Eamonn Fingleton. Foreign Affairs. Volume 74, Issue 2. March 1995.

The Ministry of Finance

Perceptive westerners may be forgiven a touch of cognitive dissonance in looking at the Japanese economy. They read daily that Japan has been badly damaged by a terrible economic slump, yet the evidence tells a different story. What are they to make, for instance, of the yen’s conspicuous strength? In the last five years, it has risen nearly 40 percent against the U.S. dollar. Meanwhile, Japan’s exports have risen 41 percent, giving Japan a current account surplus of $127 billion in 1994. The export surge is even more remarkable because for more than three years the Jeremiahs of the Western press have been predicting disastrous scenarios on the assumption that a high yen would soon price Japanese exports out of world markets. Yet how can a country be an economic has-been if it boasts one of the strongest currencies in the world while it racks up the largest trade surpluses ever recorded?

The truth is that Japan did not collapse in the early 1990s. Far from it. In the five years to the end of 1994, Japan’s total output at current exchange rates shot from 55 percent of U.S. GNP to nearly 70 percent. In other words, while the Western press has talked of collapse, Japan has quietly remained on track toward its reputed goal of surpassing the United States to become the world’s biggest economy by 2000.

This is not to say everything has gone smoothly in recent years. In particular, Japan’s financial markets have had a bumpy ride. After peaking at the end of 1989, the Tokyo stock market plunged 63 percent over the next two and a half years. In any other advanced nation, such a financial crash probably would have triggered massive damage throughout the economy. Not surprisingly, therefore, when the Tokyo market fell, Western economic commentators gloomily described the Japanese economy as “out of control.” But the Japanese economy was never out of control. The Japanese economy does not follow Western logic, whatever Western forecasters say, for the simple reason that it is not a Western free-market economy. The Japanese have discovered that basic changes in the way wealth is created in the twentieth century—specifically the rise of information as a critical factor of production—require a radically different approach to economic management. Thus they have invented a type of economics that behaves in ways that confound the predictive powers of Western observers.

Understanding Japanese power is the critical first step toward understanding the Japanese economy. While Westerners have focused on the mystery, dysfunction, and even chaos that seem to characterize Japanese power, Japanese society is actually one of the most carefully and intelligently structured hierarchies in history.

The Path to Power

How does one identify the locus of power in Japan? A clue is the career aspirations of its most ambitious youths. All Japan’s brightest students fight to get into Tokyo University, and if they make it, the very best of them invariably opt to study law. Where do they go when they graduate? The trail leads directly to a six-floor fortress of a building in the Kasumigaseki, or Foggy Gate, administrative district of central Tokyo. Most foreigners do not recognize this building because it is one of the few in central Tokyo with no English-language identification. Its name is displayed only in three barely readable ideograms. This is the Okurasho: literally, “the Ministry of the Big Storehouse.” In English, it is known as the Ministry of Finance (MOF). It is the pinnacle of Japan’s administrative system, so far above the political and bureaucratic clouds that few Japanese—and even fewer foreign observers—understand its significance. But everyone in the higher reaches of Japan’s administrative and commercial life understands. A son who wins entry to the MOF’s elite track at the age of 22 Or 23 earns his family as much distinction as if he had won a Nobel Prize. To Westerners unfamiliar with Eastern attitudes toward power, this assertion may seem hyperbolic, but it is not. MOF men truly are Nobel-caliber: brilliant, creative, tenacious, public-spirited. Many of them would probably win Nobel Prizes if they chose careers that tend to catch the eye of the Royal Swedish Academy of Sciences. And they are among the vital factors that make the MOF the source of the extraordinary will to win that Westerners have long sensed lies behind Japan’s relentless quest for economic expansion.

The MOF is the capstone of a Confucian system of power that is roughly pyramidal. Just under the MOF are big banks; a group of key bureaucratic agencies, of which the Ministry of International Trade and Industry (MITI) is the best known in the West; and the cabinet. The next layer includes big industrial corporations, lesser bureaucratic agencies, the securities industry, the press, and the main political parties.

