MITI and the Japanese miracle

by Chalmers Johnson

  Nihon no

  sangyo

  soshiki

  (Japan's industrial organization), Tokyo, 1969, p. 309.

  the RFB dominated the lives of all Japanese. The strong grip of the government over the economy also led to a "black mist" (

  kuroi kiri

  ) of corruption charges that culminated in the Showa* Denko* case of 1948alleged corrupt appropriations of RFB funds for the Showa Denko Companyand the arrest of ESB Director Kurusu Takeo and others. Thus the irony that SCAP's transfer of all economic powers to the government (instead of leaving some of them in the hands of civilians as was done during the war) heightened public mistrust of the government.

  In economic affairs the Katayama cabinet is known above all for two initiatives, both failures, that through their negative influence moved the discussion of economic policy to a new plane a year later. The first was the attempt to end inflation through wage and price controls. The priority production scheme was proving to be very hard on ordinary citizens since it subsidized producers but ruined households through inflation, rigged prices, and shortages.

  It was the incoming director of the ESB in the Katayama cabinet, Wada Hiroo, who announced a new price system that was supposed to overcome these problems and guarantee a subsistence livelihood. He set prices at 65 times the 193436 level and wages at 27.8 times the same level, calculated on the basis of his theory that a worker's productivity had fallen to a half or a third of what it had been before the war. He also set up a guaranteed minimum wage oriented to the offi-

  Page 185

  cial price of rice, and he predicted that by November 1947 a family should be able to survive on it without going into debt or resorting to the black market. As it turned out, inflation persisted and Wada was ruined when, on October 11, 1947, the press made a sensation out of the discovery that a judge of the Tokyo District Court, Yamaguchi Yoshitada, had starved to death while trying to live on the official ration. Judge Yamaguchi left a diary stating that "even bad laws are the law, and I am pledged to defend the law." He had refused to buy black market rice.

  49

  However, the longer-range consequence of Wada's abortive attempt to control inflation was a much greater degree of agreement among economic planners that priority production had to be wedded in some way to control of the sources of inflation.

  The second important but unsuccessful Katayama initiative was a proposal to nationalize the coal industry, an idea borrowed from the British Labour Party's policies of September 1946. Hirai Tomisaburo* of MCI enthusiastically drafted a state control law for the government, but it met with intense hostility in the Diet, despite MacArthur's endorsement of the plan. Mizutani Chozaburo*, MCI minister in the socialist cabinet, attempted to gain publicity for the measure by having himself photographed in a coal mine wielding a pickax and wearing only a loincloth, and he was thereafter always known as the "loincloth minister" (

  fundoshi daijin

  ). After innumerable disruptions and fist fights in the Diet, the heavily modified Law for the Temporary State Management of the Coal Industry (Rinji Sekitan Kogyo* Kanri Ho*, number 209 of December 20, 1947, implemented on April 1, 1948) came into being. It had a three-year time limit and covered some 56 ex-zaibatsu mines. Its only concrete result was to cause a reorganization and vast expansion of the Coal Agency, which by 1950 employed some 12,000 officials. The law did not, however, serve to increase coal production beyond what the priority production system had already achieved, and it was abrogated prematurely on May 2, 1950, unlamented as the last formal effort of MCI or MITI to separate management from ownership and turn management over to the state.

  50

  There can be no question that priority production achieved results. Coal production for 1947 was 29.3 million tons, or 97.7 percent of the target of 30 million tons, and production was raised during 1948 to 34,790,000 tons, or about 60 percent of the highest levels ever before achieved. The increased availability of raw materials and energy influenced all other designated industries. The ESB defended priority production in its first

  Economic White Paper

  (July 22, 1947) with the theory that "a twofold increase in coal production leads to a fourfold increase in general manufacturing." Kudo* Shoshiro*, deputy chairman of the

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  RFB, has written, ''The size of the RFB loans was foolhardy, but by the time the Dodge Line was promulgated, Japan's industrial facilities had been 80 percent restored." Moreover, according to Ikeda Hayato the RFB saw all but 2.9 percent of its loans repaid, although the RFB's successor, the Development Bank, puts the RFB's recovery rate at only 25 percent on plant and equipment loans and 78 percent on operating subsidies. Whatever the case, Ikeda concludes, "It is not right to deny the significant role that the RFB played in the recovery of Japan's postwar economy. . . . Loans were effective to a considerable degree. It is fair to say that the RFB accomplished its purposes."

