Caught Over a
Pork-barrel:
Decentralizing Japan's
1940 Fiscal Regime
ANDREW DEWIT
Decentralization ...is viewed as the "third major reform" in modern Japanese history following the Meiji Restoration and the
postwar reforms ...The Ministry of Home Affairs is committed
to seeing that this project is a success.
Ministry of Home Affairs, Japan (1997)
ntroduction I Decentralization appears to be on a roll
in contemporary Japan. To be sure, the Japanese Left
have long sought administrative and fiscal devolution
in order to democratize the state and, of late. insist that
local government is better able to address the needs of a
diversifying society. Yet, amidst the protracted fiscal and
financial crises following the collapse of the late 1980s "bubble economy," even most of the conservative establishment,
the heirs of Japan's centralized developmentalist state,
openly blame their heritage for the nation's enervation at
century's end. Hence many observers believe that the 1995
"Law to Promote Decentralization" (Bunken Suishin Hou)
heralds - to recycle a truly hoary cliche - the sunset of Japan's
centralized state.J
However, rhetoric is one thing and concrete action quite
another. Centralization in Japan is primarily a fiscal problem,
whose resolution entails disbanding whole armies of interests
encamped alongside the rich flow of expenditures from the
central state. Hardened veterans of countless turf wars, these
interests are quick to decry the mercenary aims of their
neighbours but defend their own ground to the bitter end.
I
Studies in Political Economy 57, Autumn 1998
103
Studies in Political Economy
Thus, enacting the law mandating decentralization, organizing its deliberative commission in order to prepare a roadmap
for devolution, and the commission's continuing research
and reports have all met heavy resistance from various factions of bureaucrats, business and politicians who depend
on the spending state)
Even so, this paper argues that Japan's centralized fiscal
system is in the midst of a deepening and potentially transformative crisis due to its escalating costs and its changing
context. The former include not merely monumental loads
of debt, but also environmental despoilation, political corruption, and vast material waste in the face of growing social
needs. The latter refers to decelerating economic growth and
the intensifying pressures from the global political economy.
I also maintain that an understanding of the crisis is best
pursued through a fiscal sociology approach centred on the
meso-level of analysis. In a brief digression below, I describe
this approach, and then go on to discuss the origins and
crisis of fiscal centralization in Japan.
Fiscal Politics and Fiscal Sociology The meso-level centres
on the range of institutions that lie between the micro-level
realm of individuals, especially homo economicus, and such
macro-level concepts as classes, the state, and capitalism.
This level of analysis is particularly apt for Japan because
it is the quintessential organized society: it is thick with
institutions, including bureaucratic agencies, whose abiding
interests strongly mold the country's political economy and
political culture. Previous examples of institutionalist studies
include those centred on postwar Japan's "capitalist developmental state" or, more generally, the "1940 system," an
economic-growth regime whose thickest roots lie buried in
the tumult of Japanese militarism and its aftermath.f
By contrast - and reflecting developments in mainstream
political science as a whole - the most aggressive trend in
Japanology is towards the micro-level functionalism of rational choice. This approach largely reduces institutions to
the "rules of the game" and implies that they exist because
they facilitate self-maximization. At their "principal-agent"
extreme, such accounts ignore the interests of state agencies
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DeWit/Japan
because bureaucrats are deemed to be mere handmaids for
their political principals. Fiscal politics is thus stripped of
much meso- and macro-level history, and depicted as the
ostensibly universal and predictable workings of rational
self-interest.>
Macro-level methods also have their problems. Marxian
studies of fiscal politics, for example, often embody functionalist assumptions about the role of the state and its relation to capitalists. For instance, James O'Connor argues
that the capitalist state is ineluctably driven towards fiscal
crises by having to fulfill the contradictory functions of accumulation and legitimation. However, the academic Left's
1980s debate about the state certainly taught us that examining the organizational
characteristics
of specific states
should precede any hasty attribution of functions.f
In this spirit, I adapt Joseph Schumpeter's branch of fiscal
sociology for the analysis of Japan's system. Shorn of its
rather teleological stress on the inevitable exhaustion of the
tax state itself, Schumpeter's
method is especially useful
because it has a deep regard for history and portrays fiscal
instruments as both influencing and being influenced by a
variety of interests within and without the state. This eclecticism means that one can incorporate insights from microand macro accounts while avoiding the functionalism they
are often prone to. Schumpeter's
fiscal sociology
also
stresses that the fiscal system is deeply entwined with economy and society and thus (particularly in crisis) provides a
unique window on the institutions that animate the social
order. In Schumpeter's
own words,
The public finances are one of the best starting points for an
investigation of society, especially though not exclusively of its
political life. The full fruitfulness of this approach is seen particularly at those turning points, or better epochs, during which
existing forms begin to die off and to change into something
new, and which always involve a crisis of the old fiscal methods."
As I suggested earlier, Japan's intergovernmental
fiscal
relations appear to have reached such a turning point. More
than is true anywhere else, in Japan the fiscal bonds between the central and subnational governments
are of signal
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Studies in Political Economy
importance because, as I describe below, they comprise the
bulk of the country's "fiscal regime" - a term which denotes
a particular system of taxation and spending marked by an
emphasis on specific tax fields such as income; areas of
expenditure, including social transfers and public works; and
the overall politico-economic goals, such as redistribution,
that the fiscal instruments embody. 8
The 1940 Fiscal Regime Indeed, confirming another of
Schumpeter's claims - that a crisis renders the political
economy more clearly - many critical public finance scholars now argue that Japan's fiscal regime derives more from
wartime reforms than, as the orthodoxy would have it, those
of the postwar Occupation.? To be sure, the system is not
identical to the structure adopted on the eve of the Pacific
War. Many adjustments were made to it even before Japan's
defeat in the summer of 1945 and the prompt arrival of the
Americans with their particular notions of fiscal democracy.
However, its backbone remains the centralized, bureaucratic
control of major tax fields - notably of income tax - that
is the central legacy of the landmark 1940 tax reforms. These
aspects of the 1940 reform largely survived the Allied Occupation's agenda or were reconstructed in the 1950s during
the post-Occupation rollback, otherwise known as the "reverse course." This transwar continuity of its core structure
is, in short, the reason the present regime is increasingly
referred to as the 1940 fiscal system.
