Book review essay

The Japanese Law: An Economic ApproachJ. Mark Ramseyer and Minoru Nakazato; Chicago, The University of Chicago Press,1999, 310 pages, ISBN 0-226-70384-3

1. Introduction

This book, written in English, is a concise but substantive treatise on Japanese law. MarkRamseyer and Minoru Nakazato present an overview of the legal phenomena in Japan froma perspective similar to the perspective generally used to analyze Anglo-Saxon law. Thisbook is regarded probably as the first attempt to view Japan’s statutory law system throughthe looking glass of common law. Another unifying methodology the authors employ for thiswork is the economic approach to law.

This book is informative, innovative, entertaining, and even intriguing as an introductionto Japan’s legal system. Its 310 pages, in fine font, are packed with lucid, condenseddescriptions whose rather fast-paced logic is stimulating if occasionally requiring slowreading to follow.

Readers will be surprised to find that the methodology of looking at Japanese law as if itwere a common law system has succeeded in classifying and analyzing issues of a muchwider scope than they may imagine. On the other hand, they should be warned that theauthors often indulge in the practice of overstatements. By carrying their common-lawmethodology, and their esoteric choice of topics to an extreme, they sometimes entice thereaders to overlook important aspects of the statutory law system that bear critical signifi-cance to Japanese society. Also, they tend to assert rather than demonstrate the power ofeconomic analysis, without presenting significant evidence of economics’ contributions toour understanding of legal phenomena.

1. Japanese law as a body of court decisions

This book covers a wide range of fields in Japanese law, starting from the constitution andcontinuing to property rights, contracts, torts, corporate law, criminal law, civil and criminalprocedures, and tax and administrative law. Moreover, it serves as a curious and piquantintroduction to the political economy of Japan.

In the process of its nation building, Japan adopted primarily the code-law system of thecontinent, in particular, Germany, and, in part, France. After World War II, the American law

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had influence on such areas as constitution, product liability, and antitrust law. Still, the basicreliance of the Japanese legal system on statutes has remained intact. Epoch-making courtdecisions are discussed primarily as examples of interpreting the written code rather than asnewly created legal precedents.

This book convincingly shows that Japan’s statutory legal system can be analyzed to asubstantial degree as if it were an assemble of court decisions. This can be regarded as oneof the major contributions of the book.

Since the middle of the 1970s, the economic analysis of the law, or law and economics,was gradually introduced by economists to Japan under the influence of the studies in theU.S. (e.g., Hamada, 1977, Miyazawa, 1978; Watanabe et al., 1992; Cf. Ota, 1991). Attorneysin practice and some judges showed sympathetic attitudes to the economic approach, butmost legal scholars were critical, dwelling on the interpretation of the code law by thestandard of justice and common sense. It was difficult to convince them that each courtdecision creates a new rule and accordingly new law.

The academic situation was well illustrated by the work of by Yoshio Hirai (1987). Hiraiwas under the influence of Guido Calabresi and relatively sympathetic to the economicanalysis of the law. Nevertheless, he did not pursue the line of application of economics tolaw. Instead, he initiated a field called the “Theory of Legal Policy,” a new discipline thatfocused the role of extralegal knowledge in the legislative process rather than in the makingof court decisions. In this code-law country under continental influence, Hirai seemed toimply that the impact through law should come primarily through proper legislation ofstatutory codes and hardly through court decisions. Thus economics, sociology, and otherrelevant sciences can be utilized for improving legislation of legal codes but not forproviding guides for proper court decisions. In general, it was difficult to persuade Japaneselegal scholars of the importance of court decisions.

According to legal scholars, what matters is fairness and justice in the minds of judges,and economic reasoning hardly provides a useful guide to judges who follow their ownperception of justice. Ramseyer and Nakazato provide the readers with rich examples ofcourt decisions and the applications of economic analysis to those decisions. Thus, this bookwill help those scholars realize the importance of the law being created by court decisionsand the usefulness of economic analysis.

Planned for English-language readers, some part of this book is written to trigger theircuriosity and even their bizarre hunting instinct. The readers will be entertained by a guidedtour of esoteric features of Japan. For example, the authors describe in much detail thecollusion of politicians with right-wing groups,yakuza(Japanese Mafia equivalent),sokaiya(mobster quieting the shareholders’ meetings), and shark lenders, as well as bizarre sexcrimes. They explain old court decisions that are curiosities. On the other hand, they tend toneglect relatively other socially significant facets of legal phenomena in contemporary Japan.

