JAPAN INC. AND ECONOMIC REFORMS IN JAPAN
headquarters Japan Inc. is a term used to describe the government-business partnership that scripted Japan's post-World War II economic success. It describes the cozy relationship between government and business based on "iron triangles" that unites the mutual interests of businessmen, politicians and bureaucrats sometimes at the expense of ordinary Japanese.
The success of Japan Inc. has been attributed export-driven trade surpluses, cheap credit, high productivity, long term planning, protectionist tariffs, government subsidies in key industries and cooperation between companies and the government. In recent years it has been blamed for Japan’s failures, namely the "three excessives” of the Japanese economy: excessive employment, excessive production capacity and excessive regulation.
Good Websites and Sources: Japan Inc. applet-magic.com ; Japan Inc. Comic Book amazon.com ; Japan’s Economic Reforms, A Guide for Other Nations (2005) tokyo.usembassy.gov ; Slow Pace of Economic Reforms (2001) jpri.org/publications ; Japan’s Fake Economic Reforms in Foreign Policy Magazine(2010) foreignpolicy.com/articles ; Japan’s Phoenix Economy in Foreign Policy Magazine (2002) foreignaffairs.com ; Structural Reform in Japan: Breaking the Iron Triangle in Foreign Policy Magazine (2004) foreignaffairs.com ; Book: The Enigma of Japanese Power by Dutch journalist Karel van Wolferen is regarded as a classic on Japan Inc.
Good Websites and Sources on Economics: Ministry of Economy, Trade and Industry meti.go.jp/english ; Ministry of Finance of Japan mof.go.jp/english ; Japan Economy News and Blog japaneconomynews.com ; Japan Economy Watch japanjapan.blogspot.com ; Japan Center for Economic Research jcer.or.jp/eng ; Japan Inc. Economic and Business News japaninc.com ; Google E-Book: Japan in the 21st Century, Environment, Economy and Society (2005) books.google.com/books
Iron Triangles, Kukei Tanaka and Japan Inc
Iron Triangles is a term that describes the relationship between business (particularly the construction industries), the bureaucracy and the Liberal Democratic Party (the LDP, Japan’s ruling party). The relationship revolves around LDP politicians getting government ministries to approve huge public works programs and grant the profitable contracts to construction companies that support the LPD and later employ retired bureaucrats. Construction consumes 40 percent of the national budget.
Tanaka Lee Hsien Loong, the Prime Minister of Singapore, told Foreign Policy magazine, “Japanese politicians, whether LDP or otherwise, have become too closely associated with vested interests. They depend on the farm vote, on the construction industry and on securing privileges so their constituencies will reelect them. And that system has become entrenched in politics, and it cannot be changed.”
Kakuei Tanaka a charismatic and corrupt prime minister who dominated Japanese politics in the 1960s and 1970s, is credited with creating Japan Inc. through the "Iron Triangle” patronage system. Tanaka was a populist hero who sang folk songs and appealed to ordinary Japanese. He was nicknamed the "Human Bulldozer" for his fondness for expensive public works projects including one system of roads that allowed him to drive from his office in Tokyo to his office in Niigata, a journey of four hours, making only three turns. Under his stewardship 10-year public works expenditures tripled from $37 billion to $105 billion.
The American writer Richard Katz wrote that Tanaka melded "the corruption of a Ferdinand Marcos and the interest-based politics of a Richard Daley." He made Japan Inc. into a global business powerhouse with his program to "Rebuild the Japanese Archipelago" and forged "Iron Triangles” between business, the bureaucracy and the Liberal Democratic Party. The cornerstone of Iron Triangle patronage system was getting government ministries to approve huge public works programs and granting the contracts to construction companies which employed retired bureaucrats and LDP loyalists and supported the LPD further by getting out the vote for the LDP in the areas where they were based.
