Tilting the playing field: government strategies to bolster control over policy paths in Japan and South Korea

Abstract

Following the financial crises in the late 1990s, governments in Japan and South Korea embraced institutional change that corresponded with Western neoliberal norms. These changes prompted some observers to expect a similar adjustment of monetary and financial policy to Western standards. Others anticipated that historical legacies would preserve developmental policy continuity. Curiously, neither of the two perspectives can fully explain the ensuing monetary and financial policy paths in both countries, which have exhibited differences in both conduct and objectives. To explain the puzzling policy paths, this article focuses on the role of government objectives in shaping institutional change and policy paths. It finds that in the 1990s, governments in Japan and South Korea sought to expand their control over monetary and financial policy vis-à-vis the bureaucracy. They used international pressure and expert commissions to bring about institutional change when the financial crises hit. This enabled them to instigate new monetarist (Japan) and financial stability-directed (South Korea) policy paths they preferred. The findings indicate that accounts by institutionalist and state capacity scholars should pay more attention to government objectives when explaining the timing of institutional change and the emergence of subsequent policy paths.

Keywords:

• Developmental state
• diffusion
• expertise
• financial bureaucracy
• globalization
• varieties of agency

Introduction

Following financial crises in the late 1990s, governments in Japan and South Korea implemented similar institutional changes that accommodated Western neoliberal norms, including the adoption of central bank independence, the creation of independent financial regulators, and the promotion of market-based finance. At that time, academics and policymakers understood these changes to reflect the countries’ adoption of a neoliberal tandem of institutional norms and policy norms promoted by Western states (Bernanke, 1999; Katz, 2002, p. 22).¹ Some institutionalist scholars perceived that the institutional change would put an end to the East Asian developmental economic and financial system that was key to the fast economic development following World War II (see Jayasuriya, 2005; Pirie, 2006).

Although the institutional changes to the governance of the financial system in Japan and South Korea indeed mimic Western norms, the policies adopted since the late 1990s have shown only limited convergence to them. At first glance, government actions in both countries indicated convergence as they have adopted policies to promote capital markets, further liberalize the financial system, and introduce microprudential regulations with transparency requirements. However, other policies varied among both countries. For example, monetary policy in Japan went far beyond Western prescriptions by putting the central bank back at the center of Japan’s liberalized financial system. Under Prime Minister Abe (2012–2020), the Bank of Japan (BoJ) even became the primary holder of government securities by 2019 and the largest investor in Japanese stocks by 2021 (BoJ, 2022; Asahi, 2021). By contrast, South Korea enacted a range of monetary and financial policies to expand control over liquidity conditions and thus safeguard financial stability, including macroprudential policies adopted by Western countries only after the 2007 financial crisis (Nagel, 2022). Moreover, the South Korean government perpetuated several levers to shape credit allocation, including maintaining a range of development banks and other public financial institutions as well as state-backed venture funds to support lending to targeted sectors in the economy (Thurbon, 2016). This was different from Japan, where Prime Minister Koizumi (2001–2006) privatized important public financial institutions, most notably Japan’s postal savings system, which used to be the largest financial institution in the world (2001: USD 2.4 trillion in deposits).

Seeking to explain why institutions converge while novel policy paths emerge, this paper first reviews the convergence literature and the competing divergence literature. The former approach is useful for understanding how international structural constraints cause convergence of institutions and policies. The latter helps to explain why policies have continued to exhibit features common to East Asian developmental legacies despite institutional convergence. As both approaches share difficulties in explaining the observed puzzle, this paper proposes integrating government objectives to link both theoretical perspectives. The aim is to demonstrate, first, why institutional convergence does not predetermine policy change and, second, to explain when and why countries adopt new policy paths, expressed in laws, regulations, and policy instruments.

Going beyond existing accounts that focus on international pressure and historical legacies, it is argued that governments used international pressure and expert commissions to achieve institutional change. Governments pursued institutional change as they sought to strengthen their power over policymaking vis-à-vis the bureaucracy. Governments are here narrowly defined as Cabinets, encompassing top-level ministers who devise the government’s policy agenda and act as heads of the bureaucracy. The bureaucracy, by contrast, is defined as the administrative layers below the Cabinet, consisting of unelected officials responsible for day-to-day operations.

This article thus adds to the debate around the transformation of the developmental state toward a neoliberal state (Cherry, 2005; Stubbs, 2009; Hayashi, 2010; Pirie, 2016; Lee and Kim, 2018) by focusing on how institutional change shifted control over financial and monetary policy from the bureaucracy towards the government. The institutional change made the adoption of new policy paths possible as it modified the playing field on which ideas, institutions, and interests interact to affect policy output. By putting the analytical spotlight on the direct interlinkages between institutional change and policy change, this article enhances existing explanations of the changes of the financial and economic system in East Asia. The analysis is informed by a document analysis of bibliographical accounts and speeches of Japanese and South Korean government leaders. Analyzed central bank documents entail speeches by central bankers (Japan: 694; South Korea: 238), Annual Reports (Japan: 15; South Korea: 23), Financial Stability Reports (Japan: 15; South Korea: 15), and Minutes of Policy-Setting Committees (Japan: 311; South Korea: 142). The results were triangulated through 16 semi-structured interviews with former politicians and central bankers as well as national, English-language newspaper articles (Japan: Japan Times, Mainichi Shimbun; South Korea: Chosun Ilbo, Korea Herald, Korea Times, Korea JoongAng Daily, Pulse). The analyzed period spans from 1997 to 2019.

Comparing Japan and South Korea

The motivation for comparing Japan and South Korea is based on the similar institutions and policies they shared during their developmental era between the end of World War II and the late 1990s. In this period, the state, particularly the bureaucracy, guided economic development and used the financial system to finance these objectives through targeted credit allocation (Johnson, 1982; Amsden, 1989). An important factor contributing to this similar path was Japan’s brutal colonialization of South Korea, during which Japanese developmental ideas were translated into South Korean institutions and policies (see Amsden, 1989, pp. 32–5, 47; Clifford, 1994; Kohli, 1994). The finance ministries controlled the flow of financial resources by forging close networks with financial institutions and big conglomerates (keiretsu in Japan, chaebol in South Korea). Central banks were following the lead of the finance ministries and, similar to other public financial institutions, shaped credit allocation according to political objectives.

In the 1980s, President Chun Doo-hwan (1980–88) of South Korea and Prime Minister Nakasone Yasuhiro (1982–87) of Japan strived for structural reforms and gradually liberalized the financial and economic system. Governments understood the opening of the financial system to international financial flows as key to promoting the restructuring of the economy. However, veto players, particularly the bureaucracy but also the keiretsu and chaebol, slowed down the reform process. This resulted in only gradual changes to institutions and policies in the 1980s/90s, although international actors, especially from the United States, pressed for them (Funabashi, 1989; Woo, 1991, p. 183). A window of opportunity opened up for governments in the late 1990s. Severe financial crises followed the opening to inflows of global finance, which temporarily weakened the resistance of veto players to the governments’ long-held aspiration to strengthen their control over policymaking. The 1997 financial crisis in South Korea, which led to the bankruptcy of big companies (including Kia, Hanbo, and Daewoo), and the ensuing international pressure attached to IMF emergency loans weakened the resistance of the finance ministry and private interest groups. The financial crisis in Japan originated in the bursting of the asset price bubble in 1991, and it continued throughout the 1990s, resulting in a critical juncture when large financial institutions (Yamaichi, Long-Term Credit Bank of Japan, Nippon Credit Bank) failed in 1997/98.