Japan's intergovernmental fiscal relations involve massive
transfers from the central to the subnational governments in
order to pay for a conspicuously high level of subnational
spending. Figure 1 shows, in fact, that 70 percent of Japan's
government-sector spending takes place at the local level.
A rate that is extremely high even in comparison to federal
states, as the American, Canadian, and West German examples indicate. Japan's local authorities collect just under 40
percent of overall revenues - a fairly high level in comparative terms - but because their burden of spending is
far higher still as there is a huge gap between their own
receipts and expenditures, fiscal transfers from the centre
are necessary. To show the latters' significance, the "fiscal
106
DeWit/Japan
transfer" component in Figure I measures the percentage of
the central state's operating expenditures transferred to subnational governments as both specific and general subsidies.
In the Japanese case, 50.7 percent of the central state's operating expenditures are a transfer of one form or another
to the local authorities. This rate of transfer is nearly twice
the U.K.'s 25.8 percent, the next highest in the sample.
Figure 1: Local Expenditures. Revenues
and Fiscal Transfers, 1994
80
70
60
&50
~40
l:!
If 30
I II
20
10
o
Canada
W. Ger.
US
Japan
~
Subnational Expenditures'
•
Fiscal Transfer**
0
\
France
I
Sweden
UK
Subnatlonal Revenues'
* Local Expenditures and Local Revenues are shown as a percentage of
total government*?*
** Fiscal Transfer is shown as a percentage of operating expenditures.
Note: US data is for 1993. Local Expenditures and Fiscal Transfers are
calculated from national accounts data for central, state, and local governments, in OECD: National Accounts, Detailed Tables, Volume 2, 1982-1994
(Paris: 1996). Local Revenues are calculated from tables between pp, 216234, in OECD: Revenue Statistics, 1965-1995 (Paris: 1996).
Fiscal Decentralization and Japan's 1940 System Viewed
from the meso-level of analysis, the Japanese intergovernmental system's scale and centralization have been, among
other things, perpetuated by inter-ministerial tax competition
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Studies in Political Economy
and the political coalitions that stand in defence of unusually
generous levels of pork-barrel public-works spending. The
tax competition involves two central agencies, the ministries
of Finance (MOF) and Home Affairs (MOHA), which split
jurisdiction over, respectively, Japan's national and subnational fiscal instruments. That is, MOF's jurisdiction is national taxes whereas MOHA controls subnational taxes as
well as a large share of the transfers to subnational governments. Representing separate levels of the state in a condition where fiscal resources are generally scarce, the ministries strive to maintain and, if possible, augment their potent
levers of administrative power, for complacency could mean
effectively ceding them to the other ministry or to the local
authorities. I 0
As for pork-barrel political coalitions, they exist in large part
because politicians from the ruling Liberal Democratic Party
(LDP) reap great benefits from the distributional end of the fiscal
regime. In order to maximize their chances of reelection, LDP
politicians often band together as zoku giin ("policy tribes") and
work with important interest groups in various areas of symbolic
and distributive politics. When it comes to fiscal decentralization, zoku giin opposition stems in large measure from their
desire to maintain influence over Japan's cornucopia of construction contracts. That 10.6 percent of Japan's working population was employed in construction in 1994, a level about twice
the average of other industrialized countries, gives some indication of the electoral significance of pork-barrel spending. Indeed, in the campaign for Japan's July 12, 1998 Upper House
elections, former Construction Minister Kamei Shizuka stated
bluntly that he believed his role as a politician centred on rieki
yuudou, or bringing such benefits as bridges and roads to the
local constituency. I I
Some analysts explain
Japan's high level of intergovernmental transfers through
macro- level culturalist approaches, and thus suggest the
transfers reflect a sharing society, one strikingly different from
the "West." But aside from eliding the vast differences among
the so-called Western countries, this culturalist reasoning puts
the cart before the horse. Japan's fiscal culture certainly emphasizes inter-regional redistribution, in a sharp contrast to,
say, Anglo-America's postwar emphasis on interpersonal
The Roots of Fiscal Centralization
108
DeWit/Japan
equity via the income tax. The roots of both fiscal systems
are, however, quite tangibly institutional and have little to
do with the mystical dictates of culture. 12
Perhaps the strongest influence that shaped Japan's 1940
fiscal system was MOHA's predecessor, the powerful Home
Ministry (Naimusho). The ministry was deeply concerned
about the prewar era's increasing gaps among subnational
tax rates but though the rates came under its immense jurisdiction, it could not credibly enforce its mandate without
a well-funded regime of transfers to compensate for the enormous interregional differences in fiscal capacity induced by
uneven capitalistic development. The prewar fiscal system
lacked redistributive mechanisms whereby taxes, especially
on income, could be imposed on wealthy areas, while interests and the revenues could be transferred to needy regions. Without redistribution, the latter regions - primarily
farming communities - had to rely largely on the weak
local tax base to fund education, infrastructure and the other
costs that climbed as the country industrialized. As a result,
tax rates throughout Japan became very unbalanced, so that
by the mid-1930s economically powerful urban areas, particularly Tokyo, were levying taxes at rates of less than a
tenth of those which prevailed in such peripheral areas as
Okinawa.J''
The fiscal consequences of uneven development could not
be remedied in the 1920s and 1930s due to the political
power of urban business interests, who successfully opposed
progressive social-policy bureaucrats' efforts to shift more
of the tax burden onto them. However, Japan's full-scale
invasion of China in 1937 placed enormous fiscal pressures
on the state, and eventually provided the context in which
to engineer reforms that both centred revenues on income
taxation and implemented mechanisms for large-scale redistribution. The redistributive aspect of the 1940 reform was
thus in large part a consequence of the Home Ministry's
organizational concern to bolster its centralized bureaucratic
control over local fiscal conditions.H
The Origins of the Local Spending Bias The Japanese welfare state's emergent bias towards local spending exacerbated
109
Studies in Political Economy
problems in prewar local finance. Figure 1 showed that Japan
has a heavy proportion of local spending, funded through
copious transfers. This pattern of spending and transfers is
not simply the outcome of postwar conservative politicians'
favouring rural and semi- rural constituencies, as a microlevel perspective would suggest. Rather, this spending pattern arose in the prewar era via measures to build up necessary infrastructure and to combat unemployment. As one
expert on Japanese public finance notes, "aid for rural districts was a policy that originated with the bureaucracy." As
far as possible the spending was to be done locally with the
aim of shoring up the sense of belonging (kizokusei) among
the residents of local communities - an aim comparable in
intent to the "familism" then emerging in the modem, corporate sectors of the economy. 15
Figure 2: Central Transfers as a Share
of Subnational Revenues, 1931-1962
0.6
••!
