werner 3
Winning the Peace
An Economy at War
The Cold War Propaganda Myth of the Postwar Reforms
If Japan’s postwar economic, social, and even political system was created during the war, then what were the U.S. occupation and the postwar reforms all about? General MacArthur’s Occupation Administration was given orders to democratize, deconcentrate, demilitarize, and liberalize Japan. To implement this goal, first the wartime laws and ordinances, such as the National General Mobilization Law, were abolished and the control associations and other wartime organizations dissolved. The military and their bureaucracies were disbanded. The Munitions Ministry, at the heart of the war economy, was broken up in December 1945. So was the powerful Home Ministry, with its police apparatus, including the dreaded Thought Police. War criminals were brought to trial.
Second, the political system was reshaped. Japan was given a new constitution, which established democratic principles and the freedom of speech and religion. Female suffrage and free elections were introduced. Third, MacArthur’s GHQ implemented three major reforms designed to dismantle the war economy system: the breakup of the zaibatsu, land reform, and labor democratization.
Thanks to these high-profile reforms, it seemed that Japan made a break with the past and was about to become a free, democratic, and liberal capitalist country, partner of the United States, the leader of the “free world.” This, at least, is how Cold War propaganda on both sides of the Pacific presented it.
At first glance it looks as if the U.S. occupation fulfilled its official goal. But when the occupation ended in April 1952, its fruits were quite different from those it had promised. Instead of dismantling the war economy system and deregulating and liberalizing the economy, the opposite had happened. The U.S. occupation succeeded in strengthening and further entrenching the fully mobilized war economy system.
With the advent of the Cold War, some lobbyists in the United States were more interested in establishing Japan as a “bulwark against Communism” and hence urged that Japan’s economy be strengthened as quickly as possible.1 “Japan hands” in the State Department, such as prewar ambassador Joseph Grew, succeeded in pushing for far milder occupation policies than were implemented in Germany.2 Ultimately, interests in New York and Washington came to the same conclusion as the wartime economic planners did in the 1930s: that the visible hand of the government should be used to accelerate growth.3 Already by 1947, General MacArthur’s democratization policies had been seriously undermined. Although there was no official announcement, a major U-turn of the U.S. stance vis-à-vis Japan had taken place. The GHQ now actively advanced the continuation and strengthening of the successful war system of total resource mobilization.
Reform by Relabeling
As a result, for all intents and purposes Japan’s wartime economic controls remained unchanged even after the end of World War II. The Munitions Ministry merely split into the Ministry of International Trade and Industry (MITI) and the Economic Planning Agency (noticeably less menacing labels).4 The wartime control associations soon resurfaced as private-sector business associations of the various trades and industrial sectors. The postwar carmakers’ lobby, the Japan Automobiles Manufacturers Association, for instance, was the automobile control association during the war. The keidanren, the powerful umbrella organization of all sectoral associations, is the successor to the wartime center of economic control associations. A random check into the history of many postwar companies and associations, not to mention laws, rules and customs, inevitably unearths wartime roots—whether it is the Tokyo Eidan Subway Corporation, the Japan Productivity Center, the Bankers’ Association, the Association for the Promotion of Savings, or the neighborhood police reporting system.5
Certain wartime legislation was officially reintroduced soon after the war, especially by MITI and MoF: the Order No. 3 of the occupation forces of September 1945 declared the continuation of economic controls. Foreign currency rationing was reintroduced immediately. A materials supply and demand plan was drawn up in place of the materials mobilization plan.6
The continuation of the war system was most blatant when it came to the monetary system and financial controls: the wartime Temporary Funds Adjustment Law of 1937 and the Ordinance on Funds Operation of Banks of 1940 remained effective. So did the Bank of Japan Law of 1942 (it was changed fundamentally only in April 1998). The Foreign Exchange and Foreign Trade Control Law, promulgated in 1949, was merely a continuation of the laws that started with the Capital Flight Prevention Law of 1932, the first series of laws that established the controlled war economy. It lasted until April 1998.
The close relationships between companies and banks that were set up during the war also reestablished themselves when the U.S. occupation ended, in the form of the powerful keiretsu and the main bank system. Even key parts of the postwar tax system can be traced to the war economy. The Enterprise Rationalization Promotion Law of 1952 established a depreciation system for important machinery with very high rates of depreciation and hence large tax incentives to accelerate capital investment. This furthered the corporate bias of overinvestment and underconsumption. Its origin is to be found in the Price Compensation System of 1943.
Supreme Rule of the War Economy Bureaucrats
It was not only the institutions of the wartime system that survived intact with only minor name changes. More importantly, there was virtually complete continuity of wartime bureaucrats and managers. While the troops were disbanded, the leaders and war planners who had run the war economy remained in their positions.7
General MacArthur had decided to implement systematically the principle of indirect rule through the Japanese bureaucracy, unlike the more direct rule established by the occupation forces in Germany. This left the bureaucracy practically completely in place. If anything, the power of the economic bureaucracy that had pushed for the war economy system increased after the war. Thanks to the U.S. occupation, their principal rivals for power, the military and the Home Ministry, had been disbanded. Another, somewhat lesser rival, the once proud Foreign Ministry, had also greatly diminished, as Japan’s foreign policy was mostly made in Washington, not Tokyo. As long as they could agree with the goals of MacArthur, the economic bureaucrats at MoF, MITI, the predecessor of the Economic Planning Agency, and the Bank of Japan had become the rulers of Japan.
Even though with the abolition of the National General Mobilization Law their powers were now “informal,” this did not diminish them in practice. The principal source of bureaucratic power, the licensing system, was still in place and terminology merely changed from “control,” “planning,” and “allocation” to “guidance” and “moral suasion.” Since their private-sector counterparts were also largely the same people they had been working with during the war, strict obedience was assured. “Japan was placed under an American system of rule, but the ideological pattern remained exactly as hitherto.”8
The Return of the Manchurians
The very bureaucrats and managers who had demonstrated excellence in running the fully mobilized war economy, whether in Manchuria or back home, received rapid promotions to even more elevated positions in the postwar system. This is not surprising, since of the economic war planners, hardly any were purged by the United States—forty-two Ministry of Munitions, nine MoF bureaucrats and basically no Bank of Japan officials.9 And as soon as the U.S. occupation left, practically all the nonmilitary men who had been purged were rehabilitated in order to fill the ranks that their seniority deserved. This includes wartime politicians and most Home Ministry bureaucrats who had been in charge of the Thought Police. A number moved into the Education Ministry to take care of postwar education policy in Japan.10
The wartime planners did not just move back to modest positions in the public arena. The suspected Class A war criminals took center stage in the 1960s and early 1970s in positions as high as Japan’s prime ministership.11 The most important postwar economic and political leaders came from the elite group of wartime bureaucrats, the “Manchurians.”
While Albert Speer, the German wartime economy minister, was incarcerated in Berlin’s Spandau Prison, his Japanese wartime colleague, Nobosuke Kishi, became prime minister. Kishi had been the leading Manchurian control bureaucrat, and during the war he became the minister for munitions, heading the war economy. As such, he had been a key designer of the wartime economic system.12 He was also the nephew of Yosuke Matsuoka, a general director of the South Manchurian Railway Company—the core of the Manchurian mobilized war economy and one of the largest companies in the world at the time. Matsuoka was a staunch backer of the army and the Manchurian experiment, and later rose to become pro-German foreign minister of the second Konoe Cabinet (from July 1940 to July 1941).
Kishi and his brother, Eisako Sato (a former railway bureaucrat), were prime ministers for altogether ten years, between 1957 until 1972.13 Other prime ministers with experience of the wartime system include Yasuhiro Nakasone, a former Home Ministry official. A key figure later in this book, the governor of the Bank of Japan in the 1990s, Yasushi Mieno, was born in Manchuria, since his father was a top control bureaucrat in the Manchurian Railway, the cadre school of the wartime economy. Finally, one should not forget the emperor himself, who was also an active leader during the war and a willing collaborator afterward.14
Among the eleven major automobile manufacturers of postwar Japan, only Honda is a true postwar creation. Toyota, Nissan, and Isuzu were key producers of trucks for the military. The seven other carmakers switched to car production from aircraft, tank, and warship manufacturing. Nissan and Hitachi were the core of the conglomerate operated by Yoshisuke Ayukawa, a supporter of the Manchurian experiment of the controlled economy. He moved the headquarters of his conglomerate, including Nissan, to Manchuria, where he named it the Mangyo (Manchurian Industries) concern. Ayukawa became a member of parliament after the war.
