MITI and the Japanese miracle

by Chalmers Johnson

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  The difference from the German pattern was that the Japanese government exercised much greater control over the "financial lineages" (

  kin'yu

  *

  keiretsu

  ), as they came to be called, than the German government ever did over its bank groups and syndicates. The "big six" among the Japanese conglomerates that came into being during the 1950's were those based on the Fuji, Sanwa, Dai Ichi, Mitsui, Mitsubishi, and Sumitomo banks. The Fuji Bank, for example, established financial ties with the old Yasuda zaibatsu, the old Asano zaibatsu (which contributed the Fuji group's steel company, Nippon Kokan*), and Ayukawa Gisuke's old Nissan companiesand after 1955 with its own trading company, Marubeni-Iida, formed by the merger of Marubeni and Takashimaya-Iida.

  A typical Japanese group includes a big bank, several industrial firms, and a general trading company. The bank plays the critical role during expanding business conditions by supplying capital to the members, and the trading company plays the critical role during contracting business conditions by importing raw materials on credit and fiercely promoting exports of products that cannot be sold domestically. SCAP broke up the old zaibatsu trading companies, but as soon as the occupation was over, MITI busily rebuilt them. Mitsui Bussan and Mitsubishi Shoji* were dissolved on November 30, 1947, and their liquidation completed on August 31, 1950. The largest and most successful Mitsui offshoots were the Dai Ichi, Sanshin, and Kyo-kuto* trading companies, while the leading Mitsubishi splinters were the Tozai*, Fuji, and Toyo* trading companies. By the end of 1952, the successor Mitsubishi companies had already recombined, but Mitsui took until the end of 1955 to come back together.

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  Ralf Dahrendorf's observation is to the point: "One of the decisive differences between industrialization in Germany and in the Anglo-Saxon countries lies in the role of banks, which themselves combined into mammoth financial empires at an early stage, carried by their credits and investments a considerable part of the weight of German industrialization, and at the same time facilitated the rapid growth of large industrial units."

  Society and Democracy in Germany

  (Garden City, N.Y.: Doubleday, 1967), p. 37.

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  MITI helped rebuild the trading companies by issuing laws that authorized tax write-offs for the costs of opening foreign branches and for contingency funds against bad debt trade contracts, and as early as 1953 the ministry's powerful Industrial Rationalization Council (discussed below) called for the "keiretsu-ization" of trading companies and manufacturers. This meant, in practice, that MITI would assign an enterprise to a trading company if it did not already have an affiliation. Through its licensing powers and ability to supply preferential financing, MITI ultimately winnowed about 2,800 trading companies that existed after the occupation down to around 20 big ones, each serving a bank keiretsu or a cartel of smaller producers.

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  The bank groups were the successors to the old zaibatsu, and they came into being for the same reason that the old zaibatsu had been fostered in the Meiji erato concentrate scarce capital on key developmental projects. However, they differed from the old zaibatsu in that their internal organization was much more businesslike than the old family-centered empires, and they competed with each other much more vigorously.

  This competition was ultimately caused by the nature of the banks' assets. As Abegglen and Rapp observe, "The financial risks associated with high debt levels are very much reduced in Japan by the fact that the central bank stands implicit guarantor of the debt positions of major Japanese companies."

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  It was this elimination of risk that above everything else made competition mandatory. And the risks for bank managers were even further reduced by powerful Finance Ministry controls over all interest rates and dividend rates, over the scope of a bank's operations, and over permission to open new branches, which meant that a banker really had only one thing to concentrate oncompetition for the expansion of a bank's share of loans and depositors. Under these conditions city banks did everything in their power to discover and come to the aid of growth industries and growth enterprises. Most important, each bank group had to have its entry in each new industry fostered by MITI or face being frozen out of the truly riskless sectors.

  The result of these pressures and incentives was the famous "one setism" of high-growth Japan, a term meaning that each bank group acquired or created within it a full complement of companies covering all the government-designated growth industries, regardless of whether it made business sense to do so. This competition became the bane of MITI's existence during the 1960's, when, for example, the ministry fostered four petrochemical companies but soon found that five more were building their own complexes as fast and on as big a

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  scale as the chosen leaders. Overproduction was inevitable, but this was not as serious a danger from the point of view of any one particular group (since MITI would have to organize a cartel to allocate market shares) as not being in on an important government-guaranteed industry at all.

  Controlled though the Japanese economy surely was, Ichimada's modest efforts to expand the supply of capital during the dark days of 1950 thus led to much fiercer competition among big businesses than is common in other open economies dominated by oligopolies. Even the government's purely indicative "plans" of 1955 and after (discussed below) fed the competitive fires by revealing the industries that the government planned to commercialize over the coming termthat is, those in which the risks would be close to nil unless Japan itself went under. It is not at all surprising, therefore, or a reflection on the competence of government planners (as some scholars seem to think), that the targets for the designated priority sectors in all EPA plans have invariably been wildly overfulfilled.