Measured merely by its formal statutory powers, the MOF is a titan among Japanese government agencies. In regulating the financial system alone, it gathers under one roof powers that in the United States are dispersed among the Federal Reserve, the Department of the Treasury, the Federal Deposit Insurance Corporation, the Office of the Comptroller, and the Securities and Exchange Commission. Moreover, the MOF controls the Japanese tax system through the National Tax Agency, one of its divisions. (Historically, the MOF’s designation as the Ministry of the Big Storehouse derives from the days when the Japanese paid taxes in rice.)

Yet another crucial MOF level of power is Japan’s national budget. Contrary to appearances, the Diet, Japan’s parliament, has no substantive budget powers; it merely rubber-stamps MOF-written legislation. The scope of the MOF does not end there. The MOF controls the Defense Agency via, among other things, staffing; the agency’s top ranks are seeded with career MOF officials, and its head is generally a MOF man.

Add it all up: the MOF controls taxing, spending, and defense. Since antiquity, these have been the three defining functions of government.

Who’s In Charge Here?

If the MOF is so powerful, why has one not heard of it before? In the Confucian tradition, the MOF believes that power is exercised most effectively when it is least obtrusive. Thus its near-invisibility has helped spawn many myths attributing supreme power to other parts of the establishment.

One of the more enduring myths about Japan is that big business runs the country. It is easy to see how Japanese policymaking might sustain such an illusion. Foreign business executives in particular are often impressed by how quickly Japanese business leaders can open doors. After years of futile efforts to break into the Japanese market, a foreign corporation finally decides to do a joint venture with a Japanese partner. Suddenly, as if by magic, the new venture partner effortlessly cuts through previously impenetrable red tape. But the Japanese partner is far from all-powerful. He merely understands the Japanese bureaucracy’s industrial policy and can recast the foreign company project to win official support by, for instance, making sure that the foreign company transfers vital, sought-after technologies to Japan. Civil servants often go to some lengths to sustain the illusion of big business’ supremacy. Among other things, this allows them to disclaim responsibility for their sometimes controversial economic policies.

Some observers have canvassed a theory that Japan’s farmers enjoy a veto power over national policies. But how strong can the farmers’ lobby be? Japan’s farm population has been deliberately reduced by three-quarters in the last four decades by policies detrimental to farmers. The government has presided over the virtual demise of Japan’s silk-growing industry. It saw no point in keeping the industry on life-support after demand fell in the 1950s, so Japan now imports most o its silk from Thailand and other cheap-labor countries. That the markets in rice and other foodstuffs have not been similarly thrown open to foreign suppliers is a reflection less of the farmers’ power than of the bureaucracy’s concern to maintain food security. If Americans had nearly starved in 1945, their government might also be concerned about food security.

Westerners often fail to understand such nuances because in Japan the direction of causality between policymaking and lobbying is reversed. Whereas in America vested interests tend to create policy, in Japan policy tends to create vested interests. For instance, a preexisting policy of promoting rice production sustains a vociferous rice lobby. If the bureaucracy were to abandon the policy, the rice lobby would dwindle as quickly as the silk lobby did in the 1950s.

Many noted Japan watchers consider MITI the supreme agency of Japanese power. MITI is indeed a powerful agency, particularly (as its name suggests) in shaping the international side of the Japanese economy. Moreover, as Chalmers Johnson has documented, MITI has originated many of the strategies driving Japan’s economic growth. But MITI’s ideas cannot be implemented without the MOF’s financial support. MITI proposes, and the MOF disposes.

In recent times another myth has superseded the “mighty MITI” story: the void-at-the-top theory. This myth states that the various power centers in Japan are constantly warring with each other and no power center ever establishes permanent superiority. Thus Japan is leaderless and incapable of charting a rational course. This theory appeals to Western believers in laissez-faire economics, who mistakenly believe that Japan’s economy is chaotic and assume that any government that presides over such “chaos” must be dysfunctional.

