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Thus it was thanks to Ishibashi and Ikeda that the high-growth system, fed by both a domestic "consumer revolution" and a new apparatus for export promotion, was finally underway.
MITI's policy statement of September 1954 led to several new institutions on the export promotion front. One was the Supreme Export Council (Saiko* Yushutsu Kaigi), composed of the prime minister; the ministers of MITI, finance, and agriculture; the governor of the Bank of Japan; the president of the Export-Import Bank; and several business leaders. Its highly public function was to set export targets for the coming year and to publicize at the highest level of government the need to promote exports by all possible means. This cabinet-level council did not, of course, make its own calculations of targets. Instead, it assigned this task to the new Economic Planning Agency (a renamed and reorganized Economic Deliberation Agency). The chief task of the EPA was the writing of "plans" that would indicate to government and business alike the goals that the nation should be striving to achieve during a given term. Needless to say, the new EPA remained as bound to MITI as its predecessors had been, although during the 1960's it attempted (unsuccessfully) to assert some independence from its powerful patron. Table 17 summarizes the EPA's first three long-range plans for the economy as a whole.
65
Another new institution was the Japan External Trade Organization (JETRO), an international commercial intelligence service set up to overcome the problem of what Hirai called "blind trade." By "blind trade" he and others meant that during the mid-1950's Japanese manufacturers were operating without detailed information on what they should be producing for various foreign markets. They also lacked agents abroad to help them keep close tabs on changes in tariff rates and specifications for products, as well as to assist in publicizing and marketing new Japanese products. JETRO was set up to do these
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TABLE
17
Plans of the Economic Planning Agency, 19551960
Item
I
Five-year plan for economic independence
II
New long-
term economic plan
III
National income-
doubling plan
Date of plan
12/1955
12/1957
12/1960
Cabinet
Hatoyama
Kishi
Ikeda
Plan period
195660
195862
196170
Planned growth rate
5.0%
6.5%
7.2%
Realized growth rate
9.1%
10.1%
10.4%
a
a
Rate for 196167.
things. By 1975 it operated some 24 trade centers and 54 reporting offices in 55 different countries.
During the 1950's there were actually three JETROs. The first was set up in 1951 in Osaka on the initiative of the mayor, Akama Bunzo * (an old MCI cadre, 192547), and Sugi Michisuke, chairman of the Osaka Chamber of Commerce and Industry. Kansai industrialists and the individual prefectures put up the money for this early organization, and MITI merely approved its activities. In 1954 MITI took it over, provided more national funds for it, and greatly expanded its operations. Finally, in 1958, in recognition of the fact that national funding now heavily outweighed that of the prefectures and that MITI wanted to bring it more securely under the ministry's control, JETRO was transformed into a public corporation with all of its capital coming from the central government (Japan External Trade Organization Law, number 95, of April 26, 1958). From 1951 on MITI also began providing key executive personnel for JETRO, notably its managing director (from 1951 to 1954 he was Okabe Kunio, the recently retired director of MITI's Trade Promotion Bureau; and from 1954 to 1965, Nagamura Teiichi, who had ended his MITI career as vice-minister of the EDA). Virtually all of JETRO's overseas personnel are MITI transferees.
66
Except during its earliest days, when it was the brainchild of Osaka business leaders, JETRO has always been an operating arm of MITI. However, its post-1958 legal status as a public corporation rather than as an agency of the government has sometimes gotten it into trouble in the United States. During the late 1950's JETRO set up in Washington an organization wholly staffed by Americans called the United StatesJapan Trade Council but failed to register it under the Foreign Agents Registration Act of 1938. As a result of this oversight, in 1976
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the U.S. Department of Justice sued the Trade Council for civil fraud, charging that 90 percent of its funds actually came from MITI via the New York office of JETRO. The Council settled out of court. It also agreed to file as a foreign agent and to identify its publications as coming from Japanese government sources. The issue in this case was not JETRO's lobbying efforts on behalf of Japanese interests but possible American confusion over just whom, exactly, JETRO represented.
67
One of the more innovative aspects of the early JETRO was its funding. During the 1954 recession MITI raised the money for it from the import of bananas. Under the system of foreign exchange quotas, licenses to import bananas and sugar had become the most valuable in the country; supplies of both commodities were in such short supply that any amounts that could be brought to market commanded exorbitant prices. In the case of bananas, the government charged importers a tax on their profits and turned the proceeds over to JETRO. The organization's funds grew from slightly under ¥3 million in 1954 to over ¥100 million in 1955, all because of bananas. This scheme was similar to the sugar-link system for subsidizing ship exports. Between 1953 and 1955 MITI would issue import licenses for sugar to trading companieswhich were then selling Cuban sugar in Japan at from two to ten times the import priceonly if they had allied themselves with a shipbuilder and could submit an export certificate showing that they had used 5 percent of their profits to subsidize ship exports. For the two years it was in effect, the sugar-link system supplied some ¥10 billion to the shipbuilding industry. It ultimately had to be stopped because too many other industries wanted subsidies from the sugar and banana fees and because the IMF frowned on the practice.
