How Japan Realized Her "Impossible Dream": T.Murata

Fortunately, my home in Kochi on the island of Shikoku was intact, although the main part of the city had been seriously damaged by bombing on July 4, 1945. As a result, we had an unobstructed view of the whole city from our house. The reconstruc tion of Japan had to begin, so to speak, from "Ground Zero." Professor Murata has taught economics for many years at Yokohama Commercial College in Japan. He earned a master's degree at New York University, writing his dissertation under the late Ludwig von Mises. He has also translated sev eral of Dr. Mises' books into Japanese, includ ing, Human Action. Post-World War II Hardships and InBation (1945-1949) The soldiers and civilians who returned from the war aggravated the food and un employment situation. Production nation wide was in disarray. Of Japan's eighty millionor so people, close to 10 millionwere nonproducers, either in the military or on some other government payroll. Land re form, abolition of the peerage system, and the liquidation of big financialcombinations had overturned the entire prewar social structure. Bank deposits had been frozen; depositors could withdraw only a limited amount each month. The prewar privileged were hardpressed to survive, while some who had experienced hyperinflation and other calamities abroad had learned how to make a fast buck. There was a serious shortage of food. Farmers were more for tunate than most as they were able to trade their rice for jewels, furniture, kimonos, wedding costumes, or whatever, with those who were trying to supplement their insuf ficient rations.

In those postwar days, the Japanese could" escape" for a few hours by watching American movies. Beautiful American houses and appetizing food on the screen were the envy of the Japanese. "Catch up and pass America" became their goal. But at that time it seemed an "impossible dream." The government tried to cope with the shortages by printing money, Le., inflating. When prices rose because of the demands for commodities by the new money recipi ents, the government attempted to fix prices, at least of the major staples. The government's Price Control Board had to hire more clerks to keep pace with the increased applications from businessmen for price increases. But government con trols and government employment could not bring economic development to Japan. That would take the energy and genius of entre preneurs who were freed to compete on world markets. Eventually Japanese busi ness produced steel, refined oil, built ships, manufactured automobiles, and developed a 493 494 THE FREEMAN • SEPTEMBER 1994 wide range of consumer electronics goods.

Honda, Toyota, Nintendo, Sony, and Canon became household words throughout the world. Recovery Begins The Reconstruction Finance Bank (RFB), founded in January 1947, floated bonds, most of which were underwritten by the Bank of Japan, and loaned money to pro ducers of priority goods-food, coal, steel, ships, electricity, etc. The RFB's loans increased the production of coal, iron, steel, and rice, but at a high price: accelerated inflation. An American adviser, Dr. Joseph M. Dodge, visited Japan in February 1949; his aim was to stop the inflation. The "Dodge Line" he prescribed called for reducing subsidies, discontinuing the RFB bonds, and developing a government surplus. In flation subsided as a result and production began to revive. With the intent of encouraging economic development, the government restructured its Ministry of Commerce and Industry in May 1949, forming a new Ministry of Inter national Trade and Industry (MITI). MITI hoped to shape and direct Japanese produc tion by administrative regulations. It has had an impact on steel, oil, and trade.

However, its influence has not been com plete, and it has not always been beneficial. MITI's administrative regulations were not supposed to be binding but businesses gen erally felt compelled to go along "voluntar ily," or face possible "bureaucratic harass ment" later. Administrative guidelines could also be used as a barrier toderegula tion. Many production facilities had been re duced to ashes during the war. So new plants had to be constructed and the latest technology was imported. The new factories with low labor costs had a competitive edge over American plants; they were able to cut costs and increase productivity. Investment expanded and economic reconstruction ac celerated. However, the quality of Japanese products in those years was often inferior. People used to say that" After the war, only women and nylon stockings were stronger. " But changes were in the offing. Economic Development.

