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POINT OF VIEW/ Charles Yuji
Horioka , Reiko Kanda: How to
fix the Japanese economy:
Socialize risk using a
two-pronged strategy
SPECIAL TO THE ASAHI SHIMBUN
2010/04/22

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The Japanese economy has been in the doldrums more or lesscontinuously for the past two decades, and this long-term
recession has imposed at least three costs on Japanesehouseholds:(1) A decline in their standard of living;(2) An increase in the risks and uncertainties concerning how tomake ends meet, employment, old age, etc.; and(3) An increase in income inequalities.
Many economists, policymakers, etc., focus on (3) but here wewould like to focus on (2).

交通動画

It is not efficient or rational for individuals to bear the entire
burden of risks and uncertainties. For example, it is not efficientor rational for an individual to work so hard that she ruins herhealth and becomes unable to work because she is so worried
about losing her job. The market mechanism and income
redistribution by the government both play an important role inpooling risk and avoiding such an outcome.
However, the division of labor between these two mechanisms
varies from country to country and depends on the values ofeach country.
Danish sociologist Gosta Esping-Andersen categorizes modern
developed capitalist states into three types of welfare states:(1) "Liberal" or "residual" welfare states, such as the UnitedStates and other Anglo-Saxon countries, which emphasize
redistribution via the market mechanism, and two types ofwelfare states that emphasize income redistribution by thegovernment:(2) "Social democratic" welfare states, such as Sweden andother Scandinavian countries, in which income redistribution isdone via the tax system; and(3) "Conservative" or "corporatist" welfare states, such as
France, Germany, and other continental European countries,
which rely on mutual assistance within corporations, families,
and other collectivist entities.
Where does Japan lie within this taxonomy of welfare states?
According to recent research, Japan exhibits both thecharacteristics of the U.S.-style liberal welfare state (such as
the underdevelopment of "welfare" and other government
redistribution policies) and those of the French-styleconservative welfare state (such as reliance on one's family andemployer for mutual assistance and employment security).

