 1936, the army increasingly
9 expanded its power and attempted to permeate civil administration. Rather
40111 than the relationship with party politicians, it was the relationship with the
1 army that became crucial to understanding the Japanese bureaucracy from
2 1936 to the end of the Second World War.
3 The theme of this book, however, is the relationship between party
44 politicians and bureaucrats. Therefore, in this section I present only a
45111 brief description of the Japanese bureaucracy’s relationship with the army
34 The political system from the Meiji era to 1993
during this period, which shows the tenacious structure of the Japanese
bureaucracy in spite of persistent intervention by the army.
The Japanese bureaucracy from 1936 to the end of the Second World
War in 1945 can be described from two aspects: expansion of bureaucratic
power and intervention by the army.
With regard to the expansion of bureaucratic power, increasing demand
for state control of economic and social activities brought about the pene-
tration of bureaucratic power into those areas. After the war in Manchuria
(1931) and in China (from 1937), the necessity of regulating economic and
social activities was advocated by the army and bureaucrats to prepare for a
total war. To win a total war, a nation is required to devote all kinds of
resources, not only military resourses but also economic and social resources.
The government’s intervention in those areas greatly increased, and this
brought about considerable expansion of bureaucratic power. In 1938, the
Imperial Diet passed two important laws: the National Mobilization Law
(Kokka Sødøinhø), which provided ‘a sweeping delegation of authority to
impose economic controls on labour and capital by executive ordinance
alone’ (Spaulding Jr 1970: 64); and the Electric Power Control Law (Den-
ryoku Kanrihø), which nationalized the electric power industry. The passage
of those laws symbolized an expansion of bureaucratic power. Following the
National Mobilization Law, 42 ordinances10 were enacted, which enabled
bureaucratic power to penetrate every aspect of economic, social and cul-
tural activities (Shibagaki 1979: 298). According to the Ordinance of Organ-
izations of Key Industries (J¥yø Sangyø Tøseirei), organizations (Tøseikai)
were established from 1941 to 1942 in order to form a cartel in each key
industry, through which the government regulated key industries. As will be
explained later in this chapter, the wide-ranging regulatory administration
during this period remained after the Second World War, and this sustained
the expansion of bureaucratic power.
The other aspect to be described – the intervention by the army in
the civil administrative area – took two forms: attempts to take the leader-
ship regarding national mobilization policies; and attempts to reform
administrative organizations.
With respect to the leadership in national mobilization policies, the Army
Ministry strongly supported the establishment of the Cabinet Planning
Board (CPB) in 1937. After the war with China broke out in July 1937,
the CPB was established to plan general policies of mobilization. In the
CPB, the appointing of army and navy officers on active duty to staff
positions was permitted, which breached the traditional barrier between
the civil and military services. The Army attempted to make the CPB the
central organization to control national mobilization policies being under
the direct control of the Prime Minister. The Army intended to take the
leadership in national mobilization policies through this organization.
However, not only bureaucrats but also the Navy strongly opposed the
Army’s intention. As a result, the superiority of the CPB to other ministries
 The political system from the Meiji era to 1993 35
1111 was denied. Article 1 of the Ordinance of the Cabinet Planning Board
2 provided that, with respect to important issues presented by other minis-
3 ters to the cabinet meeting, the CPB could report its opinions through the
4 Prime Minister to the Cabinet. The ordinance gave the CPB only the oppor-
5111 tunity to report its opinions, and it did not provide it with authority to
6 supervise other ministries. Although the CPB succeeded in legislating
7 the National Mobilization Law, drafting concrete plans and their imple-
8 mentation were delegated to established ministries, and the CPB did not
9 necessarily take the leadership. For instance, in the process of enacting the
1011 Ordinance of Organizations of Key Industries, the CPB fiercely confronted
1 the Ministry of Commerce and Industry (MCI). The CPB insisted on
2 enacting an ordinance regarding each industry, while the MCI insisted
3111 on one ordinance which would be applied to all industries. The CPB made
4 a concession to the MCI, and an Ordinance of Organizations of Key Indus-
5 tries that would be applied to all key industries was enacted (Shibagaki
6 1979: 312).
7 Concerning attempts at administrative reform, the army attempted to
8 integrate the personnel matters of bureaucrats into a central organization
9 in order to control appointments and promotion of civil officials. In 1936,
20111 the Hirota Cabinet (March 1936 to February 1937) put the reform of
1 administrative organizations on its political agenda, and the Ministers
2 of Army and Navy presented ‘Guidelines for Reform of Administrative
3 Organizations’. It proposed the establishment of a central organization that
4 would have the authority to decide the personnel matters of bureaucrats.
5111 Bureaucrats of every ministry ‘were singularly united in adamant opposi-
6 tion to a centralized civilian personnel bureau’ (Spaulding Jr 1970: 74).
7 Although six successive cabinets11 attempted to enact an Ordinance that
8 would establish a Cabinet Personnel Bureau, all attempts failed. The Army’s
9 attempt to establish a central personnel organization ‘vanished into thin air’
30111 (Ide 1974: 158) because of strong opposition from bureaucrats. Indeed,
1 so-called ‘revisionist bureaucrats’12 were ‘much more willing than other
2 bureaucrats to act . . . across the line between the civil and military services’
3 (Spaulding Jr 1970: 61) Nevertheless, the relationship between revisionist
4 bureaucrats and army was not necessarily harmonious. Young extremists in
5 the Army’s Imperial Way (Kødø) faction13 ‘put the civil service on the list
6 of their enemies’ (Spaulding Jr 1970: 57), and ‘by 1935 they no longer
7 regarded revisionist bureaucrats as exceptions to the rule’ (Spaulding Jr
8 1974: 70). At the beginning of 1936, the army attempted to separate the
9 Trade Bureau of the Ministry of Foreign Affairs and to make an indepen-
40111 dent Trade Ministry. Bureaucrats fiercely opposed this plan. After negotia-
1 tions between the CPB, the Cabinet Legislative Bureau, the MOF and
2 the MHA, the Cabinet approved a revised plan. The Trade Bureau Chief
3 and more than a hundred officials of the Ministry of Foreign Affairs resigned
44 in protest. As a result, the Trade Ministry Ordinance was withdrawn, the
45111 officials then withdrew their resignations and the Army abandoned its plan
36 The political system from the Meiji era to 1993
(Spaulding Jr 1974: 73). Even revisionist bureaucrats were ‘staunchly
opposed to appointing non-career men to chokunin positions (career
officials’ positions)’ (Spaulding Jr 1974: 75). Kazami Akira, the Cabinet
Secretary of the First Konoe Cabinet, wrote in his memoirs:

[When he (Konoe) began to revise the Imperial Ordinance of Civil

Officials Appointment] four or five revisionist bureaucrats (Kakushin
Kanryø) came to see me. I thought they agreed with the revision and
came to encourage me. To my surprise, their attitudes were quite oppo-
site. They absolutely opposed the revision and they came to see me
to tell their strong opposition.
(Kazami 1950: 153)

The influence of the Army during this period is not deniable, but the failure
of the Army’s attempts to take the leadership in mobilization policies and
to reform administrative organizations highlights the strong resilience of
the Japanese bureaucracy.
The activities of the CPB and the revisionist bureaucrats seemed to be
conspicuous during this period. However, the strict state control policies
executed during this period were not necessarily the innovations of
revisionist bureaucrats. Rather, changes of political and economic cir-
cumstances pressured the government to take such policies (Spaulding Jr
1970: 60). Political circumstances greatly changed after the outbreak of
the war in China in 1937. The Japanese government began to prepare for
a total war against the United States or Russia, and in order to make
the most of limited resources, changing political, economic and social
systems became urgent issues for the Japanese government (Spaulding Jr
1970: 61–2). It can therefore be said that state control of economic and
social activities was not necessarily a policy innovation by revisionist
bureaucrats. It was planned and implemented by bureaucrats (not always
revisionist bureaucrats) as required measures responding to the political
and economic circumstances at that time, which demanded preparation for
a total war.

Political reforms after the Second World War

After the Second World War, the Supreme Command for the Allied Powers
(SCAP) and the General Headquarters’ Office (GHQ) executed political,
social and economic reforms. The New Constitution was enacted in 1946
as the symbol of the new Japanese political and social system. The Emperor
became the symbol of the State and lost his position as Supreme Sovereign.
The New Constitution declares that the Diet has supreme sovereignty
of the nation (Article 41), and it monopolizes the legislative authority and
the approval of the next year’s budget (Articles 41, 83). The leader of a
majority party in the Diet is supposed to be appointed Prime Minister by
 The political system from the Meiji era to 1993 37
1111 an election in the Diet. The status of bureaucrats changed from that of
2 Emperor’s servants to that of public servants (The National Public Service
3 Law, Article 96). The Cabinet and Ministers control civil officials by
4 having the authority to appoint Ministry officials (The National Public
5111 Service Law, Article 55).
6 In spite of such political reforms after the Second World War, continuity
7 can be observed in the political institutions and institutional relationships
8 before and after the Second World War. The following sections examine
9 structural continuity in the Japanese bureaucracy – in its organizations
1011 and its personnel system – and in the relationships between politicians and
1 bureaucrats.
2
3111
4 The continuity in the Japanese bureaucracy before and after
5 the Second World War
6 Despite the reform of the civil service system executed by the GHQ, the
7 structure and characteristics of the Japanese bureaucracy before the Second
8 World War remained under the New Constitution.
9 The GHQ adopted ‘an indirect governing style’ (Kansetsu Tøchi
20111 Høshiki). Instead of implementing economic, social and political reform
1 by itself, the GHQ decided to govern by using Japanese administrative
2
organizations. The GHQ needed both the expertise and the help of Japan-
3
ese bureaucrats to implement reform, so ‘reform of the bureaucracy itself
4
had to take second place in the scale of priorities’ (Stockwin 1999: 106).
5111
A division in the GHQ over the principle of occupation was also advan-
6
7 tageous to Japanese bureaucrats. The Government Section of the GHQ
8 (GS) advocated thorough reform to achieve complete democratization
9 of Japan; on the other hand, the Military Intelligence of the GHQ (G-2)
30111 gave priority to maintaining public order in consideration of the political
1 tension surrounding Japan after the Second World War. When the GS
2 created a list to purge politicians, businessmen, military and civil officials
3 from their positions, this was strongly opposed by the G-2, who insisted
4 that the number and range of civil officials to be purged should be substan-
5 tially limited (Mastuda 1996: 8–9). As a result, the number of bureaucrats
6 purged from their positions was significantly limited (1,809) as compared
7 to the number of politicians (about 35,000) and military officials (about
8 167,000) (Mizutani 1999: 302–3). In the Japanese establishment, only
9 bureaucrats remained almost unharmed by the purge.
40111 As for administrative organizations, all ministries, except for the Minist-
1 ries of Army, Navy and Home Affairs (MHA), survived. The MHA was
2 divided into several organizations, such as the Ministry of Construction, the
3 Prime Minister’s Agency and the National Public Safety Commission.
44 However, in 1960, organizations whose jurisdiction was local administration
45111 were reintegrated and restored as the Ministry of Home Affairs.
38 The political system from the Meiji era to 1993
Concerning the personnel system of bureaucrats, the autonomy of each
ministry in its personnel matters was hardly damaged by the GHQ’s reform.
The GHQ attempted to integrate the authority to decide bureaucrats’
personnel matters into the National Personnel Authority. However, each
ministry succeeded in protecting its actual authority to recruit its new
officials independently. Since 1949 the National Civil Servants’ Examin-
ation has been held once a year, and each ministry has independently
employed new officials from those who pass the examination. The major-
ity of career officials has consisted of graduates from Tøkyø University
(Tøkyø Imperial University was renamed Tøkyø University after the
Second World War). The proportion of graduates of Tøkyø University who
were employed by the MOF (Higher Class Officials) from 1949 to 1963
was 83 per cent, which illustrates the fact that in the MOF, graduates of
Tøkyø University greatly outnumbered those of other universities (Hata
1983: 54). Thus the closed career system based on a qualifying examina-
tion and the university from which most career officials graduated scarcely
underwent any changes in spite of reforms conducted by the GHQ. With
regard to the promotion of bureaucrats, a seniority rule also remained.
Furthermore, bureaucrats maintained their influence on economic and
social activities. The GHQ implemented its policies through the Japanese
bureaucracy. Immediately after the Second World War, the Japanese econ-
omy was largely destroyed, and Japan lacked capital, infrastructure, energy
and facilities to restore its economy. To achieve rapid economic recovery,
the government depended on administrative regulation to utilize limited
resources. Noguchi Yukio refers to the Japanese economic and social sys-
tems after the Second World War as ‘the 1940s system’, since the strict
regulation of economic and social activities introduced in the 1940s
remained in place after the Second World War (Noguchi 1995: 234–5). As
explained in the previous section, from the end of the 1930s, various
regulations were introduced in order to expand the production capacity of
military supplies by making the most of limited capital and resources. For
instance, the Foreign Exchange Control Law was entirely revised in 1941.
The trade in foreign exchange was completely regulated by the govern-
ment, and the ordinance of the MOF provided the details of regulation. This
comprehensive regulation of foreign exchange generally remained after the
Second World War. According to the Ordinance of Organization of Key
Industries (J¥yø Sangyø Tøseirei), organizations (Tøseikai) were established
from 1941 to 1942 in order to form a cartel in each key industry. The
government regulated key industries through those organizations. Noguchi
Yukio argues that this way of regulation, i.e. through Tøseikai, remained
after the Second World War as a way of regulation through organizations
of major industries (Noguchi 1995: 40–1). Such extensive regulation of
economic and social activity expanded and strengthened the bureaucrats’
power.
 The political system from the Meiji era to 1993 39
1111 Despite the reforms executed by the GHQ, the Japanese bureaucracy
2 succeeded in protecting its institutional structure, its organizations and its
3 personnel systems established under the Meiji Constitution. As B. C. Koh
4 describes, ‘the old patterns of Japanese bureaucracy’ were ‘singularly
5111 resilient’ (Koh 1989: 65) so the two organizational factors of bureaucratic
6 autonomy – organizational integrity, and organizational ability – were
7 hardly damaged. The Japanese bureaucrats retained their high prestige as
8 the most competent actors in the Japanese political system.
9
1011
The relationship between politicians and bureaucrats
1
2 Whereas many military officials and party politicians were accused of
3111 responsibility for the Second World War and purged from their public
4 ositions, bureaucrats remained as almost the only actors in the Japanese
5 establishment. In addition, the Japanese bureaucracy succeeded in protecting
6 its autonomous meritocratic personnel and employment systems, which
7 had reinforced their monopoly of expertise in policy-making. Under the
8 Meiji Constitution, bureaucrats were regarded as servants of the Emperor,
9 who represented the state. They were proud of representing national inter-
20111 ests as the Emperor’s servants. Although the bureaucrats’ status changed
1 from that of the Emperor’s servants to that of civil servants, bureaucrats
2 still regarded themselves as the only actors to pursue the national interest.
3 The political circumstances surrounding bureaucrats (outlined above)
4 strengthened their self-pride.
5111 Sakakibara Eisuke, an ex-MOF bureaucrat who became known as ‘Mr
6 Yen’ to the mass media after he served as Vice Minister of Finance for
7 International Affairs, admits in his book, Nihon wo Enshutsu suru Shin
8 Kanryøzø (New Bureaucrats who lead Japan): ‘[bureaucrats] sometimes
9 despise party politicians in their heart. Many bureaucrats are confident that
30111 it is not party politicians but bureaucrats who are “real statesmen”. For
1 bureaucrats, “political neutrality” means “not submitting to unreasonable
2 demands from political parties”. . .’ (Sakakibara 1977: 114). He openly
3 states in this book: ‘Bureaucrats actually control Japanese politics. For
4 bureaucrats, deliberation in the Diet and demands from interest groups are
5 nothing but obstacles that bureaucrats have to get over in order to execute
6 “politics in the true sense”’ (Sakakibara 1977: 114). ‘Transcendentalism’,
7 as described by Tsuzuki Keiroku, was inherited by the bureaucrats after
8 the Second World War.
9 As for party politicians, political parties such as Nihon Jiy¥tø, Nihon
40111 Shinpotø and Nihon Kyødøtø were formed at the end of 1945. However,
1 the GHQ purged many politicians in February 1946 and January 1947. In
2 January 1946, the GHQ executed the first purge of politicians, civil and
3 military officials, and business leaders from public service. Many influen-
44 tial senior politicians were purged. As for Nihon Shinpotø, 260 out of 274
45111 members were purged, and for Nihon Jiy¥tø, 30 out of 43 members were
40 The political system from the Meiji era to 1993
purged. The number of purged politicians amounted to 35,000, 16.8 per
cent of the total number purged. As a result, the existing political parties
were seriously damaged, and politicians who won the first general elec-
tion of April 1946 were almost all new junior members (Kitaoka 1995:
33–4). Newly elected politicians in the election of 1946 lacked ability and
experience in policy-making. On the other hand, as mentioned before, the
number of purged bureaucrats was only 1,809 (0.9 per cent) (Mizutani
1999: 302–3). As a result, bureaucrats, who monopolized expertise and
information from the GHQ, were in a dominant position in policy-making.
One ex-MOF bureaucrat (an official of the Budget Bureau of the MOF at
that time) illustrated party politicians’ lack of expertise under the Katayama
Cabinet (from 24 May 1947 to 10 March 1948): ‘bureaucrats attended the
Cabinet Meeting’, and issues were settled ‘by negotiations between bureau-
crats who attended the Cabinet Meeting’ (Mizutani 1999: 304). Under the
Ashida Cabinet (from 10 March 1948 to 15 October 1948), bureaucrats
still attended and took the lead in discussion at Cabinet meetings (Mizutani
1999: 305).
Furthermore, bureaucrats expanded their influence on political parties by
supplying ex-bureaucrats as candidates for general elections. The purge of
many politicians brought about a serious shortage of professional politi-
cians. Such a shortage resulted in a rapid increase in the number of
ex-bureaucrats in political parties (especially the Jiy¥tø). The Prime
Minister Yoshida Shigeru vigorously recruited bureaucrats as candidates of
the Jiy¥tø, and appointed them Ministers or party executives. For example,
Satø Eisaku (an ex-bureaucrat of the Ministry of Transportation) was
appointed Chief Cabinet Secretary of the second Yoshida Cabinet (1948–
1949), Ikeda Hayato (an ex-bureaucrat of the MOF) was appointed Minister
of Finance of the third Yoshida Cabinet and the Minister of International
Trade and Industry of the fourth Yoshida Cabinet (1952–1953).
The purge of 1946 and 1947 seriously damaged political parties, but
scarcely damaged bureaucrats. They maintained self-confidence as the only
actors representing national interests, and they succeeded in protecting
their organizations and their autonomy in personnel matters, which had
strengthened their high prestige and transcendental attitudes. As a result,
from immediately after the Second World War to the 1950s, bureaucrats
were in a dominant position in the Japanese political system.

The Japanese political system under LDP dominance

After defeat in the Second World War, political parties were restored. In
November 1945, the Nihon Shakaitø, the Nihon Jiy¥tø and the Nihon
Shinpotø were established, and in December 1945 the Nihon Kyødøtø was
formed. Three conservative parties, the Nihon Jiy¥tø, the Nihon Shinpotø
and the Nihon Kyødøtø, were integrated into two parties, the Jiy¥tø (Liberal
Party) and the Minshutø (Democratic Party) by 1955. In 1951, the Nihon
 The political system from the Meiji era to 1993 41
1111 Shakaitø divided into two groups, a left-wing group and a right-wing group.
2 Nevertheless, they increased their number of seats in the HR,14 and, in
3 October 1955, they merged into one party, the Nihon Shakaitø (Japan
4 Socialist Party, JSP). Competing with this consolidation, two conservative
5111 parties, the Jiy¥tø and the Minshutø were integrated into the Jiy¥minshutø
6 (Liberal Democratic Party, LDP) in November 1955. When the LDP
7 was consolidated, the number of its seats in the HR and the House of
8 Councillors (HC) were 299 (out of 467) and 118 (out of 250) respectively.
9 Subsequently, the LDP kept a majority in the Diet until 1993. Table 3.5
1011 shows the number of seats which the LDP won in general elections from
1 1958 to 1993.
2 LDP dominance in the Diet had significant effects on the structure of
3111 political institutions and institutional relationships, especially in the LDP
4 and in the relationship between LDP politicians and bureaucrats.
5
6
7 The structure of the LDP under LDP dominance
8
9 The personnel system of the LDP
20111 Although a seniority rule has been applied to personnel matters in the LDP
1 since its foundation in 1955, there were several exceptions. Some junior
2 members of the LDP were appointed Ministers or LDP executives in the
3 1950s, for instance, the Minister of Posts and Telecommunications, Tanaka
4 Kakuei, in the First Kishi Cabinet (July 1957), the Secretary General of
5111 the LDP, Fukuda Takeo, in the second Kishi Cabinet (January 1959) and
6 the Cabinet Secretary, Øhira Masayoshi, in the First Ikeda Cabinet (July
7
8
9 Table 3.5 The number of seats held by the LDP after the general elections from
1958 to 1993
30111
1 Number of Date of Number of seats Total seats
2 election general election held by LDP in HR
3
28 22.05.1958 298 467
4 29 20.11.1960 300 467
5 30 21.11.1963 294 467
6 31 29.01.1967 280 486
7 32 27.12.1969 300 486
8 33 10.12.1972 284 491
34 05.12.1976 260 511
9 35 07.10.1979 258 511
40111 36 22.06.1980 287 511
1 37 18.12.1983 267 511
2 38 06.07.1986 310 512
3 39 18.02.1990 286 512
40 18.07.1993 228 511
44
45111 Source: Asano 1997: 285–9.
42 The political system from the Meiji era to 1993
1960). However, as the LDP obtained a stable position as a ruling party,
a seniority rule was established in the personnel system of the LDP.15
Figure 3.2 illustrates the distribution of LDP members according to the
times of winning an election after the general elections of December 1976
and October 1979. It shows that the number of LDP members who won
an election enough times to be appointed as a Minister (about five times)
became stable. Thus the condition for adopting a seniority rule was
completed, and LDP politicians who have won elections five or six times
have been constantly appointed as ministers.
In addition to a seniority rule, the rule of allocating posts in proportion
to factions’ power (Habatsu Kinkø Jinji) was also established as the per-
sonnel system of the LDP.16 Table 3.6, Table 3.7 and Figure 3.3 illustrate
that ministerial posts were allocated to factions according to the number of
their members after the 1980s. Table 3.6 shows the difference in each
faction between the proportion of factional members and the proportion
of ministerial posts with regard to the third Ikeda Cabinet (from 9 Decem-
ber 1963 to 8 November 1969) and the second Øhira Cabinet (from
9 November 1979 to 16 July 1980). Both Table 3.6 and Table 3.7 show
the absolute values of the difference between the proportion of the number
of ministers’ posts and the proportion of the number of members with
respect to each faction, and the total of those values. The less the total
value, the more the posts are allocated in proportion to the number of
factional members. Compared with the third Ikeda Cabinet (total value
46.97), the posts of the second Øhira Cabinet (total value 12.91) were
allocated much more in proportion to each faction’s power. Table 3.7
shows the values of the total in comparison with the following cabinets,

45
40 Dec. 1976
Numbers of members of HR

35 Dec. 1979
30
25
20
15
10
5
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Times of winning an election

Figure 3.2 Distribution of LDP members according to times of winning an

election
 The political system from the Meiji era to 1993 43
1111 Table 3.6 The difference between the proportion of the number of factional
2 members and the proportion of the number of ministerial posts
3 The Third Ikeda Cabinet
4
5111 Name of faction A B C D E
6
Ikeda 4 60 14.49 23.53 9.04
7 Satø 3 91 21.98 17.65 4.33
8 Øno 3 40 9.66 17.65 7.99
9 Kawashima 2 20 6.28 11.76 5.58
1011 Køno 2 67 16.18 11.76 4.42
1 Fujiyama 1 34 8.21 5.88 2.33
Ishii 1 28 6.76 5.88 0.88
2 Miki 1 49 11.03 5.88 5.15
3111 Kishi 0 5 1.20 0 1.20
4 Fukuda 0 20 4.83 0 4.83
5 Total 17 414 45.75
6
7
8 The Second Øhira Cabinet
9
20111 Name of faction A B C D E
1 Øhira 4 70 20.90 22.22 1.32
2 Tanaka 4 85 25.40 22.22 3.18
3 Fukuda 4 75 22.39 22.22 0.17
4 Nakasone 3 48 14.33 16.66 2.33
Miki 2 42 12.54 11.11 1.43
5111 Mizuta 0 5 1.49 0 1.49
6 Nakagawa 0 10 2.99 0 2.99
7
Total 17 335 12.91
8
9 A: number of ministerial posts (except posts that were allocated to LDP members who did
30111 not belong to any faction)
B: number of members (total of the House of Representatives and the House of Councillors)
1 C: proportion of factional members (%) = number of its members divided by total number
2 of LDP members × 100
3 D: proportion of ministerial posts (%) = number of its ministerial posts divided by total number
of ministerial posts × 100
4 E: difference between the proportion of factional members and proportion of ministerial posts
5 = |C–D|
6 Source: Kitaoka 1995, Satø and Matsuzaki 1986.
7
8
9 and Figure 3.3 illustrates the data in Table 3.7. The figure indicates that,
40111 by the end of the 1970s, this rule – allocating posts in proportion to the
1 power of each faction – was established in the LDP. (Although the total
2 value of the third Nakasone Cabinet reaches 23.5, the difference was caused
3 by allocating 8 out of 19 ministers’ posts to the Tanaka faction, which was
44 the largest faction at that time and played a crucial role in establishing the
45111 Nakasone Cabinet.)
Table 3.7 The totals of the difference between the proportion of the number of
factional members and the proportion of the number of ministerial posts

Name of cabinet Date of formation Total value

3rd Ikeda 09.12.1963 46.97
2nd Satø 17.02.1967 43.35
1st Tanaka 07.07.1972 35.87
2nd Tanaka 22.12.1972 37.90
Miki 09.12.1974 26.18
Fukuda 24.12.1976 28.69
2nd Øhira 09.11.1979 12.91
Suzuki 17.07.1980 18.06
2nd Nakasone 27.12.1983 5.40
3rd Nakasone 22.07.1986 23.50
Takeshita 06.11.1987 11.36
2nd Kaifu 28.02.1990 12.15
Total value: total of the difference of each faction between the proportion of factional members
and the proportion of ministerial posts = total of E
E = difference between the proportion of factional members and the proportion of ministerial
posts = |C–D|
C: proportion of factional members (%) = number of its members divided by total number
of LDP members × 100
D: proportion of ministerial posts (%) = number of its ministerial posts divided by total number
of ministerial posts × 100
Sources: Kitaoka 1995, Satø and Matsuzaki 1986, Ishikawa 1984.

50
45
40
Total of difference

35
30
25
20
15
10
5
0
a

to

da

ra

ki

ita

ifu
ik
ed

ak

ak

on

on
zu
hi
Sa

sh

Ka
ku
an

O
Ik

as

as
Su

ke
Ta

Fu
d

d
tT

ak

ak
d

2n

2n
Ta
2n
3r

N
1s

2n

d
2n

3r

Names of cabinets

Figure 3.3 The totals of the difference between the proportion of the number of
factional members and the proportion of the number of ministerial
posts
Sources: Kitaoka 1995, Satø and Matsuzaki 1986, Ishikawa 1984.
 The political system from the Meiji era to 1993 45
1111 The decision-making system of the LDP
2
Under LDP dominance, the decision-making system of the LDP was
3
systematized. Figure 3.4 shows the organizations of the LDP. Key organ-
4
izations of the decision-making process of the LDP are the Policy Affairs
5111
Research Council (PARC) and the Executive Council (EC). The PARC
6
has Divisions which correspond to ministries (for example, the Agriculture
7
and Forestry Division corresponds to the Ministry of Agriculture, Forestry
8
and Fisheries). In the decision-making process of the LDP, each division
9
of the PARC scrutinizes drafts of bills or discusses political and economic
1011
issues, and then its decisions are examined at the general meeting of the
1
PARC. Finally, the EC approves them.
2
As the decision-making system of the LDP was systematized, the impor-
3111
tance of LDP organizations in the decision-making process of the govern-
4
ment increased. Members of each division of the PARC, the so-called
5
6
7 Diet Management Committee
8 Policy Board
9
20111
General Assembly of Party Members of the HC
1
2
3 General Assembly of Party Members of the HR
4
5111 Policy Affairs Research Council
6 Policy Deliberation Commission
7
8
Vice President Diet Management Committee
9
30111
1 President Secretary General
2
3 Election Strategy HQ Party Organization Headquarters
4
5 Personnel Committee Finance Committee
6
7
Finance Committee
8
9
40111 Party Convention Executive Council
1
2 Public Relations Headquarters
3
44 Figure 3.4 Organizations of the LDP
45111 Source: Satø and Matsuzaki 1986: 189
46 The political system from the Meiji era to 1993
‘zoku’, strengthened connections with a ministry that corresponded to their
division. For instance, members of the Agriculture and Forestry Division
of the PARC, Nørin-zoku, had close connections with bureaucrats at the
Ministry of Agriculture, Forestry and Fisheries. Although the zoku, espe-
cially the leaders of the zoku, accumulated expertise and information about
a policy area in their division, they did not necessarily confront bureau-
crats in policy-making. Rather, they exerted power in the process of budget
compilation by cooperating with bureaucrats. The power of the zoku in
policy-making increased, and the importance of LDP organizations in the
decision-making process of the government was enhanced.
In addition, the separation of the management of the LDP from that of
the Cabinet strengthened the independent power of LDP organizations.
After Prime Minister Tanaka Kakuei resigned in December 1974, due to
the Lockheed Scandal, the Vice President of the LDP, Shiina Etsusaburø,
recommended Miki Takeo, the leader of the Miki faction, as the next LDP
President, and other leaders of factions agreed to accept this recommen-
dation. They also agreed that the Secretary General of the LDP should
not be appointed from the Miki faction. Before the Miki Cabinet, the
Secretary General was appointed from a faction to which the LDP President
belonged (Søsaibatsu), except for the third Ikeda reshuffled Cabinet and
the First Satø after the third reshuffled Cabinet (in both cabinets, the Chairs
of the PARC were appointed from Søsai batsu). Since the Miki Cabinet,
the Secretary General has been appointed from non-Søsai batsu, except for
the First Øhira Cabinet (established on 7 December 1978). Although the
Prime Minister was the LDP President at the same time under LDP domi-
nance, the position of Secretary General was the key one regarding the
management of the LDP. As it became a tacit agreement after the Miki
Cabinet to appoint the Secretary General from non-Søsai batsu, control by
the LDP President in the management of the LDP has become weaker,
and the management of the LDP has become more independent from the
management of the Cabinet.
Furthermore, after the Lockheed Scandal, the Tanaka faction – although
the largest faction in the LDP – could not put forward a candidate for LDP
President. Instead of achieving the position of LDP President, the Tanaka
faction obtained executive positions of the LDP, such as Vice LDP
President, Secretary General, Chair of the EC, and Chair of the PARC.
Table 3.8 shows the important positions of the LDP that the Tanaka (later
the Takeshita) faction attained from the Fukuda Cabinet to the Miyazawa
Cabinet. It highlights the fact that the Tanaka faction (later the Takeshita
faction) almost monopolized the position of Secretary General. When the
Tanaka faction did not attain the post of Secretary General, it attained the
post of Vice LDP President, the Chair of the EC or the Chair of the PARC
instead. Such control by the Tanaka faction in the management of the LDP
accelerated the independence of LDP organizations from the Prime Minister
and the Cabinet.
 The political system from the Meiji era to 1993 47
1111 Table 3.8 The positions attained by the Tanaka faction from the Fukuda Cabinet to
2 the Miyazawa Cabinet
3 Name of the Cabinet Positions attained by the
4 Tanaka (lager Takeshita) faction
5111
6 Fukuda (Fukuda) Chair of the EC: Ezaki Masumi (Tanaka)
7 Fukuda, reshuffled (Fukuda) Chair of the PARC: Ezaki Masumi (Tanaka)
First Øhira (Øhira) Vice LDP President: Nishimura Eiichi
8 (Tanaka)
9 Second Øhira (Øhira) Vice LDP President: Nishimura Eiichi
1011 (Tanaka)
1 Suzuki (Suzuki) Vice LDP President: Nishimura Eiichi
2 (Tanaka)
3111 Suzuki, reshuffled (Suzuki) Secretary General: Nikaidø Susumu (Tanaka)
4 First Nakasone (Nakasone) Secretary General: Nikaidø Susumu (Tanaka)
5 Second Nakasone (Nakasone) Vice LDP President: Nikaidø Susumu
(Tanaka)
6 Second Nakasone, Vice LDP President: Nikaidø Susumu
7 reshuffled (Nakasone) (Tanaka)
8 Secretary General: Kanemaru Shin (Tanaka)
9 Third Nakasone (Nakasone) Secretary General: Takeshita Noboru
20111 (Tanaka)
1 Takeshita (Takeshita) None (the LDP President was Takeshita, the
2 leader of the Takeshita faction)
Uno (Nakasone) Secretary General: Hashimoto Ry¥tarø
3 (Takeshita)
4 First Kaifu (Kømoto) Secretary General: Ozawa Ichirø (Takeshita)
5111 Second Kaifu (Kømoto) Secretary General: Ozawa Ichirø (Takeshita)
6 Miyazawa (Miyazawa) Vice LDP President: Kanemaru Shin
7 (Takeshita); Secretary General: Watanuki
8 Tamisuke (Takeshita)
9 Source: Kitaoka 1995: 285–95.
30111
1
2 Under LDP dominance, the decision-making process was systematized,
3 and the LDP organization increased its influence on policy-making and its
4 independence from both Prime Minster and Cabinet. Consequently, the
5 system that is called ‘Yotø Shinsa’ (the scrutinizing of bills by the LDP)
6 became a usual practice. In this system, every bill submitted by the govern-
7 ment to the Diet – including the draft budget – was scrutinized and
8 approved by LDP organizations before being discussed in the Cabinet
9 meeting. No substantial change was permitted to the decisions of LDP
40111 organizations in the Cabinet meeting. Furthermore, because of the hege-
1 mony of the LDP in the Diet, the decisions of LDP organizations were
2 legislated in the Diet, although minor revisions were sometimes made in
3 the process of bargaining with opposition parties. Therefore the govern-
44 ment’s policies and the legislation in the Diet were actually decided at the
45111 level of the PARC and the EC.
48 The political system from the Meiji era to 1993
Factions
Factions were formed in the process of an LDP Presidential election. Kitaoka
Shin’ichi argues that factions were established after the LDP Presidential
election of 1956 (Kitaoka 1995: 73–4). During the presidential election of
1956, 11 groups were integrated into 8 factions (Kishi, Køno, Ishibashi,
Ikeda, Satø, Øno, Miki-Matsumura, Ishii). Out of them, 5 factions (Takeshita
(ex-Satø), Miyazawa (ex-Ikeda), Abe (ex-Kishi), Nakasone (ex-Køno)
and Kømoto (ex-Miki-Matsumura)) remained until the Miyazawa Cabinet
in 1993.
Satø Seizaburø and Matsuzaki Tetsuhisa argue that factions have four
main functions: supporting an election campaign; giving financial support;
dealing with demands from members’ constituencies; and allocating the
posts of a Cabinet and of LDP organizations (Satø and Matsuzaki 1986:
55–66). Regarding the first function, supporting election campaigns, under
the ‘multiple seats middle-sized constituencies’ election system, more than
two LDP candidates stood for election in most constituencies. Since these
LDP candidates would be competing against each other, they could not
rely on LDP organizations to help with their election campaigns. However,
factions also sought new members in order to expand their influence and
to win LDP Presidential elections, so factions were constantly recruiting
new members as their candidates and supporting their election campaigns.
Second, with regard to financial support, factions collected political funds
by receiving donations from business groups or interest groups, and they
distributed these to their members.
Third, factions supported their members by dealing with demands from
their constituencies. Factions allocated their members to Divisions of the
PARC or the Committees of the Diet, and let them negotiate with bureau-
crats in order to deal with such demands. For example, the Tanaka faction,
which had more than 100 members, was called ‘a general hospital’ since
it could deal with various kinds of demands by allocating its members to
almost all Divisions of the PARC and the Committees of the Diet. The
prominent ability of the Tanaka faction to sort out demands from consti-
tuencies was regarded as the source of its strong power in the LDP (Satø
and Matsuzaki 1986: 61–2).
Finally, factions also played a crucial role in allocating the posts in a
Cabinet and in LDP organizations. As explained in the previous section,
the posts of Ministers and LDP executives were allocated to factions in
proportion to the number of factional members. Each faction recommended
its members as candidates for the posts, and then the Prime Minister (the
President of LDP) appointed Cabinet members and LDP executives
according to factions’ recommendation. Therefore in order to obtain a post
of a Minister or an executive of the LDP, LDP members, in general, had
to belong to a faction.
 The political system from the Meiji era to 1993 49
1111 As factions were organized, controls by faction executives over faction
2 members were tightened. When factions were first formed in the 1950s
3 and the 1960s, they were only gatherings of LDP members. However, as
4 factions were integrated into five major factions and the number of their
5111 members increased, they gradually strengthened their organizations. Each
6 faction was organized in exactly the same way as the LDP. For example,
7 for Keiseikai (the Takeshita faction), the President of Keiseikai directed
8 the Secretary General, and the Secretary General supervised four bureaux
9 (Secretariat, Policy Affairs, General Affairs, and Public Relations). The
1011 Committee of Top Executives decided the line of the administration and
1 activities of Keiseikai (Iseri 1988: 34).
2 In 1983, the Tanaka faction appointed Ozawa Tatsuo as its first Director
3111 General, and other factions also appointed their Directors General one after
4 another (Iseri 1988: 24–5). After the LDP presidential election of 1987, the
5 Directors General decided to form a Committee of Directors General of
6 Factions (Kakuha Jimusøchø Kaigi) and to have regular meetings in order to
7 discuss not only each faction’s activity but also important political issues.
8 For example, in August 1988 the Committee agreed that all factions would
9 cooperate with each other to bring about the introduction of the consumption
20111 tax system (Ishikawa and Hirose 1989: 210–11), and each faction adopted
1 a resolution that appealed to the members of each faction to unite and devote
2 themselves to getting the Consumption Tax Bill passed. Thus factions were
3 organized, and they established systems to control their members.
4 Under LDP dominance, the personnel system was systematized. Each
5111 faction gathered its members by giving support and benefits, and controlled
6 them through its organization. Accordingly, the LDP’s management system,
7 by which LDP members are controlled through their factions, was estab-
8
lished under LDP dominance. As for LDP organizations, the decision-
9
making system of the LDP was systematized, and LDP organizations
30111
established unshakable positions in the decision-making process of the
1
government and the Diet.
2
3
4 The relationship between politicians and bureaucrats
5
At the beginning of LDP dominance, the LDP attempted to reform admin-
6
istrative organizations, especially the MOF, in order to expand their power.
7
8 All attempts failed. The Third Hatoyama Cabinet (from 22 November 1955
9 to 23 December 1956) presented an administrative reform plan, which
40111 included the transfer of the Budget Bureau from the MOF to the Prime
1 Minister’s Office. The Third Administrative System Research Council dis-
2 cussed this plan, but it did not pass the Diet. The Second Ikeda Cabinet
3 (from 8 December 1960 to 18 July 1963) created a plan in which the Budget
44 Bureau of the MOF would be transferred to the cabinet as the Fiscal Bureau
45111 or the Fiscal Agency. This plan also failed to pass the Diet.
50 The political system from the Meiji era to 1993
As the Japanese economy rapidly recovered in the 1960s, LDP politi-
cians found that it was more beneficial for them to cooperate with
bureaucrats than to confront them. Rapid economic development, for
instance in the car manufacturing industry or the electrical appliance
industry, resulted in a rapid increase in budget surplus. The LDP distrib-
uted this surplus to less competitive industries, such as the agricultural
industry, or to rural areas by allocating the surplus as subsidies, public
works or grants in return for receiving their support. LDP politicians
cooperated with bureaucrats in budget compilation to obtain such subsidies
or grants.
As explained in the previous section, the decision-making process of
the LDP was systematized and the importance of LDP organizations in
the decision-making process of the government increased under LDP
dominance. As the importance of deliberation in Divisions of the PARC
increased, LDP politicians accumulated information and expertise through
their activities in Divisions of the PARC. Such politicians (zoku) repre-
sent the benefits of particular interest groups. For example, LDP members
of the Agriculture and Forestry division of the PARC are called Nørin-zoku
and they represent the interests of farmers and the Federation of Agricultural
Cooperative Associations (Nøkyø). The increase of the power of zoku,
however, did not necessarily result in the confrontation between zoku and
bureaucrats nor the decline in the influence of bureaucrats. In the process
of becoming zoku executives, LDP politicians experienced the positions of
Parliamentary Vice Minister or Chair or Vice Chair of a division of the
PARC and accumulated expertise and information in a specific policy
area. Such a background did not necessarily bring about their independence
from bureaucrats in policy-making. An LDP politician, when appointed
Parliamentary Vice Minister or executive of a division of the PARC, accu-
mulated expertise and information through contacts with bureaucrats. LDP
politicians established close connections with bureaucrats and received
information and expertise through those connections.17
Bureaucrats established close connections with zoku members, main-
taining a position as the only supplier of information and expertise to them.
As a result, zoku members shared the same purpose and value as bureau-
crats in their policy areas. Consequently, the more LDP politicians
accumulated expertise and information as executives of the zoku, the closer
became their relationship with bureaucrats, and ‘it is unlikely that they
have come to a position sharply opposed to bureaucrats’ (Katø 1997: 106).
For instance, executives of the Tax System Research Council of the LDP
(LDP TSRC), such as the Chair, the Vice Chair and the Director General,
are regarded as experts in tax matters. They consist of ex-MOF officials,
ex-Ministry of Home Affairs (MHA) officials18 and long-term members of
the LDP TSRC. MOF officials have frequent contacts with these execu-
tives of the LDP TSRC, and meetings of the executives (chairs and
vice-chairs) of the LDP TSRC (Sei-fuku Kaichø Kaigi) have actually
 The political system from the Meiji era to 1993 51
1111 made the LDP TSRC decisions. When representatives of business groups
2 requested a ‘zero-tax rate’ for tax-free transactions in the consumption tax,
3 the MOF strongly opposed it. The MOF submitted its opinion to the LDP
4 TSRC, and the LDP TSRC Subcommittee Vice Chair, Murayama Tatsuo,
5111 stated at a press conference that it was not possible to adopt a zero-tax
6 rate system (Nihon Keizai Shinbun, 25 May 1988).
7 While LDP politicians needed bureaucrats to plan policies, it was crucial
8 for bureaucrats to negotiate with LDP organizations in order to imple-
9 ment their policies. Under LDP dominance, without the approval of LDP
1011 organizations, drafts of bills could not be submitted to the Cabinet meeting.
1 The decisions of LDP organizations were actually the decisions of the
2 government and their policies were not legislated without the consent of
3111 LDP organizations. Therefore bureaucrats vigorously participated in the
4 decision-making process of the LDP. Bureaucrats attended discussions in
5 Divisions of the PARC and cooperated or negotiated with LDP executives.
6 Executives of Divisions of the PARC, leaders of the zoku and bureaucrats
7 informally negotiated with each other and made substantial decisions about
8 important issues (Satø and Matsuzaki 1986: 93). For instance, bureaucrats
9 of the Ministry of Agriculture, Forestry and Fisheries cooperated with
20111 Nørin-zoku (LDP politicians who are members of the Agriculture and
1 Forestry Division of the PARC). Thus LDP politicians and bureaucrats
2 formed close cooperation, and became ‘interdependent participants’ (Koh
3 1989: 218) in policy-making processes.
4 As for the relationship between LDP politicians and bureaucrats, J. Mark
5111 Ramseyer and Frances McCall Rosenbluth argue that a principal-agent rela-
6 tionship is observed in the relationship between LDP leaders (principals)
7 and bureaucrats (agents) (Ramseyer and Rosenbluth: 1993: 6). They argue
8 that LDP leaders monitor bureaucrats’ behaviour and prevent bureaucrats’
9 deviation from the preferences of LDP leaders by retaining a veto over
30111 what bureaucrats do, by controlling bureaucrats’ promotion, by obtaining
1 information by encouraging constituents who are dissatisfied with bureau-
2 crats and by encouraging competition among ministries and controlling
3 bureaucrats’ post-ministerial posts (Ramseyer and Rosenbluth 1993: 107–9).
4 LDP leaders punish bureaucrats who deviate from their preferences by
5 manipulating the above devices.
6 The application of the principal-agent model to Japanese politics, how-
7 ever, oversimplifies actual Japanese political processes. Applying the
8 principal-agent model to the Japanese political processes fails to consider
9 the effects of conflicts and cooperation within and between voters, LDP
40111 leaders, LDP backbenchers and bureaucrats on policy-making processes.
1 For instance, LDP leaders and LDP backbenchers are divided according
2 to their factions, and factions compete and cooperate with each other.
3 Bureaucrats also compete and cooperate between ministries over their
44 ministry’s jurisdiction and authority. LDP zoku and the corresponding
45111 ministry’s bureaucrats cooperate with each other and compete with other
52 The political system from the Meiji era to 1993
LDP zoku and ministries. It is not appropriate to understand LDP leaders
as principals because they are not coherent actors. The above complicated
interactions among and between LDP leaders and bureaucrats cannot
be comprehended as a principal-agent relationship.19 This model also over-
looks the effects of third parties, such as interest groups, on the policy-
making processes.
The relationship between LDP politicians and bureaucrats is not that the
one controls the other, such as that implied by a principal-agent relation-
ship. It is mutual cooperation and dependence. LDP politicians have to
rely on bureaucrats regarding policy-making; on the other hand, bureau-
crats need party politicians to put their plans into legislation. Such mutual
dependence between bureaucrats and politicians brings about close coop-
eration between them not only in formal processes in LDP organizations,
such as the EC and the PARC, but also in informal processes. Bureaucrats’
frequent informal consultation with LDP politicians, however, does not
mean that the relationship between them is a principal-agent relationship.
Rather, it builds a coalition, or constructs ‘a broad consensus in which
all interests that “need to know” were consulted’ (Wright 2002: 370).
Sometimes, it is necessary for bureaucrats to compromise with LDP politi-
cians to put their plans into legislation because of such mutual dependence.
As a result, the indirect influence of politicians on bureaucrats’ policy-
making cannot be dismissed, and some policy choices may be precluded.
Nevertheless, such a situation does not justify the application of the
principal-agent model to the relationship between LDP politicians and
bureaucrats. Rather, ‘their shared interest, and the mutual dependence of
their relationship’ (Wright 2002: 373) should be emphasized.
Maurice Wright explores the relationship between bureaucrats and LDP
politicians in the process of budget compilation, and rejects ‘the polarities
of bureaucrats versus politicians’ (Wright 2002: 372). Although his analysis
is limited to the process of budget compilation, he develops the same argu-
ment explained above, mutual dependence based on shared interests between
LDP politicians and bureaucrats. Although formal structures and arrange-
ments exist that involve LDP politicians and bureaucrats, such formal
procedures are merely ceremonial. Informal procedures, he argues, perform
more substantial functions to advance cooperation and coordination between
the two (Wright 2002: 372–3).
In addition, he emphasizes that frequent meetings and consultations do
not necessarily mean that LDP politicians use such procedures to force
their preferences upon bureaucrats. Influence and pressure are exerted by
both sides in such informal procedures in order to bring about mutual
benefits and expectations.
Indeed, as explained in this section, bureaucrats systematically consulted
and negotiated with LDP politicians before and after discussions at LDP
organizations. Therefore it cannot be denied that LDP politicians exert
indirect and implicit influence through these procedures. By ‘knowing
 The political system from the Meiji era to 1993 53
1111 the LDP’s mind’ (Wright 2002: 372), some options may be precluded or
2 foreclosed. It is, however, extremely difficult to distinguish between cases
3 in which bureaucrats’ preferences are ruled out due to indirect influence
4 by LDP politicians and those in which some options are ruled out because
5111 of the shared interest of bureaucrats and LDP politicians (Wright 2002:
6 372). As mentioned earlier, LDP politicians achieve expertise by accu-
7 mulating information from bureaucrats, and this develops ‘an identity of
8 interest between bureaucratic and political values’ (Wright 2002: 372). The
9 relationship between LDP politicians and bureaucrats is a subtle inter-
1011 dependence in which they exchange information and imply their interests
1 and intentions (Wright 2002: 374).
2 Katø Junko examines the relationship between LDP politicians and
3111 bureaucrats from the viewpoint of their rational behaviour, and in a similar
4 way to Wright and the argument in this book, she rejects the polarities of
5 bureaucrats versus politicians. Although the framework of her analysis
6 (rational behaviour of bureaucrats and politicians) is different from that of
7 this book (historical institutionalism), she also elaborates the same argu-
8 ment developed earlier, the shared interests and cooperation between LDP
9 politicians and bureaucrats (Katø 1997: 37, 101).
20111 Bureaucrats, she argues, create desired policies that are ‘consistent with
1 their organizational interests’ (Katø 1997: 56). She goes on to argue that
2 they exert their influence through institutional factors, such as decision-
3 making procedures and monopolized policy-information and expertise, to
4 put such policies into practice. They bargain with LDP politicians and
5111 make compromises on unimportant factors to achieve their main target
6 (Katø 1997: 87). As for LDP politicians, she emphasizes their ‘volun-
7 teering cooperation’ with bureaucrats. She argues that such cooperation is
8 the result of their rational strategic behaviour in order ‘to promote their
9 own influence in policy-making circles’ (Katø 1997: 101). She points
30111 out that LDP politicians accumulate their expertise by receiving informa-
1 tion from bureaucrats. Therefore, she argues, it is unlikely that LDP
2 politicians will sharply oppose bureaucrats. Instead, by supporting bureau-
3 crats’ policy plans, LDP politicians demonstrate their understanding of
4 technical matters, which results in an increase in their credibility and
5 influence as policy experts.
6 Ramseyer and Rosenbluth argue that policy changes during the periods
7 from 1949 to 1954, from 1959 to 1963 and from 1971 to 1976 confirm
8 the principal-agent relationship between bureaucrats and LDP leaders.
9 During the above periods, LDP leaders changed their programmatic aims
40111 to boost their electoral performances. They adopted new aims that would
1 move away from growth-oriented goals. In spite of their own preferences,
2 namely economic development, bureaucrats, as the agents of LDP leaders,
3 implemented programmes that would retard economic growth. They imple-
44 mented policies that gave major benefits to small farmers and small firms
45111 (1949–1954), established national health insurance and pension plans
54 The political system from the Meiji era to 1993
(1959–1963), enhanced welfare and health plans (1971–1976), legislated
environmental protection schemes (1971–1976) and gave subsidies to small
firms (1971–1976) aiming to promote the electoral success of the LDP
(Ramseyer and Rosenbluth 1993: 134–6). Such an argument, however, fails
to consider the diversity of preferences pursued by ministries and shared
interests between LDP politicians and bureaucrats. Implementing new poli-
cies means, for bureaucrats, the expansion of their ministry’s jurisdiction,
authority, budget and organization. For example, subsidies and aids to
farmers result in benefits for the Ministry of Agriculture, Forestry and
Fisheries, the enlargement of welfare and health care systems means the
expansion of the authority and organizations of the Ministry of Health and
Welfare, and subsidies to small businesses are to the benefit of the Ministry
of International Trade and Industry (MITI). Policies, therefore, during the
above periods were not necessarily against bureaucrats’ preferences.
Rather, for the ministries in charge of those policies, implementing those
policies resulted in benefits for them. During the above periods, the LDP
needed policies that would boost support for the LDP, and bureaucrats
exploited such needs and presented LDP policies that would also suit their
preferences. Policy changes during the above periods were the result of
cooperation between the LDP and bureaucrats, and both the LDP and
bureaucrats obtained benefits from such policies.
With respect to the relationships between bureaucrats and opposition
parties, LDP politicians generally negotiated with opposition parties. LDP
members of the Diet Management Committee of the LDP (Giun-zoku)
bargained with opposition party executives to pass bills and the budget
smoothly. Since the LDP maintained its majority in the Diet until 1993,
bureaucrats could concentrate on negotiating with the LDP in order to put
their policies into legislation.
Under LDP dominance, based on mutual dependence between LDP
politicians and bureaucrats, the issue settling system – in which bureau-
crats planned policies, LDP executives, faction leaders and bureaucrats
negotiated with each other over those plans, and LDP executives negoti-
ated with opposition parties to legislate them – was established and
functioned effectively. Both LDP politicians and bureaucrats obtained
benefits from this system. Close cooperation between them enabled bureau-
crats to put their plans into law effectively and LDP politicians to maintain
themselves in office by distributing subsidies and public works to their
supporters. As a result, this system was reinforced under LDP dominance.
However, after the general election of 1993, structural changes in the
Japanese political system – the end of LDP dominance – reduced the
efficacy of such close cooperation.
1111
2 4 Changes in the Japanese
3
4 political system since 1993
5111
6
7
8
9
1011
1
2
3111 The background of political changes after 1993
4
5 The mature Japanese economy
6 By the 1980s the Japanese economy had matured, and this damaged the dis-
7 tribution system by which the LDP had obtained constant support. The
8 Japanese economy experienced rapid development in the 1950s and the
9 1960s. The LDP exploited benefits from such rapid development to obtain
20111 support from voters. From the 1950s the LDP had achieved stable support
1 from farmers and small-business owners. Until 1990, about 70 per cent of
2 farmers and 60 per cent of small-business owners had supported the LDP
3 (Richardson 1997: 17).
4 In the 1980s, however, the Japanese economy had reached a stage of
5111 stable development. The average rate of real economic growth from 1981
6 to 1987 was only 3.71 per cent, compared with that in the 1960s and the
7 1970s (10.42 per cent and 4.55 per cent respectively). Since the Japanese
8 economy had matured Japanese people could no longer expect benefits
9 from rapid economic development. Increases in benefits were gradually
30111 reduced. The growth in the general account revenue gradually declined
1 from 19 per cent in 1970 to 14 per cent in 1979, and significantly dropped
2 from 10.7 per cent in 1980 to 0.7 per cent in 1986. As a result, the LDP’s
3 traditional manoeuvre, distributing benefits from economic development
4 and obtaining support in return, was no longer possible, and the LDP there-
5 fore had to issue deficit bonds in order to maintain the distribution system
6 and cover the budget deficit.
7 The budget of the 1974 fiscal year had a deficit of 770 billion yen,
8 and the Minister of Finance, Øhira Masayoshi, declared in the Diet that
9 Japanese public finance was in crisis. The government issued deficit bonds
40111 in the 1975 fiscal year, and after that, deficit bonds were issued every fiscal
1 year. In the budget compilation of the 1982 fiscal year, the MOF decided to
2 adopt an austere budget policy, and it implemented a ‘zero-ceiling’ in which
3 an estimate of budget requests from each ministry was kept at the same
44 amount as in the initial budget of the preceding fiscal year. Furthermore, in
45111 budgets from the 1983 fiscal year to the 1987 fiscal year, the MOF adopted
56 Changes in the Japanese political system since 1993
a ‘minus-ceiling’ in which an estimate of budget requests from each min-
istry was reduced to be below that of the preceding fiscal year. Conflicts
about allocation of shrinking benefits became intense (Satø 1997: 178). For
instance, urban areas, which received less benefit than rural areas, com-
plained about their burden. Voters in urban areas began to oppose these LDP
policies. In the general election of 18 February 1990, the LDP obtained 36
per cent of votes in the Tøkyø area compared with 51.9 per cent in the
Shikoku area. In the general election of 18 July 1993, the LDP suffered a
further loss of votes in the Tøkyø area (obtaining only 27 per cent). However,
in the Shikoku area, the votes for the LDP increased to 58.7 per cent. As the
Japanese economy experienced serious depression in the 1990s, such separ-
ation of urban and rural areas became more conspicuous. As for the general
election of 20 October 1996, the LDP won 14 seats out of 25 in single-
seat constituencies in the Tøkyø area compared with 10 out of 13 seats in
those in the Shikoku area. Regarding proportional representation seats, the
LDP obtained 27.0 per cent of votes in the Tøkyø bloc, while it obtained
35.97 per cent of votes in the Shikoku bloc. In the general election of
25 June 2000, the LDP significantly lost seats in urban constituencies com-
pared with those in rural areas, while it maintained its support in rural areas.
For example, in single-seat constituencies, the LDP won only 9 seats out of
25 in the Tøkyø area, and 7 out of 19 in the Øsaka area. On the other hand,
the LDP won 11 out of 13 seats in constituencies in the Shikoku area. As
for proportional representation seats, the LDP obtained only 19.48 per cent
of votes in the Tøkyø bloc, while it obtained 35.97 per cent of votes in the
Shikoku bloc.