Government and Japanese Companies
Japanese Diet Building The Japanese government is a major shareholder in many of Japan's largest companies. It owns two thirds of the stock in the Japan Tobacco company, which controls nearly 80 percent of the nations cigarette market, and two thirds of Nippon Telegraph and Telephone Corporation (NTT), which at one time was the largest company in the world and monopoly that controled the Japanese telephone and telecommunications market.
Japan’s economy is controlled by country's bureaucracy. Companies need licenses and government approval to do just about anything. The government tries to protect jobs and fund research in hopes of generating future pay offs. Japan’s constitution limits military spending to one percent of GDP. Money that might have gone to arms and weapons is instead invested in technology, businesses and public works projects.
Japanese business and politics is dominated by Zaikai, and elite group of politicians, businessmen and bureaucrats. Zakai is made up of the Sanken (Industrial Problems Study Council) and the broader keidanren (Federation of Economic Organizations). The "Prime Minister" of Zaikai is usually one of Japan's most powerful businessmen. Top businessmen, conservative politicians and powerful bureaucrats regularly hold breakfast meetings at Tokyo's plush Imperial and Okura hotels.
Japan Business Federation (Nippon Keidanren) is Japan’s most powerful business lobby. It was created in 2002 from a merger of the Japan Federation of Economic Organizations (Keidanren) Japan Federation of Employees’ Association (Nikkeiren). The first chief was Hiroshi Okuda, the CEO of Toyota.
Hiromasa Yonekura, chairman of Sumitomo Chemical Co., was named the head of Keidanren in 2010. A man with a strong international reputation, he has worked oo many overseas projects with Sumitomo and is well connected both at home and abroad.
Bureaucrats are not as influential as they once were as companies increasingly make more decisions for themselves and rely less on the government for help. In recent years there has been more discord between politicians, businessmen and bureaucrats over policy and more questions about bureaucrat’s decision-making.
Ministry of Finance in Japan
Ministry of Finance The Ministry of Finance (MOF) is arguably the most powerful organization in Japan. Employing 11,000 hard working bureaucrats, it takes care of the duties performed in the United States by the U.S. Treasury, Federal Reserve, Internal Revenue Service, Office of Management and Budget, Securities and Exchange Commission and numerous other agencies.
The Ministry of Finance oversees Japan tightly regulated economy. It is responsible for collecting taxes, issuing bonds, printing money, insuring banks deposits and countless other duties. It sets the budget, runs the banks through oral directive known as "administrative guidance," and defines policy that not only shapes and outlines the path of the Japanese economy but influences global trade in a number of key sectors.
The Ministry of Finance is an unpoliced bureaucratic organization that is accountable to no one---not the Prime Minister, legislators, company CEOs or bank presidents---and it freely meddles in the affairs of banks and other financial institutions. It has a cozy, incestuous relationships with the banks, financial industry and organized crime. After retiring many ministry employees, not surprising, get jobs in banks and securities firms.
One of the main problems with the Ministry of Finance is that it has two conflicting purposes. On one hand it is supposed to be a regulatory agency that keeps an eye on banks and major enterprises. On the other hand, it is a major shareholder in many banks and enterprises and has to look out for their interests.
The Japanese economy has long lived and died by the Ministry of Finance successes or failures. Its power has been diminished in recent years as its policies were ineffective in tackling Japan’s recession in the1990s and 2000s and a more freewheeling style of capitalism has emerged in Japan. The ministry has also been involved in some corruption scandals (See Corruption Under Government) and has been accused of having conflicts of interest.
Toyota headquarters Japanese companies have traditionally been joined together in keiretsu (webs of suppliers and interrelated companies) that share long-term business goals and hold shares in each other's companies. Keiretsu are basically cartels. They dominate everything from auto parts to agriculture to cosmetics. It is estimated that roughly half of the Japanese manufacturing companies belong to them. Some keiretsu are huge. Nissan's, for example included 1,000 companies and employs 10 workers for every one of Nissan's.