-r-------------.,
~ 0.5 -J----------jr..-\-------I
>
!
iOA-J--------I-IL...\---"'.-------,--=~
~
.g 0.3 +-------j'"l---\------I
-.Total
Specific Subsidies
••
....•...
i
0.2 +-----.,.------.If---~,,e:--____I
'0
1:~ 0.1 -t- __"""'..,~
General Subsidies
.....••••••.•
d_-----1
l.
O-L..i-+_-+-_-
- _
_+_'
'31 '34 '37 '40 '43 '46 '49 '52 '57 '62
Source: adapted from Table 3-3, p. 59, Noguchi Yukio, /940-nen Taisei:
Saraba Senji Keizai [The 1940 System: Goodbye to the Wartime Economy].
(Tokyo: Toyo Keizai Shimbunsha, 1995).
Figure 2 shows that Japan's prewar transfers from the
centre to the subnational authorities were negligible compared with the system that was institutionalized in 1940.
110
DeWit/Japan
The general subsidies (ippan hojokin) shown in the figure
comprise a tax-sharing scheme, centred on the Local Allocation Tax (which is actually a grant), that was implemented
in order to aid jurisdictions with low fiscal capacity. The
programme at present sees close to a third of the centrallycollected income, consumption, and liquor taxes allocated
to a fund whose proceeds are redistributed according to complex measures of local fiscal needs. On the other hand, specific subsidies (tokutei hojokin) are disbursements from
general revenues for specific local projects, such as public
works, and are allocated by individual ministries. As we
also saw earlier in the "fiscal transfer" component of Figure
I, both these types of subsidies have come to provide a
large share of subnational revenues and central-state expenditures during the postwar years.
The 1940 system was reinstituted in the wake of early
postwar American efforts to federalize decision-making in
the Japanese fiscal system. The return to the wartime fiscal
order meant that central-state bureaucracies were again
largely unimpeded by institutionalized local input into decisions concerning taxing and spending at the subnational
and national levels. However, noting that bureaucrats wield
great influence should not be confused with asserting that
they possess autonomous control. Through the rise of party
politics in the postwar democratic order, the specific subsidies in Japan's rich mix of redistributive programs became
a powerful tool through which central-state conservative
politicians maintained their electoral base. The result is a
massive collusion of bureaucratic and political purposes
which generates enormous spending pressures, particularly
for public works.
The Construction State Table I gives evidence of the Japanese state's heavy orientation towards public works spending, especially at the subnational level. The first column in
the table shows the percentage of GDP consumed by general
government sector fixed capital formation (which is largely
public works). Japan's level of 6.6 percent of GDP is nearly
twice that of France and Sweden, which devote 3.4 and 3.3
percent, respectively, of their GDP to capital formation 111
Studies
in Political
Economy
a level that is itself noticeably greater than the rough average
of about 2.0 percent for the rest of the sample.
Table 1: Government Fixed Capital Formation, 1994
Canada
West Germany
U.S.
Japan
France
Sweden
U.K.
General Government
Fixed Capital
Formation/GDP (%)
2.3
2.0
1.6
6.6
3.4
3.3
2.0
Subnational Fixed
Capital Formationl
Subnational Expenditures
6.9
10.1
9.1
31.8
(%)
23.0
7.0
8.1
Source: OECD, National Accounts, Detailed Tables, Volume 2, 1982-1994
(Paris: 1996). Note: the U.S figures are for 1993. The Japanese data for
the 1990s are elevated, due to anti-recession measures, from the 1980s
rough average of a little over 5 percent of GDP. Other countries' data vary
as well, but within narrower limits.
The second column shows that fixed capital formation
constitutes almost a third of Japan's local authorities' expenditures. This means that subnational government in Japan
is, to a large extent, proportionately more of a conduit for
public works spending than in any of the other countries
sampled.
Japan's immense public works spending is in fact a core
characteristic of its fiscal state. Table 2 displays various countries' government-sector spending as a percentage ofGDP. The
Japanese state stands out as unusual in its combination of
Table 2:
Government Section Spending as a Percentage of GDB, 1994
Total
Social Transfer
Final Con.
Interest
Fixed Capital
Canada W.Genn. U.S.
49.0
46.8
35.4
12.4
15.2
16.1
20.2
17.7
16.5
3.4
4.4
9.2
1.6
2/3
2.0
Japan France Sweden
34.8
56.3
69.7
23.3
12.3
24.9
27.3
9.6
19.6
3.7
3.8
6.8
3.4
3.3
6.6
U.K.
45.2
15.3
21.6
3.3
1.9
Note: US data are for 1993.
"Final Con." = Final Consumption
Source: GEeD, National Accounts, Detailed Tables, Volume 2, 1982-1994
(Paris: 1996).
112
DeWit/Japan
low final consumption and social transfers coupled with high
fixed capital formation.
Specifically, Japan's final consumption expenditures
(these are mostly for civil servants' salaries) are by far the
lowest of the seven countries. Moreover, Japan's "social
transfers" (government spending on social security and social assistance) are easily in the same league as the residualist welfare state of the U.S. Japan is therefore clearly not
an interventionist welfare state of the European type where high public sector employment, service provision, and
transfers are reflected in elevated levels of spending on final
consumption and social transfers. The Anglo-American
states are generally smaller than those in Europe, but they
cannot match Japan for stinginess when it comes to the number of civil servants. Nor do any of the other countries,
whether Anglo-American or Continental European, come
close to Japan's outlays for fixed capital, especially as a
proportion of total government sector spending.