Takes Off After 1950 Transportation was difficultin those early years after the war. Many Japanese workers commuted long distances to their jobs by bicycle. Then in 1947, a company with only twelve employees devised a bicycle with a small motor, the Honda Kabu. This little motorcycle met a crying need. Thanks to the initiative and energy of the company's man agement, it expanded production in re sponse to consumer demand. It made not only motorcycles but also began producing automobiles. Its efforts paid off. It went on in time to become the present Honda Group, with thousands of employees, exporting so many cars to America and Europe as to cause international friction. The oil shock of 1973, when OPEC blocked the export of Middle East petroleum, was actually a wind fall for the small economical Honda with its high gas mileage. In 1980, the Japanese surpassed the Americans in car production for the first time. Soon Japanese car manu facturers were asked to restrict exports themselves. Later they developed close working relations with U.S. automobile manufacturers and began producing cars in the States.

Steel MITI sought to balance production, to avoid both surpluses and shortages. When in 1950 Kawasaki Steel's president, Yataro Nishiyama, announced plans for building a plant with two new blast furnaces, he en countered strong objections from MITI, the Bank of Japan, and the big-three steel mak ers. They feared an oversupply of steel and criticized his proposal as wasteful, unnec essary, and a duplication of investment. They pointed out that 19 of the then existing 37 blast furnaces were idle for lack of orders. 1 But Nishiyama was not discour aged; a third of the existing furnaces, he HOW JAPAN REALIZED HER "IMPOSSIBLE DREAM" 495 said, were over 30 years old; his modem blast furnaces would cut the cost of steel substantially. He went ahead. In February 1953, MITI finally approved the first phase of Kawasaki's project and the company was able to borrow from the Japan Development Bank and the Bank of Japan. In time Ka wasaki became one of the big six, diversi fying in 1991 into chemicals, and acquiring in June 1994 a Du Pont Chemical England plant making plastic compounds for use in auto parts. While government agencies like MITI look at what is, businessmen who risk their own funds do their best to anticipate what will be, what consumers will want in the future. In this case, Nishiyama was right; if he had acceded to MITI's adminis trative guidelines in 1951, his company's development and expansion would have been checked before it began.

Opinion concerning MITI was thus di vided. Government control versus free com petition was the issue. During the 1965 recession, MITI sought to curtail steel pro duction; six firms agreed to go along with the plan. However, Sumitomo Metals, with 4.5 percent share of the country's steel produc tion, clashed with MITI; it considered it unfair to restrict its output, an unnecessary intervention with private enterprise. The company's president, Hosai Hyuga, had guts. He was a leading businessman of Osaka, a city whose people were known for their free and independent spirits. He re fused to accede to MITI's administrative guidelines requiring a cut in production. The conflict between him and MITI made head lines. At first, Hyuga had the backing of other steel producers, but soon he was standing alone against MIT!. Moreover, MITI warned Hyuga that Sumitomo would not be allowed to import more materials than those needed for its quota of the reduced production. Hyuga had to compro mise and Sumitomo reduced its production of steel. Three years later in 1959 he ap pointed an ex-MITI bureaucrat to its Board of Directors "voluntarily.,,2 The case of Yawata Steel was very dif ferent. Originally established as a govern ment enterprise in 1899, it was privatized only after the war. But it retained close links with the government. In October 1969,with MITI approval, it merged with Fuji Steel to form the world's largest steel producer, New Japan Steel Corp. New Japan Steel became in effect a MITI-protected" cartel, "

