Political Economy of Social Capital in Japan 1

The Political Economy of Social Capital in Japan: How Welfare Institutions and Industrial
Relations Shape Social Trust
Research Paper 5150011
Clement Nocos, ID 51-148233
Supervisor: Professor Junko Kato
21 May 2015

Dual Degree – Master of Public of Public Policy
International ProgramPolitical Economy of Social Capital in Japan 2

Abstract
Japan has been a challenging country to categorize for foreign observers and scholars of comparative
political economy. In the variety of typologies and frameworks that have been developed to explain thevariance in welfare and production regimes between economically developed capitalist democracies,
Japan’s position within these clusters has been difficult to place. The trouble in placing Japan within thesecomparative frameworks also complicates the analysis of social capital in Japanese society. Social capitalcan be briefly defined as the varying levels of trust, norms of reciprocity, and networks used tocollectively overcome social dilemmas. Institutions are influential in the generation of generalized trustand it would be expected that different institutional arrangements produce varying levels of generalized
trust and patterns of institutional trust. Japan’s market-based social welfare system produces peculiarsocial capital outcomes that differ greatly from archetypical production and welfare regimes.
Liberalization and resultant changes to wage and labour structures in Japan have not destabilized levels ofsocial trust as in other advanced, capitalist democracies, but divergent trends in vertical trust between
market institutions and partisan institutions have implications for public policymakers.

Contentsi.

Introduction: Japan’s Puzzling Position and Social Capital

pp. 3

ii. The Relationship between Welfare and Social Capital

pp. 4iii. Varieties of Capitalism, Welfare Worlds, and Complementarity

pp. 8

iv. Mapping the Japanese political economy and its historical development

pp. 13v. Macro-Level Observations

pp. 18vi. How does Japan’s political economy produce these social capitaloutcomes?

pp. 27a.

Distancing the state from the coordinated market economy

pp. 27b.

Dependence on market institutions for social welfare

pp. 30c.

Solidarity-coordination trade-off

pp. 33vii. Micro-Level Regression Analysisviii.

pp. 37a. Varieties of Institutional Trust

pp. 40b. Individual Economic Perceptions

pp. 41

Conclusion: Re-allocating Social Capital in Japan

pp. 42

Political Economy of Social Capital in Japan 3
Introduction: Japan’s Puzzling Position and Social Capital
Japan has been a puzzling country for foreign observers and scholars of comparative political
economy to categorize. Through the lens of Gøsta Esping-Anderson’s welfare regimes typology (1990), it
is unclear whether Japan’s developmental welfare state regime should be categorized as a conservative
regime, liberal regime, a hybrid of the two, or something else entirely unique (Esping-Andersen, 1997).
Though low levels of social expenditure by the Japanese government and dominant private welfare
provision follow along the lines of a liberal welfare state, familial social policies and occupational
segmentation also give the country some conservative welfare regime characteristics. Through the lens of
the Varieties of Capitalism framework, Japan is less ambiguously a coordinated market economy (CME)
as opposed to a liberal market economy (LME) (Hall & Soskice, 2001). However, Japan differs from mostCMEs with its work-based focus on social welfare and the relative absence of organized labour ineconomic coordination (Estevez-Abe, 2008). The dual, work-based social security scheme also
differentiates welfare provisions between workers within a single industry or firm, constructing in-groups
and out-groups receiving different sets of benefits and protections that are segmented more strongly thanother conservative welfare state complemented by a CME system. Furthermore, with the onset of global
liberalization pressures, these arrangements of Japan’s political economy face the need for structuralreforms to adapt to an increasingly volatile global economic environment.
The difficulty in placing Japan within these comparative frameworks also complicates analysis ofsocial capital in Japanese society. “Japan is often cited as a country rich in social capital” (Inoguchi,
2002). However, the social and economic inequality that has grown in the country within the past decadeshould have the effect of weakening trust and networks. The generation of social capital depends largely
on how institutional arrangements are designed and developed, and their propensity to generate trust,norms, and networks (Kumlin & Rothstein, 2005). The way welfare institutions and industrial relations
are structured, for example, can influence the strength or weakness of generalized trust in a society by
way of the equalizing mechanisms that distribute resources fairly and impartially. While countries withconservative welfare regimes are expected to maintain lower levels of social solidarity than the Anglo-

Political Economy of Social Capital in Japan 4
Saxon, liberal welfare states and production regimes (Larsen, 2013), Japan’s ambiguous position
warrants further analysis into the relationship between institutions and social capital.
The arrangement of Japan’s political economy therefore leads to some questions for investigation.
Does institutional trust as an independent variable have an effect on generalized social trust as adependent variable? Do some institutional arrangements generate social capital better than others? Whateffect do processes of institutional change have on social capital? What are the determinants of trust inJapan and do these differ from the determinants of trust in other developed, capitalist democracies? Dolabour market out-groups trust less than in-groups in Japan? Furthermore, are the trends in social capitalalso having an adverse effect on Japan’s economic policies and democratic processes, such as thedifficulty in implementing consumption taxes and recent record-low voter turnout? What implications
does this have for good governance and public policy? This research paper will consider Japan’s
institutional arrangements through the complementarity of its production regime and welfare state, anddevelop a framework for explaining their effects on social capital. This will include an empirical analysis
using OECD and World Values Survey (WVS) data for a macro-level comparative analysis between
Japan and other developed, capitalist democracies. A micro-level, logistic regression analysis using WVS
and Japanese General Social Survey (JGSS) data will also be used to illustrate the determinants of social
trust in Japan and the model archetype regimes of Germany’s conservative-CME and the liberal-LME
regime of the United States.

The Relationship between Welfare and Social CapitalSocial capital can be briefly defined as the varying levels of trust, norms of reciprocity, andnetworks used to collectively overcome social dilemmas (Ahn & Ostrom, 2008). A high level of social
capital is often associated with effective collective action, good governance, a robust economy, anddemocratic efficiency, while poorly performing political and economic institutions are usually equatedwith the absence of social capital. This is because “social capital, by definition, includes all thosebehavioural dispositions that help to reduce transactions costs and to overcome the undersupply of publicPolitical Economy of Social Capital in Japan 5
goods that results from the propensity to be a free rider,” (Offe & Fuchs, 2002). Therefore, variations in
the level of political and economic performance over time between nation states can be explained in partby the varying levels and patterned characteristics of social capital. In much of the literature, trust is held
as the most analyzed and integral component of social capital. There are also distinct types of trust. Social
horizontal trust is the generalized or horizontal trust people have towards one another, whether between
recognized people or strangers; it is indicative of society’s capacity or propensity for collective action.
Institutional vertical trust refers to the social capital between groups of individuals and the institutions
with which they interact. Institutional vertical trust may indicate the source of generated social capital,
depending on the institution’s capacity for impartiality, fairness, and redistribution (Rothstein & Stolle,2008). Thick and thin social capital, inward looking and outward looking social capital, as well as
bridging and bonding social capital tie networks and communities together by forming trust between andwithin in-groups and out-groups (Putnam & Goss, 2002). Reciprocal norms like meritocracy can help
networks generate bridging social capital.
Of primary analysis for this research paper are the effects that Japanese institutional arrangements
have on social trust and institutional trust, as well as the in-group and out-group dynamics of social
capital in Japan’s political economy. While levels of vertical trust influence the level of horizontal trust,horizontal trust does not have any effect on vertical trust (Eek & Rothstein, 2005). This implies that thegeneration of social trust is related to institutions in which citizens place high levels of confidence, whilehigh levels of social trust can also exist alongside low confidence in other institutions. Furthermore, there
are a variety of types of institutions that maintain varying levels of vertical trust and may not distributegeneralized trust evenly throughout Japanese society. There are differences in perceptions between
distinct partisan-political institutions, order institutions, power-checking institutions, and market
institutions (Rothstein & Stolle, 2008). Variance in the types of institutional trust may depend on theways that these institutions are arranged to promote socioeconomic equality, and their capacity to
produce perceived impartial and fair distributive outcomes. Trust in order institutions, for example, isusually high in democracies: institutions like courts and police in the justice system are usually expectedPolitical Economy of Social Capital in Japan 6
to treat citizens impartially and provide just outcomes. This will be elaborated on further in the discussion
on the relationship between institutional arrangements and social capital.

Institutional
Arrangements

Level of
Socioeconomic
Equality

Varying Levelsof Social Capital
Indicators

Democratic
Outcomes Efficiency &Efficacy

Figure 1 – Relationship between institutional arrangements and social capital.

