WDPo?ZU MA"C 1qq4 Public Disclosure Authorized
2 2 1 1z1 World Bank Discussion Papers
Public Disclosure Authorized Policy-Based Finance
The Expenrence of Postwar Japan Public Disclosure Authorized
The Japan Development Bank The Japan Economic Research Institute
Kozo Kato Yuichiro Miwa Tsutomu Shibata Yoshikaz Niwa
Public Disclosure Authorized Koichiro Fukui Nobuhiko Ichikawa Aiichiro Mogi Masahiro Furuta Recent World Bank Discussion Papers
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(Continued on the inside back cover.) 2 2 1 *)1World Bank DiscussionPapers Policy-Based Finance
The Experience of Postwar Japan
The Japan Development Bank The Japan Economic Research Institute
Kozo Kato Yuichiro Miwa Tsutomu Shibata Yoshikaz Niwa Koichiro Fukui Nobuhiko Ichikawa Aiichiro Mogi Masahiro Furuta
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Library of Congress Cataloging-in-Publication Data
Policy-basedfinance: the experienceofpostwarJapan / The Japan DevelopmentBank [and]The Japan Economic Research Institute ; Kozo Yato ... [et al.]. p. cnL - (World Bank discussionpapers ; 221) Includesbibliographical references. ISBN 0-8213-2716-X 1. Governmentlending-Japan. 2. Finance,Public-japan. 3. Finance-Japan. 4. Industryand state-Japan. 5. Nihon Kaihatsu Ginko. I. Kato, Kozo, 1935- . I. Nihon KaihatsuGinko. InI. Nihon Keizai ChosaKyogikai. [V. Intentional Bank for Reconstruction and Development. V. Series. HG4245.3.P65 1993 336.52-dc2O 93-31025 CIP CONTENTS
FOREWORD...... vn ACKNOWLEDGMENTS...... ix EXECUTIVESUMMARY ...... xi INTRODUCTION...... xvii Chapter I. FISCAL INVESTMENTS AND LOANS AND POLICY-BASEDFINANCE ...... I 1. Fiscal Investments and Loans...... lI A. The Characteristicsof Fiscal Investments and Loans...... I B. The Institutional Evolution of the Fiscal Investments and Loans System...... 3 C. Structure of the Fiscal Investment and Loan Program...... 4 D. The Role of Fiscal Investments and Loans: Historical Transition...... 19 E. Business Cycle Adjustments:The Function of Fiscal Investments and Loans...... 24 2. Policy-Based Finance ...... 24 A. Policy-Based Fmance Institutions: Classification, Scale, and Trends...... 25 B. Policy-Based Fmance: Historical Perspective...... 34 C. Policy-Based Finance: Its Multfunctional Role...... 47 D. Policy-Based Finance: Operations and Activities...... 54 E. Related Laws: the JDB Example...... 61 Chapter II. INDUSTRIAL POLICY: POLICY FORMATION AND TOOLS...... 65 1. The Concept of Industrial Policy...... 65 A. Industrial Policy Trends...... 66 2. The Policy-Formation Process...... 68 A. Formulating the Economic Plan.69 B. Formulating Industral 'Visions"...... 70 C. Drawing up Special Legislation...... 74 D. Private-Level Participation in the Policy-Formation Process...... 75 3. The Tools of Industrial Policy...... 81 A. Classification of Policy Tools...... 8 1 B. The Characteristics and Function of Policy Tools ...... 82 C. Selecting and Mixing Policy Tools...... 90 Chapter E.L THE FINANCIAL SYSTEMIN POSTWARJAPAN: Special Characteristics and The Fiscal and Monetary Environment...... 96
1. The Fiscal and Monetary Environment in the Postwar Period - 1945 to the Mid-1960s...... 96
ii A. Fiscal and Monetary Affairs (Table HI-i) ...... 96 B. The Status of Private Financial Institutions (Table 11-3)...... 100 C. The Status of the Capital Market ...... 103 D. The Position of Public Finance...... 104 2. The Fonnation of the Postwar Fmancial System...... 105 A. Preconditions for the Formation of the Fmancial System...... 105 B. The Characteristics of the Postwar Fmancial System...... 106 C. How Policy-Based Fmance Evolved ...... 110 3. Comparison of Private Fmance and Policy-Based Fmance...... 111 A.IThe Scale of Loans ...... 111 B. Interest Rates ...... 116 C. Loan Periods...... 118 D. Write-off Ratios for Bad Loans...... 120 4. The Special Characteristics of the Postwar Financial System...... 121 A. The Predominance of Indirect Fmance and Bank-Centered Fmancial Intermediation...... 121 B. The Importance of Supplementing the Shortage of Long-Term Funds ...... 121 C. Building a System That Seeks to Maintain the Credit Order...... 121 D. Other Systemic Characteristics...... 121 Chapter IV. POLICY-BASEDFINANCE IN THE POSTWAR PERIOD (1945 - Mid-1960s)-The Case of the Japan Development Bank...... 123 1. 1945 to 1950.123 A. Postwar Economic Reform.123 B. Postwar ReconstructionFmance and the Dodge Line .125 2. 1951 to 1955.136 A. Desire for Long-Term Stabilization Funds .136 B. Establishing a Long-Term Fiancial Institution.141 C. JDB and the Introduction of Foreign Capital .143 D. Increasing the Productivity of Basic Industries.144 E. Shifts in Monetary ano FLscalConditions .147 3. 1956 to 1960...... 153 A. High Growth and the Shift to Guidance Policies...... 153 B. JDB Fmance Shifts to QualitativeSupplements ...... 157 C. Fmancing Trends ...... 159 D. World Bank Loans ...... 165 4. 1961 to the mid-1960s...... 168 A. The Shift to an Open Economy...... 168 B. Basic Direction of IDB Financing...... 173 C. Direction of Funding...... 174 D. Foreign Bond Issues...... 179
iv 5. Fmancial Conditions .10...... I A. Financial Resource Composition of JD ...... B 180 B. Revenues, Expenditures, and Fmancial Conditions...... 183 6. A Summary of the History of JDB ...... 183 Chapter V. INDUSTRY CASE STUDIES...... 190 1. Infant Industries: Machine Tools and Automobile Parts...... 190 A. 1945 to 1955...... 190 B. 1956 to 1965...... 196 2. Export Industries: Shipbuilding...... 204 A. 1945 to 1954...... 204 B. 1955 to the mid-1960s...... 208 3. Basic Industries : Iron and Steel...... 211 A. The Postwar Reconstruction Process (1945 to 1950) ...... 217 B. The Fir RationalizntionPlan (1951 to 1955)...... 217 C. The Second Rationalization Plan (1956 to 1960)...... 218 D. The Third Rationalization Plan (1961 to the mid-1960s) ...... 221 4. Declining Industries: Coal Mining ...... 222 A. Rationalization Policies (1951 to 1959).226 B. New Developments in Coal Policy (1960 to the mid-1960s) ...... 230 Chapter VI. SUMMARY AND LESSONS...... 233 1. Summary of Policy-Based Finance in Postwar Japan...... 233 A. The Core of Policy-Based Finance in Japan: The Fiscal Investment and Loan Program...... 233 B. Industrial Policy: The Foundation for Economic Growth in the Postwar Period...... 234 C. The Evolution of the Postwar Fmancial System...... 235 D. Policy-Based Fmance in the Postwar Period: The Evolution of JDB ...... 237 E. The Application of Policy-Based Fmance: Industry Case Studies...... 238 2. The Postwar Policy-Based Fmancial System in Japan: Key Lessons and Response...... 239 Endnotes... :242
Bibliography ...... 27
V FOREWORD
Directed credit programs involving loans on preferential terms and conditions to priority sectors were a major tool of development policy in both developed and developing countries in the 1960s and 1970s. Since the beginning of the 1980s,the realization that most of these programs had resulted in distorted incentives among both lenders and borrowers has led to a reconsiderationof their rationale and effectiveness. The experience of most countries around the world showed that directed credit programs stimulated capital intensive projects, suffered from abuse and misuse of preferential funds for nonpriority purposes, increased the cost of funds to nonpreferentialborrowers, involveda decline in financialdiscipline and resulted in low repayment rates, and contributed to a swelling of budget deficits. Moreover, once introduced, directed credit progrmds proved difficult to remove. This general assessment of the adverse effects of directed credit programs has contrasted with the experience and views of government officials in Japan and other East Asian countries who have long advocated the merits of well managed and focused directed credit programs. According to this view, govenment involvement in directingcredit is warranted when there is a significant discrepancybetween private and social benefits, when the investment risk of particular projects is too high, and when information problems discourage lending to small and medium size firms. Use of policy-based lending rather than other forms of industrial assistance (e.g. lower taxes, grants, etc) is premised on the argument that the main cnnstraint facing new or expanding enterprises is their access to extemal finance at reasonable terms and conditions. Directed credit programs involving small subsidies overcome this constraint, but to avoid the misuse of funds and abuse of credit programs, a strong emphasis must be placed on the maintenance of macroeconomic stability to minmize distortions in incentives and on effective monitoring to ensure the dmely repaymentof loans. In the context of this debate, the present report was commissioned from the Japan Development Bank and the Japan Economic Research Institute. The purpose of the report is to document the history of policy-basedfinance in Japan in the immediate postwar period and the so- called high growth era and to analyze the factors that contributed to its success. The report highlightsthe small size of subsidies involved (no more than 2 to 3 percentagepoints), the limited coverage and scope of the programs (representing approximately 10% of total loans by the Japanese financial system) and the role of effective monitoring(which kept loan losses to very low levels). The report also emphasizes the importance of three basic characteristics of Japanese policy-based finance: respect for the market economy and reliance on the private sector, close relationship between guiding policies centered around the national economic plans and policy- based finance; and respect for the managerial independence and autonomy of the government financial inidtutions. Selection of individual projects and firms for channelling funds 'o the targeted sectors was effected on purelyeconomic criteria. The report is part of a wider effort to study the effectiveness of directed credit programs in Asian countries. It also complements the research effort undertaken under the comparative study of economic growth and public policy and reported in the recently published volume on "The East Asian Miracle:Economic Growth and Public Policy".
vi The support of the Government of Japan for the research program on the effectivenessof creditpolicies in Japan andother East Asian countries is gratefullyackmowledged. The report is a product of the staff of the Japan DevelopmentBank and the Japan Economic ResearchInstitute, whose diligence,effort and speed in preparingthis report have been much appreciated.The judgements made in thisreport do not necessarilyreflect the view of the Boardof Directorsof theWorld Bank or the govemmentsthey repesent.
GaryPerlin Director FmancialSector Development Departqmt The WorldBank
vii ACKNOWLEDGMENTS
The authors express special thanks to Professor Yukio Noguchi, Hitotsubashi University,Professor Charles W. Calomiris,University of Illinois,and Messrs.Andrew Sheng, DimitriVittas and Yoon-JeCho, FmancialSector Development Department, the World Bank, who assistedin the completionof this study. This paperwas initiatedas a componentof the World Bank Study entitled "Effectivenessof Credit Policies in East Asia'. Its findings were partly incorporatedin the recentlypublished World Bank Policy Research Report on the 'The East Asian Miracle:Economic Growth and Public Policy". The authorsexpress their appreciationfor the insightfuladvice of ProfessorCharles P. Himmelberg,New York University,Professor Frank Packer, Universityof Columbia,Ms. Nancy Birdsall,the Inter-AmericanDevelopment Bank, formerlywith the WorldBank, and Mr. John PageJr., the WorldBank, andthe generoussupport of staff fromthe InternationalCooperation Department of theJapan Development Bank.
ix EXECUTIVE SUMMARY
Policy-basedfinance has a mixed record woldwide. On the one hand, it has often not been successfuleither at raising the level of aggregateinvestment or at intermediatingfunds efficiently. It has also led to the accumulationof bad loans and has expandedfiscal deficits. On the other hand is the Japanesepolicy-based finance system- one of the most successful. In channelingfunds to the private sector, the Fiscal Investmentand Loan Proa (FILP) and the Jaoan DevelopmentBank (IDB) were instrumentalin the high economic moranceof Japan in the early postwar period. E!xcellentperformanc was predicatedon three factors - a respect for the marketeconomy, a close relationshipbetween govemrnentpolicies and policy based finance, and the managerialautonomy and professionalismof JDB. Monicoringand organizationalcommitnent were also effective and they ensuredthat loan lossesoccurred at a minimum.
_oi_-B a d t Objet of the Stud Japan has successfullytransformed its economyin the latter half of this century. From a war- torn, destitutecountry, it has quickly becomean economicgiant. One of the most noteworthylessons about its development- particularlyfor developingcountries - is the emergenceand importanceof policy based finance from the war's end in 1945 to the mid-1960s - the period when Japan developedinto an advancedindustrialized country. The governmentestablished the Reconstruction Finance Bank (RFB) with a view to reconstucting the economy. This government-ownedterm- lending institutionconcentrated its resourceson certain targetedsectors. Yet, althoughthese sectors successfullyincreased their production,the financingof RFB with bonds underwrittenby the Central Bankcontributed to the acsclration in the rate of inflation. The govermmentwas forced to suspend RFB lending operationsin 1949, but this still left a majorconstraint against reconstruction:the lack of investmentfinancing in an economythat was about to take off with a weak capital market. As capital demand from industrial sectors grew louder, the government established the Japan DevelopmentBank (JDB),the government-ownedinstitution for policy-basedinvestment financing.
This studyexamines the activitiesof policy-basedfinance in post-warJapan - from 1947 to the mid-1960s. It focusesprimarily on the activitiesof JDB, whichwas the principalinstitution in charge of industrialfinancing. The studyalso emphasizesinstitutional aspects of policy-basedfinance - the fundingresources, the industrialpolicy makingprocess, and priority sectorsand their characteristcs. It also presentscase studiesof how policy-basedfinance and governmentpolicy worked in tandemto assist, foster, and enhance industrialproduction. %Aneconomic assessment of postwarpolicy-based financeis the subject of anotherstudy, and is thus not the primaryaim of this study).
"OW"ina" -o"q-a"-dWorks Policy-basedfinance in Japan is part of govemrnmentfunding activities carried out to realize nationalpolicy objectives. Each year, fundingallocation for workingtoward these objectivesis set in the Fiscal Investmentand Loan Program (P112),an accountestablished in tandem with the overall General Account. The major financial resources for FILP are procured from postal savings a.ad pensionfunds managedby the govemfnent;their distinctivecharacteristic is that they must be repaid. By using these funds for projectswhere recovery of investmentis possible, FILP supplementsthe General Account and has a fairly substantialweight in the Japanese economy. The size of FILP cuaetly is apprximately 8% of GNP and 50%of the GeneralAccount. It is importantto understandthat Japan's policy-basedfinance supplements private financing. While the content of Japan's policy-basedfinance has changedover time, its proportionof overall loans outstanding.including those of private financial institutions,has been a steady 10%. Policy-
xi based finance has gradually dc-emphasized its industry-related financing as private finance has matured and enterprises have grown. Its relation with private finance also has shifted from providing quantitative supplements to providing qualitative supplements.
Industrial policies in postwar Japan have evolved steadily over four decades, from an early emphasis on individual industries to a rcent emphasis on policies that cross industrial boundaries: 1950s: policies for developing and fostering industry; 1960s: policies for strengthening the competitiveness of industry in the face of trade and capital liberalization; 1970s: policies for enabling industry to adjust to changes caused by the oil crises; 1980s: policies for promoting diversified targets such as technology and information network. The most distinct element of Japan's industrial policy is the cooperative relationship between govemment and industry, each of which recognized the necessity of striving toward common go.als. This relationship is reflected most clearly in emergence of the 'deliberative council system." The council provides the public and private sectors with a forum for coordinating and had been well established by the 1960s, when almost all important industrial policies were decided in their respective councils. These councils were formed with industry representatives, former bureaucrats, academics, and others, thus ensuring that the broader range of interest could be captured and then synthesized into a policy directive. Without a council's reaching a consensus, it is unlikely that policy would materialize as intended. Industrial policies consist of dir.'ct regulations (special legislation and administrative guidance) and indirect measures (infrastructural development, taxation, subsidies, and policy-based fmance). In Japan, these tools were selected by government ministries either as sole policy implements or as part of a policy mix. In postwar Japan, policy-based finance formed an indispensable element of any policy mix, due largely to its distinct characteristics - its discretion in selecting projects, its flexibility to respond to changes in policy priorities and objectives, and its pump-priming and cow-bell roles.
Polic-vBased Finance: Its Chaycteristics Policy-based finance is supposed to guide the financial resources of the government and private finance into areas that are most desirable from the view of the national economy. To function effectively, policy-based financ,U institutions must often provide loan conditions that are more favorable thar those of private finance. The most favorable interest rate offered by policy-based financial institutions at the beginning of the 1950s was lower than the private-sector long-term prime rate by 3.5%; the least favorable was the same as the prime rate. Policy-based finanec appears to be supei'or to loan guarantees by private financial institutions. The first problem with loan guarantees if that private financial institutions may make loans too casually if they are able to shift all the risk to the government. Second, a guarantee fee may weaken the effectiveness of the interest rate aspect of policy-based guidance. Third, allowing private financial institutions to identify and select P mnprojects autonomously makes it difficult to ensure that policy is applied comprehensively and fairty.
xii InvyestmntFhgandeg WhyLong Ter Ln g nEBecame N&cagr= Facing a widespreaddecline in productionactivities immediatelyafter the war, the government adopteda Priority ProductionSystem that soughtimmediately to increase the output of the coal and iron and steel industries. In order to support these measuresfinancially, the govemmentestablished the RFB. Yet, because the RFB derived much of its funding from central bank credit, it fueled inflation,and was forcedto ceasefinancing activities in 1949. As the 1950sunfolded, the government was striving toward economic self-sufficiencyby implementingpolicies to supportmodernizing industrial facilities. The problem was that long-term funding for capital investmentscould not be secjred. Thus were bom policy-based financial institutionsand privateinstitutions for long-termfinancing. But still problematicwas the absenceof a solid capital market, partly due to balanced budget policies that stifled the development of a governmentbond market. From the late 1940sto the early 1970s,the scarcityof funds for capital investmentwas met largelythrough the intermediationof financial institutionsthat collected the savings of the household sector. During this period, Japan's financial system evolved into separate long- and short-term finance components and was marked by broad-ranging interest rate controls. These elements constituteda systematicframework for providinglong-term investment funds to strategicsectors. There are two primaryfactors which served as preconditionsfor the formationof this system. First, the level of accumulatedfinancial assets was low, and except bank deposits,there was a scarcity of alternative financial products. Second, financialrelations were sheltered internationally,through effectiveforeign exchange controls and restrictionson foreignownership of Japanesefirms.
Priority Sectors of Policy-BasedFinance JDB initially targetedits financingat basic industries(electric power, iron and steel, coal, and ocean shipping) in which plants and machinerywere consideredobsolete requiring modernization, and whose productsand servicescomprised a large share of the cost componentof other industries. Modernizingthese industries with expansionary investmentto crack production bottlenecks was indispensablefor increasingexports, sustaining economic growth, and upgradingother industries. At the same time, JDB was instrumentalin introducingforeign capital through World Bank loans and servingas the guarantorfor private-sectorforeign currency loans. In the mid-195C,,funding areas diversifiedinto infant industries,such as machinery,and new industries,such as petrochemical.JDB fundingfor these industrieswas key toward guidingprivate financing. At the outsetof the high growthperiod of the 1960s,JDB begantargeting its fundingat areas to address the effects of trade liberalizationand regional disparities -this in response to the shifting objectives of the Japaneseeconomy. In 1961, as it diversifiedits funding procurement,JDB also issued foreign currency bonds, playing a pioneering role in introducing foreign capital into the domestic market.
Policr-BasedLending Ins"tUtioDs; Their vAUtOOnU Althoughthe RFB wasin a sense the predecessorto the JDB, it did not share JDB's managerial independence. In short. lendingdecisions were actuallymade beyondthe purviewof the RFB, and they were not necessarilybased on solid appraisalcriteria. At its inception,the JDB learned lessons from the RFB. The governmentassured the first govemor that he need not have to bend to political pressurefor nonviableprojects. The JDB also established a capable loan appraisal department. Thus, loan decisions were left to the professional judgment of JDB, while the governmentwas responsiblefor establishingthe basic policy for the
xiii operadon of funds annually. JDB continues to verify how project funds are spent and their impact. A government auditor also conducts a rmgular annual audit. Thus, a system of multiple checks prevents the inappropriate or illegal application of the funds from policy-based financing. This overall framework enabled IDB to keep its loan losses at a level much lower than that of the private financial sector. JDB made relatively few mistakes in selecting loan projects. At the time of JDB's establishment, equity capital from the government accounted for a substantial portion of its funds. Further, as the accumulation of statutory reserves increased in proportion to increases in its loan balance, JDBs financial composition continued to be favorable. As such, it could offer a preferential interest rate in line with policy demands, without being subsidized by public finance. Its strong financial position also guaranteed its managerial independence.
InduC ry Case Studes: The Appllcation of Polio Measures and Funding Four industries illustrate how policy-based finance was combined with industrial policies to address different stages of individual development. For the machine industry (an infant industry), the government established a special law, and sought to modernize the sector by promoting the renovation of obsolete facilities and the accumulation of capital and technology. It sought specifically to establish machine-specific rationalization plans and arranged for JDB funding. Particularly noteworthy was its funding to subsectors of machine tools and automobile parts, and it also guided private financial institutions toward these emerging machine industries. For the shipbuilding industry (an export industry), the loss of its international market after the war was considerable. However, orders for export ships increased after 1950, triggered by a global shipping shortage. To promote exports, the goNzrnment provided special tax deductions for income eaned by exports, established an export insurance system, and arranged for long-term, low-interest deferred payment financed by Export Import Bank of Japan (EIBJ). From 1950 to the early part of the 1960s, EIBJ financing for export liners occupied a considerable share of its fund operations. This financing largely benefitted the shipbuilding industry, and enabled it to become the principal foreign exchange earner in the late 1950s. (It was only 20 years later that the industry, once so conspicuously dominant in the world market, had to undergo extensive restructuring in the face of the worldwide depression, new competition, and the change in the industrial structure of Japan.) The iron and steel industry (a basic industry) was the core of the postwar Priority Production System and the target of various policy tools - including the priority distribution of coal input, RFB fiancing, and price-support subsidies. The preferential status of the industry continued throughout 1950s. The tools used to promote the rationalization of the industry included IDB financing, specially accelerated depreciation, tariff exemptions on important machinery, and the priority allocation of foreign currency for introducing technology. JDB provided 13% of the funding for capital investments under the First Rationalization Plan between 1951 and 1955. During the Second Rationalization Plan (from 1956 to 1960) JDB served as the "windowwthrough which loans were borrowed from the World Bank. The result was the successive, competitive construction of new technology blast fumaces among steel producers. Japan's coal mining industry (a declining industry), also a core component of the postwar Priority Production System, fell into a structural slump during the remarkable energy revolution around 1956. Govemment support measures and efforts by the industry could not stop its ultimate decline. Thus, in 1962 the rationalizationpolicies shifted to alleviating the social friction precipitated by the closure of some coal mines. JDB supplied rationalization funds to highly efficient mines in an effort to concentrate production in these mines. In addition, the government provided subsidies for interest payments, mediated the reemployment of those who lost their jobs, and fornulated policies to facilitate locating other industries in coal-producing regions.
xiv Behind the Good Performance of Pollg.Based Finance Given that the policy-based financial system in Japan (particularly JDB) was instrumental in spurring high economic growth in the postwar period, an understanding of factors and background which made this system function effectively is extremely valuable for other countries that are considering establishing policy-based financial systems. Three characteristics of the Japanese system are most notable. The first is a respect for the market economy. A precondition for a policy-based finance system is the existence of a private sector business structure and private finance that can be supplemented with policy-based finance. In Japan's case, its prewar experience as a market economy and its endeavor to establish postwar economic reform created an environment that fostered an entrepreneurial spirit among the private sector. The second characteristic (which became particularly evident in Japan as the high growth period unfolded) is the close relationship between the government's economic plans and policy-based finance. The state did not actively compete against the private sector --it augmented private sector activities through a consultative, collaborative, and infrastructure-building stance. Through policy- based finance, the priority allocation of financing was implemented in line with govemment policies that incorporated the will of the private sector. The precondition for this relationship was the existence of a public savings system, and a vehicle for allocating funds efficiently - that is, the Fiscal Investment and Loan Program. The third characteristic (particularly relevant to JDB) is a respect for managerial independence given the existence of a sound financial composition and management. While JDB had inherent limitations as a government-related financial institution, its neutral and fair appraisal base enabled it to make funding decisions autonomously. But beyond these characteristics of the system is a recognition of the prevailing social economic, and political climate. The policy-based finance system of Jap-n functioned effectively because it was able to capture the tenor of the environment in Japan at that time.
Lessons for Other Countries: Some Questions and Possble Answers In countries that lack appropriate macroeconomic management and policy designs or do not rigorously enforce monitoring, offering preferential measures such as low-interest loans from the govemment institutions without restriction may likely have an adverse effect on the overall economy. However, the adverse effect does not necessarily materialize if the factors behind the success of policy based finance are established. The remainder of this section addresses several questions that have emerged with this issue. WMllsuch measures encourage the substitution of credit for the borrowers' own funds and promote excessive indebtedness? It is clear that with excessive investment, even with low-interest loans, the profitability of projects will deteriorate and their risk of default will increase. If one has sufficient project appraisal capabilities, this type of project does not become a funding target. When necessary, JDB required that loan recipients invest a certain level of their own funds as a condition for receiving funding. Do such measures skew incentives in favor of capital-intensivetechniques of production? This problem is not inherent to low-interest loans-other policy means for promoting capital investment (subsidies, preferential tax measures, and so forth) also face the same problem. But given the appraisal procedures that can be established for checking the viability of such investments, such loans are superior compared with other means.
xv Do such measures encourage corruption and the rationing of credit in favor of already advantageous groups and weaken the imcentivesof both borrowers and lenders for debt recovery? It is possibleto prevent these adverseeffects with an appropriatesystem of multiplechecks and balances. Beyond this point, the answer cannot be found in economictheory. Rather, this issue depends on the social and institutional aspects of a country. Do suh measuresadd to the fical deflcit and increse the costs of borrowingby others? To begin with, low interest loans are not the only method that can exacerbate fiscal deficits. In addition, when the interest rate for low interest loans is set at a level slightly lower than the market interest rate, a fiscal deficit does not always occur. It is also true that, even if low interest loans reduce Fiscal revenue for a period of time, funding viable projects will eventually increase profits, in turn increasing tax revenue. Finally, when the financial resources for loans in developing countries are channeled from a low interest-rate source outside the financial system (such as IDA), a fiscal deficit will not inevitably occur.
xvi INTRODUCTION
This report examines the activities of policy-based finance in post-WWII Japan. It focuses primarily on the activities of the Japan Development Bank (JDB), which, as the primary institution in charge of industrial finance, played a large role in bringing about high economic growth. The report examines primarily the period from the end of WWII in 1945 to the mid-1960s, when Japan became an advanced industrialized country. Events after that time are discussed as necessary. The report consists of six chapters. Chapter One presents the history, characteristics, and structural framework of fiscal investments and loans, which serve as the systemic support for the activities of policy-based financial institutions such as JDB. The chapter then outlines Japan's policy-based finance by discussing such issues as its significance, classifications, scale, functions, and history. Finally, based on JDB operations, the chapter explains the actual procedures of policy-based finance, beginning with the formation of a budget, up through the execution and management of a loan. Chapter Two outlines industrial policy and the economic plans that supported implementing this policy, since these pertain to the policy aspects of policy-based finance, particularly JDB. Drawing examples from the past, this discussion includes an overview of the framework, and how such matters as the process of formulating policies and the mixing of policy tools are carried out. As is readily evident from the term, policy-based finance shoulders part of the financial activities that include the private sector, and these activities change according to such factors as prevailing financial circumstances. With this in mind, Chapter Three surveys approximately twenty years of the macro-environment of fiscal and monetary policies after the end of WWHI. This environment served as background to establishing and operating policy-based financial institutions, beginning with the Reconstruction Finance Bank (RFB) and JDB. Chapter Four provides a period-by-period account of the postwar activities of policy-based finance (using JDB as an example). The chapter describes the activities of RFB in the 1940s and JDB since the 1950s, touching on the major characteristics of each period. The chapter ends its account in the mid-1960s with Japan's entry into the circle of advanced industrialized countries. Chapter Five takes a different approach to the topic. With the history of policy-based finance in Chapter Four serving as the warp of the total weave, this chapter provides the weft by using examples from several industries to describe the position of and role played by policy-based finance in the industrial policies of each industry. Four industries are examined: the machinery industry (an infant industry example), the shipbuilding industry (an export industry example), the iron and steel industry (a basic industry example), and the coal mining industry (a declining industry example). Chapter Six touches on the accounts given in Chapters One through Five, focusing on the characteristics of Japan's policy-based finance system in the postwar period. This chapter discusses such aspects as the background and preconditions to realizing Japan's policy-based finance system, and includes additional comments on the points to be considered if countries other than Japan were to try to implement this system.
xvii Chapter1. FISCAL INVESTMENTS AND LOANSAND POUCY-BASED FINANCE
1. Fiscal Inveshnents and Loans 1.1 Fiscal investments and loans are govemrnentactivities carried out to realize national policy objectives. The government itself raises the funding source for these investment and loan activities, and backs them with credit. To allocate these mostly limited financial resources effectively and in response to policy objectives, the govemment draws up the Fiscal Investment and Loan Program (FILP) each year - a comprehensive and uniforn accounting of the distribution of these fiscal investments and loans. To coordinate FlLP with the nation's various policies, including its fiscal and monetary policies, the governmentconfigures FILP at the same time that each fiscal year's General Account budget is drawn up. As such, FILP is also refenredto as the "SecondBudget." 1.2 Although FILP does not represent the entirety of the government's investment and loan activities (both financial resources and fund operations), an understanding of fiscal investments and loans is a precondition to the understanding of policy-based financing in Japan. Thus, the first section of this chapter provides a historical overview of the evolution, configuration, and thrust of FILP. A. The Characteristics of Eiscal Investments and Loans 1.3 Figure 1-1 presents the flow of funds within the FILP framework. The government draws funds for its fiscal investmentsand loans from such sources as postal savings, pensions, and postal life insurance. It then allocates these funds to the institutions that implement national policies - such as the nation's special accounts, policy-based financial institutions, project implementation organiations, local governments,and special corporations. 1.4 The funds used for fiscal investmentsand loans are characteriied by three features: • Necessity of Repayment. Fiscal investments and loans must be repaid; thus, they differ from the general account,which uses non-repayment funds (such as taxes) as its funding source. As such, the government extends fiscal investments and loans only when the capital that is invested can be recovered from project-generated income and when the repayment of both principal and interest is ensured. Fiscal investmentsand loans are not provided to deficit-operatingbusinesses that are unable to repay. * PassiveCollection. The TrustFund Bureau Fund and the PostalLife InsuranceFund are the financial resources for fiscal investments and loans, although they are not configured to provide this support actively and expressly. Accordingly, unlike the amount of taxation, which the govemment can adjust according to its expenditures, the principle behind these funding operations is that the distribution of fiscal investments and loans is limited to the amount of funds that are passively collected through these various sources. * Public Benefit, The financial resources for fiscal investrents and loans are collected through national institutioiisand based on national sredit. Since they are essentially national funds, they must be used to promote and enhance the public good in the form of economic and social development
I Figure11 . Flowol Finds1hbauag Fiscd lavesuu ts FiaaclulResuws Fiscalfavenmeots and Opemi0cs 9 LW(biflioniyea) 4G _ , (37,406M oem GovernmentBa . . xa QilIIa yOng)(600) Govemnwat Bonds
SaviagS i i~.i Savill)VIDIS (3,100, Ban|s mahdOovernnmn | aS PeciailrAccoUNt * waltag. n c .. Fna|SpedalCncplou,u .______LoanRecovety etc. (13,90) _Cmmwaa Ndsumce WelfaresuranCe Q199135.
.Postal IVSma SOi
WandPosalAewnnuPpec Acoun Pcostal i)1ain aa(ub6 .3o05iase)I r80 Fia .cCorpo l BOJcdSScrulAccount Spedal A Iduidl iwuuiutSpciaLIclaa _~~~~~~~~~~ l-u~aa------etc. Spedd~fo(66)Ua ~Account mue Fun
.. Ac~emmnt LomnicdMdciaOaiurgsa) (S.OO
Note;Amounts ame for FY 1991.
Source; BOJ B. The Institutional Evolutdon f the Fscal Investments and Loans System 1.5 Although FILP has existed in its present form since 1953, its components have undergone several changes that have shaped its current structure. 1) Trust Fund Bureau Fund 1.6 Early in the Meiji era (1868-1912), the governmentbegan placing postal service deposits with the Ministry of Finance. The operation of these funds (the predecessor to postal savings) were the origin of the Trust Fund Bureau. In the beginning, the funds were used almost exclusively to purchase government bonds. Later, the operations were expanded to include special bank debentures, municipal bonds, and loans to special accounts and other uses. In 1925 the government enacted the Finance Ministry Deposit Fund Bureau Deposits Law and the Finance Ministry Deposit Fund Bureau Special Accounts Law, which consolidatedthe system for managing the operation of funds from the Deposit Fund Bureau. These laws essentiallyprovided the framework for the current system. Actual.operations were still targeted primarily at supporting government and municipal bonds, but, as Japan moved toward the war, greater emphasis was placed on providing funds to national policy companies and munitionscompanies. 1.7 During the occupation period after WWII, GHQ policy stipulated that the Deposit Fund Bureau's funds be targeted at governmentand local govemrnments,and in fact almost all of the funds went toward underwriting municipal bonds. However, in 1948, a surplus of funds began emerging, and, given the insufficient supply of long-term funds for reconstructing Japan's economy, the government faced growing pressure to expand the range of recipients of the funds. Thus, in 1950, the Deposit Fund Bureau began underwriting the bank debentures issued by private banks. Nevertheless, the fundamental solution to the shortage of long-tenn funds had to await the enactment of the Trust Fund Bureau Fund Law in 1951. 1.8 The Trust Fund Bureau Fund Law took shape as a renovation of the Deposit Fund Bureau Fund Law. Following are the key features of the law: Purpose (Article 1): • To provide through the Trust Fund Bureau unified management of postal savings, reserve funds, and excess fumds of governmentspecial accounts and otiherfunds that are deposited with the Trust Fund Bureau in accordance with laws and provisions of governmentordinances. * To contribute to the promotionof the public good. Fund operadiontagets (Article7): * In order to secure the safety and public benefits of fund opefations, targets of fund operations are restricted by law. 2) Postal Life Insurance and Postal Annuity Special Account Reserve Fund (Postal Life Insurance und) 1.9 A separate law enacted in 1952 establishedthe independent managementof the Postal Life Insurance Fund by the Minister of Posts and Telecommunications.It is the sole exception to the unified managementof funds by the Trust Fund Bureau. 1.10 Postal life insurance and postal annuities are services managed by the government to provide life insurance and annuity insurance readily to citizens, and, through reliable management, at the lowest possible premiums. These services were initiatedto supplementthe privateiy managed insurance business, which targeted only the high-incomebracket (Postal Life Insuance from 1916, Postal Annuities from 1926). When the government first initiated these activities, their fund operations were managed separately from the Finance Ministry's Deposit Fund Bureau given the
3 special nature of the business (that is, loans to contracting parties), and because the unified management of governmentfunds had not yet been established. 1.11 During WIW,all but part of these postal funds fell under the managerial purview of the Deposit Fund Bureau. Even as the idea of unified nanagement of government funds was canceled after the war, the Trust Fund Bureau Law was enacted in a form that temporarily included the Postal Life Insurance Fund. However, in 1952, at the insistence of the Ministry of Posts and Telecommunications,the governmentenacted the Law Concerning the Operation of the Postal Life Insurance and Postal Annuity Reserve Fund. Since then, these funds have been separated from the Trust Fund Bureau and managed independently, primarily because, as a voluntary inclusion insurance program, the Postal Life Insurance competes with the private sector. 1.12 Two measures are taken to ensure that the separate operation of these two govemment funds does not create inconsistencies:(1) the legal regulationsapplying to the operation of the Trust Fund Bureau Fund and the Postal Life Insurance Fund are coordinated carefully, and (2) a Fund Operations Council comprised of impartial professionalsoversees and coordinatesthe operation of both funds. 3? Draving up the Fiscal Investment and Loan Program 1.13 The first step toward establishing the fiscal investmentand loan system after WWII was the enactment of the Trust Fund Bureau Fund Law in April 1951. A year later, the system was revised to separate out the operation of the Postal Life Insurance Fund. In 1953, a special law was then enacted to provide government guarantees on the bonds issued by the Japanese National Railways and Nippon Telegraph and Telephone Public Corporation - thus paving the way for private-sector funds to be used as financial resources for FILP. In addition, the Industrial Investments Special Account was set up as successor to the assets of the AssistanceGoods Fund Special Account, which was eliminated with the end of U.S. aid to Japan. As the efficient operation of these diversified funds increasingly required uniform management, the government unified all of its various invesunent and loan activities under FILP in fiscal 1953, and published this information as reference material for Diet deliberationof the budgeL 1.14 In 1973, responding to the expanding scale of FILP and the progressive diversification of both recipient organizations and fund uses, the government enacted the Long-Term Funds Operation Law, which requires Diet deliberation of Trust Fund Bureau Fund and Postal Life Insurance Fund long-term operations of five years or more. C. Structure of the FiscalInvestment and Loan Program 1.15 FILP can be represented by three tables: the Fiscal Investment and Loan Funds Program, the Fiscal Investnents and Loans Financial Resources Forecast, and the Fiscal Investnents and Loans Use ClassificationsTable. The Fiscal Investmentand Loan Funds Program is the basic table. and the others serve as supplementary tables. (The Use Classifications table has formally been drawn up since FY 1961.) 1) Fiscal Investment and Loan Funds Program 1.16 The Fiscal Investment and Loan Funds Progms for FY 1953 and FY 1991 are shown in Tables 1-1-A and I-1-B. The organizations eligible for fiscal investments and loans (the demand side) are listed on the left side of the tables, while the suppliers of financial resources for fiscal investments and loans (the supply side) are listed across the top. Consequently, the tables take the form of what could also be called the Table of Relatons between Financial Resources and FILP Agencies. 1.17 The supply side of the table shows how each financial resource is allocated among each of the FELPagencies. In 1991 (and since FY 1973), the four financial resourcesfor fiscal investmentsand loans are the Industial Investment Special Account, the Trust Fund Bureau Fund, the Postal Life Insurance Fund, and Government-GuaranteedBonds and Borrowings.In FY 1991, a total
4 Table 1-1-A.PILP PundsProgram: FY 1953 (bilLionyen)
Orgniations eneral Assiane ndutr Tut Postl Pubicue Tolal _ck Aceount Geods Inveanment Fund LUe Bondsand Specild Speital Ban InsumanceBorrowings, Own Sum Accwan Account Funds Funds e. Fund Total Special Accounts SpediiedRoad Wo*s 2.5 - - 2.5
Postal Senrices - - - 0.5 - 0.5 2.1 2.6 Public Corporations Japawne NadonaRilways - - 14.5 8 .5 23 32.6 556 NipponTelegraph and Telephone Public Corporation 3.2 - 7.5 10.7 35.5 46.2 Telo RoodTrultAumhow-ty - 1.5 - 1.5 - - Govermuuot Finance Corporatdio.s etc. Housn Loan Corpoaion 8 - - 10 - - 18 2 20 PeoplesFinance Corpordon 4.5 - 3.5 - 8 19 27 SmallBuines Fince Corporation I - - 2 - 13 2 15 Apialte Forestry nd Fidseries Finance Corporaoin 18.1 - - 5 - - 23.1 1 24.1 J pn Dnelopemt Bank - 14.5 31.5 14 - 60 26 36
Local Govemmets LAW Govem ta - - - 72 19 20.5 111.5 - - Specil CorporUtlon etc. Jan Aidines Corporation I -- - - I - - Elctric Pwr Devdepment Corpation - 4 11 5 - 20 - 20
Bank Debetrsa BankDehenume - - - 30 - -30 - - Total 48.3 11.5 42.5 tS8 19 36.5 322.8 -
Noter . Initial pgmrm bae 2. For die Export-ImpwrtBak of Japan'own hfud aloneequal 24 billion yen. Source:Minisy Of Firnanc
5 Table I-I-B. FILP Funds Progra: FY 1991 (billion yen)
Organizations Induwtr Tintr Pnd Posl Ufc Government Total BaC Investment Bunnm Insurnce Guaanteed Specal Panda Fund Bondsad Own sum Account Borrowings Funds Total Special Accounts National Forest Service Special Accmnt 258 - - 258 93 351 Postal Savings Spedal Account 4,000 - - 4,000 - 4,000 Government Finance Corporations, etc. HousingLoan Corporation - 6,267 136 - 6.403 302 6,705 People'sFinance Corpomdon - 1.914 321 - 2.235 1,300 3.535 Small BusinessFinance Cowomtion 5 1.385 557 20 1.967 467 2,434 Small Business Credit Insurance Corporadon 2 - - - 2 402 404 EnvironmentalSanitation Busines Finance Corporation - 237 - - 237 -12 225 Agriculke Forestryand FisheriesFinance Corporation - 388 57 - 445 54 499 Japan Finance Corpoation for Municipal - - - 1.135 1.135 -26 1.109 Enterprises Hokkadoand Toloku DevelopmetCoporation 2 98 53 - 153 36 189 OkinawaDevelopment Finance Corportion 0 109 36 - 145 -3 142 JapanDevelopmen Bank 1,196 64 - 1.261 367 1,627 Export-ImpontBankofJapan - 1,111 60 - 1,171 180 1,351 Public Corporatmous, etc. Housingand UrbanDnev orpmentCporaion - 519 1S1 220 890 1.670 2.560 PensionWelfereServicePubli:Corporation - 4,183 - - 4.183 200 4.383 JapanHghway Publc Corporatin - 838 1.075 145 2.058 2.062 4.119 Japan Railway Conswution Public Co _xrtio - 55 20 55 130 436 565 JapanNational Oil Copamion - 35 15 - 50 1.106 1.156 OverseasEcononaicCoopeationFund - 690 37 - 727 183 910 PostalLife Insuanceand WelfiaePublic Cosxoaton - - 1.650 - 1,650 - 1.650 Local Goverumenb LocalGovernments - 3,285 1.080 - 4.365 3.633 7.998
Special Corporations, etc. Kansai IntemationalAirport Comporation - - - 64 64 227 290 Ele__icPowerDevelopmentCo-74 19 - 93 28 121 Total (incuding other organizations) '6 28.535 6.305 1.900 36.806
Notes: 1. Initial programbase. 2. This table is an excerptfrom te fimndprogram Source:Ministry of Finance.
6 Table 1-2.Distribution of FILP Funds by InstitudionalSector (billion yen)
FiscalYear Sector 1953 1955 1960 1965 1970 1975 1980 1985 1990 1991 Special Account 3 4 10 27 37 188 381 436 651 729 (1) (1) (2) (2) (1) (2) (2) (2) (2) (2) Government Bonds - - - 90 30 420 2,500 5,000 2,000 600 (5) (1) (4) (12) (19) (7) (2)
Natlonal Tobal 3 4 10 117 67 606 2,881 5,436 2,651 1,329 (1) (1) (2) (7) (2) (6) (14) (21) (9) (4)
IAlTotla 112 117 157 390 643 1,830 4,011 4,899 5,320 5,500 (35) (36) (26) (23) (18) (19) (19) (19) (18) (19)
Policy-BasedFinancial 122 98 223 645 1,561 3,882 8,854 9,315 12,639 14.018 Institutions (38) (31) (37) (37) (43) (40) (43) (36) (43) (47)
ProjectInplementation 86 103 217 559 1,339 3,410 4,935 6,208 9,012 8,859 Organizations (26) (32) (35) (33) (37) (35) (24) (24) (30) (30)
General YILPAgencks 208 201 440 1,204 2,900 7,291 13,789 15,523 21,651 22,877 Tota (64) (63)=(72) (70 (80) (5) (7) a7) Total b 323 322 607 1,711 3,610 9,730 20,680 25,858 29,622 29,706 (100) (100) (100) (100) (100) (100) (100) (100) (100) (100)
Note: Numbes in parenthesesrepresent the share as a percentageof the totaL a.Local includes local governmentsand the Japan Fnance Copation for Municipal Enteprises. b. Total equals the amount of FiLP funds plus the amount of governmentbonds underwrittenby the Trust FundBureau (however,the portfolio investmentis excluded in 1990 and 1991). Source:Ministry of Fmance; Zbstu:ZaidiTayhi.
Table 1-3.FILP Financial ResourcesForecast, FY 1991 (bilion yen)
Amount Share as % IndustrialInvestnent SpecialAccount 66 0.2
Trust Fund Bureau Funds 29,135 77.9 Postal Savings 8,800 23.5 Welfare Insurance and National Pensions 6,430 17.2 * Loan Rcpayments. 13,905 37.2
Postal Life Insurance Funds 6,305 16.9 Govenment-Guarnteed Bonds 1,900 5.1 Total 37,406 100
Note: Of this finacial resources forecast, 36,806billion yen will be allocated to the FILP, and 600 billion yen will be allocated to underwritinggovenment bonds.
Source: Ministry of Finance.
7 amount of i36.8 trillion (or approximately $300 billion) was distributed among the 67 FILP agencies.' 1.18 The demand side shows the financial-resource breakdown of the funds required by each FILP agency for their planned projects (loans) for that fiscal year. For example in FY 1991. the loan scale total of V1.627 trillion for JDB includes not only planned loans of V1.196 trillion from the Trust Fund Bureau Fund and K64.4 billion from the Postal Life Insurance Fund, but also V365.5 billion procured independently through loan repayments, the issuance of foreign bonds, and other means.2 1.19 The distribiution of funds is shown in Table 1-2. For convenience, fund recipients are broadly classified as national, local, and general FILP agencies.The weight of each sector changes over time in line with structural changes in Japan's economy (For a more detailed explanation see 1.59-1.61.)The govemment bonds (in the middle of the table) take the form of loans to the General Account for the purchase of government bonds; since FY 1975, the operation has increased significantly with the growing amount of government bonds issued. The purchase of these government bonds is not included in FILFs fund operations targets (because they only weakly serve the function of distributing financial resources), but the funds required to support the purchases are incorporated into the Financial Resources Forecast and are shown in the margin of the Fiscal Investmen. and Loan Funds Program because they fall under the Long-Term Funds Operation Law. 2) Financial Resources for Fiscal Investnents and Loans [Trust Fund Bureau Fund] 1.20 The central source of funds for the FILP agencies is the Trust Fund Bureau Fund. In FY 1991, the fund provided approximately 80% of the financial resources for fiscal investments and loans - up from the approximately50% when fund was inauguratedin FY 1953 (Table 1-3). 1.21 a) Unified Manageent. The Trust Fund Bureau (Fmance Bureau, Miniqtry of Fmance) manages the operation of funds deposited with the government according to provisions of law. Since most of the deposited funds comprise the small savings of citizens, the government must use these funds not only judiciously and reliably, but also to contribute to the public good. The unified managementmethod has been adopted to enable the govemrnmentto: SSecure large-scale and stable funds, in turn enabling it to distribute these funds efficiendy throughthe economy according to policy goals. - Carry out operations flexibly according to prevailing economic conditions and in coordination with fiscal and monetarypolicies. * Avoid duplicativefund investmnentsand organizationaland staffing increases. 1.22 b) Deposits. The Trust Fund Bureau Fund Law (Articles 2 and 3) earmarks the following types of deposits for the Trust Fund Bureau: * Postal savings (excludingfunds necessary for covering daily repayments or loans to customers). *Reservefundsfromsetilementssurpluses andsurplusfian fromgovemment special accounts (with the exception of some special accounts), including welfare insurance and national pension funds. * Other deposits designated specificallyin other laws. Table I-4 shows how the deposit balance of the Trust Fund Bureau Fund has changed-an expansion in scale from approximatelyV600 billion in FY 1953 to V245trilLion at the end of FY 1990.
8 Table 1-4.Trusl Fund Bureau Fund Deposit Balance (Liabilities) (billion yen)
Fiscl YearEnd 1953 1955 1960 1965 1970 1975 1980 1985 1990 PosialSaving Deposits 350 533 (53.8) 2,673 7,676 24.199 60.506 101,324 135,931 (55.5) (59.1) 1,118 (52.9) (52.5) (56.5) (60.5) (60.6) (55.4) PostalUfc Insurance 126 129 142 90 350 1,092 1,850 2,575 4,380 and PostalAnnuity (20.0) (14.3) (6.8) (1.8) (2.4) (2.5) (1.8) (1.5) (1.8) Deposits Welfae Insurane 82 142 450 1,406 4,344 12,098 27,542 50,305 74,275 Deposits (13.0) (15.8) (21.7) (27.8) (29.7) (28.3) (27.5) (30.1) (30.3) NationalPension 189 717 1,798 2,360 2,493 4,925 Deposits - - - (3.7) (4.9) (4.2) (2.4) (1.5) (2.0) 73 97 368 696 1,543 3,623 7,835 10,371 25,690 OtherDeposits (11.5) (10.8) (17.7) (13.8) (10.5) (8.5) (7.8) (6.2) (10.5) Total 631 901 2,078 5,054 14,630 42,810 100,095 167,068 245.201 (100) (100) (100) (100) (100) (100) (100) (100) (100)
Note: Numbers in parenthesesare the share as a percentage of the total. Source: Ministry of Finance.
Table 1-5-A.Trends in Postal Savings: Changes in tie Balance
Balance Gwth GmssInceasb Net Inease FiscalYear End Ratea (billionyen) (%) (biDlionyen) (billionyen)
1950 155 26.7 33 30 1955 538 18.3 81 62 1960 1.123 13.8 133 86 1965 2,703 21.2 471 369 1970 7,744 22.6 1.427 1,111 1975 24,566 26.4 5,135 3,804 1980 61,954 19.3 10,043 6.106 1985 102,998 11.0 8,990 2,88'
1990 136,280 1.2 1,550 -5,141
a. Growth rate is in rlation to de previous fiscal year end. b. Gross increase= net increase(cash inctease)+ intereston principal (transfer increase). Sources: Bank of Japan, KLizaiTokei Nhn.; Ministry of Posts and Telecommunications.
g Table 1-5-B. Trends in Postal Savings: Share of Households'Financial Assets
DepositBalance Savings Balance (Excluding Stocks)a Fiscal Year Growth Postal Savings' Growth Postal Savings' End Rate b Share Rateb Share -(% (billion yen) (%) (billionyen)
1955 3,128 23.5 16.0 3,743 22.8 13.4
1960 7,619 19.8 14.6 10,002 23.1 11.1
1965 18,210 18.9 14.3 24,095 16.7 10.8
1970 42,714 17.6 17.3 56,689 18.6 13.1
1975 109,343 19.5 21A 143,315 19.8 16.3
1980 213,061 11.2 28.3 286,121 12.1 21.1
1985 330,081 7.5 30.5 473,014 8.5 21.3
1990 492,198 9.2 27.2 756,365 10.1 17.7 a. Savings balance = cashdeposits + long-tem bonds + life insurance+ other financial assets. b. Growth rate is in relationto the previous year end. Sources: EconomicPlanning Agency, Kokumin Keizai Keiman.and others.
Table I-S-C. Trends in PostalSavings: Changes in the Balance,by Type (billion yen; %)
Fisc_ OrdinarySavings Savings Certificates Time Savings Installment Total Year End Savings, etc.
1950 103 (66.4) 38 (24.2) ( 1.4 (9.4) 155 (100)
1955 264 (49.1) 223 (41.4) - (-) 5.1 (9.5) 538 (100)
1960 458 (40.8) 581 (51.7) - (-) 8.4 (7.5) 1,123 (100)
1965 977 (36.1) 1,557 (57.6) 2 (0.1) 167 (6.2) 2,703 (100)
1970 2,014 (26.0) 5,434 (70.2) 5 (0.1) 291 (3.7) 7,744 (100)
1975 4,019 (16.4) 19,844 (80.8) 236 (0.9) 467 (19) 24,566 (100)
1980 5,957 (9.6) 54570 (88.1) 675 (1.1) 752 (1.2) 61,954 (100)
1985 8,044 (7.8) 92,856 (90.2) 864 (0.8) 1,234 (1.2) 102,998 (100)
1990 12,258 (9.0) 109,567 (80.4) 13,137 (9.6) 1,318 (1.0) 136,280 (100)
Sources: Bank of Japan;Ministy of Posts and Telecommunications.
10 Table1-6. Changes in FILP FinancialResources (billion yen)
Cotegoriest 1953 1955 1960 1965 1970 1975 1980 1985 1990 GeneralAccount 48 11- . . (14.9) (3.4)
Industnal InvestmentSpecial 61b 4 5b 26 56 104 65 17 31 64 Account (18.9) (14.0) (4.3) (3.5) (2.9) (0.7) (0.1) (0.1) (0.2)
TrustFundBumeuFund 158 168 342 1,064 2,544 8,211 17,389 20,029 28,453 (48.9) (52.2) (56.4) (65.6) (71.1) (84.4) (84.1) (77.5) (77.8)
Postal Savings 72 110 130 380 1,130 4,050 7,900 6,400 7,200 (22.3) (34.2) (21.4) (23.4) (31.6) (41.6) (38.2) (24.8) (19.7)
Welfamrlnsumnceand 19 31 77 375 923 2,100 3,300 3,950 5,540 National Pensions (5.9) (9.6) (12.7) (23.1) (25.8) (21.6) (16.0) (15.3) (15.1)
Loan Repayments, etc. 67 27 135 309 491 2,061 6,189 9,679 15,713 (20.7) (8.4) (22.3) (19.1) (13.7) (21.2) (29.9) (37.4) (43.0) PostalLife InsuranceFunds 19 50 115 110 393 1,050 1,692 2,588 6,055 (5.9) (15.5) (18.9) (6.8) (11.0) (10.8) (8.2) (10.0) (16.5)
Government-Guaanteed Bonds 37 48 124 391 539 404 1,582 3,210 2,000 and Borrowings I11.4J (14.9) (20.4) (24.1) (15.0) (4.1) (7.6) 12.4) (5.5) Total 323 322 607 1,621 3,580 9,730 20,680 25,858 36,572 (100) (100) (100) (100) (100) (100) (100) (M0O) (100) Notes:1. Figuresare initial programbase. 2. Numbersin parenthesesreprsent the shareas a percentageof the totaL a. Categofiesrepresent the currentfamework. b. 'Mese figures include other special acconts. Source:Ministry of Finance.
Table 1-7.Trut Fund Bureau FundOpCations (Assets) (billionyen)
Use 1955 1960 1965 1970 1975 1980 1985 1990 GovenmentBonds 45 310 500 1,716 4,219 15,321 39,313 56,890 (5.0) (14.9) (9.9) (11.7) (9.9) (15.3) (23.7) (23.2)
GeneralAccount and Special 20 42 199 505 2.680 10,894 16,218 31,587 Accounts (2.2) (2.0) (3.9) (3.5) (6.3) (10.9) (9.7) (12.9)
Govenment-Related 301 808 2,430 7,333 20,765 42,427 62,461 69,466 Organizations (33.4) (38.9) (48.1) (50.1) (48.5) (42.7) (37.4) (28.3)
Local Govenments 365 479 1,040 2,241 6,777 14,054 23,205 33,300 (40.5) (23.1) (20.6) (15.3) (15.8) (14.0) (13.9) (13.6)
Speial Corporaions a 5 87 555 2,207 7.009 15,631 22,671 47,304 (0.6) (4.2) (10.9) (15.1) (16.4) (15.6) (13.6) (19.3)
Bnk Debentures 135 167 56 298 959 1,155 2,055 5,221 (15.0) (8.0) (1.1) (2.0) (2.2) (1.2) (1.2) (2.1)
Othem 30 185 275 331 401 614 844 1,433 (3.3) (8.9) (5.5) (2.3) (0.9) (0.6) (0.5) (0.6) Total 901 2,078 5.054 14,630 42,810 100,096 167,068 245,201 (100) (100) (100) (100) (100) (100) (100) (100)
Notes: Numbesin pantheses representthe shareas a percentageof the totaL a. Speial corpoations include the Electric PowerDevelopment Corpotion. Source:Ministry of Fnance. 11 Currently, postal savings comprise 50% to 60%, and together with pension funds (at approximately 30%) account for around 90% of all deposits. The following discuss how these two revenue sources have changed since the inaugurationof the Trust Fund Bureau. 1.23 Postadsavings were initiated early in the Meiji era (the 1870s) and developed as a reliable and easy way to accumulate savings implicitly backed by govemment credit. A wide range of citizens currently deposit funds through the nation's approximately 24,000 post offices (with a balance of approximately V136 trillion at the end of FY 1990). Having withstood the confusion following WWII, postal savings began to show healthy development from the 1950son. Particularly in the 1970s, when high growth generated an increase in disposable income, money began to turn to deposits of the advantageous postal savings' main product - Savings Certificates (created in 1941, these certificates have a ten-year term, with fixed interest compounded semi-annually, and a free abrogation of account six months after the initial deposits). The growth rate slowed in the 1980s, due in part to the emergence of high-yielding products in the private sector. Nevertheless, the amount of overall increase is holding at V7-8 trillion annually, including increases of interest accruing on principal (see Tables I-5-A, B, and C). The annual share of postal-saving deposits of financial resourcesfor fiscal investmentsand loans changes with the times, but it has recently been around 25% (about 30% of Trust Fund Bureau funds (see Table I-6). 1.24 Japan's pension funds system developed steadily after 1961, when the national pension system (for individualsand the self-employed)was initiated as a comnplementto the existing welfare insurance system (for employees of private enterprises). To date, the ratio of pension recipients to pension subscribers has been quite low. Thus, the increase in pension reserve funds bas stabilized. and the funds now comprising roughly 15% of the financial resources for fiscal investments and loans (about 20% of Trust Fund Bureau funds).
1.25 The contract term for deposits with the Trust Fund Bureau is set at a minimum of one month, and until March of 1987 the interest rate for each deposit term was determined by law. (The annual interest rate for long-term deposits of seven years or more, which accountfor most deposits, was 6%.) However, to compensate for deficits in the postal savings account, a special law was enacted in 1952 to add a 05% interest bonus, which brought the interest rate up to 6.5% through 1972.3
1.26 As interest rates began to decline rapidly in the latter half of the 1980s, the Trust Fund Burean deposit interest rate (which is the interestrate on loans to policy-basedfinancial institutions) became downwardly inflexible given that it was fixed at a minimum rate. Thus, in 1987, the Trust Fund Bureau Fund Law was revised to allow govemment ordinance to determine the Trust Fund Bureau deposit interest rate. Specifically, Article 4 of the Trust Fund Bureau Fund Law stipulates that government ordinance determine the interest rate after consideration of the interest rate on govermnent bonds and other market rates, and after the Fund Operations Council has rendered an opinion. As a general rule, the Trust Fund Bureau deposit interest rate is currently set in line with, and at about the same level as, the marketinterest rate on long-termgovernment bonds. 1.27 c) Operations. Operational targets for Trust Fund Bureau funds are restricted by law, and operations are fundamentallyunder the control of the Diet. Since 1973 operation of funds of 5 years or more requires Diet resolution. Article 7 of the Trust Fund Bureau Fund Law defines the acceptable targets of fund operations as follows: * National govemnment. * Govemment-related institutions (institutions whose budgets require Diet approval, including the so-calledpolicy-based financial institutions). * Local government. * Special corporations (corporations without private-sector capital, including public corporations and governmentagencies).
12 * ElectricPower DevelopmentCorporation. * Bank debentures. * Foreign bonds (bonds issued by foreign governments or international institutions etc.). Operations are carried out through loansor bond acquisition, which for foreign bonds and bank debentures include not only the purchase of newly issued bonds, but also the acquisition of previously issued ones (Table 1-7 shows how operations have evolved since 1955). 1.28 The Trust Fund Bureau started underwriting bank debentures in December 1950, during the Deposit Fund Bureau era. This practice sought initially to recycle Deposit Fund Bureau funds - originally nationalsavings -- back to the private sector as long-term funding, thereby addressing the shortage of long-term funding among the private sector. At the same time, this method differed from previous methods for regulating government net receipts because it increased loans from the Bank of Japan. Targeted at the direct administration of government funds, this method sought to correct overloaning by private financial institutions by constricting Bank of Japan lending. The actual underwriting of bank debentures for FY 1950 was V18.0 billion, some 30% of the gross amount issued. 1.29 When the Deposit Fund Bureau was reorganized as the Trust Fund Bureau in the following year, bank debenturescontinued to be underwritten.However, because priority was placed on safety of the management of Trust Fund Bureau funds (Dodge memo of November 11, 1950), serious limitations were imposed on using funds for bank debentures. (The amount used for such purposes could not exceed one third of total Trust Fund Bureau funds, or 50% of the bank debentures issued by a single financial institution, or 60% of the bank debentures issued in a single issue by a given financial institution. The amount could also not be used to undertake the bank debentures under conditions that differed from those prevailing for privately purchased ones.) The amount underwrittenduring FY 1951 was approximatelyV30.0 bilion, or 46% of the total issue amount. 1.30 When private long-tern financial institutions (such as the Industrial Bank of Japan) were inauguratedunder the Long Term Credit Bank Law of 1952, bank debenturesbecame an important source for raising funds. As their main underwriter, Trust Fund Bureau funds, in addition to such savings banks as the city banks, also captured much weight. (The share of Trust Fund Bureau underwriting of the net increase of bank debentures was 51% in FY 1952, 44% in FY 1953, and 33% in FY 1954.) Because long-term credit banks were private banks, it was hoped that to the extent possiblethat the private sector would amass capitaL Yet, because private sector underwriting was considered insufficient by itself for generating the necessary amount of capital, government funds were invested from the viewpoint of fostering long-termcredit banks.
