Chalmers Johnson - MITI and the Japanese miracle

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One important, if deeply conservative, point of view concerning what to do about the recession of the 1920's is associated with the name of Inoue Junnosuke (18691932), a former official of the Yokohama Specie Bank, president of the Bank of Japan in 1919, and minister of finance in the Hamaguchi cabinet of 1929. (Like several other finance ministers of this era, he too was assassinated, on February 9, 1932, in the so-called Blood Brotherhood Incident, a fascist attack on the Japanese capitalist establishment.) Inoue's idea was that Japan should lift the "temporary" gold embargo that it and all other major countries had imposed at the outbreak of World War I. Japan had continued the embargo after the war because of its unfavorable balance of payments, and it was alone among major powers in not having returned to the gold standard. In Inoue's view this was the reason that efforts to revive exports had been unsuccessful. The situation was somewhat comparable to that in 1949, when Japan had to achieve a stable exchange rate for the yen in order to resume international trading, a goal that in turn required Japan to halt inflation and live within its means. In 1949 Dodge and Ikeda led the fierce deflation that was prerequisite to economic rebuilding.

In theory a nation in a situation like Japan's in the 1920'sone that imported more than it exportedwould pay out gold to cover the balance. This outflow of gold, which had been prohibited during the 1920's, would raise the value of the domestic currency and thereby lower export prices. The effect would be highly deflationary, and would drive marginal firms out of business, but it would also thoroughly shake up an economy that was living off inflation and restore

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its international competitive capacity. This is what Inoue and the Minseito * party wanted to do.

Before any attempt to lift the gold embargo could be undertaken, however, the government had to get its own financial house in order, and this meant resolving the matter of the outstanding earthquake bills. During the 52nd Diet (December 1926 to March 1927), the Wakatsuki (Minseito) government introduced two bills that would convert the outstanding earthquake bills into ten-year government bonds. The opposition parties complained bitterly that the government wanted to use the people's tax revenues to aid the capitalists, and during the course of a heated Diet debate the minister of finance accidentally revealed just how shaky the nation's entire banking structure really was. Runs began on banks, although they temporarily cooled after the Diet passed the bills on March 23.

The debate did not cool, however. It had revealed that two institutions, the Suzuki Trading Company and the government-owned Taiwan Bank, were in serious financial difficulties. Suzuki Shoten*, the biggest of the wartime nouveaux riches, controlled some sixty companies, many of which were in the heavy and chemical industries and had been badly affected by the postwar recession. The China trade, in which Suzuki had invested heavily, had also stagnated due to anti-Japanese boycotts and the rising competitive ability of new Chinese firms. The Taiwan Bank had the mission of helping Japanese firms advance into China and Southeast Asia; it had lent Suzuki over ¥350 million, and it also held some ¥100 million in earthquake bills. Rumors spread that the real intent of the new laws was to save Suzuki and the Taiwan Bank, and when Suzuki's competitors, beginning with the Mitsui Bank, began withdrawing their deposits from the Taiwan Bank, the public run on all banks revived.

As a result of the panic, the Wakatsuki government fell, the Seiyukai* party came to power, some 37 banks went under, and the zaibatsu renewed their strength. Finally, the Suzuki zaibatsu collapsed, with Mitsui and Mitsubishi picking up the surviving firms. (One strong firm, Teijin, or Imperial Rayon, came back to haunt the government again in 1934, when a scandal erupted over the covert sale to high government officials of Teijin shares held by the minister of finance as collateral for the Taiwan Bank's debts.) Loans to medium and smaller enterprises became much harder to obtain, but access to capital for large zaibatsu enterprises was enhanced. Disastrous though it was, the 1927 panic produced one of the first "reforms" of the industrial structure in Japan: a large number of competing banks and enterprises were weeded out, and the economy's limited capital was con-

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centrated in the strategic sectors. However, the way it was done and the enrichment of the zaibatsu in the process contributed to the radicalization of the whole society and brought forth demands that someone speak for the nation as a whole.

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In this climate of opinion, the new minister of commerce and industry, working with and on the inspiration of his chief of the Documents Section, Yoshino Shinji, undertook an initiative that is acknowledged to be the beginning of modern Japanese industrial policy. On May 23, 1927, Minister Nakahashi set up within MCI a Commerce and Industry Deliberation Council (Shoko* Shingikai). Its charter was to examine broadly what was ailing the Japanese economy and what the government ought to do about it. As a joint public-private forum, it is the direct antecedent of the 1950's-era Industrial Rationalization Council and its successor, the Industrial Structure CouncilMITI's number one official channel to the business community. Nonbureaucratic members of the 1927 council included all the leading businessmen of the time. Among the most influential in the actual deliberations were Okochi* Masatoshi, who was both a Todai* professor of engineering and a prominent private industrialist, and Nakajima Kumakichi of the Furukawa zaibatsu, who later became an important MCI minister.

The council achieved unprecedented results. It convinced MCI to strengthen its compilation of industrial statistics (this was Minister Nakahashi's pet project and his main contribution to the council), authorized some ¥30 million in loans to medium and smaller enterprises (a figure ten times larger than any previous loans), proposed for the first time the amalgamation of the Yawata steel works with private steel firms (an idea that came to pass in 1934), and underscored the need for improved trade intelligence and subsidies for export industries. The discussions also had their comic side. Both Kishi and Kogane Yoshiteru recall Okabe Nagakabe's objections to the introduction of the metric system in Japan as a way of standardizing industrial products. Okabe reflected the views of the House of Peers when he noted that the metric system was associated with the French Revolution and was therefore incompatible with the Japanese national spirit. Members of the council proposed shelving the issue until Okabe died. Since Okabe lived until 1970, twenty-five years beyond his term as minister of education in the wartime Tojo* cabinet, it would have meant a long wait.

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As it turned out, Kogane managed to introduce the metric system in the late 1930's with the help of the army.

By far the most important achievement of the council was the introduction into Japan of the concept of "industrial rationalization" (

san

-

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gyo

*

gorika

*). Since 1927 the concept has been in almost daily use by the economic bureaucracy. At first no one knew precisely what it meant, but it seemed admirably to sum up what the MCI bureaucrats thought was needed for Japan. Yoshino has written, "All we did with 'rationalization' was to hang out a signboard as a name for our activities, but having hung out the sign, we then had to find out what it meant."

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The first government reference to the term seems to have been in one of Kishi's reports of 1926. He had been sent to Philadelphia as the Japanese representative to the 150th anniversary celebration of the United States, and he returned home via Europe. He reported on the Taylor and Ford movements in the United States for "scientific management" and "production lines," and on the promotion of trusts and cartels in Germany to improve industrial efficiency. No one paid much attention to Kishi's initial report, but with the onset of the depression "industrial rationalization" became a popular catch phrase in Japan for efforts to pull the country out of the slump. Within the ministry it became a rallying cry for the integration of industrial policy.