Source: Reischauer, E. , & Jansen, M. B. (1995). The Japanese Today (pp. 295-342). Belknap Harvard.
Chapter 30
The Premodern Background
Japan's political success in creating an efficient and solid democracy may be its most remarkable achievement in recent times, but it is the extraordinary record of the Japanese in modernizing their economy and becoming one of the top two or three industrial powers and trading nations in the world that has drawn the most attention and inspired wide acclaim for "the Japanese miracle." Whereas the Japanese artist and later the fanatic soldier once seemed to typify the nation, everyone would now recognize the Japanese businessman as the national symbol. Instead of Mount Fuji and Hiroshige prints or the Rising Sun flag and banzai charges, the name Japan now conjures up factories, robots, endless streams of automobiles pouring off ships onto American roads, and the ubiquitous Japanese businessman with his attache case rushing through airports all over the world.
The Japanese have displayed since early times many of the characteristics that have contributed to their modern economic success. One was their tendency to work hard. Another was their drive for formal education. Others were the painstaking effort they displayed in their workmanship and their skill in mastering difficult technologies. Although they were introduced to agriculture and the casting of bronze and iron relatively late, they quickly caught up with the continental lands that had known agriculture for millennia and metalworking for centuries. The Japanese soon mastered the intricate water control systems and the transplanting of rice shoots for paddy-field cultivation. The two Great Buddhas of Nara and Kamakura of the eighth and thirteenth centuries are still among the largest bronze figures ever cast. The steel of Japanese swords had become the finest in the world by the twelfth century. The Japanese mastered the weaving and embroidery techniques of the Chinese in the seventh and eighth centuries and also their beautiful architecture in wood. They acquired dozens of other skills, such as papermaking, still unknown at that time in Europe, and in the eighth century printed with woodblocks a million Buddhist talismans. With the wave of new technology from China came Chinese painting and the other fine arts, which the Japanese absorbed with amazing speed and skill. Thus in the course of only a few centuries Japan changed from a technologically backward land into a nation of fine artisans. It also remade its institutions, at first on a borrowed Chinese model, to accommodate the rapid development of its technology.
In the sixteenth century the Portuguese were astounded by the skills of Japanese craftsmen, while the Japanese rapidly adopted what interested them most in Western technology. In an age of constant warfare, the guns of the Portuguese drew their special attention. First seen by the Japanese in 1542 or 1543, muskets were being produced in great numbers and sometimes with slight technical improvements within two decades and were used successfully in battle by massed bodies of musketeers as early as 1575.
Subsequently, more than two centuries of self-imposed isolation caused the Japanese to lag technologically behind the West, which just at this point was entering the age of science and the early phases of the industrial revolution. Nevertheless, Westerners in the middle of the nineteenth century were struck by the high quality of Japanese technical skills in metalwork, porcelainmaking, multicolored woodblock prints, which were triumphs of technical skills as well as art, and a number of other crafts. It should have been obvious to Westerners, though it was not to most of them, that the Japanese, if given the opportunity, could readily master the technology of the West and learn to produce machinemade goods of comparable quality to those of the Occident.
The Japanese entered the modern age not only with the work skills and habits needed for economic success but also with many of the necessary institutions, at least in partially developed form. They had a highly monetized economy and a single nationwide market. Under the Tokugawa all the feudal lords were forced to spend a large part of their incomes outside their domains for the maintenance of their large establishments at the feudal capital, Edo, and in annual trips to and from Edo. This required them to produce within their domains for sale to consumers elsewhere either sizable surpluses of staple commodities, such as rice, or some special local products, such as sugar, as in the case of the Satsuma domain in southern Kyushu and the Ryukyu lslands. Surplus commodities were shipped either directly to Edo or, in western Japan, to the great entrepot of Osaka at the eastern end of the Inland Sea. These two cities became the twin economic capitals of Japan, as they still are today, one for East Japan and the other for West Japan. Already in the seventeenth century fluctuating prices on futures in rice in the one city would be raced to the other, where they would immediately affect prices there.
Commercial, banking, and, to a lesser extent, manufacturing activities of nationwide importance centered in these two cities and also in the old imperial capital of Kyoto, not far from Osaka. Already in the early seventeenth century, some family businesses that were centered in one or another of these cities spread into a number of regions in a variety of fields of activity, such as sake brewing, dry-goods retailing, and banking. Financial institutions were well developed (though the currency system remained extremely diverse), and major retail stores developed fixed prices, with none of the haggling that is still to be found in most parts of the world. Such advanced retail outlets developed smoothly into the great department stores of today.
The ownership of large family enterprises remained in the hands of the original family, but management was gradually transferred to head clerks, who stayed with the company for life. In fact, the whole business firm was a sort of extended family, with a strong sense of mutual loyalty between employers and employees. Only a few of the large firms of the premodern period, such as Mitsui, which established dry-goods stores and moneylending enterprises in Kyoto, Edo, and Osaka in the seventeenth century, survived the troubled times of the mid-nineteenth century, but the spirit of the old Tokugawa companies is still very much alive in their contemporary successors.
The commercial drive of the big city merchants and a surge of peasant entrepreneurs in the late eighteenth and early nineteenth centuries prepared the Japanese well for the modern age of international business. So also did the attitudes of many members of the samurai class. They desperately sought new ways to make a living after the Meiji reforms swept away the feudal system and with it their hereditary stipends. The new government encouraged them to go into manufacturing, banking, and trade, which many of them did, some with great success. Even under the old regime, some of these samurai had become semibusinessmen through their service in the economic branches of their domain, managing its warehouses, the transportation and sale of its surpluses in the centers of trade and consumption, and the operation of its monopolies.
An outstanding example of a samurai entrepreneur is Iwasaki Yataro of the Tosa domain in Shikoku, who managed to become the domain's economic agent in Nagasaki, acquired its remaining ships, and with this start built up the Mitsubishi Company, which grew to be second only to Mitsui among the great economic enterprises of modern Japan. Not all samurai turned businessmen were as successful, and many failed miserably, but probably because of the connections they had with their colleagues in government, more of the new captains of industry came from the samurai class than from either the peasantry or the old merchant class.
As we have seen, some of Japan's neighbors, such as China and Korea, had many of the same talents as the Japanese, including a capacity for hard work and skills in craftsmanship and commercial organization. They also had the same esteem for formal education, which unquestionably was one of the chief reasons for Japan's subsequent economic success. But they lacked some of the attitudes that helped the Japanese rapidly modernize their economy and start catching up with the West. The Chinese and Koreans were relatively oblivious to the outside world and as a consequence were not as able as the Japanese to discern the magnitude of the political and economic menace the West posed for them. In addition, they lacked the historic consciousness the Japanese had of having learned from abroad in the past. For these reasons they neither perceived the necessity or comprehended the possibility of learning much from the West. They sought to continue in their traditional ways, avoiding all changes they could. They felt little of the urgency to catch up to the Occident that the Japanese felt so keenly.
Because of these differences Japan got off to a faster start in closing the gap in technology and institutions between itself and the West. This fact has profoundly affected its history ever since. Although both China and Korea eventually stirred into action, Japan's head start put it well in advance of all other non-Western nations and has enabled it to come abreast of the frontrunners in the world today.
Chapter 31
The Prewar Economy
Japan faced a huge task in the second half of the nineteenth century just to defend its economy from the predatory foreigners, to say nothing of catching up with the West in technology. The treaties forced on the Tokugawa regime in its final years robbed the Japanese of control of their own import tariffs, which were set on average around 5 percent, far too low to give their textiles and other handmade goods protection from the cheap machine-made wares of the West. A different exchange rate between gold and silver in Japan and the outside world also produced a serious drain of gold and disrupted prices. Japan was saved from complete economic disaster only by the general lack of appeal of Western goods to the Japanese public--a significant parallel to conditions today--and a blight that struck European silkworms and produced a strong temporary demand for Japanese silk and silkworm eggs.