Incremental reforms to liberalize the financial system had been introduced in both Japan and South Korea already beforehand. But it was in the late 1990s that governments could use the crisis as a powerful symbol to emphasize the need for punctuated, substantial reforms of an outdated financial and economic system over which the bureaucracy had lost control. Although the nature of the crises differed between Japan and South Korea, governments in both countries used this critical juncture to overcome domestic resistance from the bureaucracy and the private sector to institutional change that the governments pursued. Notably, the adoption of the clear-cut neoliberal prescription of institutional change did not result in a corresponding change of actual policies. Instead, institutional change allowed for crises interpretations that differed from neoliberal and developmental ones to shape novel policy paths (see Widmaier et al., 2007).

Important differences between Japan and South Korea pertain to the political system. Authoritarian regimes ruled South Korea for most of the developmental era until the election of Roh Tae-woo to become president in 1988. By contrast, Japan’s parliamentary democracy was already established after the end of World War II. Furthermore, the government head in South Korea’s presidential democracy has more power than the government head (prime minister) in Japan’s parliamentary system. The power of the Cabinet over the bureaucracy is thus more pronounced in South Korea than in Japan (see Hayes, 2008). Conversely, the Ministry of Finance in Japan has maintained more control over policymaking than the one in South Korea.² Unlike in South Korea, a single party (Liberal Democratic Party) has dominated Japan’s party landscape, governing the country continuously since 1955, except for the brief periods between 1993–4 and 2009–12. As these differences were already present before the institutional change of the late 1990s, they do not suffice to explain the timing of institutional change and the ensuing, diverging policy paths.

The following section reviews the literature and presents government objectives as a further factor to fill the identified gap in explaining institutional and policy change. Next, the trajectories of institutional and policy change in Japan and South Korea are analyzed. The concluding section discusses alternative explanations and situates the findings in current institutionalist debates.

Bridging the gap between institutional change and policy change

Although institutional change and policy change are intuitively closely related, there is a relatively clear distinction between scholars studying institutional change and those interested in policy change. In a rare attempt, Streeck and Thelen (2005, pp. 9–12) sought to differentiate them. They conceive institutions as formalized, enduring ‘building blocks of social order’ based on shared social norms. By contrast, they envisage that policies do not concern common norms. Instead, these are relatively flexible rules that target not the rule-maker themselves but other actors. Following Streeck and Thelen’s distinction, this paper frames ‘institutions’ as durable, formalized arrangements such as central bank mandates, central bank independence, developmental financial systems, and market-based financial systems. Conversely, monetary policies (such as quantitative easing or credit policies) and financial policies (such as financial regulations or investment regulations for public financial institutions) are policies as they set out temporary rules for financial and non-financial institutions on how they can finance themselves and make investments. With this distinction in mind, this section reviews the literature on the changes of Japan and South Korea’s institutions and policies since the 1990s. It emphasizes how differing between observed institutional change and policy change can help to elucidate the scope and consequences of the observed change. It then introduces governments as change agents (Mahoney and Thelen, 2009) to enhance explanations of why we observe similar institutional change and varying policy change.

The literature on the change of institutions and policies in East Asian countries comprises a spectrum between two extremes. On the one end, scholars adhering to a convergence view are positioned. They have argued that deviating countries, particularly in East Asia, have finally yielded to international pressure and adopted neoliberal institutions and policies. On the opposite end, scholars with a divergence view have stressed how domestic structures as well as the actual behavior of private and public actors have limited the effect of institutional change on policies and the developmental financial and economic system.³

Concerning monetary and financial policy, scholars with a convergence view have presented various explanations for the global adoption of neoliberal institutions such as central bank independence and market-based finance as well as policies such as the use of short-term inter-banking rates to conduct monetary policy, floating exchange rate policy, and microprudential regulations. They find that material and ideational forms of international pressure, which are mediated through international organizations and transnational epistemic communities, explain convergence to Western institutions (Polillo and Guillen, 2005; Marcussen, 2006). Contributions have investigated the power of core states to bring about convergence, mainly focusing on the United States, and the transmission of this power through international organizations like the International Monetary Fund (IMF) and World Bank (Levi-Faur, 2005; Moschella, 2010; Johnson, 2016). Transnational epistemic communities that share common ideas about monetary and financial policy based on scientization and depoliticization (Haas, 1992; Marcussen, 2006) contributed to the translation of institutional and policy norms to other countries (Johnson, 2016; Ban, 2016). The spread of norms such as central bank independence and forward guidance policies is one of the most prominent examples to demonstrate how international pressure promotes global convergence of institutions and policies (Maxfield, 1997; Polillo and Guillen, 2005; Marcussen, 2005; Johnson, 2016). Due to the hierarchical global economic, monetary, and financial system in which countries adopt varying positions, particularly small economies are subject to international pressure (Nölke and Vliegenthart, 2009; Yeung, 2014; Alami et al., 2022).

The crises of the 1990s have become the focal point for convergence scholars in their study of the impact of international pressure on institutional change in East Asian countries. They have argued that the states in Japan and South Korea finally succumbed to international pressure and made neoliberal adjustments to their economic and financial system (Laurence, 2001; Katz, 2002; Amyx, 2004; Jayasuriya, 2005; Pirie, 2006; Kalinowski, 2008; Rosenbluth and Thies, 2010). Convergence scholars have found that these crises constituted critical junctures in which international pressure could overcome domestic resistance to institutional and policy convergence. Particularly states’ dependence on the provision of emergency support from international organizations has been identified as catalysts for change (Wade and Veneroso, 1998; Robertson, 2007). The financial crisis in South Korea in 1997/98 illustrates how this mechanism operates. As the state required emergency loans to overcome liquidity problems, it had to accept conditionalities from the IMF that promoted institutional and policy change according to Western neoliberal norms. An integral part of these conditionalities was the adoption of central bank independence, the creation of independent financial regulatory agencies, and the promotion of market-based credit intermediation. Convergence scholars considered these changes in South Korea to be evidence of the end of the developmental state and the adoption of Western neoliberal norms (e.g. Pirie, 2006; Kalinowski, 2008). Unlike in South Korea, the financial crisis in Japan did not make the country susceptible to emergency loans as it was relatively independent of global liquidity. However, convergence scholars interpreted the political reactions to the crisis, such as the adoption of central bank independence and the creation of independent financial regulators, to be clear signs that it succumbed to the, in their eyes, superior Western neoliberal model.

The convergence view explains well how international pressure has delimited national political choice and induced Japan and South Korea to adopt neoliberal institutions. However, things become puzzling when moving from the institutional to the policy level: Instead of observing an expected convergence to Western policy norms, the two countries have followed distinct paths, moving Japan and South Korea in different directions. This is particularly odd in the case of South Korea, as it was subject to a high degree of international pressure due to its reliance on IMF emergency lending.