1.31 Primarily because the supply of money eased around 1955, general financial institutions were able to increase funding amounts, and much progress was made toward the purchase of bank debentures by the private sector. But because postal savings began to level off, financial resources for Trust Fund Bureau funds began to taper off, and underwriting by the Trust Fund Bureau was slashed drastically (in FY 1955, the weight of Trust Fund Bureal underwriting was 5%). Thereafter, with the exception of economic adjustments and fund management, underwriting was in principle halted.
1.32 In general, interest rates on loans are set at the same level as Trust Fund Bureau deposit interest rates (of 7 or more years) and do not differ across targeted organizations or the period of the loan. And the terms for bond underwriting are the same as those for government-guaranteedbonds. The repayment period for loans is determined accordingto the actual business conditions of each organization,but the maximum loan term is 30 years. (Tbe redemption period for bond underwriting is the same as for government-guaranteedbonds, which is currently 10 years.) The average loan repayment period for all organizations is about 20 years, which is longer than the average deposit term (about 7 years).
13 [PostalLife insurance Fund] 1.33 Special accounts are established to make clear and accurate the accounting and balance of payments of the postal life insurance and postal annuity businesses that are managed by the govemment. Income is derived from insurance premiums, installments, and revenue from the operation of reserve funds. Surplus funds that remain after insurance payments, pension payments, and business expenses are subtracted out are then deposited with the Trust Fund Bureau. The range of fund operation targets is defined by law, but in practice most of the funds are incorporated into FILP and, with the Trust Fund Bureau Fund, constitute one pool of financial resources for fiscal investmentsand loans. The balance of postal life insurance reserve funds at the end of FY 1990 was V42 trillion, and 70% were used to finance fiscal investmentsand loans (the remainder went to loans to insurance subscribers, bond purchases, and so forth). Even for the initial program for FY 1991, about 80% of these funds are appropriated for FILP. The applicable loan interest rate is based on either the Trust Fund Bureau deposit interest rate or the coupon rate of govemment-guaranteed bonds. The loan repayment period of 10 years or less is shorter than the period for Trust Fund Bureau funds. [Industrial InvestmentSpecial Account] 1.34 The Industrial Investment Special Account is the successor to the U.S. Assistance Goods Fund Special Account; established in 1953, it sought to direct the nation's fiscal resources toward investment in economic reconstruction, industrial development, and trade promotion. In its early stages, it supplied capital and loans to such institutions as JDB and EIBJ, and provided more than 10% of the FlLP's financial resources. Over time, however, this share has declined gradually and is currently less than 1%. Its content has also changed, reflecting more emphasis on capital investnents than on loans. 1.35 Financial resources for the Industrial Investment Special Account come from such sources as foreign currency bonds (1959-1968) and transfers from the General Account, as well as from operating income generatedby payments from investment in such institutions as JDB and EIBJ.No funds have been transferred from the General Account since FY 1981, but dividend income from the stock of the privatized Nippon Telegraph and Telephone Corporation and Japan Tobacco Co., Ltd., has provided some financial resources since FY 1985.
[Government-GuaranteedBonds and Borrowings] 1.36 Govemment-guaranteedbonds and borrowings are fundamentally private funds and thus differ from government-backed funds from the Trust Fund Bureau. Nevertheless, since the government ultimately guarantees the repayment of principal and interest, these bonds and borrowings are backed by public finances and are treated as equivalent to financial resources managed by the govemnment. 1.37 Government-guaranteedbonds were first introduced in 1953 to provide guarantees on bonds issued by the former Japanese National Railways and Nippon Telegraph and Telephone Public Corporation. Government-guaranteed borrowings were introduced the same year, to guarantee loans from private banks to Japan Air Lines. Since govemment-guaranteedbonds and borrowings are private-sector funds, and thus constrained by movements in the corporate bond market and general financial conditions,their share among financial resources for fiscal investments and loans changes significantly each year (from 15% in FY 1955 to 24% in FY 1965, to 4% in FY 1975, and to 5% in FY 1990). In contrast to passive funds that serve as financial resources, these funds are proactive and flexible, in the sense that each FILP agency may use them to acquire its own private-sectorfunding to supplement its other passive financial resources. 1.38 Govemment-guaranteedbonds (with a 10-yearterm) are one of the public-issue bonds that go to numerous and unspecified investors. As with government bonds, an underwriting syndicate comprising financial institutionsand securitiesfirns uses an underwriting and subscription method for issuing public bonds. Normally, the terms of issuance (rates) are the next lowest to those of government bonds.
14 Table1-8. FILP Us ClaulicaldonsTable: FY 1991 (bllion yen)
Taus FundBuruu Funds Classification Industrial Pensilon Postal Subtotal Postal Uovemment. Total Share Refetece Share Investment Special Funds Savings Ufe Guanteed (% FY1953' (% Account Insurance Bondsand Funds Borrowings 1. Housing 1,979 6.831 8. 10 385 280 9.475 33 17 5 2. UvinB EnvironmentImpovernent 0 232 2,451 2.683 677 933 4,293 15 25 8 3.PubllcWelfre 2 787 222 1,009 14 * 1,026 3 5 2 4. Cultureand Education 49 230 279 296 8 582 2 14 4 5. Small Business 13 631 2,949 3.580 882 20 4.495 15 26 8 6. Agriculture,Forestry and Fisheries 4 145 676 821 84 908 3 36 11 Subtotal 1-6 19 3,823 13,359 17,182 2,338 1,241 20,779 71 123 38 7. National LandConservation and Disaster Relief 73 211 284 22 25 331 1 45 14 8. Roads 282 820 1,102 1.694 187 2,983 10 12 4 9. Transpoutadonund CommunIcation 2 223 648 871 294 300 1,468 5 37 11 10. Regional Development 5 97 284 381 176 147 709 3 12 4 Subtotal 7-10 7 675 1,963 2,638 2,186 659 5.491 19 106 33
I1. Industryand TechnoloWy 40 864 864 34 - 938 3 94 29 12.Trde nd EconomicCooperation - - 1,8101 1,801 97 1,898 7 - Subtotal 11-12 40 - 2,665 2,665 131 2,836 to 94 29 13. Portfolio Investment 2,050 4,000 6,050 1.650 7,700 Total 66 6,548 21,987 23,535 6,305 1,900 36,306 323 100 (29,106) (100)
Notes: Shares for FY 1991are percentages of the total amountof items 1-12(29,106 billion yen) a. Becausethe Use amsirtcadonsTable wu adoptedin FY 1961the referencesto FY 1953are to some extent estimates. Source: Ministryof Finance. Table I-9. FILP Use Classification:Changes in DistributionalShares (%)
Fiscal Year PolicyField 1953 1955 1960 1965 1970 1975 1980 198S 19901 1991I 1. Housing 5.2 13.8 12.8 13.9 19.3 21.4 26.2 25.4 30.3 32.6 2. Living Environment 7.8 7.7 9.3 12A 11.6 16.7 14.1 15.7 15.3 14.8 3. Public Welfare 1.6 2.1 1.8 3.6 2.8 3.4 3.5 2.8 3.1 3.5 4. Culture and Education 4.5 4.5 3.5 3.1 2.2 2.9 4A 3.6 2.0 2.0 S. Small Business 7.9 8.1 12.7 12.6 15.4 15.6 18.7 18.0 15.7 15.4 6. Agriculture,Forestry, and Fishedes 11.2 8.9 7.1 7.2 5.0 4.1 4.9 4.3 3.1 3.1
Subtotal 1-6 38.2 45.1 47.2 52.8 56.3 64.1 71.8 69.8 69.5 71.4
7. National Land Conservationand 14.0 7.7 6.5 3.1 1.6 1.2 1.7 2.3 1.2 1.1 DisasterRelief 8. Roads 3.7 3.7 3.6 7.9 8.6 8.0 5.7 8.8 9.8 103 9. Transportationand Communications 11.3 12.2 14.1 13.9 13.2 12.7 9.6 8A 8.3 5.1 10. Regional Development 3.7 8.5 7.1 7.0 4.0 3.3 2.6 2A 2.5 2A
Subtotl 7-10 32.7 32.1 31.3 31.9 27A 25.2 19.6 21.9 21.8 18.9
11. Industry and Technology 29.1 15.8 13.6 7.8 5.7 3.0 3.0 2.9 2.9 3.2 12. Trade and Economic Cooperation - 7.0 7.9 7.5 10.6 7.7 5.6 5.4 5.8 6.5
Subtotal 11-12 29.1 22.8 21.5 15.3 16.3 10.7 8.6 8.3 8.7 9.7
13.Portfolio Investment ------Total 100 100 100 100 100 100 100 100 100 100
Notes: 1. Figures are initial program base. 2. Because the Use ClassificationsTable was adopted in FY 1961,references to earlier years are estimates to some extent. a. For FY 1990 and 1991 shares are basedon the total excludingPortfolio Investment (item 13). b. The amounts for PortfolioInvestment in FY 1990and 1991 were,respectively, 6,950 billion yen and 7,700 bilion yen (or 20.1 % and 20.9 % of the share of the total FILP amount). Source: Ministry of Finance.
16 Figure 1-2. FILP Use ClassMcation: Broader Trends
Percent(%) _)290 [3 0 100.00 -
90.00 7.80 *, ,
80.00- - 29.10, ' -~~~~~~~~~~~~~.- , ,, i
_ ,,,,,, ,,,,w, ,,,,, ,...... ,, 70.00 31.90
I,,,, II ,,,
40.0050.00 - 71.40
_ _ ~~~~~~64.101 30.00-40.00 --- 52.80 98 -
20.00- 38__.20
10.00-
0.00 - 1953 1965 1975 1985 1991
[] (12)Trade and economic cooperation * (11)Industry and technology EC](7)to (10)Building the foundation for national ife * * (1)to (6) Directlyenhancing the qualityof nationallife
Note: Figuresare the shareas a percentageof the total(29,106 bilion yen) excludingfinancing for portfolioinvestmenL Source Ministryof Finance(1991), Zusetsu Zaisei Tovushi.
17 [Own Funds, et. 1.39 Although FlLP agencies rely on the four financial resourcesjust discussed for most of their business funds, they pool these together with a variety of other funds to support their operations. These "own funds," listed in the reference column of the Fiscal Investment and Loan Funds Program, are non-FILP funds that are classified roughly as "own funds" and "funds from the private sector." Own funds include loan repayments, internal reserves, and treasury funds (such as interest subsidies) from the General Account and Special Accounts, but loan repayments capture the largest share. Various methods are used to collect funds from the private sector - for example, the issuance of bonds not guaranteed by the govemment, and the issuance of bonds overseas with government guarantees. In particular, overseas issuance has been used actively since the 1980s, especially by JDB and EIBJ. 3) Fiscal Investments and Loans Use Classifications 1.40 Table IQ-shows the policy fields to which fiscal investments and loans are allocated. This classification system has been used since the national pension system was established in FY 1961, and consists of 13 categories. More broadly, table items I to 6 are policy fields that seek to stabilize and enhance national life; 7 to 10 are the foundation for stabilizingand enhancing national life; and 11 to 12 largely comprise industrialpolicy. 1.41 The FILP resource distribution by policy-field use changes dramatically with the direction of economic and social change in Japan. For example, FILP initially distributed approximately30% of funds in FY 1953 to the industrial and technological policy fields; at present, it distributes only about 3% to these fields. In contrast, the share of funds distributed to policy fields I through 6 has increased steadily; at present, it represent approximately70% of all fund distributions.These trends illustrate how each annual FILP reflects economic conditions in Japan - that is, the thmst of economic development has shifted gradually from a "production base" to a "lifestyle base" (Table 1-9 and Figure I-2).
4' Procedures for Setting FILP 1.42 The three so-called FILP tables (see 1.15) are submitted to the Diet as reference materials, and the Diet establishes the revenue and expenditure budget for each of the four financial resources. Accordingly, the procedures for setting FILP are incorporated into the national budget compilation process itself. By the end of August in the preceding fiscal year, each government ministry and agency sends its FILP requests and its estimates of shares from the National General Account to the Ministry of Finance. After revisions by the Ministry of Finance, the govemment's budget proposal is normaRlycompiled by the end of December. The budget proposal for each of the financial resources is then passed to the Diet for deliberation;the Diet then refers to the three FILP tables as reference materials. Legal provisions governing the Trust Fund Bureau Fund and the Postal Life Insurance Fund dictate that they be discussed and approved by the Fund Operations Council before the government compiles its budget proposal for each fiscal year. As such, the Council usually debates the FILP proposal at the same time. a) Supplmeuts to the Program 1.43 With the exception of the Industrial Investment Special Account, the three financial resources are based on the flexibility clause of the budgetesgeneral principles -- that they facilitate a prompt, flexible response to sudden changes in economic conditions. This clause stipulates that under certain set conditions, up to 50% of the initial budgets can be increased without being subject to budgetary revision procedures. Fmancial supplements are introduced almost every year - for example, to facilitate financing for small- and medium-size businesses or to undertake additional public works as an economic stimulation. Yet, regardless of whether actual budgetary revision is necessary, the supplementalfinancial resources that come from the Trust Fund Bureau Fund and the Postal Life InsuranceFund must be discussed by the Fund OperationsCouncil.
18 b) Defermentsfr e Programn 1.44 Accordingto the Long-TermFunds Operation law, unused funds from the Trust Fund BureauFund and the Postal Life InsuranceFund can be held for up to one year. Defermentsfrom the Industrial Investment Special Account are also allowed; deferments from government-guaranteedbonds are not. c) Fund OperatiomCouncil 1.45 To ensure that the Trust Fund Bureau Fund and the Postal Life 'nsurance Fund were operatedappropriately, legislation placed the Fund OperationsCouncil within the PrimeMinister's office.The Councilhas servedits role since the Trust Fund BureauFund Law was enactedin FY 1951,but its currentform reflects two revisions,the CouncilComposition in 1961,and the Council Authorityin 1987. 1.46 CouncilComposition. The Councilconsists of up to sevenmembers appointed by the Prime Ministerfrom among neutral professionals. The term of officeis twoyears, at part-time(until 1960, the Council had been formedprimarily around the related administrativeinstitutions; the Prime Ministerwas chairmnan,the Ministerof Financeand the Ministerof Postsand Telecommunications were vice-chairmen;and up to 12 other members sat on the Council, 5 of whom were neutral professionals). 1.47 Council Authority.The Council provides advice and suggestionsas requested by the Minister of Finance and the Minister of Posts and Telecommunications,and examines and deliberateson issuespertinent to the operationof the TrustFund BureauFund and the Postal Life InsuranceFund -- primarilyplans, terms, and conditionsof operations.It also assessesinterest rates paid on depositswith the Trust Fund Bureau(since FY 1987).Moreover, even withouta request, the Councilcan express its opinionabout these issues at any time to both Ministers.Each fiscal year, the Ministerof Financeand the Ministerof Postsand Telecommunicationsare responsiblefor preparingan operationsreport for each fund each fiscalyear and submittingit to the Council. D. The Role of Fiscal Investents and Loans: Historical Transition 1) The Scale of Fiscal Investents and Loans 1.48 Table I-10 shows how the scale of fiscal investmentsand loans in relationto net annual expenditures(actual figures) for the Generaland SpecialAccounts and to GNP has changedsince FY 1953.In the 1950s,the scale of fiscalinvestments and loansranged from about 13 to 19%of net annualexpenditures (column 8); beginningin the 1960s,it surpassed20% and has remainedin the 20 to 30% range thereafter.Fiscal investments and loansin relationto GNP also increasedsteadily over tim - fromroughly 3.5% in the 1950sto more than 8%cunrently (column 9). 1.49 Accordingly, as Japan's "second budget" to the General Account, FILP has become an important pillar of national fiscal affairs - and large enough to exercise significant influence on the national economy. It has come to play this important role because, as fiscal demands increase with economic growth, general treasury expenditures alone cannot satisfy this demand. Looked at from another angle, the role of FILP can be seen as one in which its funds have been used to respond to fiscal demands that surpassed the limits of tax revenue. It has assumed this role from before the early 1970s, when goverment policy held firmly to the balanced-finance principle in place since the Dodge Line of 1949, and since the late 1970s, when the government has been faced with fiscal deficits. Indeed, from an overall fiscal perspective, fiscal investmentsand loans are much more efficient than treasury funds for dealing with all fiscal demands; it is clear that projects in which investment and interest paymen. can be recovered provide a crucial supplement to the General Account.
19 Table l-10. Scale of FILP: 1953 to Present
Fiscal Fiscal Investmentand Fiscal lnvestmentand NetTotil Budget GNP BIC BDI Year Loan Program (Planned) Loan Program (Actual) (Actual) (%) (M) [A) (B) IC] CD] Billionyen Growth Billionyen Growth Billionyen Growth Rate(%) Rate(%) Rate(%M 1953 323 - 337 - 1,919 15.1 7.5 17.6 4.5 54 282 -12.6 286 -15.3 2,009 4.7 7.8 14.2 3.7 55 322 14.1 298 4.2 2,169 8.0 8.9 13.7 3.4 56 350 8.6 327 9.7 2,284 5.3 10.0 14.3 3.3 57 411 17.4 397 21.4 2,463 7.8 11.2 16.1 3.5 58 417 1.6 425 7.2 2,636 7.0 11.8 16.1 3.6 59 533 27.7 562 32.2 2,916 10.6 13.6 193 4.1 1960 607 13.9 625 11.2 3.269 12.1 16.2 19.1 3.9 61 774 27.5 830 32.8 3,740 14.4 19.9 22.2 4.2 62 905 17.0 951 14.6 4,374 17.0 21.7 21.7 4.4 63 1.110 22.6 1.207 26.9 5,059 15.7 25.6 23.9 4.7 64 1,340 20.8 1.431 18.5 5.800 14.6 29.7 24.7 4.8 1965 1,621 20.9 1,776 24.2 6.586 13.6 33.6 27.0 5.3 66 2,027 25.1 2.085 17.4 7,621 15.7 39.5 27.4 5.3 67 2388 17.8 2.497 19.7 8.969 17.7 46.2 27.8 5.4 68 2,699 13.0 2,783 11.5 10,415 16.1 54.8 26.7 5.1 69 3,077 14.0 3,182 14.3 12,067 15.9 64.9 26.4 4.9 1970 3.580 16.3 3,799 19.4 13,727 13.8 75.2 27.7 5.1 71 4,280 19.6 5,009 31.8 15,525 13.1 82.8 32.3 6.0 72 5,635 31.6 6,038 20.5 18.748 20.8 96.5 32.2 63 73 6,925 28.3 7,413 26.1 22,065 17.7 116.7 33.6 6.4 74 7.923 14.4 9,038 21.9 28,399 28.7 138.2 31.8 6.5 1975 9,310 17.5 10,561 16.9 33,571 18.2 152.2 315 6.9 76 10,619 14.1 11,218 6.2 40,854 21.7 171.2 27.5 6.6 77 12,538 18.1 13.414 19.6 48,605 19.0 190.0 27.6 7.1 78 14.888 18.7 14,021 4.5 57,213 17.7 208.8 24.5 6.7 79 16,833 13.1 16.175 15.4 64.580 12.9 225.4 25.0 7.2 1980 18,180 8.0 18,104 11.9 72.931 12.9 245.4 24.8 7.4 81 19.490 7.2 19,410 7.2 80,212 10.0 260.3 24.2 7.5 82 20289 4.1 20,604 6.1 83,554 4.2 273.5 24.7 7.5 83 20.703 2.0 20,705 0.5 90,798 8.7 286.0 22.8 7.2 84 21,107 1.9 19,612 -53 93,630 3.1 305.7 20.9 6.4 1985 20.858 -1.2 20,491 4.5 90,834 -3.0 325A 22.6 63 86 22,155 6.2 21,536 5.1 95,887 5.6 339.7 22.5 6.3 87 27,081 22.2 27,595 28.1 102,867 7.3 3563 26.8 7.7 88 29,614 9.4 29,523 7.0 IOS.623 2.7 379.0 28.0 7.8 89 32,271 9.0 33,013 11.8 113,391 7A 406.2 29.1 8.1 1990 34,572 7.1 35.816 8.5 N.A. - 437.6 - 8.2 91 36.806 6.5 N.A. - N.A. - N.A. - -
Note: GNPamounts are in units of trillion yen; other amountsin units of bllion yen. a. Net total budget= General Accomt Budget + Special AccountsBudget - overlappings. Source: Based on Ministry of Finance data.
20 2) Changes in the Conposition of Financial Rsoures 1.50 The compositionof financialresources for FILP (the originalprogram) in FY 1953was as follows:14.9% from the GeneralAccount; 18.9% from the AssistanceGoods FundSpecial Account and the IndustrialInvestment Special Account; 48.9% from the TrustFund BureauFund; 5.9% from the Postal Life InsuranceFund; and 11.4%from publicbonds and borrowings(see earlierTable I- 6). In other words,approximately half came fromthe TrustFund BureauFund, and aboutone third weretreasury funds that did not requirerepayment. In contrast,the compositionof financeresources for the FY 1990FELP was as follows;0.2% from the IndustrialInvestment Special Account, 77.8% from the Trust Fund Bureau Fund, 16.9%from the Postal Life InsuranceFund, and 5.1% from government-guaranteedbonds and borrowings(again Table 1-6).What distinguishes the FY 1990 FILP is that the weightof the TrustFund BureauFund increased, while the weightof treasuryfunds declined(to almostzero). The followingsection shows how the compositionof financialresources has changedover several, roughly ten-year periods. a) Inauguradonto the Early1960s: Early High-Growth Period 1.51 The programwas inauguratedbefore Japan began to experiencehigh growth.At the time, Japan dependedheavily on treasuryfunds, because Trust Fund Bureaufunds (primarily from postal savings) and private-sectorfunds could not by themselvesmeet enormousdemand for funds by basic industries.Nevertheless, whereas the scale of FILP beganexpanding rapidly, the financial rsources and the investmentscale of the IndustrialInvestmert Special Account did not - and the weight of treasury funds has declined each year. This trend was also due to the major role of investmentsin the face of financial resourcelimitations, and the decliningweight of the basic industryand trade sectors,served by such institutionsas JDB. Increasesin pensionreserve funds, especiallywelfare insurance, compensated for the sluggishnessof postalsavings and the PostalLife InsuranceFund during this period.In the end, financialresources for fiscal investmentsand loans wereexpanded in the formof private-sectorfunds through public bond issues,and so forth. b) Late1960s to Early1970s: Late High-GrowthPeriod 1.52 Postalsavings increased significantly in this period,and both the PostalLife InsuranceFund and pensionfunds improvedsteadily. Thus, the weightof treasuryfunds declinedeven further,as did government-guaranteedbonds and borrowings. Since government-guaranteedbonds and borrowingsenable the governmentto use private-sectorfunds relatively flexibly, they support adjustingsurplus or deficitfinancial resources for fiscal investmentsand loans.In that sense, they servedas a regulatoryvalve in responseto the rapid increasein postalsavings during this period. c)Late1970s To Preseut: Stable Growth Period 1.53 As Japan passedthrough the first oil shock into a periodof stablegrowth, postal savings and pensionfunds becamesluggish. For postalsavings, this trend reflectedthe growingdiversity of personalfinancial assets (intosecurities and new financialproducts); for pensionfunds, it reflected the maturationof the pensionsystem. The weightof government-guaranteedbonds and borrowings that had increasedup to the early 1980sbegan to declinesteadily thereafter, superseded by steady increasesin the Postal InsuranceFund. The trend also reflectedthe fiscal benefitsof FELP:since fiscal investment and loan funds are paid back with interest and are then recycled as new investments,this process increasesrepayment funds collectedfrom funds investedin the past. Duringthis period,the weightof repaymentfunds collected by the Trust FundBureau exceeded one third of totalfinancial revenue. 3) Changes in Fund Operations 1.54 The role of FILP has also changedaccording to changesin its distrbution by sectorand its distributionby policyuse. (Tables1-2 and 1-9provided the breakdownsfor sectorand field earlier).
21 a) ChangesIn DIstributionby Sector(Table 1.2) 1.55 Early in the high-growthpenod, fiscal investments and loans sought to channel fundinp to basic industries, primarily through policy-basedfinance, thereby inducing private-sector funds into investments.In addition, in the latter part of the period, fiscal investmentsand loans were crucial to enhancing the economic growth and industrial structure of Japan, because they shifted the investment focus towards small- and medium-size businesses and social capital developments to correct some of the distortions that came about through high-growth.Two developments provided the fundamental background that allowed fiscal investments and loans to be used actively:4 • On the fiscal side, the principle of balancing revenues and expenditures was upheld, and for a long time (up to 1964) government bonds were not issued through the General Account. Thus, fiscal investmentsand loans were not subject to limitations due to bond underwriting, but were also able to serve a credit allocation function in the face of the continuing excess demand for funds in the financial market. • Due to the numerous restrictions on the private financial sector, private financial institutions enjoyed a type of monopolistic, excessive profit margin. As this margin existed in the private sector, policy-basedfinance was able to achieve a sizable effect through low-rate financing. b) Changesin Distributionby PolicyUse (TableI-9) 1.56 At the outset, emphasis was placed on supplying funds to basic industries, such as electric power, iron and steel, coal mining, and ocean shipping; for example, the share for industry and technology (category 11) Noi 29.1%. Nevertheless, between FY 1955 and 1956, funds shifted towards categories I to 6 (evidenced by the enormous reduction of bank debentures to support industrial funds, and an increase in amounts to the Small Business Finance Corporation and the Agriculture, Forestry, and Fisheries Finance Corporation in the middle of FY 1955), and quantitative supplements shifted toward qualitative supplements (FY 1956 Fiscal Investment and Loans Budget Compilation Policy). Fiom that point through the high-growth period, the share for the basic industries policy field declined gradually, while the weight of the housing and welfare policy fields (categories I to 3) and the small- and medium-size business sector (category 5) increased. Moreover, weight was shifted to fields that can be thought of as "social capital" in the broad sense. The foundation for these changes was the further consolidation of the private financial market, as well as the strengthening of policy demands to rectify various distortions from high economic growth. 1.57 After the first oil shock and from the mid-1970s on, the environment surrounding fiscal investments and loans changed substantially. These changes included a gradual shift towards financial liberalization, as well as the emergence of fiscal rigidity given the proliferation of govemment bonds that were issued when the growth rate waned. As such, the distribution of fiscal investment and loan funds to general FILP agencies other than national and local govemment institutions declined (see 1.59). The weight of categories 1 to 6 (particularly housing) continued to increase, while the weight of the industrial base-related fields (categories 7 to 10) declined slightly, while still securing a share of around 20%. In contrast, the share for the industry fields (categories 11 to 12) dropped substantially. In addition, since FY 1987, when the system was established to allow some funds to be operated separately (such as postl savings that demanded more profitable operations), the weight of this category of independently managed funds, or so-called "portfolio investments,"has also increased. 1.58 Consequently, the broad national, local, and FLP agency sectors in the period up to the first oil shock captured the following shares: less that 2% for national, between 60% and 70%ofor FILP agencies, and between 20% and 30% for local.5
1.59 As the economy of Japan shifted towards low, stable growth after the first oil shock, both the relative reduction in the shortage of corporate funds and the expansion of deficits in the
22 Table I- I1. FILP Supplements and Defennents
Fiscal (A) Initial Growth (B) Post Supplement Remarks Year Progam (%) Supplement B/A Growth Rate (%)a Amount Amount (billion yen) (billion yen)
1953 323 - 22 6.8 54 282 -12.6 8 2.9 -15.8 * 55 322 14.1 3 1.0 12.1 56 350 8.6 4 1.0 8.6 57 411 17.4 -3 - 15.4 58 417 1.6 28 6.8 9.3 59 533 27.7 43 8.1 29.3 1960 607 13.9 36 5.9 11.6 61 774 27.5 65 8.5 30.5 * 62 905 17.0 79 8.7 17.2 63 1.110 22.6 103 9.3 23.3 64 1,340 20.8 100 7.4 18.7 1965 1,621 20.9 199 12.3 26.4 66 2,027 25.1 102 5.0 17.0 67 2,388 17.8 128 5.4 18.2 68 2,699 13.0 97 3.6 :1.1 69 3,077 14.0 131 4.3 14.7 1970 3,580 16.3 244 6.8 19.2 71 4,280 19.6 789 18.4 32.6 72 5,635 31.6 801 14.2 27.0 73 6,925 28.3 636 9.2 17.5 * 74 7,923 14.4 1,206 152 20.7 1975 9,310 17.5 1,396 15.0 173 76 10,619 14.1 770 7.3 6A 77 12.538 18.1 1,388 11.1 223 78 14,888 18.7 654 4.4 11.5 79 16,833 13.1 53 0.3 8.6 1980 18,180 8.0 77 0.4 8.1 81 19,490 7.2 134 0.7 7.5 82 20,289 4.1 548 2.7 6.2 83 20,703 2.0 221 1.1 0.4 84 21,107 1.9 -155 - 0.1 1985 20,858 -1.2 13 0.1 -0.4 * 86 22,155 62 72 03 6.5 87 27,081 22.2 1,172 4.3 27.1 88 29,614 9.4 571 1.9 6.8 * 89 32,271 9.0 1,208 3.7 10.9 1990 34,572 7.1 1,468 4.2 7.7 91 36.806 6.5 2.210 6.0 8.3
a. Because the post supplementgrowth rates are based on the final plans from each year, they may differ somewhatfrom the actual results. * means that within the same fiscal year some reductionsor defermentswere put into effecL Source: Based on Ministry of Finance data.
23 government sector (both central and local) shifted the targets for fiscal investments and loans significantly,away from the privatesector towards the governmentsector. In FY 1975,the national share was 6% and the FILP agency share was 75%; by FY 1985, the national share had increased to 21% and the FILP agency share had fallen to 64%. Since then, govermmentbond issuance has been declining because progress has been made toward restoring sound government finance; in its place, portfolio investments are increasing through the Postal Savings Special Account, enabling the national sector to continue holdinga share of about 25%. 4) The Balance between Macro-Savings and Investment 1.60 Fiscal investments and loans have had three broad effects on Macro-Saving and Investment:6 * From the high-growthperiod to the first oil shock, fiscal investmentsand loans were crucial in directing savings from both the govemment sector, which was supported by balanced finances and the onset of the national pension reserve fund, and the household sector (postal savings), which was an excess-savings sector, into the business sector,which was an excess-investmentsector. * After the first oil shock, the savings and investment balance changed substantially. The fLundshortage in the corporate sector declined, while the government sector became saddledwith a sizable fiscal deficit. (The household sector maintained about the same level.) Thus, the basic function of fiscal investments and loans changed significantly -- from supplying funds to the private sector to supplying funds to the government. * Since the late 1980s, progress has been made toward fiscal reconstruction, and private-sectorcapital investment has maintainedhigh levels. Thus, again, a shortage L*ffunds emergedin the corporate sector. E. Business Cycle Adjustments: The Function of Fiscal Investments and Loans 1.61 In addition to providing financial resources function discussed under 4) above, fiscal investments and loans are used to adjust to business cycles. Given that compared to the General Account, fiscal investments and loans provide greater implementation and operational flexibility than does the General Account, and, as such, they function readily as adjustment mechanisms. Again, funds fromnfinancial resources, excluding special accounts, can be increased up to 50% of the initial program budget withoutbeing subject to budgetary revision procedures. In addition, fund supplements and fund defennents are allowed (1.43-1.44). Supplements are made practically each year (Table I-1 1).
2. Policy-Based Finance 1.62 Policy-based finance is a government activity designed to induce the private-sector to achieve specified policy objectives. Policy-based finance differs from policy-based taxation and subsidies because in addition to the "private business entities" that ultimately effect policy objectives, "private financial institutions,"together with policy-basedfinancial institutions, provide funds to these entities. Consequently, if the private financial market was perfect (in terms of competition, information,and freedom of transactions),policy-based finance would be unnecessary. In reality, however, these conditions cannot be met completely in the financial market. Thus, the significance of policy-based finance is that it is one vehicle for compensating for these market limitations. 1.63 In Japan, as in other countries whose economy is based on market mechanisms, the government must have somejustification for participatingand intervening in economic activities. In the absence of rational intervention, the exercise of public authority or credibility by the government not only may disrupt free economic activity in the private sector, but also may distort
24 the nation's allocation of resources. While, in reality, the govemment participates in economic activities in a variety of forms, its participation is necessitated by broadly defined "market failures" -- when the goods and services required by society cannot be provided entirely by the profitmaking economic activities of the private sector. 1.64 Arguments abound about the types of government intervention that are most appropriate socially. Moreover, the govemment cannot necessarily rectify all 'market failures." Accordingly, when the government does intervene in private economic activities, or undertakes economic activities as a substitute for the private sector, it must clearly explain why its intervention is necessary and seek public approval for its action. The same applies to policy-based finance, which seeks to stimulate and supplement the activities of private financial institutions. A. Policy-Based Finance Institutions: Classlfication, Scale, and Trends 1)Institutions 1.65 Policy-based finance is an essential component of FILP, and the government has established policy-based financial institutions to respond to each policy objective. The nature and function of each institution can be broadly categorized as follows: banks, government finance corporations, and public corporations & government agencies (Table 1-12 summarizes each institution). In this report, unless otherwise specified, banks and government finance corporations are referred to as policy-basedfinancuialinstijuions. • Banks. Both JDB and EIBJ are special corporations that are capitalized entirely by the govemment. They are considered to be representative policy-based Fmancial institutions that are legally autonomous from the government, and are given substantial amount of capital as part of their autonomy. - Govenomentfinance corporations.Eight govermnent finance corporations conduct policy-based finance: the Housing Loan Corporation; the People's Finance Corporation; the Small Business Fmance Corporation;the Environmental Sanitation Business Finance Corporation; the Agriculture, Forestry and Fhsheries Finance Corporation; the Japan Finance Corporations for Municipal Enterprises; the Hokkaido and Tohoku Development Corporation; and the Okinawa Development Finance Corporation. (In addition to these, the Medical Care Facilities Finance Corporation was active between FY 1960 and FY 1984.) All are special corporations capitalized entirely by the government. Their distinctive feature is the heavy involvement of the government in their activities. Thus, unlike the banks, each govemment finance corporation has limited policy goals, and each quarter they must obtain ministerialapprval for projects and fumdingprograms.
* Public Corporations& GoV u't Agencies In additionto the strictly policy-based finance institutions, public corpo, tions and govermmentagencies also undertake some policy-based finance as a isiness supplement to their equipment and construction projects. As of 1991, 1 .i'itutions in this category operate in Japan, including the Overseas Economic Coo, -ration Fund. 2) Scale and Trends 1.66 As of the end of FY 1990, the balance of loans by policy-basedfinancial institutionstotaled V93 trillion (Table 1-13). This amount represented about 12% of the total loan balance, which included a loan balance of Y692 trillion for private financial institutions. Since 1950, the share of policy-based finance has declined from 132% in FY 1955 to 9.6% in FY 1965, and then increased to 14.1% in FY 1980, only to drop gradually again thereafter. The increase in the middle period is attributable to the tremendous expansion in policy-based finance for developing Japan's lifestyle base (through the Housing Loan Corporation, the Japan Finance Corporation for Municipal Enterprises, and similar institutions).The share of policy-based finance in terms of the new supply of funds for industial facilities dropped dramatically after the 1980s (Table I-14). The drop was
25 Table 1-12.Oidlin of Policy-Bued Fina l Inatisudoos
qg4 andStaf In py 1991 ldoudiia Yaw Cl RglrStF CompeW Miats Pnpal dns Remars 1_taishod (ies veal
Jaan Devdopmut 1951 234.0 1,96 MiaistzyofFiam 1.Emu sad finag of a, I dvelopepntfunds afor uank domekc u. 2. Fowe osanrcy rgants ec. Expoatand Impon 1951 967.3 533 MiMby of Fn 1. Was ad findg reltd to expom,Imports. and Bankof Japin ovea laveslets 2. DIt crdaf, to.o devlopngcantries Gewnmen FLhce CerpertiA IousingLoan 1950 97.2 1.157 MinistyofFinace I. Lous forhinsins calan a pudha:d idnal Caipaton &tAWKYohsing, tal housings. Ceunbeim 2. L1i ftr de costucO of public enoonee faclites ed btouin 3. Li forhad p forhousng pupsr 4. hace of s bypriv fanial insdutions PeopldsFinance 1949 51.3 4,811 MinistryofFiee I. Gneal SmaI-s li to sallWbusinesses forbusnm CorpoatIon fhuds 2. Small-sinelwo to rcipls of pensionsc1c. 3. Loansfor busla uwdusing special govaenen bonds asCOllaera. SmallBusines 1953 89.7 1.1GS Minhtry ofFiae 1. Les tounall- ameslumslzcbuiness for equipmentBusnes cvered(a pre")': FinanceCorportion & Mnsay of andlongtenn wrking capital. Capital:not moCe tt 100mom yen tate Inl Trade 2. Lan ofba-4em funs toSmalA Bus(Os ltwesrTM I Iyrw monma 300Fpans= andIndustry ComPaDnie I Asocarried at nconjuno waiagey 3. Loa to o irpati dig knd tuipment las throujibprivae rnancialis tio s Envirmomneal 1967 1.0 60 Miaiy of Fnae 1. Lns to resur bareop, hbtac,cean cm Inaddaii todct loan aso a t SanitalonBusins & Minsty of Health agucyomiadaauuh - ficia FlnanceCorpoaton andWelfare intlois anddie Poples Fice Corporin Akicultuem.Foesty 1953 lIS.2 948 Ministryof Fince . Lons tosiultrs. foreswy.and rbei businessesad andFishedes Finance & Misry of toprcessors and distributorsof these pdu Coporation Ageulawre.Foresuzy aNdFiheri Table 1-12.(Condnued)
Caplidand Staff In FY 1991 Institudons YearEstabhed Capital Reula Staf CompetentMlnhay Pricipal Busine Remnk (billion ma) apanFine 1957 16.6 U Minisuyof Finace 1.t4as to localpublic onizations: sewers. wterwods. C _podonfor &Minsty oHome etc. MunkipalEnterpdsa Affain 2. Lan to loa pubic od entepriseand public land develomententerpres: toll highways. habor reclamadon,nd prepauon ec. Hokkaidoand 1956 531 295 PrdmMinitses 1.L1ans and fincing of pavatedevelopment businencs in lhe JapanDvelopmet Bank is TohokuDevlopment Office& Ministryof Hokkaidoand Tohoku ditrc msponsbefor development financinl Corpontion Finance in rfions oherthan Hokkaido and TohokudistricL Oklnawa 1972 28.5 228 PdmeMinls a Lon forindustaldvelopmentsmall-andmedium-size ibiss e onlyp bcysedfi i DeveopmentFinance OfRe& Ministyof business,business operhoni housing. agriculture. intitution ki nwaPefectue Cofporaton Finance fory andfihri, medki ca andenvirnmental sanaon InOkinawa Prefectur MedkcalCre 1960 11.5 182 Mnityof Fhne 1 Lo topivate hospitals and medical lnics. In 1915ihis jstwionas d FacUletisFlce (u of 1983) (a of 1983) & Minstryof Heath withthe Soci WelfweServie Corxion mmWdbtre AdvacementAscii. nd renaeud CorporatIon and ~Iu theereSoca Welfre a 1.edcaid ServicePuaic Copoation. (Referencej SmallBusines Credit Irnsurnce Corporaton 195S 583,7 419 MinisyofFnianec l.EnEu diegrumteeoblipgaionofdieCmditGuanty & Ministryof Assclon whensmall- and mediumwsize busine IternatIonalTrade opertorsboow frm priva fncl intutin. andIndustry 2. LAn to t CreditGuanty Association. Soure:Ministry of Finae andBOJ Table 1-13.Tte Propotionof Policy-BasedFinancing in the Loansand Discounts Outstanding of All FinancialInstitutions.
1955 1960 1965 1970 1975 1980 1935 1990
Trillion% Trillion Trillion % Trillion V. Trillion% Trillion % Trillion % Trillion % Yen yen _en yen yen yen yen yen Policy.Based Finaoclal lastllutlonas 0.7 13.2 1.6 11.0 3.5 9.6 S.1 9.8 20.1 10.6 43.5 14.1 66.2 13.7 92.5 11.S Jaan DavelopaeatBank 0.4 7.5 0.6 4.1 1.0 2.3 1.S 2.2 3.5 1.3 5.4 1.7 7.7 1.6 9.6 1.2 Export-lmportBankoflapan 0.0 0.0 0.1 0.7 0.5 1.4 1.6 1.9 3.4 1.3 5.1 1.7 5.8 1.2 6.6 0.9 HousingLoan Corpoution 0.1 1.9 0.2 1.4 0.5 1.4 1.1 1.3 4.1 2.2 13.2 4.3 25.0 5.2 41.1 5.2 PeoplesFinance Corpomtloa 0.1 1.9 0.1 0.7 0.3 0.7 0.7 0.5 2.0 1.1 4.0 1.3 5.0 1.0 7.0 0.9 SmallBuslnessFinanceCorpormton 0.0 0.0 0.1 0.7 0.4 1.0 0.9 1.1 2.4 1.3 4.5 1.5 5.2 1.1 7.4 '.0 EnvironmentalSanitation Business Finance Corportona* * - - 0.1 0.1 0.4 0.2 0.7 0.2 0.6 0.1 0.7 0.1 MedicalCare Facilides Flamce Corpontdon 0.0 0.0 0.0 0.1 0.2 0.3 0.3 0.2 0.6 0.2 AgriculturesForestry and Fsherdes Finance Corporadon 0.1 1.9 0.2 1.4 0.3 1.4 1.0 1.2 2.0 1.1 3.9 1.3 5.2 1.1 5.3 0.7 Japn FinanceCorporation for Municipal Enterprises 0.0 0.0 9.2 0.5 0.5 0.6 1.2 0.6 4.7 1.5 9.7 2.0 12.8 1.6 Hokkaidoand Tohoku Developrnent Corpotiom - * 0.0 0.0 0.1 0.3 0.2 0.3 0.4 0.2 0.7 0.2 0.9 0.2 1.0 0.1 OkinawaDevelopment Finance Corporation * * * - - - - 0.2 0.1 0.6 0.2 0.3 0.2 1.0 0.1 Private Finasocial Inslltullonsa 4.6 36.8 12.9 89.0 33.2 90.4 74.4 90.2 170.1 39.4 265.4 35.9 415.9 36.3 692.2 38.2 Bankingaccounts of allbanks 3.3 62.3 8.6 59.8 19.7 53.5 41.2 49.9 90.8 47.8 139.3 45.1 242.5 50.3 445.9 56.3 CityBanks (1.9) (35.8) (4.9) (33.8) (11.1) (30.2) (22.7) (27.5) (48.9) (25.7) (72.8) (23.5) (126.9) (26.3) (212.3) (27.1) RegionalBanks (0.9) (17.0) (2.4) (16.6) (5.6) (15.3) (12.1) (14.7) (27.3) (14.4) (44.7) (14.5) (71.3) (14.9) (137.0) (14.9) Long-teu'nCfeditBanks (0.3) (5.7) (1.0) (6.9) (2.3) (6.4) (5.0) (6.1) (11.4) (6.0) (16.9) (5.5) (23.9) (6.0) (46.0) (5.9) Tmstaccounts of all banks 0.2 3.3 0.8 5.5 2.3 6.2 5.4 6.5 12.5 6.6 17.9 5.S 23.3 4.3 34.2 4.4 FinancialInstitutions for smallbusinessb 0.5 9.4 2.0 13.8 5.7 15.5 13.3 16.1 32.1 16.9 53.6 17.3 75.5 16.2 71.3 9.1 _nsu_neCompanies 0.1 1.9 0.5 3.4 1.4 3.9 4.3 5.2 10.0 5.3 17.3 5.6 26.3 5.6 57.5 7.3 Total 5.3 300 14.5 300 36.7 300 32.5 300 390.2 300 303.9 100 432.3 300 714.7 300 a. Privatefinancial institutions Include other financial Institutions, such as the Noria Chukin B8an b. FinancialInstitutions for smallbusiness consist of Sogobanks (shifted into thebanking accounts of all banksfrom 1988). Shinkin banks and, the Shoka Chukin Bank. Source:Bank of lapandata. Table1.14. The Paos i of PolkyBased F dnancingIndie NewSupply of i 8dustraRquipnent Funds FiscalYear 1955 1960 1965 1970 1975 1980 1985 1939 ElaN..Earn.. maim.. ~~MW... ffiui.. DiJiac DaJim ye. v.a itu yea~~~~ % "M yes Wa Government Financial 102 22.8 221 14.6. 555 15.9 1,200 13.8 2,456 16.0 3,380 17.6 3,179 11.5 4.425 8.1 Instilullonsu JapanDevelopment Dank 46 10.3 6S 4.3 200 5.7 342 3.9 766 5.0 973 5.1 1,102 4.0 1,402 2.6 Private Financial 313 69.6 1,228 81.1 2,861 81.8 7,341 84.4 12,434 81.0 15,235 79.3 23,679 8S.4 48.175 68.6 lIstllutlousb Banklingaccounusofallbanks184 40.9 643 42.5 1,282 36.7 3,514 40.4 6,282 40.9 S.181 42.6 14,647 52.8 38,178 70.2 (Citybanks) (46) (10.3) (217) (14.3) (342) (9.8) (1,218) (14.0) (2,430) (15.8) (3.518) (15.3) (7,637) (27.5) (19.476)(35.1) (Regionalban) (24) (5.3) (95) (6.3) (235) (6.7) (782) (9.0) (1.490) (9.7) (2,311) (12-0) (4.208) (15.2) (9079) (16.7) (Long-tenmcredltbanks) (113) (25.2) (328) (21.7) (692) (19.8) (1,413) (16.3) (2.262) (14.7) (2,259) (11.6) (2,381) (8.6) (4,021) (7.4) Tust ounts ofall banks 588 16.8 1,399 16.1 2097 13.7 1,556 9.7 1,524 5.5 1,820 3.3 Financialinsitutins for 129 28.7 585 38.7 smallbusinesCJ 652 18.7 1,422 16.4 2,604 17.0 3,664 19.1 S,936 21.4 6,231 11.5 lasummCompanies _ _ 299 8.6 934 10.7 1,316 8.6 1.363 7.1 1,281 4.6 1,719 3.2 Financing speclal 34 7.6 65 4.3 80 2.3 155 1.8 466 3.0 592 3.1 874 3.1 1.771 3.3 Accouantd TOalW 449 100 1 13 100 3,496 100 8,696 100 i5,356 100 19,207 100 27,732 100 54.371 100
Note:Idugal EquipmentFunds exclude finds far fiancl fnstitudo, localgovamas. and niviuhls. a Govenmmentflnancil insttutons excludeth HousingLoan Corportion, the JapanFinance Corporion for MuniipalEnterprises, d theEaps-nqpost Bak of Jqpin b.Puivat financialinstituions includes th Norn ChukinBank. c. FinandalInstitutions for smallbueses consistof theSogo bank (shifted Into o banidngaccouts of all basi om 988) t ShinkinB ad th Sboo kC Bni d. Financingspedal accounts, suchu theTrust Fund Bureau, provide new loan to specal corpocdonsand pvefnnmt . Source:Bank of lan data. Table1-1S-A. Actual Financing by Policy-BasedFinancial Insdtutions Fscal Year 1955 1960 1965 1970 1975 1930 1915 1990 Billion % Billieo * 1311110uI% BillIom * Billia. % Billiee % Biliog % Billiea % won VeC ve VCR VON yeas Teo yee Housinl Hciu La CoupCbxda 16.4 6.J 43.5 1.6 11S.9 9.7 267.4 10.3 1,235.0 19.4 3.060.3 26.5 3.221.1 26.3 6,354.4 32.1 Small. and Medium-SIze BwuIlu (32.9) (37.1) (33.4) (40.3) (40.5) (39.6) (42.0) (329) PeophaFleasFlCosponli 49.4 20.4 110.5 21.9 264.0 22.0 563.9 21.6 1.4S2.3 21.9 2,517.6 21.3 2.773.1 23.0 3.174.0 19.0 Sma1BuslnessHuseRCospauadoe 30.2 12.5 76.5 15.2 197.5 16.4 437.7 16.3 .1,076.2 16.2 1,305.4 15.6 2.129.4 17.7 2.109.7 12.7 Eavlruatual SalauiolaBusnes Fice CGFponio . . . - 63.0 2.4 161.3 2.4 2S4.0 2.2 153.6 1.3 206.6 1.2 AgrIculure, Ferutry aid Fisherles Industries Aplcultw. Fbtm*yad Flshras Fiunce C 4^mdm 21.9 11.9 52.1 10.3 109.9 9.2 211.7 3.1 405.3 6.1 660.3 5.7 505.2 4.2 473.4 2.9 Public Wetfre MedicalCam Fadliltks FIaaa Co qim - 2.9 0.6 17.5 IS 35.0 1.3 64.5 1.0 82.3 0.7 - - Regional Develepmiml (6.0) (7.5) (5.9) (6.9) 11.1) (303) (7.6) JapanFlace Caponiw for MunIcipl E ep*a 14.3 2.3 52.6 4.4 101.7 3.9 270.3 4.1 1,016.4 3.5 1,027.7 3.5 921.2 5.5 okidamdTiobakghvDeapCoepn - 16.0 3.2 37.0 3.1 52.0 2.0 107.0 1.6 143.6 1.3 135.0 1.1 174.0 1.1 OimawawDevelpmne FinanceCpqon . . . , 832.8 1.2 109.0 1.0 305.3 0.9 168.4 1.0 JapanDevelopmenlt Bak 55.3 23.1 37.0 17.2 199.7 16.6 341.9 13.1 766.2 11.6 973.4 8.4 1,105.0 9.1 1.492.6 9.0 Eznanm-Imon Bank of Juan 61.3 25.3 102.2 20.2 205.3 17.1 535.6 20.5 959.7 14.5 926.1 3.0 137.9 7.4 1,587.0 935 Tetal 242.0 100 505.0 100 1,199.9 100 2,609.9 100 6,631.1 100 11,548.9 100 12,051.0 100 16666.9 100
Note:Table Includes equity paicipation. Saunce:Ministry of Financedata. Table1-15SB. Len Outsding by PolkyBaed FinmcWllISI1tutihs
1955 1960 1965 1970 1975 1910 11935 1990
Vye Yen yen Vna van Ira va vn. HmueluE HeuuiqLAMRcapauo SS 12.4,S 209.8 13.4 466.6 13.3 1,132.8 14.0 4.124.0 20.6 13,235.3 30.5 25.001.6 37.9 41.119.9 44.4 Small- aud Medium-SiueBusines Pfoph'sRFeeCmaC udo. 47.8 6.7 111.5 7.6 275.2 7.9 706.7 8.7 2014.3 10.1 4.034.6 9.3 5.034.3 7.6 6.996.6 7.6 SmalBua Rlum Caqponlot 49.9 7.0 149.3 9.6 365.3 10.4 926.6 11.4 2429.3 12.2 4,459.S 10.3 S,249.1 S.0 7.354.2 1.0 Eviromtal Saluniw Buswns Fn Ceontbu . . . * 12821.7 1.6 360.8 1.3 736.1 1.7 634.7 1.0 637.3 0.7 A*grlulture, Forutry, and Flsheries lndurttles Agilculwue,F aresuyEd Fibds Finance Carpoudia 93.9 13.1 205.5 13.2 456.1 13.0 1,001.9 12.4 2,030.9 10.2 3,SSI.1 3.9 5,156.5 7.3 5,291.3 5.7 Public Welre MedicalCue FeaclisFinueCorporation - 2.9 0.2 52.7 1.5 152.1 1.9 320.0 1.6 555.5 1.3 Raelinal Development i-a hJpanFnance Corporation for Municipal Eatepdses 39.4 2.5 180.5 5.2 453.4 5.6 1.218.5 6.1 4,692.4 10.8 9.669.2 14.7 12.846.4 13.9 HokkasidoandTohokluDevelopmetCorpaimilon 53.1 3.4 126.3 3.6 190.1 2.3 407.9 2.0 734.3 1.7 364.0 1.3 972.6 1.1 OkinawaDevelopment Finance Corporation ...... - 233.5 1.2 578.2 1.3 792.7 1.2 1,019.6 1.1 JapanDevelopm.n Bank 339.3 54.5 641.5 41.1 1,037.0 29.6 1,814.0 22.4 3,471.9 17.4 5,393.1 12.4 7,679.6 11.7 9,643.6 10.4 Ex_oLn-ImpotBank of japan 44.3 6.3 140.4 9.0 542.1 15.5 1,596.7 19.7 3,361.2 16.5 5.101.7 11.3 813.8 3.3 6.600.4 7.1 Total 724.5 200.01,560.4 100.0 3.501.3 200.0 81,03.0 200,0 19.972.1 100.0 43.43.5 100.0 65.895.5 200.0 92.536-9 200.0 Note:Table includes equity paiticipation. Source:Ministry of Financedata. Figure 1-3. Trends in the Share of Policy-BasedFinancial Institutions by M, ~~~~PolicyFields
90 -
80U
32.9 5,
4.Be I
3, 32.9 21
1955 '60 '65 '70 '75 '89 '85 '96
E Export-Inport Bank of Japan * Japan Development Bank * RegionalDevelopment i PublicWelfare E Agiculture,Forestry and FisheriesIndustries o Small-and Medium-SizeBusiness * Housing Note: Basedon the flowof actuallending for specificfiscal years. Soure: Basedon Ministryof Fmancedata.
32 Tabl 1-16.Changes in Govenent Polciesad Reaponesby do hapaDevelopment Bank
Period PoldkObjective RsommbX dte JDB P.W1 FIacNetalss Exbou_ F_e_ -19S4 Economctcoasnutloe ad Reucoe ld rnilv baic Electricpowe. coalmining. ocon shipping.lmm end Guarnteesevices sef-sutklency Indusubs steel Foliel Iasbenwy 1955.1964 Catchup to deeloped Fosic,Infant indusnties Synthek ber,pe l c powerar Figp bd nes countnes genefation.machieery d eetlks Industries Fancag of ad re _amulonforI_diuae Cometregiol disparities Dvelopthe iodustriai snetucm Pctcbenuals,auimobiles. spinning indust oran Respondto egioa Issue shipping Regionldevelopment 1965-1974 Pm e natiol land Pomoteuba andregiona developmet U*a redevelopmentmoriao of goo"ds Chagig objectives developmentand social distributionsystem privase uiHways housig Equitypancieon i eprises teost ct development developmesf lkrge-a I_rnuial bes Costmnt a welfre sockty Improvenaltaa living standards Pllution control,husing lodusry. food fety Financagof lhd 1I-' for honlg Builda foundaionfar measures.as nationa welfae ciities develApent econmic and soial Promotetechnologkal development New technologies,domstlly poducedcompueas FInains for rfnlies lmpner est in exi ti development Securea sableenerg5y upply Natinal oil compaes, domesticproduction of nues tn arena powergeneation equi_n_. 1975-1984 Ensureeconomic ecurily Seure astableneay apply Useof aternativeenergy sources erergy coserion Attlin stableeconomk growth Promotethe development of original Promotionof techoology,promotion of Information Improvenatlonal life technologies procssingand communicatons Consolidateand develop the living Urbandevelopment, regienal development. W environment improvementof asionallife tW 1985.1988 Promoteeconomic PromoteIndustrial reitcturing Enterptisereitniturlng projects,rtgioa activtion Expanssinoequity ptcpation: restructuring projects.stabiliation of the shipbuildingindustry Teaooka dev_opie Eapanddomestik demand Provideconditions for forcignand Promotefacilties for Importedgoods oad direct Urba deveoplme etc. Stabilizcand improvenalional dowesticcompelition Investmentinto Japan Financs for resech Ad devebpment life Inmroduceprivate-sector vitality Into dhe Key railroaddevelopment and construction of nw lim larersn-frec m syqstem developmentof socialcapital. Protnxe private-sectorInvestment In regional CCUbods economies.Kinsai Cudtural Academy and Research City. resortaesa deveopment Promotethe developmentof cretive Biotechnologyand other advanced technoblgas. space technologies industrics Promoteinformation-related industries New telecommunicationcompanies, VAN Improvenational welfare Promotedie employmenof disabledpeople, fee- charginghomes for theaged t989. Buildup thefoundation for Improveliving standardsnnd urban Social capital developmemntkey transporttion Fasaing for fannp funds national living standards Infrastruclure facilities. efricient goods distribution system. Reducentierational economk environmentalmeasures friction Prumote intertatlonalizatlon Promotefacilities for Imported goodsand direct Balanceddevelopment among investmenlinto Japan rcegions Promoicindustrial restructuring Entcrpriserestructuring projects, regional activation projects Revitalizeregional economies Regionaldevelopment, the formationof a multi-polr pattemof nationallamd use
Source:Japan Development Bank. brought about in part by the maturation of private-sectorfinance and in part by the new priorities for policy-basedfinance that accompanied a change in the governments policy objectives.
1.67 The distribution of fiscal investments and loans by policy field use shows the same fundamental trend exhibited broadly by policy-based financial institutions (see Table 1-15 and Figure I-3). In essence, it shows that policy goals have shifted away from developing the industrial base towards developing the lifestyle base -- more specifically, (I) a growing share of housing-related finance by the Housing Loan Corporation, (2) a stabilization in the finance shares for small- and medium-size business and improvements in the living environment by the Small Business Finance Corporation and the People's Finance Corporation, and (3) smaller shares for trade and economic cooperation, and for industrial and technological financing by 1DB and EIBJ. One can also observe these changes within specific institutions. For example, JDB, which is a comprehensive policy-based financial institution, emphasis shifted from the reconstruction and modernization of basic industries in the early 1950s to the support of infant industries in the late 1950s to the early 1960s (Table 1-16). Since then, it has shifted from urban development and pollution control in the late 1960s to early 1970s, to the stabilization of the energy supply in the late 1970s to early 1980s, to technological development, industrial structure adjustment, and social capital formation in the late 1980s. B. Policy-Based Finance: Historical Perspective 1.68 Explaining the fields and functions of governmentfmance corporations is relatively straight forward, since both their policy goals and the fields that correspond to those goals are to some extent specified. However, for JDB and EIBT, whose institutional goal is not necessarily to supply funds to a specified field or industry, the role of the institution changes over time.7 Japan's economy and society are dynamic, and policy objectives reflect its growth and development. To address these changes constructively, the government must have a policy vehicle that can respond flexibly to new situations,unfettered by industry- or field-specificconditions. On the financing side, such institutionsas JDB and E1BJfulfill this role.
1) The Evolution of JDB
1.69 Each fiscal year, the Cabinet establishes the general features of JDB's fund operations through the Basic Policy Regarding Fund Operations by the Japan Development Bank (hereafter referred to as the Basic Operations Policy). Tbe Basic Operations Policy indicates JDB's role as a policy-based financial institution -- a role that is not simply to supply funds to a specified field, but to supply funds judiciously to fields that are most important for actualizing the government'spolicy objectives at that time (Table 1-17 depicts both these changes in policy emphasisand the changes in the actual financing carried out in response). The following section shows how the emphasis of activities conducted by JDB has changed over several, roughly five-year periods (and one ten-year period).
a) FY 1951to FY 1955(Table I-17-A) 1.70 Early after it was established in 1951, JDB targeted its finance operations at modernizing basic industries, such as electric power, coal mining, ocean shipping, and iron and steel. The overriding policy objective was to support economic reconstruction and independence.In FY 1952 and FY 1953, the proportion of JDB financing of total capital investment in these basic industries was quite high, accounting for 15% to 30%. b) FY 1956to FY 1960(Table I-17-B) 1.71 After FY 1955, the emphasis on economic reconstruction shifted to policy fields targeted at new growth, such as consolidating and strengthening the industrial base, improving the industrial stucture, and correcting regional disparities. In response, JDB also diversified its financing xields. While JDB initially targeted basic industries, especially electric power and ocean shipping, new
34 fields steadilycaptured greater financing later in the period.For example,JDB beganto finance such fields as regionaldevelopment (to correctregional imbalances that arose throughthe pocess of economicexpansion), and privaterailroads and urban gas facilities(in an effort to enrich the livingenvironment). Moreover, as industrialpolicies diversified, JDB financingwas increasingly provided in conjunctionwith individual industry legislation,deliberative council reports, ad rationalizationplans. To summarize,four policyand financeactivities were key in this period:
* Consolidatingand strengtheningthe industrialbase -- electricpower, ocean shipping, coal mining,iron and steel,and so forth.
* Improvingthe industrialstructure -- specifiedmachinery and electronicsindustries, new industries,and so forth.
* Correctingregional disparities - regionaldevelopment. * Others -- intemational tourism facilities, private railroads, urban gas facilities, shippingservices for remoteislands, and so forth.
During the period, the share of total funds suppliedby JDB to industrialfacilities was 4.6% - a significantreduction from the 13.5% share betweenFY 1952 and FY 1953. Tbis trend shows clearlyand quantitativelyJDB's role in supplementingprivate finance.
c) FY 1961to FY 1IX5(Tabe 1-17-C) 1.72 In June 1960,the GeneralFeatures of the Trade and CurrencyExchange Liberalizaton Progm marked the beginningof a shift in governmentpolicy objectivesaway from fostering domestic industries under a closed economic system towards strengtheningthe intemational competitivenessof industries under an open system. Accordingly,the thrust of JDB's Basic OperationsPolicy was to contributeto the qualitativestrengthening and upgradingof Japan's industrialstructure. In particular,it sought to adapt to the progressiveliberalization of trade and foeign exchangewhile also consolidatingthe economicbase, thereby striving toward stable growth in the longterm. To summarize,three policyfields emerged in this period: • Fields that sought to consolidatethe industial base, such as energy, transport capacity,and industry-relatedfacilities.
