by Akio Morita
I thought the floating system would, by international agreement, be monitored, and that rates would not be allowed to fluctuate too far or to be influenced artificially. What we didn’t count on was that a factor other than the competitive power of our goods—namely, money traders—would begin to affect the value of world currencies. No mechanism had been set up to monitor the system and, figuratively speaking, to set the handicaps. Money speculators used one criterion only for buying one currency and selling another—profit. This resulted in a constant changing of rates that had nothing to do with industrial competitiveness. For those of us engaged in worldwide trade, it was as though some bully had come swaggering onto the golf course and was changing our handicaps after every hole.
In this situation the price of our goods became a matter virtually beyond our control. To illustrate the problem, suppose, for example, we listed the price of a television set not at a specific dollar, yen, pound, franc, or lira amount, but at whatever the price ten shares of Sony stock would be on the day you bought the set. Who would buy under such circumstances while the stock is being traded and the price is fluctuating each day? Who could manufacture under such circumstances?
For industrialists, money is a scale. We use it to measure the economic activity of our companies, our assets, our inventories, and even the results of human effort. When prices are set by factors other than the competitiveness of the products made, there is inevitably a withering of our confidence to invest. I am a firm believer that the foundation of the economy lies with a nation’s industry. In order to invest wisely we must be able to predict the return we can reasonably expect on our investment. If we can’t forecast the return, it takes a very good sixth sense, or perhaps a dash of foolhardiness, to invest. If we reach the point where there is no investment, industry will collapse. If industry collapses, money will lose all its meaning and then even the financial markets will collapse.
It worries me that today some industrialists have begun to take part in the money trading game. Since they cannot forecast the return on potential investments, many industrialists have stopped investing in their own companies and are investing a lot of energy, time, and money in acquisitions and mergers. Companies have become a commodity to be traded, bought, and sold. This is not the natural and rightful role of industry, which is to better existing products and create new ones. Looking at the situation as a Japanese, I cannot believe employees of such companies have much desire to work. How can a sense of loyalty and harmonious productivity be cultivated in such an environment, when management is concerned more about whether they are taking over another company or being taken over? The outlook is not encouraging. This is why I continue to talk loudly about the need for a new exchange-rate system based on industrial values rather than money markets.
The oil shocks of 1973 and 1979 were a great blow to the world monetary system as vast amounts of money were pooled in the oil-exporting countries. Under Reaganomics, the U.S. tightened the money supply and raised interest rates to stop inflation. Large amounts of Japanese currency went to America in the form of investments, seeking the benefit of those high interest rates. In fact, money from all over the world came pouring into the United States. This made the dollar stronger, cheapened all other currencies, made bigger American government spending possible, and bigger debt accumulation, too. The world money game was on in earnest.
I have written earlier, maybe not with too much sympathy, about how many American businessmen must run their businesses with greater and greater profit foremost in mind, always with the fear that their stock price may drop if their quarterly dividends do not show constant improvement. In this atmosphere, when the pursuit of profit gets stronger and stronger, managers are forced to seek the easiest ways to make a profit. Two dangerous things have happened: some managers have found they can make more money more easily by trading money rather than goods; others have found that manufacturing where the cost is cheapest gives them the best chance to show profits quickly, even if it means moving production offshore.
This phenomenon is leading to what I call the hollowing out of American industry. America’s industrial establishment is being reduced to a mere shell, and the same is happening all over Europe. Some Japanese firms may soon face it also. Many are beginning to export production. American companies like Motorola, Texas Instruments, Fairchild, and many others have moved production facilities to Japan or added new facilities here. Yet congressmen in districts where jobs in these companies have been lost in the U.S. complain about Japan being responsible for the decline in American employment. In 1984, IBM Japan was the biggest exporter of computers from Japan. One reason American firms move to Japan or buy hightech parts from Japan is to take advantage of the skills available here now that quality labor, not merely less expensive labor, is needed. But Sony, on the other hand, has been able to find the skills we need in America and in other countries. Employing our production technologies, and using our longer-term business philosophy, we can make money where domestic companies often flee, because they demand quick and consistent profits.
In the fall of 1985 I took a trip to Europe with Yoshihiro Inayama, the chairman of the Keidanren (Japan Federation of Economic Organizations), and we met many Europeans who were boasting, “There are no new ideas made in Japan. We make the ideas, right here in Europe.” I said to one such, “Look, there is no sense in boasting that you have ideas. I mean, everyone has some kind of ideas that people agree are good. The important thing is how you are going to interpret that idea in your industry. Japan has been working hard in that area. You haven’t, so don’t boast too much.”