Nippon Steel is a good example of how Japanese enterprises are incestuously intertwined. In the 1970s, when it was the largest steel company in the world, with nearly 100,000 employees, its largest stockholder and lender was the Industrial Bank of Japan, In turn Nippon Steel was the second largest stockholder in the Industrial Bank. The Fuyo group was Nippon Steel's second largest lender and 3rd largest stockholder, while Nippon Steel was the Fuyo groups third largest stockholder. The Chairman of Nippon Steel was on the advisory board of at least a dozen of the country's banks, corporations and government ministries.
Letting a supplier or partner go bankrupt was as unthinkable as a parent abandoning a child. Banks were known for rescuing troubled companies. On the relationship with suppliers one Nissan executive told writer Steven Vogel, “If you just procure what is cheapest then what do you do about the cost of developing the next technology?”
The keiretsu system allows companies to think in the long term, take bigger risks, invest more and compete more aggressively without worrying quarterly profits. It also gives them the power to fix prices, impede imports and shut competitors out of markets by cutting off shipments from suppliers and convincing distributors not to accept their products. As cartels keiretsu were very effective over the years in keeping foreign imports out of Japan and were often the target of trade battles between Japan and the United States. Exchanging shares makes large companies immune to hostile takeovers and prevents large dividend payments.
Foreign companies have claimed that huge domestic profits made by companies like Fuji film using cartels to jack up prices allowed them undersell the competition abroad. They also claimed that cartels, in copper for example, became so large that could control prices and bidding.
The power of the keiretsu and Japan Inc is no what it once was. Keiretsu loyalties are breaking down as companies have become more concerned about the bottom line. During hard times, keirestu obligations can be a burden as large companies give loans and subsidize to help prop up their ailing subsidiaries.
Economic Reforms in Japan
Sizing up Japan's problems after the 1990s Recession, Tagart Murphy, a former banker and author of The Weight of the Yen, told Time: "Japan's problem is that the methods it used to run the economy since 1950 simply don't work now. Japan is not going to see growth until it overhauls the way the economy works."
A general theme of Japan's critics is that the cozy relations between Japan's large companies and the government no longer seems to work and Japan must open ups it markets to make the Japanese economy more efficient, responsive and competitive.
Some Japanese companies have made adjustments and are leaner, meaner and more competitive than ever. Other have stuck with their old ways and stagnated. Weak companies need to be allowed to go bankrupt to clear away money-losing enterprises that drag down the economy. Efforts are being made to make the Japanese economy more reliant on domestic demand rather that exports. Smokestack industries like cement, chemicals and paper are merging and shrinking their work force. Cartel have come apart as a consequence of tough economic times, tougher antitrust laws, and aggressive foreign competitors taking advantage of yen fluctuations and openings in the markets.
Deregulation in Japan
Some Japanese economists blame Japan's economic problems on government intervention in the private economy which have suppressed market forces to boost industrial output. In an effort to make the Japanese economy more efficient, troublesome licensing procedures have been discarded. This has made it easier to form new businesses, for foreign companies to enter Japanese markets and for foreigners to buy Japanese companies. Despite the protest of Japanese farmers, the Japanese government finally gave in to demand to allow foreign rice imports into the court so that foreign markets would remain open to Japanese exports.
Bank of Japan
Deregulation of the financial sector, known as the Big Bang, began in April 1998 partly as a result of the Asian financial crisis in 1997. Regulations on currency exchange were ended in 1998. Fixed commissions charged by brokerages were ended in 1999. The Ministry of Finance’s informal "guidance regulatory system---for banks was replaced with a system based on stricter rules backed up through inspections. Under the old system the ministry relied on banks to report problems rather than investigating them themselves.
The scope and speed of deregulations and reform has been small and slow. New laws made it easier to spin off, split up or reorganize bankrupt companies and helped bring in some sources of capital New accounting and disclosure rules forces companies to cut spending and reveal hidden debts.
In May 2009, the head of the BJP urged banks to reduced their stocks and holdings in Japanese companies and said their failure to do so could undermine the domestic economy, citing the risks and hardships caused when stocks fall in value.
