Explaining Japan's Kūdōka [hollowing out]: a case of government and strategic failure?

Abstract

The proposition that Japan is undergoing ‘kudoka’ (a hollowing out process) is examined before exploring explanations for the process. The paper finds much of relevance in the ‘government failure’ approach, whereby the export success of certain sectors combined with import protection for other sectors has produced a trade imbalance, continual yen appreciation, a rising cost base, outward foreign direct investment and hollowing out. However this analysis is incomplete in ignoring the central role of Japanese transnationals in the process. Taking into account the latter via a ‘strategic failure’ approach renders a more complete view of the nature of the hollowing out phenomenon, and how and why government failed. A policy framework to counter such strategic failure is set out, involving a mix of careful deregulation and policies to diffuse strategic decision-making and to reinvigorate declining clusters of small firms.