During the period 1949 to 1954 the Japanese forged the institutions of their high-growth system. In 1954, with the passing of the Yoshida government and other political developments, MITI put the system into effect. To understand the Japanese economic performance of the late 1950's, it is necessary to appreciate that when all the various institutions of the Korean War era were put together and operated by an "economic general staff," they constituted a systemalthough no single institution was ever created with the emerging system in mind. As Nakamura Takafusa has argued, the agencies of 195561 for forcing investment from a poor, capital-starved society resulted from the combination of two complicated sets of circumstancesthe persis-
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tence of wartime and occupation controls until very late in the postwar era, and the tremendous strengthening of competition that was an unintended consequence of the emergency measures for industrial financing adopted by the government during the "stabilization panic."
1
Some of the elements of what became MITI's high-growth system derived from the government's selection of industries for "nurturing," perfection of measures to commercialize the products of these chosen industries, and development of means for regulating the cut-throat competition that the first two sets of policies generated. The tools in the hands of the economic bureaucrats included control over all foreign exchange and imports of technology, which gave them the power to choose industries for development; the ability to dispense preferential financing, tax breaks, and protection from foreign competition, which gave them the power to lower the costs of the chosen industries; and the authority to order the creation of cartels and bank-based industrial conglomerates (a new and rationalized version of the zaibatsu, now made totally dependent on government largesse), which gave them the power to supervise competition. This high-growth system was one of the most rational and productive industrial policies ever devised by any government, but its essential rationality was not perceived until after it had already started producing results unprecedented for Japan or any other industrialized economy.
The system began to be forged during the Dodge Line. Dodge's policies certainly ended inflation, but at the cost of almost shattering what little economic recovery had been achieved through priority production. The cutting off of government price subsidies and loans to industry from the Reconstruction Finance Bank (RFB) eliminated the main sources of capital in the system, and there simply were no alternative sources to fill the void, either from the internal savings of enterprises or from the new capital market that SCAP was trying to foster. Equally important, when governmental aid to designated sectors of priority production stopped and SCAP began to promote export industries, there was a radical reallocation of what little private capital was available. Funds for coal and electric power development declined drastically, while funds for the reestablished textile industry shot up.
2
SCAP was pleased by this development, since textiles earned foreign exchange, but Japanese bureaucrats saw an energy crisis looming. And even the policy of export promotion was seriously undermined by the devaluation on September 18, 1949, of the British pound. The pound was cut by 30.5 percent in terms of U.S. dollars, its value dropping from $4.03 to $2.80, a step that caused some 30 other
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countries also to devalue their currencies. Japan, which had just pegged its own currency at ¥360 to $1, suddenly found that its products were overpriced in its principal export markets. During the winter of 194950 the Japanese people faced some of the harshest economic conditions they had seen since the war ended, and the threat of revolution came perilously close.
3
On June 25, 1950, warfare erupted on the Korean peninsula, and the United States intervened. This development ended the "stabilization panic" quantitatively, if not qualitatively. In addition to the American foreign aid that had sustained the Japanese economy since stabilization began, the United States now began to place extensive orders with Japanese firms for ammunition, trucks, uniforms, communications equipment, and other products needed for the war effort. The Americans also started to buy fertilizers and consumer goods destined for South and Southeast Asian noncommunist countries as part of the American foreign aid effort. For example, between July 1950 and February 1951 the U.S. armed forces and the U.S. Economic Cooperation Administration placed orders with Japanese firms for some 7,079 trucks worth nearly $13 million; this was the key to the revival of the Japanese automotive industry.
4
The Enterprises Bureau of MITI supervised these "special procurements" (
tokuju
) to ensure that the foreign exchange thus gained was used for investment in basic industries. For a while the "special procurements boom," as it was called, provided a false sense of euphoria and a feeling that the hard times were over. Special procurements plus the expenditures of U.S. troops and their dependents constituted 37 percent of all foreign exchange receipts in 195253, and they still contributed 11 percent in 195960.
5
This windfall, however, created major internal financial difficulties. Japanese firms could not obtain investment capital fast enough to retool to meet the orders that the Americans were placing, and their working capital was insufficient to keep them in business if even a few of their contracts involved delays in payment of six months or more. The Japanese economic bureaucrats debated among themselves about what emergency measures to take to rectify this situation, and the outcome of this debate had a profound significance for the economy of later years and for governmental economic policy. It led to the two-tiered structure of government-guaranteed "city bank" overloaning and newly created government-owned "banks of last resort." These latter institutions, particularly the Japan Development Bank (Nihon Kaihatsu Ginko*, abbreviated Kaigin), came to possessand still retain todaytremendous indicative powers over the whole economy as a result of their decisions to make or refuse "policy loans."