European nations appreciate scientists—we all know that. Many of the greatest “American” scientists have their roots and even received their education in Europe; it has been one of the great strengths of the United States. But whereas in the U.S. and in Japan equal appreciation was given to engineers—the people who translate scientific breakthroughs into usable goods—many European countries traditionally tended to shun this hands-on discipline, engineering, through a sense of snobbishness. European engineers for a long time were considered “merely” craftsmen. It was America and Japan that recognized their crucial importance. Universities in both countries developed good engineering departments. Lately, however, emphasis on university engineering studies is higher in Japan than in the U.S., where (and this is connected to the U.S. emphasis on litigation) law currently seems more intriguing to American youth.
As concerned as I am about the trend toward the expansion of trade in currencies at the expense of the expansion of the trade in goods, this lack of interest in keeping up with the need for changing technologies and production of new kinds of goods concerns me too. The problem is far deeper than simply the fact that the dollar and the yen are unreasonably valued. In 1986, U.S. senator Thomas Eagleton made an impassioned comment at a breakfast meeting of the American Chamber of Commerce in Tokyo in answer to a question about the decline of America’s industrial capability. Eagleton said the United States had to protect its industry and expand it, and he vowed that the U.S. would never allow itself to become a nation of mere service trades. The context of the senator’s statement was that Japan must do more to correct the trade imbalance between the two countries—otherwise the U.S. might turn protectionist. I sympathize with his frustration, but the fact is that what must be done to help the U.S. depends more on the U.S. than on Japan. Exporting production and playing the money game are not the ways to ensure a strong and healthy industrial plant in the United States.
Recent treasury secretary Donald Regan was formerly chairman of Merrill Lynch Pierce Fenner and Smith, Inc., which is a big player of the money game. The philosophy of the monetarists, handicapped by not knowing anything firsthand about industry, is that a strong dollar is best for America, and that the problems of an imbalance of currencies will correct themselves naturally over time. When James Baker took over from Regan in the Treasury Department in 1985, he grasped the problem immediately. In on
e of his first speeches he staked out his position, saying that unless we change the exchange system in the world and correct the abnormal situation of the strong dollar, the problem of this wide imbalance of currencies will plague us. That led to the first of the Group of Five (G-5) meetings of finance ministers from Japan, the U.S., the U.K., France, and Germany on the subject that resulted in a readjustment in exchange rates in 1985.
The attempt by Baker and the Group of Five produced a sudden, too drastic swing in exchange rates, rocketing the yen to historically high levels in record time, making a reasonable adjustment by business virtually impossible. In a little over half a year, after central banks of the G-5 nations intervened by selling other currencies to lower the value of the dollar, the yen zoomed more than 35 percent against the dollar, a stunning rise that was difficult to cope with, especially for small- and medium-sized firms. Although Japanese makers of export goods raised their prices because of the rise of the value of the yen, we were dismayed to see many American companies raise their own prices as well, creating an inflationary trend.
As well-meaning as the G-5 action was, it is obvious to me that the world cannot depend upon arbitrary policy coordination between countries to keep exchange rates realistic. Nations must get together to create a new international mechanism to stabilize rates. And the pursuit of monetary profits through mere speculation rather than productive endeavor must be discouraged.
Leaders of the seven industrialized nations meeting at the Tokyo Economic Summit in May 1986 did not take any significant action on exchange rates. But they recognized the problems inherent in wide fluctuations of rates, and by agreeing to monitor the situation they moved a step toward what I hope will be a resolution, but I was disappointed that they didn’t go farther and set up a formal mechanism for monitoring the rates or call for a meeting to consider a new system.
How much can be accomplished by intervention and for how long? The money that is being shipped around the world by the money merchants is enormous compared with the amount that Japan or any other single country can use to intervene. So the money game players of the world are biding their time, thinking that sooner or later things will get better for them. If the amount of funds available to central banks for intervention in the market to influence currency rates is insufficient, the system may begin to falter and chaos may ensue. That is why I insist on the need to change the exchange system once again.
Nobody knows what a “fair” set of exchange rates would be, and I have no magic prescriptions either. But once a year the International Monetary Fund could meet and agree to adjust currencies to the current realities, allowing for a small and reasonable amount of fluctuation between preset limits below and above the optimum figure. We in industry put tremendous effort into reducing the original cost of a product by as little as 1 or 2 percent, but under the current system the value of our money can fluctuate as much as 10 or 15 percent in a single day, wiping out all our attempts at economy. This saps the will to work, to innovate, and a fundamental incentive in a free economic system is being lost. It is difficult to do business and make plans for the future without knowing what the value of your money will be.
Our decision to invest in a manufacturing plant in San Diego was made despite such uncertainty. When Kazuo Iwama was president of Sony America he was very strong, as was I, for a domestic TV plant, even though the economics didn’t look very good. The yen was still fixed at three hundred and sixty to the dollar (it was being traded on the black market for as little as four hundred and twenty to the dollar), and American companies like RCA, Zenith, and Admiral were going offshore to produce their television sets, to places like Mexico and Singapore. Iwama and I, who had the most experience in the American market, felt that for us, it was better to go in the opposite direction, that is, to go to the U.S. because that was where the market was.
