MITI and the Japanese miracle

by Chalmers Johnson

  Japanese employment system derives from traditional practices), the Council's Labor Subcommittee met some 22 times during 1951 alone to produce standards for the wage system and promotion system, for the organization of work sites and measures to avoid strikes, and for employee training programs; these were subsequently recommended to all Japanese firms. The Industrial Rationalization Council had no legal authority to force its proposals on a particular enterprise, but it should be recalled that the council's sponsor, MITI, could and did cut off the access to foreign exchange of any firm that it felt was wasting valuable resources. Not surprisingly, the Council's educational programs were well attended and their suggestions widely adopted.

  39

  After setting up the Council, the Enterprises Bureau's next big initiative was the enactment of the Foreign Capital Law (Gaishi Ho*, number 163 of May 10, 1950). The Foreign Exchange and Foreign Trade Control Law of 1949 had already given the government the power to concentrate all foreign exchange earned from exports (by law such foreign exchange had to be sold to a foreign exchange bank within ten days of its acquisition), and this power made possible the control of imports through the use of a foreign exchange budget. MITI made every effort to suppress imports of finished goods, particularly those that competed with domestic products, but it urgently sought imports of modern technology and machinery. The problem was to keep the price down and to "untie the package" in which such foreign technology normally came wrappedto separate the foreign technology from its foreign ownership, patent rights, know-how agreements, proposals for joint ventures, capital participation, voting rights, and foreign managers on boards of directors.

  The Foreign Capital Law dealt with this problem. It established a Foreign Investment Committee and stipulated that foreign investors wanting to license technology, acquire stock, share patents, or enter into any kind of contract that provided them with assets in Japan had first to be licensed (kyoka) by the committee. (At the end of the occupation, the powers of this committee were transferred to the Enterprises Bureau). SCAP approved the law in order to guarantee the availability of foreign exchange for license payments, but the Japanese were more interested in restricting the import of foreign technology to those cases deemed necessary for the development of Japanese industries. As SCAP wrote, "Restrictive provisions of the law were to be relaxed and eliminated as the need for them subsided."

  40

  But restrictions did not even begin to be relaxed until 1968, long after Japan's balance of payments constraints had been overcome.

  41

  The next big accomplishment of the Enterprises Bureau was the En-

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  terprises Rationalization Promotion Law of 1952, on which it had spent some two years in planning, consultation, and political preparation. Its actual drafters were Ishihara and Hizume. MITI refers to it as a "completely epoch-making law."

  42

  Its complex provisions can be reduced to three basic points: first, it provided direct governmental subsidies for the experimental installation and trial operation of new machines and equipment, plus rapid amortization and exemption from local taxes of all investments in research and development; second, it authorized certain industries (to be designated by the cabinet) to depreciate the costs of installing modern equipment by 50 percent during the first year; and third, it committed the central and local governments to building ports, highways, railroads, electric power grids, gas mains, and industrial parks at public expense and made them available to approved industries.

  43

  The last provision was perhaps the most important because it drastically reduced production costs. It began the extensive efforts by MITI and the Ministry of Construction over the next two decades not just to build the infrastructure for industry but to rationalize it as completely as possible. The idea behind the provision was the recognition that since Japan's industries had to import most of their raw materials and to export their products, factories and port facilities should be completely integrated. The prewar Japanese steel industry had worked out the rule of thumb that it had to transport six tons of raw materials in order to produce one ton of steel.

  44

  MITI planned to change that by dredging harbors, building factories at dockside, and locating intermediate processors next to final manufacturers. One of the most famous products of this policy is the Keiyo* industrial belt and petrochemical

  kombinato

  , which was built in Chiba prefecture on land entirely reclaimed from Tokyo Bay. The Kawasaki Steel Company alone, which in 1953 fired the first blast furnace of its new, integrated facility (pig iron to rolled steel; at the time, the world's most modern), received some 3 million square meters of free land from Chiba prefecture. Ichimada, the banks, and Kawasaki's biggest competitors (Yawata, Fuji, and Nippon Kokan*) all derided the Kawasaki effort at the time as beyond Japan's capabilities and needssomething MITI has never let them forget in view of its unexampled success.

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  Despite MITI's own early successes with the Development Bank, the Foreign Capital Law, and the Rationalization Council and Law, Japan was still some remove from a true high-growth system. Throughout the 1950 to 1954 period economic fluctuations buffeted the country. These fluctuations were caused, first, by the Korean truce negotiations and truce and, second, by balance of payments problems, since

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  TABLE

  16

  Japan's Business Cycle, 19501974

  Popular name

  Period

  Duration

  Doran * bumu* (Korean War boom)

  6/506/51

  13 months

  Kyusen* hando* (Truce recession)

  7/5110/51

  4 months

  Shohi* keiki (consumption boom)

  11/511/54

  27 months

  Nijuku-nen* fukyo* (the 1954 recession)

  2/5411/54

  10 months

  Jimmu keiki (boom unprecedented since the emperor Jimmu)