3. Social functions of Japanese law

This book presents fresh perspectives on the functions of the legal system in Japan. First,Ramseyer, in his work with Rasmusen, sheds light on the power the long dominating Liberal

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Democratic Party (LDP) on the Secretariat of the Supreme Court. The Secretariat of theSupreme Court was likely to assign worse-than-average job positions to judges who be-longed to a left-leaning organization (p. 19), or who handed down decisions unfavorable tothe government. Those unfavorable decisions include criminal cases. Thus, the high con-viction rate may not be the sign of police efficiency but rather the manifestation of controlby the Supreme Court Secretariat. Because the Supreme Court judges are appointed by theruling party, the authors argue, the Japanese legal system is under the tight control of the LDP.

This argument is reinforced by Table 8.1 (p. 219), which shows that the winning (verdict)rates against the National Government that was under the LDP’s control are generally lowerthan the winning rates against the local governments that were often under the control ofopposition parties. This work gives statistically significant evidence that supports the exis-tence of the political biases in verdicts, which liberal political scientists have intuitively claimed.

This is another remarkable contribution of this book, though the reader should cave at thebook’s tendency to overgeneralize. In fact, Japanese courts have not always been just theinstruments of the LDP. For example, the Tokyo Appellate Court decided in 1980, that theimplicit cartel agreement by large petroleum companies was illegal, in spite of the existenceof administrative guidance by the Ministry of International Trade and Industry (MITI). Thisdecision undermined the effectiveness of the administrative control. The cited statisticalresults should not be used to minimize the role of serious conscientious decisions by judgesthat have helped the process of emancipating Japanese people.

Examples of oversimplification abound. After giving a clear description of the role ofsokaiya(blackmailers in the shareholder’s meeting), the authors claim that the new legisla-tion (The Amended Commercial Code) neither contains much new substance nor alters theenforcement practices. They misleadingly ridicule: “If the change [of the commercial code]seems trivial, that is the point” (p. 127).

Even before the publication of this book, this claim turned out to be wrong. Manypractices that involvedsokaiyacame under scrutiny, and many executive officers of firmswho were accused of having directly or indirectly accommodated these practices wereindicted. As already pointed out, many judges are reluctant to give criminal verdicts againstprosecutors, that is, the government. Probably for this reason, most of the defendants wereconvicted, though often with probation. In sum, legislationdoesmatter in Japan. In partic-ular, the amendment to the Commercial Code, Article 294-2, and Article 497 did havesignificant effects, if one does not mention the recent Daiwa case.

One of the crucial questions about Japanese law is the small number of suits and trials inJapan. The authors describe traditional explanations such as the cultural explanation byTakeyoshi Kawashima that the Japanese love harmony, and the supply-side explanation byWatanabe et. al. (1992) and John O. Haley (1991) that costs of litigation in terms of time andmoney are high. Then the authors develop their own innovative and empirically basedexplanation of this issue, particularly in cases of traffic accidents that people would rathersettle rather than pursue in court because verdicts are relatively stable and easily expected.

The explanation of litigation by the incentive to sue usually requires the assumption ofwishful thinking on the part of the defendant as well as the plaintiff. In order to go to trial,a plaintiff or a defendant must assume a prior probability that is favorable to her side, andneither of them learns enough to fill in the gap between their mutually optimistic views. This

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is an example of “cognitive dissonance” that is often discussed by psychologists. On thispoint, see the exchanges between Ramseyer (1999) and Hamada (1999) in Aoki andSaxonhouse (1999).

The book ignores many social, political, and economic phenomena that changed thedirection of the country. It would not be fair to ask the authors to cover all the important legalphenomena in Japan in this short space. In its present form, however, this book may givesome readers a misleading impression of Japanese society and its legal system. Japan maybe conceived of as a land where the right wing,sokaiya, and red-light industries prosper, andwhere legal professionals, and in particular, judges, are under pressure from the SupremeCourt Secretariat controlled by the ruling LDP. In reality, socially important cases wereexamined in court, and court decisions did exerted significant impacts on Japanese society.

Let me add some more examples. A focal point of the society from the late 1970s was theincidence of pollution. Severe protests developed. One momentum that changed society’sattitude was the effect of several verdicts against firms and governments regarding publicnuisance. The public was alarmed by such notorious environmental cases asMinamata(district) disease due to the mercury,itai-itai (“ache-ache!”) cadmium disease, the develop-ment of asthma as a result of polluted air in Yokkaichi city, and the noise nuisance from theOsaka Airport. Court decisions are generally against polluters and new techniques and logicwere used to justify their positions by supplementing the simple and inflexible civil codeprovisions on tort law. The judicial sector and judges were ahead of time in their determi-nation against pollution. As a result of the court decisions against the government or thethreat of such decisions, even the reluctant LDP-led government was compelled to draftantipollution legislation around 1970. Those aspects are virtually neglected by the authors.Minamata is mentioned (p. 125) as an example ofsokaiyawithout any substantial accountof its economic or social impacts.

