VELOCITY OF MONEY -- LEGAL ASPECTS

This is one of my favorite anecdotes about Japan that does a good job of exemplifying some of the changes that have happened in Japan over the past two or three decades.

Before my time in Japan, maybe up to some point in the 80s, alcohol distribution was heavily regulated. I am not sure how the regs worked, but during the regulation period, there were about 7 or 8 hands touching a beer between the time it left the factory and the time it reached the consumer. Each of these hands took a cut. After deregulation, it dropped to about 2 or 3 hands, although the prices didn't really seem to change. If I recall correctly, this delayering was made due to clamoring by "the West" that Japan's market was insulated, overregulated, protected, inefficient, etc. All of these claims were pretty much true.

The rest of the story that largely went untold at the time in western media (even in relatively informed higher brow publications like The Economist), was that this "inefficiency" effectively served as a social welfare net for the country in some obvious and not-so-obvious ways. Specifically:

- Each of those layers of distribution created direct jobs. Some of these jobs were still needed after deregulation but in fewer numbers (e.g., delivery guys, warehouse folks, logistics managers, etc.), but some were not (e.g., most management positions that could be REALLY good for social connections but not actually needed to get the alcohol from one place to another).

- Each of those layers were socially obligated to do some business with companies farther down the chain. A simple example is that a mid-level distribution company would make sure to hold their enkai parties at a restaurant/bar that is a client of a client of theirs. The owner of a typical bottom-level liquor distributorship (I have befriended a few) would visit 1-3 of their clients for a drink and maybe some food each night for 3-5 nights a week. It was an expected part of greasing the wheels of the economy.

The loss of these layers, a often times the loss of the high-touch layer of distribution to discount "wholesalers", meant that the money cycled fewer times in the economy.

Liquor distribution may seem like an obvious example, but this type of delayering has happened throughout the economy, and the backscratching patronage has decreased along with it. Without getting into a discussion of velocity of money, I would say that this has had a pronounced negative impact on the economy because the money just isn't cycling as much. Unfortunately this is sometimes happening by design.

For those economically inclined, I don't want to suggest that the inefficient alcohol distribution system should have stayed in place. Maybe it should have, maybe it shouldn't have -- that actually gets into a tricky discussion about the weak or non-existent welfare programs in Japan and how this leads to an inability to deconstruct and reconstruct some areas of the domestic economy. My main point is that I don't think anyone had a right to be surprised that the domestic economy took a long and big hit when a high-velocity system was replaced with a low-velocity system with no other social or political changes made to pick up the slack.