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TABLE
14
Governors of the Bank of Japan, 19451975
Governor and tenure
Background
Shibusawa Keizo *, 3/4410/45
Yokohama Specie Bank; Dai Ichi Bank.
Araki Eikichi, 10/456/46
Bank of Japan; purged; depurged, 1950.
Ichimada Naoto, 6/4612/54
Bank of Japan; later minister of finance in the Hatoyama and Kishi cabinets.
Araki Eikichi, 12/5411/56
See above.
Yamagiwa Masamichi, 11/5612/64
Ex-vice-minister of finance; Export-Import Bank.
Usami Makoto, 12/6412/69
Mitsubishi Bank.
Sasaki Tadashi, 12/6912/74
Bank of Japan.
Morinaga Teiichiro, 12/7412/79
Ex-vice-minister of finance; Export-Import Bank.
The two great antagonists in this industrial finance debate were Ikeda Hayato (18991965), former vice-minister of finance and minister of finance in the third Yoshida cabinet (February 1949 to October 1952), and Ichimada Naoto (b. 1893), governor of the Bank of Japan from June 1946 to December 1954.
*
Their conflict was based as much on political and bureaucratic differences as it was on genuine differences over policy. As it turned out, Ikeda emerged victorious and his ministry asserted its dominance over the Bank of Japan (particularly after November 1956, when for the first time in 29 years the ministry named one of its own officials governor of the bank; see Table 14). But Ichimada made his own important contribution to Japan's economic future, despite the bad press he has received from MITI officials because of his opposition to heavy industrialization. During the Dodge Line and Korean War periods, Ikeda and Ichimada each invented one tier of the two-tiered Japanese system of industrial financinga wonderful instrument on which MITI would become a virtuoso player.
Ikeda was not precisely an inflationist in the mold of Ishibashi Tan-
*
In order to follow I
keda's activities, the following dates should be kept in mind. While serving as minister of finance in the third Yoshida cabinet, Ikeda also held the concurrent post of minister of MITI from February to April, 1950. Yoshida then named him MITI minister in his fourth cabinet, but he was forced to resign after only a month in office (Oct.Nov. 1952) because of his "slip of the tongue" in the Diet (discussed below). Between 1952 and 1956 he held various Liberal Party posts, including that of secretary-general. From December 1956 to July 1957 he returned to the cabinet as minister of finance. His last cabinet post (June 1959 to July 1960) before becoming prime minister was again as minister of MITI. References to Ikeda's "own" ministry of course refer to the Ministry of Finance, in which he served as a bureaucrat from 1925 to 1948.
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zan, but he was also not a typical fiscal conservative of the Finance Ministry. During the late 1950's he fought as hard against his own ministry to get his ideas of "positive finance" accepted as he had earlier against the deflationists of the central bank.
6
He believed that the government was the only available source of capital for industry, and he was a supporter of the activities of such governmental financial institutions as the Industrial Bank before and during the war and the RFB during the occupation. Although his name is associated with so-called low-posture politics because, as prime minister after Kishi and in the wake of the 1960 security treaty riots, he shifted the focus of government from politics to economics, he was very outspoken in internal debate.
7
On November 27, 1952, in a famous incident, Ikeda was forced to resign as MITI minister and accept a temporary setback in his political career because he had said too candidly in the Diet, "It makes no difference to me if five or ten small businessmen are forced to commit suicide" as a result of the heavy industrialization efforts.
8
Ikeda must be recorded as the single most important individual architect of the Japanese economic miracle.
Ichimada held almost directly contrary financial views. He had served in Germany before the war and was personally acquainted with the German inflation, so he strongly agreed with SCAP's opposition to Ishibashi's inflationary policies of 1947. Throughout the occupation, with most senior zaibatsu executives purged and the commercial banks virtually the only institutions left unscathed, Ichimada wielded enormous powers over the banks and their borrowers through his decisions on how much the Bank of Japan would let them borrow. After Dodge launched his deflation and the "stabilization panic" hit, Ichimadanow known to the press as "Pope Ichimada"came to exercise life-or-death powers over businesses. Partly as a result of his German experiences and partly because most of the inflationists were concentrated in the Finance Ministry, Ichimada came to stand for a deflationary, balanced-budget fiscal policy and for a mildly expansionist monetary policy. During the capital shortage Ichimada upped the tempo of government loans to city banks (the twelve national banks to which the Bank of Japan extends loan privileges), who in turn distributed the funds to the industrialists who were clamoring for money to expand their facilities. He never went as fast as Ikeda and MITI would have liked, but he started the process of central bank "overloaning" that led to the nexus between the city banks and industry that persists to the present day. In the process he virtually insured that SCAP's proposal for a capital market for industrial financing (a stock exchange) would remain stillborn for at least twenty years.
