MITI and the Japanese miracle

by Chalmers Johnson

  SCAP does not appear to have realized how long the issue of industrial property rights had been a bone of contention between Japanese and foreign firms. The problem went back at least to the Firestone Rubber Company's suit of 1933 against Japan's Bridgestone Rubber Company, founded in 1931, because of the similarity in their names (Bridgestone won the case when its founder, Ishibashi Shojiro*, demonstrated that "bridgestone" was a literal translation of his family name). In 1949 these issues were still highly salient because the government had extended all prewar patents issued to foreigners (Japanese patents normally run for 15 years, American patents for 17 years), and because the du Pont Company was just then charging Toray Textiles with infringing on its patent for Nylon 6 (this was settled out of court, and du Pont and Toray became partners).

  52

  Under the AML many foreign companies concluded not just that they could not protect their know-how and trade secrets in Japan (Japanese law had never provided protection against "breach of trust" with regard to know-how), but that even patent-licensing agreements would not be honored. Most refused to sell their patents until the law was clarified. Thus, to promote economic recovery, SCAP authorized the first formal amendment to the AML itself (law number 214 of June 18, 1949), which liberalized the provisions covering patent and exclusive agent contracts and allowed foreign corporations to acquire stock

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  in Japanese firms. This amendment of course also spurred MITI to enact the Foreign Capital Law in order to give the Japanese government control over who licensed what patents and how much they paid for them in royalties.

  These various challenges to and changes in the AML were all preliminary to MITI's actions of 1952. As noted in the preceding chapter, from 1946 on MCI, the ESB, and their subsidiary public corporations (kodan *) exercised absolute control over all commodities in the domestic economy under the terms of the Temporary Materials Supply and Demand Control Law. This lawapproved by SCAP as an emergency replacement for the wartime National General Mobilization Lawwas due to expire on April 1, 1948; but SCAP extended it for two more years because of the continuing shortages and consequent need for rationing. In 1950, when the government wanted to extend it again, SCAP balked: "To SCAP this proposal looked very much like a bid by the Government to continue the controls system as a government institution instead of ending it."

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  However, SCAP finally went along with a one-year extension because the Japanese feared that abandoning the materials supply-and-demand plans would destabilize the economy. During April, 1951, the effects of the "truce recession" that followed the beginning of negotiations in Korea were just being felt, so SCAP extended the law for yet another year. But SCAP and Yoshida were both determined to let it lapse on April 1, 1952.

  MITI has often contended that its acquiescence in the expiration of the Temporary Materials Supply and Demand Control Law demonstrated that it is a more liberal and less control-oriented ministry than either Finance or Agriculture, whose control laws (over the banks and rice production) have never ended.

  54

  Professor Maeda, on the other hand, believes that the expiration of the Supply and Demand Law merely ushered in a "second control era" based on MITI's use of the foreign exchange budgets to carry out its policies, a phase that lasted until 1964.

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  Whatever one thinks about this issue, the fact that the law was coming to an end in the spring of 1952 had a major unsettling effect on several industries, particularly those in which there were many firms, strong competition, and damage due to the decline in American procurements. Under these circumstances MITI took its first totally independent action as a new ministry. On February 25, 1952, it informally advised ten big cotton spinners to reduce production by 40 percent, and the ministry assigned quotas to each individual firm. To enterprises that rejected this "administrative guidance," MITI mentioned (again verbally and informally) that foreign currency al-

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  locations for their next month's supply of raw cotton might not be available. This was the first postwar instance of a famous Japanese institution, the MITI

  kankoku

  sotan

  * (advice to limit production), and of the inevitable government-organized cartel that followed in its wake. Similar kankoku sotan* were issued in March and May for rubber and steel. The FTC said that MITI's actions were illegal, but the ministry replied that the Antimonopoly Law did not cover informal advice from the government, and it persisted in its policies.

  Thus was the issue joined. As soon as the occupation ended in April, MITI introduced in the Diet two lawsthe Special Measures Law for the Stabilization of Designated Medium and Smaller Enterprises (number 294 of August 1, 1952) and the Exports Transactions Law (number 299 of August 5, 1952)both of which authorized MITI to create cartels among small businesses as exceptions to the Antimonopoly Law. They were the precedent for many such laws to comeand for the revision of the AML itself in 1953, the first such revision by an independent Japanese government.

  Throughout 1953 both the Steel Federation and the Federation of Economic Organizations petitioned the Diet (some say they also bribed Diet members) to permit cartels for businesses in recession or businesses trying to implement rationalization plans. MITI's position, according to its annual reports, was that it respected the intent of the original AML but had found that in practice it led to the excessive fragmentation of industries and stood in the way of capital accumulation in order to enhance international competitiveness. In its proposed amendment to the AML, MITI asked for the power to approve "cooperative behavior" (

  kyodo

  *

  koi

  *, the new euphemism for cartel) to limit production and sales for depressed industries and to lower costs and promote exports for industries undergoing rationalization. Such "cooperative behavior" was to include the sharing of technologies, the limiting of product lines, the joint use of warehouses for raw materials and finished products, and joint consultations on investment plans. On September 1, 1953, the Diet amended the AML (law number 259) to permit so-called depression and rationalization cartels, and it also abolished SCAP's Trade Associations Law. The Tokyo correspondent for the

  New York Times

  wrote that ''hardly a vestige now remains of the anti-trust measures forced upon the Japanese during the occupation of General of the Army Douglas MacArthur."

