JAPANESE INDUSTRIAL TARGETING Also by William R Nester JAPAN'S GROWING POWER OVER EAST ASIA AND THE WORLD ECONOMY THE FOUNDATION OF JAPANESE POWER: Continuities, Changes, Challenges Japanese Industrial Targeting The Neomercantilist Path to Economic Superpower William R Nester Assistant Professor Department ofGovernment and Politics, St lohn' s University, New York Palgrave Macmillan © William R Nester 1991 Softcover reprint of the hardcover 1st edition 1991 All rights reserved For information write: Scho1arly and Reference Division SI Martin's Press, Inc., 175 Fifth Avenue, New York, N.Y 10010 First published in the United States of Arnerica in 1991 ISBN 978-1-349-21286-6 ISBN 978-1-349-21284-2 (eBook) DOI 10.1007/978-1-349-21284-2 Library of Congress Cataloguing-in-Publication Data Nester, William R., 1956Japanese industrial targeting : the neornercantilist path to econornic superpower / William R Nester p crn Includes index ISBN 978-0-312-05782-4 I Japan Cornrnerce Japan Cornmercial policy Japan Econornic policy-1989- Industry and state-Japan Mercantile system-Japan Protectionism-Japan United States-Foreign econornic relations-Japan Japan Foreign econornic relations-Uni ted States International econornic relations I Title HF3826.5.N39 1991 338.952-dc20 90-20560 CIP With the deepest love to my brothers Mark, Brian and Steve Contents Introduction 1 Neoclassical versus Neomercantilist Economics: Theory and Reality 13 Japanese Neomercantilism: Continuities and Changes 25 For Their Money and Votes: Farmers, Distributors, and Builders 43 Heavy Industrial Giants: Steel, Machine Tools, and Automobiles 79 Fueling Industrial Superpower: Energy, Raw Materials, and Comprehensive Security 119 From Technological "Catch-Up" to "Leap-Frog": Computers, Semiconductors, and Telecommunications 161 Banker to the World: Managing Oceans of Cash, Stocks, and Bonds 207 Notes Bibliography Index 270 294 255 Vll Introduction Leaders of the seven top democratic industrial nations - the United States, Japan, West Germany, France, Britain, Italy, and Canada have met annually to discuss global problems since President Ford initiated the first get-together in 1976 Of the twelve summits to date, none was more richly symbolic of the immense changes that have occurred since 1945 than the July 1989 meeting Hosted by President Mitterrand in Paris to coincide with his nation 's spectacularcelebration of the French Revolution's 200th anniversary, the summit straddled a year which recalled Dickens' adage that "it was the best of times, it was the worst of times " The world economy was in its seventh straight year of growth with North America, Europe, and East Asia leading the way The European Community's (EC) twelve members were actively preparing for 1992, when they would abandon all internal barriers thus creating the world's largest common market with 360 million people For the first time, the global environmental disasters behind the worsening greenhouse effect and depletion of the ozone layer were a top summit agenda item Meanwhile Gorbachev's glasnost and perestroika policies were partially fulfilled through his renouncement of the Brezhnev Doctrine which justified Russian intervention in other communist countries, and his encouragement of quasi-democratic elections in the Soviet Union, Poland, and Hungary; the Soviet empire itself appeared to be slowly crumbling as Russian troops withdrew after ten years of fighting in Afghanistan, and calls for genuine autonomy swept the Baltic states and many of the Muslim states; Moscow and Washington took turns announcing