After coming to power in 1868 the Meiji government at once sought means to save the economy. It established modern economic institutions--a nationwide monetary system, modern banking institutions, Western types of taxes, and a national budget. It hired Western experts at great expense to build railroads, improve port facilities, set up factories, and teach Japanese disciples their technical skills and Western science in general. It dispatched promising youths abroad, again at great expense, to learn the skills of the West. It did away with the class restrictions of feudalism, making it possible for ambitious young men from all social backgrounds to achieve success in the business world. The response was tremendous, especially from the sons of lower-ranking samurai and wealthy farmers, who saw opportunities opening up to them that they never could have aspired to under the old regime. They crowded into schools to learn Western business techniques, new technology, and the English language, the chief gateway to Western knowledge and international business activities.
Despite these vigorous beginnings in the 1870s, Japan had virtually bankrupted itself by the end of the decade because of the very ambitiousness of its attempts at reform and the costs of liquidating the ancien regime against armed opposition. A serious financial retrenchment became necessary, but just at this point Japan's arduous efforts at economic modernization began to pay off. Agriculture production increased significantly as the technology of the more advanced parts of the country spread to all regions in a now thoroughly unified nation. The privately financed Osaka Spinning Mill was built in 1882 on a large enough scale to be competitive in the world market, and its success was followed by a rush of private capital into spinning and then weaving. Except for factories in militarily strategic industries, the government had sold off the many pilot plants it had built, and these, now under private management and capitalized at the low levels their purchasers had been able to pay, began to show a profit, leading to industrial booms in one field after another.
Japan took off at a relatively rapid rate of industrial growth, which was soon stimulated by the Sino-Japanese War of 1894-95, the large indemnity it brought from China, and the Russo-Japanese War of 1904-05. World War I left the Asian empires of the European powers open to Japanese industrial exports. The worldwide economic slowdown of the 1920s and the stock market crash at the end of the decade affected Japan along with the rest of the world, but, stimulated by renewed military expansion in the 1930s, the Japanese economy returned rapidly to its upward industrial surge.
Japan's modern economic growth followed the classic patterns already established in the West. Increased agricultural production, improved communications, and effficient centralized government set the stage for industrial success, which came first in cotton spinning and weaving, expanded into other light industries, and then spread into heavy industries and chemicals. Early exports were often shoddy, and the label "made in Japan" became almost synonymous with second-rate goods. The Japanese still could not equal the longer-established industries of the West and had to seek their chief markets in the impoverished lands of Asia. But gradually the gap in quality was narrowed, and by the 1930s Japan had become one of the major industrial nations of the world.
By the beginning of World War II Japan had established certain characteristics in its economy that distinguished it from most other industrialized nations and still persist to some degree today. At one time these distinctive characteristics were looked upon as survivals from the feudal past that indicated an economic immaturity Japan would in time outgrow, but, following Japan's tremendous postwar success, they came to be looked on as part of a sinister plot through which the Japanese sought to gain unfair advantages over their Western competitors. In actuality, however, Japan's unusual economic characteristics were the result of natural evolutionary developments from earlier Japanese patterns of organization or in some cases ingenious inventions to meet new problems. They are more deserving of study and, where appropriate, of emulation than of disdain or condemnation.
One characteristic of Japan's modern economy is common to most newly industrialized nations but has been especially marked in Japan because of the speed of its industrialization. This is the "dual structure" of the economy, as the Japanese call it. Many of Japan's economic activities, including agriculture, small handicraft industries, many service industries, and most retailing, continued little changed from Tokugawa times, becoming a lower level of the Japanese economy. It was joined by new machine production that could be performed in small units by family members or pseudo-family apprentices in tiny machine shops supplying parts for larger enterprises. Meanwhile, large-scale new industrial undertakings were built on top of this foundation as an upper level of highly mechanized production. The two levels contrasted in scale of operations, productivity, wages, and profitability. Although at first the upper level employed very few people, it grew rapidly and absorbed increasing numbers of workers from the lower level. But the sharp differences between the two levels spawned many economic and social problems. Before World War II the surplus of underemployed, lowproductivity workers in the lower level depressed wages in the upper level as well.
Eventually this situation turned around. With the great success of Japanese industrial production after World War II, a general shortage of labor developed, and wages in the lower level were pulled up by the great productivity of the upper level. But this situation saddled the upper level with the cost of paying for higher wages for the low-productivity workers. Agriculture is an extreme case in point. Despite its present high mechanization, the smallness of farms makes agriculture still an extremely labor-intensive operation. Generous government price supports help maintain Japanese rice prices that are five to ten times those of the world market. Economically it makes no sense for Japanese to grow rice, but lingering sentimental feelings about the small family farm as the foundation of the nation and outmoded strategic worries about the need to produce one's own staple food (even though Japan is already dependent on foreign lands for about half its total food supply) make the Japanese determined to maintain their agricultural sector, however heavy a drain it may be on the economy as a whole.
Japan has less choice in regard to its inefficient retailing system. The Japanese have cars, but there is little room for parking lots to service supermarkets and shopping centers, which are relatively small and rare in Japan. Narrow roads further complicate the problem of cheap distribution through large retail outlets. Lack of space simply rules out the supermarket, shopping-center approach to retailing that prevails in most of the United States and binds the Japanese to greater reliance on "mom and pop" size stores and a bewildering complexity in wholesale distribution. Lack of space is a serious handicap to the Japanese economy, for it will continue to necessitate the maintenance of a relatively large lower level of the economy in the form of costly small-scale enterprises.
Another characteristic of Japan's prewar and postwar economy is the close-knit bond between most employers and employees. This reflects the family-based organization of Japan's premodern business enterprises and also the national tendency to organize by groups. This close employer-employee tie was natural in the small units of the lower half of Japan's dual economy, but, as will be discussed more fully later, it has gradually been adopted in the large-scale upper half as well, giving a paternalistic and humanistic feel to Japanese industry that is usually lacking in big business enterprises in other countries.
A third distinctive feature of the Japanese economy both before and after the war has been the close cooperation between government and business. In the United States, as in many other countries, the two have been seen as rivals, with business continually seeking to escape the taxation and control of government; but in Japan industry grew up and throve under the eager encouragement of the government. As a result, it learned to look to the government for patronage and guidance. Only as it became strong during the early twentieth century did it begin to chafe at government interference, but by that time it had itself become influential in government decisions by means of the Diet and political parties. The destruction of the Japanese economy in World War II put business again under the sponsorship and guidance of the government, and, despite considerable erosion of this situation in recent years, habits of close cooperation persist between the two. In contrast to the hostility between them that we find in America, government and business remain essentially partners in Japan.
In prewar times the distinctive Japanese economic institution that most caught the attention of the outside world was the so-called zaibatsu system. The term zaibatsu is pejorative, literally meaning "financial clique." It is specifically applied to certain giant financial, commercial, and industrial combines but is loosely used for prewar Japanese big business in general. The four greatest zaibatsu in the 1920s were, in order of size, Mitsui and Mitsubishi, which have already been mentioned; Sumitomo, dating back to an early seventeenth-century copper mining and smelting company; and Yasuda, founded as a banking institution in the 1880s. Some of the late entrants into the category, known as the "new zaibatsu," were particularly involved in military-related industries and the exploitation of Manchuria, which had recently been conquered by Japan.
The zaibatsu came to control a very large part of the upper level of the Japanese economy. This concentration of wealth and economic power was greatly aided by the sale of the government enterprises in the early 1880s to the relatively small number of individuals who could pay even the low prices demanded and who appeared to the government leaders to be capable of managing them well. Marxist historians charge that this sale of government property at bargain rates was motivated by a desire to create a strong capitalist class, but, as we have seen, it was necessitated by the government's desperate financial plight, and before long the government became suspicious of the growing political influence of big business. By the 1920s and 1930s there was wide condemnation of the zaibatsu, particularly by the supporters of the military, as being elements of Western decadence in Japanese society, corrupters of the parliamentary system, and moneygrubbing betrayers of Japan's imperial destiny.
