MITI and the Japanese miracle

by Chalmers Johnson

  Pressure from GATT also developed. Before the British would sign a basic treaty of commerce and navigation with Japan, they insisted that Japan accept article 14 of GATT (no governmental subsidies of exports); and Japan's acceptance of IMF article 8 was tantamount to adhering to GATT's article 11 (no trade controls because of balance of payments deficiencies). Therefore, with its ratification on April 4, 1963, of the Anglo-Japanese treaty, Japan notified GATT that within a year it would shift to article 11 status. During July 1963 Japan also applied for membership in the Organization for Economic Cooperation and Development (the first Asian nation to do so), and it was admitted on April 29, 1964but with some seventeen temporary reservations to the OECD's code of behavior for members. Nonetheless, membership in the OECD meant that Japan was committed not only to trade liberalization but also to the removal of controls on capital transactions. The "fully opened economy" was at last on the nation's agenda.

  Simultaneously with the acceptance of these new international obligations, the economy itself began to decline into its worst postwar recession. During October 1964, the same month that Sahashi replaced

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  Imai as vice-minister, the recession began. At first it looked like a normal cyclical downswing caused by a balance of payments crunch and government controls on credit, a type of recession that Japan had experienced several times since the Korean War. However, on December 1, 1964, the Japan Special Steel Company declared that it was bankrupt and applied to the courts for relief under the Company Reorganization Law (Kaisha Saisei Ho *). On March 6, 1965, the Sanyo* Special Steel Company followed suit, announcing that it could not cover its debts of some ¥50 billion. This was the biggest bankruptcy that had yet occurred in postwar Japan. Two months later the Yamaichi Securities Company reported that it too was unable to meet its debts and was going under; it was saved only by a drastic, government-secured loan program. Finally, in June and July the government abandoned its sixteen-year policy of balanced budgets and began to issue bonds to cover deficit financing of counterrecession expenditures. Fiscal policy had finally replaced Japan's long reliance on monetary policy alone.

  Under these circumstances analysts began to argue that this was not a "normal" recession but instead a "structural recession" caused by the "distortions" of high-speed growth. The structural recession thesis was associated above all with economists around Prime Minister Sato*, who replaced Ikeda in November 1964, and with MITI.

  31

  In retrospect it appears that the thesis was somewhat overstated and was motivated as much by Sato's* political need to find an issue to use against Ikeda as by any fundamental changes in the economy. The causes of the recession were, first, the uncertainty that followed liberalization, assumption of IMF article 8 status, and entry into the OECD; second, rising labor costs due to a drying up of the supply of young workers; third, the government's tight money policies; and fourth, continued overcapacity due to excessive, keiretsu-driven investment.

  For all of their coolness to the Special Measures Law, political leaders such as MITI Minister Fukuda had feared that something like this would happen. During mid-1964 Fukuda provided Sahashi with one of his greatest satisfactions. On June 26, 1964, he told the cabinet that the motivations and purposes of the Special Measures Law had all been sound, that the idea of the "cooperation formula" contained in the bill was a good one, and that it should be adopted as a tool of general industrial policy even though the law had failed to pass. MITI, he said, was going to set up cooperation discussion groups for synthetic textiles (actually created on October 26, 1964) and petrochemicals (December 19, 1964), and would entertain the possibility of

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  establishing them for other industries suffering from excess capacity. These measures, he said, would be taken through the ministry's residual powers of "administrative guidance"a term that had first appeared in a MITI annual report only during fiscal 1962and not on the basis of any particular law.

  32

  On July 18, 1964, a month after Fukuda made this speech, Ikeda reshuffled his cabinet and replaced Fukuda with Sakurauchi Yoshio, the son of a prewar MCI minister (1931) and a leader of the Kono* faction (Nakasone faction after Kono's* death in July 1965). Sakurauchi continued as MITI minister in the Sato* cabinet but was replaced by Miki Takeo in June 1965. It was thus Sakurauchi, Miki, and Sahashi who had to combat the recession by implementing the ideas of the Special Measures Law through administrative guidance.

  The institution of administrative guidance has done more than any other Japanese practice to spread the belief around the world that the Japanese government-business relationship is based upon some underlying, possibly culturally derived, national mores that have no parallels in other countries. The London

  Economist

  defines administrative guidance as "Japanese for unwritten orders"; and Prof. Uchida Tadao of Todai* writes that "the Diet is almost powerless in . . . determining economic programs in this country as such authority actually has been transferred to the administrative sector, particularly government offices."

  33

  Many foreigners have protested. "What bothers our manufacturers," says Ernst Hermann Stahr of the Union of German Textile Manufacturers, ''is that it's not really a matter of Japanese competitiveness, but a maze of impenetrable government supports and subsidies. Our people feel that whatever they do, the Japanese will just lower their prices."

