How Japan Realized Her Impossible Dream

Eight months after the end of World War II, in the spring of 1946, I brought my men of the Army Field Hospital in Hang-zhou, China, back to Japan. When we got off the train at their home station, we found the whole city destroyed, devastated by some powerful bomb or incendiaries. No buildings, houses, or trees were to be seen. Only new shacks here and there.

Ichiro Watanabe of our group, who had lived there with his family and had had a store near the railroad station, was so shocked by the hellish scene that he suddenly started singing a lullaby, a requiem to his beloved children.

The name of the city was Hiroshima.

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 reconstruction of Japan had to begin, so to speak, from “Ground Zero.”

Post-World War II Hardships and Inflation (1945-1949)

The soldiers and civilians who returned from the wax aggravated the food and unemployment situation. Production nationwide was in disarray. Of Japan’s eighty million or so people, close to 10 million were non-producers, either in the military or on some other government payroll. Land reform, abolition of the peerage system, and the liquidation of big financial combinations 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 hard-pressed 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 fortunate 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 insufficient rations.

In those post-war 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, i.e., inflating. When prices rose because of the demands for commodities by the new money recipients, 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 controls and government employment could not bring economic development to Japan. That would take the energy and genius of entrepreneurs who were freed to compete on world markets. Eventually Japanese business produced steel, refined oil, built ships, manufactured automobiles, and developed a 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 producers 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. Inflation 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 International Trade and Industry (MITI). MITI hoped to shape and direct Japanese production by administrative regulations. It has had an impact on steel, oil, and trade. However, its influence has not been complete, and it has not always been beneficial. MITI’s administrative regulations were not supposed to be binding but businesses generally felt compelled to go along “voluntarily,” or face possible “bureaucratic harassment” later. Administrative guidelines could also be used as a barrier to deregulation.

Many production facilities had been reduced 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 accelerated. 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 difficult in 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 management, it expanded production in response 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 windfall 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 manufacturers 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 encountered strong objections from MITI, the Bank of Japan, and the big-three steel makers. They feared an oversupply of steel and criticized his proposal as wasteful, unnecessary, 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 discouraged; a third of the existing furnaces, he said, were over 30 years old; his modern 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 Kawasaki became one of the big six, diversifying 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 administrative guidelines in 1951, his company’s development and expansion would have been checked before it began.

Opinion concerning MITI was thus divided. Government control versus free competition was the issue. During the 1965 recession, MITI sought to curtail steel production; six firms agreed to go along with the plan. However, Sumitomo Metals, with 4.5 percent share of the country’s steel production, 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 refused to accede to MITI’s administrative guidelines requiring a cut in production. The conflict between him and MITI made headlines. At first, Hyuga had the backing of other steel producers, but soon he was standing alone against MITI. 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 compromise and Sumitomo reduced its production of steel. Three years later in 1959 he appointed an ex-MITI bureaucrat to its Board of Directors “voluntarily.”[2]

The case of Yawata Steel was very different. Originally established as a government 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 considered” 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 furnaces were constructed between 1973 and 1978. By 1975-1977, Japan was becoming one of the world’s big three in steel production; 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 production. It designated the open-hearth furnace industry a “depressed industry” and demanded that some production facilities be shut down. Blast-furnace steel makers, protected by MITI and depending on “cost-plus pricing,” along with small- and medium-sized steel makers, joined the “recession cartel.” However, privately operated Tokyo 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 competition, remarked: “Regulations imposed by a comprehensive network of administrative guidelines now pervade the steel industry, seriously hindering proper competition . . . . 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 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 employs only 29 persons; each staff member has his own personal network-linked computer, reducing paperwork and the time spent on meetings. Contrast Tokyo Steel’s efficiency with that of MITI-supported New Japan Steel with 1,700 employees in its headquarters and, according to its consolidated 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 imports, provided that (1) MITI publish a petroleum supply plan as a guideline for producers, (2) oil producers conform to MITI’s production plan, (3) producers modify their production plan if MITI’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 themselves; 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 compensate producers for losses MITI, by administrative 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 anything and everything, even toilet paper and detergents. MITI’s response was to regulate the distribution and consumption of petroleum. 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 innovate led to lower oil consumption and improved productivity.