The generation of social capital depends largely on how institutional arrangements maintainsocioeconomic equality. Though major proponents of social capital sometimes negate the effectiveness ofstructures and institutions as generators of social capital (Putnam, 1993), the specific design of welfare
policies and institutions matters for the production of social capital (Kumlin & Rothstein, 2005). The
institutional approach centres on the role of organizations and networks that enable the generation ofsocial capital through the establishment of reliable contracts between citizens and the enforcement ofrights and rules that sanction freeriding. A welfare system that fosters socioeconomic equality andfrequent contact with welfare institutions, whether based on the state, market, or civil society, can lead toan increase in social trust among people that benefit. In universal welfare states, where state mechanismsof redistribution promote equality and social protections, enforcing social contracts with little distinction
between “have” and “have-not” groups, generalized trust is strong among citizens. Experience withmeans-tested state welfare programs, however, tends to erode social trust as have and have-not groups arevisibly formed under these kinds of institutions. Means-testing and dualization of qualifications forbenefits are typically related to mistrust between in-groups and out-groups (Larsen, 2013). Depending on
how they are designed, welfare programs and institutions have the capacity for “making or breaking”
social capital (Kumlin & Rothstein, 2005). Furthermore, with stronger resource redistribution andsocioeconomic equality, a majority of the population is more inclined to have an optimistic attitude

Political Economy of Social Capital in Japan 7
towards engaging with others. A perceived even distribution of resources also consolidates shared values
and experiences of the community, as poorer and wealthier classes are not separated by wide normative
distances (Uslaner, 2002). Institutions and redistribution as a source of social capital implies that, byinvesting in institutions, social capital can be generated to produce more democratic and efficientinstitutions (Brewer, et. al., 2014). Democratic outcomes such as varying levels of efficiency through the
speed of the decision-making process and varying efficacy through the level of consensus can, in turn,impact institutional arrangements in a feedback effect by influencing how policymakers maintain andadjust institutional arrangements.
What should be noted in this analysis, however, is that welfare provision is not exclusively to thestate; private actors, non-governmental organizations, and the market are also able to provide equalizing
welfare that helps generate social capital. It should also be noted that the sheer size of the welfare state or
the sums of social expenditure are also unrelated to the variance in social capital. For example, thoughFrance has some of the highest social spending in the OECD as a proportion of GDP (OECD, 2014), it
only has middling socioeconomic equality among those qualities and low levels of social trust (World
Values Survey, 2014). Moreover, though a state-centred approach to trust has predominated theinstitutional social capital literature, with a particular focus on Nordic model countries in contrast to
Anglo-Saxon model social welfare institutions, little has been explored on how welfare arrangements
provided by market and non-state institutions also affect social capital. Though countries with theuniversal welfare state model are known today to foster higher levels of social trust, during the “GoldenAge” of the welfare state in the post-Second World War prosperity, liberal, market-based systems ofwelfare also thrived with high levels of social trust (Larsen, 2013). This suggests that merely maintaining
a universal welfare state and socioeconomic equality are not the only ways to foster high levels of social
cohesion in a country. How institutions deliver equalization also needs consideration. Even with weak
welfare provisions from state institutions, high levels of social capital can be generated by equalization
through the market, given good economic conditions and market institutions that effectively equalizes the
distribution of wealth and income. Also important for social capital is the perception of socioeconomic

Political Economy of Social Capital in Japan 8
equality among members of the imagined community (Larsen, 2013). Citizens that tend to feel neighbours
or strangers are being treated unequally, despite living in a country with low levels of inequality or living
comfortably themselves, are still less inclined to trust most people. Perceptions of public safety, economic
security, and free-riding amongst the imagined community can have beneficial or detrimental effects withregards to social capital. Analyzing these perceptions also helps us to understand different attitudes
towards social trust between the different in-groups and out-groups of segmented societies (Larsen, 2013).
How structural inequalities affect social capital and its resulting democratic outcomes in Japan will befurther discussed in this paper.

Varieties of Capitalism, Welfare Worlds, and Complementarity
For comparing national systems of political economy, Hall and Soskice’s (2001) “Varieties ofCapitalism” and Esping-Anderson’s (1990) “Three Worlds of Welfare Capitalism” provide usefulframeworks for analysis. The Varieties of Capitalism approach focuses on economic actors and the arenas
in which they interact on the production side of the political economy. Hall and Soskice (2001)
distinguish between the Coordinated Market Economy and the Liberal Market Economy and thearrangements in which industrial relations take place. CMEs depend on active coordination, information
sharing, and strategic bargaining between market and non-market actors. Non-market relationships are
regularized and institutionalized to coordinate economic actors. LMEs, on the other hand, depend on
economic signalling, hierarchies, and competitive market arrangements to coordinate actors who are more
independent and decentralized. Market competition rather than cooperation characterizes the interactions
between economic actors in LMEs. Though market relations are important for economic actors in all
capitalist economies, not all are fully mediated by market forces. Still, the degree to which economies rely
on market mechanisms and the types of institutions that guide coordination differ between CMEs andLMEs. Furthermore, there are patterned clusters of countries that fall into these types of arrangements:
LMEs are generally comprised of the Anglo-Saxon countries, while CMEs best describe Continental
Europe, Scandinavia, and Japan (Hall & Soskice, 2001). However, Japan differs from most CMEs inPolitical Economy of Social Capital in Japan 9
important ways, including that social protection is largely work-based, much like in LMEs (Estevez-Abe,2006). The relative weakness of labour unions and the complacency of the labour movement withbusiness and state actors positions Japan’s political economy further away from the European models andcloser to Anglo-Saxon systems.
Esping-Andersen’s (1990) distinct welfare regime typologies also provides a complementarystate-centred framework for analyzing the arrangements of institutions by the degree of welfare rights
commodification between states and markets. Esping-Andersen distinguishes between three types of
welfare state regimes: liberal, conservative, and social democratic. Liberal welfare regimes provide themost commodified welfare, relying on measured assistance, modest universal transfers, or modest-social
insurance plans dominated by market provisions. Benefits are normally targeted towards low-income state
dependents, founded on liberal work-ethic norms. These regimes establish an order of stratification thatblends relative poverty for state-welfare recipients and market-differentiated welfare for the majority
outside of the working class (Esping-Andersen, 1990). Social democratic, “universalist,” welfare regimes
are the most decommodified in providing welfare as a social right, where the welfare state promotes
equality of the highest standards to working and middle classes and displaces the market. These regimes
are also related to higher levels of social capital indicators. Conservative welfare regimes preserve status
differences between classes and occupations, where the state still displaces the market as the main
provider of welfare but to certain segments of society. Shaped by traditional Christian values, theseregimes foster welfare systems meant to preserve traditional family structures through meager childbenefits and an emphasis on familial care. Because of social segmentation and the dualization of welfare
recipients between in-groups and out-groups, these regimes are middling in Esping-Andersen’s scale ofcommodification (1990). Liberal welfare states are comprised of Anglo-Saxon countries, Continental
European countries generally maintain conservative regimes, and the Scandinavian countries aredescribed as social democratic regimes (Esping-Andersen, 1990). Japan features a fusion of key elementsfrom conservative welfare regimes such as occupational segmentation and familialism along with liberal,
American-style dominance of private welfare plans and low public provision of social welfare, to give thePolitical Economy of Social Capital in Japan 10
appearance of a hybrid system (Esping-Andersen, 1997). The implications of Japan’s rather ambiguous
position as either a hybrid liberal-conservative regime or sui generis welfare state should also be expected
to have particular effects on the characteristics of the social capital it generates.

ConservativeCMEs
Germany
Belgium
Netherlands
Italy

Austria
FranceSpain

Liberal-LMEs
Japan

United Kingdom
United States
CanadaAustralia

Figure 2 – Japan between conservative-CME and liberal-LME typologies.