The globalized economy

The globalized economy has promoted both rapid expansion of foreign
companies (such as service, finance and retail companies) in Japanese
markets and also the expansion of Japanese companies in foreign markets.
Severe competition in the globalized economy has widened the differences
between winners and losers. Industries that cannot compete with foreign
businesses demand more protection in order to retain their profit. On the
other hand, competitive industries demand more deregulation in order to
compete with foreign companies, and they refuse to cooperate with the
government to protect less competitive industries at the cost of their profit.
For instance, farmers demanded that the government should protect their
business from foreign agricultural businesses by keeping strict restrictions
on the import of agricultural products, such as oranges and rice. The car
manufacturing industry and the electrical appliance industry made the crit-
icism that such protection caused disadvantage to their industries in foreign
markets because they were afraid that the US would impose tough import
restrictions on Japanese car manufacturers in retaliation for the Japanese
government’s import restrictions on American oranges and rice.
 Changes in the Japanese political system since 1993 57
1111 The end of the cold war
2
3 The end of the cold war made the confrontation between supporters and
4 opponents of the Japan–US Mutual Security Treaty less important. The
5111 Japan–US Mutual Security Treaty was concluded in 1951. Based on this
6 treaty the US has deployed military personnel in Japan until now. After
7 the Second World War, the main political theme over which the LDP
8 and opposition parties confronted each other was the question of whether
9 Japan should maintain the Japan–US Mutual Security Treaty. Satø
1011 Seizaburø argued that there were two political themes over which polit-
1 ical parties confronted each other immediately after the Second World
2 War: support versus revision of the reforms after the Second World War,
3111 and support of the Japan–US Mutual Security Treaty versus ‘unarmed
4 neutrality’. However, he argued that by the 1960s the first theme had trans-
5 formed into an interpretation of Article 9 of the Constitution (concerning
6 the security of Japan). As a result, he concluded that only the second theme,
7 which included the interpretation of Article 9 of the Constitution, remained
8 until the 1990s (Satø 1997: 177). The LDP pledged anti-Communism
9 and supported the Japan–US Mutual Security Treaty as an important
20111 measure to protect Japan from Communism. On the other hand, opposi-
1 tion parties, such as the Japan Socialist Party (JSP), opposed the treaty
2 and insisted on ‘unarmed neutrality’. However, the end of the cold war
3 lessened the anti-Communist characteristic of the treaty. In addition, the
4 Gulf War thrust a difficult issue before Japan: how Japan should contribute
5111 to settling regional wars. The response of the Japanese government, ‘Japan
6 will send only money not troops’, was criticized by foreign countries.
7 Left-wing opposition parties could not present persuasive reasons for
8
their policy of ‘unarmed neutrality’, whereby they refused to make a
9
commitment to participate in any military activities. All opposition parties,
30111
except the Japan Communist Party (JCP), actually accepted the Japan–
1
2 US Mutual Security Treaty. Consequently, the difference between the
3 LDP and other parties had become less distinct, which made it much easier
4 for the LDP and other parties to form a coalition. Under the Murayama
5 Coalition Cabinet, on 3 September 1994, the JSP approved a new party
6 programme that acknowledged the Self Defence Force and the Japan–US
7 Security Treaty.
8 Furthermore, because of the disappearance of a distinct ideological
9 confrontation between the LDP and the left-wing parties, it became much
40111 easier for LDP supporters who resented the LDP’s policies to vote for
1 opposition parties. Kabashima Ikuo examines the loyalty of LDP supporters
2 with respect to the elections of the House of Councillors from 1977 to
3 1998. He calculates the rate of loyalty, which indicates the correlation
44 between support and voting behaviour of LDP supporters in the elections
45111 of the HC since 1977. The more LDP supporters vote for the LDP, the
58 Changes in the Japanese political system since 1993
closer the numerical value comes to 1. Before 1986, the value had been
relatively stable, at about 0.7. However, in 1989 it dropped sharply to 0.58
and has never recovered to 0.7. The loyalty of LDP supporters plummeted
in the election of the HC of 1989. Although it later recovered slightly, it
still remained at about 0.62 (Kabashima 1999: 82–3).
T. J. Pempel points out that it was the fragmentation of conservatives
that resulted in the demise of LDP dominance (Pempel 1998: 169–205).
He argues that, from the 1970s to the 1980s, responding to socioeconomic
and electoral challenges, the LDP took a strategy of expanding its supporting
groups. With regard to supporting groups for the conservatives, the reduc-
tion in the population of farmers and small business owners and urbanization
brought about a shrinking supporter base; on the other hand, with regard
to supporting groups for the left-wing parties, organized labour abandoned
its unmitigated hostile attitude towards the conservatives. Responding to
this situation, he argues, the LDP embraced the electorate in urban areas –
union members and white-collar workers – by presenting environment and
welfare policies, while keeping its core supporting groups, such as farmers,
small shopkeepers, small-business owners and business circles. Simultan-
eously, the supporting bases of the left wing parties (especially the JSP),
such as trade unions, were gradually undermined due to economic pros-
perity under LDP dominance. As a result, conservatives who supported the
LDP included not only the core of LDP supporters but also the groups that
had been regarded as ‘centre-left’. However, this expansion diluted the cohe-
siveness of the conservatives. In the 1990s, as economic stagnation became
chronic, tensions and conflicts within the conservatives emerged, which
undermined the supporting bases of the LDP. For instance, a low-price
policy, which appealed to urban voters and organized labour, went against
the interests of farmers, small business owners and business circles. As
Pempel pointed out, it became increasingly difficult to satisfy all segments
of conservative supporters because of serious confrontations between them
over, for example, ‘more protection versus less protection, more pork-barrel
policies versus tighter fiscal restraints, high yen versus low yen’ (Pempel
1998: 199). His argument supplements the argument examined above to
explain conflicts and disintegration within the supporting bases of the LDP.
The mature Japanese economy made it difficult for the LDP to maintain its
tactics of ‘distributing benefits and obtaining votes’. As a result, conflicts
between LDP supporting groups were exacerbated.
The globalized economy brought about conflicts among industries that
had previously united in supporting the LDP, and the end of the cold war
deprived the LDP of its ideological integrity and gave voters alternative
choices to voting for the LDP, which also contributed to the fragmenta-
tion of conservatives. The bases that had supported LDP dominance
changed during the 1980s. The LDP was not able to retain the stable
and broad support it had previously maintained, and dissatisfaction with
it was accumulating among voters. Such dissatisfaction exploded after a
 Changes in the Japanese political system since 1993 59
1111 series of political scandals from the end of the 1980s to the beginning of
2 the 1990s, which caused the end of LDP dominance after the general
3 election of July 1993.
4
5111
Structural changes in the Japanese political system
6
7
The end of LDP dominance
8
9 From the end of the 1980s to the beginning of the 1990s Japan experi-
1011 enced a series of political scandals. When the ‘Recruit Scandal’ was
1 revealed over the years 1988 and 1989, the ex-Chief Cabinet Secretary,
2 Fujinami Takao, was arrested for taking bribes.1 In 1991 two political
3111 scandals, the ‘Kyøwa Scandal’2 and the ‘Sagawa Ky¥bin Scandal’3 were
4 revealed, and the ex-Director General of Hokkaidø Development Agency,
5 Abe Fumio, was arrested for taking bribes from Kyøwa. Kanemaru Shin
6 admitted he had received 500 million yen from Sagawa Ky¥bin and he
7 was forced to resign as Vice President of the LDP. In 1993 the ‘Gene-
8 Con Scandal’ was revealed, and the mass media reported that many major
9 construction companies allegedly gave illegal political funds to politicians.4
20111 Public opinion strongly demanded political reform, and junior LDP
1 members reacted to this demand. Immediately after the Recruit Scandal
2 was revealed, junior LDP members formed a study group called ‘Utopia’
3 across the factions and requested the revision of the electoral system. When
4 the Kyøwa Scandal and the Sagawa Ky¥bin Scandal were revealed, junior
5111 LDP members formed another study group on political reforms. In October
6 1992 junior LDP members formed a study group on ‘Regaining Trust
7 in the LDP’, and requested that Kanemaru Shin and Takeshita Noboru
8 should leave the LDP and resign as members of the House of Represent-
9 atives (HR). Some of them, namely Takemura Masayoshi and his group,
30111 contacted other parties, such as the Japan New Party (JNP), and they
1 defected from the LDP and formed the New Harbinger Party (NHP) after
2 the dissolution of the HR in July 1993.
3 However, the main incident that triggered the end of LDP dominance
4 was the struggle within the Keiseikai, the largest faction (the Takeshita
5 faction) in the LDP. In September 1992, Kanemaru Shin, who was the
6 actual leader of the Keiseikai at that time, was involved in the Sagawa
7 Ky¥bin Scandal. He was fined for breaking the Political Funds Control
8 Law and resigned from all his political offices. Later, in October 1992, he
9 resigned from his parliamentary seat. The Keiseikai had suddenly lost its
40111 influential leader. Over the successor of Kanemaru Shin, the Keiseikai was
1 divided into two groups, the Ozawa Group (led by Ozawa Ichirø, ex-
2 General Secretary under the Kaifu Cabinet and then acting leader of the
3 Keiseikai), and the anti-Ozawa group. The Ozawa group made Hata
44 Tsutomu their leader and pledged political reform. They called themselves
45111 ‘reformist’ and criticized the anti-Ozawa group as being ‘anti-reformist’.
60 Changes in the Japanese political system since 1993
However, the Ozawa group could not obtain the leadership of the
Keiseikai, and Obuchi Keizø became the leader, supported by the anti-
Ozawa group. The Ozawa group split from the Keiseikai and formed
‘Forum 21 for Political Reform’. Responding to public demand for polit-
ical reform, Prime Minister Miyazawa Kiichi pledged political reforms,
including the reform of the electoral system. Nevertheless, he abandoned
attempts to legislate the package of political reform bills not only because
of conflicts with opposition parties but also because of severe confronta-
tion within the LDP. On 18 June, opposition parties called for a no-
confidence resolution against the Miyazawa Cabinet. A total of 39 (the
members of the Ozawa group) out of the 274 LDP members voted for the
resolution, and 18 LDP members (those who were led by Takemura
Masayoshi) abstained. LDP members who voted for or abstained from the
no-confidence resolution defected from the LDP and formed the Japan
Renewal Party (JRP) and the New Harbinger Party (NHP). Prime Minister
Miyazawa Kiichi dissolved the HR and a general election was held on 18
July 1993. The LDP could not retain its majority in the HR and lost its
position as a ruling party for the first time since its foundation in 1955.
Table 4.1 shows the result of the general election of 18 July 1993.
The result of the general election of 1993 caused a significant change in
the Japanese poitical structure – from stable LDP dominance to unstable

Table 4.1 The result of the general election of 18 July 1993

Name of Number of seats Number of seats Number of seats

party after the election after the election before the election
of 18 July 1993 of 18 February 1990 of 18 July 1993
LDP 223 275 222
JSP 70 136 134
JRP 55 – 36
CGP 51 45 45
JNP 35 – 0
JCP 15 16 16
DSP 15 14 13
NHP 13 – 10
SDL 4 4 4
Others 0 1 2
Independent 30 21 15
Total 511 512 497
LDP: Liberal Democratic Party (Jiy¥minshutø)
JSP: Japan Socialist Party (Nihonshakaitø)
JRP: Japan Renewal Party (Shinseitø)
CGP: Clean Government Party (Kømeitø)
JNP: Japan New Party (Nihonshintø)
JCP: Japan Communist Party (Nihon Kyåsantø)
DSP: Democratic Socialist Party (Minshushakaitø)
NHP: New Harbinger Party (Shintø Sakigake)
SDL: Social Democratic League (Shakai Minshu Rengø)
 Changes in the Japanese political system since 1993 61
1111 multiparty coalition politics. Since 1993, three HR general elections (July
2 1993, October 1996 and June 2000) and three HC elections (July 1995,
3 July 1998, and July 2001) have been held. In each election the LDP has
4 failed to maintain a majority by itself. The LDP obtained 228 seats out of
5111 511 (1993), 239 out of 500 (1996) and 233 out of 480 (2000) in the HR as
6 the results of the respective general elections, and it maintained 111 (1995),
7 106 (1998) and 109 (2001) seats out of 252 as the result of the elections
8 of the HC. The LDP has therefore been forced to make coalitions with
9 other parties in order to maintain its position as a ruling party.
1011 Consequently, cabinets after the Hosokawa Cabinet have been coalition
1 cabinets (including coalitions in which non-LDP coalition parties do not
2 have ministers’ posts). Table 4.2 shows the composition of cabinets after
3111 the Hosokawa Cabinet. It shows that all cabinets after the Hosokawa
4 Cabinet were coalition cabinets (except for a short period during the Obuchi
5 Cabinet, July 1998 to December 1998).
6 The end of LDP dominance brought about significant changes in the
7 factors that were the conditions for the issue settling system based on close
8 cooperation between the LDP and bureaucrats: the decline in the impor-
9 tance of LDP organizations in the decision-making process of the
20111 government and the Diet; the loosened management system of the LDP;
1 and the change in politicians’ attitudes towards the bureaucrats.
2
3
Table 4.2 The composition of cabinets after the Hosokawa Cabinet
4
5111 Cabinet Period Coalition parties
6
7 Hosokawa 08.1993 to 04.1994 JNP, JSP, JRP, NHP, CGP, SDL,
DSP
8 Hata 04.1994 to 06.1994 JNP, JRP, NHP, CGP, SDL, DSP
9 Murayama 06.1994 to 01.1996 LDP, JSP, NHP
30111 1st Hashimoto 01.1996 to 11.1996 LDP, SDPJ,1 NHP
1 2nd Hashimoto 11.1996 to 07.1998 LDP, SDPJ, NHP (SDPJ and NHP
2 ended their coalition with LDP
in May 1998)
3 Obuchi 07.1998 to 04.2000 LDP, LP (1.1999–),2 CGP (4.1999–)2
4 1st Mori 04.2000 to 07.2000 LDP, CP, CGP
5 2nd Mori 07.2000 to 04.2001 LDP, CP, CGP
6 LDP: Liberal Democratic Party (Jiy¥minshutø)
7 JSP: Japan Socialist Party (Nihon Shakaitø)
8 JNP: Japan New Party (Nihonshintø)
9 JRP: Japan Renewal Party (Shinseitø)
NHP: New Harbinger Party (Shintø Sakigake)
40111 CGP: Clean Government Party (Komeitø, including the new Komeitø formed in 11.1998)
1 SDL: Social Democratic League (Shakai Minshu Rengø)
2 DSP: Democratic Socialist Party (Minshatø)
3 1 On 19 January 1996, the JSP changed its name to the Social Democratic Party of Japan
(SDPJ).
44 2 The Obuchi cabinet formed a coalition with the LP from January 1999 and with the CGP
45111 from April 1999.
62 Changes in the Japanese political system since 1993
The decline in the importance of LDP organizations
Under LDP dominance, the decisions of LDP organizations were, in general,
approved by the government and they were put into legislation. Although
the LDP sometimes revised its decisions in the process of bargaining with
opposition parties, the decision-making processes of the government and
the Diet were almost always concluded in the LDP. The end of LDP dom-
inance changed these processes.
Figure 4.1 shows the decision-making system under the Hosokawa
Coalition Cabinet. The Committee of Representatives of the Coalition
Parties (Renritsu Yotø Daihyøsha Kaigi) supervised the Council of Secre-
taries of the Coalition Parties (Kakuha Kanjikai), which had the Policy
Affairs Council (Seisaku Kanjikai) and the Diet Affairs Council (Seimu
Kanjikai). The Committee of Leading Members of the Government and
Ruling Parties (Seifu Yotø Shunø Kaigi) was formed as the organization
in which the coalition cabinet communicated with the ruling coalition
parties. The Committee of Representatives of the Coalition Parties, in which
Ozawa Ichirø, an actual leader of the JRP, took the leadership, functioned
as a supreme decision-making organization. The LDP was excluded from
the decision-making process of the government for the first time since its
establishment in 1955.
Under the Murayama Coalition Cabinet, the LDP regained the posi-
tion of ruling party by making a coalition with the NHP and the JSP.

Coordination between the

Government and the
Ruling Parties Ruling Parties

Committee of Committee of
Leading Members of Representatives of the
the Government and Coalition Parties
the Ruling Parties
Supervise

Committee of Council of Secretaries

Coordination between of the Coalition Parties
the Government and
the Ruling Parties

Supervise

Policy Affairs Diet Affairs

Council Council

Figure 4.1 The decision-making process of the Hosokawa Coalition Cabinet

Source: Nonaka 1998: 47.
 Changes in the Japanese political system since 1993 63
1111 Figure 4.2 shows the decision-making process under the Murayama
2 Coalition Cabinet. Under both coalition cabinets, the Ruling Coalition
3 Parties Representatives Committee (Renritsu Yotø Sekininsha Kaigi, con-
4 sisting of the Secretary General, the Chief Secretary, the Representative
5111 Secretary and other executives) was the supreme decision-making organ-
6 ization in the ruling coalition parties. It supervised the General Committee
7 (Innai Sømukai), under which the Policy Coordination Committee (Seisaku
8 Chøsei Kaigi) formed 18 different issue-specific project teams and ministry-
9 specific coordination committees (Shøchøbetsu Seisaku Chøsei Kaigi).
1011 The project teams and coordination committees made substantial deliber-
1 ations, and the posts in these organizations were allocated to the LDP, JSP
2 and NHP in the ratio of 3:2:1 in order to prevent the LDP from taking a
3111 majority in each organization (Yamaguchi 1997: 43–6, Itø 1997: 166–9).
4 In this decision-making process, the JSP and the NHP obtained power dis-
5 proportionate to the number of seats they had in the Diet, which caused
6 dissatisfaction among LDP politicians.
7
8
9 Coordination between
the Government and
20111 Government Ruling Parties Ruling Parties
1
2 Council of
Committee of Committee of
3 Coordination Representatives of Ruling
three
between the Coalition Parties
4 Leaders of
Government and
5111 Ruling
Executives of
6 Parties
Ruling Parties
Supervise
7
General Committee
8
9
30111 Supervise
1
2
Diet Management Policy Coordination
3 Committee Committee
4
5
6
7 18 Issue Ministry
8 Specific Specific
Project Coordination
9 Teams Teams
40111
1 Posts were allocated in the ratio of
2 3 (LDP) : 2 (JSP) : 1 (NHP)
3
44 Figure 4.2 The decision-making process of the Murayama Coalition Cabinet
45111 Source: Nonaka 1998: 49.
64 Changes in the Japanese political system since 1993
After the general election of 20 October 1996, both the JSP and the
NHP lost many seats (the JSP went from 30 seats to 15; the NHP went
from 9 seats to 2) and they did not have enough members of the HR to
maintain posts in every project team and committee. Although the import-
ance of coordination among the three parties declined, the LDP had to
keep support from them since the LDP did not obtain a majority in the
HR by itself.
After the overwhelming defeat in the election of the HC of July 1998,
the LDP was forced to make a concession to opposition parties. Since the
LDP and other ruling coalition parties could not obtain a majority in the
HC, the LDP had to accept opposition parties’ demands in order to let
bills or the budget pass the Diet. Opposition parties such as the Democratic
Party (DP), the Liberal Party (LP) and the Peace and Reform (PR) played
a crucial role in the decision-making process of the Diet. As will be
explained in Chapter 6, the LDP was forced to accept the plan of three
opposition parties (the DP, the LP and the PR) for the revision of the
Financial Revitalization Bill. After political confusion about the revision
of the Financial Revitalization Bill, the LDP sought to form a coalition
with the LP and the Clean Government Party (CGP).5 The Obuchi Cabinet
made a coalition with the LP (in January 1999, the LP split into the LP
and the Conservative Party (CP), and the CP maintained its coalition rela-
tionship with the LDP) and the CGP (in April 1999). Figure 4.3 shows
the decision-making process under the Obuchi Cabinet. Again, the LP and
the CGP had disproportionate power in the decision-making process of the
government in comparison with the number of seats they had in the HR.
Under the coalition cabinets, agreements between the ruling coalition
parties in this decision-making process were given superiority over deci-
sions of the LDP organizations in order to maintain the ruling coalition.
The decisions of the government and of the Diet were not the same as
those of LDP organizations. Consequently, the importance of the LDP
organization in the decision-making process of the government and the
Diet had declined.

The weakened management system of the LDP

The end of LDP dominance has affected the management system through
factions. LDP factions exerted four functions: allocating cabinet and party
posts; distributing political funds; sorting out demands from the constituen-
cies of factional members; and supporting election campaigns. Through
these functions, factions gathered and controlled their members. Since 1993
the control power of faction leaders has been weakened for five reasons.
First, as explained in the previous section, the importance of the LDP
organization has declined. Under LDP dominance, internal organizations
of the LDP, such as the Policy Affairs Research Council (PARC), the
Executive Council (EC) and Divisions of the PARC, actually decided
 Changes in the Japanese political system since 1993 65
1111
2 Government Committee of Representatives Report
of Ruling Coalition Parties
3
4 (LDP) Executive Council

5111 Supervise
6
(CGP) Central Committe
7
Project Teams of Ruling Parties of Executives
8
9
1011 LDP: the Liberal Democratic Party (CP) General Council of
1 CGP: the Clean Government Party Parliament Members
2 CP: the Conservative Party
3111
Figure 4.3 The decision-making process of the Obuchi Coalition Cabinet
4
Source: Nihon Keizai Shinbun, 29 December 2000.
5
6
7 government policies. The executive posts of these organizations were allo-
8 cated to factions’ executives according to recommendation by factions.
9 In addition, executives of these organizations held closed-door meetings
20111 and made substantial deliberations by themselves (before or after formal
1 meetings of organizations) that actually decided the results of discussion
2 in those organizations. After 1993, under coalition cabinets, decisions
3 between the LDP and other coalition parties have been given priority over
4 the decisions of LDP organizations. As the importance of LDP organ-
5111 izations in the decision-making process of the government has reduced,
6 the power of faction leaders and executives has declined.
7 Second, one of the functions of factions – allocating posts – faced a
8 difficulty over the strict seniority rule. Under coalition cabinets, the LDP
9 has been forced to share cabinet positions with other coalition parties.
30111 Table 4.3 shows allocation of cabinet posts. As this table indicates,
1 important posts such as those of Prime Minister, Minister of Finance and
2 Cabinet Secretary were allocated to non-LDP politicians under the
3 Murayama and the First Hashimoto Cabinet. This reduction in the number
4 of cabinet posts hampered the smooth implementation of the seniority rule
5 in the LDP, and this brought dissatisfaction among LDP members.
6 Third, the revision of two laws, the Political Funds Control Law and
7 the Public Official Election Law, under the Hosokawa Coalition Cabinets
8 damaged two other functions of factions: collecting and distributing
9 political funds and supporting election campaigns. Eight political parties
40111 (the JSP, the JRP, the JNP, the NHP, the DSP, the CGP Kømeitø and two
1 other minor parties) pledged political reforms and formed the Hosokawa
2 Coalition Cabinet after the general election of July 1993. The Hosokawa
3 Coalition Cabinet made political reform its main political agenda, in
44 response to public demand. The Political Funds Control Law and the Public
45111 Official Election Law were revised in 1994. In the revised Political Funds
66 Changes in the Japanese political system since 1993
Table 4.3 Allocation of cabinet posts among parties

LDP JSP NHP LP CGP Others

(SDPJ)
Murayama 13 51 2
Murayama Res. 13 52 13 1
1st Hashimoto 12 64 2
2nd Hashimoto 20
Obuchi 20
Obuchi 1st Res. 18 1 1
Obuchi 2nd Res. 17 1 1 1
Res.: Reshuffled cabinet
LDP: Liberal Democratic Party
JSP: Japan Socialist Party, The JSP changed its name to the Social Democratic Party of
Japan (SDPJ) in January 1996
NHP: New Harbinger Party
LP: Liberal Party
CGP: Clean Government Party
Others: non-Members of Parliament
1 Included the Prime Minister, the Minister of Finance and the Cabinet Secretary
2 Included the Prime Minister and the Cabinet Secretary
3 Included the Minister of Finance
4 Included the Minister of Finance

Control Law, political fund donation is limited in order to prevent corrup-

tion associated with political fund donation. Private companies, labour
unions and other associations cannot donate political funds, except to polit-
ical parties, political funds associations or political funds management
organizations (each politician is permitted to have only one political funds
management organization). As a result, LDP factions have lost their prin-
cipal means of collecting political funds.6
For example, in addition to electoral funds, factions used to distribute
political funds to their members. However, the Asahi Shinbun reported that
four out of the five main factions of the LDP did not distribute political
funds to their members in the summer of 1994 because of financial diffi-
culties (Asahi Shinbun, 10 August 1994, evening edition). Instead, LDP
members themselves have had to collect political funds. They have exploited
the LDP’s local branches and their political funds management organizations
by transferring political funds between these organizations (Yoshida and
Yamamoto 1999: 23–4)). The LDP had about 58,000 party branches in
August 1998, and the number of branches increased by 935 in three-and-a-
half years (Taniguchi 1999: 68).
As for the function of supporting election campaigns, the revised
Public Official Election Law adopted a new electoral system based on a
combination of single-seat constituencies and proportional representation
constituencies instead of multiple-seat medium-sized constituencies. Under
this new electoral system, formal recognition by the party as a LDP candi-
date is crucial for LDP members in order to stand for election as LDP
 Changes in the Japanese political system since 1993 67
1111 candidates, and there is no possibility that more than two LDP candidates
2 in one constituency will compete with each other. As a result, LDP candi-
3 dates do not need the factional support for election campaigns they needed
4 under the multiple-seat medium-sized constituencies system.
5111 The fourth reason for the weakened management system of the LDP is
6 the fact that conflicts across factions have weakened faction leaders’ control
7 of their members. Factions of the LDP previously competed with each
8 other for the post of Party President. The main LDP factions were formed
9 during the LDP Presidential election campaign in 1956. Eight factions
1011 (Kishi, Satø, Ikeda, Øno, Ishii, Køno, Miki-Matsumura and Ishibashi)
1 were formed, and five of them remained until the Miyazawa Cabinet in
2 1993 (Kitaoka 1995: 73–4). A faction to which the LDP President belonged
3111 (Søsaibatsu) and factions that cooperated with Søsaibatsu formed a power-
4 holding group (Shury¥-ha); factions that competed with Søsaibatsu in the
5 process of selecting the LDP President formed an anti-power holding group
6 (Han Shury¥-ha). Since the 1990s, the theme of conflicts across factions
7 has emerged: generational conflict (a conflict between junior LDP members
8 and senior LDP members) and conflict over the principle of coalition.
9 Factions have been divided over these issues, and a power-holding group
20111 and an anti-power holding group have been formed across factions.
1 With regard to generational conflict, the dissatisfaction of junior LDP
2 members with the strict seniority rule increased under LDP dominance.
3 After a series of political scandals were revealed from the end of the 1980s
4 to the beginning of the 1990s, they demanded ‘a change of generation’
5111 within the LDP. Junior LDP members demanded that some senior LDP
6 members should retire and junior members should have more influence
7 on the management of the LDP. In addition, under the Hosokawa Coalition
8 Cabinet and other coalition cabinets, junior members of other parties, who
9 had won elections only once or twice, obtained executive posts within
30111 their parties. Compared with such promotion of junior members in other
1 parties, junior LDP politicians were dissatisfied with the strict seniority
2 rule of the LDP.
3 As for the principle of coalition, the LDP was divided into two groups:
4 the group that supported a coalition with the JSP and the NHP (‘Ji-Sha-
5 Sa’ group)7 and the group that preferred a coalition with more conservative
6 parties (‘Ho-Ho’ group).8 The former group became a power-holding group
7 under the Murayama and Hashimoto Coalition Cabinets and the latter
8 became an anti-power holding group. The two themes (generational conflict
9 and coalition principle) are related to each other and various groups were
40111 formed across factions. The so-called ‘YKK’ group – Yamazaki Taku (the
1 Chair of the PARC under the first and second Hashimoto Cabinet), Katø
2 Køichi (the Chair of the PARC under the Murayama Cabinet, and the
3 Secretary General under the First and Second Hashimoto Cabinet), and
44 Koizumi Jun’ichirø (the Minister of Health and Welfare of the Second
45111 Hashimoto Cabinet) – were leaders of the power-holding group. They
68 Changes in the Japanese political system since 1993
supported the change of generation in the LDP and a coalition with the
JSP and the NHP. The YKK group and other junior LDP members formed
‘Shinseiki’ (New Century) in May 1994. Shinseiki opened its membership
to the JSP and the NHP, and attempted to strengthen connections with
them. An anti-power holding group, including Kajiyama Seiroku and other
senior members, argued for a coalition with more conservative parties,
such as the New Frontier Party (NFP). In June 1995 they formed ‘Kay¥kai’.
Junior members who sought coalition with the NFP formed ‘a study group
on the security of Japan’ in May 1997. When Yamazaki Taku (one of the
YKK members) and junior LDP members formed ‘Kin Mirai Kenky¥kai’
across factions in July 1998, the anti-power holding group formed ‘Nihon
Saiseikaigi’ (Committee on the Revitalization of Japan) in August and
‘Hazukikai – Nihon Saikøkaigi’ (Committee on the Reconstruction of
Japan) in September 1998. Table 4.4 shows the groups that were formed
across factions.
As conflicts between the two groups became intense, each faction was
divided into two groups and the factions’ cohesiveness declined. Figure
4.4 illustrates the split in each faction of the LDP under the Second
Hashimoto Cabinet. Each faction was divided into two groups.
For example, under the Second Hashimoto Cabinet, within the Obuchi
faction, Chief Cabinet Secretary Kajiyama Seiroku was a leader of the Ho-
Ho group and Acting Secretary General Nonaka Hiromu belonged to the
Ji-Sha-Sa group. As for the Mitsuzuka faction, Minister of Health and
Welfare Koizumi Jun’ichirø was a leader of the Ji-Sha-Sa group and
Minister of Construction Kamei Shizuka was from the Ho-Ho group. From
the Miyazawa faction, Secretary General Katø Køichi was a leader of the
Ji-Sha-Sa group and Director General of Economic Planning Agency Asø
Tarø was from the Ho-Ho group. Each faction was divided into these two
groups. The faction to which the LDP President belonged (Søsaibatsu) and

Table 4.4 Groups formed across factions

Ji-Sha-Sa groups

Date of inauguration Name

May 1994 Shinseiki
July 1998 Kin Mirai Kenky¥kai

Ho-Ho groups

Date of inauguration Name

June 1995 Kay¥kai
May 1997 A Study Group on the Security of Japan
April 1998 Nihon Saisei Kaigi
September 1998 Hazukikai – Nihon Saikøkaigi
 Changes in the Japanese political system since 1993 69
1111
2
Ji-Sha-Sa Group Neutrals Ho-Ho Group
3
4
5111 Obuchi Nonaka Hiromu Takeshita Noboru Kajiyama Seiroku
6 faction (Acting Secretary (Chief Cabinet
General) Obuchi Keizo- Secretary)
7
(LDP Vice President)
8
9
1011 Mitsuzuka Koizumi Jun’ichiro- Mitsuzuka Hiroshi Kamei Shizuka
1 faction (Minister of Health) (Minister of Finance) (Minister of
and Welfare) Construction)
2 Mori Yoshiro-
3111 (Chair of Executive
4 Council)
5
6 Miyazawa Kato- Ko-ichi Ko-no Yo-hei Aso- Taro-
7 faction (Secretary General) (Ex-President of LDP) (Director General
8 Miyazawa Ki’ich of Economic
9 (Ex-Prime Minister) Planning Agency)
20111
1 Ex-Watanabe Yamazaki Taku Yosano Kaoru
2 faction (Chair of PARC) (Vice Cabinet
3 Secretariat)
4 Nakasone Yasuhiro
(Ex-Prime
5111
Minister)
6
7
8
9
30111 Figure 4.4 Groups within factions under the Second Hashimoto Cabinet
1
Source: Asahi Shinbun 22 August 1997.
2
3
4 factions which supported Søsaibatsu constituted a power holding group.
5 However, after 1993, the ‘Ji-Sha-Sa’ group (a power holding group) and
6 the ‘Ho-Ho’ group (an anti-power holding group) were formed across fac-
7 tions. As a result, factions were divided into these two groups and the cohe-
8 siveness of factions was severely damaged, and the power of faction
9 leaders to control their members was significantly weakened. For example,
40111 30 junior members of the Mitsuzuka faction attended the meeting
1 of ‘a study group on constructing Japan in the 21st century’ (one of the
2 ‘Ho-Ho’ study groups). The mass media reported a confrontation between
3 faction executives and junior members over attending this study group.
44 The Director of the Mitsuzuka faction, Miyashita Søhei, asked junior
45111 members to refrain from attending them and to notify faction executives
70 Changes in the Japanese political system since 1993
beforehand when they wish to attend such study groups. Junior members
strongly opposed this and fiercely quarrelled over the issue (Asahi Shinbun:
12 August 1997).
The fifth reason for the weakened management system of the LDP relates
to the fact that winning the post of the LDP President has not always been
the primary target of the factions. As explained above, LDP factions were
formed in the process of LDP Presidential elections. Leaders of each faction
were candidates for LDP Presidential elections, and factions therefore
competed with each other for the post of LDP President. Factions would
unite in order to win an LDP Presidential election that maintained their
integration and cohesiveness. However, in the 1990s, candidates for the
LDP presidential election were not necessarily faction leaders. For instance,
Hashimoto Ry¥tarø became the LDP President and Prime Minister from
1996 to 1998, although he was not a leader of a faction at that time (he
was a member of the Obuchi faction; the leader of the Obuchi faction at
that time was Obuchi Keizø). In the LDP Presidential election of July
1998, three factions – the Kømoto faction, the Watanabe faction and the
Miyazawa faction – did not have their own candidate. On the other hand,
Koizumi Jun’ichirø stood for election although he was not a leader of the
faction to which he belonged (he was a member of the Mori faction). The
factions’ primary target had been to achieve the post of LDP President for
their factional leader since 1955; this had strengthened and maintained the
integrity and cohesiveness of the factions. As factions lost such a target,
their integrity and cohesiveness weakened.
Weakened control over factional members brought about conflicts within
factions, which resulted in splits within factions. Figure 4.5 shows factions
of the LDP since 1958. Under LDP dominance, factions integrated into five
main factions and, apart for the split of minor groups, the stability of the
five factions continued until 1993. The fragmentation of factions after 1993
shows the weakened control power of faction leaders over their members.
The election of the LDP President in 2001 also revealed the weakened
power of faction leaders. The Hashimoto faction, the largest in the LDP,
decided to support ex-Prime Minister Hashimoto Ry¥tarø as a candidate
for LDP President. Junior members of the Hashimoto faction openly
expressed their dissatisfaction with this decision. Five junior members
of the Hashimoto faction absented themselves from the general meeting of
the Hashimoto faction on 12 April 2001. Furthermore, 30 junior members
of the LDP asked the LDP Presidential Election Administration Committee
for permission to have a discussion with each candidate. They united across
almost all fations, including the Hashimoto, the Mori and the Horiuchi
factions.
Thus since 1993 the control power of faction leaders over their members
has been weakened, which has loosened the management system of the
LDP.9
1111
2
3
-
4 1958 Sato- Ikeda Ono Ishii Kishi Kono- Ishibashi Miki-Matsumura
5111
6
7 1960 Fuji
8 yama
9 Fuka Kawa
1011 da shima
1
2
3111 1964 Maeo Mura Funa Naka Miki Matsumura
4 kami da sone
5
6
7
-
8 1972 Tanaka Ohira Mizu X Shiina X
9 ta
20111
1 1979 X X X
2
1980 Suzuki X Ko-moto
3
4
5111 1987 Take Nikai Miya Abe
6 shita do- zawa
7 1993 Obu JRP Mitsu Wata
8 chi zuka nabe
9
30111
1998 Kaji Kato- Mori Kamei Mura Yamazaki
1 yama kami
2 Ko-no
3
1999 Eto--Kamei
4
5 2000 Hashi
6 moto
7
2001 Hori Ko-mura
8 uchi
9
40111
1
2 Figure 4.5 Factions of the LDP since 1958
3
44
45111
72 Changes in the Japanese political system since 1993
The change in attitudes of politicians towards MOF
bureaucrats
The attitude of LDP politicians towards bureaucrats, particularly MOF
bureaucrats, has changed. Under LDP dominance, LDP politicians and
bureaucrats had established a close partnership. Bureaucrats offered their
information and expertise by presenting policies to LDP politicians. LDP
politicians, in return, turned these policies into legislation. LDP politicians
also received beneficial treatment in budget compilation in the form of sub-
sidies or public works in their constituencies. However, under the Hosokawa
Coalition Cabinet, bureaucrats treated the LDP as one of the opposition
parties. According to a survey conducted by Nihon Keizai Shinbunsha in
1993, 42 per cent of executive bureaucrats answered that they tried to dis-
tance themselves from the LDP after the LDP went into opposition (Nihon
Keizai Shinbunsha 1994: 420).10 Without support from bureaucrats, LDP
politicians experienced a lack of information and expertise, and lack of ben-
eficial treatment.11
Under the Hosokawa Coalition Cabinet, bureaucrats worked for politi-
cians of ruling coalition parties as they had done for LDP politicians. LDP
politicians realized that bureaucrats were not their exclusive partners. In
particular, they resented MOF bureaucrats since the cooperation of the
Administrative Vice Minister, Saitø Jirø, with the actual leader of the JRP,
Ozawa Ichirø, under the Hosokawa Coalition Cabinet was conspicuous com-
pared with other executive bureaucrats. For instance, in December 1993,
he voluntarily met representatives of four major economic organizations12
and the mass media with the Administrative Vice Minister of Industry
and International Trade, Kumano Hideaki, and explained the Hosokawa
Cabinet’s plan to boost the economy. When Prime Minister Hosokawa
announced the introduction of the national welfare tax, the mass media
reported that the MOF, especially Saitø, had vigorously cooperated with
Ozawa in persuading the Prime Minister to institute the national welfare
tax.13 Furthermore, in the general election of October 1996, two ex-MOF
bureaucrats stood for election as NFP candidates, which fuelled the LDP’s
antipathy of the MOF.14 In the general election of June 2000, three out of
five ex-MOF bureaucrats stood for election as DP candidates. When the
LDP regained its position as ruling party under the Murayama Coalition
Cabinet, LDP politicians intervened in the personnel matters of bureaucrats
to eliminate the influence of other political parties. In order to break the
relationship between Ozawa Ichirø, an influential leader of the NFP, and
MOF executives, LDP executives intervened in the appointment and
dismissal of the Administrative Vice Minister of Finance. Two Admin-
istrative Vice Ministers of Finance, Saitø Jirø and Komura Takeshi, were
forced to take premature retirement since LDP executives believed that
they had a close relationship with Ozawa. As a successor to Komura, the
MOF attempted to appoint Wakui Yøji. But LDP executives influenced
the MOF to appoint Tanami Køji since they regarded Wakui as one of the
 Changes in the Japanese political system since 1993 73
1111 Saitø group having a close relationship with Ozawa. It was the first time
2 that LDP executives had apparently influenced an Administrative Vice
3 Minister of Finance to take premature retirement and had overturned the
4 MOF’s decision on the appointment of the Administrative Vice Minister.
5111 As for support – or the lack of it – from bureaucrats, some junior LDP
6 members obtained support from private companies, such as consulting com-
7 panies or private research institutions, rather than from bureaucrats. As a
8 result, the close relationship between LDP politicians and MOF bureau-
9 crats has changed from that of a close partnership to a more businesslike
1011 relationship. Mabuchi Masaru describes the relationship between LDP
1 politicians and MOF bureaucrats since the 1970s as that of ‘partners’, and
2 that since 1993 as of ‘neighbours’, a more cool and detached relationship
3111 (Mabuchi 1997: 92–131).
4 The issue of the integration of the Japan Development Bank and the
5 Export-Import Bank of Japan reflected the cool or rather chilly relation-
6 ship between LDP politicians and MOF bureaucrats. The Murayama
7 Coalition Cabinet pledged administrative reform as its political agenda and
8 pursued the integration and abolition of juridical persons in public law as
9 the main theme of administrative reform. LDP executives, especially the
20111 Chair of the PARC Katø Køichi and Secretary General Mori Yoshirø,
1 advocated the integration of the Japan Development Bank and the Export-
2 Import Bank of Japan in spite of strong opposition from the MOF. Retired
3 MOF executives had occupied the positions of Governor of the Japan
4 Development Bank and Governor of the Export-Import Bank of Japan.
5111 Therefore the MOF strongly opposed the integration of the two banks. On
6 the other hand, some LDP members resented the fact that the MOF had
7 cooperated with the JRP, especially Ozawa Ichirø, under the Hosokawa
8 Coalition Cabinet, and they wanted to damage the MOF. The mass media
9 reported a comment made by one LDP executive, ‘we will make Admin-
30111 istrative Vice Minister Saitø Jirø regret his cooperation with Ozawa Ichirø
1 . . .’ (Asahi Shinbun, 20 February 1995).
2 While the deterioration of the relationship with LDP politicians was
3 exacerbated, MOF bureaucrats could not institutionalize a close connec-
4 tion with new political parties as it had with the LDP. New parties
5 mushroomed after 1993, and many of them lacked leadership and party
6 discipline. As for the NFP, two groups, the Ozawa group (led by Ozawa
7 Ichirø) and the anti-Ozawa group, confronted each other in the first NFP
8 Presidential election. Although Kaifu Toshiki, whom the Ozawa group
9 supported, won the election, his leadership was weak because of severe
40111 confrontation between the two groups. When the budget of the 1996 fiscal
1 year and a package of bills for the J¥sen were debated in the Diet in
2 January 1996, the NFP was divided into three groups: a group led by
3 Ozawa Ichirø; a group led by Hata Tsutomu; and a group that consisted
44 of ex-members of the Clean Government Party. Finally, in January 1998,
45111 the NFP was broken up into six groups. As for the Democratic Party (DP),
74 Changes in the Japanese political system since 1993
the first DP (formed in September 1996) started with two leaders, Kan
Naoto and Hatoyama Yukio, and was divided with respect to cooperation
with the LDP. One of the leaders, Kan Naoto, expressed his view that the
DP would consider a coalition with the LDP, while the other leader,
Hatoyama Yukio, publicly admitted that his stance towards a coalition with
the LDP was different from that of Kan. The second DP (formed in April
1998) consisted of groups whose political principles were significantly
different from each other – from ex-JSP members to ex-LDP members.
As a result, the DP could not come out with a definite principle with respect
to controversial issues such as the revision of the Constitution or the secu-
rity of Japan. Because of frequent formation and dissolution, and the lack
of leadership, bureaucrats could not establish the same connection with the
new parties as they had with the LDP.

