The Enigma of Japanese Power (55 page)

There is a very common misconception that uncontrollable and unstoppable developments must bring about important structural changes. At regular intervals foreign observers draw the conclusion that ‘Japan Inc.’ is being dismantled, and that the days of government supervision of industry are over. There is a widespread notion that the global economic developments of the 1980s, together with the much increased sophistication of Japanese banks and corporations and the transfer of labour-intensive production processes to cheaper foreign labour markets, are diminishing the ability of the bureaucrats to control the private sector. Japanese officials, weary of foreign criticism about controlled trade, applaud these views and help to spread them.

Yet the loosening of controls that can sometimes be discerned should not be taken to mean that the System is about to crumble. It has too many institutions, habits and needs that prop it up. Given the congruence of the ‘private’ and ‘public’ sectors, and the mutual-aid habit among Japan’s administrators, to ask whether ‘industry’ is becoming less dependent on, and less beholden to, the ‘bureaucracy’ is to ask the wrong question. The idea of Japanese industry wrestling with the bureaucracy in order to escape from its grip is, quite simply, false. Besides, the major economic institutions are related to each other in such a manner that freedom from direct bureaucratic interference does not imply that industrial developments have slipped from the bureaucratic grasp. Whereas in the Western perspective bureaucratic meddling is automatically assumed to be abhorrent to business, élite business organisations in Japan would feel naked without the guarantee that, in the final analysis, someone is watching over them. At the level of the individual businessman, and especially among heads of firms in the lower echelons of their sector, the partnership may be involuntary, but the benefits that come with it are appreciated none the less.

Maverick businessmen are not able to oppose the administrators successfully for long. When in the summer of 1984 an enterprising oil-marketing firm tried to switch to direct imports in order to sell at lower prices – which it had every official right to do, but which went against the wishes of the Ministry of International Trade and Industry as well as the Petroleum Association of Japan – the banks withdrew their credit. The following December a new law was passed, ostensibly to liberalise the import of specific oil products, but in effect restricting trade even further by closing the loophole.

The manipulations of the Ministry of Post and Telecommunications (MPT) in connection with the new and potentially very large information-processing and communications market provide a perfect example showing why the notion that the bureaucrats are ‘losing control’ constitutes a basic misunderstanding of how things work in Japan. The officials concerned mapped the future of the market at various stages in the 1990s. Believing that sales would only increase from 230 billion yen in 1987 to around 560 billion in 1992, they decreed that there was room for only one new company to compete with the recently privatised Nippon Telephone and Telegraph. When officials gave their explanatory briefing to potential foreign competitors, they characterised their regulations and guidance as inspired by their concern to prevent any company from getting into trouble. From their reactions to potential foreign entrants in the Japanese telecommunications market, it became abundantly clear that they do not want genuine competition.

In the metamorphosis of corporate leadership whereby the money-grabbing entrepreneur became the bureaucratic manager one can trace a remarkably consistent course of development. Industry today shows the culmination of a process that began long before the war, with the separation of ownership and management that occurred when the
zaibatsu
families hired
banto
, professional managers, to look after the firms belonging to their conglomerates.
⁶³
The post-war apotheosis of the manager has led to the almost complete bureaucratisation of the large enterprises, while the disbandment of the
zaibatsu
by the United States occupation made ownership almost invisible if not totally irrelevant. The few large firms that are still run by strong entrepreneurial leaders are now seen as more or less peripheral to the main power bases of the economy. The industrialist of Meiji and Taisho Japan seems a long-forgotten type. Today, the authentic entrepreneur, driven by the urge to become rich, is to be found only in the small or medium-sized firms or, at most, in a few new large firms that are regularly reminded of their subordinate station in the
zaikai
pecking order.

Although this may superficially resemble developments in Western corporations, the latter are still ‘owned’ to the extent that they remain answerable to stockholders. Since post-war Japanese firms have been strongly discouraged by a complex of tax and other regulations from raising capital on public markets with stocks and bonds, their dividend payments to stockholders are the lowest in the world. In the 1970s the leading companies listed on the first section of the Tokyo Stock Exchange paid on average about 1.5 per cent. As we have seen, the members of a conglomerate tend to own each other. The banks in particular generally hold large quantities of their clients’ stocks; and Japanese banks have entirely different priorities from Western stockholders. Company presidents in Japan, instead of being bothered by major stockholders breathing over their shoulders and forcing them to watch the profit charts, have to worry about expansion schemes they and their bankers have agreed on.