The Making of a Leviathan

The MOF is Japan’s oldest surviving power center. Founded in 1869, just after the collapse of Japan’s feudal system, it was the successor organization to the deposed shogun’s tax-gathering apparatus. The MOF’s only rival in seniority is the Bank of Japan. By comparison, the Diet, the courts, the Defense Agency, and MITI are relative parvenus in the Japanese power system. The MOF began paying a pivotal role in Japan’s administration right from the start. In fact, the MOF’s first recruits included no less than four of the half dozen or so oligarchs who were to dominate Japanese government for the next half-century. These founding fathers—Toshimichi Okubo, Hirobumi Ito, Shigenobu Okuma, and Masayoshi Matsukata—were crucial in launching Japan’s quest for great power status in the last decades of the nineteenth century. Okuba was de facto prime minister in the 1870s and coined the catch phrase, “Rich country, strong army”; Hirobumi crafted Japan’s first constitution and was a three-time prime minister; Okuma was prime minister twice and is regarded as the father of modern Japanese mercantilism; Matsukata, twice prime minister, was founder of the Bank of Japan. They are big names in Japanese history, roughly the counterparts to George Washington, Thomas Jefferson, Alexander Hamilton, and James Madison in American history.

In the early years of the twentieth century, the MOF found itself increasingly upstaged by the military and the Home Ministry, an octopus of an agency that, among other duties, ran Japan’s formidable secret police. For a time, the MOF’s main function seems to have been to gather the taxes needed to finance Japan’s military machine. But the militarist years left the MOF with One valuable legacy: in the 1930s, it was given massive regulatory powers over the Japanese financial system. These powers, devised to enable the MOF to direct vast amounts of capital into Japan’s burgeoning munitions industries, remained on the books after World War II and formed the basis of the MOF’s tight regulatory control of the financial system in the postwar era.

The MOF’s climb to undisputed leadership began with Japan’s surrender in 1945. The Americans sent General Douglas MacArthur to head an ambitious program to reform Japanese public life. MacArthur quickly shut down the Japanese military and the Home Ministry, creating a power vacuum that the MOF eagerly filled. Another of MacArthur’s objectives, the reform of Japan’s economy, also played into the MOF’s hand. The centerpiece of this effort was a plan—similar to trustbusting campaigns in the United States—to break up the zaibatsus, the huge holding companies that had dominated the Japanese economy. The breakup suited the MOF just fine because the wealthy families who owned the zaidatsus had long been an irritating counterweight to its power in shaping economic policy.

The Americans’ antagonism towards the zaibatsus was well advertised before the war ended. Thus, with characteristic foresight, the MOF was ready when MacArthur arrived. In the days just after Japan’s surrender, it covertly launched its characteristically counterintuitive preparations for the zaibatsu breakup by ordering an extraordinary round-the-clock program of printing banknotes by the truckload. It even commandeered several of Japan’s largest printing factories for the task. Then it warehoused the money at secret locations while it negotiated the breakup details with MacArthur. Japanese and American negotiators quickly agreed that the Japanese government would buy all shares in the zaibatsu holding companies, and the owners would receive a special issue of government bonds in return.

Then the MOF delivered the coup de grace: it released the new banknotes into circulation by the ton, deliberately detonating hyperinflation. The zaibatsu owners’ bonds became virtually worthless as the yen lost 95 percent of its purchasing power in the next four years. For Japanese citizens with a long memory, all this was deja vu. Seventy years earlier, in compensation for loss of feudal privileges, the samurai class was given bonds that were reduced by inflation to almost nothing. On that occasion there had been some doubt about whether the inflation was intended. On this occasion, however, the MOF clearly knew what it was doing.

The MOF closed the loop by imposing a savage wealth tax that took away as much as go percent of the assets of some families. Right under the noses of the Americans, the OF pulled off one of the great power plays in history. When the dust settled, control of industry had been transferred almost painlessly from the capitalist class to a handful of big banks and insurance companies, who in turn were controlled by the MOF. Under the guise of trying to open up Japan to the forces of individualism, MacArthur had instead helped concentrate power in a robust pyramid headed by the MOF. Unwittingly, MacArthur had created a leviathan.

Lords of the Budget

IN A recent book, prominent Tokyo journalist Takao Kawakita reported that the MOF dubs itself “the Ministry of the Ministries.” The nickname accurately reflects the MOF’s near-total control over Japan’s $600 billion national budget. MOF officials draw up the main lines of the budget in intense negotiations with civil servants in other ministries. A striking sign of the MOF’s preeminence is the protocol for budget negotiations with other ministries. The rule, as recorded by Kawakita, is that other ministries must send an official two ranks higher than the MOF official they are meeting. Thus a senior MITI official, for instance, must suffer the indignity of being treated as an equal by a MOF official who may be 15 years his junior.