Conclusion
The result of the general election of July 1993 brought about the end of
LDP dominance and the beginning of the era of coalition cabinets. The
LDP has had to make coalitions with other political parties in order to
maintain its position as a ruling party ever since the Murayama Cabinet.
Such a structural change in the Japanese political system has caused insti-
tutional changes in the factors that had supported the issue settling system
based on close cooperation between LDP executives, faction leaders and
bureaucrats.
Under LDP dominance, decisions of LDP organizations were actually
decisions of the government and the Diet, and the LDP controlled its mem-
bers through factions. Therefore bureaucrats participated in LDP organ-
izations, such as the PARC and the EC, and negotiated with faction leaders
and LDP executives in order to legislate their policies. Faction leaders and
LDP executives controlled LDP members, and bargained with opposi-
tion parties to obtain smooth deliberation in the Diet. The negotiation with
faction leaders and LDP executives and their consent to plans created
by bureaucrats guaranteed support from the LDP as a whole for those
plans and their legislation. Thus bureaucrats established and relied on their
close relationship with faction leaders and LDP executives under LDP
dominance.
Since the end of LDP dominance, the importance of LDP organizations
in the decision-making process of the government and the Diet has
declined, the faction leaders’ control power over their members has been
weakened, and the relationship between LDP politicians and bureaucrats,
particularly MOF bureaucrats, has grown distant. MOF bureaucrats cannot
rely on a close connection with faction leaders and LDP executives to
settle political and economic issues. Although MOF bureaucrats obtain
consent from faction leaders and LDP executives, such consent does not
guarantee that bureaucrats’ plans will be put into practice as the govern-
 Changes in the Japanese political system since 1993 75
1111 ment’s plan, since under a coalition cabinet, the decision-making process
2 of the government is not concluded in the LDP organization. MOF bureau-
3 crats cannot expect support from the whole of the LDP because the LDP
4 is not integrated under the control of faction leaders.
5111 Thus institutional changes in the Japanese political system caused by
6 the end of LDP dominance seriously reduced the effectiveness of close
7 cooperation between MOF bureaucrats and LDP executives. It seems that
8 the mechanism that had adjusted to political changes until 1993 has not
9 been able to adapt to new political circumstances after 1993. Two factors
1011 can be seen as the causes.
1 One is the rigidity of the relationship between LDP politicians and
2 bureaucrats and its effectiveness under LDP dominance. Under LDP domi-
3111 nance, cooperation between LDP politicians and bureaucrats was firmly
4 institutionalized. Formal cooperation in each LDP organization (from divi-
5 sions of the PARC to the EC) and informal negotiations before and after
6 the formal meetings in such organizations were solidly organized and func-
7 tioned effectively, so LDP politicians and MOF bureaucrats did not dare
8 to change such procedures immediately after the General Election of July
9 1993.
20111 The other cause is the uncertainty of the alignment of parties in the
1 future. As explained before in this chapter, contrary to the expectation of
2 bureaucrats,15 the Hosokawa Coalition Cabinet did not last one year, and
3 the LDP regained the position of a ruling party in 1994. Nevertheless, the
4 LDP has been forced to cooperate with other parties to keep its majority
5111 in the Diet. New parties rapidly mushroomed and disappeared after 1993.
6 The JRP (established in 1993), which was supposed to be a major rival to
7 the LDP, was reorganized as the NFP in December 1994; however, it split
8 into six groups in 1998. The DP, which is supposed to be another major
9 rival to the LDP, has been plagued by internal conflicts since its founda-
30111 tion. Therefore it is difficult for both LDP politicians and MOF bureaucrats
1 to construct strategies to cope with new political circumstances.
2 When the mechanism, by which bureaucrats planned policies and put
3 them into legislation by cooperating with party politicians, faced the Taishø
4 Democracy and defeat in the Second World War, cooperation between
5 politicians and bureaucrats was not as rigidly institutionalized as under
6 LDP dominance. Regarding the Taishø Democracy, although some MHA
7 bureaucrats became members of the Seiy¥kai, the majority of bureaucrats
8 took aloof attitudes towards party politicians to avoid being involved in
9 party politics. During the Second World War, since the activities of polit-
40111 ical parties were largely limited, cooperation between party politicians and
1 bureaucrats was not so much observed in decision-making processes of
2 the government. As for the uncertainty of political parties’ alignment,
3 during the Taishø Democracy bureaucrats’ counterparts were two major
44 parties, the Seiy¥kai and the Kenseitø, and either of the two parties could
45111 obtain the position of a ruling party. Immediately after the Second World
76 Changes in the Japanese political system since 1993
War bureaucrats were in a dominant position in the Japanese political
system because of the purge of many party politicians from their public
positions, and since 1995 the LDP has monopolized the ruling position of
the Diet. Therefore the political circumstances in both these cases were
less uncertain compared with those after 1993.
It can be said that since 1993 Japanese politics has been in a period of
transition to a new political equilibrium. Politicians and MOF bureaucrats
have not been able to establish an effective relationship to settle political
and economic issues, which has caused political confusion and delay in
taking measures to surmount political and economic problems.
1111
2 5 Introduction of the
3
4 consumption tax in 1989
5111
6
7
8
9
1011
1
2
3111 Close cooperation between MOF bureaucrats and the LDP under LDP
4 dominance promoted a high growth in the Japanese economy in the 1960s
5 and 1970s. In July 1960, an ex-MOF executive, Ikeda Hayato, formed the
6 First Ikeda Cabinet, and the Cabinet proposed ‘The Income Doubling
7 Programme’ in which he pledged to double the national income within ten
8 years. The MOF answered this plan by expanding annual expenditure and
9 a government investment and loans programme (Zaisei Tøy¥shi). In the
20111 budget of the 1961 fiscal year, while the amount of tax reduction totalled
1 113 billion yen, the annual expenditure and the government investment
2 and loans programme increased to 19.4 per cent and 30.5 per cent respec-
3 tively from the previous fiscal year to improve social welfare systems and
4 infrastructure (Økurashø Zaiseishishitsu 1998: 209). The average growth
5111 rates of the annual expenditure and government investment and loans
6 programme from the 1961 fiscal year to the 1971 fiscal year were 16.76
7 per cent and 20.8 per cent respectively. The Japanese economy experi-
8 enced ‘the high growth period’ (Kødo Seichøki) during the 1960s and early
9 1970s.
30111 When the ‘oil price shock’ attacked the Japanese economy in 1973,1 the
1 Japanese economy suffered from serious inflation. An ex-MOF executive,
2 Fukuda Takeo, was appointed Finance Minister in 1973. The MOF
3 succeeded in restraining the annual expenditure of the 1974 fiscal year.
4 The growth rate of annual expenditure shrank from 25.7 per cent (in the
5 1973 fiscal year) to 8.5 per cent. On the other hand, the reduction in income
6 tax amounted to 2 trillion yen, and a supplementary government invest-
7 ment and loans programme (636 billion yen) was put into practice to
8 support small and medium-sized enterprises. Thus the Japanese economy
9 overcame the serious inflation after the ‘oil price shock’.
40111 The introduction of the consumption tax, which was enforced in April
1 1989, illustrates how the issue settling system functioned successfully
2 under LDP dominance. The structure of the Japanese tax system after the
3 Second World War was established following the Shoup Report,2 which
44 proposed a tax system mainly depending on direct taxes, such as an income
45111 tax and a corporate tax. Since then, although there have been minor
78 Introduction of the consumption tax in 1989
revisions, there has been no significant change which would bring about
a new imposition on Japanese taxpayers as a whole. As will be explained
later, the MOF fostered the introduction of a broad-based indirect tax
system as a long-term issue in order to cover the shortfall of tax revenue
and to stop the issuance of deficit-covering bonds. However, the intro-
duction of a new tax was widely regarded as an unpopular issue. The result
of an opinion poll conducted by the Asahi Shinbun in March 1987 showed
that 82 per cent of respondents opposed the introduction of a new broad-
based indirect tax system, while only 7 per cent approved of its introduction
(Asahi Shinbun, 14 March 1987). After the LDP announced the ‘Major
Line of Structural Tax Reform’ on 15 June 1988, which proposed the intro-
duction of the consumption tax, the Asahi Shinbun conducted an opinion
poll and found that 60 per cent of respondents still opposed the intro-
duction of the consumption tax (Asahi Shinbun, 26 June 1988). Because
of strong opposition by the public, opposition parties and even LDP
members, the Øhira Cabinet and the Nakasone Cabinet failed to introduce
a new broad-based indirect tax system.
Considering the above situations, it can be said that it seemed most
unlikely that the government would legislate a new indirect tax system,
such as a consumption tax, which would impose on the Japanese taxpayers
as a whole. Nevertheless, the Takeshita Cabinet succeeded in legislating
the Consumption Tax Law in 1989.
In the 1980s, organization of and factional control over LDP members
was at its height. Not only was the bottom-up structure of the LDP’s decision-
making process institutionalized (decisions were made in the Divisions of
the PARC first and those decisions were passed on to the EC) but also
each faction formed an organizational structure similar to LDP organizations.
In 1987, the Director General of each faction formed the Committee of
Director General of Factions to coordinate the factions. Based on the above
circumstances in the LDP, cooperation between bureaucrats, LDP execu-
tives and faction leaders was firmly institutionalized in the 1980s. Bureau-
crats could grasp the decision-making process of the LDP by participating
in its every stage, from the Divisions of the PARC to the EC, and by count-
ing on faction executives’ control over their members. As a result, this coop-
eration, which was the essential component of the issue settling system,
became firm and stable by the end of the 1980s. The LDP organizations
such as the PARC and the Tax System Research Council (LDP TSRC), kept
their important positions in the decision-making process of the government.
Therefore their decisions actually determined the government’s decisions.
LDP members were strictly controlled through factions; as a result, they fol-
lowed faction leaders’ decisions. LDP politicians and bureaucrats formed
close relationships. The stability and effectiveness of close cooperation
between bureaucrats, LDP executives and faction leaders reached a peak at
that time. Consequently, the MOF succeeded in enacting its plan, the intro-
duction of the consumption tax, by making the best use of the issue settling
 Introduction of the consumption tax in 1989 79
1111 system. It can therefore be said that the success in introducing the consump-
2 tion tax demonstrates the effectiveness of the issue settling system.
3
4
Details of the introduction of the consumption tax
5111
6
The attempts to introduce a new indirect tax by 1987
7
8 After the first oil price shock in 1973, the Japanese economy experienced
9 negative economic growth. As a result, the tax revenue shortfall in the
1011 1975 fiscal year amounted to about 3 trillion yen, which was 22.3 per cent
1 of the initial estimate of tax revenue. The government issued 3 trillion 480
2 billion yen of national bonds, 2 trillion 290 billion yen of which were
3111 deficit-covering bonds.3 Consequently, the proportion of tax revenue to
4 general account revenue fell to 60 per cent. The bond dependency ratio of
5 the budget sharply increased from 9.4 per cent (the initial budget of the
6 1975 fiscal year) to 26.3 per cent. Finance Minister Øhira Masayoshi deliv-
7 ered ‘the Declaration of Fiscal Crisis’ at the House of Representatives
8 Budget Committee.
9 The MOF already recognized the need for a broad-based indirect tax
20111 and studied the value-added tax (VAT) systems which had already been
1 introduced in European Community countries, and in the autumn of 1970,
2 it formed a research group to study VAT (Kinoshita 1992: 526).
3 In 1971, the Government Tax System Research Council (GTSRC)4
4 emphasized the need for a broad-based tax on consumption in the ‘Long
5111 Term Proposal on the Tax System’. The large tax revenue shortfall in the
6 budget for fiscal year 1975 put this issue on the political agenda (Mizuno
7 1993: 19). In October 1977, the GTSRC presented ‘A Proposal on the
8 Future Tax System’, which suggested that, in order to be freed from depen-
9 dence on a large issuance of national bonds, it was a reasonable policy to
30111 adopt a broad-based tax on consumption, and it advised that the intro-
1 duction of a system such as the VAT should be considered. Following this
2 proposal, the government began to discuss a new tax on consumption and,
3 in December 1978, both the GTSRC and the Tax System Research Council
4 of the LDP (LDP TSRC) proposed that a general consumption tax should
5 be introduced in the 1980 fiscal year. According to those proposals, the
6 Prime Minister at that time, Øhira Masayoshi, an ex-MOF official, was
7 determined to implement tax reform in the 1980 fiscal year.
8 In January 1979 at a Cabinet meeting, the Øhira Cabinet did decide to
9 introduce a general consumption tax in the 1980 fiscal year. However, LDP
40111 members, even the ‘zeisei (tax) zoku’ took a negative attitude towards the
1 introduction of the general consumption tax. Business circles and public
2 opinion strongly opposed it. Finally, Prime Minister Øhira was forced to
3 abandon the introduction of the general consumption tax in the 1979
44 general election campaign. Opposition parties attempted to eliminate the
45111 possibility of a future introduction of a general consumption tax by passing
80 Introduction of the consumption tax in 1989
a resolution ‘to abandon a general consumption tax’. The LDP and the
MOF made an effort to preserve the possibility of the future introduction
of a general consumption tax. The LDP, especially Finance Minister
Takeshita Noboru, and the MOF vigorously negotiated with opposition
parties and succeeded in changing the resolution into a resolution ‘on fiscal
reconstruction’. The resolution admitted that the general consumption tax
that the government had attempted to introduce in the 1980 fiscal year had
not been supported by the public, and it asked that fiscal reconstruction
should be achieved first by administrative reforms and the rectification of
tax inequality, and then by fundamental reforms of the current tax system.5
After the 1979 general election, the Suzuki Cabinet, which followed the
Øhira Cabinet, announced ‘administrative and fiscal reform’ and ‘fiscal
reconstruction without a tax increase’. Although the attempt to introduce
the general consumption tax failed, the MOF adopted clever strategies to
place the introduction of a value-added tax on the political agenda. Under
the label ‘administrative and fiscal reform’, the expenditure items of each
ministry’s budget were uniformly curtailed, and the constraint of a ‘zero
ceiling’ – in which the expenditure level of each ministry in the next fiscal
year was assessed at the same level as that in the current fiscal year –
severely restricted any increase in expenditure, except for defence and offi-
cial development assistance (ODA). In spite of the restraint of expenditure,
deficit-covering bonds were continuously issued. Figures 5.1 and 5.2 show
the rates of dependence of revenue on national bonds and the amounts of
the issuance of deficit-covering bonds from 1975 to 1985 respectively. The
rate and the amount increased from 1975 to 1980, and although both of
them slightly decreased after 1980, deficit-covering bonds were issued
amounting to more than 6 billion yen every fiscal year from 1980 to 1985.
In addition, the restraint of expenditure, especially the expenditure on
public works and subsidies, caused dissatisfaction among LDP members.6
In the six years after 1978 while expenditure had been curtailed, no
reduction of income tax had been put into practice. In the deliberations on
the budget of the 1984 fiscal year, the reduction of income tax was heat-
edly discussed and, as a result, a reduction in income tax was introduced
in the 1984 fiscal year. In order to secure a revenue source for this reduc-
tion, the rates of corporate tax, commodity tax and liquor tax were raised,
and the revision of taxable items of the commodity tax regarding office
automation facilities, such as computers and photocopiers, was discussed
in the LDP TSRC.7 Although business leaders had demanded ‘fiscal recon-
struction without a tax increase’, they thought that accepting the introduction
of a value-added tax system was inevitable. For example, on 7 January
1985, the Federation of Economic Organizations (Keidanren), one of four
major business organizations, decided to create a proposal for the future
tax system that would include the introduction of a broad-based indirect
tax system (Asahi Shinbun, 8 January 1985). Thus the condition for reviving
the introduction of a value-added tax on the political agenda was prepared.
1111
2
3
4 40
5111
35
The rates of dependence of
revenue on national bonds

6
7 30
8 25
9
20
1011
1 15
2 10
3111
5
4
5 0
6
75

76

77

78

79

80

81

82

83

84

85
19

19

19

19

19

19

19

19

19

19

19
7
Fiscal years
8
9 Figure 5.1 The rates of dependence of revenue on national bonds (1975–1985)
20111 Source: Gendai Yøgo no Kiso Chishiki 2002: 203.
1 Note: the rate of dependence of revenue on national bonds (%) = the total amount of revenue
2 by the issuance of national bonds divided by the total amount of general account expenditure
3 x 100 .
4
5111
6 8
deficit-covering bonds (billion yen)

7
The amounts of the issuance of

7
8
9 6
30111 5
1
4
2
3 3
4 2
5
1
6
7 0
8 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985
9 Fiscal years
40111
Figure 5.2 The amounts of the issuance of deficit-covering bonds (1975–1985)
1
2 Source: Jiy¥kokuminsha 2002: 203.
3
44
45111
82 Introduction of the consumption tax in 1989
After the simultaneous elections of the House of Representatives (HR)
and the House of Councillors (HC) in July 1986, the Third Nakasone
Cabinet was formed, having gained a record-breaking 300 seats out of 511
in the HR. Prime Minister Nakasone Yasuhiro appealed for tax reform as
one of ‘final accounts of postwar politics’ (Asahi Shibun, evening edition,
26 January 1987). In his administrative policy speech of 26 January 1987,
he pledged that the tax reform bills that were supposed to be submitted to
the Diet would reform the tax system based on the Shoup Proposal of 1949
by revising indirect tax systems. In February 1987, the tax reform bills were
endorsed by the Cabinet and submitted to the Diet. Regarding the Sales
Tax Bill, opposition parties severely objected, and deliberation in the Budget
Committee of the HR was suspended several times because opposition
parties refused to attend the Budget Committee. In spite of this, the budget
of the 1988 fiscal year passed the Budget Committee of the HR on 15 April.
The attitudes of the opposition parties became more confrontational. The
LDP began to negotiate with opposition parties with respect to the Sales
Tax Bill in order to let the budget of the 1988 fiscal year pass the plenary
session of the HR. The LDP presented a plan to the Speaker of the HR
and, in accordance with this plan, the Speaker presented a mediation
proposal to the LDP and opposition parties. On 23 April 1987, the LDP
and opposition parties (except for the Japan Communist Party) agreed to
this proposal, and the budget of the 1988 fiscal year passed the plenary
session of the HR. The proposal included the following points:

1 The Sales Tax Bill would be left to the Speaker of the HR.8
2 All the parties would cooperate and make the maximum effort to put
tax reform into practice; this would include the revision of the tax
revenue share of direct and indirect tax.
3 A committee on tax reform would be established in the HR.
4 The Sales Tax Bill would be dealt with according to the result of
discussion in the committee. If the committee did not present a deci-
sion by the end of this session, the LDP and opposition parties would
make an effort to reach an agreement and to deal with the Sales Tax
Bill according to the agreement.

Although the Sales Tax Bill was finally dropped, the LDP succeeded in pre-
serving the possibility of future tax reform in this proposal. On 13 October
1987, the LDP TSRC decided the ‘Principle on Fundamental Reform on
Tax System’, and on 15 October 1987 the PARC and the EC approved this
principle. It was also submitted to and approved by the Cabinet meeting on
16 October 1987. The principle included the following points:

1 Fundamental reform of the present tax system should be implemented

according to the mediation proposal presented by the Speaker of the
HR on 23 April 1987.
 Introduction of the consumption tax in 1989 83
1111 2 Considering the feeling of middle-income-level groups, that the tax
2 was too heavy, a fair income tax system should be implemented.
3 3 A corporate tax system that would adapt to a globalized economy
4 should be established.
5111 4 The present indirect tax systems should be fundamentally reformed.
6 5 The inheritance tax and other taxes on properties should be reexamined.
7
8 The Takeshita Cabinet, which followed the Nakasone Cabinet in November
9 1987, tackled tax reform, including the introduction of a new tax on
1011 consumption, according to this principle.
1
2
3111 Details of the introduction of the consumption tax
4 In November 1987, the Takeshita Cabinet was formed, and from the begin-
5 ning, Prime Minister Takeshita Noboru presented structural tax reform as
6 a primary part of the agenda of his cabinet. At the press conference of 31
7 October 1987, he stated that he would execute tax reform according to the
8 ‘Principle on Fundamental Reform on Tax System’, and on a television
9 programme he presented the view that: ‘The present indirect tax system is
20111 too complicated. We should change this system into a more simple tax
1 system. I think conditions for which we have a thorough discussion about
2
this issue have been prepared . . .’ (Asahi Shinbun, 1 November 1987).
3
In November 1987, Prime Minister Takeshita submitted an enquiry about
4
structural tax reform to the GTSRC. The enquiry asked the GTSRC to
5111
present a concrete proposal with respect to appropriate tax systems on
6
7 income, corporate, property and consumption considering the ‘Principle on
8 Fundamental Reform on Tax System’ and the current circumstances. The
9 GTSRC held public hearings on 8 and 9 December 1987, and formed
30111 committees on the direct tax system, the indirect tax system and basic
1 issues of tax systems. Concrete issues were discussed in those commit-
2 tees. In February 1988, the GTSRC presented the ‘Basic Issues of Tax
3 System Reform’, which proposed that the introduction of a broad-based
4 indirect tax should be discussed, and it held public hearings in February
5 and March 1988 regarding the ‘Basic Issues of Tax System Reform’. On
6 28 April, the GTSRC presented an interim report on tax reform. Its outline
7 was to:
8
9 1 reduce income tax and residents’ tax by decreasing the number of
40111 brackets in the tax rate and by increasing the amount of deductions;
1 2 introduce a new consumption tax;
2 3 reduce the inheritance tax by raising the lowest taxable limit;
3 4 reduce the corporate tax by reducing the basic tax rate;
44 5 revise the existing tax systems in order to ease the public feelings of
45111 tax inequality.
84 Introduction of the consumption tax in 1989
As for the LDP, the LDP TSRC, one of the organizations of the PARC,
played a main role in dealing with this issue. In December 1987, the LDP
TSRC began to discuss structural tax reform. After the budget of the 1989
fiscal year passed the HR on 10 March 1987, the LDP TSRC had an inten-
sive discussion over this issue. In April 1988, it held public hearings with
industrial groups and business circles. On 28 May, the LDP TSRC
presented an interim report to the EC and the PARC, and it had finished
the discussion on the main issues of tax reform by 2 June. On 3 and 4
June 1988, Divisions of the PARC discussed this interim report. Finally,
on 14 June the LDP TSRC presented the ‘Major Line of Structural Tax
Reform’ and, on the same day, the PARC and the EC approved it. The
outline of the ‘Major Line of Structural Tax Reform’ was to:

1 introduce a value-added type indirect tax: the consumption tax with

the account method;
2 revise existing indirect taxes;
3 reduce income tax and residents’ tax by decreasing the number of
brackets in the tax rate, reducing the maximum rates and increasing
the amount of deductions;
4 reduce the basic rate of the corporate tax from 42 per cent to 37.5 per
cent;
5 reduce the inheritance tax by raising the lowest taxable limit and
reducing its maximum rate;
6 revise the existing tax system in order to ease the public feelings of
tax inequality.

On 15 June, the GTSRC presented the ‘Final Report on Structural Tax

Reform’. Its content was almost the same as that of its interim report, and
it approved the fact that ‘the “Major Line of Structural Tax Reform”
presented by the LDP TSRC mostly agreed with the basic principle
presented in the interim report presented by the GTSRC on 28 April 1987’
(Asahi Shinbun, 16 June 1987). On 28 June, the Cabinet approved the
‘Major Line of Tax Reform’, which was created by the MOF based on the
‘Major Line of Structural Tax Reform’ presented by the LDP TSRC and
the final report presented by the GTSRC. On 29 July, the Cabinet submitted
a package of bills on tax reform that included the Consumption Tax Bill.
Unlike the sales tax case, opposition parties were divided over the
consumption tax.9 On 15 June, after the ‘Major Line of Structural Tax
Reform’ was approved by the LDP, the leader of the DSP, Tsukamoto
Saburø, presented three conditions: the reduction of income tax in the 1989
fiscal year; discussion between the LDP and opposition parties regarding
the rectification of tax inequality; and the creation of middle-term plans
for administrative reforms and welfare systems. He announced that the
DSP would attend the deliberation on the Consumption Tax Bill in the
Diet if the LDP promised to implement those conditions. After the package
 Introduction of the consumption tax in 1989 85
1111 of tax reform bills, which included the Consumption Tax Bill, was
2 submitted to the Diet on 14 September, the Special Committee on Tax
3 System was formed in the HR to deliberate on the package of tax reform
4 bills. Opposition parties demanded that the rectification of tax inequality
5111 should be discussed in the Special Committee before the deliberation on
6 the package of tax reform bills. The LDP compromised with opposition
7 parties and first discussed the rectification of tax inequality in the Special
8 Committee; they reached an agreement with respect to taxation on the
9 profit from sales of stocks.10 In addition, responding to the conditions that
1011 the DSP demanded, the ‘Plan for the Promotion of Administrative and
1 Fiscal Reforms’ and the ‘Basic Principles and Targets for Long-Life and
2 Welfare Society’ were presented to the DSP and submitted to the Special
3111 Committee by the MOF, the Ministry of Health and Welfare and the
4 Ministry of Labour. Although the LDP and opposition parties discussed
5 the rectification of tax inequality as preparation for the deliberation on the
6 package of tax reform bills in the Special Committee on the Tax System,
7 opposition parties still refused to vote on the package of tax reform bills
8 and to deliberate on this in the plenary session of the HR. Finally, on 10
9 November 1988, the package of tax reform bills passed the Special
20111 Committee on the Tax System without the attendance of opposition parties.
1 Despite such a forced passage in the Special Committee on the Tax
2 System, the LDP wanted to avoid a forced passage of the Consumption
3 Tax Bill in the plenary session of the HR, since this would incur public
4 antipathy. Therefore, although the LDP had a majority in the HR and in
5111 the HC, the LDP negotiated with the DSP and the CGP in order to ensure
6 their attendance in the plenary session of the HR. After negotiations
7 between the DSP, the CGP and the LDP, agreements were made between
8 them. These agreements included the addition of an article to the Con-
9 sumption Tax Bill that provided that the consumption tax law would be
30111 applied flexibly mainly through public relations, consultations and admin-
1 istrative guidance for six months from April 1989 and that there would be
2 payment of extra welfare pension to recipients of the old-age welfare
3 pension. The bills passed the HR on 16 November 1988 and the HC on
4 24 December 1988.
5
6
The role of LDP organizations
7
8 The LDP TSRC played a key role in introducing the consumption tax. The
9 Special Committee on Tax Reform was formed as an organization of the
40111 PARC in 1956, and in 1959 it was renamed the Tax System Research Council
1 (the LDP TSRC). Although it was not particularly active in the first half of
2 the 1960s, in the 1970s it became a more active and influential organization
3 of the PARC. Every year in the process of budget compilation, the current
44 tax systems are re-examined to look at the tax revenue of the fiscal year,
45111 and the LDP TSRC creates the ‘Major Line of Tax System Reform’. This
86 Introduction of the consumption tax in 1989
has actually formed the government’s decision on tax reforms in every fiscal
year. Satø Seizaburø and Matsuzaki explain that interest groups seeking
favourable treatment found that it was necessary to submit requests to the
LDP TSRC as it became influential in the 1970s (Satø and Matsuzaki 1986:
112).The number of organizations that submitted requests to the LDP TSRC
in connection with the ‘Major Line of Tax System Reform’ rapidly increased
from 95 in 1970 to 84 in 1980s and soared from 198 in 1984 to 358 in 1986
(Satø and Matsuzaki 1986: 113).
Another example showing the influence of the LDP TSRC is its rela-
tionship with the GTSRC. Satø and Matsuzaki point out that at first the
LDP TSRC decided on the ‘Major Line of Tax System Reform’ after
the GTSRC had presented its own proposal; however, in 1967, regarding
the 1968 fiscal year, the LDP TSRC presented the ‘Major Line of Tax
System Reform’ of the 1968 fiscal year on the same day that the GTSRC
presented its own proposal. Since then, the LDP TSRC has actually taken
the leadership in deciding the contents of tax reform in every fiscal year
(Satø and Matsuzaki 1986: 112–13).
Concerning the tax reform of the 1989 fiscal year, which included the con-
sumption tax, the LDP TSRC also took the leadership. The GTSRC tried to
keep its proposals of its interim report in line with those of the LDP TSRC.11
For instance, over the tax rate, which caused a heated discussion, the interim
report of the GTSRC only suggested that the same tax rate should be applied
to all taxable items.12 This issue was intensely discussed in the LDP TSRC,
and it was finally decided that 3 per cent should be applied to all taxable
items. With respect to the method of calculation, the interim report of the
GTSRC presented both arguments that supported the invoice method and
also arguments that supported the account method.13 Regarding other issues
related to the interests of corporations, such as the tax exemption point, the
optional use of the simplified calculation rule and the areas of tax-free trans-
action, the interim report of the GTSRC did not make a concrete proposal,
and the LDP TSRC decided on those issues in the ‘Major Line of Structural
Tax Reform’. Therefore the details of tax reform, especially on the con-
sumption tax, were decided by the LDP TSRC rather than the GTSRC.
The discussions of LDP organizations such as the LDP TSRC, the PARC
and the EC were incorporated into the ‘Major Line of Structural Tax
Reform’. After the LDP TSRC presented its interim report to the PARC
and the EC on 27 May, Divisions of the PARC discussed the report on
3 and 4 June. In each Division of the PARC, details of the discussion in the
LDP TSRC were reported. On 6 June, the results of the discussion in 17
Divisions of the PARC were reported to the LDP TSRC, and the LDP TSRC
issued the ‘Major Line of Structural Tax Reform’, based on the discussions
in the PARC and the EC.14
After the LDP decided the ‘Major Line of Structural Tax Reform’, the
Cabinet meeting approved the ‘Major Line of Tax Reform’ on 28 June.
Table 5.1 shows the main details of the consumption tax in the Interim
3
2
1
9
8
7
6
5
4
3
2
1
9
8
7
6
4
3
2
1
9
8
7
6
5
4
2
1
9
8
7
6
4
3
2

44
5111
3111
1011
5111
1111

45111
40111
30111
20111
Table 5.1 The consumption tax proposals of the GTSRC, the LDP TSRC and the Consumption Tax Bill

Interim (Final) Report of ‘Major Line of Structural Consumption Tax Bill

the GTSRC Tax Reform’ of LDP TSRC

Type of tax value-added tax value-added tax value-added tax

Calculation method invoice method or invoice method invoice method
account method
Tax rate single rate is preferable 3% 3%
Date of enforcement no specific proposal 1 April 1989 1 April 1989
Tax exemption point no specific proposal 30 million yen of taxable 30 million yen of taxable
amount sold amount sold
Tax-free transaction no specific proposal transfer or loan of estate transfer or loan of estate
interests of loan, interests of loan,
insurance contribution insurance contribution
transfer of stocks and bonds transfer of stocks and bonds
transfer of stamps transfer of stamps
commissions of international commissions of international
postal exchange, foreign postal exchange, foreign
exchange, services of exchange, services of
government (including government (including
local government) local government)
medical treatments based medical treatments based on
on medical insurance medical insurance
social welfare service social welfare service
tuition fee of schools tuition fee of schools
founded according to the founded according to the
School Education Law School Education Law

Optional use of simplified no specific proposal less than 500 million yen less than 500 million yen of
calculation rule of taxable amount sold taxable amount sold
88 Introduction of the consumption tax in 1989
(Final) Report of the GTSRC (the contents of the final report of the GTSRC
were the same as those of its interim report, the ‘Major Line of Structural
Tax Reform’ presented by the LDP TSRC and a Consumption Tax Bill
submitted by the Cabinet). As this table shows, the main details of the
Consumption Tax Bill were almost the same as the ‘Major Line of
Structural Tax Reform’ approved by the LDP.
In the process of introducing the consumption tax, the LDP TSRC played
a main role, and the PARC and the EC also participated in creating the
‘Major Line of Structural Tax Reform’. The GTSRC kept its proposals in
line with those of the LDP TSRC, and it authorized the proposals of the
LDP TSRC in its final report. Furthermore, both the ‘Major Line of Tax
Reform’ approved by the Cabinet meeting and the package of bills of tax
reform were based on the ‘Major Line of Structural Tax Reform’ presented
by the LDP TSRC. The results of discussion in LDP organizations such as
the LDP TSRC, the PARC and the EC were incorporated in the decision
of the Cabinet and the bills submitted by the Cabinet. It can therefore be
said that the decisions of LDP organizations were actually the decisions of
the government. Thus, with regard to the introduction of the consumption
tax, LDP organizations played a crucial role in the decision-making process
of the government.

The management of the LDP

When the Nakasone Cabinet attempted to legislate the sales tax, many LDP
members, especially junior LDP members or members from closely con-
tested constituencies, were against its introduction. Their supporting groups
in their constituencies, køenkai, were mainly based on local small-sized
businesses and shops, which strongly opposed the introduction of the sales
tax. LDP members were afraid that they would lose the support of their
køenkai, and they gave priority to their køenkai’s demands over the LDP’s
decisions. For example, Hatoyama Kunio and Fukaya Ry¥ji, who were both
from the closely contested eigth constituency of Tøkyø, attended an anti-
sales tax meeting held by small shopkeepers in their constituency. Prime
Minister Takeshita controlled the LDP from the beginning, unlike the
situation in the Nakasone sales tax case. He was the leader of the Keiseikai
(Takeshita faction), the largest faction of the LDP at that time, and could
count on its support. In addition, he was appointed President of the LDP
without an LDP Presidential election. Former Prime Minister Nakasone
Yasuhiro recommended him as the next Prime Minister, and other factions
agreed with Nakasone’s recommendation. The Takeshita Cabinet began
without severe conflicts between the Keiseikai and other factions.15
Prime Minister Takeshita also kept his control over the LDP by appointing
his right-hand men to crucial positions in the LDP and the Cabinet. For
instance, he appointed Obuchi Keizø (a member of the Keiseikai) as the
Cabinet Secretary. He negotiated with the LDP to implement the Prime
 Introduction of the consumption tax in 1989 89
1111 Minister’s decisions. Vice Cabinet Secretary Ozawa Ichirø (a member of
2 the Keiseikai at that time) handled negotiations with opposition parties.
3 In addition, Prime Minister Takeshita was well known for his ability to
4 manipulate factional control. He controlled the personnel matters of the
5111 LDP, which were based on the balance of factional power, and by managing
6 personnel matters, he had a tight grip on the LDP.16
7 In the process of the introduction of the consumption tax, he made the
8 best use of factions to control LDP members. As the leader of the largest
9 faction, the Keiseikai, he counted on its firm support. Kanemaru Shin, who
1011 was an influential executive of the Takeshita faction (Keiseikai) at that
1 time, appealed to members of the Keiseikai at a general meeting that all
2 the members of the Keiseikai should unite together and use all means to
3111 ensure that the tax reform bills were enacted.
4 Prime Minister Takeshita also utilized the management function of fac-
5 tions. On 25 August 1989, at a meeting of the Secretaries General of each
6 faction, the Cabinet Secretary, Obuchi Keizø, asked the Secretaries General
7 to cooperate with the Prime Minister to get the tax reform bills enacted,
8
and they agreed that each faction would do its best to let the Consumption
9
Tax Bill be passed by the Diet. Following this agreement, each faction
20111
adopted a resolution to allow the Consumption Tax Bill to be passed by
1
the Diet. On 26 August, the Nakasone faction adopted a resolution: ‘We
2
will unite ourselves tightly, devote all our energies, and put the tax reform
3
4 bills into legislation in this extraordinary session’ (Asahi Shinbun evening
5111 edition, 30 August 1988). On 29 August at the Takeshita faction meeting,
6 Kanemaru Shin, ex-Vice Prime Minister, appealed, ‘If the consumption tax
7 is not put into practice, the meaning of the existence of the Keiseikai will
8 be questioned. We must devote ourselves to putting the tax reform bills
9 into legislation’ (Asahi Shinbun evening edition, 30 August 1988), and
30111 members agreed to adopt his appeal as a resolution. On 4 September the
1 Miyazawa faction adopted the following resolution: ‘Political circumstances
2 face a crucial moment with regard to the tax reform. We unite ourselves
3 tightly under the leadership of Mr Miyazawa, and put the tax reform bills
4 into practice in this session.’ On the same day, the Abe faction also decided,
5 ‘We will devote our energies and let the tax reform bills pass the Diet in
6 this extraordinary session.’ Furthermore, faction leaders and executives pre-
7 vented their members from speaking publicly against the consumption tax.
8 The Asahi Shinbun reported that executives of the Abe faction told junior
9 members who criticized the procedure of the discussion in the LDP TSRC,
40111 ‘You should not get the Secretary General [Abe Shintarø, the leader of Abe
1 faction] into trouble’ (Asahi Shinbun, 18 May 1988).
2 Faction leaders and executives controlled their members effectively.
3 The LDP was integrated by factional control and supported Prime
44 Minister Takeshita with respect to putting the Consumption Tax Bill into
45111 legislation.
90 Introduction of the consumption tax in 1989
Cooperation between the LDP and the MOF
The MOF closely negotiated with executives of the LDP TSRC from the
beginning. The decision-making process of the LDP TSRC consists of three
stages: the Inner Committee, which consists of ex-Chairs of the LDP TSRC
and some influential LDP members; the Chair and Vice Chairs Committee;
and the Small Committee in which all members of the LDP TSRC may
participate. First, the Inner Committee makes decisions that actually decide
a course of discussions in the Chair and Vice Chairs Committee and the
Small Committee, then issues are discussed in the Committee of Chair and
Vice Chairs, and finally they are discussed in the Small Committee. MOF
bureaucrats attend all three stages and hand out materials to them.
With regard to the introduction of the consumption tax, the MOF main-
tained this close cooperation with executives of the LDP TSRC. When
Yamanaka Sadanori was appointed as Chair of the LDP TSRC on 29 July
1986, executives of the Tax Bureau of the MOF ‘immediately contacted
the Chair of the LDP TSRC, Yamanaka, and discussed how to deal with
the tax reform issue’ (Mizuno 1993: 82). When the Takeshita Cabinet
succeeded the Third Nakasone Cabinet, the MOF created the ‘Principles
of Structural Tax Reform’ and both the LDP and the Cabinet approved
them as their own principles. The MOF also consulted the Chair of the
LDP TSRC, Yamanaka Sadanori, and created the ‘Basic Principles of
Structural Tax Reform’ (Mizuno 1993: 183). The LDP TSRC agreed it on
13 October, and the PARC and the EC approved it on 15 October as the
decision of the LDP. Thus, the plans that the MOF created in consultation
with LDP executives were submitted to organizations of the LDP and
approved as the decision of the LDP.17
When many industries demanded a zero-tax rate system at hearings
conducted by the LDP TSRC, the MOF strongly opposed this system. The
MOF insisted that a zero-tax rate system would allow ‘the tax-exempt
corporations reimbursement of the taxes on their purchases’ (Katø 1997:
218–19) and submitted the relevant data to the LDP TSRC. The LDP TSRC
Subcommittee Vice-Chairman, Murakami Tatsuo, who was an ex-MOF
official, implied at a press conference that there was no possibility of
conceding a zero-tax rate system in the consumption tax.
As for negotiations with opposition parties, it was the LDP executives
who handled negotiations with executives of the opposition parties. The
MOF supported the LDP by preparing answers to the demands of the DSP
and the CGP. For example, the DSP demanded the postponing of the date
of enforcement of the consumption tax until April 1991 as a condition for
their attendance at the plenary session of the HR. The government and LDP
executives asked the MOF to report to them regarding the following points:

1 the reason why the date of enforcement of the consumption tax could
not be postponed; and
 Introduction of the consumption tax in 1989 91
1111 2 whether the consumption tax would be applied smoothly although
2 only four and a half months were left until the scheduled date of its
3 enforcement, April 1989 (Mizuno 1993: 328).
4
5111 The MOF reported to the government and LDP executives:
6
7 1 The consumption tax was a part of structural tax reform, which also
8 included the reduction of income tax and residents’ tax and the revi-
9 sion of the liquor tax. It was difficult to postpone the reduction of the
1011 income tax and the residents’ tax, and the postponement of the revi-
1 sion of the liquor tax would cause difficulties with respect to the
2 relationship with the European Community and the UK.
3111 2 The procedure of the consumption tax was substantially simplified and
4 the burden of preparation for its enforcement on corporations was
5 reduced by adopting the account method.
6 3 Elections for the HC and the Tøkyø Metropolitan Assembly were going
7 to be held in summer 1989, and the general election was going to be
8 held by July 1991. Political confusion would be brought about if these
9 elections were held before the enforcement of the consumption tax
20111 (Mizuno 1993: 328–9).
1
2 Based on these arguments, ‘the MOF strongly requested [LDP executives]
3 that the consumption tax should be enforced on 1 April 1989’ (Mizuno
4 1993: 329). The LDP’s answer to the DSP was that the scheduled date
5111 of enforcement should not be changed, and consequently the LDP and the
6 DSP agreed a compromise, whereby an article that provided that the
7 consumption tax be applied flexibly through mainly public relations,
8 consultation and administrative guidance by 30 September 1989 was added
9 to the Consumption Tax Bill.
30111 The CGP demanded the payment of an allowance for nursing care of the
1 aged in order to support bedridden aged people. The MOF opposed this
2 request and proposed an alternative plan that would introduce the expan-
3 sion of tax deductions as a welfare policy for bedridden aged people (Mizuno
4 1993: 326). Finally, the LDP and the CGP agreed that the deduction amount
5 for dependants would be increased.
6 The MOF not only maintained cooperation with the LDP but also kept
7 a close connection with Prime Minister Takeshita.18 He was the Minister
8 of Finance of the Øhira Cabinet and the Second Nakasone Cabinet. While
9 he was in office, he formed personal contacts with MOF executives.
40111 As explained before, after the 1979 general election, opposition parties
1 intended to pass a resolution in which the introduction of a general
2 consumption tax, which was a heated issue during the 1979 general elec-
3 tion campaign, would be clearly rejected. The MOF and Finance Minister
44 Takeshita vigorously cooperated and negotiated with opposition parties in
45111 order to make the resolution relevant to fiscal reconstruction and to preserve
92 Introduction of the consumption tax in 1989
the possibility of future tax reform (Mizuno 1993: 21–3). They succeeded
in preserving the possibility of future tax reform in the ‘Fiscal Reform
Resolution’.
In the process of introducing the consumption tax, the MOF created bills
and plans for tax reform, and participated in each stage of the decision-
making process of LDP organizations, such as the LDP TSRC, the PARC
and the EC, by negotiating with LDP executives, such as the Chair of the
LDP TSRC, Yamanaka Sadanori. When LDP executives negotiated with
opposition parties, the MOF cooperated with them by creating proposals
that answered the demands of opposition parties. The MOF could utilize
close connections with LDP executives in order to put into effect their
plan for tax reform.

