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Playing Tag with Japan

MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975

by Chalmers Johnson
Stanford University Press, 393 pp., $28.50

The Eastasia Edge

by Roy Hofheinz Jr., by Kent E. Calder
Basic Books, 296 pp., $14.95

As Japan inundates America with video cassette recorders, facsimile copies, microwave ovens, minicomputers, semiconductors, fiber-optic cables, robots, numerically controlled machine tools, automobiles, farm machinery, stereo components, musical instruments, specialty steel, and countless other goods, the American business community is taking oddly contradictory views of the “Japanese challenge.”

On the one hand, American business leaders are paying increasing lip service to the virtues of Japanese management. The business press daily praises such innovations as “quality circles” and “lifetime employment,” which are said to result in greater worker commitment, fewer strikes, better quality of products. American management consultants repeatedly advise long-term investments in new products and processes seen as critical to the success of Japanese firms. American business schools are returning to the “basics” of production management and engineering, which are thought to underlie the ability of Japanese firms to respond quickly to new business opportunities. And American businessmen talk of new Japanese-style “understandings” between labor and management as well as profit-sharing schemes, joint research ventures, divestment programs, “theory Z.” Meanwhile, with each passing month, American business loses more ground. Bankruptcies soar, inventories expand, the percentage of industrial capacity being used declines. The American economy is grinding to a slow, painful halt.

With its own man in the White House, on the other hand, the American business community has found it awkward to place blame for its present troubles on the administration in Washington. Not even poor Paul Volcker, trying desperately to keep a rein on the money supply, fits the part of a national villain. The frantic search for scapegoats therefore has come to focus, as it so often does in times of national crisis, on a foreign villain, in this case Japan. American business is outraged by Japan’s tariff and nontariff barriers, which allegedly keep out American-made goods; by its “dumping” of products in the American market allegedly at prices far lower than those at which they are sold in Japan; and by Japan’s refusal to spend a larger percentage of its national income on defense. The “Japanese challenge,” which had been the extraordinary cleverness and ability of Japanese managers, is transformed into the devious, high-handed, and inscrutable policies of the Japanese government.

Both caricatures reveal far more about the American business community, and about American economic ideology, than they do about the Japanese. This is made evident in two new books that examine the relationship between Japanese business strategies and industrial policies. Taken together, these studies are valuable for understanding what is unique about the relations between business and government in Japan and the implications for America.

MITI and the Japanese Miracle, by Chalmers Johnson, presents an illuminating history of Japanese industrial policy, beginning with the creation of the Ministry of Commerce and Industry in 1925 and continuing through the postwar period when the Ministry of International Trade and Industry became central to Japan’s remarkable growth. Johnson shows that what appears to many Americans as the “art of Japanese management” is in fact a particular set of national industrial policies emanating from MITI. These business strategies and industrial policies have evolved together, complementing each other.

Neither could exist without the other. A bold American manager who tried to guarantee his workers permanent employment, and to invest for long-term growth instead of short-term profits, would soon find his company bankrupt and himself without a job. To do these things managers need the benefit of tax and credit policies that ease the burden on their firms during troughs in the business cycle. And they need subsidies to guide the flow of capital away from industries that are becoming less competitive in world markets and simultaneously to promote the development of industries that have a better chance to compete. Similarly, any inspired Washington bureaucrat who sought to pick industrial “winners” and steer investment to them would be doomed to failure without the benefit of Japan’s intricate network of strategic market information, which links Japanese firms, industries, banks, and key government agencies.

This match between business strategies and national industrial policies in Japan is not owing to Japanese character or culture. As Johnson shows, many of the practices that are considered peculiarly Japanese today were not conspicuous until relatively recently. Social and industrial harmony, for example, is a postwar phenomenon; the prewar years were marked by bitter struggles between factions in the army and navy, between the military and the large industrial groups called zaibatsu, between tenant farmers and landlords. Trade unions were suppressed by the authorities. Lifetime employment had little meaning in an industrial system in which most factory employees were young female textile operators whose working lives were two to three years, and in which nearly half the population were poor peasants.

National industrial policies were barely able to maintain stability after the financial panic of 1927, the invasion of Manchuria in 1931, the fascist attacks on capitalism in the 1930s, the war with China from 1937 to 1941, the Pacific war, the economic collapse of 1946, the post-Korean War recession of 1954. Many people will remember a time, not so many years ago, when “Made in Japan” was synonymous with cheap, shoddy workmanship. (During the 1950s, the American authorities filed charges against a toy manufacturer from the Japanese town of Usa, whose products bore the label “Made in Usa.”)

During the past twenty-five years, however, Japanese industrial policies have concentrated almost exclusively on transforming the Japanese economy toward industries with higher value. In 1959 Japan exported mainly products such as clothing, shoes, and toys from unskilled, labor-intensive industries. Throughout the 1960s, Japan pushed its economy into the more capital-intensive industries—steel, motorcycles, and ships—and industries derived from petrochemicals, such as plastics and fibers. By the mid-1970s, Japan could compete successfully in industries requiring complex machinery—automobiles, home appliances, and television receivers. By the end of the 1970s, Japan’s exports shifted once again, this time toward high-technology products—computers, robots, semiconductors, office equipment, and numerically controlled machine tools. Rather than try to preserve its industrial base at any given time, Japan’s industrial policies have sought to propel it into the future, while at the same time casting off older industries in which Japan’s competitive position is declining.