As the American political scientist John Creighton Campbell has pointed out, the MOF’s preeminence is enhanced by the fact that it screens virtually every new government policy in Japan for budget implications, even negligible ones. Other agencies must get the MOF’s permission merely to reassign money from one purpose to another. Moreover, the MOF holds other agencies to a legendarily high standard of parsimony in spending taxpayers’ money.

The MOF’s budget-setting prerogatives are hard to reconcile with Japan’s presentation of itself as a Western democracy. Where do elected representatives fit in? In drafting the budget, the MOF takes some soundings in the Diet, but the elected representatives’ hands-on involvement begins only after the budget’s basic shape is already a fait accompli. Their power to amend spending provisions is limited to minor pork barrel items, such as construction of local bridges and tunnels. In taxation and other key areas of national policy, their role is mainly to rubber-stamp the MOF’s decisions.

The Informal Levers of Power

MOF bureaucrats outrank elected representatives for many reasons. For one thing, the bureaucrats designed the system (and for the most part masterfully frustrated MacArthur’s efforts in the latter half of the 1940s to institute reform). An important part of the design was to create a tremendous community of interest among Tokyo University’s old boys. Tokyo University graduates dominate not only the bureaucracy but the major banks and many of the biggest corporations. The essential dynamic here is classic Japanese group logic: the Tokyo University people form a powerful clique, and through peer pressure they almost automatically back each other up. By comparison, politicians generally come from a host of lesser universities. Thus they lack a deep sense of group loyalty and make easy prey for the Tokyo University crowd’s divide-and-rule tactics.

The bureaucracy also buttresses its authority by dispatching its retirees to important jobs in the banks and large corporations. Ironically, the Western press has long regarded this retirement system, known as amakudari, as one of the Japanese bureaucracy’s weak points. The press has imagined that the system provides a means for the private sector to exercise improper influence by dangling promises of attractive post-retirement employment to key government officials. Press commentators, however, have characteristically grasped the wrong end of the stick. They mistakenly assume that individual bureaucrats are free to choose their post-retirement careers. In group-oriented Japan, this assumption does not apply. Retired bureaucrats are obligated to accept jobs approved by their former ministry. In fact, their entire post-retirement career is usually decided by the ministry. Even the MOF’s top bureaucrat must submit to this discipline when he retires; his future career is determined for him by his successor at the MOF.

Moreover, in contrast with Washington’s revolving-door system, former Japanese bureaucrats do not see themselves primarily as lobbyists representing their new employers in influencing their old ministry. On the contrary, they see themselves as ambassadors from their old ministry making sure that their new employers abide by ministerial policy.

In addition to a carefully structured social system, the MOF bureaucrats benefit from many counterintuitive tools of power. Decades ago, the Diet vested the MOF and other agencies with almost complete freedom to write and rewrite Japan’s regulations without further approval from elected representatives, thus underpinning the preeminence of MOF bureaucrats. Bureaucrats can more or less make up the law as they go along, even fine-tuning it to harass those who offend them.

Usually, however, MOF bureaucrats do not need to resort to such extremes. They dominate Japanese society by selectively enforcing existing regulations. Because regulations in Japan are written very restrictively, but enforcement is often deliberately lax, the bureaucrats can maintain a double standard: they tolerate certain kinds of tax evasion, for instance, but can strictly enforce Japan’s formidable tax code against anyone they want to punish. When the Japanese car market was first opened to imports, for instance, tax officials made a habit of auditing buyers of foreign cars.

The significance of the tax system as a tool of Japanese power has long been hidden from the West by a widespread belief, voiced most notably by The Economist, that the National Tax Agency functions largely independently of the MOF. Anyone who checks the standard Japanese—language directory of the Tokyo bureaucracy, however, can see that this is nonsense. The tax agency is richly laced with career MOF officials, most of whom are destined to return to the MOF. There is not the slightest ambiguity regarding where their loyalty lies.

