MITI and the Japanese miracle

by Chalmers Johnson

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  As it turned out, MITI had less to fear from medium and smaller enterprises than it did from some very big businesses themselves. And it had forgotten all about the Fair Trade Commission.

  Before these problems developed, MITI got an assist from the top leaders of business, but for reasons more connected with the Sumitomo Metals Company incident than with capital liberalization itself. Inayama Yoshihiro, the president of Yawata Steel, had been so appalled by the "Sahashi, minister; Miki, vice-minister" controversy and the public squabbling over market shares in the steel industry that in January 1966 he proposed to Nagano Shigeo, president of Fuji Steel, that they merge their two companies. This would produce one steel company so large that it would create a genuine hierarchy in the industry, and, he hoped, conditions of stable oligopoly. Nagano responded favorably. In order to create a forum in which these negotiations could be pursued, in March 1966 the leaders of the main industrial federations formed a policy board, or "business general staff," named the Industrial Problems Research Association (Sangyo* Mondai Kenkyu* Kai, called "Sanken" for short). The big steel merger was Sanken's greatest achievement (it became inactive thereafter), but its formation coincided with the rise of the capital liberalization issue, and the association therefore decided to address the problem of mergers for all major industries as well as for steel.

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  In its fully elaborated form Sanken brought together leaders from steel, electric power, chemicals, machinery, textiles, trading, finance, and securities, plus representatives of medium and smaller enterprises. Its guiding intellectual orientation was provided by Nakayama Sohei (b. 1906), since 1961 the president of the Industrial Bank of Japan (Nihon Kogyo Ginko*) and probably the greatest go-between of modern Japanese business. He took charge of a committee to make recommendations for the reorganization of Japanese industry in order

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  to end "excessive competition" and to prepare to meet the challenges of capital liberalization. The Nakayama Committee, augmented by bureaucrats from MITI and the EPA, worked on its report between July 1966 and June 1967. When it was completed, the report called for either mergers or "cooperation" in seven industries: steel, automobiles, machine tools, computers, petroleum refining, petrochemicals, and synthetic textiles. The committee's main contribution was to provide a rationale for the Yawata-Fuji merger, but its influence can be seen in many other areas, including both MITI's ultimately abortive efforts to reorganize the automobile industry and its very successful measures to link the electronics and machine tool industries.

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  While these analytic activities were underway, MITI was also busy preparing countermeasures to hold off liberalization until the basic phases of the reorganization could be accomplished. In January 1967 the ministry set up a Capital Transactions Liberalization Countermeasures Special Committee (Shihon Torihiki Jiyuka* Taisaku Tokubetsu Iinkai) within the Industrial Structure Council to hear and endorse what it proposed to do. This committee joined with another special committee set up by the Ministry of Finance's Foreign Capital Council (Gaishi Shingikai) and came up with a vast tangle of rules and procedures that had the effect of turning Japan's capital "liberalization" into a strictly pro forma acquiescence in international conventions.

  Some of these rules included the 100 percent liberalization of only those industries in which foreign competition was unlikely (sake brewing, motorcycles, and the manufacture of

  geta

  , or Japanese wooden clogs, are the famous examples), the limitation of direct investment in other industries to joint ventures with at least 50 percent Japanese participation, the limitation of equity ownership in established firms to 20 percent, the selective designation of industries to be liberalized, the omission of vital segments from allegedly liberalized industries (the television industry was declared liberalized, except that foreigners could not produce color sets or use integrated circuits; the steel industry possessed eight of the ten largest blast furnaces on earth, but foreigners were prohibited from supplying the precise kind of steel needed by the automobile industry), the requirement that at least half of the directors in a joint venture must be Japanese nationals, and so forth endlessly. As if these measures were not enough, all proposed joint ventures or wholly owned subsidiaries remained subject to screening and approval by MITI under either the Foreign Exchange and Foreign Trade Control Law or the Foreign Capital Law if they involved the introduction of foreign technology into Japan.

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  (It is hard

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  to imagine a joint venture or subsidiary that would not include the introduction of some form of technology or know-how).

  On June 6, 1967, the cabinet adopted these principles and with great fanfare proclaimed the "first round" of capital liberalization on July 1. This opened up some 50 industries, 17 at 100 percent and 33 at 50 percent, to foreign participation. There can be no doubt that this initial effort was a purely cosmetic public relations gesture. All the industries liberalized were ones in which a Japanese enterprise controlled more than 50 percent of the market, or in which most of the products were sold exclusively to the Japanese government (railroad cars), or for which no Japanese market existed (corn flakes). Genuine capital liberalization came to Japan only slowly, and not through MITI's initiative but as a consequence of the weakening of the ministry and the growing realization on the part of industry that it had to "internationalize" if it was to avoid isolation. Ironically enough, by the time the economy was fully liberalized in the late 1970's, the big investors were not the Americans or the Europeans but the Arab oil sheiks.