Even the postwar media scene is the result of wartime concentration legacy: The Nikkei and the Sankei Shinbun are basically the result of wartime mergers, as are many other firms. Dentsu, Japan’s top advertising company, is the product of the wartime concentration of the advertising industry, which reduced the number of firms from almost two hundred to only twelve. “It recruited so many former military and Manchukuo bureaucrats that in the early postwar era it was often called the ‘Second Manchurian Railway Building.’”15 Manchurian origins can also be found with many large publishing companies. The list of successful or important postwar companies, institutions, and individuals with Manchurian or war economy backgrounds is a long one.16
LDP—“Bureaucratic Rule Assistance Association”
The minor role of political parties in forming serious economic policies in postwar Japan is well known. It remains to say that the unification of several parties to create the so-called Liberal Democratic Party in 1955 established the one-party reign (if not rule) that provided the democratic fig leaf for the control bureaucrats who were actually running the country. The so-called 1955 system closely resembled the one-party Imperial Rule Assistance Association system of the war era.17 The minor, and clever, improvement was that an opposition was allowed to provide an outlet for dissenters and to show the world that Japan was, really, a democracy.18 For forty years, until 1993, all governments were constituted solely by the LDP.
With a Little Help from My U.S. Friends
Michio Morishima, a seasoned expert on Japan’s economy, concluded: “As a result of this shift [in U.S. policy], Japanese capitalism re-emerged like a phoenix in a form almost identical to that of the prewar period.”19 More than that: The irony is that only during the postwar era did the reform bureaucrats succeed in implementing their boldest reforms. During the war, they had failed to implement their ideas in two important areas. One was the complete elimination of the capitalist class from public and business life—the purge of the powerful zaibatsu families. The control bureaucrats considered this necessary to ensure continued growth orientation and the permanent neglect of profit maximization.20 The other was full-scale land reform that would expropriate large-scale landowners and redistribute land to boost wealth equality. This was expected to raise productivity and living standards in the agricultural sector. Despite their far-reaching powers, the reformers had faced stiff resistance during the war, as both policies smacked of communism. It was therefore anathema to the more capitalistically inclined leaders of the wartime period. Although the economic planners had to shelve these radical ideas, they remained convinced that they were necessary to enhance Japan’s growth potential.
They did not have to wait very long. General MacArthur volunteered to implement these socialist policies, employing all the force of an occupation power. He purged the capitalist class, the zaibatsu families (the official reason was that they had allegedly been instrumental in setting up the militarist regime). They had mainly controlled their zaibatsu firms through holding companies, which owned the majority of zaibatsu firm stock. In 1946, holding companies held 167 million shares of stock. Since the total number of shares in all companies in the country was 443 million, they owned almost 40 percent of the total.21 The zaibatsu owners were forced to sell their stocks to the public, and the holding companies were forbidden entirely (until 1998). Zaibatsu leaders, including illustrious members of the founding families—the core of the capitalist elite in Japan—were purged as war criminals or supporters of a criminal war and prohibited from further business activity. An Anti-Monopoly Law and a Law for the Elimination of Excessive Concentration of Economic Power were enacted in 1947.
While the capitalist families disappeared from the economic landscape, their large conglomerates remained. Of the 325 firms scheduled for dismantling in 1948, only 18 were actually split up. By 1953, just a year after the departure of the U.S. occupation, the Anti-Monopoly Law had already been drastically watered down. Restrictions on stock retention, interlocking directorships, and mergers were relaxed, depression and rationalization cartels allowed. In the 1950s and 1960s about 30 laws were passed that provided exemptions to many industries from the Anti-Monopoly Law as well as the Export-Import Law. These included the Insurance Industry Law, the Aviation Industry Law, the Securities Investment Trust Law, the Fruit Industry Promotion Special Mearures Law, and so forth. Thanks to such vigorous intervention, the number of official cartels swelled from 162 in 1955 to 1,079 in 1966—as we shall see, an important part of the war economy system.22 Most of all, the originally planned breakup of the five largest banks was abandoned, leaving the financial system entirely unchanged from its wartime setup.
Meanwhile, the companies regrouped as keiretsu business groups. While they were not held together by centralized holding companies, the companies simply tied themselves together by issuing more shares and swapping them, that is, by rapidly expanding the cross shareholdings. The war bureaucrats preferred this to holding companies, because the latter could be influenced by shareholders, but diffuse cross shareholdings established their system of capitalism without capitalists. Thanks to MacArthur’s anti-zaibatsu reform, Japan’s corporate giants had been rendered even more independent from shareholder influence and unaccountable to outsiders. Although banks could only hold up to 5 percent of stock of any industrial corporation, and since 1953 up to 10 percent, by arranging the purchase of stock by related keiretsu firms—each buying a small percentage of stock from each other’s firm—they could cumulatively control over two-thirds of all shares. The resulting bank-centered business groups were identical to the prewar conglomerates, only they were now controlled by managers, not the capitalist shareholders. And in this managerial capitalism it was only the banks and ultimately the bureaucrats who had the say and could allocate resources as they saw fit.
Expropriation of Capitalists
The U.S. occupation also helped the wartime bureaucrats in implementing another one of their key goals. During the war, they had made attempts at sweeping land reforms. Politically unable to expropriate the large-scale owners during the war, the bureaucrats had instead opted for rendering them de facto irrelevant, just like the shareholders. By having a government agency buy rice at a high price directly from the farmer while paying landowners low rents for their land, they had severed the tie between tenant and owner and, crucially, between owner and land. Like shareholders, landowners had become receivers of a fixed income without actual say over their property. However, a full-blown reallocation of landowner-ship had remained impossible during the war.
The U.S. occupation did the job for them by reallocating landownership to the tenant farmers. The postwar land reform almost completely wiped out the pre-1945 landlord class. This reallocation of land property went so smoothly only because the preparation had already taken place during the war. As a result, a major step toward social equality was achieved. The U.S. occupation initially pushed for the democratization of the labor market, introducing new labor legislation and a nationwide labor union movement. Accordingly, the share of unionized labor rose from zero in 1945 to almost 60 percent in 1949. The increasingly powerful communist influence over this movement, with the background of the Cold War, convinced the U.S. occupation to change course. In July 1948 it restricted the right to form trade-based unions and abolished the right of civil servants to engage in strikes. From then on, the wartime company labor unions, the Industrial Patriotic Associations, were revived and mushroomed all over the country. After this, all the other wartime labor practices, from lifetime employment to bonus payments, were reinforced. This ensured that real strikes declined sharply, because workers would only hurt their firm, and hence themselves. The health insurance system introduced during the war essentially laid the foundation for the postwar Japanese social security system.
Kamikaze Capitalism: The Fight for Market Share
Thanks to the efforts of the U.S. occupation, the system of a fully mobilized war economy was led to completion in the postwar years—almost. Only in one aspect was the wartime economic model not yet complete, despite the tacit support from the United States. Indeed, there is a snag in the model that became visible during peacetime. Since the structure of the firm is designed such that the goal is growth, not profits, managers will compete for market share. Although concentration was greatly increased in every industry in order to rationalize production and take advantage of economies of scale, the planners always made sure that enough firms would remain to compete against each other to prevent managers from resting on their laurels. Since there are no trade unions any more, the company tie is more important than the fate shared with fellow employees in other firms. Steel workers thus compete with each other instead of uniting. The management of one firm battles the management of another. Being in a firm with higher rank brought more prestige and had material benefits of higher incomes, pension plans, and more company facilities for housing, health care, and recreation.
In wartime, there was no problem with this, because firms focused on the production of their allocated quota with the simultaneous goal of highest quality. But in peacetime, bureaucrats soon found that their structure was getting too successful: When these market-share-oriented firms were let loose against each other without production quotas, fierce competition for market share would ensue. Like competition for ranking among managers in the hierarchy, the result of the war system was that entire firms would compete not for profits but for ranking—the corporate pecking order decided by market share.