The shoguns’ bureaucracy invented the concept of using selective enforcement in the feudal era as a tool of power, and to this day the ability to calibrate tax assessments individually gives Japanese officialdom great leverage over corporations and wealthy citizens. As the Japanese commentator Kenichi Ohmae reported a few years ago, if corporations flout the MOF’s guidance, tax officials “can come in and ransack every single page of their books.” One prominent Japanese businessman, only half jokingly, recently described the National Tax Agency as “Japan’s KGB.” The MOF uses selective enforcement not only in tax matters but in banking and securities regulation. Thus the MOF almost effortlessly dominates the corporate sector, which in turn controls Japan’s elected representatives by providing them with much of their campaign money.

As if this were not enough, politicians are also subject to direct bureaucratic control via selective enforcement of Japan’s election laws. Among other things, the bureaucracy heavily restricts corporate funding for elected representatives. It has also imposed restrictions on elected representatives’ efforts to organize grassroots campaigns. Some of the rules are truly amazing. Door-to-door canvassing of voters, for instance, is outlawed in Japan.

How, then, do Japanese politicians win elections? In practice, they flout the rules, particularly those on electoral funding. They also often buy votes via an extraordinary network of local political strategems. Needless to say, purchasing votes is illegal. But as long as a politician remains on good terms with the MOF and other bureaucratic agencies, he or she can probably sleep soundly at night.

Selective enforcement is the hidden dynamic behind most of Japan’s political scandals, including the Recruit scandal of the late 1990s, in which prominent people were accused of receiving shares at below-market prices, and the Nomura scandal in which Nomura Securities was accused of misconduct in selling shares to institutional clients, of the early 1990s. Such scandals have been a constant in Japan for a century and follow a standard pattern. They begin with leaks to the press, usually concern securities violations or tax evasion, and are generally instigated by the MOF. Typically the victims are politicians or their supporters in business. These victims’ real offense is usually that they tried to stand up to the MOF.

Japan’s Non-Revolution

If you are to believe the Western press, Japan’s bureaucrat-dominated government is rapidly crumbling. Supposedly, in 1993 the Japanese electorate voted decisively for change and thereby triggered what press commentators in the United States billed as an earthquake. Actually, remarkably little has changed in Japan. The press presentation of the 1993 election as an exercise in “throwing the bums out” was a heroic misrepresentation of reality. Virtually every incumbent politician of the formerly dominant Liberal Democratic Party who stood for reelection was victorious. Even LDP politicians who had been deeply implicated in various money-politics scandals were reelected. Whatever change took place stemmed mainly from the fact that, just before the election, some members of the LDP broke away to found a new party. They duly won election under new party labels, prompting the less observant in the Western press to proclaim a revolution. In essence, however, the same old bums had returned to the Diet. Not only that, they arrived via the same old smoke-filled rooms. Japan’s voters, as usual, had not been given much choice in the matter.

Clearly almost everyone involved intends to create a new political structure that, in appearance at least, will approximate a Western two-party system. Big business, which has long been somewhat embarrassed by Japan’s designation abroad as a one-party state, will welcome such a system. What is less clear is whether the new two-party system will do much to rein in the prerogatives of the bureaucracy, particularly those of the MOF. The new system can be expected to win some token victories in battling the bureaucracy. The MOF, in particular, will probably play along. In fact, it has long been careful in its public dealings to preserve the impression that elected representatives have the last word. In drafting the budget, for instance, the MOF is adept at including unnecessarily unpopular provisions as bargaining ploys. It later makes a show of bowing to pressure from politicians in removing the offending provisions, thus preserving the impression that the popular will prevails. In the economic slowdown of the early 1990s, for instance, the MOF preposterously proposed a doubling of Japan’s unpopular consumption tax—and then backed off, ostensibly in response to elected representatives. If the MOF wants to give the new two-party system some power, that is the MOF’s decision to make. Moreover, the MOF will retain the power to change its mind later.

The MOF’s magic

Amid all the confusion about Japan’s supposed revolutionary political changes and moribund clear: the Japanese economics, one thing is economy has emerged from the early 1990s stronger than ever. It is hard in the space of a few paragraphs to do justice to Japan’s true strength but here are a few facts:

• Between 1989 and 1993, Japan rose from sixth in the world in per capita income to a close second, behind Switzerland.
• Japan’s per capita income is now more than 40 percent higher than America’s.
• According to Deutsche Bank, Japan in 1993 passed the United States to become the world’s biggest manufacturing economy.

