Multimedia Mania/abacus-multimedia-mania.iso/dp/0033/00334.txt

Text File | 1993-07-27 | 28KB | 461 lines

$Unique_ID{bob00334}
$Pretitle{}
$Title{Japan
Chapter 4B.   Government-Business Relations}
$Subtitle{}
$Author{Stephan B. Wickman}
$Affiliation{HQ, Department of the Army}
$Subject{corporate
system
banks
government
percent
miti
corporations
group
japan
industry
see
pictures
see
figures
}
$Date{1981}
$Log{}
Title:       Japan
Book:        Japan, A Country Study
Author:      Stephan B. Wickman
Affiliation: HQ, Department of the Army
Date:        1981

Chapter 4B.   Government-Business Relations

     The government utilized several legal and discretionary methods for
influencing industrial activity. Each ministry or agency had the right to use
what was termed "administrative guidance" (see Glossary) to pressure
industries to conform voluntarily to policies or procedures that could not be
legally enforced. For example it could suggest ways in which several
industries might cooperate to achieve an economic gain for the community. Or
it could enact regulations to protect failing industries. At other times
guidance seemed more negative, as when a ministry or agency attempted to
restrict the production of export commodities.

     Each arm of the government had the right to utilize "administrative
guidance" in the area of its charter, and MITI was by far the most active and
important organization in this respect. MITI helped industry form production
cartels, explore new types of technology, or adjust marketing strategies.
Because of overlapping responsibilities, however, MITI was sometimes opposed
by other agencies, such as the FTC.

     An example of MITI guidance can be drawn from the electronics industry.
As early as 1965 the department within MITI in charge of the electronics
industry became aware of the potential importance of integrated circuits. MITI
was able to find funds to pass out to a group of producers to conduct
cooperative research efforts. MITI also prevented foreign companies from
setting up shop in Japan, except with a domestic partner, and the first such
linkage was between the United States firm of Texas Instruments, Inc. and the
Japanese firm, Sony. Soon Texas Instruments' patented technology became
available to Sony and other domestic producers. Integrated circuits began to
appear in a whole range of products from calculators to automobiles, and MITI
was able to open the economy to competing imports in 1970. By the middle of
that decade, the technological gap between Japan and the originators of
integrated circuits had closed completely.

     MITI also played a large role in forming industrial cartels, although
each cartel had to be approved by the FTC. Under provisions of the
Antimonopoly Law, which was revised in 1977, "recession cartels" could be
formed when conditions in a particular industry reduced prices below the
average production cost and threatened the survival of a significant number of
producers. Membership in the cartel was voluntary. "Rationalization cartels"
were permitted in order to improve the technical efficiency and product
quality of an industry, and these were formed by limiting the use of a
particular technology or new product lines. Other cartels were allowable when
passed as special legislation by the Diet. In these cases FTC approval was not
necessary, and special cartels tended to be more numerous. Finally MITI could
organize "guidance cartels" by advising industries of desirable levels of
output, prices, and investment.

     The other major type of MITI involvement in the industrial structure was
its merger activities. Mergers had to be approved by the FTC, and compliance
was only voluntary. But such was the power of MITI that the FTC seldom refused
its requests. Additionally, unless an enterprise was particularly powerful, it
could scarcely afford to shun MITI guidance. Before the liberalization of
foreign trade in the mid-1960s, MITI used its control over the issuance of
foreign exchange licenses as a means of persuading private industry to bend to
its will. Although the ministry has lost much of its authority over particular
types of economic activity, maintaining good relations with the appropriate
department of MITI remained an important prerequisite to business in Japan in
1981.

     On the other hand the responsibility of the FTC was to prevent the
harmful concentration of power in the nation's markets. According to the
Antimonopoly Law, corporations engaging in unauthorized price cartels were to
receive penalties in excess of 100 million Yen. The FTC was also empowered to
break up an enterprise whose market share exceeded 50 percent of one industry.
Two corporations that controlled over 75 percent of a market were also
designated as monopolies and subject to FTC regulation. The FTC was reluctant,
however, to challenge the nation's powerful business elites and other more
powerful government agencies.