The shift from entrepreneur to manager has been paralleled by a gradual shift in emphasis from profit-making to expansion of the firm’s market share. In the Western corporate environment the pursuit of profits and the expansion of market share are both respectable and are, of course, interrelated. What has made the post-war Japanese case special is the apparent possibility, for corporations, of ignoring profit for very long periods while pouring all their resources into expansion. The emphasis on conquering market shares and the ability to do so at the expense of profits are relatively new. During the early phase of industrial development in the Meiji period, entrepreneurs were encouraged by the authorities to use the firms transferred to them, or set up with government assistance, for personal enrichment. Similarly, in the first third of this century, when industries in private hands were more clearly separated from the public sector than they are today, companies were driven by a need to maximise profits.

But as the military-bureaucratic alliance strengthened its grip on Japan and emphasis on the ‘national essence’ reached new heights, profit-making began to be viewed as an unworthy activity,
⁶⁴
a view encouraged by the allegation that competition for profit had been the source of the economic problems of the 1920s and 1930s. This fitted in well with traditional ways of thought, for the model samurai had always disdained the quest for financial gain, believing service to his lord to be a much nobler pursuit. Thus the Army deplored the old-style
zaibatsu
precisely because of their appetite for profit. The same attitude survived the war; one of the points made by the founders of Keizai Doyukai was that the
zaibatsu
preoccupation with profit was ‘harmful and could not possibly contribute to the building of a strong and viable economy or really serve the national interest’.
⁶⁵
The federation has continued to portray profit as something that gets in the way of dedication to public (read ‘administrator’) ideals.
⁶⁶

The cartel movement sponsored by the government in the 1930s, together with other arrangements that improved the security of the
zaibatsu
, had stimulated among businessmen, too, an awareness of the exciting possibilities of expansionary business methods. It inspired them with new ideas that, with the help of a seemingly inexhaustible flow of credit, were enthusiastically applied from the 1950s onward.

Several deliberately created post-war factors forced large firms to compete for market shares, especially after the mid-1950s.
⁶⁷
The economic bureaucrats clearly demonstrate the priorities of their thinking when MITI, in the context of recession cartels, decrees capacity reduction on the basis of existing market share rather than plant efficiency. This means that investing firms know that their drive for a larger market share will be rewarded with a guaranteed market share.
⁶⁸
This major driving force among Japanese corporations has led to oligopoly in many fields. In most industrial sectors one will find one to three companies controlling roughly 70 per cent of the market. The dominating companies agree with each other on prices, and the pressure to conform in other areas is also very great. This, in turn, facilitates controls promoting ‘order’ within each industry.

Many Western appraisals of the Japanese economy refer to the ‘cutthroat’ competition that is supposedly normal among corporations. It is not, but such competition does exist and when referred to by officials is invariably described as ‘excessive competition’. The phenomenon is almost exclusively confined to the growth sectors of consumer industries, and entails battles for market share between divisions, usually relatively new, of major companies or between new subsidiary companies. Occasionally a spectacular battle develops, such as the one that occurred in the motor-cycle market between Honda and Yamaha in the early 1980s, producing a proliferation of some ten to fifteen new models a month. This instance of genuine cut-throat competition (which Yamaha lost) was caused by an enormous production overcapacity arising from a sudden saturation of export markets.

The home electronics sector, where new products follow each other in quick succession, is the scene of fairly frequent battles for domestic market share involving medium-sized but fast-growing firms. Such battles are generally followed by a weeding out in which the less successful firms end up under the wing of the
keiretsu
giants; all of this is busily monitored by the bureaucrats. More typically, however, the domestic market is a relatively stable arena that allows the Japanese corporation to concentrate on competition abroad. In the battle for foreign market shares, Japanese managers are aided by ‘economies of scale’ achieved through reliance on a solid share of the home market and relatively high domestic earnings that often subsidise the exports. Such a situation can be attained only by private understandings among firms, not by relentless competition. Large Japanese firms take very few risks. They are ensconced in a protective environment that not only shields them from foreign competitors but also fosters forms of mutual protection. It is this basis that permits them to move simultaneously into foreign markets with rock-bottom prices.