It is ironic that after the war the American occupation in turn attacked the zaibatsu for being the root cause of Japanese imperialism and on these grounds singled them out for destruction. Their ownership was removed from the controlling families virtually without compensation, and the great combines were broken up into their component parts. Before they could be further atomized in a traditional American "trustbusting" operation, the occupation's reform program was halted, leaving the larger corporate subunits of the original zaibatsu intact. Since the occupation, these have gradually reassumed their old names (except for the Yasuda Bank, which became the Fuji Bank) and have drawn together in loose, informal associations, now known in Japan as keiretsu.
Because of the existence of these keiretsu groupings, many observers have asserted that the zaibatsu system has been restored, but this is not correct. The keiretsu form something like clubs, whose members may look first to each other for aid or cooperation before trying other sources. There is thus a certain degree of mutual back scratching. But their relations are by no means exclusive, and there is no central ownership and none of the rigid controls once exercised within a zaibatsu organization. Other relations have become much more significant, such as the groups of firms in the same line of business and the overall grouping of the Federation of Economic Organizations (Keidanren). There are many nostalgic survivals of the feelings of closeness of the old zaibatsu system, but the system itself has disappeared entirely.
In their heyday before the war, the zaibatsu were typically under the control of a central holding company, largely owned by the original family. The holding company controlled several major affiliates and these in turn a series of smaller affiliates. This sort of pyramiding of control is common enough in the West, but what made the Japanese case unique was the fact that the controlling company often lacked majority ownership, sometimes having as little as 10 percent of the stocks of some minor affiliate. Control, however, was exercised through other means. The affiliate would probably be completely dependent on the banking, shipping, and trading facilities of the combine; interlocking directors were common; executives were switched around among the component firms as though they were members of a unified bureaucracy; the advantages and prestige of belonging to a large zaibatsu combine were great; and a strong sense of personal loyalty to the combine permeated the leadership, much as in a premodern feudal domain. Young executives joined a zaibatsu enterprise for a lifetime career. This was the feature of the zaibatsu system that was most like earlier Japanese society and is still most characteristic of contemporary Japan.
A typical zaibatsu organization was not like the contemporary American conglomerates, which bring together entirely unrelated corporations under the same ownership. Instead they were rational outgrowths of evolving economic activity and therefore are better described as combines. They tended to cluster around a central bank that financed the various activities of the combine. These functions often stood in a vertical relationship. For example, a series of separate companies might mine a certain ore, fashion it into manufactured products, transport these abroad on the combine's shipping line, and sell them abroad and purchase needed raw materials for the whole process through the combine's "general trading company" (sogo shosha), while all of these different stages of the operation would be financed by the combine's bank.
The extent and nature of a zaibatsu combine's activities are illustrated by the names of the many major companies that still use the Mitsubishi name today. There are the Mitsubishi Bank, the Mitsubishi Corporation (the general trading company), Mitsubishi Chemical Industries, Mitsubishi Electric Corporation, Mitsubishi Estate Company, Mitsubishi Gas Chemical Company, Mitsubishi Heavy Industries, Mitsubishi Metal Corporation, Mitsubishi Mining and Cement Company, Mitsubishi Motors Corporation, Mitsubishi Oil Company, Mitsubishi Paper Mills, Mitsubishi Petrochemical Company, Mitsubishi Rayon Company, Mitsubishi Steel Manufacturing Company, Mitsubishi Trust and Banking Corporation, and Mitsubishi Warehouse and Transportation Company. The Mitsubishi combine started in shipping, but the shipping company never bore the Mitsubishi name, being known as Nippon Yusen Kaisha (NYK).
A particularly interesting component of the zaibatsu system and of the postwar Japanese economic system as a whole is the general trading company, an ingenious innovation that developed to meet specific Japanese needs. From the start the upper level of the Japanese economy depended heavily on the importation of raw materials and on foreign markets, but Japanese companies were still small and lacked much knowledge of economic conditions abroad. They also lacked capital. It made sense to concentrate capital, knowledge of the outside world, and skills in trading abroad in specialized institutions that could then service many companies unable to maintain their own independent purchasing and sales forces overseas. The general trading companies of the various zaibatsu did this primarily for the member companies of their combines, while other trading companies serviced all the companies in some particular field.
The trading companies built up excellent worldwide services, which individual companies could not hope to match and which helped fund much of the trade they carried on. They conducted a huge amount of business, on which they charged only a very slim margin of profit. At first their activities were almost exclusively in Japan's foreign trade, but they later extended them to domestic business, and since World War II, because of their unique services, they have come to do considerable trade between other countries not involving Japan at all. At one point more than a third of Japan's total GNP passed through the hands of the ten largest trading companies, but in more recent years the development of a number of giant firms fully able to conduct their own foreign contacts has cut into the role of the general trading companies.
The overall influence of the zaibatsu system has long been a hotly debated subject in Japan. The great concentrations of power and wealth it produced were undoubtedly unhealthy in many ways for Japanese social and political development. But it did not have the unfocused gigantism of the modern conglomerates, nor did it produce the stultifying economic effects of a monopolistic system. No zaibatsu ever held a monopoly in any important field of activity. In fact, they developed rival enterprises that usually operated in stimulating competition with each other. At times a few zaibatsu or other large firms formed virtual oligopolies in certain fields, but these could be transformed into temporarily useful cartels in times of stress. The concentration of capital the zaibatsu system made possible helped channel funds into particularly promising though risky fields in which the returns could be realized only over a long period, and thus made possible important long-term investments that otherwise might not have been made. Finally, the narrowness of the ownership group, combined with traditional Japanese frugality, permitted a high rate of reinvestment and growth. Despite government interference under the military leaders in the 1930s and their squandering of much of Japan's economic power in fruitless foreign conquests, Japan under the zaibatsu system did lay a solid industrial base for the country's spectacular growth in recent decades.
Chapter 32
The Postwar Economy
Japan had not fully closed the economic and technological gap between itself and the West before World War II, and the conflict and its aftermath once again widened it greatly. The Japanese had been absorbed in military adventures since 1931; full-scale war came with China in 1937 and with the United States and Britain in 1941; Japan's merchant marine and industrial cities, both of which were essential to its livelihood, were all but wiped out; the country emerged from the war a pariah nation, shunned by most of the nations with which it had to trade if it were to live; it lacked most natural resources, not even being able to feed itself; and, finally, the drastic American reform program caused such disruption and uncertainties that long-term investments even by the few who still had some resources were unattractive. Only the black market flourished. Most Japanese were reduced to grim subsist- ence living, and the economy as a whole remained moribund. Japan seemed more hopelessly behind the West than in the desperate days at the beginning of the Meiji period.
Recovery was much slower than in any of the war-devastated lands of the West and did not start until the United States had carried out its stringent retrenchment policies of 1949, stopped further American reforms of the economy, and then started heavy purchases in Japan of supplies for use in the Korean War, which broke out in 1950. At first recovery went slowly, but it gradually picked up speed, having the strong underpinnings of Japan's high educational levels, the good working habits of a populace familiar with industrial labor, a large reservoir of experienced technicians, industrialists, and businessmen, and a superb government bureaucracy intent on rebuilding the economy. The government targeted certain basic industries, such as shipbuilding; coal mining, and production of steel, electric power, fertilizers, and chemicals for initial concentration of investment and effort, and business cooperated smoothly with it. By 1955 per capita levels of wealth had regained prewar levels, and economic growth was accelerating. Prime Minister Ikeda's proposal in 1960 of a ten-year income-doubling plan proved a gross underestimate. The Japanese miracle was well under way.