Conclusion
The introduction of a broad-based indirect tax was difficult to put into effect,
failing twice – under the Øhira Cabinet and under the Nakasone Cabinet.
The reason why the Takeshita Cabinet succeeded in implementing this
unpopular policy was that the issue settling system, which was based on
an integrated LDP organization and close cooperation between politicians
and bureaucrats, functioned effectively.
As for LDP organizations, the LDP TSRC led the discussion of this issue
and played a main role in the decision-making process, not only of the LDP
but also of the government. The package of tax reform bills submitted by
the government was based on the decisions of the LDP. Through dis-
cussion in the decision-making process of the LDP, such as discussions
in the LDP TSRC, Divisions of the PARC and the EC, LDP members’
opinion was incorporated in the decision not only of the LDP but also of
the government.
With respect to factional control, under LDP dominance factions were
systematized and they controlled their members by allocating political
funds, supporting election campaigns and distributing cabinet and LDP
organization posts. When the introduction of the consumption tax became
a main part of the political agenda, Secretaries General of each faction had
a meeting and agreed to support the Takeshita Cabinet in order to put the
package of tax reform bills into legislation. Following this agreement, each
faction adopted a resolution to unite to put the tax reform bills into prac-
tice. Under such factional control, LDP members obeyed this resolution.
With regard to members who still tried to criticize LDP executives, faction
leaders suppressed their movements one by one. Thus the LDP maintained
its integrity through factional control.
Close cooperation between LDP executives and the MOF also con-
tributed to the success of the introduction of the consumption tax. The
MOF made the best use of its close connections with executives of the
LDP TSRC and faction leaders. In the process of the discussions in LDP
 Introduction of the consumption tax in 1989 93
1111 organizations, the MOF participated in every stage of those discussions by
2 negotiating with LDP executives. As for negotiations with opposition
3 parties, LDP executives handled negotiations with executives of opposi-
4 tion parties, and the MOF supported them by presenting answers and
5111 proposals. Since the LDP monopolized its position as a ruling party in the
6 Diet and maintained a tight factional control on LDP members, the MOF
7 could concentrate on negotiating with only LDP executives and faction
8 leaders.19
9 Thus in the introduction of the consumption tax, the issue settling system
1011 worked effectively. The MOF succeeded in putting a highly unpopular
1 policy into practice by making full use of the issue settling system.
2
3111
4
5
6
7
8
9
20111
1
2
3
4
5111
6
7
8
9
30111
1
2
3
4
5
6
7
8
9
40111
1
2
3
44
45111
6 The financial crisis in Japan
1994–1998

The MOF has been regarded by the public as the most powerful and
competent ministry among Japanese administrative organizations. It has
monopolized the jurisdictions of taxation and budget compilation; it has
therefore controlled both annual revenue and expenditure. Furthermore,
through the budgetary process, it has played the role of arbitrator or coor-
dinator between ministries’ policies (Brown Jr 1999: 161). As Peter
Hartcher points out, the MOF has been regarded as ‘much more than an
office of government’ and ‘In Japan, there is no institution with more
power’ (Hartcher 1998: 2). In particular, the MOF had strictly controlled
financial policies and institutions by monopolizing information, issuing
directives (ts¥tatsu) and executing administrative guidance. Thus the MOF
had effectively dealt with financial institutions that were in difficulties. For
example, when the difficulties of the Yamaichi Securities Company were
revealed in 1965, the MOF cooperated with the Bank of Japan and city
banks that had close business relationships with the Yamaichi Securities
Company and succeeded in restoring its business. Until 1993, the MOF had
been proud that no financial institution had failed since the Second World
War. However, the MOF was severely criticized for financial crises in the
latter half of the 1990s. The process of liquidation of the J¥sen and the
Long-Term Credit Bank of Japan (LTCBJ) was confused, and such confu-
sion and delay of liquidation worsened the Japanese economy. In this
chapter, I explain that such confusion was caused by the decline in the
effectiveness of the issue settling system.
The influence of the malfunctioning issue settling system on the process
of dealing with financial crises is clearly described by comparing two types
of failure. The one is the failure of a financial institution that became a
political issue, and the other is a failure that did not become a political
issue. Once the failure of a financial institution becomes a political issue,
politicians intervene in the process of its resolution, and bureaucrats have
to negotiate with them in order to settle it. On the other hand, if the failure
of a financial institution does not become a political issue, politicians do
not intervene in the process of its resolution and the issue is dealt with by
the MOF in its own territory. Therefore the failure of financial institutions
 The financial crisis in Japan 1994–1998 95
1111 in the latter half of the 1990s is examined by classifying them into these
2 two types.
3
4
Financial policy after 1945
5111
6 The MOF had strictly controlled financial policies and institutions and
7 had the initiative in planning policies by monopolizing information
8 and expertise.
9 Ramseyer and Rosenbluth argue that, in Japanese politics, bureaucrats,
1011 as agents of LDP politicians, execute LDP politicians’ preferences; there-
1 fore LDP politicians, not bureaucrats, have the initiative in planning and
2 implementing policies. As examples supporting their argument, Ramseyer
3111 and Rosenbluth cite the abandonment of a new banking law in 1951, the
4 failure of new proposals by the MOF in 1956, the failure of ‘the efficiency
5 campaign’ from 1965 to 1973, in 1977 and in 1979. They explain that those
6 failures were the result of LDP politicians’ veto on those policies. Therefore,
7 they conclude, the MOF could not deviate from the preferences of the LDP
8 (Ramseyer and Rosenbluth 1993: 125–7). However, their argument either
9 overlooks other manoeuvres of the MOF or is based on misunderstanding.
20111 As explained in the following paragraphs, the MOF set the target or prin-
1 ciples of financial policies and put them into effect using various measures,
2 such as laws, directives and administrative guidance.
3 From 1946 to 1955, the MOF promoted the following principles for
4 financial policy: the reconstruction of financial systems and the sound
5111 management of financial institutions. Responding to fragile economic
6 circumstances immediately after the Second World War, the MOF intended
7 to protect depositors and to maintain the credibility and order of markets
8 by regulating and protecting financial institutions (Økurashø Zaiseishishitsu
9 1991: 80). In order to maintain sound management of financial institutions,
30111 the MOF prepared a revision of the Bank Law in 1951. The draft of the
1 new Bank Law included:
2
3 1 raising the amount of minimum capital requirement;
4 2 restricting the amount that could be loaned to a single borrower;
5 3 restricting the possession of fixed assets for business use; and
6 4 giving the Minister of Finance authority to order or to direct financial
7 institutions regarding their management.
8
9 This draft caused severe opposition from the banking industry, and it failed
40111 to be made law. In 1956, following this failure, the MOF created three
1 bills to achieve the above principles: a bill for the introduction of a deposit
2 insurance system; a bill for the introduction of systems to reconstruct finan-
3 cial institutions in financial difficulties; and a bill for the regulation of
44 deposit contracts to prohibit unfair contracts. Of these, only the third bill
45111 was made law.
96 The financial crisis in Japan 1994–1998
The attempts of the MOF to legislate the above bills failed. Nevertheless,
the aims embodied in them were not abandoned by the MOF. The MOF
put its intentions into practice through administrative guidance by issuing
directives (Økurashø Zaiseishishitsu 1991: 167). It executed administra-
tive guidance based on the directives described in the following paragraphs
to achieve the sound management of financial institutions (Økurashø
Zaiseishishitsu 1991: 168).
The directive of 19 March 1953 set the target ratio of current expenses
to current income at 78 per cent, and banks whose ratio exceeded the target
had to obtain the approval of the Director General of the Banking Bureau,
reporting the cause and the measures to deal with such excess.
The directive of 2 November 1957 set the target loan-deposit ratio at
less than 80 per cent, and limited the ratio of loans to a single borrower
to net worth equity capital at less than 25 per cent.
The directive of 2 March 1959 provided that banks that could not achieve
the target loan-deposit ratio (less than 80 per cent) were required to submit
the list of the movements of their loan-deposit ratio with data that explained
their loans to large-lot debtors and major industries, and that the MOF
would then give them concrete directives regarding their business.1 The
directive of 2 March 1959 also set the ratio of the average balance of cur-
rent assets to total deposit (more than 30 per cent) and the ratio of current
expenses to current income (78 per cent).2
Following the above directives, banks were required to submit the plan
of their business to the MOF and make detailed reports regarding the
plan of loans to their major debtors and their demand for funds. Based
on the plans and reports, the Banking Bureau made a list of the ranking
of banks according to their achievement of the above target ratios, and it
used the list as reference material. For instance, the Banking Bureau consid-
ered those data when it decided whether it should permit a bank to found
a new branch. The Banking Bureau created Gyømu Keikakuhø (the List
of Ranking) bi-annually. With regard to each bank, the list enumerated the
ratios of bank-loan deposit, current assets to total deposits, current expenses
to current income, necessary expenses to gross revenue, and fixed assets
to net worth equity capital, and it ranked the banks according to their ratios
(Økurashø Zaiseishishitsu 1991: 178–90).
Although the MOF failed to legislate the bills in 1951 and 1956, it
succeeded in achieving the same results by issuing directives and executing
administrative guidance. Furthermore, by receiving detailed reports of
their business from financial institutions, the MOF monopolized informa-
tion about their business, which was indispensable to planning financial
policies.
From 1967, the Banking Bureau set out ‘the efficiency campaign’, which
was intended to promote an efficient financial system (Økurashø
Zaiseishishitsu 1991: 347). The campaign proposed to re-examine the
functional segmentation of financial institutions,3 to promote competition
 The financial crisis in Japan 1994–1998 97
1111 between financial institutions and to prepare systems that would support
2 such competition by promoting mergers between financial institutions
3 and establishing a saving insurance system. Responding to this proposal,
4 the Merger and Conversion of Business Law (1967) and the Deposit
5111 Insurance System Law (1971) were enacted. The Merger and Conversion
6 of Business Law allowed mergers and conversion of business between city
7 banks, mutual saving banks, credit associations and credit unions. As for
8 the effect of this law, the number of mergers from 1965 to 1975 was 108
9 (13.5 cases per year), compared with 56 from 1956 to 1964 (4.3 cases per
1011 year) (Økurashø Zaiseishishitsu 1991: 439). Therefore the conclusion of
1 Ramseyer and Rosenbluth about the efficiency campaign (1965–73) – that
2 the efficiency campaign ‘went nowhere’ (Ramseyer and Rosenbluth 1993:
3111 127) – is not appropriate.
4 The main theme of the revision of financial systems in 1979 was not
5 the strengthening of the MOF’s regulatory powers that Ramseyer and
6 Rosenbluth point out (Ramseyer and Rosenbluth 1993: 127) but the relax-
7 ation of the functional segmentation of financial institutions. In June 1979,
8 the Financial Systems Research Council proposed to improve flexibility
9 regarding the business areas of banks. Responding to this proposal, the
20111 Long-Term Credit Banks Law and the Foreign Exchange Banks Law were
1 revised. The most heatedly discussed issue was whether banks could sell
2 government bonds ‘over the counter’ of banks as a business accompanying
3 banking business that was permitted by the Article 5 of the Bank Law
4 (Gotø 1992: 222–40).4
5111 On 30 November 1980, the MOF presented the following three
6 principles regarding securities business:
7
8 1 The business of public bonds by banks would be put in statutory form
9 in the Bank Law.
30111 2 According to the Securities and Exchange Law, banks were required
1 to obtain approval from the MOF regarding securities business, and
2 the present regulations would be applied to the permitted securities
3 business.
4 3 This time revision prepared conditions for securities business by banks
5 and the enforcement of securities business by banks would be discussed
6 in future.
7
8 Banking business circles pressured LDP politicians to approve banks
9 selling medium-term discount government bonds ‘over the counter’ as a
40111 business accompanying banking business. In April 1981, the Minister of
1 Finance, Watanabe Michio, and the Chair of the PARC, Abe Shintarø,
2 presented the following points to the representatives of banking business:
3
44 1 The Minister of Finance, Watanabe Michio, and the Chair of the
45111 PARC, Abe Shintarø, reached an agreement that the MOF would
98 The financial crisis in Japan 1994–1998
decide whether it would give the approval of securities business to
banks according to laws and taking circumstances into account.
2 This time revision of the Bank Law would put the securities business
of banks in statutory form through the Bank Law.
3 The Minister of Finance, Watanabe Michio, and the Chair of the PARC,
Abe Shintarø, were considering the establishment of a committee, con-
sisting of three experts independent from both banking and securities
businesses, to secure fair decisions regarding the enforcement of the
approval of banks selling public bonds ‘over the counter’.

The above three points were almost the same as the three principles
presented by the MOF (Gotø 1992: 233). In May 1981, based on the three
principles presented by the MOF, the revised Bank Law passed the Diet,
and provided that banks could carry out securities business such as under-
writing and distributing associated with the underwriting of public bonds
as a business accompanying banking business (Gotø 1992: 235). It can
therefore be said that the revision of financial systems in 1979 was put
into effect according to the intention of the MOF.
Thus, contrary to the argument of Ramseyer and Rosenbluth that the
MOF could not implement its preferences because of LDP politicians’ veto,
the MOF set forth the principles of financial policies and initiated policies
to put them into practice. Although some bills, such as the revision of the
Bank Law in 1951 and bills in 1956, were not legislated, the MOF
succeeded in legislating some of them later (such as the Deposit Insurance
System Law in 1971), and it took other measures, such as administrative
guidance based on directives, to fulfil its intention. Formally, administra-
tive guidance is not coercive. Nevertheless, banks followed it since it
‘limited competition and protected markets and market shares, and conse-
quently gave them substantial rents and a rather easy life’ (Rixtel 2002:
120). If banks were reluctant to follow the directions of the MOF, the
MOF could use ‘a large array of sanctions’ based on its licensing power,
particularly licensing new branches, its authority to inspect financial insti-
tutions and its influence in tax matters (Rixtel 2002: 120). For instance,
the MOF refused to give permission to the Mitsui Bank to open three new
branches in 1980 when it transgressed the limit of lending to a single
borrower. The Daiwa Bank had difficulties in obtaining approval from the
MOF to open new branches after it disobeyed the direction of the MOF
to separate banking business and trust business (Rixtel 2002: 120).
The MOF took the lead in planning and implementing financial policies.
It set forth principles responding to economic and political circumstances,
such as ‘the sound management of financial institutions’ or ‘the efficiency
campaign’, and created bills and issued directives to achieve the aims of
these principles. When bills drafted by the MOF were not legislated in 1951
and 1956, the MOF sought other measures to achieve the same results. It
issued directives that regulated the business of financial institutions in detail,
 The financial crisis in Japan 1994–1998 99
1111 and made those institutions follow those directives by manoeuvring admin-
2 istrative guidance. Through those directives and administrative guidance,
3 the MOF tightly controlled financial institutions and monopolized the infor-
4 mation of their business. As cited later in this chapter, LDP politicians
5111 safely left the matter of financial policies in the hands of the MOF, and, as
6 the case of relaxing the regulation of banks’ securities business in 1979
7 shows, the LDP generally backed up the intentions of the MOF. It there-
8 fore seemed highly unlikely that the MOF would lose its control over the
9 financial policy area and cause political confusion.
1011
1
The failure of two credit unions (Tøkyø Kyøwa and
2
Anzen)
3111
4
The process of liquidation
5
6 The liquidation of two credit unions – the Tøkyø Kyøwa Credit Union and
7 the Anzen Credit Union – was the beginning of the financial crises of the
8 latter half of the 1990s.
9 On 17 September 1994, the Nihon Keizai Shinbun, one of Japan’s quality
20111 papers, reported the financial difficulties of two credit unions, the Tøkyø
1 Kyøwa Credit Union and the Anzen Credit Union. It revealed that the
2 Tøkyø Metropolitan Government had advised two credit unions to reform
3 their businesses. The MOF knew that financial difficulties had existed since
4 1993. Although the Governor of a prefecture has the authority to inspect
5111 and supervise credit unions, in the case of these two credit unions, it was
6 the MOF and the Tøkyø Metropolitan Government that cooperated in
7 inspecting them in 1993 and 1994. After the inspection of June 1994, the
8 MOF began to plan a liquidation scheme for two credit unions, cooper-
9 ating with the Bank of Japan and the Tøkyø Metropolitan Government.
30111 On 9 December 1994, the liquidation scheme was announced. In this
1 scheme the two credit unions would be liquidated and their business would
2 be transferred to the Tøkyø Kyødø Bank funded by the Tøkyø Metropol-
3 itan Government, financial institutions and the Bank of Japan. Accordingly,
4 the two credit unions were dissolved and their business was transferred
5 to the Tøkyø Kyødø Bank on 13 February 1995.
6
7
MOF’s control over these failures
8
9 Issues about particular financial institutions have been dealt with by the
40111 MOF as administrative issues in which politicians refrained from interven-
1 tion.5 Katø Køichi, the Secretary General of the LDP at that time, explained
2 such behaviour of LDP politicians in an interview with the Asahi Shinbun:
3
44 I feel responsibility for financial crises because we (politicians) did
45111 not voluntarily collect information about financial institutions or take
100 The financial crisis in Japan 1994–1998
the leadership either. But if we intervened in issues of particular finan-
cial institutions, we would obtain critical information about financial
situations of particular financial institutions, and that might arouse
public suspicion of us for insider trading . . .
(Asahi Shinbun, 22 February 1995)

For example, when the Yamaichi Securities Company faced financial diffi-
culties in 1965, the MOF created a reconstruction plan and executed it,
cooperating with the Bank of Japan and other financial institutions.
Following this tradition, the planning of the liquidation scheme for the two
credit unions was dealt with by the MOF as an administrative issue.
Therefore the MOF controlled the whole process of making the liquida-
tion plan, and took the leadership from the beginning. The Director General
of the Banking Bureau at that time, Nishimura Yoshimasa, answered at
the Budget Committee of the House of Representatives (HR) that the
Banking Bureau had begun to prepare for the liquidation of the two credit
unions after the inspection of July 1994.
Politicians did not intervene in the process of planning a scheme for
liquidation. Even the Minister of Finance was only informed of the detail
of the liquidation scheme just before its announcement. The Minister of
Finance, Takemura Masayoshi, answered at the Budget Committee of HR
that he had been informed of the scheme just before it was announced.6
After the scheme was announced, a scandal involving the Chief
Executive Officer of the two credit unions and MOF executives about their
excessive entertainment was revealed. The newly elected Governor of
Tøkyø Metropolitan refused to fund the Tøkyø Kyødø Bank. However,
despite the scandal, the liquidation scheme was implemented, and the two
credit unions were dissolved according to the scheme in 1995. The MOF
took the lead and controlled the whole process of planning and executing
the scheme. There was no political confusion in planning the liquidation
scheme, and the liquidation of the two credit unions was carried out
according to the scheme.

The failure of two securities companies (Sanyø and

Kokusai)

The process of these failures

In 1996 the Japanese economy, which had been stagnant for a few years,
seemed to be emerging from recession although its recovery was very
fragile. The gross domestic product (GDP) during the January to March
and April to June periods of 1996 was 8.4 per cent and –1.1 per cent
respectively (annualized). The Second Hashimoto Cabinet set fiscal reform
as its main political agenda, and decided that the general expenditure of
the 1998 fiscal year would be reduced to less than that of the previous
 The financial crisis in Japan 1994–1998 101
1111 year. In 1997 the Japanese economy was thrown into recession. The GDP
2 during the April to June period of 1997 plunged to –11.2 per cent (annu-
3 alized). On 1 April 1997, the Hokkaidø Takushoku Bank and the Hokkaidø
4 Bank announced that their merger would take place in April 1998. On the
5111 same day, the Nihon Credit Bank (NCB) affiliated non-banks filed for
6 bankruptcy (their bankruptcy was declared on 7 April).
7 The Securities Bureau of the MOF realized the financial difficulties of
8 the Sanyø Securities Company in advance. In January 1997 one insurance
9 company informed the Securities Bureau that it would be difficult to extend
1011 the payment period of Sanyø’s subordinate debt. The maturity date of
1 Sanyø’s subordinate debt to insurance companies, such as the Japan Insur-
2 ance Company, was the end of January 1999. A securities company cannot
3111 calculate its subordinated debts as its net worth equity capital if their pay-
4 ment period is less than one year. Furthermore, according to the minister-
5 ial ordinance about Article 54 Clause 2 of the Securities and Exchange Law,
6 the MOF should order a securities company to form a drastic reconstruc-
7 tion plan, such as a merger plan, when its equity ratio becomes less than
8 120 per cent. The equity ratio of the Sanyø Securities Company was 164.4
9 per cent at the end of March 1997. The Sanyø Securities Company was on
20111 the verge of failure. The Securities Bureau formed a rescue scheme for the
1 Sanyø in which it would merge with the Kokusai Securities Company and
2 the Sanwa Bank would fund the Kokusai Securities Company and the newly
3 merged company. However, this scheme was revealed by the mass media
4
on 26 September 1997, and the negotiation reached a deadlock. After this,
5111
the Securities Bureau prepared a scheme in which the Corporate Rehabili-
6
tation Law would be applied to Sanyø. On 3 November 1997 the Sanyø
7
Securities Company, which was a middle-sized securities company in
8
Japanese terms, filed for application of the Corporate Rehabilitation Law at
9
30111 the Tøkyø District Court.
1 On 12 November 1997, Tøkyø markets marked a triple depreciation (the
2 stock price, the price of the government bonds and the appreciation of
3 the yen against the dollar plunged). Foreign markets immediately reacted
4 to the Japanese financial crisis. As a result the ‘Japan premium’7 in inter-
5 bank markets of the Euro-dollar was raised to 0.5 per cent in this same
6 week. Financial institutions that were in financial difficulties found it
7 extremely difficult to obtain funds from call markets. The Hokkaidø
8 Takushoku Bank, whose merger plan was actually abandoned on 12
9 September 1997, announced its failure and the transfer of its business
40111 within the Hokkaidø area to the Hokuyø Bank on 17 November. The rating
1 of the Yamaichi Securities Company’s bonds was degraded to ‘specula-
2 tive’ on 21 November, and it faced severe difficulties in raising funds from
3 markets. Finally, the Yamaichi Securities Company, one of four major
44 securities companies in Japan, announced the closing down of its business
45111 on 24 November.
102 The financial crisis in Japan 1994–1998
MOF’s control over these failures
As in the case of the two credit unions, the Securities Bureau of the MOF
knew in advance about the financial difficulties of the Sanyø Securities
Company. The Securities Bureau formed a merger plan at first, and then
prepared a detailed plan for the application of the Corporate Rehabilitation
Law. After its failure, the default of Sanyø in a call market brought about
a serious credit crunch in call markets, which caused the failure of the
Hokkaidø Takushoku Bank and the Yamaichi Securities Company. It could
be said that the MOF and the Bank of Japan (BOJ) underestimated the influ-
ence of the default in a call market and the suspicious mood among insti-
tutional investors.8 Although the credit crunch that was caused by the failure
of Sanyø was beyond the expectation of the MOF, the process of Sanyø’s
failure took place according to the plan created by the MOF. As for the fail-
ure of the Yamaichi Securities Company, the Securities Bureau decided that
it was not appropriate for the Yamaichi to apply for the Corporate Rehab-
ilitation Law because of its large amount of unlisted liability, and the Secur-
ities Bureau advised the Yamaichi to close down its business. Both failures
were dealt with as administrative issues by the MOF and politicians were
not informed of their failure beforehand. Therefore politicians did not inter-
vene in the planning of the schemes for the two securities companies. The
MOF controlled the whole process of planning and executing the schemes,
and there was no political confusion in that process.

The failure of the J¥sen

The liquidation process
The J¥sen were established in the 1970s with strong support from the
MOF. The MOF responded to the increase in public demand for personal
housing loans by supporting the establishment of the J¥sen from 1971 to
1976. At that time, corporations demanded loans from city banks in order
to expand their businesses, and city banks concentrated on trade with
private companies. As a result, individuals found it difficult to obtain loans
from city banks. Responding to the demands for personal housing loans,
the MOF took an initiative to establish financial institutions specializing
in personal housing loans, the J¥sen.
During the first half of the 1980s, the J¥sen steadily expanded their busi-
nesses. Table 6.1 shows the amount and the ratio of individual housing loans
made by the J¥sen. The J¥sen had increased their ratio during the 1970s.
During the second half of the 1980s, however, city banks expanded their
business into personal housing loan markets. By the end of the 1980s, pri-
vate companies had grown rapidly and their demands for loans to expand
their businesses had gradually declined. In addition, major private compa-
nies tended to raise funds by issuing bonds in markets. As a result, city banks
tried to expand their business into personal housing loan markets in order
 The financial crisis in Japan 1994–1998 103
1111 Table 6.1 J¥sen housing loans to individuals from 1971 to 1994
2
3 Total amount of housing J¥sen housing loans
loans to individuals to individuals
4 (Billion Yen) (Billion Yen)
5111
6 1971 3,760 27 (0.8)
7 1975 16,227 610 (3.8)
1980 45,151 3,264 (7.2)
8 1985 67,605 3,507 (5.2)
9 1986 72,205 3,057 (4.2)
1011 1987 79,157 2,702 (3.4)
1 1988 88,013 2,504 (2.6)
2 1989 99,159 2,643 (2.7)
1990 108,515 3,842 (2.6)
3111 1991 117,434 2,844 (2.4)
4 1992 123,607 2,699 (2.2)
5 1993 131,665 2,551 (1.9)
6 1994 141,824 2,402 (1.7)
7 Source: Saeki 1997: 30.
8
9
20111 to maintain their profits. The Housing Loan Corporation (J¥taku Kiny¥
1 Køko) also increased its loans to individuals, following the government’s
2 housing policy. The J¥sen could not compete with city banks in this mar-
3 ket, so they expanded their businesses into another area, loans to specula-
4 tive real estate business (Saeki 1997: 30). Table 6.2 shows the percentage
5111 of J¥sen housing loans to individuals and loans to business. Until the 1980s
6 the J¥sen gave loans mainly to individuals. In the 1990s, however, about 80
7 per cent of their loans was given to business. The J¥sen had rapidly increased
8 loans to business, mainly speculative real estate business, since the 1980s,
9 which sharply increased the amount of their bad loans. Table 6.3 shows the
30111 amount and the percentage of bad loans of the J¥sen in 1991. The bad loans
1 of seven J¥sen totalled more than 4.6 trillion yen and the average ratio of
2 the bad loans of seven J¥sen was 37.8 per cent (Saeki 1997: 55).
3
4
5 Table 6.2 The percentages of J¥sen housing loans to individuals and loans to
6 businesses
7
8 1971 1975 1980 1985 1990 1991 1992 1993 1994
9 Housing loans 100 99.5 95.6 67.0 21.4 21.6 21.6 21.4 20.6
40111 to individuals
1 (%)
2 Loans 0 0.5 4.4 33.0 78.6 78.4 78.4 78.6 79.4
3 to businesses
(%)
44
45111 Source: Saeki 1997: 28.
104 The financial crisis in Japan 1994–1998
Table 6.3 Bad loans of seven J¥sen (1991)

Amount of bad loans Ratio of bad

(hundred million yen) loans (%)
Nihon J¥taku Kiny¥ 6,617 29.1
J¥taku Loan Service 4,326 26.4
J¥sø 7,465 39.9
Søgø J¥kin 3,690 39.9
Daiichi J¥taku Kiny¥ 5,435 30.7
Chigin Seiho Housing
Loan 6,252 59.8
Nihon Housing Loan 12,694 53.7
Total 46,479 39.9
Source: Saeki 1997: 55.

Responding to public demands that the high prices of real estate be

slashed, two directives were issued on 27 March 1990. One was issued
by the Director General of the Banking Bureau of the MOF to banks
and the other was issued by the Director General of the Banking Bureau
of the MOF and the Director General of the Economic Bureau of the
Ministry of Agriculture, Forestry and Fisheries (MAFF) to the Chief
Executive Officer of the National Federation of Agricultural Credit Unions
and the Central Agricultural Forestry Bank (Nørinch¥kin). The directive
issued by the Director General of the Banking Bureau to banks requested
that:

1 the amount of the increase of financial institutions’ loans to property

business should be reduced to less than that of the total increase in
financial institutions’ loan (Søryø Kisei, regulation on the amount of
loans to property business); and
2 financial institutions should report to the Banking Bureau about their
loans to the real estate business, the construction industry and non-
banks (Sangyøshu Kisei, regulation on loans to three industries).

However, the latter directive requested only Søryø Kisei and lacked
Sangyøshu Kisei. As a result, farm-related financial institutions, such as
the federation of agricultural credit unions in each prefecture (Shinren),
and the Central Agricultural Forestry Bank (Nørinch¥kin), could give
loans to the J¥sen (non-banks) without reporting to the Banking Bureau.
Furthermore, the first directive was not issued to the J¥sen. Therefore the
J¥sen could give loans to property business without regulation of Søryø
Kisei.9 After the ‘bubble economy’ collapsed, the prices of real estate
plunged and the Japanese economy experienced a severe recession. The
number of the J¥sen’s bad loans soared and the J¥sen were thrown into
financial difficulties.
 The financial crisis in Japan 1994–1998 105
1111 As explained above, the J¥sen were established under the strong initia-
2 tive of the MOF responding to an expanding demand for personal housing
3 loans. Some retired MOF executives obtained the top posts of the J¥sen.
4 Six out of the seven presidents of the J¥sen were ex-MOF officials.
5111 Not only the MOF but also the MAFF had a serious interest in the J¥sen
6 problem. When those directives were issued, J¥sen’s largest creditors were
7 farm-related financial institutions: Nørinch¥kin (Central Agricultural Fores-
8 try Bank), Shinren (Federation of Agricultural Credit Unions in each prefec-
9 ture) and Kyøsairen (Federation of Mutual Benefit Associations), and the
1011 MAFF had the authority over them. Nøkyø (Agricultural Coorporative
1 Associations), Shinren and Nørinch¥kin formed a close financial relation-
2 ship. The articles of Nøkyø provided that more than two-thirds of idle
3111 Nøkyø cash should be deposited in Shinren, and the articles of Shinren
4 provided that more than half of its idle cash should be deposited in
5 Nørinch¥kin. For example, Nøkyø collected 68 trillion yen from their
6 members at the end of the 1994 fiscal year, and 46 trillion yen was deposited
7 in Shinren, and 62 per cent of the deposit of Nøkyø was deposited in
8 Nørinch¥kin through Shinren (Saeki 1997: 186). The MAFF was afraid that
9 the J¥sen problem would cause financial difficulties for Shinren, which
20111 would create serious financial damage for Nøkyø. Saeki Yoshimi explains
1
that the financial difficulty of Shinren could have caused the reduction in
2
dividends to Nøkyø or a cut in bonuses to Nøkyø, which could mean serious
3
financial damage to Nøkyø (Saeki 1997: 223–4).
4
Such serious interest of the MOF and the MAFF in the J¥sen problem
5111
6 caused an intense confrontation between them. In order to solve the
7 J¥sen’s bad loans problem, the Director General of the Banking Bureau of
8 the MOF and the Director General of the Economic Bureau of the MAFF
9 wrote a memorandum in February 1993, in which they agreed that the
30111 founding financial institutions (financial institutions that funded and kept a
1 close business relationship with the J¥sen) would take responsibility for the
2 J¥sen bad loans following the reconstruction schemes. The memorandum
3 agreed that the MOF would let founding financial institutions confirm that
4 they would take responsibility for restoring the J¥sen following the J¥sen’s
5 reconstruction scheme. The memorandum also decided that founding finan-
6 cial institutions, other financial institutions and farm-related financial insti-
7 tutions would reduce the interest rates of their credits to the J¥sen to 0 per
8 cent, 2.5 per cent, and 4.5 per cent respectively. Furthermore, they agreed
9 that the MOF and the MAFF would make adjustments in order that the Bank
40111 of Japan would lend any necessary funds to the Central Agricultural Forestry
1 Bank (Nørinch¥kin) as an ordinary loan. Writing a memorandum between
2 ministries was a traditional measure in order to settle an issue in which two
3 or more ministries’ interests confronted each other.10 Usually such a mem-
44 orandum was kept confidential between the two ministries involved. But
45111 this memorandum was revealed later, and it provoked severe criticism that
106 The financial crisis in Japan 1994–1998
the process of dealing with the J¥sen problem was not transparent but
involved closed-door administration.11
In spite of the first reconstruction schemes formed in July 1991, the finan-
cial difficulties of the J¥sen became worse. The increase in the bad loans
of the seven J¥sen after the first investigation (1991–1992) totalled about
3.5 trillion yen in 1995. Table 6.4 shows the amount and percentage of the
J¥sen’s bad loans at the end of June 1995, by which time the average
percentage of bad loans had soared to 75.9 per cent (Saeki 1997: 77). The
first J¥sen reconstruction schemes required that financial institutions dis-
claimed or reduced their interest rates and would not collect the principal
of their credit to the J¥sen while the J¥sen made efforts to collect their
claims. These schemes assumed early recovery of the price of real estate.12
However, the price of real estate was still declining, and the MOF took the
initiative to plan the second J¥sen reconstruction schemes.
In March 1995 the increase in bad loans caused the insolvency of Søgø
J¥kin and the J¥taku Loan Service (both J¥sen) in March 1995. The amount
of J¥sen bad loans continued to increase. On 14 September 1995, the Nihon
J¥taku Kiny¥, the Daiichi J¥taku Kiny¥ and the Nihon Housing Loan (all
J¥sen) were declared insolvent, and the MOF announced that the total
amount of losses of the J¥sen was 7 trillion 700 billion yen.
Foreign governments were aware of the seriousness of the large scale
of bad loans of the J¥sen and the negative effect of this on the world
economy. At the Annual Conference of Presidents of Central Banks in
September 1995, the central bank presidents argued that the issue of bad
loans on the part of Japanese financial institutions was serious not only
for the Japanese economy but also for the stability of global economy. The
House of Representatives of the US had a hearing from experts about
the J¥sen problem. The Minister of Finance, Takemura Masayoshi, had to
make assurances about the early disposal of the J¥sen’s bad loans at the
G7 (the summit conference of the finance Ministers and the Presidents of

Table 6.4 Bad loans of seven J¥sen (1995)

Amount of bad loans Ratio of bad

(hundred million yen) loans (%)
Nihon J¥taku Kiny¥ 14,367 74.4
J¥taku Loan Service 10,833 76.3
J¥sø 12,097 80.2
Søgø J¥kin 9,606 85.9
Daiichi J¥taku Kiny¥ 9,914 65.8
Chigin Sehiho Ju¥taku Loan 6,951 79.2
Nihon Housing Loan 16,743 74.2
Total 80,511 76.5
Source: Saeki, 1997: 77.
 The financial crisis in Japan 1994–1998 107
1111 Central Banks of the seven industrialized nations) on 7 October. His assur-
2 ances were reported as a pledge to foreign governments to solve the J¥sen
3 problem by the end of 1995.
4 On 27 September 1995, the Financial Systems Research Council (Kiny¥
5111 Seido Chøsakai), an advisory council of the Minister of Finance, presented
6 an interim report about the disposal of bad loans of financial institutions.
7 This report did not present a concrete disposal plan for the J¥sen’s bad
8 loans. On 31 October 1995, the tripartite ruling parties’ study group on
9 financial and securities systems presented an interim report about the J¥sen
1011 problem. But it could not decide the concrete ratio of the loss contribution
1 between banks and farm-related financial institutions because of severe
2 conflicts within the LDP. On 1 December 1995 the Committee of Coordin-
3111 ation of the Government and Executives of Ruling Parties also presented a
4 guideline. This guideline did not present a plan for the loss contribution.
5 LDP politicians were afraid that the large amount of loss contribution of
6 farm-related financial facilities would create serious financial damage for
7 Nøkyø. Therefore they could not decide on the loss contribution between
8 banks and farm-related financial facilities.
9 A plan for J¥sen liquidation that the Banking Bureau prepared did not
20111 at first include the direct injection of public funds. The negotiations between
1 the MOF and the MAFF reached a deadlock on 15 December; after this
2 the Budget Bureau and the Minister’s Secretariat began to make a plan
3 for the injection of public funds into the J¥sen. The Budget Bureau and
4 the Minister’s Secretariat were aware that the injection of public funds was
5111 necessary to solve the J¥sen problem.
6 On 16 December the MOF presented a liquidation scheme for the J¥sen.
7 As for loss contribution, which amounted to 6 trillion 300 billion yen,
8 founding banks would disclaim all of their credits (3 trillion 600 billion
9 yen), and farm-related financial institutions would accept a loss contribu-
30111 tion of 1.1 trillion yen. In addition, founding banks were supposed to fund
1 a new loan-collecting organization and to share a part of ‘the second loss’,
2 the loss that would materialize after the J¥sen’s liquidation.
3 On 19 December the Cabinet meeting approved the J¥sen liquidation
4 scheme. The amount of loss contribution of farm-related financial institu-
5 tions was reduced from 1 trillion 100 billion yen to 530 billion yen. The
6 difference – more than 600 billion yen – would be paid by deficit-covering
7 bonds issued in the initial budget of the 1996 fiscal year. The MOF exec-
8 utives carefully negotiated with LDP politicians about the injection of
9 public funds into the J¥sen. Nevertheless, LDP politicians flinched from
40111 the injection of public funds. They were afraid that they would be criti-
1 cized for rescuing banks by spending public funds. On 18 December
2 1995, the executives of the ruling coalition parties were so afraid of public
3 criticism that they demanded that the J¥sen’s large-lot debtors, funding
44 banks and the MOF should take responsibility. On 19 December, the
45111 Committee of Representitives of the Ruling Coalition Parties presented a
108 The financial crisis in Japan 1994–1998
statement that declared that the responsibility of founding banks and
ministries in charge of the J¥sen problem should be investigated, on condi-
tion that the liquidation of the J¥sen was enforced. On the same day,
at the general meeting of the Executive Council of the LDP, the injection
of public funds faced strong objections from its members. In this meet-
ing, LDP politicians expressed their concern that the injection of public
funds into the J¥sen would not achieve public support (Asahi Shinbun,
19 December 1995, evening edition).
It was a confused and painstaking process to pass the budget of the 1996
fiscal year (685 billion yen was to be injected into the disposal of the
J¥sen’s bad loans) and a package of six J¥sen liquidation bills. Prime
Minister Murayama resigned in the middle of the deliberation of the budget
in January 1996, and the Hashimoto Coalition Cabinet followed. One of
the opposition parties, the NFP, strongly opposed this package of bills,
and formed a picket line in the Diet. As a result, the deliberation in the
Diet was suspended from 4 March until 25 March. After an NFP candi-
date lost the by-election of the House of Councillors in Gifu prefecture
on 24 March 1996, the NFP agreed to deliberate on the package of
bills for the J¥sen in the Diet. Finally, the budget was approved by the
Diet on 10 May 1996, and the package of six bills was approved by
the Diet on 18 June 1996.

