Chalmers Johnson - MITI and the Japanese miracle

As we saw in the last chapter, Takahashi reimposed the gold embargo in December 1931, an action that advanced the government's intrusion into the private economy well beyond that of the cartels authorized by the Control Law. In order to make the embargo effective, the government also passed the Capital Flight Prevention Law (Shihon Tohi* Boshi* Ho*, law number 17 of July 1, 1932); and when that proved to be ambiguous and therefore evadable, it passed the Foreign Exchange Control Law (Gaikoku Kawase Kanri Ho, law number 28 of March 29, 1933), which made all overseas transactions subject to the approval and licensing of the minister of finance. Although no one at the time could have imagined it, governmental control over the convertibility of yen lasted uninterruptedly until April 1, 1964, and over capital transfers until the capital liberalization policies of the late 1960's and early 1970's.

During 1932 Takahashi also launched his famous policy of deficit financing to overcome the depression (and thereby won the sobriquet that is now associated with his name, "the Keynes of Japan"). Military expenditures in the general account budget rose from 28 percent in 1930 to 43 percent in 1935, and the combined deficit of the years 1932 to 1936 reached an enormous ¥1.9 billion.

6

Takahashi's cutting the yen free from gold also produced a steep decline in the foreign exchange value of the yen. The rate against the U.S. dollar fell from ¥100 = $49 in 1931 to ¥100 = $19 in 1932, and the consequent lowering of prices of Japanese goods overseas fueled a tremendous surge of exports, particularly to South and Southeast Asia, that was loudly denounced abroad as Japanese "dumping." The Ministry of Finance cov-

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ered the deficit through the issuance of bonds, which it sold to the Bank of Japan, and through some tapping of the trust fund accounts (the funds of small savers deposited in the Treasury through the postal savings system). A degree of inflation was expected, but Takahashi's theory was that a return to business prosperity would lead to a "natural" increase in government tax revenues sufficient to retire the debt. These methods were unorthodox for the time (the 1932 budget was the first unbalanced budget in Japan's modern history), and all the Finance Ministry officials under Takahashi were dubious.

7

But the policies seemed to work; Japan was well out of the depression before its international competitors had adopted similar policies (see Table 8).

During the autumn of 1935 the demand for goods began to outrun supply, and prices started to rise. Takahashi applied the brakes to military spending in order to control inflation and the balance of payments, but a section of the military revolted against what it took to be his civilian interference in the army's modernization efforts and assassinated him on February 26, 1936. Takahashi was once quoted to the effect that "it is much harder to nullify the results of an economic conquest than those of a military conquest," but this was a lesson that many more Japanese had to learn before they took it to heart after the Pacific War. His remark might well serve as an epitaph for his eraas well as a promise of the MITI era to come.

8

Takahashi's successor gave the army a free hand to spendwhich primarily meant to import needed resourcesand within a year, well before the outbreak of war with China, Japan was facing a full-blown balance of payments and inflation crisis. The Tokyo wholesale price index (193436 = 100) jumped from 99.5 in January 1935 to 123.2 in January 1937and then to 131.0 in April. Since the military had ruled out a tightening up of the economy by the Finance Ministry, the only other recourse was to economic controls and rationing. And the advent of rationing raised new demands that an "economic general staff" be empowered to plan for the whole economy. This economic general staff, in the form of the Cabinet Planning Board, came into being on October 23, 1937, under the added impetus of the China Incident.

Since the creation of the Resources Bureau in 1927, and especially after passage of the Important Industries Control Law in 1931, the military economists' primary efforts had been to enact individual laws in conjunction with MCI for particular strategic industries. The first industry law to be passed that had explicit military implications was the Petroleum Industry Law of March 28, 1934; it remains interesting to-

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TABLE

8

Indices of the World Economic Crisis, 19301935

(1929 = 100)

Country

1930

1931

1932

1933

1934

1935

Wholesale Prices

Japan

82.3

69.6

77.2

88.5

90.2

92.5

United States

90.7

76.6

68.0

69.2

78.6

83.9

England

87.5

76.8

74.9

75.0

77.1

77.9

Germany

90.8

80.8

70.3

68.0

71.7

74.2

France

88.4

80.0

68.2

63.6

60.0

54.0

Mining and Manufacturing Production

Japan

94.8

91.6

97.8

113.2

128.7

141.8

United States

80.7

68.1

53.8

63.9

66.4

75.6

England

92.3

83.8

83.5

88.2

98.8

105.6

Germany

85.9

67.6

53.3

60.7

79.8

94.0

France

99.1

86.2

71.6

80.7

75.2

72.5

SOURCE

: Arisawa Hiromi, ed.,

Showa

*

keizai shi

(Economic history of the Showa* era), Tokyo, 1976, p. 52.

day as the direct ancestor and model for the Petroleum Industry Law of 1962. The 1934 law gave the government authority to license the business of importing and refining petroleum, and it required importers to stockpile at least a six months' supply of petroleum in Japan at all times. It also empowered the government to set quotas, fix prices, and make compulsory purchases of petroleum products.

An Imperial ordinance put MCI in charge of administering the law, and Yoshino, as vice-minister, set out to negotiate with Japan's foreign suppliers (chiefly the Standard Vacuum and Rising Sun oil companies). One of Stan-Vac's representatives in Japan recalls that in late 1934 Yoshino himself was not difficult to deal with or antiforeign, but that both of them had agreed it would be better to postpone their negotiations until after the current Diet session had ended in order to lessen possible military charges that MCI was bending to foreign coercion.

9

The result of the negotiations in 1934 was that the foreign suppliers more or less met the terms of the law in order to keep the Japanese business.

The Petroleum Law affected the ministry most directly by authorizing the creation of a Fuel Section in the Mining Bureau. Three years later, on June 9, 1937, this section became the Fuel Bureau (Nenryo* Kyoku), an external agency of MCI charged with making fuel policy, developing new sources of petroleum, promoting the synthetic petroleum industry, and administering the Petroleum Industry Law. It

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was MCI's first industry-specific bureaua pattern that the whole ministry would adopt in 1939and it was the first bureau of MCI to which military officers on active duty were seconded.

10

Meanwhile, during 1934 the first of two political events that were to lead to the creation of the economic general staff in its most fully developed form erupted on the political scene. This was the Teijin scandal that brought down the Saito* cabinet. The second incident was the military mutiny of February 1936 that dramatically increased military influence over the whole society. In January 1934, in a series of articles in his

Jiji

shimpo

* newspaper, the businessman and political polemicist Muto* Sanji charged that a group of ministers and higher officials were corruptly manipulating the stock of the Imperial Rayon Company (Teijin) for their own profit, and that Teijin shares held by the minister of finance since the bail out of the Taiwan Bank in 1927 had been secretly sold to them. It is unclear to this day whether Muto sincerely believed what he wrote or whether his charges were part of a militarist plot to discredit the political parties and their capitalist supporters. The effect of his charges is not, however, in dispute; they contributed strongly to the belief that civilian politicians were hopelessly corrupt.