Saori N. Katada
Japanese Style Financialization: Its Impact on Monetary Policy and Infrastructure Investment
The project examines the impact of financialization on two areas on the Japanese government’s policies. One area is domestic macroeconomic stability and monetary policy priorities of the Bank of Japan, and the other area focuses on the quality infrastructure investment in competition with China’s Belt-and-Road Initiative.
In the first area, the question related to the impact of financialization is in what way the variety of financialization has affected choices of monetary policy. The Japanese case in the last eight years under Abenomics is illustrative. With the appointment of Governor Haruhiko Kuroda in March 2013, the Bank of Japan (BOJ) launched an “extraordinary monetary easing (ijigen no kinyu kanwa)” with a goal of reaching a 2-percent CPI target by doing “whatever it takes.” But this target has not been achieved so far. It is clear that BOJ’s quantitative easing has had both direct and indirect impact on the uptick of Japan’s stock prices, however; directly by BOJ’s purchase of bonds and stocks, and indirectly through lowering pressure on Japanese yen and inviting foreign investors into Japan. By the end of 2020, the BOJ became the largest stock holder in the Tokyo Stock Exchange (TSE), and along with the Government Pension Investment Fund (GPIF), their combined holdings are worth $640 billion and 12 percent of TSE total market capitalization.
As such, the Japanese case is quite distinct from the United States or United Kingdom, where share-holder economy based on wealth effect of housing equity, pension funds and corporate profits heavily dominate (Chwieroth and Walter 2019b; Krippner 2005). Due to distinct allocation of Japan’s household saving and investment behavior, the stock market has rarely been the focus of wealth accumulation for middle-class Japanese (Kotou 2000; Yamaguchi 2017). Rather, the political pressure to prop up share prices concentrates among the large companies and financial institutions. Meanwhile, political debates at the Diet reveal that a large sum of stocks held by the BOJ as well as valuation of Japanese Government Bonds (JGBs) are the major focus of political pressure imposed on the BOJ.
The second area covers infrastructure and financialization connection. Infrastructure investment has been an important engine of economic growth and catch-up for late industrializers throughout modern history (Gerschenkron 1962). Due to the vast shortfall of infrastructure investment, which is estimated to reach $94 trillion in the next two decades, funding these investments globally are of crucial importance.
International development community’s response to infrastructure needs in emerging and developing world through development financing came by the ebbs and flows. Since the global financial crisis of the late 2000s, however, infrastructure investment has become one of the top priorities of development so much so the issue is now included prominent in the United Nations Sustainable Development Goals (2015-2030) (Mawdsley et. al. 2014). This shift in the aftermath of the global financial crisis has emerged partly from the continuing financialization in the capital rich economies. With the end of the housing boom and the souring of the mortgage-backed securities, wealth-seeking energy of “share-holder” and “rentier” economy has been in search for profitable investment in development. This condition has created what Gabor (2021, 431) calls the ‘Wall Street Consensus’ where the institutional mechanisms of the state is reoriented towards protecting the political order of financial capitalism.With this supply condition, high demand for infrastructure development has led to “financialization of development” where development projects are turned into assets to invest and investment into such assets are considered ‘development finance’ consisting not only of governments’ funding but also private capital (Mawdsley 2018).
The Japanese economy relied on infrastructure-led growth under the guidance of developmental state utilizing domestic savings captured through the postal savings system (Ikeo 2005). From the 1970s to the early 1990s, Japan was a giant infrastructure exporter capitalizing on the “trinity approach” (trade, investment and foreign aid) of economic cooperation and development (Fukuda-Parra and Shiga 2016). But such emphasis was slowly phased out for twenty years since then (from the 1990s into the 2000s) under the pressure from the other donors through OECD/DAC against tied aid and criticisms against heavy use of foreign aid in support of physical infrastructure exports, at the time the Japanese economy went through liberalization and reforms in its financial market under duress (Amyx 2004).
Since the mid-2010s, however, the Japanese government started to take back a visible leadership role in promoting infrastructure investment with the emphasis on its quality, since Japan’s announcement of the “Partnership for Quality Infrastructure” initiative in May 2015. This is generally considered an alternative to the rising Belt-and-Road Initiative promoted by China since 2013. The Japanese government was also successful in having “G20 Principles for Quality Infrastructure Investment” adopted at the Osaka G20 Summit in June 2019. Furthermore and especially eying the post-Covid economic recovery strategy for the Indo-Pacific region, the Japanese government has collaborated with the United States and Australia to establish Blue-Dot Network that certifies high-quality and “bankable” infrastructure projects. By 2021, these quality infrastructure initiatives expanded into the “Build-Back-Better World (B3W)” proposed by the US Biden administration at the G7 summit in the UK.
