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Political Economy of the Japanese Crisis

While the 1990s in Japan have often been viewed in a negative light, due to sharply declining financial and economic conditions, from a political perspective they were somewhat more successful. A particular focus is on the electoral reform of 1994, which introduced single-member districts in order to end the decades-l ong one-party dominance. Japan had been governed by the Liberal Democratic Party (LDP) from 1955 to 1993, but governed less securely under coalitions (with the New Party Sakigake and the Japan Socialist Party) starting in 1994. Under the new system, truly competitive parties had to garner more widespread support than under the old system, in which they could align with and appeal to special interest groups.

As a result of this change, electorally popular reform measures, rather than those catering to financial industry constituents, were promoted by the LDP in 1996. The LDP’s coalition partners also called for reorganization of the Ministry of Finance, which was attacked for ineffectiveness and corruption. The financial industry was not consulted over reforms during this period, and did not benefit greatly from the outcome, losing competition to foreign financial firms that were positioned to enter the market. Concentrated power declined, as informal relations between politicians, bureaucrats, and businessmen were weakened (Kushida and Shimizu 2014). Large keiretsu firms morphed into relationships between banks and weaker firms, and into keiretsu groups with different functions.


The Japanese crisis and its lack of a robust recovery has puzzled many economists. Although Japan is a highly developed country in terms of both standard of living and innovation, true economic vibrance has failed to return, as it usually does after the crisis fades away. This may be one of the most important conundrums in the modern history of financial crisis: why has the economy failed to rebound to its pre-crisis rate of growth? Some posit that it is due to the aging of the population, or to Japan’s reaching the end of its development curve and increased concentration in the services sector. Still, it is not clear why this is so, or what implications this might have for the future of other developed countries that are currently trying to emerge from crisis (that is, the US and Europe).

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