Can Japan Disengage? Winners and Losers in Japan's Political Economy, and the Ties That Bind Them

The Japanese economy is splitting into two--or so it would seem from recent press reports.1 For many years, Japan's world-class manufacturers coexisted in relative harmony with uncompetitive small enterprises, inefficient service industries, and staunchly protected farmers. But as the economy matured, the interests of the two Japans diverged: one sought free trade and the other demanded protection; one thrived on competition and the other survived on regulation. Recent developments only exacerbated the conflict of interest between the two, as the prolonged recession made the system's inefficiencies less tolerable and the appreciation of the yen increased the gap between domestic and world market prices.2 In political terms, however, the two Japans never really parted ways. Consumers pay for protection and regulation through higher prices, fewer choices, and lower financial returns, yet sympathize with the farmers and shopkeepers and workers who might be displaced by liberalization. They have certainly not rallied for liberalization, and some have even lobbied against it. Manufacturing exporters face the threat of foreign retaliation for Japan's protectionism, and pay for the high cost of services in their home market. Yet they are linked to the protected sector through business transactions and corporate networks. And the political parties have no