  34

  It was administrative guidance that gave MITI the reputation during the 1960's of being the "Ministry of One-Way Trade."

  35

  On the other hand, a Japanese analyst writes, administrative guidance "is what makes Japan's business tick. It is what made this country the world's third industrial nation. It is one of the pillars that support Japan Incorporated."

  36

  There is nothing very mysterious about administrative guidance. It refers to the authority of the government, contained in the laws establishing the various ministries, to issue directives (

  shiji

  ), requests (

  yobo

  *), warnings (

  keikoku

  ), suggestions (

  kankoku

  ), and encouragements (

  kansho

  *) to the enterprises or clients within a particular ministry's jurisdiction.

  37

  Administrative guidance is constrained only by the requirement that the "guidees" must come under a given governmental organ's jurisdiction, and although it is not based on any explicit law, it cannot violate the law (for example, it is not supposed to violate

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  the Antimonopoly Law). During the 1950's administrative guidance was rarely mentioned in connection with MITI's actions because most of its orders, permissions, and licenses were then firmly based on explicit control laws. Administrative guidance came to be openly practiced and discussed during the 1960's, and then only because MITI lost most of its explicit control powers as a result of liberalization and the failure to enact the Special Measures Law. In a sense, administrative guidance was nothing more than a continuation by MITI of its established practices through other means. All Japanese observers concur in Shiroyama's conclusion. "After the failure of the Special Measures Law, the only thing left was administrative guidance."

  38

  Administrative guidance differs from orders issued in accordance with, for example, the Foreign Exchange and Foreign Trade Control Law in that it is not legally enforceable. Its power comes from government-business relationships established since the 1930's, respect for the bureaucracy, the ministries' claim that they speak for the national interest, and various informal pressures that the ministries can bring to bear. The old Japanese proverb used to describe this threat of governmental retaliation is "To take revenge on Edo by striking at Nagasaki," meaning that the bureaucracy has the means to get even with a businessman who refuses to listen to its administrative guidance.

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  As w
e shall see below, MITI has on occasion retaliated with force against an enterprise that rejected its advice.

  In some of its forms administrative guidance is indistinguishable from a formal legal order by the government. An example is guidance through policy statements (

  shido

  *

  yoko

  *). This refers to the obligation of the public to pay attention and respond in good faith to properly drawn and published policies of the government, although penalties for noncompliance have never been specified. The most famous case of this form of administrative guidance occurred during the early 1970's, when the city of Musashino in the suburbs of Tokyo issued a policy statement saying that housing contractors who built large projects had to cooperate in providing or helping to buy land on which to build elementary schools. When a contractor ignored these guidelines, the city capped the water and sewage lines he had built for the project with concrete. The contractor took the city to court, but the court upheld the city.

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  Generally speaking, few objections are possible when administrative guidance is couched in terms of the national interest. The press likes to cite the case of a city bank executive who called on the Ministry of Finance to protest that his bank could not absorb the full quota of government bonds assigned to it by administrative guidance. A Banking Bureau official replied, "So you think

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  your bank can survive even after Japan collapses? Go back and tell your president exactly what I said."

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  Sahashi was particularly adept at and inclined to use this kind of defense of his administrative guidance.

  The problems of administrative guidance begin when it is suspected that a ministry is not neutral in an issue it is supposed to be arbitrating, or when it has been captured by the people it is supposed to be regulating, or when its administrative guidance is really only a governmental cloak (kakuremino) hiding an otherwise illegal cartel, or when the deliberation councils in which administrative guidance is carried out have been packed with people leaning in a certain direction. There is no ready relief from such malpractices when they are suspected. Several protests against administrative guidance on these grounds erupted during the 1970's, as we shall see in the next chapter.

  During the recession of 1965 the main form of MITI's administrative guidance was investment coordination done in "cooperative discussion groups." Whatever businessmen or their representatives may have said in the Diet about MITI, Sahashi, or the Special Measures Law, in private they welcomed these cartels to stave off the consequences of their own preemptive investment and the weakening of demand during the recession. On January 29, 1965, the discussion group for petrochemicals decided that new ethylene-producing facilities for fiscal 1965 and 1966 should be limited to 350,000 tons, and that firms already established in the industry should be the only ones to develop such facilities. And on March 18, 1965, the synthetic textiles discussion group agreed on a formula for new acrylic fibers facilities that would keep output below 30 tons per day. In May 1965 MITI set up a paper pulp industry discussion group, and in November 1966, one for the ferroalloys industry. Other industries employed the specialized committees of the Industrial Structure Council for the same purpose, and the council ultimately replaced the discussion groups as the place where most industrialists and financiers got together to agree on how much each was going to invest in what kinds of plants and equipment.

