Predicting Court Outcomes through Political Preferences: The Japanese Supreme Court and the Chaos of 1993

Empiricists routinely explain politically sensitive decisions of the U.S. federal courts through the party of the executive or legislature appointing the judge. That they can do so reflects the fundamental independence of the courts. After all, appointment politics will predict judicial outcomes only when judges are independent of sitting politicians. Because Japanese Supreme Court justices enjoy an independence similar to that of U.S. federal judges, I use judicial outcomes to ask whether Japanese premiers from different parties have appointed justices with different political preferences. Although the Liberal Democratic Party (LDP) governed Japan for most of the postwar period, it temporarily lost power in the mid-1990s. Elsewhere, Professor Eric Rasmusen and I asked whether the administration of the lower courts changed during this non-LDP hiatus. Here, I explore whether the supreme court changed. More specifically, I ask whether the non-LDP premiers appointed supreme court justices with different policy preferences. I find that they did not

The Case for Managed Judges: Learning from Japan after the Political Upheaval of 1993

Although the executive branch appoints Japanese Supreme Court justices as it does in the United States, a personnel office under the control of the Supreme Court rotates lower court Japanese judges through a variety of posts. This creates the possibility that politicians might indirectly use the postings to reward or punish judges. For forty years, the Liberal Democratic Party (LDP) controlled the legislature and appointed the Supreme Court justices who in turn controlled the careers of these lower-court judges. In 1993, it temporarily lost control. We use regression analysis to examine whether the end of the LDP’s electoral lock changed the court’s promotion system, and find surprisingly little change. Whether before or after 1993, the Supreme Court used the personnel office to 'manage' the careers of lower court judges. The result: uniform and predictable judgments that economize on litigation costs by facilitating out-of-court settlements.judges, Japan, supreme court, political economy

The Value of Prominent Directors

Observers of modern transitional economies urge firms there to ignore stock markets. Stock markets simply will not work in such environments, they explain. Firms should instead rely on debt finance, particularly bank debt. Only then will they be able to keep principal-agent (i.e., investor-manager) slack to manageable levels. Turn-of-the-century Japanese firms faced problems that closely mirrored those in modern eastern Europe. Yet in Japan, the successful large firms did not rely on debt. Instead, they raised their funds through the stock market, and took a variety of steps to mitigate the principal-agent slack involved. As one of those steps, they recruited prominent investors to their boards. Using data on firms in the cotton-spinning industry (arguably the most important industrial sector in turn-of-the-century Japan), we explore why the firms recruited prominent directors. First, we note that firms with such directors had higher profits than others. In part, they probably had higher profits because such investors had an eye for firms that would likely succeed. In part too, however, they seem to have had higher profits because those investors brought basic management skills -- they knew how to monitor and when to intervene. Second, prominence held constant, we find that firms did not have higher profits by having directors affiliated with a bank or with other spinning firms. One might have thought directors with access to a bank or spinning technology would raise profits at a firm. In fact, they did not, for banks did not have the funds to lend, and the technolgy was freely available. Last, we explore whether the directors certified firm quality on behalf of other investors. Although firms with prominent directors apparently did have an advantage in the capital market, we conclude that quality certification was at most a by-product (if even that) of the monitoring and intervention these directors performed.http://deepblue.lib.umich.edu/bitstream/2027.42/39663/3/wp279.pd

"The Myth of the Main Bank: Japan and Comparative Corporate Governance"

In this essay on Masahiko Aoki's recent study of Japanese corporate governance, we argue that he and others misdescribe Japan on several fundamental dimensions. First, Japanese firms and employees choose neither to arrange implicit life-time employment contracts nor to invest heavily in firm-specific skills. Instead, firms keep employees employed during economic downturns only because interventionist courts do not let them lay their employees off. Second, Japanese firms do not organize themselves into keiretsu corporate groups, do not exchange shares with other alleged group members, and do not necessarily use the money-center bank attributed to the group as their "main bank." Last, Japanese "main banks" neither agree in advance to rescue troubled debtors nor monitor firms on behalf of other creditors.