Analysis of the process of the J¥sen liquidation

The liquidation of the J¥sen became a serious political issue since LDP
politicians had a deep interest. It was anticipated that farm-related finan-
cial institutions and Nøkyø would suffer from serious financial damage
by the liquidation of the J¥sen, and LDP politicians were afraid of the
reaction of farmers to this damage.
Farmers have been regarded as a regular support group (kotei hyø) for
the LDP. As explained in Chapter 4, the LDP had usually achieved support
from more than 70 per cent of farmers. LDP politicians wanted to avoid
any decision that would be disadvantageous to farmers before the next
general election under a new electoral system. The previous general
election had been held on 18 July 1993 (the term of service of a member
of the House of Representatives is four years), and the Revised Public
Officials Election Law, which introduced a new electoral system, was
enforced on 25 December 1994. Politicians expected the next general elec-
tion under the new electoral system to be just around the corner. Therefore
they (especially the Nørin-zoku) vigorously protected farm-related finan-
cial institutions’ benefits. In addition, the injection of public funds into the
J¥sen required budget allotment. Therefore the deliberation in the Diet was
inevitable in order to enforce the liquidation scheme for the J¥sen.
Consequently, the liquidation of the J¥sen became a political issue, which
was thrown into serious political turmoil.
 The financial crisis in Japan 1994–1998 109
1111 In the process of J¥sen liquidation, it can be observed that the factors that
2 were conditions for the issue settling system under the LDP dominance
3 had changed; the importance of LDP organizations in the decision-making
4 process of the government and the Diet had declined and the LDP man-
5111 agement system through factions had become disintegrated.
6
7
8 The decline in the importance of LDP organizations
9 Under LDP dominance, the LDP monopolized the Chair of the HR, and
1011 members of the LDP Diet Management Committee (Giun-zoku) bargained
1 with opposition parties’ executives, exploiting the LDP’s predominant posi-
2 tion in the Diet. Under the Murayama Coalition Cabinet and the First
3111 Hashimoto Cabinet, which dealt with the J¥sen problem, the LDP formed
4 a ruling coalition with the JSP and the NHP. The LDP gave up trying to
5 obtain the speakership of the HR, and the former JSP Chair, Doi Takako,
6 assumed this position. The Giun-zoku could not control the Speaker, Doi
7 Takako, so they were not able to control the deliberation in the Diet at
8 will. The mass media reported the LDP politicians’ dissatisfaction with
9 her. In the meeting of LDP executives on 8 March 1996, criticisms against
20111 her arose one after another.13 Under coalition cabinets, the LDP Giun-
1 zoku could not take leadership regarding bargaining with the opposition
2 parties as they used to do under LDP dominance. Furthermore, connections
3 between the LDP Giun-zoku and opposition parties did not function effec-
4 tively. The NFP also lacked leadership. While the NFP’s picketing of the
5111 Diet was dragging on in March 1996, there was no influential member
6 who could take the leadership to end the picketing and settle the confu-
7 sion. In the meeting of the leaders of the LDP and the NFP, it was reported
8 that the leader of NFP Ozawa Ichirø admitted to LDP President Hashimoto
9 Ry¥tarø, ‘I ordered an end to the picketing. But NFP members do not obey
30111 my order . . .’ (Asahi Shinbun, 23 March 1996). The picketing dragged on
1 until 25 March 199614 and the package of the bills for the J¥sen problem
2 passed the Diet on 18 July.
3
4
5 The weakened LDP management system
6 The weakened LDP management system was reflected in the behaviour
7 of the Nørin-zoku. There was no influential leader of the Nørin-zoku who
8 could control its members. Influential members of the Nørin-zoku, such
9 as Hata Tsutomu, defected from the LDP to establish the Japan Renewal
40111 Party. Faction leaders could not control their members of the Nørin-zoku
1 either.15 The Nørin-zoku increased their pressure. The mass media reported
2 that the Nørin-zoku made the criticism that the ruling coalition parties’
3 study group on financial and securities systems was too favourable to the
44 MOF and founding banks. Responding to this criticism, three executives
45111 of the Committee of Coordination of the Government and Executives of
110 The financial crisis in Japan 1994–1998
Ruling Parties had to take over this issue from the study group. The Nørin-
zoku applied strong pressure in order to reduce the ratio of farm-related
financial institutions’ loss contribution, which triggered strong opposition
from founding banks. As a result, the committees and the study group that
discussed the J¥sen problems could not decide on the concrete loss contri-
bution of the J¥sen’s bad loans.
On 27 September 1995 the Financial System Research Council (Kin’y¥
Seido Chøsa Kai) presented an interim report about the disposal of finan-
cial facilities’ bad loans; however, it could not decide a principle for the
disposal of the J¥sen’s bad loans. It only stated:

It is required that the J¥sen and founding banks should take the
leadership to reach an agreement on a basic principle for the future
of the J¥sen and the disposal of their bad loans. In the process of reach-
ing an agreement, it is also required for the J¥sen and founding banks
to discuss with farm-related and other financial facilities. In this dis-
cussion it is required that all the parties should make their best efforts
to compromise, considering their responsibility for this problem.
(Asahi Shinbun, 28 September 1995)

On 31 October the ruling coalition parties’ study group on financial and

securities systems presented an interim report, but it did not include a plan
for the loss contribution of the J¥sen. On 27 November the Chair of the
PARC attempted to settle this issue, but the attempt deadlocked immedi-
ately. The Chair of PARC, Yamazaki Taku, listened to an explanation from
the Nørin-zoku and the Økura-zoku and attempted to mediate in this
conflict. However, he failed to make a compromise. On 1 December the
Committee of Coordination of the Government and Executives of Ruling
Parties (Seifu Yotø Seisaku Chøsei Kaigi) also could not decide the loss
contribution of the J¥sen’s bad loans.
Because of such strong pressure from the Nørin-zoku, the MOF and the
MAFF found it difficult to compromise with respect to the loss contribu-
tion. The ruling parties asked the MOF and the MAFF to propose a scheme
for the disposal of the J¥sen’s bad loans by 15 December, but the two
ministers failed to reach an agreement.
Strong pressure from the Nørin-zoku changed the MOF’s scheme, and
the MOF was forced to formulate a new scheme. Under the MOF’s orig-
inal scheme presented on 16 December, farm-related financial institutions
would have had to renounce 1.1 trillion yen of their loans. However, the
Nørin-zoku insisted that this would damage farm-related financial institu-
tions excessively. Finally, on 19 December the government presented a
plan in which the farm-related financial facilities would donate 530 billion
yen, instead of 1.1 trillion as in the original plan. As for the difference,
more than 600 billion yen, it would be paid by deficit-covering bonds
 The financial crisis in Japan 1994–1998 111
1111 issued in the initial budget of the 1996 fiscal year. The MOF had to draw
2 up a budget just before the MOF presented the draft budget of the 1996
3 fiscal year to the Cabinet on 29 December.
4 The weakened LDP management system was also reflected in the delib-
5111 eration of the package of bills for the J¥sen in the Diet. The LDP was
6 divided into the power-holding group and the anti-power-holding group
7 across factions, which caused political conflicts within the LDP and so
8 negotiation with the NFP was confused. The power-holding group, the
9 so-called ‘YKK’ group (Chair of the PARC Yamazaki Taku, Secretary
1011 General Katø Køichi, Minister of Health and Welfare (the Second
1 Hashimoto Cabinet) Koizumi Jun’ichirø) supported the ruling coalition
2 between the LDP, the JSP and the NHP. On the other hand, the anti-power-
3111 holding group, including Kajiyama Seiroku, advocated forming a coalition
4 with a conservative party. The mass media reported serious confrontation
5 between the two groups in the meeting of the Executive Council of the
6 LDP on 5 March 1996. One after another, senior LDP members raised
7 objections against the supplementary scheme for the J¥sen presented by
8 the power-holding group. Yamanaka Sadanori, one of the influential senior
9 LDP members, presented a counter-plan, and the Chair of the Executive
20111 Council, Shiokawa Seij¥rø, supported this counter-plan. In addition, the
1 ex-Director General of the Management and Coordination Agency, Mizuno
2 Kiyoshi, requested reconsideration of the supplementary scheme. The
3 ex-Cabinet Secretary, Gotøda Masaharu, and the ex-Director General of
4 the Economic Planning Agency, Takashima Osamu, also criticized the
5111 supplementary scheme. The LDP was divided and it could not, therefore,
6 take decisive action against the opposition parties.
7 In the process of planning a liquidation scheme for the J¥sen, there were
8 no influential leaders among the Nørin-zoku who could control members.
9 Neither could faction leaders control the behaviour of the Nørin zoku.
30111 Therefore, the MOF could not create a liquidation scheme or put into prac-
1 tice its original scheme by negotiating only with LDP executives and
2 faction leaders. The MOF could not decide a scheme for the J¥sen’s liqui-
3 dation until the last moment, and it was forced to change its original scheme.
4 With regard to deliberation in the Diet under LDP dominance, LDP exec-
5 utives and LDP Giun zoku negotiated with other parties, and budgets passed
6 the Diet smoothly. However, in the J¥sen case, LDP Giun zoku and LDP
7 executives could not control the deliberation of the package of bills for the
8 J¥sen, since the Speaker of the HR was not an LDP member. The division
9 within the LDP and the lack of leadership in the NFP made this confusion
40111 worse.
1 As a result, the deliberation of the package of bills for the J¥sen was
2 confused, and the approval of the budget of the 1996 fiscal year was
3 delayed. The legislation for the J¥sen liquidation scheme was also signifi-
44 cantly delayed, and the package of bills for the J¥sen liquidation passed
45111 the Diet on 18 June 1996.
112 The financial crisis in Japan 1994–1998
The failure of the Long-Term Credit Bank of Japan
(LTCBJ)

The process of the failure of the LTCBJ

After the failure of three financial institutions (the Sanyø Securities
Company, the Hokkaidø Takushoku Bank and the Yamaichi Securities
Company) in November 1997, the Hashimoto Cabinet changed its econ-
omic policies from fiscal reform to stimulating the Japanese economy. On
16 February 1998 the Immediate Measures for Financial Stabilization Law
passed the Diet. According to this new law, public funds – 1 trillion 800
billion yen in total – were injected into 21 banks. On 26 March 1998, the
government and the LDP decided to revise the Financial Structural Reform
Law and to enforce a tax increase. However, the financial situation was
not improved, and the LDP was badly defeated in the election for the
House of Councillors (HC) held on 12 July 1998. LDP seats decreased
from 119 to 102, while the number of seats held by the opposition parties
increased substantially; for instance, the Democratic Party (DP) improved
from 38 to 47. After the election, the ruling coalition parties (the LDP, the
SDPJ and the NHP) had 118 out of 252, which meant they could not keep
the majority in the HC. In spite of the overwhelming defeat, the LDP still
kept the largest number of seats in the Diet, so the Obuchi Cabinet
succeeded the Second Hashimoto Cabinet on 30 July.
On 5 June 1998, Gendai, a monthly magazine, reported that the Long-
Term Credit Bank of Japan (LTCBJ) was on the verge of failure.
Institutional investors sold stocks of the LTCBJ one after another. The
LTCBJ negotiated with the Sumitomo Trust Bank about a merger in order
to escape financial difficulties. The LTCBJ and the Sumitomo Trust Bank
formed a committee for their merger on 2 July 1998, and negotiated to
reach an agreement about the merger. On 21 August 1998 the LTCBJ
announced the disposal of its bad loans – 750 billion yen – and a recon-
struction plan that included a complete withdrawal from overseas business.
It requested the injection of public funds of more than 500 billion yen.
Responding to the successive failures of financial institutions, the govern-
ment and the LDP re-examined the policy of injecting public funds into
failed financial institutions. On 2 July 1998 the LDP agreed on the ‘Com-
prehensive Plan for Financial Revitalization’, and submitted the package of
bills for financial Rehabilitation to the Diet. This plan adopted a ‘bridge
bank’ system. A failed financial institution was to be managed by supervi-
sors appointed by the Financial Supervisory Agency (FSA), its bad loans
were transferred to the Resolution and Collection Bank (RCB), and other
loans were bought by private financial institutions. If no private financial
institutions bought its loans, a bridge bank was to be established, funded by
the Deposit Insurance Corporation, and the failed financial institution’s
business would be transferred to this bridge bank. On the other hand, three
 The financial crisis in Japan 1994–1998 113
1111 opposition parties (the DP, Peace and Reform (PR), and the Liberal Party
2 (LP)) drew up a counter-plan; they demanded the abolition of the
3 Immediate Measures for Financial Stabilization Law, which provided for
4 the injection of public funds to financial institutions before their failure.
5111 The opposition parties’ counter-plan did not include the injection of
6 public funds into financial institutions before their failure, and this issue
7 became a serious political topic between the LDP and opposition parties.
8 It was related to the LTCB’s rescue scheme: the LDP insisted that the
9 LTCBJ was not insolvent and it should be rescued by the injection of
1011 public funds according to the Immediate Measures for Financial System
1 Stabilization Law; on the other hand, three opposition parties demanded
2 abolition of this law and insisted that the LTCBJ should be dealt with as
3111 a failed financial institution without the injection of public funds.
4 At first the DP announced that it would attend the deliberation of the
5 revision of the Financial Revitalization Bill in the Diet, although the LDP
6 decided to settle the LTCBJ case by adopting the injection of public funds.
7 The leader of the DP, Kan Naoto, announced that the DP would not relate
8 the LCBJ issue to the deliberation of the revision of the Financial
9 Revitalization Bill in the Diet. However, the DP suddenly changed its atti-
20111 tude and insisted that the LTCBJ should be dealt with as a failed financial
1
institution and that the new system for failed financial institutions must be
2
applied to the LTCBJ case.16 The LTCBJ case was related to the deliber-
3
ation of the revision of the Financial Revitalization Bill in the Diet, and
4
became a serious political issue.
5111
6 The LDP was forced to compromise with opposition parties in order to
7 pass the package of bills because of its overwhelming defeat in the most
8 recent HC election. On 15 September 1998, the LDP presented a compro-
9 mise plan in which liquidation-like measures would be applied to the
30111 LTCBJ. In this plan, a financial institution would reduce its capital when
1 its capital ratio became less than 2 per cent, and then the government
2 would buy its stocks and temporarily nationalize it. The LDP proposed
3 that this new system be applied to the LTCBJ. However, negotiations
4 between the LDP and opposition parties were deadlocked with respect to
5 the split of divisions of financial policies from the MOF (this issue is the
6 main theme of MOF reform, which will be explained in the next chapter),
7 and the LDP was also forced to compromise on this issue. On 18 September
8 1998, leaders of the LDP and three opposition parties reached an agree-
9 ment. Prime Minister Obuchi and leaders of the DP, LP and PR agreed
40111 that:
1
2 1 Regarding the system for failed financial institutions, the new law
3 would include not only the bridge bank system, which the LDP insisted
44 upon but also a temporary nationalization, which opposition parties
45111 insisted upon.
114 The financial crisis in Japan 1994–1998
2 Regarding the injection of public funds, the present system of injecting
public funds into financial institutions before their failure would be
abolished, and a new system would be founded in which a financial
institution whose equity ratio was extremely low would be temporarily
nationalized.
3 A Financial Reconstruction Commission would be established accord-
ing to Article 3 of the National Administrative Organization Law.
Integration of jurisdiction over financial policies into one organization
would be legislated by the ordinary session in the next year.
4 The LTCJB case would be settled by the application of the new system,
a temporary nationalization, etc., which would be legislated in this
session according to the agreement between executives of the LDP
and the three opposition parties.

This agreement was deliberately ambiguous with respect to the LTCBJ

case, which caused confusion between the LDP and the three opposition
parties. In the agreement, the LTCBJ case would be settled by ‘the appli-
cation of a new system, a temporary nationalization system, etc., which
would be legislated in this session according to the agreement between the
executives of the LDP and the three opposition parties.’ The ambiguous
‘etc.’ left the possibility of applying the injection of public funds to the
LTCBJ. Some LDP members stated that the LTCBJ case could be settled
by the injection of public funds and the merger with the Sumitomo Trust
Bank. The Chair of the PARC, Ikeda Yukihiko, insisted, ‘the system of
the injection of public funds into financial facilities before their failure will
remain in the revised bill . . .’ (Asahi Shinbun, 19 September 1998). The
LDP Secretary General, Mori Yoshirø, emphasized on a TV programme,
‘we will not make the LTCBJ fail, and we prepare the condition for a
merger with the Sumitomo Trust Bank . . .’ (Asahi Shinbun, 21 September
1998). The LDP and the three opposition parties continued negotiations
concerning the deal with the LTCBJ, and the LDP was forced to abandon
the injection of public funds into the LTCBJ.
On 26 September the LDP and the three opposition parties finally reached
an agreement. They agreed that the LTCBJ would be temporarily under
state control and would then become a subsidiary of a private financial
facility by transferring its shares to it.

Analysis of the process of the LTCBJ liquidation

The decline in the importance of LDP organizations

After the election of the HC of July 1998, the ruling coalition parties – the
LDP, the SDPJ and the NHP – lacked a majority. Therefore the LDP was
forced to compromise with the three opposition parties in order to pass the
Financial Revitalization Bill. At first, the LDP decided to introduce a bridge
 The financial crisis in Japan 1994–1998 115
1111 bank system to deal with a failed financial institution and to rescue the
2 LTCBJ by the injection of public funds and a merger with the Sumitomo
3 Trust Bank according to its original scheme. However, the LDP was forced
4 to accept the demands of the three opposition parties and to revise the Bill
5111 according to their demands. The LDP therefore accepted the temporary
6 nationalization system for failed financial institutions, and it abandoned the
7 plan to merge the LTCBJ with the Sumitomo Trust Bank by injecting public
8 funds to the LTCBJ.
9 Such one-sided concessions triggered strong objection and criticism from
1011 senior LDP politicians, which considerably delayed the whole process.
1 Although leaders of the LDP and the three opposition parties reached an
2 agreement on 18 September, they had to continue the negotiation (which
3111 dragged on until 26 September) because of the strong dissatisfaction among
4 senior LDP politicians. The fact that the LDP was forced to change the
5 bills that had been based on LDP organizations’ decisions and to accept
6 the opposition parties’ plan clearly shows the decline of importance of
7 LDP organizations in the decision-making process of the Diet.
8
9
20111 The weakened management system of the LDP
1 The LDP was divided over the LTCBJ case into two groups across factions:
2 the so-called ‘new policy-oriented politician’ (Seisaku Shinjinrui) group
3
and a group of senior members. Members of the first group, such as Ishihara
4
Nobuteru and Shiozaki Yasuhisa, who were actually in charge of revising
5111
the Financial Revitalization Bill, showed a positive attitude towards the
6
counter-plan of the three opposition parties, and cooperated with DP
7
8 members. They united across factions and resisted pressure from faction
9 leaders with respect to revising the Financial Revitalization Bill. On the
30111 other hand, the latter group resisted accepting the opposition parties’ draft
1 of the Financial Revitalization Bill, and they attempted to rescue the LTCBJ
2 by a merger with the Sumitomo Trust Bank. They pressured junior LDP
3 members of the ‘new policy-oriented politician’ group.
4 Nevertheless, the ‘new policy-oriented politicians’ resisted control by
5 faction leaders and senior LDP politicians. In addition, there was no influ-
6 ential mediator to settle this confrontation. The Asahi Shinbun reported the
7 complaints of one DP executive: ‘We cannot find who is taking the lead-
8 ership in the LDP and the government’ (Asahi Shinbun, 17 September
9 1995). Negotiations between the LDP and the three opposition parties was
40111 confused and delayed until just before the Prime Minister left Japan to
1 meet the US President. Although the leaders of the LDP and the three
2 opposition parties reached an agreement on 18 September 1998, the agree-
3 ment triggered severe objections from senior LDP politicians. The meeting
44 of the Executive Council of the LDP on 18 September fell into turmoil
45111 because of strong objections from senior LDP members.
116 The financial crisis in Japan 1994–1998
In spite of the agreement, senior LDP members, who constituted anti-
power holding groups and were dissatisfied with the concessions made by
the Cabinet to the opposition parties, attempted to rescue the LTCBJ by a
merger with the Sumitomo Trust Bank expressed their favour for a merger
plan, which broke off the negotiation between the LDP and opposition
parties concerning revision of the Financial Revitalization Bill. However,
LDP exectutives who constituted a power-holding group restored the nego-
tiations between the LDP and three opposition parties despite the dispproval
of senior members of the anti-power holding group. The negotiation was
confused because of the split in the LDP and was prolonged until 26
September.

The change in the attitude of politicians towards MOF

bureaucrats
Under LDP dominance, bureaucrats exerted influence on LDP politicians
by presenting information and drafts of bills. The ‘new policy-oriented
politicians’, who were in charge of the revision of the Financial Revital-
ization Bill, rejected the MOF’s support. They revised the draft, cooper-
ating with DP members. Usually the MOF participated in the whole process
of legislation by planning drafts of bills, attending discussions in LDP
organizations and negotiating with LDP executives before and after those
discussions. But in this case, the ‘new policy-oriented politicians’ did not
seek support from the MOF regarding creating the revised draft. The main
venues of this revising process were not LDP organizations but negotia-
tions between the LDP, the DP, the LP and the CGP, and the MOF was
excluded from these. The MOF could negotiate only with the senior
members’ group, which included, for example, the Minister of Finance,
Miyazawa Kiichi, and the Chair of the PARC, Ikeda Yukihiko. These senior
members could not impose their preferences on junior LDP members of
the ‘new policy-oriented politicians’. DP members also took a negative atti-
tude towards support from the MOF and the MOF therefore failed to have
an influence on the revision of the Financial Revitalization Bill.17
In the LTCBJ case, like the J¥sen case, the institutional factors that sup-
ported the issue settling system under LDP dominance had changed. First,
the decision-making process did not conclude in the LDP organizations.
Since the LDP and ruling coalition parties had lost their majority in the
HC, the LDP had to compromise with opposition parties. In spite of strong
objection from LDP members, the LDP was forced to negotiate with oppo-
sition parties and to accept their plan for the LTCBJ. Second, the man-
agement system of the LDP through factions did not work effectively. The
LDP was divided over the LTCBJ issue, and there was no influential
member who could integrate LDP politicians. Third, some LDP politicians
refused the MOF’s support for revising the Bill, and they excluded the
MOF from negotiation with the three opposition parties and the process of
 The financial crisis in Japan 1994–1998 117
1111 the revision of the Bill. In order to settle the LTCBJ case, MOF bureau-
2 crats were not able to rely on the close connections with LDP executives
3 and faction leaders that were established under LDP dominance. As a result,
4 the process of planning a scheme for the LTCBJ was seriously confused
5111 and the scheme was considerably delayed.
6
7
Conclusion
8
9 With regard to the financial crisis in the latter half of the 1990s, the effects
1011 of foreign markets and the decline of the control by the MOF over finan-
1 cial markets have been pointed out. Indeed, the trend of foreign financial
2 markets and foreign investors entering the domestic financial markets
3111 exacerbated the difficulties of those institutions that had already fallen into
4 difficulties. While Japanese financial institutions expanded their business
5 into foreign markets, foreign investors increased their business in Japan-
6 ese financial markets. As a result, the control by the MOF over domestic
7 financial markets became weakened and Japanese financial institutions
8 became vulnerable to the trend of foreign markets. For instance, the
9 Yamaichi Securities Company experienced severe difficulties in raising
20111 funds from markets after a foreign grading institution downgraded the rating
1 of the bonds of the Yamaichi to ‘speculative’ on 21 November 1997. The
2 Yamaichi Securities Company was forced to announce the closing of its
3 business on 24 November 1997.
4 What is investigated in this case study, however, is not the causes of
5111 the financial crisis but the reasons for political confusion and the delay in
6 taking countermeasures. And the trend of foreign markets and foreign
7 investors entering the domestic market did not necessarily affect the
8 MOF’s process of making liquidation plans. The venue for creating a liqui-
9 dation plan was concluded in domestic political settings that were not
30111 generally affected by the movements of foreign markets and investors. For
1 example, in the cases of the two credit unions and the two securities compa-
2 nies examined in this chapter, it is true that trends in foreign markets and
3 the actions of foreign investors exacerbated the financial difficulties of
4 those credit unions and securities companies, finally causing their failure.
5 Nevertheless, the processes of making liquidation plans for them were
6 controlled by the MOF.
7 It can therefore be said that malfunctioning in the issue settling system
8 was the principal cause for political confusion and the delay of measures
9 regarding the failure of the J¥sen and the LTCBJ.
40111 First, the importance of LDP organizations in the decision-making
1 process of the government and the Diet declined. The decisions of the
2 government and the Diet were not the same as the decisions of LDP organ-
3 izations since the LDP had to compromise with other ruling coalition
44 parties or opposition parties. As a result, consent from faction leaders and
45111 LDP executives did not guarantee that plans created by bureaucrats would
118 The financial crisis in Japan 1994–1998
be submitted to the Diet as the government’s bills or legislated in the Diet.
In the J¥sen case, LDP Giun-zoku could not control the deliberations on
the budget of the 1996 fiscal year and a package of bills for the J¥sen
in the Diet. As a result, the legislation was significantly delayed. In the
LTCBJ case, the LDP and the government were forced to abandon their
plan for the LTCBJ and the Financial Revitalization Bill and to accept the
opposition parties’ plan, which caused political confusion and the delay of
legislation.
Second, the management system of the LDP through factions disinte-
grated. LDP executives and faction leaders found it difficult to make LDP
members obey their orders, and therefore consent from faction leaders and
LDP executives did not guarantee support from LDP members as a whole.
In the J¥sen case, faction leaders and LDP executives could not control
the Nørin-zoku, and the LDP was divided into a power-holding group and
an anti-power-holding group. The MOF had to abandon its original scheme.
In the LTCBJ case, the LDP was divided into ‘new policy-oriented politi-
cians’ and senior members. ‘New policy-oriented politicians’ cooperated
with DP politicians in the process of revising the Financial Revitalization
Bill, and faction leaders could not control them.
Third, the relationship between LDP politicians and MOF bureaucrats
became more detached compared with that under LDP dominance. Some
LDP politicians did not rely on MOF bureaucrats for creating a bill. In the
LTCBJ case, ‘new policy-oriented politicians’ refused the MOF’s support
and they created the draft of the revision of the Financial Revitalization
Bill by cooperating with the DP.
Because of such changes in institutions and institutional relationships
caused by the end of LDP dominance, the efficacy of the issue settling
system based on close cooperation between LDP executives, faction leaders
and bureaucrats considerably declined. The negotiation and consent from
LDP executives and faction leaders did not guarantee the expectation of
the MOF that the plans that the MOF created would be submitted to the
Diet as the government’s bills and legislated in the Diet. The issue settling
system, on which the MOF had relied in order to settle the failure of the
J¥sen and the LTCBJ, did not work in either case. Consequently, the
process of dealing with the failure of the J¥sen and the LTCBJ was thrown
into political turmoil, and their liquidation was significantly delayed, which
brought about serious damage to the Japanese economy. For instance, the
movement of the ‘Japan premium’ illustrates how foreign financial markets
evaluate the Japanese financial systems. The ‘Japan premium’, which had
soared from 0 per cent in October 1997 to more than 0.7 per cent in January
1998, had declined to less than 0.2 per cent by June 1998. But, as the
deliberation of the Financial Revitalization Bill in the Diet (from August
1998) was thrown into political turmoil and the rescue plan for the LTCBJ
was delayed, the ‘Japan premium’ began to soar, reaching almost 0.7 per
cent in November 1998.
1111
2 7 The reform of the Ministry
3
4 of Finance
5111
6
7
8
9
1011
1
2
3111 The MOF protected its organization from the attempts of party politicians
4 to reorganize it. From the 1950s to the beginning of the 1960s, LDP politi-
5 cians had attempted to reorganize the MOF. Under the Third Hatoyama
6 Cabinet (from November 1955 to December 1956), the Director General
7 of Administrative Management Agency, Køno Ichirø, presented a plan for
8 administrative reforms which proposed reorganization of central ministries
9 and agencies. The crucial point of this plan was that jurisdiction over
20111 budget compilation, which belonged to the Budget Bureau of the MOF,
1 would be transferred to the Prime Minister’s Office (PMO). Although this
2 plan was discussed in the Third Research Council on the Administrative
3 System (established in December 1955) it was not put into practice. The
4 Second Ikeda Cabinet (from December 1960 to July 1963) established
5111 the Provisional Research Council on the Administrative System in 1962.
6 This Council attempted to transfer the jurisdiction of the Budget Bureau
7 of the MOF to the Cabinet. However, this attempt also failed. Since then,
8 the LDP had preferred to form close connections with the MOF rather than
9 reorganize it. LDP politicians obtained beneficial treatment regarding
30111 public works and subsidies in return for cooperating with MOF bureau-
1 crats, and they secured their seats in the Diet by distributing those public
2 works and subsidies to their supporting groups, i.e. LDP politicians found
3 it profitable to maintain this cosy cooperation, which reinforced the issue
4 settling system. Intervening in the personnel and organizational matters of
5 the MOF was supposed to harm this profitable cooperation because such
6 intervention would directly affect MOF bureaucrats’ interests. Accordingly,
7 LDP politicians refrained from intervening in the personnel matters of
8 MOF bureaucrats and putting MOF reform on the political agenda to
9 avoid harming such a beneficial relationship with MOF bureaucrats, and
40111 therefore reorganizing the MOF, especially dividing its jurisdiction, was
1 regarded as very unlikely.
2 Nevertheless, in 1998 a part of MOF jurisdiction was divided from the
3 MOF and transferred to two newly established organizations, the Financial
44 Supervisory Agency (FSA) and the Financial Reconstruction Commission
45111 (FRC). In the processes of legislation related to MOF reform, such as the
120 The reform of the Ministry of Finance
Foundation Law of the Financial Supervisory Agency, the Foundation Law
of the Financial Reconstruction Commission, the Financial Revitalization
Law and the Basic Law on the Reform of Central Ministries and Agencies,
the MOF attempted to take the lead and influence the legislation by drafting
bills and negotiating with LDP executives and faction leaders as it had
done under LDP dominance through the issue settling system. Under LDP
dominance it had drafted bills, attended each stage of discussion in
LDP organizations from Divisions of the PARC to the EC, and negotiated
with LDP executives and faction leaders before and after those discus-
sions, and thus legislation that agreed with the intentions of the MOF had
been enacted. However, the processes of the legislation of the laws referred
to at the beginning of this paragraph were different from that under LDP
dominance. As examined later in this chapter, three institutional changes
transformed the decision-making process under LDP dominance, which
was based on the issue settling system. The main venues for this legisla-
tion process shifted from LDP organizations to organizations that consisted
of ruling coalition parties or negotiation meetings with opposition parties.
The LDP was forced to change its decisions, compromising with other
ruling coalition parties or making concessions to opposition parties.
Regarding the Financial Revitalization Bill, the MOF was excluded from
its revising process. The MOF could not control the legislation processes
of the above laws through the issue settling system, and as a result of this,
it failed to prevent its reorganization. Therefore MOF reform in the latter
half of the 1990s highlights the point that the issue settling system did not
function in the Japanese political processes after 1993.
The target of the attempts at MOF reform from the 1950s to the begin-
ning of the 1960s was to transfer the jurisdiction of budget compilation
away from the MOF. However, the aim of MOF reform in the latter half
of the 1990s was to split the jurisdiction of financial policies away from
the MOF, in response to the following political circumstances.
In June 1991, it was revealed that four major securities companies
(Nomura, Nikkø, Yamaichi and Daiwa) had compensated institutional
investors for the losses suffered in stock prices, which went against a
direction issued by the MOF that forbade securities companies to make
such compensation. The MOF was criticized on the ground that it could
not detect or prevent such compensation through the inspection of the
four major security companies. As a result, in 1992, the Securities and
Exchange Surveillance Commission (SESC) was established as an organ-
ization that would inspect financial institutions regarding illegal trans-
actions in securities and financial futures markets. The establishment of
the SESC entailed the reorganization of the MOF because parts of the
divisions of the MOF were transferred to the SESC. However, the SESC
was established as an organization that was supposed to be supervised
by the MOF, so the establishment of the SESC actually enlarged MOF
organization.
 The reform of the Ministry of Finance 121
1111 After the massive bad loans of the J¥sen were revealed and a package
2 of bills for the liquidation of the J¥sen was submitted to the Diet in
3 December 1995, criticism against the MOF regarding its inspection and
4 supervision surged again. The MOF was criticized on the ground that it
5111 could neither detect the large-scale bad loans of the J¥sen nor prevent the
6 failure of the J¥sen. The necessity for an independent organization from
7 the MOF that would execute the inspection and supervision of financial
8 institutions was discussed in the mass media. For instance, a leading article
9 in the Asahi Shinbun argued that:
1011
1 it is time to settle structural problems of the MOF. . . . we should
2 discuss the reorganization of the MOF which includes splitting the
3111 Banking Bureau, the Securities Bureau, and the Foreign Finance
4 Bureau from the MOF and transferring them to a new organization
5 which would inspect and oversee financial transactions.
6 (Asahi Shinbun, 31 December 1995)
7
8 As a result, removing from the MOF the jurisdiction of financial policies,
9 especially the inspection and supervision of financial institutions, was on
20111 the political agenda. The movement for MOF reform in the 1990s emerged
1 in the above political circumstances. Therefore it focused on the transfer
2 of the financial policy divisions, especially inspections and supervision of
3 financial institutions, away from the MOF.
4
5111
The first wave of MOF reform: the establishment
6
of the Financial Supervisory Agency
7
8 The injection of public funds into the J¥sen brought about severe public
9 criticism of the government, including the LDP and the MOF. The LDP
30111 and other ruling coalition parties were afraid that such criticism would
1 damage the approval rating of the Murayama Coalition Cabinet. When the
2 government’s scheme for the J¥sen was presented, the LDP and other
3 ruling coalition parties’ politicians demanded that the MOF should take
4 responsibility for the injection of public funds. On 19 December 1995, the
5 Committee of Representatives of Ruling Coalition Parties presented a state-
6 ment that demanded that the responsibility of the ministries in charge of
7 the J¥sen problem should be investigated. The deliberation of the budget
8 of the 1996 fiscal year and the package of bills for the J¥sen liquidation
9 in the Diet was seriously confused. In January 1996 Prime Minister
40111 Murayama Tomi’ichi suddenly resigned in the middle of this deliberation,
1 and the Hashimoto Coalition Cabinet was formed. As a result, criticism
2 of the MOF arose among LDP politicians.1
3 Thus the reform of the MOF suddenly appeared on the Cabinet’s polit-
44 ical agenda. On 6 February 1996, the government and tripartite ruling
45111 coalition agreed to reorganize and to re-examine MOF’s jurisdiction. The
122 The reform of the Ministry of Finance
Tripartite Ruling Camp’s Committee on MOF Reform (chaired by the
Secretary General of the LDP, Katø Køichi) was established on 17 February
1996 and, under this committee, a study group (chaired by Itø Shigeru, a
member of the Social Democratic Party of Japan (SDPJ)) was formed.
On 2 March 1996, the study group decided that the revision of the Bank
of Japan Law should be discussed first in order to strengthen the inde-
pendence of the Bank of Japan (BOJ) from the MOF. The main points of
the discussion were strengthening the authority of the Policy Board of the
BOJ and providing the inspection conducted by the BOJ in the Bank of
Japan Law.
While the study group was discussing the revision of the Bank of Japan
Law in June and July 1996, it became a serious issue as to whether the study
group should discuss splitting the divisions of inspection and supervision of
financial institutions away from the MOF. On 2 June, the Asahi Shinbun
scooped the ‘basic policy’ of the study group on MOF reform. It reported
that the basic policy would not include a split of the divisions of inspection
and supervision of financial institutions away from the MOF. The mass
media criticized this basic policy and demanded that these divisions should
be split away from the MOF. For example, the Asahi Shinbun demanded in
its article of 5 June 1996 that the study group should undertake intense dis-
cussion and accomplish MOF reform. The article argued: ‘[the study group]
should clearly present the split of jurisdiction over financial policies from
the MOF, and this issue should be thoroughly discussed in public . . . (Asahi
Shinbun, 5 June 1996). On 13 June 1996, the study group formally pre-
sented its basic policy, ‘The Construction of New Financial Policies and
Administration’. The study group agreed the following points:

1 The Bank of Japan Law would be revised to strengthen its indepen-

dence from the MOF and to clarify its responsibility for financial
policies.
2 The study group would continue to discuss the reorganization of the
MOF including the split of the divisions of inspection and supervision
on financial institutions, and a plan would be presented by September
1996.

When Chair Itø presented a memorandum on 6 August 1996, the LDP

members of the study group opposed this draft proposal and refused to
receive it. The draft proposed that the divisions of inspection and super-
vision of financial institutions should be split away from the MOF and
transferred to a new committee. The draft also proposed that a complete
split of jurisdiction on financial policies away from the MOF should be
discussed in the study group. LDP members of the study group opposed
the memorandum. They argued that discussion in the study group was not
enough, and that some of the contents of the memorandum were unac-
ceptable. On the next day, the LDP Secretary General and executives of
 The reform of the Ministry of Finance 123
1111 ruling coalition parties discussed how to settle this conflict. The LDP
2 compromised with the SDPJ and the NHP, and they agreed that Itø’s draft
3 proposal should be a springboard for discussion in the study group. On
4 21 August 1996, the study group reopened discussion.
5111 As for the stance of the LDP about the type of new organization, by 11
6 September 1996, LDP executives had agreed to establish an Article 8 type
7 committee2 supervised by the MOF, and the study group was supposed to
8 follow this agreement. Nevertheless, the LDP suddenly changed its stance
9 and took more of a positive attitude towards MOF reform. On 18 September
1011 1996, the Committee of Top Eight Executives of the LDP agreed that the
1 divisions of inspection and supervision of financial institutions should be
2 split away from the MOF and transferred to a new FTC-like organization
3111 (an Article 3 type).
4 On 25 September 1996, the study group on MOF reform agreed on a
5 final report, and the LDP Secretary General and executives of other ruling
6 parties approved it. They agreed that the Banking Bureau and the Securities
7 Bureau would be integrated into one bureau and the divisions of inspec-
8 tion and supervision of financial institutions would be split away from the
9 MOF and transferred to a new FTC-like (Article 3 type) organization. This
20111 report proposed that:
1
2
1 The Banking Bureau and the Securities Bureau would be integrated
3
into one bureau (Financial Bureau). The International Financial Bureau
4
would keep its current organization for the time being.
5111
2 The divisions of inspection and supervision of financial institutions
6
7 would be split away from the MOF and transferred to a new commit-
8 tee, an FTC-like organization. This new committee would fulfil the
9 following requirements:
30111 i high independence from the MOF, especially with respect to its
1 personnel system;
2 ii immediate, appropriate and responsible administration;
3 iii precise and objective understanding of the business of financial
4 institutions;
5 iv employment of those with expertise in financial issues.
6 3 The integration of the jurisdiction over financial policies would be
7 discussed without delay.
8 4 The system of budget compilation would be discussed later.
9 5 With respect to public financial institutions, the transparency and effi-
40111 ciency of government investment and loans (Zaisei Tøy¥shi) would be
1 maintained and drastic reforms of their management would be required.
2 6 A drastic revision of the ‘amakudari’ system would be made. (The
3 ‘amakudari’ system is a custom among bureaucrats and private compan-
44 ies after 1945 in which many retired bureaucrats obtain executive posi-
45111 tions of private companies or public-service corporations. For instance,
124 The reform of the Ministry of Finance
retired MOF bureacrats obtain executive positions of financial institu-
tions, or public-service corporations which are subject to regulation by
the MOF.)
7 The separation of the jurisdiction between revenue and expenditure
would be discussed in future.

A general election was held on 20 October 1996; this was the first general
election under the new electoral system. The LDP won 239 seats out of
500 (the number of LDP’s seats before the election was 211). Although
the SDPJ (which had split shortly before the election) and the NHP found
their numbers in the HR had decreased from 30 to 15 and from 9 to 2,
respectively, the LDP retained the support of the SDPJ and the NHP in
order to keep a majority in the Diet.
On 21 November, the LDP decided that the new organization should be
an Article 3 type (an FTC-like) organization. However, the LDP proposed
to the NHP and the SDPJ that only the divisions of inspection would be
transferred to this new organization at first, and the divisions of super-
vision would be discussed later in the process of creating an administrative
reform plan that would be implemented in 2001. The NHP and the SDPJ
strongly opposed this proposal. At this stage, the LDP and the other ruling
coalition parties (the NHP and the SDPJ) disagreed with each other on
three points:

1 to which organization (the MOF or the PMO) the new organization

would belong;
2 what form (a council committee or an agency) the new organization
would take; and
3 whether the jurisdiction of the new organization would include both
inspection and supervision of financial institutions or whether only
inspection would be included.

While negotiation between the LDP, the SDPJ and the NHP over the three
points was prolonged, on 1 December 1996 Prime Minister Hashimoto
directed Secretary General Katø Køichi to form a plan in which both divi-
sions of inspection and supervision would be separated from the MOF. On
4 December the government and the LDP decided to split both divisions
away from the MOF and transfer them to an Article 3 type agency super-
vised by the Prime Minister’s Office. Finally, on 25 December 1996, the
tripartite ruling coalition agreed on a final plan of MOF reforms. They
agreed in this final plan that:

1 The Banking Bureau and the Securities Bureau would be integrated

into the Financial Bureau. The International Financial Bureau would
maintain the current jurisdiction for the time being, except that a part
of its jurisdiction would be transferred to the Financial Bureau.
 The reform of the Ministry of Finance 125
1111 2 With respect to a new agency:
2 i a new organization, the Financial Supervisory Agency (FSA),
3 would be established according to Article 3 of the National
4 Administrative Organization Law;
5111 ii the FSA would belong to the PMO and the Director General of the
6 FSA would be appointed by the Prime Minister;
7 iii the FSA and the MOF would have regular discussions in order to
8 keep order in market systems;
9 iv the FSA would consult the MOF when the measures for failed
1011 financial institutions adopted by the FSA brought about change in
1 the current systems;
2 v when the FSA inspected financial institutions in provincial areas,
3111 the FSA would use the MOF’s current organization in those areas.
4 3 In the discussion of drastic reform of the central ministries and
5 agencies, the separation of jurisdiction over financial policies from the
6 MOF would be clarified.
7
8 After this agreement, the main organization to discuss MOF reform was
9 transferred from the study group to the Committee of Representatives of
20111 Ruling Coalition Parties3 and the Council on Administrative Reform (CAR).
1 After the general election of 20 October 1996, the second Hashimoto
2 Cabinet presented administrative reform as its political agenda, and the
3 CAR was established as a Prime Minister’s advisory council. The CAR
4 had its first meeting on 28 November 1996, and MOF reform was discussed
5111 in the CAR as a part of administrative reform.
6 From 18 to 21 August 1997, the CAR held an intensive discussion of its
7 interim report. With regard to MOF reform, three issues were discussed:
8 the complete split of jurisdiction over financial policies from the MOF; the
9 separation of the National Tax Administration Agency from MOF organ-
30111 ization; and the allocation of jurisdiction between the FSA and the MOF.
1 On 3 September 1997, the CAR agreed on its interim report. This report
2 did not present a clear proposal about the complete separation of juris-
3 diction over financial policies from the MOF, and it decided that removing
4 the National Tax Administration Agency from MOF organization was to
5 be discussed after the interim report was presented.4 As for the allocation
6 of jurisdictions between the MOF and the FSA, the MOF’s jurisdiction
7 over planning of financial policies was limited to the planning of finan-
8 cial policies for maintaining order in market systems. The SDPJ and the
9 NHP criticized this interim report on the grounds that it did not decide on
40111 the complete split of the jurisdiction over financial policies away from
1 the MOF.
2 Because of the NHP’s and the SDPJ’s firm attitudes, the negotiation
3 between the LDP, the NHP and the SDPJ was prolonged, and executives
44 of the ruling coalition parties agreed to continue negotiating over this issue
45111 and to make a final decision by January 1998. Finally, on 20 January 1998,
126 The reform of the Ministry of Finance
the tripartite ruling coalition reached an agreement. The MOF would main-
tain its jurisdiction over the planning of financial policies for the time being,
and the date of transfer of this jurisdiction to the FSA was not clearly stated
in this agreement. The agreement included the following points:

1 The jurisdiction over overseas monetary policies would remain with

the MOF for the time being.
2 The establishment of the FSA and the revision of the Bank of Japan
Law should be regarded as a part of the division of jurisdiction over
financial policies away from the MOF.
3 The jurisdiction over the management of failed financial institutions
and financial crises would remain in the MOF for the time being.
4 The following issues would be legislated by the time the administra-
tive reform of central ministries was completed:
i the FSA would be reorganized as the Financial Agency (FA);
ii the jurisdiction over planning of domestic financial policies (except
the management of failed financial institutions and financial crises)
would be transferred to the FA.

According to this agreement, the FSA was established on 22 June 1998.

Analysis of the first wave of MOF reform

The decline in the importance of LDP organizations

In the process of the first wave of MOF reform, the decline in the impor-
tance of LDP organizations was observed in two ways: the change of
organizations that controlled the government’s decisions; and successive
concessions of the LDP to the SDPJ and the NHP.
First, it was not LDP organizations but the organizations of the ruling
coalition parties that played a main role in the decision-making processes of
the government. The study group of ruling coalition parties under the
Tripartite Ruling Camp’s Committee on MOF Reform and the Committee
of Representatives of Ruling Coalition Parties led the discussion in the coali-
tion government. In these organizations, the SDPJ and the NHP obtained
disproportionate influence considering the number of their seats in the Diet.
The study group consisted of 21 members: 10 were LDP members, 7 were
SDPJ members and 4 were NHP members. Under the Murayama and the
Hashimoto Coalition Cabinets, the ruling coalition parties formed several
organizations in the decision-making process of the government. In order to
maintain the ruling coalition, these organizations were carefully constituted
so that the LDP would not obtain a majority in each organization. As a result,
the NHP and the SDPJ obtained excessive power in the decision-making
process of the government compared with the number of seats that they had
won in the Diet. In addition, the Chair of the study group, Itø Shigeru, was
 The reform of the Ministry of Finance 127
1111 a member of the SDPJ; therefore, it was difficult for the LDP to control the
2 discussion at will in the study group. For example, while the revision of
3 the Bank of Japan Law was being discussed in the study group, the Chair,
4 Itø, in an interview with the Asahi Shinbun, suddenly emphasized the import-
5111 ance of the separation of the divisions of inspection and supervision of
6 financial institutions from the MOF, and tried to lead the discussion in the
7 study group to this issue. In an interview with the Asahi Shinbun, he stated:
8
9 It is crucial for MOF reform whether the divisions of inspection and
1011 supervision of financial institutions should be split from the MOF and
1 transferred to an organization which will be established according to
2 Article 3 of the National Administrative Organization Law.
3111 (Asahi Shinbun, 18 April 1996)
4
5 LDP members, especially LDP executives, took a negative attitude towards
6 Itø’s proposal for the split of the MOF.5 Nevertheless, after this interview,
7 the LDP had to discuss in the study group the removal of divisions of the
8 inspection and supervision of financial institutions from the MOF.
9 Second, to maintain a ruling coalition, the LDP had to compromise with
20111 the SDPJ and the NHP by changing the decisions of LDP organizations.
1 Although the LDP and other ruling parties (the SDPJ and the NHP) agreed
2 to establish a study group of the tripartite ruling parties, their attitudes
3 towards MOF reforms were different from each other. The mass media
4 reported that the real intention of many LDP members was to soothe public
5111 anger against the injection of public funds into the J¥sen and to pass the bud-
6 get of the 1996 fiscal year smoothly (Asahi Shinbun, 8 February 1996). The
7 NHP took the most aggressive attitude. The NHP presented its idea of MOF
8 reform, in which the MOF would be divided into three agencies – finance,
9 public finance and revenue – and a budget agency of the PMO would be
30111 established that would be directly supervised by the Prime Minister.
1 In the study group, the LDP had to make concessions to the SDPJ and
2 the NHP successively. After presenting a basic policy on 13 June 1996, the
3 study group continued discussion to create a plan for MOF reform. Whereas
4 the LDP took a negative attitude towards splitting the divisions of inspec-
5 tion and supervision of financial institutions away from the MOF, the NHP
6 insisted that they would not compromise with respect to the reorganizing of
7 the MOF. The NHP implied that if reorganizing of the MOF was not put
8 into practice, it would break out of the ruling coalition. As a result, the study
9 group had to continue discussions on splitting the MOF and postponed pre-
40111 senting a plan about this issue until September 1996. When LDP members
1 refused to receive Chair Itø’s memorandum on 6 August 1996, on the next
2 day the LDP negotiated with the NHP and the SDPJ. They agreed to discuss
3 Chair Itø’s draft in the study group. By 11 September 1996, the LDP decided
44 to adopt an Article 8 type organization (less independent from the MOF
45111 than Article 3 type) as the new organization. Nevertheless, the LDP changed
128 The reform of the Ministry of Finance
this decision and decided to adopt an Article 3 type, which was what the
NHP and the SDPJ were pressuring for. On 21 November, the LDP pre-
sented its plan in which only the division of inspection would be split away
from the MOF; however, responding to the strong opposition of the NHP,
on 4 December 1996, the LDP finally agreed to separate both divisions of
inspection and supervision from the MOF at the same time.
While the CAR discussed administrative reforms, the LDP continue to
compromise with the SDPJ and the NHP. In its interim report, the CAR
proposed that the MOF’s jurisdiction over planning of financial policies
should be limited to the planning of financial policies for the purpose of
maintaining order in market systems. The NHP and the SDPJ opposed this
decision and insisted on a complete split of jurisdiction over financial poli-
cies away from the MOF. Some NHP hard-liners insisted that the NHP
should dissolve its coalition with the LDP if a complete separation were
not accomplished. The LDP was forced to reduce the MOF’s jurisdiction
over planning of financial policies from maintaining order in market systems
to managing failures of financial institutions.6
In the first wave of MOF reform, therefore, LDP organizations were
deprived of a leading position in the decision-making process of the
government and replaced by organizations of ruling coalition parties.