The divergence view helps to explain why policies have evolved differently than envisioned by convergence scholars. Drawing on informal practices and historical legacies, they have shown how actors do not follow neoliberal scripts but continue to act relatively independently of neoliberal institutional changes. The divergence view contends that the observed institutional changes have not induced a corresponding change in the behavior of public and private actors. Given the embeddedness of developmental structures and practices in Japan and South Korea since the 1950s, they find that punctuated legal change cannot supplant historical legacies. Divergence scholars have found that persisting social norms have undermined the convergence of the financial and economic system to Western neoliberal norms. This has resulted in sluggish reactions of private-sector practices and informal norms to government reforms in corporate, financial, and labor policies. (Gotoh, 2019; Vogel, 2018). Even more, divergence scholars contend that policies have not followed neoliberal norms. Instead, developmental state capacity has continued to inform policymaking (Amsden, 1989; Evans, 1995; Weiss, 1998; Walter, 2006; Thurbon and Weiss, 2006; Thurbon, 2016; Klingler-Vidra and Pardo, 2020; Song, 2021). They find that developmental states have maintained their capacity to develop and deploy policies independent of international pressures. The divergence view acknowledges that developmental states have transformed over the last decades. But unlike asserted by convergence scholars, they did not cease to exist as developmental structures are deeply embedded in the policymaking apparatus (Hwang, 2017). While scholars like Amyx (2004) analyze developmental state capacity as a factor that impedes the necessary adjustment to globalization pressures (’crony capitalism’), the divergence view ascribes a positive value to state capacity as it helps the state to stay on top of adverse challenges from globalization processes. Particularly policy-relevant expert knowledge has served as a critical resource for transforming existing and adopting new policies (Thurbon, 2016). Therefore, even subordinated countries constrained by the global economic, monetary, and financial system can counter international pressure through domestic policies to adjust to external changes.

Divergence scholars have argued that the adoption of institutional forms such as central bank independence does not necessarily determine the subsequent policy path. For example, it is not unexpected from their perspective that the informal political interference in central bank policies has continued despite the formal introduction of central bank independence (see Dwyer, 2012). Conceiving informal social norms and state capacity as national structures that constrain change, the divergence view argues that formalized institutional change can be more cosmetics than an indicator of a substantial change of policies guiding the financial and economic system. This theoretical view thus helps to explain why developmental policy paths persist in a modified manner. However, it falls short of explaining the observed policy changes after the institutional reforms of the late 1990s. Some degree of continuation of developmental policies can indeed be observed in South Korea, but this is different for Japan, where the adoption of monetarist policies under the Abe government was path-breaking. Furthermore, it needs to be clarified how the adoption of financial stability-directed policies in South Korea is linked to its developmental legacy, as the policy objective has shifted from economic development to financial stability. Although economic and financial challenges differed across both countries, it is not self-evident what policies would be needed to overcome them, opening new possible pathways (Widmaier et al., 2007).

To explain the puzzling patterns of institutional and policy change, this paper analyzes governments as change agents that have propelled institutional change in the late 1990s to instigate novel policy paths. Accounting for government objectives helps to clarify the rationale behind the observed institutional change, which may not have been an automatic response to international pressure. Moreover, it enhances explanations of the novel policy paths that have contradicted both the convergence and the divergence view. Taking account of government objectives situates the analysis of institutional change in the domestic political contexts of the late 1990s when governments escalated attempts to strengthen their control over policy output vis-à-vis the finance ministry. From this perspective, looking at the observed institutional change allows for asking whether international pressure posed less of an exogenous structural constraint and was rather endogenous to government objectives. Suppose the governments’ objective was to use institutional change to strengthen its control over policymaking. In that case, the subsequent policy output remains unspecified and subject to the outcome of interactions between institutions, ideas, and interests in the newly modified political playing field. Thus, it is unclear whether institutional change, such as the adoption of central bank independence, indicates a wide-scale transformation of the economic system as suggested by convergence view (e.g. Pirie, 2012, p. 374). Instead, the effect of institutional change on policy change as well as the financial and economic system is rather underdetermined (see Dabrowska and Zweynert, 2015). Policy output may also have been secondary to the government, depending on how precisely governments envisage the deployment of specific policies. Governments may push for policy change that could continue the developmental policy path or align with Western policy norms. But they also could empower policy entrepreneurs with challenging expert knowledge to inform the creation of novel policy paths (see Steinberg et al., 2021). The following section analyzes the role of Japan and South Korea’s governments in the adoption of institutional change and the shaping of the subsequent policy output.

Pushing for change: the role of international pressure and expert commissions

Since the 1980s, governments in both Japan and South Korea have sought to rebalance the power within the state. They particularly considered the finance ministry to be a major hindrance to the introduction of policy change that they believed was necessary to overcome developmental structures and promote economic growth. Due to their powerful position in the policymaking process, the finance ministry could block reform attempts that governments endeavored (Vogel, 1996; Masujima, 2005; Cheung, 2005). What governments missed was the momentum to implement institutional change for overcoming this resistance.

The financial crises in 1997 presented such an opportunity as it weakened the resistance of veto players to reforms. Governments blamed the finance ministries for policy failures related to insufficiently regulated international financial inflows (South Korea), corruption scandals, and unsuccessful crisis resolution (Japan). In Japan, the financial and economic system was under continuous strain following the bursting of the asset price bubble in 1991, which was fueled by financial liberalization and the low monetary policy rates of the 1980s. The bursting of the bubble severely impaired assets on the balance sheets of financial and non-financial companies (Koo, 2009). Based on the traditional convoy system, the finance ministry extended liquidity to struggling financial institutions to prevent failures (Hoshi and Kashyap, 2001, pp. 111–112). In the past, this strategy successfully helped the country to overcome financial problems until returned economic growth resolved the problem itself. As, however, the amount of accumulated debt was this time much higher following the considerable expansion of the financial system, the subsequent balance sheet problems had a more lasting effect on credit supply and demand. As a consequence, non-performing loans more than tripled from JPY 12.8 trillion in 1992 up to JPY 43.2 trillion in 2002. Economic growth remained sluggish over the 1990s, resulting in financial problems for various financial institutions and ultimately in the failure of some of them in 1997/98, including Yamaichi Securities and Sanyo Securities. In addition to these unsuccessful policies, the eruption of corruption scandals in the mid-1990s around the use of public money to support the jusen (non-banks specialized in housing loans) further destabilized the finance ministry’s reputation (Amyx, 2004, pp. 221–22).

In South Korea, the financial crisis in 1997 followed the opening of the financial system to international financial flows under President Kim Young-sam (1993–8). Financial inflows led to a massive buildup of cheap foreign debt, especially through unregulated non-banks established by the chaebol. Debt-to-equity ratios increased to almost 400 percent by 1997. When global investors panicked following the currency crisis in Thailand in July 1997, financial inflows stopped and the private sector could no longer roll over its foreign debt. The government perceived the crisis as a problem of an outdated regulatory system that the finance ministry failed to adjust to the changing circumstances. As the following sections stress, governments exploited two factors to develop and enact institutional change and policy change at this critical juncture: international pressure and expert commissions.