* Fields that sought to strengthen internationalcompetitiveness - upgrading the industrialstructure, adjusting the domesticindustrial system, and modemizingand ationalizingindustrial facilities. * Fields that sought to enhancethe intemationalbalance of payments,by fostering industriesand rationalization. 1.73 In the early 1960s,corecting the distortionsof highgrowth and maintainingan equilibrium in the internationalbalance of paymentsbecame the two dominantobjectives of the government's economic policies. Broadly defined, these two policy fields accounted for about half of 1DB financing.Fmancing for regionaldevelopment was also inreasing steadilyyear by year, accounting for just less than 20%.At the same time,the share of JDBfinancing for electricpower, which had been sizable since the inception of JDB, declined considerably. (Loans were restricted to coal-generatedelectric power and deferredpayment for heavyelectrical machinery.) The declinein electric power financingby JDB was due to the emergenceof private-sectorfinance, primarily corporatebonds. Given improvements in the bond issuanceenvironment surrounding electric power bondsand the consolidationof the managementbase of the electricpower companies, the financing of generalfacilides, such as for electricpower sourcedevelopment, was transferred(after 1964)to privatesector finance.
35 d) FY 1966to FY 1970(Tab I-17-D) 1.74 In the latter half of the 1960s,Japan had essentiallyachieved its policy objectives to reconstruct the economy, strengthen its industrial base, and adjust to trade liberalization. Nevertheless,policy continued to focuson developinga base for high-leveleconomic grwth. But new objectivesemerged along this policyfront, as rapidgrowth led to such problemsas pollufion, slow social-capitaldevelopment and overcrowdingin some areas, and underpopulationin other areas. In response,JDB financingaccompanied this change in policy objectivesby fundingthe technologicaldevelopment and redevelopmentof largeurban areas, and the modernizationof goods distribution.These areas soon overrodethe policyemphasis on improvingthe intemationalbalance of paymrents.JDB operationspursued three key activitiesin this period:
*Expanding financing for policyfields that cross industrialboundaries - technological development,the redevelopmentof large urban areas, the modemizationof goods distribution,and so forth. * Shifting energyfinancing from coal miningto petroleum(The drastic reductionin JDB financingfor coal miningwas madepossible with the emergenceof the Coal MiningIndustry Reorganization Corporation, which becamethe major supplierof funds to this industry.). * Providingnew financingin an effort to dispersefactories -- to correctovercrowding in large urban areas and prevent pollution,and to promotethe redevelopmentof formerfactory sites. In short,as the govemment'spolicy objectivesbecame more complexafter the mid-1960s,JDB's financingfields also becamebroader and morediverse. e)FY 1971to FY 197S(Table I-17-E)
1.75 During this period,dramatic changes in both the domesticand intemationalenvironment had a significantimpact on Japan's economy.Internationally, the NixonAdministration shocks of August 1971precipitated the collapseof the fixedexchange-rate system and a rapid increasein the valueof the yen.Then, in 1973,the furstoil shockquickly constricted the energyoutlook for Japan's economy.Domestically, in the midst of growingpublic concem about pollution,the government reconsidered its growth-orientedpolicies and sought to consolidate national welfare policy objectives.Sinmilay, overconing the suddensurge in commodityprices and the limitationson the energysupply precipitated by the oil shockbecame an urgentpolicy objective.
1.76 In response,the JapanDevelopment Bank Law was revisedin June of 1972.The revision includedan amendmentof the PurposeClause, which was verysignificant because it clarifiedthe aim of policy-basedfinance institutionally- not to be limited to specifiedfields, but rather to change flexiblyin responseto the policyobjectives of the times.8 JDB operationsfocused on two key areas: * Industrialdevelopment and socialand economicprogress became the twin goals of JDB financing.So-called social developmentand welfare-relatedissues, such as urbandevelopment, became just as importantas the consolidationand strengthening of the industrialbase. * Pollutioncontrol became a majorpolicy issue. AfterFY 1973,JDB adopteda new major policyitem -- to improvenational life and the livingenvironment, including pollutioncontrol. These distinctive financing features are shown clearly in the increased weight of "urban development"(to almost 20%),the remarkablegrowth of "improvingnational life' (centeringon
36 Table1-17. Treds In ActualLending by the JapanDevelopnent Bank. by PolicyObjective IA:l FiscuaYean 1951-1955 Objective 1951 1952 1953 1954 1955 1951-55ToWal Billion *. Billion Billion %* Billion S Billion S Billion S ven nYn you ven yen w Domestlc Fund Subtotal 20.6 10.0 51.3 10.0 88.6 98.4 57.5 91.1 49.4 33.5 274.4 95.3 ElectricUPower 2.5 12.1 14.3 25.4 44.0 43.9 33.8 53.5 22.4 40.1 117.4 40.3 OceanShipping 4.7 22.8 5.7 9.3 21.5 23.9 16.3 25.1 15.9 23.5 64.1 22.3 Col Mining 3.1 15.1 3.5 6.0 4.4 4.9 1.9 3.0 3.6 6.4 16.6 5.7 tooandSteel 3.6 17.5 5.8 9.9 3.9 4.3 0.8 1.3 0.1 0.2 14.2 4.9 Odthr 6.7 32.5 28.5 41.9 14.8 16.4 4.7 7.4 7.4 13.3 62.1 21.6 ForeiRmCurreney Loans _ - 1.4 1.6 5.6 3.9 6.4 11.5 13.4 4.7 Toall 20.6 100.0 51.3 100.0 90.0 100.0 63.1 100.0 55.3 100.0 237.3 100.0 lncerseoverPreviousriscal Year() - 132.9 54.4 -29.3 -11.7
IB:] FiscalYeas 1956I1960 Objective 1956 1957 1958 1959 1960 1956.60Tol Billion * Billion V. Billion % Billion V. Billion % 1lUice S yen ven Yen Ten yen Domestic Fund Subttaol 45.5 91.9 63.7 88.2 59.6 69.1 68.7 71.5 65.2 74.9 302.7 77.4 Stengtheningthe IndLitrialBase 39.1 79.0 55.3 76.6 50.5 53.5 52.4 54.6 43.9 50.4 241.2 61.7 Fourmajor basic industries (38.7) (73.2) (54.8) (75.9) (49.9) (57.3) (49.7) (51.7) (41.0) (47.1) (234.1) (59.9) Improvingthe Industrial Structure 4.0 8.1 7.0 9.7 6.9 8.0 10.5 10.9 3.1 9.3 36.5 9.3 Designatedmachinery and electmnics industries (0.0) (0.0) (3.3) (4.6) (2.0) (2.3) (2.3) (2.9) (2.8) (3.2) (10.9) (2.)
CorrectingRegional Disparities - - - . - - 0.2 0.2 7.3 9.0 3.0 2.0 Others 2.4 4.8 1.4 1.9 2.2 2.6 5.6 5.3 5.4 6.2 17.0 4.4 Foreign Currency Loans 4.0 3.1 8.5 11.3 26.7 30.9 27.4 23.5 21.3 25.1 U.4 22.6 Total 49.5 100.0 72.2 100.0 36.3 100.0 96.1 100.0 37.0 100.0 391.1 100.0 Incse overPrevious Fical Yearf(V) 11.2 45.9 19.4 11.4 -9.5 Table 117. (continued)
[C:l FiscalYeus 1961-1965 Objective 1961 1962 1963 1964 1965 1961-65 Toul Billion V. Billion V. Billion V. Billion * Billion V Billion * yen yen yen yen yen yen Domeatic Funds Subtotal 86.2 89.0 120.3 99.0 121.4 100 145.1 100 199.7 100 672.6 98.4
Strengtheningthe Industrial Base 53.1 54.8 69.7 S7.9 71.2 58.7 86.4 59.5 131.7 65.9 412.0 60.3
Enely 31.0 32.0 42.8 35.6 35.3 29.5 31.4 21.6 32.4 16.2 173.3 25.4 ElectricPower (21.1) (21.3) (29.7) (24.7) (25.1) (20.7) (IS.5) (12.7) (17.4) (2.7) (111.9) (16.4) CoalMining (9.0) (9.3) (12.5) (10.4) (10.7) (8.3) (10.9) (7.5) (14.2) (7.1) (57.2) (3.4)
Transpont Capaity 19.7 20.3 24.7 20.5 32.9 27.1 53.0 36.5 96A1 43.1 226.5 33.1 OceanShipping (18.0) (18.6) (21.4) (17.8) (27.6) (22.7) (45.8) (31.6) (39.3) (44.7) (202.0) (29.6)
Indusirial Facilities 2.4 2.5 2.2 1.S 2.5 2.1 2.0 1.4 3.2 1.6 12.2 1.3
Strengthening InternatIonal Competitivenessof Industries 11.0 11.4 26.4 21.9 16.9 13.9 20.1 13.9 24.1 12.1 93.5 14.4 m DesIgnatedMachinery and ElectronicsIndustries (7.3) (7.5) (8.1) (6.7) (8.0) (6.6) (7.7) (5.3) (6.5) (3.3) (37.6) (5.5)
Improving the International Balanceof Payments 3.7 3.8 4.1 3.4 3.0 6.6 7.6 5.2 6.4 3.2 29.3 4.4
Regional Development 15.9 16.4 19.2 16.0 24.2 19.9 23.4 .19.6 34.0 17.0 121.7 17.3
Others 2.5 2.6 0.9 0.8 1.1 0.9 2.6 1.3 3.5 1.3 10.6 1.5
ForeluJn Currency Loans 10.6 11.0 0.1 1.0 0.0 0.0 - - - - 10.7 1.6 Total 96.8 100.0 120.4 100.0 121.4 100.0 145.1 100.0 199.7 100.0 633.3 100.0 Increaseover PreviousFiscal Year (%) 11.3 24.4 0.3 19.5 37.6 Table 1-17. (continued)
ID:1 Fiscal Years 1966-1970 Objective 1966 1967 1968 1969 1970 1966-70 Totl Billion % Billion S Billion % Billion * Billion % Billion % yen ven yen yen yen yen Strengthening the Industrial Base 135.9 61.0 129.0 55.4 141.0 51.6 136.2 46.6 146.0 42.7 633.1 50.5 Encrgy (43.7) (19.6) (40.7) (17.5) (43.5) (15.9) (37.9) (13.0) (39.1) (11.4) (204.9) (I5.0) Ocean shipping (92.2) (41.4) (88.3) (37.9) (97.5) (35.7) (98.3) (33.6) (106.9) (31.3) (483.2) (35.5)
Strengthening Internationsl Competitiveness 14.3 6.4 21.1 9.4 22.5 8.2 26.8 9.2 29.0 3.5 114.3 8.4 Structural development (5.9) (2.7) (12.5) (5.4) (14.5) (5.3) (17.3) (5.9) (19.0) (5.6) (69.2) (5.1)
Promoting Technology 10.5 4.7 12.6 5.4 21.9 8.0 28.8 9.9 39.3 11.5 113.0 8.3 Promoting domestic technology (3.5) (1.6) (4.2) (1.8) (10.4) (3.8) (12.8) (4.4) (14.0) (4.1) (44.9) (3.3)
Promoting domestically produced Computers (7.0) (3.1) (7.0) (3.0) (9.0) (3.3) (15.5) (5.3) (21.5) (6.3) (60.0) (4.4)
Urban Redevelopmentand Modemization of Goods Distribution 14.5 6.5 25.3 10.9 31.3 11.4 36.4 12.5 51.1 15.0 153.6 11.6
Regional Development 38.5 17.3 37.3 16.0 43.9 16.1 45.0 15.4 52.1 15.2 216.9 15.9
Improving the International Balance of Payments 3.2 1.5 4.1 1.7 8.9 3.3 8.6 . 2.9 9.6 2.8 34.5 2.5
Others 6.0 2.6 2.7 1.2 3.9 1.4 10.4 3.5 14.3 4.3 37.3 2.3 Total 222.9 100.0 232.8 100.0 273.4 100.0 292.2 100.0 341.9 100.0 1,363.2 100.0 Increaseover Previous Fiscal Yea (%) 11.7 4.4 17.4 6.9 17.0 Tabe 1-.17.(continued)
EJ:1Fisc Yem 1971-1975 Objective 1971 1972 1973 1974 1975 2971-75Totl Billion I Billion % Billion % Billion % Billion S Billiona ven ven yen yen yen ven Urban Development 62.0 14.6 73.8 16.0 100.9 13.6 109.3 17.3 139.0 13.1 435.0 17.2
RegionalDevelopment 66.5 15.6 74.1 16.1 81.1 14.9 99.9 I5.1 112.1 1.6 433.7 15.3
ImprovingNational Life 32.5 7.6 64.6 14.0 97.6 17.9 183.1 29.0 235.6 30.3 613.4 21.7 Pollutionprevention (24.3) (5.7) (42.2) (9.2) (76.1) (14.0) (162.7) (25.8) (205.5j (26.8) (510.S) (18.1)
Resourcesand EnetBy 38.9 9.2 45.3 9.3 65.2 12.0 64.8 10.3 69.5 9.1 283.7 10.0
OceanShipping 115.3 27.1 135.6 29.4 96.7 17.3 78.6 12.4 75.6 9.9 501.3 17.7
PromotingTechnology 67.6 15.9 40.4 8.3 57.1 10.5 62.9 10.0 87.5 11.4 315.5 11.2
Others 42.3 9.9 26.9 5.8 45.4 3.3 33.1 5.2 47.0 6.1 194.7 6.9 Total 425.2 100.0 460.5 100.0 543.9 100.0 631.7 100.0 766.2 100.0 2.S27.4 I00.0 Increaseover Previous Fiscal Year(%) 24.4 3.3 1.1 16.1 21.3
j1:1 Fiscal Yeas 1976-1930 O Objective 1976 1977 1978 1979 1930 1976-80Total Billion % Billion % Billion % Billion % Billion f Billion % yen ven ven yen yen yen Urbn Development 130.0 27.2 235.9 20.2 175.7 27.7 277.8 13.7 205.7 20.9 725 I 16.7
RegionalDevelopment 124.0 16.3 136.0 20.2 150.0 15.1 125.4 13.2 107.6 11.0 643.0 14.8
ImprovingNational Ufe 255.5 33.6 153.3 22.3 178.2 18.0 119.5 12.6 148.4 15.2 854.9 19.7 Pollutionprevention (190.2) (25.0) (102.1) (15.2) (131.7) (13.3) (35.7) (9.0) (112.8) (11.6) (622.5) (14.3)
ResourcesadEnergy 37.1 11.4 114.3 17.0 273.5 27.6 283.3 29.9 353.6 36.3 1.111.8 25.6
OceanShipping 50.1 6.6 20.0 3.0 33.1 3.3 82.0 3.6 130.0 13.4 315.2 7.2
PromotingTechnology 33.4 11.0 71.2 10.5 129.0 13.0 103.5 11.4 96.4 9.9 438.5 11.2
Others 30.7 4.0 42.5 6.3 52.3 5.3 52.4 S.6 31.7 3.3 210.1 4.8 Total 760.3 100.0 673.2 100.0 992.4 200.0'943.9 100.0 973.4 100.0 4343.7 100.0 Increaseover Previous Fiscal Year (%).03 -11.5 47.4 4.44 2.6 Table1. 17. (continued) (G:IFiscal Yeus 1981-198S Obtjecive 1981 1982 1993 1994 198S 1981-85Toul Billion Billion %i Billion Wi Billion 5b Billion Wi Billion SE ven yen van yen ven s Resoun=sand Energy 400.9 37.2 520.9 44.9 527.6 45.7 529.9 45.5 470.0 42.5 2.488.3 43.2 PromodngTechnology 96.1 8.9 110.4 9.5 128.2 11.1 156.1 13.4 163.4 14.8 654.2 11.6 OceanShipping 128.3 11.9 134A 11.6 100.2 8.7 75.9 6.6 80.4 7.3 519.2 9.2 UrbanDevelopment 144.1 13.4 139.9 12.0 131.1 11.4 137.4 11.8 151.3 13.7 703.8 12.4
RegionalDevelopmenl 156.0 14.5 140.6 12.1 120.2 10.4 101.1 8.7 108.8 9.9 626.7 11.1
ImprovingNational Ufe 117.7 10.9 89.4 7.7 103.4 9.0 119.9 10.3 87.7 7.9 518.1 9.2 PollutionPrvention (85.8) (8.0) (86.1) (7.4) (94.2) (8.2) (116.3) (10.0) (82.9) (7.5) (465.3) (82)
OtLhes 34.4 3.2 25.9 2.2 43.3 3.7 43.1 3.7 43.4 3.9 190.1 3.3 Total 1,077.5 100.0 1,161.S 100.0 1,154.0 100.0 1,162.4 IW.0 1,105.0 100.0 5.660.4 100.0 Incraseover Prvious FiscalYear (%) 10.7 7.8 -0.6 0.7 -4.9 Table1-17. (condnued) [H:] Fiwa Yea 1986-1991 Objective 1986 1987 1993 1989 199 1991 1986-9ITosul Billion % Billion % Billion % Billion %6 BillionBiDlon % Billion io sen wt y en van vtwMM vn Reourcesand Energy 430.9 39.5 388.9 30.3 385.1 28.5 386.6 27. 417.6 28.0 530.6 27.5 2,539.7 29.7 lmpovenwnlotfUvingStandards and Urban 274.4 25.1 297.7 23.2 324.6 24.0 323.2 22.9 327.5 21.9 423.4 22.0 1.970.8 23.0 Uiba development (199.8) (18.3) (236.4) (IS4) (259.0) (19.1) (258.7) (18.4) (266.0) (17.8) (346A) (18.0) (1-5663) (18.3) Envirnmentalmenasus (71.3) (6.5) (53.6) (42) (60.0) (4.4) (60.6) (4.3) (57A) (3.8) (68.6) (3.6) (371.5) (4.3) KeyTransporatimFnacillties - 83.2 6.5 112.3 8.3 115.0 8.2 110.4 7.4 179.0 9.3 599.9 7.0 OceanShipplngandAkncafk 55.5 5.1 91.9 7.2 55.9 4.1 99.1 7.0 96.9 6.5 143.7 7.5 543.0 63 Oceanshipping (55.5) (5.1) (23.4) (1.8) (21.8) (1.6) (35.1) (2.5) (40.2) (2.7) (43.7) (2.3) (219.7) (2.6) lntmon andCommunicadioFacilides 83.5 7.6 110.5 .86 137.1 10.1 135.9 9.6 152.5 10.2 184.0 9.5 803.5 9.4 PronodnglndustrW Technology 63.5 5.8 81.6 6.4 57.5 4.2 66.6 4.7 75.0 5.0 103.9 5.4 448.1 5.2 RegionalDeedopmea 143.9 13.2 149.8 11.7 147.5 10.9 145.7 10.3 153.9 10.3 183.0 9.5 923.8 10.8 Intenatdonaliza*ionandIndustrial Restucturng 29.5 2.3 48.3 3.6 52.6 3.7 75.9 5.1 93.8 4.9 300.1 3.5 PromolingSocial Capital Developmente 3.5 0.3 40.5 3.0 42.1 3.0 50.6 3.4 80.1 4.2 216.8 2.5 Odtu 40.2 3.7 47.0 3.7 44.7 3.3 42.2 3.0 32.2 2.2 5.5 0.3 211.8 2.5 Total 1091.7 100.0 1,283.5 100.0 1,353.5 100.0 1.409.1 100.0 1.4966 100.0 1,927.1 100.0 8,557.5 100.0 IncreaseoverPreviousPiscaiYear(%) -1.2 17.6 5.4 4.1 5.9 29.1 a. Promotingsocial capital development involves interest-free loans. Source:JDB pollution control), and the reduced weight of "ocean shipping." In this period, the cornerstone of JDB's lending activities essentially shifted from supplying funds for equipment and facilities in order to expand the economy quantitatively towards contributing to social and economic progress, with a specificfocus on improvingnational life and the living environmnent. f) FY 1976to FY 1985(Table 1-17-Fand G) 1. ,7 Havingexperienced two oil shocks, Japan sought to strengthen its economic base largely by promotingenergy conservationand developing altematives to petroleum-based energy. In addition, its policy objectives focused on equipping a long-term, stable socioeconomic development base to accompany the transition from high growth to stable growth. JDB diversified its financing operations even more. Beyond providing financing for building a more desirable lIving environment overall, JDB soughtto diversify energy sources, promote the use of alternatives to petroleum-based energy, augment petroleum stockpiles, and accelerate resource and encrgy conservation. Of course, actual lending in these resource and energy-related fields also increasedrapidly. 1.78 In the latter half of this period, the role of policy-based finance became the topic of various debates in such forums as the Provisional Committee on Administrative Reform -- a product of efforts to restore sound government finance. In particular, the debates considered whether to redefine or cut back business fields related to industrial finance and developmental finance, which were the financing responsibility of such institutions as JDB. These considerations culminated in restrictions on quantitative increases in the scale of loans and investmentsin the budget compilation process, reflecting a reduction and readjustment of lending in fields that could be covered by private-sector finance. But this trend did not mean an end to the role of policy-based finance itself, but rather a policy thrust targeted at fields of greatest national importance and, as such, more efficient policy-basedfinance operations. g) FY 1986to 1991C(able I-17-H) 1.79 In this period, the major policy objective of the government was to stabilize and enhance national life, develop social capital based on private-sector vitality, and revitalize regional economies. These new objectives sought to respond to an excessive concentrationaround the Tokyo area, to restore sound govemment finance, to address the rapid appreciation of the yen after the Plaza Agreement, and to arrest trade imbalances and expanding international obligations. JDB diversified its operations further to address three key policy activities:
* Readjusting the industrial structure - convertingJapan's industrial structure smoothly into a vital force in harmony with the internationaleconomic environment. * Introducing private-sector vitality into developing social capital -- establishing a low-interest-rate loan program to complement the Temporary Measures Act to Promote Private-Sector Participation in Special Public Facilities, and establishing financing programs for privatizing Japanese National Railways and Nippon Telegraph and Telephone Public Corporation.
* Promoting internationalization - developing a loan prograamfor accelerating direct investrnent in Japan by foreign-affiliated firms and developing an import system for manufacturedgoods. 1.80 Amid the debates about redefining the role of policy-based finance, JDB was granted new functions to augment its existing role in supplying funds for facilities (Revision of the Japan DevelopmentBank Law). The following functions were conferred upon JDB. * 1985: equity participation, research, and development fund loans (nonfacilities funds). * 1989: start-up support fund loans (nonfacilitiesfunds), and ECU bond issuance.
43 * 1991: expansionof loans for developing social capital (special low-interest loans), loans to transfer-methodprojects, and Euroyen bond issuance. 2) The Evolution of EIBJ
1.81 As discussed, the policy fields targeted by policy-based finance are shaped in response to changes in national policy objectives. If the essential function of finance is not to achieve the specified ends itself, but rather to support and facilitate efforts towards achieving those ends, then the constant refinement of policy fields can be evaluated positively from a view point of increasing the efficiency of policy-based assistance. Changes in JDB's ficlds of operation since its founding provide a typical example of this approach. In the same way, EIBJ (and other policy-based finance institutions) has also changed according to the policy objectives of the times (Table [-18 shows the evolution of national policy objectives and EIBJ's response; Table 1-19 shows trends in the finance operations of EIBJ). a) FY 1950to FY 1954 1.82 EIBJ was established in December 1950 as the Export Bank of Japan. Its mandate was to support medium- and long-term financing for exports. (In 1952, import finance activities were added, and the name was changed to the Export-Import Bank of Japan.) At the inception of the EIBJ, the urgent task of the governmentwas to promote postwar economic independence;as such, it sought to strengthen the competitivenessof exports, and stabilize the balance of payments structure by eliminating trade deficits. In response, and according to Japan's policy of heavy chemical industrialization,EIBJ focused largely on supplying the low-interestand long-term funds necessary for ship and plant exports. Export financing accounted for 99% of EIBJ's finance operations dunrng this period, usually in the form of supplier credit to Japan's exporters.From 1952 to 1953, EIBJalso began engaging in import and overseas investment finance. The purpose of these new activities was to help secure the materials necessary to enhance exports, and to serve as facilities for financing naturalresource development,considering the scarcity of natural resources in Japan.
b) FY 1955to FY 1964 1.83 In this expansionaryperiod of global trade, Japan's economy continued to grow rapidly, yet the increase of imports that accompanied this growth also perpetuated the deficit tendency in its intemational balance of payments. In order to free itself from the limitations imposed by the internationalbalance of payments, Japan sought to encourage even greater export activity, and EIBJ sought to finance exports concomitantly.Yet, while its main business was export financing for such products as ships and plants (constituting about 80% to 90% of its finance activities), EIBJ also attempted to expand overseas investment financing (about 6% of its activities) in order to help secure the key raw materials that Japan could not do without. In addition, in the midst of demands for economic cooperation to help developing countries, the Purpose Clause of EIBJ was revised in 1957 whereby the original mandated to "promote trade" was changed to a broader mandate to "promote economic exchange primarily through trade (Table I-18)." As such, yen credits increased from the latter half of this period, ultimately representingmore than 10% of EIBJ'sactivities. 9 c) FY 196Sto FY 1974 1.84 In the first half of this period, export-led growth continued, and export financing from EIBJ expanded. Financing took the form not only of supplier credits (as before), but also of direct loans to importers in foreign countries (buyers' credit and bank loans). When the 1971 Nixon shock and the first oil shock of 1973 occurred in the latter half of this period, the global economy was concurrendy entering a period of stagnation. In response, EEBJdiversified its activities, targeting imports, overseas investment, and economic cooperation while decrasing export financing, whose share fell from 77% in 1965-69 to 47% in 1970-74 (see Table 1-19). The following are the key developmentsin the period:
44 Table 1-18. NationalPolicies and Responseby the Export-importBank of Japan: PeriodTrends
Period PolicyObjecdve Responsebythe EIBI PriorityFinance Items ExpandedFunctions
1954 Economicreconstruction and self- Stimulateexports Exportof shipsand plants Importflnancc sufficiency Guarnteeservices Overseasinvestment finance Overseasbusiness finance 1955-1964 Higheconomic growth: Stimulateexportc Exportor shipsand plantc Expansionof overseac Improvethe intemationalbalance of Promoteeconomic cooperation Overseasinvestment by investmentfinance paymcnts manufacturingindustries Developmentbusiness finance Shiftto a liberaleconomic system Government-basedyen credits Refinancingof services Enhancethe trade structure Expansionof guarantee services Developeconomic cooperation
>l 1965-1974 Promotefree trade Sdmulateexports Exportof shipsand plants Expansionof directcredits. Expandeconomic cooperation Securekey resources, such as energy Developmentand import of energy overseasinvestment. and Mantainbalance in intemational andother natural resources imports balanceof payments Respondto the internationalizationof the Overseasinvestment by Untiedloans economy manufacturingindustries Diversifyeconomic cooperation Government-basedyen credits Provideemergency foreign currency loansfor imports 1975-1984 Attainstable economic growth Stimulateexports Exportof shipsand plants, buyers Issuanceof foreigncurrency Maintainbalance in intemational credit,bank loans bonds balanceof payments Securekey resources, such as energy Developmentand import of energy Expansionof import finance Provideemergency foreign currency andother natural resources loansfor imports 1985- Achieveharmony with intemational Respondto tradefriction: lmponof manufacturedgoods Expansionof guarantee services economy: Stimulateimports Overseasinvestment by Improvementof overseas Correctexternal Imbalance Cooperatewith ovcrscasindustry manufacturingindustries investmentfinance Recyclefunds to developing Respondto debt-riddendeveloping Acdveuse of untiedloans Expansionof untiedloans countries countries Loans,etc., coordinated by Investmentsand investment internationalfinancial institutions uarantees
Source:The Export-import Bank of Japan. Table1.19. Approved Loans of theExpout-Iniport Bank of Japan,Period Trends
1950-54 1955-59 1960-64 1965-69 1970-74 1975-79 1980-4 1985-89 Billion % Billion 9' Billion 9' Blrlion 9' Billion 9% Billion 9' Billion * Billion % ven ven yenwn en yen yen yen
Exports 73.1 99.6 262.7 90.6 595.1 78.0 1.134.4 76.7 1,634.7 46.9 2,316.8 45.1 2,530.0 45.3 677.5 10.5 (Ships) (39.4) (53.7) (191.0) (65.9) (370.5) (48.6) (691.1) (46.7) (875.8) (25.1) (530.6) (10.3) (462.6) (8.3) (24.2) (0.4)
Imports 0.0 0.1 2.5 0.9 4.1 0.5 29.4 2.0 598A 17.2 1,215.9 23.7 524.8 9.4 890.7 13.7
Overseas lnveslmentsa 0.3 0.3 19.3 6.6 44.7 5.9 83A 5.6 579.5 16.6 562.5 11.0 1.284.2 23.0 1,401.7 21.6
DirectCredits - 5A 1.9 119.2 15.6 232.9 15.7 624.2 17.9 984.0 19.2 888.2 15.9 933.9 14A
Untied Loans ------48.1 1.4 53.1 1.0 358.1 6.4 2,577.6 39.8
Total 73A 100.0 289.9 100.0 763.1 100.0 1,480.1 100.0 3,484.9 100.0 5,132.3 100.0 5,585.3 100.0 6.481.4 100.0
Notes:Exports until 1965are only supplier'scredits. Exports include the provision of technology. a.Oveneas Investmnts include overseas businesse. Source:The Export-impont Bank of Japanand Ministry of Financedata. * 1972 revision of the Lkw: to p;omote aid to developing countries in the form of ur,tiewjloans, which do no: rcstrict the procurementof materials by Japan. The Foreign currency loan program (197'): to promote imports and help firms avoid foreign-exchangerisk.
d) FY 1975to FY 1984 1.85 In this period, the surplus in Japan's international balance of payments increased; trade friction began to emerge between Japan, and the United States and other countries over certain items. National policy was targeted at reducing the current account surplus and expanding domnestic demand. As such, EIBJ financing sought to expand imports, and it created three key programs: a foreign currency loan program for emergency imports (1977 and 1982), a foreign currency loan program for loans and investments for resource development (1978), and a program concerning the import of manufactured goods (1983). e) FY 1985to FY 1989 1.86 By the end of the 1980s, trade friction intensified, and because it centered on imbalances in the international balance of payments, its effects pervaded the global economy. In response, EIBJ targeted financing at promoting overseas direct investment and financing imports, primarily of manufactured goods. And as the debt began accumulating rapidly by developing countries, fund recycling measures of $30 billion drawn up by the governmrentin 1987 (expanded to $65 billion in 1989) supported EIBJ financing to extend bilateral economic cooperationto developing countries in the form of untied loans, and EIBJ actively participated in co-financing with such international institutions as the World Bank. C. Policy-Based Finance: Its Multifunctional Role 1.87 As mentioned, the role of policy-basedfinance is to guide the country's resources into fields that best serve the national economy. The government promulgatesits priority policy fields through the various economic plans and policies of govemment offices; in the budget compilationprocess, it determines whether policy-based finance is the appropriate vehicle for achieving its policy objectives. 1) Moving Beyond Interest Rates: Its Guidance Function 1.88 To help support an effective allocation of financial resources, policy-based finance institutions must often offer interest rates or loan periods that are more attractive than those offered by private-sector financing. Yet, since the mid-1960s, the attractivenessof these financing terms by JDB has declined steadily (see Figure I-4). In the 1960s, the interest-rate differentialbetween JDB and the private sector was between 2% to 3%; in the 1970s, it narrowed to 1% to 2% (moreover, considering that insurance deposits and compensating balances had been common practices in private-sector finance, the actual interest-rate spreads were supposed to be much greater). Then, ir. the 1980s, profit margins between loans and deposit rates at private-sector financial institutions dropped rapidly, as Japan sought to stabilize growth with interest-rate liberalization and the macro-level monetary easing. Thus, the interest-rate advantage of policy-based finance shrank rapidly, as balanced against the once-large profit margins in private-sector financing. Moreover, even as monetary easing progressed in the late 1980s, interestrates on deposits with the Trust Fund Bureau could not be lowered further, leading to the temporaryemergence of an inverse relationship in which private-sector interest rates were lower than policy-based finance rates (This inverse phenomenon was eliminated when the Trust Fund Bureau Law made revisions in 1987).
1.89 As interest-rate advantages fell, some thought was given to providing low-interest rate funds to key policy fields through some combination with treasury funds. Yet, for such a comprehensive policy-based financial institution as 1DB, this appruach was limited to a very small scale.10
47 Rale
Figure14. LendingRate
.\ I I i ii; 11.5 105 \Lonte rm r I Ia*
101051 74/10 j'80/5 I
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1'515'60'65 '70 '75 '80 '85 190 Fiscal Year 1.90 Policy-based finance can function as an effective policy vehicle only by giving full play to the gamut of financing and related functions. For 1DB in particular, it must serve several policy-based financing functions: • Risk-compensatngfunction. Provide funds for initiating effective projects whose technical or market risks would deter private-sector financing -- for example, the commercializationof new technologies,and research and development. * Term-supplmentingfwnction. Provide long-term funds to projects whose lengthy investment-recovery period would deter private-sector financing alone -- for example, electric power and other energy sources, and railroad and urban development. * Income-suppkmenting function. Supplement income by supplying low-interest rate funds to projects whose high up-front investment costs, expenditures for public benefits, and fee regulations reduce their earnings capacity - for example, projects that would benefit the community, such as parking lots, conferences hall, and transportationterminals. * Credit-supplementing function. Supply funds and supplement the credit-worthiness of projects by business agents that do not have adequate market strength for the undertakings, such as new companies - for example, joint ventures between local governments and the private sector for newly designated projects, and medium-size local businesses. * Stable funds supply function. Provide projects funds that are stable over the long term and unaffected by the fluctuations of private-sector financing -- all JDB financing falls under this rubric, but in particular, projects with lengthy construction periods. * Poic-based guidancefuncion. Supply advance funds to guide private sector funds to projects that are essential to national policy objectives - for example, loan programs to promote antipollution and labor-saving investments, and to promote imports. * Consulation function. Support initiating effective projects by providing information and know-how during the conception and planning stages - for example, business feasibility studies, and equity participationin projects. 2) PumpEPriming Effect 1.91 Together with these explicit functions, an implicit function of policy-based finance is to guide private sector funds indirectly through its "pump-primingeffect." The following points have been made about this effect. Tsuruta (1982) has said this about fostering infant industries: At the stagewhen (thefuture of an industry)is unclear,active investment of funds by the governmentinto these kindsof industriesin the end meansthat government-affiliatedfinancial institutionsguarantee the growth of the industry,and in reality once govermment-affiliatedfinancial institutions decided to finance, private financial institutions competed to provide financingwithout examination of the project.I In addition, since the oil shocks, "hard" industrial policies (those that rely on subsidies,low-interest rate loans, and taxation) have given way to "soft" industrial policies (those tt guide private corporations by providing infonnation).1 2 It has also been pointed out that disseminating information to produce the pump-priming effect differs from "the simple transmission of infonmationin that, since the government actually bears costs in the form of loans, the information
49 that the government will protect or give favorable treatment to that industry is more credible, and therefore has that much more ral effectiveness."1 3 1.92 One function of 1DB policy-based finance since the high growth period has been to use information from the government, to supplement and guide private financial institutions through "pump-priming" rather than to provide direct quantitative incentives, thereby spurring private corporate investment into areas deemed desirable for the national economy as a whole. Given its circumstantial nature, exanples of the guidance of private-sector funds by JDB are not concretely available. However, Table I-20 provides several examples that have becn pointed out by Higano (1986), who makes the following comment about the role of 1DB funding in guiding private-sector funds: In the case of JDB funding,the objetives of such guidanceare detennined by governmentpolicy. However,the actual process in which guidanceis carriedout and informationis passedon in orderto achievethese objectives, is nota politicalor an administrativeone, nor is it purelymarket competitive. Rather, it is a distinctiveprocess in that it ir carriedout througha kind of external effect, namely,the activities of a given organizationreveal the information held by that organization and decisions based on that information.In this sense it can be said that the guidingof private sector funding which resulted from JDB funding ingeniouslyfunctioned as a methodfor the prioritydistribution of capital.
3) Policy-Based Finance: Direct Loans verst 6 Intarest Subsidies and Loan Guarantees 1.93 The effects of direct loans through pWtz,y-basedfinancial institutions differ from those of interest subsidies and loan guaranteesto private financial institutions,which are other vehicles used by the government to guide private-sectoreconomic activities. 1.94 Of the many functions fulfilled by policy-based financing, interest subsidies serve only to s^upplementincome (the third item in the bulleted list of functions). Moreover, interest subsidies ive individual private institutionsdiscretion over identifying and selecting loan projects, making it ifficult to ensure the universality and fairness of policy. Furthermore, interest subsidies may diminish the effectiveness of policy-based guidance, because the relationship between changes in interest rates and budget liritations on available subsidies would likely make any enterprise more uncertain about the adequacy of the subsidiesunder tight market conditions. 1.95 Loan guarantees also pose problems beyond giving individual private financial institutions responsibility over the application of loans. For instance, they create the so-called "moral hazard" problem -- that is, if private financial institutions are able to use loan guarantees to shift all of the risk to the government, they will make loans too casually. Moreover, since a guarantee fee is usually appended to loans made at private-sector market interest rates, they weaken the effectiveness of the interest-rateaspect of policy-basedguidance. 1.96 Of course, policy-based finance should abide by the principle of encouraging and supplementing private-sector finance. Nevertheless, "direct loans" have effects on policy-based guidance that cannot be achievedby interest subsidiesand loan guarantees as clarified earlier.
1.97 As reference, Table 1-21 provides major economic indexes from 1951 to 1991; Table 1-22 shows the revenue and expendituresof the General Account from 1951 to 1990.
50 Table 1-20.Examples of GuidingPrivate Funds
Company (millionyen) Initial Contact with Bank Transactions JDB Before JDB After lDB lending lendint (Main Banks) Case A: Chemical Small Business I city xank *One long-tenn credit bank started to InvestmentCo. I regionalbank lend. Capital amount: 200 *Short-tern lending of major banb increased.
Case B: Foundry Small Business I sogo bank "One long-temrcredit bank started to InvestmentCo. I city bank lend. Capital amount: 1S0 *Outstandingsof private banks lending tripled.
Case C: MachineLeas Introductionby 2 city banks *One long-termcredit bank started to Main Bank lend. Capital amnount:220 Anothertwo city banks increased outstandingsby 20%.
Case D: Home Appliances Introductionby 1 long-termcredit Another 2 city banks started to lend. Main Bank ba ' AIl (a total of five) private banks Capital anount: 950 2 city banks doubled their outstandings.
Case E: Electric Introductionby 1 city bank Two long-termcredit banks srted to Components Parent Company 1 trust bark lend. *All four banks began to apply the Capital amunt: 980 long-term prime rate.
Case F: NA. Intoduction by 2 city banks *After3DB's rescheduling was Parent Company approved, private banks applied the Capitalamount: 350 primeor subprnmerates andapproved the withdrawalof the deposits. CaseG: MachineTools SmallBusiness 2 regionalbanks Two regionalbanks inaeased the InvestmentCo. outsandings20 times. Capitalamount: 200 [appliedfor the *Allprivate banks applied the prime newtechnology rate. loanpvoaraml
Source: Higano,(1986).
51 Table 1-21.Trends in the Major Economic Indexes (millionsof dollam) Fiscal Growth GrowthRate of Rate of Rate of GDP Trade Cwrent Year Rate of Real Equipment Increase in Incrase in Deflator Baance a Balance a Real GDP Investmentby Wholesale Consumer PrivateSector Prices Plices (nonresidential) 1951 ------287 330 1952 ------406 224 1953 - - - 8.0 - -790 -205 1954 - - -2.9 3.8 - -427 -52 1955 - - -0.5 -1.0 - -53 227 1956 6.4 39.1 6.2 0.9 5.5 -131 -34 1957 8.3 21.5 -0.3 2.7 6.1 -401 -620 1958 6.8 -0.4 -5.7 -0.3 0.1 371 265 1959 11.1 32.6 2A 1.8 5.9 362 361 1960 12.1 39.6 0.2 3.9 7.0 268 143 1961 11.5 23.5 1.2 6.1 8.5 -557 -982 1962 7.7 3.5 -1.7 7.0 3.0 402 -48 1963 10.1 12A 2.2 6.5 6.7 -165 -780 1964 9.8 14A .- 0.0 4.7 5.7 375 -480 1965 6.2 -8.4 1.0 6.4 4.6 1,902 932 1966 11.2 24.7 2.6 4.7 5.7 2,273 1,254 1967 10.9 27.3 1.5 4.1 5.5 1,157 -190 1968 12.8 21.0 0.6 4.9 4.8 2,529 1,048 1969 12.1 30.0 3.3 6.5 5.8 3,699 2,119 1970 8.0 11.7 2.2 7.0 7.1 3,933 1,970 1971 5.1 -4.2 -0.8 5.7 5.0 7.787 5.797 1972 8.8 5.7 3.3 5.2 6.8 8.971 6.624 1973 4.8 13.6 22.7 16.2 15.5 3,688 -136 1974 -0.0 -8.5 23A 22.0 18.6 1,436 -4,693 1975 3.9 -3.9 2.0 10.2 6.0 5,028 -682 1976 4.0 0.6 5.5 9A 8.1 9,887 3,680 1977 4.7 -0.7 0.4 6.8 5.9 17,311 10,918 1978 5.0 8.5 -2.3 3.4 4.6 24,596 16,534 1979 5.5 10.8 13.0 4.8 2.3 1,845 -8,754 1980 3.3 7.6 12.8 7.8 5.5 2,125 -10,746 1981 3.3 2.7 13 4.1 2.9 19,967 4,770 1982 3.3 0.7 1.0 2.4 1.5 18,079 6,850 1983 2.9 4.4 -2.4 1.9 1.5 31,454 20,799 1984 4A 11.6 OA 2.2 2.3 44,257 35,003 19'. 4.6 12.2 -3.3 1.9 1.6 55,986 49,169 1986 2.9 3.0 -9.3 -0.2 1.5 92,827 85,845 1987 4.7 8.6 -2.0 02 -0.1 96,386 87,015 1988 6.0 16.8 -0.7 0.6 05 95,012 79,631 1989 4A 14.6 3.4 2.9 2.3 76,917 57,157 1990 5.7 12.1 1.5 3.2 2.1 63,528 35,761 1991 3.5 3.0 -0.7 2.8 1.9 103,044 72,901 a.Figures for the trade balanceand current balanceare based on calendar ynar. Sources: BOJ, Keizai Tokei NenKo;Kazushi et al. (eds.). (1979),Choki Kei7i Tokei 14. MOF. Zise KinyuTokei Gp k Shushi Tokshu; and EPA, Kokumin Keij.Kes.
52 Table 1-22.Revenue and Expendituresof General Account(Actual) (billion yen)
Fiscal Total Tax and other Govemment (BY(A) Year Expenditures Revenue Bonds (*) (A) (B)
1951 750 895 - - 1952 874 1,079 - 1953 1,017 1,219 - - 1954 1,041 1,185 - - 1955 1,018 1,126 - - 1956 1,069 1,233 - - 1957 1,188 1,400 - - 1958 1,332 1,454 - 1959 1,495 1,597 1960 1,793 1,961 - - 1961 2,063 2,516 - - 1962 2,557 2,948 - 1963 3,044 3,231 - - 1964 3,311 3,447 - - 1965 3,723 3,576 197 53 1966 4,459 3,887 666 14.9 1967 5,113 4,590 709 13.9 1968 5,937 5,598 462 7.8 1969 6,918 6,697 413 6.0 1970 8,188 8,112 347 4.2 1971 9.561 8,784 1,187 12A 1972 11,932 10,844 1,950 163 1973 14,778 14,996 1,766 12.0 1974 19,100 18,219 2,160 11.3 1975 20,861 16,193 5,281 253 1976 24,468 17,878 7,198 29A 1977 29,060 19,872 9,561 32.9 1978 34,096 24,233 10,674 313 1979 38,790 26,307 13,472 34.7 1980 43,405 29,871 14,170 32.6 1981 46,921 34,543 12,900 27.5 1982 47,245 33,957 14,045 29.7 1983 50,635 38,167 13,486 26.6 1984 51,481 39,402 12,781 24.8 1985 53,005 41,685 12,308 23.2 1986 53,640 45,234 11,255 21.0 1987 57,731 51,971 9,418 163 1988 61,471 57,455 7,152 11.6 1989 65,859 60,60^r 6,639 10.1 1990 69,269 64,392 7,312 10.6
Source: Ministry of Finance.
53 D. Policy-BasedFinance: Operations and Activities I) BudgetarySystem a) The BudgetPosition of Policy-BasedFlancial Insditutlons 1.98 The two banks and eight government finance corporations responsible for policy-based finance are govcrnment-affiliatcdinstitutions whose budgets are decided together with the nation's GeneralAccount and Special Accounts, and are passed by the Diet after Cabinet approval. As established by laws, the business year for each of these institutionsruns from April 1 to March 31 of the following year. Settlement of accounts at each institution must also be submitted to the Diet togetherwith the settlement of national revenue and expenditures. 1.99 Diet-approved budgets are primarily revenue and expenditure estimates, but details about each institution, such as project plans and funding programs, are noted in reference materials that accompany the budget. Then, details, including the scale of loans and the breakdown of targeted loan fields by sector, are merely appended references to the budgetary estimates; they are not items for budgetary deliberation. Funding programs are treated similarly, but are actually decided when FILP is formulated (and in turn the General Account and Special Accounts budgets). In this way, the budgets for policy-based financial institutions are structured whereby the scale of fund operations and their targets for each fiscal year are set when other budgetary items are determined -- such as estimates of the revenue and expenditures of each institution, estimates of the financial resources for FILP, and the budgets of the General Account and Special Accounts.Thus, not only is the process of determining the budgets and business xctivitiesof policy-based financial institutions similar to the process of deternining the nation's General Account, but they are also mutually inclusive and undertaken through the same policy discussions. b) Relationshipto individualGovernment Agency Polides 1.100 As will be discussed in detail in chapter II, each govemment ministry and agency effects its own policies in various ways, such as taxation and subsidies, and policy-based finance is one of the more important of such tools. This tool is applicable to the policy fields of almost all ministries and agencies, particularly when policy requires that private-sector entities play a major role. In drawing up policies and considering whether systems should be created or expanded, each ministry and agency consults and coordinates with policy-based financial institutions. During the budget deternination process, ministries and agencies discuss these issues with the Ministry of Finance; at the same time, policy-based financial institutionsclarify their role in these issues to the Ministry of Finance. The government may also consider using a combination of policy-based finance and other means, such as taxation and subsidies, particularly for projects that have important policy ramifications. Whether or not a policy-based finance system should be established or expanded is determined considering policy evaluations that are made in conjunction with the initiation of funding programs and revenue and expenditureestimates for each institution. c) Contentof BudgetNegotiations 1.101 Each policy-based financial institution makes budget requests specific to its revenue and expenditures and its scale of operations, includingits borrowings from each of the fiscal investment and loan financial resources, and the content of the operations of each institution is examined in detail as a premise to the budget determinationprocess. Several points are generally examined: 1.102 Necessity of Policy-Based Guidance. As a matter of course, policy-basedfinancial systems are established or expanded only in fields that have a strong policy need. Accordingly, whenever a ministry or agency seeks to use policy-based finance to promote its policies, it must clearly define why. In particular, the government ministry or agency must explain why private-sector finance alone cannot deal adequately with the targeted situation. 1.103 Suitability as a Policy Vekicle. Determiningwhether or not policy-basedfinance is suitable for a specific policy context requires a thoroughcomparison of its effectivenessagainst other policy
54 vehicles, in recognitionof policy goals, project constituents,policy priorities, policy outcomes, and its position among public activities overall. Generally, policy-based finance is suitable for fields in which the government can expect to recover invested funds, and in which the positive effects of financial -ssistance can be demonstrated. 1.104 Scale of Funds ia Polcy-Based FiWance. While the funding scale of policy-based finance obviously depends on the size of the targeted projects, it also depends on the purpose and function of policy-based finance -- that is, whether it is to be quantitative or qualitative supplement to any given targeted project. Thus, the amount funding scale is not usually determninedaccording to the specific policy-based financial institution, but more to the needs and exigencics of the targeted project and in recognition of the financial environment. Moreover, the government must also consider the quantity of funds required by multi-year projects (which are reviewed each fiscal year). 1.105 Counter-Cyclical Economic Measures. Just as FILP is drawn up according to the prevailing business climate, the funding scale for policy-basedfinance is also adjusted according to counter-cyclicaleconomic measures in place at that time. The growth rate of the scale of operations of policy-based financial institutions is generally lower than the growth rate of fiscal investments and loans, but it shows the same trend as movements in the FILP as a whole. Moreover, the flexibility clause, which allows for fund increases by as much as 50% over the amount initially approved by the Diet, enables policy-basedfinance to respond to business conditions with flexibility and maneuverability. 1.106 Loan Conditions. In discussions of policy-basedfinance, the loan conditions to be set are examined from various angles. Since financing is a negotiated transaction, the detailed conditions (loan term, collateral, and so forth) are decided on a case by case basis between the individual policy-basedfinancial institution and the project constituent.However, the basic conditions, such as the interest-ratelevel and the maximum lending ratio, are determined during budgetary negotiations. These basic conditions are not only the assumptions in the revenue and expenditure estimates for each institution,but are also required to specify the conditionsto be applied to encourage projects. Moreover, since policy-based financial institutions are fair and impartial institutions, they must provide equitable financingopportunities to any project constituent that can achieve the same policy goal. Thus, the interest-rate level and maximum lending ratio will generally be the same for each entity that receivesa loan from the same governmentinstitution under the same program at the same time. The government sets the interest-rate level after considering and examining from various angles factors such as preserving balance with other programs, project risks, and policy priority. 1.107 Reviews of Existing Systems. Policy-based finance is constantly being reviewed to ensure that it is in line with policy needs at the time. These reviews change the shape of policy-based finance over time, as shown clearly by the trends within fiscal investment and loan use classifications. Moreover, each year, the government abolishes loan programs or revises loan conditions when the need for policy-basedassistance has diminished. Discussionsabout eliminating existing systemshave also become a very important part of the budget compilationprocess. 1.108 Combining Policy-Based Finance with Other Policy Means. In order to enhance the effects of policy-basedfinance, the governmenthas recently diversified its assistance methods, such as combining policy-based finance with interest-rate subsidies or capital investments. These measures have lowered project costs and enhanced policy-basedguidance. However, since they also increase the degree of government assistance, their suitability must be examined according to whether they are compatiblewith the overall policy-basedfinance system. d) Executingthe Budget 1.109 Each institutionis responsible for carrying out the operations that have been budgeted for it. While government finance corporations are subject to project and funding approval from the relevant minister each quarter, JDB is not, and, within the bounds of its budget, can make its own judgment about selecting projects and their loan amounts. Still, the general outline of fund
55 operations is determined by the Cabinet in each fiscal year's "Basic Policy Regarding Fund Operations by the Japan Development Bank" and is circulated to JDB through the Ministry of Finance.
e) Approvalof AccountsSetdsement 1.1 10 According to the laws that regulate each policy-based financial institution, profit and loss statements for each business year are sent to the Minister of Finance, with balance sheets appended. Then, after these financial statements are examined by the Board of Audit, which is the nation's auditing institution, they are presented to the Diet with the settlement of national annual revenue and expenditure statements. Inspection by the Board of Audit is based on provisionsin Article 22 of the Board of Audit Law and includes the inspection of accounts settlement and business activities for the targeted institutionseach year. 2) Financing Procedures: the JDB Example 1.111 The financing procedures followed by policy-basedfinancial institutions are fundamentally the same as those at private financial institutions - from consultation with the applicant to actual provision of the loan (see Figure 1-5). However, given their public orientation, the financial evaluations made by policy-basedfinancial institution must assess whether the project constituent or the project itself can capture government policy objectives. The content of financing procedures followed by IDB are outlined below. FigureI-S. Flowof LoanAdministration
FinancingRquest
|Appraisal1
|LoanDecisionl ~~~~~~~~I
IContract I
LoanTransfer
'wonfirmazionof FundUse
I ___ IManagement and Reovey
56 a) Flunclng Request 1.112 Applicants send their financing requests directly to JDB's head and branch offices. As it receives each request, JDB makes an initial assessment of the conditions applicable to and the suitability of projects in a hearing that covers aspects of the desired loan conditions, including an outline of the proposed project, the substance of the firm, and the desired financing amount. b) Appraisal 1.113 When the JDB hearing has determined the general eligibility of financing for the project, it begins formal financing procedures. JDB uses an appraisal process to decide whether it "can and should provide financing."This JDB evaluation is based on two judgments: the compatibility of the project with policy objectives (policy judgment) and the credit-worthinessof the applicant (frnancial judgment). As mentioned, the financial judgment is essentially the same as the judgment made by private financial institutions,but the policy judgment is unique to the JDB appraisal process. 1.114 Policy Judgment Evaluating the compatibility of projects to policy entails examining whether the project to be financed conforms to JDB's standards for financing projects. In making this judgment, JDB refers to recommendationsfrom related policy ministries and agencies. While the standards for financing policies vary according to the specific loan program, they consist largely of such elements as the requisites of the project, the orientation of the firm and the region in which it is located, the financing ratio, the applicable interest rate, and loan period.
1.115 Appraisal Objectives. The appraisal focuses on the substance of the funi, the project plan, and the ability of the project constituent to repay: - In examing the substane of the finn. JDB determines whether the firm can take charge of the proposed project plan -- that is, its soundness, the abilities of its business managers, the strength of its facilities, its technological capacity, and its production and sales conditions, income and financial conditions,and collateral. * In exainiung the project plan, JDB assesses whether it conforms to its basic fnancing policy and is a significant venture for the applicant firm. * Examining tke project constituent's abilty to repay. JDB seeks an accurate understanding of the project constituent's current performance, as well as a best judgment about how the project firm might change in the future. Therefore, in general, many of the projects financed by JDB face harsh profitability conditions, and it is difficult to predict their ability to repay. 1.116 Appraal Process. The general appraisal process consists of five broad stages (see Figure I- 6). The following are the main points of that process: * Accumulation of Materials and Information. In gathering information, JDB must not only interview the managers and employees of the firm's head office and factories, but also listen to the opinions of related industry groups, others in the same industry, and the firm's banks. This process enables JDB to generate a profile of the propriety of the proposal, serving as an influential reference in the final appraisal stage. *Assessment of Future Prospects. Based on an analysis of the ctrrent operating conditions of the applicant firm, JDB forecasts the firm's profit and loss account, incorporating such factors as fluctuations in managerial resources in the realization of the proposed project, and anticipated changes in the direction of the industry and the general economy. This assessment generates an overall evaluation of the applicant's human, material, financiaL and informationresources, thereby serving as
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I . SZ @ IU I mainNW(aapilam him Sdo) I I t I I I S
pin I (Psokeumampmenbbn) I aaC an essential element in the overalljudgment. Moreover, JDB uses this information to check and confirm the propriety of the qualitativejudgment as it stands at this point in the examination process, thereby providing a basis for calculating the applicants ability to repay. OveraUJudgment. JDB reaches a conclusion based on its overall assessment of the major results of its analysis of the firm's current situation and its forecasts for the future. At that time, however, JDB must also consider two factors. The first is that analytical results reached one at a time are often mutually contradictory, thus calling for prudent and judicious decisions in determining which factors are essential. Second, obtaining all necessary information is not realistic, but any serious constraints on obtaining information relevant to the judgment should be stated clearly. 1.117 Appraisal Items. Since JDB deals with'a diverse group of target firms and projects, appraisal items and key points also vary by case. Actual appraisal requires the creativity of examiners in supplementingor selecting and rejecting appraisal items. As an example of appraisal items, the following are used for the general manufacturing industry: history, managers, stock relations, and overviewof the business (major products,industry conditions,business scale, location conditions, facilities, employees, and presence of pollution); production, sales, profits and losses, and financial position;the proposed applicationof requested funds (constructioneffects and funding plans); ability to repay; and collateral and guarantor. c) F1nancnigDecidon 1.118 If the appraisal process indicates that the proposed fmancing project is compatible with policy objectives and can repay the debt, the financing decision is made after passing through several intemal JDB procedures. After JDB was established, the government clearly showed its intention of respectingJDB's autonomy. For example, the Basic Operations Policy stated that 'the selection of individual projects and determination of loan amounts all should be left up to JDB's independent judgment as a financial institution." Given this background, financing decisions are made independentlyby JDB and are their responsibility. d) Contrcts 1.119 After the loan determination procedures are completed,JDB and the firm begin procedures for concluding the loan contract. The contract includes three clauses that are unique to JDB and which serve to solicit the sincere execution of the project and restrict the use of the borrowed funds: * A clear specificationof the "projectnamne". * An advance repayment clause in case the borrower fails to carry out the proposed project for an extended period of time without reasonable grounds. * An obligation to report on the progress of the project and on the payment of project expenses. e) Transfer of Funds 1.120 The appropriate funds are transferred after the progress of the project, the payment of project expenses,and the funding situation of the project constituent are considered. In transferring funds thereafter, JDB procedures differ from those used by private financial institutions. f) Confirmationof Fund Use 1.121 The use of funds is confirmed immediately after the total amount of the loan is transferred and the project is completed (physicallycomplete, with all project expenses paid). This procedure is also unique to JDB. In confirming fund use, JDB checks whether project expenses were paid and
59 policy effects were achieved as scheduled. In general, JDB conducts an inspection of the project at this time. With confirmationof fund use, the series of loan period procedures is finished. Work after this point focuses on preservingthe claim and ensuringthat the funds are recovered. g) LoanManagement and Recovery 1.122 Loan management is generally carried out in much the same way as at private financial institutions - focusing on the debtor's (guarantor's) business and credit conditions, its ability to secure and manage the collateral, and its ability to fulfill other loan conditions.Practically speaking, one of the important tasks of the person responsible for the loan is to always have a good handle on the debtor's conditions by requesting reports of accounts settlement each period and by making direct contact when necessary. 1.123 In addition, when debt repayment becomes problernatic in the presence of deteriorating business conditions, JDB cooperates with private financial instiEutionsto examine and possibly institute debt rescheduling policies, such as deferring repayment of principal and interest or reducing and exempting interest. JDB writes off claims when, after disposing of the collateral and pursuing the guarantor, it concludes that debt recovery is impossible.Yet, for JDB, this amount is extremely small. In this way, managementresponsibility for loans rests with JDB, and JDB's profit for each fiscal year covers the defaults of individual companies.From the latter half of the 1960s to the beginning of the 1970s, one of the drastic measures implementedby JDB for reconstructingthe coal mining industry was to transfer the repayment of the principal and interest for a greater part of the borrowed money (including private debt) to the treasury account in order to reduce the loan burden of companies. (Of the approximately V70 billion balance in JDB loans to the coal mining industry as of the end of March 1975, approximately70% of the credit was subject to transfer). 1.124 Numerous companies that have received funding from JDB have subsequently fallen into a business slump, having been rehabilitated after obtaining cooperation from interested parties under the Corporation Reorganization Law. As shown in the following example, several types of cooperation (burden) can be carried out by interestedparties in a single case: • Cowna. Agricultural machinery specialty manufacturer (at the time that it applied for reorganization, the company was capitalized at '2A billion, had 2,800 employees,and had V118.6billion in annual sales).
* Cooperationfrom Interested Parties (Burden)
- Pfecture (lo1 ggv'rnment) special financing in order to prevent chain- reaction bankruptciesamong subcontractors.
-Stockhotere a 99% reductionof capital.
-Creditors (financial nstitutions and vendors, with a gross amount of credit of Gri1ima& l QyWU b_1Jil): secured credits were cut by approximately 50% (those bonds that were cut were treated as unsecured credit). A two-year grace period was extended for the repayment of the remaining bonds, to be appropriated over a ten-year period. Unsecuredcredit was cut by approximately 80%. The remaining credits were to be repaid through newly issued stocks.
- Business partner (maior machineq manufacturer): agricultural machinery production was almost completely transferred from the partner to the control of this company; a subsidiary was established for the tale of agricultural machinery, and provided support for the sale of this company's products; and new stocks were underwritten to re-build capital after the capital reduction (consequently,the shareholding ratio was slightly less than 50%).
- Main customers initially, for a three-year period, main customers guaranteed orders for a set amount; thereafter, they cooperated on the sales front.
60 -Others: subcontractors and vendors (unsecurmdcreditors as well) also agreed to cooperate in the continuationof production. *Comledon gf Canaor at ion Procedum
- Approximately ten years after it had applied for reorganization,the company was restored to normal. In the following year, it established a joint venture with its sales subsidiary, and has now begun producing and selling agricultural machineryas ordinary manufacturersdo.
E. Related Laws: the JDB Example
1.125 JDB conducts its activities accordinL,." the Japan Development Bank Law (enacted on March 31, 1951). The law contains several major provisions,summarized as follows:
1) Puzhe 1.126 The purpose of JDB is to supplement and encourage such functions as the credit operation of ordinary financial institutions by supplying long-term funds or other business; it does so to promote both industrial development and economic and social progress Artick 11.14 2) Status of Juridical Person 1.127 According to national intentions, IDB is an especially established so-called "juridical person under public law" fArtick 21. That character is expressedconcretely by the following: * JDB's total capitalizationvalue is invested by the government[Article 41. * The Govemor and Auditors shall be appointed by the Prime Minister[Article 12). * The scope of JDB business is specified by law; several legal regulationsdefine those specified activities further, and JDB must prepare a Statement of Business Methods (Articks 18 to 201.
• JDB must submit a budget of revenue and expenditures to the Diet [Articles 24 and 26) and JDB must use the budget within the legally defined bounds applicable to national institutions [Arcles 30to 321.
•3DB must submit a report of the settlement of accounts to the Diet [Article 35), and JDB's financial statements are examined by the Board of Audit ArFticles35 and 39; Board of Audit Law Artick 221.
* 3DB is not assessed local, national, or corporate taxes, but pays the balance of any profits remaining after a set level of intemal reserves to the National Treasury are deducted [Aie 36) ,15
1.128 Although JDB is a govemment-affiliated institution, its autonomy is respected by the government This autonomy is stipulated in the Japan Development Bank Law in the following form.
* *'With the word "Bank," in its name, 1DB is expected to manage its business efficiently and autonomously in the same manner as ordinary banks Artice 7J.
*Restrictions on personnel matters are relaxed - illustrated by the fact that the Governor can appoint all the board members and staff with the exception of Auditors, who are appointed by the Prime Minister Aricles 12 and 16).
