MITI and the Japanese miracle

by Chalmers Johnson

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  His view ultimately prevailed, although the vertical bureaus were much better camouflaged after the reform of 1973 than they had been during high-speed growth.

  Other officials preferred their own euphemisms for what Amaya had spelled out. For example, Morozumi insisted that economic growth should continue but that what should now be stressed was not speed but the "utilization of growth" for the good of the whole society. He was concerned that the new MITI policy not become so oriented to social issues that it neglect the nurturing of new industries. He also recognized that too great a social welfare commitment by MITI would raise unmanageable jurisdictional disputes with other ministries. He also explicitly rejected any European or American notion of a static international division of labor; Japan, he said, would have to compete in the computer, aviation, and space industries, and he was not willing to concede these to any other country.

  28

  In light of all the comment on the "private-sector industrial guidance model," the ministry asked the Industrial Structure Council to recommend a new industrial policy for the 1970's. Not surprisingly, since he was in charge of the research efforts, the council confirmed and expanded many of Amaya's ideas. The new policy was published in May 1971. It acknowledged that high-speed growth had caused such problems as pollution, inadequate investment in public facilities, rural depopulation, urban overcrowding, and so forth. It proposed

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  adding two new standards to those already in existence for determining what industries were appropriate for the new industrial structure. In addition to a high income elasticity of demand and a high growth rate of productivity, these were an "overcrowding and environmental standard" and a "labor content standard." These new standards meant that the ministry would try to phase out industries that contributed to overcrowding and pollution and replace them with high-technology, smokeless industries ranking very high on the value-added scale. The objective was what was termed a "knowledge-intensive industrial structure" (

  chishiki

  shuyaku-kata

  *

  sangyo

  *

  kozo

  *), the main components of which would be machines controlled by integrated circuits, computers, robot development of ocean resources, office and communications machinery, high fashion (including furniture), and management services such as systems engineering, software, and industrial consulting. In order to implement and administer these policies, a complete reform of the ministry was also recommended, which Vice-Minister Morozumi (June 1971 to July 1973) undertook to carry out.

  29

  If during the spring of 1971 the Industrial Structure Council's proposals seemed somewhat visionary and long range, before the summer was over most of the conditions on which they were predicated would be outdated. Two MITI ministers, Ohira* and Miyazawa (November 1968 to July 1971), had exhausted their usefulness in trying to solve the Japanese-American textile dispute. In July 1971 Prime Minister Sato* asked the LDP faction leader Tanaka Kakuei to take over and give it a try. Tanaka was a party politician but with a difference. Not only was he not a former high-ranking bureaucrat, he did not even have a university education. He was a self-made millionaire in the construction, railroad, and real estate businesses; and he had been a member of the Diet from his native Niigata prefecture since 1947, when he was first elected at the age of 29. Ten years later Kishi had appointed him postal minister, which made him one of the youngest cabinet members in Japan's history, and in 1962, when he was 44, Ikeda named him minister of finance (July 1962 to June 1965).

  After performing well in that critical post, Tanaka went on to become secretary-general of the LDP, where he won Prime Minister Sato's* respect for his skill in managing two general election victories for the party (January 1967 and December 1969). At the Ministry of Finance and subsequently at MITI he became known as an activist minister, one who told bureaucrats what he wanted done, used them as his own personal brain trust, and often won their respect and loyalty because of his intelligence and generosity.

  30

  He was well known

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  for his unusually sharp memory, and the press nicknamed him the "computerized bulldozer." He also had a lot of money of his own, received more of it because of his powerful positions within the party and government, and spent it effectively to enlarge his faction in the Dietall of which ultimately led to his downfall.

  Shortly after Tanaka took over at MITI, the "Nixon shocks" occurred. It is unclear to this day whether President Nixon and National Security Adviser Kissinger were retaliating against Prime Minister Sato * because of his failure to deliver on the textiles-for-Okinawa deal, or whether they simply overlooked Japan in the midst of their other troubles (Kissinger has acknowledged that it took him five years to gain some understanding of Japanese political processes).

  31

  Nixon and Kissinger did feel that they had reason to be irritated with Japan: capital liberalization was proceeding at a snail's pace, demands that Japan revalue its obviously undervalued currency were consistently rebuffed, the Vietnam War was causing the American balance of payments to hemorrhage, the textile dispute simmered on, and the American press was becoming sharply critical of Japan (see, for instance, the

  Time Magazine

  of March 2, 1970, on Japan's "hothouse economy," and the

  Business Week

  of March 7, 1970, on "Japan, Inc.").

  Whatever the case, in July 1971 the Nixon administration unveiled its basic shift in United States' policy toward the People's Republic of China without coordinating this démarche in any way with its leading East Asian ally; and on August 16, 1971, it suspended convertibility of the U.S. dollar into gold and put a 10 percent surcharge on imports into the American market. On August 28, 1971, the Bank of Japan cut the yen free from the exchange rate that Dodge had created in 1949; and on December 19, 1971, following conclusion of the Smithsonian agreement ending fixed exchange rates, revalued the yen upward by 16.88 percent to US$1 = ¥308. Even before these dramatic developments, Japanese analysts were publishing books on the "Japanese-American Economic War" and saying that "the age of Japanese-American cooperation will never return." This turned out to be vastly overstated, but no one knew that during 1971 and 1972.