  12/546/57

  31 months

  Nabezoko fukyo (bottom-of-the-pot

  recession)

  7/576/58

  12 months

  Iwato keiki (boom unprecedented since the time of the sun goddess Amaterasu)

  7/5812/61

  42 months

  Sanjushichi-nen* fukyo (the 1962 recession)

  1/6210/62

  10 months

  Kokyokan-naki* hanei (prosperity without a sense of boom)

  11/6210/64

  24 months

  Yonju-nen* fukyo (the 1965 recession) (also called the Kozoteki fukyo, the structural recession)

  11/6410/65

  12 months

  Izanagi keiki (boom unprecedented since the god Izanagi joined with Izanami to create the islands of Japan)

  11/656/70

  56 months

  Yonjugo* yonjuroku-nen* fukyo (the 197071 recession)

  7/7012/71

  18 months

  Ijo* infure no jiki (period of unusual inflation)

  1/721/74

  25 months

  Sekiyu shokku igo (after the Oil Shock)

  2/74

  SOURCE

  : Togai Yoshio, "Sengo Nihon no kigyo* keiei" (Postwar Japanese enterprise management), in Kobayashi Masaaki et al., eds.,

  Nihon keieishi o manabu

  (The study of Japanese enterprise management), Tokyo, 1976, 3: 2.

  imports outran exports whenever the people's economic conditions improved even slightly (see Table 16). The recessions of 1951 and 1954 caused numerous bankruptcies (the largest was that of Amagasaki Steel, which was absorbed by Kobe Steel), and manufacturers turned increasingly to the government for direction. The government, however, was divided. To the extent that Yoshida had an economic strategy at all, it was to ally Japan with the United States as closely as possible. MITI officials did not necessarily disagree with this approach, but their nationalism prompted them to plan to compete with the Uni
ted States as well as rely on it. Moreover, some of them wanted to try to restore Japan's traditional China trade, which Yoshida and the Americans resolutely opposed. Most important, MITI stood for a shift of industrial structure from light to heavy industries, which neither Ichimada nor most consumers thought made economic sense.

  On April 28, 1952, the San Francisco peace treaty restoring Japan's

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  independence came into effect. On May 29, 1952, thanks to U.S. sponsorship, Japan was admitted to the International Monetary Fund and the International Bank for Reconstruction and Development (the "World Bank"); and on August 12, 1955, Japan joined the General Agreement on Tariffs and Trade (GATT). However, at the time both Japan's IMF and GATT memberships were in the special category reserved for poor countries. On September 15, 1953, Japan also concluded a basic commercial treaty with the United States. Some of these affiliations did not go down well in Japanparticularly Yoshida's plan to "introduce foreign capital" via loans from the World Bank, which irritated many nationalists and led to shouts of "national dishonor" in the Diet.

  46

  Yoshida pushed the loan agreements through anyway; in the autumn of 1953 the World Bank made its first loan of $40.2 million to the Kansai, Chubu, and Kyushu Electric Power companies to build thermal generating plants. In later years the steel companies also borrowed from the World Bank. MITI was delighted with these loans, but it also saw in the political controversy surrounding them a potent reason to continue with its own approach to rapid economic development.

  Once the occupation had ended, the Yoshida government ordered a general review of the executive branch and of all laws and ordinances inherited from the SCAP era. Among other things Yoshida himself wanted to abolish the Economic Stabilization Board as a symbol of the controlled economy, but MITI, which sent by far the largest number of officials to it, liked it. In order to save it, Hirai Tomisaburo* of MITI bypassed Yoshida to obtain the Liberal Party's agreement to transform the ESB into a smaller (only 399 officials) organ for economic analysis and forecasting.

  47

  Thus, on August 1, 1952, the powerful ESB ("whose name alone would stop a child's crying") became the Economic Deliberation Agency (EDA; Keizai Shingi Cho*), a "think tank" with no operational duties at all. On July 20, 1955, after Yoshida had left the scene, its name was changed to Economic Planning Agency (EPA; Keizai Kikaku Cho).

  MITI continued to regard the EDA/EPA as its own "branch store"it appointed the agency's vice-minister, the chief of its Coordination Bureau, and numerous other key posts. Moreover, in 1952 the substantive powers of the old ESB were all transferred to MITI. The International Trade Bureau (ITB) took over preparation and administration of the foreign exchange budget, and the Enterprises Bureau began to screen all foreign investment proposals. These developments transformed the ITB; its offices on the third floor of the old MITI office building became known as the "Toranomon Ginza" because of the

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  hundreds of importers gathered there daily to seek licenses. Journalistic observers of MITI have also concluded that this was the ministry's most corrupt period. Officials of the ITB received numerous presents and invitations to mahjong sessions (at which they never seemed to lose money); and some trading companies employed attractive female negotiators to deal with the ITB.

  48

  It has been alleged that officials even sold copies of the "secret" foreign exchange budget for large sums, it being of great value to importers in calculating how much of each commodity would be approved.

  49

  These conditions were the natural concomitants of tightly controlled trade, but they did not do anything for the ITB's reputation.