Since market share was the goal, firms would competitively lower prices; cutthroat competition and a dumping war would ensue until no firm was making any profits. In U.S.-style capitalism, the profit motive is the goal. Market shares are only a means to the ultimate end of higher profits. When competing against another firm, the profit motive would limit competition. As margins of both competitors approach zero, firms would stop lowering prices. They would be satisfied with profits and would be happy to coexist with each other. Not Japan’s corporate warriors. Since the whole corporate structure was not aimed at profit maximization, low profitability, even losses, failed to stop the combatants from continuing their ruthless battle.
War Model Too Successful for Its Own Good
This was the inevitable result of an institutional setup where competition takes place between parallel groups of the same kind, as the “enemy” is so similar.23 It is also a major strength of the collectivist ranking competition on which the war economy is based: Society is divided into homogeneous groups, all ranked, and competition exists between those in the same category for ranking.24 “The pursuit of maximum growth has serious industrial and macroeconomic consequences,” notes an observer of the phenomenon.25 The war-mobilized model was so successful in inducing growth and market-share expansion that firms would not stop. This phenomenon was soon recognized by the bureaucracy and called “excess competition” (katō kyōsō)—competition beyond what is necessary and good for the firms. Firms would go deeply into the red and even borrow to subsidize their output. It was a war of one management against another. Profits were no consideration. Firms would fight until bankruptcy to gain market share. There was no truce. The war system produced economic war until one side was destroyed.
During the postwar era, however, firms were not given predetermined production quotas. Left to their own devices, the structure would produce many bankruptcies, higher unemployment, and excessively high concentration in each sector. Once the bureaucrats had identified the problem, a solution could be worked out. The solution was the creation of explicit or implicit cartels, usually administered by the trade associations (the former wartime control associations). A ranking of firms was established, and the guidance of the industry association ensured that firms would by and large leave the ranking unaltered; all the firms continued to compete, but just enough to keep the rankings intact.
Cartels Were Necessary
To many observers, cartels may appear to be a bad thing. However, the cartels and industry associations fulfilled a crucial function.26 Without them, excess competition would lead to economically wasteful excess production and dumping of goods below their production value. At the same time, the cartels and industry associations served the purpose of implementing the bureaucratic “guidance.” The problem was that the Anti-Monopoly Law had rendered cartels and agreements illegal in many sectors, such as construction. If they had been made public, they would also have drawn criticism from abroad. Thus the bureaucrats tacitly tolerated illegal collusion to fix prices and market shares, the so-called dango, such as in the construction and public works sectors. Given Japan’s economic system, they served the public interest, for collusion was aimed not at profits, but at maintaining market-share rankings, while firms continued to compete for price and quality.
Despite the cartels and industry associations, however, the competition between firms remained so fierce that “excessive competition” was the biggest weakness of the mobilized economy set-up. Until the 1990s, it seemed to be the problem that Japanese firms produced too much, invested too much, competed too much, and grew too much.27
The Mobilized Postwar Economy
The militarization embraced people’s daily lives: Western-style trousers had replaced the kimono during the war, and rationed food and consumption had standardized consumption patterns. The thought that consumption was bad and savings good had been hammered deeply into the psyche. What previously was an agricultural and traditional craftsmen’s workforce had now concentrated in big cities and was employed in factories: “They put on industrial overalls and learned the life of bondage to the factory whistle.”28 All this thanks to the war.
The wartime shift of labor to the heavy manufacturing sector and the shift of production capacity away from light industry, especially textiles, which dominated the prewar economy, laid the foundations for the rapid industrialization of heavy and chemical industries in the postwar era.29 The increase of technical schools from less than a dozen in the early 1930s to more than four hundred in 1945 was due to the science and engineering requirements of the military, which exempted these fields from military service. By the end of the war the number of engineering students had tripled compared with a decade earlier.30 Quality control had been a major concern of the military, which rigorously enforced norms and standards set by the Industrial Standardization Law of 1940.
The relationships forged during the war between banks and companies, large firms and their small suppliers, and bureaucrats and the industry associations provided the framework for postwar success. In the 1960s, more than 40 percent of the parts suppliers to Toyota had begun this relationship as wartime subcontractors.31
War technology was transferred to manufacturing consumer goods. Engineers and workers trained in this technology put their knowledge to making consumer goods. There are cases of machine-gun factories switching to sewing machine production. Optical weapons factories became exporters of cameras and binoculars. Suppliers of military hardware, such as tanks, trucks, planes, and ships, became the postwar shipping, automobile and heavy industries giants. Upstart firms created and championed by the military during the war became postwar world leaders in their sector.
Exports, Not Bullets
The wartime ideology of the firm as family, fostered by the Industrial Patriotic Associations, was carried over unaltered to the postwar era.32 Lives remained regimented, with company exercises in the morning, military boot camps for new company employees, and army-style discipline and obedience to superiors. The ultimate goal of a soldier had also been transferred to the postwar corporate warriors—loyalty unto death, as documented by the stunning phenomenon of karōshi (death from overwork).33
Consumers and households were encouraged to withhold their purchasing power by saving, while firms were given funds to invest in the priority sectors. Their products had to be sold. In the early postwar years, the expansion of domestic demand was important for growth, based on enfranchised farmers and workers.34 By the early 1960s it became apparent that, given the high domestic savings, the markets had to be overseas. So instead of munitions, the priority industries were now export-oriented manufacturers.
Managers were the commanding officers, workers and salarimen the corporate soldiers. The bureaucracies of MoF, MITI, and the Bank of Japan were the economic general staff. All fought the total economic war against the world.
Exports were the bullets flying out, hitting world markets and often leaving deep wounds in other countries in the form of high unemployment. Imports were hits taken and had to be minimized. This was done with the wartime exchange rationing system, revived immediately after the war. Importers required import licenses for each item, which were granted only to producers in priority industries, such as the export industry. This system was used to impose extreme restrictions on automobile imports, tantamount to total import ban, while the infant domestic car industry was getting into gear. The more bullets were fired and the fewer hits taken, the likelier Japan was going to win the economic war it was fighting. A trade surplus meant victory. It seemed Japan was following the oft-quoted caricature of mercantilism, where trade surpluses had become an end, not a means to an end.
But the World Was Unprotected
The result could not fail to be even more successful than the war economy. Economically speaking, weapons are wasteful production, because they are consumed. The same factories now produced similarly high-value-added export goods, which now, however, earned foreign currency. The money could then be used to import other production factors, such as raw materials, or for reinvestment. Thus instead of a steady drain on the system, as weapons production had been, exports would continuously strengthen Japan. The only limit would be the willingness of the world to put up with a country that was still at war with the world in economic terms—closed to imports and hence piling up trade surpluses as if they were war loot.
While domestically the bureaucrats and industry association leaders ensured that companies would be protected against the kamikaze-like market share expansion behavior, the rest of the world was not so lucky. The only place where the full thrust of Japan’s totally mobilized growth-oriented economy was working unmitigated and without restraining cartels was the world market.
As the United States pushed the Western countries to welcome Japanese exports, the full force of Japan’s war economy was unleashed onto the world. Ignoring profits and aiming at market share, Japanese exports soon dominated the steel and shipbuilding markets in the 1960s. European and U.S. firms, aiming at profitability, were soon driven out of business. The onslaught by Japanese carmakers followed. Subsidized by the underconsumption of the domestic population, they began to conquer world markets.35 Then, in the 1970s and 1980s, the entire U.S. consumer electronics industry was wiped out by Japan’s militarized and mobilized exporters. As a consequence, unemployment rose in the United States and Europe.
U.S. economists were often puzzled by the fact that Japanese monopolization of many markets in the world did not lead to concerted price rises to exploit monopoly profits. Analysts still failed to see its intrinsically different organizational structure and dynamics as a scale-maximization machine. Profits were irrelevant for management.
Ensuring Access to World Markets
Before Japan could make these historic inroads into world markets, however, it had to ensure that the world would be open to its products. The major clubs of the postwar industrialized world community, the GATT (now WTO), and the OECD, guaranteed open markets for all its member countries. That is why Japan had been pushing for membership since the 1950s. There was only one catch: The membership rules said that only countries with market-oriented and open economic systems could join.