Japan's fiscal statistics thus confirm the claim that it is
a "construction state" (kensetsu kokka) - one that redistributes an inordinate amount of national wealth through regional spending on infrastructure. Japan has indeed an
unparalleled devotion to building dams and roads, straightening rivers and coastlines, blasting tunnels and erecting
bridges, and otherwise frenetically blighting the natural environment with vast quantities of concrete and steel. The
many culturalists who claim Asians have a special harmony
with the environment, in contrast to Westerners' rapaciously
instrumental rationality, evidently put on the thickest of rosecoloured lenses when perambulating the fixed capital of the
Japanese countryside. 16 But the more insightful scholars who
analyze the political economy of state spending in Japan are
under no such illusions, drawing attention to the deleterious
environmental and political consequences of public works.!?
The counterpart of Japan's relentless quest for greater economic efficiency in export-oriented industries, the key to
the economic miracle, has thus been a concern for political
effectiveness in expenditures. Unlike the soft-authoritarian measures favoured in other high-growth regimes
throughout Asia - such as stridently anti-liberal Malaysia
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Studies in Political Economy
and Singapore - the postwar Japanese state has to a large
extent bought off potentially threatening opposition with the
pacifier of public works. The legacy of this spending includes woefully inefficient construction firms, entrenched
and expanding networks of political corruption, and a monumental load of debt.lf The construction state itself is undergirded by the fiscal instruments of the 1940 regime, as
it could not exist without there being powerful fiscal instruments in place to draw revenues from rich urban areas, to
pool them at the centre, and then to redistribute them to
rural constituencies. MOF and MOHA have important roles
in both managing these fiscal instruments and in contending
with one another for fiscal turf, thereby giving them strong
incentives to oppose fiscal decentralization. Postwar politicians' use of transfers for pork-barrel purposes has also reinforced these incentives, as MOHA seeks to maintain order
in local finances and MOF strives to maintain a measure of
discipline in national-level fiscal policymaking.
Central agencies - especially the ministries of Construction, Agriculture, Forestry and Fisheries, and increasingly
of Health - along with their allied zoku giin, generally
target public works to the local level via specific subsidies.
These are among the principal elements in the continuing
debate over decentralization, and provide over 40 percent
of the intergovernmental fiscal transfers. Specific subsidies
are much loathed in the press and by progressives because
they are regarded as often wasteful means by which Diet
politicians and their bureaucratic allies can impose developmentalist and other agendas on local communities. They are
also carrots that subnational governments will go to great
lengths to secure. Municipal governments at times get so
caught up in the feeding frenzy of budgetary allocations that
they spend more in lobbying the centre than the particular
subsidy they seek is actually worth.J?
Fiscal Crisis and the 1940 Fiscal System However, specific subsidies supplied 15.3 percent of local revenues in
1994, down from 22.8 percent in 1979. The late 1990s
show an increase due to various fiscal stimuli, including
a whopping 16 trillion yen anti-recession package in 1998,
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DeWit/Japan
but the long-range prospect is for further attrition. This decline has been depicted by political scientists as a reduction
in explicitly "political" intervention in local affairs, because
the reigning assumption is that general subsidies are removed
from the realm of politics.s?
Specific subsidies were cut in order to cope with the fiscal
consequences of the 1970 slowdown in Japan's once phenomenal economic growth. Though Japan's post oil-shock
performance diverged greatly from the stagflation that hit
most other industrialized states, its rate of economic expansion did drop. Tax revenues therefore failed to keep pace
with the cost of public works and of the welfare spending
launched with great fanfare in the early 1970s. Fiscal deficits
therefore exploded, reaching close to a third of the annual
budget in the late 1970s. This crisis saw the conservative
political, bureaucratic and business hierarchy institutionalize
a process of "administrative reform" that held down the escalation in expenditures by - among other things - cutting
specific subsidies.U
Japan's slowing growth also ended its postwar record of
virtually annual tax cuts and brought an increasing politicization of taxes. Prior to the 1970s, tax policy-making was
a markedly bureaucratic affair in which the annual reports
of the MOF-dominated Government Tax Advisory Council
(Seifu Zeiseichousakai) were in large measure adopted by
the ruling party. By contrast, the party's own Tax Advisory
Council saw little activity and released its report in the wake
of the government's. This relationship changed markedly in
the 1970s as pressure groups increasingly sought to avoid
tax increases and therefore began to aggressively lobby the
LDP's tax council. Party politicians responded to the new
zero-sum politics of taxation by joining the party tax council
in droves and by representing their client interests. The politics of instituting Japan's notorious Consumption Tax were
indicative of the fiscal stress that continued in the 1980s,
and also gave evidence of the political limits to increases
in the personal income tax.22
Although serious pressure on taxes and transfers has been
building for close to two decades, the late 1980s saw the
problem compounded when the Japanese state sought to
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Studies in Political Economy
expand domestic consumption in order to alleviate the country's chronic trade imbalance with the Americans and others.
Given the nature of Japan's fiscal regime, public works became the centrepiece of the new program. But with specific
subsidies in decline, the cost for yet more imposing mounds
of concrete and steel were shifted increasingly onto local
finances. General subsidies thus began to be drawn into the
voracious maw of the construction state.23
Funding the Bullet Trains However it is Japan's protracted
recession in the 1990s that has driven the pork-barrel potential of the 1940 system to a destabilizing pace. A troubling
development in this respect occurred on Christmas Day of
1996: the delayed conclusion of the annual budgetary negotiations between the ruling party and the bureaucracy, primarily MOF. One of the major sticking points in the negotiations between the ruling coalition and the bureaucracy
concerned funding for the construction of new high-speed
shinkansen ("bullet train") lines. A proposal for five new
lines has long been left languishing on the drawing boards
for lack of finances, especially because the projects are truly
massive pork-barrel public works.
