Recently, the puzzle of the unexpected and never-ending Japanese financial crisis has eluded Japan specialists and comparative political economists alike. How could the same institutions generate an overperforming economy for more than three decades and a decade-long crisis? How could a system once praised for its ability to handle economic shocks such as the two oil shocks and a massive reevaluation of the Yen suddenly stall and prove unable to adapt to changing conditions? How could the greatest creditor and capital exporter of the planet have such weak financial regulations? Scholars have disagreed on both the diagnostics and the causes of the crisis. While some have focused on mistakes in fiscal or monetary policy, others have emphasized a systemic breakdown. While some have emphasized domestic political factors (be they interest groups, party politics, electoral system, or bureaucratic dominance), others have focused on external factors.

Japan's Financial Crisis is the most systematic and thorough treatment of these questions to date. Building upon Daniel Okimoto's concept of a network state and Masahiko Aoki's work on institutions and Japanese bureaucratic incentives, Jennifer Amyx analyzes the successes and failure of Japanese finance through the lens of bureaucratic policy networks. First, she argues that informal, highly institutionalized, pervasive, and exclusive networks between Ministry of Finance (MOF), on the one hand, and political leaders, banks, and other government agencies, on the other hand, form the defining feature of financial regulation in postwar Japan. These networks generated an efficient and self-enforcing regulatory system in the high-growth period. They lowered moral hazard risks and transaction costs (p. 113). These same networks turned into “paralyzing networks,” once key underlying conditions disappeared. Second, Amyx identifies two intervening variables that explain the shift from efficient to suboptimal networks: the amount of information requirements necessary for regulation, and stability in a key network hub, namely, the linkage between MOF and the dominant party of Japanese politics, the Liberal Democratic Party (LDP). When information requirements increased in the 1980s, the networks proved unable to provide the solution for optimal financial regulation. When the links between MOF and the LDP were disrupted by the LDP's brief loss of power in 1993–94 and its rapid return to power in a coalition with anti-MOF partners, policy networks became detrimental. Internal chaos led to reform inertia.

The book begins by systematically analyzing the overall logic of policy networks, the links between MOF and the LDP, the ties between MOF and the private sector (amakudari, ama-agari, and MOF-tan), and the ties between MOF and other ministries. In turn, Amyx unpacks the five key phases of Japanese financial regulation: the miracle period (up to 1984); the bubble period and the oversight failure of policy networks (1985–90); network-managed phase after the collapse of the bubble (1990–94); policy paralysis in the midst of network breakdown and internal infighting (1994–98); and the active reform period beginning in 1998. The last chapter includes the most comprehensive analysis of recent reforms in the Japanese network state to date.

Through both a single parsimonious theoretical model and a thorough process tracing of the entire boom–bust cycle of Japanese finance, Amyx's is arguably one of the first accounts that are able to explain both miracle and crisis. The study develops a novel approach to institutional change in Japan through a focus on policy networks and on the variables affecting these networks. Furthermore, the author is able to take the debate on bureaucratic leadership and a strong state in Japan to a new direction. After retheorizing the strength of the Japanese state as a catalytic or coordinating strength, she shows how such strength can turn into dramatic weakness when underlying conditions disappear. In the face of global change, the Japanese state is split between a bureaucracy that is too weak to regulate and too strong to allow systemic reforms, and a political leadership that remains too weak to take over from the bureaucracy and lead Japan to a new direction.

On the empirical side, the book presents a fascinating narrative of all key steps of the protracted story of financial regulation between 1980 and 2003. Amyx draws upon available sources in Japanese and English, as well as unique primary data on the career paths of all tier-1 MOF bureaucrats during three decades. She also makes use of hundreds of interviews with all key actors involved in the battle, as well as primary government materials and data sets. This book is the most definitive of MOF's internal politics and role in financial politics.

These strengths notwithstanding, the book remains solely focused on Japan's finance and, to a secondary degree, on the paradigm of a financial crisis. In this narrow context, the continued commitment to bank-centered finance and financial intermediation appears puzzling and costly. Absent from the analysis is any reference to the vast literature on types of capitalism, the flag bearer of which has become Peter Hall and David Soskice's (2001) Varieties of Capitalism. In this broader comparative literature, financial regulation is but one pole among several interdependent components of a political economic system. The reform of one such pole in the absence of a transformation of all other poles may be problematic and suboptimal. Choices of types of capitalism rely upon social and political compromises and may be deeply embedded. In this context, comparisons between the United States and Japan may not be helpful. In addition, in explaining why the Japanese system veers from an efficient to a paralyzed system, much of the action lies in the two intervening variables. Yet they remain underspecified in the analysis. For example, the analysis of information requirements (pp. 31–32) does not explore the true determinants of what may only be an intermediate variable. What lies behind changes in information requirements? Is it a story of technological revolution or a story of globalization of finance and regulatory competition between noncooperating states?

Furthermore, while the sections on the miracle and on network-based forbearance in the 1990s offer strong explanatory power, the section on the initiation of the bubble may be slightly weaker. The crucial step of the failed banking reforms of 1981 may be more than a case of “the network stalling reform” (p. 135). Rather, it is an extranetwork intervention of banks to the LDP that led to the weakening of MOF's ability to control the private sector network. One might also surmise that this episode marked an early breakdown between the MOF and the LDP. In addition, it is difficult to explain the bubble without referring to the ill-supervised process of financial deregulation accelerated after 1984 and partially induced from outside. Finally, while the empirical analysis of post-1998 reforms is outstanding, these reforms are not explained by the argument of policy networks. New variables and new actors (political leadership, foreign investors, policy entrepreneurs) are necessary to fully explain this reform period.

Beyond these minor issues, Japan's Financial Crisis is a must-read for any reader interested in Japanese political economy or political economy. It will stand out as a classic interpretation of the peculiar Japanese trajectory.