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  MITI was engaged on many fronts during this period. The Yawata-Fuji merger, which Sanken and MITI kept totally secret until 1968, required all the influence the ministry could muster to get past the FTC and the other steel companies. MITI also had its difficulties in bringing off mergers in such competitive fields as automobiles and textiles, and the foreigners were not kept quiet for long by the limited liberalization of 1967. However, MITI's abilities to deliver on its policies during the late 1960's were attenuated by internal factional struggles. Sahashi's wrangle with Sumitomo Metals was the true cause of his retirement as vice-minister, but some politicians who wanted him out made a public issue of another incident that they contended showed MITI's arrogance and Sahashi's unsuitability.

  As vice-minister, Sahashi had appointed Kawahara Hideyuki (class of 1941) as chief secretary. Kawahara had been one of Sahashi's closest associates for many years and an outstanding MITI official (he was one of the first to identify the pollution problem as serious). On February 27, 1966, Kawahara suddenly took ill and died, and Sahashi authorized a formal, state-financed funeral for him at Tokyo's Tsukiji Honganji (a major Buddhist temple). This led to some petty complaints in the Diet about the small funerals provided for politicians as compared to the elaborate rites for Kawahara. The incident embittered Sahashi but also put the ministry on notice that the politicians were gunning for him and for the type of MITI official he represented.

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  Before his retirement Sahashi was able to name Kawahara's replace-

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  ment as chief secretary, but Minister Miki made it clear that he himself would choose Sahashi's own successor. The next chief secretary was Ojimi * Yoshihisa (March 1966 to May 1968), a transitional figure in that he was sometimes thought of as a member of the "Sahashi faction" (he had headed the Industrial Structure Investigation Office in the Secretariat at the time of the Special Measures Law), but he was also more oriented than Sahashi to the problems of Japan in the world economy. He became the last vice-minister (196971) to have some claim to represent the old "Kishi-Shiina" orientation. For the position of vice-minister after Sahashi, Miki chose Yamamoto Shigenobu, a former chief of the International Trade Bureau and an official who, having served overseas in the Bangkok embassy, was in 1966 director of the Medium and Smaller Enterprises Agency. When Yamamoto took over as vice-minister, he in
turn selected Kumagai Yoshifumi as his chief of the Enterprises Bureau, and for the period May 1968 to November 1969 Kumagai succeeded Yamamoto as vice-minister.

  In addition to all their pending policy problems, this post-Sahashi team of Yamamoto, Kumagai, and Ojimi had to devote a great deal of attention to the internal problems of factions and lowered morale that had persisted since the Sahashi-Imai fight. By all accounts Yamamoto performed brilliantly; he is one of the most fondly remembered vice-ministers. He set out systematically to put industrial faction officers in international faction posts and vice versa, a policy that also reflected his own background as a specialist in promoting Japan's export trade in heavy machinery and high-value-added products rather than textiles and sundries (he was, significantly, the first vice-minister whose amakudari was to the automobile industry, where he became in 1968 the executive director of Toyota Motors). Typical of Yamamoto's personnel policy was the appointment of Miyazawa Tetsuzo*, who had a background in heavy industry but no overseas service, to be director of the International Trade Bureau; and his appointment of Morozumi Yoshihiko, whose background included service in Paris and the Enterprises Bureau, to be chief of the Mining Bureau.

  These policies worked well enough for the time being, but bickering within the ministry continued about Sahashi's policies. Old industrial-policy cadres insinuated that the new leaders were not true "raised-in-the-ministry samurai" (like Sahashi) and that they were inclined to pursue a "foreign appeasement" policy in the face of the demands for capital liberalization. These charges often caused early leaders of the "international faction" to go out of their way to be tough, as for example in the United StatesJapan textile negotiations, in order to refute the accusations that they were predisposed to pla-

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  cate foreigners. After Yamamoto retired and Kumagai became vice-minister, the leaders of the ministry decided that the old Sahashi faction had to go. Kumagai appointed Morozumi chief secretary (May 1968 to November 1969), and he carried out a thorough purge of Sahashi's younger associates. No member of the Sahashi faction prospered in the ministry (with the possible exception of Ojimi *, who was really an independent) after Sahashi himself left the scene.

  It is important to understand that this internal factional struggle interacted with and influenced MITI's various policies during this period. The new leaders of the ministry did not differ much from Sahashi on fundamentals, but most of them had served overseas, were well versed in the "culture" of international commerce (which involved institutions such as the IMF, GATT, and the OECD, and trends such as capital liberalization), and they were sensitive to the new, high-technology industries that were shortly to succeed steel, chemicals, and textiles. In contrast to men such as Sahashi, they are accurately described as "cosmopolitan nationalists." They were also the leaders who reformed the ministry in 1973 and who led Japan out of the oil shock.