68
The sugar and banana links were only two of the more spectacular tax breaks that Ministry of Finance and Enterprises Bureau officials invented in this era to aid industries and to help commercialize particular products. Nakamura Takafusa argues that tax exemptions replaced direct subsidies as early as 1951 as the main means by which the government pursued its industrial policy.
69
And it is certainly true that after Dodge cut off subsidies created through price differentials and RFB loans, MITI's Enterprises Bureau moved decisively into the tax field in search of alternatives.
The main obstacle to its work was the lingering influence of SCAP's special tax mission, which Prof. Carl S. Shoup of Columbia University had headed, and which included such experts as Jerome B. Cohen of the City College of New York. In the spring of 1949 the Shoup mission accompanied Dodge to Japan, and it delivered its report in September. The Ministry of Finance held the mission in high regard, and its
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advice on the proper system of national and local taxes in Japan still carried great weight during the period 1950 to 1955. In essence, Shoup had called for a simplification of the tax system that would aggregate all types of income of a taxpayer (whether an individual or a "juridical person") and eliminate to the greatest degree possible the special tax benefits that were contained in the Taxation Special Measures Law (Sozei Tokubetsu Sochi Ho *, number 15 of 1946) and its numerous amendments.
Some of Shoup's proposals, such as a locally controlled value-added tax, were simply too advanced for the time; businessmen were outraged at the thought that they might have to pay a tax even when operating at a deficit, and it was quietly abandoned. But Shoup's ideas were not necessarily hostile to the use
of the tax system to stimulate the economy. For example, his advocacy of a revaluation of assets in the light of Japan's inflation as a way to enhance the capitalization of enterprises met with a very favorable response and resulted in the passage of the Capital Assets Revaluation Law (Shisan Saihyoka* Ho, number 110 of April 1950). This statute literally created capital where none had existed before by a (downward) reassessment of industrial assets for tax purposes, a process that was conducted some three different times between 1950 and 1955.
But the main problem with the Shoup system was its hostility to the preferential treatment of strategic industries. Ikeda felt that Japan had to go in this directionalthough of course it meant an increasingly inequitable distribution of tax burdens throughout the societyand many of his Finance Ministry colleagues followed his lead because they preferred tax exemptions to subsidies on practical grounds. As Yoshikuni Jiro* (former director of the National Tax Agency and vice-minister of finance) has put it, taxes are better than subsidies, even though they are the same thing in theory, because a tax advantage is valuable only after an enterprise has done what the government wants it to do, whereas a subsidy is paid prior to performance and sometimes does not produce any improvement in performance.
70
Another reason to prefer tax breaks to subsidies is their lower political saliencea feature of some value to Japanese bureaucrats during the 1950's in light of the Showa* Denko* and other scandals associated with the early occupation era.
*
*
Randall Bartlett's comments are apropos: "Specific tax breaks offered to particular farms and industries act, in effect, like governmental subsidies to these agents. Rather than directly taking money from other segments of society and redistributing it to these firms through the budget process, these tax concessions merely leave them with greater financial resources (and lower costs). The resources which finance this subsidy are essentially the higher taxes paid by other agents. Because the use of taxes elimi-
(footnote continued on next page)
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Beginning in 1951 the Ministry of Finance, in consultation with the Enterprises Bureau of MITI and the Industrial Rationalization Council, proceeded very slowly with annual revisions of the old Taxation Special Measures Law, which resulted by the end of the decade in the complete dismantling of the Shoup system. Among the ministry's actions were the exclusion of up to 50 percent of a firm's income earned from exports (this was raised to 80 percent by the tax revision of 1955), rapid depreciation of designated investments for industrial rationalization, exclusion of strategic machinery from import duties, deductions for royalties paid for foreign technology, and many others. A "deliberation council" controlled by the Ministry of Finance supervised and approved these annual revisions. In 1959 this council, renamed the Tax System Deliberation Council (Zeisei Chosa * Kai), became a permanent organ of the prime minister's office. It, and not the cabinet or the Diet (which normally only rubber-stamps its recommendations), makes annual revisions in the tax system in the light of changing needs and economic conditions. The minister of finance chooses the council's members, and its proceedings are not open to the public. After the creation of the LDP the council became the Finance Ministry's main tool for attempting to prevent the party from politicizing the tax system.
71
Among the more creative of the special tax measures invented during the 1950's were the "reserve funds" set up to assist developing industries. These came in two types,
hikiatekin
, which are normal, accepted reserves of the sort found in most nations' corporation tax laws, and
jumbikin
, which the Ministry of Finance describes candidly as "those reserves which may not be duly justified by generally accepted accounting principles."