The funding hurdle confronting negotiators seemed insurmountable, for two major reasons. The first was Japan's
debt-strewn fiscal landscape of the 1990s. Economic pumppriming in the 1990s via public works and income-tax cuts
has left Japan the industrialized world's most debt-ridden
nation. The combined debt of the government sector in Japan
in 1996 stood at 440 trillion yen, which created a consensus
among the public finance community that spending cuts were
imperative. Large-scale projects such as the shinkansen lines
were declared not only wasteful but a dangerous anachronism, the "dregs" (zanshi) of the high-growth era's porkbarrel politics.U
A more immediate barrier arose because quasi-privatized
Japan Rail was unwilling to take on 50 percent of the construction costs, which is the funding arrangement in place
for previous shinkansen projects. Attention then turned to
whether Local Allocation Tax payments might be used to
cover part of the costs. In principle, MOHA has been against
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DeWit/Japan
this use of general subsidies for a long time and had confidently assessed the proposal as a non-starter when it appeared on the agenda in the summer of 1996. When it
reemerged later in the year, MOHA tried to stall by requesting a postponement
of any decision until August of 1997.
MOF also opposed funding the projects by citing the country's massive debt load. However, the deal concluded just
before the end of the year sees MOHA transfer Allocation
Tax monies - equivalent to about 30 percent of construction
costs of 173 billion yen - to the local authorities where
shinkansen construction is to occur.24
Though it opposed the funding arrangement, MOHA is
largely ambivalent on the issue. Its gatekeeper role with the
Allocation Tax gives it great influence in the decision-making process for the shinkansen funding scheme and other
such "economic development"
(keizai kaihatsu) projects.
These latter envision Japan as a slew of technopolies and
other public-works bonanzas. Initiatives on this scale cost
a lot of money, especially in Japan, but as we have seen
the specific subsidies that are largely the purview of the
Construction Ministry and its zoku giin are on a slow decline.
Hence the rush of interest in the Allocation Tax by the politicians.
However, MOHA's opportunity offers a dangerously open
politicization of the Allocation Tax, in contrast to the more
manageable back-room requests of the past. As we have seen,
for a number of years the pork-barrel principle of the Japanese construction state has been expanding well beyond specific subsidies and has been threatening to draw general
subsidies into its vortex. The more this occurs, the greater
it will undermine the purposes of the Allocation Tax, whose
legitimacy derives from its role in fiscal equalization. Open
politicization
of the Allocation Tax will add unnecessarily
to public debt, for the most dubious of projects, and thus
threaten to drive a wedge between the interests of urban
and rural taxpayers. Indeed, the 1998 appearance of a "sensational" book - in the words of discomfited MOHA bureaucrats - alerting urban, especially Tokyo, taxpayers to
rural governments' waste of general subsidies likely reflects
an emergent trend in Japanese fiscal politics.I>
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Studies in Political Economy
Turf Wars over Tax Fields Further indicators of the 1940
fiscal system's exhaustion and potential transformation are
seen in bitter struggles between MOF and MOHA over tax
fields. As I noted earlier, the ministries have long sought
to maintain their control over the local and national tax regimes - both of which are substantial because of Japan's
high proportion of local taxation. Yet recent years have seen
an intensification of their competition, with often quite public and costly fights between MOF and MOHA over taxes
on corporate income, fixed assets (especially property), and
general consumption.
The background to these fights is an increasing elite consensus that the Japanese tax state needs to shift away from
income taxation to heavier levies on property and consumption. There are various reasons for this consensus, including
the political difficulties of increasing personal and corporate
income taxes. Many in the tax policy-making community
worry that Japan's high levels of corporate income taxation
are grossly out of line with those of trading partners, especially nearby Asian countries. Most advanced capitalist countries in the postwar era reduced their relative burdens on
corporate income, but Japan's has increased until the mid1990s. Between 1965 to 1990 Japan's taxation of corporate
income rose (as a percentage of GDP) from 4.1 percent to
6.8 percent, while the OEeD America burden dropped from
3.9 percent to 2.3 percent. Admittedly, the average among
European countries rose over those years from 1.8 percent
to 2.6 percent of GDP, but the overall level was still relatively low and Europe's economic heartland, Germany, decreased its corporate tax burden from 2.5 percent to 1.8
percent in the same period.26
One reason for the increase is that Japan's central and
subnational governments (represented, respectively, by MOF
and MOHA) rely heavily on the tax field for revenues (as
we see in Figure 3). This split jurisdiction has seen each of
MOF and MOHA seek to deflect the heavy pressures for
corporate income tax cuts onto the other ministry's tax regime, and has produced "unprecedented" (zenrei no nai) conflict between MOF and MOHA in tax policymaking
forums.I?
118
DeWit/Japan
Figure 3: Corporate Taxation at
National and Subnational
Levels, 1994
5 -..--------------------,
4 -
~
----------------
e
~ 3 - --------------
12-:-------------II
:.I!
1 - -
o -1-L-..L..+ .....••.•
--' •...•...
~ ••.••._+_lL.- .•••.•+_L-..L..+ .•••.•-L+~ .•..•.....•
Canada Germany
us
Japan
France Sweden
UK
D
Source:
National
OECD, Revenue Statistics.
•
Subnational
1965-1995
(Paris: 1996).
The ministries' struggle over asset taxation dates from
the late 1980s, when MOF pushed to secure its Land Value
Tax. This levy is imposed on the same tax field as MOHA's
Fixed Assets Tax, which supplies about 40 percent of the
revenues for municipal governments. MOF ostensibly sought
the new land tax as a means to control land-price spirals,
but in fact had larger organizational interests. One major
goal, due to the above-noted consensus on the need to shift
the tax base, was access to a potentially expanding source
of revenues,. MOHA bureaucrats were outmanouevred in this
instance, and MOF was able to have the tax implemented
in 1991. MOHA fought back through increasing property
assessments in 1993, trying to squeeze MOF from the tax field.
As property values continued their giddying plunge in the
1990s, the ministries were caught in the path of a tax revolt
that made rapid headway through the courts. However, both
119
Studies in Political Economy
remain keen to increase their levies on this highly desirable
tax field - especially as a means to recoup revenues lost
from their virtually inevitable need to make partial withdrawals from the corporate income tax field.28
Similarly, the consumption tax field saw a truly bitter
fight over the enactment of a local version of the national
Consumption Tax. Because MOF was steadfastly opposed
to a local version of the tax that it had spent years pushing
to see adopted, MOF and MOHA carried on a well- publicized war of manoevres and insults from the fall of 1993,.