The weakened management system of the LDP

LDP politicians were not united with regard to what extent the reorgan-
ization of the MOF should be put into practice.7
Under coalition cabinets, the issue of the coalition principle, i.e. whether
the LDP should continue the current coalition with the SDPJ and the
NHP or form a new coalition with more conservative parties, emerged. A
confrontation over the reorganisation of the MOF within the LDP was related
to the principle of coalition because the NHP took a strong attitude towards
MOF reform and the negotiation with the NHP was prolonged. A power-
holding group, which consisted of LDP members who supported the current
coalition with the NHP and the SDPJ, such as Katø Køichi (the Secretary
General of the LDP), Yamazaki Taku (the Chair of the PARC), and Koizumi
Jun’ichirø, tried to compromise with them by adopting the demands of the
NHP about MOF reform. On the other hand, an anti-power-holding group,
which consisted of LDP members who preferred a coalition with more con-
servative parties, including Kajiyama Seiroku and many senior LDP mem-
bers, criticized the attitude of the power-holding group in that they made too
many concessions. The confrontation between the two groups was intensi-
fied across factions. At a general meeting of the Executive Council on
20 November 1997, the power-holding group asked members of the EC to
delegate this issue to LDP executives consisting of members of the power-
holding group, but the anti-power-holding group strongly opposed making
a further concession to the NHP and refused to make such a delegation. The
 The reform of the Ministry of Finance 129
1111 mass media reported fierce confrontation between these two groups at this
2 meeting. One member of the anti-power-holding group stated: ‘we need not
3 make a coalition with the NHP’, and the Chair of the EC, Mori Yoshirø,
4 angrily answered, ‘What are we supposed to do if we dissolve the coalition
5111 with the NHP?’ (Asahi Shinbun, 21 November 1997). Ultimately, the power-
6 holding group failed to obtain the delegation of this issue to them from mem-
7 bers of the EC at this meeting. The conflict over the principle of coalition
8 divided factions, and faction leaders could not, therefore, control this con-
9 flict. In addition, there was no influential leader who could mediate it.
1011 Thus in the process of the first wave of MOF reform, factional control
1 did not functioned effectively because of intense confrontation across
2 factions. As a result, it was difficult for the MOF to obtain the unanimous
3111 support of the LDP by negotiating with faction leaders.
4
5
The change in politicians’ attitudes towards MOF bureaucrats
6
7 Under the Hosokawa Coalition Cabinet, LDP politicians realized that MOF
8 bureaucrats would cooperate with other political parties, and that MOF bur-
9 eaucrats were not their own exclusive partners. Furthermore, many LDP
20111 politicians resented the detached attitudes on the part of bureaucrats, par-
1 ticularly MOF bureaucrats, towards LDP politicians under the Hosokawa
2 Coalition Cabinet. Therefore, when the LDP regained the position of rul-
3 ing party under the Murayama Coalition Cabinet, LDP politicians had lost
4 their strong motivation for protecting the MOF at all costs.
5111 Furthermore, LDP politicians were anxious about the effects on the elec-
6 torate of their attitude towards MOF reform. When the study group dis-
7 cussed MOF reform, a general election under a new electoral system was
8 close at hand. On 19 September 1996, while executives of the ruling coali-
9 tion parties were negotiating with respect to the separation of the divisions
30111 of inspection and supervision on financial institutions from the MOF, Prime
1 Minister Hashimoto informed the leaders of the SDPJ and the NHP that the
2 next general election would be held on 20 October 1996. In addition, LDP
3 politicians were concerned about the threat of new political parties, which
4 pledged administrative reform. The founding committee of the DP was
5 formed on 17 September 1996, and the DP attracted considerable attention
6 from the mass media. On 19 September, the Asahi Shinbun reported the
7 result of an opinion poll in which 34 per cent of respondents showed a
8 favourable attitude towards the establishment of the DP, so LDP politicians
9 were very sensitive to public opinion.8
40111 Although by 12 September 1996 LDP executives had agreed to adopt
1 an Article 8 type as the new organization, they suddenly changed this deci-
2 sion and decided to adopt an Article 3 type (more independent from the
3 MOF than an Article 8 type) on 18 September. It can be said that this
44 sudden change reflected the severe political circumstances facing the LDP
45111 at that time.9
130 The reform of the Ministry of Finance
After 1993, LDP politicians lost their strong motivation to take the risk
of protecting the MOF at the cost of public support. To win the next general
election and secure the position of ruling party, LDP politicians dared to
implement MOF reform.

The second wave of MOF reform

The reform of the MOF temporarily died down after the establishment of
the FSA; however, the serious defeat of the LDP in the House of Councillors
election of 12 July 1998 changed the political circumstances of MOF reform.
Responding to the financial crisis that had existed since November 1997,
the LDP formed the ‘Comprehensive Plan for Financial Revitalization’ on
2 July 1998. Following this plan, the Obuchi Cabinet submitted a Financial
Revitalization Bill and a package of bills for financial crises to the Diet.
On 13 August, three opposition parties (the DP, the Liberal Party (LP) and
the Peace and Reform (PR)) presented a counter-plan that included the
complete separation of jurisdiction over financial policies from the MOF.
In the Financial Revitalization Bill presented by the government and the
LDP, the MOF, the Bank of Japan (BOJ) and the FSA would cooperate to
deal with the financial crises caused by the failure of major financial insti-
tutions. On the other hand, in the opposition parties’ counter-plan, an Article
3 type committee would be established in order to deal with financial
crises and supervise the FSA. In this counter-plan, the MOF was eliminated
from the procedure of planning and managing of financial crises, which
meant a complete split of jurisdiction over financial policies away from
the MOF.
The LDP and other ruling coalition parties did not win a majority in the
HC (the number of LDP seats in the HC was 102 (out of 252), the SDPJ
held 13 seats, and the NHP 3). Therefore, to pass the Financial Revitalization
Bill, the LDP had to compromise with opposition parties by accepting their
demands. At first, the LDP attempted to reach an agreement with the three
opposition parties by presenting a revised bill. In this revised bill, the
Committee would be established according to Article 3 of the National
Administrative Organization Law. A Minister would be appointed Chair of
the Committee, and the authority of the Committee would be strictly limited
to declaring the failure of financial institutions. The majority of LDP
members took a negative attitude towards the reorganization of the MOF.
The three opposition parties criticized the proposal in that it did not change
the current MOF organization, and they refused to accept it. The LDP was
forced to make a further concession to the three opposition parties.
On 18 September 1998, the LDP President and Prime Minister, Obuchi
Keizø, and the leaders of the three opposition parties reached an agree-
ment. In the split of the MOF organization, they agreed that the Financial
Reconstruction Commission would be established according to Article 3
of the National Administrative Organization Law, and that the Commission
would have authority to declare the failure of financial institutions and the
 The reform of the Ministry of Finance 131
1111 temporary nationalization of failed financial institutions. They also agreed
2 that the integration of the jurisdiction over financial policies would be
3 legislated by the end of the ordinary session in the following year. Although
4 leaders of the LDP and the three opposition parties reached this agree-
5111 ment, it was ambiguous with respect to the MOF’s jurisdiction over
6 financial policies for financial crises and the date of operation of the
7 separation of MOF organization. Such ambiguity caused confusion between
8 the LDP and the three opposition parties. As for the split of the MOF, the
9 LDP explained that the jurisdiction over the managing of financial crises
1011 would remain with the MOF, and the division of the MOF would operate
1 from 2001 at the earliest. On the other hand, the three opposition parties
2 explained that all jurisdictions over financial policies would be split from
3111 the MOF and transferred to a new agency, which would begin to operate
4 during the ordinary session in the next year. As a result, negotiation
5 between the LDP and the three opposition parties was confused. Finally,
6 on 26 September 1998, the LDP and the three opposition parties reached
7 an agreement. With respect to the removal of jurisdiction over financial
8 policies from the MOF, they agreed that the authority of the Financial
9 Reconstruction Commission would be legislated by the end of the current
20111 session and the removal of jurisdiction over financial policies from the
1 MOF would be legislated in the ordinary session of the next year.
2 Additionally, the LDP, the DP and the PR wrote a memorandum when
3 they presented the revised Financial Revitalization Bill to the Diet. In
4 this memorandum, they agreed that a complete split of jurisdiction over
5111 financial policies away from the MOF and the integration of jurisdiction
6 over financial policies into a new organization, the Financial Agency, would
7 be legislated by the end of the next ordinary session and enforced by
8 1 January 2000.
9 Such a considerable concession to opposition parties provoked strong dis-
30111 satisfaction among LDP politicians. After submitting the revised Financial
1 Revitalization Bill to the Diet, the LDP sought to form a coalition with other
2 political parties, such as the LP and the PR (the PR merged with Kømei and
3 reconstituted the Clean Government Party (CGP) on 7 November 1998).10
4 The Obuchi Coalition Cabinet began negotiation with the LP to form a rul-
5 ing coalition on 14 January 1999. On 26 January, the coalition government
6 and the LDP Headquarters’ Office on Reforms of Central Ministries and
Agencies decided the ‘Basic Outline of Reforms of Central Ministries
7
and Agencies’. With respect to the removal of jurisdiction over financial poli-
8
cies from the MOF, they decided that the jurisdiction of planning and man-
9
aging of the failure of financial institutions and financial crises would remain
40111
with the MOF.
1
On 15 April 1999 the LDP also reached an agreement with the CGP on
2
MOF reform. In this agreement the planning or managing of financial crises
3
would be a joint jurisdiction of the MOF and the new financial agency,
44
and authority over public financial institutions and overseas monetary
45111 policies would remain in the MOF’s jurisdiction.
132 The reform of the Ministry of Finance
Analysis of the second wave of MOF reform

The decline in the importance of LDP organizations

LDP organizations suffered further damage after the election of the HC in
July 1998. The LDP was forced to compromise with not only the other
ruling coalition parties but also the three opposition parties (the DP, the
LP and the PR) in the decision-making process of the Diet, because the
LDP and the other ruling coalition parties could not achieve a majority
in the HC. At first, the government and the LDP submitted to the Diet the
Financial Revitalization Bill, which was based on the ‘Comprehensive
Plan for Financial Revitalization’ decided by the LDP. However, the LDP
had to abandon the attempt to legislate this bill. It had no choice but to
accept the plan presented by the three opposition parties, which included
reorganization of the MOF. The Financial Revitalization Bill put forward
by the LDP was substantially changed, which highlighted the decline of
the importance of LDP organizations.

The weakened management system of the LDP

After 1993, as well as the issue of a coalition principle, the issue of the
change of generation in the LDP emerged. In the process of the second
wave of MOF reform, the LDP was divided into two groups: a ‘new policy-
oriented politician’ group and a group of senior LDP members. The new
policy-oriented politician group consisted of junior LDP members who
had won elections only once or twice and who advocated that politicians
should take the lead in policy-making. They supported reorganization of
the MOF and cooperated with the DP on the revision of the Financial
Revitalization Bill.
On the other hand, senior LDP members opposed the reorganization of
the MOF.11 Nevertheless, a new policy-oriented politician group resisted
the pressure from senior LDP members and created the revised draft of the
Financial Revitalization Bill which included reorganization of the MOF.
In the process of the second wave of MOF reform, faction leaders could
not control junior LDP members who criticized LDP executives’ decision
and cooperated with opposition parties.

The change in the attitudes of politicians towards MOF

bureaucrats
Under LDP dominance, bureaucrats monopolized the presentation of exper-
tise and information on policy-making to LDP politicians. Bureaucrats
formed close connections with LDP politicians and exerted influence on
them by giving them information and expertise. On the other hand, LDP
politicians accumulated expertise through such connections. However, the
 The reform of the Ministry of Finance 133
1111 new policy-oriented politician group, which was actually in charge of
2 revising the Financial Revitalization Bill, refused the support of the MOF,
3 and the MOF was excluded from the decision-making process of the Diet.
4 As a result, the MOF was unable to participate in revising the Financial
5111 Revitalization Bill and could not influence its process.
6
7
Conclusion
8
9 MOF reform in the latter half of the 1990s was the first significant
1011 reorganization of the MOF. The reasons why this time MOF reform
1 succeeded has been explained by presenting three institutional changes
2 in the Japanese political system caused by the end of LDP dominance:
3111 the change of LDP politicians’ attitudes towards MOF bureaucrats; the
4 weakened LDP management system; and the decline of the importance of
5 LDP organizations.
6 Regarding the decline in the importance of LDP organizations, under
7 the coalition cabinets organizations of the ruling coalition parties (such as
8 the study group and the Committee of Representatives of Ruling Coalition
9 Parties) decided the government’s policies instead of LDP organizations
20111 (such as the PARC or the EC). Furthermore, in the process of negotiation
1 in the study group and the Committee of Representatives of Ruling
2 Coalition Parties, the LDP had to compromise with other ruling coalition
3 parties, the NHP and the SDPJ, in order to maintain a coalition cabinet.
4 Although the MOF persuaded LDP executives and faction leaders to agree
5111 with plans created by the MOF, it was no longer guaranteed that the govern-
6 ment’s decisions would be the same as the decisions of LDP organizations.
7 In addition, after the defeat in the election of the HC of July 1998, the
8 LDP had to make concessions to opposition parties in the Diet by accepting
9 their demands, which included reorganization of the MOF. Nor were the
30111 decisions of LDP organizations necessarily the same as those of the Diet.
1 Although the MOF negotiated with LDP executives and faction leaders
2 and obtained their consent, it was no longer guaranteed that their decisions
3 would be legislated in the Diet.
4 With regard to the control over LDP members by factional executives,
5 conflicts between LDP members over the coalition principle and the change
6 of generation in the LDP were intensified in the processes of the first and
7 second wave of MOF reform. The issue of MOF reform had been related
8 to the principle of coalition since the NHP took a firm attitude towards
9 the reorganization of the MOF. The LDP was divided as to how far it
40111 should compromise with the NHP. In the first wave of MOF reform, the
1 anti-power-holding group, which included Kajiyama Seiroku, which was
2 against the current coalition with the NHP and the SDPJ, criticized the
3 power-holding group, which included Katø Køichi (the Secretary General
44 of the LDP) and Yamazaki Taku (the Chair of the PARC), on the grounds
45111 that it made too many concessions to the NHP. Confrontation between the
134 The reform of the Ministry of Finance
two groups was intensified across factions. Another cross-factional issue,
the change of generation in the LDP, affected the process of the second
wave of MOF reform. The LDP was divided into a ‘new policy-oriented
politician’ group, which consisted of junior LDP members, and a senior
LDP politicians’ group. The new policy-oriented politician group resisted
senior LDP members’ control and cooperated with DP members. In both
cases the LDP was divided across factions, therefore faction leaders could
not control their members. As a result, the MOF could not obtain support
from LDP members as a whole, although it negotiated with faction leaders
and obtained their consent.
In addition, because of a change in the attitude of LDP politicians the
MOF faced difficulties in persuading LDP politicians to protect its organ-
ization. LDP politicians resented the attitude of the MOF towards them
under the Hosokawa Coalition Cabinet. Furthermore, when the first wave
of MOF reform was in progress, the next general election was close at
hand. LDP politicians were afraid of the negative effects of their attitude
towards MOF reform and the positive effects of opposition parties, which
pledged fundamental administrative reform to the electorate. In order to
obtain support from public opinion and to maintain their position as a
ruling party, LDP politicians promoted MOF reform. With regard to some
LDP politicians, the MOF lost its ability to exert influence on them.
Expertise in policy planning had been a powerful means by which the
MOF bargained with LDP politicians. However, in the process of the
second wave of MOF reform, new policy-oriented generation politicians
refused such support from the MOF, and planned reorganization of the
MOF in cooperation with DP members.
Thus, three institutional changes were observed in the first and second
wave of MOF reform. The MOF attempted to protect its organization,
influencing the decision-making processes of the LDP and the government
through the issue settling system. However, the decision-making processes
that were based on the issue settling system were transformed under the
coalition cabinets. The main venues of the government’s decision-making
shifted from LDP organizations to organizations that consisted of ruling
coalition parties. Additionally, in those organizations the LDP had to
change its decisions, compromising with other ruling coalition parties.
Cooperation between MOF bureaucrats and LDP executives and faction
leaders no longer resulted in the decisions being taken up by the govern-
ment and the Diet. Under LDP dominance, the MOF drafted bills and
negotiated with LDP executives over those bills. In the revising process
of the Financial Revitalization Bill, the ‘new policy-oriented politicians’
created the revised draft cooperating with the DP and the LDP politicians,
and the MOF was excluded from this process. Consequently, the MOF
could not control the decision-making process of the government and the
Diet through the issue settling system and failed to prevent the splitting
of its jurisdiction.
1111
2 8 Conclusion
3
4
5111
6
7
8
9
1011
1
2
3111 Under LDP dominance, there was an effective issue settling system, in
4 which bureaucrats planned policies and negotiated with LDP executives
5 and faction leaders in order to submit those plans as bills to the Diet, while
6 LDP executives negotiated with opposition parties to obtain smooth delib-
7 eration in the Diet. This was a result of an incremental adjustment of the
8 mechanism consolidated in the Meiji era. The efficacy of this issue settling
9 system considerably declined, particularly regarding the MOF, as the result
20111 of institutional changes caused by a fundamental political change after
1 1993, the end of LDP dominance.
2 We have explored the above argument from a historical institutional
3 approach, clarifying the structure of contemporary Japanese politics. The
4 analysis of Japanese politics, in terms of institutions and institutional rela-
5111 tionships, elucidated the existence of the mechanism that consisted of an
6 autonomous bureaucracy and cooperation between bureaucrats and party
7 politicians. Our historical investigation, examining the original political
8 settings of institutions and the process of their incremental adjustment,
9 clarified that, despite political changes, the Japanese bureaucracy and
30111 party politicians preserved their structure and characteristics. As a result,
1 the mechanism has been maintained since the Meiji era. In spite of struc-
2 tural changes in Japanese social and political circumstances, such as defeat
3 in the Second World War, the relationship between the Japanese bureau-
4 cracy and party politicians remained more or less intact. Adopting a
5 historical institutional approach, the book has highlighted the formidable
6 resilience of the Japanese bureaucracy and the chronic dependence of party
7 politicians on bureaucrats with respect to policy-making.
8 The path dependent process of institutions and institutional relation-
9 ships is divided into three stages: initial critical juncture, the stage of
40111 reproduction and the end of the path.
1
2 The initial critical juncture of the mechanism The initial critical juncture
3 of the mechanism is the Meiji era. The Japanese bureaucracy and political
44 parties were established and the mechanism was consolidated during this
45111 period. The original setting in which a particular institutional configuration
136 Conclusion
is selected decides its reproduction mechanism. Therefore the political
settings of the Japanese bureaucracy and political parties during the Meiji
era affected the structure and characteristics of the Japanese bureaucracy,
political parties and the relationship between them.
Hanbatsu politicians who dominated the political processes of the Meiji
government faced strong demands for participation in the political process
and dissatisfaction with the government of those who were excluded from
the government. Hanbatsu politicians required administrative organiza-
tions that would protect the vulnerable government from such political
movements. Therefore the structure of the Japanese bureaucracy was elab-
orated to secure the vulnerable position of the government by centralizing
information and expertise of policy-making with the bureaucracy and by
ensuring the independence of administrative organizations. As a result,
the Japanese bureaucracy achieved a high ability to plan and implement
policies and an autonomous organization from the beginning. On the other
hand, those who were dissatisfied with the government formed political
parties as opponents to the government. Therefore political parties were
excluded from the decision-making process of the government when they
were formed, and they could not obtain opportunities to accumulate the
information and expertise necessary for policy-making.
The above political setting affected the relationship between bureaucrats
and party politicians and decided the structure of the mechanism: highly
autonomous bureaucracy; bureaucrats’ superiority to party politicians in
policy-making; and cooperation between bureaucrats and party politicians
in the legislative process. This structure brought about the reproduction
pattern of the mechanism. Bureaucrats’ superiority in policy-making was
reinforced by the reproduction of the monopoly of information and expertise
through the structure of the Japanese bureaucracy (the closed career system,
the on-the-job training system, the promotion system). Both bureaucrats and
party politicians found the mechanism was beneficial, which reinforced it.
Bureaucrats found that cooperating with party politicians was an effective
way to put their plans into effect. Party politicians could secure their
positions in the Imperial Diet because they could concentrate on their election
campaign.
The long-lasting equilibrium known as the Edo Shogunate was disrupted
by the Meiji Restoration, and a new institutional arrangement – the mech-
anism explained above – was consolidated under the Meiji government.
Political circumstances at the beginning of the Meiji era determined the
structures of the Japanese bureaucracy, political parties and the relation-
ship between them. Thus the circumstances formed the reproduction
pattern of the mechanism – the monopoly of expertise in policy-making
by bureaucrats and the effectiveness of cooperation between bureaucrats
and party politicians.

The reproduction stage of the mechanism In its reproduction stage, the

mechanism evolved through incremental adjustments to the changes of
 Conclusion 137
1111 Japanese political circumstances, such as the Taishø Democracy, defeat in
2 the Second World War and LDP dominance after 1955. During the Taishø
3 Democracy (from the 1910s to the beginning of the 1930s), the areas in
4 which party politicians intervened were limited to functions such as public
5111 works and police activities related to the regulation of election campaigns.
6 Therefore the reproduction pattern of the mechanism, namely the monop-
7 olizing of expertise of policy-making by bureaucrats and the effectiveness
8 of the cooperation between bureaucrats and party politicians, did not change
9 during this period. After the Second World War, political reforms executed
1011 by the GHQ brought about a significant change in Japanese politics –
1 namely, the rejection of the sovereignty of the Emperor. However, the repro-
2 duction pattern of the mechanism was not damaged by the political reforms.
3111 The structure of the Japanese bureaucracy that had reproduced the monopoly
4 of expertise and information by bureaucrats did not change despite the
5 reforms because the Japanese bureaucracy succeeded in preserving its
6 employment and personnel system. Since many party politicians were
7 purged by the GHQ from their public positions, newly elected party politi-
8 cians lacked expertise and experience of policy-making. Therefore, in order
9 to keep their seats in the Diet, it was highly profitable and effective for
20111 party politicians to cooperate with bureaucrats relying on the mechanism.
1 Thus, the mechanism survived after defeat in the Second World War. After
2 the LDP monopolized the position of ruling party in the Diet in 1955,
3 bureaucrats immediately established close connections with LDP politicians.
4 For bureaucrats, concentrating on maintaining connections with the LDP
5111 was the most effective way of putting their plans into legislation. For LDP
6 politicians, maintaining close cooperation with bureaucrats in the legisla-
7 tive process was profitable and the most effective way of securing their
8 positions because they could concentrate on election campaigns and obtain
9 votes by distributing public works and subsidies among their supporters.
30111 Under LDP dominance, the mechanism evolved as the issue settling system
1 by establishing close cooperation between LDP executives, faction leaders
2 and bureaucrats.
3 It can be argued that the period from the end of the Meiji era to
4 1993 was that of the reproduction of the mechanism. Despite political
5 changes, such as party cabinets during the Taishø Democracy, political
6 reforms after the Second World War and LDP dominance after 1955, the
7 reproduction pattern of the mechanism – the monopoly of expertise by
8 bureaucrats and the effectiveness of cooperation between bureaucrats
9 and party politicians (LDP politicians under LDP dominance) – was not
40111 fundamentally disrupted.
1
2 The end of the mechanism Since the general election of 1993, it can be
3 said that the mechanism has been at the third stage, the end of the path.
44 After the general election of 1993, the single party dominance of the LDP
45111 in the Diet collapsed and the era of coalition cabinets began. The repro-
duction pattern of the mechanism – namely, the effectiveness of close
138 Conclusion
cooperation between LDP executive, faction leaders and bureaucrats –
declined, particularly with regard to the MOF, because of this fundamental
change. Close cooperation between LDP executives, faction leaders and
MOF bureaucrats could not solve issues efficiently because of the three
institutional changes caused by the end of LDP dominance (decline in the
importance of LDP organizations, the weakened management system of the
LDP and the detached attitudes of LDP politicians towards MOF bureau-
crats). Therefore, for MOF bureaucrats, the mechanism was not an effec-
tive measure to use to put their plans into effect. For LDP politicians the
mechanism was not profitable since it could not solve political and eco-
nomic issues efficiently, which might jeopardize their positions in the Diet.
The mechanism was not able to overcome this breakdown of the repro-
duction pattern by adjusting itself incrementally. Under LDP dominance
bureaucrats and the LDP elaborated formal and informal connections
between them from divisions of the PARC to the EC, and such connections
were solidly institutionalized. The cooperation between them was so insti-
tutionalized and rigid that it was difficult for both MOF bureaucrats and LDP
politicians to change their way of cooperation immediately after the general
election of July 1993. After 1993, coalition parties such as the JSP (later the
SDPJ), the NHP and the CGP participated in the decision-making process of
the government. Nevertheless, coalition partnerships with the LDP were not
stable. Under the Murayama and Hashimoto Cabinets, the LDP aligned itself
with the JSP (later the SDPJ) and the NHP, and under the Obuchi Cabinet
it cooperated with the CGP and the LP. The LDP itself was divided over
the principle of coalition. Furthermore, new political parties mushroomed
and disappeared, which increased the uncertainty and unpredictability of
political situations under the era of coalition cabinets. Accordingly, both
MOF bureaucrats and party politicians could not comprehend the alignment
of political parties in the future.
Compared with the above situation, political situations during the Taishø
Democracy, after the Second World War and during LDP dominance were
either more comprehensible or more flexible. During the Taishø Democ-
racy, there were only two major parties, the Seiy¥kai and the Minseitø, and
one or other of them was able to obtain the position of ruling party in the
Imperial Diet. Immediately after the Second World War, major party politi-
cians were purged from their public positions. As a result bureaucrats were
dominant over party politicians in the political processes. Furthermore,
there was no institutionalized tie between bureaucrats and political parties
immediately after the Second World War. During the Taishø Democracy,
bureaucrats took an aloof attitude towards party politicians although some
MHA bureaucrats became members of the Seiy¥kai. When the Imperial
Rule Assistance Association was formed in 1940, all political parties
were dissolved, and after the Second World War all political parties were
newly formed. Therefore bureaucrats and party politicians could construct
 Conclusion 139
1111 connections between them flexibly. Once the LDP dominated the position
2 of ruling party in the Diet, bureaucrats could concentrate on establishing
3 connections with the LDP.
4 Contrary to those situations, political circumstances after 1993 were
5111 inflexible for bureaucrats and LDP politicians because of rigidly institu-
6 tionalized ties between them and also uncertain because of the unpre-
7 dictability of the alignment of political parties in the future. Consequently,
8 the mechanism was not able to cope with the end of LDP dominance by
9 making an incremental adjustment.
1011 Therefore, since 1993, the mechanism has been at the third stage, the end
1 of the path. Its reproduction pattern was interrupted since the effectiveness
2 of the cooperation between LDP politicians and bureaucrats, especially
3111 MOF bureaucrats, significantly declined because of the three institutional
4 changes caused by the end of LDP dominance. The long-lasting political
5 equilibrium of the mechanism was disrupted.
6
7 The three case studies in this thesis support the above argument. The process
8 of the introduction of the consumption tax shows the effectiveness of the
9 issue settling system under LDP dominance. Decisions made by LDP organ-
20111 izations were almost all put into practice as decisions of the government
1 and the Diet. The LDP TSRC and the PARC played a main role in the
2 decision-making process of the government, and their decisions were
3 embodied in legislation as the Consumption Tax Bill and the Consumption
4 Tax Law. LDP executives and faction leaders controlled their members.
5111 LDP members obeyed their factions’ resolution, which appealed to them
6 to unite to pass the Consumption Tax Bill. Therefore MOF bureaucrats
7 mainly concentrated on negotiating with LDP executives (such as the Chair
8 of the LDP TSRC) and faction leaders to obtain support from the LDP for
9 their consumption tax plan. As a result, the introduction of the consump-
30111 tion tax, which had been regarded as highly unlikely to be put into prac-
1 tice, was legislated. The issue settling system worked effectively under LDP
2 dominance.
3 Contrary to the consumption tax case, the case studies of Chapters 6
4 and 7 – the financial crises and MOF reform in the latter half of the 1990s
5 – show the inefficacy of the issue settling system. The three institutional
6 changes after 1993 were observed in both cases. The management system
7 of the LDP through factions did not function effectively. There was no
8 influential leader who could control the behaviour of the Nørin zoku, who
9 strongly opposed the J¥sen liquidation plan that had been created by the
40111 MOF. As a result, the plan created by the MOF was overturned and
1 measures to solve the J¥sen problem were delayed. With respect to the
2 LTCBJ case, the LDP was divided over the liquidation of the LTCBJ across
3 factions, and LDP executives and faction leaders could not control junior
44 LDP members who advocated the liquidation of the LTCBJ and cooper-
45111 ated with opposition parties (the DP and the LP) in revising the Financial
140 Conclusion
Revitalization Bill. Furthermore, the importance of LDP organizations in
the decision-making process of the Diet declined. The LDP was forced to
make a concession to opposition parties in order to let the Financial
Revitalization Bill pass the Diet. As a result, the Financial Revitalization
Bill submitted by the LDP to the Diet was entirely revised to incorporate
most demands of the opposition parties. The MOF failed to put into prac-
tice its liquidation plans for the J¥sen and the LTCBJ although it relied
on the issue settling system.
With regard to MOF reform, organizations consisting of ruling coalition
parties – such as the study group of ruling coalition parties and the Committee
of Representitives of the Ruling Coalition Parties – played the main role in
the decision-making process of the coalition government. The LDP had to
compromise with other coalition parties, the SDPJ and the NHP, which
demanded fundamental MOF reform. Additionally, the LDP was divided
across factions over the coalition principle – whether the LDP should con-
tinue with the coalition with the SDPJ and the NHP. Such confrontation
escalated in connection with MOF reform. LDP members who did not
support the current coalition with the SDPJ and the NHP opposed making
further concessions to them with regard to MOF reform. On the other hand,
LDP members who supported the current coalition sought to make further
concessions with respect to MOF reform in order to maintain the current
coalition. The MOF attempted to protect its organization by negotiating to
influence the decision-making process of the government. It attempted to
control the process through the issue settling system by drafting bills, attend-
ing discussion in LDP organizations and negotiating with LDP executives
and faction leaders. However, LDP organizations were replaced in their
important position in the decision-making process of the government by
organizations of ruling coalition parties. The consent of LDP executives and
faction leaders did not result in decisions of the LDP – or the coalition
government either. In addition, some LDP politicians resented the attitudes
of MOF bureaucrats under the Hosokawa Cabinet, and many LDP politi-
cians were concerned about the influence of new parties, such as the DP,
which appealed to the electorate for fundamental MOF reform. Therefore
LDP politicians did not have a strong motivation to protect the MOF from
reorganization. Consequently, the MOF failed to prevent the splitting of its
jurisdiction by influencing the decision-making processes of the LDP and
the government through the issue settling system.
The institutional changes in the three factors that supported the issue
settling system significantly reduced its effectiveness. Consequently, its
reproduction pattern was interrupted, and the long-lasting equilibrium of
the issue settling system was disrupted, which brought about political
confusion in the cases of the financial crises and MOF reform in the 1990s.
It can be argued that the effectiveness of the issue settling system would
not have declined as much as it actually did if any one of the three factors
had not changed.
 Conclusion 141
1111 If LDP faction leaders’ control of their members had remained strict
2 after 1993, LDP members would have obeyed faction leaders’ decisions
3 about MOF reform and the liquidation schemes for the J¥sen and the
4 LTCBJ. The LDP could have taken a more decisive attitude when it nego-
5111 tiated with other ruling coalition parties and opposition parties. Deliberation
6 in the Diet would not have been thrown into political turmoil and the
7 liquidation schemes would have been put into practice without significant
8 delay. Under LDP dominance, the LDP sometimes made a concession to
9 opposition parties. For instance, the LDP compromised with the CGP and
1011 the DSP to obtain smooth deliberation of the Consumption Tax Bill in the
1 Diet. Nevertheless, the LDP took a decisive attitude in the negotiation
2 process, and the Consumption Tax Bill passed the Diet without significant
3111 delay.
4 Supposing LDP organizations had maintained the same influence on the
5 decision-making processes of the government and the Diet as they had
6 under LDP dominance, the decisions of the LDP would have been adopted
7 by the government as its own decisions and put into legislation. Although
8 the LDP was divided over MOF reform and the liquidation schemes for
9 the J¥sen and the LTCBJ, it would not have compromised with other parties
20111 in the Diet. Therefore the deliberation of a package of bills for the J¥sen
1
and the Financial Revitalization Bill would not have been thrown into
2
serious confusion. As for MOF reform, the LDP would not have changed
3
its decision and made compromises with other ruling coalition parties and
4
opposition parties that strongly demanded the complete split of the MOF
5111
6 organization.
7 If the relationship between MOF bureaucrats and LDP politicians had
8 been still as close as it was under LDP dominance, the MOF would not
9 have been excluded from the revising process of the Financial Revital-
30111 ization Bill. MOF bureaucrats and LDP politicians would have closely
1 cooperated with each other, and the Financial Revitalization Bill and the
2 liquidation scheme for the LTCBJ created by the MOF would have been
3 put into practice even if they might have been modified. Both the revised
4 bill and the liquidation scheme would not have faced strong opposition
5 from senior LDP politicians, which in practice caused serious political
6 confusion. About MOF reform, LDP politicians would have given priority
7 to close cooperation with MOF bureaucrats as they did under LDP domi-
8 nance, and, even though some junior LDP politicians might have supported
9 MOF reform, the LDP as a whole would not have promoted the complete
40111 split of the MOF organization.
1 It can therefore be argued that if any one of the three factors had not
2 changed after 1993, the effectiveness of the issue settling system would
3 not have declined so much and the political processes of the financial crises
44 and MOF reform would not have taken the same confused processes as
45111 described in Chapters 6 and 7.
142 Conclusion
After 1993, as two case studies illustrate, cooperation with LDP exec-
utives and faction leaders has not guaranteed that plans created by MOF
bureaucrats will either be transformed into LDP plans or confirmed as the
decision of the government. While the mechanism has not been able to
adapt itself to new political circumstances, the decision-making system
under coalition cabinets has not been clearly established. Rather, MOF
bureaucrats are forced to take the role of coordinators between ruling
coalition parties.
There are two types of response by MOF bureaucrats and politicians to
this structural change in the Japanese political system. One is an incre-
mental adjustment of the mechanism, and the other is a fundamental change
of the mechanism, reshaping the relationship between politicians and
bureaucrats in policy-making.
Regarding an incremental adjustment, MOF bureaucrats are trying to form
the same connections with other political parties as the ones they had with
the LDP. Some ex-MOF bureaucrats have stood for election as candidates
for other political parties. For example, in the general election of October
1996, two ex-MOF bureaucrats stood as NFP candidates, and in the general
election of June 2000, three out of five candidates who were ex-MOF
bureaucrats stood as DP candidates. Some junior MOF bureaucrats have
sought to make contact with other political parties. LDP organizations are
losing their crucial position in the decision-making process of the govern-
ment. Although the LDP has kept its position as a ruling party, it has been
forced to form a ruling coalition with other parties. Considering such circum-
stances, in order to legislate their policies smoothly, MOF bureaucrats are
trying to form with other political parties the same connections as those
with the LDP under LDP dominance. It could be said that their strategy is
just the expansion to other political parties of the connections that they
formed with the LDP under LDP dominance.
Concerning the fundamental reshaping of this mechanism, there are signs
of change among politicians. Some junior LDP members, the so-called
‘new policy-oriented politician’, insisted that party politicians should take
the lead in policy-making, and they created the revised Financial
Revitalization Bill without the support of the MOF. In 2000, a vice-minister
system was introduced, the main aim of which is that junior politicians
can accumulate expertise while they are serving as vice ministers. In March
2002, the LDP Headquarters’ Office on National Vision presented a ‘Plan
for the Reform of the Policy-Making System’, which proposed that the
ability of the Cabinet to solve political and economic problems should be
enhanced and politicians’ leadership with regard to policy-making should
be strengthened. The plan presented three principles: strengthening the
leadership of the Prime Minister and the cabinet; strengthening the lead-
ership of politicians in policy-making; and the abolition of the zoku system.
As for strengthening the leadership of the Prime Minister and the cabinet,
the plan proposed that:
 Conclusion 143
1111 1 The meeting of Administrative Vice Ministers, which in practice has
2 settled issues before the Cabinet meeting, should be abolished, and the
3 meeting of Ministers should deal with issues that require coordination
4 between ministries.
5111 2 The Prime Minister and Ministers should be allowed to employ experts
6 from administrative organizations and private companies as political
7 advisers at their disposal.
8 3 The function of the intelligence service of the Cabinet Secretariat
9 should be enhanced.
1011 4 A political appointee system should be introduced with regard to senior
1 positions of ministries.
2
3111 To strengthen the role of politicians in policy-making, the plan proposed
4 the introduction of a system of political advisers and the enhancement of
5 the Legislation Bureaux of the House of Representatives and the House
6 of Councillors. However, this plan also proposed the abolition of the
7 so-called Yotø Shinsa (prior screening by the LDP). Yotø Shinsa was estab-
8 lished under LDP dominance, and in it, LDP organizations screened the
9 government’s policies, such as bills and budgets, before a Cabinet meeting.
20111 The aim of this proposal was to change the balance of power between the
1 Cabinet and the LDP in the decision-making process of the government
2 and to strengthen the leadership of the Prime Minister and Ministers in
3 policy-making by preventing intervention by LDP members, especially the
4 zoku. This proposal is likely to provoke severe objection among LDP
5111 members, and it is therefore not clear whether the proposals of this plan
6 will be put into practice.
7 Although the pace of reshaping is slow, the new direction in policy-
8 making, strengthening the ability of the Cabinet, has been gradually put
9 into practice since 1993. The Central Ministries and Agencies Reform Law,
30111 promulgated in July 1998, provides the basic principles of the reform of
1 central ministries and agencies in Article 4: ‘the function of the cabinet
2 should be strengthened, the leadership of the Prime Minister with regard
3 to implementing national policies should be more clarified, and the systems
4 which support the cabinet and the Prime Minister should be reorganized’
5 (Article 4 of the Central Ministries and Agencies Reform Law). In addi-
6 tion, Article 9 of this law paves the way for the introduction of political
7 appointees in the Cabinet Secretariat by providing that ‘officials of the
8 Cabinet Secretariat should consist of those who are personally appointed
9 by the Prime Minister, and necessary systems to employ officials of the
40111 Cabinet Secretariat from and outside of administrative organizations should
1 be established’ (Article 4 of the Central Ministries and Agencies Reform
2 Law). Following those principles, planning and making bills with respect
3 to the Cabinet’s important policies were added to the jurisdiction of the
44 Cabinet Secretariat. The number of officials in the Cabinet Secretariat was
45111 also increased, and new positions were included, such as that of Assistant
144 Conclusion
Vice-Cabinet Secretary. Furthermore, in order to assist the Cabinet Secre-
tariat, the Cabinet Office (Naikakufu) was established in 2001.
The following situations, which weakened the power of MOF bureaucrats,
propelled this movement. One was a number of scandals concerning MOF
bureaucrats, which damaged their credibility and integrity. During the first
half of 1998, the Japanese mass media, especially weekly magazines,
reported scandalously excessive entertainment of MOF bureaucrats by finan-
cial institutions. On 26 April 1998, two MOF officials who were in charge
of the inspection of security companies were arrested for bribery. On 27 April
1998, 112 MOF officials were reprimanded, and this included one official
who was suspended from office and 17 who had their pay cut, and resulted
in two resignations and five demotions of career officials. On 5 March 1998,
the Assistant Chief of the Coordination Division of the Security Bureau was
arrested for bribery. This apprehension significantly damaged the reputation
of the MOF since no career MOF officials in active service had been arrested
before. As a result of the above scandals, the reputation of MOF bureaucrats
was tarnished. Japanese people had trusted the morals and competence of
MOF bureaucrats since the Meiji era, but now they became doubtful about
the morals and integrity of MOF bureaucrats. According to a survey con-
ducted by the Asahi Shinbun, 71 per cent of respondents answered that they
did not trust bureaucrats (Asahi Shinbun, 4 November 1998).
The other situation that has weakened the bureaucrats’ power is the trend
toward deregulation and globalization. Since the 1990s, deregulation of the
Japanese economy has been strongly demanded by foreign countries, espe-
cially the US, and deregulation has been on the political agenda. The finan-
cial crisis in 1997 pushed forward the movement toward deregulation since
it was pointed out that excessive control by the MOF of financial institu-
tions had weakened the institutions’ independence and capability. On 8 June
1998, the MOF abolished 400 directions (ts¥tatsu) to financial institutions
and 243 circulations (jimurenraku) issued by the Directors of Bureaux,
which were the basis for the detailed regulation of financial institutions.
Deregulation meant that bureaucrats lost measures, such as administrative
guidance based on directions and circulations, through which they had
tightly controlled financial institutions. In addition, the above revelations
about the excessive entertainment of MOF bureaucrats by financial institu-
tions caused severe criticism of the excessively close connections between
them. Many financial institutions announced the abolishment of the MOF-
tan system.1 The MOF had accumulated information through measures such
as administrative guidance and the MOF-tan system, so the ability of MOF
bureaucrats to collect information became seriously weakened.
Furthermore, the globalized economy introduced many foreign institu-
tions, which were not under the tight control of the MOF, to Japanese
markets. It also brought about a flood of information that was highly tech-
nical and rapidly became obsolete. It is difficult for MOF bureaucrats, who
are transferred from one position to another every two to three years, to
 Conclusion 145
1111 understand highly technical and rapidly changing information and to grasp
2 Japanese markets flooded with such information and new foreign actors.
3 Thus, through these two situations, MOF bureaucrats lost the trust of
4 the Japanese people and the close control of Japanese financial institutions,
5111 which weakened their political power.
6 The recent political situations, however, have also not necessarily been
7 favourable to politicians. Successive scandals involving politicians have
8 damaged their reputation. On 9 April 2002, Katø Køichi, who was regarded
9 as one of the future candidates for Prime Minister, resigned as a member
1011 of the HR when one of his secretaries was arrested for the violation of
1 Income Tax Law. On 19 June, a member of the HR, Suzuki Muneo (an
2 LDP member), was arrested for bribery, and his improper use of close
3111 connections with the Ministry of Foreign Affairs was reported as a scandal
4 by the mass media. During the first half of 2002, newspapers and weekly
5 magazines were flooded with scandals not only of LDP politicians but also
6 of SDP politicians, reporting that they had illegally received or misappro-
7 priated the salaries of their government-paid secretaries. On 9 August
8 2002, the former Foreign Minister, Tanaka Makiko, resigned a member of
9 the HR due to an allegation of the misappropriation of the salaries of her
20111 government-paid secretaries. On 18 July 2003, a member of the HR,
1 Tsujimoto Kiyomi (an SDP member) and one of the secretaries of the ex-
2 SDP Leader, Doi Takako, were arrested for the illegal receipt of the salaries
3 of her government-paid secretaries. It was alleged that the SDP systemat-
4 ically supported illegal receipts of government-paid secretaries of its
5111 members. From April to May 2004, in the process of the deliberation of
6 pension reform bills, pension scandals were revealed that related not only
7 to the LDP but also to other political parties. In April 2004, it was revealed
8 that seven out of eighteen ministers of the Koizumi Cabinet had failed to
9 pay national pension premiums. On 7 May 2004, the Cabinet Secretary,
30111 Fukuda Yasuo, resigned his office because of his failure to make the
1 payment. On 10 May, the Leader of the DP, Kan Naoto, also resigned his
2 position because of his failure to pay. On 12 May 2004, the leader of the
3 CGP, Kanzaki Takenori, and the Secretary General of the CGP, Fuyushiba
4 Tetsuzø, admitted their failure to make the payments. On 13 May, five DP
5 members resigned their positions as the Chairs of the Committees of the
6 HR and the HC because of their failure to pay. On 14 May, Prime Minister
7 Koizumi and the ex-Leader of the SDP, Doi Takako, admitted they had
8 failed to pay national pension premiums.
9 Despite the above succession of scandals, the majority of the Japanese
40111 people seem to be in favour of shifting the balance towards party politi-
1 cians with regard to policy-making. When the most recent general election
2 was held on 9 November 2003, both the LDP and the DP announced pack-
3 ages of policy plans as their ‘manifestos’, and according to the survey con-
44 ducted by the Asahi Shinbun, 69 per cent of respondents considered those
45111 manifestos when they cast their votes (Asahi Shinbun, 12 November 2003).
146 Conclusion
The relationship between politicians and bureaucrats under such new
political circumstances is not yet clearly defined. Nevertheless, it can
be said that politicians and public opinion share a common goal, namely,
that politicians should take more initiative with regard to policy-making.
This trend may contribute to bring about more democratically controlled
administration.
Unless, however, the balance between politicians and bureaucrats of
the ability to plan policy innovation is reshaped, this goal will be hard
to achieve. In order to take the lead in policy-making processes, it is
necessary for party politicians to obtain the ability to plan policies.
Sufficient staff to support politicians, especially Ministers, is required for
achieving such ability. Considering the broad range of jurisdiction of a
ministry and the increasing amount of information, it is unrealistic to
presuppose that a Minister can grasp every issue in his or her ministry’s
jurisdiction. The LDP Headquarters’ Office on National Vision proposed
in a ‘Plan for the Reform of the Policy-Making System’ that the Prime
Minister and Ministers should be allowed to employ experts from admin-
istrative organizations or private companies as political advisers at their
disposal. Such a personal political adviser system has been adopted in the
UK. The Blair Cabinet strengthened the ability of the Cabinet by making
the most of task forces and by increasing the number of personal advisers.
Task forces, which are set up to deal with specific issues, include a large
number of non-civil servants and are less reliant on civil servants for advice
(Smith 1999: 171). Under the Blair Cabinet, the number of political
advisers significantly increased to more than 50. ‘Ministers now draw on
several sources of policy advice: political advisors, think-tanks, consul-
tants’ (Rhodes 2001: 107). Nevertheless, it is also pointed out that ‘the
senior civil service is not bypassed, nor is their influence reduced to that
of second stringers to political advisers. Rather, they put together pack-
ages of advice from many sources’ (Rhodes 2001: 107). However, the
negative sides of a political appointee system are also pointed out. It is
argued that the value of a politically neutral civil service, evaluating all
factors objectively, would be lost and policies could become biased towards
the short term. The deterioration of civil service morale is also noted, and
it is argued that competent young candidates will not enter administrative
organizations (Drewry and Butcher 1991: 166–7). If a personal political
adviser system were to be introduced in Japan, it would have significant
effects on bureaucratic organizations. The introduction of a political
appointee system and personal political adviser system would cause signifi-
cant changes in the employment and personnel systems of bureaucrats,
which constitute the structure of autonomous organizations. A closed career
system and a seniority rule would be re-examined, which would damage
bureaucrats’ homogeneity and monopoly of expertise. Their loyalty to their
ministry might be also damaged. As a result, the organizational factors of
bureaucratic autonomy – organizational integrity and organizational ability
 Conclusion 147
1111 – which have been the source of the overwhelming power of bureaucrats,
2 would be significantly affected. Not only for administrative organization
3 but also for private companies, comprehensive reforms of employment and
4 payment systems based on life-time employment and a seniority rule would
5111 be required, and recruitment, payment, promotion and pension systems
6 would have to be reformed in order to promote personnel interchange
7 between private and public sectors.
8 Another serious problem is politicians’ intervention in the personnel
9 matters of bureaucrats. Preventing the politicization of bureaucrats’ per-
1011 sonnel matters is a prerequisite for protecting the core characteristics of
1 bureaucracy, the continuity and the political neutrality. In the UK, although
2 the Labour Party obtained the position of ruling party after 18 years, it is
3111 said that ‘so far, however, there has been no overt politicization of appoint-
4 ments to the senior civil service’ (Rhodes 2001: 106). In Japan, excessive
5 intervention by politicians in the personnel matters of bureaucrats during
6 the Taishø Democracy (from the beginning of the 1910s to the beginning
7 of the 1930s) brought about severe criticism and strong antipathy to polit-
8 ical parties among bureaucrats, and this was one of the factors which
9 resulted in criticism and distrust of party politics not only from bureaucrats
20111 but also from public opinion.
1 After the general election of July 1993, it was argued that the political
2 circumstances in which the LDP would be replaced by other political
3 parties had finally come. The Hosokawa Coalition Cabinet was formed
4 in August 1993 with unusually high support from public opinion, but
5111 the Cabinet lasted only a short period. From 1994 the LDP returned to the
6 position of ruling party and, superficially, there seems to be no change
7 in Japanese political circumstances. Nevertheless, the position of the LDP
8 as a ruling party has become more vulnerable. The LDP has been forced
9 to make a ruling coalition, which has gradually weakened its integrity.
30111 The decision-making system in such political circumstances has not been
1 established. What is apparent is that, especially regarding the MOF, the
2 issue settling system now does not work effectively. It is also clear that
3 an incremental adjustment of the mechanism consolidated in the Meiji era
4 by expanding close relationships between LDP politicians and MOF
5 bureaucrats to those between other political parties and MOF bureaucrats
6 is not attainable. This is because a political party that could substitute for
7 the LDP has not yet appeared in Japanese politics.
8 It could be said that it has become a common aim among the public
9 that the leadership of the Cabinet and the Prime Minister should be
40111 strengthened and politicians should take more initiative in policy-making.
1 In order to implement this aim, the Cabinet Law was revised, and new
2 political systems such as the Cabinet Office and the Junior Minister system
3 were introduced. The Koizumi Cabinet (26 April 2001–) put structural
44 economic and political reforms at the top of its political agenda. Japanese
45111 politics has been in a transition period since 1993, and it seems that no
148 Conclusion
conspicuous result of political and economic reform has been achieved so
far. Nevertheless, it is clear that the decision-making system under LDP
dominance, whereby informal negotiations between LDP executives and
bureaucrats made substantial decisions, is no longer operative. For instance,
under LDP dominance, every bill submitted by the Cabinet to the Diet
was scrutinized and approved by the LDP before being discussed in the
Cabinet meeting. In April 2002, the Koizumi Cabinet submitted a package
of bills for the deregulation of postal services to the Diet without the
approval of the LDP, which showed the significant change in the decision-
making process of Japanese politics. Although it takes time for the new
systems referred to above to fulfil their functions, they pave the way for
an empowered Prime Minister, Cabinet and politicians to take the lead in
policy-making.
On the other hand, MOF bureaucrats have not coped well with the new
political circumstances under coalition cabinets. The Japanese bureaucracy
has protected its structure and preserved its characteristics in spite of polit-
ical changes. Such resilience and path dependency prevent the Japanese
bureaucracy from implementing fundamental changes in its structure.
MOF bureaucrats tried to cope with the new circumstances by expanding
their close connections with the LDP to encompass other political parties
as well. Nevertheless, as mentioned above, such a tactic has not worked
effectively. Until now, MOF bureaucrats have not been able to redefine
their role following the end of LDP dominance.
Since the collapse of single-party dominance by the LDP in 1993,
Japanese politics has been in a transition period. Although some move-
ments seem to go in the direction of more democratically controlled
administration, a new decision-making system that can substitute for the
issue settling system under the LDP dominance has not yet been estab-
lished. In addition, it is not clear to what extent MOF bureaucrats would
develop new roles under new political circumstances. So long as MOF
bureaucrats, who have exerted overwhelming power in policy-making, fail
to construct new roles for themselves, the confusion of Japanese politics
will continue.
1111
2 Appendix
3
4 Chronology of Japanese politics
5111
6
7
8
9
1011
1
2
3111
4 1978
5
7 December The First Øhira Cabinet is formed.
6
7
8 1979
9
19 January The cabinet presents the ‘Major Line of the Tax System
20111
Revision’ for the fiscal year 1979, including the intro-
1
duction of the general consumption tax in 1980.
2
3 7 October General election is held.
4 9 November The Second Øhira Cabinet is formed.
5111 21 December The Diet issues a resolution on ‘fiscal reconstruction’.
6
7
8 1980
9 17 July The Suzuki Cabinet is formed.
30111
1 1982
2
3 27 November The First Nakasone Cabinet is formed.
4
5 1983
6
7 27 December The Second Nakasone Cabinet is formed.
8
9 1986
40111
1 6 July Simultaneous elections of the House of Representatives
2 and the House of Councillors are held.
3 22 July The Third Nakasone Cabinet is formed.
44 28 October The GTSRC issues its final report on structural tax reform,
45111 including the introduction of a new consumption tax.
150 Chronology of Japanese politics
23 December The LDP TSRC proposes the introduction of the sales tax
in the ‘Major Line of the Tax Reform’.