  51

  Although no Japanese official doubts that the RFB inflation inflicted enormous hardships on the people and that it ultimately had to be stopped, priority production had an important effect on later bureaucratic attitudes as a precedent for bolder rather than more cautious, fiscally responsible courses of action. It also intensified the nationalistic attitudes of MITI officials, since the policy had been executed in the teeth of SCAP's disapproval.

  52

  There can also be no question that the actual institutions of priority productionthe RFB, the Supply and Demand Control Law, the ESB, and the Coal Agencywere recreations of Japan's wartime state apparatus for the economy. RFB financing was copied directly from the wartime policies of the Ministry of Finance and the Bank of Japan. The Supply and Demand Law was, if anything, stronger than any wartime law, since it gave the state control over all commodities, not just over trade. The ESB duplicated the CPB's functions and techniques, and employed many of its personnel. And the Coal Agency was the old Fuel Bureau, reborn without its seconded military officers. The creation of the ESB and the enactment of the Supply and Demand Law also forced the reorganization of MCI on November 9, 1946, into vertical bureaus for each industry, just as the creation of the CPB and its materials mobilization planning had done in 1939. As Jerome Cohen noted at the end of his study of the wartime economy, "The wartime control system with its vestiges of cartel domination was abolished, but the substitute allocation system had a very familiar appearance."

  53

  The obvious flaw in priority production was its effect on inflation, but an equally serious problem was the fact that it was carried out in the hothouse atmosphere of a blockaded economy. As the indices of economic activity for 1949 and 1950 indicate (see Table 13), great progress had been made toward the restoration of prewar levelsexcept in one area, foreign trade. The raw materials of Japanese industry, particularly raw cotton for the textile industry, plus petroleum and

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  TABLE

  13

  Indices of Economic Activity, 1949 and 1950

  (193436 = 100)

  Category

  1949

  1950

  Real national income

  82

  97

  Mining and manufacturing

  72

  94

  Agriculture, forestry, fishing

  97

  100

  Exports (including SCAP purchases)

  15

  35

  Imports

  30

  39

  Private plant and equipment investment

  70

  82

  Per capita real national income

  69

  80

  SOURCE

  : Japan Development Bank,

  Nihon kaihatsu

  ginko

  *

  10-nen shi

  (A ten-year history of the Japan Development Bank), Tokyo, 1963, p. 18.

  food, were being supplied by the United States. In 1949 Joseph Dodge contended th
at U.S. aid was one of the two "stilts" on which Japan's rigged economy rested; the other was RFB financing. According to SCAP, "The realization of a self-supporting status [for Japan] by 1953 requires a 700 percent increase in the volume of exports over 1948 with no more than a 120 percent increase in the volume of imports."

  54

  In 1949 Japanese exports were running at about $500 million per annum and imports at $900 million, with the difference being covered by disbursements from the U.S. Treasury.

  According to the terms of the Potsdam Declaration, which Japan had accepted at its surrender, SCAP exercised complete control over all exports or imports of goods and services, as well as all foreign exchange and financial transactions. The little Japanese foreign trade that SCAP allowed was conducted government to government until September 1947, when private foreigners were first allowed to participate. Private Japanese could not engage in international commerce until December 1949.

