Zeitschrift für Japanisches Recht

2. Jahrgang 1997- Heft Nr.4

A Regulatory Cartel Model of Decisionmaking in Japanese Finance

Curtis Milhaupt and Geoffrey Miller

Japan is typically viewed from the West as a consensus-based society, characterized by public-spirited cooperation which eliminates the need for many of the formal legal procedures and institutions common in the United States. There is considerable merit to the traditional view: negotiation and cooperation do influence the formulation of private bargains and public policy in Japan, and appear to substitute for the more "legalistic" procedures used elsewhere in the developed world. Yet, although undoubtedly accurate in part, the received wisdom about Japan is not wholly accurate either, at least to the extent that Japan is seen as following fundamentally different economic or cultural laws than the rest of the world.

This article presents a theory of the consensus norms in Japan – with specific reference to Japanese finance – that does not depend on any fundamental differences between Japan and the West. We model decisionmaking in Japanese finance as a form of "regulatory cartel." In part, the basic purpose of the regulatory cartel is similar to the purpose of any cartel: to control entry and output and thereby increase price above the market-clearing level. The Japanese regulatory cartel differs from the standard industrial cartel familiar from price theory textbooks in that (a) it is extremely far-reaching, extending not only within industries but across industry groups; and (b) responsibility for coordination and enforcement of the cartel is vested, not only in groups within particular industries, but also in bureaucrats and, ultimately, in politicians. As we will demonstrate, many features of the "consensus" style of decisionmaking in Japanese finance can be understood as effective methods for enforcing division of markets and control of output and price in the face of threats to defect by weaker members of the cartel. The Japan of consensus, cooperation, and social cohesion is similar, in some respects, to a big-city political machine in which all the politically influential groups receive their share of the benefits as long as they adhere to the rules of the game and remain loyal to the politicians who retain the ultimate control over the system as a whole.

The model is composed of two sets of norms, which we call "bargaining norms" and "substantive norms." Bargaining norms arise out of the institutional context of Japanese finance. They shape the structure of negotiations and the resolution of disputes in the financial industry, thereby determining the process by which regulation is made and enforced. The dynamics unleashed by these bargaining norms in turn generate a second set of norms that substantively shape the operation of the financial industry. Substantive norms govern primary conduct and encourage or discourage particular forms of behavior. Together, these norms constitute the "rules of the game" in Japanese finance.

I. Traits of Japanese Financial Regulation

Before constructing our model, we survey six salient features of Japanese financial regulation identified in the existing literature: limited competition, regulatory concentration and patterning, "convoy" style regulation, avoidance of failure, informality, and gradual "legalization." These traits provide the backdrop for our analysis and offer an alternative vision of approaches to regulation for readers accustomed to U.S. regulatory practices.

1.  Limited Competition: One prominent trait of Japanese financial regulation is limited competition. Competition is limited through extreme compartmentalization of distinct sectors of the financial industry. The banking and securities industries are separated, and the banking industry is subdivided into numerous sectors including commercial banking, trust banking, long-term credit banking, and regional banking. Each segment of the banking industry serves a distinct segment of the market. With certain exceptions, players in one sector are not permitted to engage in business in any other sector.