The Enigma of Japanese Power (54 page)

The opportunity to put into practice the unfulfilled designs for a centralised wartime economy and the lessons learned in Manchuria was, as we have seen, handed to the bureaucrats on a silver platter by SCAP. General MacArthur and his ‘reformers’ also supplied considerable thrust to early post-war industrial policy. At first the occupation measures against big business quite unintentionally had an opposite effect to the ‘democratisation’ they were meant to accomplish. And after a communist regime had taken over China there was, as we saw in Chapter 3, a deliberate shift in emphasis from ‘democratising’ Japan to helping it establish a strong economy capable of withstanding a potential communist onslaught in Asia – a shift generally referred to as the ‘reverse course’.
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Dissolution and reorganisation of the
zaibatsu
holding companies, removal of
zaibatsu
family control and company reorganisation under an economic deconcentration programme affecting some one hundred companies not only strengthened the economic bureaucrats but also elevated bureaucratic managerial personnel to the highest positions in industry. The
zaibatsu
dissolution also released large quantities of securities that passed into government hands along with the financial and administrative control formerly exercised by the conglomerates. Government officials began to take over responsibilities that once belonged to
zaibatsu
managers. Moreover, the scarcity of private capital immediately after the war meant that companies were almost entirely dependent on the bureaucrats for investment funds, which could be obtained through the Reconstruction Finance Bank and later the Japan Development Bank as well as the Japan Export-Import Bank (originally the Export Bank).
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The important political decision to emphasise development of the chemical and heavy industries would probably not have been so easy to carry out without the replacement of the old captains of industry. Before the 1930s, when the Ministry of Commerce and Industry had relatively little power and Japan’s business world was still fairly autonomous, the economic bureaucrats had discovered that promotion of just these industries helped expand their sphere of authority. By mediating between this sector and military clients in Manchuria, they had succeeded in making their ministry the main supervisory organ over domestic chemical and heavy industries.
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The bureaucrats knew what they were doing even if, right after the war, the emphasis on heavy and chemical industry did not seem a logical
economic
choice.

Post-war reconstruction turned by imperceptible stages into an established policy of unlimited industrial expansion. Without ever debating the pros and cons of such a policy, the Diet endorsed hundreds of laws and amendments to laws that helped to co-ordinate the institutions used in forced economic development. By the mid-1950s the number of bills submitted to the Diet had increased to between 200 and 250 per year. The same pace continued until the early 1960s, when a dramatic decrease indicated that by then the legal apparatus sustaining high growth had been put in place.
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Among the most important legal instruments supporting industrial policy was the law controlling foreign trade, which was based on that of 1937. The chief means chosen by the bureaucrats for protecting domestic industry against foreign competition were foreign currency restrictions rather than tariffs.
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Another important tool in industrial policy was the Enterprises Rationalisation Promotion Law enacted in March 1952. Together with amendments to the Special Tax Measures Law, it provided for stimulative tax exemptions, especially for exporters, and created reserve funds for developing industries. The tax measures came to be collectively known as the ‘capital accumulation tax system’, and ‘the preferential application of the new policies resulted in strengthening existing privileged positions and in making industrial policy much more rigid’.
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The Japan Development Bank was set up in March 1951 and was allowed to issue its own bonds. In July 1952 the Fiscal Investment and Loan Plan was created; this ‘second budget’, backed by Japan’s vast postal savings system, was to be used totally at the bureaucrats’ discretion. The Export-Import Bank, the Smaller Business Finance Corporation, the Housing Loan Corporation and the Agriculture, Forestry and Fishery Finance Corporation were also established in the early 1950s to generate a flow of funding for investment.

SCAP’s contribution to economic legislation, the Anti-Monopoly Law of 14 April 1947, had been amended under the occupation and again in 1953. It was systematically enfeebled, permitting depression cartels and rationalisation cartels, allowing price-fixing and halting the warnings to firms with excessive economic concentration.
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In the first quarter of 1949 SCAP’s economic policy underwent a dramatic change with the arrival of Detroit banker Joseph Dodge, who introduced the so-called Dodge Line, a set of austerity policies designed to control runaway inflation in the aftermath of the war. The Dodge phase began at a time of economic crisis and was needed to introduce a deflationary policy that the government most probably could not have implemented by itself. The sobering new idea had to be introduced that the prerequisite for attaining the paramount goal of recovery was economic stability, for which, Dodge believed, a balanced budget was essential.