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  The second tier of the industrial finance system, the government banks created by Ikeda, came into being to supplement the city banks at the point where the Bank of Japan had to place ultimate limits on how much it could lend. Shortly after the outbreak of the Korean War, Ichimada declared that the overloans had in fact reached their limits.

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  It would never have been possible, in any case, for the city banks alone to have supplied all the capital needed for the rehabilitation of Japan, particularly during the early period of capital shortage and particularly for the nonexporting but key infrastructure sectors of coal, steel, and electric power. These were the industries that the RFB had served, and Ikeda clearly recognized the need to create a replacement for it. His problem was that the Government Section of SCAP and Dodge both derided the RFB as the cause of hyperinflation, and some SCAP purists remained hostile to anything that smacked of the "national policy companies" of the prewar and wartime eras. The RFB's primary weakness was that a good portion of its funds had come straight out of the general account budget; Dodge had eliminated that source through his absolute requirement that Japan maintain balanced and even overbalanced budgets. What other sources of capital for a new bank were there?

  There were two sources, primarily. The first was U.S. "counterpart funds" (

  mikaeri shikin

  )the yen proceeds from the sale in Japan of U.S. aid products; since Dodge's arrival, these proceeds had been carefully segregated into a special account rather than being combined with all foreign receipts, as was the case during the first half of

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  the occupation. The second source of capital was the funds from the government-operated postal savings system, which were held in trust accounts by the Ministry of Finance. The postal savings system for small savers had existed since the Meiji era, and it had experienced a checkered career of alleged scandals and misuse by the government for various political ventures; for example, the Terauchi government in 1917 and 1918 had used the people's savings to redeem the notorious Nishihara loans to China. During the occupation SCAP had restricted government use of the postal savings accounts
primarily to collateral for local bonds, but with the ending of inflation the accounts began to grow quite large as savers turned to the post offices rather than the private banks, which they did not fully trust. Ikeda wanted to open up the use of these funds to support the reindustrialization effort, and he wanted to see the counterpart monies spent for vital projects that the banks could not cover. He thus set out to negotiate these proposals with Dodge.

  Ikeda first proposed an export bank, and this idea went down much easier with the Americans than his second onea new version of the RFB. The lack of adequate banking facilities to handle longer-term loans than were commercially available for the export of capital goods was having a retarding effect on trade, and SCAP therefore readily agreed to the creation of the Export Bank of Japan (law number 268 of December 15, 1950). The bank was established on December 28, 1950, and opened for business on February 1, 1951. The initial capital of ¥15 billion came from U.S. aid counterpart funds and from general account budget appropriations. The prime minister appointed the bank's president, and the Ministry of Finance supervised the bank. In April 1952, when the occupation ended, the government renamed it the Export-Import Bank of Japan and gave it the additional task of lending Japanese importers the funds they needed for advance payments for commodity imports approved by MITI. By 1958 the Export-Import Bank's capital account had risen to ¥38.8 billion, and its total loans outstanding amounted to ¥60.3 billion.

  During the 1950's the largest proportion of Export-Import Bank loans went for exports, but not all of these truly left the country. A favored category of loans was for what MITI dubbed "plant" (

  puranto

  ) exports, except that the term "plant" in Japanese had come to have a special bureaucratic meaning. Shimamura Takehisa of MITI's Machinery Bureau (MITI 1938 to 1965, and after retirement a senior executive of Furukawa Electric) defined the wordsince there were so few actual exports of complete factories in the early periodto mean any export contract worth more than ¥10 million and with a delay in pay-

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  ment of six months or more. Most "plant exports" in the mid-1950's were actually ships, and a good many of them were only exported for a day. They were then resold back to Japanese shipping companies, the whole transaction having been subsidized by the Export-Import Bank. During the recession of 1954, as we shall see later in this chapter, MITI came up with an even more ambitious scheme for paying for ship "exports"it linked their manufacture and sale to the extremely lucrative sugar and banana importing business.

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  The age was one of quite inventive ad hoc arrangements.

  Of the six government banks established between 1949 and 1953 (plus two more that continued undisturbed from the prewar era), the most important for industrial policy was the Japan Development Bank (JDB), created by law number 108 of March 31, 1951.

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  Despite Ikeda's pleas to Dodge that the JDB be allowed to borrow from the postal savings accounts, Dodge refused. During 1951 Dodge authorized disbursements from the savings trusts for specific government projects, but because of SCAP's hostility to the JDB, the funds could not be assigned to cover such an RFB-like operation. SCAP provided all of the JDB's initial capital of ¥10 billion from counterpart funds, and it allowed the bank to be established only on condition that it would not be permitted to issue debentures, borrow funds, or grant loans to cover an enterprise's operating costs. Old occupation hands were still very wary of reigniting inflation. According to SCAP historians, the JDB "was to provide long-term equipment loans to private enterprise when the commercial banks were not in a position to assume the risks involved."