The fight reached a stalemate in the fall of 1994, forcing
the political leadership to find the ground for compromise.
This they did by granting a Local Consumption Tax, which
was implemented as 20 percent of the Consumption Tax itself
when the latter's rate was raised to 5 percent on April I,
1997. This gives the ministries a common interest in expanding regressive taxes on consumption, which means their
considerable influence can be added to pressures to recast
Japan's fiscal regime.
International Pressures and Domestic Politics Japan's anemic economic growth in the 1990s suddenly dropped in the
spring of 1998, becoming a full-blown recession along with
an ominous upward drift in unemployment. These developments have bred a pervasive climate of crisis, compounded
by the entire Asian region's seemingly inexorable drift into
politico- economic instability and beggar-thy-neighbour currency devaluations. These developments have added force
to international and domestic demands that Japan take radical
steps to reflate and restructure its economy, in order to bolster the global economy in general, and to increase its imports from beleaguered Asian neighbours in particular. Japanese policymakers have thus been under enormous pressure
from impatient Japanese multinationals, foreign governments, and international money markets, to carry through
on commitments to make permanent cuts in personal and
corporate income taxes. American government figures and
their academic allies calling on Japan to undertake all kinds
of drastic economic reforms including a re-enactment of the
120
DeWit/Japan
Reagan tax cuts regularly appear in the pages of Japan's
leading business daily.I?
This pressure is likely to hasten moves towards massive
tax reform, or "deform" as is perhaps more appropriate a
depiction. Japan's July 12, 1998 Upper House elections saw
all the major parties offer income-tax cuts in their electoral
manifestos. The LDP initially avoided the issue, as thenPrime Minister Hashimoto Ryutaro and his advisors were
clearly dubious about further pump-priming
and were concerned about Japan's escalating load of debt. They favoured
tax reform, but a centre-right income-tax reform, one that
is not an attractive package to most voters. In Japan such
reform means moving closer to the norm for the advanced
capitalist countries, which entails cutting the current top rate
(national and local income taxes combined) of 65 percent
and then lowering the very high level of exemptions that
allow the vast majority of low-income families to avoid paying income tax altogether.
Hashimoto, shocked by portents of impending electoral
defeat, offered voters income-tax cuts and then reluctantly
promised to leave the exemptions where they are. Nevertheless, the LDP took a severe beating in the elections, for
which Hashimoto resigned. As of this writing, the party is
set to choose from among three candidates to replace Hashimoto. All of whom are committed to tax reform. Since the
LDP still holds a comfortable majority in the more important
Lower House and the overall tax debate is dominated by for North American ears - familiar rhetoric about incentives
to work (which are not noticeably lacking in Japan) centreright reform appears to be the likely course.30 In that case,
Japan's declining reliance on income taxes (shown in Table
3) reflects earlier tax cuts as well as the squeeze that low
economic growth has put on revenues, is likely to become
a permanent, rather than partly cyclic, phenomenon.
Conclusions This paper's fiscal sociology approach has
highlighted the interaction between Japan's fiscal culture of
redistribution
and the meso-level institutions that compose
its 1940 fiscal regime. As we have seen, the prewar bias
towards local spending, especially on infrastructures, became
121
Studies in Political Economy
Table 3:
Taxes on Income and Profits as Percentage of Total Taxation
1970
1975
1980
1985
1990
1991
Japan
47.7
44.6
46.1
45.8
48.5
46.9
42.7
40.6
37.7
OECD America
47.2
46.6
42.2
37.3
40.6
39.8
39.7
40.3
40.0
OECD Total
36.1
37.7
38.7
37.4
37.6
36.4
36.0
35.7
35.4
Source:
1992
1993
Table 9, p. 78, OECD, Revenue Statistics. 1965-1995 (Paris,
1994
1996).
greatly enhanced and entrenched in the postwar years
through the influence of the 1940 tax reforms and the later
incentives of party politics. In recent years, the system has
gone out of control and begun cannibalizing general subsidies in order to finance wasteful public works.
The upshot of this, coupled with current and impending
shifts in the tax base and its associated institutions, could
be even less desirable than the present state of affairs - at
least from the perspective of equity and popular input into
tax policy-making. The politicization of the Local Allocation
Tax opens up a vast reservoir of funds for pork-barrel projects. Previously, determining the rules for distributing these
general subsidies was undertaken away from public scrutiny
within MOHA's "black box." That condition of relative
autonomy, so to speak, hardly measured up to democratic
ideals, but it did at least keep the door barred to most pressures from zoku giin. The movement of these political entrepreneurs into the general subsidy field in search of funds
for shinkansen and other concrete-intensive economic development projects is likely only to corrupt the accounts
rather than to bring control over them into the hands of
ordinary Japanese voters.
Moreover, the shift of the tax base away from income
towards consumption and assets will exacerbate the above
situation, because, in the past, the revenues to pay for the
"construction state" came to a large extent from corporate
interests and high income earners. Japanese tax authorities
have not reformed the tax system as inequitably as happened
in the 1980s fiscal free-for-all of Reaganism and Thatcherism, but Japan has seen its progressive rate structure for
national income tax decline from 19 brackets in 1974 (the
122
DeWit/Japan
top being 75 percent) to 5 brackets since 1989 (the top being
50 percent). Moreover, bringing a greater proportion of lowincome earners into the tax net is viewed as a responsible
means for securing alternative revenue sources. Along with
this, placing higher burdens on regressive consumption and
property tax levies suggests that those least able to afford
and benefit from pork-barrel public works are likely to pay
an increasing share of the bill for them.
By contrast, the construction state itself appears safe from
serious reform, at least in the medium term. The LDP candidates, facing upcoming Lower House elections, a recession-bound economy, and foreign pressures, will almost
certainly maintain spending levels - and one even proposes
a further fiscal stimulus of ten trillion yen. Cutbacks would
cause large-scale layoffs in the construction industry, and
probably negate the effects of future tax cuts as consumers
continued to save rather than spend due to anxiety about
their own jobs. Moreover, even should the LDP lose the
next Lower House elections, breaking up the construction
state requires a full-scale assault on a deeply entrenched
network of institutions. However, the political actors and
social forces that would seek to reform this voracious complex "are ill-coordinated and face a highly articulated and
ramified system of commitment to continued growth at any
cost."3l
Indeed, the job of reform will be tougher than that, as it
also involves reducing the politically tempting transfers between the central and subnational governments. Fiscal decentralization is a motherhood issue that virtually everyone
pays lip service to, but which powerful forces have largely
stymied and can be counted on to attempt to do so again.