1987
10 February The tax bills, including the sales tax bill, are submitted to
the Diet.
27 May The 108th session of the Diet ends. The tax bills are
dropped.
16 October The LDP and the government decide on the introduction
of a structural tax reform in the future.
6 November The Takeshita Cabinet is formed.
12 November The GTSRC receives an inquiry from Prime Minister
Takeshita about a structural tax reform.

1988
28 April The GTSRC presents an interim report on tax reform.
14 June The LDP TSRC presents the ‘Major Line of Structural
Tax Reform’, including the introduction of the consump-
tion tax.
15 June The GTSRC presents the ‘Final Report on Structural Tax
Reform’.
28 June The ‘Major Line of Tax Reform’ is approved by the
Cabinet.
29 June The tax bills are submitted to the Diet.
16 November The tax bills are passed by the House of Representatives.
24 December The tax bills are passed by the House of Councillors.

1989
3 June The Uno Cabinet is formed.
10 August The First Kaifu Cabinet is formed.

1990
18 February General election is held.
28 February The Second Kaifu Cabinet is formed.
27 March The Director General of the Banking Bureau of the MOF
issues a directive, in which the MOF is to regulate finan-
cial institutions’ total amount of loan on real property
business.
 Chronology of Japanese politics 151
1111 1991
2
3 January Seven J¥sen get into financial difficulties. First schemes
4 for their reconstruction are formed.
5111 5 November The Miyazawa Cabinet is formed.
6
7 1992
8
9 26 July Election for the House of Councillors is held.
1011 October The MOF announces that the total amount of non-
1 performing loans (loans to failing companies or those
2 delayed more than six months) of 21 major banks is
3111 12 trillion 300 billion yen.
4
5
6 1993
7
3 February The Director General of the Banking Bureau of the MOF
8
and the Director General of the Economic Bureau of the
9
MAFF make a memorandum in which the founding finan-
20111
cial institutions take responsibility for the J¥sen’s bad
1
loans according to the reconstruction schemes.
2
3 26 February The founding banks of Nihon J¥taku Kin’y¥ (one of the
4 J¥sen) make the second reconstruction scheme. Based on
5111 this scheme, other J¥sen make their second reconstruction
6 schemes.
7 18 June The Diet passes a vote of no-confidence in the Miyazawa
8 Cabinet.
9 21 June The NHP is formed.
30111
1 23 June The JRP is formed.
2 18 July The general election is held.
3 9 August The Hosokawa Cabinet is formed.
4
5
6 1994
7 29 January A package of four bills for political reforms is approved
8 by the Diet.
9 8 February The government announces the ‘Administrative Guideline
40111 for Disposal of Financial Institutions’ Non-performing
1 Loans’.
2
3 March The Chigin Seiho Housing Loan Company and the J¥so
44 (two J¥sen) are declared insolvent.
45111 28 April The Hata Cabinet is formed.
152 Chronology of Japanese politics
25 June The Hata Cabinet resigns en masse.
30 June The Murayama Cabinet is formed.
9 December The liquidation plans for the two credit unions (the Tøkyø
Kyøwa Credit Union and the Anzen Credit Union) are
announced.
10 December The NFP is formed.

1995
March The Søgø J¥kin and the Housing Loan Corporation (two
J¥sen) are declared insolvent.
8 June The MOF announces that the total amount of non-
performing loans of financial institutions is 40 trillion yen,
and publicizes the guideline for the disposal of its bad
loans in the ‘Principle for the Reconstruction of Financial
Systems’.
4 July The Financial Systems Research Council forms the Com-
mittee on Stabilizing the Financial System. The Committee
starts to examine the injection of public funds for the
disposal of financial institutions’ bad loans.
23 July Election for the House of Councillors is held.
1 August The Tokyo Metropolitan Government announces the
suspension order to the Cosmo Credit Union.
13 August The MOF announces a liquidation plan for the Hyøgo
Bank.
16 August The MOF makes on-the-spot inspections of the J¥sen.
29 August The liquidation plan for the Cosmo Credit Union is
announced.
30 August The MOF and the Øsaka Metropolitan Prefectual Office
announce suspension orders to the Hyøgo Bank and the
Kizu Credit Union.
2 September The MOF publicizes a liquidation plan for the Hyøgo
Bank.
14 September The MOF announces that the total loss of the J¥sen is 7
trillion 700 billion yen. The Nihon J¥taku Kin’y¥, the
Daiichi J¥taku Kin’y¥ and the Nihon Housing Loan are
declared insolvent.
27 September The Financial System Research Council presents an
interim report, in which it proposes an injection of public
funds into financial institutions. Finance Minister
Takemura announces the ‘Principle of Early Disposal of
Bad Loans of Financial Institutions’.
 Chronology of Japanese politics 153
1111 7 October Finance Minister Takemura assures the early disposal of
2 bad loans at the conference of G7.
3 31 October The tripartite ruling parties’ study group on financial and
4 security systems presents an interim report on the J¥sen
5111 problem.
6
7 1 December The Committee of Coordination of the Government and
8 Executives of Ruling Parties presents guidelines to the
9 disposal of bad loans of the J¥sen.
1011 16 December The MOF presents the liquidation scheme for the J¥sen.
1 19 December The Cabinet approves the J¥sen liquidation scheme.
2
The Committee of Representatives of Ruling Coalition
3111
Parties presents a statement about the responsibility of
4
5 founding banks and ministries for the J¥sen problem.
6
7 1996
8
9 5 January Prime Minister Murayama announces his resignation.
20111 11 January The First Hashimoto Cabinet is formed.
1 6 February Ruling coalition parties and the government agree to form
2 a study group on the reform of the MOF.
3
4 17 February Ruling coalition parties and the government establish the
5111 Committee on MOF Reform, under which a study group
6 (chaired by Itø Shigeru) is formed.
7 4 March The deliberation of the Diet is suspended until 25 March
8 because of picketing by the NFP.
9 10 May The budget of the 1996 fiscal year, which includes the
30111 injection of 685 billion yen for the disposal of the bad
1 loans of the J¥sen, is approved by the Diet.
2
3 13 June The study group on MOF reform presents the ‘Construc-
4 tion of New Financial Policies and Administration’, which
5 includes the splitting of the divisions of financial policies
6 away from the MOF.
7 18 June A package of six J¥sen liquidation bills is approved by
8 the Diet.
9 6 August LDP members of the study group on MOF reform refuse
40111 to receive a draft proposal prepared by the Chair, Itø.
1
2 7 August The Secretaries General and executives of the ruling coali-
3 tion parties agree that discussion in the study group should
44 be based on the draft proposal prepared by the Chair, Itø.
45111 20 August The study group on MOF reform restarts discussion.
154 Chronology of Japanese politics
18 September The Committee of eight LDP executives reaches an agree-
ment in which the divisions of inspection and regulation
of financial institutions should be split away from the MOF
and transferred to a new organization based on Article 3
of the National Administrative Organization Law.
25 September The study group on MOF reform presents its final report,
and Secretaries General and executives of ruling coalition
parties approve it.
27 September The House of Representatives is dissolved.
28 September The DP is formed.
20 October A general election is held under the new election system.
7 November The Second Hashimoto Cabinet is formed.
11 November Prime Minister Hashimoto presents a comprehensive plan
for fiscal reform.
19 November The Cabinet approves a package of Cabinet orders for
establishing the Council on Administrative Reforms.
21 November The MOF announces a suspension order to the Hanwa
Bank.
28 November The first meeting of the Council on Administrative
Reforms is held.
2 December The government and the LDP decide to split the divisions
of inspection and regulation of financial institutions from
the MOF and to transfer them to a new agency by April
1999.
25 December Ruling coalition parties agree on the final plan for MOF
reform.

1997
21 January The first meeting of the Council on Fiscal Structural
Reform is held.
11 March The Cabinet submits a package of MOF reform bills to
the Diet.
1 April The Hokkaidø Takushoku Bank and the Hokkaidø Bank
announce their merger, to take place in April 1998.
The Nippon Credit Bank-affiliated non-banks file for bank-
ruptcy, and the bankruptcy is declared on 7 April.
25 April The MOF announces a suspension order to the Nissan
Health Insurance Company.
28 May A package of MOF reform bills is approved by the
Diet.
 Chronology of Japanese politics 155
1111 11 June The revised Bank of Japan Law is approved by the Diet.
2 16 June A package of bills for the Financial Supervisory Agency
3 is approved by the Diet.
4
5111 20 August The Council on Administrative Reforms decides a plan
6 for the reorganization of central ministries and agencies.
7 12 September The Hokkaidø Takushoku Bank and the Hokkaidø Bank
8 announce the postponement of their merger.
9 6 October The Council on Administrative Reforms presents a draft
1011 proposal for MOF reform.
1
3 November The Sanyø Securities Company files for application of the
2
Corporate Rehabilitation Law at the Tøkyø District Court.
3111
4 12 November ‘Japan premium’ at the inter-bank market of the Euro-
5 dollar is raised to 0.15 per cent. The Tøkyø markets mark
6 triple depreciation (the stock price, the price of govern-
7 ment bonds and the appreciation of the yen against the
8 dollar plunge in the market).
9 14 November The LDP announces ‘A Package of Emergent Policies to
20111 Stimulate Economy’. The Nikkei Stock Average marks
1 less than 15 thousand yen.
2
17 November The Hokkaidø Takushoku Bank announces its failure and
3
the transfer of its business within the Hokkaidø area to
4
the Hokuyø Bank.
5111
6 The Council on Administrative Reforms has intensive
7 deliberations from 17 to 20 November to prepare for its
8 final report.
9 18 November The LDP Committee on Urgent Countermeasures to
30111 Economic Crises presents a plan to rescue financial insti-
1 tutions.
2
24 November The Yamaichi Securities Company announces the clos-
3
ing down of its business. The Bank of Japan announces
4
extraordinary funding to the Yamaichi Securities Com-
5
pany.
6
7 26 November The Tokuyø City Bank announces its failure and transfer
8 of its business to the Sendai Bank.
9 28 November The Financial Structural Reform Law is approved by the
40111 Diet.
1 3 December The Council on Administrative Reforms agrees on a final
2 report.
3
44 12 December The Revised Deposit Insurance Law is approved by the
45111 Diet.
156 Chronology of Japanese politics
23 December The Marushø Securities Company files for bankruptcy to
the Tøkyø District Court.
24 December LDP Extraordinary Headquarters’ Office on Stabilization
of Financial System presents ‘Urgent Countermeasures for
Stabilization of the Financial System’.

1998
20 January The cabinet approves a package of six bills for financial
stabilization.
21 January The House of Representatives starts to deliberate the Law
on Urgent Measures for Financial Stabilization and the
Revised Deposit Insurance Law.
15 February The Revised Deposit Insurance Law and the Law on
Urgent Measures for Financial Stabilization are approved
by the Diet.
5 March Nine city banks, three long-term credit banks, six credit
banks and three regional banks request the injection of
public funds to the Deposit Insurance Corporation.
31 March The Examination Committee on Financial Crises under the
Deposit Insurance Corporation decides to inject 1 trillion
815 billion 600 million yen of public funds into 21 banks.
24 April The cabinet decides an additional economic stimulus
package (total amount 16 trillion yen).
27 April The DP (new) is formed.
1 May The SDP decides to leave the ruling coalition.
20 May The Nippon Credit Bank requests 22 insurance companies
to postpone the maturity date of its subordinate debt.
28 May The Special Committee on a Comprehensive Plan for
Financial Rehabitalization presents its interim report.
29 May The Revised Financial Structural Reform Law and a
package of three bills of tax reduction are approved by
the Diet.
1 June The NHP leaves the ruling coalition.
5 June A package of bills for the Financial System Reform Law
is approved by the Diet.
8 June The MOF announces that its 400 directives regarding
financial institutions will be disestablished.
9 June The Basic Law on Central Ministries and Agencies
Reform is approved by the Diet.
19 June The Bank of Japan funds the Long-Term Credit Bank of
Japan (LTCBJ).
 Chronology of Japanese politics 157
1111 22 June The Financial Supervisory Agency starts.
2 28 June The Special Committee on a Comprehensive Plan for Finan-
3 cial Rehabitalization starts extensive deliberation for a final
4 plan.
5111
6 2 July The Special Committee on a Comprehensive Plan for
7 Financial Rehabitalization decides to introduce the ‘Bridge
8 Bank System’ for failed financial institutions.
9 12 July The election for the House of Councillors is held.
1011 24 July Obuchi Keizø, Koizumi Jun’ichirø and Kajiyama Seiroku
1 stand for election for the LDP Presidency.
2
3111 30 July The Obuchi Cabinet is formed.
4 5 August The Cabinet submits a package of six bills for financial
5 revitalization to the Diet.
6 21 August The LTCBJ announces the disposal of its bad loan, 750
7 billion yen, and the reconstruction plan including request-
8 ing the injection of public funds of more than 500 billion
9 yen.
20111
1 25 August Three opposition parties (the DP, the LP and the Peace
2 and Reform Party) reach an agreement about a plan for
3 financial revitalization.
4 7 September The Director General of the DP, Kan Naoto, announces
5111 that the DP will attend deliberations regarding the revi-
6 sion of the package of bills for financial revitalization
7 presented by the cabinet, although the cabinet decides on
8 an injection of public funds to the LTCBJ.
9 10 September The Director General of the DP, Kan Naoto, announces
30111
that the liquidation of the LTCBJ is a condition for delib-
1
eration of the package of bills for financial revitalization.
2
3 17 September The LDP accepts a plan that includes the complete
4 splitting of financial divisions away from the MOF and
5 the establishment of the Financial Services Agency in
6 2001.
7 18 September The leaders of the LDP and the three opposition parties
8 reach an agreement on a compromise plan for the LTCBJ
9 and the splitting of financial divisions away from the MOF.
40111
20 September Prime Minister Obuchi leaves Japan for a meeting with
1
2 the President of the US.
3 26 September The LDP and the three opposition parties reach an agree-
44 ment regarding the LTCBJ and the splitting of financial
45111 divisions from the MOF.
158 Chronology of Japanese politics
27 September LTCBJ-affiliated non-bank Nippon Lease files for appli-
cation of the Corporate Rehabilitation Law at the Tøkyø
District Court.
28 September The LDP and the three opposition parties agree to submit
the joint revised Financial Revitalization Bill.
1 October The LDP, the DP, and the Peace and Reforms agree on
the splitting of the financial divisions away from the MOF.
2 October The LDP, the LP and the SDPJ agree on the revised bill
of the National Railway’s Debt Law.
7 October The Cabinet submits the Urgent Measures for Early
Improvement of the Financial System Bill to the Diet.
12 October The LDP, the LP and the Peace and Reform submit the
joint revised bill of the Urgent Measures for Early
Improvement of the Financial System to the Diet.
A package of bills for financial revitalization is approved
by the Diet.
The LDP, the SDP and the LP agree on the revised bill
of the National Railway’s Debt Law.
16 October A package of four bills for financial revitalization and the
joint revised bill of the Urgent Measures for Early
Improvement of the Financial System are approved by the
Diet.
23 October Prime Minister Obuchi decides to put the LTCBJ under
temporary state control. The government declares the in-
solvency of the LTCBJ and decides on its liquidation.
19 November The LDP and the LP agree to form a ruling coalition.
24 November The major 15 banks announce that they are requesting an
injection of public funds.
13 December The government announces the failure of the Nippon
Credit Bank (NCB) under Article 36 of the Financial
Revitalization Law, and decides to put the NCB under
temporary state control.
15 December The Financial Revitalization Committee starts.

1999
14 January The Obuchi Coalition Cabinet (the LDP and the LP) is
formed.
26 January The Cabinet and the LDP Headquarters’ Office on
Reforms of Central Ministries and Agencies decide on the
‘Basic Outline of Reforms of Central Ministries and
Agencies’.
 Chronology of Japanese politics 159
1111 15 April The LDP and the CGP reach an agreement on MOF
2 reform.
3 28 April The Cabinet approves a package of bills for reform of
4 central ministries and agencies.
5111
8 July A package of bills for reforms of central ministries and
6
agencies is approved by the Diet.
7
8
9
1011
1
2
3111
4
5
6
7
8
9
20111
1
2
3
4
5111
6
7
8
9
30111
1
2
3
4
5
6
7
8
9
40111
1
2
3
44
45111
Notes

1 Introduction
1 The eight parties were the Japan Renewal Party (Shinseitø), the New Harbinger
Party (Shintø Sakigake, NHP), the Democratic Socialist Party (Minshatø,
DSP), the Clean Government Party (Kømeitø, CGP), the Japan Socialist Party
(Nihonshakaitø, JSP), the Japan New Party (Nihonshintø, JNP), the Social
Democratic League (Shakai Minshu Rengø, SDL), and the Democratic Reform
League (Minshu Kaikaku Rengø, DRL).
2 After the Second World War, in 1949, the Japanese tax system was fundamen-
tally reformed according to a recommendation presented by the Shoup Mission,
lead by Carl Sumner Shoup.

2 The Japanese political system: a historical institutional approach

1 ‘Bokuminkan’ is a concept that originated from ‘Shi-ki’, a classic Chinese book
that describes ancient Chinese history.

3 The Japanese political system from the Meiji era to 1993

1 Hanbatsu mainly consisted of four han (fiefs) – Satsuma, Chøsh¥, Køchi and
Hizen – that played crucial roles in the Meiji Restoration. Many politicians who
played an important part in the early stage of the Meiji era originated from these
four han.
2 Young Navy officials had felt strong resentment against party politicians since
the London Navy Disarmament Treaty, which limited the military power of the
Japanese Navy, was concluded under party cabinets. A group of junior military
officials assassinated Prime Minister Inukai Tsuyoshi on 15 May 1932.
3 Sasaki Suguru names bureaucrats in the early stage of the Meiji era (from 1968
to 1871) as ‘Ishin Kanryø’ (bureaucrats of the Restoration era). He argues that
Ishin Kanryø had the characteristics both of influential politicians who partici-
pated in the decision-making process on national policies and of bureaucrats
who were engaged in practical administration.
4 Ex-Administrative Vice Minister of Finance Matsukuma Hideo explained the
seniority rule in the MOF: ‘[Concerning promotion in the MOF] we were waiting
in line with the year [we were employed]. Unless those who were employed
before us moved to a new position, we could not get promotion. On the other
hand, it was highly unlikely that those who were employed after us would get
a higher position than us’ (Naiseishikenky¥kai 1971: 6).
5 An ex-MOF executive, Hoshino Naoki, explained in an interview: ‘the MOF
had relatively little connection with political parties. Party politicians thought
 Notes 161
1111 that the MOF had no interest in party politics and party politicians themselves
2 did not expect the MOF to do party politics’ (Naiseishikenky¥kai 1964a: 6).
6 The ex-Administrative Vice Minister of Commerce and Industry, Yoshino Shinji,
3 answered in an interview in his memoirs: ‘I did not have serious difficulties with
4 political parties. Neither I nor my senior colleagues were forced to resign or
5111 were sacked because of intervention by political parties . . .’ (Yoshino 1962:
6 249).
7 7 The ex-Administrative Vice Minister of Commerce and Industry, Yoshino
Shinji, recalled the attitude of bureaucrats towards party politicians in his
8 memoirs: ‘Although it was the era of party politics, we did not respect party
9 politicians . . . they were absorbed in taking care of their constituencies . . .’
1011 (Yoshino 1962: 114).
1 8 Yoshino Shinji also stated in his memoirs: ‘Party politicians rarely intervened
2 in our work. It was highly unlikely that party politicians would interfere with
our budget compilation. . . . Although political parties had committees on policy
3111 research, I hardly ever went to those committees to explain our plans . . .’
4 (Yoshino 1962: 114–15).
5 9 On 26 February 1936, about 20 junior army officers attempted to carry out a
6 coup d’état, leading more than 1,300 army soldiers. They attacked the residences
7 of high government officials, such as the residences of the Prime Minister and
the Finance Minister, and killed some Ministers, such as Finance Minister
8 Takahashi Korekiyo. Martial law was proclaimed and, on 29 February 1936, the
9 revolt was repressed.
20111 10 Twelve Ordinances (Ordinance of Employment Control, Ordinance of Labour
1 Management, Ordinance of National Recruitment, Ordinance of Reporting
2 Professional Abilities, Provisional Ordinance of Wages Control, Provisional
Ordinance of Office Workers’ Salary Control, Ordinance of Employees Move-
3 ments Control, Ordinance of Labour Management in Key Industries, Ordinance
4 of Mariners Recruitment, Ordinance of Working Hours in Factories Control,
5111 Ordinance of Wages Control, and Ordinance of Technicians in Factories Train-
6 ing) regulated human resources. Thirteen Ordinances (Ordinance of Agricultural
7 Production Control, Ordinance of Commodities Control, Ordinance of Price Con-
trol, Provisional Ordinance of Agricultural Land Prices Control, Ordinance of
8 Electric Power Management, Ordinance of National Mobilization Commodities
9 Expropriation, Ordinance of Metal Goods Collection, Ordinance of Living Neces-
30111 sities Control, Ordinance of Rent Control, Ordinance of Agricultural Lands
1 Control, Provisional Ordinance of Agricultural Land Management Control,
2 Ordinance of Electric Power Distribution Control, and Ordinance of Buildings
Management and Expropriation) controlled material resources. Four ordinances
3 (Ordinance of Dividends and Funding, Ordinance of Accounting Control, Ordin-
4 ance of Banks’ Fund Management, and Ordinance of Stock Prices Control) reg-
5 ulated the flow of funds. Eleven Ordinances (Ordinance of Organizations of
6 Key Industries, Ordinance of Business Licenses, Ordinance of Land Transport-
7 ation Control, Ordinance of Wartime Marine Transportation Control, Ordinance
of Financial Organizations, Ordinance of Business Management, Ordinance of
8 Marine Transportation Control, Ordinance of Factories Management, Ordinance
9 of Munitions Factories Inspection, Ordinance of Factories Expropriation, and
40111 Ordinance of Trade Control) regulated business activities. Two ordinances
1 (Ordinance of Newspaper Business and Ordinance of Publishing in Newspapers
2 Control) inspected the mass media.
11 The six cabinets were the Hirota, Hayashi (February 1937 to May 1937), First
3 Konoe (May 1937 to January 1939), Hiranuma (January 1939 to August 1939),
44 Abe (August 1939 to January 1940), and Yonai (January 1940 to July 1940)
45111 Cabinets.
162 Notes
12 After the 26th February Uprising in 1936, some bureaucrats who were called
‘revisionist bureaucrats’ (Kakushin Kanryø) advocated reform of the Japanese
economic, social and political systems. They proposed a change in the existing
order – political, social, and economic – to ‘increase the nation’s spiritual and
military strength’. In a word, they advocated changing the status quo. (Spaulding
Jr 1974: 70).
13 The Army was divided into two factions, the Imperial Way (Kødø) faction and
the Control (Tøsei) faction, and they fiercely confronted each other. In August
1935, General Nagata Tetsuzan, one of leaders of the Control faction, was assas-
sinated by an Army officer of the Imperial Way faction. The leaders of the 26th
February Event were members of the Imperial Way faction.
14 The total number of seats that both groups won in the general elections of 1952,
1953 and 1955 were 111, 138 and 156 respectively.
15 Kawato Sadafumi argues that a seniority rule was being constantly applied to the
personnel matters of the LDP by the end of the 1970s because the number of
LDP politicians who won elections a sufficient number of times to be appointed
Minister (five or six times) became stable in the 1970s (Kawato 1996: 118).
16 Kawato Sadafumi argues that this rule was also established in the LDP by the
end of the 1970s. By the end of the 1970s, factions were integrated into five
major factions (Tanaka, Øhira, Fukuda, Nakasone and Miki), and the secession
of one faction from the LDP would have resulted in the loss of its position as
a ruling party. Therefore power-holding factions (factions to which the President
of the LDP belonged (Søsaibatsu) and factions which cooperated with Søsaibatsu)
had to make concessions to the anti-power holding factions (factions that
competed with Søsaibatsu in a LDP presidential election) by allocating posts of
ministers and LDP executives in order to prevent such a result (Kawato 1996:
126).
17 The ex-Prime Minister Takeshita Noboru referred to such a relationship in his
memoirs: ‘When we hold the office of Parliamentary Vice Minister, although
there are some exceptions, bureaucrats make a judgment on our capability. . . .
Bureaucrats, once they regard a politician who holds office of the Parliamentary
Vice Minister as competent, give him thorough lectures including expertise and
information regarding the policy area of their ministry. . . . I studied very hard.
[When I was the Parliamentary Vice Minister of the International Trade and
Industry] I eagerly received lectures from bureaucrats’ (Takeshita 2001: 109–10).
18 The jurisdiction of the Ministry of Home Affairs includes taxation on residents
by local governments, such as a residents’ tax.
19 After 1993, as will be explained in Chapter 4, the power of factions declined.
The weakened factions, however, did not bring about coherent LDP leaders.
Several groups were formed across factions, and those groups both cooperated
with each other and confronted each other. In addition, zoku did not suffer
significant changes after 1993. Therefore it is still not appropriate to apply a
principal-agent model to the relationship between LDP leaders and bureaucrats
after 1993.

4 Changes in the Japanese political system since 1993

1 The Recruit Company, a major personnel placement agency, transferred its affil-
iated company’s unlisted shares to many politicians, ex-bureaucrats and exec-
utives of private companies. Prime Minister Takeshita Noboru was forced to
resign since he received a 50 million yen loan from the Recruit Company.
2 The Kyøwa Co., a major steel frame industry company, gave bribes to politi-
cians, and ex-Prime Minister Suzuki Zenkø allegedly received 230 million yen
from Kyøwa.
 Notes 163
1111 3 The Sagawa Ky¥bin, a major road delivery company, contributed political funds
2 illegally to many politicians. The Vice President of the LDP, Kanemaru Shin,
3 admitted that he had received 500 million yen and he was forced to resign as
Vice President and member of the House of Representatives. In 1993 Kanemaru
4 Shin was arrested for tax evasion.
5111 4 The Mayor of Sendai City, Ishii Tøru, the Governor of Ibaraki Prefecture
6 Takeuchi Fujio, the Governor of Miyagi Prefecture Honma Toshitarø and the
7 ex-Minister of Construction, Nakamura Kishirø, were arrested for taking bribes
8 from construction companies.
5 The Peace and Reform and other ex-Clean Government Party members re-
9 established the Clean Government Party in November 1998.
1011 6 One LDP politician admitted in an interview that his faction had asked him to
1 donate money to it (interview with an LDP politician on 19 March 2001).
2 7 In Japanese, the LDP is (Jiy¥minshutø), the JSP is Shakaitø and the NHP is
3111 Shintø Sakigake. The group that supported a coalition between these three parties
was called ‘Ji-Sha-Sa’ in abbreviation.
4 8 In Japanese, conservative is ‘Hoshu’. The group that advocated a coalition with
5 more conservative parties was called the ‘Ho-Ho’ group in abbreviation.
6 9 An MOF executive admitted in an interview: ‘When we negotiate with faction
7 executives, they say, “I agree with you. But I cannot guarantee that other faction
8 members will also agree with you” ’ (interview with a MOF executive, 13 April
2002).
9 10 One LDP politician recalled that when he had asked the MOF about tax issues,
20111 the Director General of the Tax Bureau sent a junior official to him although
1 the Director General himself had used to come to see him (interview with an
2 LDP politician, 19 March 2001).
3 11 One ex-LDP politician explained that LDP politicians were deeply shocked and
seriously afraid that they would lose political power forever (interview with a
4 member of the HR (member of the CP), 3 August 2001).
5111 12 The four major economic organizations were: the Federation of Economic Organ-
6 izations; the Japan Committee for Economic Development; the Japan Federation
7 of Employers’ Associations; and the Japan Chamber of Commerce and Industry.
8 13 The Asahi Shinbun reported a comment of an executive of the Japan Trade Union
Confederation (Rengø, one of supporting groups of the Hosokawa Coalition
9 Cabinet): ‘the attempt of the introduction of the national welfare tax was played
30111 by the MOF as the scriptwriter, Ozawa and Ichikawa [the Secretary General of
1 the CGP] as the directors, and Hosokawa as the leading ø(Asahi Shinbun,
2 4 February 1994).
3 14 Interview with an ex-MOF executive, 22 December 2000.
15 According to a survey conducted by Nihon Keizai Shinbunsha in 1993, 30 per
4 cent of executive bureaucrats answered that the current coalition of the Hosokawa
5 Coalition Cabinet would exist in 1994; 35 per cent of them answered that the
6 parties of ruling coalition might change while the LDP would remain one of
7 opposition parties (Nihon Keizai Shinbunsha 1994: 422).
8
9 5 Introduction of the consumption tax in 1989
40111 1 After the fourth Middle East War broke out, the six member nations of OPEC
1 regarded Japan as a hostile country and announced a reduction in the amount
2 of oil exports to Japan and an increase in oil prices.
2 After the Second World War, the Japanese tax system was fundamentally
3 reformed according to a recommendation by the Shoup Mission, led by Carl
44 Sumner Shoup, in 1949. Since this reform, the Japanese tax system has become
45111 significantly dependent on income taxation.
164 Notes
3 National bonds are classified into two categories, construction bonds and deficit-
covering bonds, according to the purpose for which they are issued. Construction
bonds are issued for raising funds for public capital infrastructure, such as
roads and harbour facilities, and deficit-covering bonds are issued for other ordi-
nary expenditures, such as personnel expenditures. The Fiscal Law provides only
for the issuance of construction bonds (Article 4) since the issuance of deficit-
covering bonds was regarded as one of the causes of serious inflation before
the Second World War. A special law is therefore required in order to issue
deficit-covering bonds.
4 The GTSRC was established as a permanent advisory organization to the Prime
Minister in 1962. The GTSRC examines the current tax system and presents a
proposal in answer to an enquiry from the Prime Minister once a year, and a long-
term proposal at least one in three years. The Tax Bureau of the MOF supports
the Cabinet Secretariat Office regarding the management of the GTSRC. The Tax
Bureau actually decides the members of the GTSRC and creates drafts of pro-
posals. About this role of the Tax Bureau, Mizuno Masaru wrote in his memoir
that the Tax Bureau created a plan about the process of the discussion in the
GTSRC and the details of the enquiry from the Prime Minister to the GTSRC
considering what was in the mind of Prime Minister Nakasone about what should
be discussed in the GTSRC. About members of the GTSRC, Prime Minister
Nakasone requested that at least ten members who would play an active part in
the GTSRC and not specialists in tax should be chosen as new members. The Tax
Bureau decided on the new members and asked ten people to join the GTSRC as
special members (Mizuno 1993: 50–1).
5 Takeshita Noboru, the Minister of Finance at that time, explained in his memoir
that the resolution did not deny the possibility of the future introduction of a
general consumption tax (Takeshita 2001: 318–19).
6 For instance, Vice-Secretary General Kanemaru Shin, who was a leader of køkyø-
jigyø (public works) zoku at that time, expressed his concern about an austere
fiscal policy and cautiously accepted tax increases at a meeting of the three top
executives of the LDP (the Secretary General of the LDP, the Chair of the PARC
and the Chair of the EC) and executives of four major business organizations (the
Federation of Economic Organizations, the Japan Committee for Economic Devel-
opment, the Japan Federation of Employers’ Associations and the Japan Chamber
of Commerce and Industry) (Asahi Shinbun, 29 November 1984, evening edition).
7 At first, the LDP TSRC proposed taxation on office automation facilities (com-
puters, word processors, photocopiers, pocket calculators, electric typewriters
and facsimiles) from the 1984 fiscal year in ‘the Major Line of Tax Reform of
the 1984 Fiscal Year’. But the LDP TSRC abandoned this because of strong
opposition from the business group.
8 According to Section 2 Article 56 of the Diet Law, when a bill is submitted to
the HR, the Speaker of the HR passes it to a committee that has jurisdiction
over it and, after deliberation by the committee, the Speaker of the HR passes
it to the plenary session of the HR. When a bill is not voted in by the end of
the session in which it was submitted, it is dropped (Article 68 of the Diet Law).
9 Mizuno Masaru, the Director General of the Tax Bureau at that time, admitted
in his memoirs that executives of the government, the LDP and the MOF listened
to opposition parties and sounded them out in order to find out their attitudes
towards the deliberation on the package of tax reform bills in the Diet. There-
fore, he wrote, when the LDP decided the ‘Major Line of Structural Tax Reform’
and the government submitted it to the cabinet meeting in June 1988, the
opposition parties did not unite together to oppose the consumption tax (Mizuno
1993: 276).
 Notes 165
1111 10 The Special Committee reached agreement with respect to taxation on the
2 founder’s profit and taxation on the profit from sales of unlisted stocks (after
which these stocks became listed stocks).
3 11 On the interim report, Mizuno Masaru wrote in his memoirs that the GTSRC
4 decided that it would make no decision or suggest multiple options. With respect
5111 to which matters the LDP TSRC should decide on and which issues the deci-
6 sions of the GTSRC should not be different from those of the LDP TSRC.
7 Therefore, he wrote, the interim report of the GTSRC stated only the process
of its discussion about a new indirect tax and presented its basic principles
8 (Mizuno 1993: 217, 224).
9 12 Some interest groups were demanding that a zero-tax rate system should be
1011 adopted. In this system, a zero-tax rate is applied to non-taxable transaction and
1 tax-exempt corporations do not have to pay the tax that is included in the price
2 of items or services offered by taxable corporations. Consequently, when a tax-
exempt corporation purchases items from a taxable corporation, the tax amount
3111 that is included in the price will be refunded. The MOF insisted that such a system
4 should not be adopted, and it succeeded in adopting a simple tax rate system.
5 13 The invoice method involves calculating the tax amount by using compulsory
6 invoices (written records of exchanges and transactions). The account method
7 is calculates the tax amount by using the account books of individual firms. It
was argued that the account method would cast less of a burden on firms since
8 it would not require changes in their business procedures. On the other hand, it
9 was argued that the invoice method would be helpful to clarify the profis of the
20111 firms and the transactions between firms. In the ‘Major Line of Structural Tax
1 Reform’ the account method was adopted.
2 14 One executive of an LDP organization explained the details of this process in an
interview: ‘we took a lot of time to discuss in each LDP organization to give
3 those who opposed the consumption tax an opportunity to express their opinions.
4 . . . Although we obtained comprehensive delegation, the Chairs of division of
5111 the PARC and the Chair of the PARC negotiated and compromised with members.
6 Indeed, you could say that such a procedure is time-consuming and not trans-
7 parent, but it worked well with regard to the introduction of the consumption
tax’ (interview with an executive of the LDP organization, 8 April 2002).
8 15 In an interview with Ch¥ø Køron, Ishihara Nobuo, the Vice Cabinet Secretary at
9 that time, explains that the political circumstances that surrounded the Takeshita
30111 Cabinet were very stable at the beginning. The Keiseikai and the Abe faction,
1 he said, cooperated perfectly with each other because the Secretary General of
2 the LDP, Abe Shintarø, who was the leader of the Abe faction, and Prime Minister
Takeshita were very good friends. He pointed out that the Keiseikai and the Abe
3 faction obtained an overwhelming majority of the LDP by cooperating with each
4 other. (Ishihara 1996: 32.) The number of members of each faction (members of
5 the HR and the HC) when the Takeshita Cabinet was formed were as follows:
6 the Takeshita faction (Keiseikai) (120), the Miyazawa faction (89), the Abe
7 faction (88), the Nakasone faction (81), the Kømoto faction (31), other groups
(21). The total number of LDP members of the HR and the HC was 446 (Asahi
8 Shinbun, 7 November 1987).
9 16 Takeshita wrote some episodes in his memoirs that indicate his control over
40111 personnel matters in the LDP. He thought he had responsibility for Ministers of
1 the second reshuffled Tanaka Cabinet (from 11 November 1974 to 9 December
2 1974) since he played a key role in appointing them. He compensated them for
such a short term in office by appointing them as Ministers of other cabinets.
3 As for Ministers of the Uno Cabinet (from 3 June 1989 to 10 August 1989),
44 Prime Minister Uno asked him to create a list of Ministers for his Cabinet.
45111 Takeshita created it and all but one on the list were appointed as Ministers of
166 Notes
the Uno Cabinet. Again, Takeshita thought he should compensate them for such
a short period in office, and he therefore appointed them as Ministers of other
cabinets. (Takeshita 2001: 120–1).
17 One MOF executive described the cooperation of the MOF with the LDP TSRC
in an interview: ‘When the discussion in the Inner Committee reached a certain
extent, we let one member of the Inner Committee suggest that it was time to
decide a rough draft of the consumption tax system, and then we handed a draft
to the Inner Committee. Of course, we negotiated key persons of the Inner
Committee and the LDP TSRC beforehand. Before the Inner Committee was
held, we informally negotiated with key members of the Inner Committee, such
as Mr Yamanaka. We negotiated them one by one, face to face’(interview with
an MOF executive, 13 August 2002). The details of deciding the rate of the
consumption tax show intense negotiations by MOF executives. In his memoirs,
Mizuno Masaru, the Director General of the Tax Bureau at that time, writes that
the Minister’s Secretariat, the Director General of the Budget Bureau and the
Director General of the Tax Bureau persistently met the Chair of the LDP TSRC,
Yamanaka, and asked him to adopt 5 per cent as the rate of the consumption
tax (Mizuno 1993: 182).
18 The foreword by Takeshita to the memoirs written by Mizuno Masaru shows
the close relationship between them. He referred to Mizuno as his comrade
because they cooperated with each other and devoted themselves to putting the
consumption tax into practice (Takeshita 1993: 3).
19 One MOF executive described this system in the process of the introduction of
the consumption tax in an interview: ‘When the consumption tax was discussed,
all that we could do was to negotiate and to persuade key persons of the LDP
TSRC. If we succeeded in persuading them and obtaining their support for our
plans, the LDP as a whole supported us. But nowadays, it is not enough. To put
it in an extreme way, if we could succeed in persuading Y. Sadanori, the LDP
as a whole supported us. Mr Yamanaka silenced LDP members who presented
objections to our plan. Now we cannot decide with whom we should negotiate
and persuade beforehand’ (interview with a MOF executive, 13 August 2002).

6 The financial crisis in Japan 1994–1998

1 The directive provided three cases in which banks should report to the MOF:
(1) when the ratio of the current month or the estimated ratio in the three months
thereafter was more than 90 per cent; (2) the month end ratio was more than 80
per cent and the marginal ratio for four months thereafter was more than 80 per
cent; (3) other cases where, for instance, the increase of loans for the next four
months was unusually large.
2 Those directives were revised later, in 1982 and in 1992. The directive of 1992
(Kihon Jikø Ts¥tatsu) set: (1) the minimum solvency ratio (4 per cent); (2) the
ratio of current assets to total deposits (at least 30 per cent); (3) the ratio of
fixed assets for business use to net worth equity capital (less than 40 per cent);
(4) the maximum dividend payout ratio (dividend payments divided by current
profits, 40 per cent); (5) the maximum amount of bank lending to a single
borrower as a percentage of own capital (20 per cent) (Rixtel 2002: 122).
3 Financial institutions were segmented according to the type of their busi-
ness, such as long-term credit, trust business, foreign exchange business and
securities business.
4 Article 65 of the Securities and Exchange Law prohibits banks from doing secu-
rities business (dealing, brokering, underwriting, distributing and selling securi-
ties). Since 1966 government bonds have been constantly issued. Banks and
securities companies agreed that banks only underwrote them as a business accom-
 Notes 167
1111 panying banking business permitted by Article 5 of the Bank Law, and securities
2 companies distributed them. After 1977, medium-term discount government bonds
were issued, and banks wanted to sell them ‘over the counter’ as a business accom-
3 panying banking business permitted by the Article 5 of the Bank Law.
4 5 One ex-MOF executive explained in an interview: ‘about the failure of banks,
5111 politicians did not intervene into such issues because they are too technical for
6 politicians to understand . . . Therefore I did not explain about the failure of the
7 two credit unions to politicians beforehand, I told only the Minister of Finance just
before its announcement’ (interview with an ex-MOF executive, 25 July 2001).
8 6 Takemura Masayoshi explained: ‘On 1 December, a MOF executive told me that
9 “the Bank of Japan, the MOF, the Tøkyø Metropolitan Government, and other
1011 financial facilities discussed this problem and made a final scheme. We have no
1 choice other than this scheme”’ (The Proceedings of the Budget Committee of
2 the House of Representatives, 22 February 1995).
7 Japanese financial institutions had to pay higher interest rates compared with the
3111 financial institutions of other developed countries (such as the European Union
4 and North American countries) when they raised funds in foreign financial
5 markets. Such high interest rates were called the ‘Japan premium’.
6 8 An MOF executive explained the details of the Sanyø’s default: ‘we knew there
7 would be a default in a call market . . . But the Bank of Japan assured us we
did not have to worry about it. The loan from Tøkyø Mitsubishi Bank, the Daiwa
8 Bank and the NCB, amounting to 8 billion 500 million yen, was a collateral
9 loan. The total amount of unsecured loan to the Gunma Shin’yø Kinko was only
20111 1 billion yen. So we thought the effect of the Sanyø’s default would not be so
1 serious. Actually, its effect did not appear for the time being . . . I suppose many
2 creditors of banks exploited Sanyø’s default as an excuse to refuse to lend
. . .’ (interview with a MOF executive, 15 March 2001).
3 9 Tsuchida Masaaki, the Director General of the Banking Bureau at that time,
4 explained the reasons why the first directive was not issued to the J¥sen and why
5111 the second directive did not include Sangyøshukisei at the Budget Committee of
6 House of Representatives on 15 and 16 February 1996. He explained that the
7 J¥sen were non-banks, not depositary institutions, and the MOF did not have the
authority to regulate non-banks in order to keep their management sound accord-
8 ing to the Regulation on Loan Industry Law. Therefore the MOF decided that it
9 was not appropriate to take a rather drastic measure with respect to the J¥sen.
30111 Instead, the MOF advised the J¥sen to exercise self-restraint from giving loans
1 to real estate businesses. As for the second directive, he pointed out that there
2 were formal and informal systems by which the MOF and the MAFF could grasp
the flow of funds of Shinren and Nørinch¥kin (Proceedings of the Budget
3 Committee of House of Representatives, 15 and 16 March 1996).
4 10 Interview with an ex-MOF executive, 22 December 2000.
5 11 Katø Køichi, the Secretary General at that time, explained the details of the mem-
6 orandum at the Budgetary Committee of the House of Representatives on 16 Feb-
7 ruary 1996. The Coordination Council of Ruling Coalition Parties had a hearing
from founding banks and farm-related financial institutions, and farm-related finan-
8 cial institutions insisted that there was a memorandum in which founding banks
9 promised to take responsibility for the reconstruction of the J¥sen. Katø Køichi
40111 asked them to submit the memorandum and decided to publicize it (Proceedings
1 of the Budget Committee of the House of Representatives, 16 February 1996).
2 12 The President of J¥taku Loan Service (one of the J¥sen) admitted at the Budget
Committee of the HR that the second reconstruction plan for J¥taku Loan Service
3 had been planned on the basis that the price of real estate would rise 25 per cent
44 from 1992 to 2002 (Proceedings of the Budget Committee of the House of
45111 Representatives, 25 February 1996).
168 Notes
13 The LDP politician Etø Køichi criticized Speaker Doi: ‘the Speaker should show
her decisive attitude by using police officers or Diet guards. How could we
explain it to voters in our constituencies?’ (Asahi Shinbun, 9 March 1996).
14 The NFP could not find a chance to stop the picketing until their candidate lost
the by-election of the House of Councillors in Gifu prefecture on 24 March
1996.
15 One ex-Chief Executive Officer of a farm-related financial institution pointed
out the lack of leadership in the LDP: ‘Faction leaders, such as Mr Takeshita,
Mr Hashimoto, Mr Nakasone, Mr Mitsuzuka, and Mr Miyazawa, did not take
leadership in this case [the J¥sen problem]. So we [farm-related financial insti-
tutions] united to deal with this problem and worked on factions . . .’ (interview
with an ex-Chief Executive Officer of a farm-related financial institution,
2 August 2001).
16 It was reported that the DP was afraid that it would lose public support if it
attended the deliberation in the Diet and tacitly permitted the injection of public
funds to the LTCBJ (Asahi Shinbun, 13 September 1998).
17 One of the ‘new policy-oriented politicians’ explained the process of this
case: ‘the process of making the revised draft of the Financial Revitalization
Bill was this: at first we discussed with members of the DP, such as Mr Edano,
and we reported what we had decided to the PARC, then the PARC asked
the Minister of Finance, Mr Miyazawa, his opinion. In the process from the
PARC to Mr Miyazawa, the MOF intervened and MOF’s idea was reflected in
the opinions of the PARC and Mr Miyazawa. But after all they could not resist
our draft’ (interview with a member of the HR (member of the LDP), 1 August
2001).