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  In the years that followed MITI kept up the pressure on the FTC and the AML, although neither ever did disappear completely. In 1955 MITI amended the Exports Transactions Law (now called the Export-Import Transactions Law, number 121 of August 2) to make the

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  cartels compulsory for all small exporters and to strengthen the general trading companies. During that same year it also abolished the occupation-era Law Prohibiting Excess Concentrations of Economic Power. During 1956 the ministry began its sponsorship of a long series of "industry laws" that provided for exceptions to the AMLincluding, for example, the Textile Industry Equipment Special Measures Law (number 130 of June 5, 1956), the Machinery Industry Promotion Special Measures Law (number 154 of June 15, 1956), and the Electronics Industry Promotion Special Measures Law (number 171 of June 11, 1957). And in June 1958 MITI caused the FTC to approve its plan for a "public sales system" (

  kokai

  *

  hambai seido

  ) for the steel industryan ingenious system of price rigging invented by the old MCI cadre Inayama Yoshihiro, then a director of Yawata Steel, and Sahashi Shigeru, then the deputy director of the Heavy Industries Bureau.

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  It seemed to some that the FTC would approve anything short of piracy if MITI said it was necessary for Japan's rapid economic growth.

  In fact, MITI judged the time was ripe to get rid of the AML altogether. From October 1957 to February 1958 the Enterprises Bureau sponsored a cabinet-level deliberation council on the future status of the AML. Professor Nakayama Ich
iro* chaired it. The council stated in its final report that "the stipulations of the AML do not necessarily conform to the proper operation of our country's economy," and that "the public interest is not best served by the legal maintenance of a free competitive order." The council recommended a new law that would allow for the "coordination of investment" and that would encourage mergers to overcome ''excessive competition" among the banking keiretsu.

  The new law was introduced in the Diet in October 1958, but it "got lost" in the turmoil surrounding the Kishi government's attempts to revise the police duties law. The following year, according to MITI, interest in abandoning the AML "fell asleep under the pleasant clouds of the Iwato boom."

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  After that the situation began to change subtly. The FTC did not regain its earlier powers, but it stopped losing what powers it had left. Until about 1958 the country was united in its belief that MITI's measures were necessary to regain national economic independence. After that time divisions over the issue began to appear. Most of MITI's subsequent innovations were based on administrative guidancefor example, the coordination of investment that was implemented after the failure of Sahashi's Special Measures Law for the Promotion of Designated Industries (discussed in the next chapter). The FTC continued in existence and finally, during February 1974, it

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  brought its first ever formal complaint against a restraint of trade (discussed in Chapter 8).

  Antitrust legislation is a controversial subject. Western theory asserts that it is an indispensable tool of industrial policy in order to maintain competition. Former MITI Vice-Minister Sahashi Shigeru has argued, on the other hand, that Japan's industrial policy, which is hostile to antitrust legislation, has produced higher levels of both competition and growth than the economies of Japan's Western critics.

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  From the point of view of the history of MITI, the major significance of the 1953 reform of the AML was that it almost completed MITI's ensemble of industrial-policy tools. The ministry now had under its control foreign exchange, foreign capital, cartels, banking keiretsu, industrial location, and direct government finance, plus the whole range of activities of the Industrial Rationalization Council. It was almost ready to put the high-growth system into operation, but it still needed some innovations on the tax front and political backing for its particular point of view. It was the harsh recession of 1954 following the Korean War that provided the opportunity to acquire both. As Kakuma has observed, the recession following the special procurements boom was as important as the Korean War itself to Japan's economic development; its influence has too long been unrecognized.

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  During the four years that followed the outbreak of the Korean War in June 1950, the United States pumped some $2.37 billion worth of special procurements into the Japanese economy. This factor, plus the effects of the rationalization campaigns in putting people back to work and of the euphoria that followed the end of the occupation, led to a major consumption and investment boom throughout 1952 and into 1953. Imports of consumer goods and industrial machines skyrocketed. By the end of 1953 Japan was showing a deficit of $260 million in its balance of payments, and the prospects for 1954 looked even worse. Inventories had grown very large, but export sales were sluggish because of the comparatively high prices of Japanese goods and the slowdown in the growth of international trade following the Korean War. The Ministry of Finance and the Bank of Japan had no choice but to tighten credit and cut governmental expenditures, including disbursements from FILP and loans from the Development Bank. Their squeeze on credits and imports caused the recession.