Product liability cases also gave large social impacts. Court decisions as well as settle-ments on the cases regarding thalidomide, SMON (subacute myelo-opticoneuropathy) dis-ease, and HIV due to nonsterilized blood products given to hemophiliacs received strongattention from the public. Some of them resulted in legislating a new law, the productLiability Act in 1995, whose effectiveness the authors also try to minimize.

In sum, the emphasis of court decisions in this book is certainly welcome, but often it isoverdone. In order to understand the role of the legal system in Japan, one cannot neglect thesocial momentum that is created by court actions provided by able and conscientious judges.The momentum facilitates the changes and the legislation. One can neither neglect the roleof the statutes legislated under the momentum. Codes work as social, behavioral norms muchmore than court decisions do in Japan. Drafting a statute is an important step in the careerof an elite bureaucrat, and the administrative law functions well as an instrument for definingthe jurisdiction and the balance of power between government bureaus.

4. Economic approach to law

Being prepared as a textbook, the book stops before presenting the sharp edges of analysisthat the authors have contributed to law and economics in their research. In other words, theyexplain the contour and not the detail of economic approach.

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Minoru Nakazato has addressed (see p. 246) the asymmetric income-tax treatment ofwages and capital gain, and argued that the system functions as a kind of consumption tax.This point is related to the controversy in economics concerning what type of income shouldbe taxed to enhance growth (e.g., Chamley, 1986), and could be analyzed further in thecontext of the Japanese economy.

Ramseyer (1990), who writes in Japanese, strongly advocated for liberalizing treatment ofinsider trading on the Coase type of reason that any contract between an insider and thecompany may improve the welfare. In this book, in contrast to the above, the authors refrainfrom giving any recommendations for legislation in this case, as well as any policy recom-mendations.

Another example of the authors’ exaggerating tendency is found in the discussion of “TheLearned Hand Formula.” This famous formula in the U.S. law stipulates that the decisionson a tort case should be conducted by the comparison between the mathematical expectedvalues of benefits and costs. The authors claim that this rule was implicitly used in Japanesecourt decisions on tort. A close examination of the case decisions at various court levelswould hardly justify the authors’ claim. Only in the case ofHasegawa vs. First NationalHospital(discussed on p. 80) surfaces the slightest hint of probabilistic concept, let alone thecomparison of expected values. The description here reminds us of “crying wine, sellingvinegar.”

The field of tort is a playground of the Coase theorem. The authors do not go in depth itsapplication either. The lack of class actions is explained but without any reference to itseconomic impact. In short, the economic analysis applied in this book falls short of itsalleged objective, that is, clarifying “the impact that a legal system can have on economicdevelopment” (p. xii).

5. The state of “law and economics” in Japan

The authors’ tendency to overstate their case can be seen in their references as well. Intheir convenient study guide for Japanese law in the hardcover version, they write: “Asrecently as the mid-1980s, virtually no one took a law and economics approach to Japaneselaw” (p. 294).

This misleading sentence was deleted in the paperback version just published when thisreview was in press. (This review is based on their hardcover version published in 1999.)Even in the paperback edition, important works of Japanese scholars seem to be relativelyneglected. Although Japanese legal scholars were generally critical of the economic ap-proach to the law, already in the latter half of the 1970s there existed serious studies of theJapanese law utilizing the methods of economics and other social sciences. From the side oflegal scholars, Ota (1982) pioneered the Baysian analysis of court procedures. Hirai (1987)inspired interest in interdisciplinary research for many young law scholars. Economistsengaged in applying economic tools to the concrete problems of Japanese law (e.g., Hamada,1976, 1977; Miyazawa, 1978). For a survey of the literature in law and economics, see Ota(1991).

This kind of relative neglect of the materials in the original language may occur when two

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languages or cultures merge. The reader may wonder why this takes place in a book writtenby a Japanese scholar and an American writer who could himself write a complete book(Ramseyer, 1990) in Japanese.

Another reason for the neglect of the above may reflect the division of approaches amonglaw and economics scholars between those scholars who, like the authors, observe andunderstand the legal phenomena and those who try to improve the incentive mechanisms. Asa reviewer of Ramseyer (1990) for theEconomic Review(Hitotsubashi University), thepresent reviewer was impressed with his mastery of economic analysis, which surpassesmany economists. The reviewer did not have the courage to question why he did not makereference to other law and economics scholars who preceded him but did question why hecompletely neglected the work of Calabresi (1960)! Now the reviewer seems to have foundanother possible reason: there is a schism between the Chicago school and the Post-Welfare-Economics school in law and economics.

