Shorenstein APARC director Gi-Wook Shin offered his analysis of the possible scenarios for succession of power in North Korea in an interview with the New York Times. Shin told The Times that he thought the Kim dynasty would continue to play a role, even if symbolic in the structure, of power in North Korea. "My guess is like this: they will keep the Kim family as a social and political institution like the emperor system in Japan, offering symbolic and moral power for North Koreans, but are likely to establish a collective leadership system in which the military will play a key role. We may, then, witness some political instability in the North."

For the past ten years, Japan has undergone aggressive, government-driven reforms aimed at changing its financial systems, labor markets, and corporate governance institutions. Faced with the challenges of globalization and an ageing population, Japan undertook these reforms to regain its former competitiveness. What remains uncertain, however, is whether these reforms will also be effective in creating an environment
that is more favorable to entrepreneurship and innovation. If the reforms are effective, at what pace, and in what shape will new firms emerge? Will Japan’s system mirror the institutions that have evolved in regions such as Silicon Valley, or will it develop into a new framework of innovation?

The persistent decline in Japanese asset values during the 1990s engendered many policy and legal responses. Among these was a series of business policy and associated legal reforms intended to foster the creation of new companies, new industries, and new financial institutions. Starting in 1997, these reforms included changes in how firms are formed. For example, the capital required to start a stock-issuing firm was reduced from ten million yen to a mere one yen. The yugen kaisha—a secondary form of Japanese company—was also abolished and the limited liability partnership created instead. Holding companies were allowed, mergers were deregulated, treasury shares were authorized, and the liability of company directors was limited.

Additional reforms were promulgated to encourage new forms of financial intermediation. Tax benefits created for “angel” investors, foreign venture capitalists, foreign private equity, and foreign lawyers became common. Purchase of shares with shares, triangular mergers, and repurchase of shares were all allowed. Moreover, several new stock exchanges were created expressly for relatively new companies.

Corporate governance laws were also revised. For one, Japanese firms may now use U.S.-style board of director committees, with an upper limit placed on directors’ liabilities. Japanese auditors are now required to be outsiders, and consolidated accounting is likewise compulsory, as well as “mark-to-market” rules for financial reporting. These are just a few of the changes, all of which combine to increase transparency in Japan’s markets.

The results were noticeable. By 2006, new companies were garnering price-to-earnings ratios of greater than 100 to 1 in the new markets; the number of IPOs per year was comparable to the rate during the U.S. Internet bubble; and the mergers and acquisition market was transformed from one of the most moribund in the world to one of the most dynamic. Venture capital firms proliferated, as did new law firms, private equity firms, and foreign banks. Existing Japanese banks merged, new banks formed, and money-lending began again. Some new companies even gained sufficient liquidity and stature to turn their founders into celebrities and some of the wealthiest people in Japan. Rakuten, Mixi, ValueCommerce, and Cybird are just a few of these success stories. Japan is currently in its seventy-first month of economic expansion—the longest of the postwar period.

The future, however, is unclear. As Professor Yoko Ishikura, of Hitotsubashi University, recently observed at a SPRIE seminar at Stanford, “Japan is at a turning point and it is uncertain which direction it will choose.” For 2008, IPO valuations have returned to levels more comparable to those in the United States, and the climate for startups has moderated somewhat. New company startup rates are flat and IPO rates have recently dipped significantly. Some prominent studies of the entrepreneurial climate in various countries rank Japan among the least favorable. Many observers are impatient for more evidence of results from the reforms. It remains an open question whether Japan is being affected by the U.S. slowdown and commodity price increases, or if the country is simply retreating from it entrepreneurial gains.

In light of these developments, scholars remain curious: Are the reforms permanently changing the Japanese economy? Are the reforms sufficient to meet the challenges that Japan faces? Will the reforms be effective? Alternatively, are these reforms even desirable? SPRIE and the U.S.-Asia Technology Management Center, in cooperation with selected experts and research organizations in Japan, are undertaking
a major project to study the seemingly contradictory corporate and social climate in Japan, which is at present stretched between entrepreneurial and more conservative forces.

Japan’s economic relationship with the countries of the Pacific Rim—and indeed with the rest of the world—is vital to all of the economies involved. If Japan is transforming into a new economic culture, an understanding of that transformation is relevant both to global economic development and to the study of entrepreneurial growth.