Outsourcing, Downsizing and Moving Operations Overseas in Japan
Corporations increasingly have oriented themselves towards making profits, cutting costs and the bottom line rather than looking out for the welfare of their employees and other Japanese companies. Outsourcing, relying on foreign suppliers and and moving operations overseas have all become commonplace. Looking for ways to cut costs, Nissan, for example, started purchasing steel from South Korean manufacturers instead of more expensive Japanese suppliers.
Toyota, Toshiba and Sony and other corporation now have a large share of their production facilities outside of Japan, particularly in China. Japanese companies now manufacture more overseas than they export from home. Among the items that Japan imports are Honda cars, Sony televisions an Panasonic air conditioners produced in overseas factories, primarily in China and elsewhere in Asia. Hundreds of thousands of jobs in the United States are now tied to Japanese companies.
Laying Off Workers, See Economics, Labor, Labor, Unemployment, Unions
Hostile takeovers remain rare despite some well publicized ones. Business sometimes merge to cut costs and become more competitive or pool resources in specific projects and or products for the same reason. Occasionally foreign companies get a piece of the action as was the case with Renault and Nissan. Mergers and acquisition have traditionally been looked upon as gimmicky.
In 2007, laws were changed making it easier for companies to merge and launch takeover bids. The rule changes worried many Japanese companies that might be the target of hostile takeover bids from large foreign companies. The mid 2000s was a time when Japanese companies became increasingly interested in mergers and acquisitions themselves both at home and abroad.
American-Style Competitiveness in Japan
In recent years the "Japanese way" of management has been replaced by more international styles. Japanese companies are looking more and more at American companies for ways to improve their competitiveness and productivity.
One executive told the Washington Post, "I think sooner or later the harmony that was with Japanese companies for a long time will diminish, because enterprises have to make profits. Japanese people don't like intense cutthroat competition. I myself don't like it, but there is no other way in the future." If the system does not change "Japanese companies cannot survive."
Japanese companies are 1) looking more at short-term results as a measure of responsiveness to a quickly changing economy, 2) giving bonuses and salary increases based on performance, and 3) reducing the size of board of directors and including more directors from outside the company so that decisions can be made quicker and reflect a broader range of viewpoints.
Koizumi Reform Drive
Junichiro Koizumi, Japan’s prime minister in the early 2000s, promised to change the LPD's traditional pork barrel politics, privatize state monopolies, eliminate bridges-to-nowhere public works projects and liquidate bad bank loans. He talked about diverting tax revenues earmarked for road construction to other purposes; said he would find money for the pension and health care systems; and said regional government should decide which projects should be built rather that the national government.
Koizumi pledged to make four major reforms: 1) reform the pension system, which was stressed from a rising elderly population and declining revenues: 2) reform local government’s fiscal conditions: 3) reform the four road-related public corporations: and 4) privatize the three postal systems. Koizumi also promised abolish or privatize public corporations such as the postal services savings system that have underwritten much of the economic activity in the 1990s but were very unprofitable.
Koizumi cut state pensions, raised health insurance premiums, and changed laws to allow companies to hire more easy-to-lay-off temporary staff at lower wages. Heizo Takenaka, Koizumi’s economy czar, led a tough but successful effort to clean up the economy and change the way of doing business. His greatest success was cleaning up the banking system. Takenaka was unpopular with industry leaders, bureaucrats and lawmakers and was accused of running the show with a “dictatorial” governing style and not compromising or even consulting with the groups affected by the decisions he made.