As political scientists debate the different groupings based on similar political and economic
types, their categories and criteria sometimes run parallel to each other. It is immediately apparent that
the LME and liberal welfare state regime categories follow similar groupings of countries, as do CME
and corporatist/social democratic regimes (Hall and Soskice, 2001). More importantly, even though bothtypologies struggle to place Japan firmly within clustered groupings of similar political economies, they
do provide foundational frameworks with which to analyze Japan’s highly-coordinated market economy
and highly-commodified welfare state in comparison to other countries. While it may or may not be
possible to classify the Japanese variety of capitalism, it is still useful to evaluate the institutional
performance of Japan’s arrangements within these comparative frameworks. Despite the different
empirical and theoretical frameworks of how Varieties of Capitalism and Welfare World typologies areorganized, they “pair up” (Haddow, 2008) or, rather, these welfare and production regimes appear tomutually support each other in the national economy. Though they involve different actors andPolitical Economy of Social Capital in Japan 11
institutions, both typologies come together and exert a looped causal influence on one another to produce
different sets of outcomes. For example, strong unions and collective bargaining in CMEs have the effectof equalizing income distributions, levelling the ground on which more egalitarian welfare states are
established (Schröder, 2013). Underlying both frameworks of analysis is to what degree societies rely onmarket mechanisms to govern production and distribution, though Varieties of Capitalism focuses on the
production side while Welfare World’s focuses on state distribution. This complementarity also helps to
explain how different institutional arrangements generate social capital through their resource
distribution mechanisms. The LME cluster and their complementary liberal welfare regimes focus onmarket-based welfare schemes and less state-centred social protection. CME cluster and conservative
regimes focus on retaining a highly skilled workforce and a high degree of institutional coordination.
Table 1 below illustrates the strengths and weaknesses of both typologies and how each can be used toreinforce the explanatory weaknesses of the other.

Weakness of typology
Varieties ofcapitalism

Welfare state
research-

Solution by complementary typology

Lacks a dynamic framework toconceptualize institutional change. Success of ‘intermediary and ‘failure’ of pure
Very rigid model, cannot explain cases can possibly be explained by welfare
performances of a number ofstate research.
countries.

Cannot explain firm performance.

Can possibly be explained by VoC.

Table 1 – Complementarity of Varieties of Capitalism and Welfare Worlds typologies (Schröder, 2013).

The frameworks also help to describe the liberalization trajectories of these systems. This isuseful for analyzing the relationship between institutional arrangements and social capital because, withchanges to the global economic environment, the effectiveness and efficiency of social capital generationfrom these institutions should also change over time. For example, the decline in social capital amongliberal-LMEs over the past several decades has been attributed to the incapacity of these institutions tomaintain equalization during periods of economic volatility, first realized during the global energy crises

Political Economy of Social Capital in Japan 12of the 1970s (Larsen, 2013). Among CMEs there are also differences in the effects liberalization has hadon coordinating institutions over time, between CMEs paired with conservative welfare regimes and thosecomplemented by universal welfare regimes. For many conservative-CME regimes, institutional rigidity
and strategic coordination are maintained at the cost of growing inequality which, in turn, heightens
conflict between labour market insiders and outsiders. In universal-CME states, policy preferences formaintaining the welfare state and socioeconomic equality have come at the cost of coordination andflexibility and amicability in the labour market (Thelen, 2014). In the context of Japan and how its
institutional arrangements have coped with economic crises alongside a critical demographic shift, theseframeworks help to explain the variance in Japanese social capital compared to other industrializedcountries, and how that variance has changed or stabilized over time.
In much of the Varieties of Capitalism and Welfare Regime literature, it is generally expected that
universal-CME countries maintain higher levels of social capital because of their emphasis on crossnational solidarities between members of the imagined community, and between citizens and institutions
through the provision of both an active labour market policy and universal welfare state (Kato &Rothstein, 2006). Liberal-LME states once maintained high levels of social trust that has declined since
the post-war “Golden Era.” Because of the market-based provision of welfare for the majority and thenature of inter-coalitional conflict in these set-ups, vertical institutional trust in political and powerchecking institutions is expected to be low, while the trust in other institutions of the order or market typeare expected to be higher. In conservative-CMEs, due to the social segmentation of welfare and anemphasis on social stability, social trust would be expected to remain low; along with vertical trust inpolitical, market and power-checking institutions; and trust in order institutions ought to be high. Though
in recent years, conservative-CMEs may have lost some economic efficacy relative to liberal-LMEs (Witt,
2006), the way that conservative-CMEs have had to readjust and cushion the effects of globalization may
differentiate their social capital outcomes from that of liberal-LMEs (Larsen, 2013).

Political Economy of Social Capital in Japan 13
Mapping the Japanese political economy and its historical development
Before any predictions can be made as to the relationship between the social capital andinstitutional arrangements of the Japanese political economy, its position between these typologies should
be mapped to provide comparative context for this analysis. The difficulty of categorizing Japan as aconservative-CME comes from the extreme dualism between in-groups of mostly skilled, unionized, core
workers employed by large firms and the out-groups of part-timers, precariously employed, theunderemployed, and the unemployed. The Japanese state is still involved in the coordinated economy,
however, it does not directly provide welfare. Instead, the government relies on propping up large firmsthat employ a substantial portion of the labour force to fulfill the role of social welfare provider (Schoppa,
2006). Though a small liberal welfare state typology may best describe the meager public spending of theJapanese government, there are principle differences between Japan’s social programs and the meanstested or meager-universal programs of the Anglo-Saxon cluster countries. Public healthcare spending inJapan is high compared to liberal-LMEs countries, as a rapidly aging population puts strain on the
country’s health systems (OECD, 2014). Unlike universal or means-tested healthcare schemes in otherAnglo-Saxon countries, those not covered by an employee health insurance program enrol in the National
Health Insurance scheme. The lack of differentiation between either health insurance programs gives
Japan’s healthcare system a quasi-universal characteristic. Basic pension schemes are also provided by thewelfare state, but are expected to be complemented by work-related pension plans. For labour market
insiders, pension coverage is much more generous than for outsiders.

Political Economy of Social Capital in Japan 14

Table 2 – Degrees of welfare decommodification vs. degree of coordination of production regimes (Schröder, 2013).

Some scholars of political economy argue that these typologies as comparative analyticalconcepts are useless when analyzing Japan, due to the inadequacies of decommodification as a criterion
for categorization and inconsistencies of policies between countries of the same regime identities (Kasza,
2006). Still, the purpose of this analysis is not to categorize Japan within these typologies, but to map its
position relative to the regime clusters to point out how different institutional arrangements affect social
capital, or more directly, social trust and institutional trust. Between the liberal-LME cluster and theconservative-CME cluster, it is not entirely clear where in the middle the Japanese political economy
should be placed; is it closer to the Continental Europe model or the Anglo-Saxon model? Placing theJapanese economy along two scales measuring the degrees of welfare state universalism and degrees of
economic coordination, Japan’s position becomes less ambiguous (Schröder, 2013).

Political Economy of Social Capital in Japan 15
In Table 2 below, the high degree of market coordination in Japan places it closer towards theconservative-CME cluster than to the liberal-LME cluster, albeit at the extreme end of the state
redistribution spectrum when compared to the model European countries. Despite frequently being
described as having attributes of both clusters, the superficial characteristics of Japan’s institutionalarrangements are rooted in its economic development. Before analyzing how these institutionalarrangements produce social capital outcomes in Japan, this paper will briefly consider its historicalfoundations.
Compared to the other advanced capitalist democracies, Japan’s industrialization developed rather
late. This not only influenced a difference in the speed of industrial growth, but it also created a variancein the productive and organizational structures of industry (Geschenkron, 1962). Borrowing welfare andproduction model regimes from other countries that started out with successful development strategies,
the Japanese government after the Meiji Restoration set out to implement the foundational policies ofJapan’s development political economy. Post-restoration policymakers settled on the Modell
Deutschland, Bismarckian system of contributory social insurance. The foundations for the in-group andout-group dualism in Japan’s modern political economy were set during this period with the intention ofpreserving the pre-restoration system of social status in the feudal economy and maintaining social
stability after the domestic conflicts that came with the end of the of the Tokugawa Shogunate (Schröder,2013). Japan, however, did not develop the same policy trajectory as Germany had due to the historicalcircumstances surrounding its economic development and later period of development. While Japan’s
industrialization was first sparked by gaiatsu foreign pressures and the rapid developmental catch up toWestern counterparts, German unification in 1871 was a result of industrialization that had alreadyhappened with the pre-unification Zollverein customs union established earlier in the 19th century. The
prominence of large, centralized zaibatsu firms as opposed to the decentralized Mittelstand model left
economic coordination in Japan to employers, excluding organized labour from the coordination process.
The development of health insurance and social security schemes, as well as industrial relations, in thePolitical Economy of Social Capital in Japan 16
first half of the 20th century also followed the same patterns as other Bismarckian systems in the 19th
century, though they had less time to mature with the onset of the Pacific War in the 1930s.
On the foundations of pre-war arrangements, the institutions of Japan’s post-war
developmentalist economy were built again with the goal of catching up to the West (Streeck &Yamamura, 2003). The dual structure niju kozo system of productivity was again consolidated in the
1950s and 1960s to supplement welfare and to facilitate the government’s “Income Doubling Plan” which
relied on economic growth and the market for social policy (Milly, 1999). Policymakers in the post-war
reconstruction set goals to eliminate class conflicts while weakening organized labour by establishing a
middle-class and a welfare system dependent on economic growth management. By the 1970s, Japan
looked more like a liberal welfare state combined with a coordinated market economy, despite theuncharacteristic weakness of organized labour. Business groups and industrial networks coordinated withthe government to fulfill Income Doubling Plan goals by promoting economic growth as a means to theend goal of economic welfare (Milly, 1999). This is not to say that labour was totally excluded fromcoordinated market processes, as unions and other workers institutions are still seen as essential
complements to Japanese business management (Witt, 2006). Rather, their influence on economic policy
was limited due to already generous benefits provided to those in-group members of labour unions,enabling their complacency with employers. Though health and pension programs were broad andbenefits were meagre, like in the Anglo-cluster of liberal welfare states (Esping-Andersen, 1999), Japan’s
institutional arrangements provided a much greater degree of social protection than its small social
spending would indicate (Estevez-Abe, 2008). The economic growth management strategy maintained bypolicymakers relied on policies of work-based protection that supported guarantees of lifetime
employment and generous seniority wages to complement a small welfare state. Until the “Lost Two
Decades” that ended the success of Japan’s development economy, the historical progress of Japan’s
welfare and production regimes developed the confounding complementarities that make it difficult toposition the country’s political economy system relative to other advanced, capitalist democracies.
Japan’s highly coordinated economy, without the state redistribution normally associated with