6. Conclusion: the role of “law and economics”

This leads to a fundamental question: What is the purpose of the economic approach tolaw? This book seems to take the Hegelian approach: “What is rational is real, and what isreal is rational.” In other words, rationality is realized because people are motivated byeconomic rationality. Thus, the role of law and economics is to detect economic rationalitynaturally working there.

In many parts of the book, the readers feels as if the authors would breathe a sigh of reliefand fall short of considering policy suggestions or system designs as soon as they testify tothe existence of economic logic. This would well serve the self-satisfaction of certaineconomists because it shows the power of economic methodology. Before the war, manyfamilies in rural areas sold their sons and daughters to sweatshops and brothels. Ramseyer(1996) regards the contracts as a normal economic exchange rather than slave indenture,because for a poor family without proper means of birth control the marginal utility or theprice of a child was zero or negative. What a triumph of economic logic, indeed!

May economists or “law and economics” scholars simply indulge in self-complacencyasserting the ubiquitous power of economics over other sciences? Given the understandingof motivations of actors, should economists not consider improving the institution as well asthe incentive mechanisms? Can economic analysis not give attorneys and judges certaincriteria for improving resource allocation by clarifying the social benefit and cost derivedfrom legal decisions? If one may risk the blame of over categorization, here one can detecta strong contrast between the “Hegelian” or “Chicago School” type of thinking (e.g., RichardPosner), that one is satisfied to see the economic reasoning working, and the tradition ofmodern welfare economics (e.g., Calabresi), which purports not only to observe the eco-nomic logic but also to utilize it for improving the incentive system.

This book should be welcomed as an alarming call to the conventional Japanese legalscholars who underrate the value of economic analysis in law. On the other hand, readers arewarned that the approach taken in this book is merely one way of applying economics tolegal phenomena among many possible options of doing so. The readers should take the

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messages in the book seriously, but with care in order not to be bewildered by authors’rhetoric of overstatements in many places. It is hoped that this provocative book will beinstrumental in lifting the self-imposed barriers by Japanese scholars to the interdisciplinaryapproach between law and economics.

Acknowledgments

The reviewer is indebted to Honorable Bruce D. Beaudin, Carolyn M. Beaudin, ProfessorsScott A. Boorman, Yasunari Koshino, Shozo Ota, Hugh T. Patrick, Minoru Tokumoto andSusan Rose-Ackerman for valuable discussions. The reviewer is solely responsible foropinions expressed and errors remaining in the paper.

References

Aoki, M., & Saxonhouse, G. R. (Eds.) (1999).Finance, governance, and competitiveness in Japan. Oxford:Oxford University Press.

Chamley, C. (1986). Optimal taxation of capital income 1 general equilibrium with infinite lives.Econometrica,54 (3), 607–622.

Haley, J. O. (1991).Authority without power: law and the Japanese paradox. New York: Oxford UniversityPress.

Hamada, K. (1976). Liability rules and income distribution in product liability.American Economic Review, 66(1), 228–34.

Hamada, K. (1977).Songai Baisho no Keizai Bunseki (The economic analysis of Tort). Tokyo: University ofTokyo Press.

Hifrai, Y. (1987).Hoseisaku Gaku (Theory of legal policies). Tokyo: Yuhikaku.Miyazawa, K. (Ed.) (1978).Seizobutsu Sekinin no Keizaigaku (Economics of product liability). Tokyo: Sanrei

Shobo.Ota, S. (1982).Saiban ni okeru Shomei Ron no Kiso (Foundation of the theory of proof in court). Tokyo:

Kobundo.Ota, S. (1991). Law and economics in Japan: hatching stage.International Review of Law and Economics, 11,

301–308.Ramseyer, J. M. (1996).Odd markets in Japanese history. Cambridge: Cambridge University Press.Ramseyer, J. M. (1999). Rational litigant redux: a response to Professor Hamada. In Aoki and Saxonhouse (Eds.).Watanabe, Y., & Miyazawa, S. (Eds.) (1992). Tekisuto BukkuCendai Shiho (Text book: Japanese judicial

system). Tokyo: Nihonhyoronsha, pp. 244.Koichi Hamada

Cabinet Office, Economic and Social Research Institute,Tokyo, Japan

E-mail address: koichi.hamada@yale.edu.PII: S1049-0078(01)00078-1

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