This provision was aimed at protecting the members from countries that might dump their products while keeping their own markets closed—countries just like Japan. European countries argued that Japan’s application to join GATT should be refused until the country had deregulated its economy and opened its markets to the world. However, the Cold War was raging. Japan being America’s key ally in the Pacific, the Americans put politics before economic considerations. Against the express wish of European countries (France objected particularly strongly), the United States used its dominant position to push through Japan’s application.36
In response to GATT membership, Tokyo strengthened its tariff barriers—just in case these foreigners thought they could now export to Japan.37
The Japanese bureaucrats realized, however, that Japan would not be allowed to maintain its exemptions forever. Moreover, they longed for an even greater prize, namely, membership in the prestigious OECD, the club of “advanced” countries. And it was already clear that the United States would not allow quite as many exemptions from membership rules. There was one rule that Japanese leaders knew would ultimately have to be adhered to: free flows of money and free foreign investment among member countries.
At the time, much of the world had fixed exchange rates with the U.S. dollar under the Bretton Woods system (until 1971). This forced other countries to accept the U.S. dollar at given exchange rates. Japanese bureaucrats watched with horror as the United States took great advantage of the system by simply printing large amounts of dollars. The U.S. Federal Reserve had embarked on a major domestic credit expansion drive, and much of that excess money was used to buy up European corporations.38
Government-Organized Deception
The war bureaucrats scrambled back to their drawing boards to find a solution. Business leaders of all industries held meetings in their various industry associations. Everyone was keen to keep the world open to Japanese exports. But all were very much afraid of an influx of foreign capital that could take over corporate Japan and change the wartime system. Foreign investment was a threat to the war bureaucrats and business leaders. Japan needed to “defend” itself against forced takeovers from abroad.39 So what to do?
It was time for a great act of deception. What followed was, in the inconspicuous words of MITI, “a series of measures as a part of [the government’s] effort to prepare for the liberalization of capital transactions to strengthen business and industrial structures in order to make them competitive with foreign firms.”40
To take over a Japanese company, foreigners would have to buy shares on the stock market. So the bureaucrats used a weapon of their war economy arsenal: they had already successfully reduced the influence of the zaibatsu families and other individual shareowners by the system of cross-shareholdings. More of the same was needed to keep the foreigners out.
Assume there are two firms that have issued one hundred listed shares in the hands of a zaibatsu family. If both issue two hundred more shares each and swap them, the ownership and hence control of the original owner is drastically reduced; instead of owning the entire firm, the one hundred shares now entitle the zaibatsu family to only a third of the firm. Since the managers of both firms agreed beforehand not to sell each other’s shares and also not to use the ownership to interfere in each other’s businesses, it is nothing but a managers’ mutiny to expropriate the original owners and take over the firm.
Companies Choose Their Shareholders
That, of course, was precisely what the wartime planners had wanted. The same would also work for foreigners, the bureaucrats thought. The only obstacle—a mere detail—was that expropriating shareholders was now theft. And theft was illegal, even in Japan’s postwar mobilized economy. Article 280 of the Commercial Law protected shareholders from dilution of their ownership without their consent given at a general meeting of shareholders. During the war, such niceties could be dispensed with by invoking the National General Mobilization Law. As the world was to find out, the postwar power of bureaucrats was hardly any smaller now. Article 280 of the Commercial Law was simply rewritten. In 1955, just in time for GATT membership in September of that year, the Diet revised and amended Paragraph 2 of Article 280. “The new provision allowed the board of a company to issue additional shares and assign them to each other—that is, they dilute the present stock of shares without obtaining formal approval from the current stockholders.”41
Thanks to the exemptions to the GATT rules, there was no immediate need by companies to invoke this new clause of the Commercial Law. The law change therefore drew little public attention in Japan, let alone the rest of the world. Careful not to cause any headlines, companies slowly but surely issued new stock and swapped it with their business partners, such as subcontractors, and their banks.
The process accelerated in the early 1960s, as Japan received clearer hints by its allies that it would be allowed to join the OECD soon, provided it deregulated international capital flows. At the time, American capital outflows had increased even further and U.S. companies were just about buying up the free world with their printed money. France, Germany, and Britain received large inflows of foreign investment. This takeover by U.S. capitalism of European companies in the late 1950s and early 1960s came to be dubbed “le défi Americain” by a French contemporary. In this situation the United States did not want their European allies to get any ideas about protecting themselves from U.S. foreign investment. Any exemption for Japan from the capital flow clause of the OECD membership rules was therefore going to be temporary.
“Japan could no longer use any reason to impose import restrictions and invisible trade regulations for balance-of-payment reasons, and instead became obliged to promote liberalization of capital transactions,” to borrow the words of MITI strategists.42 Japan still succeeded in obtaining eighteen exemptions to the OECD membership rules.43 Moreover, companies stepped up their new issuance of stocks and swapped them with each other.44 Though billed as a measure to “raise capital,” no new money was raised.
Instead, management had built up an invincible defense against takeovers and outsiders trying to influence their policy. Now let the foreigners come. Japan was open to their investment. They would find nothing to buy. Japan Inc. was simply not up for sale. Most shares were not traded, but held in stable interlocking relationships. Most large firms participated in the scheme, thus increasing their keiretsu ties. The degree of cross shareholdings between firms thus increased rapidly again in the 1960s. While in 1949 about 70 percent of all shares were held by individual owners, by the late 1980s this had dropped to a mere 19.9 percent of all shares traded on the Tokyo Stock Exchange.45 The lack of dominant individual holdings makes it harder for the dispersed individuals to assert their rights and influence management.
By 1966, the program to boost stable cross shareholdings was virtually completed. To prevent the possibility of criticism from abroad, the bureaucrats and business leaders decided to modify Article 280 to give the appearance of propriety. A large number of small provisions were added that gave details of the circumstances under which management boards could issue new shares without shareholder approval. And thus it came that the world never took notice of Japan’s act of deception.
In the words of Paul Krugman: “Japan’s situation with regard to direct investment is like its situation with regard to imports, only more so. De jure, Japan is wide open … de facto, foreign firms in Japan face endless informal obstacles.”46 In 1988, Japanese companies acquired 315 firms abroad. Foreigners, however, bought only 11 firms in Japan.47 Even when foreigners managed to obtain large stakes, such as T. Boone Pickens, who acquired more than 30 percent of the shares of Koito, a parts supplier within the Toyota keiretsu, this did not guarantee influence on management. Pickens failed to gain representation on the board of the company in which he held a “controlling” stake and felt forced to sell out. The extremely low amounts of direct investment by the world into Japan has been an important reason why foreign firms have found it hard, if not impossible to penetrate the Japanese market. In Japan it was not shareholders that chose which company’s shares to buy, but companies that chose their shareholders. Foreigners were not favored.
Japan as Perpetual War Economy
Thanks to this maneuver, by the early 1970s the war economy had been more firmly established than ever since bureaucrats and the military set out to mobilize it in 1937. Japan’s bureaucracy had managed to realize its wartime dream of a management entirely free from the profit-oriented interests of individual ownership. The wartime vision of managers not aiming at profits, but their own goals, had become entrenched reality. And managers’ aims are advanced best when the firm grows—growth for the glory of the nation. A mobilized war economy had been established, a nation run by public and private bureaucrat-soldiers in the fight for economic supremacy.
Perceptive observers, especially within Japan or in Europe, pointed out the important role of strong government intervention.48 While the Cold War lasted, U.S. opinion leaders did not allow such critique to come to bear. But it was clever intervention. Bureaucrats had also learned during the war not to pick winners but to treat worthy competitors equally. As long as companies met certain standards of rationalization, they would receive equal government assistance. Targeted competition was always used to give firms and their employees maximum incentives to work hard. When subsidies were decided for an industry, firms had to compete against each other to obtain them. Bureaucrats employed conscious organizational design to shape incentive structures toward the desired outcome.
The Emperor’s New Clothes
Their clocks gave it away, but nobody noticed: The Japanese did not set them back to zero in 1945. The official Japanese calendar counts years by the rule of the emperor. After 1945, the Showa emperor, Hirohito, took off his military uniform, in which until then he had been seen in public for most of his reign. He was given new clothes. But he remained in office. And the clocks just ticked on. Nineteen forty-five was far from zero hour. It was not even half-time of the official calendar, the Showa era, which ended only in 1989, sixty-four years after Hirohito began his reign. Modern Japan can be understood much better when the entire Showa era is considered. The ascendance of the Showa emperor in the 1920s is where we must start if we want to trace the true origins of the postwar Japanese economic, social, and political system.49
An Economy at War
The Cold War Propaganda Myth of the Postwar Reforms
If Japan’s postwar economic, social, and even political system was created during the war, then what were the U.S. occupation and the postwar reforms all about? General MacArthur’s Occupation Administration was given orders to democratize, deconcentrate, demilitarize, and liberalize Japan. To implement this goal, first the wartime laws and ordinances, such as the National General Mobilization Law, were abolished and the control associations and other wartime organizations dissolved. The military and their bureaucracies were disbanded. The Munitions Ministry, at the heart of the war economy, was broken up in December 1945. So was the powerful Home Ministry, with its police apparatus, including the dreaded Thought Police. War criminals were brought to trial.