Though well-developed proposals to give local residents
greater control over taxing and spending decisions in order
to deal with pressing welfare needs exist, they would likely
be swamped by such opposition, especially in the current
crisis-driven rush to reflate the economy and do away with
what are deemed impediments to growth.V In other words,
the crisis of the 1940 centralized fiscal system would appear,
for the average Japanese taxpayer, to herald more public
works at a greater cost to his or her pocket.
123
Studies in Political Economy
Notes
I.
2.
3.
Earlier versions of this paper were presented to the July 1997 Melbourne meeting of the Australian Japanese Studies Association
and
to the June 1998 International Convention of Asia Scholars in Nordwijkerhout, Holland. Also, many thanks to Caroline Andrew, Wallace
Clement, and an anonymous SPE reviewer for their very helpful comments on this paper. Note that I refer to Japanese scholars' work by
their family names first, as is customary in Japan, unless the work
being cited is published in English.
On decentralization,
see the review essay by Andrew DeWit, "Heisei
Japan's Growth Industry: The Decentralization
Debate," Social Science Japan Review, I / I (1998).
For example, opposition greatly attenuated the committee's
March
29, 1996 mid-term recommendations.
The report avoided specific
goals, whereas an earlier draft proposal, leaked to the Mainichi Shinbun ("Kokko hojofutankin, zeizaigen kaikaku yoso youshi" [The main
points for reform of taxes and subsidies], March 23, 1996, p, 2),
made much stronger recommendations.
The mid-term
report and
comments on it can be found in "Zeizaigen nado, guttaian shimezu:
chihou bunken suishinin chuukan houkoku" [The mid-term report of
the Committee for Promoting Decentralization:
No concrete proposals
for finances and other areas], Mainichi Shinbun, March 30, 1996, p.
2.
4.
5.
On levels of analysis, see Robert R. Alford and Roger Friedland,
Powers of Theory: Capitalism. the State. and Democracy (Cambridge:
Cambridge University Press, 1985). On transwar institutions, the bestknown works include Chalmers Johnson, MIT! and the Japanese Miracle (Stanford:
Stanford University
Press, 1982), Noguchi Yukio,
1940-Nen Taisei: Saraba "Senji Keizai" [The 1940 System: Goodbye
to the Wartime Economy], (Tokyo: Toyo Keizai Shimbunsha,
1995)
and Okazaki Tetsuji and Okuno Masahiro (eds), Gendai Nihon Keizai
Shisutemu no Genryuu [The Sources of the Contemporary
Japanese
Economic System], (Tokyo: Nihon Keizai Shinbunsha,
1993).
Notable examples include Peter Cowhey and Mathew McCubbins,
Structure and Policy in Japan and the United States (Cambridge:
Cambridge University Press, 1995); and Mark Ramseyer and Frances
Rosenbluth, Japan
Political Marketplace
(Cambridge:
Cambridge
University Press, 1993).
See James O'Connor,
The Fiscal Crisis of the State (New York: St.
Martin's Press, 1973). On the state debate, see Len Guenther, "Economic Policymaking
and State Capacity," Studies in Political Economy, 26 (1988), pp. 149-72.
Joseph Schumpeter, "The Crisis of the Tax State," in International
Economic Papers, (1954). On fiscal sociology in general, see Jinno
Naohiko, Shisutemu Kaikaku no Seijikeizaigaku
[The Political Economy of System Reforms], (Tokyo: Iwanami Shoten, 1998), esp. pp.
13-24.
The concept of. a fiscal regime is adapted from W. Elliott Brownlee,
"Reflections on the History of Taxation," Funding the Modern Ameri-
s
6.
7.
8.
124
DeWit/Japan
W. Elliott Brownlee (ed.) (New York: Woodrow
Wilson Centre Press, 1996), p. 5.
For example, Jinno Naohiko, "Nihongata Zei, Zaisei Shisutemu" [The
Japanese Fiscal System], Okazaki Tetsuji and Okuno Masahiro (eds),
Gendai Nihon Keizai Shisutemu no Genryuu (see n.4 above).
On this refer to Andrew DeWit, "Trench Warfare on the Tax Fields:
Fiscal Centralization and the Japanese Tax State" (Unpublished PhD
Thesis, UBC, 1997).
On Kamei's speech, see Wakamiya Yoshibumi, "Japan's future rests
with the voters," Asahi Evening News, July II, 1998. Also, the percentage of labour in construction in Canada in 1994 was 4.8, the US
4.3 (1993), France 6.4, Germany 7.0, Sweden 4.7, and the UK 3.8.
The data are from OECD: National Accounts, Detailed Tables, Volume
2, 1982-1994.(Paris: 1996).
A culturalist example is Mochida Nobuki, "Balancing Equity and
Decentralization," Social Science Japan, November (1995), pp. 14-5.
On institutions and the role of the income tax, see Sven Steinmo,
can State. 1941-1995,
9.
10.
II.
12.
Taxation and Democracy: Swedish. British and American Approaches
to Financing the Modern State (New Haven: Yale University Press,
13.
1993).
Several works by Home Ministry personnel and allied academics review the fiscal problems of the 1930s in detail. See, for example,
Shiomi Saburou, Nihon Zaisei Seisaku [Japan 50 Fiscal Policy], (Tokyo: Chikura Shobo, 1938), esp. pp.175-80; Mizuyasu Momoharu,
Chihouzaisei
14.
15.
16.
17.
18.
19.
20.
Chouseiron
[The Local
Finance
Adjustment
Debate],
(Tokyo: Ryousho Fukyukai, 1933).