Political Economy of Social Capital in Japan 17
CMEs, worked well until the 1990s. High growth under these production and welfare regimes propelled
Japan, at its height, to the position of the world’s second largest economy, but its slow economic decline
further hampered by dramatic demographic aging have made these complementary arrangements
unsustainable. Corrective measures to resolve the economic decline such as political reforms implemented
in 1994, attempts to fix structural economic issues like seniority wages and lifetime employment
guarantees, and recent macroeconomic policies changes under the “Abenomics” brand have yet to
produce an economic recovery. Though worsened by the 2008 Great Recession and the 2011 Tohoku
Earthquake, the Japanese development economy has still been slow to adjust to trends of liberalization.
Why has an economic model that had performed well above average for several decades failed to fasttrack the implementation of policy changes that could help in its recovery? Some say that the Japanese
economy is a victim of its own success (Witt, 2006), but two decades on into sustained economic
stagnation this argument no longer holds. Furthermore, other attempts at structural economic adjustments,
such as the implementation of increased consumption taxes, have failed to gain broad support despite theintended benefits of these reforms. In Germany, on the other hand, unpopular social policy reforms, suchas the Hartz IV reform in 2005, were nevertheless enacted and led to a significant reduction in
unemployment and relieved some liberalization pressures on the country’s social welfare system. What
may be holding back Japanese policymakers from the autonomy to implement institutional adjustments inthe economy may be the misallocation of social capital, with trust directed to market institutions insteadof partisan institutions, as a result of the country’s solid institutional arrangements.

Political Economy of Social Capital in Japan 18
Macro-Level Observations

Table 3 – Income Inequality and Horizontal Social Trust. a OECD Stats (2008) b World Values Survey, Wave 5 (2005-2009)

Universal-CME regimes are generally expected to maintain high levels of horizontal social trust,
conservative-CME regimes are expected to foster lower levels of social trust, and social trust levels in
liberal-LME regimes finding themselves in between the other two typologies. But what would be Japan’s
expected social trust output? In empirical analyses, social trust is typically measured using the World
Values Survey question: ‘Generally speaking, would you say that most people can be trusted – or – thatyou can’t be too careful in dealing with people?’ This question reflects a respondent’s tendency to trust inothers and is therefore commonly accepted as a measure of horizontal trust. As high levels of trust areusually related to efficient democracies, economic growth, and satisfaction with society, this variable
captures what most social scientists look for in the study of social capital. The most important aspect ofsocial capital is that citizens believe they share the norm of not cheating each other and can therefore
trust, at the very least, most people (Larsen, 2013). Being closer to the welfare and production regimes ofPolitical Economy of Social Capital in Japan 19
the conservative-CME type, it would be expected that the output of Japan’s institutional arrangement
would be roughly similar levels of social capital. However, with similar redistributive outcomes, Japan’slevel of social trust fits among liberal-LME regimes. Though conservative-CMEs tend to have moreredistributive outcomes, institutional arrangements that foster social segmentation alongside decreased
economic efficacy result in lower levels of social trust for these countries. Despite heavy segmentation in

Social Trust in Advanced Capitalist Democracies Over Time
WVS1
19811984

WVS2
19901993

WVS3
19941999

WVS4
19992004

WVS5
20052009

WVS6
20102014

Trend

UK
Spain
US
CanadaFranceJapan
Finland
Italy
Australia
SwedenNorwayGermany
Netherlands
Denmark

43

44

30

29

30

.

-13

l

LME

35
41
49
25
42
57
27
48
58
61
32
45
53

34
51
53
23
42
63
36
.
66
65
38
54
58

30
36
.
.
42
49
.
40
60
65
42
.
.

36
36
37
21
43
57
33
.
66
.
32
60
67

20
40
42
19
39
59
29
48
68
74
41
45
76

19
38
.
.
39
.
.
54
65
.
45
67
.

-16
-3
-7
-6
-3
2
2
6
7
13
13
22
23

c
l
l
c
c/l
s
c
l
s
s
c
c/s
s

Ind-CME
LME
LME
Ind-CME
LME-CME
Nat-CME
Ind-CMELME
Nat-CME
Nat-CME
Ind-CME
Nat-CME
Nat-CME

Lib-LME mean
Cons-CME mean
Soc-CME mean

42
30
57

49
33
63

35
36
57

34
31
63

40
27
69

Welfare Varieties of Capitalism
Regime-2-3
12Table 4 - Social Trust in Advanced Capitalist Democracies Over Time, World Values Survey Wave 1 (1981-1984) - Wave 6 (20102014). Percentage of respondents who answer ‘Most people can be trusted’.

the economy through niju kozo labour market dualism, however, Japan deviates from the conservativeCME cluster. Though Japan’s position at this point in time is closer to the liberal-LME cluster, over timeit has also maintained a very stable level of social trust. Unlike the other liberal-LME countries where
social trust indicators have varied widely in the past three decades, Japan’s social trust has remained
remarkably stable, only dropping 3 points between 1984 and 2014.

Political Economy of Social Capital in Japan 20
Though the level and consistency of social trust in Japan has been associated with the lack ofradical change in the Japanese business system (Witt, 2006), what are the social capital generating
mechanisms in the political economy that have been causing these outcomes, and why have they remained
intact despite decades of liberalization? In other conservative-CMEs like Spain and France, for example,
economic crisis and the structural changes within the coordinated market economy have been associatedwith the decline of social trust, as their capacity to maintain socioeconomic equality has diminished. In
Japan, however, a strong network of interlinked business groups through the keidanren federation,
keiretsu groups, research and development consortia, and a tripartite state-associations-firms nexus, alongwith strong arrangements between employers and labour, have yielded a stubbornness for structuralchange (Witt, 2006). The mechanisms behind this continued strength of economic institutionalarrangements and their effect on social trust will be further discussed in this paper.

Political Economy of Social Capital in Japan 21

Political Economy of Social Capital in Japan 22
Despite the economic stagnation of the last two decades, social trust in Japan does not seem at allaffected. If the diminished equalization outcomes of institutional arrangements under liberalizationstresses are supposed to have an effect on horizontal social trust, they do not appear to have an effect inJapan. However, when comparing cross-national levels of vertical trust, between Japan and thearchetypical regimes of Germany and the United States, it is clear that vertical trust varies between
institutions (Rothstein & Stolle, 2005): citizens make distinctions between partisan, order, powerchecking, and market institutions and can have varying degrees of confidence between them. Table 6
below categorizes some available variables from the World Values Survey that indicate vertical trust in avariety of institutions.
Partisan Institutions••••

Government
Political Parties
Parliament
Civil Services

Power-Checking
Institutions
•
•

Press
Labour Unions

Order Institutions

Justice System &CourtsMarket Institutions••

Major Companies
Banks

Table 6 – Distinctions between institutions and corresponding WVS variables for analysis (Rothstein & Stolle, 2005). Addition ofmarket institutions to the Rothstein & Stolle, 2005, model.