Second, the political system was reshaped. Japan was given a new constitution, which established democratic principles and the freedom of speech and religion. Female suffrage and free elections were introduced. Third, MacArthur’s GHQ implemented three major reforms designed to dismantle the war economy system: the breakup of the zaibatsu, land reform, and labor democratization.
Thanks to these high-profile reforms, it seemed that Japan made a break with the past and was about to become a free, democratic, and liberal capitalist country, partner of the United States, the leader of the “free world.” This, at least, is how Cold War propaganda on both sides of the Pacific presented it.
At first glance it looks as if the U.S. occupation fulfilled its official goal. But when the occupation ended in April 1952, its fruits were quite different from those it had promised. Instead of dismantling the war economy system and deregulating and liberalizing the economy, the opposite had happened. The U.S. occupation succeeded in strengthening and further entrenching the fully mobilized war economy system.
With the advent of the Cold War, some lobbyists in the United States were more interested in establishing Japan as a “bulwark against Communism” and hence urged that Japan’s economy be strengthened as quickly as possible.1 “Japan hands” in the State Department, such as prewar ambassador Joseph Grew, succeeded in pushing for far milder occupation policies than were implemented in Germany.2 Ultimately, interests in New York and Washington came to the same conclusion as the wartime economic planners did in the 1930s: that the visible hand of the government should be used to accelerate growth.3 Already by 1947, General MacArthur’s democratization policies had been seriously undermined. Although there was no official announcement, a major U-turn of the U.S. stance vis-à-vis Japan had taken place. The GHQ now actively advanced the continuation and strengthening of the successful war system of total resource mobilization.
Reform by Relabeling
As a result, for all intents and purposes Japan’s wartime economic controls remained unchanged even after the end of World War II. The Munitions Ministry merely split into the Ministry of International Trade and Industry (MITI) and the Economic Planning Agency (noticeably less menacing labels).4 The wartime control associations soon resurfaced as private-sector business associations of the various trades and industrial sectors. The postwar carmakers’ lobby, the Japan Automobiles Manufacturers Association, for instance, was the automobile control association during the war. The keidanren, the powerful umbrella organization of all sectoral associations, is the successor to the wartime center of economic control associations. A random check into the history of many postwar companies and associations, not to mention laws, rules and customs, inevitably unearths wartime roots—whether it is the Tokyo Eidan Subway Corporation, the Japan Productivity Center, the Bankers’ Association, the Association for the Promotion of Savings, or the neighborhood police reporting system.5
Certain wartime legislation was officially reintroduced soon after the war, especially by MITI and MoF: the Order No. 3 of the occupation forces of September 1945 declared the continuation of economic controls. Foreign currency rationing was reintroduced immediately. A materials supply and demand plan was drawn up in place of the materials mobilization plan.6
The continuation of the war system was most blatant when it came to the monetary system and financial controls: the wartime Temporary Funds Adjustment Law of 1937 and the Ordinance on Funds Operation of Banks of 1940 remained effective. So did the Bank of Japan Law of 1942 (it was changed fundamentally only in April 1998). The Foreign Exchange and Foreign Trade Control Law, promulgated in 1949, was merely a continuation of the laws that started with the Capital Flight Prevention Law of 1932, the first series of laws that established the controlled war economy. It lasted until April 1998.
The close relationships between companies and banks that were set up during the war also reestablished themselves when the U.S. occupation ended, in the form of the powerful keiretsu and the main bank system. Even key parts of the postwar tax system can be traced to the war economy. The Enterprise Rationalization Promotion Law of 1952 established a depreciation system for important machinery with very high rates of depreciation and hence large tax incentives to accelerate capital investment. This furthered the corporate bias of overinvestment and underconsumption. Its origin is to be found in the Price Compensation System of 1943.
Supreme Rule of the War Economy Bureaucrats
It was not only the institutions of the wartime system that survived intact with only minor name changes. More importantly, there was virtually complete continuity of wartime bureaucrats and managers. While the troops were disbanded, the leaders and war planners who had run the war economy remained in their positions.7
General MacArthur had decided to implement systematically the principle of indirect rule through the Japanese bureaucracy, unlike the more direct rule established by the occupation forces in Germany. This left the bureaucracy practically completely in place. If anything, the power of the economic bureaucracy that had pushed for the war economy system increased after the war. Thanks to the U.S. occupation, their principal rivals for power, the military and the Home Ministry, had been disbanded. Another, somewhat lesser rival, the once proud Foreign Ministry, had also greatly diminished, as Japan’s foreign policy was mostly made in Washington, not Tokyo. As long as they could agree with the goals of MacArthur, the economic bureaucrats at MoF, MITI, the predecessor of the Economic Planning Agency, and the Bank of Japan had become the rulers of Japan.
Even though with the abolition of the National General Mobilization Law their powers were now “informal,” this did not diminish them in practice. The principal source of bureaucratic power, the licensing system, was still in place and terminology merely changed from “control,” “planning,” and “allocation” to “guidance” and “moral suasion.” Since their private-sector counterparts were also largely the same people they had been working with during the war, strict obedience was assured. “Japan was placed under an American system of rule, but the ideological pattern remained exactly as hitherto.”8
The Return of the Manchurians
The very bureaucrats and managers who had demonstrated excellence in running the fully mobilized war economy, whether in Manchuria or back home, received rapid promotions to even more elevated positions in the postwar system. This is not surprising, since of the economic war planners, hardly any were purged by the United States—forty-two Ministry of Munitions, nine MoF bureaucrats and basically no Bank of Japan officials.9 And as soon as the U.S. occupation left, practically all the nonmilitary men who had been purged were rehabilitated in order to fill the ranks that their seniority deserved. This includes wartime politicians and most Home Ministry bureaucrats who had been in charge of the Thought Police. A number moved into the Education Ministry to take care of postwar education policy in Japan.10
The wartime planners did not just move back to modest positions in the public arena. The suspected Class A war criminals took center stage in the 1960s and early 1970s in positions as high as Japan’s prime ministership.11 The most important postwar economic and political leaders came from the elite group of wartime bureaucrats, the “Manchurians.”
While Albert Speer, the German wartime economy minister, was incarcerated in Berlin’s Spandau Prison, his Japanese wartime colleague, Nobosuke Kishi, became prime minister. Kishi had been the leading Manchurian control bureaucrat, and during the war he became the minister for munitions, heading the war economy. As such, he had been a key designer of the wartime economic system.12 He was also the nephew of Yosuke Matsuoka, a general director of the South Manchurian Railway Company—the core of the Manchurian mobilized war economy and one of the largest companies in the world at the time. Matsuoka was a staunch backer of the army and the Manchurian experiment, and later rose to become pro-German foreign minister of the second Konoe Cabinet (from July 1940 to July 1941).
Kishi and his brother, Eisako Sato (a former railway bureaucrat), were prime ministers for altogether ten years, between 1957 until 1972.13 Other prime ministers with experience of the wartime system include Yasuhiro Nakasone, a former Home Ministry official. A key figure later in this book, the governor of the Bank of Japan in the 1990s, Yasushi Mieno, was born in Manchuria, since his father was a top control bureaucrat in the Manchurian Railway, the cadre school of the wartime economy. Finally, one should not forget the emperor himself, who was also an active leader during the war and a willing collaborator afterward.14
Among the eleven major automobile manufacturers of postwar Japan, only Honda is a true postwar creation. Toyota, Nissan, and Isuzu were key producers of trucks for the military. The seven other carmakers switched to car production from aircraft, tank, and warship manufacturing. Nissan and Hitachi were the core of the conglomerate operated by Yoshisuke Ayukawa, a supporter of the Manchurian experiment of the controlled economy. He moved the headquarters of his conglomerate, including Nissan, to Manchuria, where he named it the Mangyo (Manchurian Industries) concern. Ayukawa became a member of parliament after the war.