Government strategies for institutional change: expert commissions and international pressure

Factoring in the long-held aspiration by governments to enhance their control over the policymaking process helps to clarify the role of ideas and international pressure in the conduct of institutional reforms in the late 1990s. First, ideas promoted by expert commissions had been an essential resource for governments to sideline the powerful finance ministry and develop alternative blueprints before 1997. This links back to a history of expert commissions in Japan and South Korea which governments used to strengthen their control over institutional and policy change. Expert commissions established by Kim Young-sam (1993–98) in South Korea and Prime Minister Hashimoto Ryūtarō (1996–98) in Japan became central to undergirding their reform agenda. Second, international pressure gave further impetus for promoting change, although it was weaker in Japan than in South Korea. Japan was subject to a strengthening of Western institutional norms around monetary and financial policymaking exerted through transnational expert communities and the education of policymakers in the United States. South Korea additionally experienced direct international pressure through its dependence on emergency liquidity from the IMF after the 1997 financial crisis.

Japan

In Japan, already Prime Minister Nakasone established the Commission for Administrative Reform in 1981 and the Maekawa Commission (Economic Structural Adjustment Study Group) in 1985 to challenge the finance ministry’s dominance as well as initiate institutional and policy change (Funabashi, 1989, pp. 87–8, 90–3; Horne, 1985, pp. 34, 86; Masujima, 2005; Hoshi and Kashyap, 2001, ch. 7). International pressure put the finance ministry further in a defensive position. The United States urged Japan to open its financial system to global investors and reduce foreign exchange imbalances, leading to the adoption of the Plaza Accord in 1985. Through expert commissions and international pressure from the United States, Nakasone could partially sideline the opposition of the finance ministry to gradually liberalize the financial system and transform developmental economic structures (Vogel, 1996, pp. 42–3; Funabashi, 1989, pp. 87–93, 104–107; Interview with former Japanese policymaker A, Tokyo, 27 March 2019).

Like Nakasone, also Hashimoto pursued a strategy to curtail the finance ministry’s power and foster financial liberalization. Hashimoto could, however, use the financial crisis in 1997 as a window of opportunity that offered an additional tailwind. Over the 1990s, it became increasingly consensual among politicians and the public that the failed adjustment to economic and financial globalization required developmental structures to change (Interview with former Japanese policymaker B, Tokyo, 11 March 2019). The weakening of the finance ministry was an integral part of this reform attempt. According to Hashimoto, the bureaucracy needed to be subordinated to the ’political will’ of the government:

I do not see politics and the bureaucracy as being in conflict. Rather, I see them as cooperative, politicians exercising determined will and leadership for sweeping reforms and the bureaucracy providing the specialist expertise needed to complement this political will (Hashimoto, 1996).

He aimed to conduct a range of institutional changes to create a ’new, high-transparency financial system in which market discipline is fully exercised’ (Hashimoto, 1996). Symbolic for the turn away from developmentalism was Hashimoto’s decision to let Yamaichi Securities, Sanyo Securities, and Hokkaidō Takushoku Bank fail in late 1997 ’to reconcile standards with international standards and open up the Japanese market’ (Hashimoto, 1997).

Hashimoto, too, used expert commissions and international pressure to promote these objectives. He readily picked up reform proposals that had been developed by his party’s Administrative Reforms Promotion Headquarters and the finance ministry since early 1996 (Toya, 2006, pp. 8, 172–174; Konoe, 2014, pp. 67–72). Facing growing public and political reform pressure, the bureaucrats in the finance ministry perceived the preparation of such a proposal as the best strategy to maintain control over an inevitable reform process. Given the bureaucracy’s dominance over policymaking and the production of policy ideas, Hashimoto additionally established several expert commissions tasked with developing blueprints for reforms. The ideas they advanced legitimized, informed, and promoted institutional and policy change. First, Hashimoto established and headed the Administrative Reform Council (November 1996), consisting of two of his assistants, five university professors, five private sector representatives, one researcher, and one labor representative. It presented its ’Final Report of the Administrative Reform Council’ in December 1997, which served as a draft for subsequent reforms, including the establishment of a new and independent financial regulatory agency. The report was also the basis for enacting the Basic Law of the Administrative Reform of the Central Government in June 1998 and several laws in January 2001 to ’strengthen the administrative leadership of the Cabinet and Prime Minister’ (Government, 2001). Second, Hashimoto set up the Financial System Reform Consultative Committee in 1996, entailing members from various other research committees (Financial System Research Council; Insurance Council; Securities and Exchange Council; Committee on Foreign Exchange and Other Transactions; and the Business Accounting Council). Its final report from June 1997 outlaid the plan for a ‘Japanese Financial Big Bang’ in the late 1990s and early 2000s in the pursuit of a ’free, fair, and global’ financial system (MoF, 1997; Toya, 2006). Third, Hashimoto created the Central Bank Study Group in July 1996, consisting of six university professors, one representative from the business federation, and one member from the Dentsu Research Institute. Its aim was the development of a blueprint for revising the BoJ Act. In November 1996, it published its report entitled ’Reform of the Central Bank System: In Search of Open Independence,’ which was then sent to the finance ministry’s Financial System Research Council (consisting of 19 representatives from the private sector, five university professors, one member of the BoJ, and one member from a research institute). This Council published its report in February 1997, which resulted in the revision of the BoJ Act in June 1997 (see Cargill et al., 2001, pp. 91–6). Additional momentum for change in the 1990s came from the prevalence of Western norms concerning institutions and policies dispersed by international organizations and transnational epistemic communities (see Marcussen, 2005; Walter, 2006). The dominance of these transnational ideas, such as central bank independence, made resistance to change more difficult.

The substance of institutional changes enacted under Hashimoto seems closely aligned with Western standards. Inspired by Thatcher and Reagan’s neoliberal reforms, Hashimoto’s plan of a ‘Japanese Big Bang’ set a schedule of financial liberalization measures in November 1996 (see MoF, 1997). However, some of their details indicate that the government created new channels of influence for the government to affect policy output. First, financial regulation was transferred from the finance ministry to the newly established Financial Supervisory Agency (FSA) in June 1998. The FSA became an external organ of the Cabinet’s Office. In July 2000, it was merged with the finance ministry’s Financial System Planning Bureau to adopt the task of financial system planning. In January 2001, the FSA was renamed to Financial Services Agency and became subordinated to the prime minister after the implementation of further administrative reforms. Second, the government inserted loopholes into the new BoJ Act that expanded its influence over policy output. Most notably, Article 4 demands that the central bank maintains ’close contact’ with the government. The government also gained the right to appoint board members (Article 23). Furthermore, the finance minister may attend BoJ’s policy board meetings (Article 19), appoint executive members (Article 23), and control the central bank’s budget (Article 15). Another curiosity against the Western trend at that time was that financial stability became an explicit central bank objective (Article 2). To this end, the BoJ was equipped with a Special Loan facility to extend liquidity when necessary for safeguarding financial stability (Articles 38 and 33).

South Korea

South Korea’s government pursued a similar strategy to enact related institutional change in the late 1990s. Already President Chun Doo-hwan (1980–1988) created the Committee on Improving Restraints of Growth and Development to initiate gradual financial liberalization and institutional change, although the outcome remained limited. Presidents Kim Young-sam (1993–8) and Kim Dae-jung (1998–2003) accelerated efforts to achieve this dual objective (see MoF, 2011, pp. 68–70). Both were former leaders of the democratic movement and the first civilian presidents since 1962. They could hence draw on popular support in their agenda to break South Korea’s authoritarian developmentalism that was particularly linked to the regime of General Park Chung-hee (1961–79). Financial liberalization and the weakening of developmental state structures were thus closely connected, as reflected in the inaugural address by Kim Dae-jung:

[d]emocracy and the market economy are like two sides of a coin or two wheels of a cart. If they were separated, we could never succeed […] I firmly believe that we can overcome today’s crisis by practicing democracy and a market economy in parallel (Kim, 1998).

