The government's overall monetary policy was deflationary, but many of its particular policies fed the price inflation that was making many Japanese products uncompetitive on world markets.
The most notorious among these policies was the government's response to the catastrophic Kanto* earthquake of September 1923. In
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order to avert immediate financial collapse at the time of the earthquake, the government ordered all banks closed for a month. When they reopened, the Bank of Japan instructed the banks to refinance all debts that had fallen due in the interim, with the Bank of Japan itself guaranteeing them against losses from these transactions. The government implemented this policy through "earthquake bills," of which it discounted a staggering ¥438 million. Included in this amount were many bad debts that had existed since the end-of-the-war recession. By the spring of 1927, some ¥231 million of these bills had been redeemed, but the outstanding balance of ¥207 million looked irrecoverable and also stood in the way of reconstructing the country's public finances on a sound basis. There was, however, considerable public sentiment against writing off this debt, which would amount to a major subsidy of big business while smaller firms and farmers were allowed to go bankrupt.
25
In this general milieu, one person within MCI stands out as beginning to have some interesting ideas for reenergizing the economy. He was Yoshino Shinji. Yoshino's legal training at Todai1* had not taught him much about the economy, but after he returned from San Francisco in 1915, he had some experiences that gave him a more than purely bureaucratic perspective. The first was a period of duty as a transferee to the Home Ministry, during which he worked as a factory inspector in Kobe. There he discovered the world of medium and smaller enterprises (
chusho
*
kigyo
*), which during the 1920's and 1930's Japanese defined as manufacturing enterprises with from 5 to 30 employees (small) and from 30 to 100 employees (medium).
His second useful experience came as an official in the Temporary Industrial Investigation Bureau (Rinji Sangyo* Chosa* Kyoku) set up within MAC by the Terauchi government (February 1917) to study the effects of the war on the Japanese economy. The bureau was not intended to produce policy or take action, since the private sector led Japan's growth during World War I. But it was expected to compare Japan with other belligerent powers and to advise about possible social problems. Nothing ever came of the bureau's work, but Yoshino met there such famous figures as Kawai Eijiro* (18911944) and Morito Tatsuo (b. 1888), both Todai economists who were working in MAC as consultants. Kawai, in particular, a man who later was to die in prison during World War II as an opponent of militarism from a non-Marxist socialist position, had a significant influence on Yoshino. In the bureau they wrote papers on such subjects as economic planning, stockpiling for emergencies, industrial finance, and American customs duties. As a result of these activities, Yoshino committed himself un-
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equivocally to the industrial side of the ministry's commercial and industrial administration.
26
During the early 1920's, while serving as a section chief in the Industrial Affairs Bureau, Yoshino became one of the first government officials to gain expert knowledge of the medium and smaller enterprises sector. He discovered that despite the strategic importance of the modern zaibatsu enterprises, medium and smaller factories employed the overwhelming majority of Japan's industrial workers. Even more important, the zaibatsu firms produced primarily for the domestic market, but the medium and smaller enterprises concentrated on production for export. With a few exceptions such as rayon, silk yarn, and cotton textiles, where large enterprises were also strong exporters, medium and smaller manufacturers of sundries such as bicycles, pottery, enamelware, canned goods, hats, silk textiles, and so forth were contributing from 50 to 65 percent of all of Japan's exports. And they were losing money doing it.
27
Yoshino and his colleagues in MAC concluded that there were too many small firms, an overabundance of cheap labor, and inadequate channels and information for marketing; the result was that the small business sector was dumping goods overseas. The small export firm not only did not earn much foreign exchange, it was often not even meeting its costs. Moreover, the big zaibatsu trading companies, which monopolized the marketing of these products, were exploiting the medium and smaller enterprises by supplying raw materials at high prices and taking consignments of finished products at low prices.
During 1925 the new ministry sponsored and the Diet unanimously passed two new laws that were a first effort to alleviate these conditions, the Exporters Association Law and the Major Export Industries Association Law. In them we see in embryonic form major instruments of policy that the Japanese government has employed to the present day, notably the "recession" and "rationalization" cartels, as they were to be called in the MITI era.
The Exporters Association Law created export unions (
yushutsu kumiai
) in particular product lines among the medium and smaller enterprises. It authorized these associations to accept products for export on consignment from members, and to control quantities, qualities, and prices of export goods. The Major Export Industries Association Law attempted to end cutthroat competition among such enterprises. It established industrial unions (
kogyo
*
kumiai
), which differed from the export unions in being genuine cartels whose mem-
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bers agreed among themselves on the amounts each member could produce and sell.
There were several precedents for cartels in Japan. The Japan Paper Manufacturers Federation of 1880, the Japan Cotton Spinning Federation of 1882, and the Japan Fertilizer Manufacturers Federation of 1907 were the main trade associations with cartellike powers before World War I.
28
The Production Cooperatives Law of 1900 had authorized prefecturally supervised industrial unions (
sangyo
*
kumiai
), but despite their name, these were actually agricultural cooperatives, not industrial manufacturers.