61 * Government supervisory powers, such as the extent to which business managenent matters require approval, are kept as limited as is permnissible.[Article 3 (2): location of offices; ArtIk 5 (2): changes in Articles of Incorporation; and Artilek 20: statemnentof business mrethods]. * In addition to keeping budgetary restrictions as limited as possible, independence is also respected in accounting matters (Article 24: only revenue and expenditure estimates require Diet approval (funding programs and loan programs do not); Articles 30 and 32: flexibility in budget execution; and Article 36: disposition of profits, accumulation of reserves, and so forth]. 3) Business Affairs 1.129 The main restrictionson business affairs are as follows: * Business Scope. The scope of JDB's activities is stipulated in Aricke 18. Although these provisions have been revised several times since the inception of JDB, they are currently as follows:
- Make loans and subscribe to corporate bonds related to funds used primarily for acquiring plants and equipment.
- Make loans and subscribe to corporate bonds related to funds for repaying loans from other financial institutions.
- Assume loan credits from other financial institutions.
- Guaranteeobligations. -Make equity investments. All apply only to long-term funds (a maturity period of one year or more) and under conditionsof certainty of repayment. - Loan Interest Rates. According to Artile 19, the rate of interest on loans shall be set 'in consideration of the interest rates of ordinary banks ... so that (following the principle of balancing revenues and expenditures) the revenue accruing from interest on loans, etc., will be sufficient to cover the business expenses, interest on borrowings, etc." In addition,JDB must apply its interest rates fairly. - Prohibition of Competition with Private Financial Insttutions. As stipulated in Arficle 1, competition between 1DB and private financial institutions is prohibited. This is prescribed clearly in Article 22: "the Japan Development Bank shall not compete with other banks and financial institutionsin conductingits business." 1.130 Fundamental matters pertaining to JDB's business administrationare prescribed in the Japan Development Bank Law, but, by law, actual business affairs are executed as prescribed by the Governor. For these purposes, JDB prepares a Statement of Business Methods, as is stipulated in Article 20. Unlike such institutions as government finance corporations, JDB's autonomy is respected - it is not obligated to send notification, and need not obtain consent or authorization from the Minister of Finance. Nevertheless, this autonomy is not limitless. The Statement of Business Methods itself clearly specifies that "in conducting its business TDBwill be mindful to not compete with private financial institutions, and to adapt to the govemment's overall policies and basic programs" (Artick 5). The Statement of Business Methods also includes several principles governing such matters as methods for loaning funds and establishing interest rates, maturity periods, and collateral.
62 1.131 JDB obtains the funds necessary for its business affairs through borrowings and bond issuance. Borrowings are restricted to "borrowingsfrom the govemment" or "borrowingsof foreign curency funds from foreign banks and other financial institutions" [Arlicle 371. Bond issuance, which has been permitted since 1960, originally meant only bonds denominated in foreign curmncies. However, JDB has been able to issue ECU bonds since 1989 and Euroyen bonds since 1991 (Artcl 37-21. a) Orpnglzatonand Staffingof JDB 1.132 According to the current (March 1992) organization of JrB, the Governor, Deputy Governor, and seven senior executive directors preside over the 19 departments of the Head Office, the Research Institute of Capital Formation, 7 local branches, 6 local offices, and 5 representative offices abroad (see Figure 1-7). Actual lending operations are handled by the loan departments located in the Head Office and the loan sections of the local branches. The Project Appraisal Department and the project appraisal sections of the local branches are responsible for project appraisals. Until the mid-1960s, the Project Appraisal Department and project appraisal sections carried out the appraisals of all loan cases, but after appraisal know-how had accumulated and was disseminated throughout the Bank, loan department appraisals were also used, thereby rationalizing business operations. 1.133 JDB currently, has 1,100 officers and staff. From its inception until about 1960, JDB had approximnately850 employees; with the construction of new branches in regional areas in the latter half of the 1960s, this number surpassed 1,000. Since then, the number of staff has stabilized, but its workforce has successfully handled the expansion and diversification of JDB business. Their capacity to meet these demands has been made possible by a process of rationalizing operations in the interim, a replete training system that relies heavily on on-the-job training, and a system for fostering human capital under which job rotations are carried out at 2- to 3-year intervals. The training and job rotation systems give JDB employees broad-ranging business experience and allows them to hold positions of responsibilityat a comparativelyyoung age. 1.134 Since its inception in 1951, JDB has been active in a wide range of policy fields. JDB has been able to assume this broad responsibility successfully partly because it shows a profit for each fiscal year, and has continued to make payments to the National Treasury as essentially dividends on the government's investment(an aggregate total of approximatelyV620 billion between FY 1951 and FY 1990). This result is attributable to JDB's sound business management,as well as to its large capital base (capitalized at approximatelyV234 billion in FY 1955) that came from capital invested at its founding, as well as from transfers of capital from borrowings related to the Reconstruction Fmance Bank and the Assistance Goods Fund. IDB has not once received supplementary funds from the nation. This business approach has enabled 1DB to use its own judgment in such matters as fnancing, and to respond flexibly to the government'sshifting policy objectives.
63 Figure I-7. 1DB OrganizationalChart Office of Secretanat
PersonnelDepartment -Ispection Department
Planningand CoordinationDepartment
InformationSystems Department
Project PlanningDepartment
Loan DepartmentI (Energy) Loan DepartmentII (Transportation)
Auditor Loan Departmentm (Machinery,Electronics, etc.)
-LoanDepartment IV (Chemicalsand Others)
Loan Departmentfor Urban Development Bureau for Regional Development Senior Governor Executiv. ResearchDepartment Directors Loan Department
internationalDepartment Center for i | Overseas Promotion of FRepresentativeDirc investent Deputy I Office in Japan Governor Project AppraisalDepartment
Accountingand TreasuryDepartment
- Economic and Industial ResearchDepartmet
General ServicesDepartment Counciors -Infrmation Service Center
DomesticBranches and Offices
Research instituteof Capital Formation 64 Chaper 11.INDUSTRIAL POUCY: POLICY FORMATION AND TOOLS
L The Concept of Industrial Policy 2.1 Although the term industrial policy has long been used in govemment-finance discussion, its definition is not well established. Many refer to the termnbroadly as "policies targeted at industry". Still others define industrial policy as those elements of a nation's economic policy targeted specifically at industry. Yet some define it in extremely narrow terms, claiming that it refers only to promoting and reorganizing individual industries. Some academics have defined industrial policy as "the policies carried out by the Ministry of International Trade and Industry (Mlll}" 2.2 According to a former MM official's view: Industrialpolicy consists of those supplementalmeasures which, based on marketprinciples, seek to resolvesuch marketuncertainties as environmental pollution,trade friction,large-scale research and development(R&D), and energysupply instability, and at the sametime, promoteindustrial transition and labor transferssmoothly while avoidingsocial friction.The following toolsare employedin thisprocess: (1) legal regulations; (2) the provision of informationthrough future "visions"and guidelines;(3) the indirectincentives offered by taxationand governmentfinancial institutions etc.; (4) adviceand guidanceon the part of Mm16
2.3 But, accordingto recent academic theory, industrial policy is that which tries "to influence a nation's economic welfare through government intervention in the allocation of resources among a nation's industries (sectors) and the industrial organization of specific industries (sectors).1 7 Specifically, this defiition embraces several industrial policy classifications: * Poflicieshat attemt to influencea nation'sindustrial structure -- to protect and foster specific industries and coordinate the transfer of resources among industries by intervening in pricing, imports, and exports, by making direct investments, and by providing financial incentives such as subsidiesand taxation. *Policies that promotetechnological development, and enhancethe disseminaon of information - to correct so-called "market failures" and encourage the allocation of resources in the desired direction by promoting technological development and providing accurate informationon market and demand prospects. * Policies that promote economic welfare based on direct intervention in the organizationof indvidualindustries - to coordinatethe allocation of resources and improve competition within individual industries by providing various types of "administraive guidance" (gyosei shido) to address recession and facilities capacity cartels, and industrialreorganization.
* Policiest addresshow indstry affects the exter'wlenvwonment - to captureall national, regional, and individual perspectives,including the promotion of small- and medium-size firms and local industry, the promotion of employment in and the transfer of industries to local areas, guidance to support the prevention of pollution and energy conservation,and export self-restraintsto cope with trade friction.' 8 2.4 These cassifications of industrial policy are based on the market mechanism and optimal resource allocation discussed in economic theory. Classified more generally according to their pructical policy objectives, they would be defined as follows:
65 * Polckesforfostering industry -- for example, supporting the growth of the iron and steel, automobileand computer industries. * Polickes for industrial organization -- for example, promoting the production or capacity adjustment and industrial reorganization of the oil refining and petrochemicalindustries. * Poicies for Industrialadjustment -- for example, structural reform of the textile, shipbuilding,and aluminum refining industries. * Others -- for example, policies to promote technological development and energy conservation, including measures to promote the development of semiconductor- related technology, and to treat investments in energy conservation in a favorable manner. 2.5 Of these, the first two policies are targeted primarilyat individual industries;the second two cross industrialboundaries. 2.6 The targets of industrial policy are not limited to fields that fall under the purview of the MJTI, such as those raised here. For example, seeking to foster the ocean shipping industry, the Ministry of Transport is carrying out the managementof a planned shipbuilding system based on a long-term plan and has provided companies with interest subsidies for money borrowed for equipment and facilities. In addition, the Transport Policy Council is seeking to carry out overall interest coordination both within the various sectors of the transportation industry and among sectors for the entire industry,including land, sea, and air transport.
A. Industrial Policy Trends 2.7 These four industrial-policy classifications capture the historical transition of industrial policy in postwar Japan. Central policy objectives have shifted from fostering industryto promoting industrial organization and structtuing, to strengthening the industrial foundation. During this transition of objectives,the focus of the industrialpolicy has also gradually shifted - from targeting issues specific to individual industries to targeting issues that cut across industrial boundaries. Postwar trends in Japanese industrial policy (Table HI-1)roughly cover four phases: 2.8 The 1950s. The main objective of industrial policy was to further the industrialization of Japan. To achieve this goal, the government regulated imports and domestic direct investment, and implementedpolicies to foster select industries, such as electrical power and iron and steel. The end result was the foundation for developing industry, with heavy industry at the center, and promoting economicgrowth in Japan. 2.9 The 1960s. The main objective was to liberalizetrade and capital and establish an industrial structure that could accommodate liberalization. In the period, theories about the new industrial order and industrial reorganization were posited, and industrial organization policies were implemented in each industry to promote mergers, tie-ups, and cooperative activities among and between firms in order to eliminate excessive competition and strengthen the international competitiveness of Japanese industries. Accord;ngly, progress was made toward arranging the intemal structures of each industry, and the so-caled "Industrial Order" took shape - creating the frameworkfor the industrialsociety of today. 2.10 The 1970s.Industrial policy in Japan entered a transitional period. As progress was made toward industrializingthe Japanese economy and strengtening the intemational competitivenessof basic industries, these policy ends began having negative reperussions, such as industrial pollution and oligopoly. In addition, the dramatic upheavals in the economic environment brought about by the Nixon shock and the oil shock. as well as the emergence of trade friction, necessitated 'adjusting the industrialstructure." As such, the primary objective of i.adustrialpolicy was to correct the distotions caused by industrialization- to implementenvironmental protection and
66 Tablenl L. TrendsIn PostwarIndustrial Policy
Year MainEconomic Conditions BasicConcepts and Priorities of IndustialPolicy
-1949 DodgeDeflation (shift toward a freeeconomy: Shiftfrom domestic to internationalcommaec (promote brde; promoteindustr insufficientpurchasing power); Foreign Exchange and ationalization);MM established. ForeignTrade Control Law enacted 50-SI KoreanWar Boom (special demands); highprices for Securebase for economicindependence (prmote tade; incrase producton commodities capacity;promote Industrial rationalization; promote snafl- andmedim-size finns; promotetechnology). 52-54 Fromconsumption boom to investmentboom; Achieveeconomic independence (promote exports; promote industrial increasedimports and fiscal retrenchment ationalization;increase degree of self-sustenance;implemet resource policies; promotesmall- and medium-size firms; prmote techology). 55-58 JlimmuBoom; Nabezoko recession; Five-Year Plan Furter thedevelopment of economicinde ce (prmotetrade; stengten the for EconomicSelf-Suppoft; New Long-Term industrialbase; foster new industries; promote small- and medium-size rms; EcononicPlan promotetechnology). 59-61 IwatoBoom; Income Doubling Plan; Trade and Liberalizetrade and Improve the industrial suure (lberalizetrade and forign ForeignExchange Liberalization Plan exchange;promote exports; rtionalize industry; pre industrialstruct; promotesmall- and medium-size firms; promoe techndoo; lpient me os for coalstructural recessionr ; impment measur for distnbuionand 4 consumption). 62-63 OlympicBoom Achievehigh grwth andcomet disparities (modenize small- and mediun-size fuins;promote technology; implement liberalizaion policies; prmte expos locateindustry aWropriately; implement comprehensive energy policies; Implement pollutionprevention measures; establish administaion for consumerprotectica). 64-65 Shiftto anopen economy (change of IMF status, Balancedgrowth through international cooperaton (prmo expots promote OECDmembership); Medium-Term Economic Plan economiccooperaton; implement polcies for small-and medium-size fims; promotetechnology; establish patent administrtion; strenghen inanadonal competitiveness;establish administration for consumerprotection; impement comprehensiveenergy poliies; promoteregions). 66-67 IzanagiBoom: Economic and Social Development Balancedgrowth under an open system (promote exports; promote economic Plan;Capital liberalization cooperation;implement policies for small-and medium-size finns; promote techology;foster technologically advanced indusie reformindtial stuctare; implementcomprehensive energy policies; locate indutry approriawly;prqiNc conditionsfor industriallocation; provide distribution and consumer guidance). 68-69 Businessexpansion and surplus in international Economicprosperity and high standard of living(promote trade; promotc economic balanceof payments;high growth takes root; New cooperation;implenent policies for small-and medium-size fios; proote Economicand Social Development Plan technology;foster technologically advanced industies; reform indusal stuctnr, strengthenenterprise constitution; implement comnprehensive energy policies; undertakeresource developnent; locate industy apprpriatelr. implemt potlution oreventionmeasures. 'odernize distribution system: Provide consumer oruction). Source:Ministry of InternationalTrade and Industry (1979). TsushoainaXosho 30nenshi. Table II-2. Japan's Postwar Economic Plans
Real Date GrowthRate Nameof EconomicPlan Established PlanPeriod Tar EconomirRecovery Plan 1948 1949-1953(5 Years) 5.8% Five-YearPlan for EconomicSelf- 1955 1956-1960(5 Years) 4.9% Support NewLong-Range Economic Plan of 1957 1958-1962(S Years) 6.5% Japan NationalIncome Doubling Plan 1960 1961-1970(10 Years) 7.8% Medium-TermEconomic Plan 1965 1964-1968(5 Years) 8.1% Economicand Social Development Plan 1967 1967-1971(5 Years) 8.2% NewEconomic and SocialDevelopment 1970 1970-1975(6 Years) 10.6% Plan BasicEconomicand SocialPlan 1973 1973-1977(5 Years) 9.4% EconomicPlan for the SecondHalf of 1976 1976-1980(S Years) 6.0% the 1970s New Economicand SocialSeven-Year 1979 1979-1985(7 Years) 5.7% Plan Outlookand Guidelines of Economy 1983 1983-1990(8 Yeas) 4.0% and Societyin the 1980s EconomicManagement within a Global 1988 1988-1992(5 Years) 3.75% Context Shaing a BetterQuality of Lifearund 1 1992-1996(5 Years) 3.5% the Globe Source:Economic Planning Agency. antimonopoly policies, to coordinate the industrial structure itself so that it could cope more effectively with changes in external factors, and to create a structure for stable growth. 2.11 The late 1980s.The nation began to search for a 'new industrial policy." With rapid globalization and the 'softening" of the economy have come growing demands that cross industrial boundaries - including those for international cooperation, technological development, and the support of an "information-oriented' society,19 Thus, the objective of industrial policy has evolved into "strengthening of the industrial foundation" - making the transition to domnesticdemand-led industries, promoting technologicaladvances, and establishinginfonnation networks.
2. The Policy-Formation Proce 2.12 The role of industrial policy in the economic developmentof Japan has been significant. Natraly. other countries have also relied on policies to potet and foster their domestic industries.
68 Table 11-3.Results of the Income Doubling Plan
Targets Results
1970 Annual 1970 Annual Target IncMase Actual Increase
Population millionpeople 102.2 0.9 103.7 1.0 GNP trillionyen 26.0 7.8 40.6 11.6 Per CapitaIncome 1000yen 208.6 6.9 317.7 10.4 Per CapitaConsumption 1000yen 147.9 7.6 204.1 9.4 Miningand Manufacturing FY1968=100 431.7 11.9 539.4 13.9 Production Agriculture,Forestry and FY1968=100 144.1 2.8 130.3 2.1 FisheriesProduction DomesticFreight Transportation billionton/ 97.5 6.9 210.9 10.2 kilometer DomesticPassenger billionpeople/ 343.8 7.6 588.9 8.3 Transportation kilometer
OverallEnergy Demand a milliontons 302.8 7.8 574.1 12.0 Exports(customs based) billiondollas 9.3 10.0 20.3 16.8 Imports (customsbased) billiondollars 9.9 9.3 19.5 15.5
Note: Relevantamounts are basedon FY 1968prices. a. Overallenergy demand is basedon coal conversion. Source:Ministry of InternationalTrade and Industry (1992), Tsusho Sangyo Seisakushi. but in Japan beyond these policies there exists a distinctivekind of cooperative relationshipbetween government and industry, commonly referred to as the pubtic-private cooperative system. The fundamental goals of both governnent and industryhave been the same throughout each of the four transitional periods of industrial policy - and with mutual adjustments, they have created a system that continues to address emerging issues effectively. A look at the 1960s, the period in which this type of system functioned most classically, provides an instructive examination of the process through which industrial policies are formulated. A. Formulating the EconomicPlan 2.13 In 1948, the government drew up the Economic Recovery Plan as the basic blueprint for reconstructing its economy. Unlike in most developingcountries, industryand government in Japan work mutually toward policy goals. Thus, the govemment's official economic plans are widely accepted by industry, despite the fact that the govemment lacks the legal right to compel their
69 acceptance. After the Economic Recovery Plan, Japan began elaborating long-term economic schemes with the Five-Year Plan for Economic Self-Support in 1955, and the New Long-Term Economic Plan in 1957 - both of which adopted the projected growth rate of the Gross National Product (GNP) as the back-bone of economic planning. In 1960, the Ikeda Cabinet issued a proposal for an Income Doubling Plan, which, when accepted, provided the framework for the high economic growth that followed (As historical perspective, Table II-2 shows the evolution of economic planning in the postwar period in Japan). 2.14 In the pre-1960 period, three fundamental components for a sound economic environment had emerged. First, the conditions for high growth had been established. During the reconstruction period, the government promoted economic growth by introducing such measures as the Priority Production S -stem. However, beginning in the late 1950s, private-sector investmentemerged as the driving force behind the economy, giving rise to a "high savings-high investment" growth pattern. Second, the transition to an open economy had begun. As Japan began to return to the international market, trade liberalization and direct investment were strongly demanded at home and abroad. Third, competitive principles had largely been established. Deconcentration and the enactment of the AntimonopolyLaw provided the framework for a market economy, and economic development based on competition among firms had taken root. 2.15 Given these conditions, the Policy Affairs Council (PARC) of the ruling Liberal Democratic Party (LDP) began to study the fundamentalconcepts of the Income Doubling Plan in July 1959. In November, after having coordinated views with the Economic Planning Agency (EPA), the LDP submitted the plan to the Economic DeliberationCouncil, the government'sofficial organ for deliberating the nation's economic plans. In December, the plan was passed by cabinet resolution. While the original idea for this plan was prnposed within the LDP - primarily by Prime Minister Dcedaand those close to him - its theoreticalframework was based almost entirely on the "growth theory" of then government economist Osa,-nuShimomura (Economics Ph.D.; Executive Director, Research Institute of Capital Formation of the JDB, 1964-74). Dr.Shimomura, who functioned as Prime Minister lkeda's economic policy "brain," argued that the latent desire for capital investment and the considerable potential for technological innovation in the Japanese economy at the time would enable the nation to attain an annual economic growth rate of 10% add to double national income levels within a period of a few years. It was this "dogmna"espoused by a single economistthat became the foundation for the Income Doubling Plan. 2.16 In all, the views of all parties were embraced to reach a policy consensus: an academic built the policy theory; the party made the proposal; the council investigated and drafted the issues; and the cabinet made the final resolution. Planning and deliberationwere carried out by academics, LDP party members, and bureaucrats; the approximately 30 academics, former bureaucrats, industry leaders, and general citizens, comprising the council, supported refining the plan with a more detailed deliberation. In general, the Economic Planning Agency, not the LDP necessarily, makes the initial proposal for a plan.
2.17 The plan was a tremendous success - at least in achieving the desired levels of economnc growth (Table 11-3). By the target year (1970), the GNP had exceeded the initial goal by more than 50%, and the initial plan to double income in ten years actually culminated in a threefold increase. It is only natural that this economic plan served as the symbol of Japan's postwar period of rapid economic growth. B. Formulating Industyrial "Visions" 2.18 The ultimate objective of the Income Doubling Plan was to increase the standard of living and establish full employment.Several more specific policy proposals were central to achieving this objective: * To consolidate social capital. * To upgrade the industrial structu.
70 * To promote trade and internationaleconomic cooperation. * To enrich human capital and promote science and technology. * To ease the dual economic structure and preserve social stability. These aims were directly reflected in the industrial policies at that time. MITI, the Economic Deliberation Council, and other relevant institutions initiated the process of developing the Income Doubling Plan by submitting informational reports to the relevant policy divisions of the government; in turn, the divisions conceived of industrial "visions" that were either industry-specific or cross-industrial. These "visions," capturing the proposed policy measures, provided the foundation for actual industrial policy. 2.19 To consolidate social capital MITMhad to support drawingup an industrial location policy. Raising industrial production -- a necessary prerequisite to economic growth -- was predicated on building industrial sites, industrial water facilities, roads, ports, and so forth. An Industrial Location Subcommittee was thus established, which subsequently proposed that four large industrial zones (Keihin, Chukyo, Hanshin, and Kitakyushu, the so-called Pacific Belt Zone) become centers for development, and that sites in developingareas be selected for later industrialization. 2.20 To upgrade the industrial structure, MITI created the Subcommittee for Upgrading Industries. At the time, the heavy and chemical industries were the main pillars of the industrial structure. The subcommittee proposed increasing the weight they were to occupy within the manufacturing industry from 61 to 73% (on a value-added basis). The concrete "vision" of the Subcommitteesought to:
* Modemize facilities, establish a mass-productionsystem, standardize products and strengthen internationalcompetitiveness by forming kombinat(industrial complexes). • Secure funds for capital investment and amass equity. • Secure a stable and affordable supply of materials and energy resources from abroad. • Locate industries appropriately and construct new industrialzones. • Promote scienceand technology and foster new industries. • Modernize small- and medium-sizefirms and secure a structure based on the division of labor among industries. 2.21 To foster trade, the committee proposed acquiring foreign currency by expanding exports. It argued that this goal required strengthening the international competitiveness of exported products and encouraging exports. In addition, to promote technology, the committee proposed establishing training for technical experts and developing domestic technology, improving the patent system, and providing tax benefits to offset research and development costs. To ease the dual economic strucure, the committee proposed various policies to support small- and medium-size firms - for example, establishing appropriate operational scales, modernizing facilities, consolidating equity, reforming the work environment, and so forth. 2.22 In the process of creating these industrial "visions," MMTIarranged study groups, a research group, deliberative councils (shingikail, and other bodies to capture the views of academics, industry officials, consumers, and other interested parties. At the same time, MTIMcould get a general idea of the public's reaction to its drawn-up plans (Figure 11-1). As such, plans were proposed only after the actual needs and conditions of society were merged with the theoretical concepts underlying the economic plans.
71 FigureII-1. Formulating Industrial Visions: The IncomeDoubling Plan
Conductsurvey MITI JuniorStaff Hearing: Compiledata Study Group ...... - Learnedindividuals -Interestedparties i -Overseasemployees I -Localrepresenatives iI8( -Others ( ~~~~(PrepareDrat)
Researc --Group<* ...... ,_ .... (Outside lecrs)
...... -* p Subcommittee) Si
S ~ ~ ~ ~ ~ ~ ~ ~ ~~ -EpaaoyS rnas (F:eeaback) (Prepare Briefingsand SubcommitteeRcpmots) A. I
...... ''''''' ic I pDelibertive Council
; ~~~~~PublicRelations: (Pmcpareand disseminatcReport) ...... -- >. -Epulicationysemn -Lcctures
Source:Ono (1992), FissentekiSangyo Sri;W=un.
72 Figure 11-2Industrial Policy Legislative Pmcess
External: Top: Internal: -Opinionsfrom academic -Instructionsfrom the pany -Resultsof surveys circles -Instructionsfrom seniorofricials -Proposalsfrom staff -Peitionsfront industry -Instructionsand advice from various -Advicefrom former -Requestsfrom consumers planningdiv;sions/bureaus staff -Foreignpressure. others
(Scoutingand Accumulating Seeds) Divisionalmeetings
Coodinationof Intersts: -Relatedindustries Lted lnin fPwpatory Woric -Relatedgovesnment ministries __ glnestigaionblbo plsannings- of -V noussurveys andagencies . ui ca -Studygroups -Diet members etc...... -Others Ij :RecomeIntra-Bureau: I (Rocomnmend--- Juniorstaff mceting changes)
...... Meting managemcntand abovc)
-ConceptA ion Process>+- - IFedback +------Concrir Daft sion Prccss>
galDeliberaton CommitHern
GMetnalAffairsDirectors
Ministea Confacnce . (DimctorGe iaals and abovc) f Minist of FinAsc ssment *Cabinet | l (When needed the Ministry of ---- Legislation Buau Home Affairs, etc.) Investigation Budget Tresury Tax Bureau Bureau Bureau
Vice-MinisterialMeedng _ _ _ _ _ |Cabinet Coundfl Pa
Diet Source:Ono (1992);Jiasenteki SanEvo Seisakuron.
73 C. Drawing up Special Legisation 2.23 After industrial "visions" are drawn up (as illustrated by the process for the Income Doubling Plan), actual industrial policy is finally formulated. At this stage, various bureaus and divisions within MITI play a central role. Roughly speaking, each industry is "represented" by a specific division, which serves as the locus for supervisingand guiding that industry. Divisions are also responsible for developingand su ervising overall policies for that industry. Por example, the petrochemical industry falls under the purview of the Basic Chemicals Division of the Basic Industries Bureau, while the automobile industry is covered by the Machinery and Information Industries Bureau's Automobile Division, the cement industry by the Ceramics and Construction Materials Division in the Consumer Goods Industries Bureau, and the retail industry by the Commerce Policy Division in the Industrial Policy Bureau. In addition, the petroleum, coal, and electric power industries fall under the jurisdiction of the Agency of Natural Resources and Energy, and the Small and Medium EnterprisesAgency is in charge of small- and medium-size industries. 2.24 Each division has jurisdiction over its respective industry along the following dimensions: (1) formulating laws that govern the industry; (2) formulating preferential measures, such as tax laws and policy-based financing; (3) changing tariff rates; (4) drawing up concrete plans for trade and capital liberalization; (5) licensing new entries and adjusting capacity in special fields; and (6) providing general administrative guidance. It is up to the specific division to select either a particular policy tool or a combination of tools in order to implement actual policies. Several representative industrial policies in the 1960s illustrate the process through which policies are formnulated. 2.25 Industrial policy in the 1960s began with measuresto promote establishinga new industrial structure, introducingtrade liberalization,and supportinginduslrial reconstructior as part capital liberalizationpolicy. Becausethese policies sought primarilyto eliminateexcessive compe-uon and to establish an optimal industrialscale, they attempted to build a desirable industrial structure based on public-private cooperation. In concrete terms, this meant promoting mergers and cartels, and providing special privileges (such as taxation and financing) for three designated industries - automobiles, special steel, and petrochemicals. Eventually, the Bill for Temporary Measures for Pronoting Designated Industrieswas placed before the Diet in 1963. Although the bill was rejected
- because among other reasons it ran counter to the AntimonopolyLaw - its basic concepts were incorporatedinto later industrialpolicies (and, as we shall see later, were made concrete in the form f industrial reorganizationand capital investment adjustment). In the late 1960s, policy sought to promote large-scale mergers, starting with the amalgamation of the shipping industry and the nerger of the three MitsubishiHeavy Industries in 1964. These were followed by the merger of the Nissan and Prince automobile manufacturers in 1966 and the merger of the Yawata and Fuji Steel corporations in 1970. It was through such efforts that firms of sufficient scale to compete intemationally were successivelycreated in various sectors. 2.26 Another policy directive sought to implement capacity adjustment as part of a broader policy to cope with excess facilities. Here, the governmentintervened in the investment behavior of private enterprises by implementingresource allocation policies that induced the private sector to keep its investment within the scope of the growth rate desired by the govenment In this respect, these policies bear a strong resemblance to those of planned economies. In fact, throughout the 1960s, capacity adjustmentwas carried out in the so-called"capital-intensive industries" of iron and steel, syntheticfibers, oil-refining,petrochemicals, and paper and pulp - and it was the government that held the real decision-makingauthority over major capital investment projects. However, with the exception of the oil-refiningindustry (whose investmentwas limited by the Petroleum Industry Law), this practice had no official legal basis and in many cases was carried out through MIT=s administrative guidance. Classic examples are the new ethylene plant standards for the petrochemical industry (in which annual production was limitedto a minimum of 300,000 tons) and the investment rotation system. 2.27 The third policy area in the 1960s sought to adjust production areas in order to achieve economies of scale. For industries whose market concentation was low, such as those that encompassedmany small- and medium-size firms, a product slization system based on
74 concentratedproduction was established,and joint project cooperationwas encouraged.These efforts strengthenedthe internationalcompetitiveness of those industries.Most noteworthyis the plan for a product specialization system in the machine tools industry. The basis for the policy was the 1956 Law on Temporary Measures for Promoting the Machinery Industry; MITI used this law to proposeits Basic Plan for the Promotionof the MachineTools Industry in 1968.This plan advocated (I)indicating the appropriate scale for the production of 12 multi-purpose machines, including regular lathes; (2) introducing a product specialization system that could achieve the desired economies of scale; and (3)suspending the production of machine types that captured little of the market. It was based on this plan that structural reform was carried out successfully in the machineryindustry. 2.28 The fourth area was a comprehensiveenergy policy. The energy base for industrial development was strengthened almost entirely through the enactment of special legislative measures. Such legislation included the PetroleumIndustry Law (1962), the ElectricPower Industry Law (1964), the Law on the Establishmentof a ComprehensiveEnergy Research Council (1965), the Law on the Power Reactor and Nuclear Fuel Development Corporation (1967), and the Coal Mining Industry Reorganization Temporary Measures Law. Furthermore, in 1973, the Natural Resources and Energy Agency was establishedand its policy bureaus strengthened. 2.29 The final policy area in the 1960s was fostering technologically advanced industries. In addition to the Law on TemporaryMeasures for Promotingthe Machinery Industry, other laws were enacted to foster specific industries- including the Law on Temporary Measures for Promoting the Electronics Industry and the Aircraft Industry Promotion Law. These laws made it possible to protect and foster individual industries by providing such preferential measures as taxation and policy-basedfinance. In addition, MIT! also advocated establishingthe Japan Electronics Computer Company in 1961 as a rental agent for domestic computers. 2.30 It is clear that many vehicles are used to implement industrial policy in Japan. Such tools have been selected on a case-by-case basis according to the policy objectives and industrial sector at hand. While the various policy tools are discussed in-depth in section 13, decidingwhich policy tools might be the most appropriate in a given case entails an iterative process that captures the views of those both within and outside the ministry before special legislation can be enacted (see Figure 11-2).Promoting this iterativeconsolidation of policy goals has become one of the key tasks of the relevant division. D. Private-Level Participation in the Policy-Formadion Process 2.31 As mentioned, the most outstanding characteristic of Japanese industrial policy is the cooperation between public and private entities; this 'system" is revealed most clearly in the deliberative council system and industry associations. While the Japanese economy is based on market principles, the reality of industrialpolicy is that the government delineates a basic outline of what it considers "desirable economic development" and induces the private sector to move in that direction. Thus, the most important aspect of this government-initiated process is designing an economic plan that reflects the public will as much as possible. Measures that are decided by the governmnentunilaterally are no different than those of the planned economies of socialist nations. It is doubtful whether any plan can be formulated successfully if a consensus has not been reached among the private sector. In Japan, this system for coordinatingthe views of the public and private sectors has functioned quite effectively, and, as others have pointed out in the past, it has enhanced the effectiveness of industrial policy to the extent that 'Japan, Inc." has been used to describe the entire Japanese economy. In some cases, the government has soughtto coordinate and carry out the interests of the private sector; in others, it has intervened forcefully in the private sector. Yet in either case, the government establishes policy only after capturing and considering the views of the private sector. 2.32 The deliberative council system was largely in place by the 1960s, and most industrial policies were reviewed by their respective councils before their submission to the relevant minister or before their legislative enactment. One of the most powerful councils during the 1960s was the Industrial Strucure Advisory Council, which had 30 regular members, 15 temporary members, 33
75 Table 11-4.Areas Covered by the Industrial Structure Council
Year CommitteeName Established Main Itemsof Deliberation
CentralCommitee 1964 Basicdiection of overallIndustrial policy
DistributionCommittee 1964 Surveythe actual state of distribution ytemad baic isues for its nodernization
IndustrialPollution Committee 1964 Measuresto copewith industrialpollution
IndustrialFund Committee 1964 Formulateappmprit amnnualcapital investuent plansfor upgradingte industial structumand strengthening intradonal competitiveness;formulate plans for pmcuringnecemss fimds
ManagementCommittee 1964 Financial,labor, and production manrament
CinemaCommittee 1964 Liberalizationmeasures and export promotion
Nuckar Power IndustryCommnittee 1964 Developnuclear power and related businesses
Energy Committce 1964 Comprehensiveenergy policy
InternationalEconomy Committee 1964 Undersmndand take measuresfor the directionof the inernationaleconomy, focus prmarily on the Nodh-South problem.East-West problm, and problemsof advance industrializednations
Consumer EconomyCommittee 1964 Analyzethe consumptionstructure and providefor a sound aonsumerlifestyle
Heavy IndustryCommittee 1964 General measuresfor promotingthe machineryindustry. naysis of the market for heavy indutial pmduct and mere to promoteexports Chemical IndustryCommittee 1964 Measuresto guarantee long-termsupplies of naphthafor the pe.nbchemicalindustry analysisof the export market for chemical products,and mesr s to promoteexports
GeneralMerchandise and 1964 Grasp the current state of tht generalmerchandise distnbution Contuction MaterialsCommiute systemand formulatemeasures for the futur; measurs to promotethe export of geneal mhndis; survey the current conditionof the gravel supply; providebasic direction for the pr- fab industry
Textile Committee 1965 Grasp the actual condition of the distnbutionsystem for txiles and policiesfor its normalization
IndustrialFmance Comnittee 1965 Indusurialfinanmc policies for nonnalizingfinance, consolidadng equity, and upgading the industrialstuctue
xidustrialLabor Committee 1965 Measuresfor the effective applicationof industria labmorpotential
IndustrialLocation Committee 1966 AppRopiatepacmnt of industry: epare the conditionsfor Woang industy
IndustrialTechnology Committee 1965 Streten the developmentof technology
Source: Minnitry of International Trade and Industry (1992), TsS
76 Table 11-5.Major Regular DeliberativeCouncils Attached to MITM(1990)
CouncilName AffiliatedBureau or Agency Year Founded CommodityExchange Council IndustrialPolicy Bureau 1950 Exportand ImportTransaction Council IntemationalTrade Administration Bureau 1953 Coal MiningCouncil Agencyof NaturalResources and Energy 1955 MiningIndustry Council Agencyof NaturalResources and Energy 1962 Smalland MediumEnterprise Policy Making Smalland Medium Enterprise Agency 1963 Council IndustrialStructure Council IndustrialPolicy Bureau 1964 TextileIndustry Council ConsumerGoods Industries Bureau 1964 ElectricityUtility Industry Council Agencyof NaturalResources and Energy 1964 IndustrialLocation and WaterCouncil IndustrialLocation and Environmental 1966 ProtectionBureau IndustrialProperty Council PatentOffice 1966 Data ProcessingPromotion Council Machineryand Information Industries Bureau 1971 IndustrialTechnology Council Agencyof IndustrialScience and Technology 1973 Large-ScaleRetail Stores Council IndustrialLocation and Envirounmental 1974 ProtectionBureau ChemicalProduct Council BasicIndustries Bureau 1974 TraditionalCraft Industry Council ConsumerGoods Industries Bureau 1974 PetroleumCouncil Agencyof NaturalResources and Enery 1978 AircraftIndustry Council Machineryand Information Industries Bureau 1986
Soure: ManagementCoordination Agency, Shingikai Soran.
77 Table I1-6.Composition of Industrial Structure Council
Industries and Business Representatives (20) Academdcs (7)
Japan Committee for Economic Development, National universityprofessor Secretary General National university professor The Japan Chamber of Commerceand Industry, Private universityprofessor Managing Director Private universityprofessor Osaka Chamberof Commerceand Industry, President Private universityprofessor Private universityprofessor Kansai Economic Federation,Chairanan Economiccommentator National Federation of Small Business Associations, Chairman Journalsts (2) Synthetic fiber company,President Chemicalcompany, HonoraryPresident Newspaperadvisor Chemical company, President Broadcaststation analyst PetroleumAssociation of Japan, President Oil company, Advisor Consumer and Labor RepresentatIves (3) Steel company, Chairnan ElectronicsIndustry Association,Chairman Consumerassociation, Director ElectronicsIndustry PromotionAssociation. Chairman Labor association,Director Labor association,Director Electrical manufacturingcompany, President AutomobileIndustry Association,Chairman Financial Representatives, Otbers (6) Retail company,Chairman Railway company, President City bank, Chairman The Federation of Electric Power Companies,Chairman Long-TermCredit Bank, Chairman Japan DevelopmentBank, Governor Electric Power Company, President The ShokoChukin Bank, President PrefecturalGovernor National Mayors' Associaion, Former BuQecrats (4) Chairman
Think tank, Managing Director Think tank, Managing Director Think tank, Managing Director Japan Foreign Trade Council,Chairman
Total: 42
Source: Management of CoordinationAgency, Shinikai Soran.
78 specialist members, and 18 subcommittees (see Table II-4). The Industrial Structure Advisory Council deliberated over issues associated primarily with general industrial policy, but each industrial sector had its own council and board of inquiry to deliberate over issues specific to its industry. By the 1960s, approximately 30 such councils and boards had been established. The system continues to be widely used today, with currently more that 33 regular councils attached to MITMalone (see Table II-5). 2.33 Ordinarily, the councils and boards consist of industry representatives, business leaders, former bureaucrats, academics, joumalists (newspaper editorial writers and so forth), representatives from consumer groups (the Housewives Federation and so forth), representatives from labor (labor union associations and so forth), representatives from the finance industry (.DB), and others (local governmentofficials and so forth). (Table II-6 summarizes the current mnembership of the Industrial Structure Advisory Council.) 2.34 However, one must recognize the fact that the deliberativecouncil is not a decision-making entity; at best, it is a place for debating policy. Actual policy decision-making is entrusted to MITM. Rather, the most noteworthy aspect about the councils is their interest-coordinationfunction in the policy-making process. As noted in the previous section, these councils gave MMT!the opportunity to listen to the views of academics, industry, consumers, and concerned parties, to draw up a plan that reflected their views, and get feedback from the general public. If MITI were to propose a plan that ran counter to the interests of a certain industry, the members of the committee representing that industry would strongly object to the proposal; at that point, even MMTIcould not hope to formulate the policy entirely as planned. This is true of comminee members who represent consumers or labor. Although MMTIdoes have ultimate authority for appointing committee members, almost all interested parties are appointed to the councils, and it is normal that a consensus of opinion is sought at the council meetings. Of course, not all cases come to a consensus; in such cases, MT's draft generally passes, but only after MITI seeks actively to lay the groundwork for obtaining an informal consensus from the parties (nemawashi). Views are also refined during council meetings. The councils play an important role in providing a place for "persuasive" argumentation;as such, when a proposal has successfully passed the council, it almost assuredly would be enforced (at least within the relevant industry). Thus, some academics have argued that the council system is a classic example of democratic institutions at work in postwar Japan. Deliberation over the coordination of capital investment in the iron and steel industry, for example, was for the most part carried out by the Industrial RationalizationCouncil, and it was here that a dialogue was carried out among firms in this industry. 2.35 What would happen if deliberations were not caziied out in the council, and MMTIsought to provide only administrative guidance for managing the situation? The response would be negative. Even if MMTIproposed an exceptional plan, companies would probably oppose it unilaterally because they were not part of the policy decision process. For example, when production in the oil refining industry was adjusted unilaterally by MITI in the first half of the 1960s based on the Petroleum Act, two leading companies - Idemitsu Kosan and Daikyo Sekiyu - refused to comply and began carrying out production based on their own plans. Thus, production adjustment was ultimately a failure. 2.36 In what ways are the opinions of the opposition, outsiders, and newcomers reflected in policies? First, M1TIand other members continuouslyattempt to persuade the oDpositionto support a plan - and, in any event, incorporate the opposing opinion in a partially revised plan. Even when MITl does not capture the opposing viewpoint in a specific plan, it and other council members will consider discussing the opinion in future policy deliberations. For instance, when capital spending in the iron and steel industry was coordinated, in 1965, SumnitomoMetals objected to the freeze on new investments. Repeated deliberations in the Industrial RationalizationCouncil thereafter led to the complete acceptance of the plan to increase the capacity proposed by blast furnace companies, despite the fact that numerouscompanies were forced to postponeconstruction. 2.37 While outsiders and newcomers cannot directly present their opinions during council meetings, academics and journalists are included among those who participate as committee members in such councils, in the hopes that these neutral individuals can represent the opinions of
79 Table II-7. Major Business Organizations (related to NMT)
OrganizationName Year Number Year Number Founded of OrganizationName Founded of Members Members JapanElectric Association 1921 2023 JapanPaint Makers! Association 1948 108 Flat GlassAssociation of Japan DepartmentStores' Japan 1947 3 Association 1948 121 JapanLight Metal JapanSpinners' Association 1948 83 Association 1947 171 The JapanGas Japan InorganicChemical Association 1947 248 IndustryAssociation 1948 131 The Shipbuilder's TheJapan Rubber Associationof Japan 1947 23 ManufacturersAssociation 1950 168 JapanDyestuff& TheJapan Plastics Industry ChemicalIndustry Federation 1950 37 Association 1948 61 The CementAssociation The JapanMachinery of Japan 1948 21 Federation 1952 59 CommunicationsIndustry The Federationof Electric Associationof Japan 1948 186 PowerCompanies 1952 9 JapanChemical Industry JapanMachine Tool Association 1948 236 Builders'Association 1953 113 JapanChemical Fibers JapanCamera Industry Association 1948 59 Association 1954 33 JapanMining Industry PetroleumAssociation -f Association 1948 74 Japan 1955 29 The JapanSociety of JapanPeatocheical IndustrialMachinery IndustryAssociation 1958 34 Manufacturers 1948 276 JapanAuto Parts JapanAutomobile Dealers IndustriesAssociation 1948 388 Association 1959 1865 JapanCoal Association 1948 19 TheJapan Bearing IndustrialAssociation 1963 37 The JapanIron and Steel JapanAutomobile Federation 1948 50 ManufactrersAssociation 1967 13 JapanAssociation of JapanChain Stores RollingStock Industries 1948 54 Association 1967 117 The JapatLElectrical JapanLeasing Association 1971 91 Manufacturer's Association 1948 142 ElectronicIndustries JapanPaper Association 1972 77 Associationof Japan 1948 502 The lapan ElectricWire & JapanAlumninun Federaton 1978 74 CableMakers Association 1948 165
Source: Federationof EcononicOrganizations, Dantai Yora.
80 those not included. For example, for policies that give preferentialtreatment only to existing interest groups, opposing views are sought and made public. If public opinion supports this opposing viewpoint, academics and journalists who are members of the councils will probably act as spokespersons for that viewpoint. Moreover, from the perspective of protecting the rights of new firrmsand prohibiting moropoly, the Fair Trade Commission keeps a close watch on recomnended policies. And, in fact, the Bill for Temporary Measures for Promoting Designated Industries was shelved at the Parliament because it tolerated monopoly. However, compared with unilateral decision-making and enforcement carried out solely by policymakers, the deliberative council system is a democratic and efficient process, even with its imperfections. 2.38 The councils also provide a significant information-gathering function during the policy-making process. In many cases the theoretical plan drawn up by the bureaucrats is adjusted to fit the realities of industry and society as brought out in the council meetings or pre-meeting nemawashi.. When such views are ignored and the draft proposal has been forced through the council, it has been difficult to enforce. Both the bill for the Law on Temporary Measures for Promoting Special Industries, which did not pass, and a plan for consolidating the automobile industry into 3 groups, which in fact never materialized,were strongly opposed at the council level. In the end, a consensus was not reachedwithin the relevant industries. 2.39 If the council is the place where the views of government and the private-sector are coordinated, the industry association is the place where the views of a particular industry are coordinated. Furthermore, as counterpartsto the divisions, industry associationsrepresent the views of an industry as a whole. They seek to coordinate different views within an industry and to establish an uniform consensus. In addition, the associations ensure that the relevant divisions design policies that are advantageousto industry. 2.40 The number of industry associations is considerable, but neither their structure nor their influence is uniform. While some of the industry associations established under government guidance in the early postwar period generally comply with the dictates of government, a gradual shift has occurred in the balance of power between many industries and the government. Today, industry often formulates industry rules on its own, while the number of cases in which industry has actually led industrial policy is increasing(seeTable 11-7). 2AI For example, when the product specializationsystem for machine tools was established, the Japan Machine-Tools Builders' Association, following MlTI's recommendation, established a Production Specialization Committee; after it had gathered sufficient information and coordinated views, the Committee drew up the Agreement Concerning ConcentratedProduction independently in 1960. It was based on this agreement that MITI announced the Basic Plan for the Promotion of the Machine Tools Industry in 1968, and, structural reform of the industry commenced. Although the initial "agreement" had no legally binding power, it remained in effect for a period of almost eight years as the industry's official agreement.
3. The Tools of Industial Policy A. Clasification of Policy Tools 2.42 Although the term industrial policy sums up a single phenomenon, numerous tools are available to implement it. In MlTIs view, the four major industrial policy tools are (1) legal regulations, (2) the dissemination of information in the form of "visions" and "guidelines," (3) indirect incentives offered by taxation and government financial institutions, and (4) advice and guidance by MT. But, as implemented in Japan, industrial policy tools consists of the following: 1. Special legislation 2. Administrative guidance 3. Industrial-basestrengthening 4. Taxation 5. Subsidies 6. Policy-based finance.
81 2A3 While each of these tools can be deemedas a specialmeasure targeted at industry,they all fall into two distinctcategories of policy vehicles,defined accordingto the degreeof govemnment intervention. In the first category -- difredreguuation (tools 1 and 2) -- the government intervenes directlyin the marketor industrialorganization in order to allocateresources in a way that it deems most desirable. In the secondcategory - indirect incentives ( tools 3, 4, 5, and 6) -- the govemment tries to induce industryto move in the desiredpolicy directionby providingfinancial and other incentives. 2.44 For example,suppose that the govemrnmentwants to attract industryto a specialregion in order to promote developmentin that region. The govemment might implementthe following policymeasures: * Enactinga law to stipulatethat factoriesbe locatedonly withina designatedregion and to prohibitfactories from being builtin other regions. * Announcinga long-termdevelopment plan for the specialregion, and convincing industryof the advantagesof buildingfactories there.
* Buildingor rehabilitatingthe infrastructureof the region- roads, ports,and industrial water facilities -- and supplying industrialparks. * Reducingor exempting the fixed-assetstax of factories located in the area, and providingspecial depreciation rates. * Providingsubsidies to cover the employmentcosts of factorieslocated in the special area • Providing long-term,low-interest government financing to cover the construction costs of factorieslocated in the specialarea. 2.45 These measuresare not distinctivelyJapanese; for example,the United States has relied widelyon providingtax exemptionsand subsidiesfor employmentcosts. Yet the United States relies on marketmechanisms, so that direct interventionby the government- such as legislative action and administrafiveguidance - is rare. At most,the U.S. governmentmight try to force the consumptionof Americangoods by enacting'Buy American"laws or allocatingcredit (government guaranteed loans), but these measures would not be deemed active measures for controlling industry.But in Japan.the govemmenttries to influenceindustry by promulgatinglong-term visions and attemptingto coordinate those policy measuresthat can be coordinated.In a sense, it is as houghindustry has been forcedto let the gonment tendto its needs.Consequendy, a wide range of policytools are used in Japan, rangingfrom legal regulationsto indicativeguidelines. But such governmentintervention is not limitedto coordinatingindustrial policy intemally(whether within an industry or among industries,or amongenterprises); it also extendsto controllingthe parties externalto industry(the environment, consumers, and labor)and abroad(Table II-8). B. The Chaacteristics and Function of Policy Tools 2.46 This section examinesthe variouscharacteristics of each policy tool nore closely,using capitalinvestment as a policyexample. Table Il-9 providesa matrixof the policytools that could be used to effectthe relevantconditions for private-secorinvestment. 2.47 In making investment decisions, private-sector entities first consider the invesbna exviament wad conditwns, such as land, building costs, competitiveconditions, and fund procurement.It then builds revenueand expenditureforecasts for operatingthe facilities.Of the revenueconditions, the price of the commoditiesand the volume of their demandare key; of expenditures, interest, the repayment of principal and taxes are the primary considerations. Nawrally, other extemal factors, such as resourceand labor costs, fall under the expenditure category,but theyare not relateddirectly to the policytools discussedherein. The six policytools
82 Table11i. Tupg ad PolicyTools for CoordinaingIndustial Policy
DitectReiulaon IndirectGuidance SpecialLegisltion Adminisave Guidance IndustridBase Tadsdon Subsidies Palicy-BasedFnne
Withinan AntimonopolyLaw Coorinatngproducton Industrialshea Spedalt nmesus Subsidiesfor JapanDevelopment Bank Industry Delibeativecouncil Industrialwater fadlides Mergertaxaton interestpayments to SmallBsine Finance Roads shippingindustris Copoation Rairoads ShakoCbkn Bak Within Among EnergyIndustes Individualguidance, PoFs Taxadonfor modniaing Fundsfor Peopie'sFance Industry Industries Law Delibeativecounciis AIrpOMts of small-andmedium- modemifzngsmill- corporin size nrms ndmedium-size Agencyof Industril fums Scencend Technology Among ims Ordinac to prote Chamberot Comme Technlogyresearch Reseesto prmote Fundsfar subcontracton Deliberatvecounci associations subcontractors upgading Industrystandads
Go EnvironmentPolludon control Environmentastandads Geenbelt Specidaldepredadon Subsidiesfor JaparDevelpment Bank W ordinanre Dlsposalof wastematter Technologyfor pollution interestpayments prevendon Outside Consumes Productstabilizadon Consum,eradvice City planng Homeowneestax Foodstuffscontrol HoushisLoan Industry ordinance Contracts Satetechnologies SpecialAccount Cofporation Design Worken Basiclabor law Supervisinglabor Housingpolides Specidaldepreciation Housingsupply WorkeresCfedit Union Enagy-efftdcnt
Bilateral Tradereguladons Voluntayrestricdons on ODA Dudes Tradeinsurance Export-importBank of Foreigninvestment exports WorldBan Importpromodon Investment Japan regulations Respectfairnes Jointdevelopment taxation insurance Industrialstriucture Raisinghuman capital Invatmentpromotion adjustment taxadon Abroad Multilateral GATT IMF
Source:Ono (I9921). ekLlangynhlaakurmz. Table 11-9.Policy Tools for CoordinatingPrivate-Sector Capital Investment
DirectRegulation IndirectGuidance SpecialLegislation Administrative IndustrialBase Taxation Subsidies Policy-based Guidance Finance
Location Investmentincentives - Preparelocation Landtax - Investment conditions incendves Investment Construction . Prepa social Landacquisition tax Subsidize Reduceinterest conditions costs capital reduction construction ineunedduring costs consbuction
Competitive Exempdonsfmm Facilitiesregulations - Duties conditions AntimonopolyLaw Jointaetivities
Fund Provisionsfor securing Fundmediation - Investmentcredit Financing prmcurement funds
Co Productprices Contmlrtes InterveneIn price - Indirecttax Price-support IndicatePrices fonnation Duties subsidies Revenues Demand Regulatedemand and Securedemand volume supply
Interest - - Grantsfor Low-intrst payingrixed financing intemest
Expendi:uresRepayments - - - Rqpayments overlong-term Tax . Reserves Specialdepreciation Loca tax reductionslexemptions
Source: Japan DevelopmentBank. used to coordinate private-sector capital investment have different effects on these investmnent considerations. 1) Special Legislation 2.48 Various industrial and regional-developmentlaws can be enacted to promote investment, and in most cases these laws can also capture the five other tools used to coordinate a policy measure. At the same time, special laws can contain provisionsto regulate the economic behavior of the private sector -- such as licensing and land-use regulations-- and as a policy tool it is the regulating function of special laws that is important. Accordingly, the advantages of special laws for promoting investment cannot be ascertained definitively. Yet the very enactment of special legislation means that the policy measure has been prioritized as a national objective. And because the support measures to be provided will assuredly be comprehensive, such laws are largely effective at promoting the development of targeted industries and areas in both tangible and intangible ways. During an industry's infancy or during regional take-off periods, for example, the priority allocation of resources has helped provide the conditions for the shift to autonomous development. Yet because the political process is used to enact the special legislation,the tendency is often to protect established, rather than newly developing, industries. Even when legislation is enacted to foster new industries, the tendency is to keep the protection in place over the long term. For that reason, enacting temporaryspecial legislation with a set time limit is preferable, because it will accommodate future revisions to policy. For example, after the Law on Temporary Measures for the Rationalization of Snall- and Medium-Sized Steel ShipbuildingIndustry (enacted in 1959) and the Law on TemporaryMeasures for the Stabilizationof the Metal Mining Industry (enacted in 1963) had achieved their projectedgoals, they were rescinded largely according to the original time limitations placed on them. In addition, even when temporary special legislationmust be extended to capture emerging policy considerationsand needs, both the essence of the law and its content are normally changed to a certain degree. For example, after the Law on Temporary Measures for the Promotion of the Machine Industry had achieved its original goal to reform the dual structure of the industry, it was then extended and revised in response to new national policy objectives to cope with trade liberalizationand to strengthen the intemationalcompetitiveness of the industry.
2) Administrative Guidance 2.49 Administrative guidance is provided both at the discretion of various government agencies and ministries according to their legislative mandate and in conjunction with their enforcement of certain basic laws, such as the Foreign Capital Law. In generaL when a certain industry is in its early stage of development,planning capital investment and coordinatingthe introduction of foreign technology facilitate the path toward autonomousdevelopment, as was evident with petrochemicals. However, when an industry has matured, such guidance can hinder its operational and developmental autonomy. Of course, administrative guidance can be advantageous even at this stage by reducing the impact of business fluctuations and strengthening international competitiveness, but it can also have negative consequences if, for instance, it interferes with pricing practices and competitiveconditions. 3) Industrial Strengthening 2.50 Public-sector investment itself can promote private capital investment by providing such infrastructure as roads, ports, and railroads. However, because public spending must be allocated according to principles of impartiality, the government cannot necessarily target independent projects. Actual capital investment by the government for strengthening the industrial base has continued to increase annually (Table II-10); in 1956, public spending on capital investment represented 1% of GNP, but by the 1960s it had reached 3% as the govenmnentbegan backing the Income Doubling Plan and other measures.
85 TableII-10. Trends in Investments for Strengtheningthe Industrial Base (billion yen) Year Roads Ports Waste Industrial Railways GrossInvetment As a % of Disposal Water GNP Facilities Facilities
1955 23 4 0 0 53 80 0.9 1960 198 24 1 1 116 339 2.1 1965 705 87 5 8 331 1,136 3.4 1970 1,275 185 4 10 402 1,876 2.5 1975 2,508 316 23 21 759 3,628 2.4 1980 4,756 580 66 23 1,259 6,684 2.8
Source:Komiya et al. (eds.), 1988
4) Taxation 2.51 Although special tax measures are often criticized on the grounds that they provide an unfair advantage, they are clearly effective at promoting investment. For example, by providing duty reductions and exemptions, special customs measures lower the costs of imported plant and equipment and thus construction costs. Yet they also interfere with the competitiveness of foreign products by protecting domestic industries. Domestic tax measures - a reduction in and exemption from such local taxes as land-acquisition taxes and fixed-assets taxes -- are fairly effective investment incentives. From the national tax perspective, a reduction in and exemption from indirect taxes helps promote investment by freeing up commodity pricing, while reserve funds and special depreciation promote investment by narrowing the range of expenditure items. For example, with rescrve funds, special expenditures can be deducted from income as cost in advance, thus promoting the accumulation of eamings and enhancing investment incentives. With special depreciation rates for the acquisition of special-purposeor region-specific plants and equipment, the ceiling of costs that can be deducted annually increases, thus reducing investment risk by shortening the period of investment recovery. Yet both policy tools cannot easily be targeted at special projects, and both are predicated on the existence of a sufficient base of revenue.
2.52 Special depreciation was a significantpolicy tool twice in particular during the postwar era (Figure n-3). For example, in 1960, the iron and steel and automobile industries benefited from large special depreciation rates. This period coincided with the iron and steel industry's 'second rationalization plan," in which large-scale, integrated steel factories were constructed in various regions along the coast; the period also coincided with an acceleration in investment in the automobile industry, when a system was established for mass-producing domestic automobiles. In addition, both industries had comparatively high profit rates during this period, enabling them to benefit even more from their special depreciation.In the late 1960s to early 1970s,the iron and steel and automobile industries again benefited heavily from special depreciation,-withthe construction of two steel factories in the ten million-ton class and extra-large-size docks, and with the rapid increase in automobile exports. For -Alindustries in 1970, the actal amount of special depreciation reached approximately :300 billion. Given that the effective tax rate for corporate enterprises in 1970 was approximately52%, special depreciationled to a net tax savings of V156 billion.
86 Figure E-3. Special Depreciation as a Prportion of Total Depreciation: Trends since 1955 so %c iron & Steel 45
40
35 33
30A I 3D' ~~~~~~~~26 25 t \ | 24.5 ,,-Shipbuilding 210A Alld 10I~~~~~I
15 200'\-__.-j*i '-..~ ' . Ci .! s
4510 - 5 60 65 70 75 80 40 Ch-cl
4ff5~ ~ 4
35- AutoMobiles 30
155 25-~~~~2 60 65 70 75 80
20 , % I
10 .
FAectical
55 60 65 70 75 80
Note: Proportionof specialdepreciation =Amount of specialdepredation /total depreciation
Source: KDmiyaet aL (eds.) 1988.
87 5) Subsidies 2.53 Because subsidies actually reduce capital investment amounts and expenses, they have a considerable guiding effect in the early period of economic development. Yet because they are allocated through the political process -- as with special legislation - they tend to favor existing industrial groups and in many cases create fiscal inflexibility. Moreover, as with subsidies for interest payments in the ocean-shipping industry, the conditions for subsidization include restrictions on dividends and the disposal of property; subsidizationmay thus limit the economic behavior of the private sector overall. Subsidies also cannot easily be targeted at individual projects, given equity considerations. Subsidies during the postwar period were targeted primarily at declining industries such as the coal industry and weakened ocean-shippingindustry, and were then expanded later to support the structural reform of small- and medium-size industries and textiles, and the developrnent of leading technologies (Table }-1i1).The share of industrial subsidies in the government's General Account peaked in approximately 1970, and then declined gradually since 1980.
Table 11-I1. Subsidies to Industry: Trends from 1955 to 1980
Year Ocean Coal Small Advanced Total As a % of Shipping Mining Business, Technologies Subsidiesto General Textiles,etc. Industry Account (billionyen) (billionyen) (billionyen) (billionyen) (billionyen) 1955 4 0 1 1 6 0.5 1960 2 6 3 1 12 0.6 1965 14 20 22 1 57 1.6 1970 15 79 52 8 154 1.9 1975 15 61 129 43 248 1.2 1980 10 49 244 35 338 0.8
Source: Komiya et al. (eds.) 1988.
6) Policy-Based Finance 2.54 Policy-based financing eases the availability of funds and, with its low interest rates, reduces construction costs; moreover, with its long terms, it reduces expenditure flows after facilities have been constructed. As discussed in-depth in Chapter I, policy-based finance is distinct from other policy tools along several dimensions: * It has the flexibilityto target individualprojects on a priority basis. * It can easily respond to changes in the economic environment and policy priorities and objectives. * It is not subject to the political process in targeting projects, and can thus select projects neutrally, without political pressure. For the same reason, its application is held accountableto equity considerations.
88 Table 11-12.Reductions in Interest Burden: A Comparisonof the Benefits of Policy-BasedFinance and Special Depreciation Schemesin Relationto Capital Investment
Manufacturing Ocean Electric
Total Transport Iron and Machinery Shipping Power Machinery Steel (%) (%) (%) (%) (%) (%) 1961-73
Reduction in Interest Burden by Policy-BasedFinance in 1.0 6.9 0.5 3.6 22.3 5.9 Relation to Capital Investrnent
Benefits from Special Depreciation Schenes in 0.95 1.3 1.4 1.4 7.2 0.36 Relation to Capital Investnent
Total 1.95 8.2 1.9 4.9 29.5 6.26
1974-80
Reductionin Interest Burden by Policy-BasedFinance in 1.6 6.4 1.6 2.6 ;7.0 2.8 Relationto Capital Investment
Benefits from Special DepreciationSchemes in 0.57 0.4 0.7 0.5 4.1 0.9 Relation to Capital Investment
Total 2.17 6.8 2.3 3.1 21.1 3.7
Note: Capital investmentincludes the acquisitionof land. Source: Komiya et al. (eds.), 1988.