72
Both types of reserves can be excluded from taxable profits. The best-known of the hikiatekin is that used for lump-sum payments to employees when they retire. This reserve fund was authorized in 1952 following an incident in which an automobile repair facility run by the U.S. military at the Yokosuka naval base was closed down and all the employees fired without receiving any retirement allowance. In order to prevent a recurrence of the turmoil that surrounded the case, the government authorized re-
(footnote continued from previous page)
nates the necessity of actual government-to-producer payments and because it eliminates the necessity of annual review of the wisdom of such action, it is more desirable than a direct subsidy from the producers' point of view. It is also easier for the government to establish since the low visibility of the action will have less of a detrimental effect on consumers' perceived utility streams than would a more visible, direct subsidy."
Economic Foundations of Political Power
(New York: Free Press, 1973), p. 109.
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tirement reserves for all companies as well as for enterprises run by the U.S. forces.
73
The jumbikin are much more imaginative. They provide for tax deferment, not tax exemption, but used creatively they can effectively free a company of all taxes during a given year (as, for example, they did for Toray Industries, the big nylon manufacturer, during the early 1950's).
74
Various jumbikin include the price fluctuations reserve fund (
kakaku
hendo
*
jumbikin
, 1952), the water shortage reserve fund (
kassui jumbikin
, 1952), the breach-of-contract reserve fund (
iyaku sonshitsu
hosho
jumbikin
, 1952), and the abnormal hazards reserve fund (
ijo
*
kiken jumbikin
, 1953). By the 1970's reserve funds of the jumbikin variety had been authorized for bad debts, losses on goods returned unsold, bonuses, special repairs, warranties, overseas market development, overseas investment losses, losses incurred in the free trade zone of Okinawa, pollution control, specified railway construction projects, the construction of atomic power generating facilities, reforestation projects, losses due to stock transactions, repurchase of electronic computers (for computer manufacturing and sales companies), and guarantees of the quality of computer programs (for software manufacturers).
75
Most of these jumbikin had time limits on them, except that the 1957 tax revision lifted such limits on reserve funds for export losses.
76
Other comparable business tax benefits include special deductions from taxable profits for foreign sales of patents and know-how (55 percent); foreign sales of copyrights, except royalties from the showing of movies (20 percent); and payments for planning and consultation services in overseas construction projects (20 percent). The Enterprises Bureau of MITI has always been particularly ingenious on the tax front. In 1964, for example, when Japan had to end its tax deductions for income from exports because of its changed status in GATT, the Enterprises Bureau came up with a new scheme to reward exporters. It replaced export income deductions with changes in the way a company calculates its depreciation based on its previous export performance. The new system allowed a firm to augment its normal depreciation allowance during a given period by multiplying it by the previous periods' export transactions, divided by the previous periods' gross receipts, times 0.8.
77
Tsuruta estimates that for the period 1950 to 1970, the net loss of taxes to the treasury because of enterprise tax benefits of all kinds was nearly ¥3.1 trillion, or a 20 percent cut in the corporate tax rate (30.2 percent for the period 195559).
78
Another area of innovative tax policy was the elimination of excises
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on targeted products in order to make them easier for consumers to buy (and for producers to sell). The Ministry of Finance credits itself with nurturing the Sony Corporation through its formative years because it
lifted commodity taxes on transistor radios for the first two years after their market appearance and because it levied taxes on television receivers only in two-year stages as mass production brought down their prices (taxes went up as prices, calculated in terms of the price per inch of picture tubes, went down).
79
These government policies led to the Japanese phenomenon of all households buying the same goods during a particular periodfor example, the ''three sacred treasures" (television, washing machine, and refrigerator) of the early sixties, and the "three c's" (car, cooler, and color TV) of the late sixties. Annual reductions in the individual income tax rate in proportion to the growth of the economy, plus selective elimination of excises, thus fueled a made-in-Kasumigaseki "consumer revolution."
In its fully elaborated form, the late 1950's MITI system of nurturing (ikusei) a new industry (for example, petrochemicals) included the following types of measures: First, an investigation was made and a basic policy statement was drafted within the ministry on the need for the industry and on its prospectsan example is the Petrochemical Industry Nurturing Policy adopted by a MITI ministerial conference on July 11, 1955. Second, foreign currency allocations were authorized by MITI and funding was provided for the industry by the Development Bank. Third, licenses were granted for the import of foreign technology (every item of petrochemical technology was obtained on license from abroad). Fourth, the nascent industry was designated as "strategic" in order to give it special and accelerated depreciation on its investments. Fifth, it was provided with improved land on which to build its installations, either free of charge or at nominal cost. (In August 1955, MITI Minister Ishibashi approved the sale of the old military fuel facilities at Yokkaichi, Iwakuni, and Tokuyama to four newly created petrochemical companies despite howls in the Diet from two old military officers, Tsuji Masanobu and Hoshina Zenshiro*, in protest against the government's selling to the zaibatsu installations built with military blood). Sixth, the industry was given key tax breaksin the case of petrochemicals, exemption from customs duties on imported catalytic agents and special machinery, the refund of duties collected on refined petroleum products used as raw materials for petrochemicals, and special laws exempting certain users from gasoline taxes. Seventh, MITI created an "administrative guidance cartel" to regulate competition and coordinate in-
MITI and the Japanese miracle Page 37