Structural reforms, including the opening of the financial and economic system, were thus interlocked with the idea of democratization.

A main veto player was the finance ministry, which did not want to lose its control over policymaking. The bureaucracy’s dominance was buttressed, as in the case of Japan, by its control over the production of ideas that informed policymaking (see Mo and Lee, 2014; Clifford, 1994, pp. 133–5). Against this resistance, Kim Young-sam could only gradually implement reforms before the 1997 crisis, including the abolishment of the finance ministry’s influential International Finance Bureau and its merger with the neoliberal Economic Planning Board in 1994 (Lee and Hong, 2019, p. 90). Therefore, Kim Young-sam and, later, Kim Dae-jung continued using expert commissions to develop blueprints for reforms (see Choi, 2001; Rhee Baum, 2007).

First, Kim Young-sam established the Basic Act on Administrative Regulations in August 1997, which strengthened the enforceability of policy recommendations made by the Regulatory Reform Committee (MoF, 2011, p. 71). He considered this necessary as his Commission on Administrative Reform, established in May 1993, had failed to generate substantial changes. Using the legal foundation introduced by his predecessor, President Kim Dae-jung merged various expert commissions in April 1998 to establish the new Regulatory Reform Committee, which consisted of 13 non-government representatives and only one member from the finance ministry (see Choi, 2001, p. 6). The president tasked it with determining the ’basic direction of regulation policy as well as research and development of regulatory institution’ which included reviewing and developing proposals for new regulations (Act No. 5368, Article 24). Second, the Presidential Commission for Financial Reform (PCFR), established in January 1997, was influential in preparing institutional change to be initiated in December 1997 (Lee, 2011, p. 11; Hahm, 1998). Half of the 31 members were academic economists. The remaining ones belonged to the private sector (see Hahm, 1998, p. 1). In analogy to Hashimoto’s Financial System Reform Consultative Committee and Central Bank Study Group, the PCFR envisioned similar institutional change that encompassed the creation of an independent financial regulator, the introduction of central bank independence, and a plan to promote financial liberalization (see PCFR, 1997).

Next to expert commissions, international pressure was an essential factor for institutional change. After being elected to office, President Kim Young-sam used reform demands posed by the OECD to accept Korea as a member in 1996 as leverage to promote policy adjustment and financial liberalization (Thurbon, 2003). However, international pressure following the 1997 crisis was more consequential. When South Korea signed a stand-by agreement with the IMF in December 1997 to prevent the financial system’s collapse, expert commissions had already provided the government with blueprints for reform. There was a substantial degree of overlap between government objectives, expert commissions’ blueprints, and IMF conditionalities regarding the direction of institutional reforms and financial liberalization (see IMF, 1998). The perceived failure of the finance ministry to prevent the financial crisis, combined with the reform demands connected to IMF support, substantially weakened resistance to reform plans. IMF demands such as the introduction of central bank independence, the establishment of an independent financial regulator, and corporate governance reforms thus helped the government curb the finance ministry’s opposition. Policymakers active at that time strengthened this interpretation of international pressure as an auxiliary factor, stating ’it was not that we [South Korean government] were dragged along by the IMF, but rather we took advantage of the IMF agreement’ (presidential advisor, as quoted in Lee and Hong, 2019, p. 220). The international pressure was conceived as a ’disguised blessing’ (Interview with former South Korean policymaker A, Seoul, 8 March 2019) and ’instrumental in terms of realizing this reform plan to be accepted’ (Interview with former South Korean policymaker B, Seoul, 27 February 2019).

Similar to Japan, South Korea’s institutional change of the late 1990s indicates convergence to Western norms but also displays substantial differences. The finance ministry lost its control over financial regulation and supervision through the establishment of new regulatory agencies, Financial Supervisory Commission (FSC) in April 1998 and Financial Supervisory Service in January 1999, which were both subordinated to the government. The government moreover delegated the finance ministry’s budgetary competence to the newly founded Ministry of Planning and Budget in May 1999. The influence over financial policy thus moved incrementally from the finance ministry to the government.

Furthermore, the adopted Bank of Korea (BoK) Act from December 1997 entailed elements that countered the Western institutional norms as promoted by the IMF. After ending the central bank’s subordination to the finance ministry, the government became more influential: First, the government gained the right to appoint the governor and other policy board members (Articles 32 and 36).⁴ Second, the central bank has been required to coordinate with the government in policymaking. Notably, the central bank should pursue its policies ’in harmony with the economic policy’ (Article 4). Moreover, the vice finance minister has the right to attend meetings of the policy-setting committee and voice her or his opinion (Article 91). Third, the seven policy board members are appointed based on the recommendation of each finance ministry, BoK, Financial Services Commission, Korea Chamber of Commerce and Industry, National Banks Federation, and Korea Securities Dealers Association (Article 13). The government exerts informal pressure also on these recommendations (Lim, 2012, p. 688). Fourth, loan extensions to the governments are possible, including through direct subscriptions (Article 75), the purchase of securities with government guarantees (Article 76), and loans to government agencies (Article 77). While these factors gave the government new tools to influence the central bank, two other articles of the new BoK Act display continuity with developmentalism: Article 1 maintained credit policy, which was a key instrument during the developmental era, as a key policy instrument; and Article 65 equipped the BoK with liquidity and loan facilities to support financial and non-financial companies in a credit crunch or liquidity crisis (Articles 64 and 80) and widen eligible collateral to expand access to BoK liquidity.

In both countries, governments used expert commissions and international pressure as resources to promote the objective of strengthening their control over policymaking vis-à-vis the finance ministry. The next section assesses the impact of these institutional changes on policymaking.

Policy change on a modified playing field

The observed institutional change suggests a similar convergence to policy norms prevalent in Western countries. Indeed, convergence scholars interpreted this to reflect the replacement of the distinct East Asian form of capitalism with a ’self-regulated governance of independent state agencies’ (Jayasuriya, 2005), ’market-based neo-liberal regulation’ (Pirie, 2006), or ’reactive and erratic state interventions’ (Kalinowski, 2008). From their perspective, the expectations were that policies would converge like institutions to Western neoliberal norms, most notably that political influence would shrink. If instead, as this paper argues, government objectives were driving these changes, it is expected that governments will use their new control over policy output to suit their preferences that may or may not be in line with Western norms.

Japan

In Japan, policies initially converged to Western norms following the 1997 crisis. The BoJ reduced its interventions in the financial system, the government adopted a new bank resolution framework, the FSA implemented stricter loan classification, and all three actors promoted the development of financial markets. In March 1998, Prime Minister Hashimoto used his newly gained right from the BoJ Act and appointed Hayami Masaru to become governor, indicating further convergence to Western norms. Hayami was a fierce advocate of central bank independence, structural reforms, and the discontinuation of low policy rates that prevented indebted firms from going bankrupt (see Hayami, 2002). This reduction of BoJ interventions in the economic and financial system indicated a turn to Western policy norms. Moreover, Hayami introduced new collateral policies (Basic Policy on the Eligibility as Collateral of Asset-Backed Securities and Debt Obligations in September 1999; Guidelines on Eligible Collateral in October 2000) aimed at promoting market-based financing (Hayami, 2003).