virtually an "executive organization" of MITI's Basic Industries Bureau. 3 MITI and New Japan Steel together strove to stabilize steel markets and maintain steel prices, to hold them up by preventing what they con sidered "excessive" competition that might bring prices down. While this was going on, small producers with open-hearth furnaces were gradually replacing them with electric or revolving furnaces. Twenty-three new electric fur naces were constructed between 1973 and 1978. By 1975-1977, Japan was becoming one of the world's big three in steel produc tion; its 1976 exports were the highest in its history. Yet, New Japan Steel's market share was dropping-from 35.7 percent at the time of the merger in 1970 to 26.86 per cent in 1986.4 Although Japan's steel exports fell and her balance of trade went down in December 1978, as a result of the oil crisis, MITI persisted in trying to reduce steel produc tion. It designated the open-hearth furnace industry a "depressed industry" and de manded that some production facilities be shut down. Blast-furnace steel makers, pro tected by MITI and depending on "cost-plus pricing," along with small-and medium sized steel makers, joined the "recession cartel. " However, privately operated To kyo Steel refused to go along. It struggled bravely against MITI and the cartel. Tokyo Steel's chairman and president, for years strong advocates of free and open compe tition, remarked: "Regulations imposed by a comprehensive network of administrative guidelines now pervade the steel industry, seriously hindering proper competi tion.... We can survive ourselves without relying on MITI's guidance. ,,5 By competing with the large blast-furnace steel producers, Tokyo Steel has become the leading steel producer using electric furnaces. It is very efficiently operated. Its 496 THE FREEMAN • SEPTEMBER 1994 head office occupies only 1,600 square meters of floor space; its Administration Division's 21 employees administer sales of 200 billion yen; its Marketing Division em ploys only 29 persons; each staff member has his own personal network-linked com puter, reducing paperwork and the time spent on meetings. Contrast Tokyo Steel's efficiencywith that of MITI-supported New Japan Steel with 1,700 employees in its headquarters and, according to its consoli dated income statement of March 31, 1994, a deficit of 54 billion yen.6 Petroleum The Petroleum Industry Law of 1962, originally enacted to strengthen MITI and counteract the future liberalization of im ports, provided that (1) MITI publish a petroleum supply plan as a guideline for producers, (2) oil producers conform to MIT!' s production plan, (3) producers mod ify their production plan if MIT!' s and the producers' figures did not agree, (4) MITI approve new facilities, and (5) MITI set prices. Refiners resented the regulation of their facilities and, in anticipation of its enactment, expanded operations. MITI had not expected such an expansion and asked refiners to restrict their production them selves; the Petroleum Association was made to coordinate its members' production.

In October 1970,OPEC began to raise the prices of crude oil but MITI did not permit a markup in kerosene prices. To compen sate producers for losses MITI, by admin istrative guidelines, allowed increases in other prices. A virtual "black cartel" emerged as a result of MITI and oil-industry cooperation in controlling the production and prices of oil and kerosene. On October 6, 1973, the first OPEC induced oil crisis occurred. Since Japanese industries depended heavily on Middle-East oil, all prices of petrochemicals went up 334 percent and housewives rushed to buy any thing and everything, even toilet paper and detergents. MITI's response was to regulate the distribution and consumption of petro leum. The prices of petrochemical goods were frozen. Producers who could not shift their higher costs to customers inevitably suffered losses. However, the efforts of private businesses to cut costs and to inno vate led to lower oil consumption and im proved productivity.

In 1986, Taiji Sato, president of Lions Petroleum, tried to import oil which he expected to sell in Japan below MIT!' s rigged price. The importation of oil was not then prohibited. But when MITI learned that Lions' oil tanker was approaching Ja pan, it had the tanker blocked, prevented Lions' bank from lending the money needed to finance the shipment, and persuaded the Japanese government to pressure foreign governments to cancel Lions' contracts for purchases of oil.7 Although the company is no longer in existence, Sato's efforts have not been in vain. As a result of internal and external pressures, MITI's powers are being curbed. This past summer the question of liberalizing petroleum imports was finally presented to the Subcommittee on Funda mental Problems of Petroleum Policy of the Petroleum Deliberation Council. Also, MITI now intends to abolish, by the end of 1995, the law regulating the importation of certain petroleum products. And the regu lations on the opening of fillingstations will be gradually repealed.