If these facts look startlingly at variance with those often cited in the Western press, there is a reason. Unbeknownst to the Western public, the press generally uses out-of-date exchange rates that value the yen at as little as half its recent market value. Thus it systematically understates Japan’s recent economic performance. The justification for using such exchange rates is that the yen’s internal purchasing power has not kept up with its external purchasing power. This is a highly debatable point. Even at today’s exchange rates, some prices in Japan remain lower than in the United States (the Japanese spend less than Americans on health care, for instance). Overall, the Japanese clearly now enjoy one of the highest standards of living in the world. This is evident in their world-beating life expectancy rates, which have increased by nine years since 1964 and now surpass American rates by about three years.

In any case, the yen’s internal purchasing power is largely irrelevant for anyone interested in Japan’s—and in particular the MOF’s—rapidly growing influence in the global economy. For that, the yen’s external purchasing power, as measured by the current exchange rate, is unequivocally the appropriate yardstick. Driven by the rising yen, Japan’s presence in, for instance, development assistance has enormously increased, so much that Japan now slightly outspends the United States, whereas a decade ago the United States outspent Japan two-to-one.

Perhaps the ultimate indicator is Japan’s rapidly rising share of global savings. Japan in 1993 accounted for an astonishing 56 percent of the developed world’s total net savings. By contrast, the U.S. share was just five percent. The implications of these figures are enormous. In foreign direct investment, for instance, Japan’s outflows have increased fivefold in the last ten years (and remember that, by the early 1980s, Japan was already investing heavily abroad).

All in all, it is apparent that the MOF sits atop a growth machine that accounts for close to half of the world’s industrial expansion each year. No organization in history has wielded more economic clout than the MOF does today.

The Reasons to Watch

Clearly, the MOF is an institution that should be watched at least as closely by the international press as the Federal Reserve and the Bundesbank. Its influence reverberates down from macroeconomic issues of global currency stability to pocketbook issues such as the interest rates that Americans must pay for credit cards and small loans. Its retirees run such globally important agencies as the Tokyo Stock Exchange, the Bank of Japan, the Fair Trade Commission, the National Finance Corporation, the Overseas Economic Cooperation Fund (which administers Japan’s vast foreign aid budget), the Japan Development Bank, and the Export-Import Bank of Japan.

Under MOF leadership, the Japanese government has been consistently producing budget surpluses for many years. Indeed, Japan’s tight budget policies are probably the ultimate proof that Japan is driven by a particularly resolute system of centralized power. The MOF deviates from fiscal rectitude only in years of poor consumer demand, when a fiscal stimulus is needed to support the lifetime employment system. The Japanese government has been an avid saver for most of the postwar era. According to figures compiled by the U.S. Congressional Budget Office, Japan’s government savings rate averaged 4.8 percent in the 1970s and 4.6 percent in the 1980s. By contrast, the U.S. government savings rate fell from 0.4 percent in the 1970s to -2.1 percent in the 1980s.

The MOF’s policy of maximizing government savings flies in the face of repeated efforts by Washington in the last decade to get Japan to increase government spending as a way of reducing America’s trade deficit. It also runs counter to the wishes of Diet members. As The Wall Street Journal reported in April 1993, the MOF deliberately uses byzantine and archaic accounting methods to obscure the strength of the government’s finances, thus bamboozling politicians into voting each year for the MOF’s ultraconservative budgets. MOF officials boast openly about their role in frustrating elected representatives’ spending proposals. One MOF official told The Wall Street Journal, “In your country, you at least have politicians in Congress who are fiscal conservatives. But we don’t have any. Every politician wants to spend and spend.”

Perhaps the best way to get a sense of the power the MOF derives from its savings is to use absolute money numbers. Measured by Western accounting methods, the Japanese government’s savings in 1991 alone totaled about $300 billion, more than two times the net savings of the entire American economy. The MOF, in effect, is the world’s biggest saver. These savings help Japan maintain its historical disdain for foreign capital. The MOF’s characteristically non-Western approach to industrial development was apparent from the start of Japan’s economic drive in the nineteenth century. Whereas most other economically backward countries imported capital heavily, the MOF rigidly refused to borrow abroad. Two small loans were raised abroad in 1870 and 1873, but for the next 25 years the MOF maintained a virtual ban on foreign capital.