But to produce the sets in those days before the integrated circuit, we knew we had to do a lot of manual operations on the sets, at higher American labor rates, and we, of course, had to build a plant, which we estimated would cost us at least twenty-five million dollars. Junichi Kodera, who was to be our first San Diego plant manager, was brought back to Japan, and we set him to work evaluating and projecting the current and future costs of operating in the U.S. That project team knew that integrated circuits were on the way and would soon be replacing transistors and that in about three to four years, as the number of components of each set decreased, assembly time would decrease, too, which would compensate for the increased wages we would be paying in the United States compared with Japan.
But that was the only light at the end of the tunnel. Kodera says today that when he came to our management committee with all his figures and projections, he was very pessimistic. Based on the exchange rate of three hundred and sixty yen to the dollar, even though we could see a dramatic business turnaround in three years, the numbers at the time, in August of 1971, didn’t justify building the plant. But Ibuka and I were heading the management committee then, and we knew the figures; we also felt, however, that this move would prove a wise one in the long run. We knew the cheap yen could not last forever. We surprised Kodera by not even asking about the numbers. We told him we were going ahead. We sent him to our main TV assembly plant at Ichinomiya to get briefed on the latest production systems in preparation for his job in San Diego.
Later that same day, August 16 (it was still August 15 in the United States), President Nixon announced a change in U.S. monetary policy, in effect devaluing the dollar and raising the yen value against the dollar by 15 percent. Nixon temporarily suspended the pledge to convert dollars held by foreign central banks into gold or other monetary assets. He cut back on foreign aid and slapped a 10-percent surcharge on all imports. It was an amazing turn of events that suddenly made the projections on the San Diego operation look very much better. And although we were committed to going ahead with the plant, even if it meant financial difficulty for a few years, we were thrilled with this good omen for our future, enabling us to manufacture products that would carry the label, “Made in U.S. A.”
It is ironic that in Europe, socialist prime minister Francois Mitterrand seems to be the only leader who understands the need to change the exchange rate system. He has said often that the current exchange system is wrong and that he wants to apply the European Monetary System (EMS) to the dollar and the yen.
The European countries that trade with each other in the EMS maintain fixed exchange rates that are periodically adjusted by the EMS. Trade with nonmember nations is conducted at foreign exchange market rates and can fluctuate greatly, but inside the group there is coordination and freedom from any great swings caused by currency speculators or unrelated events.
Imagine, we are getting this sound free market advice from the head of a socialist government, and the heads of states who say they believe in a free economy do not understand this. I think it is ironic and dangerous.
I have the same problem in Japan. I have tried very hard to stress this point. The money experts, however, are shortsighted. They say, “We cannot do this.” Or, “Oh, that would be too dangerous.” They seem to lack creativity, imagination.
When I suggested to experts in the Ministry of Finance in the past that we must intervene in money markets, buying yen to make the yen stronger, they would say, “No, we cannot intervene, the amount of money we can spend to prop up the yen by buying it is so small.” But after the G-5 decision was made, the Bank of Japan intervened and it worked very well in helping to raise the value of the yen.
I spoke about this need in America, too, before it happened. The money experts there said, “How can we go back now to a fixed rate? If we cannot change back to the fixed rate, the floating system that we have now is the best we can do. There is no other choice.” I got angry. I said if we engineers were to think that the systems we have today are the best we can devise and that we have no other alternative, we would stop all innovation. We scientists and engineers work constantly t
o come up with new ideas. The day we make an invention is the day we begin to work to improve it, which is how technology has developed to this point. I responded to one expert by saying, “If you people say that because you cannot change back to the fixed rate system, the floating system is the only choice and that there are no other alternatives, then you are showing yourself to be lame before the whole world.”
A main challenge to the world trading system is the rebuilding of the American industrial structure. I believe there are signs that it is beginning, but there are contradictory signs, too, of industries that are giving up and blaming their failure on others. Although many Americans proclaim that service industries are the future of American business, it is obvious that no nation can give up all of its crucial industrial infrastructure, and, as the senator says, become a nation of fried chicken restaurant franchisers. But I do not see Congress making this kind of recovery a priority.
Protectionism, the stifling of free trade, is a curious way to expand free trade, but too often that is the short and oversimplified answer that congressmen in America and government officials and parliamentarians in Europe come up with. I have been saying to my government for years that we should be telling the United States that what is wrong with American industry is not Japan; it is an American problem. Even Lee Iacocca has admitted that. I have long felt that instead of stifling our trade through so-called voluntary restraint agreements, as we have in automobiles and some other fields, it is much better to have forthright protectionist legislation. At least that way the people who impose the restrictions have to face up to what they are doing. They can no longer see themselves as free-traders.