Privatization and the Market Economy (1980-1985) The early 1980s was the era of Prime Minister Thatcher and President Reagan. Japanese Prime Minister Nakasone dreamed ofprivatization andin 1981 he began to carry out his dream. Japan Telegraph and Tele phone Public Corporation was privatized as the Nippon Telegraph and Telephone Cor poration (NTT) in 1985. The Japan Monop oly Corporation was privatized in 1985 as the Japan Tobacco Industry Corporation (JT). And in 1987, the Nippon National Railways (JR) was divided into six passen ger companies and one freight company, solving in the process its 37.5 trillion yen accumulated debt problem. These privati zations were not only great achievements HOW JAPAN REALIZED HER "IMPOSSIBLE DREAM" 497 for Nakasone and his Cabinet but for the companies too; their respective financial situations improved. A fairly recent contender on the Japanese Market is Nintendo which came into prom inence during this period. The company began as a small firm making traditional flower cards, then other playing cards, and still later plastic playing cards with Disney characters on them. Then in 1983,Nintendo created game computers for children that took the world by storm. Children all over the world became Nintendo fanatics. In 1993,Nintendo, with 890employees, earned 163.7billion yen. Compare that with Toyota which, that same year, 1993, with 72,000 employees, earned 280 billion yen, its great est operating profits ever. However, nothing ever stands still on the market. To maintain his position on the market, every entrepre neur must re-earn the support of his cus tomers everyday. Nintendo' s position is now being seriously challenged by Sega Enterprises, makers of new electronic games.

It is not possible within this space to trace the ups and downs of the Japanese yen to the U.S. dollar and the effects of these fluctu ations on Japan's exports and imports. At times the Bank of Japan pursued an easy money policy, weakening the yen; at other times it raised interest rates, strengthening the yen. These changes alternately encour aged or discouraged international trade in the short term. Throughout these fluctua tions, however, the Japanese saved and invested in stocks, bonds, and real estate, even foreign real estate. It was their energy, hard work, and ingenuity that was to be responsible for Japan's long-term economic development. MITI's Powers Reduced As we have seen, MITI's attempts to direct Japan's production have not always been successful. When it tried to maintain steel prices for the benefit of its cartel members by restricting steel output, some of the more energetic steel producers resisted.

When it tried to cope with oil shortages by controlling prices and distribution rather than encouraging imports, consumers of petroleum products objected. Mter 45 years of trying to foster economic development in Japan and coordinate supply and demand, MITI's powers are now being curbed. On February 8, 1994, the Hosokawa Cab inet announced a policy of deregulation. The proposed program should wipe out many of the more than 12,000 regulations issued by MITI and the Ministries of Transportation, Agriculture, Forestry and Fishery, Finance, and Health and Welfare. The plan appears excellent on paper and if implemented would increase productivity and reduce price differentials between Japan and the United States. The question remains, how ever, whether this large-scale deregulation can be carried out without being sabotaged by bureaucrats who want to retain power. Nobuyoshi Namiki, formerly chief ofMI TI's Industrial Structure Section, reveals the truth about the Petroleum Industry Law: The world attributed the cause of the high-speed growth of Japan after 1985 to Japanese industrial policy. But this is far from the truth. It is true that Japan en joyed high-speed growth, but that was caused by the efforts of diligent and hon est Japanese workers and by the tenacity of executives filled with never-quenching aspiration, working under "excessive"

competition. 8 The February 26, 1994, issue of The Economist reports on recent research con cerning MIT!. Professors Richard Beason (University of Alberta) and David Weinstein (Harvard) note four tools of industrial policy which had been offered to 13 sectors of the Japanese economy between 1955 and 1990-cheap loans, net transfers, trade pro tection, and tax relief. Beason and Wein stein asked "whether the most-helped sec tors grew fastest?" and found that "support was given on the whole to slow-growth industries. . . . That the economy suc ceeded for decades is plain enough," they said. "But, on this evidence, industrial pol icy may well have hindered rather than advanced the cause.,,9 498 THE FREEMAN • SEPTEMBER 1994 Beason and Weinstein confirm Nobuy oshi Namiki's position. MITI is not so mighty as once it was; its power has been considerably reduced. In the world of ka leidoscopic, wide-ranging international trade that has developed, MITI can do little more than offer subsidies to dying industries Real Causes of Japanese Economic Development The true explanation of Japan's success ful postwar economic development rests, not on MIT!' s "industrial policy," but on good old-fashioned virtues-saving, hard work, reduced government spending, and innovative entrepreneurship-combined with ingenious marketing techniques and relatively free world trade.