The MOF also led the Japanese establishment in eschewing direct investment in Japan by foreign capitalists. Thus the MOF violated one of the most cherished principles of Western economics, that unrestricted transfers of capital across borders serve to boost efficiency in recipient countries. The Japanese saw things differently, forming their opinion from practice, not theory. They were influenced in particular by the slow deaths of the Chinese and Ottoman empires in the latter decades of the nineteenth century. Both had thrown themselves open to foreign capital, which in the Japanese view had decapitated these once-proud empires and led to corruption and demoralization.

Although the MOF has no direct involvement in the broader aspects of industrial policy, there is little doubt that many of Japan’s most important industrial initiatives—targeting markets, for instance—could not exist without the MOF’s support. Just as a chief executive works through divisions and profit centers in the search for profitable new products, the MOF works to promote economic growth through cartels, banks, bureaucratic agencies, and keiretsus, the informally organized clusters of Japanese companies that intertwine their ownerships and cooperate regularly in each others’ management decisions. Moreover, the MOF has been the mainspring of Japanese mercantilism since the 1870s, when it invented nontariff barriers. The MOF was, for example, the protagonist in a dispute with the United States over the size of Japan’s current account surpluses. A few years ago, the MOF’s international affairs vice minister, Makoto Utsumi, made a proposal that came to be known as the kuroji yuyo ron, “the theory that surpluses are useful.” Utsumi argued that the American government needed Japan to run trade surpluses so that Japan could have the money to finance America’s budget deficits.

Perhaps an even more telling insight into the MOF’s mercantilist mindset is its decisive role in protecting the auto industry. Until 1973, it used its controls on foreign investment in Japan to block American and European automakers from establishing Japanese manufacturing operations. It used its taxing powers to levy duties on imported vehicles until 1978 and on imported auto parts until 1986. It even used its powers over the insurance industry to require Japanese motorists to pay three times as much to insure a foreign car as a domestic model. This discrimination was abolished only in 1988, years after Japanese automakers had passed their last remaining serious rivals, the Germans. The MOF’s enthusiasm for mercantilism is reinforced by its private agenda. It has been the main beneficiary of mercantilism because Japan’s thwarted purchasing power ends up in MOF-regulated savings institutions.

The MOF is also the mainspring of Japan’s cartelization policy, thanks to its right to appoint top executives of Japan’s Fair Trade Commission. MOF appointees at the commission which administers Japan’s antitrust laws, naturally turn a blind to most cartels. Employing these powers, the MOF has become a skilled exponent of limited monopoly. In its hands, a limited monopoly generally does double duty as a tool of power and a device to generate economic efficiency (via the “good” cartel, the ultimate limited monopoly). The MOF has even used limited monopolies to control the advance of foreign securities firms in Japan. Only a few foreign securities firms and financial organizations are allowed to participate in the Japanese financial services industry. With other applicants arbitrarily shut out, those on the inside enjoy monopolistic pricing opportunities. But because their right to participate is by grace, they must be careful to remain on the right side of the MOF.

Another key area in which the MOF’s influence is widely felt is overseas aid. Disbursements of aid are often made on the understanding that the recipient country will make contributions to the reelection campaign funds of specified Japanese politicians. In the case of some recent Japanese financial aid to Indonesia for instance, up to one-third of the money is said to have returned to Japan in the form of political contributions. According to the scholar Robert M. Orr, Jr., Japanese aid now accounts for 15 to 20 percent of the entire government budget of almost every East Asian country Clearly, therefore, when the MOF speaks, East Asia listens.

Rich Country, Strong Bureaucracy

Japan is, of course, not the only country with a strong bureaucracy. It shares this characteristic with most of Europe’s advanced societies, notably France, Germany, Switzerland, and Austria. A strong bureaucracy is also a feature of East Asia’s most successful societies, including Taiwan, South Korea, Singapore, and Hong Kong. However, the Japanese civil service’s power—especially that of the MOF—is in a league of its own. Japanese civil servants enjoy the priceless advantage of the moral high ground. As a Confucian society, Japan is avowedly paternalistic, and there is little sympathy for the essentially alien view that supreme power is rightfully the prerogative of elected representatives.

Thus the bureaucrats do not have to apologize for overruling populist tendencies. As ever in Japan, politicians reign and bureaucrats rule.