On fiscal politics in the 1920s, see Ikegami Takehiko, "Daiichiji
Taisen ato Nihon ni okeru Zeisei Seiri Mondai no Hassei" [Japan's
Tax Reform Issues after the First World War], Tohoku Daigaku Kenkyu
Nenpou, 48/6, November (1986).
On prewar welfare goals, see Jinno Naohiko, "Nihongata Fukushi
Kokka Zaisei no Tokuchou" [Special Features of the Japanese-Style
Welfare State], in Fukushi Kokka Zaisei no Kokusai Hikaku [Comparative Welfare State Finance], Hayashi Takehisa and Kato Eiichi
(eds)(Tokyo: Tokyo Daigaku Shuppankai, 1992), esp. pp. 218-221.
Countless trees have been sacrificed in publishing this nonsense; see,
for example, the world-renowned Kurokawa Kisho's Each One a
Hero: The Philosophy of Symbiosis, Jeffrey Hunter (trans.)(Tokyo:
Kodansha International, 1997).
See, for example, Gavan McCormack's chapter on "The Construction
State,"
in The Emptiness
of Japanese
Affluence,
(London:
M.E.Sharpe, 1996) and Yoshida Kazuo, Zaisei Kaikaku ga Nihon 0
Sukuu [Help Japan via Fiscal Reform], (Tokyo: Nihon Keizai Shinposha, 1998).
On corruption, note Brian Woodall, Japan Under Construction: Corruption. Politics. and Public Works (Berkeley: University of California Press, 1996).
Hitoshi Abe, Muneyuki Shindo, and Sadafumi Kawato (eds), The
Government and Politics of Japan James White (trans.) (Tokyo: University of Tokyo Press, 1994), p. 64.
See, eg, Akizuki Kengo, "Institutionalizing the Local System, The
Ministry of Local Affairs and Intergovernmental Relations in Japan,"
125
Studies in Political Economy
21.
22.
23.
23.
24.
25.
26.
27,
28.
29.
126
in The Japanese Civil Service and Economic Development
Hyung-ki
Kim, Michio Muramatsu, T.J.Pempel, and Kozo Yamamura (eds)(Oxford: Oxford University Press, 1995), pp. 360-61.
Noguchi Yukio presents a good account of the fiscal crisis, in "Public
Finance," in The Political Economy of Japan: Volume 1, The Domestic
Transformation.
Kozo Yamamura and Yasukichi Yasuba (eds) (Stanford: Stanford University Press, 1987).
The representative
study of this phenomenon
is Kishiro Yasuyuki,
Jimintou Zeiseichousakai
[The Liberal Democratic Party Tax Advisory Council] (Tokyo: Toyo Keizai Shinposha, 1985), pp. 43-52.
An excellent study can be found in Nakanishi Hiroyuki, "Gyouzaisei
Kakikaku to Chiiki, Jichitai" [Regions and the Local Authorities in
Fiscal and Administrative
Reform], in Nihon Zaisei no Kaikaku [The
Reform of Japan s Public Finances], Iwanami Kazuhiro, Taniyama
Haruo, Nakanishi Hiroyuki, and Ninomiya Atsumi (eds) (Tokyo: Shin
Nihon Shuppansha,
1998).
The comments are from Ishi Hiromitsu, in "Zaisei saiken honenuki
no shouchou" [A symbol of the mutilation of fiscal reconstruction],
Yomiuri Shinbun, December 26, 1996, p. 7.
"Hashiru seiji, kasumu zaisei saiken" [Fast politics leaves fiscal reconstruction
in the dust], Nihon Keizai Shinbun, December 18, 1996,
p. 5.
A thorough academic study of the problems with the Allocation Tax
can be found in Ikegami Takehiko, "Ippan zaigen shugi no genkai
to aratana ippan zeigen shugi no kadai" [The limits of general subsidies and the issue of new tax sources],in Chihou ni Zeigen a [Transfer Tax Bases to the Local Level] Jinno Naohiko and Kaneko Masaru
(eds) (Tokyo: Toyo Keizai Shinposha, 1998). The "sensational"
book
is by a critical journalist,
Murano Masayoshi, and is titled Chihou
Sakaete,
Nihon wa Tousan: Zeikin "Tsukamidori " to "Chihou
Koufuzei " no Karakuri [The Regions Prosper and Japan Goes Bankrupt: Tax Grabs and the Mechanism of the Local Allocation
Tax]
(Tokyo: Kondansha,
1998).
From Table 12 in Revenue Statistics of OECD Member Countries,
1965-95,(Paris:
OECD, 1996), p, 80,
See "Seifu Zeichou, Ookurashou, Jichishou to Chokusetsu Taiketsue
'Tochi,' 'Houjin' no Kentoukai de" [MOF-MOHA
contest in the
tax council study group on land and corporations],
Mainichi Shinbun,
September 12, 1995, p. 9 and "Bappon kaikaku sakiokuri tsuyomaru"
[Strong possibility full-scale reform will be put off], Nihon Keizai
Shinbun, October 17, 1996, p. 3.
On these issues, see Naohiko Jinno and Andrew DeWit, "Japan's
Taxing Bureaucrats,"
forthcoming
in Social Science Japan Review,
II 2 (1998).
See Lawrence Lindsey, "Nihon-gata 'Reegan genzei ' 0" [Towards a
Japanese-style
Reagan tax cut], Nihon Keizai Shinbun, July 14, 1998,
p. 27; and note the surprisingly harsh tone towards Japan from former
US Embassy Special Economic Advisor (and now Senior Fellow at
the Brookings Institute) Edward J. Lincoln, "Japan's Financial Mess,"
Foreign Affairs, 77/3 (1998),
DeWit/Japan
30.
31.
32.
Note, for example, "Koukyuu genzei: daiwaku, aki ni mo teiji" [Permanent tax cuts: outline possible by the fall], Nihon Keizai Shinbun,
July 17, 1998, p. 5.
Gavan McCormack, The Emptiness of Japanese A.fJluence, p. 17 (see
n.17 above).
Thoroughgoing treatments of welfare needs and their relationship to
a program for decentralization can be found in Jinno Naohiko and
Kaneko Masaru (eds), Chihou ni Zeigen 0 [Transfer Tax Bases to
the Local Level](see n. 25 above).
127