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  Within a year of its creation the JDB became one of MITI's most important instruments of industrial policy. The bank itself had been put under the Ministry of Finance's administrative jurisdiction, but MITI exercised a predominant policy-making influence because it was given the duty of screening all loan applications and making annual estimatesto be transmitted to the bank's board of directorsof the shortfall between available and needed capital. For example, for fiscal 1952 the Enterprises Bureau calculated that investments in the steel industry would require ¥42 billion, of which the steel firms could generate or borrow from their banks ¥31.5 billion, and that coal

  *

  The eight government banks existing at the end of 1953 were the Central Cooperative Bank for Agriculture and Forestry (1926), the Bank for Commerce and Industrial Cooperatives (1936), the People's Finance Corporation (1949), the Housing Loan Corporation (1950), the Export-Import Bank (1950), the Japan Development Bank (1951), the Agriculture, Forestry, and Fishery Finance Corporation (1953), and the Smaller Business Finance Corporation (1953). See Chalmers Johnson,

  Japan's Public Policy Companies

  (Washington, D.C.: American Enterprise Institute, 1978).

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  would need ¥40 billion, of which ¥27 billion could be raised from civilian sources. The rest was to be provided by the JDB.

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  In addition to these inputs to the bank, MITI also placed some of its important retired "seniors" on the JDB's board, beginning with Matsuda Taro*, the last MCI vice-minister and a member of the JDB board from August 1952 to June 1957 (Matsuda was succeeded by Yoshioka Chiyozo*, MITI 1934 to 1957, and Yoshioka was succeeded by Imai Hiroshi, MITI 1937 to 1962).

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  Almost as soon as the occupation ended, the government amended the JDB's charter (law number 224 of July 1, 1952) giving it authority to issue its own bonds and lifting the loan ceilings that SCAP had imposed. At the same time the Ministry of Finance modified all of the statutes covering the postal savings accounts, combining them into one large investment pool named the Fiscal Investment and Loan Plan (FILP; Zaisei Toyushi* Keikaku). This "second" or "investment" budget was constructed annually by officials of the Ministry of Finance and of the Industrial Capital Section of MITI's Enterprises Bureau. From 1953 on it became the single most important financial instrument for Japan's economic development.

  In order to keep FILP healthy and to ensure that people kept depositing their savings in the post office, the Ministry of Finance made the interest on the first ¥3 million (circa $15,000) that an individual deposited tax exempt and authorized highly competitive interest rates. The system became a rousing success, so much so that during 1980 the total amount of postal savings was estimated at nearly ¥55 trillion (four times the assets of the Bank of America, the world's largest commercial bank); this compares to ¥31 trillion in personal deposits with all city banks and ¥30 trillion in personal deposits with regional banks. (During the 1970's the postal savings system was to become the major means of tax evasion in Japan, since an individual saver could open as many ¥3 million savings accounts as there were post offices in the country, and the Postal Ministry claimed that it was simply unable to monitor the numbers of the accounts involved. To compound the problem, postmasters routinely recommended to savers whose accounts threatened to exceed ¥3 million that they open an account at another post office.)

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  When FILP was created, the Development Bank was authorized to borrow from its funds, and then to make loans to industrial customers who had been approved by MITI.

  From 1953 to 1961 the direct supply of capital by the government to industry (as distinct from its indirect supply via overloans) ranged from 38 percent to 19 percent (see Table 15). The JDB itself contributed 22 percent in 1953 and only 5 percent in 1961, but even as the size of

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  its loans declined relative to the expansion of city-bank funding, the bank retained its power to "guide" capital through the indicative effect of its decisions to support or not support a new industry. A JDB loan, regardless of its size, became MITI's seal of approval on an enterprise, and the company that had received a JDB loan could easily raise whatever else it needed from private resources.

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  Much more important than the figures for all industry during the period 195355 are t
he figures on the JDB's contributions to MITI's designated strategic industrieselectric power, ships, coal, and steel. Some 83 percent of JDB financing in this period went to these four industries, accounting for 23.1 percent of all investment in electric power, 33.6 percent in shipbuilding, 29.8 percent in coal mining, and 10.6 percent in new steel plants.

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  The enormous weight of government investment is the inspiration behind the most common expression employed by Japanese academics to characterize their own economynamely, "state monopoly capitalism" (

  kokka dokusen shihon-shugi

  )even though the Marxist flavor of this concept is more of a tribute to academic fashion in Japan than it is to any genuine Marxist idea. Professor Endo* explains that he means by the term the activities of the state to supply capital or other funds to industry on terms not available from the private sector and for specific, state-determined policy objectives. In his view FILP is the most typical institution of state monopoly capitalism, a configuration that he believes originated in Japan during the great depression, and that has continued uninterruptedly to the present time.

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  Although they would be unlikely to employ so ideologically loaded a concept and would certainly reject the Marxist implication that as state officials they worked for some propertied "class," the officials of MITI's Enterprises Bureau would have to admit that Endo has accurately described the functions of FILP. From 1953 on FILP has always been from a third to a half the size of the general account budget and has ranged from a low of 3.3 percent (1956) to a high of 6.3 percent (1972) of GNP. Until 1973 it was totally controlled by the economic bureaucrats and was not subject to the scrutiny or approval of the Diet. As Boltho says, it was "the main means of circumventing the rigid balanced-budget principles laid down after the war."