Japan's first postwar successes in exports were in industries that had been stimulated by the recent war. Binoculars, cameras, buses, and trucks had all benefited from technology developed during the war. Shipbuilding had also progressed to meet wartime needs. Japan had built the world's largest battleship, so it is not surprising that in the 1960s it began to construct the world's largest oil tankers to haul this primary source of energy all the way from the Persian Gulf around Singapore to Japanese ports especially designed to receive these behemoths of the sea.
On the whole, however, the Japanese once again followed the classic line of industrial development, though this time at a much faster pace. Textiles were the first major postwar exports. Then, as newly industrializing areas such as Taiwan and India entered the textile field, the Japanese shifted their main export emphasis to steel and machines, such as motorcycles, cars, and tractors. From these they progressed into the electronic industries, gradually emerging as the only major competitor with the United States in computers and some other high-technology products and the leader in some fields, such as robotics. They also began to show signs of displacing the United States as the world's financial center. They became the world's greatest creditor nation just as the United States sank to the status of being the world's largest debtor nation. By the late 1980s the Japanese had more than closed the gap with the countries of the West and appeared ready to push ahead of them.
The brilliant success of the Japanese economy since 1950 must be attributed primarily to the nature of Japanese society, Japan's prewar economic experience, and certain distinctive characteristics of Japanese business organization, which we shall discuss later. It is frequently explained, however, as being basically the product of lower wage scales than in the West. At first Japanese wages were indeed quite low, but this fact primarily reflected the low productivity of labor in early postwar Japan. Actually low wages, by limiting the domestic market, were as much of a drag as an asset to the economy as a whole. As the economy recovered and productivity soared, wages kept pace, rising to half, then two thirds, and eventually equality with those in the United States. With the recent rise in the value of the yen relative to the dollar, they may well be higher now. But in any case labor costs have all along represented a shrinking share of the costs of production, and Japan's economic success must be attributed basically to other factors.
The very destruction of the prewar economic machine proved in some ways a stimulus to the growth of the postwar economy. Old factories had either been destroyed by bombing or allowed to rust into obsolescence because of the lack of replacement parts and labor. As a result they were not worth restoring and were replaced by brand-new plants, often quite superior to the aging factories of the United States and Europe. The destruction of the zaibatsu system shook Japanese businessmen out of their traditional patterns of operation, which were beginning to become too rigid, and forced them to innovate. Even more important, the removal of the zaibatsu giants gave room for growth to a whole new generation of entrepreneurs, and the unsettled conditions of the time rewarded innovation and daring. Small prewar enterprises and a great number of entirely new ones flourished, and some blossomed into leading companies of worldwide prominence. Matsushita, Canon, Sharp, and YKK, the largest producer of zippers in the world, are examples of the first category and Honda, Sony, and Sanyo of the second.
Despite the primary role of the Japanese in their own economic recovery, it cannot be denied that fortuitous external influences also played a major role. One relatively small factor, already noted, was the Korean War. A much greater influence was the American occupation itself. Although its radical reforms impeded early recovery and caused uncertainties in business circles, its many basic economic and social measures had an extremely helpful long-range impact and probably could not have been carried out by the Japanese themselves through normal democratic procedures in the turmoil of the early postwar years. The economic retrenchment of 1949 and the shaking up of business practices through the destruction of the zaibatsu system are cases in point. Far more important were the clear and unchallenged democratic reforms of the new constitution, the liberation of women to a status of equality with men, and the thoroughgoing land reforms, which, though of iittle or no economic benefit, gave Japan a stable social base for its democratic system.
The American involvement in Japan was helpful in another way. It removed the costly burdens of military defense. After the war the Japanese shunned any type of militarism, and the United States and Japan's other erstwhile adversaries as well as its neighbors, remembering how formidable and cruel the Japanese military had been, were all happy to see Japan without arms. World conditions, however, did not permit an entirely defenseless Japan, and the United States, as the occupying force, naturally stepped in to fill the vacuum. Japan supplied the United States with bases, but Americans bore the cost of maintaining a large military establishment in and around Japan. As a result, while other large countries were devoting between 4 and 7 percent of their GNP, and sometimes much more, to military expenditures, the Japanese were paying next to nothing. Even after they subsequently created a modest SelfDefense Force, they made it a rule to restrict expenditures for it to no more than 1 percent of GNP. This arrangement permitted them to keep taxes considerably lower than in other countries and to devote research and development activities exclusively to economically beneficial undertakings.
Japan had been so thoroughly defeated and its economy so badly injured that Americans could not imagine it rising to become a serious economic competitor. They worried more about Japan's economic viability and its domestic stability in the face of serious poverty and political confusion. Under these circumstances the United States did all it could to get the Japanese back on their feet, treating them with surprising generosity. At first it supplied emergency economic aid to prevent starvation, and subsequently it opened its markets wide to Japanese exports while permitting the Japanese to maintain tight import restrictions to protect their supposedly "infant" industries. The Americans also provided the Japanese with useful technology. Private companies who sold obsolescent technology to Japanese firms at a small profit regarded this as an unexpected windfall and never considered that the sharing of this technology might someday come back to haunt them. In this way the Japanese were able to narrow rapidly the technological gap. With their new industrial plant and their often superior business organization and marketing techniques, they developed quickly into formidable economic competitors.
The most important external influence on Japan's renascent industrial economy was the world trading environment the Americans and their allies fashioned after the war. They made strong efforts to reduce barriers to trade between nations everywhere, and worldwide commerce flourished. This was an environment in which Japan, poor in national resources and heavily dependent on foreign markets and sources of supply, could thrive without resorting to the old technique of attempting to conquer its own economic empire.
Many countries were at first reluctant to permit Japan to join the world trading community. Except for Americans, who had developed a paternalistic pride in Japan because of their role there as occupiers and reformers, the peoples of the West, still feeling the bitterness of the recent war, were not ready to welcome the Japanese into their group, and Japan's neighbors remembered the Japanese conquerors and feared a revival of Japanese military power. Only the Americans championed Japan's full membership in the world community, winning for the Japanese membership in the General Agreement on Tariffs and Trade (GATT) in 1955 and in the Organization for Economic Cooperation and Development (OECD) in 1964. In 1975 Japan was one of the six (later seven) major democratic countries that started holding annual summit meetings.
European hostility toward Japan still has not disappeared entirely, but Australia, which was among the most bitter in the early postwar years, suddenly woke up in the 1960s to the fact that Japan was becoming its chief market and adopted an attitude of warm interest comparable to that of the United States. At the same time the less developed countries of the world increasingly turned to Japan as the best source of the industrial goods and technology they needed. The quality of Japanese manufactures had improved greatly over those of prewar days, until by the 1980s "made in Japan" signified excellence in every field. Japan was universally recognized as being not only a genuine economic giant but also a world leader in every type of industrial production. It had more than drawn abreast of the West. In the eyes of many people it was a model of economic success and a harbinger of the future.
Chapter 33
The Employment System
Japan's economic success has caused a veritable mystique to grow up around it in the West. Many nations see Japan as the master of some secret and probably unfair business practices that should be changed to permit others to meet Japanese business on a ievel economic playing field. A more generous view is that the Japanese have developed mysterious skills that others would do well to learn about and emulate. Neither attitude is quite correct. Japan does have some special economic characteristics that are little understood abroad and on the whole are advantageous to the Japanese. These, however, are evolutionary developments from within Japanese society and, though surprising to Westerners, are in no way mysterious. They also are not set in concrete but keep evolving as conditions change.
One of the most outstanding characteristics of the Japanese economv is the lifetime employment system. For executives this is a carry-over from premodern days. Big companies select their future executives through examinations administered to fresh university graduates, often limited to a few prestigious universities Successful candidates are enlisted for lifetime careers with the firm. In their early years they are all trained thoroughly, often through advanced study in Japan or abroad and through a variety of jobs in order to broaden their knowledge of the company's activities, though the most promising are likely to be given the most challenging assignments.