  On October 9, 1945, SCAP had directed the Japanese government to create a single governmental agency to account for and distribute the goods that SCAP itself imported into Japan and to receive and transfer to SCAP products manufactured by the Japanese for export. This order led to the creation of the Board of Trade (BOT; Boeki* Cho*, established by Imperial ordinance 703 of December 13, 1945) as an external bureau of MCI.

  55

  The BOT was an unusual institution. The fact that it was even tenuously attached to MCI rather than to the Foreign Ministrywhich SCAP would have preferred, since U.S. practice is to give the Department of State final authority over American tradewas due to some

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  fast action by Shiina and his successor as vice-minister after October 12, 1945, Toyoda Masataka. When MCI was recreated in August 1945, Shiina had thoughtfully set up a Trade Section (Koeki-ka *) in the Commercial Bureau, even though it did not have anything to do. Its head was Matsuo Taiichiro*, class of 1934 and one of the few MCI foreign trade specialists. During the Pacific War he worked as chief of the Import Section in the Greater East Asia Ministry, and in September 1956 he became the first genuine MITI bureaucrat to head the International Trade Bureau after the ministry finally freed itself of dominance by Foreign Office transferees. After retirement in 1960 Matsuo headed the New York office of the Marubeni Trading Company, and during the 1970's he became president of Marubeni. Arguing that MCI already had the nucleus of the organization SCAP wanted, Toyoda barely managed to beat back the claims of the Foreign Ministry. He also recalled years later that this MCI victory had occurred early in the occupation, before SCAP knew the lay of the land very well.

  56

  Even though the BOT was attached to MCI, the ministry had very little influence over it. BOT staff members from MCI were heavily outnumbered by Foreign Office officials who spoke Englishan indispensable requirement, since the BOT's main business was with SCAPand who needed assignments during the period when Japan had no other foreign relations. Until April 1947 the BOT conducted its domestic business through some 78 "semigovernmental" trade associations of exporters and importers. These associations were straight postwar continuations of the old control associations, although under new names; when SCAP realized what was going on, it banned any further use of the cartels. They were then replaced by four fully governmental corporations (kodan*), one each for minerals and industrial products, textiles, raw materials, and foodstuffs (see the Foreign Trade Public Corporations Law, number 58 of April 14, 1947). The BOT also controlled the Foreign Trade Fund, which concentrated all U.S. aid receipts and foreign exchange earned from exports into a single account to be used to buy strategic imports.

  During 1947 and 1948, when the priority production system was in full operation, the ESB set basic trade policy and drew up a foreign exchange budget; the BOT in turn kept the accounts for the fund and supervised the kodan, whose fixed capital was supplied by the government and whose working capital was obtained by loans from the BOT's Foreign Trade Fund. The kodan actually purchased goods for export from domestic producers and sold them to the BOT, and they received consignments of SCAP imports from the BOT, which they in turn sold to consumers. Before April 1949 SCAP and the BOT also

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  subsidized these transactions by maintaining an exchange rate between the dollar and the yen of US$1 = ¥130 for imports and US$1 = ¥330 (or ¥500, depending on the product) for exports.

  57

  Imports were sold in Japan at prices fixed in accordance with the ESB's supply-and-demand plans.

  During the autumn of 1948 both SCAP and the Japanese recognized that they had to make some fundamental changes in the priority production system and in the state trading operations of the BOT. On October 15, 1948, the Ashida cabinet resignedthe prime minister himself had been arrested in the Showa* Denko* scandal over the misuse of RFB fundsand Yoshida returned to power. SCAP was now determined to stop the so-called RFB inflation, for two reasons in particular. First, beginning in July 1948, in order to increase Japanese imports and thereby try to rehabilitate the economy, SCAP had started to draw on two new accounts of U.S.-appropriated aid fundsthe so-called GARIOA and EROA ("Government Appropriations for Relief in Occupied Areas" and "Economic Rehabilitation of Occupied Areas")and it could not afford to see these politically sensitive funds consumed by the fires of inflation. Second, in December 1948 Washington unequivocally ordered SCAP to make the quick attainment of Japanese economic self-sufficiency its primary objective. In order to do this, trade had to be increased, which in turn required the establishment of a fixed commercial exchange rate for the yen, and this could not be accomplished without halting inflation. The world was changing: the Cold War had begun, the communist revolution in China was nearing its denouement, and the United States now saw Japan as a strategic territory of critical importance to its own security and not just as an object for political reform policies that had grown out of the ideological confrontations of World War II.