89 * Given a similarbase of financialresources, policy-based finance can target more projectsthan can taxationor subsidies. * By supplyingfinancing in advance,it promotesprocuring funds and credit support throughthe market(its -pump-priiing"effect). * By targeting financing at projects that respond most closely to national policy objectives, it moves general private-sector investment toward desired policy outcomes(its "cow-bell"effect). *It continuesto constrainthe flow of expenditureseven after facilitiesare constructed. * Unliketaxation, it encouragesinvestnent for the futuredespite the currentexistence of an operatingdeficit. * Unlikesubsidies, it does not fundamentallylimit the economicbehavior of the private sector. * Becauserepayment is necessaryfor policy-basedfinance, it motivatesenterpises to executetheir projectsefficiently. At the sametime, proposalsfor businessprojects that wouldbe difficultto executeare excludedbeforehand. Thus, althoughit cannotdefinitively be assertedthat policy-basedfinance is the best policytooL it is clearly an indispensableelement of any mix of policy measures.Policy-based financing has consisently had more positive effects on reducing the costs to industry than has special depreiation (Table11-12). It has also yieldedconsiderable benefits in the area of capitalinvestmenl C. Select and Mixing Policy Tools 2.55 Because each policy tool has its own strengths and weaknesses, it is selected according to how effectivelyit can addressthe overridingnational policy objectives. Frequny, a combination of several policy tools is most applicable. The industial rationalizationpolicies of the 1950s, often referredto as the "industrialpolicy departmentstore," are a primeillustraion of how variouspolicy tools are selectedand applied. 2-56 The central forum for deliberatingindustrial policy in the early 1950swas the Industrial Rationaliztion Councilunder the Law for the EstabHlishmentof the Ministryof IntemnationalTrade and Industry.The Councilhad beenestablished in 1951 as an auxiliaryorgan to M1TLIn addition to a centralcommittee, the Councilconsisted of 20 sectionalcommittees divided according to type of industryand region,and 65 branchcommittees. The Council immediately entered into a vigorous debate about modernizingindustrial facilities and improvingmanagerial efficiency. In 1952, the centralcommittee issued a reportthat proposedthe followingpolicy measures: *Promoting capital accumulation among firms. * Securingneeded funds forfirms. *Lowering interest rates on loans. * Reducingimport duties on machineryand facilitiesequipment * Reducingprices for importedraw materials. * Improvingthe qualityof raw materials. * Promotingthe developmentof domesticresources. * Cooperatingin the developmentof SoutheastAsia.
90 Table II-13. Selected Reports Issued by dte Industrial RationalizationCouncil
Date Titleof Report Committee Jul. 1952 RationalizationPolicies for Japan's CentralCommittee Industries(Second Report) Jan. 1953 The Acceptanceof UniversityGraduates by GeneralAffairs Comnmittee Industry Sep. 1953 RationalizationPolicies for Japan's CentralCommittee Industries(Third Report) Sep. 1953 Reporton ProcessControl rieneralAffairs Committee Feb. 1954 The Acceptanceof HigbSchool Graduates ManagementCommittee by Industry Apr. 1954 Job Pay RateSystems Based on Job ManagementComnmittee Evaluations Mar. 1955 A Reportfrom the hdustrial Facilities IndustrialFacilifies Committee Committee Jun. 1956 The Industrial-EducAtionalCooperafion ManagpemntConmittee System Dec. 1956 The Oudookfor Long-TermEnergy EnergyCommittee Dmand and Supply Mar. 1957 RationalizingShop Floor Management ManagementCommittee Stnucus Mar. 1957 On FaciHtiesPlacement ManagementCommittee Dec. 1957 Fute OperatingPolicies of the Industrial CentralCommittee RationaliationCouncil Jun. 1958 CapitalInvestment Plan IndustrialFund Conunitte Dec. 1958 CapitalFunding for PrioritySectors Indusil FundCommittee Mar. 1959 The Managementof ElectricalPower ManagementCommittee Jan. 1960 The CurrentState and Problemsof AutomationCommittee Automation Sep. 1960 ProfitManagement through the Division ManagementCommittee System
Source:Ministry of InternationalTrade and Industry (1992), rsushoSangyo Seisakushi.
91 * Providing transitional priority measures for the domestic production of select products. * Revising the AntimonopolyLaw. 2.57 Deliberations continued even after the committee submitted its report to MMTI.Throughout 1953, ea-h sectional committee and branch committee compiled individual reports that expounded on a broad range of issues, including corporate taxes, customs duties, special depreciation, assets revaluation, budgets, subsidies, foreign currency loans, JDB and EIBJ funding, export financing, interest rates, capital investment, raw materials, managerialmethods, and cooperation among firms. In 1953, the Council issued its Third Report on rationalization policies for Japan's industries; by 1958, the Council had been reconfigured into new committees specific to such areas as industrial structure, industrial organization, industry-related facilities, markets, management, energy, individual industries, small- and medium-size industries and so forth, and these new committees continued to carry out concrete policy deliberations. By 1960, the Council had submitted more than 40 reports on a range of policy measures (Table II-13 lists some of the major reports). 2.58 A variety of policy tools have actually been used to address proposed pclicies, but they effectively encompass the six policy tools listed in section 3.A. In short, fairly detailed policy measures have been applied, as discussed in greater depth in the remainderof this section. 1) Special Legislation: Law for the Promotion of Industrial Rationalization 2.59 The Law for the Promotion of Industrial Rationalization served as the basis for a series of industrial rationalization policies in the 1950s and was itself modeled after Mr7ITs Bill for the Modernizationof Industrial Machinery and Facilities (1950). This bill included special depreciation schemes, exemptions from the assets tax, import duty exemptions, lending for machinery and facilities, and subsidies. Administrative guidance for scrapping superannuated machinery and the creation of a special account for supporting that guidance were also considered. In 1951, after having received the report from the Industrial Rationalization Council, MTI drew up the Bill Concerning the Promotion of Industrial Rationalization, which included additional measures for improving technology,refomiing basic units, and strengthenin: :he industrial base. After consulting with Ministry of Finance officials and other relevant parties, MlTI revised the draft bilL and in 1952, it was enacted as the Law for the Promotion of Industrial Rationalization.The law consists of five major items, as listed below. Included in the list are items that had previously been enforced as administrative measures. These items were given a legal basis, and obtained priority status when this legislation was enacted.
• Technological improvement - subsidies, lending for state-owned machinery and facilities, special depreciation, and reductions in and exemptions from fixed-assets taxes for machineryand experinental research facilities. * Machinery andfacilities -sniin-specialdepreciation and reductions in and exemptions from fixed-assetstaxes. * Indastrial-base strwengghening- roads, ports, and so fordt.
*Improved basic units - publicizing targets and so forth. * Diagnosis of small- and medium-size industries 2) Administrative Guidance 2.60 In contrast to the Law for the Promotion of Industrial Rationalization, which targeted industry as a whole and crossed industrial boundaries, administrative guidance sought primarily to coordinate individual industries. Classic examples of administrative guidance are the facilities rationalization of the iron and steel industry and the adjustment of capital investment in the
92 petrochemical industry. In 1955, MIT1 established the Basic Policy for the Rationalization of Iron and Steel, which included administrativeguidance for the following: * Modemizing facilities and scrapping superannuatedfacilities. * Strengtheningindustrial groups and adjustingcapital investment. * Coordinating production according to product category and revitalizing depressed markets. * Coordinatingexports, imports, and inventories. * Supportingjoint purchasesof raw materials. * Improving financial positions. In the petrochemical industry in the same year, MMTIdrew up the General Plan for Fostering the Petrochemical Industry, which included administrativeguidance for the following: * Selecting eligible firms. * Licensing and planning for capital investmentaccording to product type. * Concentrating production within product categories. * Establishingthe minimumscale for facilities. * Avoidingoverlap in the introductionof foreign technology. The two sets of administrative guidance had incredible binding power over the individual firms to which they were directed. Moreover, because MI was also responsiblefor enforcing the licensing of facilities and recommendingfirms for 1DB fmancing, its aims were generally realized. 3-i Strengthening the Industrial Base 2.61 Measures for strengthening the industrial base included public-sector investment in the infrstructure, the promotion of exports, and product quality and productivity controls. To promote exports, MI establishedthe following: * The Export Credits Guarantee System (1950). * The Machinery Export Association (1952). * The Japan External Trade Organization (JETRO) (1954). * The Japan Plant Association (1955). * MI also sponsored several intemational trade fairs. To promote product quality and productivity controls, MITI did the folowing: * Created the Japan Industrial Standards(JIS) (1949). * Introduced quality control techniques (QC circles and so on). * Establishedthe Japan Business EfficiencyAssociation (1949). . Establishedthe Japan ProductivityCenter (1955).
93 In addition to these measures, MITMestablished a diagnostic system as part of the policy to foster small- and medium-size industriesunder the Law for the Promotion of Industrial Rationalization.
4) Taxation 2.62 The Industrial RationalizationCouncil made the following tax-related proposals in its first report submitted in 1951: * To reduce and provide exemption from import duties and fixed-assets taxes for modemizationand research facilities. * To introduce a special depreciation system for modemization and research facilities in which reserves related to rationalizationcould be deducted as costs. * To conduct assets revaluation.
At the time, these measures were referred to as "priority tax reductions," but they all were part of the special tax measures implemented under a series of tax reforms beginning with the recommendations of the Shoup mission in 1950. The actual amount of these tax reductions in the 1950s was approximatelyV480 billion, a fairly high level. The tax reform included the following policy measures: • A reduction in and exemption from mport duties and the fired-assets tax: Important machinery, difficult to produce domestically (361 machine types), were exempted from import duties, while the fixed-assets taxes of importantresearch facilities were reduced. • Tar exemptons for importont commodities. Exemptions from corporate income taxes were granted to firms that handled important industrial products (25 items, including syntheticfibers and petrochemical products). • Special tax deductions for export income and exemptions for dividend income. Tax exemptions were granted for income related to select exports and dividend income earned from an increase in capital stock. • Special dep''ciation. Companies were allowed an additional 50% off beyond the normal depreciationfor the first three years for the purchase of importantmachinery (1,432 machine types; designated in 1951); companies that acquired machines for rationalizationwere allowed a 50% depreciation for the first year (52 business types and 467 machine types; designated in 1952); companies that purchased machinery for experimental research could depreciate it for three years (designated in 1952); and a 50% depreciation for the first year was permitted for the purchase of machinerythat applied new technologies (designatedin 1958). * Reserteftunds. The amount of reserves for credit losses was increased(195 1). and the ceiling was raised on reserves to cover price fluctuations (1954); reserves for retirement allowance were established (1951). * Assets revaluaton. Depreciation was increased as the book value of fixed assets was raised three times (1950-54, no tax). O) Subsidies 2.63 Subsidies were provided primarily for research and development and the importation of machine tools. In the period after 1950, R&D subsidies were successively institutionalized,and a total of W4.6billion in subsidies (the aggregate for the period 1953-60) were granted for
94 industrializationtesting, applied research, and the trial manufacture of machinery.When the correspondingprivate-sector burden is included,a total of approximatelyV20 billion was invested. The costs of superior-quality, foreign-made machinery were subsidized by 50%, and, when this practicewas institutionalizedin 1952,it led to a remarkableincrease in the accuracyand efficiency of the domesticmachine tools sector. 6) Policy-based Finance 2.64 JDB was a major policy-basedfinancing entity for industrialrationalization during the period. Establishedin 1951 as a governmentinstitution for fiscal investmentand loans, JDB provideda considerableamount in loansto the electricpower, ocean shipping,iron and steel, coal mining,textile, chemical,and machineryindustries throughout the 1950s.In other words, under conditionsof absolutelyinsufficient capital, JDB helped supplementthe amountof funds available to basic industrieswhile also mobilizingmarket cooperationto provide additional funding for targeted projects (its pump-primingeffect). Moreover,by targeting financing at projects that respondedmost closely to policyobjectives, and by providinglow-interest, long-tern loans, JDB was supportingthe rationalizationefforts of numerousindustries.
95 ChapterIll. THE FINANCIALSYSTEM IN POSTWARJAPAN: ENVIRONMENT
1. The Fiscal and Monetary Environment in the Postwar Period -- 1945 to the Mid- 1960s 3.1 Japan's financial system as it evolved in the postwar period from economic reconstruction to high growth encompasses four broad aspects of the surrounding environment: fiscal and monetary affairs; the status of private financial institutions; the state of the capital market; and the position of public finances. A. Fiscal and Monetary Affairs (Table III-1) 3.2 Fiscal and monetary affairs in postwar Japan can best be illustrated by dividing the period into three time frames: reconstruction (1945-1949), preparation for economic independence (1950- 1954), and high growth (1955-1965). What we refer to here as the high-growth period is the approximatelyten years after 1955 that captures the early period of high growth.
1) Reconstruction Period (1945-1949) 3.3 The end of the war in August 1945 provided Japan an opportunityto effect broad reforns in various aspects of national life, including the country's political, economic, social, labor, and educational systems. At the end of the war, the damage to industrial production facilities was severe, substantially reducing plant capacity, especially for consumer goods. The hope was that restoring these facilities would help restart production activities. Yet the sudden increase in purchasing power from the large-scale distribution of temporary military expenses, such as compensation to veterans, brought about precipitous inflation. Thus, the govemment's two most important policy objectives were to support the recovery of production activities and to control inflation.
3.4 To taclde these objectives, the govemrnmentused stop-gap remedies to implementemergency financial measures in February 1946, including a freeze on deposits and bank notes; yet these measures produced only temporary effects. In October 1946, the government sought to rebuild public finances by discontinuing war-time indemnities, such as military compensation. Nevertheless, inflation continued to skyrocket as the fiscal deficit rose to a staggering amount, due primarily to the increased expenses associated with termninatingthe war (Occupationexpenses) and to the conspicuous lack of goods and because on top of this, Bank of Japan credits were being used to cover these expenses. 3.5 To break out of this crisis, the government established a new price structure in January 1947, in which it introduced official prices, while simultaneously adopting the Priority Production System, whose policy thrust was to increase the production of coal and iron and steel. In concert with these measures from the financial side, the Reconstruction Finance Bank (RFB) was also established in January of that year to supply emergency funds to basic industries. In March 1947, "standing rules for loans by financial institutions" were publicly proclaimed, imposing loan restrictions on private-sector finance as well.2 0 These regulations sought to restrain Bank of Japan lending by restricting the loans of private financial institutions in principle to within the bounds of their accumulated assets, and to categorize types of industries by whether they needed equipment funds or working capital funds, thereby directing loans from private financial institutions primarily to the highest priority areas (Table IH-2). These countermeasures also failed to get at the root of inflation - the fiscal deficit. Moreover, since the procurement of funds for the RFB (established in January 1947) depended largely on Bank of Japan credit, these countermeasures only exacerbated inflation.
96 Table M1I. Formationof the Postwar Financial System PrivateFinance Policy-BuedFinancld Inmtlutlos Ilb Economyin GenrL ad Othefs 1945 Aug.: Endofdhe war 1946 Feb.: EmesgencyFinania Maures Ordinance implemented OCL: Financial Insttutions' Reconstruction and Reorgaization Law enacted 1947 Mar.: Proclamationof he Securities and Jan.: The ReconstructionFinance Mar.: Proclamdon of Exchaoe Law Bank establisbed the Fnance Law Dec.: Poclamation of the Temporary Intest RatcsAdjustment Law 1948 July, Banks cxempted from the Elimination Dec.: Announcemt of of Excessive Concenrion of the NIne EconomicPower Principls for Trust companiesconveted into trust Ecooniic banks Stabilization (Meforceenct of the Dodge Line) 1949 May: Securities Exchange reopened June: The People'sFinance Apr.: Indtion of a Corporation established singl excbha ratc Dec.: Proclamationof the Fordgn Exchange and ForeignTrade Control Law 1950 Apr.: The IndustrialBank of Japan. The June: The HousingLoan Corporation June: Outbreakof tbe Nippon Kangyo Bank. and The - established KoreanWar HokkaidoTakushoku Bank converded Dec.: The Expott Bankof Japap into ordinay banks established(rnamed the Export-ImportBank of Japan May. Proclm ation of the Law Concerning in April 1952) Foreign Investment 19SI June: Sogo Bank Law and Shinldn Bank Law Apr.:Tmst FundBurau FundLaw enacted enacted SecuridesInvestment Trust Law enacted The Japan DevelopmentBank established 192 June: Loan Trust Law enacted Jan.: The Reconstrction Finance Apr.: Peace Treaty Bank dissolved signed into effect Dec--Long-trm Cre(dit Bank Law enacted The Aug.: Japanjoined the IndustrialBank of Japanconvated IMF into a long-termcredit bank 1953 Apr.:The Agriculture. Forestry and Fisheries Fiance Corporation established SepL:'he SmallBusiness Fanc Corporation established 1954 Apr.: ForeignExchange Bank Law encted 1955 Sept: Japanjoined GATr 1956 Apr.: Secondarybond market opened July: The HokkaidoDevelopmen Corporation established (renamedthe Hokkaidoand Tohoku Development Corporationin April 1957) 1957 June: The FinanceCorporation for Municipal Enterprises established 1958 July: lTe SmallBusiness Credit Insurance Coporation established 1961 Jan: Inaugurationof Bond Invesmnot Trusts 1964 Apr.: Japan became an Article VIDM membernation; Japanioined OECD
Sources:Bank of Japan.Institute for Monetaryand EcononicStudies (1988), N ihonMlau n=vo. Teashi (1982). Nihon no Keizai Hatmento Kiny=r
.97 Table m-2. Designated IndustrialSectors Based on Priority Ranking for IndustrialFund Loans
Numberof Designated IndustrialSectors for:
Priority Rank EquipmentFunds Wo*kingCapital Loan Sham b Sectors
A-1 9 9 5.3 Coal. brown coal. iron Manufacturing,steel manufacturing,and fertilizer Semi A-1 - - 9.2
A-2 60 146 55.8 Metal and mining, cotton fabric, and so forth
B 253 229 23.7 Fields not included in A-I. Semi A-1, A-2, or A-c
C 136 76 5.9 Silk thread, steel furniture. cosmetics, and so forth
Total 460 460 100.0 a. Targets superior-quality bills, such as stamp bills and commercialbills eligible for rediscountingby the Bank of Japan. The rankingof operating funds is treated the same as that of the Bank of Japan. b. Compositionratio of total net inceases in loans on a per-rank basis between April and December 1947. Sourc: Bank of Japan (1985),Nihon Cinko Hyakuen ShivDai Kan.
3.6 In response, the Allied General Headquars (GHQ) announced in December 1948 the Nime Principles for Economic Stabilization," which sought to stabilize inflation in a single stroke. Subsequently, in early 1949, the so-called Dodge Line was enforced, finally bringing the rampant inflation of several years to a full stop. The Dodge Line consisted primarily of disinflationary policies; it established a single exchange rate (1 U.S. dollar equaled 360 yen), suspended RFB loans, and enforced surplus public finance, which entailed increasing taxes and reducing and abolishing such benefits as price-support subsidies. When RFB loans were suspended, the Assistance Goods Fund Special Account was established (sometimes referred as the Counterpart Fund) to channel funds to industry.
2) Prepara n for Economic Indendence (1950-1954) 3.7 While the outbreak of the Korean War in June 1950 brought a wave of "special demands" that were fortuitous for Japan, the economic recession that followed the suspension of hostilities led to demands for rationalizing industry in order to attain economic independence. 3.8 Although the Dodge Line had eradicated postwar inflation, the price of goods again climbed sharply with the onset of the KoreanWar. In the immediatepostwar inflationary period, increases in the price of consumer goods were severe, but the profitability of producer goods was supported through subsidies. As the war progressed, the price structure changed completely; wholesale prices rose precipitously (a 67.3% increase from 1949 to 1952), surpassing inceases in consumer prices (which increased by 13.9% from 1949 to 1952). In the presence of a single foreign-exchange rate system, these conditions significantly diminished Japan's international competitiveness.In order to overcome these conditions,the govenment drew up industrialrationalization policies.
98 3.9 The core of industry rationalizationwas investment for modernizingfacilities. The goal was to renovate facilities and cut costs, thereby strengthening international competitiveness. In contrast to priority production, which sought to raise the production level of the entire economy by expanding production reciprocally in two large industrial sectors -- coal and iron and steel -- industrial rationalization sought to heighten the competitiveness of entire industries by reciprocally cutting back costs in both sectors. In August 1950, the Cabinet adopted Measures for Rationalizing the Iron and Steel and Coal Mining Industries: in February 1951, the Industrial Rationalization Council, an advisory committee to the MITI, issued its report on Methods for Rationalizing Our Industries; and in March 1952, the Industry RationalizationPromotion Law was enacted. 3.10 One of the most important necessities associated with modernizing facilities was to secure long-term funds for capital investment. Yet, unlike the high-growth period that followed, the household savings rate in this period was weak, and the issue was how these small savings could be mobilized.
3.11 Thus, in the early 1950s, the government established policy-based financial institutions, such as JDB, which used the Assistance Goods Fund and funds from fiscal investmentsand loans to supply long-term funds to industrial projects. In the private sector as well, the framework for long-term finance was established, based on such products as bank debentures, loan trusts, and investment trusts. These developments supported the funds-related aspects of this period's industrial rationalization,and also gave shape to the financial system of the high-growth period. 3) High Growth Period (1955-1965) 3.12 Throughout this 10-year period, Japan's economy continued to experience high growth, led by capital investnent and exports. However, due to the overheating of business conditions, Japan sometimes faced a foreign currency reserve crisis, prompting the govemrnmentto enforce monetary tightening. Serving as a check on the overheating of business conditions during the high-growth period was an international rule which required that nations under the IMF system seek an equilibrium in their international balance of payments. One method for breaking through the ceiling imposed by the international balance of payments is introducing foreign capital into the domestic economy, and examples of countries that have used foreign capital to finance their economic development abound. Yet, Japan's economy was growing without relying on foreign capital -- due in part to an increase in domestic savings during this period, and in part to the fact that, under the principle of balanced public finances, government issuance of foreign bonds was unthinkable. In addition, private-sector corporations had an aversion to corporate control by foreign capital. The Law Concerning Foreign Capital was used primarily to introduce technology into Japan; it was used only in exceptional circumstances to introduce foreign capital.2 ' 3.13 After a successful reconstruction period and from 1955 on, the goal of Japan was to catch up with the advanced industrial countries - the United States and those in Europe. This goal was the impetus behind heavy and chemical industrialization and the technological modernization of facilities. Long-term credit banks and trust banks that could procure long-term funds specialized in supplying long-term funding, especially funds for equipment. But these institutions were not the sole funding sources. Other financial institutions, even those such as city banks that did not have access to long-term funds, actively supplied long-term equipment funds because the shape of the interest rate structure under regulated interest rates guaranteed a normal yield curve, thus negating concem about interest-rate risks. In addition, the lending supplied somewhat passively by the Bank of Japan provided systemic support to allow these institutions to assume the liquidity risks that accompany mismatching maturity periods. 3.14 An additional but important point is that tbe stringent control of foreign exchange prevented overseas influences from disturbing these vz.npusregulations. 2 2
99 B. The Status of Private FinanmealInstitutions (Table III-3) 3.15 The discontinuationof wartimeindemnities after the war had a severelyadverse effect on the qualityof the assets of privatefinancial institutions. At the same time, the outbreakof severe inflationafter the war acceleratedthe declinein the valueof deposits,leaving each type of financial institutionto start accumulatingassets fromscratch. However, in contrastto businesscorporations, which suffered lar;c and pervasive organizationaleffects when the Eliminationof Excessive Concentrationof EconomicPower Law was enacted and zaibatsuwere dismantled after the war, the positionof banksheightened because they wereexempt from partition.This factoris also one of the organizationalelements that explainswhy in the ensuinghigh-growth period industrial funds were suppliedthrough indirect financing from banks. 3.16 Of the commercialbanks, the suspensionof new loans from RFB (1949)forced a rapid increase in demand for funds from city banks, and their loans increased;yet they continued to dependon borrowingsfrom the Bankof Japan.Thus, the ratioof loansto depositsat city banksrose conspicuously,giving rise to the overloan"structure (Table Efl-4).23 Conversely, the depositsand loansof regionalbanks increasedwithout an accompanyingdeterioration in their fundingposition. The performancewas supported by the vigorof agriculture,forestry, and fisheriesas they increased their productionto respondto the scarcityof foodstuffs. 3.17 The specialbanks and specialfinancial institutions that held importantpositions in financial circles before the war became the targetsof Allied democratizationpolicies. In September 1945, overseas banks were abolished,such as the Korean Bank and the Taiwan Bank. In 1947 the YokohamaSpecies Bank wasreconfigured into the Bankof Tokyo,which became an ordinarybank because it had been named as a closed institution (though in 1954 it was converted into a specializedforeign-exchange bank under the ForeignExchange Bank Law). The Nippon Kangyo Bankand the HokkaidoTakushoku Bank also becameordinary banks, as did the IndustrialBank of Japan(which also was reconfiguredlater into a long-termcredit bank). 3.18 The Korean War rapidly increasedthe demand for equipment funds to meet special requests and to support exports for basic industries,such as the electricpower and heavy and chemicalindustries. In June 1952,the Long-TermCredit BankLaw and the LoanTrust Law were enactedto cope with this increaseddemand. But their purposewas also to establishinstitutions for long-termcredit these banks were able to procurelong-term (3- to 5-year maturity)funds with bank debentures(which are absent in ordinarybanks), trust banks were given powerfulmeans to absorb funds in the form of loan trusts, and each institutioncamne to shoulderits particularrole in supplyinglong-term funds. 3.19 The postwarperiod broughtsignificant changes to other privatefinancial institutions as well. In the field of small-and medium-sizebusiness financing, the SogoBank Law was enactedin 1951to modernizethe existng mutualloan companies, and to convertthese mutualloan companies into Sogo banks. Among the credit cooperatives, those most closely resembling financial institutionsbecame Shinldn banks (under the ShinkinBank Law of 1951).In the field of agriculture and forestry financing, the enactment of the Agriculture CooperativesLaw in 1947 and the re-inaugurationof NorinchukinBank in 1948 establishedfmancial institutions affiliated with the cooperativessystem. Insurancecompanies were dealt a tremendousblow by both the war and inflation(losses on munitionscompany investments and lossesof overseasassets). In particular,the severeimpact on the life insuranceindustry left many life insurancecompanies with no optionbut to dissolveand then to reorganizeand continuetheir businessby establishingsecond companies.
100 Table 113. Ogaaizaiaen Chait otPdvaL Flarncial rutlluthau (1965) -Cit lanu -F;; _ ~~~~~~~~~~~~~~~~~~~Regbnal B&nks
FHIri~ncW tzulUudera r FctdpgoEuhdian SpedatlLedForclgn Ezdngc Buank
qLenngTermhullamld fLidhtlOf Len5l-TermCnditlanks
_Sog, Bns (Mutul L1a A SavingsBank) ZaWfen B nk L Swinn Banks SpWeeizedFLtwxl hsJltleom -fA FbIneljl lMlLbao for SmunBwinez .la.- nal Fgrdutio of nedk Coop_,dwo
iivas -itNa110NaFcdeto eatves Odl Aoct L Lbor Cedi Assdatons ShakoChukin Bank
Arku Ki^ tnttih y erd | NorMCbuln Bank 1 .Ciledit FWdulaonofAgieultwal Coowativa. 0 L^rtAp "icuitwaloLptulw CreditFedetakr of Fiaay Coopntvu
_nvxancoconwulW U IrauraK Conypane Non-UfaInsewam COntee
Call MoneyBrmkas SeawilyFWANeCmnpyal _ Seo9w9U ConoSdae
SoutmeBankalapllo(1969), Wagl(uniNl(oLnyueloo (IAo nsFlkuneIlSystem). Tablem-4. Overloan Conditions LoanRatio a Bankof JapanBorrowint Ratio b End of Year AllBanks City Banks AllBanks City Banks 1945 73 94 22 29 1946 95 124 19 28 1947 71 83 9 14 1948 80 85 9 13 1949 92 98 10 13 1950 102 112 14 19 1951 108 124 17 25 1952 104 116 12 18 1953 103 114 13 19 1954 97 105 8 13 1955 89 93 2 3 1956 91 96 2 5 1957 98 107 10 16 1958 94 101 5 9 1959 91 98 4 7 1960 91 97 5 8 1961 96 103 11 18 1962 96 105 9 16 1963 96 102 7 12 1964 96 104 5 9 1965 93 99 5 9
a. LoanRatio=Loans+ForeignExchangeAccount x 100 Acal Deposits+ BondIssuance b- BOJ BorrowingRatio=BorrowingsfromBOJ +ForeignExchangeAccgunt x 100 ActualDeposits + Bond Issuance+ Own Capital + Borrowingsfrom BOJ + ForeignExchange Account Soue: Bank of Japan (1985 ), NihonGinko HyakunenShi. Dai 5 Kan.
3.20 To highlight developments from the beginning of the high-growth period, the demand for equipment funds flourished among the heavy and chenical industies, and city banks, which were their main transaction partners, fulfilled a financing leadership role during the period. The long-term credit banks and trust banks greatly increased their long-term loans to large corporations, and their managerial stability was achieved. The handicap on their fund-receiving side - that is, because these institutions have only a few branches - was compensated for by the underwriting of their bank debentures by other banks, as well as by the sales of those debentures by securities firms. During the high-growth period, life insurance companies began gradually to recover their status, which had declined during the postwar inflation period, and worked to consolidate their business by targeting corporate pensions. On the fund operations side, they sought actively to provide long-termn loans in addition to investment in stocks and bonds. They began to pursue lending in part because, due to the regulated low yields on corporate bonds, loans were more attractive than securities investments, and in part because loans helped promote insurance policy subscription among loan recipients.
102 C. The Status of the Capital Market 3.21 In line with its basic policy of economicdemocratization, GHQ came up with a two-pillar approach for reconstructingthe financial system -- to use financial institutionsfor long-term finance,and financialinstitutions for short-termfinance. At the root of this plan was the idea of transplantingto Japan the financial systemestablished in the United Statesduring the 1930s.In other words,short-termn finance would be shoulderedby commercialbanks, and long-termfinance would be shoulderedprimarily by securitiesfirms, with the developmentof a capital market consistingof a stockmarket and a corporatebond market. 3.22 Thisconcept took concreteforn withthe enactmentof the Securitiesand ExchangeLaw in 1947.The principlebehind the law was the separationof securitiesand banking,and it sought to support developingboth a new issue marketand a secondarymarket. Furthermnore, in 1949 the SecuritiesExchange was reopened.
3.23 Despitethis policyconcept, actual financial conditions in the reconstructionperiod differed substantially from the U.S. model. Given that capital accumulationin the U.S. model was sufficientlyadvanced, as was the formationof investmentfunds, all the conditionswere in place for developing the collection and allocation functions of funds sufficientlythrough interest-rate movementsin the financialmarket. Moreover, the financialmarket was configured whereby both the long- and short-termmarkets functioned interactively. Yet, in postwarJapan, the conditionsto support a U.S.-typefinancial structure were not in place. First, excessiveinflation postponed the formnationof savings,mroreover, low-level income became so pervasivethat it curtailedthe scale of savings overall, and it was impossiblefor the general public to reduce risks by diversifying investment.For these reasons,the investmentfunds of the generalpublic were not concentratedin the capitalmnarket. Second, banks, which had servedas the nucleusof the financialstructure since before the war, were reconstructedand reorganizedbefore other industrieswere, which led to the near totalabsorption of savings. 3.24 In the bond marketjust after the war, the main bondsissued were govemment bonds used to pay for the nationalfiscal deficit and RFB bondsfor industrialfunds, both of whichwere absorbed largely through Bank of Japan underwriting.Corporate bonds were not issued regularly by the private sectoruntil after 1949.Since onlyfinancial institutions were able to absorbcorporate bonds at that time, purchasesof governmentbonds by the Bank of Japan using "conditionaloperations," and the activationof preferentialfinancial measures for corporatebond collateral,created in June 1949 an environment for supplying funds to private financial institutions and for absorbing corporate bonds. In this way, corporatebonds were absorbed almost solely by banks and other financial institutions,and the marketwas actuallybeing controlledby the Bank of Japan and the commissionedbanks that deternminedthe terms of bond issuanceand the quantityof bonds issued each month.Under these conditions,bonds could be issued only to the electricpower companies and majorcorporations whose scale was largeand financialratios weresound. But these corporate bonds were issued under restrictionson the interestrate and the amountof the bond, and so in realitythey wereactually modified loans. 3.25 As the high-growth period unfolded, progress was being made toward systemic improvements;the secondarybond marketwas established in April 1956,bond investmenttrusts in January 1961,and the second sectionof the stock marketat the Tokyo Stock Exchangeand two other securitiesexchanges in Octoberof that same year. Around 1960,an investmenttrust boom attracted generalinvestors, and with this opportunitythe securitiesmarket exhibited much more vigor.Nevertheless, after the monetarycontraction of July 1961,and becausestock prices collapsed and interestin stock tradingwaned, the financialauthorities began coordinating capital increases in January 1962 and even suspendedtrading on the secondary bond market. Moreover,with the secondary bond market also subject to interest-rate regulations, the tightening of monetary conditions created a mismatch between demand and supply, revealing the very incompletely equippedstate of the secondarymarket. Moreover, the securitiesmarket continued to slump,until runningheadlong into the securitiesdepression in 1965.At that point,a seriesof countermeasures
103 became necessary, including switching from a registration system to a license system for securities tradersand dealers (under the Revision of the Securities and Exchange Law in October 1965),and having the Bank of Japan make special loans available for some of the securities companies. 3.26 In sum, up through the high-growth period, Japan's capital market made systemic progress but did not develop fully, in that quantitative and qualitative regulations were in effect in both the new-issue and the secondary markets. Two factors underlie this capital-marketclimate: - Actual financial administrationduring this period relied on interest-rateregulations and regulations that segmented the business fields of financial institutions to support the discretionary allocation of funds using indirect financing through banks; in principle, these methods could not easily accommodate developing a capital market premised on a fundamentally free-marketprice structure. * Until the latter half of the 1960s, the principle behind Japan's fiscal policy was not to issue government bonds. This meant that a deep and wide govemment bond market could not be developed,thus adversely affecting efforts to develop the capital market overall. D. The Position of Public Finmnce 3.27 Fiscal expenditures played a positive role for a brief period after the war by awakening macroeconomic demand. In FY 1946 about 20% of the General Account budget was allocated to industrial economic expenses, most of which was used to compensate banks for losses (Financial Institutions' ReconstructionCompensation Funds) when wartime indemnities were discontinued. In 1947, fiscal funds began to be invested in the so-called Priority Production System, which was to rebuild the basic industries, primarily coal and iron and steel. These funds were used by the national treasury as price-support subsidies to compensate for differences between the official prices set by the government and actual production costs. Since deficits of 30% to 40% of total expenses were emerging among such basic industries as iron and steel, coal, and ammonium sulfate, price-support subsidies also skyrocketed,capturing 13% of the General Account expenditures in FY 1947, and as much as 30% in FY 1949. Thus, immediately after the war, the function of Japan's public finances was to supply basic industries with funds procured through taxes from the nation's citizens. 3.28 However, this role of public finance changed drastically after 1949, when the "super-balanced public finance" element of the Dodge Line was enforced. Needless to say, the immediate aim of the Dodge Line was to get inflation under control, but its enforcement also determined the fundamental direction of the fiscal and monetary policies that supported high growth. 3.29 Public finance during the high-growth period was less restricted by policy intervention to supply funds directly to strategic industries. Public finance was used to develop the social infrastructure, adjust the industrial structutr of the declining industries that accompanied high growth, and assist underdeveloped regions. Funds to growth industries were appropriated from the savings of the household sector through financial institutions,and this includes policy-based finance using fiscal investments and loans. From a macroeconomicperspective, the drain of funds caused by the flourishing capital investment demands of corporations was sufficiently plugged with the savings of the household sector, intermediated through financial institutions; and since the public- finance sector in Japan at that time was not a deficit sector, it did not crowd out or impose an excessive burden on the private sector. Thus, savings could be converted smoothlyinto investment.
3.30 The switch to super-balanced public finances through the Dodge Line essentially held steady up to the mid-1960s - at the least, the General Account budget was held to the balanced budget principle. The govemment was able to maintain balanced public finances primarily because, even with planned increases in public investments, social security expenses and defense expenses imposed little burden on Treasury expenditures.At the time, social security still centered on medical treatment, and its structure was such that the share of expenditures for public-aid and annuity-
104 insurance programs was small; and defense expenditures had declined given the international environment surrounding Japan during the high growth period.2 4
2. The Formation of the Postwar Financial System 3.31 The postwar financial system was formed between the end of the 1940s and about 1955; it gave rise to the basic framework of the financial system during the high-growth period. The evolution of the financial system was determninedby three basic factors: the historical conditions underlying the formation of the financial system; the special characteristics of the postwar financial system that helped shape its policy orientation; and the evolution of policy-based financial institutions in the postwar financial climate. A. Preconditions for the Formation of the Financial System 1I)The Depreciation of Financial Assets 3.32 Severe inflation during and immediately after the war reduced the real value of financial assets substantially. From 1940 to 1950, the ratio of financial assets to GNP declined from 2.17 to 0.51. The share of time deposits among total bank deposits exhibited a similar trend, sinking rapidly to levels as lcw as 14.5% in 1948. This ratio did not return to its pre-war level of 50% until after 1960 (Table 111-5),implying that during the reconstruction period the supply of funds was still for the remarkably short-term. Inflation brought about a significant change in the distribution of assets. Because many wealthy individualslost their wealth after the war, asset levels were low, and assets were distributed more broadly among the public.
Table m-5. Trends in the CompositionRatio of Time Deposits
YearEnd ShareofTimeDeposits of Shareof TimeDeposits of Sbareof Long-Term All BankDeposits All BankDeposits by Depositsof All in City Individuals BanksTime Deposits
1930 49.6 - - 1935 S0.A 1940 41.7
1945 29.4 - - 1948 14.5 - - 1950 28.6 44.8 - 1955 42.0 59.2 54.9 1960 51.8 73.1 77.0 1965 503 71.5 79.3 1970 543 73.3 832 1975 53.8 73.9 82A
Source: Teranishi(1981). Jin*tk TIkiri To Seifu Kinyu..seM
105 2) The Changc in the Comosition of the Financial Structure 3.33 The organization and management of financial institutions, especially banks, underwent a wholesale change during the war to the immediate postwar period. Two major changes are noteworthy. a) The Separationof Ownersamipand Managemunt 3.34 During the interwar period, financial institutions, especially regional banks, began to be consolidated and their number reduced, weakening the managerial control of large shareholders. In addition, the reconstruction and reorganization of financial institutions that accompanied postwar inflation, and the discontinuation of wartime compensation, required broad-scale sacrifices by bank shareholders, thus loosing their ability to increase capital. These developments led to the rapid separation of ownership and management.
b) Safer Conditons for Busihs Operations 3.35 The business operations of financial institutions became more risk-free after the war. Under the wartime system, the concentration of banks progressed even further, reducing the number of banks; moreover, control over funds during the war cleared away special financing relationships that had developed between specific industries and firms and regionalbanks. 3.36 While these conditions impelled the h.omogenizationof financial institutions, they also made it easy for financial institutions in the postwar period to accept the regulations imposed by financial authorities on interest rates and business-field segmentation. They also established an environment in which the policies of financial institutions, whose managerial foundation has subsequently been stabilized, could readily be enforced.
3) Isolation from Overseas Financial Relations 3.37 During the Allied occupation, all transactions with foreign countries required permission. And even after the Foreign Exchange and Foreign Trade Control Law was enacted in 1949, many activities were still regulated, including the flotation of corporate bonds and stocks overseas by Japanese companies and financial institutions, the subscription of foreign-currency-denominated securities, and the subscription of Japanese securities and corporate bonds by non-residents. This law was enacted primarily to deal with the international balance of payments, but it also indirectly created barrier between domestic and international finance, which became a fundamental component of the financial system in the high-growth period.
B. The Characteristics of the Postwar Financial System 3.38 Two characteristics of Japan's postwar financial system are key: the division of labor philosophy followed by the banking system, and the widespread use of interest-rate regulation. These characteristics served as the systemic framework for addressing how long-term funds for capital investment in priority fields could be supplied. 1) The Division-of-Labor Philosophy 3.39 The division-of-labor philosophy consisted of four unique characteristics: the separation of long-term and short-tern finance, the separatwionof banks and trusts, the separation of banking and securities, and the fostering of other specializedfinancial institutions.The philosophy was adopted in the hopes that dividing up and promoting specialization among financial institutions would enable the government to construct a safe and efficient financial system that could direct funds on a priority basis to specified fields in an effort to enhance economic reconstruction and growth. Moreover, as disoussed in section B.2, below, introducing interest-rate regulations on a broad-scale inhibited the interest-rate function from distributing funds to each field naturally, a function that was inevitably carried out on an individual basis by specialized financial institutions, including
106 those separted according to long-tern and short-term functions. In this sense, specialization and interest-rate regulations were in a mutually noncommittalrelationship. The remainder of this section discusses the four unique division-of-laborclassifications. a) The Separationof Long-Termand Short-Term Fimnce 3.40 The conceptual framework for bank finance in Japan was originally based on concepts from the British-style commercial banking philosophy. Yet, because adhering to these principles entirely would have created obstacles to providing long-term funds for promoting industrialization, the commercial banking philosophy was augmented with a strategy that called for creating new banks that specialized in long-term finance. This strategy was adopted concretely during the Meiji era (1868-1912), when the governmentestablished such special banks as the Nippon Kangyo Bank and the Industrial Bank of Japan; moreover, corresponding policies were adopted to use these banks as the principal agents for supporting long-tern financial activities, such as for equipment funds. 3.41 To compensate for the shortage of long-term funds in the reconstruction period, the government introduced the division-of-labor philosophy with the enactment of the Long-Term Credit BankLaw (1952), which was based on the principle of separating long-term and short-term finance. Long-term credit banks were established to shoulder responsibility for long-term financing by using funds raised through the issuance of bank debentures. In 1948, the Banking Law had reorganized existing trust companies into trust banks, engaging in both trust and banking activities; then, in 1952, trust banks were allowed to procure their funds by using loan trusts to attract long-term savings. In order to foster the development of financial institutions for long-term credit, the Ministry of Finance provided administrative guidance for establishing term periods for time deposits whose purpose was to prevent competition between ordinary banks that collect funds primarily through deposits and banks that use bank debentures or loan trusts to collect funds. Since 1947, the term periods for time deposits have been set at 3 months, 6 months, and one year, with an 18-month product approved in 1971. The issuance of bank debentures was restricted by administrative guidance to a small group of financial institutions in addition to the long-term credit banks, and institutionsother than trust banks were prohibited from offering loan trusts. 3.42 In this way, administrative guidance was used as a policy tool to actualize the principle of separating long-term and short-term finance. As such, it sought actively to ensure the existence of financial institutions for long-term credit, and restricted the maximum term periods of the major fund procurement vehicles of ordinary banks. b) The Separationof Banks and Trusts 3.43 The policy of separating banks and trusts after the war is closely tied to policy of separating long-term and short-term finance. That is, trust banks were separated from ordinary banks and allowed to function as financial insttutions for long-termfinance.25 3.44 As mentioned in the preceding subsection, trust banks were allowed to deal in loan trusts only to procure funds that would appropriately match their long-term fmancing responsibilities. Thus, Japan's trust banks were oriented more strongly towards serving as financial institutions that provide long-tern loans using the joint operation of money trusts and loan trusts as financial resources rather than serving as trust banks that participate in long-term fund operations as part of their property managementqcti-;ities for individuals and others, such as the trust banks in the United States and Great Britain.
c) The Separation of Banking aDd Securiies 3.45 The separation of banking and securities is also based in part on the philosophy of commercial banking - namely, that holding long-term securities and stocks that amesubject to large price fluctuations could greatly harm the stability of bank management. In addition, allowing banks to participate in the securities business would tend to create conflicts of interest between depositors and investors. Although Article 65 of the Securities and Exchange Law incorporated the U.S. Glass-Steagall Law, the separation between banking and securities that was a routine practice
107 in prewarJapan wasthe drivingforce behindJapan's adopting this principleof separation.Article 65 prohibitsbanks, from participating in the securitiesbusiness, except for investmentpurposes and only for trust contracts.Moreover, although these prohibitionsdo not apply to governmentbonds, local bonds, or government-guaranteedbonds, administrative guidance through the high-growth periodall but prohibitedthe underwritingof governnentbonds. d) The Fosteringof Oter SpeialzedFinancial lmtltudou 3.46 As discussed,the creation of long-termcredit banks and trust banks provide concrete examplesof how specializedfinancial institutions were fostered.Yet additional advanceswere made when other specializedfinancial institutions,such as foreign-exchangebanks, financial institutionsfor small and medium-sizebusinesses, and financialinstitutions affiliated with the agriculture,forestry, and fisheriesindustries, were established. 3.47 Foreign Exchange Banks. Businessaffairs for handlingforeign exchange were clarified with the enactmentof the ForeignExchange and ForeignTrade Control Law in 1949; the law authorizedas "foreignexchange banks" those institutionsthat were equipped to handleforeign exchangeand couldadapt to the expansionof internationalbusiness activities. However, to give the Bank of Tokyoa strategicposition in Japan'spostwar policy of exportpromotion (the Bankalready had a long tradition of overseasactivities), the Foreign ExchangeBank Law enacted in 1954 converted the Bank into a "specializedforeign exchangebank." The Bank of Tokyo receives systemicpreferential treatment because, among other things,it is allowedto issue bank debentues, receivespriority approval for overseasbranch offices, and receivesfavorable treatment when the governmentdeposits foreign currency in exchangebanks. 3.48 FInanca Insttutions for Smal- and Medium-Size Businesses, and for the Agricultur, Forestry and Fisheries Industries. The Law for Small Business Cooperatives was enacted in 1949, to reorganize credit associations in urban districts into credit cooperatives; with the Shinlin Bank Law of 1951, credit cooperatives whose banking transactions were relatively large became Shinkin banks. In addition, the enactmentof the Sogo Bank Law in 1951 restructured mutual loan companiesinto Sogo banks to modemizethose institutions.
3.49 Financialinstitutions for small- and medium-sizebusinesses differ from ordinarybanks becausethey are restrictedto makingloans only to such businesses,and they must continueto deal in low-costfunds, such as installmentfinancing operations (mujin). Shinkin banks are structrd as miemberorganizations whose business activities are restrictedto specificregions. In addition,the ZenshinrenBank serves as an over-archingorganization that receivessurplus funds fromindividual Shinkin banks as deposits, seeks to increaseefficieacy and to concentratefunds by providing loans to nonmembers, and adopts measuresfor enhancingthe stability of the Shinidn bank system. 3.50 In the field of agriculture,forestry and fisheriesindustries finance, a system of financial institutionsaffiliated with cooperativeswas establishedfirst throughsuch laws as the Agricultural CooperativesLaw of 1947. These laws merged financial activitieswith the activities of coopeatives for the agriculture and fisheries industries and stabilized their business matters, and then saw through the re-inaugurationof the NorinchukinBank as the overseeingorganization in 1948. 3.51 The division-of-labor and the specialized-institutions philosophies applicable to private financial institutions also applied to policy-based financial institutions. Individual policybased financial institutionswere established in each policy field. The JDB and EEBJfocused on industria finance; the Small Business Finance Corporafionand the People's Finance Corporation focused on financing small- and medium-size businesses: the Housing Loan Corporation, the Finance Corporation for Municipal Enterprises, and the Environmental Sanitation Business Fmance Corporation focused on finance in theirrespective policy fields.
108 2) Interest Rate Regulations 3.52 Interest rate regulationswere establishedin the high-growthperiod as a policy-based framework.This sectiondiscusses the evolutionof these interest-rateregulations in Japan'spostwar financialsystem. 3.53 Fromthe Meijiera up throughthe mid-Taishoera (1912-1926),deposits were not subjectto maximum interest rates, and institutionsused interest rates to compete for deposits. Yet this competitionled to lower profit margins,the loss of loan customers as interest rates on loans increased,and even outbreaksof withdrawalpanic as the qualityof bank'sassets deteriorated. Then, in 1918,banks reached an agreementto self-imposeregulations on maximumdeposit rates and minimumloan rates.
3.54 Yet after the war, when the Anti-MonopolyLaw was enacted in July 1947, these agreementsamong banks were no longerlegal in principle.Nevertheless, in fear of damagefrom the steeplyrising interest rates that camewith skyrocketing inflation, the TemporaryInterest Rates AdjustmentLaw was enactedin December1947, imposing interest-rate regulations in depositsand short-termloans (of one year or less).Specifically, interest rates on depositswere regulated within a structurethat linked them to the officialdiscount rate and in line with the advice of the Interest AdjustmentCouncil; the maximuminterest rates on loanswere also stipulatedin the law. Later, in June 1958,the maximuminterest rate on loansbecame a self-regulatedrate thatchanged within the bounds of legally specified minimumlevels with the agreementof the Federationof Bankers Associationsof Japan and accordingto changesin financialcircumstances, such as the official discountrate. Then, whenthe short-tern primerate systemwas introducedin February 1959,the officialdiscount rate was in fact usedto set theserates.
3.55 Actualinterest rates on loanswere adapted to individualloans and set at a levelbetween the prime rate and the self-imposedregulated rate. In the latterhalf of the 1960s,the spread between these two rates was around 1%. Furthermore,because private financial institutionsdemanded insurance deposit against discountor compensatingbalance against loans as de facto restricted deposits from their regular transactionpartners when they discountedbills or made loans, real interestrates were substantiallyhigher than nominal interest rates. Since interestrates on loans of more than one year were not regulated,an interest-ratestructure emerged in line with supply and demandin the loan market,even if that wasrather imperfect.
3.56 Long-terminterest rates are not coveredby the TemporaryInterest Rates Adjustment Law and are not regulatedinterest rates; yet,since 1961,the long-termprime rate has customarilybeen basedon a formulain whicha fixed spread(originally 1.4%, which fell to 0.9%after 1966)is added to the interestrate paid by long-termcredit banks and trust banksto raise 5-yearfunds. Similarly, regulationswere in fact imposedon interestrates for publicand corporatebonds, because the small size of the secondarymarket in relationto the new-issuemarket made it possibleto set issue ter,ms independentlyof the conditionsin the secondarymarket, and consequently,they wereset according to a rate structurethat capturedthe prevailingpolicy perspective - meetingthe supply of and the demandfor funds by financialinstitutions in the long-ternloan market
3.57 In these ways,holding interest-rate levels below market realities was used as a policy tool for loweringthe cost of funds to corporationsand promotingcapital investment.Interest-rate regulationresponded effectively to the prevailingfinancial climate -- an inadequateaccumulation of internal savings by private corporations in the reconstruction period, accompanied by the underdevelopedcondition of the capitalmarket. Furthermore, the regulationof depositinterest rates stabilizedthe cost of funds to financialinstitutions and helpedthem keep their fundoperations away from high-risk activities in pursuit of high returns. In short, maintainingthe credit order and stabilizing the management of financial institutions were the fundamentals of financial administrationduring this period. 3.58 Again, this regulatorypolicy for keepinginterest rates low was made possible by three prevailingconditions that gave rise to the postwarfinancial system: (1) the level of accumulated
109 financial assets was low, and, with the exception of deposits, alternative financial products were scarce, (2) the management of financial institutions was increasingly being separated from their ownership, changing the structure into one well suited to uniform regulations, and (3) financial relations were shelteredinternationally. C. How Policy-Based Finance Evolved 3.59 The major policy-based financial institutions still active today were established by the middle of the 1950s -- beginning with the People's Finance Corporation(1949), and continuing with the Housing Loan Corporation (1950), the Export Bank of Japan (1950), the Japan Development Bank (1951), the Agriculture, Forestry and Fisheries Finance Corporation (1953), and the Small Business Finance Corporation (1953). 3.60 These policy-based financial institutions were established in recognition that private financial institutions alone could not support reconstructing the economy and achieving social stability. On one hand, private financial institutions would not be able to provide a socially adequate supply of funds for investing in such projects as individual housing, small- and medium-size businesses and very small businesses. On the other hand, private-sector financial institutions by themselves could not be expected to assume the high risks or long recovery periods of loans necessary to promote long-term social and economic development- such as fostering industries in their developmental stages, developing necessary technologies,stabilizing the supply of energy, and developing social capital. 3.61 This dual recognition led to the creation of the two broad policy-basedfinancial institutions - government finance corporations, and the EIBJ and JDB. 3.62 While both the government and the private sector long held the view that these specialized financial institutions were necessary for supplying long-term funds, GHQ was generally negative towards the concept, having seen the cooperation among special banks in the war effort, and during the first half of the Occupation. RFB was established provisionally for a limited period as an unavoidable policy tooL Yet, with the change in U.S. policy towards Japan after 1947, GHQ began tolerating efforts to establish policy-based financial institutions. The first permanent public institutions were established to finance those fields that tend to be left behind in the process of economic growth - again, small- and medium- size businesses, housing,agriculture, forestry, and fisheries industries. 3.63 However, creating the public institutions to support long-term economic and social development was fraught with complex questions about their relationship to RFB and the Assistance Goods Fund, and about how long-term finance could be designed in the private sector, including the development of a capital market, and the role of the old special banks, such as the Industrial Bank of Japan.
3.64 At the time, the increased exports and special demands brought about by the Korean War gradually expanded production and investnent activities, and Japan'seconomy temporarily reached a "boom" period. However, the supply of funds for suppoting business activities in this expansion process was extremely scarce, and, in particular, the absence of long-tern equipment funds pressed for a quick solution. The conditions were ripe for creating public long-termfinancing:
* After the war, new loans from RFB were suspended,to be substituted by funds from the Assistance Goods Fund; yet this substitutiondid not always respond smoothly to the actual demand for funds. Moreover, U.S. economic aid to provide the financial resources for these activities was also expectedto taper off.
* A policy was implemented to promote developing the securities market so that corporations could raise long-term funds by increasing capital or issuing corporate bonds; yet, given the condition of private savings and national income at that time, it was unreasonableto expect adequate results from these efforts.
110 * A series of assistance measures was considered -- such as underwriting bank debentures by the Ministry of Finance Deposit Fund Bureau in order to open the door for long-termfinance, but, because individualshad few means to absorb bonds, fiscal funds were still necessary in the end.
* Given their commercial orientation, ordinary private banks found it difficult to provide long-term finance; since they were already in an 'over-loan' situation, they could not be expected to assume the role of supplier. 3.65 Counteracting the absence of finance vehicles in the private sector was the growing surplus of public funds in FY 1949 and FY 1950. Given the healthy growth rate of postal savings, postal insurance, and postal annuities, the quantity of funds in the Ministry of Finance's Deposit Fund Bureau Fund had increased rapidly - which, when combined with a GHQ memorandum that held the operation of these funds within strict limits, enabled the fund to amass a sizable surplus. The Assistance Goods Fund was able to operationalize residual funds that remained after the initial redemption of debt, such as RFB bonds, was completed. Then, after the full amount of RFB debt was redeemed (in March 1950), new operations could be carried out with the repaid RFB funds. 3.66 This climate led to the strong realization that bolder measures were required to respond to long-term finance needs -- for instance, using funds repaid to RFB, keeping the operation of the Assistance Goods Fund flexible, and transferring private-bank loans that had been fixed for long-term lending over to fiscal funds. And, after steadfast negotiations with the United States, the govemment established JDB and EIBJ, whose mandate was to help rebuild the economy, accelerate industrial investment, and support export finance. This institutional framework for policy-based finance evolved by necessity from the relative scarcity of long-termfunds in the private sector.2 6 3. Comparison of Private Finance and Policy-Based Finance 3.67 In the reconstruction period, private finance and policy-based finance co-existed in a mutually complementary relationship. This section examines the relationship between these two types of institutions by comparing such aspects as the scale of loans, interest rates, and loan periods.
A. The Scale of Loans 3.68 Trends in the supply of industrial funds provided by private finance and by policy-based finance, including working capital funds, are shown on a net change basis (Tables m-6-A and m-6- B). As shown, the largest share held by govemnmentfunds overall (13.8%) was during the FY 1947-1950 period when RFB was active and the Assistance Goods Fund was a supplier, this share diminished afterwards. The share of policy-based finance loans was as large as 8.6% during the 1951-1955 period, when a series of policy-based financial institutions was promoted; thereafter, the share shifted to around 6% to 7%. 3.69 Trends in the supply of new industrial equipment funds are shown in Table 11-7. As shown, government funds accounted for more than one third of the total for FY 1952-1955 period; thereafter, the share for govemment funds declined. Similarly, JDB's share was 15.1% in FY 1952-1955, but fell to 5% in FY 1956-1965. These trends clearly indicate the shift in emphasis of FILP away from equipping basic industries early in postwar Japan toward supporting policy fields related to national life (such as housing) in the late 1950s. 3.70 Table m-8 compares loans outstanding among the key private financial and policy-based financial institutions. When RFB activities were at their peak in 1948, the share held by policy-based financial institutions reached the 20% level; thereafter, the share declined. But, in 1955, as the JDB was established and other government-affiliatedinstitutions were being created, the share held by policy-based financial institutions returned to 12.9%. In the 1960s, as the increase in funds from policy-based finance declined relative to the increase in funds from private financial institutions, the share of the loans outstandingalso declined, from 11% in 1960 to 9.5% in 1965.
111 Table111-6-A. The Supply of IndustrialFunds (Net Change Basis) (billion yen) Total Stocks IndustdalLoanS Bonds Total PrivateFinancial Government Inst;tUtions Funds Policy-BasedFinancial TUst Fund Assistance ForeignExchange Institutions Bureau GoodsFund Lns by BO8 ______~~~RFBJDB ______
1945 50.4 3.1 0.3 47.0 45.8 1.2 .. 1 2 46 59.2 4.5 -1.2 55.9 56.1 .0.2 . . . 0.2
47 133A 9.0 - 124.4 80.2 44.2 44.2 44.2 - 48 437.7 59.4 0.2 378.1 312,1 66.0 66.9 66.9 - -0.9
49 491.8 108.5 15.0 368.3 363.1 5.2 *2.7 -2.7 - -1.1 9.0
1-h 50 512.9 31.9 43.5 437.5 372.6 64.9 .16.0 .18.5 - -0.3 28.9 52.3 51 857.7 69.6 36.0 752.1 640.2 111.9 12.8 .10.6 12.9 0.3 49.1 49.7
52 1,021.3 122.4 37.0 861.9 796.5 65.4 26.8 - 18.6 0.3 50.6 -12.3 53 1,063.3 165.8 41.2 856.3 736.5 119.8 82.9 * 62.4 2.9 1.3 32.7
54 611.9 142.1 18.4 451.4 405.2 46.2 100.0 - 32.1 16.3. -70.1
55 676A 95.5 26.5 554.4 466.2 88.2 74.9 - 24.5 i.1 - 5.2
SoUrce:Ministry of FinanCe,ZAlselushi Shitsu (Compiladon of HistoalcalFacts on Public Finance) ed.(l 978), ShowaZuisci Shi: husenKa KowaMade. 19 Tokei (Historyof PublicFinance In theShowa Era: FrOm the End of theWar to thePeaCe Treaty, Vol. 19,Statistics). Table 1114-B.The Supply of IndustrialFunds (Net Change Basis, Loan CompositionRatio)
Total Private Government Financial Funds Policy-BasedFinancial Trust Fund Institutions Institutions Bureau, etc.
194546 100.0 99.0 1.0 0.0 1.0
1947-50 100.0 86.2 13.8 7.0 6.8
1951-55 100.0 87.6 12.4 8.6 3.8
1956-60 100.0 90.0 10.0 7.4 2.6
1961-65 100.0 91.5 8.5 6.9 1.6
Source: Same as Table 11-6A.
Table 111-7.The Supply of New IndustrialEquipment Funds
FY1952-55 FY1956-60 FY1961-65 Amount Composition Amount Compostion Amount Composition Ratio Ratio Ratio (biHioinye) M(bflUomye.) M% (biflionyca)
PrivateFinancial Instibions Allbanks 711.7 44.0 2,230.6 43.7 4,971.0 37.6 others 384.9 23.0 1,727.4 33.8 5,710.6 43.2 Subtotal 1,096.6 67.9 3,958.0 77.5 10,681.8 80.8
GovemrnentFunds JDB 244.1 15.1 299.9 5.9 672.7 5.1 Othes 275.5 17.0 850.3 16.6 1,867.5 14.1 Subtotal 519.6 32.1 1,150.2 22.5 2,540.2 19.2
Total 1,616.2 100.0 5,108.2 100.0 13,221.8 100.0
Sources: Bak of Japan(1962-66). HonnoKeizai T&ak. The Japan DevelopmentBank (1976). Nihon Kaihatu Ginko N_uann Sj.