Regulatory Reform in Japan
Faced with economic stagnation since the end of the bubble economy in the early 1990s, Japan has increasingly focused on regulatory reform as a driving force for growth. Since the mid-1990s the government has initiated a wide-ranging series of measures aimed at promoting regulatory reform in Japan’s economy, society, and government. The need for reform has been further emphasized by fundamental changes taking place in the social and economic environment in the early years of the new millennium, changes such as: even-faster-than-expected aging of the Japanese population, worsening environmental problems, acceleration of the information technology revolution, and evolution of the industrial structure due to economic globalization. [Source: Web-Japan, Ministry of Foreign Affairs, Japan]
“In 1995 the government formulated the Plan to Promote Deregulation, which included 1,091 deregulation items in the following 11 categories: (1) land and housing; (2) information and telecommunications; (3) distribution; (4) transport; (5) standards, certification, and imports; (6) finance, securities, and insurance; (7) energy; (8) employment and labor; (9) pollution, waste, and environmental protection; (10) dangerous materials, disaster protection, and public safety; and (11) other. This plan was revised in both 1996 and 1997, with the latter revision adding a twelfth category, education, and bringing the total number of items to 2,823. With the expiration of the time period covered by the 1995 plan, in 1998 the government established the Three-Year Program for Promoting Deregulation, which included new measures as well as not-yet-implemented measures from the previous plan. [Ibid]
“The goals of this three-year plan were to carry out a drastic structural reform of Japan’s society and economy, to create a free and fair socio-economic system that is fully opened to the international community and based on the rules of self-responsibility and market principles, and to shift emphasis in public administration from ex ante facto regulations to ex post facto monitoring of compliance with general rules. Three new categories’ competition policies, healthcare and welfare and legal affairs---were added to the 12 deregulation categories in the previous plan, and a total of 624 items were defined. This three-year program was revised in 1999 and 2000. [Ibid]
“In March 2001 the government defined the Three-Year Program for Promoting Regulatory Reform, with the term “deregulation” used in previous plan titles being replaced by “regulatory reform.” This program covered 554 regulatory reform items in 15 specifics fields, including law, finance, education, medical care, employment, distribution, and energy. It also included 104 cross-sector reform items covering areas such as information technology, the environment, competitiveness, standards certification, and qualification systems. In April 2001 the Council for Regulatory Reform was established as part of the Cabinet Office to act as an advisory body of the prime minister over a three-year term. The first two reports prepared by the council served as the basis for revisions made to the three-year program in 2002 and 2003. The 2002 revised program focused on the six areas of medical care, social welfare and childcare, employment, education, the environment, and urban redevelopment; and the 2003 revised program incorporated a new emphasis on facilitating the creation and optimal utilization of special zones for structural reform. [Ibid]
“The council’s final report, issued in December 2003, summarized the results of past reform efforts and set forth issues to be tackled in the future. From 2004, the discussion of regulatory reform within the government was handled by the Council for the Promotion of Regulatory Reform (2004-2007) and the new Council for the Promotion of Regulatory Reform (2007-2010); and since March 2010 that regulatory and systematic reform is being handled by the committee set up by the Government Revitalization Unit. [Ibid]
Special Zones for Structural Reform
Special zones for structural reform are specially designated geographical areas in which---as a result of the implementation of regulatory exceptions consistent with local characteristics---it is possible to carry out activities which are prohibited on a nationwide basis by laws and ordinances. Plans for such activities are to be compiled through the initiative of local governments and private sector corporations. The objectives of the zones are to revitalize regional economies through deregulation and to showcase successful examples of structural reform for possible later implementation on a nationwide basis. [Source: Web-Japan, Ministry of Foreign Affairs, Japan]
“The Bill on Special Zones for Structural Reform was passed in December 2002, and the system went into effect in April 2003. As of June 2011, the government had approved a total of 1,155 of these special zones. Included were special education zones in which private corporations are able to run schools and universities, special agricultural zones in which private corporations are able to engage in farming, and special international exchange zones in which visa regulations on foreign researchers are relaxed. [Ibid]
Financial Reform in Japan
