Institutional Analysis of Japanese Economy I (Graduate Level)

In the early seventh century, the imperial court completed introduction of the Chinese centralized administrative and land-ownership regime, which only proved to fail to provide appropriate incentives to relevant stake
holders. Adjustment of the regime to the reality brought about the manorial system.

The manorial system, the landownership and administrative system in medieval times, was a characterized by multiple claimants and stratified authorities on a parcel of farmland. This complicated mechanism better worked to share risk and to mitigate incentive problems that had become salient in the ancient times. Then, in early modern times, the shogunate and lords came to protect peasants' exclusive property right of a parcel farmland the peasant family cultivated, to provide augmented incentives to peasants who now became more resilient against external shocks. The protection of exclusive property right in the early modern times formed the institutional basis of the market economy. At the same time, the shogunate attempted to stabilize the peasant economy by regulating the
farmland and agricultural financial markets. The regulation enabled the social stability under the shogunate regime.

After the Meiji Restoration, the exclusive property right was reauthorized, and regulations on the farmland and financial markets were abandoned. Furthermore, modern judicial system and firm organizations, along with
modern technologies, were introduced from the West. The modernization effort accelerated market expansion and ignited industrialization.

Industrialization from the 1880s not only accelerated the productivity growth but also transformed the Japanese society to a more market oriented system, whose entire process is called industrial revolution. The modern sectors in the Japanese society composed a classical market economy from the 1880s to the 1910s. The development in the period was supported by the well integrated international market, and was at least partly accommodated by the pool of slack labor in the traditional sector. Since the 1920s, especially in the 1930s, those favorable environments were impaired. Without a stable international financial market, the macroeconomic stability of a national economy needed to be sustained by individual states. Such an international condition rather exacerbated difficulty of managing the society as the labor market was becoming tighter as slack labor in rural regions was absorbed by the growing modern sector. At the end, Japan chose a state-coordinated market economy after the experiment of command economy during the second world war.

Then, from the 1980s, the economy has gradually back to the normal, the rule-based market economy. As of the course is to overview institutional changes in the Japanese economy from the 1920s to the 2000s and to understand how institutional and organizational factors work in a changing society.

How was the manorial system formed, and how did it mitigate incentive problems then? How was property right of peasants was formed and protected in early modern times? Finally, how was Japan industrialized after the Meiji Restoration? In the real world, the first best resource allocation, which is presumed to be realized under perfect competition, cannot be achieved anyway. Given the structure of informational asymmetry and other technological conditions, a better second best has been sought and has evolved over times. The first aim of the course is to
understand economic development of Japan from the medieval times, through the Tokugawa period and the Meiji Restoration, to the industrial revolution in the late 19th century. Then, current shape of the Japanese economy would be better understood by placing the structural reform in the last three decades on a broader context from the 1920s. This is our goal.