Even the postwar media scene is the result of wartime concentration legacy: The Nikkei and the Sankei Shinbun are basically the result of wartime mergers, as are many other firms. Dentsu, Japan’s top advertising company, is the product of the wartime concentration of the advertising industry, which reduced the number of firms from almost two hundred to only twelve. “It recruited so many former military and Manchukuo bureaucrats that in the early postwar era it was often called the ‘Second Manchurian Railway Building.’”15 Manchurian origins can also be found with many large publishing companies. The list of successful or important postwar companies, institutions, and individuals with Manchurian or war economy backgrounds is a long one.16
LDP—“Bureaucratic Rule Assistance Association”
The minor role of political parties in forming serious economic policies in postwar Japan is well known. It remains to say that the unification of several parties to create the so-called Liberal Democratic Party in 1955 established the one-party reign (if not rule) that provided the democratic fig leaf for the control bureaucrats who were actually running the country. The so-called 1955 system closely resembled the one-party Imperial Rule Assistance Association system of the war era.17 The minor, and clever, improvement was that an opposition was allowed to provide an outlet for dissenters and to show the world that Japan was, really, a democracy.18 For forty years, until 1993, all governments were constituted solely by the LDP.
With a Little Help from My U.S. Friends
Michio Morishima, a seasoned expert on Japan’s economy, concluded: “As a result of this shift [in U.S. policy], Japanese capitalism re-emerged like a phoenix in a form almost identical to that of the prewar period.”19 More than that: The irony is that only during the postwar era did the reform bureaucrats succeed in implementing their boldest reforms. During the war, they had failed to implement their ideas in two important areas. One was the complete elimination of the capitalist class from public and business life—the purge of the powerful zaibatsu families. The control bureaucrats considered this necessary to ensure continued growth orientation and the permanent neglect of profit maximization.20 The other was full-scale land reform that would expropriate large-scale landowners and redistribute land to boost wealth equality. This was expected to raise productivity and living standards in the agricultural sector. Despite their far-reaching powers, the reformers had faced stiff resistance during the war, as both policies smacked of communism. It was therefore anathema to the more capitalistically inclined leaders of the wartime period. Although the economic planners had to shelve these radical ideas, they remained convinced that they were necessary to enhance Japan’s growth potential.
They did not have to wait very long. General MacArthur volunteered to implement these socialist policies, employing all the force of an occupation power. He purged the capitalist class, the zaibatsu families (the official reason was that they had allegedly been instrumental in setting up the militarist regime). They had mainly controlled their zaibatsu firms through holding companies, which owned the majority of zaibatsu firm stock. In 1946, holding companies held 167 million shares of stock. Since the total number of shares in all companies in the country was 443 million, they owned almost 40 percent of the total.21 The zaibatsu owners were forced to sell their stocks to the public, and the holding companies were forbidden entirely (until 1998). Zaibatsu leaders, including illustrious members of the founding families—the core of the capitalist elite in Japan—were purged as war criminals or supporters of a criminal war and prohibited from further business activity. An Anti-Monopoly Law and a Law for the Elimination of Excessive Concentration of Economic Power were enacted in 1947.
While the capitalist families disappeared from the economic landscape, their large conglomerates remained. Of the 325 firms scheduled for dismantling in 1948, only 18 were actually split up. By 1953, just a year after the departure of the U.S. occupation, the Anti-Monopoly Law had already been drastically watered down. Restrictions on stock retention, interlocking directorships, and mergers were relaxed, depression and rationalization cartels allowed. In the 1950s and 1960s about 30 laws were passed that provided exemptions to many industries from the Anti-Monopoly Law as well as the Export-Import Law. These included the Insurance Industry Law, the Aviation Industry Law, the Securities Investment Trust Law, the Fruit Industry Promotion Special Mearures Law, and so forth. Thanks to such vigorous intervention, the number of official cartels swelled from 162 in 1955 to 1,079 in 1966—as we shall see, an important part of the war economy system.22 Most of all, the originally planned breakup of the five largest banks was abandoned, leaving the financial system entirely unchanged from its wartime setup.
Meanwhile, the companies regrouped as keiretsu business groups. While they were not held together by centralized holding companies, the companies simply tied themselves together by issuing more shares and swapping them, that is, by rapidly expanding the cross shareholdings. The war bureaucrats preferred this to holding companies, because the latter could be influenced by shareholders, but diffuse cross shareholdings established their system of capitalism without capitalists. Thanks to MacArthur’s anti-zaibatsu reform, Japan’s corporate giants had been rendered even more independent from shareholder influence and unaccountable to outsiders. Although banks could only hold up to 5 percent of stock of any industrial corporation, and since 1953 up to 10 percent, by arranging the purchase of stock by related keiretsu firms—each buying a small percentage of stock from each other’s firm—they could cumulatively control over two-thirds of all shares. The resulting bank-centered business groups were identical to the prewar conglomerates, only they were now controlled by managers, not the capitalist shareholders. And in this managerial capitalism it was only the banks and ultimately the bureaucrats who had the say and could allocate resources as they saw fit.
Expropriation of Capitalists
The U.S. occupation also helped the wartime bureaucrats in implementing another one of their key goals. During the war, they had made attempts at sweeping land reforms. Politically unable to expropriate the large-scale owners during the war, the bureaucrats had instead opted for rendering them de facto irrelevant, just like the shareholders. By having a government agency buy rice at a high price directly from the farmer while paying landowners low rents for their land, they had severed the tie between tenant and owner and, crucially, between owner and land. Like shareholders, landowners had become receivers of a fixed income without actual say over their property. However, a full-blown reallocation of landowner-ship had remained impossible during the war.
The U.S. occupation did the job for them by reallocating landownership to the tenant farmers. The postwar land reform almost completely wiped out the pre-1945 landlord class. This reallocation of land property went so smoothly only because the preparation had already taken place during the war. As a result, a major step toward social equality was achieved. The U.S. occupation initially pushed for the democratization of the labor market, introducing new labor legislation and a nationwide labor union movement. Accordingly, the share of unionized labor rose from zero in 1945 to almost 60 percent in 1949. The increasingly powerful communist influence over this movement, with the background of the Cold War, convinced the U.S. occupation to change course. In July 1948 it restricted the right to form trade-based unions and abolished the right of civil servants to engage in strikes. From then on, the wartime company labor unions, the Industrial Patriotic Associations, were revived and mushroomed all over the country. After this, all the other wartime labor practices, from lifetime employment to bonus payments, were reinforced. This ensured that real strikes declined sharply, because workers would only hurt their firm, and hence themselves. The health insurance system introduced during the war essentially laid the foundation for the postwar Japanese social security system.
Kamikaze Capitalism: The Fight for Market Share
Thanks to the efforts of the U.S. occupation, the system of a fully mobilized war economy was led to completion in the postwar years—almost. Only in one aspect was the wartime economic model not yet complete, despite the tacit support from the United States. Indeed, there is a snag in the model that became visible during peacetime. Since the structure of the firm is designed such that the goal is growth, not profits, managers will compete for market share. Although concentration was greatly increased in every industry in order to rationalize production and take advantage of economies of scale, the planners always made sure that enough firms would remain to compete against each other to prevent managers from resting on their laurels. Since there are no trade unions any more, the company tie is more important than the fate shared with fellow employees in other firms. Steel workers thus compete with each other instead of uniting. The management of one firm battles the management of another. Being in a firm with higher rank brought more prestige and had material benefits of higher incomes, pension plans, and more company facilities for housing, health care, and recreation.
In wartime, there was no problem with this, because firms focused on the production of their allocated quota with the simultaneous goal of highest quality. But in peacetime, bureaucrats soon found that their structure was getting too successful: When these market-share-oriented firms were let loose against each other without production quotas, fierce competition for market share would ensue. Like competition for ranking among managers in the hierarchy, the result of the war system was that entire firms would compete not for profits but for ranking—the corporate pecking order decided by market share.