Based on the concept of “free, fair, and global,” the Japanese government implemented radical reforms in the financial market---the so-called “Big Bang.” Regulatory reforms in this sector have been aimed at facilitating the participation of private investors in Japan. An amendment to the Securities and Exchange Law removed barriers between the banking, securities, and insurance fields, thereby enhancing the attractiveness, competitiveness, and vigor of the securities market. The ban on holding companies was lifted, and the scope of operations was enlarged for security houses and banks. [Source: Web-Japan, Ministry of Foreign Affairs, Japan]
“With the amendment of the Foreign Exchange Control Law that went into effect in April 1998, foreign exchange was totally liberalized. This enabled enterprises and individuals to freely transact deals and settle accounts with their foreign counterparts. December 1998 saw the implementation of a series of financial system reform laws that included provisions deregulating stock commissions and non-life insurance premiums, removing restrictions on over-thecounter securities derivatives, and permitting the sales of investment trust products in banks. Regulatory reform measures implemented since 2001 have enabled banks to do over-the-counter sales of a variety of insurance products. [Ibid]
Distribution Industry Reforms in Japan
The Large-Scale Retail Store Law was passed in 1974 to protect small independent retailers. Its restrictions were relaxed in three revisions that took place during the 1990s. The number of applications for opening large-scale stores jumped from 794 in 1989 to 1,667 in 1990, and peaked at 2,269 in 1996. The Law Concerning Measures by Large-Scale Retail Stores for Preservation of the Living Environment was enacted in 1998 and went into effect in 2000, replacing the Large-Scale Retail Store Law. The new law shifted the focus from protecting existing small stores to protecting the local living environment. [Source: Web-Japan, Ministry of Foreign Affairs, Japan]
“In 1996 the system regulating rice sales was changed from a restricted permission system to a registration system in which anyone can participate, and in 1999 the registration procedures were further simplified. Rules that cover the granting of licenses for liquor sales were greatly liberalized in 1993, and remaining population and distance criteria were eliminated in 2000. [Ibid]
Lack of Reforms in Japan
Ministry of Economy, Trade and Industry Reforms have come slowly. Rather than encourage bloated companies to restructure, and making it easier for people to change job, the government still provides subsidies to companies to keep workers who are no longer needed. There has been a reluctance to foreclose on bankrupt companies and weed out corrupt officials because they were regarded as necessary to get the country back on course.
In some cases, antitrust legislation intended to dismantle cartels and spur competition between different companies within specific industries such as concrete manufacturing has not led to lower prices but instead has produced more mergers among the companies so that prices can continue to be artificially high.
While Japan stagnated in the late 1990s and early 2000s, South Korea, which enacted bold reforms in the 1990s, grew. The dulled sense of emergency in Japan was called the Boiling Frog Phenomenon, a reference to the fact a frog does not jump out of a pot of hot water when water temperature is raised so gradually the frog's loses it s ability to react.
For a shrift from tradition egalitarian and collective business to culture to one that is more individualistic and creative will require changes in society as a whole, beginning with the education system.
Most of the efforts to thwart Koizumi’s reforms came from within his party, the LDP, and the bureaucracy by old timers who were linked with construction and real estate interests and wanted to protect their pet projects and their supporters. People in Hokkaido, which receives the largest proportional share of government revenues for construction projects, were particularly upset about the reforms.
The construction industry that Koizumi said he wanted to dismantle was in many was key to keeping the LDP in power. When a government advisory panel on privatizing public highway operators called for strict limits on the construction of new highway its chairman resigned and walked out. Some pundits said if Koizumi went through with his reforms he would dismantle the LDP the same way Gorbachev dismantled the Soviet Union.
There has been a lot of resistance to American-style economic reforms. The head of credit association in Hokkaido forced to inflict hardships on his customers to improve the economic health of his business told the New York Times, “We can’t just cut them off. Everyone would know about it. It would be very difficult for people who have have failed to live here.”
Image Sources: 1), 5), 7) Wikipedia 2), 9) Kantei, Office of Prime Minister 3), 6) Shugin House of Representatives site 4) Ray Kinnane 8) China Labor Watch
Text Sources: New York Times, Washington Post, Los Angeles Times, Daily Yomiuri, Times of London, Japan National Tourist Organization (JNTO), National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.
© 2009 Jeffrey Hays
Last updated March 2012