     A number of semigovernment advisory councils, committees, or boards
facilitated the dialogue between government and business. In 1980 there were
around eighty-five such committees attached to various economic ministries or
their departments, and their membership included government representatives,
academic experts, businessmen, and respected citizens. Often their
deliberations were only for show, and major policies were decided behind
closed doors. Several key agencies were: the Economic Council, attached to the
EPA; the Industrial Structure Council, affiliated with the Industrial Policy
Bureau of MITI; the Transportation Council, attached to the Ministry of
Transportation and responsible for recommending price increases; and the
Central Social Health Insurance Council. In addition there were key business
lobby groups that represented the interests of particular industries, large
and small (see Business Interests, ch. 6). It was difficult to judge which of
these economic forces was most powerful in controlling the course of the
economy in 1981. In general the power of the ministries declined as the
nation's large business enterprises accumulated assets, but the ministries
were important sources of financial, technological, and legal support,
particularly during economic crisis. The best characterization was probably
one of a plurality of business and government interests which, tempered by
concern for the average consumer and citizen, vied with each other over
specific policies and directions for the economy.

Banking and Finance

     Japan's financial system was geared toward providing industrial rather
than consumer credit. Throughout most of the postwar era the extensive system
of private and public banks has provided essential loans to industry. About 90
percent of the nation's financial assets flowed into the corporate and public
sector through the banks, while only 6 percent went through the stock market.
At the same time, however, the government has maintained strict control over
the banking system, which has led both domestic and foreign bankers to clamor
for decontrol. Government reforms in the late 1970s and early 1980s have
tended to liberalize the banking system, at least partly in order to attract
the nation's largest corporations away from financing abroad. Securities
trading was kept legally distinct from banking.

     Commercial banks were the most important private lending institutions and
engaged mostly in the provision of short-term industrial loans. There were
seventy-six such banks in 1981, of which the thirteen "city banks" were the
core (see table 4, Appendix). These banks received deposits to support their
loans, but they have also had to borrow in the interbank money markets for
call loans and commercial bills. "City banks" have borrowed from 60 to 90
percent of their funds from the sixty-odd regional or local banks. The overall
surplus of deposits over loans in the local banks has been falling, however,
as these institutions have been required to divert their funds to underwrite
more and more local public bond issues.

     Much of the nation's long-term credit originated in the public banks,
particularly the Long-Term Credit Bank of Japan and the Industrial Bank of
Japan. These institutions were allowed to raise capital by offering special
debentures to other financial institutions. In the private sector the seven
"trust banks" were the major sources of long-term capital. They were an
amalgamation of private pension funds, unit trusts, and mutual fund management
groups and acquired extra funds by issuing loan trust certificates. The
government strongly encouraged insurance corporations to extend long-term
loans to industry, while a host of mutual savings and loans, credit
associations, and cooperatives were expected to lend to medium- and
small-scale enterprises. The Japan Development Bank funded industries such as
electric power, shipping, and mining, while other state financial institutions
supplied credit to small businesses.

     The source of funds for public lending agencies was the Trust Fund Bureau
of the MOF, which in turn was supplied by the national postal savings and
insurance systems. Private bankers have been increasingly upset, however, at
what they felt was unfair competition from the postal savings system. Indeed
postal deposits have risen rapidly, and together with savings from the postal
life insurance and annuities accounts, they have generated a fifth of all
savings. The attraction of postal accounts was that individual depositers
could save up to 3 million Yen tax free, and there was no attempt to check
whether individuals maintained more than one account. The MOF hoped to
institute an identification card system by 1984, but in the interim the
population was engaged in a massive form of tax evasion.

     The solution was, however, not completely clear. The Bank of Japan and
affiliated sections of the MOF agreed with the private banking community that
the postal savings system had to be curbed. The Trust Fund Bureau, which
depended on these savings to underwrite issues of government bonds, lobbied in
favor of the system. Should the share of postal savings be reduced, private
banks would undoubtedly put more pressure on the government to raise the
interest rates on government bonds. In turn the government would be even more
strapped for public investment funds and might have to raise taxes.

     The private banking system was beset by other problems as well. Lending
opportunities were not increasing as rapidly as in the boom growth periods of
the 1960s. Industries were able to finance more and more of their needs
through the sale of stock and securities, and the larger firms were active in
international money markets. Whereas before the first oil crisis some 75 to 80
percent of the net increase in fixed corporate assets was financed by domestic
bank borrowings, the ratio dropped to about 50 percent in 1979. This change
along with improvements in the technology for electronic transfers and the
growing importance of international capital movements underscored the need for
significant financial reform and liberalization.