Since market share was the goal, firms would competitively lower prices; cutthroat competition and a dumping war would ensue until no firm was making any profits. In U.S.-style capitalism, the profit motive is the goal. Market shares are only a means to the ultimate end of higher profits. When competing against another firm, the profit motive would limit competition. As margins of both competitors approach zero, firms would stop lowering prices. They would be satisfied with profits and would be happy to coexist with each other. Not Japan’s corporate warriors. Since the whole corporate structure was not aimed at profit maximization, low profitability, even losses, failed to stop the combatants from continuing their ruthless battle.
War Model Too Successful for Its Own Good
This was the inevitable result of an institutional setup where competition takes place between parallel groups of the same kind, as the “enemy” is so similar.23 It is also a major strength of the collectivist ranking competition on which the war economy is based: Society is divided into homogeneous groups, all ranked, and competition exists between those in the same category for ranking.24 “The pursuit of maximum growth has serious industrial and macroeconomic consequences,” notes an observer of the phenomenon.25 The war-mobilized model was so successful in inducing growth and market-share expansion that firms would not stop. This phenomenon was soon recognized by the bureaucracy and called “excess competition” (katō kyōsō)—competition beyond what is necessary and good for the firms. Firms would go deeply into the red and even borrow to subsidize their output. It was a war of one management against another. Profits were no consideration. Firms would fight until bankruptcy to gain market share. There was no truce. The war system produced economic war until one side was destroyed.
During the postwar era, however, firms were not given predetermined production quotas. Left to their own devices, the structure would produce many bankruptcies, higher unemployment, and excessively high concentration in each sector. Once the bureaucrats had identified the problem, a solution could be worked out. The solution was the creation of explicit or implicit cartels, usually administered by the trade associations (the former wartime control associations). A ranking of firms was established, and the guidance of the industry association ensured that firms would by and large leave the ranking unaltered; all the firms continued to compete, but just enough to keep the rankings intact.
Cartels Were Necessary
To many observers, cartels may appear to be a bad thing. However, the cartels and industry associations fulfilled a crucial function.26 Without them, excess competition would lead to economically wasteful excess production and dumping of goods below their production value. At the same time, the cartels and industry associations served the purpose of implementing the bureaucratic “guidance.” The problem was that the Anti-Monopoly Law had rendered cartels and agreements illegal in many sectors, such as construction. If they had been made public, they would also have drawn criticism from abroad. Thus the bureaucrats tacitly tolerated illegal collusion to fix prices and market shares, the so-called dango, such as in the construction and public works sectors. Given Japan’s economic system, they served the public interest, for collusion was aimed not at profits, but at maintaining market-share rankings, while firms continued to compete for price and quality.
Despite the cartels and industry associations, however, the competition between firms remained so fierce that “excessive competition” was the biggest weakness of the mobilized economy set-up. Until the 1990s, it seemed to be the problem that Japanese firms produced too much, invested too much, competed too much, and grew too much.27
The Mobilized Postwar Economy
The militarization embraced people’s daily lives: Western-style trousers had replaced the kimono during the war, and rationed food and consumption had standardized consumption patterns. The thought that consumption was bad and savings good had been hammered deeply into the psyche. What previously was an agricultural and traditional craftsmen’s workforce had now concentrated in big cities and was employed in factories: “They put on industrial overalls and learned the life of bondage to the factory whistle.”28 All this thanks to the war.
The wartime shift of labor to the heavy manufacturing sector and the shift of production capacity away from light industry, especially textiles, which dominated the prewar economy, laid the foundations for the rapid industrialization of heavy and chemical industries in the postwar era.29 The increase of technical schools from less than a dozen in the early 1930s to more than four hundred in 1945 was due to the science and engineering requirements of the military, which exempted these fields from military service. By the end of the war the number of engineering students had tripled compared with a decade earlier.30 Quality control had been a major concern of the military, which rigorously enforced norms and standards set by the Industrial Standardization Law of 1940.
The relationships forged during the war between banks and companies, large firms and their small suppliers, and bureaucrats and the industry associations provided the framework for postwar success. In the 1960s, more than 40 percent of the parts suppliers to Toyota had begun this relationship as wartime subcontractors.31
War technology was transferred to manufacturing consumer goods. Engineers and workers trained in this technology put their knowledge to making consumer goods. There are cases of machine-gun factories switching to sewing machine production. Optical weapons factories became exporters of cameras and binoculars. Suppliers of military hardware, such as tanks, trucks, planes, and ships, became the postwar shipping, automobile and heavy industries giants. Upstart firms created and championed by the military during the war became postwar world leaders in their sector.
Exports, Not Bullets
The wartime ideology of the firm as family, fostered by the Industrial Patriotic Associations, was carried over unaltered to the postwar era.32 Lives remained regimented, with company exercises in the morning, military boot camps for new company employees, and army-style discipline and obedience to superiors. The ultimate goal of a soldier had also been transferred to the postwar corporate warriors—loyalty unto death, as documented by the stunning phenomenon of karōshi (death from overwork).33
Consumers and households were encouraged to withhold their purchasing power by saving, while firms were given funds to invest in the priority sectors. Their products had to be sold. In the early postwar years, the expansion of domestic demand was important for growth, based on enfranchised farmers and workers.34 By the early 1960s it became apparent that, given the high domestic savings, the markets had to be overseas. So instead of munitions, the priority industries were now export-oriented manufacturers.
Managers were the commanding officers, workers and salarimen the corporate soldiers. The bureaucracies of MoF, MITI, and the Bank of Japan were the economic general staff. All fought the total economic war against the world.
Exports were the bullets flying out, hitting world markets and often leaving deep wounds in other countries in the form of high unemployment. Imports were hits taken and had to be minimized. This was done with the wartime exchange rationing system, revived immediately after the war. Importers required import licenses for each item, which were granted only to producers in priority industries, such as the export industry. This system was used to impose extreme restrictions on automobile imports, tantamount to total import ban, while the infant domestic car industry was getting into gear. The more bullets were fired and the fewer hits taken, the likelier Japan was going to win the economic war it was fighting. A trade surplus meant victory. It seemed Japan was following the oft-quoted caricature of mercantilism, where trade surpluses had become an end, not a means to an end.
But the World Was Unprotected
The result could not fail to be even more successful than the war economy. Economically speaking, weapons are wasteful production, because they are consumed. The same factories now produced similarly high-value-added export goods, which now, however, earned foreign currency. The money could then be used to import other production factors, such as raw materials, or for reinvestment. Thus instead of a steady drain on the system, as weapons production had been, exports would continuously strengthen Japan. The only limit would be the willingness of the world to put up with a country that was still at war with the world in economic terms—closed to imports and hence piling up trade surpluses as if they were war loot.
While domestically the bureaucrats and industry association leaders ensured that companies would be protected against the kamikaze-like market share expansion behavior, the rest of the world was not so lucky. The only place where the full thrust of Japan’s totally mobilized growth-oriented economy was working unmitigated and without restraining cartels was the world market.
As the United States pushed the Western countries to welcome Japanese exports, the full force of Japan’s war economy was unleashed onto the world. Ignoring profits and aiming at market share, Japanese exports soon dominated the steel and shipbuilding markets in the 1960s. European and U.S. firms, aiming at profitability, were soon driven out of business. The onslaught by Japanese carmakers followed. Subsidized by the underconsumption of the domestic population, they began to conquer world markets.35 Then, in the 1970s and 1980s, the entire U.S. consumer electronics industry was wiped out by Japan’s militarized and mobilized exporters. As a consequence, unemployment rose in the United States and Europe.
U.S. economists were often puzzled by the fact that Japanese monopolization of many markets in the world did not lead to concerted price rises to exploit monopoly profits. Analysts still failed to see its intrinsically different organizational structure and dynamics as a scale-maximization machine. Profits were irrelevant for management.
Ensuring Access to World Markets
Before Japan could make these historic inroads into world markets, however, it had to ensure that the world would be open to its products. The major clubs of the postwar industrialized world community, the GATT (now WTO), and the OECD, guaranteed open markets for all its member countries. That is why Japan had been pushing for membership since the 1950s. There was only one catch: The membership rules said that only countries with market-oriented and open economic systems could join.