1. Saving. The Japanese have a tradition of saving and as they struggled to pull themselves up from "Ground Zero" after World War II, most Japanese managed to consume a little less each year than they produced. On the basis of 1971-1991figures, the average gross saving rate in Japan was twice that in the United States; the saving rate per household in Japan was 2.7 times that in the States. 10 As production depends on capital savings and investment, this gave a substantial boost to Japan's economy. 2. Diligence. Japanese workers in general are hardworking, even to the point of being workaholics. This also contributed to the rapid growth of the Japanese economy. In 1992, workers averaged 1,972 hours per year; since then their hours have been gradually reduced and in 1996, they are expected to work less than 1,800 hours. Public offices, banks, and post offices now have a full five-day work week. Also there are fewer strikes in Japan and Japanese workers lose fewer days from strikes than in the United States. II 3. Government spending for defense. Ac cording to the National Defense White Pa per, the average ratio of defense expendi tures in Japan to GNP for the period 1981 1991 was 0.98 percent, while in the United States, Britain, and West Germany the ra tios to GDP were 6.2 percent, 4.8 percent, and 3.0 percent respectively. Thus, taxes in Japan were lower and more funds were available for investment than in other ad vanced countries.

4. Independence and Entrepreneurship. Osaka is a city known for the entrepreneur ial spirit of its inhabitants. Osaka was the home of at least two firms that resisted MITI-Kawasaki Steel and Sumitomo Metals. Yujiro Iwai, an Osakaite and former president of Iwai and Co., reflected that "the fundamental philosophy of the citizens in Osaka concerning the economy seems to be free and independent-they try hard not to depend on others, not even on the gov ernment. " Iwai finds this spirit expressed in a haiku by Raizan Konishi (1654-1716) "Obugyo no na sae shirazu toshi kurenu" (' 'The year has come to an end, Without even knowing the name, of the magistrate.") The world of Osakaites, as described by Iwai, is the very "opposite of that portrayed in George Orwell's 1984, where the face and voice of the leader penetrated the lives of the people from morning till night through means of mass communication . . . . Is it possible to realize a free world where we can live without even knowing the name of the magistrate? Osakaites believe it is." 12 S. Innovative management and marketing.

Japanese exports in prewar days were re garded as "cheap, but of poor quality." W. E. Deming, a U.S. professor, played a major role in improving the quality of Jap anese goods. A prize established in his honor is awarded to individuals and com panies making important contributions to quality control. Today, thanks no doubt to lessons learned from Professor Deming and from taking consumer wishes to heart, Jap anese appliances and automobiles are rated among the best in the world. In Japan, consumer sovereignty is recog nized in the field of marketing. To sell their products and services and earn profits, pro ducers realize they must satisfy their cus tomers. The success of Japanese exporters has depended largely on their efforts to learn the languages, customs, tastes, and de mands ofpotential purchasers in other coun tries. Matsushita, a manufacturer of appliHOW JAPAN REALIZED HER "IMPOSSIBLE DREAM" 499 ances, now sends some of its employees to Frankfurt (Germany) as resident engineers in charge of product development. Their families accompany them. The company believes that their engineers must experi ence European daily life to develop new washing machines which will satisfy Euro pean buyers. 13 American producers who want to sell in Japan would do well to try a similar ap proach; they would then realize that the narrow width of the staircase in a typical Japanese home makes it difficult or impos sible to carry any appliance wider than 25 inches-washing machine or refrigerator, for instance-up the 30-3/4 inches wide steps to the second floor without scratching the walls. Only recently have U.S. automo bile manufactures begun producing· for ex port to Japan low-priced cars comparable in quality to those the Japanese make for export. Also it was not until this past sum mer (1994) that Ford changed the steering wheels on their cars to accommodate the Japanese who drive on the left side of the road. If American goods were suitably mod ified to satisfy Japanese consumers, U.S.