113 TableIlI-S. Loans Outstanding among Financial Institutions, by BusinessTypes: Postwar Trends 1947 1948 1950 1951 1955 1960 1965 Amount Shue AmountShae Amount Shae Amount Share Amount Sham Amouit Shue Amot Shae nbti en) (%b) {blUo r) Ou*) Y-) (bS) Y-) (%) (tmT- Y-) 085 ym *) (bfi m) (S2) PrivateFlandu Iastutoas BankingAccountsof All Banks 168.2 68.4 381.3 67.8 994.7 75.1 1,517.8 73.9 3,195.8 60.2 8.182.6 59.0 19,217.9 54.1 (ofthese: Long-Tem Credit Banks) (30.5) (12.4) (49.3) (8.8) (149.2) (11.3) (231.0) (113) (324.0) (6.1) (934.3) (6.7) (2.2413) (6.3) TnaatAccountsofAllBanks 3.4 1.4 6.6 1.2 16.8 1.3 31.3 1.5 229.7 4.3 723.0 5.2 2192.7 6.2 Othr Financial dtuldons 28.0 11.4 60.7 10.8 213.5 16.1 373.1 18.2 1,198.3 22.6 3,4303 24.8 10,729.9 30.2
Subtol 199.6 81.2 448.6 79.8 1,225.0 92.4 1,922.2 93.6 4,623.8 87.1 12,336.1 89.0 32.1405 905 Policy.BasedFinial Iosf fous I-A (of dtes.:Reconstucdon Finane p. Bank) (44.2) (18.0) (111.2) (19.8) (89.9) (6.8) (79..2) (3.9) (-) (-) (-) Ce JapanDevclopmnt Bank) (-) (-) (-) (12.9) (0.6) (316.6) (7.3) (629.1) (4.5) (1.0118) (2.8) (People'sFinance Coipoation) (.) (-) (5.5) (0.4) (9.7) (0.4) (48.2) (0.9) (125.2) (0.9) (276.4) (08)
(SmallBusiness Finuace (-) C.) (-) (-) (37.6) (0.7) (147.9) (1.1) (344.1) (1.0) Corpomion) (Housing LoanCoporation) (-) (-) (5.0) (0.4) (22.5) (1.1) (84.9) (1.6) (201.9) (15) (432) (1.2) Subtotal 46.2 18.8 113.6 20.2 100.3 7.6 130.5 6.4 685.3 12.9 1,518.7 11.0 36.3i 9.5 Toal 245.8 100.0 562.2 100.0 1,3253 100.0 2,052.7 100.0 5,309.1 100.0 13.854.8100.0 35-503A 100.0
Sources:Bank of Jn (1950-65),Honpg KeluI Tokel. Bank of Japan(1970), Kizal TokeLMenp. Ministryof Finance(ed.). 1978,Zahislhi Shisu, ShowaZalsel Shi: ShusenKm Kow Made 19Tolei. Table I11-9.Loans Outstandingfor EquipmentFunds from Private Financial Institutions,by BusinessType: Postwar Trends
1950 1955 1960 1965 Amount Share Amount Share Amount Share Amount Share (billion yen) (%) (billion yen) (%) (billion Yen) (%) (billion yen) (%)
Banking Accountsof All Banks 97.5 68.9 386.2 58.5 1,344.7 51.1 3,294.4 43.9 of these: (Long-TermCredit Banks) (46.9) (33.1) (232.7) (35.2) (802.0) (30.5) (1,923.1) (25.6)
Trust Accountsof All Banks 0.9 0.6 68.9 10.4 466.5 17.7 1,663.9 22.2
Other Financial Institutions 43.2 30.5 205.3 31.1 802.8 31.2 2,549.9 34.0
Total 141.6 100.0 660.4 100.0 2,632.0 100.0 7,508.2 100.0
Sources: Bank of Japan(1955-1960), Honpo Keizai Tokel. Bank of Japan (1970), Keizai Tokei Nenpo. Among private financial institutionsat this time, the share of all banks as a whole declined, but the relative position of small- and medium-size financial institutionsand of life and non-life (casualty) insurance companies increased.Trends in the supply of equipment funds by private banks show that the long-term credit banks have maintained a share of about 30%, while the trust accounts of all banks increased rapidly from 10% in 1955 to 22% in 1965 (Table M-9). 3.71 As these tables indicate, the influence of policy-based finance reached its peak in the 1950s, when long-term funds became relatively scarce. However, into the 1960s, private financial institutions were able increasingly to absorb funds as high growth progressed, and they became the central suppliers for meeting the growing demand for funds in terms of quantity.
B. Interest Rates
3.72 Let us trace the reasoning in determining interest rates at policy-basedfinancial institutions back to the case of RFB immediately after the war (Table II1-10). Even for the RFB (1947-1949), which was responsible for priority finance, interest rates were set after considerationof interest-rate movementsin the private sector, and the guiding principle was that lower interest rates were applied to industries with higher priority, and higher interest rates were applied to industries with lower priority. During the period of RFB activity, interest rates were rising, and RFB's maximum standard interest rate increased from 7.3% at its inception to 10.6% after July 1948. In July 1948, RFB interest rates for coal mining (the highest-priority industry) were 9.1% for short-term funds and 9.5% for long-term funds; the rates for the iron and steel, fertilizer, and electric power industries were 9.9% for short-term and 10.2% for long-term funds; and the rates for other industries were 10.2% for short-term and 10.6% for long-term funds. At the time, market loan rates were about 11% for short-term and about 14% for long-tern funds, suggesting that RFB interest rates were preferential,especially for long-term funds. 3.73 After RFB functions were suspended and up until policy-based finance became fully operational-- that is, when AssistanceGoods Funds (1949-1952)were the major financing source - loan terms for private corporations were 7.5%. At the time, the position of GHQ was that, while it would not demand rates particularly higher than private-sector interest rates, it also did not want rates that were lower. Accordingly, GHQ considered starting with an interest rate of 10%, which was just slightly lower than the private-sector interest rate (a long-term rate of 11% to 12%). Nevertheless, in the end, the interest rate was set at the relatively low level of 7.5%, for three reasons: Japan had major demands for assistance in the ocean shipping industry; the interest rates for the Assistance Goods Fund in Europe ranged from 5% to 8%; and GHQ came to believe that -'puttinglow interest rates on these said funds [would] promote the lowering of interest rates overall, stimulate needed business programsand contribute to general economic stability." 3.74 Because the purpose of 1DB at its inception was to supplement and encourage long-term financing by the private sector, it began its operations with a standard interest-rate level of 10%, which was close to the private-sector interest rate at the time. In 1955, after a general reduction in long-term interest rates, JDB's standard interest rate was reduced to 9%, and in 1961 it was lowered again to 8.7%. In the 1960s the long-term credit banks introducedthe long-term prime rate system and applied this rate to their preferred customers. After interest rates were revised in 1961, JDB's standard interest rate also became linked to this long-tern prime rate at the same level. 3.75 On the one hand, from FY 1952, a preferential interest rate targeting specified types of industries (shifted to a project basis afterwards) was established at the level of 7.5%. However, the beneficiaries were largely limited to electric power and ocean shipping as the application of this preferential interest rate was guided by principles such as "it is an industry with the highest priority," "the effect of reducing costs through lower interest rates is large," "the influence on JDB's profits will be relatively insignificant," and "it will not become an impediment to private-sector finance." This preferential interest rate applied to electric power and ocean shipping was lowered to 6.5% in February 1954, but as this was identical to the interest rate on loans from the Trust Fund Bureau Fund which serves as JDB's fund procurement base, this rate becme the lower boundary of preferential interest rates.
116 Table111-10. fntemcst Rates for Pblicy-BasedFinance: Postwar Trnds (9ge)~ ~ ~ ~ ~ m
PmfetentialRate Officia Yieldon Bank Yieldon Long-TemnnIntetest Rate Standi Electic Coal Assisance Tmst postal Discount Debentufwb tndustial PrimeRate on Lons by ineest Powerad Mining GoodsFuds lrmd Savuigs: RateA Bad theRFB Rate O0e11 etc. (forPrivate 8umz Savigs (Long-Tern) Shipping Business) Lon Ceificats ierest Ineb" RaW Rate
1945 3.29 4.20 4.29 46 3.65 4.20 4.34 47 1 5.34 5.75 6.6-8.4 48 5.11 6.33 9.86 14.0 7.0-10.6 49 1 8.96 IOA2 12.0 7.5 50 I 8.50 9.21 1 1 Sl 5.84 8.51 8.98 1 10.0 1 6.5 3.15 52 1 8.52 9.01 10.6 1 7.5 1 1 4.8 53 1 8.52 9.00 1 1 1 1 1 54 1 8.52 9.03 1 1 6.5 I I 55 7.30 7.92 8.23 10.2 9.0 1 6.5 I i 56 1 7.20 7.30 9.1 1 1 1 1 5.0 57 8.40 7.62 7.72 1 1 1 1 1 1 58 7.30 1 1 1 1 1 1 1 1 S9 1 1 1 1 1 1 1 1 1 60 6.94 7.61 1 1 1 I I I 61 7.30 7.30 7.41 8.7 8.7 6.-7.0 I J 4.7 62 6.57 1 1 1 1 1 1 63 5.84 I I I I I I I I 64 6.57 1 1 I I 1 6.5-7.5 I I 65 5.48 1 1 1 ' ' ' ' I a. Theofficial discountrate is therate applied when discounting comnmercial bills. b. Bankdebentures are interest-bearingbonds. Secondarymarket yieldup to 1954.and yieldto subscribers1955 and after. c. Industrialbonds are A-rated bonds. Rates compiled as per bankdebentures above. Sources:Ministry of Finance(ed), 1976and 1983, Zall-shi Shitsu. Showa Zalisel Shii Shusen Kara Kowa Made 12.13. Bankof lapan(1986),NihonX GiAoHyakunen sHi Bankof Japan(1958), Tokei inmn(Fumoku). lle JapanDevelopnent Bank (1976).Nihon KnlhatsuGinko Nilyugonen Sihi. 3.76 The structure of interest rates for all policy-based financial institutions is essentially the same as the structure for JDB. Because the purpose behind establishing these institutions was to supplement private-sector finance, the standard loan rate was approximately the same as the private-sector interest rate, and, while low interest rates were applied to fields in which the govemment was trying to carry out special policy-based assistance, the minimum level of those interest rates was the interest rate on loans from the Trust Fund Bureau Fund (which was equivalent to the fund procurement rate of policy-based financial institutions). In addition, when combined with interest subsidies, some loan programs had even lower interest rates, but they were generally restricted to policy fields that sought to adjust the industrial structure or enhance national life, such as housing finance. 3.77 In this way, even the policy-based finance system as a whole is necessarily constrained by how interest rates in private-sector finance are structured, and it has thus adjusted the interest rate structure according to changes in regulated interest rates in the private sector. Differences between the standard interest rate on loans from policy-based financial institutions and the interest rate on loans from the Trust Fund Bureau Fund were as large as 3.5% in the beginning of the 1950s. The difference then shrank to 2.5% from 1955 and to 2.2% from 1961, but an adequate profit margin was secured. The existence of this profit margin during this period made it possible to introduce preferential interest rates that were lower than private-sectorrates, even in the absence of subsidies. C. Loan Periods 3.78 In the reconstructionperiod, the supply of long-term funds was the most important function of policy-based finance. As shown in Table III-11, the average remaining period on loans differs sharply by type of financial institution. Since the city banks among the private financial institutions focus on short-term finance, they averaged 1.8 years in 1955; yet, even for the long-term credit banks that carry out primarily long-term finance, the average was just 3.3 years. In contrast, JDB had a long loan period of 12.2 years, and can thus be said to have supplied exceptionally long-term funds.
Tablem-1 1. Comparsonof LoanPeriods for EquipmentFund Loans, by Typeof FinancialInstitution (numberof years)
1955 1965 CityBanks 1.8 2.9 Long-TermCredit Banks 3.3 4.8 JapanDevelopment Bank 12.2 11.3
Note:Loan periods are calculatedas loansoutstanding at term-endamountrepaid during the term. Sources:Bank of Japan(1956). Honmo Keizai Tokei. Bankof Japan(1966), Keizai Tokei Nenuo. TheJapan Development Bank (1976), Nihon Kaihatsu Ginko Njugonen Shi.
3.79 Making these long-termpublic finance loans possible was the anple surplus of stable funds amassed from postal savings. First, at the deposit collection stage, the structure of postal savings makes them advantageousfor long-termdepositors (Table III-12). While the maximum interest rate paid by both postal savings and private banks is nominally the same, the fact that the interest rate for postal saving is compounded semi-annually (which is one of the merits of postal saving) yields different rates for different deposit term ranges. For example terms of 6 months and 1 year for time deposits at banks are advantageous,but terms of 2 or more years for the savings certificates offered through the postal savings system yield higher interest rates. This fact also shows up in the
118 Table M-12. Comparison of Interest Rates on rime Deposits and Savings Certificates
1960 1970 Nominal lmerst Interest Rate Nominal 1n rest Interest Rae Rate Calculated with Rate Calculated with Semi-Annual Semi-Annual Compounding Compounding ((%) M (%)
Time Deposits:Banks 3-month 4.30 4.00
6-month 5.50 - 5.00
1-year 6.00 - 5.75
Savings Certificates: Postal Savings From 6 months 4.50 4.50 4.25 4.30
From I year 5.00 5.06 4.75 4.81
From 1.5 years 5.50 5.58 525 5.32
From 2-years 6.00 6.09 5.75 5.83
Source: Teranishi (1982), Nihon No Keizai Hatten To Kinmu.
Table M-13. Average Retaining Periods for Postal Savings and Bank Deposits (numiberof years)
Postal Savings Deposits of All Banks Ordinary Savings Monetary Savings Fiscal Year Savings Certificates Deposits Deposits
1955 0.71 2.86 - -
1960 0.59 336 0.02 0.88
1965 0.64 3.84 0.03 0.85
1970 0.62 3.69 0.02 0.84
Source: Teranishi(1982), Nihon No Keizai Hatten To inyu . differences in theretaining periods of banks and postal savings (Table III-13). The average retaining period for savings certificates is about three years, whereas the retaining period for savings deposits at banks is just 0.8 to 0.9 years. As such, most of postal savings are entrusted to the Tmst Fund Bureau for operating periods that extend over the long-term of 7 years and longer, and the Trust Fund Bureau thus has been able to supply those funds to policy-based financial institutions based on long-term conditions. 3.80 Of course, private fmancial institutions, especially the city banks, did supply long-term funds by rolling over short-term loans. However, in rolling over short-term funds, they could not avoid increasing short-term interest rates inperiods of monetary tightening; moreover, compared
119 with fixed-rate,long-term funds, these rates are unstableand maynegatively affect busines, income and expenses.Thus, businessmanagers had high expectationswith long-termfunds. D. Write-off Ratios for Bad Loans 3.81 One of the roles and benefitsof policy-basedfinance is that it seeks to ensure that funds duringthe developmentalstages of industrialfinance, when a largegap existsbetween the supplyof and demandfor credit information,are distributedefficiently with policyobjectives. It pursuesthis aim by undertakingstrict appraisals of the managerialability and prospectsof businessesthat proposeimplementing projects of policy importance,and then providingfunds appropriatelyto businessesand projectsbased on thoseappraisals.
3.82 Was policy-basedfinance in the postwarera able to assumethis role satisfactorily?This questioncan be answeredby examiningthe differencesin ratio of bad loans betweenprivate and governmentinstitutions (Table M-14). In comparingthese figures,one must considertwo major factors:(1) the weightof long-ternand short-termfunds differsfor each typeof business,and their compositionof loan customersalso differs substantially,and (2) to the extent that their profits allow,private-sector banks will in many caseswrite off loans at an early stage, accountingfor the administrativeexpense incur to recover claims. As shown in the table- the write-off ratio was generallyhigh for each type of businessin FY 1951-1955,when the economyhad not yet recovered from the earlier period of confusion;through FY 1965, the write-offratios declinedamong all institutions.Yet, throughout the postwar period, they have been significantlylower at JDB. Althoughit is unreasonableto extendour conclusionsto policy-basedfinance in generalwith just this information,the relativelylow numberof judgementalerrors by JDB in its loan decisionsis priseworthy. Of course,because 1DB funds must be repaid,it stronglyemphasizes securing credit whenit makesloans, and thus, even in unexpectedcases such as the bankuptcvof a borrower,JDB has been able to enforcc.*ic repaymentof debts reliably and at an early stage.27
Tablem-14. Write-offRatios of Bad Loansby FinancialInstitutions: Postwar Trends
OrdinaryBanks TrustBanks IndustriaBank of Japan Japan Development (M) (*) (%) Bank (%1
FY1951-55 025 0.27 0.11 0.09
1956-60 0.14 0.23 0.07 0.01
1961-65 0.04 0.03 0.01 0.01
Note: The write-offratios of bad loans = amount of writeoffsduring the tern (annualrate) x 100 averageloans outstanding during the term Sources:Federation of BankersAssociations of Japan(1951-66 each period), Zenkoku GinkoZaimu Shghvo Bunseki. The Japan DevelopmentBank (1976), Nihon KaihatsuGinko Niiugonen Shi.
120 4. The Special Characteristcs of the Postwar Flnmclal System 3.83 Up to this point, this chapter has examined some of the unique characteristicsof the financialsystem in postwarJapan, includingthe surroundingfiscal and monetaryenvironments. This last section summarizesthese special characteristicsof the postwarfinancial system as a whole. A. The Predominanceof Indirect Finance and Bank-Centered Financial Intermediation 3,84 Throughoutthe high-growthperiod, the shareof funds suppliedthrough indirect finance was overwhelminglyhigh, running consistentlyat about 90%. This was in part becauseof the historicalbackground of Japan'shaving worked to emergeas a modernindustrial nation through the developmentof the bankingsystem. Yet the predominanceof indirectfinance was also due to two factors: (1) varioustypes of regulationsstabilized the businessof financialinstitutions responsible for indirectfinance, thus permnittingan evengreater consolidation of indirectfinance; and (2)during the high-growthperiod, the governmentchose not to issuegovernment bonds, and, since few public bondswere suitable for markettrading, an activecapital market did not take shape.Moreover, while banks played a large role in supplying long-term funds for capital investment during the reconstructionand high-growthperiods, they did so because,with the historicallyhigh uncertainty surroundingcredit informationfrom corporations,financial intermediationby banks produced higher-qualityinformation than would the alternatives,such as direct finance. B. The Importance of Supplementingthe Shortage of Long-Term Funds 3.85 In the postwarperiod, heavy and chemicalindustrialization required an enormousamount of funds for capitalinvestment. Particularly crucial to this needwas a frameworkthat could allocate long-termfunds preferentiallyto importantsectors, as well as a methodfor convertingshort-term savings into long-termequipment funds. Theserequisites led to the predominantdivision-of-labor wndspecialization philosophies, including the principleof separatingshort- and long-termfinancial institutions,and to the formationof a financialsystem with interest rate regulations.Similarly, from Ehe reconstructionperiod through the high-growthperiod, policy-based finance from such institutionsas IDB also played crucial role in convertingshort-term funds into funds for capital investmentwithin the frameworkof FILP.
C. Building a System Tlat Seeks to Maintain the Credit Order 3.86 To respondto indirectfinancing needs of the countryand to the absenceof an activecredit market,Japan's supervisory system for financialinstitutions in the postwarperiod evolved into one that soughtto maintainthe creditorder and to preservesound business management. Not onlywere administrative-basedregulations imposed on interestrates, business fields, and new marketentry, but regulationscovering non-price competition, such as branchingregulations and businesshours, and administrativeguidance for financialand businessmatters, such as regulationson dividends, wasalso implemented.Consequently, the fnancial systemof high-growthperiod had become extremelystable. D. Other Systemic Characteristics 1) "Main Bank" Relationshiy 3.87 The bankingrelationship between financial institutions and corporationsis very closely relatedto the specialcharacteristics of the financialsystem. Since the high-growthperiod, .lmostall of Japan'slarge corporations,and manyof the middlerange and small-and medium-sizebusinesses, have had a main bank relationshipwith a specified bank - that is, (1) the bank is the said corporation'slargest lender, (2) the bank has a long-termand continuoustransaction re_tionship with the corporation,having gone throughboth prosperousand slack businessconditions, (3) the bank holdsthe stock of the corporation,(4) the banksends or secondspersonnel to the corporation
121 as a board member, and (5) the bank is in charge of the comprehensivefinancial transactions of the corporation, including deposits and loans. Main banks played two important roles in postwar Japan. First as with items 1, 2, and 5, main banks soughtto reduce the cost of producing credit infornation about the borrowing corporation, by continually monitoring the corporation as representative of the lending group. 3.88 The second, as with items 3 and 4, pertains to the role of main banks as shareholders and as members of a keiretsu. This view began from the assumption that main banks were able to obtain inside information about the corporation,and could then serve to check up on mnanagerialdiscipline to ensure the corporation's existence. Under the usual conditions of information asymmetry, main banks can thus function more efficientlythan market-based means in bringing about altematives to corporate purchases, such as urging the rotationof managers in poorly performningcorporations.
3.89 Producers and traders increased rapidly in the high-growth period, and, because a supply and demand gap in credit information could evolve easily between the borrowers and lenders of funds, uncertainty about the future of investmentswas pervasive. This can be one factor behind why corporations and banks linked hands and formed main bank relationshipsin this period. 2) The Collateral Principle 3.90 Japan has a common transaction practice called the colateral principle -- that "with the goal of safe transactions in mind, in principle important financial transactions, such as corporate bond issues, bank loans and interbank transactions,will be secured with collateral." Historically in the prewar period, Japan's financial institutions had suffered enormous losses, especially as claimants to unsecured corporate bonds. This was due to the numerous corporate bond defaults during the financial panic at the beginning of the Showa era and the economic stagnation that acompanied the lifting of the gold embargo. It became common historical practice for the banks not to provide loans or purchase corporate bonds on an unsecured basis. 3.91 As the collateral principle was applied in postwar corporate finance in Japan, the long-term funds for capital investment came from indirect financing by the banks. In contrast to the more mamtreU.S. economy during Japan's high-growthperiod, not only small- and medium-size firms, but also large fimns carrying out large-scale capital investments, had to bear considerable business risks. It was easier to forecast the repaymnentof funds for short-term financing, such as discounts on commercial bills backed by substantive transactions. But for funds for capital investments, it was expected that the banks knew that they were carrying a high level of risk, since interest payments and the repayment of principal hung on the success or failure of the targeted loan project. In addition, most Japanese firms had limited equity capital and poor financial ratios in comparison with those of firms in Europe and the United States, thus exposing them to considerable financial risk.2 8 The banks' behavior was based on e;onomic rationality in order to handle the risk of bankruptcy. 3.92 Moreover, the fact that the collateal principle is included in the conditions of the contract means that, because the contract is even more binding for the borrower and makes it difficult to transfer risks chosen by the borrower to the lender, it has the effect of preventing the borrower from taking morally hazardous actions. In addition, in the case of equipmentfunds, the equipment that is the target of the loan becomes an actual collateral object that has durability, and since an entity carrying out capital investment will, according to this principle, at least be given priority as a borrower holding material collateral, it was possible to position the collateral principle as having contributed to directing funds from savings towards the financing of capital investment. 3.93 Thus, banks came to hold a good deal of influence through the predominance of indirect finance, and as a result, the usual practice among banks of requiring collateral extended their strong influence as far as the issuance of corporatebonds and transactionsconceming call-market funds.
122 ChapterIV. POUCY-BASEDRNANCE IN THE POSTWARPERIOD (1945- mld-1960s)-The Cam of the Japal DevelopmentBak
1. 1945to 1950 A. Postwar Economic Reform 4.1 In August1945 WorldWar II cameto a close with Japan'sunconditional surrender. Japan was placed under the indirect administrationof the Allied powers until the San Franciscopeace treatywas effected in 1952.In this period,all policiesrelated to Japan'sadministration were carried out under the fmn initiativeof the Generl Headquartersof the Allied Powers(GHQ). The initial goals of GHQ policies for administeringJapan were describedin a documententitled GHQs Mission and Achievements,written when the GHQ's duties were terminated:to dismantle the military, and to democratize and thus reconstruct the economy, so that Japan could regain independenceas a peaceful,free-market nation. 4.2 Uponoccupation, GHQ issued a seriesof demilitarzationand democratizationorders, and attemptedto implementreforms that wereunprecedented in the historyof Japan:the dissolutionof the zaibatsu, agriculturalland reform and the democratizationof labor.29 AlthoughGHQ later retreated parially from these original aims - due, for instance, to the growing East-West confrontationand because these reformsdid not always conformto the actual circumstancesof Japan - the reforms provided the motivationfor sound economic development.Because the lapaneseeconomy and societywere quite forward-looldngin their viewof thesereforms, the nation sought readilyto assimilate them in a mannerthat was compatiblewith Japan'sown historyand
1) Dissolution of the Zaibatsu 4.3 The dissolutionof the zaibasu was one of the main pillarsof occupationpolicy because the Alliedcountries believed that the zaibatsuwas one of the majorfactors that had propelledJapan towards war. Specifically, 83 companies -- including the 4 zaibatsu designated as holding companies(Mitsui, Mitsubishi, Yas andSumitomo) and 56 membersof zaibatsufanilies, were orderedto disposeof their stocksand bonds.At the sametime, the purgeof high-rankdngofficials in business circles was expanded to include the directors of large corporations,and influential businessmenwere compelledto retire. Thus,considerable progress was madetoward dismantling the two major elementsof the zaibatsu--personalnetworks and the ties that companies had as holdingcompanies.
4A In order to eliminatethe excessiveconcentration o; economicpower, GHQ advocatedan even more thoroughdivision of large corporations(325 targ, -d companies);yet, as the cold war progressed,the U.S. govemmentaggressively sought to pL 'tz the economicindependence of Japan.When a more moderatestance was taken toward deconce . rcaon,only a portionof the initial policieswere actually enforced.
4.5 The dissolutionof the zaibatsuwas completedby 1949.This reformrepresented a retreat from GHQ'searlier plans, and somehave criticizedit as not havingbeen thorough enough. At the same time, the disappearance of prewar family combines reduced the level of industrial concentration,with the followingeffects: Companiesthat had been made smaller by deconcentrationhad to be extremely competitivein orderto survive,thus givingrise to a new economicvitality.
123 * New ranks of younger management who had gained managerial experience in firms that had been severely weakened by deconoentrationdeveloped into a new class of industrial leaders. * Through the release of stocks formerly owned by the zaibaisi, progress was made toward both democratizingfirms and separating management and ownership. These effects helped shape the entrepreneurialspirit and the high propensity to invest that served as the basis for economic growth in postwar Japan. 4.6 Furthermore, while new enterprise groups eventually developed around the banks, which had not been part of the dissolution of the zaibatsu, they could exert less control than did the holding companies of the prewar zaibatsu. Thus, many enterprises began engaging in vigorous capital investments at their own initiative, thereby also serving as a motivational force behind Japanese economic recovery and growth. 2) Agricultural Land Reform 4.7 Land reform in the three-year postwar period after 1946 sought to eradicate long-established "semi-feudal"patterns of agricultural land ownership, and culminated in a radical reform of the landlord-tenant farmer relationship. This reform itself greatly transformed Japan's economy and society, and was by most accounts the most far-reaching of the agricultual land reforms carried out in several countries after World War II. 4.8 To motivate farmers to produce more food in an effort to avoid political instability in the postwar period and to respond to the impending food crisis, the Japanese govenmer t also sought to enact reforms to absorb the dissatisfaction of farmers with the old landlor -tenant farmer relationship (the first reform, in December 1945). However, GHQ demanded a more thorough reform; thus, in October 1946, a law was enacted to implement the second reform - that, with the exception of holdings of less than 1 hectare, all agricultual land was to be sold to tenant farmers. By September 1947, approximately 1,870,000hectares, of farming land bad been sold.
4.9 While land owners in mountainous and forest regions were relatively unscathed by the reform, Japan's landed class disappeared almost entirely. Thus the tenant farming system was completely destroyed, with the following positive impacts on the economic growth of Japan: * The creation of the landed farmer system increased work motivation, and food production increased and agricultual technology expanded. * As farmers began to restrict their movements from and stabilized farming villages, farmers became part of the conservativepolitical base. At the same time, the division of agricultural land meant that a village's second- and third-born sons would no longer be part of a land inheritance system, prompting them to move to the cities for employment. Their outmigration guaranteed a sufficient supply of labor as Japan entered its high- growth industrial period, stimulatingthe advance of the middle class. 3) Democratzation of Labor 4.10 The framework for postwar Japanese labor policy began to be debated in Washington a year before the close of the war. As soon as GHQ occupied Japan, it quickly issued instructions to draw up labor laws; in December 1945, the Labor Union Law was enacted. In addition to recognizing labor's right to form unions, bargain, and strike, this revolutionary law also introduced a labor committee system that served as an independent administrative entity comprising three parties (management, labor, and govermment).Then, in 1947, the two other of the so-called "three labor laws" were enacted-the Labor Relations Adjustments Law, and the Labor Standards Law. These laws formed the foundation for democratic labor relations in the postwar period. As such, labor unions organized rapidly, and in a period of three months union membership increased from
124 380,000 to 3,000,000. Yet, disputes between labor and management intensified, giving rise to several large-scale strikes that harmed company business and sometimes damaged the Japanese economy. 4.11 At the samnetime, however,following the progress in the growth of the economy, enterprise unions based on Japan's distinctive "lifetime employment systen," were established, giving rise to more favorable labor-managementrelations. In this way, labor's sense of belonging to the company increased the morale of the labor force and helped strengthenthe competitivenessof Japanese firms.
B. Postwar Reconstruction Finance and the Dodge Line
1! Priotr- Production 4.12 Due primarily to the massive destruction of Japan's production facilities during World War II, Japan's production levels had fallen drastically. While in October 1946 the nation returned to production levels that were 30% of prewar levels, the index of industrial production in the mining and mnanufacturingsectors again began to decline (Table IV-I). This decline was due the reluctance of firms to engage in production activities in the face of such conditions as the unsettled nature of the reparations issue, an insufficient supply of resources, and rampant labor offensives. Consequently, many firms attempted to cope with this situation by disposing their resource holdings.
Table IV-1. Stagnationof Production in 1946 (1934-36=100)
Minng and Mewa Mwblinoy Chemicas Texuiles Foodstffs Manucuning
January 1946 18.3 7.0 27.5 14.3 5.9 35.0
April 28.7 14.1 50.3 24.2 8.5 36.8
August 35.6 18.0 61.3* 31.9 13.7 41A*
September 35.7* 19.1* 60.2 31.3 16.1 40.7
October 34.9 18.7 55.4 32.2* 16.9 40.8
Novemnber 34.8 18.1 55A 28.7 18.1 37.6
December 33.1 17.3 49.3 27.9 18.2* 39.0
Notes: Table is based in the Agency for Economic Survey's revised index of industrialactivity. * indicates the annual peak. Source:Industrial Bank of Japan(1957), NihonLKgyognko50nenshi.
4.13 At the same time, the retirement allowances paid to veterans at the end of the war, compensations made to munitions manufacturers, payments by the Allied forces to cover occupational costs, and the payment of wages and retirement allowances from an increase in bank loans gave the private sector an abundance of liquidity. As such, the desire to convert money into goods given the latent consumer demand that had been suppressed during the war, and the movement towards collecting property taxes, effected a dramatic rise in consumption demand and the concentation of capital in the purchase of consumer goods.
125 4.14 Consequently, inflation increasedrapidly, and between the wa's end and February 1946 the wholesale price index multiplied 2.6 times. However, because commoditiesrequired for daily living were extremely scarce, macroeconomic policies to control inflation (Emergency Measures to Cope with the Economic Crisis, February 1946) and policies to promote the resumption of production were implemented successively. 4.15 The continuation of economic embargoes even after the war's end made it impossible for Japan to import raw materials from abroad. Consequently, the mining and manufacturing industry had to utilize natural resources that had been stockpiled for military use in order to produce consumer goods, and fears grew that it would no longer be possible to produce consumer goods when these stocks were depleted. 4.16 In order to avoid the impending economic crisis, the government decided to promote a Priority Production System to increase production in the mining and manufacturing industries. The Priority Production System sought to increase mining and manufacturing output by jointly expanding the production levels of two key sectors - coal and steel. The expansion in domestic coal output would be allocated as a priority to the steel industry, whose production levels had declined with the dearth of the supply of coal. In tum, steel production was to increase, which could then be used to increase coal output.
4.17 To promote priority production, the government used various fiscal and monetary tools - including direct control measures, such as materials rationing, price controls, and the priority allocation of imported goods, and policy-based measures,such as financing from the Reconstruction Finance Bank (RFB) and price-support subsidies. The govemrmentwas forced to intervene in the production of producer goods due to the suspension of foreign trade and the extremely low standard of living in Japan at that time. Moreover with the enterprise reconstruction issue, the reparations issue, inflationary pressure, and unstable social conditions for private-sector finance, the government decided that production from the consumer goods sector could not be extended smoothly to the producer goods sector. 4.18 Established in January 1947 with V10 billion in government funds, the RFB engaged in financing activities from 1947-48 primarily to respond to the needs of the Priority Production System. Later, when the Dodge Line was implementedin March 1949, new lending operations were suspended, and RFB's task was limited to managing and collecting credit claims. Finally, in 1952, the RFB was disbanded, and its credit claims and debt liabilities were inherited by JDB. 4.19 In the immediate postwar period, the progression of inflation and monetary tightening were straining financial conditions, and it was extremely difficult to secure capital funds from private financial institutions for priority production. Thus, in January 1946, the government began to consider a recommendation by the Committee on Financial Systems Research to use fiscal funds to finance such basic industries as iron and steel and coal. Yet, at the same time, GHQ indicated that it was moving toward terminating government wartime compensation, and the government began to consider measures to counter the beating that firms and financial institutions would take. As such, then Fmance Minister Ishibashi, advocating an aggressivedeficit fiscal policy, stated that, "the main cause of the production bottlenecks which hinder the resumption of production is insufficient capital; even if it invites a fiscal deficit and a rapid increase in currency issues, we must supply necessary financing." Against this backdrop, the RFB was established as an institution to provide for reconstruction finance. 4.20 With the introduction of the Priority Production System in early 1947, the priority allocation of resources, capital, and labor to the coal and iron and steel industries was strengthened. Consequently, the production index for FY 1947 increased by 33% over the previous year for coal, 31% over the previous year for iron and steel, and 26% over the previous year for mining and manufacturing. Thus, for the time being, it appeared that the domestic production of producer goods was on its way to recovery (Table IV-2).
126 Table IV-2. Index of Production for Major Industries: 1946 to 1948'
All Miningand Manufacturing Coal Imn andSteel Increaseover Increaseover Incrase over Year Index PreviousYear Index PreviousYear Index Prvious Year
1946 27.6 55.3 22A 1947 34.7 25.7 73.7 33.3 29.3 30.8 1948 45.8 32.0 90.6 22.9 49.2 67.9
Notes:Table is basedon MMT's"Survey of the Indexof IndustrialProduction." The index uses 1934-36 asa base(1934-36=100). Source:Kosai (1981), KodoSeicho No Jidai.
2) RFB Financing:_the Centepee of Economic Reconstruction 4.21 From its inception to March 1949, the RFB financed a total of V295.1 billion in new loans and V132 billion in net loan increases. This sum was colossal, and occupied a high position in the funding supply in Japan at that time (by the end of March FY 1949 it accounted for 23.3% of the loans outstanding among all financial institutions). It was practically the only institution that was supplying funds for capital investment, providing 74% of the capital investment made by all financial institutionscombined. 4.22 For major industries, such as coal, iron and steel, fertilizers electric power, ocean shipping, and textiles, the RFB supplied 84% of the total funding for capital investment and 16% of the total working capital, for a total of 44% of the total financing supplied to these industries by all financial institutions. For coal, electric power, and ocean shipping in particular, the RFB provided a large proportion of the total funding provided by all financial institutions - 70.7% of coal industry borrowing, 88.1% of electric power borrowing, and 65.5% of ocean shippingborrowing. That is, the majority of the capital required by these priority production industries was funded by the FRB (Tables IV-3 and IV-4 ).
4.23 For the other pillar of priority production - the iron and steel industry - the RFB provided 68.9% of its capital funding requirements (although a smaller proportion of the total amount of funding provided to this industry).Because the iron and steel industry already had a fairly extensive amount of plant and equipment, its capital investment needs were limited. And thus, RFB funds were primarily a supplement to the financing required by iron and steel to secure the distribution of coal, as well as to price-support subsidies that were provided by the general account as one of the economic measures to support priority production, particularly iron and steel. 4.24 The RFB also played an importantrole in maintainingthe official price system by financing working capital for firms and supplying funds for public organizations. Funds for working capital were used by firns to cover the portion of government price subsidies that could not be supplied due to budgetary restrictions; of the total increase of V37.6billion in working capital, VI 8.8 billion went for deficit working capital. For eleven public corporations, including the Food Distribution Corporation, the Price Adjustment Corporation, and the Oil Distribution Corporation (which had been founded as govemment organizations to control the accumulation, distribution, and safekeeping of commodities), RFB was the sole provider of funding, including the large amount of funds required for their worldng capital (funding to public corporations was VI 8.2 billion, as shown in Table IV-5).
127 Table IV-3. RFB's Share of the Total Loans Outstanding among All Financial Institutions: to March 1949
All Financial RFB(B) (B)/(A) Institutions"(A) (billionyen) (billionyen) (%)
Coal Mining 67.3 47.5 70.7 EquipmentFunds 33.9 32.8 96.9 WorkingCapital 33.4 14.7 44.0 Iron andSteel 21.9 3.5 16.1 EquipmentFunds 2.8 1.9 68.9 WorkingCapital 19.1 1.6 8.3
Fertilizer 16.1 6.1 37.9 EquipmentFunds 7.1 4.5 64.0 Working Capital 9.0 1.6 17.3
Electric Power 25.4 22.4 88.1 EquipmentFunds 20.6 19.1 92.9 Working Capital 4.8 3.3 67.5
Ocean Shipping 20.6 13.4 65.5 EquipmentFunds 15.6 13.3 85.6 Working Capital 5.0 0.1 2.6
Textile 69.9 5.0 7.1 EquipmentFunds 11.1 5.0 44.9 Working Capital 58.8 - -
Other Industries 344.9 34.0 9.9 EquipmentFunds 36.4 17.6 48.3 Working Capital 308.5 16A 5.3
Total Financing 566.1 132.0 23.3 Equipment Funds 127.4 94.3 74.1 Working Capital 438.7 37.6 8.6
a. The figures for all financial institutions are basod on a survey by the BOJ Statistics Bureau. Source: JDB (1963), Nihon Kaihatsu Ginko Junen Shi.
128 Table IV-4. Actual RFB Lending, by Industry
FY1946 FY1947 FY1948 Amount (M) Amount () Amot () (billionyen) (billionyen) (Wioa ven)
Coal 1.0 17.0 18.8 35.0 27.6 38.1
I=onand Steel 0.3 4.9 1.6 2.9 1.7 23
Featilizer 0.6 9.4 3.2 6.0 2.3 3.1 ElectricPower 0.3 5.0 2.5 4.7 19.6 27.0
Ocean Shipping 0.5 8.5 2.3 4.5 2.5 3.5
Shipping Public - - 1.3 2.5 6.8 9.4 Cmoporation
Textiles - 0.8 0.7 1.2 4.3 S.
Odthes 3.3 54.4 23.1 43.2 7.7 10.7
Total 6.0 100.0 53.5 100.0 72-5 100.0
Source:1DB (1963), I°hon KaihasuGinko Junen Shi.
Table IV-5. Trends in RFB Loans Outstanding, by Use
1946 1947 1948 End of Fiscal Yea Amount (%) Amount (%) Amout (%) (billionyen) (billionyen) (billio yen)
EquipmantFMnds 2.8 47 26.0 44 94.3 71 GeneralIndusties 2.8 - 24.7 - 85.6 -
Public Corpoations - - 1.3 - 8.7 -
Workbg CapIl Fun 3.2 53 33.4 56 37.6 29
Generalnd ustries 3.2 - 16.5 - 282 -
Public Corpoations - - 16.9 - 9A -
TOWa 6.0 100 59.5 100 132.0 100
Gened Industries 6.0 - 41.3 - 113.8
Public Corporations - - 18.2 - 18.2
Soue:. 1DB (1963),Mihon GihauAGinkoJunen Shi.
129 Table IV-6. Conditions for RFB-Bond Issuance
FirstIssue:February 20, 1947 (1) Redemptionpeiod I year (2) Bondredemption method Cash redemptionof full amount (3) Issueprice V95.62 (4) Yield 4.58%annually
Source:JDB (1963),Nihon Kaihtsu GinkoJunen Shi.
Table IV-7. Annual Issuance of RFB Bonds (billion yen)
FiscalYear IssueAmount Underwrittenby Underwlittenby BOJ PTivate-Sector 1946 3.0 2.7 0.3 1947 55.9 46.6 9.3 1948 109.1 77.3 31.8
Total 168.0 126.6 41.4 Source:JDB(1963), Nihon KuibaWu.QinkolnnMn Shi.
Table IV-8. nrease in GovermmentDebt and RFB Bonds: (1946-48) (billion yen)
Underwrittenby Underwrittenby Shareof PrivateFinancial BOJ Others Institutions Total GovenmentDebts 209.3 115.7 883 325.0 (64%) (36%) (27%) (100%) RFB Bonds 70.3 38.8 38.8 109.1 (64%) (36%) (36%) (100%) Total 279.6 154.5 127.1 434.1 (64%) (36%) (29%) (100%)
a. Govenment debt includes domestic bonds, short-term securities, and loans. Source: Econornic Planning Agency (1959), S=go Keizaihi Zaij Kinyuhen.
130 4.25 RFB financing and price-subsidy supports made priority production possible and had an impact on the resumption of industrial production. Yet, because these measures were one of the determinants of the rapid increase in inflation, they became the target of criticism. Initially, the funds for the RFB were to have come from government expenditures; in reality, budgetary restrictions forced the [PB to issue bonds as its primary source of funding, most of which were underwrittenby the Bank of Japan. Because the conditions for issuing RFB bonds were practically identical to those for the Industrial Bank of Japan (special bank debentures) -- that is, since the Bank of Japan deemed that RFB bonds would be subject to the same collateral conditions governing government bonds -- the conditions for private underwriting should have been established. Yet, because the volume of capital held by private financial institutions was insufficient, collateral stipulations actually inhibited private underwriting C(able IV-6 lists the conditions for RFB-bond issuance). Because private sector underwriting was sluggish in July 1948, the issue price dropped from 95.62 to V93A3.30 Against loans outstandingof VI32.0 billion at the end of March FY 1949, the proportion occupied by RFB-bond issuance was 83% , or V109.l billion, 64% of which, or V70.3 billion, was underwritten by the Bank of Japan. This underwriting increased the supply of money, and became one of the reasons for inflation (during this period, total government indebtedness, including RFB bonds, was V434.1 billion, 64% of which was underwritten by the Bank of Japan (Tables IV-7 and IV-8). 4.26 Yet, in contrat to its sizable role, the RFB had little autonomyas a financial institution, and the locus of responsibility for its lending decisions remained unclear. At the time, RFB lending policy was set by the Economic Stabilization Board. The Board drew up a detailed lending plan each quarter, specifying the industries and the type of lending that should be emphasized. Only after this plan was accepted by the cabinet did RPB receive its instructions. Furthermore, even for individual lending decisions, deliberations were carried out, not within the RFB, but within a complex external framework that included the Reconstruction Finance Conmmittee(itself a body of representatives from various govemment organizations), the committee's suborganizations, the Board of Secretaries, and informal group meetings. In short, authority for lending decisions did not rest with the RFB, meaning that, in addition to RFB's having lost its autonomy as a financial institution, the locus of its lending responsibility was blurred. This managerial characteristic of the RFB would later become the focus of attention when the RFB became entangled in the conuption scandal surrounding te Showa Denko Corporation. This scandal itself provided an opportunity to reflect upon and reevaluate the make-up governmentfinancial institutions.
4.27 SuspiciUnsalso arose with price-subsidysupports - that illegitimateexpenditures had been included in the calculation of production costs. Moreover, while these supports helped reduce consumer prices, they were criticized because, at the macro level, the issuance of governmentbonds to pay for the subsequentincreases in fiscal expendituresspurred inflationarytendencies.
3) The Dodge Line 4.28 With the successful impiementationof priority production, the first step had been taken to resume production. However, as discussed in the previous section, this policy was fraught with certain problems beyond its inflationary effect, which was making it difficult to establish economic stability based on expanded export (Table IV-9). 4.9.9 As the government began to consider policies to reduce inflation in order to stabilize the economy, GI4Q tried to stabilize the economy in a single stroke by issuing a direct order to the government in January 1948 in the form of the Nine Principles for Economic Stabilization -- or the Dodge Line. In addition to promoting a super-balancedbudget and discontinuingprice supports and other measures, one of the recommendations of GHQ was to suspend RFB financing, which it argued was one of the prime instigatorsof inflation. 4.30 But recognizing the necessity of RFB finance, the govemment advocated that the RFB be maintained, and that only the inflationary aspects of the procurement of funds be removed. However, beyond its desire to implementthe Dodge Line, GHQ also had doubts about the basic
131 Table IV-9. CommodityPrice Trends (1934-36 = 100%)
Year 1946 1947 1948 1949 WholesalePrice 16.3 482 127.9 208.8 Producergoods 16.3 44.8 115.0 171A Consumergoods 15.4 50.2 144.5 248.8 ConsumerPrice 50.6 109.1 189.0 236.9
Source:Kosai (1981), KodoSeicho No lidai. structure of the RFB (which was then involved in the Showa Denko scandal) and its relatively large number of delinquent loans; it thus strongly urged that RFB functions be suspended immediately. In March 1949, RFB operational activities were in fact discontinued. In the period before it was disbanded, the RFB's role was limited to the managementand collection of credit claims. 4.31 The Dodge Line was implemented in 1949 according to a scheme to achieve a super-balanced budget and establish a single exchange rate. Although this policy did respond successfully to the underlying causes of inflation, it also led to powerful deflation. That is, as a super-balancedbudget, the FY 1949 budget soughtnot only to balance the General Account but also to achieve an overall balance, including that of the Special Account. To that end, a large-scale repayment of government debt was made (a total of VI 30.0 billion, V109.1 billion of which was RFB debt repayment). As such, receipts and payments of treasury accounts with the private sector led to a substantial surplus for receipts, and had a fairly strong deflationary impact on the Japanese economy. 4.32 With the implementationof the Dodge Line, commodity prices began to drop considerably (by an annual rate of 30 to 40% from their peak in spring 1949); the currency supply was also reduced, and postwar inflation disappeared almost entirely. With the disappearance of inflation, firms changed their attitude about pursuing the types of debtor profits that are possible during periods of inflation, and began rationalizingmanagement, making it possible to resuscitate private individual savings. These factors allowed the economy to move towards more normal levels of production, and supported constructing the base for an independent economic systern, in which international competitivenesscould be strengthenedwith the stabilization of exports. 4.33 At the same time, however, fund scarcities from these austere policy measures led to sluggish investment. Moreover, a fixed exchange rate was established (V360= $1), exports took a beating, severely inhibiting aggregate demand. Thus, with the deflationary policies, the Japanese economy fell into a serious economic slump, and finns were forced to make cuts in personnel. The impact was particularly strong on small- and medium-size fms; from March to July 1949, 6,207 companies closed, suspended operations, or cut production. The economic situation was so serious that, in January 1949, even the number of regular employees, which had increased continually since the end of the war, began to decline, and there were 8 times more job applicants an job offers. 4.34 In response, the so-called disinflationary policies to support monetary measures, were implemented in June 1949. At issue was how the vacuum in the supply of industrial funds created by the suspension of RFB lending was to be taclded. After the Dodge Line was implemented, three vehicles were used to cover this financing: loans from private financial institutions, the issuance of stocks and bonds, and funding provided to private enterprises through the Assistance Goods Fund.
132 Table IV-10. Trends in the Supply of IndustrialFunds (Net Change Basis): FY 194749
FY1947 FY1948 FY1949 Amount Ratio Amount Ratio Amount Ratio (bil;ionyen) (%) (billionycn) (%) (billionycn) (m)
GovernmentFinance 44.2 33.2 66.0 15.1 7.5 1.5 RFB 44.2 33.2 66.9 15.3 -2.7 -0.5 AssistanceGoods Fund - - - - 9.0 1.8 DepositFund Bureau - - -0.9 -0.2 1.2 02 andothers PrivateFinance 80.2 60.1 312.1 71.3 363.1 73.4 Allbanks 21.8 16.3 213.1 48.7 297.7 60.2 Others 58.4 43.8 99.0 22.6 65.4 13.2 Stocks/Bonds 9.0 6.7 59.6 13.6 123.5 25.0 Total 133.4 100.0 437.7 100.0 494.1 100.0
Source:BOJ.
Table IV-1 1. Percentage of Equipment Funds Procured by Industry: FY 1949
anumberof Required Procured Percent Targeted Amount Amount Procured Companies (billionyen) (billionyen) Coal 17 30.0 9.7 32 Electric 10 37.6 19.0 50 Power Iron andSteel 24 6.7 4.4 65 Mining 58 8.7 7.3 85 Chemicals 90 9.6 8.7 91 Maahines 86 3.0 1.9 63 Textiles 52 5.5 6.9 126 Others 100 5.5 4.5 81 Total 437 116.6 62.4 59
Note: Datafrom MlTrs Entprise Bureau. Source:JDB (1963),Nihon Kaihatsu Ginko Junen Shi.
133 Table IV-12. Breakdown of Actual Lending by AssistanceGoods Fund to Private Enterprises (billion yen) Sub-Total Total Percentageof TTo Fiscal Year 1949 1950 1951 (1949-51) 1952 Lending
ElectricPower 10.1 10.0 23.2 43.3 19.8 63.1 45.1
Ocean Shipping 8.3 12.9 21.5 42.7 11.9 54.6 39.0
Others 5.9 4.5 1.7 12.1 - 12.1 8.1
Coal 3.8 2.4 0.2 6.4 - 6.4 4.6
Ironand steel 1.4 0.8 - 2.2 - 2.2 1.5
Fertilizer 0.3 0.2 - 0.5 - 0.5 0.5
Chemicals 0.3 0.2 0.3 0.8 - 0.8 0.7
Others 0.9 1.2 2.1 - 2.1 1.5
Small- and Medium- 0.3 1.2 1.9 3.4 0.7 4.1 2.9 Size Finns
PrefenredStocks - 5.2 - 5.2 0.8 6.0 4.2
Total 24.6 33.8 48.3 106.7 33.2 139.9 100
Source:JDB (1963), Nihon Kaihatsu Ginko Junen Shi.
Table IV-13. Breakdown of Actual Lending by Assistance Goods Fund to Public Enterprises (billion yen) Fiscal Year 1949 1950 1951 Total 1952 1953 (1949-51)
PublicWorks - 8.0 2.9 10.9 - -
GovementEnterprises 27.0 19.0 - 46.0 - -
Telecommunications 12.0 12.0 - 24.0 - -
Nadonal Railways 15.0 4.0 - 19.0 - -
NationalForests - 3.0 - 3.0 - -
GovernmentOrganizations - 11.1 20.4 31.5 25.0 17.8
JDB - - 10.0 10.0 22.0 13.8
EIBJ - 2.5 5.0 7.5 - -
Housing Loan Corporation - 8.6 1.A 10.0 -
Agriculture,Forestry and Fisheries FinanceCorporadon - - 4.0 4.0 3.0 -
Electric Power Development Co. - - - - - 4.0
Total 27.0 38.1 23.3 88.4 25.0 17.8 Source: JDB (1963). Nihon Kaihatsu Ginko Junen Shi.
134 4.35 For private financial institutions,disinflationary policies included measures by the Bank of Japan to loosen the monetary supply and supply capital through fiscal funds (by redeeming of the holdings of government and RFB bonds by private banks). With a recovery in the propensity to save, deposits and the percentage of lending by all banks in the total funding supplied to industry reached 60% in FY 1949. However, because RPB financing had been suspended, it was not possible to finance the increase in the demand for funds; consequently, the ratio of overloans was high during this period (See Table IV-10, as well as Table III-4 in the previous chapter). For this reason, banks carried out selective financing, and the limitations on bank lending to increase industrial funding were recognized. The scarcity of funds for industry during this period is illustrated by financing for equipment, for which, according to a survey carried out in FY 1949 by Mm, only 59% of required capital funding had been procured (Table IV-11). The funding scarcity was even more serious in the first period of FY 1950, when only 23% of necessary funding was acquired. 4.36 GHQ had assumed that the major vehicle for long-term funding would be stocks and corporate bonds; as such, a U.S.-style Securities ExchangeLaw and Commercial Law were enacted, and the Stock Exchange was reopened in 1948. However, the condition of private-sector capital accumulation was making it impossible for firms to procure capital directly from the security market, giving rise to such indirect funding vehicles as financing from private financial institutions with funds supplied through Bank of Japan purchasing operations, and Bank of Japan loans secured through corporate bonds. While stocks and bonds increased remarkably as a substitute for RFB financing in FY 1948-49,the rapid expansion of issues and the spread of deflation began to stagnate the capital market, and the market slumped severely by the end of FY 1949. The slump in corporate business performance was also marked, and in early FY 1950 the amnountof stocks issued declined significantly, accompaniedby a stagnation in corporate bond issues. 3) The Assistance Goods Fund 4.37 Before the Dodge Line was introduced, the Japanese government had used the proceeds from the sale of commodities provided as assistance by the United States as the revenue source for price supports for foodstuffs and basic commodities. In order to put these proceeds under the administration and operation of the GHQ, the Dodge Line introduced a system whereby the Japanese govemment could deposit an equal amount of yen in Assistance Goods Fund Special Account. From 1949 to 1951, a phenomenal sum of Y304.3billion was deposited into the Assistance Goods Fund. While the Account allocated 32%, or VI 11.8 billion, of the deposits to repaying debts and purchasing govemment bonds, the remaining portion was recycled largely as long-term funding: 31% (or Y106.7billion) was allocated to private enterprise investment, and 26% (or V88.4 billion) was allocatedto investment in public enterprises (Tables IV-12 and IV-13). 4.38 Although industrial circles had anticipated that the Assistance Goods Fund would be used to finance capital investment by industry as a substitute for RFB funding, the existence of inflation prompted GHQ to screen applicants strictly, and to release initial funds from the Assistance Goods Fund quite restrictively.However, with the prevailing scarcity of long-term funding, the share in the capital fund supply (external capital) increased gradually from 23% in FY 1949 to 26% in FY 1950, to 28% in FY 1951, thus also expanding its role. Ihe financing of private corporate investmentsalso shifted from coal and iron and steel, which were important under priority production, to electric power (45%) and ocean shipping (39%). This shift sought to redress the production bottlenecks of basic industries that accompaniedeconomic expansion. 4.39 Until FY 1950, part of the Assistance Goods Fund earmarked for public enterprises was channeled primarily into the government operation of telecommunications and the national railways. Later, funding to these enterprises was to be supplied through Trust Fund Bureau Funds; consequently, the portion of the fund eannarked for these purposes was used to establish such policy-based financial institutionsas 1DB and the Export Bank of Japan.
135 2. 1951 to 1955 A. Desire for Long-Term Stabilizaton Funds I) Koreai War Boom and Economic Recovery 4.40 As the 1950s began, thc Japanesc economy under the Dodge Line was beginning to show signs of stagnation, due to the scarcityof industrial financing; moreover, while real national income and manufacturing and mining production had reached levels similar to those of the prewar period, exports and imports, capital investment,and per-capita income had not, and were lagging behind the Western European nations, which had already reached the prewar levels. Thus, recovering from the delay in economic reconstruction,restructuring the industrial sector, and coping with changes in the trade structure when Japan forfeited her colonies were the crucial policy priorities. Demands for government financing to rebuild industry began growing in the private sector. 4.41 In the government sector, the balanced fiscal policies under the Dodge Line generated a surplus of noninflationary funds, including Deposit Fund Bureau funds, such as postal savings, postal insurance, and welfare insurance, as well as repayments and interest from the Assistance Goods Fund and RFB lending. 4.42 This was the prevailing economic climate when the war broke out in Korea in June 1950. The war boom exerted a new influence on the Japanese economy. The special demands and the increase in exports as the war progressed led to an increase in production and prices, and thus to a large increase in the profits of firmns.As the investment activities of firms became more aggressive, the domestic economy quickly began to show signs of general prosperity - for example, operating prorit ratios in the manufacturingsector were 6.5% in the first half of 1950, 9.9% in the second half of 1950, and 15.9% in the first half of 1951. However, the process of expansion also gave rise to several new problems for an economy that was still in recovery and in which limited capital had been accumulated. 4.43 One of the problems was that production increases were not balanced among industries. Production grew swiftly in such industries as teytiles, chemicals, metals and lumber, due to expanded exports and the special demand, and then spread to other sectors, such as iron and steel and the machine industry.Yet production was slow in other basic industries and in industrial sectors related to dormesticconsumer demand - for example, in the electric power, coal, and ocean shipping industries, which had limited plant capacity for production increases. 4.44 Second, economic expansion through the promotion of exports was being compromised by the rapid increase in commodityprices due to production bottlenecks.In FY 1950-51, the wholesale price increased by 39% (Table IV-14). 4.45 Third, with the scarcity of funding, private banks were targeting their loans at industries related directly to the special demands generated by the war boom, such as textiles, foodstuffs, lumber, and pulp. Thus. an increasinglyscarce supply of capital funds for the basic-industrial sector was threatening its profitability. 2) The Transition from Tight Financial Policies to More Aggressive Policies 4.46 The economic climate created by the Korean War provided a good opportunity to shift away from the deflationary policies of the Dodge Line. Demands were growing for more active fiscal and monetary policies, and industrial circles began calling for establishing a govemment financial institution to finance industry. Furthermore, while the government was using import expansion policies to control the inflation that accompanied the Korean War, based on an understanding with the GHQ, it began devising measures for applying government funds and supplying long-term financing. Such measures included the enactment of tle Export Bank Law in 1950, the reorganization of the Deposit Fund Bureau into the Trust Fund Bureau, and the underwriting of bank debentures.
136 Table IV-14. Commodity Price Increase duringthe Korean War
OverseasWholesale Price Year Wholesale Consumer Nominal U.S. GreatBritain Price Price Wages
1949 100.0 100.0 100.0 100.0 100.0 1950 118.2 93.2 126.5 104.5 102.4
1951 164.1 108.5 139.1 116.1 111.2
1952 167.3 113.9 160.5 112.9 111.2
1953 168.4 121.A 182.1 111.6 114.7
Source: Kosai(1981), KodoSeicho No Jidai.
4.47 The Japanese govemnmentfirst began considering creating the Export Bank of Japan in 1949, and finally established the Bank in February 1951. Two factors underscored why the Bank was necessary: • As recommended by the Dodge Line, the promotion of exports was necessary for rebuilding the Japanese economy. • Beginning in about 1950, the industrialization of countries in Southeast Asia generated an increase in the number of orders for plant exports from Japan. However, while it required more than 6 months to produce these plants, private financial institutions did not have the funds to finance the capital required for this period of manufacture. Thus, this task was entrusted to the Preferential Trade Bill System of the Bank of Japan. 4.48 Two proposals were forwarded for the structure of the Export Bank: a nongovermmental institution managed freely by private-sector parties and a more publicly oriented institution whose directors and personnel should be drawn from current civil servants. In the end, after negotiations with Dodge, the decision was made to make the bank independent from the direct management of the govemment. This idea would be raised again as JDB was being created, and had a considerable impact on its ultimate functions. 3) The FoUnding of the Jan Development Bank 4.49 The idea of establishing a new financial institution funded by fiscal funds and responsible for financing Japanese industry was first proposed in January 1951 by then Fmance Minister Ikeda. The institution was expected to answer industrialdemand for a stable supply of capital funds in light of the following: * The ternination of RFB and RFB repayments. * The uncertain future of the AssistanceGoods Fund and its portfolio mnanagement * The use of short-term funds by commercial financial institutions to make long-term loans, thus hindering their liquidity, and the problem of how to refiance such loans.
137 4.50 The govemment later submitted a draft of the Japan Development Bank Law in which it advocated that JDB serve the following two functions: * Surplus fiscal funds could be passed through JDB and appropriated as long-term capital funds to such priority industrie as electric power, coal, ocean shipping and iron and steel, thus making it possible to control inflation. * With the dearth of private capital in Japan, JDB could supply funding, which the private sector could not serve, as an 'adjustment tank" by using the money it recovered from profitable industries as loans to industries with insufficient capital, thereby effecting the redistributionof capital. In other words, while administering the total amount of private funding, the government could secure necessary financing and avoid having to control private funding or implement preemptory lending regulations. 4.51 Later, as negotiations with the GHQ continued, various changes were made in the initial draft, including a decision not to include articles for bond issuance and borrowings. An understanding was then reached between GHQ and the government about the scope of operations, and it was agreed that JDB would inherit RFB debts and credits. Finally, in March 1951, the JDB Law was enacted by the Diet and the following month JDB was established with a V2.5 billion installment (for a total amount of V10 billion for that fiscal year) from the Assistance Goods Fund. As an independent bank, the JDB chose as its first governor Mr. Ataru Kobayashi, a well-known business figure from the private sector.31 4.52 Diet debate about the structure and scope of the JDB centered on the following questions:
* If JDB attempted to undertake the risk of private financial institutions single-handedly,would it ultimately incur a large number of delinquent loans? • To the extent that JDB was to be a government-affiliated institution, would considerablepolitical pressure be imposed on its funding decisions?
* If JDB was to remain autonomous, how would it be possible to ensure that loaned funds were in line with the govemment'seconomic policies? 4.53 Based on the government's views about these issues, the JDB was configured as follows (which closely reflects its actual managementthereafter): - JDB would not be the sole vehicle for covering the risks of private financial institutions;the purpose of 1DB would be to promote and supplementprivate funding cooperatively with private financial institutions. The statute in the Japan Development Bank Law mandates that JDB not compete with private financial institutions. * JDB would both be a government organ and have autonomy of action: while the government would formulate general policy and basic plans, decisions about how these policies would be implemented and funds managed would be the autonomous responsibilityof JDB, based on sound financial principles.
4.54 The JDB Articles of Incorporation stipulate that JDB comply operationally with the govemment's general policies or basic plans. However, the term "compliance" does not mean that J1DBmust follow the government's plan; it is understood that JDB will carry out its operations based on sound managementpractices of its own volition and responsibility. Each year the govemment indicates its fundamental policy direction in a Basic Operating Plan, but the plan also specifies that JDB is to select individual firms and make financial decisions independently. These JDB functions and its configurationwere formulated on the basis of a critical review of the RFB (Table IV-15 lists the major points of difference between the two institutions).