The members of the annual cohort keep in step with one another throughout most of their careers in both salary and rank. Normally no one is asked to serve under either a member of his own age group or a younger person. Only when the group nears the top are the ablest selected for the chief executive posts and the remainder retire--a common age is fifty-five --though many receive peripheral positions as executives in smaller affiliated enterprises that may supply parts for the main company.
This general system of selection, training, promotion, and retirement is also used by the various ministries and agencies of the central government. Bureaucrats when they retire usually take advisory positions in the government or more frequently in business, where their income remains much the same but the duties are much lighter.
The whole Japanese employment system has certain drawbacks but also some major virtues. It tends to ameliorate if not eliminate corrosive competition and friction within the age cohort and across age and status lines. Because a subordinate cannot leapfrog an incompetent superior, the superior has nothing to fear from an able or ambitious subordinate. No one tries to demonstrate individual brilliance or aggressive leadership for fear of being considered a misfit. All office workers see themselves as members of office teams. The leader consults fully with his subordinates and encourages them to show initiative and special abilities, because their achievement redound to the credit of the whole office team. The subordinate dares to speak up without fear of drawing disapproval. At the same time, he gives his superior full support, regardless of the latter's ability or lack of it. The result is a system of easy consultation that brings out the best in all members of the office team. Full cooperation is counted on among all levels of management, and initiative is expected to be displayed at any level.
This brings us to the Japanese decision-making process in business and the bureaucracy, which foreigners often find puzzling. Americans, accustomed to a relatively dictatorial top-to-bottom style of decision making, are surprised to see in Japan decisions that appear to come from the bottom up. This phenomenon is related to a system called the ringisei, in which documents are widely circulated, usually from the lower echelons to higher ones, and officers at each level affix their seals as a sign that they have seen the document and are not actively opposed to it. This is not unlike the clearance system in American bureaucracies or the distribution of memoranda for information. Many routine matters can be settled in this way, but the system is not peculiar to Japan nor is it a way to make difficult high-level decisions.
What is indeed special in the Japanese decision-making process is the system of careful and thorough consultations before a decision is arrived at by general consensus. This is called nemawashi, a term literally denoting cutting around the roots of a plant before it is transplanted. Instead of an individual making a decision at the top, yanking out a plant by its stem, as it were, the Japanese conduct wide informal discussions involving concerned subordinates. From this may emerge a consensus that can be embodied in a ringisei document drafted by some subordinate. Or the final decision may still have to be made by a small group or one man at the top. In any case, all persons concerned are made fully familiar with the decision in advance and are in a position to carry it out much more effectively than if they were suddenly handed it without previous warning.
This corporate decision-making process and the tight cohesiveness of the age cohort and the office team do have some serious drawbacks. They slow up the decision-making process and also make it difficult for outsiders, especially foreigners, to fit in. Foreigners tend to lack not only fluency in Japanese but also sufficient knowledge of Japanese styles of personal relations and long enough associations with their office mates to perform effectively. As the Japanese economy rapidly becomes more international, the difficulty of incorporating foreigners at the highest levels of leadership will become a growing problem.
On the other hand, Japan's system of lifetime employment for executives has the advantage of reducing internal frictions and building up great loyalty to the company or branch of government a person joins. He tends to identify himself not by his specialized function as an engineer, electronics expert, sales executive, economist, or the like so much as by his firm or branch of government as a Toyota, Nippon Steel, Hitachi, or Finance Ministry man. He proudly wears his company logo in his buttonhole, and his "name cards" (meishi), which are ubiquitously exchanged, will always feature this professional affiliation. The value of such intense loyalty is incalculable.
Lifetime employment for persons in executive positions is by no means limited to Japan. It is common in most military organizations and in many civilian branches of government, such as the American foreign service. But the extension of this system to labor is a unique feature of the Japanese system. This is commonly assumed to be a survival from premodern Japanese society, but it is in fact a more modern development. Early Japanese machine production, as in the West, was mostly in textiles and, again as in the West, was largely staffed by transient young female workers. In Japan most of these were girls attempting to build up dowries, who lived in dormitories under close company control and chaperonage.
Workers in the technically more demanding metal industries were men who wandered from job to job, selling their labor to the highest bidder as in the West. Around the turn of the century Japanese employers began to realize that such skilled workers were a relatively rare commodity worth holding onto through various special privileges, the chief of which was job security. The hold on this labor could be made more secure by a wage system that rewarded length of service, making it progressively less attractive for workers to leave. Promising young men with adequate educational records would be recruited at relatively low wages determined by the abundance of unskilled labor, trained for specialized jobs at company expense, and retained by promises of steadily rising wages in accordance with seniority.
The lifetime employment system is essentially the same for executives and workers, though it started earlier with executives. It began to be important for labor only after World War I and became the dominant system in big business only after World War II. It succeeds in building almost as much loyalty to the company among workers as among executives. The office groups of executives and white-collar workers are paralleled by work groups or quality control circles on the floor of the factory. Together with their supervisors, workers form small close-knit units that take pride in the achievements of their particular group, policing the quality of their work and produce and collectively seeking means to improve their performance or suggesting innovations for the manufacturing process.
No clear line is drawn between executives and workers, though executives are clearly on a higher track from the start. They usually wear the same work jackets and hats in the plant and eat in the same company restaurants. Cheap company housing may be provided both groups, and a great deal of company indoctrination is included in the initial inservice training for both. In some companies all employees start the day by singing the company song together. The company takes a paternalist interest in both young workers and executives. Warm relations of trust are encouraged between supervisors and subordinates, the former often function as personal counselors to those below them. A big firm may have a vacation resort for groups from the company, and sports teams, field days, and other activities are sponsored to strengthen the feeling of company solidarity. The lives of young workers and executives are focused on the company as much as possible, usually with considerable success in building a sense of personal identification with the company.
Although the whole system of lifetime employment and pay in accordance with seniority grew out of labor needs, it fits well into basic Japanese group attitudes and produces a number of important side benefits. It makes for a loyal and even enthusiastic work force that takes pride in its products and is happy to work overtime. Many workers, particularly junior executives, make a point of not taking full advantage of the vacation time allotted them, perhaps wishing to impress others with their loyalty and the importance of their work. Workers are diligent and police their own output so carefully that, in contrast to most countries, outside inspections are not need for quality control.
The worker finds that his close identification with his company satisfies his need for membership in a group, and the steady rise of his wages with age fits his economic requirements as he progresses through the various stages of life--marriage, having children, paying for their education, and, finally, preparing for his retirement. The system is much more modernized and humane than that of industrialism in the nineteenth century, when wages were determined primarily by skills and energy, which often tapered off as a person grew older. It is similar to the pay system of modern armies and bureaucracies and can be considered more the pattern for the future than are the old-fashioned wage practices still found in many other industrial countries.
The Japanese lifetime employment system also acts as an ameliorating counterforce against the waves of unemployment that have buffeted the industrialized world in modern times. If a company no longer needs workers for some particular line of activity, it will always seek to train those displaced for some other form of work in the company, and even when it faces an overall surplus of labor, it may seek to keep workers occupied in make-work activities until natural attrition has eliminated the surplus.
This approach, of course, is socially as well as economically beneficial to the workers, saving them from loss of self-respect as well as economic strains of unemployment. For the economy of the nation and society as a whole, and even for the individual companies, it also has its benefits. The system assures the companies of the loyalty of its workers and of public goodwill. It also may not increase its long-term economic burdens. Unemployed workers must be supported in some way, probably out of taxes, and these in the last analysis are borne by the companies themselves. The costs of unemployment ultimately must be paid.
Japan seems to have done very well with its lifetime employment system. Unemployment figures have for some time been only a small fraction of what they are in other industrialized countries and have not risen appreciably even at times of economic crisis, as in the oil shocks of the 1970s. Of course, the chief reason for this has been the thriving of the Japanese economy. Another factor is that Japanese unemployment figures are in some cases deceptively low because of the tendency of unemployed female workers not to register as part of the work force. But the Japanese employment system has unquestionably been an important part of Japan's economic success.