In observing the rise of Japan’s leadership in infrastructure development assistance, Sasada (2020) argues resurgence of the “Japan model.” I argue, however, that Japan’s institutional underpinning of infrastructure investment has fundamentally shifted. As discussed by Lechevalier et. al. (2019), finanicalization has transformed the institutional environment particularly the state-finance nexus, and such transformation imposes challenges not only to Japan’s industrial policy, but also its geoeconomic strategy via quality infrastructure promotion.
Therefore, the motivation behind the quality infrastructure initiatives exist a major financial innovation and challenge for Japan. By analyzing the transformation of Japan’s overseas infrastructure funding mechanism especially with the emphasis on the evolution of policies and facilities of the Japan Bank for International Cooperation (JBIC), this project examines efforts to adjust to changing state-finance nexus in mega-funding such as those for infrastructure investment in Asia.
ReferencesAmyx, Jennifer Ann.2004. Japan's Financial Crisis: Institutional Rigidity and Reluctant Change. Princeton University Press.
Bernoth, Kerstin, Philipp König, and Carolin Raab. 2015. “Large-Scale Asset Purchases by Central Banks II: Empirical Evidence.” DIW Roundup: Politik im Fokus.
Boyer, Robert. 2000. “Is a Finance-led Growth Regime a Viable Alternative to Fordism? A Preliminary Analysis.” Economy and Society. 29(1): 111-45.
Chwieroth, Jeffrey M, and Andrew Walter. 2019a. The Wealth Effect. Cambridge University Press.
------------ 2019b. “The Financialization of Mass Wealth, Banking Crises and Politics over the Long Run.” European Journal of International Relations 25(4): 1007-34.
Fukuda-Parr, Sakiko, and Hiroaki Shiga. 2016. “Normative Framing of Development Cooperation: Japanese Bilateral Aid between the DAC and Southern Donors.” Working Paper No. 130 (Tokyo: JICA Research Institute).
Gabor, Daniela. 2021. “The Wall Street Consensus.” Development and Change 52.3: 429-459.
Gerschenkron, Alexander. 1962. Economic Backwardness in Historical Perspective. Harvard University Press.
Ikeo, Kazuto. 2006. Kaihatsu shugi no bōsō to hoshin: Kinyū sisutemu to heisei keizai [Runaway state and self-preservation of developmentalism]. Tokyo: NTT.
Inderst, Georg (2010) Infrastructure as an asset class, EIB Papers, ISSN0257-7755, European Investment Bank (EIB), Luxembourg, Vol. 15, Iss. 1, pp. 70-104
Kotou, Hisaya. 2000. “Wagakuni kakei no shisan sentaku kodo ni tsuite [Analysis on Japan’s household portfolio Selection Behavior] Bank of Japan, Financial market working paper series 2000-J-9.
Krippner, Greta R. 2005. “The Financialization of the American Economy.” Socio-Economic Review 3(2): 173–208.
Lechevalier, Sebastien, Pauline Debanes, and Wonkyu Shin. 2019. “Financialization and Industrial Policies in Japan and Korea: Evolving Institutional Complementarities and Loss of State Capabilities.” Structural Change and Economic Dynamics 48: 69-85.
Mawdsley, Emma, Laura Savage, and Sung-Mi Kim. 2014. “A ‘Post-Aid World’? Paradigm Shift in Foreign Aid and Development Cooperation at the 2011 Busan High Level Forum.” The Geographical Journal 180(1): 27–38.
Mawdsley, E. 2018 ‘Development Geography II: Financialization’, Progress in Human Geography 42(2): 264–74.
Sasada, Hironori. 2019. “Resurgence of the ‘Japan Model’?: Japan’s Aid Policy Reform and Infrastructure Development Assistance." Asian Survey 59(6): 1044-1069.
Van der Zwan, Natascha. 2014. “Making Sense of Financialization.” Socio-Economic Review 12(1): 99–129.
Yamaguchi, Katsunari. 2017. “Wagakuni no Kinyu shisan no okeru risuku kyoyoudo [The level of risk tolerance on financial asset among Japanese households] Koudou Keizaigaku 9: 68-75.