unilateral weapon- and troopcuts, and seemed on the brink of major nucJear and chemical arms reduction treaties - all of which led many analysts to decJare the Cold War's denouement if not finale These positive developments, however, were somewhat undercut by such trends as Beijing's crushing of China's mass democratic movement, the failure of Gorbachev's reforms to spark the fossilized Soviet economy, the $1.2 trillion Third World debt burden dragging at the heels of an otherwise dynamic world economy, and another year of mass famine and natural disasters in Central Africa, South Asia, and elsewhere The most startling long-term economic development, however, seemed to get lost behind all these other headlines - Japan was lntroduction rapidly solidifying its manufacturing, financial, and increasingly technological leadership over the world economy while the United States remained mired in its immense trade and budget deficits Although the American president still occupied the summit's center stage while the Japanese prime minister remained as obsequious as ever, the real balance of economic power was revealed by their respective foreign aid announcements Before the summit, President Bush paid a visit to Po land and Hungary during which he promised American aid of $110 million and $30 million, respectively, to help alleviate both their immense debts and their attempts at economic reform The Poles and Hungarians were openly disappointed, and commentators on both si des of the iron curtain were critical of these miserly amounts But given its own economic difficulties the money was all the United States could spare Ouring the same week, Tokyo announced a five-year $35 billion foreign-aid program Japan was clearly fulfilling its röle as the world's financial superpower, a position it had achieved as recently as 1985 How could Japan afford to give so much, and America so little? As of March 31, 1989, Japan had the world's eight largest banks, sixteen of the top twenty-five banks, and twenty-three of the top fifty banks; in sharp contrast, only four American banks ranked among the world's top fifty banks, with the largest, Citicorps, in tenth place, and the second largest, Chase Manhattan, a distant thirty-sixth Japan's financial power reflected its manufacturing and technological power that same year, there were 345 Japanese firms among the world's top 1,000 corporations, and those firms accounted for 47% of the total assets; aithough the number of American firms was slightly larger at 353, they accounted for only 32% of the total assets A 1987 National Academy of Engineering report revealed that Japan was superior to the United States in twenty-five of thirty-four critical high technology sectors, while of twenty-five key semiconductor technologies, Japanese producers led in twelve, were equal in eight, and were rapidly clsoing the gap in five Japan's 116,000 robots in 1987 were almost five times greater than America's 25,000 and ten times more numerous than West Germany's 12,400 Japan's per capita income of $21,040 and household savings rate of 15.1% in 1989 far surpassed America's $19,780percapital income and5.4% household savings rate Japan's economic superpower is largely based on its ability to maximize its economic growth and exports and minimize imports Between 1977 and 1986, Japan's GNP grew at an annual rate almost twice that of the United States - 4.4% compared to 2.7% In 1987 Introduction Japan had trade and payments surpluses of $96.3 billion and $87.0 billion while the United States had deficits of $160.2 and $153.9 billion