The seniority system of pay also acts as a built-in spur to economic growth. A dynamic, rapidly growing company will have a disproportionately large number of newly hired young workers who are underpaid in terms of their productivity, while a stagnant company will on average have an older, more costly work force. There are thus strong economic incentives for rapid expansion. Growth in Japanese business breeds more growth. And the fact that wages are a fixed cost not easily reducible by dismissals militates strongly against any reduction of production, regardless of demand or price. The natural pressures are all for expansion and against contraction.
As described above, the Japanese employment system sounds almost idyllic, but it has severe limitations. It has never applied to the bulk of the workers in the lower level of the dual economy or to most women, who have always been considered temporary employees outside the system. Workers in petty retailing and small industrial plants have no assurance of lifetime employment or steadily rising wages geared to seniority. Around each of the great manufacturing corporations are gathered scores of small subcontracting firms that serve as feeder plants, supplying small elements to the manufacturing process but affording their workers none of the privileges of the system. Even within the big corporations there are whole categories of workers who are considered temporary labor outside the system, however permanent their employment may actually be. These various peripheral workers receive fewer financial benefits and run the risk of unemployment, while only the elite workers of the big companies enjoy the full privileges of the system.
Changes are taking place even among them. During the period of most rapid economic growth, from the late 1950s to the 1970s, labor was plentiful, and companies could grow quickly by hiring relatively inexpensive young workers, especially those from the postwar baby boom period. Rapid growth thus was definitely advantageous for a firm, since it lowered average labor costs. The increase in population, however, subsequently slowed down. As young workers became less numerous and older ones became a larger percentage of the work force, the so-called graying of the population made labor more expensive on average and the rapid growth of firms less easy or advantageous.
Younger workers also are beginning to find the Japanese employment system less attractive than did their predecessors. Distant economic rewards for present hard work do not have as much appeal. They find the paternalistic attitudes of the company a little stifling and crave more freedom in their personal lives. As a result they show less loyalty to the company, and more of them, including young executives, are inclined to shift jobs, to the horror of their elders. The whole wage system, which is highly complex, is moving toward more emphasis on skills and production results and away from an overwhelming reliance on seniority. In other words, the system is showing signs of erosion.
The Japanese employment and wage system, however, still seems on the whole to be firmly entrenched and will probably remain basically intact for some time. The poorer wages of the lower level are being pulled upward toward the better wages of the upper level because of the general scarcity of labor. Although it seems clear that the whole system will continue to erode to some extent, and conditions in Japan will gravitate closer to those in the West, it is even more probable that the Western system of employment and wages will move even further toward the obviously successful Japanese pattern.
The employment and wage system in Japan has clearly influenced the development of labor unions there. As we have seen, immediately after World War II the labor movement flourished on the foundations of a determined though oppressed prewar labor movement and with the strong encouragement of the American occupation. For a while it even made a bid to take over control of industry. Subsequently, however, because of American opposition to such activities and the satisfaction of Japanese workers with their rapidly rising wages, the labor movement settled down into a less militant stance, which has been maintained ever since.
Only a third or less of Japanese workers are unionized--a figure comparable to much of Western Europe and definitely higher than in the United States. Since the workers think of themselves primarily as lifetime members of some specific company rather than as pliers of specific skills and their lives are heavily bound up in the activities of that company, most unions are not craft unions spread throughout several companies, Iike those of the West, but are limited to a single company, in which they embrace all workers, including often even the lower echelons of management. Such unions might be called enterprise unions to distinguish them from "company unions," a term that implies an artificial creation dominated by the company. Japanese enterprise unions are entirely independent organizations designed to defend the workers against management and engaging the company in an annual nationwide "spring offensive" over wages.
Enterprise unions commonly are banded together in larger groups to include all the unions in a certain line of economic activity, and these in turn are sometimes formed into nationwide federations that are likely to be focused more on national issues than on local ones. As we have seen, Sohyo, the largest, is primarily made up of government employees and white-collar workers, whose wages are more likely to depend on political action than on the marketplace. As a consequence, its unions tend to retain the early emphasis on political activity, particularly through support of the Socialist Party or even the Communists. The second-largest federation, Domei, made up mostly of blue-collar workers in private industry, emphasizes wages and working conditions for its members and gives its political support to the Democratic Socialist Party. The lesser federations and independent unions tend to remain politically neutral.
The average worker in most of private industry is fundamentally interested in his own enterprise union, not in the national federations. Both he and his union realize that his own well-being depends on the success of his company. Knowing that the company will retrain him for a new job if his old one becomes outmoded, he and his union put up no opposition to technological advances, which sometimes cause costly losses in the West. They also realize that the company can scarcely increase its wages and benefits for its workers without increased productivity and profits. Though bargaining stubbornly for their share, they remain reasonable in their demands, tailoring them to fit the financial conditions of their company. When the Japanese economy was growing very rapidly, Japanese workers could expect annual wage increases of around 15 percent, which made everyone happy, but in more recent years of slowed growth or even setbacks the workers and their unions have proved to be equally reasonable.
Workers and their unions are about as unhappy to see strikes ana other work stoppages as management itself, because they realize that they too must pay for the profits lost. For this reason many strikes are purely symbolic, set for short periods before the commencement of work in the morning, allowing workers to demonstrate their muscle without impairing production. Real strikes are normally brief. Prolonged strikes are likely to occur only when a whole industry is going under and workers must be shifted out of it. The last such strike was the Miike coal strike in 1960, when the strikers inevitably had to give way in their demands. In recent years, man-days lost to strikes have been far fewer than in the West--a mere third or quarter as many as in the United States and the United Kingdom.
In these and other ways the Japanese labor unions have contributed to the rapid growth of the Japanese economy while satisfying the needs of the workers. They are one of the significant ways in which the whole Japanese employment and wage system has been an important asset to the Japanese economy. Of course, the system works more smoothly when Japan's economy is steeply rising, but it still seems to run very well even when the economy slows down, as it now has. It is obviously one of the reasons for the extraordinary success of the modern Japanese economy.
Chapter 34
Business Organization
Japanese business organization at its higher levels has been another major reason for the country's economic success. This aspect of Japan's economy in particular is little understood in the West. One question often asked is who owns Japanese business, since most remaining industrial wealth was virtually confiscated in the capital levy by the American occupation at the end of the war. The answer basically is the nation itself, that is, the people in general.
Successful new entrepreneurs, farmers owning land near cities, and people with desirable nonagricultural land have built up considerable fortunes, but stockholders typically do not own or control most of the big companies. Instead, they are run though not owned by their own executives, who operate under the watchful eye of the financial institutions that provide them with most of their capital. Ownership exists, if anywhere, with banks and other lending institutions. Debt-equity ratios sometimes run as high as 80 to 20 percent, which would be considered a very dangerous situation in the West. Behind the banks, insurance companies, and other sources of capital stands the central Bank of Japan, which in turn is supported by the credit of the government and the taxes and savings of the population as a whole. The net result is a sort of national ownership.
Because of this situation, most Japanese businesses do not have to worry much about the quarterly bottom line, as their American counterparts do. They can concentrate on long-range stability and growth in market share, which are of primary interest to the lifetime employees who are the executives of the company and to the lending institutions, which look for security and long-term returns on their loans. As a result, the Japanese businessman pays more attention to a good growth record, which will entitle him to more bank loans, than to immediate profits, which would be helpful in raising equity capital. Whereas the American executive must keep his eye on stock prices and the quarterly bottom line, his Japanese counterpart can take a more Olympian view, seeking to maintain a sound company and to lay the basis for growth that may not pay off for a decade, long after he himself has retired. This longer time horizon for Japanese business permits a wiser strategy for growth and is probably the single greatest advantage it has over business in the West.