Citizens make distinctions between institutions and, depending on the institution’s impartiality, tend toshare opinions on their fairness and efficacy at generating equalization or redistribution. Citizens place
their confidence and trust in the institutions they perceive as impartial and equalizing (Rothstein & Stolle,2005). Institutions with higher levels of confidence may be the generating source of generalized trust in asociety whereas institutions with low levels of confidence might not be influencing the level ofgeneralized trust, or may even be having a negative effect (Eek & Rothstein, 2005). Changes ininstitutional trust over time could also be the result of institutional retrenchment or changes in theinstitution’s capacity to carry out equal treatment and resource redistribution. What follows is acomparison of the patterns of vertical institutional trust between Japan, the United States, and Germany
from the past three decades.

Political Economy of Social Capital in Japan 23

Political Economy of Social Capital in Japan 24

Political Economy of Social Capital in Japan 25

Political Economy of Social Capital in Japan 26
In Japan, confidence in partisan institutions is consistently much lower than in Germany or the
US. While in these two countries’ trust in partisan institutions has, at times, been higher than social trust,levels of partisan confidence in Japan never break this threshold. Though the level of confidence in US
partisan institutions is now roughly equal to Japanese levels, these are also accompanied by declines in
confidence in market and power-checking institutions. Even more unusual for Japan is the increase in thelevels of trust for power-checking and market institutions. In the last WVS Wave 6, 73.54% of Japanese
respondents said they had at least some confidence in the Press, 65.61% had confidence in Banks, and
54% had confidence in major companies. This deviates from the low levels of trust in market institutionsin Germany and the US, where confidence is ranked alongside low levels of confidence in partisan
institutions. Moreover, Japan’s increased confidence in the press and in major firms from rather expected,
stable trends appear to share a common point of departure after the first “Lost Decade”. Furthermore, therise of confidence in labour unions, which have historically played a limited role in the Japanese
production regime, has also increased within the same period of time, while political authority remains
weak (Witt, 2006). While the increased confidence in power-checking institutions follows German trends,
though to a more dramatic degree, the increased trust in market institutions is unique to Japan.
The high confidence of Japanese respondents to market-oriented institutions may be indicative of
those institutions’ capacity for impartiality, fairness, and equalization, where other institutions may beineffective or reversing these outcomes. High confidence in the press may also be related to declining
confidence in partisan institutions. What is even more puzzling is that, with Japan’s decade’s long
economic stagnation, market institutions are perceived to be more fair and impartial than partisan
institutions. Socialization and welfare happen around the workplace more intensely in Japan than in otheradvanced capitalist democracies, which may contribute to increasing confidence in market institutions
alongside the failure of partisan institutions (Witt, 2006). With uniquely consistent levels of horizontal
generalized trust, the characteristics of Japan’s institutional trust needs a more in-depth micro-level
analysis as to the mechanisms behind the relationship between institutional arrangements and social
capital in Japan.

Political Economy of Social Capital in Japan 27

How does Japan’s political economy produce these social capital outcomes?
Distancing the state from the coordinated market economy
In the post-war period, policymakers sought to institutionalize a rather limited welfare state tofocus on economic growth for the production of social welfare. For an economy devastated by conflict, it
would have been difficult to establish a state system of redistribution without much wealth or productivity
to begin with; this meant limiting revenue-raising capacities early on which restricted the fiscal capacity
for the government to expand welfare provisions later, even during the most prosperous years of the
postwar economic miracle (Kato, 2003). In lieu of the direct provision of welfare through government
programs, the Japanese political economy features a highly interventionist state in the market(EstevezAbe, 2008). By acting instead to regulate domestic markets, finance infrastructure projects, andsubsidize sometimes inefficient industries like agriculture, the Japanese government was able to shift thesocial welfare burden onto market institutions. This arrangement worked well through the period of higheconomic growth from the 1960s until the Asset Bubble Crash of the early 1990s. Through the 1990s thegovernment was still largely removed from directly providing most of Japan’s social welfare, and instead
helped nudge the market to provide more distributive outcomes. Firms bore most of the burden,
complementing the state in providing near universal coverage for programs such as healthcare and social
insurance. Clientelistic relationships between major business and government bureaucrats and politicians
developed over the miracle decades to facilitate this level of coordination. Uninterrupted growth ensured
continued public support for the Liberal Democratic Party of Japan (LDP), and the development ofpolicies that focused on economic growth rather than state redistribution (Kato & Rothstein, 2006).
As global liberalization pressures began to strip the government of its ability to regulate its way topolitical and economic stability, however, this unsustainable arrangement neared collapse (Rosenbluth &Thies, 2010). By the 1980s, the economic management of the dominant LDP in government came into
question among the public. High profile special relationships between LDP politicians and industry
leaders turned into long and drawn out scandals in the late 1980s, and with the defeat of the LDP in thePolitical Economy of Social Capital in Japan 28
House of Councillors after the 1989 election, electoral reform came to the forefront of the political agenda(Shinoda, 2013). The aim of eliminating the old Single Non-Transferable Vote (SNTV) system was to end
the clientelistic relationship between politicians and industry. These “pork barrel” relationships came at
the cost of massive misallocations of capital and subsidies for inefficient industries while fuelling budget
deficits, limiting consumer choice, and providing opportunities for corruption. Without the capacity forfiscal expansion, the government could no longer support this kind of market coordination without
incurring already ballooning debts. Large, competitive firms were no longer willing to support anelectoral system that did not help them. Alongside international market pressures, domestic trends like an
aging population moving from rural regions to urban centres also shifted the policy preferences of theelectorate from agricultural protections to concerns about prices and taxes (Rosenbluth & Thies, 2010).
The change in 1994 to a parallel First Past the Post (FPTP) and Proportional Representation (PR) electoral
system in the House of Representatives, with the majoritarian FPTP contesting more seats than the PR
ballots, drastically altered the relationship between business and politics.
The end of SNTV also ended intraparty competition that, in turn, reduced the need for large sumsof money to build personal support networks linked to business. The electoral reform also shifted theattention of politicians from special economic interests to the economic concerns of the average voter inthe political centre (Rosenbluth & Thies, 2010). The regulation of Japan’s political economy moved in a
majoritarian direction that undermined cartels and renewed government priorities. The“Westminsterization” of Japanese politics also had an effect on finance: with fewer regulatory shelters
provided by the government, banks were no longer afforded protective regulation, and domestic capital
became more mobile (Estevez-Abe, 2008). With a lack of access to international financing, small- andmedium-sized enterprises cut labour benefits and job security guarantees across the board, while major
firms reinforced a dual system of core and peripheral workers. Though the directly equalizing outputs ofpartisan institutions in Japan were already relatively low due to a dependence on market-based welfare,
the government’s role in market intervention still built some trust through the visibility of its coordinatingrole in the market and the perception that it was delivering equalizing outcomes. The shift from SNTV toPolitical Economy of Social Capital in Japan 29
the FPTP-PR system in 1994 limited the state’s role in redistribution even further by eroding its visible
coordinating capacity in Japan’s economy.
Lastly, the change in electoral rules changed the dynamics of how politicians interacted with theirconstituencies. The decline in strength of koenkai after their reorganization and redistricting as part of the1994 package of electoral reform has decreased the visibility and presence of Diet members in thelocalities they represent. Laws preventing door-to-door canvassing and other campaign restrictions
weakened the public visibility of other Diet member candidates in their own districts (Shinoda, 2013).
Without regular interaction with these kinds of partisan institutions, citizens are more likely to feel
alienated from the political system. The further centralization of party control within the LDP and othercompetitive political parties has also increasingly kept the policy process behind closed doors as
executive governance has begun to dominate over the relatively open legislative processes of theprevious decades. After 1994, it was becoming clearer to citizens that market institutions, not partisan
institutions, were delivering impartial, distributive economic outcomes.
As trust in partisan institutions continued to decline after this critical juncture of electoral reformin 1994, trust in market institutions began to increase. Trust in power-checking institutions like the press
also increased after the electoral reform as trust in the political system decreased. Trust in organizedlabour also increased modestly after decades of irrelevance and complacency, as their role in supporting
adjustments in individual firms increased in significance. Overall, the government’s distancing from themarket and social welfare provision may have limited its capacity for generating social trust. Lastly, it
should be noted that this does not necessarily mean the Japanese economy has transformed into an LME
as a result of the weakening of the state’s coordinating capacity; despite the Westminsterization ofJapanese politics, the Japanese coordinated market economy still differs from Anglo-Saxon LMEs dueto the intensity of its open cooperation between market actors, in contrast to the competition that has
normalized in the Anglo-Saxon economies (Yamamura, 2003).