     The reforms began in earnest along with the shift to a tighter monetary
policy in 1977. Starting from October of that year, call money rates (see
Glossary) as posted by the Bank of Japan were made almost weekly, and starting
in April 1979 banks were allowed to set their own rates. This reform permitted
the city banks to adjust their funds more swiftly and freely. In addition,
beginning in 1978 banks were allowed to resell discounted commercial bills for
the first time and to set their own interest rates on these bills. Finally a
completely new market for yen-denominated certificates of deposit was created
to complement the securities market. The notes were issued only for periods of
three to six months and with a minimum value of 500 million Yen. The Bank of
Japan was slowly lifting restrictions on arbitrage (see Glossary) between
these various financial markets in 1981.

     Japan's securities markets expanded rapidly during the 1970s, paced by
the increased volume of government bonds and the stock market. Total turnover
of stock on the Tokyo exchange was the equivalent of US$151 billion, second
only to trading in New York City in 1980. Much of the increased trading came
from the influx of foreign investment. Bond trading has also shot up,
increasing at a rate of 40 percent per year since 1969. Around a third of the
total 220 billion Yen issues in 1979 were government bonds. As the profits of
securities houses grew in 1981, the nation's banks have argued for permission
to join in securities transactions. After years of fighting between the banks
and securities traders, a revision in the banking law took place in May 1981,
allowing commercial banks to trade government bonds on a case by case basis.
In the future the walls between securities and banking transactions were not
likely to erode quickly.

     Consumer credit expanded slowly until the late 1970s when, under pressure
from foreign firms and changing consumer demand, the market boomed. Most of
the credit was handled by small-scale loan companies whose activities often
bordered on loan sharking. About 100,000 of these companies were actively
lending in 1980, but interest rates ran as high as 100 percent on short-term
loans. In 1981 the involvement of foreign credit card companies and finance
agencies cut the average rates by half to 36 to 48 percent. These companies,
however, found it extremely difficult to borrow funds from domestic sources.
The major department stores had their own credit cards, and installment plans
for consumer durables were offered at many stores.

Private Enterprise

     The engine of economic growth has been private initiative and enterprise,
together with strong support from the government and from labor. The most
numerous enterprises were single proprietorships, of which there were some 4
million in 1978. The dominant form of organization, however, was the
corporation, and in 1978 about 1.6 million corporations employed 30 million
persons, or over half the total labor force. They ranged in size from large to
small, but the favored type of organization was the jointstock company.
Replete with yearly stockholders' meetings, directors, and auditors, the main
organizational features of Japanese firms were similar to those in the United
States. The system governing corporate relations in the marketplace and
several management techniques, however, distinguished Japanese enterprises
from those elsewhere.

The Corporate System

     The formation of the postwar business order dates back to the dissolution
of the zaibatsu during the Allied occupation (see Occupation and Reform,
1945-52, ch. 1). Some 2,000 high-ranking officers and forty major stockholders
of the leading zaibatsu were forced to relinquish their stockholdings and
control. At the same time, the government instituted antimonopoly legislation
and formed the FTC. Together with the agricultural land reform and the start
of the labor movement, these measures helped establish a competitive and
fundamentally equitable free market system.

     It was not long, however, before the spirit and letter of these reform
laws were neglected. During the 1950s government guidance of industry often
sidestepped the provisions of the law. While market forces determined the
course of the vast majority of enterprise activities, adjustments in the
allocation of bank credit and the formulation of cartels favored the
reemergence of conglomerate groupings. These groups competed vigorously with
one another for market shares both within and without Japan, but they
dominated lesser industry.

     In contrast to the dualism of the prewar era-featuring a giant gap
between the modern, large-scale enterprises and the smaller, traditional
firms-the postwar system was more graduated. Interlocking production and sales
arrangements between greater and smaller enterprises characterized corporate
relations in most markets. The average Japanese businessman was well aware of
the firms that led production and sales in each industry and sensitive to
minute differentiations of rank among the many corporations.

     At the top of the corporate system were three general types of corporate
groupings. The first included the heirs of the prewar zaibatsu (including many
of the same firms), and the second consisted of those that formed around major
commercial banks. The nation's six largest groups were in these two
categories. Mitsui, Mitsubishi, and Sumitomo were revived zaibatsu, while
Fuyo, Sanwa, and Dai-Ichi Kangyo (DKB) were formed around the Fuji, Sanwa, and
DKB banking giants. A third type of corporate grouping developed around
particularly large industrial producers.