Despite its trading prowess, Japan's dependence on trade is actually the second lowest of the OECD countries In 1987, Japan's trade dependency to GNP ratio of 8.0% was actually only slightly higher than America's 7.5%, while both countries were dramatically lower than Germany's 23.1%, France's 17.6%, and Britain's 21.0% The possession of a large merchant fleet in an interdependent world is as important a basis of international power as the possession of a naval fleet was in a world in which the great powers were constantly at war Japan's merchant fleet of 9,804 ships in 1987 was the world's largest - the Soviet Union had the next largest fleet with 6,741 Thousands more Japanese ships, however, fly under Liberian or Panamanian flags The achilIes heel of Japan's economic superpower - one which American policymakers have refused to take advantage of - is its overwhelming dependence on the Uni ted States Over one-third of all Japan's trade (36.5%) is with the United States; Japan's next largest trade partner is the twelve-nation European Community which accounts for only 16.4% In comparison, only 21.1 % of America's trade is with Japan How did Japan develop so rapidly from the mass poverty and destruction of 1945 into the world's most dynamic and powerful economy? How did the United States fall so far behind? Libraries can be filled with books and articles attempting to answer the first question Many of these works fall into either the "Japan Inc." or "hard work in a free market" theses, both offering outright false answers The "Japan Inc." thesis claims that Japan is run like a giant corporation, with the national government acting as a headquarters that minutely controls and develops all aspects of the economy.6 In reality, Japan was never a command economy - industrial policies always emerged after tough bargaining and compromise between government and the affected sectors; the big corporations enjoyed varying degrees of autonomy even before the 1970s when the government rarely hesitated to use its tight controls over domestic capital and foreign exchange to yank maverick firms into line Equally fallacious is the "hard work in a free market" thesis which argues that Japan became aglobai economic superpower simply because Japan's economy is the world's most open and Japanese work harder than the rest of humanity.7 Japanese assert that their markets are the world's most open and the only reason why foreigners not seil more in Japan is because they not try hard Bibliography 283 Malik, Rex, "Japan's Fifth Generation Computer", Futures, vol 15, no 3, pp 205-211, June 1983 Mannari, Hiroshi, and Harumi Befu, eds, The Challenge of Japan's Internationalization, Organization, and Culture, Nishinomiya, Japan: Kwansei Gkuin University, Kodansha, 1983 Maruyama, Masao, Thought and Behavior in Japanese Politics, New York: Oxford University Press, 1969 Mason, Ha, International Business in the Pacific Basin, Lexington Mass.: Lexington Books, 1978 Matsuzaka, Hideo, "The Future of Japanese-Asian Relations", Asia Pacific Community, no 3, pp 11-21, Summer 1983 MeCormiek, Gavan and Sugimoto, Yoshio, Democracy in Contemporary Japan, Amronk New York: M E Sharpe, 1986 MeCraw, Thomas K., ed., American Versus Japan, Boston: Harvard Business Sehool Press, 1986 MeCulloeh, Raehel, "Points of 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Cornell University Press, 1983 Index Aerospace 188-194 Agriculture 5, 6, 44-62 Agricultural Basic Law 48, 54 Agricultural Land Law 55 Australia 86 Automobiles 6, 22, 39, 43, 65-6, 99-118 Automobile Industry laws 101-19 