As a part of the Future of Capitalism Project at the Council on Foreign Relations (CFR), Roger W. Ferguson Jr. is inviting a diverse range of participants from academia, private sector, and government to contribute to a series of blog posts to provide perspectives on the different types of capitalism in practice around the world, the challenges these systems face, and their future in the twenty-first century. This post comes from Glen S. Fukushima, former deputy assistant United States trade representative for Japan and China, and former president of the American Chamber of Commerce in Japan. Mr. Fukushima is currently senior fellow at the Center for American Progress and nominee, vice chairman, Securities Investor Protection Corporation.
The fall of the Berlin Wall in 1989 and the collapse of the Soviet Union in 1991 led many in the West to celebrate the victory of capitalism over other economic systems. Although the United States had emerged as the unquestioned military superpower, its economy was under severe competition from both Asia and Europe. This resulted in numerous debates in the early 1990s among economists and policymakers on the “three forms of capitalism”: the Anglo-American, Rhine, and Japanese.
Viewed as “polar extremes” of capitalisms within G7 countries, the Anglo-American “market capitalism” and Japanese “collective capitalism” over the past thirty years have exhibited the following contrasts:
- Trust in the “magic of the market” as the best allocator of resources in the United States vs. distrust of the market and the need to “manage” or “tame” the market in Japan.
- The role of the corporation as maximizing profit for its shareholders (à la Milton Friedman) in the United States vs. corporations providing employment and economic value to society in Japan.
- Priority to shareholder value and focus on stock price in the United States vs. emphasis on stakeholders (employees, customers, partners, suppliers, society) based on the Tokugawa Era (17th-19th century) merchants’ philosophy of Sampoyoshi (holy trinity of conferring benefits to seller, buyer, and community) in Japan.
- Large swings in unemployment as a natural and unavoidable result of market forces in the United States vs. active policies by the government and measures by companies to minimize unemployment in Japan.
- Diminishing role and power of labor unions in the United States vs. continuing role for labor unions in Japan, including the Japanese government supporting labor unions in their bargaining with companies to increase wages.
- Priority to consumers over domestic producers except in areas related to national security in the United States vs. priority to domestic producers as a source of national wealth in Japan.
- Priority to services over domestic manufacturing except in areas related to national security in the United States vs. priority to high value-added domestic manufacturing as a source of national wealth in Japan.
- Income tax that is relatively favorable to wealthy individuals in the United States vs. steeply progressive income tax applied to wealthy individuals in Japan.
- Recognition of individual achievement and rewards in the United States vs. recognition of group and organizational achievement and rewards in Japan.
- CEO/average worker compensation ratio of over 300:1 in the United States vs. under 50:1 in Japan.
- Gini index of 41.4 in the United States (high end of G7 countries) vs. 32.9 in Japan (low end of G7 countries).
- Short-term management focused on quarterly earnings and daily stock prices in the United States vs. long-term management in Japan (Japan has more companies that are over 100 years old than any country in the world; of 5,586 companies in 41 countries that are over 200 years old, 56 percent are Japanese).
- Spot transactions valued over long-term relationships in the United States vs. long-term relationships valued over spot transactions in Japan.
- Diverse board of directors of companies including outsiders in the United States vs. board of directors comprising majority insiders in Japan (and mainly men).
- Management rewarded for pursuing efficiency, cost-reduction, creative solutions, prudent risks in the United States vs. management rewarded for pursuing stability, continuity, predictability, sustainability, and following precedents and minimizing risk in Japan.
- Government as referee, stepping in only when necessary, to protect the environment, competition, worker safety, etc. in the United States vs. government as developer, supporter, and regulator of industries and companies in Japan.
Of course, these are “ideal types” and therefore simplify the differences between American and Japanese capitalism. And some would argue that the two systems are converging.
For instance, on August 19, 2019, 181 CEOs of America’s largest corporations “overturned a 22-year-old policy statement that defined a corporation’s principal purpose as maximizing shareholder return. In its place, the CEOs of Business Roundtable adopted a new ‘Statement on the Purpose of a Corporation’ declaring that companies should serve not only their shareholders, but also deliver value to their customers, invest in employees, deal fairly with suppliers and support the communities in which they operate.”
And in recent years, some Japanese companies have tried to diversity their boards, cut costs, and emphasize shareholder value. But Prime Minister Fumio Kishida has argued that Japan’s pursuit of “neoliberal capitalism” has resulted in division and disparity, and new policies are required to reduce such disparities and create greater equality of income and wealth. Among the measures he advocates are greater public-private collaboration and more government investment in regional areas—not the kind of policies that enshrine the free market.
What these examples show is the continuing differences between American and Japanese capitalism. The Business Roundtable may truly believe that American corporations are now valuing stakeholders, but it is a far cry from how much stakeholders are valued in Japan. By the same token, Prime Minister Kishida may genuinely believe that Japan is suffering from inequality, but it is nothing like the inequalities in the United States (as evidenced by the CEO/average worker compensation ratios above of 300:1 versus 50:1).
Given that inequality is the single biggest threat to the survival of American capitalism, there is merit in examining how Japan has managed to mitigate it. Among the policies, mechanisms, and institutions that can be cited: 1.) less faith on the market and more attention to regulation; 2.) less focus on stock price and more attention to stakeholders; 3.) less tolerance for large swings in unemployment and more measures to provide aid to the unemployed; 4.) more support for workers’ rights and labor unions; 5.) less outsourcing and more emphasis on retaining high-value-added manufacturing; 6.) more progressive taxation of wealthy individuals; 7.) less focus on individual achievement and rewards and more emphasis on group and organizational achievement and reward; and 8.) less disparity between the compensation for CEOs and for the average worker (in 1965, the CEO/average worker compensation ratio in the United States was roughly 20:1).
On a macro level, the Japanese economy faces many challenges, including demographic decline, secular stagnation, huge government debt, diversification of energy supplies, digitalization, immigration, climate change, etc. As noted in The Economist recently, Japan is “on the front line,” facing early on many of the challenges that will eventually confront other G20 countries. But when it comes to minimizing inequality—the single greatest threat to the survival of American capitalism—Japan offers a model of capitalism that should not be ignored.