  Another important form of administrative guidance during this period was the promotion of mergers. Sometimes this meant nothing more than MITI's bringing the parties together and endorsing their union before the FTC. The biggest such merger was the reamalgamation on June 1, 1964, of the three companies that had come into being after SCAP broke up the old Mitsubishi Heavy Industries. However, sometimes more was needed to achieve a merger than mere verbal

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  encouragement. During fiscal 1963 the Japan Development Bank set aside some ¥3 billion (enlarged to ¥6 billion during 1964) for "structural credit" loans to large firms that merged. The government had long used easy financing to encourage mergers among medium and smaller enterprises; now it extended such funds to the automobile, petrochemical, and alloy steel industries. In the merger of the Nissan and Prince automobile companies, which was finally consummated on August 1, 1966, Nissan is alleged to have received a reward in the form of an $11.1 million loan from the JDB.

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  The government justified this kind of largesse as part of its export promotion policies, since economies of scale lowered the prices of export products. As Holler-man notes, "It is ironic that whereas zaibatsu dissolution was undertaken by the occupation authorities in the name of economic democracy, their reconstruction is now being pursued in Japan in the name of import liberalization."

  43

  Sahashi credits Minister Sakurauchi with bringing off the Nissan-Prince merger, but most observers believe that Sahashi himself did most of the work.

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  These months of "structural recession," mergers, and administrative guidance led up to and conditioned Vice-Minister Sahashi's last hurrahthe fight he had with the Sumitomo Metals Company of Osaka because it refused to abide by his administrative guidance. Steel, in Inayama Yoshihiro's words, is the "rice of industry," and the steel industry has long been regarded by knowledgeable observers as the "honor student" of the Japanese government-business relationship.

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  During the mid-1960's, however, MITI was having some problems with its prize pupil. Because the Yawata works had been founded as a state enterprise (which in 1934 became the major participant in Japan Steel, a public corporation), four of the "big six" steel companies (Yawata, Fuji, Nippon Kokan*, Kawasaki, Sumitomo, and Kobe) distrusted MITI's impartiality on the grounds that it had a soft spot in its heart for its ''true children," Yawata and Fuji, the successors to Japan Steel after SCAP broke it up. Moreover, relations with the steel industry were delicate. All of the big six firms had high-ranking former MITI officials on their boards of directorsexcept for Sumitomo, which refused on principle to hire bureaucrats. But even so it was hard to give direct orders to the industry because so many of its executives were top leaders in business organizations such as Keidanren and Keizai Doyukai*.

  There were two main problems in the administration of the steel industry: coordination of investment for new blast furnaces and converters, and coordination of production in order to maintain prices at

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  a reasonable level. Inayama of Yawata had long held that avoidance of price fluctuations in the steel industry was in the national interest, both to ensure that the industry could schedule repayments on the loans for its huge investments and to avoid the ripple effect that price instability in steel had on the rest of the economy. From the era of priority production just after the war down to approximately 1960, MITI had exercised detailed control over investments in the steel industry through the plans of the Industrial Rationalization Council and through the policy use of the Foreign Capital Law. In 1960 Vice-Minister Matsuo (who went to Nippon Kokan * after his retirement) had proposed a steel industry law to establish an investment-coordination cartel as an exception to the Antimonopoly Law, but the industry had rejected it in favor of self-coordination, legalized by MITI's alleged supervision but actually carried out by the Japan Steel Federation. By 1965 this attempt at self-regulation had broken down, and overcapacity in the steel industry combined with the recession threatened to bankrupt some of the biggest firms in the nation.

  The immediate issue was a MITI recommendation to reduce production (

  kankoku

  sotan

  *) designed to prevent a collapse of steel prices. The ministry "recommended" (ordered) that for the second quarter of fiscal 1965 (July to September) each company cut its production by 10 percent based on its share of total output during the second half of fiscal 1964 (October 1964 to March 1965). All of the "big six," including Sumitomo, went along with this. The
n, on November 9, 1965, MITI ordered that this reduction be continued into the third quarter (the trough of the recession hit in October). Sumitomo refused to accept this administrative guidance on the grounds that it was the only company among the big six that had met its MITI-assigned export quota for the first half of the fiscal year, and it charged that the biggest operators, Yawata, Fuji, and Nippon Kokan, had diverted some of the steel supposedly produced for export into the domestic market. Sumitomo argued that MITI's base for determining market shares failed to take account of export performance of the various companies and was biased against the newer, better-managed firms in the industrysuch as Sumitomo.

  The president of Sumitomo Metals, Hyuga* Hosai*, was an old hand at this sort of thing. He had served Sumitomo continuously since his graduation from Todai* Law in 1931 and had gained experience in the governmental bureaucracy at first hand as secretary to Minister of Finance Ogura Masatsune (of Sumitomo) in the third Konoe cabinet (1941). During 1965 he was the leading figure in the Osaka branch of

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  Keizai Doyukai *. He had no difficulty whatsoever in controlling his enthusiasm for MITI's intervention in the steel industry, which he believed had always favored Yawata and Fuji.