     The relations among the members of the first two types of groups were
flexible, informal, and quite different from the holding company pattern of
the prewar days. Coordination took place at periodic gatherings of corporation
presidents and chief officers. The purpose of these meetings was to exchange
information and ideas rather than to command group operations in a formal way.
The general trading firms associated with each group could also be used to
coordinate group finance, production, and marketing policies (see Trading
Companies, ch. 5). The practice of crossholding shares of group stock further
cemented these groups, and such holdings usually made up about 30 percent of
the total group equity. Member corporations would typically, though not
exclusively, borrow from group banks.

     Similar relationships characterized the third type of corporate group,
that established around a major industrial producer. Members of this kind of
group were often subsidiaries or affiliates of the parent firm, or regular
subcontractors. Subsidiaries and contracting corporations normally built
components for the parent firm and because of their smaller size afforded
several benefits to the parent. The larger firm could concentrate on final
assembly and high value-added processes, while the smaller could perform
specialized and labor-intensive tasks. Cash payments to the subcontractors
were supplemented by commercial bills whose maturity could be postponed when
the need arose. In 1978 subcontracting enterprises accounted for some 60
percent of Japan's 5.3 million small and medium enterprises (those having less
than 300 employees).

     An example of this type of group was Toyota. This company had about 140
direct suppliers, which hired over 40,000 subcontractors. Toyota established
high quality standards for its products, and the subcontractors at each level
had to ensure these were met. At the top of this production pyramid, Toyota
could function smoothly while maintaining low inventories of parts. Toyota's
dependence on outside supplies-more than 60 percent in 1980-was unusually high
for Japanese industry, but many large corporations received a third of their
supplies from small-and medium-scale subcontractors.

     This characterization of the economy as split into neat, hierarchical
corporate groupings is somewhat simplistic. In the 1970s and 1980s a number of
independent middle-sized firms-especially in services and retail trade-were
busy catering to increasingly diversified and specialized markets.
Unaffiliated with the nation's large conglomerates, these corporations have
been dueling each other in a highly competitive market. Bankruptcies among
these and the smaller firms were much more common than among the large
enterprises.

     Who controlled the enterprise system in Japan, and how was it maintained?
Theoretically the economy was owned by the stockholding public, but the ratio
of individual owners has fallen from 40 percent of all issues in 1970 to less
than 30 percent in 1981. Financial corporations and other businesses accounted
for well over 60 percent. As in the United States corporate meetings were
hardly democratic and often only window dressing. Some companies have even
hired thugs to terrorize stockholders into voting as management wished. The
poorly developed accounting system has given corporations leeway to mislead
the public. In order to control this type of excess, the law was changed in
October 1981 to enhance the power of auditors and to reduce the number of
stockholders who might be in the employ of management. But in general it
seemed that business management held the reins of corporate control, often
with little public accountability. The corporate system maintained itself by
keeping smooth relations with the government bureaucracy, providing expanding
benefits to workers and consumers, and through public relations and
philanthropy.

Enterprise Management

     Although corporate management practices were probably more diverse than
many experts maintained, there seemed to be a core of features which, ideally
at least, were characteristic of Japanese management. The system was
deceptively subtle and reflected a philosophy of management that stressed
participative and consensual decisionmaking, strong company loyalty, an
orientation to the people of the organization, and a respect for seniority and
hierarchy seldom found outside Japan.

     The basic structure of the typical corporation was hierarchical and
bureaucratic, the section (or occasionally the subsection) being the lowest
level unit. Several sections formed the next highest level, the department,
and the largest corporations organized departments into divisions. A section
normally consisted of about twenty workers. These workers were either general
clerical help (female high school graduates) or managerial employees (mostly
male college graduates). In a factory the role of support staff would be
filled by technical production workers.

     The section chief led the group as a team leader and was, ideally,
something of a father figure. His status was high, and his subordinates
referred to him as "Mr. Section Chief." To reinforce this respectful image,
management usually chose new section chiefs from among the older staff, but
they were not necessarily the most technically competent. In fact most
managers were generalists who had come to understand company operations
through long years of experience. Most sections were devoid of physical
barriers, such as private office space. To reinforce the sense of group
cohesiveness, the section chief would frequently entertain his staff at
drinking or eating establishments and would participate in their major family
occasions.