That the government could use its strengthened control over policy output became more apparent under Prime Minister Koizumi Junichirō (2001–06), an ally of Hashimoto, who wanted to transform Japan into a ’nation founded on financial services’ (Koizumi, 2005). First, Koizumi deepened institutional change beneficial to the government’s power. To achieve this, Koizumi relied on expert commissions that were more neoliberal than those of Hashimoto and Nakasone (Vogel, 2006, p. 99; Gotoh, 2019, pp. 118–120). The government founded the Council for Regulatory Reform in April 2001 for developing additional blueprints with the objective ’to build the bases for the development of the financial services industry’ that it thought ’should be one of the future growth industries’ (CRF, 2001). The Council was highly influential as it could negotiate directly with the ministries. All of its members were either academics or private sector representatives (see also Mulgan, 2013). Second, Koizumi used the Council on Economic and Fiscal Policy (CEFP) to assess economic and fiscal policies as well as design policy alternatives with the goal of ’fully demonstrating the leadership of the Prime Minister’ (CEFP, 2020). Headed by Takenaka Heizō, it included the prime minister, four ministers, the BoJ governor, two businessmen, and two academics. Takenaka, a committed neoliberal who described the CEFP as a ’machine for Koizumi’s leadership’ (Takenaka, 2002), was subsequently appointed as chair of the FSA. During his tenure, the FSA introduced several programs to promote market-based financing: the Program for Structural Reform of Securities Markets (August 2001); Program for Promoting Securities Markets Reform (August 2002); Program for Financial Revival (October 2002); Action Program concerning Enhancement of Relationship Banking Functions (March 2004); Program for Further Financial Reform - Japan’s Challenge: Moving toward a Financial Services Nation (December 2004); and New Action Program (March 2005). Takenaka then became the Minister of Postal Privatization (2005) to advance the highly symbolic dismantling of the postal savings system, which included the privatization of the largest public financial fund globally (USD 2.4 trillion in 2001). In 2005, Koizumi furthermore enacted a law to privatize the Development Bank of Japan by 2008. These policies all speak in favor of a turn towards Western neoliberal policies.

Divergence from Western policy norms became apparent after Koizumi used the newly gained right to appoint a central bank governor who shared his desire to support structural reforms with low policy rates. It is important to note that Japan has struggled with low inflation rates since the bursting of the asset price bubble. The ’structuralist’ camp of policymakers and politicians, including Hashimoto and Hayami, saw the lack of structural reforms as the reason for low inflation rates and slow economic growth. By contrast, the ’monetarist’ camp, including Koizumi, Takenaka, and later Abe Shinzō, blamed insufficient monetary easing for low inflation rates and economic lackluster. When Koizumi appointed the new BoJ governor in 2003, he replaced the structuralist Hayami with the more compromising Fukui Toshihiko. Fukui continued policies to promote financial market development, particularly securitization markets. Simultaneously, he had a more open ear to Koizumi’s preference for monetary easing than his predecessor (Dwyer, 2012; JT, 2003), resulting in a further easing of monetary easing and the expansion of the, at that time novel, quantitative easing. In addition, Fukui introduced purchase programs for asset-backed securities, synthetic-type securities, and asset-backed commercial paper in June 2003, aimed at monetary expansion and promoting capital market development (BoJ, 2003).

The full potential of the government’s enhanced control over policy output became palpable when Abe Shinzō was elected for the second time to become prime minister in 2012. Already during his brief first tenure as prime minister in 2006/07, Abe aimed to increase pressure on the BoJ to intensify monetary easing. However, he was dissatisfied with the central bank’s resistance to his preference for increased monetary easing (Interview with former Japanese policymaker A, Tokyo, 27 March 2019). After losing the majority in the Upper House in July 2007, Abe had to leave office. When he returned to office after winning the general election in December 2012, he could rely on solid backing from the Diet. Abe swiftly presented the Emergency Economic Measures for The Revitalization of the Japanese Economy in January 2013, a blueprint for Abenomics: loose monetary policy, reduction of public debt, and a growth strategy for enhancing productivity. Calling it a ’terrible demon that absconds with people’s desire for change’ (Abe, 2014), Abe considered deflation the main culprit for economic problems. Similar to Hashimoto, Abe saw political will for change as necessary to overcome these problems:

We had been unable to root out deflation because Japan had been lacking strong political will […] my economic policies are backed in all respects by my political will (Abe, 2013).

In January 2013, Abe forced BoJ governor Shirakawa Masaaki to sign the Joint Statement of the Government and the Bank of Japan on Overcoming Deflation and Achieving Sustainable Economic Growth. In this document, the government and BoJ announced that they would ’strengthen their policy coordination in order to overcome deflation and achieve sustainable economic growth’ (BoJ, 2013). Against the preference of Shirakawa, who called the signing of the document the ’most difficult task of my tenure [as BoJ governor]’ (Shirakawa, 2021, p. 334), the BoJ committed to monetary easing to achieve an inflation rate of 2 percent ’at the earliest possible time’.

In his 8-year-long tenure, Abe increasingly subordinated the BoJ to the government’s objectives by filling the board with other monetarist policy board members (Interview with former Japanese policymaker D, Tokyo, 26 March 2019). Abe’s most consequential appointment was the one of his allies Kuroda Haruhiko, vice finance minister between 1999 and 2003, to become BoJ governor in February 2013 after Shirakawa left office three weeks early. Kuroda shared Abe’s view on deflation, stating that ’whatever the reason might be, it has been my view that the [central bank] is responsible for overcoming deflation and achieving price stability’ (Kuroda, 2013a). He announced ’all-out efforts to utilize every possible resource bestowed upon the Bank’ to achieve this objective (Kuroda, 2013b). Kuroda’s appointment was highly symbolic, as it links back to Japan’s developmental era when finance ministry and BoJ took turns appointing the governor. The discontinuation of this rotation principle (tasukigake jinji) was an important feature of the BoJ Act in 1997. According to the reform of the 1997 BoJ Act, Matsushita Yasuo (1994–98) was supposed to be the last governor dispatched from the finance ministry.