As the most indebted country in the Organization for Economic Cooperation and Development (OECD), Japan’s dire fiscal situation is no secret. Yet despite its financial woes, in March 2008 the Japanese government failed to renew a relatively minor tax on gasoline that had been in force for thirty-four years. The government introduced a bill that would renew the so-called “provisional” gas tax. Although it passed the House of Representatives at the end of February, the Democratic Party of Japan (DPJ) blocked the bill in the opposition-controlled House of Councilors in March, causing the provisional tax to expire. With more than a two-thirds majority in the House of Representatives, the ruling Liberal Democratic Party (LDP)-led coalition overrode the House of Councilors at the end of April, and passed the extension of the provisional tax. What can one make of this episode and what does it say about the government’s ability to rebuild its precarious finances?

Prime Minister Yasuo Fukuda’s stance on the gasoline tax is an attempt to take the high ground, sticking to the position that the government must take painful but necessary steps to address Japan’s public debt crisis. After being selected as the head of the LDP and prime minister, Fukuda appeared set to prioritize fiscal reconstruction. He appointed well-known fiscal hawks to key party posts and cabinet positions and indicated a need to raise taxes. Fukuda soon backed away from a general tax increase, but on the provisional gasoline tax issue he stood his ground, arguing that its abolition would worsen Japan’s deficit and also run counter to the government’s effort to reduce greenhouse emissions.

The Fukuda administration’s stance on the provisional gasoline tax proved to be a disaster for both his cabinet and the LDP. The largest opposition party, the DPJ, skillfully turned the gasoline tax into an issue that it used to attack the LDP. During a recent by-election in Yamaguchi prefecture, historically a LDP stronghold, the DPJ candidate, Hiraoka Hideo, soundly defeated the LDP candidate, taking 70 percent of the vote. Hiraoka and the DPJ touted their success in abolishing the gasoline tax, while denouncing the government’s move to deduct health insurance premiums from seniors seventy-five years and older.

The DPJ successfully turned the provisional gasoline tax into a winning issue in large part because the tax has been viewed as a funding source that feeds the LDP-run pork barrel machine. The heart of the matter is not the tax, but how tax revenues are spent. Funds from the gasoline tax have been earmarked for road construction projects that are widely viewed as inefficient, corrupt, and driven above all by political considerations. Although the DPJ could only temporarily block the government’s bill to renew the gasoline tax, the action signaled the DPJ’s commitment to cutting wasteful government spending. The DPJ also advocates further constraints on road spending by abolishing the earmarking of funds from the basic, nonprovisional gasoline tax. Prime Minister Fukuda has now agreed to consider this proposal, indicating the extent to which public opinion has turned against such earmarking.

While the DPJ scored a political victory with its symbolic attack on road spending, it is less clear if it or the LDP will be able to take the much harder step of increasing taxes in the future. One proposal that has emerged is to earmark revenues from an increase of the national value-added tax (VAT) for social security spending. This proposal is intended to dampen resistance to the move by ensuring that the revenues will not be diverted to wasteful projects but rather used for popular welfare programs. Some within the LDP support such a plan. The DPJ has publicly endorsed turning the VAT into a “social security” tax, but it remains vague on the details. However, a poll from the Nikkei Shimbun revealed that only 34 percent of the population supports an increase in the VAT, even if the revenues are used for social security.

It has always been politically perilous to raise taxes. This fact is not lost on the LDP, which suffered declining support after it introduced the VAT in the 1980s and then raised it under Prime Minister Ryutaro Hashimoto (1996–98). This realization largely explains why LDP-led administrations have attempted to pursue fiscal reconstruction through cuts on the expenditure side while avoiding measures to increase revenue. From “fiscal reconstruction without tax increases” during the 1980s to Junichiro Koizumi’s structural
reforms without raising taxes, this formula has proved durable.

If Japan is to get serious about restoring its public finances, it cannot indefinitely postpone the issue of increasing revenue. The fundamental problem, however, is the public’s widespread belief that the government is wasteful, corrupt, and inefficient. Ultimately, if Japan is to succeed in raising taxes and rebuilding the nation’s finances, the LDP, DPJ, or any new party that may emerge will have to address this deep-seated public perception.