The large Japanese corporations with strong ties to industrial conglomerates are formidable competitors on foreign markets because they cannot go bankrupt and need not show any profit for a very long time. When a more or less concerted effort is waged to compete with domestic manufacturers in one particular foreign market, they are basically unbeatable. This was shown by the conquest of the world markets for cameras, motor cycles, and videotape-recorders (VTRs), and by the reduction of the home market share for US machine-tool and semiconductor manufacturers to a fraction of what it was before the Japanese began to focus on it.

The VTR case offers a good illustration of the uses of ‘economies of scale’. Investments in production capacity made by Japan’s seven VTR manufacturers quadrupled output between 1979 and 1981 to 9.5 million units. Two years later the figure had almost doubled, reaching a peak of 33.8 million units in 1986. The more than 13 million sets produced in 1982 represented 140 per cent of world demand at the time. Such overproduction caused colossal inventories and made possible foreign sales at almost any price; and roughly five-sixths of annual production was exported. RCA and Zenith in the USA had long given up (and were pasting their brand names on Japanese-made VTRs), and Philips and Grundig, with their 700,000 units, could hardly compete seriously with the 4.9 million VTRs sent to Europe in 1982 by Japanese firms.

Foreign market shares are achieved by painstaking adjustment of prices to local supply and demand. That Japanese firms have unparalleled elasticity in this regard has been shown by the way they have hung on to US market shares despite the near doubling of the exchange rate of the yen against the dollar. Since relatively few products make up Japan’s export package at any one time, Japanese industry can wage fairly concentrated foreign sales campaigns. Their inroads, of course, are mere pinpricks compared with the overall industrial and trade statistics in the West, but at close quarters the concentrated effect is a razor-sharp sword cleaving into established US and European industries. Japanese officials themselves used to speak of ‘laser beam’ or ‘torrential’ exports, and in Silicon Valley, the centre of the US advanced technology industry, the term ‘rifle precision’ has been used in reference to the Japanese incursion.

The experience with semiconductors and machine-tools has opened some American eyes to Japanese methods of competition. Contrary to what Japanese propaganda and overly self-critical Western commentators have suggested, the US firms in this field worked hard and were alert enough. They simply could not, even remotely, match the financing backup of the Japanese companies; and, as companies subject to the scrutiny of stockholders and boards of directors, their decisions had to be based ultimately on considerations of profitability. Especially in manufacturing sectors utilising the latest technology, US entrepreneurs, to survive, need to show returns on their investments. Their Japanese competitors tend to be subdivisions of giants whose more profitable subdivisions can pay for the onslaught. US law favours foreign firms, because it stipulates punitive action in cases of dumping only when there is clear harm to US industry. In the years that it takes to litigate a dumping case, the Japanese competitor is able to supplant the US firms.
⁶⁹

Competitors with large Japanese firms abroad are frequently at an enormous disadvantage in that the latter’s fortunes are much less susceptible to economic factors. Their home base has the means to grow at the expense of other human pursuits, and operates in an environment where this is deemed perfectly natural. With respect to the losses they can absorb, Japanese exporters are ultimately limited only by the other firms in their
keiretsu
and, especially, by their major banks. In industries considered ‘essential’, the lending banks can rely on the ultimate guarantee of Japan’s central monetary authorities. That means that the decisions involved in lending to those who want to conquer foreign markets are in the first place not economic but political.

In the 1980s Japanese economic activities unconnected with production also began to command international attention. In the exchange not of goods but of less tangible assets such as stocks, bonds, land and foreign treasury paper, Japan’s firms quickly gained another formidable reputation. By the middle of the decade Japan had become the biggest ‘creditor’ nation in the world, largely by investing in US treasury bonds; and serious economic periodicals and ministry officials were drawing proud comparisons with England in the nineteenth century, or with the USA after the Second World War. Japan’s banks were overtaking the largest US and European banks in terms of assets; its four large security companies became a major international presence; foreign banks were being absorbed; and many firms were heavily investing in overseas real estate.