The role financial institutions play in providing adequate capital for Japan's spectacular growth raises the question of where they obtain so much money. The answer starts with the credit of the national government, which stands behind these institutions. Then comes Japan's huge economic success, which has added vastly to its financial resources. But a third and vital factor has been the strong propensity of the Japanese people to save under diverse circumstances, including even the early postwar years of economic want and the subsequent period of exuberant consumer spending. Unlike Americans, who have become accustomed to living in debt through home mortgages, credit-card buying, and other forms of borrowing, the Japanese have a firm tradition of saving. In part this has been necessitated by fewer social security programs and lower retirement pay, but it seems to be fundamentally a survival from a long history of penurious living. Japanese savings rates actually approached 40 percent of GNP in the 1960s, and even today personal savings is roughly 15 percent, as compared with around 7 percent in Europe and only 3 percent in the United States. Corporations, freed from the need to bow to demanding stockholders, tend to reinvest a much larger share of profits in further expansion than is normally possible in the West.
The tax and wage systems are also set up in such a way as to encourage savings. Tax benefits accrue to companies reinvesting their profits rather than distributing them as dividends, and for the small saver postal savings, though paying low interest rates, have been tax free. The higher wages of older workers are specifically designed to be saved for retirement, and the whole wage system has a special quirk that encourages savings at all age levels. Twice a year, at New Year's and midsummer, employees receive a bonus, usually running from one to three months' salary, depending upon the company's profits. Since most employees are accustomed to living on their monthly pay, these bonuses are easily squirreled away as savings.
As we have already seen, another major feature of Japanese business organization is the close cooperation that has existed in modern times between business and government.'Some' Americans, exaggerating the situation, have viewed Japanese business and government as secretly united into a single entity, which they call "Japan, Inc." This greatly overstates the case, because government controls are limited and business is eager to be entirely free of them. But there is enough truth to the picture of government-business cooperation to form a sharp contrast with the United States, where the two have traditionally been considered to be enemies.
In premodern Japan, business was seen as an undesirable reality that disrupted the ideal patterns of the feudal system, but in the mid-nineteenth century the new Meiji government became the sponsor of business in order to catch up with the West, while businessmen gratefully accepted government leadership and assistance. Business, however, grew so rapidly that in the eyes of some the tail began to wag the dog. Eventually military leadership in the 1930s forced most businesses to become dissatisfied but obedient handmaidens of government.
During the American occupation, the concept of free business activity was introduced through the dissolution of the zaibatsu, passage of the Anti-Monopoly Law, and the establishment of a Fair Trade Commission and other institutions borrowed from United States models. In reality, however, government control over business was never more thorough. This was because the desperate economic situation called for such controls, as did the sweeping social and political reforms the Americans were carrying out.
The occupation reformers thought of their innovations as temporary measures, but many became a permanent new starting point for government-business relations. Much of the government control was exercised through the powerful Ministry of International Trade and Industry (Tsusansho)--commonly known in the West as MITI (pronounced meetee)--which replaced the prewar Ministry of Commerce. While an Economic Planning Agency formulated broad economic objectives, the various branches of MITI set goals for specific industries and guided much of Japan's actual growth. Through control of foreign exchange and the licensing of foreign technology, the bureaucrats carefully supervised the acquisition of new technology, seeking to obtain the best on the most favorable terms for those best able to make optimum use of it. At the same time they avoided creating monopolies within Japan and encouraged competition by ensuring that two or more strong companies would get similar technology. MITI also helped in the formation of depression cartels, when production had to be curtailed and export cartels when "voluntary" restrictions on exports were demanded by foreign countries, especially the United States. It also encouraged mergers of weak, small companies with larger, stronger ones in order to improve the overall performance of the economy.
As has been mentioned, tax strategies were designed to encourage industries that had good prospects for growth, and the Bank of Japan adopted policies that assured the ample flow of funds into such fields. Both MITI and other ministries also gave "administrative guidance" with a view to steering companies into the most productive lines of activity. This "guidance" did not have the force of law, but businessmen voluntarily accepted it, because they realized that MITI and the other ministries had many administrative means of rewarding or punishing them.
In these various ways, the government played a major role in guiding Japan's postwar economic recovery. As we have seen, it first encouraged a few selected basic areas of industrial activity and then, as the economy prospered, moved on to other more advanced fields. It has had a steadily shifting strategy as economic conditions have changed. Already by the 1960s it was moving away from labor-intensive industries, as the newly industrializing countries, the so-called NICs, such as South Korea, Taiwan, Hong Kong, and Singapore, appeared on the world industrial scene with their decidedly lower wage scales. Subsequently it began to shift from heavy industries, which required huge imports of raw material and energy resources such as oil, and were likely to cause heavy pollution, to high technology that could be charactertzed as knowledge and information industries, where Japan's high educational levels and scientific skills gave it an advantage over the NICs and parity with the best in the West.
Another important role of the government has been to ease the difficulties caused by declining industries. With the exception of agriculture, it frankly accepted the necessity of shifting workers from these sunset industries to growing ones, and it aided in the process. It adopted policies of retraining workers for other fields and reducing production in planned stages to which companies could accommodate. Its role has been diametrically opposed to that of the American government, which, yielding to the pressures of congressional representatives of areas with declining industries, has sought to prop up these unhealthy elements in the economy at the expense of higher prices for consumers and higher taxes on the stronger parts of the economy. Thus the Japanese government helps to channel resources to the most productive industries, while the American government seeks to retain them for the least productive industries. The Japanese strategy naturally produces faster growth and a healthier economy.
Not all Japanese postwar industrial growth resulted from government guidance. The bureaucrats were as fallible as others in predicting the future. For example, Japan's great success in the automotive field was achieved without any particular government aid or realization of what was happening. The government in its economic guidance, however, was wise enough to leave actual business initiatives up to private industry. Thus, unlike the countries with fully planned economies, it permitted free enterprise to escape from governmental miscalculations and to exploit fields that the government had overlooked. The balance between private initiative and government aid and guidance seems to have been a happy one--perhaps the best such balance struck anywhere in the world.
The government-business relationship has by no means been all one way. Big business, or the zaikai ("financial world") as it is known in Japan, is no mere puppet of government but more of an equal partner exerting a reciprocal influence. The government has given big business guidance and aid, but it has also sought its advice. The powerful Keidanren (Federation of Economic Organizations) has played a major role in determining the government's economic policies and sometimes even its leadership, especially in the 1950s and early 1960s. The Keizai Doyukai (called in English the Committee for Economic Development), whose members initially were somewhat younger business executives than those who headed Keidanren, has also played an important advisory role. The Japan Chamber of Commerce (Nissho), which represents slightly smaller companies, and Nikkeiren (the Federation of Employers Associations), which operates as a central strategy board in labor relations, have served more parochial business interests.
In recent years both the role of government in providing guidance to industry and government-business cooperation seem to have been waning. As Japanese industry has become stronger, it has had less need or tolerance for government controls of any sort, and the demands by foreign countries for reciprocal treatment in Japan to balance the openness of their own economies to Japanese economic penetration have required the government to abandon many of the controls it once exercised. Exchange controls have had to be dropped as well as most tariff limitations on imports and MITI's supervision of the importation of technology. The one area in which government leadership has actually expanded is pollution controls. Aroused by the Japanese public, the government vigorously took up pollution controls in the early 1970s. These, unlike earlier measures, were not welcomed by business and were designed not to foster economic growth but to meet social demands. The concerns that once gave priority to economic growth and made government and business congenial partners in achieving this goal are disintegrating. The government, responding to popular emphasis on the quality of life over mere quantity of production, is being pulled in one direction, while businessmen, with their unchanging drive for economic success, are losing their position as the heroes of Japan's postwar economy and are increasingly being regarded as the villains, as the chief pollutors and creators of overcrowding. The basic cooperation between an efficient government and a dynamic, competitive business world will probably continue, but the old warm partnership as the twin engines of Japan's postwar economic success is not likely to be restored.