  However, at the time they were establishing their supremacy, they were extremely vulnerable to internal charges that they were caving in to politicians, consorting with foreigners, or otherwise letting down MITI's old traditions. To the extent that they responded to these internal complaints, they left themselves open to external attack from politicians and bureaucrats in other ministries, to charges that they were out of touch with the times, arrogant as the reform bureaucrats of the old school, in favor of policies that were damaging to Japan's foreign relations, and subservient to big business. Nonetheless, when Miki passed over Sahashi's chief of the Enterprises Bureau, Shimada Yoshito, for vice-minister and named Yamamoto instead, a new mainstream was established within the ministry. It produced a clear line of descent among the vice-ministers that was markedly more internationalist in orientation than the line of descent Sahashi had set up for the 195566 period. This new lineage went from Yamamoto to Kumagai to Ojimi to Morozumi to Yamashita Eimei to Komatsu Yugoro*.

  During the spring of 1966 Vice-Minister Yamamoto had welcomed the ideas for mergers, particularly the big steel merger, coming from Sanken; and he had set out to prepare the way for them with the Fair Trade Commission. On November 28, 1966, he received formal FTC assent to mergers that breached the commission's rule against combinations giving a single enterprise more than a 30 percent market share in an industry. The commission also accepted the necessity of

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  "investment coordination" as an exception to the Antimonopoly Law in order to confront the threats coming from abroad.

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  Yamamoto justified these measures in terms of the need to improve the industrial structure before the full force of capital liberalization hit the economy. He was delighted when, in January 1968, Yawata and Fuji came to terms. It looked like the "merger of the century" and was, of course, also the recreation of the prewar and wartime Japan Steel Corporation.

  On April 17, 1968, however, thanks to a slip of the tongue by President Nagano of Fuji Steel, the

  Mainichi shimbun

  and the

  Nikkan

  kogyo

  * newspapers broke the story that a Yawata-Fuji merger was in the works. This scoop generated a public furor that was rivaled only by the controversy over the Special Measures Law four years earlier. A group of economists at Tokyo University led by Professor Uchida Tadao met and issued a formal statement arguing that the proposed steel merger was economically unsound and would lead to monopolistic price increases. Uchida also contended that "what is really significant about the case is the absence of concern for the legal, economic, and social implications of so large a merger, as well as the widespread belief that the acts of private enterprises are not based on their own independent decisions but on the administrative guidance of MITI."

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  Uchida was particularly concerned that the Japanese public did not understand the economic need for competition and for defending it through the legal system.

  The Fair Trade Commission listened to all of this and on January 27, 1969, clarified its position on the legal requirements for mergers. The commission did not necessarily oppose mergers that resulted in the formation of the largest enterprise in an industryso long as it could be convinced that the new corporation would be unable to compel its competitors to follow its pricing decisions simply because of its size. On this basis, a month later (February 24) the commission formally declared that it would approve the Yawata-Fuji merger only if each company divested itself of certain key subsidiaries that, if retained, would give the new company price control over the steel industry. Inayama and Nagano resisted this decision, even though Sanken's Nakayama had already warned them that sales of some facilities would be unavoidable, and tried to mobilize political influence against the FTC. As a consequence, on May 7, 1969, the FTC for the first time in its existence went to the Tokyo High Court and got a restraining order against a merger. The fat was now definitely in the fire.

  During June 1969 the Tokyo High Court held public hearings on the merger; the FTC presented its position, as did the professors, the companies, consumer groups, and related industriesand MITI in

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  the person of Sakon Tomosaburo *, chief of the Steel Industry Section in MITI's Heavy Industries Bureau, who made the unfortunate public comment that in this court the "laymen are judging the professionals." The press covered the hearings extensively. On October 30, 1969, the court finally ruled that the merger could proceed only if Fuji sold one of its plants to Nippon Kokan* and Yawata turned over one of its installations to Kobe Steel. Both companies reluctantly complied, and New Japan Steel, the world's largest steel company, formally came into being on March 31, 1970. Three years later, on May 30, 1973, former MITI Vice-Minister Hirai Tomisaburo*, who had retired in 1955 and entered Yawata, became president of the country's largest enterprise. Although Hirai was widely respected as a leader of the steel industry, this elevation of a former bureaucrat to the top position of a company long associated with the government led some to see a trend toward excessive bureaucratic influence in the economy.


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  MITI, of course, was totally identified with the steel merger, if for no other reason than that the chief executives of the new company, including Ojima Arakazu, Inayama Yoshihiro, Hirai Tomisaburo, and Tokunaga Hisatsugu, were all former MCI or MITI officials. Because of this and several other issues that came to a head at precisely the same time that the steel case ended up in court, MITI was subjected to some of the most withering criticism it had ever endured in its long history. The contemporaneous foreign criticism of the ministryJames Abegglen's term "Japan, Inc." and the London

  Economist

  's references to "notorious MITI"never fazed MITI officials, but domestic criticism was taken seriously. The main issues raised by domestic critics, in addition to the steel merger, were environmental damage, overcrowding, alleged collusion with big business, and a host of other side effects of high-speed growth that the public demanded be addressed. And as if this were not enough, right in the midst of all these problems the ministry experienced the most serious revolt ever against its administrative guidance, a blow that signified a genuine turning point in its relations with big business.