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After only a few years of the Bank of Japan's monetary expansion, the Japanese industrial system took on one of its most distinctive characteristicsthe pattern of dependencies in which a group of enterprises borrows from a bank well beyond the individual companies' capacity to repay, or often beyond their net worth, and the bank in turn overborrows from the Bank of Japan. Since the central bank is the ultimate guarantor of the system, it gains complete and detailed control over the policies and lending decisions of its dependent "private" banks. This so-called indirect financing formula (
kansetsu
kin'yu
*
hoshiki
*) is really only indirect in appearance. As Ito* explains, "Unlike prewar enterprise which was founded on the basis of its own capital, postwar enterprise has been dependent on loans from commercial banks for about 7080 percent of its capital; and in the final analysis these loans are provided on credit from the Bank of Japan, Japan's central bank."
9
The opposite side of this coin, of course, is a relatively slight dependence on equity. "In 1935," writes Broadbridge, "68 percent of industrial funds raised, apart from reserves and depreciation, were derived from sales of stock; in 1963, the figure had fallen to 10 percent.''
10
At least in terms of its financing and ownership structure, Japan was a more capitalist country in the 1930's and 1940's than it was in the 1950's or 1960's.
Ichimada himself appears to have been reluctant to see the system of overloaning expand as far as it did. He regularly declared that the limits of central bank underwriting had been reached, and that a capital crisis was imminent.
11
Also, in order to protect himself and his bank, he became increasingly dependent on guidelines supplied by MITI's Enterprises Bureau on the amounts of capital various industries would need for a given period, and above all on the industries that other branches of the government were protecting and promoting.
12
If the Bank of Japan or the city banks had ever ventured very far from MITI's guidelines and taken on support of an undesignated industry, the risks not just to a particular bank but to the whole system would have become intolerable.
Although it was born of the capital shortage that accompanied the Dodge Line (and is not, as some writers contend, an element of Japanese culture itself), the system of bank overloans was also attractive to Ikeda and his MITI colleagues.
13
It revealed such possibilities of control over and coordination of their highly limited resources that they took steps to continue and institutionalize the system. As Ikeda noted in 1952, dividends on equity shares are paid from corporate profits after taxes, whereas interest on bank loans is deductible for tax purposes. It was thus less expensive for an enterprise to borrow the
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funds it needed from a bankassuming that it could get them at allthan to try to raise money through issuing new shares.
14
Since the tax system inherited from the occupation was under the control of the Finance Ministry, it was an easy stepalong with many others to be discussed belowto insure that these tax advantages were perpetuated and enlarged. And since the bureaucratic proponents of heavy industrialization saw merits in Ichimada's system, it was continued long after the crisis it was intended to meet had disappeared. A capital market slowly developed in Japan and came to play an increasingly important role in industrial finance, but it did not even begin to rival bank lending as a source of capital until the 1970's.
One advantage of the overloaning system was that managers were not pressured by stockholders, which meant that they could ignore short-term profitability as a measure of their own performance and could concentrate instead on such things as foreign market penetration, quality control, and long-term product development. This became a considerable advantage when Japanese managers began to compete seriously with American firms, since short-term profitability and the payment of dividends were the keys to the availability of capital for American enterprises (not to mention also being the keys to an American manager's longevity in his job). Another advantage was the ease and precision with which the government could employ monetary controls alone to expand or contract the tempo of economic activity in response to international balance of payments constraints. A less desirable feature of the dependence on borrowing was that it left Japanese companies with so little paid-in capital that they were easy targets for foreign purchase. However, this state of affairs only increased civilian demands for the pro
tection of the Japanese economy, which the bureaucrats wanted to pursue anyway on nationalistic grounds. The resultant community of interests reinforced both sides.
Of all the consequences of Ichimada's system, certainly the most important was the fostering of bank keiretsu (conglomerate groups) as successors to the zaibatsu, since without them the Japanese economy might not have enjoyed the high degrees of competition that prevailed in its otherwise government-dominated big business sector. By the 1960's, as we shall see in the next chapter, many MITI officials had begun to doubt the value of this featurebut it must be said that MITI bureaucrats, none of whom had ever experienced an open economic system until the 1960's, have consistently undervalued the role of competition in the structure they created.
Since the time of the stabilization panic, which had made enterprises dependent on banks for their capital, each enterprise had tried
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to develop a close working relationship with a particular bank; it did not necessarily get all the money it needed or preferential terms from its primary bank, but it did get the one thing it could not do withoutaccess to capital in the first place because it was an established customer. The banks in turn became dependent upon the financial health of their heavily indebted priority industries and therefore took responsibility for them. The resulting cooperative arrangements looked very much like the old German banking groups, such as those of the Deutsche or Dresdner banks, with cross-shareholding between banks and affiliated industries (such shareholding is illegal in the United States).
MITI and the Japanese miracle Page 32