Political Economy of Social Capital in Japan 30
Dependence on market institutions for social welfare
The Japanese economy relies on market mechanisms to supply resource distribution more heavily
than most other capitalist economies. The government’s social protection system focuses on job creationand security through an active labour market policy, rather than paying direct social insurance benefits(Estevez-Abe, 2008). Instead, government spending concentrates on indirect intervention by increasing
labour demand through infrastructure investment or increasing demand in other related industries such as
resources and low-technology products. Firms are expected to take on the burden of structuraladjustments, keeping surplus labour on the job through mechanisms such as universal pay cuts, reduced
working hours, and transfers to lower-paying subsidiaries (Witt, 2008). Though an active labour market
policy is not uncommon in the social policy mix of other CMEs, the Japanese economy relies on it far
more as a form of social protection in lieu of direct social spending. Equalizing outcomes are therefore
delivered directly by market institutions instead of by welfare institutions, but at the cost of market
efficiency. A key point to the stubbornness of institutional change in the Japanese economy is theadjustment cost of social obligations that firms and industries maintain compared to other countries,
where states, or the individual in the case in the United States, take up the burden of adjustment (Witt,
2006).
Though economic growth did take off in the mid-20th century, the intense market coordination
behind Japan’s success is described by Thies and Rosenbluth (2010) as the “dirty secret” behind theprogress. Government policies that led to market dependence on social welfare tolerated and sometimes
encouraged unsustainable clientelism and a tightly regulated domestic market. The decline of theseclientelistic relationships between the government and producers after the 1994 electoral reforms has leant
to an erosion of coordinating capacity between the state and the market. Though increasing demographicpressures have demanded the Japanese government to spend more than ever on public expenditures(OECD, 2014), the perception of indirect benefits or redistributive capacity of partisan institutions has
declined. This has also influenced the decline in the economic efficacy of market institutions that struggle
to adjust to market conditions without government protections. Paradoxically, however, this has not meanta weakening of employee-employer relations.

Political Economy of Social Capital in Japan 31
In Japan, individual association with major firms are a leading source of group identity (Witt,
2006). Consolidating this relationship between citizens and market institutions during the development of
the Japanese economy were lifetime employment guarantees in major firms and seniority-based wages.
This wage model worked to provide broad social protections, benefiting male breadwinners directly andreinforcing conservative familial structures as the basis for welfare. Though coordination of the economy
worked similarly to the tripartism between the state, employers, and labour as in the Christianconservative democracies of continental Europe, labour’s weakness in this relationship was not due toopen suppression by the government or business, but due to the fact that those who were members oflabour unions already enjoyed very generous benefits and good relations with employers (Schröder,2013). For full-time, core employees of these firms, labour’s exclusion from coordination was due tocomplacency, rather than outright hostility by managers. Under the strain of an aging population, limits oftraditional mechanisms for maintaining surplus labour, and rapid technological change, Japan’s formerlyrobust labour market had to make adjustments to continue providing market-based welfare. Contrary to
the increasing animosity between labour and business found in LMEs, Japanese employers have actively
sought to intensify cooperation with workers at the firm level to enable wage restructuring (Thelen &Kume, 2003).
Japanese executives in major firms see labour unions as integral partners to coordinate with forrisk aversion and prioritizing firm survival (Witt, 2006). At the firm-level, however, instead of structuraladjustments to cope with global liberalization, a trend of intensified traditional job protections has beenpromoted, which is linked to the growing exclusion of workers outside the in-group (Thelen & Kume,
2003). Though labour market dualism has pervaded the Japanese economy since its post-war
establishment, this uchi-soto (inside-outside) distinction between labour market insiders and outsiders has
only intensified as firms belay structural reforms for maintaining their social obligations. With pressure toreform rather unsustainable labour market structures, instead of eliminating long-term employment
guarantees, firms and core workers have leaned towards wage structure reforms for labour market
outsiders. Japanese workers have seen a shift from traditional seniority-based wages to dual performancebased wages for low skilled workers and skill-based wages for skilled, mostly young, workers. There isPolitical Economy of Social Capital in Japan 32
an overall trend towards a shrinking core of mostly skilled workers within individual firms, who continue
to enjoy lifetime employment guarantees combined with a generous wage system against a growing
peripheral and precarious workforce of low-skilled labour (Thelen & Kume, 2003).
It would be expected that the growth in precariously positioned workers would lessen the social
capital-generating capacities of market institutions, as it would be assumed that those who can easily losein the job market are less willing to engage in trust with others. With performance-based wages andweakened job security, firms have thus far been able to sustain their core workforce with peripheral
workers taking on the brunt of liberalization burden. Firms have also remained competitive in attracting
young, highly-skilled workers with these employment guarantees. Peripheral workers are typically on
temporary or short-term contracts, are ineligible to participate in organized labour unions, and are lowskilled. The growing number of labour market outsiders not receiving the full benefits of market-based
welfare would be expected to lessen cross-national social trust because of the growth of inequality and theintensification of the uchi-soto dynamic. As insiders and outsiders work side-by-side under very different
conditions with different entitlements to benefits within the same company, it would be expected thatbonding social capital between insiders and outsiders would be difficult to generate (Hommerich, 2015).
Nevertheless, trust has remained stable in Japan for the past three decades, and institutional trust in market
institutions has grown substantially.
What may be facilitating this rather inconsistent characteristic of social capital in the Japanesepolitical economy is the belief that, with hard work and skill, there is still the possibility of finding
success within the system. People who believe they live in a meritocratic society, where a middle-classposition is within reach, are more inclined to trust fellow citizens (Larsen, 2013). Merit acts as a norm
bridging trust relations between in-groups and out-groups with the prospect of out-group members
becoming in-group members with enough work and determination. While the number of precariously
positioned workers compared to the proportion of core employees is growing among firms, it is notnecessarily the status of socioeconomic precarity that affects generalized trust; rather the perception thatbeing in a precarious position is a temporary state. The precariously employed and performance-based

Political Economy of Social Capital in Japan 33
wage earners have also grown in many other advanced capitalist economies and is not unique to Japan,
however, the increase in precarious labour in the Japanese economy has not had the same effect of
decreasing generalized trust compared to Continental European Countries. Theoretically, a market
economy can deliver a meritocratic middle-class society if opportunities are more equally distributed
from the beginning and if markets are perfect (Larsen, 2013). Though these conditions are never fulfilled
and despite the increasing importance of skill in the labour market, in Japan there is still an incentivized
perception that hard work can deliver on successful socioeconomic outcomes for the individual.
Perceptions have an important influence on social capital; the most important aspect of social trust is thatcitizens believe they share the norm of not cheating each other (Larsen, 2013). For low-skilled workers,
performance-based wages incentivize harder work, which can sometimes, if mismanaged as is often thecase, actually lead low-skilled, high-performing workers to earn equal or greater benefits than highlyskilled, low-performing core employees (Thelen & Kume, 2003). Though this incentive perception can beunsustainable in the long-term, it has been working to the advantage of firms thus far, as they are able tomaintain social solidarity and labour’s complacency while cutting the cost of maintaining long-term
employment guarantees and seniority wages. The influence of these wage structures, perceptions of
meritocracy, and institutional confidence on generalized trust will be tested in a micro-level regression
analysis in this paper.