Does Japan's two-pronged approach contain an effectiverisk-coping mechanism? Compared to liberal welfare states suchas the United States, Japan offers only a meager menu of
non-recourse loans and reverse mortgages, and bankruptcy
laws that allow those unable to repay their debts to start afreshare not well-developed. In a liberal welfare state,well-developed financial and legal systems play the importantrole of complementing meager income redistribution programsby the government and hence are indispensable.
Compared to conservative welfare states such as France,
Japanese firms do offer strong employment protection topermanent workers but restrictions on working hours are weak
and thus there is a danger that workers have to accept long
working hours in exchange for employment protection.
The most serious defect of Japan's policy regime is that thesafety net protecting those facing unexpected risks, which is a
crucial element of any policy regime, is very weak. As a resultof this lacuna in Japan's policy regime, new graduates,
temporary workers, single persons, single mothers, and others
who do not belong to any firm, family or other collectivist entity
are exposed to grave risks.
In a world in which competition is intensifying due toglobalization and the structure of families is changing
dramatically due to the decline in the birthrate, the increase in
the divorce rate, and the decline in extended (three-generation)families, those who are not protected by families, firms andother collectivist entities must bear the entire risk of
unexpected contingencies by themselves because they cannot
receive government protection, transfer risks to others throughfinancial intermediation, or make a fresh start.
In what follows, we would like to propose what direction Japan
should take in order to correct the aforementioned defect inJapan's policy regime. Note that there is no need to imitateexisting policy regimes of other countries, and in fact, it is notdesirable and quite often disadvantageous to forcibly impose
the regimes of other countries on Japan. For example, it is notrealistic for Japan to adopt a social democratic policy regimewith generous income redistribution policies given that Japan
already has the largest government debt to GDP ratio of any
developed country.
Taking account of the environment in which Japan finds itself, aNational Institute for Research Advancement (NIRA) study
group of which we are a part recommends that Japan adopt thefollowing policy pillars:First, Japan should reduce its emphasis on risk sharing via
collectivist entities (the hallmark of a conservative welfarestate), which is inefficient as well as inequitable. In a world inwhich global competition among firms is intensifying, if Japan
imposes strict employment guarantees on domestic firms, theirlabor costs will increase, their productivity and competitivenesswill decline, and there is even the possibility that employment
will decline.
Moreover, strong employment guarantees will protect theemployment of currently employed permanent workers but at a
cost of longer unemployment spells for the unemployed, ahigher youth unemployment rate, and a lower overall
employment rate.
We are, of course, not advocating the complete elimination of
employment guarantees by employers although we do feel thatfirms should be able to fire incompetent workers more easily
than they currently can. What we are advocating is allowing
firms to offer a full menu of job types, for example, a job typethat offers higher wages but also a higher risk of termination
and another job type that offers lower wages but better
employment security.
Moreover, we believe that Japan should counteract theweakening of employment guarantees by employers by relaxing
eligibility requirements for “welfare” and unemployment
compensation and by placing more emphasis on deregulation,
especially in agriculture, medical care, nursing care, day care,and other service sectors, which in turn will improve thecompetitiveness of Japanese firms, raise economic growth andexpand employment opportunities, thereby reducing
employment and other risks.
In addition, we advocate greater investment in infrastructure,especially the development of better risk-sharing mechanisms in
the financial system and the passage of more generous
bankruptcy laws so that firms and individuals can better deal
with the risks they face. For example, if individuals can borrow
freely from financial institutions, they will be able to offset thedecline in employment income caused by unemployment byborrowing and will therefore be able to get by even without agenerous unemployment compensation system.
We believe that this objective can be achieved by greater
financial deregulation and institution-building regarding thefirewall between banking and insurance, the types of productsthat financial institutions can offer, etc.
Finally, Japan should create a society in which risks are sharedequitably by males and females, permanent and temporary
workers, the young, middle-aged and elderly, the singled,
married, divorced and widowed, those with and withoutchildren, etc. More concretely, Japan should better enforce
and/or strengthen existing laws banning discrimination on thebasis of gender, age, etc., improve day-care services to make iteasier for those with children to work, and allocate governmentexpenditures more equitably among different cohorts (they are
currently biased in favor of the elderly in Japan).
In short, Japan should learn about the importance of equityfrom the social democratic welfare states. However, Japanshould adopt a targeted approach of providing benefits only tothose who really need help, given the disincentive effects on
employment, etc., of government benefits and the alreadymassive debt of the Japanese government.
To summarize, Japan should shift from a mix of a French-type
conservative welfare state and a U.S.-type liberal welfare state
to a mix of a Swedish-type social democratic welfare state anda U.S.-type liberal welfare state. As we have already seen, what
Japan should learn from a social democratic welfare state is not
massive income redistribution programs by the government but
the importance of equitable risk sharing.
Moreover, what Japan should learn from a liberal welfare state
is not only the importance of a market-oriented regime but also
the importance of financial and legal systems that protect
individuals from risk and encourage competition. This is what
we mean by the transition from a society in which individuals
bear excessive risks on their own to a society in which risk isshared equitably by society as a whole (i.e., a society in whichrisk is "socialized").
Turning finally to how Prime Minister Yukio Hatoyama’s
economic policies stack up against our recommendations, they
don’t get a very good grade because he has adopted a universal
approach rather than a targeted approach (for example, dolingout child allowances, making high school tuition free, andmaking some highway tolls free to everyone regardless of theirincome). Such policies are unnecessarily expensive because
they help even those who don’t need help and will make Japan’s
government debt even higher than it already is, unless sharp
cuts are made elsewhere, which will be hard to do. Moreover,
his policy of prohibiting dispatched workers in the
manufacturing sector makes it harder for companies to hire
workers on a short-term basis and goes against ourrecommendation to reduce reliance on employers as aguarantor of employment security.

***Charles Yuji Horioka received his B.A. and Ph.D. from Harvard
University and is currently a professor of economics at theInstitute of Social and Economic Research, Osaka University.
Reiko Kanda received her B.Econ. degree from the University ofTokyo, her M.Ec. degree from Northwestern University and iscurrently director of research at the National Institute for
Research Advancement (NIRA).