  Tanaka capitalized brilliantly on the Nixon shocks. He openly championed Japanese recognition of Pekinghis slogan was "Don't miss the boat to China"and this ruined Prime Minister Sato's* chances of continuing in office. It also effectively blocked Sato's intended successor from becoming prime minister: Fukuda Takeo had suffered the misfortune of being appointed Foreign Minister only a fortnight before the dramatic shift in Washington-Peking relations. (The Chinese communists indirectly helped Tanaka by launching a strident cam-

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  paign against Sato *, claiming that he was attempting to revive Japanese militarism, and stating that they would not deal with him or anyone associated with him as Japanese prime minister.)

  On October 15, 1971, Tanaka adroitly ended the textile dispute by giving the Nixon administration what it wanted while also coming up with a ¥200 billion "relief program" for the Japanese textile industry (including governmental purchase of surplus machines, compensation for losses in exports, and long-term low-interest loans for "production adjustment" and occupational change).

  32

  Tanaka also offered the country new leadership on the overcrowding problem. Following the second Amaya thesis of 1969, the ministry had set some of its bright young officials to investigate the seriousness of that problem. They discovered that fully 73 percent of the nation's total industrial production was concentrated in a narrow belt along the east coast, and that some 33 million people lived within 30 miles of the three largest cities (Tokyo, Osaka, and Nagoya). This meant that 32 percent of the nation's population was living on 1 percent of the land area.

  They also came up with such startling statistics as the fact that during rush hours Tokyo's
traffic moved at only 5.6 miles per hour (2.5 m.p.h. along some routes), that the city had only 12 percent of its land area given over to roads (compared to 43 percent in Washington, D.C. or 23 percent in London), and that during the 1960's some 22 rural prefectures had suffered drastic declines in population (several communities in Tanaka's native Niigata prefecture were discovered to have all-female fire departments). To deal with these problems, MITI proposed a vast and very expensive program of industrial relocation, including building bullet-train networks all over the country, connecting Shikoku and Hokkaido to the main island through a system of monumental bridges and tunnels, and providing strong tax incentives to get industries to move out of the Tokyo-Kobe corridor.

  The official in charge of these plans was Konaga Keiichi, who from October 1969 to July 1971 was chief of the Industrial Location Guidance Section in the Enterprises Bureau. When Tanaka became MITI minister in July 1971, he appointed Konaga his personal secretary, and Konaga was the ghost writer for Tanaka's best-selling book

  Nihon

  retto

  *

  kaizo

  *

  ron

  (A plan to remodel the Japanese archipelago).

  33

  The book was published in June 1972, just a month before the LDP convention at which Tanaka planned to contest the party presidency (and, thus, the prime ministership) with Fukuda Takeo. A rewritten and spruced up version of MITI's original plan, it sold more than a million copies and helped ensure Tanaka's victory. On July 7, 1972, Tanaka moved from MITI to the prime minister's office, and he named

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  as MITI minister Nakasone Yasuhiro, another party politician, LDP faction leader, and last-minute ally of Tanaka's in the LDP election contest (the press suggested that a large sum of money had passed between them).

  The installation of the Tanaka cabinet seemed to mark a real turning point in Japanese politics. In contrast to the consistent domination of the government by former bureaucrats, Tanaka offered a cabinet made up of younger party politicians, including men who had experience in telling the bureaucracy what they wanted done, had no compunctions about blaming the bureaucracy for policy mistakes, and were "activist" in a way that ministers had not been since Ikeda's time. They were, however, so activist on one frontspending public moneythat they contributed to a revival of bureaucratic government following the oil shock.

  Tanaka accomplished many thingsabove all, the normalization of relations between Japan and China. But almost from the outset his administration led to serious inflationa period of what the public came to call "crazy prices." Tanaka's industrial relocation policy was not the primary cause, and many of his big construction projects were desperately needed in any case (even though some people charged that Tanaka's background as a construction industry tycoon gave him more than a political interest in them). The root cause of "crazy prices" was Japan's public finance system and the divided responsibility among politicians and bureaucrats for managing it. In this sense, crazy prices were as much a side effect of the high-speed growth era as overcrowding and pollution. By the end of Tanaka's rule the country was reviving terms not heard since the occupationeconomic control (keizai tosei *) and economic police (keizai keisatsu).

  34

  The problem was excess liquidity. The Ministry of Finance had never believed that Japan could actually be forced to relinquish its trade advantage in an undervalued currency, and the value it set in late 1971 for the yen against the dollar still left the yen considerably undervalued (the yen was not allowed to float until after 1973). Many firms, however, were doing business on the basis of an internal, more highly valued exchange rate and pocketing the difference. As the

  Mainichi

  noted, "From about the middle of 1972, Japanese industries had been conducting trade at the rate of ¥270¥280 to the dollar, and by selling the earned dollars to the Bank of Japan at a rate of ¥301 to the dollar, they earned an extra ¥20 per dollar."