In 1986, Taiji Sato, president of Lions Petroleum, tried to import oil which he expected to sell in Japan below MITI’s rigged price. The importation of oil was not then prohibited. But when MITI learned that Lions’ oil tanker was approaching Japan, 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 regulations on the opening of filling stations 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 of privatization and in 1981 he began to carry out his dream. Japan Telegraph and Telephone Public Corporation was privatized as the Nippon Telegraph and Telephone Corporation (NTT) in 1985. The Japan Monopoly Corporation was privatized in 1985 as the Japan Tobacco Industry Corporation (JT). And in 1987, the Nippon National Railways (JR) was divided into six passenger companies and one freight company, solving in the process its 37.5 trillion yen accumulated debt problem. These privatizations were not only great achievements 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 prominence 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 890 employees, earned 163.7 billion yen. Compare that with Toyota which, that same year, 1993, with 72,000 employees, earned 280 billion yen, its greatest operating profits ever. However, nothing ever stands still on the market. To maintain his position on the market, every entrepreneur must re-earn the support of his customers 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 fluctuations 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 encouraged or discouraged international trade in the short term. Throughout these fluctuations, 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. After 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 Cabinet 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 carded out without being sabotaged by bureaucrats who want to retain power.

Nobuyoshi Namiki, formerly chief of MITI’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 enjoyed high- speed growth, but that was caused by the efforts of diligent and honest 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 concerning MITI. 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 protection, and tax relief. Beason and Weinstein asked “whether the most-helped sectors grew fastest?” and found that “support was given on the whole to slow-growth industries . . . . That the economy succeeded for decades is plain enough,” they said. “But, on this evidence, industrial policy may well have hindered rather than advanced the cause.”[9]

Beason and Weinstein confirm Nobuyoshi Namiki’s position. MITI is not so mighty as once it was; its power has been considerably reduced. In the world of kaleidoscopic, 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 successful post-war economic development rests, not on MITI’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 1971-1991 figures, 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 hard-working, 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.[11]

3. Government spending for defense. According to the National Defense White Paper, the average ratio of defense expenditures in Japan to GNP for the period 19811991 was 0.98 percent, while in the United States, Britain, and West Germany the ratios 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 advanced countries.

4. Independence and Entrepreneurship. Osaka is a city known for the entrepreneurial 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 government.” 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]

5. Innovative management and marketing. Japanese exports in prewar days were regarded as “cheap, but of poor quality.” W. E. Deming, a U.S. professor, played a major role in improving the quality of Japanese goods. A prize established in his honor is awarded to individuals and companies making important contributions to quality control. Today, thanks no doubt to lessons learned from Professor Deming and from taking consumer wishes to heart, Japanese appliances and automobiles are rated among the best in the world.

In Japan, consumer sovereignty is recognized in the field of marketing. To sell their products and services and earn profits, producers realize they must satisfy their customers. The success of Japanese exporters has depended largely on their efforts to learn the languages, customs, tastes, and demands of potential purchasers in other countries. Matsushita, a manufacturer of appliances, 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 experience European daily life to develop new washing machines which will satisfy European buyers.[13]

American producers who want to sell in Japan would do well to try a similar approach; they would then realize that the narrow width of the staircase in a typical Japanese home makes it difficult or impossible 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. automobile manufactures begun producing for export to Japan low-priced cars comparable in quality to those the Japanese make for export. Also it was not until this past summer (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 modified 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-fliers 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 accumulation 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 Japanese philosopher Kinjiro Ninomiya (17871856). He is reading a book while carrying a bundle of firewood on his back.[14] Ninomiya’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 important 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.” []

1.   November 3, 1951, Asahi Shinbun.
2.   For details see Chalmers Johnson, Mill and the Japanese Miracle: The Growth of Industrial 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 niokera Shippai no Kenkyu (A Case Study of the Failure of New Japan Steel), Era 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 thai Roared,” Reason, May 1986, p. 43.
8.   Nobuyoshi Namiki, Tsusansho no Shuen: Shakai Kozo no Henkaku wa Kano ka (The End of M1TI: Is Renovation of Social Structure Possible?), Diamond-Sha, 1959, p. 61.
9.   Quoted in the Economist February 26, 1994, from “Growth. Economies of Scale, and Targeting in Japan (195590),” Harvard Institute of Economic Research, Discussion Paper 1644.
10.   International Comparison of saving ratio (1971-1991)     Gross Saving       HouseholdRate       Saving Rate

    Japan       33.3%       18.0%

    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 “International 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 Days1985       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.