It was only towards the close of the previous decade that the bureaucrats had made large-scale foreign investments possible. The move came just as Japanese firms were beginning to derive high profits from their strong foreign market positions. Enhanced by the then relatively low exchange value of the yen, these profits, combined with the new freedom to explore foreign capital markets (notably by floating Eurodollar bonds), made the large firms less dependent on the City banks for their capital.

By 1985 an ocean of liquidity had formed, as the banking community and monetary authorities pushed loans and encouraged corporations to increase their assets. Prices on the real-estate and stock markets began to rise sharply. This steeply raised the value of assets in general, which translated into collateral allowing corporations to borrow more heavily. By then a phenomenon called
zaiteku
⁷⁰
– whereby manufacturers and trading firms, either directly or through hastily established offshoot companies, borrow money to make more money in ways that have nothing to do with their original activities – had already altered the way many large Japanese corporations were calculating their strategies. Some manufacturers and trading companies had begun to resemble banks in these operations, except for their lack of experience and the bigger risks they took. This could not have happened on the scale that it did without the strong protective powers of the
keiretsu
relationships. And there were convincing indications that, as in the case of the institutional investors, many
zaiteku
enterprises were hiding significant failings in their books.

In a Western setting the speculative activities in which Japanese firms have been engaged would have brought the doom-sayers out in crowds. A few did appear in Japan, predicting ‘a bursting of the bubble’ or ‘the bottom falling out’ at some point in the near future. But short- and medium-term pessimists overlook a critical factor: that the absence of a clear division between the public and private sectors in Japan, the co-operation (or collusion as it would normally be termed in this context) among the administrators and the ease with which economic processes can be politically controlled all add up to a situation radically different from that in the other capitalist countries, whence such theories of bursting soap bubbles originally came.

The economy of intangibles thrives as long as the market participants have faith that the pieces of paper they exchange are backed up by actual worth. A crisis of confidence causes a stock-market crash. In the West such confidence hinges on the general performance of private enterprises. In Japan it means faith in the ability of the economic managers in the bureaucracy, the banks and the business federations to keep everyone’s trust in the economic apparatus going. The difference may seem subtle, but is in fact enormous.

The much publicised savings rate of the Japanese people conferred an important measure of credibility on Japanese ‘overloan’ practices in recent decades.
⁷¹
And when foreigners today wonder about the soundness of Japanese banks, they are told about the large volume of hidden assets the banks are allowed to hold without revaluing them. But there is a curious aspect to the land and securities held in assets or collateral. According to the Economic Planning Agency (with the rank of ministry), the total market value of Japanese land in fiscal 1987 was 4.1 times greater than that of all land in the United States, which is twenty-five times the size of Japan, and has fifty-seven times more inhabitable space. Some of the land in Tokyo is priced ten or more times higher than land in Manhattan business districts. Land, in fact, has taken on a function comparable to that of gold, except of course that its value is independent of foreign market forces. Japanese specialists jokingly refer to a
tochi honi-sei
, or ‘land standard’. As for the securities, average Japanese shares on the Tokyo stock market show a price-earnings ratio – stock price measured against profit – of 55.6 compared with 14.0 in New York and 12.3 in London (in January 1988). A number of explanations have been offered for this, but the simplest one is that the administrators in the banks, the ministries and the corporations have discovered a way of making money with money by agreeing not to spoil the party for each other.

That controls exist to make this possible was revealed in October 1987, following the stock-market crisis in New York that reverberated throughout the industrialised world but left Tokyo – contrary to the predictions of many international observers – relatively undisturbed. Working in conjunction with the Ministry of Finance, the ‘big four’ security firms, which form a
de facto
cartel,
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seem likely to keep even worse overseas crashes from doing much damage to the Tokyo stock market. In private conversation Ministry of Finance officials have been known to concede that it is easier to influence the stock market than the foreign exchange market.

The combined figure for increases in land and stock prices in 1986 exceeded the entire Gross National Product of that year by nearly 40 trillion yen.
⁷³
Since then land prices have climbed steeply: by an average of 96.2 per cent for commercial and 89 per cent for residential land in Tokyo, and of 21.7 per cent in Japan as a whole, in the space of one year.
⁷⁴
All this represents a colossal amount of potential collateral for borrowing to fund further
zaiteku
investments and overseas assets. Before Japan’s business could indulge in these new expansionary practices, however, the System had to make a major adjustment.