29
They were also hampered by the fact that in 1917 MAC, in an attempt to control the wartime prices of food and clothing, had prohibited them from agreeing on prices or wages. The primary functions of the early cartels were inspection and grading of products. The Japanese were not unfamiliar with cartels, but those authorized in 1925 were new in that they sought to organize a part of the whole economy, not just particular industries.
The 1925 laws did not work too well. The industrial unions were more popular than the export unions, because MCI subsidized the industrial unions from the outset but only began to finance the exporters after the world depression. There were also frequent clashes between the two. In order to get the laws passed in the Diet, MCI had to agree that membership would not be compulsory in either of the unionsalthough the ministry was given authority to order nonmembers to conform to some of the terms of cartel agreements among members.
During 1925 MCI was not a powerful ministry compared with Home Affairs, Foreign Affairs, or Finance, and it was all but unknown to the general public. Its efforts to aid medium and smaller enterprises were thus merely a first, and rather experimental, step toward industrial policy. Both its commercial and industrial activities during the mid-1920's were focused on trying to relieve Japan's balance of payments deficits by stimulating trade. Yoshino established a committee in the ministry to promote the use of nationally manufactured goods, and he sought budget authorization to station MCI trade representatives abroad. He also asked that the Trade Section in the Commercial Bureau be upgraded to a bureau. The Ministry of Foreign Affairs blocked the idea of overseas commercial attachés from MCI as an infringement on its territory, and the Finance Ministry approved an MCI Trade Bureau in 1927 but did not provide funds for it until 1930, when the world depression made it seem more important.<
br />
30
One of the leading historians of trade and industrial policy comments, "No
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one remembers working very hard in the early years of MCI."
31
Even Nakahashi Tokugoro*, who became minister of MCI in April 1927 as part of the cabinet of General Tanaka Giichi, said on taking office, "As a government agency, MCI is not a place of exciting work."
32
But he was destined to help change that condition quite decisively.
Nakahashi became minister in the wake of the financial panic of 1927, which forced the resignation of the first Wakatsuki cabinet. This crisis was the culmination of all the panics that had afflicted the Japanese economy during the 1920's, and it constitutes the true dividing line between the "old testament" and the "new testament" of Japanese trade and industrial administration. It also marks the onset of the world depression for Japana period of economic stagnation and of radical attempts to find solutions to endemic problems that afflicted the rest of the world only three years later. On the significance of the 1927 panic, Nawa Taro* observes, ''MCI already existed as a body, but the financial panic brought it to life as an organization."
33
One important, if deeply conservative, point of view concerning what to do about the recession of the 1920's is associated with the name of Inoue Junnosuke (18691932), a former official of the Yokohama Specie Bank, president of the Bank of Japan in 1919, and minister of finance in the Hamaguchi cabinet of 1929. (Like several other finance ministers of this era, he too was assassinated, on February 9, 1932, in the so-called Blood Brotherhood Incident, a fascist attack on the Japanese capitalist establishment.) Inoue's idea was that Japan should lift the "temporary" gold embargo that it and all other major countries had imposed at the outbreak of World War I. Japan had continued the embargo after the war because of its unfavorable balance of payments, and it was alone among major powers in not having returned to the gold standard. In Inoue's view this was the reason that efforts to revive exports had been unsuccessful. The situation was somewhat comparable to that in 1949, when Japan had to achieve a stable exchange rate for the yen in order to resume international trading, a goal that in turn required Japan to halt inflation and live within its means. In 1949 Dodge and Ikeda led the fierce deflation that was prerequisite to economic rebuilding.
In theory a nation in a situation like Japan's in the 1920'sone that imported more than it exportedwould pay out gold to cover the balance. This outflow of gold, which had been prohibited during the 1920's, would raise the value of the domestic currency and thereby lower export prices. The effect would be highly deflationary, and would drive marginal firms out of business, but it would also thoroughly shake up an economy that was living off inflation and restore
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its international competitive capacity. This is what Inoue and the Minseito * party wanted to do.
Before any attempt to lift the gold embargo could be undertaken, however, the government had to get its own financial house in order, and this meant resolving the matter of the outstanding earthquake bills. During the 52nd Diet (December 1926 to March 1927), the Wakatsuki (Minseito) government introduced two bills that would convert the outstanding earthquake bills into ten-year government bonds. The opposition parties complained bitterly that the government wanted to use the people's tax revenues to aid the capitalists, and during the course of a heated Diet debate the minister of finance accidentally revealed just how shaky the nation's entire banking structure really was. Runs began on banks, although they temporarily cooled after the Diet passed the bills on March 23.