Solidarity-Coordination Trade-off
Though the above analyses illustrate the mechanisms behind institutional trust and how this may
have an influence on social trust in Japan, the consistency of Japanese social trust also needs some
explanation. Among advanced capitalist democracies, the level of social trust has varied wildly. Though
coordinated market capitalism has sometimes been conflated with socioeconomic equality, the two do notnecessarily go together (Thelen, 2012); Japan’s highly coordinated economy and Anglo-Saxon level
equalizing outcomes attest to that. CMEs in most capitalist economies were not initially established topromote equality, but the association has had to do with variation over time in the scope of employer

Political Economy of Social Capital in Japan 34
coordination and the purposes of coordination, whether to enable profit maximization or social welfare(Thelen, 2012). The extent of employer coordination depends on the political coalitions that establishedand developed these institutions and the dynamics of chance within them. With the rebuilding of theJapanese economy in the post-war era, the focus on active labour market policy and education led someobservers to ascribe particularly Scandinavian characteristics to Japan in its welfare policy (EspingAndersen, 1997). In other CMEs, it was not until labour movements began to form political coalitions thatsought more equalizing benefits out of the state and the market that CMEs then began to deliverequalizing outcomes through the state and market. Despite the absence of organized labour, the politicalcoalitions of the early LDP and keidanren planned to use an active labour market policy to facilitate a
rapid economic growth strategy that relied on the market for equalization, firmly implanting labour’scomplacency to coordination primarily between the employers and the government. The coordinatedmarket economy in Japan was established by these first coalitions with the intention of facilitating social
solidarities, unlike in other CMEs where coordination was even established to sideline labour (Thelen,2012).
The coalitional dynamics and complementarity that was purposed for Japan’s market-based
program of welfare may be behind the stability of social trust through market institutions. Withliberalization pressures forcing structural changes in the political economies of advanced capitalist
countries, there is a trade-off between maintaining equality and maintaining coordination between
employers. For some economies, maintaining equality is prioritized over coordination, while for othertypes of economies there is a preference for maintaining coordination over equalization. Depending on theregime type, this can set a national economy on a particular trajectory of adjustment to these liberalizationpressures. In maintaining social trust and a complacent labour partnership, Japan’s liberalization trajectoryhas shifted along almost similar lines as the nationally coordinated Scandinavian economies, though witha slightly southward trajectory due to a decline in equality. Coordination in the Japanese economy has
shifted the most in recent decades, from being central in the sharing of information and financing in theJapanese business, to a gradual retreat from the business world after the 1994 electoral reforms. The mostnotable effect of the erosion of strategic coordination has been the withdrawal of political donations from

Political Economy of Social Capital in Japan 35
the Keidenran with the 2009 general election. Though there have been efforts to return political-business
relations to their previous strength, it is clear that the coordinating capacity of the state has been
diminished since the 1990s.

Figure 3 – Adopted from figure 4 in Thelen (2012). Three trajectories of liberalization of archetypical regimes. LMEs face
deregulation, Conservative-CME regimes are pushed towards further dualization, and universal-CME regimes are propelled ona flexibilization trajectory (Thelen, 2012).

Coordination in the Japanese economy has instead focused on firm-level restructuring for the sakeof maintaining generous benefits for labour market insiders, while maintaining a motivated peripheral
work force. Some would argue that the intensified dualization of labour in Japan should have an effect onequality (Thelen, 2012), however, incentives in this dualization and the perception of a meritocratic
economic system may be offsetting this effect. Figure 3 illustrates three trajectories of liberalization ofarchetypical political economy regimes. LMEs face deregulation, Conservative-CME regimes are pushed
towards further dualizaiton, and universal-CME regimes are propelled on a flexibilization trajectory.
When high-producing labour market outsiders are able to earn more than low-producing labour market
insiders, dualization in Japan may not have as strong of an unequalizing effect as it does on employer

Political Economy of Social Capital in Japan 36
coordination. As dualization becomes stronger, coordination has increased between workers andemployers within firms instead of between them. The flexibilization of Japanese labour market policies
has relatively maintained social solidarities, while the strength of market coordination has been
downloaded to the firm-level. Though inequality has gradually increased in Japan, like in most advanced
capitalist democracies, high coordination among businesses established alongside principles of social
obligation has had the effect of maintaining stable levels of social trust embedded in market institutions,which provide redistributive outcomes in the Japanese economy.
Though Thelen (2012) comes to the conclusion that intensified dualization in the Japanese CME
has set the country on a similar trajectory as Germany (towards widening inequality to preserve
coordination) the case of Japan is more nuanced. While dualization has lent to growing inequalities, social
cohesion has been maintained by broadly perceived meritocracy: the public perception that hard work
brings success. The prospect of equalizing social mobility enables strong social cohesion, thoughparadoxically it can also entrench status positions by enabling complacency with actors or even thepreservation of the un-equalizing institutions that facilitate this perception. Another problem with thisassertion is that Japan’s positioning in comparison to other types of political economies is placed quite a
distance from the German model. With a highly coordinated market economy and a highly commodified
welfare system, it may not be possible for Japan to increase inequality for the purposes of facilitating
strategic employer coordination, or face rather extreme levels of poverty. Furthermore, it is difficult toplace Japan on the same trajectory as Germany because strategic employer coordination in Japan has
actually intensified at the firm-level. While the strength of Germany’s industry-wide coordination
between employers has been preserved (Streeck, 2008), Japan’s micro-level coordination between firms
and workers has grown in order to enact structural wage reforms. This kind of market-based “flexicurity”
sets it on a similar trajectory as the universal-CMEs, however, due to the lack of public social safety net,
there are some downsides for equalization. Japan’s liberalization trajectory, therefore, starts from a
position of already relatively low equality and high coordination, and points in a direction middlingbetween LME deregulation and flexibilization.

Political Economy of Social Capital in Japan 37

Figure 4 – Original figure is adopted from figure 4 in Thelen (2012) with the addition of the circled trajectory by
the author to the original figure. Mapping the position and trajectory of the Japanese economy in relation toother advanced, capitalist democracies (Thelen, 2012). The originating point and trajectory of the Japanese
economy derived from previously mapped position (Schröder, 2013).

Micro-Level Regression Analysis

For a closer analysis of the mechanisms between institutions of the political economy andsocial capital in Japan, the influence of institutional trust, personal economic perceptions, and othertypical demographic variables such as age and education, will be tested against the dependent variableof social trust. If institutional arrangements are to have an effect on social capital, higher trust
institutions should have a significant influence on generalized trust, and lower trust institutions would
have little to no significant effect. How these institutions shape economic perceptions are also captured
by variables related to opinions on socioeconomic inequality, meritocracy, and feeling of job security.
To control, the typical correlation between membership associations and social capital indicators will
also be included in the models. Data from the World Values Survey, Wave 6, collected from 2010 to2014 will be used comparing Japan, Germany, and the United States due to the consistency in survey
methodology between these cases, the timeliness of the latest WVS Wave 6, and the adequate sample

Political Economy of Social Capital in Japan 38

Micro-Level Logistic Regression Analysis on
Determinants of Generalized Trust
DepVar - Social Trust
1 = most people can betrusted; 0 = you can’t be
too careful

Japan

USA

Germany

Japanese GeneralSocial Survey(2008, 2010)

Age

1.00
(.004)

1.01***(.003)

0.99*(.003)

1.01*(.007)

Education

1.14***(.036)

1.29***(.058)

1.09***(.028)

1.41***(.140)

Respondent’s income
decile1.05*(.020)

1.12***(.031)

1.12***(.037)

1.09**(.018)

Confidence: Major
Companies

1.35**(.152)

1.53***(.157)

1.16(.140)

2.79***(.468)

Confidence:
Parliament / Trust in
Ministries andGovernmenta

1.10(.127)

1.76***(.180)

1.47***(.160)

2.45***(.442)

Active Membership in a
Voluntary Association

1.41**(.158)

1.31*(.137)

1.29*(.138)

1.47*(.245)

Incomes should be mademore equal

0.88(.094)

1.03(.100)

1.25(.163)

1.07(.082)

Hard work brings
success

1.50***(.173)

1.23(.147)

1.18(1.31)

1.65*(.354)

I feel that my job issecure1.38*(.180)

1.70***(.183)

1.85***(.206)

1.63*(.333)

Constant

0.12***(.037)

0.01***(.004)

0.15***(.042)

0.05***(.028)

Pseudo R-Sq

0.04110.08670.05850.1488

N

1641

2099

1649

908

Table 10 - Micro-level logistic regression analysis of individual feelings and opinions on institutional trust, typical demographic
variables, and feelings of economic security and well-being. The dependent variable is a coded binary variable indicating
respondents who feel that ‘Most people can be trusted’. Data comparing countries are taken from the World Values Survey,
Wave 6 (2010-2014). To reinforce this analysis, an aggregated sample from the Japanese General Social Survey 2008 and 2010 issimilarly modeled. Odds ratios are presented with standard errors in parentheses below.
* = P ≤ 0.05; ** = P ≤ 0.01; *** = P ≤ 0.001. a To apply JGSS data to this model, a related but different variable “Trust in
Ministries and Government” was used to approximate trust in partisan institutions.

