MITI and the Japanese miracle

by Chalmers Johnson

  Mainichi

  estimates that in a little over three months after the surrender, the government paid out some ¥26.6 billion, a truly colossal sum amounting to about one-third of the total amount Japan had spent for military purposes between September 1937 and August 1945.

  40

  During 1946 these disbursements led to one of the first big clashes between SCAP and the Japanese over economic policy. Ishibashi Tanzan, minister of finance in the first Yoshida cabinet (May 1946 to May 1947), was a strong advocate of increased production; he boldly argued that "the current economic crisis is not one of inflation but rather of a surplus of unused labor and production facilities. The only way to get out of it is to increase production."

  41

  For this purpose Ishibashi was prepared to throw money at industry through war claims payments and price support subsidies and to deal with the resultant inflation merely by issuing "new yen" whenever necessary. SCAP profoundly disagreed; in its view price stabilization had to take precedence over any efforts to restore production. Ishibashi's position reflected the war-bred theories of many industrial bureaucrats who believed that what counted was materials, labor, and outputnot prices and money; SCAP's views were closer to those of Governor Ichimada of the Bank of Japan, who was also a confidant of such senior SCAP officials as General Courtney Whitney.

  42

  During November 1945 SCAP issued direct orders to the Japanese government to stop paying off war claims. Ishibashi stalled as long as possible, fearing that the government's suspension of payments would ruin many banks, dry up industry's working capital, and bring what production there was to a halt. This is rather close to what actually happened during the autumn of 1946: the government stopped its subsidies, inflation accelerated rather than being brought under

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  control, and production dropped precipitously. It was under these circumstances that the Japanese government began to take its own initiatives to revive the economy.

  On June 25, 1946, the cabinet finally ended wartime compensation payments, but a month later it took the first steps to restore them under new names. The government set up the Reconstruction Finance Committee (Fukko * Kin'yu* Iinkai), with Ishibashi as chairman, to prepare the way for the Reconstruction Finance Bank (RFB), created on January 24, 1947. It was one of a set of institutions that the Japanese created after the war to try to pull themselves out of the postwar economic collapse and to restore production to prewar levels regardless of the fierce inflation it generated.

  43

  SCAP derided these institutions as perpetuations of the old cozy relationship between government and business, and the specific acts of Ambassador Joseph Dodge in 1949, which came to be known as the "Dodge Line," were to terminate all further RFB lending and to order the government to balance its budget. Nonetheless, key Japanese leaders contend that the so-called priority production system of 1947 actually worked in that it restored the production of commodities such as coal and steel to levels close to those of the prewar period. The priority production system is significant because it and its institutions were clearly based on prewar and wartime precedents and because, except for the fiscal innovations made in 1949 and 1950 to control inflation, it was the prototype of the high-growth system that MITI and other ministries were to forge during the 1950's.

  The specific institutions of the priority production system, in addition to the RFB, were the Coal Agency, the Economic Stabilization Board, the fifteen

  kodan

  * (public corporations for rationing of materials and products; they were modeled after the wholly governmental eidan rather than the zaibatsu-dominated control associations), and the Temporary Materials Supply and Demand Control Law (Rinji Busshi Jukyu* Chosei* Ho*, number 32 of September 30, 1946) that empowered these institutions to control all commodities.

  At the end of the war coal production all but collapsed, plunging Japan into an acute energy crisis. Output fell from better than 4 million tons per month during the war to only 554,000 tons per month in November 1945. The reason was SCAP's immediate repatriation of about 9,000 Chinese and 145,000 Korean miners, many of whom Kishi had imported as virtual slave laborers when he was MCI minister. On December 6, 1945, on cabinet orders, the new MCI transformed its old Fuel Bureau into an enlarged semi-detached agency, the Coal Agency (Sekitan Cho*). Destined to become one of the biggest units of

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  the economic bureaucracy, it got off to a slow start. SCAP purged its first two directors, one a former president of the South Manchurian Railroad and the other a representative of the Yasukawa zaibatsu, and tried to purge its deputy director, Okamatsu Seitaro *, who escaped only because his superiors pleaded that he was indispensable to economic recovery (he went on to become MCI vice-minister during 1947 and 1948). The Coal Agency's immediate task was to transfer Japanese miners from metal mines to coal mines and to arrange through the Agriculture Ministry and SCAP to have them supplied with larger food rations than had been given to the Korean and Chinese miners during the war or to the public at large after the war. "Food for coal" thus became Japan's first postwar industrial policy.

  44

  The new system did not work well. After their governmental subsidies were cut off, the mine operators had difficulty in meeting payrolls. Insufficient coal was being produced to meet both industrial and civilian needs, and the costs of production skyrocketednot least because of the virulence of the new labor movement among the miners. The Planning Office of the MCI Secretariat worked throughout 1946 on policies to overcome these conditions. The chief of the Planning Office was Tokunaga Hisatsugu (a future MITI vice-minister), and assisting him were Takashima Setsuo (a chief of the Heavy Industries Bureau during the 1960's), Morozumi Yoshihiko, and others. They drafted the Temporary Materials Supply and Demand Control Law of September 1946 and proposed the revival of the materials mobilization plansrenamed "materials supply and demand plans"to guarantee shipments of coal to the industrial and transportation sectors rather than to civilians for consumption.