  On the Japanese side a group of planners within the ESB led by Inaba Hidezo* drafted a five-year plan for Japan's economic reconstruction. It called for investment in heavy and chemical industries as the best way to increase the value of exports and to end price subsidies. Yoshida eventually disowned this plan, not because he disagreed with its contents (it is very similar to the plans MITI actually implemented during the 1950's) but because he believed that planning was synonymous with socialism.

  58

  Influenced by his own background and several of his closest associates, Yoshida felt that the best medicine for the Japanese economy would be to open it up to the world economy and to the discipline of international competition.

  The most important of Yoshida's advisers during this period was Shirasu Jiro* (b. 1902). A graduate of England's Cambridge University,

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  Shirasu was the son-in-law of Kabayama Aisuke, the titled (count), American-educated Satsuma clansman of Yoshida's father-in-law, Makino Nobuaki. Makino in turn was the second son of the Meiji oligarch Okubo * Toshimichi and, like Kabayama, also a graduate of an American university. Yoshida and Shirasu had become friends during the 1930's in London, where Yoshida was serving as Japanese ambassador and Shirasu was the manager of the English branch of the Imperial Fisheries Corporation. Linked by family background, education, and overseas experience, Yoshida and Shirasu continued their affiliation after the war. Yoshida appointed Shirasu first as deputy director of the bureau for liaison with SCAP and then as deputy director of the ESB in his first cabinet. Shirasu also participated in many important negotiations, including those with General Whitney over the new constitution and, as a consultant, in those conducted by the Japanese delegation at the San Francisco Peace Conference. On December 1, 1948, Yoshida appointed Shirasu director-general of the Board of Trade.

  On December 19, three weeks after Shirasu took over at the BOT, General MacArthur transmitted to the Japanese government his nine-point Economic Stabilization Plan. This called for a balanced budget, strengthened tax collection, limitations o
n RFB loans, improved controls over foreign trade and U.S. aid, increased production, and several other reforms that were intended to bring Japan back into international commerce but that would also impose very harsh conditions on the Japanese people until the exports started to flow. The immediate objective of the plan was to establish a fixed exchange rate. MacArthur made it clear that concrete policies to implement the nine principles were the responsibility of the Japanese government, but he added that the United States was sending an adviser to assist the government in its efforts and to monitor its progress. This adviser was the Detroit banker and former financial consultant to General Lucius D. Clay in Germany, Joseph Morrell Dodge (18901964).

  Dodge arrived in February 1949 and, working with Yoshida's new minister of finance, Ikeda Hayato, he compelled the government to write an overbalanced budget. On April 25 he also established the official exchange rate of US$1 = ¥360 that was to last until 1971. He authorized the creation of the Japanese Export-Import Bank and the Japan Development Bank, and he supervised a host of other critical decisions that affected the Japanese economy for years to come. Dodge's most important achievement was the sudden, drastic curtailment of inflation through a draconian reduction of demandwhat Maeda has called "rationalization through unemployment" (

  kubikiri

  Page 191

  gorika

  *). Dodge once and for all ended the debate over increased production versus control of inflation by choosing the second. His policies are properly compared with the Matsukata deflation of the 1880's and with Inoue Junnosuke's deflationary lifting of the gold embargo in 1930. Moreover, just as Inoue's deflation was overcome by the war profits of the Manchurian Incident, so Dodge's deflation was overcome by the war profits of the Korean War beginning in 1950.