Japan Automobile Association 108-9 Bank of Japan 34,101,210,211, 213,223 Biotechnology 5, 88 Brezhnev, Leonid Brazil 79, 86 Britain 1,3,8,10,13,15,16,17, 22,28,62,113,116,132,137,169 Bush, George 2,61, 161-2 Canada 1,86 Chamber of Commerce 31 China 1, 13, 15, 86 Clean Government Party 6, 52 Computers 5,44, 176-83,200-5 Fifth Generation Computer 5, 164, 180 Supercomputers 40, 182-3 Construction 5,6,44,69-76 Dango 70-1 Federation of Construction Contractors 71 Consumers 40, 46-7, 48, 52-3, 60-1,68 Corporations 2, 3, 5, 7-8 Keiretsu 6,29,30,31,33,80, 83,89 Trading Firms Insurance Firms Research and Development 10 Small and Medium Sized 30, 71-5 Strategy 39-40 Zaibatsu 90-2 Corporatism 41-2 Democratic Socialist Party 6, 52 Diet 29, 46, 49, 52, 56, 92, 213 Distribution System 5, 6, 44, 62-9, 108-10 Department Store Law 63-4 Large Scale Retailers Law 64, 68 Temporary Measures to Adjust Retailing Commerce 64 East Asia 1, 116 Economic Planning Agency 25, 33,41,132 Electronics 65, 88 High Definition Television 196-9 Microelectronics 5, 88 Superconductors 194-6 Energy 119-53 Alternative 135-7, 157-9 Coal 126-131, 157-9 Electricity 124-6, 157-9 Nuclear 131-5, 157-9 Oil 137-53, 157-9 European Community 1,3,17, 37,46,84, 112-18, 123-4 Fair Trade Commission 7,30, 73, 80,84, 142 Farm Lobby 48, 50-2 Central Union of Agricultural Co-operatives 50-1, 62 Japan Federation of Farmers Unions 52 National Chamber of Agriculture 50-1, 62 National Farm Co-operative Bank 50-1, 62 National Farmers Alliance 52 National Federation of Farmers 48, 50-2 Federation of Economic Organizations 29, 37-8, 133, 136, 158 294 Index Financial Industry 2, 29 Banking 2,29,207,212, 213-18,227-55 Capital Markets 230-9 Securities 207, 217, 227-55 Stock Markets 245-8 Yen 239-45 Fiscal Investment and Loan Program 213, 223 Ford 100-2, 107-8 Ford, Gerald Foreign Exchange Control Law 35-6, 141, 164,222, 226-7 Foreign Investment Law 35, 141, 164,223, 226 France 1, 3, 8, 10, 22, 23, 46, 113, 116, 132, 169 FSX Fighter 161-2, 163, 189 General Agreement on Trade and Tariffs 59,61,74,187,223 Kennedy Round 57 Tokyo Round 58 Uruguay Round 61 General Motors 100-2, 107-8 Gorbachev, Mikhail HamiIton, Alexander 13 High Technology 2,5,16,161-206 Honda 29, 66, 104-18 Hong Kong 23 Hungary 1, 2, 15 30, 63, 88, 174-6, 177-9, 182-3, 202-3 India 133 Ishihara, Shintaro Israel 144 Italy 1, 113, 121 IBM Japan Amakudari 41-2,50,70-1,96, 210-11 Administrative Guidance 36, 80,82, 110-12, 142, 164-5 Cartel Policy 4, 6-7, 8, 26, 29, 30,50-5,58-61,64-7,68, 69-77,80-2,92-9,100-18, 164-5, 167-8, 177,223,250-1 295 Constitution 10 Cost of Living 7,53-5,58,63 Employment 4,55-6,65,69, 83 Defense Policy 9-10 Economic Growth 2,5,54,58, 141 Foreign Aid 2, 148-51 Foreign Investments (in Japan) Foreign Investments (Japanese) Foreign Policy 7, 119-59 Industrial Policy 3, 4, 6-7, 17-23,25-42,43-77,79-99, 100-18, 119-59, 161-206, 207-54 Macroeconomic Policy 20, 34, 167,208,219-30 Opposition Parties 6,40, 41, 42, 43, 48, 52, 53 Patent Policy 39, 171-4, 196 Per Capita Income 2, 53-4, 244 Power 2-11,22,37-8,119-23, 162,170,171-6,200,207-8, 249-54 Productivity 4, 55-6 Public Corporations 124, 211-14 Ruling Triad 27-8, 40-2 Savings Rate 2,219-24 Trade Policy 3,4,7-11,16, 19-23,25-42, 43-5, 46-77, 79-99,119-59,210-16,207-54 Window Guidance 34,212 Japan Communist Party 6, 52 Japan Defense Agency 189 Japan Development Bank 34,82, 83, 94, 95, 104, 129, 166, 212, 223 Japan Export-Import Bank 166, 212,223 Japan Socialist Party 6, 52 Katayama, Tetsuo 129 Koito Manufacturing Corporation 9,30,66 Korean War 9, 103 296 Index Labor Unions 