"Deregulation and Market Response in Contemporary Japan: Administrative Guidance, Keiretsu, and Main Banks"

Change is in the air in Japan, claim many observers: the government is radically deregulating crucial sectors of the economy, the large firms are unwinding their keiretsu corporate groups, and firms and banks are dismantling their main bank arrangements. Some observers see all three as exogenous institutional shocks, while others treat the last two as behavioral responses to the first. In fact, although the first phenomenon would constitute an institutional change if it occurred, it has not -- for Japanese bureaucrats had no substantial regulatory power to abandon. Although the last two would constitute market responses if they occurred, they have not either -- for firms and banks maintained no groups or main-bank arrangements to unwind or dismantle.

"Who Appoints Them, What Do they Do? Evidence on Outside Directors from Japan"

Reformists argue that Japanese firms maintain inefficiently few outside directors, while theory suggests market competition should drive firms toward their firm-specifically optimal board structure (if any). The debate suggests three testable hypotheses. First, perhaps board composition does not matter. If so, then firm performance will show no relation to board structure, but outsiders will be randomly distributed across firms. Second, perhaps boards matter, but many have suboptimal numbers of outsiders. If so, then firms with more outsiders should outperform those with fewer. Last, perhaps board matter, but market constraints drive firms toward their firm-specific optimum. If so, then firm characteristics will determine board structure, but firm performance will show no observable relation to that structure. To test these hypotheses, we assemble data on the 1000 largest exchange-listed Japanese firms from 1986-94. We first explore which firms tend to appoint outsiders to their boards, and find the appointments decidedly non-random: board composition matters. We then ask whether firms with more outside directors outperform those with fewer, and find that they do not: board composition is endogenous. As we find no robust evidence that board composition affects firm performance during either the thriving 1980s or the depressed early 1990s, we suspect that the optimal board structure may not depend on the macro-economic environment. We note that until recently courts effectively barred shareholder suits in Japan. We speculate that the much higher level of outside directors in the U.S. may have nothing to do with efficiency or monitoring. Instead, it probably reflects the way U.S. courts let firms use such directors to insulate the firm from extortionate but otherwise costly-to-defend self-dealing claims.

"Trade Credit, Bank Loans, and Monitoring: Evidence from Japan"

Firms in modern developed economies can choose to borrow from banks or from trade partners. Using first-difference and difference-in-differences regressions on Japanese manufacturing data, we explore the way they make that choice. Whether small or large, they do borrow from their trade partners heavily, and apparently at implicit rates that track the explicit rates banks would charge them. Nonetheless, they do not treat bank loans and trade credit interchangeably. Disproportionately, they borrow from banks when they anticipate needing money for relatively long periods, and turn to trade partners when they face short-term exigencies they did not expect. This contrast in the term structures of bank loans and trade credit follows from the fundamentally different way bankers and trade partners reduce the default risks they face. Because bankers seldom know their borrowers' industries first-hand, they rely on guarantees and security interests. Because trade partners know those industries well, they instead monitor their borrowers closely. Because the costs to creating security interests are heavily front-loaded, bankers focus on long-term debt. Because the costs of monitoring debtors are on-going, trade creditors do not. Despite the enormous theoretical literature on bank monitoring, banks apparently monitor very little.

Why the Japanese Taxpayer Always Loses

The tax office wins most cases in Japan. We think about why this might be. We find that although judges who rule in favor of the taxpayer do not suffer in their future careers, if the loser-- whether governemnt or taxpayer--appeals and wins, the reversed judge's career does take a turn for the worse. This implies that the government cares more about accurate judging than about pro-government judging.japan, tax law, judges, political economy

"The Legislative Dynamic: Evidence from the Deregulation of Financial Services in Japan"

In many ways, the current financial distress in Japan traces itself to the limited range of non-bank financial intermediaries available. That limited availability is itself a creature of regulation. By examining the recent deregulation of commercial paper issues by financial intermediaries, we explore the dynamics of the regulatory process that originally contributed to -- if not caused -- the current distress. We also use this case study to explore the dynamics of the Japanese legislative and regulatory process more generally. We characterize deregulation as a bargain between banks and the newer non-bank intermediaries: the banks acquiesced to commercial paper issues by non-banks, while the non-banks agreed to the regulatory jurisdiction of the Ministry of Finance. The non-banks obtained a cost-effective way to raise additional funds; the banks brought their new competitors within their regulatorily enforced cartel. At a specific level, the dynamics illustrate the classic Stiglerian theory of regulation; at a more general level, they illustrate the trans-national economic logic to the Japanese legislative and regulatory process.