Johnson explains how MITI accomplished this by astutely using industrial policies to accelerate market forces in the Japanese economy, thereby pushing Japanese businesses into becoming more competitive internationally. Apart from politically sensitive farm products, MITI has employed tariff and nontariff barriers only to protect “infant industries” until they reach a size that is competitive internationally. By contrast, the United States has consistently used its tariffs, quotas, “orderly marketing agreements,” tax breaks, and bailouts of various kinds to protect older industries that have long since become uncompetitive in world markets. These policies have retarded change in the structure of the American economy.

In every advanced nation, for example, the textile industry has become less productive as it has shifted production to the less well-developed countries with low-paid labor. Anticipating this change, Japanese firms that were making cotton, rayon, and synthetic fibers have switched to different products in Japan, and transferred their textile manufacturing to other East Asian countries, often in joint ventures with foreign companies. The US has been engaged for over twenty years in a desperate attempt to protect its domestic textile industry against foreign imports. The cost to American consumers of the tariffs on clothes alone is estimated to be $1.9 billion a year.1

Another example: in 1958 Japan decided to close down its high-cost coal industry and to base its industrial expansion on imported fuel, especially oil. MITI’s subsequent policy of discouraging nonessential consumption by allowing oil prices to rise with world market prices prepared Japan to deal effectively with the oil shocks of the 1970s. By September of 1980, only fifteen months after the second big rise in oil prices plunged its international payments into deficit, Japan had a $938 million trade surplus. The United States, by contrast, controlled the price of domestic oil throughout the 1960s, thereby encouraging consumption and rendering America wholly unprepared to deal with the oil shocks.

Shipbuilding was a key industry for Japan in the 1960s. But changes in the world economy made the industry less competitive. Johnson describes how MITI therefore created a cartel in shipbuilding under special depressed-industries legislation passed in 1977. Consulting with the industry, MITI scrapped over 40 percent of existing shipbuilding capacity. The United States, however, continues to spend over $500 million per year, and provide over $6.3 billion in loans and loan guarantees, in order to prop up its ailing shipbuilding industry. 2

In high-technology industries, MITI has been careful to preserve domestic competition by giving firms equal access to research projects carried on jointly by government and business, such as the recent effort to build very large-scale integrated circuitry. Five major Japanese firms were involved in that project, and MITI provided all with information and support. The Japanese government is even willing to ask firms to bid for its contracts—as when Nippon Telegraph and Telephone invited American firms to compete for contracts for communications equipment.

By contrast, United States government research projects have tended to go to giant American firms without competitive bidding—as with 64 percent of the dollar volume of Pentagon contracts last year.3 Indeed, the Pentagon often regards competition as a threat to the stability of large defense contractors. Only American manufacturers are now allowed to bid on many defense contracts and even nondefense work is allotted exclusively to American firms. AT&T’s recent decision to award a large fiber-optics contract to its Western Electric subsidiary rather than to Fujitsu, the lowest bidder, was strongly supported by the Federal Communications Commission and the Pentagon.

Japanese firms get long-term financing from local banks, which in turn co-ordinate their loans with the Bank of Japan, the Ministry of Finance, and MITI. This allows the firms to drop their prices suddenly when faced with declining demand or temporary over-capacity. Rather than match these low prices, American firms have charged Japanese firms with unfair “dumping” and seek duties and other sorts of import barriers against them.

America’s steel industry, for example, for decades set prices in lock step with US Steel, the industry leader. When Japanese steel makers reduced their prices in response to the steel glut of the late 1960s, the US steel-making oligopoly was unwilling to do the same and it lobbied for protection. This lobbying paid off. The Japanese first agreed to “voluntary” restrictions on steel exports in 1968, renewed them in 1971, and then in 1977 accepted the infamous “trigger price” mechanism. Between 1966 and 1972, however, the Japanese steel industry invested heavily in more efficient plants, increasing its assets by more than 23 percent a year, and it became the world’s most efficient steel producer during the 1970s.

Once the US steel industry gained protection against Japanese imports, it actually reduced its capital expenditures to an average of 4 percent growth per year. But between 1966 and 1972 the eight largest US steel producers had a 3.8 percent average return on assets, as opposed to a 1.8 percent return for the five largest Japanese steel companies.4 The secret of Japan’s success was not “dumping,” but long-term financing. A similar story can be told about American automobiles and consumer electronics, both of which are now protected behind tariff walls or “voluntary” export agreements.

  1. 1

    Morris E. Morkre and David G. Tarr, Effects of Restrictions on US Imports (US Federal Trade Commission; US Government Printing Office, June 1980).

  2. 2

    See Ira C. Magaziner and Robert B. Reich, Minding America’s Business: The Decline and Rise of the American Economy (Harcourt Brace Jovanovich, 1982), pp. 250-252.

  3. 3

    See Office of the Secretary of Defense, Military Prime Contract Awards: Fiscal Year 1981 (US Government Printing Office, 1982), p. 49.

  4. 4

    See Richard M. Duke, The United States Steel Industry and Its International Rivals: Trends and Factors Determining International Competitiveness (Federal Trade Commission, US Government Printing Office, November 1977).

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