7 The reform of the Ministry of Finance

1 On 4 February 1996, the LDP secretary General, Katø Køichi, stated the neces-
sity of MOF reform on a TV programme: ‘the Banking Bureau and the
International Finance Bureau should be integrated into a new agency, perhaps
called the “Financial Agency”, which should not have a broad range of authority
of regulation on financial institutions’ (Asahi Shinbun, 5 February 1996).
2 An Article 3 type organization (a committee similar to the Fair Trade Committee
(FTC) according to Article 3 of the National Administrative Organization Law)
has the authority to make a decision independently with respect to issues in its
jurisdiction. On the other hand, an Article 8 type organization (a committee similar
to the Securities and Exchange Surveillance Commission according to Article 8
of the National Administrative Organization Law) is subject to an Article 3 type
organization and it is supposed to assist the Article 3 type organization. Therefore,
an Article 3 type is regarded as more independent than an Article 8 type.
3 The Secretaries General of ruling coalition parties (the LDP, the SDPJ and the
NHP) comprised the committee.
4 This issue was discussed at the meeting of the CAR on 5 November, and the
split of the National Tax Administration Agency away from the MOF was aban-
doned.
5 One LDP executive who opposed Itø’s proposal said: ‘we and the MOF are now
cooperating with each other and fighting against opposition parties in order to
legislate the liquidation plan for the J¥sen. We cannot say to the MOF, “Now
we are cooperating with each other, but after the J¥sen problem is settled, we
will split your organization” . . . ’ (Asahi Shinbun, 18 April 1996).
6 Such successive concessions to the NHP caused strong dissatisfaction among
LDP members. The Chair of the Headquarters’ Office on Administrative Reform
of the LDP (HOAR), Mutø Yoshifumi, explained his difficult position at a general
 Notes 169
1111
meeting of the HOAR: ‘Very regrettably the LDP has to form a ruling coali-
2 tion. I would like to make the best efforts to negotiate with other ruling coalition
3 parties in order to make our opinion prevail . . . ’ (Asahi Shinbun, 21 November
4 1997).
5111 7 One LDP politician explained the situation of the LDP at that time: ‘There were
6 several stances within the LDP. Some, such as S. Yasuhisa, insisted that the
jurisdiction over financial policies should be split from the MOF. Some, such
7 as Mr Yanagisawa, argued that the divisions of inspection and supervision of
8 financial institutions should be separated from the MOF. I thought that the juris-
9 diction over financial policies should not be split from the MOF considering the
1011 management of the financial crisis’ (interview with an LDP politician, 19 March
1 2001).
8 One LDP politician explained the atmosphere in the LDP at that time: ‘When I
2 and other LDP members of the study group refused to receive Chair Itø’s draft,
3111 the Secretary General, Katø, warned us that such a behaviour would have a bad
4 effect on the rate of approval of the LDP . . .’ (interview with an LDP politi-
5 cian, 19 March 2001).
6 9 At the meeting of 18 September 1996, members of the Committee of Top Eight
Executives of the LDP expressed their concern about the next general election
7 that the LDP could not win it if they decided on an Article 8 type organization
8 (Asahi Shinbun, 19 September 1996).
9 10 On 2 October 1998 the LDP agreed with the LP on the revision of the Credit
20111 Insurance Corporation, which the LP strongly demanded. The LDP cooperated
1 with the LP and the SDPJ with respect to the National Railway’s Debt Law.
This law passed the HR on 2 October. On 10 November 1998 the LDP also
2 agreed with the CGP on issuing gift certificates to each citizen.
3 11 One LDP executive criticized the reorganization of the MOF: ‘reorganizing the
4 MOF while a serious financial crisis is attacking the Japanese economy is just
5111 like reconstructing a fire station while a fire is breaking out . . .’ (Asahi Shinbun,
6 18 September 1998.)
7
8 8 Conclusion
9 1 Most financial institutions had a section that was supposed to get information
30111 from and negotiate with the MOF. Those who were appointed to this section
1 were called ‘MOF-tan’ abbreviating ‘MOF tantøsha’ since ‘a person who is in
charge of’ is called ‘tantøsha’ in Japanese.
2
3
4
5
6
7
8
9
40111
1
2
3
44
45111
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8
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8
9
30111
1
2
3
4
5
6
7
8
9
40111
1
2
3
44
45111
1111 Index
2
3
4
5111
6
7
8
9
1011
1
2
3111 Page references in italics indicate figures and tables.
4
5 Abe Cabinet (1939–1940) 161n11 Bank Law 95, 97, 98
6 Abe faction 48, 89, 165n15 Bank of Japan (Nippon Ginkø) 94, 99,
7 Abe Fumio 59 100, 102, 105, 122, 130, 155, 156
Abe Shintarø 89, 97–8, 165n15 Bank of Japan Law 122, 126, 155
8
Adachi Kenzø 28 Banno, Junji 26–7
9
Administrative Guideline for Disposal Basic Law on the Reform of Central
20111 of Financial Institutions’ Ministries and Agencies (1998)
1 Non-performing Loans (1994) 151 120, 143, 156
2 administrative system 23, 26, 31; army Basic Outline of Reforms of Central
3 reform 34–9; later reform 73, 80, Ministries and Agencies (1999)
4 143; see also bureaucracy; MOF 131, 158
5111 reform Berger, Gordon Mark 32
6 Administrative Vice Ministers of Bokuminkan concept 16
7 Finance 25, 72–3 Boshin War (1868) 11
8 Agricultural Cooperative Associations bounded rationality 7
9 (Nøkyø) 105, 107, 108; Federation of Bridge Bank System 112, 157
30111 50 British policy see United Kingdom
1 Annual Conference of Presidents of bureaucracy: after 15th May Event
2 Central Banks (1995) 106 (1932) 33–6; autonomy 14–18, 28,
3 Anzen Credit Union 99–100, 152 29, 33, 38, 135, 136, 146–7;
Arai Zentarø 30 continuity before and after Second
4
army: and bureaucracy 33–6; Control World War 37–9; historical
5
(Tosei) faction 162n13; Imperial Way institutional approach 3, 7, 9–14;
6 (Kødø) faction 35 Meiji era and Meiji Constitution
7 Army Ministry 34, 35, 37 9–10, 11, 12, 13, 14–15, 22–33, 39,
8 Asahi Shinbun 1–2, 66, 73, 78, 89, 136; possible introduction of political
9 99–100, 115, 121, 122, 126–7, 129, advisers 146; see also MOF
40111 144, 145, 163n13 bureaucracy
1 Ashida Cabinet (1948) 40
2 Asø Tarø 68, 69 Cabinet: factions and 48; introduction
3 of system in Meiji era 3, 23; and
44 Banking Bureau see MOF Banking MOF reform 119; powers in
45111 Bureau Constitution (1946) 37; powers
182 Index
increased after 2000 142–3, 147–8; Committee on Stabilizing the Financial
see also individual Cabinets System (1995) 152
Cabinet Legislative Bureau 35 Committees on Election Campaign
Cabinet Office (Naikakufu) 143, 147 Discipline 33
Cabinet Personnel Bureau 35 Comprehensive Plan for Financial
Cabinet Planning Board (CPB) 34–6 Rehabilitation (1998) 112, 130,
CAR 125, 128, 154, 155 132, 156, 157
Carpenter, Daniel P. 17 Conservative Party (CP) 64, 65
Central Agricultural Forestry Bank Constitution: Meiji Constitution
(Nørinch¥kin) 104, 105 (1889) 27, 31, 32; (1946) 13, 36,
Central Ministries and Agencies 37, 57
Reform Law (1998) 131, 143, 158 construction bonds 164n3
CGP 60, 61, 64, 65, 66, 73, 138, 160n1; Construction of New Financial
and consumption tax 85, 90, 91, 141; Policies and Administration, The
and financial crises 116; (1996) 122, 153
and reform of MOF 131, 159, consumption tax 3, 5, 49, 51, 77–93,
169n11 139, 141, 149, 150
Chigin Seiho Housing Loan 104, 106, Coordination Council of Ruling
151 Coalition Parties 167n10
China, wars with: (1894–1895) 27; Corporate Rehabilitation Law 101,
(1937) 34, 36 102, 155, 158
Chokuj¥kan (Chokunin-kan) 22, 23 Cosmo Credit Union 152
Chøshi 22 Council of Secretaries of the Coalition
Chøsh¥ han (feudal clan) 11, 14, Parties (Kakuha Kanjikai) 62
160n1 Council on Administrative Reforms
Ch¥økøshøbu 20, 21 (CAR) 125, 128, 154, 155
Civil Officials’ Appointment Ordinance Council on Fiscal Structural Reform
(Bunkan Nin’yørei) (1893) 24, 29 154
Clean Government Party (Kømeitø) CP 64, 65
see CGP Credit Insurance Corporation 169n10
coalition and coalition cabinets 2, 5, credit unions 99–100, 117, 152
14, 57, 61, 67–8, 74, 75, 128,
137–8, 142, 147; and MOF 133–4, Daiichi J¥taku Kiny¥ 104, 106, 152
140, 142, 148 daimyø (feudal lords) 11, 15
Cold War, end of 57–9 Daiwa Bank 98, 167n7
Committee of Coordination of the Daiwa Securities Company 120
Government and Executives of Dajøkansei 22
Ruling Parties (Seifu Yotø Seisaku decision-making: and consumption tax
Chøsei Kaigi) 107, 109–10, 153 92, 139; and financial crises 116,
Committee of Leading Members of the 117, 140; LDP dominance 45–7, 49,
Government and Ruling Parties 50, 53; LDP’s loss of dominance 2,
(Seifu Yotø Shunø Kaigi) 62 4–5, 61, 62–5, 74–5, 138, 141, 142;
Committee of Representatives of Ruling Meiji era 10, 27–8, 136; and MOF
Coalition Parties (Renritsu Yotø reform 4–5, 49, 126–8, 132, 133,
Sekininsha Kaigi) 63, 121, 125, 126, 134, 140; new trends 147–8; see also
133, 153 LDP organizations
Committee of Representatives of the deficit-covering bonds 55, 79, 80, 81,
Coalition Parties (Renritsu Yotø 110
Daihyøsha Kaigi) 62, 107–8, 140 Democratic Party (Minshutø) see DP
 Index 183
1111 Democratic Reform League (Minshu Fair Trade Commission (FTC) 123,
2 Kaikaku Rengø, DRL) 160n1 124, 168n2
3 Democratic Socialist Party (Minshatø) Federation of Agricultural Cooperative
4 see DSP Associations (Nøkyø) 50
Den Akira 25 Federation of Agricultural Credit
5111
Denmark 6 Unions (Shinren) 104, 105
6 Deposit Insurance Corporation 112, Federation of Economic Organizations
7 156 (Keidanren) 80, 163n12, 164n6
8 Deposit Insurance System Law (1971) Federation of Mutual Benefit
9 97 Associations (Kyøsairen) 105
1011 deregulation 144 15th May Event (1932) 22, 32;
1 Diet 1, 2, 3, 13, 17, 41, 47, 48; bureaucracy after 29, 33–6
2 Constitution (1946) 13, 36–7 Final Report on Structural Tax Reform
3111 Diet Affairs Council (Seimu Kanjikai) (1988) 84, 87, 88, 150
4 62 Financial Agency ( Kin’y¥chø, FA)
5 Director General of Police and Security 126, 131
28, 29 financial crises (1994–1998) 3, 4,
6
Doi Takako 109, 145 94–118, 130, 139–40, 144
7 Dokuritsu Club 21 financial policy 4, 95–9, 121, 125, 128,
8 DP (Democratic Party Minshutø) 40, 130, 131, 134
9 41, 64, 72, 74, 75, 142, 154, 156, Financial Reconstruction Commission
20111 157, 158; and financial crises 112, (FRC) 4, 5, 114, 119, 120, 130,
1 113, 115, 116, 139; and MOF reform 131
2 129, 130, 131, 132, 134, 140 Financial Revitalization Bill/Law 5,
3 DRL 160n1 64, 113, 114, 115, 116, 117, 118,
4 DSP 60, 61, 65, 85, 90, 160n1; and 120, 130, 131, 132, 133, 134,
5111 consumption tax 84, 85, 90, 141 139–40, 141, 142, 158
6 Financial Services Agency 157
EC see LDP Executive Council Financial Structural Reform Law 112,
7
economy 38, 50, 53–4, 55–6, 58, 77, 155, 156
8 79, 101, 112; deregulation 144; Financial Supervisory Agency (Kin’y¥
9 globalized 56, 58, 106–7, 117 Kantokuchø, FSA) 4, 112, 119, 120,
30111 Edano, Mr 168n16 121–30, 155, 157
1 Edo Shogunate 136 Financial System Reform Law 156
2 Electric Power Control Law (Denryoku Financial Systems Research Council
3 Kanrihø) 34 (Kiny¥ Seido Chøsakai) 97, 107,
4 Emperor 11, 31, 36, 39, 137 110, 152
5 Etø Køichi 168n12 fiscal crisis (1974–1975) 55, 79
6 Export-Import Bank of Japan 73 Fiscal Law 164n3
7 Ezaki Masumi 47 Foreign Exchange Banks Law 97
Foreign Exchange Control Law 38
8
FA 126, 131 Forum 21 for Political Reform 60
9 factions 2–3, 42–4, 46–9; and FRC 4, 5, 114, 119, 120, 130, 131
40111 consumption tax 88–9, 92, 139; end FSA see Financial Supervisory
1 of LDP dominance 59–60, 64–71, Agency
2 74–5, 162n19; and financial crises 3, FTC 123, 124, 168n2
3 109–11, 115–16, 117, 118, 130, 139, Fujii Sadanobu 25
44 141, 144; and MOF reform 120, Fujinami Takao 59
45111 128–9, 132, 133–4, 140, 141 Fujiyama faction 43
184 Index
Fukaya Ry¥ji 88 Hashimoto Keizaburø 25
Fukuda Cabinet (1976–1978) 44, 46, 47 Hashimoto Ry¥tarø 47, 70, 109, 124,
Fukuda faction 43, 162n16 129, 154
Fukuda Takeo 41, 77 Hata Coalition Cabinet (1994) 61,
Fukuda Yasuo 145 151–2
Furui Yoshimi 30 Hata Tsutomu 59, 73, 109
Fuyushiba Tetsuzø 145 Hatoyama Cabinet, Third (1955–1956)
49, 119
G7 107, 153 Hatoyama Kunio 88
Gendai 112 Hatoyama Yukio 74
Gene-Con Scandal 59 Hayashi Cabinet (1937) 161n11
general elections: (1979) 80, 91; (1990) Hazama Shigeru 30
56; (1993) 1–2, 54, 56, 60–1, 65, 74, Hazukikai-Nihon Saikøkaigi group
108, 137, 147, 151; (1996) 56, 64, 68
72, 123–4, 129, 149, 154; (2000) 56, Hiranuma Cabinet (1939) 161n11
72 Hirose Toyasaku 25
General Headquarters’ Office (GHQ) Hirota Cabinet (1936–1937) 35,
13, 36–9, 40, 137 161n11
Germany 6 historical institutional approach 3,
Giun-zoku (LDP Diet Management 6–19, 135; to bureaucratic
Committee) 54, 109, 111, 117 autonomy 14–19; historical aspect
globalization 6, 144–5 8–11, 14–15; institutional aspect
globalized economy 56, 58, 106–7, 7–8; significance for Japanese
117 politics 11–14
Gotøda, Masaharu 111 Hizen han (feudal clan) 14, 160n1
Gotø Fumio 33 HOAR 169n6
Government Tax System Research Ho-Ho group 67, 68, 69
Council (GTSRC) 79, 83, 86, 87, 88, Hokkaidø Bank 101, 154, 155
149, 150 Hokkaidø Takushoku Bank 101, 154,
Gulf War 57 155
Gunma Shin’yø Kinko 167n7 Hokuyø Bank 101, 155
Gyømu Keikakuhø (List of Ranking) 96 Honma Toshitarø 163n4
Horiuchi faction 70
Hall, Peter 7 Hoshino Naoki 160n5
Hamaguchi Cabinet (1929–1931) 28 Hosokawa Coalition Cabinet
Hamaguchi Osachi 23, 25 (1993–1994) 1, 61, 62, 65–6, 67, 72,
han (feudal clans) 14–15, 22, 160n1 73, 75, 129, 134, 140, 147, 151
Hanbatsu government 20–2, 23, 27–8, Hosokawa Morihiro 1
31, 136 Housing Loan Corporation (J¥taku
Hanj¥kan (Han’nin-kan) 22, 23 Kiny¥ Køko) 103, 152
Hanwa Bank 154 Hyøgo Bank 152
Hara Cabinet (1918–1921) 29
Hara Kei 23, 28 Ichikawa, Mr (Secretary General of
Hartcher, Peter 94 CGP) 163n13
Hashimoto Coalition Cabinets 67, 126, Ichiki Otohiko 25
138; First (1996) 61, 65, 66, 108, Ikeda Cabinet: First (1960) 41, 77;
109, 121, 153; Second (1996–1998) Second (1960–1963) 49, 119; Third
61, 66, 68, 69, 100, 112, 125, 154 (1963–1969) 42, 43, 44, 46
Hashimoto faction 70 Ikeda faction 43, 48, 67, 71
 Index 185
1111 Ikeda Hayato 40, 77 Japan Federation of Employers’
2 Ikeda Yukihiko 114, 116 Associations 163n12, 164n6
3 Immediate Measures for Financial Japan Insurance Company 101
4 Stabilization Law (1998) 112, 113 Japan New Party (Nihonshintø, JNP) 1,
5111 Imperial Diet 20, 21, 26, 31, 32, 34 59, 60, 61, 65, 160n1
Imperial Mandate 20 Japan premium 118, 155
6
Imperial Order 22 Japan Renewal Party (Shinseitø, JRP)
7 Imperial Ordinances, and administrative 60, 61, 65, 72, 73, 75, 109, 151,
8 system 15, 17, 22, 26 160n1
9 Imperial Rule Assistance Association Japan Socialist Party (Nihon Shakaitø)
1011 138 see JSP
1 Imperial University see Tøkyø Japan Trade Union Confederation
2 (Imperial) University 163n13
3111 indirect taxation see consumption tax Japan-US Mutual Security Treaty 57
4 Inoue Kaoru 22 JCP 57, 60, 82
5 interest groups 31–2, 50, 52, 86, Ji-Sha-Sa groups 67, 68, 69
6 165n12 Jiy¥ Club 21
Inukai Tsuyoshi 22, 23, 160n2 Jiy¥minken undø (People’s Rights
7
Irie Seiichirø 30 Movement) 15
8 Ishibashi faction 48, 67, 71 Jiy¥ Minshutø (Liberal Democratic
9 Ishihara, Nobuo 165n15 Party) see LDP
20111 Ishihara Nobuteru 115 Jiy¥tø 20, 21, 40, 41
1 Ishii faction 43, 67, 71 JNP 1, 59, 60, 61, 65, 160n1
2 Ishii Tøru 163n4 JRP 60, 61, 65, 72, 73, 75, 109, 151,
3 Ishin Kanryø 160n3 160n1
4 Ishiwata Søtarø 25 JSP 1, 40, 41, 57, 58, 60, 61, 62, 63,
5111 issue settling system 2–5, 135–48; 64, 65, 66, 67, 68, 138, 160n1; and
6 establishment during Meiji era 27–8; financial crises 109, 111
7 example of successful functioning junior minister system 142, 147
under LDP dominance see J¥sen 4, 73, 94, 102–11, 117, 118, 121,
8
consumption tax; examples of 139, 140, 141, 151, 152, 153
9 inefficient functioning after 1993 see J¥sø 104, 106, 151
30111 financial crises, MOF reform; factors J¥taku Loan Service 104, 106
1 which might have prevented decline
2 in effectiveness 141; historical Kabashima, Ikuo 57–8
3 institutional approach 13–14; LDP Kaifu Cabinets: First (1989) 47, 150;
4 dominance 54, 119; LDP’s loss of Second (1990–1991) 44, 47, 150
5 dominance 61, 74–6; new trends Kaifu Toshiki 73
6 142–8 Kajiyama Seiroku 68, 69, 111, 128,
7 Itø Hirobumi 21, 22, 27 133, 157
8 Itø Shigeru 122–3, 126–7, 153 Kakushin Kanryø (revisionist
bureaucrats) 35–6
9
Japan Chamber of Commerce and Kamei Shizuka 68, 69
40111 Industry 163n12, 164n6 Kanemaru Shin 47, 59, 89, 163n3,
1 Japan Committee for Economic 164n6
2 Development 163n12, 164n6 Kan Naoto 74, 113, 145, 157
3 Japan Communist Party (JCP) 57, 60, Kanno Katsunosuke 25
44 82 Kanzaki Takenori 145
45111 Japan Development Bank 73 Katayama Cabinet (1947–1948) 40
186 Index
Kato, Junko 50, 53, 90 labour markets 6
Katø Køichi 53, 67, 68, 69, 73, Law on Urgent Measures for Financial
99–100, 111, 122, 124, 128, 133, Stabilization 156
145, 167n10, 168n1 LDP: dominance after 1955 1–2, 3, 11,
Katø Takaaki 23 13, 40–54, 137, 138–9, 143; loss of
Katø Tomosaburø 23 dominance after 1993 general
Katsura Tarø 23 election 2–3, 14, 54, 55–71, 74–6,
Kawada Isaoi 25 133, 135, 137–9, 147; as opposition
Kawagoe Takeo 25 party (1993) 1, 62; relationship with
Kawarada Kakichi 30 bureaucracy see party
Kawashima faction 43 politicians/bureaucrats relationship;
Kawato Sadafumi 162nn15, 16 structure during dominant period
Kaya Okinori 25 41–9
Kay¥kai group 68 LDP Committee of Directors General
Kazami Akira 36 of Factions (Kakuha Jimusøcho
Keiseikai see Takeshita faction Kaigi) 49, 78
Kenseikai 23 LDP Committee of Top Eight
Kenseitø 22, 75 Executives 123, 154, 169n9
Kin Mirai Kenky¥kai group 68 LDP Committee on Urgent
Kishi Cabinets (1957–1960) 41 Countermeasures to Economic Crises
Kishi faction 43, 48, 67, 71 155
Kitaoka, Shin’ichi 48 LDP Diet Management Committee
Kiyoura Keigo 23 (Giun-zoku) 54, 109, 111, 117
Kizo Credit Union 152 LDP Executive Council (EC) 45, 47,
Kobashi Ichita 30 52, 64, 74, 75, 128, 133, 138;
Kobayashi Ichita 30 consumption tax 78, 82, 84, 86, 88,
Køchi han (feudal clan) 160n1 92
køenkai 88 LDP Headquarters’ Office on National
Koga Kiyoshi 32 Vision 142, 146
Koh, B. C. 39 LDP management system 2–3, 46–7,
Koizumi Cabinet (2001–) 145, 147, 48–9; and consumption tax 88–9, 92;
148 end of LDP dominance 61, 64–71,
Koizumi Jun’ichirø 67, 68, 69, 70, 111, 138; and financial crises 109–11,
128, 145, 157 115–16, 117, 118, 139; and MOF
Kokusai Securities Company 101 reform 128–9, 132, 133–4, 140
Kømei 131 LDP organizations 2–3, 11, 45–7, 48,
Kømoto faction 48, 70, 165n15 49, 50, 141, 143; and consumption
Komura Takeshi 72 tax 78, 85–8, 92; decline in
Konoe Cabinet, First (1937–1939) 36, importance since 1993 61, 62–4, 74,
161n11 126–8, 132, 138, 142; and financial
Køno faction 43, 48, 67, 71 crises 109, 114–15, 116, 117, 140;
Køno Ichirø 119 and MOF reform 120, 126–8, 132,
Køno Yøhei 69 133, 140
Køshi 22 LDP Policy Affairs Research
Kumano Hideaki 72 Council (PARC) 45–6, 47, 48, 50,
Kuroda Cabinet (1888–1889) 21 51, 52, 64, 74, 75, 138, 139;
Kuroda Hideo 25 Agriculture and Forestry Division
Kuroda Kiyotaka 26 (Nørin-zoku) 45, 46, 50, 51, 108,
Kyøwa Scandal 59 109–10, 111, 118, 139; and
 Index 187
1111 consumption tax 78, 82, 84, 85, 86, Meiji era: bureaucracy 9–10, 11–12,
2 88, 90, 92; and financial crises 110, 14–15, 18, 22–6, 39; establishment of
3 168n16; and MOF reform 133; issue settling mechanism 3, 11, 13,
4 økura-zoku 110 27–8, 135–6, 147; political system
LDP Tax System Research Council under Meiji Constitution 20–33
5111
(LDP TSRC) 50–1, 78, 79, 80, 82, Merger and Conversion of Business
6 84, 85–8, 90, 92, 139, 150, 166n19 Law (1967) 97
7 Legislation Bureaux of the House of MHA 16, 22, 28–30, 33, 35, 37, 75,
8 Representatives and the House of 138
9 Councillors 142 MHA Local Administration Bureau
1011 Liberal Democratic Party Directors General 29, 30
1 (Jiy¥minshutø) see LDP Miki Cabinet (1974–1976) 44, 46
2 Liberal Party (Jiy¥tø) see LP Miki faction 43, 46, 162n16
3111 Lockheed Scandal (1974) 46 Miki-Matsumura faction 48, 67, 71
4 London Navy Disarmament Treaty Miki Takeo 46
5 160n2 Minabe Chøji 30
Long-Term Credit Bank of Japan Ministry of Agriculture, Forestry and
6
(Nihon Chøki Shin’yø Ginkø) see Fisheries (Nørin Suisanshø) see
7 LTCBJ MAFF
8 Long-Term Credit Banks Law 97 Ministry of Commerce and Industry
9 LP 64, 66, 138, 157, 158; and financial (MCI) 35
20111 crises 113, 116, 139; and MOF Ministry of Construction 37
1 reform 130, 131, 132 Ministry of Finance (økurashø) see
2 LTCBJ 4, 94, 112–16, 117, 118, 139, MOF
3 140, 141, 156, 157, 158 Ministry of Foreign Affairs 35
4 Ministry of Health and Welfare 54, 85
5111 Mabuchi, Masaru 73 Ministry of Home Affairs see MHA
6 MAFF 45, 46, 51, 54; and financial Ministry of International Trade and
crises (1994–1998) 104, 105, 107, Industry (Ts¥shø Sangyøshø, MITI)
7
110, 151 54
8 Major Line of Structural Tax Reform Ministry of Labour 85
9 (1988) 78, 84, 86, 87, 88, 150, ministry system 23, 26
30111 165n13 Minobe Tatsukichi 32
1 Major Line of Tax Reform (1998) 84, Minseitø 32, 138
2 86, 88, 150 Minshutø (Democratic Party) see DP
3 Major Line of Tax System Reform Mintø (People’s Parties) 20, 26
4 85–6, 149 MITI 54
5 Manchuria, war with (1931) 34 Mitsubishi zaibatsu 32
6 Marushø Securities Company 156 Mitsui Bank 98
7 mass media: and financial crises 101, Mitsui zaibatsu 32
109, 111, 112, 115; and MOF Mitsuzuka faction 68, 69, 70
8
reform 121, 122, 126–7, 128–9; Mitsuzuka Hiroshi 69
9 politics since 1993 72, 73; and Miyashita Søhei 70
40111 scandals involving politicians and Miyazawa Cabinet (1991–1993) 1, 46,
1 bureaucrats 59, 144–5; see also 47, 67, 151
2 Asahi Shinbun Miyazawa faction 48, 68, 69, 70, 89,
3 Matsukuma Hideo 25, 160n4 165n15
44 Matsuzaki Tetsuhisa 48, 86 Miyazawa Kiichi 60, 116, 168n16
45111 MCI 35 Mizumachi Kesaroku 25
188 Index
Mizuno Kiyoshi 111 Nakasone faction 43, 48, 162n16,
Mizuno, Masaru 91, 164nn4,9, 165n11, 165n15
166nn17,18 Nakasone Yasuhiro 69, 82, 88, 164n4
Mizuno Rentarø 30 Narita Ichirø 30
Mizuta faction 43 National Administrative Organization
Mizutani, Mitsuhiro 40 Law 114, 124, 127, 130, 154, 168n2
MOF 12, 25, 35, 38, 56, 135, 142, 144, national bonds 79, 80, 81
148; and consumption tax 77–8, 84, National Federation of Agricultural
85, 90–3, 165n12; and financial Credit Unions 104
crises 94–118, 139–40, 151, 152, National Mobilization Law (Kokka
153, 154; Meiji era and Meiji Sødøinhø 1938) 34, 35
Constitution 12, 25, 29, 31; National Public Safety Commission 37
relationship with party politicians National Public Service Law 37
2–5, 29, 31, 40, 50–1, 72–6, 77, National Railway’s Debt Law 158,
90–3, 116, 118, 129–30, 132–3, 138, 169n10
139, 141–2; see also Financial navy 34, 35, 160n2
Systems Research Council Navy Ministry 35, 37
MOF Banking Bureau 96, 100, 104, NCB 101, 167n7
105, 107, 123, 124, 150, 151 New Harbinger Party (Shintø Sakigake)
MOF National Tax Administration see NHP
Agency 125 NFP (New Frontier Party, Shinshintø)
MOF reform 3, 4–5, 49, 119–34, 68, 72, 73–4, 75, 142; and financial
139–40, 141, 154, 155, 157, 159; crises 108, 109, 152, 153
study group 122–3, 126–8, 129, 133, NHP 1, 59, 60, 61, 62, 63, 64, 65, 66,
140, 153, 154 67, 68, 138, 151, 156, 160n1; and
MOF Securities Bureau 101, 102, 123, financial crises 109, 111, 112, 114;
124 and MOF reform 122, 124, 125, 126,
MOF-tan system 144 127, 128, 129, 133, 140
Mori Coalition Cabinets (2000–2001) Nihon Credit Bank (NCB) 101, 167n7
61 Nihon Housing Loan 104, 106, 152
Mori faction 70 Nihon Jiy¥tø 39, 40
Mori Yoshirø 69, 73, 114, 129 Nihon J¥taku Kin’y¥ 104, 106, 151,
Murakami Tatsuo 90 152
Murayama Coalition Cabinet Nihon Keizai Shinbun 99
(1994–1996) 1–2, 57, 61, 62–3, 65, Nihon Keizai Shinbunsha 72, 163n15
67, 72, 73, 74, 109, 121, 126, 129, Nihon Kyødøtø 39, 40
138, 152 Nihon Saisei Kaigi group 68
Murayama Tatsuo 51 Nihon Shakaitø see JSP
Murayama Tomi’ichi 108, 121, 153 Nihon Shinpotø 39, 40
Mutø Yoshifumi 168n6 Nikaidø Susumu 47
Nikko Securities Company 120
Nadao Hirokichi 30 Nippon Credit Bank 154, 156, 158
Nagata Tetsuzan 162n13 Nippon Lease 158
Nakagawa faction 43 Nishimura Eiichi 47
Nakamura Kishirø 163n4 Nishimura, Yoshimasa 100
Nakasone Cabinets 78, 92; First Nishino Gen 25
(1982–1983) 47, 149; Second Nissan Health Insurance Company 154
(1983–1986) 44, 47, 91, 149; Third Noguchi, Yukio 38
(1986–1987) 43, 44, 47, 82, 149 Nøkyø 105, 107, 108; Federation of 50
 Index 189
1111 Nomura Securities Company 120 Package of Emergent Policies to
2 Nonaka Hiromu 68, 69 Stimulate Economy, A (1997) 155
3 Nordlinger, Eric A. 15 PARC see LDP Policy Affairs Research
4 Nørin-zoku (Agriculture and Forestry Council
Division of PARC) 46, 50, 51, 108, party politicians/bureaucrats
5111
109–10, 111, 118, 139 relationship 2–5, 46, 49–54, 135, 137,
6 North, Douglass C. 8 141–2; and consumption tax 77, 78,
7 90–3, 139; and financial crises 116,
8 Obuchi Coalition Cabinet (1998–2000) 118; historical institutional approach
9 61, 64, 65, 66, 112, 130, 131, 138, 11, 13, 14, 16–17, 18–19; Meiji era
1011 157, 158 11, 13, 26–33, 136; and MOF reform
1 Obuchi faction 68, 69, 70 129–30, 132–3, 134; new trends
2 Obuchi Keizø 60, 69, 70, 88, 89, 113, 146–8; Second World War onwards
3111 130, 157, 158 39–40; since 1993 14, 61, 72–6, 138,
4 Øhira Cabinets 78, 91, 92; First 139
5 (1978–1979) 46, 47, 79, 149; party politics and politicians 39–40,
Second (1979–1980) 42, 43, 44, 137, 138–9, 142–3; Meiji era 20–2,
6
47, 149 27–8, 31–2, 135–6
7 Øhira faction 43, 162n16 path dependency concept 8–11, 12–14,
8 Øhira Masayoshi 41, 55, 79 17–18, 135–9
9 oil price shock (1973) 77, 79 Peace and Reform (Heiwa Kaikaku) see
20111 Okada Cabinet (1934–1936) 33 PR
1 Okada Sh¥zø 30 Pempel, T. J. 58
2 Økuma Shigenobu 21, 23 Peters, B. Guy 10
3 Olsen, Johan P. 10 Pierson, Paul 8–10
4 Ømura Seiichi 30 Plan for the Reform of the Policy-
5111 Øno faction 43, 48, 67, 71 Making System (2002) 142, 146
6 Ono Giichi 25 Policy Affairs Council (Seisaku
Øno Rokuichirø 30 Kanjikai) 62
7
Øno Ry¥ta 25 policy-making 3, 14, 15, 16, 17, 18, 40,
8 OPEC 163n1 46, 47, 50, 51–2, 135, 136, 137, 148;
9 opposition parties 6, 54, 64, 141; and Meiji era 11, 13, 28, 30–3, 136; new
30111 consumption tax 79–80, 82, 84–5, trends 142–3, 145–6, 147; recent
1 91–2; and financial crises interest of LDP party politicians in 5,
2 (1994–1998) 108, 109, 112–16, 118, 115, 116, 118, 132, 133, 134, 142–3
3 139–40; and MOF reform 120, political advisers 146
4 130–1, 132, 157; see also individual Political Funds Control Law 59, 65, 66
5 parties political parties see party politics and
6 Ordinance of Organizations of Key politicians
7 Industries (J¥yø Sangyø Tøseirei) 34, political scandals 59, 145
35, 38 postal services 148
8
Ordinance of the Cabinet Planning power 7
9 Board 35 PR 64, 113, 157; MOF reform 130,
40111 Osaka Metropolitan Prefectual Office 131, 132, 158
1 152 Prime Minister(s) 23, 36, 142–3, 147,
2 Ozawa group 59–60 148; see also individual names
3 Ozawa Ichirø 47, 59, 62, 72, 73, 89, Prime Minister’s Agency 37
44 109 Prime Minister’s Office (PMO) 119,
45111 Ozawa Tatsuo 49 124
190 Index
principal-agent model 51–2, 53 Sakurai Tetsutarø 25
Principle for the Reconstruction of samurai (military men) 14–15
Financial Systems (1995) 152 Sanwa Bank 101
Principle of Early Disposal of Bad Sanyø Securities Company 101–2, 155
Loans of Financial Institutions 152 Sasaki Suguru 160n3
Principle on Fundamental Reform on satisficing 7
Tax System (1987) 82–3 Satø Cabinet: First 46; Second 44
Provisional Research Council on the Satø Eisaku 40
Administrative System 119 Satø faction 43, 48, 67, 71
Public Official Election Law 65, 66–7 Satø, Seizaburø 48, 57, 86
public opinion 32, 59, 144, 145, 147 Satsuma han (feudal clan) 11, 14,
160n1
Ramseyer, J. Mark 51, 53–4, 95, 97, 98 scandals involving bureaucrats and
rational behaviour approach 53 politicians 59, 144–5
RCB 112 SCAP 36
Recruit Scandal 59 SDL 60, 61, 160n1
Regaining Trust in the LDP study group SDP 145
59 SDPJ 61, 66, 112, 114, 122, 124–30,
Resolution and Collection Bank (RCB) 133, 138, 140, 168, 169; and MOF
112 reform 126, 127, 128, 129, 133, 140,
Revised Deposit Insurance Law 155, 169n10
156 Second World War 135, 137; financial
Revised Financial Structural Reform policy following 95–9; political
Law 156 reforms following 3, 13, 36–40,
Revised Public Offices Election Law 75–6, 137, 138; political themes
(1994) 108 after 57; taxation system reform
Rhodes, Rod 146, 147 following 5
Rikken Kaishintø 20, 21 Securities and Exchange Law 101,
Rikken Seiy¥kai see Seiy¥kai 166n4
Ritø (Government’s Party) 20 Securities and Exchange Surveillance
Rixtel, Adrian van 98 Commission (SESC) 120, 168n2
Rosenbluth, Frances McCall 51, 53–4, securities companies 100–2, 117, 120,
95, 97, 98 144
Ruling Coalition Parties Representatives Seinan Rebellion (1877) 15
Committee (Renritsu Yotø Sekininsha Seisaku Shinjinrui group 115, 116, 118
Kaigi) 63, 121, 125, 126, 133, 153 Seiy¥kai 13, 21, 22, 23, 27, 28, 32, 75,
Russo-Japanese War (1904–1905) 27 138
Sendai Bank 155
Saeki, Yoshimi 105 SESC 120, 168n2
Sagami Shin’ichi 30 Shidehara Kij¥rø 23
Sagawa Ky¥bin Scandal 59 Shiina Etsusaburø 46
Saionji Cabinets (1906–1908, ‘Shi-ki’ 160n1
1911–1913) 28 Shinren 104, 105
Saionji Kinmochi 23 Shinseiki (New Century) group 68
Saitø group 73 Shiokawa Seij¥ro 111
Saitø Jirø 72, 73 Shiozaki, Mr 169n7
Saka Chiaki 30 Shiozaki Yasuhisa 115
Sakakibara, Eisuke 39 Shøda Kazue 25
Sakatani Yoshirø 25, 31 Shoup Proposals (1949) 5, 77, 82
 Index 191
1111 Silberman, Bernard S. 14 Tanaka Kakuei 41, 46
2 Sino-Japanese War (1894–1895) 27 Tanaka Makiko 145
3 Social Democratic League (Shakai Tanaka Yutaka 25
4 Minshu Rengø, SDL) 60, 61, 160n1 Tanami Køji 72
Social Democratic Party of Japan Taniguchi Tsuneji 25
5111
(Nihon Minshu Shakaitø) see SDPJ taxation system 5, 77–8; see also
6 Soeda Keiichirø 30 consumption tax
7 Søgø J¥kin 104, 106, 152 Terauchi Masatake 23
8 Søj¥kan (Sønin-kan) 22, 23 Thelen, Kathleen 6, 8, 11
9 Søsaibatsu faction 46, 67, 69, 162n16 Third Administrative System Research
1011 Spaulding Jr., Robert M. 33, 34, 35–6 Council 49, 119
1 Special Committee on a Comprehensive Tøhoku Dømeikai 21
2 Plan for Financial Revitalization 156, Tøhoku Døshikai 21
3111 157 Tokonami Takejirø 30
4 Special Committee on the Tax System Tokugawa Bakufu administration
5 (1988) 85 system 11, 14
Stockwin, J. A. A. 1, 37 Tokugawa Shogun 11
6
Sugawara Michitoshi 25 Tokuyø City Bank 155
7 Sumitomo Trust Bank 112, 114, 115 Tøkyø (Imperial) University 15, 23–4,
8 Superintendent General of the 38; Law Faculty 16, 26, 32
9 Metropolitan Police 28, 29 Tøkyø Kyødø Bank 99, 100
20111 Supreme Command for the Allied Tøkyø Kyøwa Credit Union 99–100,
1 Powers (SCAP) 36 152
2 Suzuki Cabinet (1980–1982) 44, 47, 80, Tøkyø Metropolitan Government 99,
3 149 152
4 Suzuki Kisaburø 28 Tøkyø Mitsubishi Bank 167n7
5111 Suzuki Muneo 145 Tomeoka Yukio 30
6 Suzuki Zenkø 162n2 Tomoe Kurabu 21
Sweden 6 Tosa han (feudal clan) 14
7
Tøseikai 38
8 Taiseikai 20, 21 Trade Ministry Ordinance 35
9 Taishø Democracy 3, 13, 22, 28, 31, trade unions 58
30111 33, 75, 137, 138, 147 transcendentalism 26–7, 39
1 Takahashi Korekiyo 23, 161n9 Tripartite Ruling Camp’s Committee on
2 Takashima Osamu 111 MOF Reform 122, 126
3 Takemura Masayoshi 59, 60, 100, 106, Tsuchida Masaaki 167n8
4 152, 153 Tsugita Daizaburø 30
5 Takeshita Cabinet (1987–1989) 44, 47, Tsujimoto Kiyomi 145
6 78, 83, 90, 92, 150 Tsukamoto Saburø 84
7 Takeshita faction (Keiseikai) 46, 48, 49, Tsukamoto Seiji 30
59–60, 88–9 Tsushima Juichi 25
8
Takeshita, Noboru 47, 59, 69, 80, 83, Tsuzuki Keiroku 27, 39
9 88, 91, 150, 162nn17,1, 164n5 26th February Event (1936) 33,
40111 Takeuchi Fujio 163n4 162n12
1 Tanaka Cabinets: (1927–1929) 28;
2 (1972–1974) 44, 165n16 Uchida Y¥ya 23
3 Tanaka faction 43, 46, 47, 48, 49, United Kingdom: civil service 147;
44 162n16 economic policy 7; political advisers
45111 Tanaka Giichi 23 146
192 Index
United States: bureaucracy and Yamagata Aritomo 22
Congressional power 17, 18; and Yamagata Cabinet, Second
Japanese economy 144 (1898–1900) 22, 29
Uno Cabinet (1989) 47, 150, Yamagiwa Masamichi 25
165–6n16 Yamaichi Securities Company 94,
Urgent Countermeasures for 100–2, 117, 120, 155
Stabilization of the Financial Yamamoto Cabinet, First (1913–1914)
System (1997) 156 28, 29
Urgent Measures for Early Yamamoto Gonnohyøe 23
Improvement of the Financial Yamanaka Sadanori 90, 92, 111,
System Bill 158 166n19
Urgent Measures for Financial Yamazaki Taku 67, 68, 69, 110, 111,
Stabilization Law 156 128, 133
Ushio Shigenosuke 30 Yanagisawa, Mr 169n7
Utopia study group 59 Yasui Eiji 30
YKK group 67, 68, 111
value-added tax see consumption tax Yonai Cabinet (1940) 161n11
vice-minister system 142, 147 Yosano Kaoru 69
Yoshida Cabinets (1946–1954) 40
wage bargaining organizations, Yoshida Shigeru 40
historical institutional approach 6 Yoshihara Saburø 30
Wakatsuki Reijirø 23, 25 Yoshino, Shinji 161nn6–8
Wakui Yøji 72–3 Yotø Shinsa system 47, 143
Watanabe faction 69, 70 Yuasa Kurahei 30
Watanabe Michio 97–8
Watanabe Shøzaburø 30 zaibatsu (big business groups) 31–2
Watanuki Tamisuke 47 zoku system 46, 50, 51–2, 142, 143,
Wright, Maurice 52–3 162n19
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