138 Table IV-15. Compaaive Deswnipionof the RFB and the JDB
RPB JDB(to anoximainlv1955) Scopeof Operations Supplyequipment funds and working capital Supplyequipment funds 'Matutty peiodsnot sdpulated by law; ableto supply short-term financing *Maturlity period fixed by law; a maturitypeziod of lessthan I yearnot possible fora petiodof sixmonths *Bylaw, funds could be provided only when repayment could be ascerained Fundingcarried out for deficit financing that canied a significant *Competitionwith private financial Institutions prohibited by law epaymentrisk OInprinciple, financing only provided to theprivate sector Compeddonwith the business areas of privatefinanc;a institutions *Whenit wasestablished. JDB was also responsible for fudtingto small- and Financingfor publiccorporations was also a nminbusiness undertaking medium-sizerums; in 1953-54.this role was transferd to dieSmall Business *Fundingto small-and medium-size enterprises FinanceCofporatid and JDB began to spcializeas an industrial financing instdtudon LendingConditions Interest:generd, 10.2%; coal, 9.5%; small- and medium-size firns, 10.6% lnterest:standard rae, 10%(lowered to9% in 1955);inidally, tbhee we no Loanpedod: not pariculauly resricted; since forecst was impossible due preferendalinteest rates but begiWnng in October 1952 a to theeconomic upheaval, numerous loans were made with a preferendalinters rAte(7.5%) was applied to theelectric power and provisionalrepayment pediod, oceanshipping industries ( reduced to 63%in 19S4) Loanperiod: principally from I yenrto within5 years(for electricpower. oceanshipping. and othens qiing long-temsfor investment w _tmurs, the periodwas within 30 years) FundPrcurement Fundsprcured thmugh govemnment equity ctal andbond issuance Inially, operatingfunds wene procured dtough govennt equitycapital; later,with the first legal reforn, gvanm t loansand foegn capit loans wenadded u fundirnetoes Loan Fundingpolicy proposed each quater by the Economic Stabilization Board 3DBoperatng policy indiated in thegovemmentes Basc Opeaing PlM; Decision-Making aftercabinet resolution was indicated to theRFB; depending on amounts, decsion-maingautwority for independmtapplication and lending deciin Structure Individualfunding decisions determined bythe following extemal structe: residodwith theJDB Govenor ReconstductionFunance Committee (main members: related ninisters; BOJGovemor) SeceariesMeedng (main members: division chiefs from related governmentagenies) FundingtDiscussion Group (mainmernber BOJ) Budgct Eachbusiness year, the funding plan a theexpense budget were Thebudget for revenueand eipenditures for ech businessyear was sobmitted submittedtothe Reconstrucdon Finance Committee; aroval nectssa. to theDiet dieDiet made the decisions Supervision Jointsupervision by theFinance Minister and the MM Ministr.the FmanceMinistcr ReconstucidonFinance Committee was the direct supervising hnstitution lime Period TemporaryOrganization Perptal GovarnmentFince Orgaization
Source:JDB Fgure IV-1.JDB Organization:1955
Officeof Scuetiat
PersonnelDept
InspectionDept.
Planningand CoodinationDept
RegionalDept Auditor LoanDepL I
Loan Dep II
Senior Supervisd-Lon Dept Governor F=twoE Dimetors Pojet AppraisalDept
Accoumtingand Treasury Dept.
Economicand IndustrialReserch Dept
GeneralServiceDt
OsakaBranch Counselors NagoyaBranch
FukuokaBranch
SapporoBranch
140 4.55 JDB staffing reflected widc-rangingfinancial expertise. Mr. Kobayashi,the first Governor, was the president of the Fukoku Life Insurance Company and the head of the Life Insurance Association. The remaining executives of JDB included an executive and a bureau head from the Bank of Japan, an executive of the Industrial Bank of Japan (IBJ), and a branch manager from the Nippon Kangyo Bank. And because it was not feasible to staff the organization solely with new personnel,JDB asked for assistance from the Bank of Japan, IBI, and the Nippon Kangyo Bank. Of the 46 division and section chiefs and professionals, 27 came from these banks. Along with this arTayof finarcial expertise, JDB adopted the superiorappraisal methods used by such special banks as the IBJ and private banks in the prewar period. This process included evaluating the substance of the firmns,project plans, and the project constituent's ability to repay, and deciding whether or not a loan should or could be provided. Moreover, the appraisal department was made independent of the loan department in the bank. This personnel structure and its establishedappraisal procedures made it possible for JDB to embark swiftly on making independent loan decisions (Figure IV-1 provides the organizationalchart of JDB in 1955).
B. Establishing a Long-Term Fincial Institution 4.56 When JDB was established in 1951, the peace treaty had been concluded, foreign currency had been accumulated from the Korean War boom, and the groundwork had been laid for future development.At the same time, the supply of private capital necessaryto drive economic expansion was still insufficient, but demands for long-termcapital financing were growing with the increased investment in the expansion and rationalization of furms. Quickly after JDB was inaugurated, the number of loan applications increased to twice JDB's loan limit. And to respond to requests from borrowers, private banks were even beginning to depend on the Bank of Japan for overloans. The move was on by the government to consolidate and strengthen policy-based financial institutions (the People's Finance Corporation was consolidated, the Export Bank was reorganized into the Export-ImportBank, and the Housing Loan Corporation was consolidated). 4.57 To enable the newly established JDB to diversify its funding resources, have flexibility in extending credit, and introduce foreign currency, the government promulgated and enacted legal form in the following areas in July 1952: the transfer of private bank loans; governmentborrowing and foreign currency borrowing; the guarantee of loan obligations; the disposition of the Assistance Goods Funds; the establishment of legal reserve; and a reduction in and exemption from corporate taxes through a system of payments eannarked to the government . 4.58 The JDB Law had stipulated that JDB inherit the RFB. In August 1952, the total capitalization value of the RFB (V89.5billion) was combined with JDB's own capitalization (the loan amount inherited was Y78.7 billion for 6,865 loans), and, the RFB structure (including branches in Osaka, Nagoya, Fukuoka, and Sapporo) and most of its 369 personnel were folded into JDB. 4.59 IDB was also established in response to the loan portfolio management of the Assistance Goods Fund. At the outset, JDB was responsible for providing loans to all industriesexcept electric power and ocean shipping. But the government also began considering how the Assistance Goods Fund should be handled after the San Francisco Peace Treaty, given that its revenues would taper off when assistance to Japan was terminated. Thus, the government decided that incorporating the Fund into the FILP would be the most effective option, given that having two channels for loans to private firmnsmight harm the efficiency of funding operations. Thus, by October 1952, JDB had inherited all private loans fiom the Fund, which equaledV1I34.5 billion in outstanding loans. 4.60 Before JDB inherited all RFB and Assistance Goods Funds, the system of institutions and special accounts that supplied funds and the financial resources for these funds (Figure IV-2) were fairly complex. Thus, it was significant that plans had been made to enable 3DB to be the sole supply route for major industrial financing. The total amount inherited by JDB was a substantial 1216.2 billion (at the time, loans outstandingfor capital investment among all banks totaled 1217.1 billion). The fact that JDB turned this money into capital enabled JDB to consolidate its financial makeup and, with the repayment of RFB and AssistanceGoods Funds that had been invested after
141 FI5uxeIV-2. Capital Investment Supply Suuctun for GovemmentFunds: 1951452
Loansto pnvatefirms Elecltdpower, ocean from theeAssistanc Shlgjflng.s1aU-and GoodsFund' maCduK-i5zA (nidisacs
AssistanceGoods / and steel, coal, small- Fud pcialt FundSpecial IDBJDIIB .______~~~~~~~~~andIronmedium-size industiecs. A=unt .gricultr, ad forestrycta
-Bl,LTCB, etc. - General Tl fI\industries - Shoko ChuzdnBank Small-and medium-sizefrmos, Burtau Special Bankl 8ank-Agriculture andfoestry AccounlSeca debentures Norn Chuldn
Agriculture,FoeAItry Agrcltue. forst NorimChukin -and fisheries andFisheries Fund industries, General SpecialAccount B-k' Account medium-size SmallBusiness Credit Steall-and InsuranceSpecial -Shoko ChukinBank -industries Account
Sources:Japan Iron and Steel Federation (1959), SngDIgkkwhi. MM (1957),sontz YOaikL H3hisho. WWII, gave JDB an independent source of funds that it could use to provide new loans. In particular, with its more than '230.0 billion capital base, JDB had a solid financial base for discharging its duties when plans were implementedto introduce foreign capital. 4.61 But, while such institution as the Shoko Chukin Bank financed Japan's small- and medium-size firms in the prewar period, a special institution had not been established for supplying long-term funds for plant and equipment; this role had been assumed by the RFB and the Assistance Goods Fund. The situation was the same for loans to the agriculture, forestry, and fisheries industries. Thus, in the period of monetary stringency, a special financial institution directed at small- and medium-size firms was under consideration, and in 1951 a Special Account was established as the precursor to a special financial institution for supplying long-termcapital funding to agriculture, forestry, and fisheries. 4.62 When JDB inherited RFB funidsand the Assistance Goods Fund, it became responsible for loans to small- and medium-size firms and agriculture, forestry and fisheries. Yet, as the sole institution for carrying out policy-based lending to industry, it was not desirable that IDB expand into heterogeneousfields. Thus, JDB asked the govemment to establish special financial institutions for these fields, and the government eventually transferred business authority for small- and medium-size firms and the agriculture, forestry, and fisheries industries to two institutions: the Small Business Finance Corporation (established in August 1953 with a total of V12 billion placed under its control) and the Agriculture, Forestry and Fisheries Fmance Corporation (established in April 1953 with V2.6 billion transferred from 1DB). 4.63 In 1952 the Long-Term Credit Bank Law was enacted, making the Industrial Bank of Japan and the newly established Long-Term Credit Bank of Japan, the private financial institutions responsible for long-term financing. With the establishment of these long-term credit banks, a system was now in place for both the public and private supplyof long-term funding. C. JDB and the Introduction of Foreign Capital 4.64 In 1950, having concluded that capital from foreign firms, loans, and the introduction of technology from foreign firms were indispensable to reconstructing the Japanese economy, the government passed the Law Concerning Foreign Capital. At the time, Japan's foreign exchange reserves were fairly tight, and, according to the Foreign Exchange Control Law, approval was required for foreign exchange remittance. However, such approval was often influenced by foreign exchange conditions at the time, and the administration of foreign exchange was extremely strict. The Law Concerning Foreign Capital provided a powerful tool for introducing a linmitedamount of high-quality foreign capital into Japan, because it guaranteed the remittance of foreign exchange for the acquisition of stocks, loans, and technology by foreign corporations approved under the Law. Yet, because Japanese companies and the Japanese economy itself were not sufficiently appealing as investment markets, investment results were fairly limited. Thus, to spur the introduction of high-quality foreign capital, the prevailing wisdom was that, rather than having business companies introduce foreign capital directly, the govemment or governmentorgans should act as "roundabout" agents or guarantors. The govemment also hoped that by centralizingthe route for introduction,the inflow of foreign capital into Japan could be controlled, and foreign capital could be limited to public-works-relatedbusiness, such as electric power, the national railways, and roads. 4.65 The Japan Development Bank Law of FY 1952 gave 1DB pernission to borrow foreign currency and to guarantee debts for private firns in foreign currency. In 1953, the government began serving as a guarantor for JDB's liability for foreign currency borrowing. Thus, JDB began to function as a public internediary in the introduction of foreign capital. JDB began introducing foreign capital in October 1953 with a contract for World Bank credit for purchasing U.S.-made machinery to enable the three electric power companies in Kansai, Chubu, and Kyushu to provide thermoelectric power. In this case, JDB was the direct borrower, subsequently on-lending to the electric power companies, while the govemrnmentserved as JDB's guarantor to the World Bank. 4.66 In the loan negotiations for extending this credit, a debate arose between the World Bank and the government and JDB about World Bank requests for entering into project agreements with
143 the companies that were to be the final borrowers, and for using preferential ranking of collateral. First, not only did the World Bank want to supervise the projects-implemented by the companies, but it also wanted to extend its supervision to a broader area, including financial affairs and management.The Japanese govemment wanted to avoid excessive World Bank interference in the electric power business, but the World Bank argued that, because it was providing credit to meet the construction needs of thermoelectricpower plants, and not financial aid for JDB, it wanted to have direct cantact with the power companies. Eventually, the government and JDB consented to the project agreements. Second, against the World Bank's requests for preferentialranking of collateral, the government and JDB wanted loans to be granted without collateral; as a compromise, the two parties agreed to use the general collateral system normally used by Japanese electric power companies. 4.67 These negotiations provided the initiative to introduce foreign capital. Later, the World Bank increased the number of loans in which JDB was the intermediary, extending funding to strengtheningand rationalizing the machinery and iron and steel industries.
4.68 JDB and Mr. R.H. Lippman of the World Bank continued to discuss project agreements and collateral issues. When it was clear that JDB's methods for appraising applicants and administering loan funds were in line with those of the World Bank, the two parties agreed to rely on JDB's experience in such matters. This understanding was made concrete in 1958, as JDB began to require collateral instead of the World Bank, and project agreements were modified into subsidiary agreements. 4.69 Beyond these tools for introducing foreign capital, JDB could also serve as guarantor for foreigncurrency borrowed by Japanese companies. This practice commenced in 1954, when JDB was the guarantor for funding to Japan Airlines (JAL) to purchase airplanes. Later, such guarantees weretargeted primarily at the electric power industry, with long-term export credit furnished by the Export-Import Bank of the United States, primarily in the form of development loans in which American manufacturers participated.3 2 (The actual results of these tools for introducing foreign capital are provided in Table IV-34, section 4.130.) D. Increasing the Productivity of Basic Industries 4.70 While the special demand of the Korean War helped the Japanese economy expand, by 1952 the global economy entered a period of decline, and fear was growing that, if left alone, economic reconstruction might top out. Thus, in an effort to sustain its drive toward economnic independence, the Japanese government began to consider and implement various economic policies for accumulating a sufficientamount of high-quality capital. 4.71 Given the capital scarcities in the postwar period, the types of investment that should have been made had not materialized; thus, the government sought to rationalize the basic industries in which the obsolescence of plant and machinery was marked, such as iron and steel, coal, electric power, and ocean shipping. Special demands had increased prices dramatically in these industries, and they faced other problems, such as an insufficient productivity.In particular, the high price of coal and steel required urgent reform, because these products occupied a large share of the cost component of the industrial structure at the time, with a serious and pervasive effect on industry as a whole. The government believed that modemizing plant and equipment by investing in the rationalization of basic industries and carrying out expansionary investment to break open production botdenecks would help increase exports later and upgrade industry, thus sustaining economic growth. The government decided to push forward with policies for expansionary investment by reducing the technological, market, and financial risks associated with investment As its major policy tools for rationalizingbasic industries, the govemment provided preferential tax measures to enable firms to retain their profits, and expanded policy-based financing to provide extemal funding. 4.72 The expansion in capital investmentspurred by the special demands increased further in the 1951-53 period in light of policies to support investment for rationalizing and modemizing plant and equipment; gross private capital investmentrose fromV389.9 billion in 1950 to V800.7 billion
144 Table IV-16. Cost Reductionsfrom Investmentin Rationalization
MaiorProducts CostReductions
Iron 4 % Steel 10 Sheet 27 SteelPipe 30 Oil Refining 15 Rayon 25 AmmoniumSulphate 21
Sources:Japan Irn andSteel Federation (1959), Seng Tekkoshi. MffI (19S7), SMS=vGorika lHWUMh2.
Table IV- 17. The Supply of Industrial Equipment Funds (Net Change Basis): FY 1951-53
FY1951 FY1952 PY1953 Total Amount Ratio Amount Ratio Amount Ratio Amount Ratio (billionyen) (%)- (billionyn) (%) (billionyen) %) (billionyen) (%)
GovernmentFinance 73.3 31.9 109.1 33.6 105.0 27.2 287.4 30.6 JDB 18.0 7.8 31A 9.7 55.0 14.2 104.4 11.1 AssistLnceGoods 46.6 20.3 42.1 13.0 - - 88.7 9.4 Fund SpecialAccount, etc. 8.7 3.8 35.6 11.0 50.0 12.9 94.3 10.0 Prvate Finance 78.7 343 89A 27.6 141.1 36.5 309.2 32.9 Banks 62.4 27.2 53.2 16.4 76.7 19.8 192.3 20.4 oters 16.3 7.1 36.2 11.2 64.4 16.7 116.9 12.4 Stocks/Bonds 77.5 33.8 125.8 38.8 1403 36.3 343.6 36.5 Total 229.5 100 324.3 100 386.4 100 940.2 100
Source:BOY. in 1953. The percentage of this invesuent of GNP also increased, from an average of 7% in 1946-50 to an average of! 1% in the 1951-53. 4.73 Investment in FY 1951 was particularly active in industries related to exports and special demands, such as textiles, chemicals, paper and pulp, and ocean shipping; in FY 1952, as the sectors involved in special demands and exports faced a stagnating tend, investment increased rapidly in such basic industrial sectors as electric power, iron and steeL and machinery. In FY 1953. too, the development of large-scale electric power resources spurred active investment in the electric power industry, and the investment had a pervasive effect on related sectors, inducing investment in the investment goods sector. Moreover, in the textile and chemical industries, renewed investment was supported by high levels of consumption and the appearance of new industries. The so-called "investment boom" had emerged. 4.74 Following the special demands of the Koran War, the government developed the First Rationaliztion Plan for investing in industrial rationalization. Ibvestment in the rationalization of the basic industries is estimated to have led to an extremely large cost reduction, 20% to 30% (Table
145 IV- 16). During this active investment period, the governmentprovided approximately31% (O287.4 billion) of the necessary external capital, which increased by a net amount of W940.2billion in the 1951-53 period. Of the total provided by govemment, JDB's share was 36%. When the share of the Assistance Goods Fund is included, the proportion rises to 67%, a respectable relatively and important share (Table IV-17). 4.75 In the first 3 years, JDB provided a total of V146.4 billion in funding. The government's basic plan outlining the basic direction of JDB funding for FY 1951-52 targeted a large number of industries. Consequently, JDB provided funding to almost every industry. However, as of in FY 1953, the government began targeting fewer industries in the basic plan, because the enactment of the Long-Term Credit Bank Law created private long-term financial institutions which could provide the long-term financing for nonpriority industries. Thus, the government concentrated funding in four priority industries -- electnc power, ocean shipping, coal, and iron and steel -- for a total of V73.7 billion in funds, or 80% of total fhnding. 4.76 In this period, the primary role of JDB was to quantitatively supplement the funding of private financial institutions. JDB's conditions for lending closely resembled those of the private sector: * JDB applied a standard loan interestrate that was similar to the rate applied by private banks, and initially limited preferential interest rates to the electric power and ocean shipping industries (Table IV-18). * In principle the loan period was to remain within five years, and differed little from private-sector loan periods.
TableIV-18. IDB LoanAmounts at variousInterest Rates: FY 1951-53 (billionyen) Total Intaest FY 1951 FY1952 FY1953 Amount Component Rate Ratio(in %)
6.5% - - 33A 33.4 24 7.5% 1.5 11.7 31.8 45.0 33 10.0% 15.9 26.0 17.8 59.7 43 Total 17.4 37.7 83.0 138.1 100 Note:Loan amounts are for new lending. Source:JDB.
4.77 The interest rates on JDB loans were set by the JDB governor accordingto two stipulations in the JDB Law: "interest rates should be set in such a manner that a balance is maintainedbetween revenue and expenditures"; and "considerationshould be given to the loan rates of private financial institutions when setting JDB rates." To enforce policies to lower interest rates, the government asked that JDB make its rates lower than those of private banks, and to broaden the scope of preferential interest rates. However, JDB believed that low interest rates, which would crowd out private banks, were not desirable and that, regardless, they would amount to providing subsidies; thus, in setting its standard interest rate at 10%, JDB took into consideration the private bank rate for short-tern loans (9.42% on loans on notes) and long-term loans (10.8% on loans on deeds). In addition, to meet the standards for preferential interest rates, 1DB set the lower limit as the interest rate for interest on borrowing, and limited the scope of its preferential rate to those industries for which the government had established aid policies. At that time, the economy was in a recovery stage, and the demand for funds was fairly strong. Thus, JDB's main role was to supplementprivate financing quantitatively. Later, as funding eased, 3DB switched to a qualitatively supplemental role
146 in order to guide private-sector financing.It also increased the number of loans to which preferential interest rates were applied, and these rates were lower than private-sectorinterest rates. 4.78 In addition, to supplementand promote private finance, the government placed priority on joint financing (the lending ratio for financed projects during this period was 35%), with JDB providing 48% of external financing, and private financial institutions supplying 52%. This joint financing with the private sector indicates that, in addition to JDB's role to supplement the private sector quantitatively, the policy-based finance of JDB also played a 'pump-priming" role by enticing private financing with governmentfund investment C(able IV-19).
TableIV-19. JDB Lending Ratio for FinancedProjects: FY 1951-53
Private TotalCost FiscalYear JDB Finance OwnFunds of Projects (%) (%) (%) (%) 1951 40.8 36.1 23.1 100 1952 33.5 33.6 32.9 100 1953 32.3 4A 23.3 100 Total 34.8 37.9 273 100
Source:JDB (1963), Nihon KaihatsuGinko Junen Shi.
E. Shifts in Monetary and Fiscal Conditions ') The End of Chronic Monetary Stringency 4.79 The Japanese economy continued to grow even into 1953, supported in part by funds from the government. However, by September 1953, the expansion of imports due to favorable business conditions and the impact of a bad harvest led suddenly to an adverse international balance of payments (Table 1V-20), promoting the govemment to shift to tighter fiscal and monetary policies. The stringent financial measures for balancing international payments remained in effect until 1956. During this period, both the General Account (with a scale of one trillion yen) and FILP (with a scale of 240.0 to V250.0 billion after a 15% reduction from previous fiscal years) leveled off (Table IV-21). These stringent policies cooled high-level capital investment. Thus, the economy headed toward a downtum, business results deteriorated, and bankruptcies and unemployment increased. However, firms began making an active effort to redress the situation by promoting enterprise affiliations (keiretsuka)and rationalizingtheir operations.
4.80 By 1954, the effects of fiscal stringency began to appear - the international balance of payments was beginning to improve (a surplus first appeared in the second quarter in FY 1954) and prices had begun falling. On the heels of these effects in the beginning of FY 1955 was a global uptum in Western Europe and the United States that increased Japanese exports, coupled with an unprecedented domestic bumper crop of agricultural produce. Japan had renewed its economic prosperity.
147 Table IV-20. Trends in the InternationalBalance of Payments: 1946-55 (million dollars)
Exports Imports Trade Aid Special Balance Procurements
1946 67 303 -236 192 1947 184 449 -266 404 - 1948 265 547 -282 461 1949 536 728 -198 534 1950 924 886 38 361 149 1951 1,358 1,645 -287 157 592 1952 1,295 1,701 -407 5 824 1953 1,261 2,050 -790 - 809 1954 1,614 2,041 426 - 596 1955 2,001 2,060 -53 - 557
Note: Exports and imports are on an IMF basis. Sources: EconomicPlanning Agency (1976), Gendai Nihon Keizai No Tenkai. Kosai (1981), Kodo Seicho NoJda. Others.
Table IV-21. Scale of Finance: FY 1953-56
General/Special General Account AccountNet Total National Income Fiscal Year Amounta Ratio b Amotnt a Ratio b Amount a Ratio b (billion yen) (%) (billionyen) (%) (billion yen) (%)
1953 1,017.2 17.7 1,919.2 33.4 5,747.7 100
1954 1,040.8 173 2,008.6 33.4 6,022.4 100
1955 1,018.2 15.2 2,168.9 32.3 6,718.9 100
1956 1,069.2 14.0 2,283.9 29.9 7,627.6 100
a. Amounts are annual budgetary expenditures. b. Ratios are of a percentage of the national income. Source: JDB (1963), Nihon ats GinkoJunen Shi.
148 4.81 FY 1955 was the Japanese economy's "finest year" since the end of the war. The international balance of payments had improved, prices had stabilized, and economic growth was achieved. In addition, production in the mining and manufacturing industry increased by 12%, national income levels rose by 10%, and economic standards surpassed those of the prewar era. In short, postwar reconstruction had reached its conclusion (Table IV-22). Summing up the economic activities of this fiscal year, the Economic White Paper stated that, "the 'post war' period is over." Two financial conditionswere key to private and policy-basedfinancing in the 1955-56period: • The surplus in the international balance of payments and the bumper crop had increased savings deposits in banks substantially: in FY 1955, real deposits in all banks increased by V660.0billion. * Because profit could now be made from the investment in rationalization made in 1951-53, production was met through increased turnover rates. As such full-scale investment was unnecessary during this period, the demand for funding stagnated, and increases in loan amounts began to slow. This financial climate led to monetaryslackness and thus a decline in interest rates. At this point, the chronic postwar shortage of money had come to an end.
TableIV-22. Trends in EconomicLevels Compared with Prewar Levels (1934-36=100) 1951 1952 . 53 1954 1955 1956 Miningand Manufacturing 101 108 132 143 154 188 Production Real PrivateConsumption (percapita) 79 91 101 103 108 114 Real NationalIncome (percapita) 86 92 98 99 107 117 Imports 55 61 83 86 90 114 Exports 36 36 41 55 92 86
Source: JDB (1963),Nihon Kaihatsu Ginko Junen Shi.
2) Monetarg Easing and JDB Financing 4.82 With fiscal retrenchment, a reduction in investment and loans, and monetary easing, the scale of JDB financing declined fromV83.1 billion in FY 1953 to V57.5billion in FY 1954, to Vi48.4 billion in FY 1955, and to V45.5 billion in FY 1956. Thus, the relative quantitative weight of JDB financing for capital investment also fell, from 15% in FY 1952-53 to 8% in FY 1954-56 (Table IV-23). 4.83 With the compressed scale of financing, JDB placed more emphasis on priority financing for the four priority industries- electric power, ocean shipping, iron and steel and coal. From FY 1951-53 to 1954-56, JDB financing for these industries grew from VI117.4billion to 1133.6billion, or from 80% to 88% of the total. But, of this amount, V121.5billion, or 80% of total financing, was for the electric power and ocean shipping industries. Fmancing to the coal industry and iron and steel was curtailed - in the coal industry, because a long-term slump had lowered levels of capital investment, and in iron and steeL because the First RationalizationPlan had enabled the industry to procure funds through equity increases, bond issues, and borrowing from private financial
149 institutions, thus enhancing their self-sufficiency (Table IV-24). Also during the FY 1954-56 period, specialized financing for new industries and special areas, protected and fostered by the government, led to a dramatic decline in funding amounts to otber industries (from V29 billion in FY 1951-53 toYV6billion) (TableIV-25).
Table IV-23. Trcndsin CapitalInvestment: FY 1952-56
FY 1952-53 FY 1954-56 Component Component Amount Ratio Amount Ratio (billionyen) (%) (billionyen) (%)
SecuritiesMarket 131.7 14.1 273.6 14.8 Industrialbonds 24.5 2.6 63.9 3.5 Stocks 107.2 11.5 209.7 11.3 PrivateFinancial Institutions 537.8 57.6 1088.8 58.9 All banks 375.9 40.3 674.6 36.5 Others 161.9 17.3 414.2 22.4 GovernmentFinancial Institutions 252.4 27.1 426.2 23.0 JDB 140.2 15.0 148.7 8.0 Others 112.2 12.1 277.5 15.0 ForeignCapital 11.4 1.2 60.2 .3
Total 933.3 100.0 1848.8 100.0
Source:BOJ.
TableIV-24. Trendsin JDBLoans by Industry:FY 1951-56 (billionyeai) FiscalYear Totalfor Total for Amountof Increaseor 19S51-53 1954-56 Decrease Prios,.y Industry ElectricPower 61.3 73.9 12.6 OceanShipping 31.8 47.7 15.9 Iron and Steel 13.3 2.6 -10.7 Coal 11.0 9.4 -1.6 Subtotal 117A 133.6 16.2 Other Industies 29.0 16.0 -13.0 Financingfrom Economic AssistanceFund - 2.8 2.8 Total 146A 152.4 6.0
Source:JDB.
150 TableIV-25. Trendsin JDB Loans to NonpnorityIndustries: FY195 1-56 (billionyen) Amountof FiscalYear Totl for 1951-53Total for 1954-56 Incrase or Decrease Machinery 5.0 3.1 -1.9 SynthedcFibers 3.2 2.8 -0.4 AmmoniumSulphate 1.7 2.0 0.3 NewTechnology 1.0 0.5 -0.5 Agriculture,Forestry, and Fisheries 3.2 1.1 -2.1 MiningIndustry 2.0 0.7 -1.3 CityGas 1.9 0.5 -1.4 Tmnsportation 1.5 1.1 -0.4 Industry-RelatedFacilities 1.6 0.3 -1.3 InternationalTourism 0.4 0.4 OtherIndustries 7.5 3.4 -4.1 Total 29.0 16.0 -13.0
Source:JDB.
3) Summary of Lending Conditions by Priority Industrial Sector a) Elecric Powerlndstry 4.84 Capital investment for the electric power industry was targeted primarily at developing electric power resources after the nine power companies were established in May 1951 and the Law for the Developmentof Electric Power Resourceswas enacted .n July 1952. To incease the electric power supply, whose shortage was causing production bottlenecks, JDB financing was targeted primarily at projects to increase capacity and to ationalize. Specifically, funding was provided for constructing hydroelectric and new thermoelectricpower stations. In FY 1951-55, financing to the electric power industry was JDB's highest priority, for a total of VI 17.4 billion, or 46% of total JDB financing during this period. 4.85 Of this total, financing to the nine electric power companies was V104.5billion, or 31% of the total capital investment of these companies.Moreover, V87.6billion (84%) of the funding to the power companies during this period was for electric power resource development, while VI2.7 billion (12%) was for power-transmissionfacilities and transformers.
4.86 To address the energy supply scarcities during this period, JDB also actively provided financing for electric power companies other than the nine power companies, and for companies with their own power plants (112.9 billion). Later, electric power resource development by the nine power companieswas the main focus of JDB financing. b) Ocea Spping 4.87 To compensate for the tonnage shortage in the postwar period, the ocean shipping industry set out to rebuild the industry based on shipbuildingplans. The constructionof ocean liners began in 1949 with the fifth plan for shipbuilding, which relied on Assistance Goods Funds. After JDB inherited the Assistance Goods Fund in 1953, it continued to carry out full-scale financing according to the ninth plan for shipbuilding(in FY 1951 and 1952, it also financed the amount not
151 covcred either by the Assistance Goods Fund or by funds for repayment to private financial institutions). 4.88 Aftcr the Korean War boom cnded, the ocean shipping industry slumped, and the government introduced several support measures. In January 1951, it enacted the Law for Interest Subsidies for the Construction of Ocean Liners, which provided subsidies for interest payment for shipping companies; in August 1953, Provisional Measures for Reducing Shipbuilding Costs were implemented with Bank of Japan (BOJ) Special Foreign Currency Funds and JDB financing.33 4.89 Another measure was the Four-Year Plan for Expanding Overseas Ocean Liners, which supported planned shipbuilding. From 1953 to 1956, JDB increased its financing to the ocean shipping industry by V69.1 billion, or 29% of its total financing. JDB also financed 62% of the contracted price for ships under planned shipbuilding.The planned shipbuilding carried out under the Four-Year Plan generated the construction of 109 ships, totaling 964 thousand gross tons, and postwar shipping tonnage finally exceeded that of prewar levels. c) Coal MiningIndustry 4.90 Priority shifted in the coal mining industry from increasing production to investment in rationalization. Projects included coal-mining technology development, the opening of new mines, and construction to rationalize the surface and inside of mines. 1DB lent a total of VI 1.0 billion to the coal mining industry from 1951 to 1953, or 18% of the capital investment in the industry during this period. 4.91 After 1952, the Japanese industry as a whole began to rely on heavy oil, and the coal minningindustry thus entered a severe depression. Capital investment was sluggish after 1954, when several firms suspended or postponed their investment plans. JDB funding for 1954 and 1955 declined to Y5.5 billion. d) Iron and SteelIndustr 4.92 From 1951 to 1955, V17.2 billion was provided to the iron and steel industry. Of this, a large portion was for the industry's First Rationalization Plan (1951-53), with JDB focusing its funding on the rolled-steel sub-sector. 4.93 The First Rationalization Plan included provisions for modernizing facilities and emphasized investment in the rolled-steel sector. Funding was also provided for constructing manufacturing facilities, such as Kawasaki Steel's integrated steel factory, the first such factory built in the postwar period. These investments increased production between FY 1950 and FY 1954 -- from 2,230,000 to 4,600,000 tons for pig iron, from 4,840,000 to 7,750,000 tons for crude steel, and from 3,490,000 to 5,470,000 tons for steel materials; almost 50% of facilities were modemized.3 4 4.94 The amount of capital required for construction between 1951-55 was V128.2 billion. Of this amount, governmentfinancing by 3DB - and BOJ in the form of special foreign currency loans -- totaled X31.2 billion (24%). However, for the Second Rationalization Plan, government funding was no longer provided for capital investment by the iron and steel industry, because each firm had established its own management base and JDB had shifted the emphasis of its funding from quantitative to qualitative financing. 4) Economic Assistance Fund Loan 4.95 During this period, Japan received funding from the United States, including the Economic Assistance Fund, which provided loans for special purposes. In March 1954, as part of a series of Mutual Security Act (MSA) agreements concluded between Japan and the United States, the "Agreement between Japan and the United States Regarding Economic Measures" was formulated. This agreement stipulated that when Japan received surplus agricultural commodities from the United States, a portion of the funds should be accepted as a funding donation to strengthen the economic base. After negotiations were carried out between the U.S. and Japanese governments, the
152 V3.4 billion donation was used to finance the defense industry and foster and strengthen defense-related industries. The Japanese govemment decided that JDB would be responsible for handling the application of these funds in the form of loans. 4.96 JDB handled this fund as a separate account for defense-related industries because such financing posed risks in the face of changes in the political climate and other areas. Thus, following its lending principles to ensure that repaynent was possible, JDB applied these funds prudently. A special interest rate of 6.5% was applied due to the nature of the loans. 4.97 From FY 1955 to FY 1961, a total of V7.5 billion in disbursements was made both as loans to the munitions industry, the aircraft industry, the electronics industry, and the chemical industry and as investment in the Japan Aircraft ManufacturerCo. grable IV-26).
TableIV-26. Trendsin JDBLoans Supported by the EconomicAssistance Fund, by Industry (millionyen) FY 1955 1956 1957 1958 1959 1960 Total 1961
MunitionsIndustry 605 - - - - - 605 AircraftIndustry 1,250 740 510 700 430 3,630 600 ElectronicsIndustry 175 46 179 148 548 ChemicalIndustry 80 - - - - - 80 - Subtotl 2,110 740 510 746 609 148 4,863 600 Equityfor Japan AircrftMaufactuIrersa - - - - 300 750 1,050 1,000 Total 2, 10 740 510 746 909 898 5,913 1,600
a. Equityinvestment related to JapanAircaft Manufacturersis channeleddirectly fromthe Economic Aid ProgramSpecial Account. Sourc: JDB.
3. 1956 to 1960 A. High Growth and the Shift to Guidance Policies 1) The Beginning of High-growth 4.98 Having been given an opportunity to achieve reconstruction from the special demands of the Korean War, the Japanese economy attained an uncommonlylong period of high growth, lasting for 19 years from 1955 to the first "oil shock" in 1973. In the early part of this period of high growth, extensive equipment funding served as the impetus for advancing the heavy and chemical industries, leading to an average annual GNP growth rate of approximately 10%. 4.99 After the "Suryo boom" of 1955, the iapanese economy entered a favorable economic period, known as the "Jimmu boom." This boonmwhich lasted until the first half of 1956, was due to the high level of equipment fundingaccompanying technological innovations in the iron and steel, chemical, electric power, and other industries. However, the investment boom also brought a sudden increase inimports for equipment funding. Moreover, with theonset of the Suez Crisis, the inventory investmentsfor importedraw materials increasedrapidly. These two factors precipitateda
153 crisis in the international balance of payments, giving the government no choice but to implement monetary stringency to improve the international balance of payments. Deflationary policies implementedin the spring of 1957 had an impact on commodity prices and production, ushering in a business recession, and pushiiig the economy into a period of stagnation, known as the "Nabezoko depression." But as imports began to decline rapidly, the international balance of payments approached equilibrium by the end of 1957, and as tight monetary policies were loosened and private consumption revived, production in the mining and manufacturing industries recovered dramatically by the spring of 1958. Thereafter, the Japanese economy entered a long-term, favorable phase known as the "Iwato boom," which lasted until December 1961. While capital investment by basic industries had played a leading role during the Jimmu boom, increased wage levels and an explosive spread of consumer durables, known as the "consumption revolution," were the foundation for the Iwato Boom. In this period, capital investment increased in new heavy and chemical industrial subsectors, such as household electrical appliances, automobiles, petrochemicals, and others. As these subsectors expanded, investment spread to the core industrial sectors, including iron and steel and others. In addition, the reduction in costs from the growth in mass production increased consumption further, while appropriate monetary policies also made it possible for the Iwato boom to continue over the long term, eventually lastinga total of 42 months. 2) Technological Innovation and Capital Investment
4.100 From 1956 to 1960, the Japanese economy grew fairly rapidly - GNP by 57%. This economic growth was spurred by an expansion in demand centering primarily on private capital investment, and gross capital fornation among private non-residential facilities nearly doubled during this four-year period (Table IV-27). 4.101 As the economy began reaching prewar levels in 1955, economic reconstruction was for the time being completed. A broad range of investment opportunities for technological innovation, emerged during this period, as the absence of capital investmentsince the end of the war had made many facilities obsolete. In addition, with the beginning of the mass-consumption society, a close relationship existed among the capital investments in various industries that accompanied technological innovation. This investment had an effect referred to as 'investment calling forth investment,"and led rapidly to an increasein private capital investment. 4.102 The growth in capital investment from 1955 to 1969 can be broken down into three distinct industrial groups. The first group consists of the iron and steel, automobile, and electrical machinery industries. Because these industries had been carrying out technological innovations, the scale of their investment multiplied by 8 to 10 times. Supported by a steady demand, these industries built mass-production systems and led high growth. The second group consists of the oil refining, machinery, paper and pulp, and cement industries. The scale of investment in these industries increased by an average of 3 to 4 times,primarily to diversify and upgrade products and rationalize the production process. The third group consists both of industries for which the industrial base had already been established, such as electric power and gas, and of depressed industries such as coal, ocean shipping, ammonium sulphate and textiles. Investment increased in these industries by about 2 times or less, and were also targeted primarily at rationalization(Table IV-28). 4.103 The introduction of foreign technology was largely responsible for promotingtechnological innovation in Japan. Even though industries could not rely on independent research and development given its long time frame and extremely large amount of developmentalfinancing, the international climate made it relatively easy to introduce foreign technology. Thus, Japan was able to catch up with the advanced industrialized nations in Europe and with the United States in a relatively short period of time.
154 TableIV-27. EconomicIndexes: 1956-60 (billion yen)
FY1956 1957 1958 1959 1960 (BY(A) (A) (B)
GrossNational Product 9,292.9 10,149.8 10,394.7 12,572.5 14,664.9 157.9 Private Consumption 5,501.9 5,980.1 6,294.0 6,877.0 7,694.2 139.9 Private Gross Capital Formation 2,263.5 2,401.6 1,903.7 3,289.4 4,267.1 188.5 Private residential 197.3 223.3 236.9 276.1 342.7 173.7 Private non-residential 1,372.6 1,693.2 1,649.6 2,170.2 3,069.5 223.6 Stockbuilding 693.6 485.1 17.2 843.1 854.9 123.3
Exports 2,598 2,913 2,895 3,612 4,116 158.4 (million dollars) Imports 3,603 4,023 3,019 3,939 4,660 129.3 (million dollars)
Sources: EPA, Kokumin Keizai Keisan.Others.
3) The Shift to Guidance Policies
4.104 While the Japanese economy in 1955 had largely returned to its prewar level, it had been made possible by the special demands from the Korean War. However, the amount of special procurement requests peaked at $820 million in 1953, and then began falling, to $550 million in 1955. While reconstruction had been achieved, full employment had not. Thus, in December 1955 the Economic Planning Agency announced Japan's first long-term economic plan, the Five-Year Plan for Economic Self-Support The Plan sought to achieve economic self-sufficiency and full employment by setting the direction for mid-term policy management. It was not merely a continuation of previous stopgap econonic policies that had responded to given conditions only at specific points in time.
4.105 The Five-Year Plan for Economic Self-Support set the targeted annual growth rate at 5%, but the tempo of economic expansion in the two years after the plan was formulated, greatly exceeded the estimated growth rate, and most of the targets outlined in the plan were achieved early. Consequently, to readjust projections,the governmentformulated a long-term economic plan covering the FY 1958-62period, known as the New Long-TermEconomic Plan.
4.106 The goal of the New Long-Term Economic Plan was "to steadily improve the national standard of living and approach conditions of full employment, through the continual achievement of the highest possible economic growth rate while maintaining economic stability. "For that purpose, the plan projected an annual economic growth rato for the five-year period from FY 1958-62 of 6.5%. Priority measures called for expanding exports, building up capital accumulation, consolidating basic sectors (transport capacity and energy), upgrading the industrial structure, modemizing the agricultural production structure, and improving employment and the national standard of living. The government's role was also defined by the plan: "to minimize the implementationof direct control measures, and in hopes that economic growth will be guided by the ingenuity and vitality of private firms- - - the government will strive to realize the plan mainly by making its contents known to all and by indirect means such as fiscal, monetary,trade and foreign exchange policies." In fact, because high-volume private capital investment was enabling the economy to grow at a pace faster than estimated by the govemment, the government's role was primarily to guide and supplement the economic activities that sprang from unrestricted ingenuity.
155 Table1V-28. Index of Trnndsin CapitalInvestment Among Major Industries
FY 1955 1956 1957 1958 1959 1960 Overdl Invabnent 100 176 214 195 236 340
Electric Power 100 124 153 178 176 212 OceanShipping 100 249 277 179 145 135 Iron and Steel 100 302 520 514 771 1,149
Coal 100 167 239 253 213 241 Chemicals 100 237 280 238 302 483 (PetrochemicalShare) (100) (115) (140) (193) AmmoniumSulphate 100 158 101 115 85 97 Oil Refining 100 260 217 146 193 380 Machinery 100 197 317 270 413 760 (AutomobileShare) (100) (221) (343) (278) (467) (1,107) Elerric Machinery 100 175 322 325 530 779 Textiles 100 173 140 90 117 158 (SyntheticFiber Share) (100) (130) (124) (154) (205) (221) Paperand Pulp 100 228 260 166 294 435 Ceramics 100 152 170 133 214 300 (Cenent Share) (100) (136) (135) (108) (137) (218) Gas 100 137 170 207 190 217
Others 100 202 240 202 253 372
Source:1DB.
4.107 While the targeted annual growth rdte of the New Long-Term Economic Plan was 6.5%, actual economic growth again greatly exceeded the projection. Moreover, because the economic environment itself had changed considerably, the New Long-Term Economic Plan was replaced with the National Inoome Doubling Plan in 1960,covering the period from 1961 to 1970. While it initialy called for an average growth rate of 7.2%, this projection was revised upward to 9% when the actual economic indexes revealed promising results in the beginning of the period.
4.108 Thus, between 1956 and 1960, the Japanese economy continued to maintain a high growth rate sustained by capital investment, and continually surpassed the growth rates estimated by the govemment. However, this rapid growth created various imbalances in Japan's industrial structure. The lag in the formation of social capital created problems with the living environment, economic disparities among regions, and disparities between larger and smaller firmnsand between light and heavy industries (known as the "dual structure' problem). In order to address these problems, the nation's policy efforts focused on structual issues, rather than on growth. These issues had been raised as priorities in the New Long-Term Economic Plan of 1958, and had received systematic atention in the succeeding National Income DoublingPlan. The plan recognized that improvements in social capital, such as roads, ports, and harbors, industrial sites, and water facilities, lagged
156 considerablybehind those in productive capital, and that they were creating bottlenecks to growth. Thus, an improvementin social capital was fundamental to realizing high growth. The government had four major priorities: to promote appropriate industrial location in ordcr to eliminate income and regionaldisparities, to establish a comprehensivetransportation system, to improve housing and the living environment, and to preserve and conserve national land effectively. The remaining priorities were under the directives of new, positive guidance policies that sought "in principle, to leave such priorities up to the private sector, while the government sets goals and effectively supplements the private sector so that targets can be achieved." In the transition to "guidance policies" it is possible to observe that with the end of reconstructionthe government's policies with respect to the Japanese economy had entered a new phase and had taken on a new basic direction.
B. JDB FinanceShifts to Qualitative Supplements I) Economic Plans and the Basic Operating Plan of JDB 4.109 JDB financing during this period was targeted initially at strengthening and expanding basic industries;later, correspondingto a shift in policy, it increasedits financingto areas that could not be funded effectively by private financing, and to areas targeted by policy guidance. Lending diversified into such areas as consolidatingand strengtheningthe industrial base (including energy and transport capacity), improving the industrial composition, and balancing growth among industriesand among regions. 4.110 The government'sbasic direction for economic managementis reflected in Basic Operating Plans, which are given each year to govemment financial institutions. As formulated by the prevailingeconomic plans and policy objectives of the government,the basic operating plans given to 1DB evolved throughout the period: * JDB had long targeted the energy and transportation sectors to break the bottlenecks to industrial development and consolidate and strengthen the industrial base. After FY 1959, the basic operating plan for JDB also called for improvingindustry-related facilities, one of the goals of the Long-TermEconomic Plan.
* The Five-Year Plan for Economic Self-Support, which gave priority to increasing employment -- targeted industries that could make a comparatively strong contribution by absorbing workers in contrast to the export and basic industries, in which the priority was to increase productivity.The New Long-Term Economic Plan included the following comment directed specifically at the machine industry: "It is precisely because this industry has considerablepotential, a high absorption capacity for labor, and is an important sector for exports,that efforts must be made towards its promotion and development." Reflecting these economic plans, the basic operating plans of JDB increasingly placed emphasis on nurturing and strengthening the designatedmachinery industry and new industries.
* The deterioration in the internationalbalance of payments that had limited the growth of the Japanese economy was addressed as a priority issue by the New Long-Term Economic Plan. The JDB basic operating plan of FY 1958 designated "international tourism facilities" as a funding target. In FY 1959-60, the export industries were included as part of a program for "nurturingand rationalizing those industries which can contribute to an improvement in the internationalbalance of payments." * After FY 1959, "investment for regional development" became part of the basic operating plan to address the National Income Doubling Plan priority to achieve the "balanceddevelopment between industriesand regions." Table IV-29 providesan example of how the JDB's basic operatingplan evolves from the economic plans and managementpolicies of the governmentin an illustrativeyear.
157 Table IV-29.The Relationship between GovernmentPolicy and JDB's Basic OperatingPlan: FY 1959
New Long-Term Economic Plan EconomicManagement Policies JDB Basic Operating Plan Established: Dec. 1958 FY 1959 FY 1959 Plan Period: 1958-1962
Goals * Promoteexports and economic Goals "By maintainingeconomic cooperation "Followingthe aims of the FY stability while continually 1959 economic plan, and having achieving as high a rate of growth * Standardize investmentand stable growthas a goal, JDB will as possible,the plan aims to balance investmentin various contributeto improving the base attain a real increase in national sectors for long-termeconomic living standards and to approach developmentand promote the full employment." * Expand public investment; qualitative improvementof the consolidateand strengthen the national economy in the industrial base following ways:"
* Improve and modernizethe ' Improvethe industrial base, Main Policies industrial structure; to including energy, transport rationalizeand normalize capacity, and industry-related • Expand exports (an annual financing facilities increaseof 10.5%) * Reinforcecapital accumulation * Prevent excessivecompetition * Improvethe composition of (an annual increase in gross and establish an industrial industry;modernize industry capital formationof 4%) order * Expand and improve basic * Improve the intemational sectors (trnsport capacity and * Modernize small- and medium- balance of payments energy) size firms; achieve balanced * Upgrade the industrial structure growth in the agriculture, * Achieve balancedgrowth (an annual increase of 10.5% forestry and fisheries industries among industries and among for heavy and chemical regions industry value-added;5.3% for * Increase employment light industry) opportunities;improve social * Modernize the agricultural welfare production structure; Industries strengthenself-sufficiency * Increase employment and * ElectricPower improve of national life (an * Ocean Shipping annual increase in private * Coal consumptionof 5.5%) * Iron and Steel * Machinery * AmmoniumSulphate * New industriesand the * Emphasizeon the role of industrialization of new finance: technologies * City Gas - to secure necessary financing * InternationalTourism for basic sectors - to promote private capital accumulationby reducing tax burdens
Source: JDB
158 2) Diversifying Lending Areas and Qualitative Supplements 4.111 JDB's gross lending, including foreign currency loans, peaked in FY 1953 atV90.Obillion, and had fallen to V49.5 billion in FY 1956; in FY 1957, it then began rising again, reaching V87.0 billion by FY 1960. However, since the increase in the volume of demand for equipment funds accompanying high growth was much higher, the relative importance of JDB lending declined annually. In FY 1955. JDB's share of total equipment funds was 10%; by FY 1960, it had fallen to 4%. JDB's previous role as a supplier of equipment funds to basic industries and its lending characteristics began changing greatly in FY 1956. 4.112 The first change was a shift in lending areas. While the four basic industries -- electric power, ocean shipping, iron and steel, and coal -- occupied 85% of JDB financing in FY 1956, JDB began to extend its lending areas in response to govern *nt policies targeted at general industries other than the basic industries. These general industries included machinery, electronics, petrochemicals, synthetic rubber, nuclear power generation, industry-related facilities, regional development, and private railways. During the late 1950s,the government implemented individual industrial policies that covered diverse measures, including special legislation, for guiding the production and operations of the targeted sectors. JDB, in cooperation with various deliberative councils and rationalization plans, carried out financing in line with these national policies (Tables IV-30-A and 30-B). 4.113 In the process of shifting its lending areas, 1DB also began targeting its lending at mid-size firms. It could now shift its targeting to this level of business because many of the firms that JDB had financed in the past could now procure funding on the private market. Moreover, in the areas that JDB had now targeted its lending, including designated machinery and regional development, medium-scale firms required facilities modernization.Thus, JDB transferred to the private sector those areas that could be transferred and shifted its priorities to those areas that needed support and guidance (Tables IV-31-A and 31- B). 4.114 The third change was a focus on strengthening the qualitatively supplemental aspects of TDBindustrial equipment funding, which included expanding the application of preferential interest rates, and extending the loan repayment period. IDB had earlier applied the preferential interest rate to the electric power and ocean shipping industries, and from 1956 to 1957 used it as a powerful means for guiding modernization; from 1956 to 1957, JDB applied it to the designated machinery and electronics industries. Furthermore, as the demands increased for qualitative supplements from JDB. the repayment period for private finance was extended,particularly for corporate bonds, where the repayment period was extended from 5 to 7 years. Thus, the repayment period of JDB, which had been in principle a minimum of I to a maximum of 5 years was extended to I to 10 years in July 1956. C. Financing Trends 1) Financing for Basic Industries 4.115 Because the four basic industries would have a wide-ranging impact on other industries, 80% of JDB financing in the ten-year period from 1951 to 1960 went to investment in these industries. However, from 1955 to 1960, the relative weight of financing to these industries was reduced gradually (See Table I-17 in Chapter I), and the notion of targeting the basic industries in order to break the bottlenecks to industrial development was also beginning to change. However, the basic industriescontinued to be crucial to shoulderingthe economic base; at the end of FY 1960. JDB's share in all loans for equipment funds to these industries was still more than 50% (Table IV-32).
159 Table IV-30-A. Major Special Legislation and JDB Loan Targets Legislation Date JDB Loan Targets
Fostering Industry Law on the Japan SyntheticRubber June 1957 Synthetic Rubber Company Law on Temporary Measures for Promoting June 1956 Designated Machinery the Machine Industry Law on Temporary Measures for Promoting June 1957 Electronics Industry the Electronics Industry Law on TemporaryMeasures for April 1959 Small- and Medium- Rationalization of Small- and Medium- Size Steel Shipbuilding Sized Steel Shipbuilding Law on Improving Hotels for International December 1949 InternationalTourism Tourism Subsidizing Industry Law on Temporary Measures for August 1955 Rationalization of the Coal Mining Industry Coal Law on Temporary Measures to Promote April 1961 Coal-Producing Regions Law on Temporary Measures for June 1954 AmmoniumSulphate Rationalization of the Ammonium Sulphate Industry Areas Related to Public Investments Law on Industrial Waste Disposal December 1958 Waste Disposal Metropolitan Area RedevelopmentAct April 1956 Private Railways Financing for Regional Development Law on Promoting Development in the March 1959 Kyushu Region Law on Promoting Development in the April 1959 JDB Loans for Regional Shikoku Region I Development Law on Promoting Development in the December 1960 Chugoku Region Law on Promoting Developmentin the December 1960 Hokuriku Region
Source: JDB
a) Electric Power 4.116 By FY 1955, the amount of capital investment by the nine electric power companies had reached a scale of approximately V100 billion, but due to the rapid increase in the demand for electric power accompanying the expansion of the economic scale and the development of the heavy and chemical industries, this amount reached about Y300 billion by FY 1960. To respond to the expanding scale of capital investments,the governmentactively promoted private financing and the introduction of foreign capital; JDB played a positive role both in public lending and in the introduction of foreign capital. As advanced thermoelectric power facilities began to be imported, JDB debt guarantees helped support an increase in both manufacturers' credit and credit from the Export-Import Bank (United States). While World Bank credit, primarily to support developing hydroelectric generators, was also expanded through JDB intermediation. In addition, policy-based
160 Table IV-30-B. DeliberativeCouncils for JDB LAn Targets
Govnment DeliberativeCouncil JDB Loan Targets
Electric Power DevelopmentCoordination Council ElectricPower Council for the Rationalizationof Ocean Shipping Ocean Shipping,Small- and and Shipbuilding Medium-SizeSteel Shipbuilding
Council for the Rationalizationof Coal Mining -
Coal-ProducingAreas PromotionCouncil Coal Machinery IndustryCouncil
Eectronic Inlustry Council DesignatedMachinery, and ElectronicIndustries
Aircraft Industry Council AircraftIndustry
Toursm Business Council InternationalTourism
Urban Transport Council Private Railways
Road Council Councl for Ports and Harbors Industry-Related Facl]ities Couci for Civil Aviation Aircraft RgionalDevelopment Councils Regional Development (for each rural region) Scienceand Technology Administion Council Industrializationof New Technologies FafterFY1957 it was succeeded1 by the TechnologyScreening LcomittIee.J
Source: JDB(1963). Nihon Kaihatsu Ginko Junen Shi.
161 TableIV-3 I- A. Borrowersand LoanAmounts by PolicyObjective: FY 1955and 1960 (millionyen)
FY 1955 FY 1960 Numberof Loan Numberof Loan Borrowers Amounts (BY(A) Borrowers Amounts (B)I(A) (A) (B) (A) (B) ElectricPower 13 22,355 1,720 15 21,000 1,400 OceanShipping 25 15,936 637 30 13,056 435 Coal 20 3,639 182 26 6,123 236 Ironand Steel 1 100 100 6 850 142 Machine 25 1,152 46 154 3,138 20 Chenical 18 1,395 78 13 1,890 145 Regional Development - - - 111 7,748 70 Others 52 4,845 93 99 11,366 115 ToLil 154 49,422 321 454 65,171 144 Source: BOJ TableIV-3 1- B. LoanAmounts by Companies'Capital: FY 1955and 1960 (millionyen)
FY 19S5 FY 1960 Capital Numberof Loan Numberof Loan Loans Amounts Loans Amounts Less than 30 millionyen 14 495 139 3,299 (8) (1) (28) (5) 30 miillionyen - less than 50 million 11 298 52 1,524 yen (6) (1) (11) (2) 50 millionyen - less than 100million 13 1,459 59 3,054 yen (8) (3) (12) (5) 00 millionyen-lessthan 50nmillion 68 8,735 120 12,126 yen (39) (18) (25) (19) Moretian500miflionyen 67 37,559 115 45,168 (39) cm7 (24) (69) Total 173 48,546 485 65,171 (100) (100) (100) (100)
Notes: Table excludes loans for the repaymentof loans from other financial institutions. Nwnbers in parendses represent the share of the total. Source: BOJ financing began to be targeted in FY 1960 at constructingJapan's first nuclear power plant, and IDB guaranteedthe foreign currncy debt for the purchase of nuclear power reactors.
b) Oce Shipping 4.117 After the Suez Canal was reopened in March 1957, the global ocean shipping market entered a downward trend; yet, by FY 1958, the volume of Japan's ship holdings had already exceeded the highest levels of the prewar period. Thib growth was made possible by the planned shipbuildingundertaken with aid from fiscal funds, as well as by the large volume of orders placed for expensive ships which had been self-financed in previous boom periods. Moreover, demands were growing for policies to strengthen ocean transport capacity and the international competitiveness of the ocean shipping industry. Consequently, government protection and aid becare necessary for expediting the planned construction of ocean liners and reforming the excess
162 TableIV-32. Equipment Fund Loans Outstanding among IDB andAll Banks:March 1961 All Banks JDB Long-TermCredit City/RegionalBankls Total Banks Amount Amount Amount Amount (billionyen) % (billionyen) % (billionyen) % (billionyen) % ElectricPower 322.6 57.5 149.7 26.7 88.3 15.8 560.6 100 OceanShipping 171.8 59.2 65.7 22.8 52.9 18.3 288.3 100 Coal 30.3 60.8 17.8 35.2 1.7 3.3 50.6 100 Ironand Steel 60.3 33.2 103.0 57.2 19.2 10.7 180.0 100 Others 56.0 5.7 515.8 52.7 402.9 41.1 979.0 100 All Industries 641.5 31.2 852.0 41A 565.0 27A 2058.5 100
Source: BO] andIDB.
debt composition of the ocean shipping industry. As such, JDB financing to the ocean shipping industry differed from previous financing priorities, as investment was targeted at enhancing profitability and strengthening the enterprise base. Under the planned shipbuilding program, the share of JDB financing was approximately70%, and was a central force in promotingthis program. c) Coal Minng Industry 4.118 With the business boom of 1955-56came an increased demand for energy, and coal .roduction rose rapidly. However, the appearance of low-cost liquid fuel in the latter part of FY 1957,reduced coal prices, and coal stockpiles gradually increased and market conditions became structurally sluggish. Thus, coal policies increasingly came to resemble a diverse series of depressionpolicies, including the modemization of both production and distribution, the closing of inefficient mnines,and adjustment measures for unemployed mine workers. As a part of policies to rationalizethe coal mining industry, J.DBfinancing was carried out under the following conditions: "that the targeted firm has a rationalization plan," "that the targeted mine is economically efficient asa competitive source of energy," and "that targeted projects place emphasis on major investments such as the development of new mines, the consolidation of existing mines and rejuvenating projects accompanied by the movement to deeper mine areas."
d) Iron and Steel Industry 4.119 Under the Second RationalizationPlan (1956-1960) the investment levels for the iron and steel industry increased so rapidly that the FY 1960 level was more than four times the level of FY 1956. These investments sought to expand productive capacity, primarily through the construction of large-scale integrated steel works. The large-scale projects of the majorordinary steel companies were not funded directly by JDB, but by World Bank loans. Thus, JDB could focus on the special steel sector, whose rationalization had been lagging. In addition to funding for production facilities, IDB provided funding to major steel companies for the construction and rehabilitation of harbor facilities. 2 The Diversification of Policy Perspectives 4.120 One of the main characteristics of funding to the non-basic industries was the diversification of policy perspectives for funding areas. Policies began to focus on fostering industries through special legislation (the designated machinery, and electronics industry); improving the international balance of payments and acquiring foreign currency (international tourism, precision machinery, and so forth); fostering new industries and promoting the industrialization of new technologies (petrochemical, nuclear power generators, and the industrialization of new technologies); improving national life (private railways, city gas, and so
163 forth); providing public investment for improving social capital (industry-related infrastructure); and policies promoting the appropriate location of industnes in order to eliminate income and regional gaps (regionaldevelopment). These policies had varied and decentralized aims. a) Dedgated Machineryand Electronics 4.121 Compared with the finished-productsindustries, which were largely major firms, one of the deficiencies of the special machineryand electronics industries was the lag in the raw material and parts industries, which were largelysmall- and medium-sizefirms. Because these lags were slowing the industrialization of Japan's heavy and chemical industries, the governmentestablished the Law on Temporary Measures for Promoting the Machinery Industry and the Law on Special Measures for Promoting the Electronics Industry in 1956 and 1957, respectively.Thus, low-interest financing was made available from JDB to modernize facilities and upgrade technology in basic sectors designated by govemment ordinancesthat had not yet rationalized.In 1961, the targeted industrial sectors were expanded when the Law on Temporary Measures for Promoting the Machinery Industry and the Law on Temporary Measures for Promoting the Electronics Industry were reformed. These industrialsectors forned an important area for JDB loans. b) Industrlallzdon of NewTechmalogy and New Industries 4.122 The private capital investment that had supported technological innovation enabled the economy to reach high growth period. Yet, because the burden on firms for financing technological investment was comparatively large and entailed considerable risk, the hope was that the JDB would help guide and supplement private sector financing. JDB targeted financing for the industrialization of new technology at projects whose performance would ensure that industrializationcould be implemented.The chemical industry was the main target of this fundinO, but financing was also e..tended to a broad range of industries, including the metal, textile, and machinery industries. 4.123 But financing for such new industries as petrochemicalsand synthetic rubber was also fairly substantial. In the past, fertilizer had been the key sub-sector of Japan's chemical industry, but the First Period Construction Plan implemented from 1957-60 with government support effected a major shift towards petrochemicals.Under this plan, JDB provided financing to the 3 companies that played a major leadership role. In addition, JDB also provided both equity and loans to the Japan Synthetic Rubber Co., a state policy corporation and Japan's first domestic producer of synthetic rubber, established under the 1957 Law on Temporary Projects for Manufacturing Synthetic Rubber. c) AmmonluuSulphat 4.124 The end of the KoreanWar brought about the recession, and with.it, a reduction in freight charges; along with a continued decline in the international market price of fertilizers in the presence of increasing competitionfor exports, the ammonium sulphate industry began to decline rapidly, and urgently required govemment assistance. In order to stabilize the domestic price of ammonium sulphate and to promote its export, the government formulated the Second Five-Year Plan for the Rationalization of Ammonium Sulphate in 1959. In addition to providing positive financing primarily for rationalizationprojects necessitateJ by the conversionto gas resources,JDB began to implementother measures,such as providing partial exemptionsfrom interest.35
d) Hotelsior InternationalTourism 4.125 In order to help improvethe international balance of payments, the govemment formulated the Five-Year Plan for the Inprovement of InternationalTourism Facilities in 1957. The plan called for building internationalhotels with a combined total capacity of 12,000 rooms by FY 1963, in the hope of bringing 350,000 foreignersand $200 million in foreign currency into Japan. After this plan was publicly announced,JDB gradually increased its financi.igfor hotels for intemationaltourism.