Accordingly, monetary easing under Kuroda was massive, starting with his establishment of Quantitative and Qualitative Monetary Easing in April 2013. Quantity and quality of purchased assets expanded over the years to entail government bonds of all maturities, exchange-traded funds, real estate investment trusts, and credit policy (February 2014, October 2014, January 2015, December 2015, January 2016, July 2016, July 2018). The BoJ also adopted a negative interest rate policy (January 2016) and yield curve control (September 2016). A striking effect of the policies was the massive increase in the BoJ’s balance sheet, which reached the size of Japan’s GDP by 2018. Of particular interest is the high ratio of government debt held by the BoJ, which became the primary holder of government securities by 2019, and the BoJ’s extensive holdings of stocks that made it the biggest investor in the Japanese stock market by 2021 (BoJ, 2022; Asahi, 2021). While the former resembles debt monetization, the latter transfers massive risks attached to equity investments to the central bank - both facets difficult to reconcile with Western policy norms. Ironically, the increase of de jure independence of the BoJ with the 1997 reforms opened the doors for a reduction of its de facto independence (Cargill, 2012). The finance ministry’s preference for monetary easing has won over the BoJ’s rejection of loose monetary policy.⁵

South Korea

As in Japan, initial policy responses in South Korea following the 1997 crisis seem to indicate a convergence of policies to Western norms, particularly given the IMF reform pressure linked to its emergency support. In its letter of intent from December 1997, South Korea committed to further open financial markets to global finance, limit central bank interventions in the financial system, adjust regulation, and promote the development of the financial system. Indeed, the government further liberalized international financial flows with the Foreign Investment Promotion Act (September 1998) and the Foreign Exchange Transactions Act (April 1999). The government and the IMF shared the perceived need for reform. However, their interpretation of the cause and cure of the financial crisis was different. While the IMF, incorrectly, as it admitted later (see IMF, 2003), interpreted the crisis as fundamentals-driven and thus focussed on macroeconomic variables, South Korean policymakers believed financial risks from speculative global liquidity to be the main culprit. The interpretation of the financial crisis as global liquidity-driven informed the adoption of immediate and subsequent policies to protect the country from volatile international financial flows.

It soon became evident that the South Korean government and policymakers did not want to commit to policy norms propelled by the IMF. Instead, they shifted the focus to managing risks posed by global finance. Kim Dae-jung appointments to the FSC and BoK reflect this turn. Finance Minister Lee Kyu-sung (1998–1999), FSC chair Lee Heon-jae (1998–2000), and BoK governor Chon Chol-hwan (1998–2002) all understood the crisis to be driven by unregulated global liquidity. They thus perceived a need for liquidity-focused monetary policy, financial regulations to manage international financial flows, and ample foreign exchange reserves to protect financial stability (see Lee and Hong, 2019, pp. 143, 514). They also saw the promotion of domestic capital markets as conducive to enhancing independence from foreign finance and disposing of non-performing assets. This motivated the establishment of the new asset-backed securities markets in September 1998. In contrast to Japan’s inaction after the bursting of the asset price bubble, South Korean policymakers immediately deployed the public Korea Asset Management Corporation to buy bad assets from the crisis, repacked them as asset-backed securities, and sold them to investors in this new market.

Chon, Kim Dae-jung’s appointment to head the BoK, as well as his successors shared the government’s view that various policy tools are needed to manage liquidity conditions and international financial flows (see Chon, 1998; Park, 2002, Park, 2004, Lee, 2006, Kim, 2013). This was conceived as fundamental for achieving the objective of safeguarding stability in an inherently unstable global financial system. BoK, FSC, and the government thus adopted a range of policies to control financial flows that were left unregulated in the years before the 1997 crisis. The government established the Korea Center for International Finance to observe international financial flows (April 1999), and the BoK adopted the Foreign Exchange Information System (September 2000) to compile and organize respective data. Furthermore, the FSC introduced a Foreign Currency Liquidity Ratio (July 1997), a Foreign-Currency-Denominated Asset-Liability Maturity Gap Ratio (January 1999), and a Domestic Currency Liquidity Ratio (January 1999) to regulate risks attached to international financial flows and enhanced the accounting and disclosure systems to improve transparency for investments (October 1998). Notably was South Korea’s early adoption of macroprudential tools to prevent systemic risks from arising. The BoK established new policy instruments, Liquidity Adjustment Loans (June 2000) and Intraday Overdrafts (September 2000), to enhance control over liquidity conditions. The FSC enacted Limits to Foreign Exchange Positions (August 2002), a Loan-to-Value ratio (September 2002), and a Debt-to-Income ratio (August 2005). These policies served South Korea to respond swiftly to financial volatilities, such as following the 2007 financial crisis. In addition, the BoK established the Liquidity Adjustment Loans and Deposits Facility (March 2008) and expanded eligible collateral as well as eligible counterparties to integrate securities companies and asset management companies. Moreover, the government tasked public financial institutions such as the Korea Investment Corporation and the National Pension Fund to manage foreign exchange reserves and to provide liquidity to non-banks that the central bank facilities did not cover (Nagel, 2022). More than in Japan, public financial institutions continued public credit allocation to shape the development of the South Korean financial system (see Thurbon, 2016).

Although the government and BoK governors were largely aligned concerning monetary policy objectives, the newly gained control of the government over the BoK became apparent in some instances. Similar to Hashimoto’s appointment of Hayami in Japan, also hardliner Chon Chol-hwan (1998–2002) initially indicated a commitment to structural reforms and the discontinuation of government influence in monetary policy (see Chon, 1998; Chon, 1999; Chon, 2000). However, as in Japan, the limits of the central bank governor became evident soon after the introduction of central bank independence. When Chon did not adjust to the government’s preference to lower policy rates in 1998, Vice Minister of Finance Chung Duck-koo confronted the BoK’s vice governor:

It is true that central bank independence is necessary when it comes to monetary and credit policy. However, what good is the central bank when the Republic of Korea goes broke? If you do not agree with the government on its policy, all I can do is to fire […] you (as quoted in Lee and Hong, 2019, p. 120).

Against the preference of both Chon and the IMF, the BoK subsequently reduced the policy rate from 8.1 percent to 7 percent in September 1998.

Later, President Lee Myung-bak (2008–13) exerted more control over policy output, including by conducting a further push for a weakening of the finance ministry. First, Lee elevated pressure on the BoK to increase monetary easing, which led to tensions between him and BoK governor Lee Seong-tae (Chosun, 2008). Thus after Lee Seong-tae’s term ended in March 2010, Lee appointed Kim Choong-soo, his former economic secretary and OECD ambassador, to head the BoK. Coordination between the government and the BoK intensified immediately (BoK, 2010a; KJAD, 2010). Weekly meetings with the president, central bank governor, and finance minister occurred throughout the year (Reuters, 2012). Moreover, President Lee began sending Hur Kyung-wook, his vice finance minister, to BoK meetings from January 2010 onwards. Hur underlined the increased government pressure, stating that ’it is time for the government and the central bank to undertake constructive policy cooperation’ (BoK, 2010b). Second, Kim appointed outsiders and staff from the finance ministry to the central bank, aiming to break up rigid structures in the central bank from within (see Kim, 2014; Interview with former South Korean policymaker C, Seoul, 25 February 2019). Third, financial stability issues received more attention with the revisions of the BoK Act in September 2011 and March 2012. Next to having obtained a mandate for financial stability (Article 1), the BoK was equipped with new tools to provide emergency liquidity (Articles 65 and 80), expand eligible collateral (Article 64), and deploy new open market operations (Article 68). While the widened tools gave the BoK more instruments to shape liquidity conditions, the new mandate further increased the politicization potential of the BoK. A case in point for this new potential is when Prime Minister Moon Jae-in called the central bank to tighten the policy rate in late 2018 (Interview with former South Korean policymaker D, Seoul, 4 March 2019). Fourth, Lee Myung-bak further weakened the finance ministry. In February 2008, the Government Reorganization Plan transformed the Financial Supervisory Commission into the Financial Services Commission, transferring more power over financial policy and regulation from the finance ministry to the new FSC.