     The main decisionmaking body was the executive committee of the
corporation, which consisted of all the corporate directors above the rank of
managing director. A larger board of directors included junior-ranking
directors and formed a rubber-stamp group that reported corporate affairs to
the general stockholders. Managing directors were usually responsible for
functional areas of corporate activity, and they were assisted by junior
directors. In addition each joint-stock company had to appoint inside auditors
who, however, had little or no knowledge of accounting and were often retired
executives.

     Even at the higher levels of decisionmaking the ideal was to stimulate
participation and consensus. Of course in a hierarchical and rank-conscious
system, subordinates found it in their interest to accommodate their views to
those of their superiors. Nonetheless in the ideal corporation, the lower
level managers tended to play an active role in consensus formation. Consensus
was achieved according to a bottom-up process called ringi (see Glossary). A
mid- or low-level manager would draft a specific proposal in memo form on a
particular corporate matter. His superior passed the proposal on to the
concerned departments and sections, after which the document reached the
office of the top decisionmaker. As the memo passed up the corporate ladder,
each section chief would affix his seal to the document or suggest
emendations. Only rarely would a chief officer block a proposal by refusing to
pass it on.

     In the corporate tradition a manager would never draft a proposal without
first consulting the heads of all the concerned departments. Indeed such
proposals were often initiated at the top level. The system was not therefore
completely bottom-up but represented a means of generating participation from
lower level employees on decisions that were basically in line with the
interests of managers. A good manager, then, was one who was able to conduct
meaningful and close consultations with superior and subordinate alike. Group
participation fostered a dynamic that could smooth over the competitiveness
and ill-feeling that otherwise might have accompanied decisionmaking in
bureaucratic structures.

     Another major feature of Japanese management was the ideal of lifetime
employment for regular employees (see Employment, Wages, and Working
Conditions, this ch.). Particularly among the college-educated, male,
managerial staff, tenure with the corporation was expected to be long, even to
retirement at age fifty-five or sixty. Given this perspective, promotions,
wages, and benefits were tied closely to a person's age. Wages and
responsibility peaked for most persons in their forties and declined toward
retirement. The hoped-for effect of these policies was to promote deep
devotion to the aims of the corporation. Although the corporation functioned
essentially for the interests of the top-level managers, the system was
expected to disseminate corporate goals and values to the lowest levels of the
company.

     The objectives of Japanese corporations included the maximization of
sales, profits, and corporate prestige. In general, however, profit was less
important than establishing a significant and constantly rising share of the
market. Maintaining high dividends to stockholders received less attention
than the development of new products or investments to secure the growth of
the corporation's assets. Indeed most corporate funding was generated from
sales revenues or loans and depended little on equity. Many corporate leaders
also developed slogans or other rituals to instill in the workers the sense
that their company was fulfilling a mission for society as a whole.

     The management system was not static but was slowly changing under the
pressure of significant social forces. As life expectancy increased and the
population aged, many managers expressed their desire to work for a firm
beyond the age of fifty-five. The tendency of the larger firms to push up the
retirement age also put pressure on the seniority-based wage system, and it
became increasingly common for wages to be based on productivity and for
automatic pay increases to stop for individuals in their forties. Corporate
head-hunting was also becoming popular, and a few employment agencies
specialized in relocating managers to other firms. Corporations were offering
counseling to those managers who opted to retire early and find employment
elsewhere in the economy. Meanwhile the younger staff members were less
inclined to spend all their time at the office or with office workers off the
job.

Employment and Labor Relations

     Rising labor productivity, particularly in the manufacturing industries,
has contributed significantly to the nation's economic development. Labor
productivity was unusually high even in the late 1970s when Japan's wages
ceased to be low by international standards. Labor costs have grown more
rapidly than in other industrialized nations, but productivity growth has kept
pace. The average yearly increase in manufacturing productivity during 1976-79
was 7.2 percent in Japan, compared to 5 percent in the Federal Republic of
Germany (West Germany) and 2.3 percent in the United States. At the same time,
Japan has been able to keep its unemployment rate at about 2 percent of the
labor force. The structure of the nation's employment system and relatively
harmonious labor-management relations are the reasons for this enviable
performance.