Another major feature of Japanese business is the strength of group ties, which pervade it as they do the rest of Japanese society. Members of management regard their superiors, peers, and subordinates all as members of the same club, with whom they must do their best to cooperate during their whole careers. They are not likely to be lured away by higher pay in other companies, and those who may be are looked on askance as misfits or persons with a serious character flaw. This system minimizes disruptive changes in leadership and also damaging interpersonal competition. The company benefits greatly from lessened frictions and stronger cohesion among its leaders.
The resulting sense of solidarity may be one reason for lower overhead management costs in Japan than in the United States. Salaries for management are decidedly more modest than in the United States, and there is much less ownership of company stock by executives. The only exceptions are the relatively new family companies, but even in these not much of the ownership can be passed on in the face of extremely steep inheritance taxes. Success is measured less by money than by the symbols of prestige--large company residences, cars, chauffeurs, sumptuous offices, liberal expense accounts, and, most of all, the holding of a high offfice in a company of national importance. In any case, we do not find the bloated salaries or large competing bureaucracies common in American corporations.
Since the executive offficers of a Japanese company form a lifetime club sharing similar objectives, they operate smoothly together. Unless a company runs into serious financial difficulties and comes under the control of its creditor banks, the leadership is chosen from the most successful members of the club. Engineers or scientists who are thoroughly familiar with the whole process of manufacturing the company's products are likely to be in charge rather than sales managers or financiers from some larger company that has taken it over to milk its immediate profitability, not to develop its long-term strength. One result of this sort of leadership is that a Japanese company usually stays in the field of production or business it knows best and keeps its eye on further growth in that field, rather than proliferating into a conglomerate seeking short-term profits.
Japanese business executives are less concerned with quick profits ro please stockholders than with long-term growth to increase the company's market share and win national and international prestige. This is the best way to achieve both personal and company goals. The two cannot be entirely disentangled from each other, since personal rewards clearly can only come if the company is successful, but management is united in taking the long-term view of the company's success. Such attitudes contrast with American concentration on personal success in whatever company pays best and immediate profits to demonstrate personal effectiveness. They fit in well, however, with the long horizon of Japanese economic planning and the national drive for economic success.
The tendency toward group cooperation spreads into the relations between companies. As we have seen, those in the same line of activity often form associations, which in turn make up the components of the overall Keidanren federation. Businesses in one of the keiretsu groups inherited from the time of the zaibatsu combines also often have closer relations with each other than with other companies, and long association and personal friendship and trust are likely to play an important role in determining a company's corporate partners. The importance of personal respect and trust cannot be overemphasized in any explanation of how Japanese big business works. Friendships are strengthened by the exchange of gifts, intermarriage, and recreation together on the golf course and at geisha parties--or bars in the case of less exalted executives. Such personal ties play a major role in business relations, preceding legally binding agreements, which merely spell out the details. Businessmen shy away from cold legal relationships, preferring warm personal contacts. If possible, litigation is avoided and problems are decided by compromises based on personal trust. This is one reason why Japanese business employs only a small fraction of the number of lawyers per capita that the United States requires. The result is a tremendous saving in lawyers' fees and a much lower intensity of friction in business.
The emphasis on personal friendship reaches beyond relationships between companies and into their cooperation with government. One of the reasons this cooperation was so successful at a crucial time in Japan's postwar development was that the bureaucrats and the business leaders, except for some of the new self-made men, came mostly from the same prestigious universities. They were friends already or at least symbolically wore the same old school tie.
In many ways, Japan's postwar industrial system is the best in the world, as it has clearly demonstrated. It might be called postcapitalist because of its leadership by salaried "business bureaucrats" and its orientation to national service and growth rather than merely to personal salaries and immediate company profits. Monetary recompense is relatively equal, and the welfare of the nation as a whole is seen as the main objectlve.
In a sense the Japanese economy is a blend of the best aspects of capitalism and socialism. It does not submit itself entirely to the unseen hand of the market, but accepts government guidance. At the same time, the government does not stifle economic growth, as it does wherever it attempts to plan and control the whole economy. There is ample room for free enterprise and stiff competition. The economy operates harmoniously and effectively; it brings to positions of leadership men of proven intellectual talent and practical skills drawn through open competition in school and business from the whole country; and it brims over with a drive for growth, which is kept alive by vigorous competition between rival companies. Undoubtedly the Japanese economy is an outstanding success, worthy of study and, where appropriate, emulation, though it should be noted that part of its strength lies in characteristics that other people might not be able or willing to imitate.
In conclusion, however, we should remember that, for all its success, Japanese business is not without serious problems and weaknesses. There is no guarantee that it will operate as smoothly in the future as it has in the recent past. Many of its greatest strengths are clearly starting to erode. Young people have less of the unquestioning loyalty to their companies than their predecessors had. The whole wage force is aging and as a result becoming more costly and less productive. The Japanese are unwilling to see labor shortages filled by immigrants or "guest workers," as happens in the United States and in northern Europe. This attitude makes it more difficult to fill low-paying jobs but also saves the Japanese from having to cope with some of the difficult social problems of ethnic diversity.
The greatest problem area for the Japanese is foreign trade. They see themselves as precariously perched on a narrow economic ledge, depending on huge imports of food, energy resources, and other raw materials and therefore as equally dependent on large exports of industrial goods to pay for their imports. When Japan was still a relatively small economic unit recovering from the war and the world economy as a whole was rebounding vigorously from its recent devastation, there was plenty of room for rapid Japanese growth; but now Japan has become an economic giant, and although it has no problem obtaining raw material imports, since the world appears to be heading into a period of surpluses in raw materials, Japan is now encountering serious difficulties in finding markets for its exports. The newly industrializing nations with lower labor costs are pushing Japan out of labor-intensive fields, such as textiles and electronics, and into the high-technology, capital-intensive areas. But the markets in those fields are largely in the richer, highly industrialized countries like the United States and those of Western Europe, which are themselves desperately clinging to this sort of production. They are not likely to permit directly competitive Japanese imports to continue to grow at the same rate as in the past at the expense of their own industries. For example, America's current annual deficit of fifty or more billion dollars with Japan simply cannot be tolerated over an extended period and must be curbed by negotiation before it brings some more drastic and dangerous reaction.
Japan's tariffs on trade are no higher and in many cases are lower than those of most of its rivals, but other countries feel that Japan has maintained nontariff barriers through trickery, creating an economic playing field that is tilted against foreigners. They also believe that the Japanese can maintain their economic vigor and bring greater benefit to their country by devoting more of their production to enriching their own land, especially in improving housing, roadways, sewerage, and other social needs, and putting less effort into exports.
The Japanese perceive the situation quite differently. They are perilously dependent on massive foreign trade. They remember that the world oil shortage and subsequent worldwide runaway inflation over which Japan had little control forced the inflation rate in Japan to soar for a while in the 1970s as high as 26 percent. They also remember America's sudden embargo in 1973 of soybeans, which are so necessary in the Japanese diet. Such incidents give them a strong sense of vulnerability. They are keenly aware of their inability to produce their own food. They feel that they must maintain a rapid rate of growth to build up a cushion between themselves and some unforeseen disaster. They attribute the favorable balance in their trade to the unwillingness of other countries to reform their economic systems and their failure to learn the Japanese language and how to exploit the Japanese economy in the way that Japanese businessmen mastered foreign languages, the 16 economic requirements of the countries to which they wished to export, and their methods of doing business.
There is some validity to both points of view, but the important point is that Japan's economic problems lie primarily in its relations with other countries. In fact, this is true of almost all of Japan's serious problems. Japan left to itself is an extraordinarily successful and happy land. Obviously, however, at this stage in history Japan cannot live by itself; it is inevitably one of the central foci of world events. It is to Japan's relations with the outside world that we must now turn.
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Source: Reischauer, E. , & Jansen, M. B. (1995). The Japanese Today (pp. 295-342). Belknap Harvard.