  45

  What they really needed, however, was an institution comparable to the old Cabinet Planning Board or MM's General Mobilization Bureau, an organ that could not only draft further plans but also administer the new control law.

  As early as February 15, 1946, the cabinet had called for an "emergency economic policy headquarters" to deal with the coal and food shortages, inflation, the conversion of old yen into new yen, the freezing of credit funds, and new taxes. SCAP also recognized the need for something like this, but before it would give its approval, it insisted that the new agency be ranked above the existing ministries in order to try to end the frequent jurisdictional struggles. SCAP also wanted it to recruit its leadership from civilian rather than bureaucratic sources. SCAP's conditions naturally prevailed, but they insured that the new organization would start life rather anemically,

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  since the established ministries were hostile to it and boycotted it as a threat to their territories.

  The new organization, called the Economic Stabilization Board (ESB; Keizai Antei Honbu), came into being on August 12, 1946. It was the successor institution to the old CPB and the predecessor of the contemporary Economic Planning Agency. Like both of them, it was a planning and coordinating organ, not an operating unit; MCI was charged with executing its plans. Some of the staff of the new board was drawn from old CPB cadresnotably from among those who had been arrested as "reds" in the Cabinet Planning Board incident of 1941, since they now qualified as civilians. According to its charter, the ESB president was the prime minister, but its actual director was a civilian appointee with cabinet rank.

  The Yoshida government had a hard time finding the first ESB director-general. Yoshida offered the job to Arisawa Hiromi, a Todai * economics professor who had been fired from the university in 1938 for antimilitarist sentiments, but he turned it down, although he agreed to become a personal adviser to Yoshida on economic policy. Yos
hida next approached Takahashi Masao, another academic economist and an adviser to SCAP's Economic and Scientific Section, but he too refused. Yoshida then gave up on professors and offered the job to Yanagida Seijiro*, vice-governor of the Bank of Japan (and later president of Japan Air Lines), but SCAP purged him before he could take office. Finally, Yoshida settled on Zen Keinosuke, an ex-bureaucrat of MAC and MCI, a member of the House of Peers, and the man whom Yoshino had helped in the early 1930's to found the Japan Mutual Life Insurance Company. The problem was that no one knew what the ESB was supposed to do, and until that was clarified, the ministries and their clients looked on it as a pure SCAP invention.

  46

  During the autumn of 1946, when the subsidies finally ground to a halt, the economy virtually collapsed. Yamamoto Takayuki and Tokunaga Hisatsugu of MCI, together with Inaba Hidezo* of the ESB, put forward their famous thesis of a "March crisis"their prediction that by March of 1947 the Japanese economy would no longer be producing anything due to an exhaustion of stockpiles, a lack of imports, and an acute coal shortage. On November 5,1946, in order to forestall this, Prime Minister Yoshida established a personal brain trust known as the "Coal Committee" to tell him what to do. Its chairman was Arisawa Hiromi, and its members included Inaba Hidezo (formerly of the CPB), Okita* Saburo* (foreign minister in the Ohira* cabinet of 197980), Tsuru Shigeto (Harvard-trained economist and author in

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  TABLE

  11

  Directors of the Economic Stabilization Board August 1946August 1952

  Director and tenure

  Remarks

  Zen Keinosuke, 8/461/47

  Former MAC-MCI bureaucrat.

  Ishibashi Tanzan, 1/473/47

  Concurrently finance minister.

  Takase Sotaro *, 3/475/47

  President, Tokyo Commercial University. MITI minister, 1950.

  Wada Hiroo, 6/473/48

  Former agriculture bureaucrat. Arrested in Cabinet Planning Board incident, 1941.

  Kurusu Takeo, 3/4810/48

  Arrested in Showa* Denko* scandal, 10/48.

  Izumiyama Sanroku, 10/4812/48

  Former Mitsui Bank official.

  Shuto* Hideo, 12/482/49

  Former agriculture bureaucrat. Former director, Department Four, Cabinet Planning Board (1942).

  Aoki Takayoshi, 2/496/50

  Former professor (economics), Nihon University.

  Shuto Hideo, 6/508/52

  See above.

  1947 of Japan's first

  Economic White Paper

  ), Sato* Naokuni (of MCI), Oshima* Kan'ichi (of the Finance Ministry), and several staff aides such as Kojima Keizo* (formerly of the CPB and at the time working in MCI's Coal Agency). This group invented "priority production" (

  keisha seisan

  ). On January 31, 1947, in a cabinet reshuffle, Ishibashi Tanzan was asked to take on the post of director of the ESB in addition to serving as minister of finance, and he made priority production the central objective of the ESB (for a list of the ESB leaders, see Table 11).