  MITI used the opportunity of Yoshida's postoccupation review to reorganize itself totally. The Secretariat rewrote the MITI Establishment Law, and the new law, number 275, was passed on July 31, 1952. It eliminated the old prefix tsusho* (international trade) from the names of the industrial bureaus; combined the ITB and the Trade Promotion Bureau into one large unit; and abolished SCAP's Public Utilities Commission, which had been attached to the prime minister's office. In its place there was set up in MITI a Public Utilities Bureau, the direct successor of the old Electric Power Bureau that the Ministry of Munitions had acquired when it was established in 1943. The sections of the Enterprises Bureau were also expanded to accommodate the planning and control functions of the defunct ESB. MITI thus took on the form that it would retain throughout the high-speed growth period and down to the reform of 1973 (see Appendix B).

  During the crucial years 195253 MITI undertook some other initiatives that set it on a collision course with a famous SCAP-created institution, the Fair Trade Commission (FTC; Kosei* Torihiki Iinkai), guardian and administrator of the so-called economic constitution, the Antimonopoly Law. The Antimonopoly Law, which is formally called the Law Relating to the Prohibition of Private Monopoly and to Methods of Preserving Fair Trade (Shiteki Dokusen no Kinshi oyobi Kosei Torihiki no Kakuho ni kan suru Horitsu*, number 54 of April 14, 1947) had a checkered career even before the occupation ended. SCAP defended it on the grounds that "with the exception of the Unfair Competition Law of 1934, which primarily dealt with imitating and palming off one's goods as those of another, Japanese legislation did not embody any rules against unfair trade practices generally and did not recognize any concept of free, competitive enterprise as being in the public interest"; but SCAP also acknowledged that "many civil servants in various departments of the Government exhibited a strong lack of sympathy or support for the antitrust program."

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  As originally drafted, the law prohibited collusive activities among entrepreneurs to set prices, restrict the volume of production or sales, divide markets or customers among themselves, limit the construction or expansion of facilities, or refuse to share new technologies or methods of production. Article 9 of the lawas famous in its own right as article 9 of the constitution, which outlaws the use of armed forcebanned holding companies, and this article has survived intact to the present day. Holding companies in fact do not exist in the postwar Japanese economy; the zaibatsu were rebuilt on another basis entirelythat of the banking keiretsu discussed above. The law also created the Fair Trade Commission, composed of seven members who are appointed by the prime minister with the consent of the House of Representatives for five-year terms.

  Modifications to the law began almost as soon as it had been passed. SCAP discovered that firms could evade the law by creating "trade associations" as noncommercial unions or foundations (

  kumiai, shadan

  , or

  zaidan

  ) under the terms of the Civil Code. Because of this, SCAP ordered the Japanese government to enact the Trade Associations Law (number 191 of July 29, 1948), which required any association of two or more businessmen to register with the FTC within thirty days of its establishment. MITI had this law abolished in 1953.

  Another problem was that ever since Yoshino's industrial unions law of 1925, medium and smaller enterprises had depended on their cartels to remain in business without resorting to dumping. SCAP agreed that they needed some special help, but rather than authorize their cartels as exceptions to the Antimonopoly Law (AML), it sponsored the creation on August 1, 1948, of the Medium and Smaller Enterprises Agency (MSEA) as an external agency first of MCI and subsequently of MITI. This organ was supposed to gather, analyze, and freely distribute information on the procurement of materials, marketing possibilities, business methods, and so forthin effect, to act as a cartel headquarters for the small business sector. The first director of the MSEA, Ninagawa Torazo * (former dean of economics at Kyoto University), fought vigorously with both SCAP and the Yoshida government to get more powers and a secure budget for his unit; he particularly wanted governmental financing for small businesses.

  After SCAP pressured the government to do as Ninagawa asked (law number 108 of April 24, 1950, amending the MITI Establishment Law), he resigned
and was elected mayor of Kyoto, a city with many medium and smaller enterprises. Backed by the socialists and communists, Ninagawa served from 1950 to 1978 as mayor of Kyoto,

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  where he became a persistent thorn in the side of the national conservative establishment. MITI was never very enthusiastic about the MSEA, but it had no choice other than to support it because of the political clout the small-business sector wields. Moreover, some MITI officials discovered that the directorship of the MSEA was an excellent place from which to build support for their own postretirement political careers. MITI's attitude toward the MSEA has consequently remained ambivalent over the years; it is today an integral, if non-mainstream, unit of the ministry.

  By far the most serious problem with the original Antimonopoly Law was its ban on agreements that provided for the exclusive use of technologies or know-how. SCAP historians have rather lamely acknowledged after the fact that ''such a proposal represented advanced antitrust thinking."

  51

  In fact, the stipulation was so advanced it did not exist in the United States, where know-how and trade secrets can be legally protected under the laws of the various states, not to mention the constitutional protection of patent rights (art. I.8.8). The original AML seemed to ban exclusive patent licensing agreements, which stopped in their tracks all Japanese efforts to import technology.