This provision was aimed at protecting the members from countries that might dump their products while keeping their own markets closed—countries just like Japan. European countries argued that Japan’s application to join GATT should be refused until the country had deregulated its economy and opened its markets to the world. However, the Cold War was raging. Japan being America’s key ally in the Pacific, the Americans put politics before economic considerations. Against the express wish of European countries (France objected particularly strongly), the United States used its dominant position to push through Japan’s application.36
In response to GATT membership, Tokyo strengthened its tariff barriers—just in case these foreigners thought they could now export to Japan.37
The Japanese bureaucrats realized, however, that Japan would not be allowed to maintain its exemptions forever. Moreover, they longed for an even greater prize, namely, membership in the prestigious OECD, the club of “advanced” countries. And it was already clear that the United States would not allow quite as many exemptions from membership rules. There was one rule that Japanese leaders knew would ultimately have to be adhered to: free flows of money and free foreign investment among member countries.
At the time, much of the world had fixed exchange rates with the U.S. dollar under the Bretton Woods system (until 1971). This forced other countries to accept the U.S. dollar at given exchange rates. Japanese bureaucrats watched with horror as the United States took great advantage of the system by simply printing large amounts of dollars. The U.S. Federal Reserve had embarked on a major domestic credit expansion drive, and much of that excess money was used to buy up European corporations.38
Government-Organized Deception
The war bureaucrats scrambled back to their drawing boards to find a solution. Business leaders of all industries held meetings in their various industry associations. Everyone was keen to keep the world open to Japanese exports. But all were very much afraid of an influx of foreign capital that could take over corporate Japan and change the wartime system. Foreign investment was a threat to the war bureaucrats and business leaders. Japan needed to “defend” itself against forced takeovers from abroad.39 So what to do?
It was time for a great act of deception. What followed was, in the inconspicuous words of MITI, “a series of measures as a part of [the government’s] effort to prepare for the liberalization of capital transactions to strengthen business and industrial structures in order to make them competitive with foreign firms.”40
To take over a Japanese company, foreigners would have to buy shares on the stock market. So the bureaucrats used a weapon of their war economy arsenal: they had already successfully reduced the influence of the zaibatsu families and other individual shareowners by the system of cross-shareholdings. More of the same was needed to keep the foreigners out.
Assume there are two firms that have issued one hundred listed shares in the hands of a zaibatsu family. If both issue two hundred more shares each and swap them, the ownership and hence control of the original owner is drastically reduced; instead of owning the entire firm, the one hundred shares now entitle the zaibatsu family to only a third of the firm. Since the managers of both firms agreed beforehand not to sell each other’s shares and also not to use the ownership to interfere in each other’s businesses, it is nothing but a managers’ mutiny to expropriate the original owners and take over the firm.
Companies Choose Their Shareholders
That, of course, was precisely what the wartime planners had wanted. The same would also work for foreigners, the bureaucrats thought. The only obstacle—a mere detail—was that expropriating shareholders was now theft. And theft was illegal, even in Japan’s postwar mobilized economy. Article 280 of the Commercial Law protected shareholders from dilution of their ownership without their consent given at a general meeting of shareholders. During the war, such niceties could be dispensed with by invoking the National General Mobilization Law. As the world was to find out, the postwar power of bureaucrats was hardly any smaller now. Article 280 of the Commercial Law was simply rewritten. In 1955, just in time for GATT membership in September of that year, the Diet revised and amended Paragraph 2 of Article 280. “The new provision allowed the board of a company to issue additional shares and assign them to each other—that is, they dilute the present stock of shares without obtaining formal approval from the current stockholders.”41
Thanks to the exemptions to the GATT rules, there was no immediate need by companies to invoke this new clause of the Commercial Law. The law change therefore drew little public attention in Japan, let alone the rest of the world. Careful not to cause any headlines, companies slowly but surely issued new stock and swapped it with their business partners, such as subcontractors, and their banks.
The process accelerated in the early 1960s, as Japan received clearer hints by its allies that it would be allowed to join the OECD soon, provided it deregulated international capital flows. At the time, American capital outflows had increased even further and U.S. companies were just about buying up the free world with their printed money. France, Germany, and Britain received large inflows of foreign investment. This takeover by U.S. capitalism of European companies in the late 1950s and early 1960s came to be dubbed “le défi Americain” by a French contemporary. In this situation the United States did not want their European allies to get any ideas about protecting themselves from U.S. foreign investment. Any exemption for Japan from the capital flow clause of the OECD membership rules was therefore going to be temporary.
“Japan could no longer use any reason to impose import restrictions and invisible trade regulations for balance-of-payment reasons, and instead became obliged to promote liberalization of capital transactions,” to borrow the words of MITI strategists.42 Japan still succeeded in obtaining eighteen exemptions to the OECD membership rules.43 Moreover, companies stepped up their new issuance of stocks and swapped them with each other.44 Though billed as a measure to “raise capital,” no new money was raised.
Instead, management had built up an invincible defense against takeovers and outsiders trying to influence their policy. Now let the foreigners come. Japan was open to their investment. They would find nothing to buy. Japan Inc. was simply not up for sale. Most shares were not traded, but held in stable interlocking relationships. Most large firms participated in the scheme, thus increasing their keiretsu ties. The degree of cross shareholdings between firms thus increased rapidly again in the 1960s. While in 1949 about 70 percent of all shares were held by individual owners, by the late 1980s this had dropped to a mere 19.9 percent of all shares traded on the Tokyo Stock Exchange.45 The lack of dominant individual holdings makes it harder for the dispersed individuals to assert their rights and influence management.
By 1966, the program to boost stable cross shareholdings was virtually completed. To prevent the possibility of criticism from abroad, the bureaucrats and business leaders decided to modify Article 280 to give the appearance of propriety. A large number of small provisions were added that gave details of the circumstances under which management boards could issue new shares without shareholder approval. And thus it came that the world never took notice of Japan’s act of deception.
In the words of Paul Krugman: “Japan’s situation with regard to direct investment is like its situation with regard to imports, only more so. De jure, Japan is wide open … de facto, foreign firms in Japan face endless informal obstacles.”46 In 1988, Japanese companies acquired 315 firms abroad. Foreigners, however, bought only 11 firms in Japan.47 Even when foreigners managed to obtain large stakes, such as T. Boone Pickens, who acquired more than 30 percent of the shares of Koito, a parts supplier within the Toyota keiretsu, this did not guarantee influence on management. Pickens failed to gain representation on the board of the company in which he held a “controlling” stake and felt forced to sell out. The extremely low amounts of direct investment by the world into Japan has been an important reason why foreign firms have found it hard, if not impossible to penetrate the Japanese market. In Japan it was not shareholders that chose which company’s shares to buy, but companies that chose their shareholders. Foreigners were not favored.
Japan as Perpetual War Economy
Thanks to this maneuver, by the early 1970s the war economy had been more firmly established than ever since bureaucrats and the military set out to mobilize it in 1937. Japan’s bureaucracy had managed to realize its wartime dream of a management entirely free from the profit-oriented interests of individual ownership. The wartime vision of managers not aiming at profits, but their own goals, had become entrenched reality. And managers’ aims are advanced best when the firm grows—growth for the glory of the nation. A mobilized war economy had been established, a nation run by public and private bureaucrat-soldiers in the fight for economic supremacy.
Perceptive observers, especially within Japan or in Europe, pointed out the important role of strong government intervention.48 While the Cold War lasted, U.S. opinion leaders did not allow such critique to come to bear. But it was clever intervention. Bureaucrats had also learned during the war not to pick winners but to treat worthy competitors equally. As long as companies met certain standards of rationalization, they would receive equal government assistance. Targeted competition was always used to give firms and their employees maximum incentives to work hard. When subsidies were decided for an industry, firms had to compete against each other to obtain them. Bureaucrats employed conscious organizational design to shape incentive structures toward the desired outcome.
The Emperor’s New Clothes
Their clocks gave it away, but nobody noticed: The Japanese did not set them back to zero in 1945. The official Japanese calendar counts years by the rule of the emperor. After 1945, the Showa emperor, Hirohito, took off his military uniform, in which until then he had been seen in public for most of his reign. He was given new clothes. But he remained in office. And the clocks just ticked on. Nineteen forty-five was far from zero hour. It was not even half-time of the official calendar, the Showa era, which ended only in 1989, sixty-four years after Hirohito began his reign. Modern Japan can be understood much better when the entire Showa era is considered. The ascendance of the Showa emperor in the 1920s is where we must start if we want to trace the true origins of the postwar Japanese economic, social, and political system.49
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