  Priority production was a scheme to concentrate all of the economy's assets in a few strategic sectors, regardless of the effects this might have on civilian consumption or inflation. In this respect it was quite similar to the revised materials mobilization plan of 1938. The Arisawa committee had recognized that the first objective had to be to increase coal production. Calculating from the 1946 production figure of 22.8 million tons, the committee had set a goal of 30 million tons for 1947. In order to try to achieve this, it had suggested that the coal industry get first priority on RFB loans and subsidies. Allocation of coal was an equally serious problem. Before the war 60 percent of coal output had been used by industry and only 40 percent for transportation, electricity generation, and other so-called civilian uses, but in 1946 these proportions were reversed. Demand for nonindustrial use had become so great that there was no possibility of reviving industry unless coal production was increased. The committee therefore earmarked 16 million of its targeted 30 million tons for industry, and the

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  ESB was authorized to implement the Supply and Demand Law to achieve this distribution. Because the coal industry was a big steel user and steel production was itself dependent on coal, the committee designated steel as a second priority industry. It finally added fertilizer, which also uses coal, in order to try to expand food production.

  Priority production was put into effect during the spring of 1947. Under Ishibashi's leadership and SCAP's orders that all ministerial planning functions be transferred to it, the ESB came to life. By May it had grown from a unit with 5 bureaus and 316 employees into a virtually new unit with a secretariat, 10 bureaus, 48 sections, and over 2,000 employees. MCI supplied the largest number of these new recruits. At the same time, the Diet enacted one law after another setting up the government corporations (kodan *) that under ESB orders purchased all major commodities from their producers at high prices and sold them to consumers at low prices, covering the difference with price subsidies from the general account budget. Table 12 summarizes the government's payments of subsidies and indemnities through the 1940's. It reveals that between 1946 and 1949 some 20 to 30 percent of all expenditures from the general account budget went to industry to cover operating costs and priority production.

  SCAP liked the new economic institutions and the fact that the ESB had finally achieved authority (the Americans assumed that the real inspiration for the ESB was a comparable bureau they had set up in 1943 to supervise their own war economy), but SCAP still did not like the indifference to inflation of ESB Director Ishibashi.

  47

  It therefore purged him. Several observers on the scene at the time have suggested that Yoshida got rid of Ishibashi as a political rival by suggesting his name to General Whitney as an appropriate purgee, even though Ishibashi's prewar and wartime career as president of the

  Oriental Economist

  Publishing Company (Toyo* Keizai Shimposha*) had much less to do with the war effort than Yoshida's own activities. Whatever the case, Yoshida and Ishibashi became political enemies. Ishibashi did not return to the government until December 1954, when he became MITI minister in the Hatoyama cabinet and proceeded to dismantle the restraints placed on the ministry by Yoshida's Foreign Office appointments.

  48

  Shortly after Ishibashi's purge, the first Yoshida government fell and was replaced by the socialist cabinet of Katayama Tetsu. The Katayama cabinet continued and accelerated priority production, even though it no longer used that term since SCAP did not like it. The year from mid-1947 to mid-1948 was the high tide of priority production, during which the ESB, MCI, the Coal Agency, the kodan, and

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  TABLE

  12

  Government Payments of Price Subsidies and Indemnities, 19401952

  (Million yen)

  Year

  Total general account budget expenditures

  Price subsidies (

  kakaku

  chosei

  *

  hi

  )

  Indemnities for losses (

  sonshitsu

  hosho

  *

  hi

  )

  1940

  5,856

  (100%)

  17

  (0.3%)

  60

  (1.0%)

  1941

  7,929

  (100)

  95

  (1.2)

  55

  (0.7)

  1942

  8,271

  (100)

  305

  (3.7)

  240

  (2.9)

  1943

  12,491

  (100)

  510

  (4.1)

  265

  (2.1)

  1944

  19,872

  (100)

  1,266

  (6.4)

  567


  (2.8)

  1946

  115,207

  (100)

  3,731

  (3.2)

  22,661

  (20.0)

  1947

  205,841

  (100)

  28,178

  (13.7)

  8,566

  (4.2)

  1948

  461,974

  (100)

  93,118

  (20.2)

  16,632

  (3.6)

  1949

  699,448

  (100)

  179,284

  (25.6)

  31,838

  (4.6)

  1950

  633,259

  (100)

  60,162

  (9.5)

  7,830

  (1.2)

  1951

  749,836

  (100)

  26,975

  (3.6)

  9,560

  (1.3)

  1952

  873,942

  (100)

  40,308

  (4.6)

  8,183

  (0.9)

  SOURCE

  : Nakamura Takafusa, "Sengo no sangyo* seisaku" (Postwar industrial policy), in Niida Hiroshi and Ono Akira, eds.,