In both case studies, expected institutional convergence to Western norms was followed by unexpected policy divergence. The break of the policy path in Japan was more pronounced, with Abe Shinzō using his capacity to completely reshape BoJ’s policy board to induce monetarist monetary policy. In South Korea, the adoption of financial stability-directed policies under Kim Dae-jung broke with previous developmental policies. South Korea’s new policy approach is more closely linked to previous developmental policies, but financial stability became the prioritized objective. The dismantling of the developmental financial system in Japan was more pronounced. It is rather doubtful whether the adoption of these new policy paths would have been possible without the new powers gained by the government through the institutional changes of the late 1990s.

Using institutional change to tilt the playing field and instigate new policy paths

This article found that the content of the institutional changes in the late 1990s was strikingly similar in Japan and South Korea, aligning with Western norms. At first glance, also the ensuing policies indicated a break with the previous developmental policy paths. But it is the emergence of the novel policy paths (monetarist in Japan, financial stability-directed in South Korea) that pose a challenge for convergence and divergence scholars alike. This paper sought to demonstrate that the institutional changes in the late 1990s allowed governments to break with historical legacies, strengthen their control over policymaking, and thus instigate new policy paths. To induce these changes, governments in Japan and South Korea pursued similar strategies by deploying international pressure and expert commissions to overcome national veto players, particularly the finance ministry. The government could elevate its position on the modified political playing field to shape policymaking.

It was, therefore, not predetermined which new policy path would be adopted following the reforms. Instead, the new openness to policy change enabled the emergence of novel policy paths through the reconfiguration of relations on the playing field, including through the newly gained right for the government to appoint key policymakers that could translate their ideas into policies. It is certainly true that developmental state capacity has continued to inform policies to a certain degree, as Thurbon (2016) emphasizes. However, this would miss capturing the new venues available to the government to exert control over policymaking, reflected in monetarist policies favored by Abe or financial stability-directed policies preferred by Kim Dae-jung and Lee Myung-bak.

This paper argued that including government objectives as a factor next to international convergence pressure and domestic constraints can enhance the existing theoretical framework to explain institutional and policy change. In both countries, governments have pursued the objective of strengthening their control over policy output vis-à-vis the finance ministries since the 1980s. Governments established expert commissions to develop blueprints for institutional and policy change that allowed them to sideline the resistance from the finance ministry. This finding adds to the variegated political functions that expert commissions can adopt, which reach from promoting the voice of neoliberal business associations (Gotoh, 2020, pp. 134–135) to enhancing democratic participation through the inclusion of non-state actors (Jeong and Oh, 2010). This conclusion moreover relativizes the findings by Lee and Kim (2018), who note a strengthened role of the South Korean financial bureaucracy following the financial crises and argue that the direct control of the president over the bureaucracy weakened.

International pressure for institutional convergence further played into the governments’ hands when financial crises occurred in both countries at the critical juncture in 1997/98. At that moment, they could finally enact institutional change, which allowed them to modify state capacity and made the adoption of new policy paths possible. The findings thus shed more critical light concerning the role of policy diffusion, international organizations, and transnational epistemic communities. Transnational factors have been identified as causal drivers in cases such as the development of monetary and financial policy in post-Soviet countries (Johnson, 2016). However, in the presence of strong domestic constraints, such as in Japan and South Korea, these transnational factors became less consequential. The case of South Korea is particularly relevant as it demonstrates how also small open economies subject to IMF emergency support can pursue a relatively independent policy path. This insight contrasts earlier findings that suggest the Korean government was ’faithfully’ following the IMF’s reform schedule (Lee and Han, 2006, p. 306). Nevertheless, this does not imply that international pressure does not matter; instead, the findings put the focus on how international pressure is mediated and used strategically by domestic actors (see Ban, 2016). This paper thus adds to existing studies that stress the agency of smaller economies (Eun et al., 2022) and indicates the strategic role that international pressure plays for governments to enact domestic reforms (Newman and Posner, 2016; Dyson and Featherstone, 1996). These findings of the article suggest that analyzing the direct interlinkages between institutional change and policy change might help explain how peripheral economies can control the evolution of the domestic financial system (see Alami et al., 2022).

This paper left the role of interest groups in shaping institutional and policy change largely aside. The purpose was not to claim that corporate interests are not important to explain policy outcomes (e.g. see Töpfer, 2017; Lim, 2010). Indeed the keiretsu and chaebols continue to hold central positions in the economic and financial systems of Japan and South Korea. Contributions have pointed out that resistance to neoliberal reforms has been stronger among these actors in Japan than in South Korea (Gotoh, 2019). However, the institutional change of the late 1990s also curtailed the power of the conglomerates, with corporate governance reforms and restructuring being more thorough in South Korea than in Japan (Tiberghien, 2007). Although weakened by these reforms, they continue to occupy a relevant position on the modified playing field.

Acknowledgments

The author would like to thank the two reviewers for their detailed and stimulating comments as well as Cornel Ban, Manuela Moschella, Matthias Thiemann, and Lucia Quaglia for their helpful feedback on early draft versions. The article benefitted greatly from interviews conducted in Tokyo and Seoul in spring 2019.

Disclosure statement

The author reports there are no competing interests to declare.

Additional information

Notes on contributors

Max Nagel

Max Nagel The author is a post-doctoral researcher at the IAW Institute for Labor and Economy, University of Bremen. His research interests revolve around international political economy, global financial governance, and international migration. He was awarded a doctoral degree from the Faculty of Political and Social Sciences, Scuola Normale Superiore in Florence, Italy. Previously, he received a graduate degree in Economic and Financial Sociology from Goethe University Frankfurt (Germany) and an undergraduate degree in International Economics and Development from Bayreuth University (Germany). Additionally, he has held positions as a visiting scholar at the Centre for European Studies and Comparative Politics at Sciences Po, Paris (France); the Doctoral School of Political Science, Public Policy and International Relations of Central European University, Budapest (Hungary); and the Political Science Department of the University of Pennsylvania (USA).

Notes

1 In the late 1990s, monetary policy norms entailed a focus on price stability; minimal central bank interventions via countercyclical control of short-term interest rates in the inter-banking market; transparent policymaking; and inflation targeting (see Goodfriend, 2007). Financial policy norms incorporated micro-prudential regulation, self-regulation of banks, and policies promoting market-based finance (see Goodhart, 2005) that were advocated by Western states (Katz, 2002, p. 22; Bernanke, 1999). Furthermore, the government and central bank should abstain from interventions in the foreign exchange market (floating exchange rate system).

2 After several restructurings, South Korea’s Ministry of Finance was renamed to Ministry of Finance and Economy in 1994 and to Ministry of Economy and Finance in 2008. To enhance readability, it is named Ministry of Finance in this article.

3 For a concise summary of the “convergence-diversity” debate for the case of Japan, see Gotoh (2019, pp. 26–28).

4 Since the revision of the Bank Act in September 2003, the BoK’s vice governor replaced the member of the Securities Dealers Association.

5 Traditionally, the finance ministry preferred monetary loosening combined with fiscal austerity (Brown, 1999). Although Abe increased the consumption tax to 8 percent in April 2014, he postponed a further planned increase to 10 percent for several years until October 2019.