sales to Japan would surely increase. 6. Free Trade. Japan's rapid development was made possible by relatively free trade throughout the world. When I was a boy, world trade was not free; there were con flicts between the "have" and "have-not" nations. With poor natural resources, I feared that Japan, without free world trade to permit Japanese firms to import raw materials, process them, and export their products, could never expect to develop economically. I was greatly encouraged when I learned from Mises' Human Action, that economic development depends, not on rich natural resources, but on capital accu mulation per capita and free trade. Japanese Tradition On the campus of the Tanaka Junior High School, Kashiwa City in Chiba Prefecture, there stands a statue of the respected Jap anese philosopher Kinjiro Ninomiya (1787 1856). He is reading a book while carrying a bundle of firewood on his back. 14 Ninomi ya's desire to learn was so intense that he used to read while he walked to work. His message of diligence and saving for the future and for doing good voluntarily was firmly imprinted on all Japanese students from his time until the end of the war.

Japanese who are now over sixty years of age continue to admonish their sons and daughters in the words of Ninomiya: "Save, waste not; otherwise heaven will punish you. " Thus by encouraging generations of Japanese to save, Ninomiya played an im portant part in Japan's post-World War II economic development. By doing so, he made it possible for the Japanese people to realize their "impossible dream." D 1. November 3, 1951, Asahi Shinbun. 2. For details see Chalmers Johnson, MITI and the Japanese Miracle: The Growth ofIndustrial Policy 1925-1975, Charles E. Tuttle Co., 1986, pp. 269-271. 3. The close Yawata-government ties were reflected by New Japan Steel's president, Yoshihiro Inayama, when he bragged, "Steel is the state." 4. Hajime Tainaka, Shin Nittetsu niokeru Shippai no Kenkyu (A Case Study of the Failure of New Japan Steel), Eru Publishing, 1987, pp. 65-66. 5. Tainaka, ibid., p. 62.

6. The Diamond Weekly, June 4, 1994, pp. 40-42. 7. See, Toshio Murata, "The Lion that Roared," Reason, May 1986, p. 43. 8. Nobuyoshi Namiki, Tsusansho no Shuen: Shakai Kozo no Henkaku wa Kano ka (The End of MITI: Is Renovation of Social Structure Possible?), Diamond-Sha, 1989, p. 61. 9. Quoted in the Economist February 26, 1994, from "Growth, Economies of Scale, and Targeting in Japan (1955 90)," Harvard Institute of Economic Research, Discussion Paper 1644. 10. International Comparison of saving ratio (1971-1991) Gross Saving Household Rate Saving Rate Japan 33.3% 18% U.S.A. 15.2 6.6 U.K. 17.7 6.8 West Germany 23.2 12.3 France 21.9 13.0 Source: Averaged from the data of Bank of Japan "Interna tional Comparison of Saving Rates." Gross saving rate = gross savings (savings + depletion of fixed capital) / GNP; Household saving rate = household savings / household disposable income. 11. According to ILO Labor Statistics Year Book 1991, the number of strikers and the lost labor days in Japan and in America in 1985 and 1989, were as follows: Number of Strikers Lost Labor Days 1985 1989 1985 1989 Japan 123,400 85,800 264,100 219,100 U.S.A. 323,900 452,100 7,079,100 16,530,000 12. Yujiro Iwai, Osaka Shonin no Tetsugaku (A Philosophy of Osaka Merchant), Tokyo Nunoi Shuppan, 1981, pp. 76-77.

13. The Nikkei Shinbun, March 30, 1994. 14. Surprisingly Ninomiya's statue is made of cement, not of its original bronze which was melted down for bullets during World War II. Unfortunately many new schools do not have statues of Ninomiya, and he and his message are gradually being forgotten.

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