Political Economy of Social Capital in Japan 39
sizes in these three case countries. To supplement the findings from the WVS, data from the Japanese
General Social Survey will also be modeled similarly and run parallel to the WVS results. Datasetsfrom the 2008 and 2010 JGSS have been combined to provide a robust sample size.
The above model is based from Rothstein & Stolle’s (2008) individual-level multivariate
analysis that tests whether order institutions were an important factor influencing generalized trust. It
builds on the previous test to determine the influence that institutional confidence and feelings ofpersonal and social economic well-being have on generalized trust. To show the variance ininstitutional experience between countries, Japan is also compared to other regime archetypes: theUnited States and Germany. These cross-national comparisons are regressed using the WVS, Wave 6,
for consistency. Though the German General Social Survey (ALLBUS) and the US General Social
Survey (USGSS) also provide more detailed datasets and larger cross-national sample sizes, theinconsistencies in the questions and values used negate their effective use for comparison of particular
independent variables. However, for future analysis of this model, it may be useful to use the ALLBUS
and USGSS to reinforce cross-national variations found through the WVS.
For the varieties of institutional trust, ‘Confidence in national parliament’ is used to indicate
attitudes towards partisan institutions, and ‘Confidence in Major Companies’ is used to indicate trust
towards market institutions coded as dummy variables. The variable ‘Hard work brings success’ is used as
an indicator for respondents who believe their political and economic system is a meritocracy that allows
for socioeconomic mobility or stability of the middle-class for the individual and other members ofsociety. The variance in this perception between countries would indicate whether the belief that society is
meritocratic is influential to generalized trust. Variables indicating feelings of job security are also
included to illustrate the variance of confidence regarding personal economic security and its effect on
generalized trust. It would be expected that, with a dramatic structural change to job security policies,
feelings that one’s job is secure may be less influential on generalized trust. The variable ‘Incomes should
be more equal’ is included in the model to demonstrate the relevance that feelings towards income
inequality is not very influential on generalized trust.

Political Economy of Social Capital in Japan 40
It should be noted that omitted from this model is individual job status due to the unreliability andvagueness of how this measure is collected in these datasets. Variables relating to job status do not pickup on the actual precarity of employment, as full-time workers can be just as precariously employed as
part-time workers in the dualist system. Though it would have been useful to analyze how influential job
status could be on generalized trust, there is no survey available that observes these particular nuances.
Though an interaction effect could have been observed between feelings of job security and current dataon job status, this would only assume precarity rather than actually register respondents as precariously
employed.

Varieties of Institutional Trust
With high trust in market institutions in Japan and a reliance on market-based outcomes,
confidence in major companies is influential to generalized trust in both the WVS and JGSS. The odds
that respondents who trust major companies in Japan generally trust most people is 35% higher thanrespondents that don’t trust major companies. Trust in major companies is also positively influential onsocial trust in the United States, as social welfare in the model liberal-LME also depends heavily onmarket mechanisms as opposed to the welfare state. In Germany, where the market is not the main sourceof economic redistribution and where occupational segmentation does not contribute to cross-classsolidarities, trust in major companies does not have a significant effect. For the other countries comparedin this model with the WVS, Japan is the only country where confidence in the legislature is not
influential on social trust. With the partisan institutions perceived to be removed from equalizing
economic outcomes, confidence in parliament does not appear to have a significant effect on social trust.
In the United States, means-tested social programs like Medicaid and meager universal programs like theAmerican social insurance scheme still have a visible redistributive effect that is provided by partisan
institutions. This relationship is also strong in Germany, where social welfare is much more reliant onstate policies. The discrepancy in the Japanese result from the JGSS may be due to the lack of relevant
survey questions related to partisan institutions. The closest survey questions related to trust in partisan

Political Economy of Social Capital in Japan 41
institutions in the JGSS asks respondents about their “trust in ministries and government” which is broadand encompassing of a range of other roles, policies, and equalizing outcomes. Without a functionallyequivalent question in the JGSS, the significance of this variable could be written excluded from themodel, but institutional trust in partisan institutions is still included in this multivariate model for
consistency.

Individual Economic Perceptions

The belief in an effective meritocracy stands out in Japan compared to other countries. Highly
significant, there is a strong positive relationship between belief that the system still allows hard working
people to find success and social trust. Though the significance of the results between the JGSS and WVSvaries, they both point to the significance of meritocratic perceptions on social trust in Japan. In the US
and Germany, where there is more disenchantment with the possibility of socioeconomic mobility, thisbelief does not hold a significant influence on social trust. For perceptions in job security, however, there
appears to be variance in significance and effect between the three countries. Feeling job security inGermany and the United States has a greater positive effect on generalized trust than job security in Japan.
Due to the growing precarity of work and an increasing dependence on market-based welfare, the effectjob security has on generalized trust in Japan is weaker and slightly less significant. Also of note is theinsignificance of the belief that society should be more equal in each country model: this implies theimportance of meritocratic perceptions on social trust, as varied levels of income provide different
incentives for work. The results in the JGSS confirm the results obtained from the WVS. In all countries,
the opinion that society should be equal does not appear to have any effect whatsoever on generalized
trust. The implication of this empirical analysis is that the potentially negative impact of intensified labour
dualization in Japan on social trust has been offset by incentives. The strength of the perception thatlabour market outsiders can also work their way into the middle-class mainstream has helped firms
introduce performance-based wages and insecure employment with relative complacency. The question

Political Economy of Social Capital in Japan 42
remains whether generalized trust will remain stable in the next decade or so as dualization intensifies andconsolidates in the Japanese labour market.

Conclusion: Re-allocating Social Capital in Japan
While it is clear that equalization and redistribution do influence the generation of social capital,
it is important to analyze the particularities of the institutional arrangements and mechanisms that fostersocialized trust. Institutions do matter for generalized trust and how they are designed is highly influential
on the variance in social capital. In Japan, there are high levels of social capital indicators in market
intuitions as economic allocation and social welfare is based mostly in these types of institutions. This is
unique compared to other capitalist democracies where the state plays more of a role in facilitating
equalizing outcomes. Japan’s active labour market policy as social policy removed the state from directly
providing welfare. This cognitive distance between the state and well-being for citizens influences theperception that market institutions are better at delivering welfare outcomes than the state. Despite
economic and demographic crises affecting the integrity of the Japanese economy, citizens trust market
institutions more highly than partisan institutions, as they are less likely to interact with stateorganizations when the workplace provides most of the social services and cohesive solidarities. Still,
institutional arrangements cannot be given all the credit for the characteristics of Japan’s social capital,
though it does have a substantial influence. Demographic and geographic factors such as a very large
proportion of late adult and elderly citizens, ethnic and religious homogeneity, language, country size, life
satisfaction, and conformity norms can also influence cross-national social trust. However, in order forthese society-centered sources of social capital to influence social trust, they to be embedded and linked toformal institutions (Rothstein & Stolle, 2008). This nuanced analysis illustrates some of the mechanisms
behind the institutional generation of social capital through a complementary Varieties of Capitalism and
Welfare Worlds framework, and could also be applied to other national or sub-regional level cases.
That social capital is concentrated in market institutions over political institutions is also a matterof concern for policymakers. High trust in major companies has lowered adjustment costs, but haveexpended much social capital and have reformed the system that could potentially erode trust. How long

Political Economy of Social Capital in Japan 43
can market institutions generate social capital until perceptions of meritocracy start changing, whenintensified dualization makes it increasingly difficult for peripheral workers to become insiders? Will
dualization continue its intensification, will it stabilize, or will it lead to more universal retrenchment of
secure employment? With the growing mismatch of high-performing but low-skilled workers who arebecoming increasingly foundational to Japanese firms, managers may need to impose incentivizing
performance-based wages on high-skilled, low performing core workers. The lack of trust in politicalinstitutions has also meant some of the lowest voter turnout among OECD countries in recent years, withthe 2014 General Election registering the lowest voter turnout ever recorded at 52.66%. Turnout was low
despite the pressing economic issues such as the consumption tax and the continuation of Abenomics
policies that surrounded the 2014 election. Difficulties in implementing new consumption taxes may also
be attributed to comparatively low trust in political institutions. It is difficult for the government to makethe case that an increase in revenue capacity for the state will result in equalizing returns for the public
when there are little welfare programs run by the government to show for it. Disillusionment in partisan
institutions has rendered them ineffective, and democratic deficits collect into a democratic debt as reformof political institutions stagnates and Diet Members become less representative of the policy preferencesof the electorate via dramatically declining election turnouts. However, with the decline of successful
economic outcomes from market institutions, increasing inequality, and demographic pressures reaching
critical breaking points, the state ought to implement corrective measures, despite the public’s lack offaith. To re-invigorate Japanese democracy, it may be necessary to reallocate social capital from market
institutions to political ones and to generate new social capital with the introduction of new, government
run social welfare schemes.

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