The Dodge Line was partly sabotaged almost from the beginning when the central bank ordered financial institutions to bail out firms on the verge of bankruptcy. A former bureaucrat who contributed to early postwar economic planning has pointed out that this policy was an early sign of the overloan phenomenon, and that it ‘foreshadowed the strengthening of the control over commercial financial institutions by the Bank of Japan’.
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It conflicted with the ideas of SCAP, which ordered it stopped, and for some two years the Dodge Line slowed down the economic bureaucrats.
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But then to their satisfaction, in a development of major significance for the first stage of the ‘economic miracle’, the United States began to procure supplies for the Korean War, and everyone’s attention shifted to production. After only one year, 1955, in which the banks were not lending more than their deposits warranted, the policies of high growth were making full use of the overloan methods that were to allow Japanese firms to expand so rapidly.
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Not all formal measures inspired by wartime control were acceptable to the entire body of administrators. MITI lost an important battle in 1963 when its Special Measures Law for the Promotion of Designated Industries, sponsored by the Ikeda cabinet, died in the Diet because of business pressure on the LDP. The Ministry of Finance and the banking community also helped stop it, because they correctly interpreted it as an attempt at territorial expansion by the industrial bureaucrats. Moreover, the law, which aimed to empower MITI to set up formal cartels in industries that needed to be made more competitive internationally, and which would have given ‘public-private co-operation’ cherished by the bureaucrats a legal basis, would have been too reminiscent of the wartime bureaucratic control apparatus.
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Former MITI vice-minister Amaya Naohiro reflected twelve years later that the fatal flaw of the law had been ‘to make explicit what had long been known as part of MITI’s industrial policy’.
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The law that MITI failed to get to support its meddling in business was drafted against a background of fear of invasion by US and European competitors. Ever since the 1930s business had been protected against imports by foreign currency restrictions. But the administrators knew that ‘trade liberalisation’ had become inevitable if Japan wanted to be accepted as a true member of the club of free-market countries, and to continue to participate fully in the international economy. Under foreign pressure, import liberalisation, on paper at least, reached 92 per cent in the summer of 1963, thus enabling Japan to attain full status in the GATT and, by joining the OECD, to become the first Asian member of the club of advanced industrial countries.
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This undesired development, like others before it, was exploited with much success. The imagined threat of foreign competition acted as a tremendous spur in the industrial-machinery, chemical and car sectors, leading them to renovate their plants and rush headlong into new projects. The
keiretsu
tightened their internal relations in response to the liberalisation programme by increasing the degree of mutual ownership.
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The aim of the industrial groupings in consolidating their positions in this way was to enable them to establish new companies in the promising new sectors and ensure that they could beat potential foreign competition.

Liberalisation, when it finally came, turned out to be virtually painless. It improved the Japanese position with regard to raw materials, and the sole important domestic victim was the coal industry. Real changes in written rules were made only in areas where Japanese industry was internationally competitive. In sectors such as cars, computers and heavy machinery where Japan wanted to nurture infant industries, a point was made of ‘gradual liberalisation’. And MITI, without a law but with much ‘administrative guidance’ at its disposal, made the most of ‘private–public co-operation’.

Once the ‘liberalisation’ storm had passed, there was so much of this kind of co-operation that the protectionist structures remained standing after their legal supports had been removed. Although on paper the liberalised areas had become free for international competition, the administrators made sure that no genuine competition from cheaper foreign products would take business away from domestic producers, relying on a variety of the devices later to become known as non-tariff barriers. When, in the face of overwhelming foreign criticism in the late 1970s and early 1980s, a programme was started to lift these non-tariff barriers, the structure that they had helped solidify stood so secure and was so impermeable that the programme had hardly any effect on imports.

While market forces do not ultimately dictate Japanese economic developments, the market is an important instrument used by the bureaucrats in the ministries and business federations in pursuing their aims. Japanese economic intervention has recently come to be referred to as ‘market conforming’, as distinct from the more drastic intervention in Soviet-type economies, whose planners accept no free-enterprise allies. But the market-place remains a source of uncertainty, and thus a potential problem for the administrators. A major institution for reducing such uncertainty is the ‘distribution
keiretsu
’, a constraining web of relationships tying wholesalers and retailers in with a particular manufacturer. The distribution
keiretsu
together constitute what is routinely referred to by Japanese officials and frustrated would-be exporters to Japan as ‘Japan’s complicated distribution system’.

This is misleading. The distribution system is not complicated. It is rigged.

Wholesalers and retailers are not independent competitive units. A majority of shops retailing durable consumer goods are, in fact, comparable to the regular subcontractors of Japanese manufacturers. They are provided by the manufacturers with capital and, if necessary, technical know-how. The example for the distribution
keiretsu
came from the West, but the Japanese versions became incomparably stronger and more widespread.
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The most effective single element for control over the Japanese market, they began to develop during the latter half of the 1950s and continued to establish themselves ever more firmly right up to the late 1980s. They have greatly helped in the consolidation of Japan’s oligopolies, and have been indispensable for the ubiquitous price-fixing practices. The many innovations introduced to increase the control of the largest firms include dealer associations whose members are under obligation to limit their stock of competing products. The distribution process has, in fact, become a marketing machine steered by manufacturers.
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It has greatly helped the development of Japan’s consumer electronics industry.

Since tariffs and foreign exchange controls were lifted, the distribution
keiretsu
, together with the trade associations that for the most part exclude non-Japanese members, have remained the major guarantee that Japanese manufacturers need not compete with foreigners in their home market. Consumer products not produced or distributed by members of a
keiretsu
– and this naturally includes most foreign goods – are effectively barred from the normal Japanese market, because their only route to the consumer is through specialised outlets that charge prices generally double, sometimes even quadruple, the original market value of the product.

When a major new market is at stake, such as telecommunications equipment in the 1980s, Japanese industries are always allowed first to consolidate their oligopolistic positions; only then are some competitive foreign products given token market shares. The pattern for this was set in 1936 when a law, designed by Kishi Nobusuke and pushed behind the scenes by Ayukawa Gisuke, restricted the activities of foreign car manufacturers in Japan. In the late 1920s Ford and General Motors began assembling vehicles in Japan. By the mid-1930s the two US companies supplied roughly two-thirds of the Japanese car market, much to the chagrin of the Army, which realised that Ford vehicles were more reliable at the front in China than anything being made by Japanese car manufacturers with government support. Kishi’s method of protecting ‘important industries’, inspired by a couple of study trips to Germany, made ‘authorised companies’ out of Toyota and Nissan. Ford was forced to drop its plans to expand its manufacturing capacity. Life was made so difficult for both US companies that almost two years before Pearl Harbor they stopped their Japanese production ventures altogether.
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