  At MITI Minister Okano Kiyohide (May 1953 to January 1954) ordered the International Trade Bureau to cut the foreign currency quotas for the import of food, chemicals, medicine, and textiles from over $8 million during the period April to September 1952, to $4 mil-

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  lion for AprilSeptember 1953. In October 1953 he abolished the quota for these imports altogether, which immediately caused the closing of hundreds of stores in the Tokyo area dealing in consumer goods and led to the reappearance of black markets. Under these circumstances many bureaucratic organizations began to think about how to overcome Japan's dependence on U.S. special procurements, and even Prime Minister Yoshida had to recognize that his piecemeal approach to the economy was not working.

  The first important plan came from the Economic Deliberation Agency, where MITI Minister Okano (a former president of the Sanwa Bank) was serving concurrently as director-general and Hirai Tomisaburo * of MITI was working as his deputy director (May 1951 to November 1953). Known both unofficially as the "Okano Plan" (Okano koso*) and by its formal title of "On Making Our Economy Independent" (Waga kuni keizai no jiritsu ni tsuite), the plan outlined a new effort to expand exports. However, in order to do this Okano and Hirai called not just for more rationalization campaigns but also for efforts to restore economic ties with Southeast Asia, a rationalization of the tax system, and a vigorous program to develop import-substitution industries.

  The Okano Plan also reflected the view within MITI that the only way to break out of Japan's inevitable balance of payments constraints was through "heavy and chemical industrialization," by which was meant the building of an industrial structure whose export products would have a much higher income elasticity of demand than Japan's traditional light industries. Income elasticity of demand refers to the ratio of the percentage change in the quantity of a product demanded to the percentage change in the income of a group of purchasers. Okano and Hirai were among the first to recognize that as a people's income goes up their demand for food and textiles changes very little but their demand for products such as appliances and automobiles increases proportionally. Their conclusion, even though it flew in the face of Japan's so-called comparative advantages (chiefly a large, cheap labor supply), was that these products were what Japan should be manufacturing if it ever hoped to break out of its dependent position.

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  Prime Minister Yoshida rejected the Okano Plan out of hand, not because of its contents but because it was an instance of "planning," which he felt was appropriate only for socialist countries. Okano left the government, and Hirai returned to MITI as vice-minister (November 1953 to November 1955). But during 1954, as the recession continued and worsened, the ideas of the Okano Plan reappeared in

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  many forms and places. Yoshida was beginning to lose his grip on the Liberal Party, and the man he chose to succeed Okano, Aichi Kiichi, was both an old associate of Ikeda's in the Ministry of Finance (he was Banking Bureau director during the period of zaibatsu dissolution) and a much more influential politician than Okano had been.

  On September 6, 1954, Aichi and others in the government led the cabinet into adopting a "Comprehensive Policy for Economic Expansion" (Keizai Kakudai Sogo * Seisaku Yogo*), and this in turn provided MITI, later the same month, with the authority to issue its own fundamental statement of strategy, entitled "Outline of the New International Trade and Industry Policy" (Shin Tsusho* Sangyo* Seisaku Taiko*).

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  Both of these documents were upgraded versions of the Okano Plan. Finally, in December the Yoshida government fell from power, and Yoshida's rival, Hatoyama Ichiro*, became prime minister. He in turn brought Ishibashi Tanzan back into the government as minister of MITI. The ministry's days of political oblivion were over; from now on the minister of MITI would be one of the most powerful men in the governmenthis position one of the three indispensable stepping stones to the prime ministership itself (the other two are Finance and Foreign Affairs).

  Hirai has testified that Ishibashi contributed the final theoretical formulation that all other planners had been missing. Ishibashi pointed out that the key to exports was, of course, the lowering of costs, and the key to that was enlarging production to effect economies of scale. But to enlarge production, Japanese manufacturers needed more customers. And where were they to be found? In the huge
potential market of Japan itself. The Japanese people had suffered from economic stringency for at least two decades; they were ready to buy anything offered to them at prices they could afford. Ishibashi's idea was that MITI should promote

  both

  exports and domestic sales. When problems in the international balance of payments arose, the government could curtail domestic demand and promote exports; when the problems of paying for imported raw materials eased, the focus should be on enlarging sales at home. If this could be achieved, Japan's factories could keep operating throughout all phases of the business cycle. In Hirai's words, Ishibashi "combined export promotion and high-speed growth into a coherent theory."

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  These ideas were very congenial to Ikeda Hayato. As a protégé of Yoshida's, he did not receive a post in the Hatoyama cabinets, which were transitional between the old Yoshida order and the new Liberal Democratic Party regime; the LDP was created on November 15, 1955. But in the succeeding cabinets of Ishibashi and Kishi, Ikeda served as

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  minister of finance and proceeded to execute Ishibashi's ideas with a vengeance. Through his famous ¥100 billion cut in the income tax of December 1956, Ikeda put money back in the hands of consumers and industrialists as it had never been done before and began the positive stimulation of a domestic market fully half the size of that of the United States. As one contemporary Japanese analyst has put it, "the only industries in which we have seen export increases induce a production incrementinstead of the other way roundare transistor radios and perhaps cameras. We do not regard these industries as very soundly based because demand for them, especially transistors, may be saturated too soon. Export increases of all our other products have been induced mainly by expansion for the domestic market."