  35

  In addition, the government-sponsored investment boom of the late 1960's had once again left industry with considerable overcapacity. As a result, investment slumped throughout the first half of the 1970's, and because of

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  the danger of foreign protectionism the old relief valve of an export drive was also not as readily available as it had been ten years earlier. On March 31, 1970, the government even took the cosmetic step of changing the name of the old Supreme Export Council to the Trade Council. Continuing protectionism by Japan also caused problems in that the government prohibited importers from spending their cash on certain commodities, such as lumber, in order to protect domestic industries.

  Into this economic milieu the Tanaka government pumped money as the government had never done before, both because of its industrial dispersal program and because it believed it had to pay off industries that claimed to have been damaged by capital liberalization, the "Nixon shocks," or the settlement of the textile dispute. MITI itself acknowledges an increase of ¥234 billion in the general account and investment budgets during the month following the Nixon shocks of 1971 (allegedly to save medium and smaller enterprises), and Tanaka cowed the Ministry of Finance's normally independent Budget Bureau into giving him everything he wanted. On Tanaka's orders Budget Bureau Director Aizawa Hideyuki increased the fiscal 1973 budget over the previous year by some 24.6 percent.

  36

  As John Campbell argues, "The major real effect of [Tanaka's dispersal] plan seems to have been simply to provide a justification for high spending, allowing the Liberal Democrats and even the Ministry of Finance to throw a cloak of virtue and high purpose over a budget which, in the final analysis, was little more than the largest pork-barrel in the history of Japanese public finance."

  37

  The resultant inflationary conditions resembled nothing so much as the price spiral during World War I that led up to the rice riots. Again, just as in 1917 the general trading companies were in the forefront of the speculative boom. Above all other enterprises, the trading companies had too much cash sitting idle and no place to spend it. They began investing in land, which caused real estate values to appreciate in an unprecedented manner. For example, Mitsubishi Trading Company purchased the old premises of the NHK broadcasting station in the heart of Tokyo for ¥6 million per square meter, several times higher than the officially valued price, which brought a wave of criticism down on the trading company's head. Still, it had the money, and real estate was the best hedge against inflation.

  38

  Serious political problems developed when the general trading companies began to speculate in daily necessities and hold them off the market in anticipation of further price rises. Just as in 1917 the press and the public began to suspect that cornering a market (kai-

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  shime) and holding goods off the market (urioshimi) were the root causes of the crazy prices. When during the second half of 1973 steel prices shot up, criticism began to focus on monopolies and cartels, which were supposed to be illegal but were known to be flourishing under the protection of MITI's administrative guidance. Many consumers' groups began to argue that the "private-sector industrial guidance model" boiled down to a "zaibatsu guidance model," the avoidance of which had been the original justification during the 1930's for turning industrial guidance over to the government.

  On March 10, 1973, the new Price Regulation Section of the Economic Planning Agency introduced a draft law in the Diet entitled the "Temporary Measures Law Against the Kaishime and Urioshimi of Daily Life Commodities" (Seikatsu Kanren Busshi no Kaishime oyobi Urioshimi ni tai suru Rinji Sochi ni kan suru Horitsu *) to give the government new power to control prices. The debate over this law brought forth criticism of MITI and of big business every bit as devastating as that at the time of the "pollution Diet." The Diet passed and began to enforce the law (number 48) on July 6, well before the oil crisis complicated these problems.

  39

  It was a
lso right in the middle of the period of "crazy prices," and only three months before the first oil shock, that MITI unveiled its organizational "new look." Through a basic rewriting of the MITI establishment law (number 66 of July 25, 1973), Minister Nakasone and Vice-Minister Morozumi reshuffled the ministry in a way intended to placate its critics, allow it to deal with the new problems, and protect its proven capabilities. It was the first comprehensive revision of MITI's structure since 1952 and was known within the ministry as the "reform of the century."

  In essence Morozumi retained both the International Trade and Trade Promotion bureaus but renamed them; changed the name of the Enterprises Bureau to the Industrial Policy Bureau and gave it new sections for Industrial Structure and Business Behavior; merged the old Light and Heavy Industries bureaus into a new Basic Industries Bureau (metals and chemicals combined); created a new Machinery and Information Industries Bureau that put electronics, computers, automobiles, and general machinery under one administration (we shall return to this grouping later); transformed the old Textiles Bureau into the Consumer Goods Industries Bureau; and set up a new external agency, the Natural Resources and Energy Agency (NREA), which combined the administration of petroleum, coal, energy conservation, and public utilities (including nuclear power generation)

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  into one powerful unit. (Appendix B includes a chart of MITI's "new structure," or "face lift," as some critical journalists put it.)