31,40,41, 127, 130-1 Liberal Democratic Party 4,5, 27,29,40-2,43-5,46,48-51, 52,63,69,70-1,76,213 Comprehensive Far Policy Research Committee 48-50 Executive Committee 49 Policy Affairs Research Council 42 Policy Tribes 42 Rice Price Council 49-50 List, Friedrich 16 Machine Tools 6, 38, 89-99 Japan Machine Tool Builders Association 93, 94-9 Machine Tool Laws 92, 94-6 Mass Media 48 Middle East 137, 141-53 Ministry of Agriculture, Forestry, and Fisheries 48, 50, 52, 59 Ministry of Commerce and Industry 91-2, 100-2, 123, 127-8, 139-41 Ministry of Construction 70, 71, 74,75,76 Ministry of Education 165-6, 174, 189 Ministry of Finance 34, 41, 50, 54, 66, 110-12, 125, 136, 142, 164, 165, 167, 208-55 Ministry of Foreign Affairs 71 Ministry of Health and Welfare 218,228 Ministry of International Trade and Industry 17,21,30,31-5,38-9, 41-2,50,63-4,66-7,79-84, 87,88,90-9,103-18,123-59, 163-5,174,176-83,212,222-4 Agency fOT Industrial Science and Technology 136 Industrial Structure Council 41 Small and Medium Sized Agency 31,63,70 Ministry of Labor 87 Ministry of Posts and Telecommunications 165, 189, 197,213,228 Ministry of Transportation 70-1, 83 Mitsubishi Group 69-70,80, 105, 133 Mitsui Group 80, 130, 133 Mitterand, Francois Morita, Akio 4, 26 Nakasone, Yasuhiro 71,132 Neoclassical Economic Policy 4, 13-23,25-42,44,77,102-3,115, 119-22,158-9,176-7 Neomercantilist Economic Policy 4, 14-23, 25-42, 44, 77, 102-3, 115, 119-22, 158-9, 176-7 Netherlands 13 New Materials 88, 194-6 Nippon Keizai Shimbun Surveys 9,61,189 Nippon Telephone and Telegraph 165, 196-9 Nippon Steel 80-1, 86-9 Nissan 66,101-18 Nixon, Richard 53, 57 Nomura Securities 87 North America 1, 46 Organization of Economic Co-operation and Development 28,41,107,124,143,223 Organization of Petroleum Exporting Countries 49, 57-8, 85, 110, 112, 127, 145-8 Pickens, T Boone 9, 30, 66 Poland 1,2 Postal Savings System 51,225-6 Raw Materials 83, 153-9 Reagan, Ronald 13, 59, 74-6, 98, 114-18,187,195,208 Recruit Scandal 29, 42, 44 Research and Development 10, 54,55,98, 164, 167-71, 195 Ricardo, David 16, 33 Robots 2, 5, 98 Science and Technology Agency 123, 132-5, 165, 193, 195 297 Index Semiconduetors 2, 16, 20, 88, 183-8 Shipbuilding 5, 6, 25, 43, 83 Smith, Adam 13-14,15,33 Sony 4, 9, 29, 30 South Asia South Korea 22, 26, 68, 79, 86, 89 Soviet Union 1, 134 South Afriea 134 Spain 28, 121 Steel 5, 6, 16, 20, 22, 43, 79-89 Iron and Steel Federation 80, 82 Sumitomo Group 69-70, 80, 88, 110-12,133 Supreme Court 62 Switzerland 98, 121 Takeshita 70, 74 Taiwan 98 Teleeommunieations 196-9 Textiles 39 Toyo Kogyo 110-12 Toyota 9,30,65-6,101-18 Turkey 28 United Nations 13 United States 1,2,9, 13,28,37, 62-3,65,81,83,86,89,97,99, 132 Oeeupation (Japan) Poliey 9, 47-8, 93, 102-3, 125-6, 128-9, 140, 209, 220-3 Trade Poliey 3,8,9-10, 16, 19, 20-1,22,23,45,50,53,56,57-61, 66-7, 72-7, 83-5, 97-9, 112-18,132-5,144-5,161-2, 167-76, 161-206,207-54 West Germany 1,2,3,8, 10,22, 28, 62, 65, 98, 99, 113, 116, 121, 169 Yugoslavia 15 ... between the economically strong and the economically weak, the inevitable result is the dependence of the latter" Thus, adherence to the classical economic trade theory at a time when most other... Japan, the Japanese producers would get together and decide on the price and on how to split the business among themselves At times when I bought a cheaper bid from another country the Japanese. .. while they almost always gang up against any foreign firms attempting entry The more competitive the foreign product, the more tight the collusion among the Japanese cartel members to ensure the