The debate did not cool, however. It had revealed that two institutions, the Suzuki Trading Company and the government-owned Taiwan Bank, were in serious financial difficulties. Suzuki Shoten*, the biggest of the wartime nouveaux riches, controlled some sixty companies, many of which were in the heavy and chemical industries and had been badly affected by the postwar recession. The China trade, in which Suzuki had invested heavily, had also stagnated due to anti-Japanese boycotts and the rising competitive ability of new Chinese firms. The Taiwan Bank had the mission of helping Japanese firms advance into China and Southeast Asia; it had lent Suzuki over ¥350 million, and it also held some ¥100 million in earthquake bills. Rumors spread that the real intent of the new laws was to save Suzuki and the Taiwan Bank, and when Suzuki's competitors, beginning with the Mitsui Bank, began withdrawing their deposits from the Taiwan Bank, the public run on all banks revived.
As a result of the panic, the Wakatsuki government fell, the Seiyukai* party came to power, some 37 banks went under, and the zaibatsu renewed their strength. Finally, the Suzuki zaibatsu collapsed, with Mitsui and Mitsubishi picking up the surviving firms. (One strong firm, Teijin, or Imperial Rayon, came back to haunt the government again in 1934, when a scandal erupted over the covert sale to high government officials of Teijin shares held by the minister of finance as collateral for the Taiwan Bank's debts.) Loans to medium and smaller enterprises became much harder to obtain, but access to capital for large zaibatsu enterprises was enhanced. Disastrous though it was, the 1927 panic produced one of the first "reforms" of the industrial structure in Japan: a large number of competing banks and enterprises were weeded out, and the economy's limited capital was con-
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centrated in the strategic sectors. However, the way it was done and the enrichment of the zaibatsu in the process contributed to the radicalization of the whole society and brought forth demands that someone speak for the nation as a whole.
34
In this climate of opinion, the new minister of commerce and industry, working with and on the inspiration of his chief of the Documents Section, Yoshino Shinji, undertook an initiative that is acknowledged to be the beginning of modern Japanese industrial policy. On May 23, 1927, Minister Nakahashi set up within MCI a Commerce and Industry Deliberation Council (Shoko* Shingikai). Its charter was to examine broadly what was ailing the Japanese economy and what the government ought to do about it. As a joint public-private forum, it is the direct antecedent of the 1950's-era Industrial Rationalization Council and its successor, the Industrial Structure CouncilMITI's number one official channel to the business community. Nonbureaucratic members of the 1927 council included all the leading businessmen of the time. Among the most influential in the actual deliberations were Okochi* Masatoshi, who was both a Todai* professor of engineering and a prominent private industrialist, and Nakajima Kumakichi of the Furukawa zaibatsu, who later became an important MCI minister.
The council achieved unprecedented results. It convinced MCI to strengthen its compilation of industrial statistics (this was Minister Nakahashi's pet project and his main contribution to the council), authorized some ¥30 million in loans to medium and smaller enterprises (a figure ten times larger than any previous loans), proposed for the first time the amalgamation of the Yawata steel works with private steel firms (an idea that came to pass in 1934), and underscored the need for improved trade intelligence and subsidies for export industries. The discussions also had their comic side. Both Kishi and Kogane Yoshiteru recall Okabe Nagakabe's objections to the introduction of the metric system in Japan as a way of standardizing industrial products. Okabe reflected the views of the House of Peers when he noted that the metric system was associated with the French Revolution and was therefore incompatible with the Japanese national spirit. Members of the council proposed shelving the issue until Okabe died. Since Okabe lived until 1970, twenty-five years beyond his term as minister of education in the wartime Tojo* cabinet, it would have meant a long wait.
35
As it turned out, Kogane managed to introduce the metric system in the late 1930's with the help of the army.
By far the most important achievement of the council was the introduction into Japan of the concept of "industrial rationalization" (
san
-
Page 103
gyo
&
nbsp; *
gorika
*). Since 1927 the concept has been in almost daily use by the economic bureaucracy. At first no one knew precisely what it meant, but it seemed admirably to sum up what the MCI bureaucrats thought was needed for Japan. Yoshino has written, "All we did with 'rationalization' was to hang out a signboard as a name for our activities, but having hung out the sign, we then had to find out what it meant."
36
The first government reference to the term seems to have been in one of Kishi's reports of 1926. He had been sent to Philadelphia as the Japanese representative to the 150th anniversary celebration of the United States, and he returned home via Europe. He reported on the Taylor and Ford movements in the United States for "scientific management" and "production lines," and on the promotion of trusts and cartels in Germany to improve industrial efficiency. No one paid much attention to Kishi's initial report, but with the onset of the depression "industrial rationalization" became a popular catch phrase in Japan for efforts to pull the country out of the slump. Within the ministry it became a rallying cry for the integration of industrial policy.
On July 2, 1929, the Minseito* returned to power, and Prime Minister Hamaguchi appointed Inoue Junnosuke minister of finance. Inoue proceeded to carry out his plan to lift the gold embargo, but he and other members of the government now linked the step to the industrial rationalization movement. The gold standard would tie Japan's prices to world prices, they said, and industrial rationalization would strengthen the nation's international competitive ability. Prime Minister Hamaguchi himself argued to the Commerce and Industry Deliberation Council during 1929 that "industrial rationalization is not just a matter of timely policy but must be a movement of all the people."
MITI and the Japanese miracle Page 17