164 e) PrivateRailways and City Gas 4.126 Reports by the Urban Transport Council(1961 in the Tokyo area, and in 1963 in the Osaka area) emphasized the importance and urgency of extending private railway lines from the outskirts of metropolitan areas to the city centers, to cope with the rapid increase in the number of commuters. Consequently, JDB began funding 5 private railway companies. In addition, in accommodating the Second Plan for the Consolidation of City Gas (1958-62), JDB provided funding for gas production facilities and the deploymentof gas pipes in and around the metropolitan aea. n)Funding for Industry-RelatedFacilitles 4.127 With rapid economic expansion,the lag in industrial infrastructure,such as roads, ports, a .d harbors, became pronounced and appeals were made to consolidate and strengthen them. Thus, the Road Improvement Five-Year Plan, Ports and Harbors Improvement Five-Year Plan, and the Dredging Five-Year Plan were formulated. JDB provided financing for these industry-related facilities according to the structure and nature of these plans. Characteristics of the funding for industry-related infrastructure include the following: targeted areas were those related to public investment, funded targets were neither public nor private facilities, but somewhere in between, and targets required government funding because they had low profitability and were difficult for the private sector to finance. g) RegionalDevelopment 4.128 Immediately after WWII, regional development sought to increase food production and develop electric power and underground natural resources. In Hokkaido, the Hokkaido Development Agency was established as the authority for regional development, and emphasis gradually shifted to industrialization. In 1956 the Hokkaido Development Corporation was established as a policy-based financial institutionfor regional development, and in 1957 the targeted area was expanded when the Tohoku region was added and the Corporation was reorgan-zed as the Hokkaido-Tohoku Development Corporition. This movement spread to other regions as well, and in 1959 and 1960 laws for the promotion of regional development were established in, respectively, the Kyushu and Shikoku regions, and the Chugoku and Hokuriku regions. The shift toward industrializationunder regional developmentpolicies can be attributed to the increasing gap in income levels between "developed" and "developing" regions (Table IV-33). IDB commenced funding for regional development in FY 1959, and after FY 1960 it classified this funding as a special program that differed from the focus of industrial policy-based financing in the past. This funding became a major new priority within JDB operating structure, and the funding anounts were expanded. D. World Bank Loans
4.129 In addition to JDB's main funding sources - government loans and the repayment of principals - another important source was foreign currency loans from the World Bank, which increased rapidly after FY 1958. 4.130 For Japan, which continued to have a deficit in the current account balance of its international balance of payments, the introduction of foreign capital played an important role in achieving overall equilibrium. From FY 1953 to FY 1960, JDB borrowed a total of $316 million from the World Bank and carried out $238 million in guarantees for foreign currency loans from the Export-hnport Bank (United States). This amount constituted 65% of the $854 million in foreign currency introduced into Japan during the postwar period (FY 1950-60), a considerably large sum (see Table IV-34-A).
165 TableIV-33. Indexof EconomicPower by Region:FY 1960
PopulationDensity Indexof Industrial Levelsof (per inhabitablearea) Production Per-CapitaIncome (componentratio) (personlkm2) (%) (%)
NationalAverage 848 100.00 100.00 Hokkaido 269 5.74 84.85 Tohoku 531 5.38 66.87 NorthernKanto 639 2.98 71.94 )Kanto SouthenKanto 2,119 25.02 145.98 Hokuriku 598 5.17 83.36 Chubu 749 3.04 81.44 Tokai 1,179 12.45 110.01 Kinki 1,809 19.92 119.22 Sanin 697 0.67 68.71 )Chugoku Sanyo 976 6.31 81A6 Shikoku 893 3.07 73.78 NorthernKyushu 1,045 9.19 73.51 )Kyushu SouthernKyushu 635 1.05 53.86
Source:Toyo Keizai Shinposha.
4.131 When World Bank President Black came to Japan in 1957, he was extremely positive about providing funding for Japan; that year, the World Bank provided a second loan to Kawasaki Steel for $8 million, and in FY 1958 loaned a colossal sum of $166 million to four electric power companies and three iron and steel companies. These loans took the form of JDB borrowing. Granting such large-scale loans in the span of a single year was a first for the World Bank, and at that tire it made Japan the second largest debtor to the World Bank (after India). In principle, the World Bank carried out loans for foreign capital for the import of plant and equipment (tied loans). But for a large portion of the World Bank loans to Japan, a new financing medium was adopted -- "impact loans." These loans reflected a shift in the World Bank's lending policy. Given that industrialization in Japan was sufficiently advanced and that its economy had strong growth potential, the World Bank decided to supply funds for supporting the domestic production of machinery. In addition, having exarninedthe conditionsof the Japanese economy, the World Bank decided that it would be possible for Japan to procure funding from foreign capital markets, and thus began to apply a formula for making forign bond issues by recipient Japanese companies a conditionfor lend3ing(Table IV-34-B). 4.132 Guarntees for foreign currency borrowing also expanded broadly for thermoelectric power plants, aicraft, and nuclear reactors (Table IV-35).
166 Table IV-34-A. Introductionof ForeignCurrency into Japan: FY 1950to 1960 (thousanddollars)
Fiscal World Bank (which JDB EXIM U.S. City Others Total Year amount) BANK(U.S.) Banks
1950- - - - - 4,026 4,026 51 1952 - - - 10,000 24,457 34,457 1953 40,200 (40.200) - 7,000 2,162 49,362 1954 - - 4,000 11,279 15,279 1955 13,400 (13,400) - 20,479 13,177 47,056 1956 24,300 (20,000) 25,927 3,000 40,425 93,652 1957 15,000 (8,000) 80,050 6,600 22,329 123,979 1958 166,000 (166,000) 28,230 31,510 5,733 231,473 1959 84,000 (44,000) 20,186 7,200 16,227 127,613 1960 25,000 (25,000) 21,300 38,814 42,018 127,132
Total 367,900 (316,600) 175,693 128,603 181,833 854,029
Source: Ministry of Finance.
TableIV-34-B. Borrowers of World Bank Loans through JDB: FY 1953 to 1957 (thousanddollars)
Fiscal Loan Fiscal Loan Year Company Name Amounts Year Company Namc Amounts
1953 KansaiElectric Co. 21,500 1958 KansaiElectric Co. 37,000 ChubuElectric Co. 7,500 Hokuriku ElectricCo. 25,000 Kyushu Electric Co. 11,200 SumitomoMetal Industries Co. 33,000 Kobe Steel 10,000 Subtotal 40,200 Chubu Electric Co. 29,000 Nippon Steel Pipe 22,000 1955 Yawata Steel 5,300 Electric Power DevelopmentCo. 10,000 Various Industries 8,100 Nippon Steel Pipe 2,600 Subtotal 166,000 MitsubishiShipbuilding 1,500 Toyota Motor Corp. 2,350 1959 Fuji Sted 24,000 Ishikawajima-Hainma Yawata Steel 20,000 Heavy Industries Co. 1,650 Subtotal 44,000 Subtotal 13,400 1960 KawasakdSteel Corp. 6,000 1956 Kawasaki Steel Corp. 20,000 SumitomoMetal Industries Co. 7,000 KyushuElectric Co. 12,000
1957 Kawasaki Steel Corp. 8,000 Subtotal 25,000
Total 316,600
Source: 3DB(1963), Nihon Kaihatsu Ginmo Junen Shi.
167 Table IV-35. Foreign Currency Guaranteesby Industry:FY 1954 to 1965 (thousanddollars)
Fiscal Guarantee Limit Year ElectricPower Aircraft Total Thermoelectric Nuclear Powcr Power Subtotal
1954 11,333 - 11,333 4,158 15,491 1955 - - 1956 21.599 - 21,599 - 21,599 1957 4b.432 - 48,432 10,267 58,699 1958 27,747 - 27,747 - 27,747 1959 - 35,621 35,621 21,915 57,536 1960 - - 1961 17,900 - 17,900 - 17,900 1962 96,100 - 96,100 12,918 109,018 1963 - 11,023 11,023 21,203 32.226 1964 21,761 3,664 25,425 36,828 62,253 1965 37,800 - 37,800 55,147 92,947
Total 282,672 50,308 332,980 162,436 495,416
Source:3DB (1963), Nihon KaihatsuGinko Junen Shi.
4.1961 to the mid-1960s' A. The Shift to an Open Economy
1) The Return to the Global Economy and Society 4.133 The economic growth, supported primarily by private capital investment in the second half of the 1950s maintained a fairly high rate, despite the continuous business adjustments to cope with the deterioration in the intemational balance of payments. To respond to the global movement toward liberalization, the govemment formulated the General Plan on Trade and Exchange Liberalization in 1960 in an effort to strengthen international competitiveness and to liberalize imports in the hopes of moving towards an open system.
4.134 By 1964, import liberalization was completed - and the year became a landmark for the internal and extemal development of the Japanese economy. Following its acceptance as a GATT Article 11 nation in 1963, Japan became an IMF Article 8 country, and a member of the OECD, composed of advanced industrializedcountries, having completed its shift to an open system. When the Tokyo Olympics, the first large-scale international event ever in Asia, was hosted by Japan in October of that year, the strong impression was that Japan had returned to the global economic community as an advanced capitalist nation. 2) Trade Liberalization 4.135 In 1952, Japan had become an official member of the IMF, and in 1955an official member of GATT, thus becoming an official participant in the postwar international economic order. Although the ultimate objective of these two organizations was to liberalize international trade and eliminate discriminatory treatment in trade and foreign exchange, they were compelled to give preferential treatment to Japan because the nation's industrial capital accumulation and technology lagged considerably behind those of the United States and European countries, Thus, the vIMFgave
168 Japan perrnissionto manage exchange rates, and GATT gave it permissionto use such mneasuresas general and discriminatory import restrictions in order to protect domestic industry during the postwar transition; moreover, the Foreipn Exchange Rate Control Law, and the Foreign Capital Law had imposed severe limitations on foreign capital, enabling Japan to liberalize only 16% of its trade in the year it joined GATT. Of course, having become a member of GATT and the IMF, exchange rate controls and importrestrictions would be allowed only for a period of time. 4.136 Postwar rehabilitation and the reconstruction of the economies of various countries was carried out under the "dollar umbrella." However, as economic reconstruction progressed in these nations, the relative weight occupied by exported American industrial products fell gradually, thus affecting the U.S. intemational balance of payments adversely; consequently, after 1958, the outflow of dollars increased markedly. Exacerbatingthis deterioratingU.S. intemational balance of payments was the context of exchange liberation by Western European Countries, and the rapidly expanding exports of the high growth Japanese economy. In Westem Europe, concerted efforts had becn made to carry out trade liberalization, but primarily within its OEEC (later OECD) trade region (at 90%); because controls were still exerted on the import of dollar-based commodities, trade liberlization against dollar regions (the United States, Mexico, the Philippines,and so forth) was only 60%. In Japan, its exports were expanding at a tempo approximately twice the rate of intemational trade, and export volume exceeded the highest levels of the prewar period; moreover, as the postwar transition period came to a close in 1959, Japan had a $100 million surplus in its account with the United States. 4.137 Thus, in fall 1959, the major topic on the agenda at the GATT General Meeting was U.S. demand for trade liberalization. Western European countries complied by taking additional liberalization measures that raised the rate of liberalization in the OEEC against dollar regions to 94%. In June 1960, Japan also formulated the General Plan for Trade and Exchange liberalization, which outlined plans to increase the liberalization rate from 40% at that time to 90% in a three-year period (Table IV-36). TableIV-36. Trade Uberalization: FY 1955- 1964 Year Percentof Liberalization 1955 16 1958 33 1959 37 1960 44 1961 70 1962 88 1963 92 1964 92
Source:Ministry of Finance.Odters.
3) The Direction of Industrial Policy 4.138 After the General Plan for Trade and Foreign Exchange Liberlization was implemented, active debate emerged in Japan as the nation searched for a new order under the open system dtat was to replace the formnerindustrial order under the closed system. In 1962, the Industrial Structure Investigation Committee under MlTfs jurisdiction concluded that "a public-private cooperative" informal discussion group should be established to discuss the problems of infant industries in competing intemationally. In order to enforce their recommendations, it suggested that the governmentenacted "laws to promote the creation of a new industrialstructure through preferential taxation and financial measures". "The conclusions of committee provided the basis for the Bill for Temporary Measures to Promote Designated Industries, which MMI submitted to the Diet in 1963 in recognition that the automobile, special steel, and petrochemical industries would find it difficult to compete internationally in the wake of trade liberalization. The bill included recommendations with a view to promoting mergers for joint business activities for rationalization based on the
169 public-private cooperative system. When the Bill was proposed, Japan had liberalizedabout 90% of its trade, and the volume of liberalizationhad largely been completed. However, because some key industries were not yet intemationallycompetitive. MITMbelieved that their situation would become even more serious because when trade was liberalized, even more crucial capital liberalization would be awaited. Thus, MITMurgently sought a break from the excessive competition of the past and cooperation in the transition to a new economic order. Yet, in the end, the Bill for Temporary Measures for Promoting Designated Industries was rejected by the Liberal Democratic Party and industrial circles on the grounds that it was a bureaucratic control of industry that would in fact reduce competitiveness. Opposition parties were also against the measure, claiming that it would create loopholes in the Antimonopoly Law. However, the recommendations of the Industrial Structure Investigation Committee and the concepts behind the Bill for Temporary Measures for Promoting Designated Industries persisted in various forms, including the emergence of the public-private cooperation informal discussion groups and capital investment issues informal discussion groups, in some industries and the inauguration of a Structural Improvements Loan Program by JDB for the promotion of mergers. 4.139 With the formation of the General Plan for Foreign Exchange and Trade Liberalization,the government's industrial policy was to reach the economic levels of advanced industrialized countries as quickly as possible. Although the Bill on Temporary Measures for Promoting Designated Industries was shelved, the comprehensive set of industrial policies that unfolded thereafter as to promote trade liberalizationdid contain elements intrinsic to the bill - for instance, to foster infant and new industries, to improve the stmcture of depressed industries in order to maintain their stability and balance. 4.140 As these comprehensive industrial policies unfolded, the govemment began enacting a series of special laws targeted at key industries, much as it had in the second half of the 1950s. It also provided a diverse administrative guidance, such as reports from related deliberative councils, rationalization plans, and cabinet resolutions. MITMalso drew up policies to actively guide industries, including drawing up specific goals for each industry (Table IV-37). 4.141 Special legislation was enacted in response to industrial policies to promote trade liberalization. To provide stable supplies for basic industries (products and services), the government enacted the Law on Temporary Measures Related to Reconstructionand Improvement of the Ocean Shipping Industry (in July 1963) and the Petroleum Industry Law (in May 1962). To upgrade the industrial structure and strengthen intemational competitiveness, the government extended the Law on Tempory Measures for Promoting the Machinery Industry for five years(in March 1961) and the Law on Temporary Measures for Pmmoting the Electronics Industry for seven years (in June 1961). To restructure depressed industries, the govemment reformed the Law on Temporary Measures for the Rationalization of the Coal Mining Industry several times, and gradually increased its aid to the industry. In addition, the Law on TemporaryMeasures for Textile Industry Plant and Equipment (in June 1964) formed the basis for further structural reforms in the textile industry, in which excess capacity was hurting performance. Finally, to promote regional development, the government enacted the ComprehensiveNational Development Plan in October 1962, as well as various laws related to the plan, includingthe Law for the Promotion of Industrial Development in Underdeveloped Regions (in November 1961), the Law for Promoting the Construction of New Industrial Cities (in May 1962), and the Law for Promoting the Improvement of Special Regions for Industrial Improvement(in July 1964). 4.142 As for administrative guidance, policies to strengthen international competitiveness included pursuing economies of scale through a public-private cooperative system in the petrochemical industry, reorganization aimed at the rationalization of production through tie-ups and the formation of groups according to product category in the special steel industry. In addition, in terms of policies for depressed industries, there were policies to promote structural reform, including the Measures for the Ammonium Sulphate Industry (December 1962). Also, in order to foster infant industries un.2r the guidance of MIT, 7 domestic computer manufacturers joined together to invest in a computer rental company, Japan Electronics Computer Co. (in August 1961) (Table IV-37).
170 TableIV-37. The Relationship between Industrial Policies and JDB Finance:1961 to 1965
_Policy Area Legislation AdministrativeGuidance RelatedCouncis Coal-generated GeneralPlan for CoalMining (Nov. 1962) ElectricResource Development thermoelectricpower CoordinationCouncil Blectric ComprehensiveEnergy Investigpive Power Comnmiuee Defefredpaymenl on Measuresfor Liberalizingimports of Power heavyelectrical Generators(Oct. 1962) equipment Coal Lawon Temporary Measures for Rationalizationof GeneralPlar -r CoalMining (Nov. 1962) CoalMining Council theCoal Mining Industry (Revised) Second' aadonCommittee on Coal Lawon TemporaryMeasures for Regulating Minin, ;- (Dec.1964) AccountingIn theCoal Mining Industiry (July 1963) Coalloi / CouncilIntenm Report (Dec. 1965) Oil PelroleumIndustry Law (May 1962) KyodoOil Co.Inaugurated (Aug. 1965) ConprehensiveEneW Investigative Commetee .______.___ iPetroleumCouncil 'Plannedshipbuilding Lawon Temporary Measures to Provide Subsidies for Oce3nShipping and Shipbuildlng Intee Paymentsan JDB Loans for OceanLiner RationalizationCounil Constmuction(May 1961; revised July 1963) ocan ShippingEneiie Lawon TemporuyMeasures Related to ImprovementCouncil Rconstuctlonand Improvements Inthe Ocean ShippingIndustry (July 1963) Remodelingof wheat Remodelinginefficient oil tankersin the Ocean carriers 20.OO-tonclass Into wheat cariers Shipping (IntemationalBalnce of Payments . _.______Countermeure) (AuQ.1963) Construciontoreplace Targets:Companies tobe consolidaed based antiquatedships onlaws relat toreconstruction and ______improvemnentof the ocean shippinx Indestrv Remodelingstadard oil tankers _ PrivateRailways Lawto Promote the Improvement of Railway UrbanTranspoe Council Crossings(Nov.1961) _ _ TruckTerminals Lawon Japan Motor Terminal Co. (May 1965) Preventionof Industrial Pollution IndustrialWater Facilities Law (rmvised) (May 1962) IndisUalStructure Council
______d_dld PolhdionCommitte DesignatedMachinery Lawon TemporaryMeasures for Promotingthe MachinetyInAstry Council MachineryIndustry (revised) (Mar. 1961) Insrial StuctureCouncil, Heavy IndustryCommittee ElectronicsIndustry Lawon TemporaryMeasures for Promoting the Elaonics IndustryCoumcil ______ElectronicsIndustry (revised) (June 1964) PIoicyAia LesIslation AdministatveGuidance Relbe Coxncib SpecialSteel SpecialSteel Subcommiitee Repod (Nov. IndusIl Stuctre Council,Heavy 1965) IndustryCommiutee Petrochemicals PotrochemicalCooperation Discussion Group Industi SlructreCouncil. Chenical (Dcc.1964) IndustryCommittee hfeavyMachinery Lawon Special Measures for Taxation MM Ministerappmrs FirstDoomestically MachineryIndustry Counil Development ProducedMachines (Jan. 1965) - Computers Establishmentof Japan Electronics Computer EectmnicsIndusuy Council ______Co.(AUR.1961) Textiles Lawon TemporaryMeasures for TextileIndusitry TextileIndustry Council Facilities(June 1964) IndustrialStructure Council, Textile Law__- Committee AinmoniumSulphate Lawon SpecialMeasures for ManagingAccounts BasicMeasures for the AmmoniumSulphate IndustrialStructure Council. Chemical Receivablefor AmmoniumSulphate Exports (June Industry(Sept. 1961) IndustryCommitee 1963) Measuresfor the AmmoniumSulphate Industry FatilizerDiscussion Group Lawon SpecialMeasures for FertilizerPrice (Dec.1962) Stabilization(July 1964) Mainpoints in theAdjustment of Ammonia Facilities(Mar. 1965) IntemationalTourism BasicTourism Law (June 1963) Measuresfor theTokyo Olympic Games TourismPolicy Council Smalland Medium. Size Lawon Tcmporary Measures for Rationalizationor Ocean-Shipping and Shipbuilding SteelShipbuilding Small-and Medium-sized Steel Shipbuilding RationalizationCouncil ______(revised)(March 1964) RegionalDevelopment Law to PromoteIndustrial Development In ComprehensiveNational Development Plan NationalLand Developoent Council UnderdevelopedRegions (Nov. 1961) (Oct. 1962) RegionalIndusty Development Council Lawon Temporary Measures to PromoteCoal- Kyushu,Shikoku, Chugoku, Hokuriku producingRegions (Nov. 1961) RegionalDevelopment Councils Lawto Promotethe Construction of New Industrial CoalProducing Areas Promodon Council Cities(May 1962) EconomicCouncil, Regiona Subcommittee Kinki RegionImprovement Law (July 1963) Lawto Improvethe SpecialRegions for Industrial ______improvement(July1964) _ _ Source:JOB 4.143 As these special laws and administrative guidance were provided to support industrial policies, JDB came to play a guiding role for individual industries. As its lending areas diversified into both the manufacturing and non-manufacturingsectors, it began establishing a broad range of contacts with policy-related govemment agencies and other related organizations. As policy-based finance became established as one vehicle for carrying out industrial policy, JDB's position became firmly established. B. Basic Direction of JDB Financing I) JDB Basic Operating Policy 4.144 The Basic Operating Plan for Government Funding of Industrial Facilities served as the basis for JDB funding operations throughout this period. The priority industries and facilities included each fiscal year in the Basic Operating Plan changed according to the evolution of policy goals. But the plan sought largely to consolidate the economic base in order to achieve long-term, stable growth. In particular, it contained several clauses for promoting trade and exchange liberalization and strengthening Japan's industrial structure: "consolidating and strengthening the industrial base, including energy, transport capacity, and industry-related facilities etc."; "upgrading the industrial structure, modernizing and rationalizing industrial plant and equipment, and improving the domestic industrial structure to'strengthen international competitiveness"; "the fostering and rationalization of industry in order to contribute to an improvement in the international balance of paynents"; and "balanceddevelopment between industriesand regions." 4.145 Various basic operating plans contained measures for promoting trade liberalization. To improve the structure of the ocean shipping industry (based on the Law for the Reconstruction and Improvement of the Ocean Shipping Industry), JDB restricted its lending targets in 1963 to firms that could definitely be concentrated and strengthened its guidance function. In FY 1961, JDB began focusing more heavily on the machine industries (designated machinery, electronics industry, and special steel), for which certain laws were extended in order to strengthen their export competitiveness.To promote upgrading the export structure, JDB began targeting export industries in FY 1962. And beginning in FY 1963, JDB established an Industrial Structure Improvement fund to strengthen the international competitiveness of several target industries: the petrochemical and passenger car industries, and in FY 1964,the special steel and the textile industries. 4.146 Two JDB measures were implemented to help depressed industries. In FY 1961, as part of the 1960 Basic Plan for the Rationalization of the Coal Mining Industry, JDB began targeting "goods distribution rationalization projects" in the structurally depressed coal mining industry, and expanded its Electric Power Loan Program to include electric power and electric power generation in coal-producing regions. And beginning in FY 1962, JDB lending began to emphasize more on the animonium sulphate industry, which was experiencinga severe slump. 4.147 The various basic operating plans also included several other prominent measures during the 1960 - 65 period. In 1964, JDB funding for electric power, whose financing had largely been transferred to the private sector, was restricted to coal-powered generation and deferred payments for heavy electric equipment. Also in FY 1964, JDB financingfor "industry-relatedfacilities" began targeting projects to prevent industrial pollution, in order to address the deteriorating environment that accompanied high economnicgrowth. In FY 1965, oil became a new lending target in an effort to secure a stable energy supply. This made it possible to foster oil companies with domestic capital (the Kyodo Sekiyu Co.). And also in FY 1965, the category "urban transportation" "called for rationalizing the distribution of transportation in large metropolitanareas," which served as the first stage of lending for modemizing the distribution structure. 2) The Characteristics of JDB Financing 4.148 JDB funding from 1961 to 1965 almost doubled, from V86.2 billion to V197.7 billion (see earlier Table I-17 in Chapter I). Of this amount, ocean shipping, financing for strengthening the intemational competitiveness of industries, and funding for improving the international balance of payments fell under the category "funding for trade liberalization"; their overall weight was about
173 50% of the total, indicating that trade liberalization, an important economic policy issue for the gove'nment, also occupied an extremely important place in 1DB funding. As for electric power, as BOJ had included bonds issued by the industry as one of its operating targets, bond-issue became easy and general equipment funding for this industry was transferredto the private sector, primarily in the form of corporate bonds; as such, the scale of JDB funding was reduced. Funding for coal was maintained at a fixed level as part of the measures to cope with depressed industries. Conversely, JDB funding for regional development was increased gradually each year, becoming one of the pillars of JDB funding in tandem with industrial policy-based financing. In this period, JDB also gradually shifted the focus of its preferentialinterest rates from an industry-specificto a project-specific basis, and tended strongly to limit the selection of targets. Moreover, it increased the number of preferentialinterest rates.
C. Direction of Funding 1) Reconstructing and Improving the Ocean Shipping Industry 4.149 Riding on the Suez boom of 1956, ocean shipping firms placed numerous orders for large-volume ships, relying on commercial loans. However, with the opening of the Suez Canal in 1957, the ocean shipping market stagnated, and the companies were left with both an excess shipping capacity and a considerable debt. On the profit and loss side, under-depreciation meant a severe business slump for these firms, which then had no financial option but to defer repaying their loans (Table IV-38). Thus, while private financial institutions had a fairly negative attitude toward financing the ocean shipping industry, the Income Doubling Plan drawn up in 1960 called for doubling the volume of shipping reserves held by the ocean shipping industry by 1970 in order to improve the invisibletrade balance. TableIV-38. The BusinessPerfonnance of the OceanShipping Industry: FY 1957to 1963 NetProfit Before Depreciation TotalUnder- (Ay Fiscalyear Depreciation depreciation AcquisitionCost (A) (billionyen) (billionyen) (billionyen) ( 1957 35.1 20.8 41.4 11.6 l95Y 9.4 11.9 61.8 14.0 1959 24.0 18.4 67.5 14.0 1960 29.3 24.4 72.6 13.9 1961 33.5 29.5 84.7 15.1 1962 31.5 31.4 96.3 15.5 1963 45.8 38.7 61.1 9.6
Note:Amounts are for companiesreceiving subsidies for interestpayment. Source:Ministry of TransporL
4.150 Against this financial climate, the government enacted the Law for Reconstruction and Improvementof the Ocean ShippingIndustry in 1963. The law containedtwo major provisions.The first called for industrial concentration so as to achieve a certain level of ship ownership in each group; it also required that companies submit to the Transport Minister an improvementplan under which all depreciation insufficiencies would be wiped out within five years after concentration.The second major provision stipulated that companies which had implemented improvement plans be exempt from paying interest for five years on JDB funding for planned shipbuildingprovided before FY 1961, and that the governmentcontribute an amount equivalent to the exempted interest to JDB. In addition, for planned shipbuilding carried out after FY 1961, a set interest subsidy was made available to reduce the constructioncosts to shipowners.After FY 1963, funding for ocean shipping was limited to firms that were concentrated under the Law for the Reconstructionand Improvement of the Ocean Shipping Industry.
174 4.151 With these measures, the approximately 100 companies in the ocean shipping industry were concentrated into 6 major groups, and, by FY 1964, a market recovery, the industrial rationalization achieved from the construction of large-size and automated ships, and the impact of mergers all helped improve business performance in the industry: the amount of depreciation insufficiency for the 6 main companies in September 1963 was V33.8 billion, while the amount of long-term loan repayment deferred was V40.5 billion; by March 1966, these figures were V1.7 billion, and V8.3 billion respectively. 4.152 Backed by a level of govemment assistance unlike that provided to any other industry, the ocean shipping industry carried out large-scale rationalization,accompanied by the reorganization of the industry. In the process of rationalizing the industry, firms used the scrap-and-build method to increase the ratio of new ships, and relied on technological innovations,to construct large-scale tankers, specialty ships for ore, and others. In addition, with a reduction in freight charges, the ocean shipping industry was able to contribute to strengtheningthe international competitivenessof Japanese industries that depended on the importation of natural resources. For example, while the iron and steel industry had previously relied on Southeast Asia as its major supplier of iron ore given its proximity, the reduction in freight charges made it possible to buy a large volume of cheap, high-quality iron ore from such remote regions as North and South America. 2) Liberalizing Domestic Industries 4.153 By the time that the General Plan for Trade and Foreign Exchange Liberalization was formulated in 1960, Japan's trade liberalization rate was approximately 40%. However, the rapid import liberalization carried out thereafter, increased this rate to 94% by 1965, which was practically the same level as in Western Europe. In the process of making the transition to an open economy, the international competitiveness of Japanese industry had become the nation's most important priority. Moreover, JDB funding for trade liberalization measures contributed heavily to liberalizing domestic industries, and it began increasing its scale of funding. The remainder of this subsection discusses the main industrial targets of JDB funding, their relationship to various policies, and their funding conditions. a) The DesignatedMachinery and ElectronicsIndustries 4.154 By 1961, the Law on Temporary Measures for Promoting the Machinery Industry (Machinery Promotion Law), which was enacted to correct the dual industrial structure, was nearing its expiration date. However, in an effort to promote liberalized trade and recognizing that the rationalizationand modernizationof facilities in the machinery industry should be enhanced and its international competitiveness strengthenei 'he government extended the expiration date by five years and expanded the industries targeted by the law and the funding amounts. Yet, because many of the firms that were to be the recipients of this aid were small- and medium-size firms, the Small Business Finance Corporation began to participate in these funding areas. From FY 1961 to 1963, as stipulated in the Basic Law on Small and Medium-Size Firms, responsibilityfor funding small- and medium-size firms was transferred gradually to the Small Business Finance Corporation. 4.155 JDB funding for designated machineryindustries emphasized automobileparts and machine tools, and remarkably stimulated the machinery industry to modemize its facilities. And because the Machinery Promotion Law included exemptions from Antimonopoly Law restrictions on joint activities, and sought to correct the disadvantagesinherent in small-volumeproduction of numerous product types, rationalization cartels were formed. These cartels placed restrictions on product categories and standards, seeking product specialization and cost reductions. They enabled the more powerful of the small- and medium-size firms in the machinery industry to grow into enterlprisesof middle standing. 4.156 In the electronics industry, the Law on Temporary Measures for Promoting the Electronics Industry, which was to have expired in 1964, was extended for seven years, and its funding and targeted projects were expanded. Although the level of funding for the electronics industry was smaller than the designated machineryindustry, the governmentreorganized the economic potential for electronics, and sought to support its growth.
175 b) Ironand SteelIndustry 4.157 Funding for ordinary steel was transferred to the private sector after FY 1962, when funding for the construction of a blast furnace by the most recently integrated manufacturer brought to a close JDB funding for such projects. Thereafter, all JDB funding went to special steel. With the transition towards an open economy, demands increasedfor high-quality, inexpensive resources for the machinery industries, beginning with automobiles; moreover, the obsolescenceof facilities and the bad effects of the small-volume production of several products were prominent among the special steel subsector. In order to carry out rationalization and concentrated production by promoting tie-ups and the formation of groups of firms in this subsector, MT guided JDB lending into concentrted investments in designated factories among the five major special steel companies. However, the actual amount of this funding was small.
c) Computers 4.158 Japan's computer industry was still in its infancy in the 1961-65 period. Thus, demands were made for maintaining and promoting computer sales by rental to support expanding the domestic market. In 1961, with joint funding provided by 7 domestic manufacturers of computers, the Japan Electronics Computer Corporation (JECC) was established as a specialty enterprise for the rental of domestic computers. In order to foster this infant industry, JDB provided funding for rental system maintenance and contributed to the diffusion of domestic computers and the expansion of their market scale. d) Petrochenical Industry 4.159 The petrochemical industry was selected as one of the industries targeted under the Industrial Structure Improvements category established in 1963 to upgrade the industrial structure by effecting economies of scale. To prevent the excessive competition that would be caused by the excess capacity in this industry, the govemment began a program of capital investment adjustment in 1964 based on the public-private cooperative system. With coordinated capital investments made cooperatively by the public and private sectors, JDB provided funding through Industrial Structure Improvements primarily to guide funding toward the 3 most recently formed kombinat in an effort to enhance their international competitiveness. At the same time, JDB also provided funding to established kombinat to implement projects backed ',y significant resource conversion plans. Petrochemical industrial development helped strengthen the international competitiveness of Japanese industry as a whole by promoting both the modernization and rationalization of the industry's production structure, and by reducing the price of intermediategoods (Table IV-39).
e) Textile Industry 4.160 While the progress of the petrochemical industry enabled the textile industry to make the transition from chemical to synthetic fibers, the efforts of the major synthetic fiber manufactures to reduce costs by expanding scale ultimately gave them excess capacity, and they had to rely fairly extensively on exports to survive. At the same time, developing nations, primarily in Southeast Asia, were beginning to catch up with Japanese firms, and the international competitiveness of mid-level textile companies was a concern. In response, the JDB, backed by the Law for Temporary Measures for Textile Industry Facilities enacted in 1964, began to provide funding for rationalization projects for mid-level spinning companies on the condition that they do away with excess facilities. f) Devedopmentof HeavyMachinery 4.161 Technological innovations based on the introduction of foreign technology had largely been completed by 1963. At the same time, demands were growing to foster domestic technology and strengthen technological development capabilities in an effort to strengthen the international competitiveness of industry. In particular, the domestic production of heavy machinery, which had depended heavily on imports, was a major target of industrial policy. Thus, beginning in FY 1964, JDB established a lending program for heavy machinery development, and began to provide
176 Table IV-39. Shift in PetrochemicalProduction Method and DomesticMarket Price
Shift in ProducdonMethod (%) DomesticMarket Price (Zen/ kg) FY 1958 1962 1965 Forner Petro- Former Petro- Former Petro- 1958 1962 1965 method chemical method chemical method chemical
Acetone 61 39 35 65 1 99 140 78 65 Acrylonitrile 100 0 52 48 14 86 361 174 164 Vinyl chloride 100 0 100 0 83 17 B 67 37 33 Aromatic hydrocarbon 78 22 50 50 44 56 T 56 31 28 X 63 33 26 Syntheic ammonia 92 8 51 49 44 56
Source: Japan PetrochemicalIndustry Association. low-interestfinancing for users of machineryand equipmentthat had been approved by the Ministerof InternationalTrade and Industryas the first domesticallyproduced machinery of their type. 3) Restructuring DepressedIndustries 4.162 As high growthproceeded towards internationalizatior., both the coal industry,which had lost its ability to competewith oil as a competitiveenergy source,and the anunoniumsulphate industry, whose technologicalinnovation was lagging, were unableto expand and began their decline.As part of trade liberalizationpolicy measures,JDB supportedgrowth industries and also tried to tacklestructural improvements in depressed industries. a) Coal 4.163 In responseto the reductionin the oil price, itself causedprimiarily by the reductionin the cost of importedcrude oil, JDBbegan providing funding to resuscitatethe competitivenessof the coal industry,targeted largelyat the minesthat had been selectedfor expansion as part of the scrap-and-buildmethod to streamlinethe industry. Together with the Coal Mining Industry RationalizationCorporation (the Coal Mining Industry RationalizationCorporation was established in 1960, taking the place of the Coal Mining Industry ImprovementCorporation establishedin 1955 as a purchasingagent for inefficient mines, which had been progressively dissolved; at the same time, loan operations were established to provide funding for modernization),JDB played a central role in providing fundingfor the rationalizationof the industry.But, while the laborefficiency of mine workersimproved significantly, reconstructing the coal industrywas a difficulttask, because there wasno hopefor an increasein demand. b) AmmoniumSulphate 4.164 The domesticprice of ammoniumsulphate had been forceddown in considerationof the impacton agriculturaladministration, and thus ammoniumsulphate producers could not benefit from rationalization;moreover, as the exportprice of amnmoniumsulphate fell below expectations, exportsled to an in accumulationof deficits.Thus, the healthof ammoniumsulphate companies had been damnagedconsiderably. The governmentrecommended that the amrnoniumsulphate industry carry out rationalization,modemization, and businessdiversification based on the Basic Measures for the AmmoniumSulphate Industry and Measures for the AmmoniumSulphate Industry, and stronglyrecommended that 1DBprovide funding for the industry.The increasein JDB fundingfor the industryhelped improve methods for sefttngthe domesticsales price, and enabled the export price to makean upward shift in light of supplyand demandstrngency in the overseas market. Consequently,the armnoniumsulphate industry could exist as an exportindustry. Thus, after FY 1963,both the internaland extemalenvironments of the ammoniumsulphate industry had favorably been transformed. 4) The ComprehensiveNational DevelopmentPlan and the Evolution of Regonal Develgpment Policies a) TheDevelopment of RegiondPEd.es 4.165 With high growth, the gap in income and employmentopportunities grew between underdevelopedregions and developedregions, while the outflow of younger workers from low-income,underdeveloped regions to establishedindustrial regions and their environsled to the so-called "urbanizationphenomenon." Thus, in areas where the populationhad declined, the economicbase of the regionalcommunity was weakened, further accelerating regional gaps, while the now more denselypopulated regions experienced such difficultiesas housingshortages. The governmentwas made keenly aware that new industrialareas had to be establishedand developed. 4.166 The govemrnmentsought to enbancesocial capital and arrangefor new industriallocations in its NationalIncome Doubling Plan. The governmentalso thenformulated regional development plans and took variouslegal measures to correctregional disparities. In 1962,after reexaminingan
178 earlier Pacific Belt Zone Plan, the government set forth a Comprehensive National Development Plan as the framework for preventing excessive expansion in urban communities and correcting regional gaps based on nodal system development. 4.167 Nodal system development was a plan for promoting "linked" developmentin which large-scale developmental bases and small- and medium-scale developmental bases were to be positioned in the areas surrounding the establishedindustrial regions of Tokyo, Osaka, and Nagoya, and to be connected economically with these regions. Moreover, several regional development laws were enacted between 1961 and 1963: the Law for the Promotion of Industrial Development in UnderdevelopedRegions, the Law for Promoting the Constructionof New Industrial Cities, and the Law for Promoting the Improvement of Special Regions for Industrial Improvement. 4.168 With the series of legal structures that accompanied the formation of the Comprehensive National Development Plan, various regions, including Kyushu, Chugoku, Hokuriku and Shikoku, formulated their own regional development promotion plans; under the three pieces of regional development legislation,regions also designated broad-ranging industrialdevelopment schemes that called for establishing industrial development bases. Each region's development scheme was drawn up from a nationwide perspective and included the designation of large- and medium-scale development cities to serve as base cities. b) FloancingRegionl Devdopmeint 4.169 In funding regional development, JDB accommodated the government's regional development policies and the concrete regional development plans of local governments. In addition, while giving sufficient consideration to the connection between this funding and its funding for other industrial policies, as well as to the regional expansion of targeted areas and the changes in regional character that accompanied the evolution of various regional development policies in targeted areas, JDB undertook its own comprehensive assessment of projects and the selection of standards. 4.170 The scale of JDB funding for regional development from FY 1961 to 1965 expanded each year in response to the expansion of target areas and the evolution of the policies of national and local governments. Regional development became one of JDB's major funding areas. On a regional basis, the Kyushu region received 35% of JDB's regional development lending, while the Chugoku region received 25%, the Shikoku region 12%, the Hokuriku region 14%, and other regions 14%.- 4.171 In the Hokkaido and Tohoku regions, fuiding was intermediated by the Hokkaido-Tohoku Development Corporation. This example gave rise to similar movements for establishing other f-nancial organizationsfor regional development in each of the other regions. However, in the end, centralizing regional development funding in the JDB was believed to be the most efficient way to manage funding and was a fairly significant factor in the smooth progress of regional development policies. In addition, a comparatively large number of firms targeted for JDB funding were not sufficiently credit worthy, but still had great policy significance. JDB financed these projects after having determined their potential for long-term development. Many of these firms ungrudgingly carried out self-supportefforts, and a fairly large number were able to evolve into mid-level firms. D. Foreign Bond Issues 4.172 Between FY 1953 and FY 1960, JDB borrowed 87% of the $368 million in World Bank loans to Japan, but after their peak in 1958 World Bank loans to Japan declined rapidly. After FY 1961, World Bank loans were no longer made to private firms. Consequently, JDB began to shift away from its role as a public intermediary in the introduction of foreign capital and began to issue foreign bonds on its own. Based on legal reforms carried out in FY 1960, 3DB was able to issue foreign bonds in New York for $20 million. These were to be used as financial resources for loans to the electric.power companies. This was the third time in the postwar period that Japan had issued foreign bonds. By FY 1965, JDB had carried out bond issuances five other times, for a total of $100 million (Table IV-40). Not only did foreign-bondissues allow JDB to promote the diversificationof its financial resource supply during this period, but it also helped improve the international balance
179 of payments and played a role in providing the initiative for Japanese firms to introduce foreign capital later on. The shift from World Bank loans to foreign bonds served as evidence that the Japanese economy had been widely accepted by the internationalcommunity. TableIV-40. Issues of ForeignBonds and Notes(FY 1961-65) Issue IssueDate Issue Maturity IssuePrice: Coupon Placelssued Number (local) Amount FaceValue of Rate (million 100 dollars) (%) (%) 1 Oct. 16. 1961 15.0 15years 95.5 6 N.Y. 5.0 3-5 100.0 5-5.25 2 May. 15. 1962 17.5 15 96.0 6 N.Y. 3 Feb. 1. 1963 22.5 15 96.5 6 N.Y. 4 Oct. 15. 1964 20.0 15 98.0 5.75 Luxembourg 5 Nov. 1'. 1965 20.0 15 97.75 6.5 N.Y.
Source:JDB (1963),Nihon Kaihatsu Ginko Junen Shi.
5. Financial Conditions A. Finacial Resource Composition of JDB 4.173 Fmancial sources for IDB funding consist of (1) capital, (2) government loans, (3) foreign currency loans, (4) foreign bonds, and (5) reserves. At the end of FY 1964, these sources contributed 25.2%, 47.4%, 9.6%, 3.0% and 14.8% to 1DBfinancing. 4.174 From its establishment to FY 1964, 90% of JDB funding came from govemment loans and the repayment of principal (Table IV-41). JDB is capitaized at V234.0 billion (which has not changed since 1955), and the total amount is disbursed from the Industrial Investment Special Account. Of this amount, the direct contribution by the government,including fimds for establishing JDB and those inherited in FY 1952, isY30.0 billion (VO10billion from the Assistance Goods Fund Special Account, and V20.0 billion from the General Account). The claims from the RFB and the Assistance Goods Fund Special Account that JDB inherited and then changed into capital are considered to be "legal contributions' (Table IV42). 4.175 When JDB was established, no provisions were made for borrowing from the govemment. However, after the JDB Law was reformed in 1952, govemment borrowing becam possible, and thereafter became the main source of financing for JDB loans. JDB initially borrowed from the Industrial Investment Special Account, inaugurated in 1953, which was based on the inherited assets of the Assistance Goods Fund Special Account. However as the borrowed amounts increased, these funds were transferred to the Trust Fund Bureau. After FY 1955, borrowing was no longer made from the Industrial Investment Special Account. In addition, from FY 1954 to 1956, funds were allowed to be borrowed from the Economic Aid Fund Special Account (for a total of V6.5billion). 4.176 In FY 1956, government borrowing was not carried out at all, due to the reduction in JDB lending from fiscal retrenchment (Table IV-43). However, because such borrowing was the main financial resource for loans, the balance actually increased. As for the loan conditions for govemment borrowing, loans from dte Trust Fund Bureau,which comprise the largest share of such borrowing, have an interest rate of 6.5% and a loan period of 15 years. These conditions have made long-tern, low-interest loans possible.
180 TableIV-41. Source of JDB Funding (billionyen)
GovemmentEquity GovemmentLoans ForeignCumtency PrincipalRepayment Internal Reserves, etc. ForeignCurrency Total Loans Bonds Flscal Amount ComponentAmount Component Amount ComponentAmount Component Amount ComponentAmount ComponentAmount Component Year rado(%) ralo(%) Mtdo(%) atio(9%) ratio(%) ratio(%) Mrtido)
1951 17.0 82.5 - - - 3.3 16.0 0.3 1.5 - - 20.6 100 1952 13.0 22.3 22.0 37.7 - 19.6 33.6 3.7 6.4 58.3 100 19S3 5-5.5 61.7 14.5 16.1 22.5 25.0 -2.5 -2.8 - 90.0 100 1954 33.7 53.4 - - 20.7 32.8 8.7 13.8 - 63.1 100 1955 - - 20.2 36.2 1.9 3.4 30.3 54.3 3.4 6.1 - - 55.8 100 1956 - - - 4.0 8.1 31.3 63.2 14.2 28.7 - 49.5 200 1957 - - 38.0 52.6 8.6 11.9 18.9 26.2 6.7 9.3 - 72.2 100 1958 - - 40.0 46.4 22.7 26.3 13.9 16.1 9.7 11.2 - - 86.3 100 1959 45.7 47.9 27A 28A 14.5 15.0 8.5 8.7 - 96.1 100 00 1960 - - 43.0 44.1 21.8 22.3 17.1 17.5 15.7 16.1 97.6 100 1961 - - S1.2 S2.8 10.6 11.0 15.6 16.1 12.3 12.7 7.2 7A 96.8 100 1962 - - 79.7 66.2 0.2 0 14.9 12.4 11.3 9.4 14.4 12.0 120.4 100 2963 87.4 72.0 * 24.7 20.3 9.3 7.7 - - 121.4 100 1964 - 90.0 62.0 41A 28.5 6.5 4.5 7.2 5.0 145.1 100
Note:Of JDBstotal capiailndon of 234.0billion yen, 30.0billion yen resulted from direct equity investment from the government. The remaining capital included loan claims inheritedfram the RFB and the Assistance Goods Fund Specil Account. Source:JDB Table IV-42. Changes in 1DB Capitalization (millionyen)
Date Capital Total Remarks Incmase and Capital Decrease
Apr. 20, 1951 10,000 10,000 Contributionsfrom the AssistanceGoods Fund Special Account
Dec. 7, 1951 7,000 17,000 Contributionsfrom the General Account
Mar. 31, 1952 9,353 26,353 Contributionsfrom the legal transfer of RFB-relateddebt
Jun. 30, 1952 2,170 28522 Contributionsfrom the legal transfer of RFB-relateddebt
Jul. 1, 1952 13,000 41,522 ContributionsfromrtheGeneralAccount
Aug. 1, 1952 73,698 115,220 Contributionsfrom the legal transfer of RFB-relateddebt
Apr. 1, 1953 131,000 246,220 Contributionsfiom the legal transfer of the AssistanceGoods Fund-relateddebt Oct. 1.1955 -6,934 239,286 Transfer of Loans for the Small BusinessFinance Corporation to the IndustrialInvestment Special Account
Oct. 1, 1955 -2,119 237,167 TransferofLoansfortheAgriculture,FoestryandFisheries Finance Corporationto the IndustrialInvestment Special Account Oct. 1, 1955 -5,000 232,167 Transfer of Investmentsin the ElectricPbwer Development Corporationto the IndustrialInvestment Special Account
Oct. 1, 1955 1,804 233,971 Transfer of the legal debt from the Industrial Invesunent Special Account
Source: IDB
Table 1V43. Borrowins fiom the Govermnent FY 1952 to 1964 (million yen)
Fiscal Year Borrowed Repayed Outstandin2
1952 22,000 - 22,000 1953 55,500 - 77,500 1954 33,705 - 111,205 1955 20,175 807 130,573 1956 - 3,634 126,939 1957 38,000 6,013 158,926 1958 40,030 7,696 191,260 1959 45,740 8,853 228,147 1960 43,000 9,766 261,381 1961 51,130 13,173 299,338 1962 79,700 19,331 359,707 1963 87,374 25,247 421,834 1964 89,990 22,430 489,394
Source: JDB
182 B. Revenues, Expenditures, and Financial Conditions 4.177 JDB profits are calculatedafter the interestpaid on loansborrowed, business expenses, and reserves for bad loans from its main revenuesource, interest on loans,are deducted.After a fixed percentage of statutory reserves is held as retained profit, the remainderof profit is paid to the government. 4.178 Accordingto Article36 of the JDB Law, "withrespect to the profits in a givenfiscal year, either a) an amount equivalentto 20/100thof said profits,or, b) an amountequivalent to 7/1000th of the loan balance at the end of each businessyear (shouldthis amountexceed the amountof said profits,then the amount of said profits),whichever is higher,shall beplaced in reserve."Under this statutoryreserve system,the amountin reserveincreases with the increasein the loanbalance each year. Furthermore,for amassingthe reserve for bad loans, within the limit of 3% of the loans outstanding,an amountthat was within 1%of the loansoutstanding at the end of a givenbusiness year could be amassed.This systemfor amassingreserve funds enabled the JDB to secureretained profitsand preservea favorablefiscal structure. 4.179 From about the mid-1950s,the gap betweenthe average interest rate for government borrowing and the interest rate for loans was reduced,to supportthe shift towardsqualitatively supplementalfinancing that accompaniedpolicy-based preferential interest rates (Table IV-44). However, during this period, the scale of JDB loans also expandedwith the high growthof the Japanese economy, and, despite thin marginsof profit, JDB was able to reap considerableprofits and thus continued to makethe fixed scale of paymentsto the govemmentthat were a necessary condition for securingits operationalindependence. 4.180 In the first 14 years after its establishment,JDB had a profitof approximatelyY200 billion, of which more than 1150 billionwas paid to the government.This amount contributed largely to the financialresources of FILP. In FY 1964,JDB's annual profitswere V19.1 billion - Y6.5billion in statutoryreserves was amassed,while the remainingV12.6 billion was paid to the nationaltreasury. Against a capitalizationof 1234.0 billion,JDB's profit rate was 8.1%,while its contributionto the nationaltreasury was 5.4%(Table IV-45). 4.181 In additionto a sizableretained profit, including statutory and otherreserves, the ratio of net worth to debts in FY 1964 was approximately30%; thus, the soundnessof the JDB's financial strucure was sufficientlysecured. In other words,it was preciselybecause JDB had an extremely soundfinancial structure and a highnet worthratio that funds witha preferentialinterest rate and in line with policy demands could be provided, and that sound financial conditions could be maintained. 4.182 As reference,Tables IV-46 and IV-47provide JDB balancesheets and incomestatements from FY 1951 to 1964;Tables IV48 and IV-49show loan arnountsaccording to industry.
6. A Summary of the History of the JDB 4.183 The Japanese economy, which had received a destructiveblow by WWII, achieved recoveryand returnedto prewareconomic levels within 10 yearsafter the end of the war.In the less than ten years that foUowed,Japan achieved miraculously high growthand wasable to returnto the international economic communityas an advanced capitalist nation. In that period, JDB, a policy-basedfinancial institution, responded flexibly to the policygoals of the administration,and enforcedthese policy goalsby targetingfunds at individualfirms. 4.184 Due to the scarcity of privatc capital in the immediate postwar period, JDB sought primarilyto supplementprivate financing quantitatively. JDB financingwas concentratedin the four basic industries- electricpower, ocean shipping,coal, and iron and steel - and was a prime contributionto the fornation of Japan's industrialbase duringthe reconstructionstage.
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~iA ~~ ~ ~ ~~~~~~~~I Table IV-45. Profit and Profit Dispositionby Fiscal Year (million yen)
Net Profit Profit Payment (A) Disposition Rate (BY(A) Fiscal Year Statutory Payment to Reserve Government (%) (B) 1951 184 184 1952 6,897 1,885 5,012 72.7 1953 13,556 2,711 10,845 80.0 1954 12,299 2,552 9,747 79.2 1955 12,671 2,725 9,946 78.5 1956 15,944 3,189 12,755 80.0 1957 17,879 3,576 14,303 80.0 1958 16,036 3,577 12,459 77.7 1959 16,624 4,079 12,545 75.7 1960 17,588 4,491 13,097 74.5 1961 17,404 4,942 12,462 71.6 1962 17,433 5,512 11,931 68A 1963 18,857 5,973 12,884 68.3 1964 19,062 6,494 12,568 65.9
Source: JDB
4.185 Later, as Japan entered a period of high economic growth, policy goals shifted toward improving the industrial stucture in order to maintain high growth. In addition, industrial policies for effecting this improvemeat sought to target individual guidance policies at those industries in need of improvements. As the capacity of private financial institutions and the capital market expanded with the growth of the economy, the significance of quantitative supplements began to fade, and JDB began to make a shift to qualitative supplements by accommodating the individual gidance policies of the government, applying a preferential interest system and extending loan periods. 4.186 Beginning in 1960, trade liberalization became an urgent issue. Based on various industry-related laws, emphasis was placed on increasing the ratio of funding to cope with trade liberalization. At the same time, an important policy goal was to correct the marked gap that had developed between urban and regional areas in the process of economic growth. JDB funding began to target regional development financing, in addition to the industrial policy-based financing that it had provided up to that point. 4.187 This chapter has focused on the period beginning with the postwar reconstruction until the mid-1960s, when trade liberalization was carried out and Japan began to participate actively in the international economy. It has discussed how JDB, a policy-basedfinancial institution, functioned to promote the development of Japanese industry. During this period, the postwar Japanese economy had largely achieved its policy goals: it had coped with economic reconstruction, strengthened and consolidated the industrial base, and liberalized trade. 4.188 However, even after its take-off, the Japanese economy continually faced various problems, including both regional depopulation and overpopulation,a lag in social capital, the appearance of pollution, and two oil shocks. As a comprehensivepolicy-based financial institution, JDB has tried to cope with these various problems and has amassed know-how as a policy-based financial institution. Currently, JDB functions as an effective policy tool for resolving the various economic problems faced by the Japanese economy as it continues its evolution.
185 Table IV46. BalanceSheets of JDB (millionyen)
FiscalYear 19S1 1952 1953 1954 195S 1956 1957 1958 1959 1960 1961 1962 1963 1964 Debtor Loans 96,063 269,314 331,225 373,652 389,285 400,634 447,226 510.987582.725 641,536 705.961 787,366 853.306 927.695 Loans 96,063 269,314 329,853 366,613 375,883 383,494 422,236 460,264 505,619 543,962 601,366 687,312 758,641 833,732 Foreigncurrency loans - 1,372 7,039 13,402 17,140 24,990 50,723 77,106 97,S74 104,595 99,94 94,665 88,963 LIabilitiesfor Guaunteesof Credit 223 110 10 5,453 13,106 22,863 3S,337 38,839 47,701 49,514 51,888 85,478 91,508 120,858 Securities 10,017 15,380 13,191 16,139 18,287 11,599 9,904 11,092 10,S06 12,919 8,958 5,957 7,578 8,342 Others 1,826 1,754 24,056 17,932 11,869 20,261 15,339 46,112 35,093 18,361 13,041 15,640 14,835 17,632 Total 108,129 287,008 368,482 413,176 433,247 4S5,357 507,866607,040 676.325 722.330 779.848 894.441 967.227 1.074,527 Barrower Bonuwings 75.868 156,538 80,677 120,049 143,975 144,079 183,916 241,983 305,252 358,955 403,933 459,691 516.499 578,357 Govemment borrowings 75,868 156,538 79,305 113,010 130,573 126,939 158,926 191,260 228,146 261,381 299,338 3S9,707 421,834 489,394 Foreigncununcy borrowings * 1,372 7,039 13,402 17,140 24,990 S0,723 77,106 97,574 104.595 99,984 94,665 88.963 ForeignCurrency FBonds 7,234 21,576 21,360 27,399 BianksLiabiliies for UaMnteesof Credit 223 110 10 5,453 13,806 22,863 35,377 38,839 47,701 49,514 51,888 85,478 91,508 120,858 Others 1,515 2,980 17,764 12,578 8,071 12.693 6.369 40,328 31.166 14,847 11.540 15.340 16.569 1MN18 Reservefor Possible LoanLosses 257 1,348 4,455 8,066 9,690 12,019 13,417 15,330 17,482 19,246 21,179 23,301 25.310 27.566 Capital 26,352 115,220 246,220 246,220 233,971 233,971 233,971 233,971 233,971 233,971 233,971 233,971 233,971 233,971 Reserves 3,730 3,915 5,800 8,511 11,063 13,788 16,977 20,553 24,129 28,209 32,699 37,641 43,153 49,126 Net Profit 184 6,897 13,556 12,299 12,671 15,944 17,879 16,036 16,624 17,588 17,404 17,443 18,857 19,062 Total 108,129 287,008 368,482 413,176 433,247 455,357 507,86M607,040- 676,325 722,330 779,848 894.441 967,227 1,074.527
Source:IDB TableIV.47. Statements of Eamingof JDB (millionyen) FiscalYear 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 Profits Intereston Loans 2,072 11,908 20,330 21,856 24,369 26,528 29,164 31,239 35,731 40.016 43,624 47,640 53,025 49,272 GuarantecCormssions 1 1 26 27 68 45 70 100 114 III 110 171 233 Profltson Securities 100 437 352 181 424 961 315 304 302 320 475 314 278 249 Others 128 490 30 170 51 66 58 I1 16 9 41 147 30 8,654 Provisionfor PossibleLoan Losses - 256 129 34 513 88 27 43 74 30 96 63 152 242 Subtotal 2,300 13,092 20,842 22,267 25.384 27,711 29,609 31,667 36,223 40,489 44,347 48,274 53,656 58,650
Intereston Borrowing - 1,286 2,891 5,621 7,578 8,253 9,407 12,495 16,028 19,566 22,615 25,820 29,415 33,316 Intercston Foreign CurrencyBonds - - ...... 213 787 1,323 1,428 BusinessExpences 213 1,043 983 621 656 698 776 794 861 977 1,243 1,463 1,529 1,847 CreditWrite-offs 372 255 129 23 513 88 53 43 74 30 96 63 152 242 Others 1,274 2,265 46 47 74 41 44 343 410 533 S88 56 135 154 Provisionfor Possible LoanLosscs 257 1,346 3,237 3,645 3,892 2,417 1,450 1,956 2,226 1,795 2,029 2.185 2.161 2,498 Subtotal 2,116 6,195 7,286 9,968 12,713 11,767 11,730 15.631 19,599 22,901 26,943 30,831 34,799 39,588 Net Profit 184 6,897 13,556 12,299 12,671 15,944 17,879 16,036 16,624 17,588 17,404 17,443 18,857 19,062 Total 2,300 13,192 20,842 22,267 25,384 27,711 29,609 31,667 36,223 40,498 44,347 48,274 53,656 58,650
Source:JDB % TableIV-48. Loan Amounts by Companices'Main Business (millionyen)
FLia Year 1951 1952 1953 1934 1955 1956 1957 1958 1959 1960 1961 1962 1963 196 ElectricPbwer Industry 100 17,243 42,487 33,57S 22,30S 17,667 29,730 25,016 24,920 21,350 21,650 30,089 25,110 18,748 TransportationIndustry S,228 13,064 24,175 16,311 16,492 16,262 19,565 16,875 21,673 16,505 22,450 26.820 35,S35 56,014 (MarineTransport) 4,860 6,163 21,654 16,311 15,982 15,987 19,375 16,762 19,642 13,860 18,993 22.284 28,120 46,S09 MiningIndustry 4,716 4,952 6,286 2,389 4,375 4,130 4,314 6,897 4,905 6,918 10,260 15.055 12,875 15.485 (Coal) 3,578 3,898 4,526 2,209 3,978 3,786 3,964 6,567 4,715 6,043 9,050 13.130 11,215 11,175 MetalIndustry 4,875 7,910 4,602 922 475 2,365 3,404 2,226 2,267 2,984 4,493 4,555 3,340 4,285 (Iron and Steel) 4,875 7,768 4,490 920 475 2,365 2,913 1,.35 2,031 2,270 2,910 2,765 1,780 2,060
ChemicalIndustry 1,893 3,195 2,158 1,170 1,070 870 2,177 3,770 6,820 4,690 3,197 18.072 8,775 14,800 Machinry Industry 978 4,379 1,545 658 2,930 1,941 3,291 2,500 3,089 3,537 11,399 10,732 11,232 11,457 Go
Agriculture,Forestry and Fisheries 510 1,251 817 225 230 250 0 220 360 825 632 188 189 665 TextileIndustry 591 1,912 3,073 1,703 200 485 535 545 200 290 1,055 2.187 4,535 4,908 Others 1,712 4,377 3,474 529 1,345 1,539 670 1,561 4,477 8,072 11.025 12,585 19.795 18,721
Total 20,603 58,283 88,617 57,482 49,422 45,509 63,686 59.610 68.711 65.171 86,161 120,283 121,386 145,083 Source: JDB TableIV-49. Amount of ForeignCurrency Loans by Companies'Main Business (millionyen)
FiscalYear 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963
ElectricPower 1,372 5,666 5,829 615 10 14,167 12,657 7,276 6,513 - 21
Iron and Steel - - 534 2,548 7,748 12,262 14,743 14,535 4,107 135
Machinery - - - 850 791 223 - - - - -
Total 1,372 5,666 6,363 4,013 8,549 26,652 27,400 21,811 10,620 135 21
H Note:No loanswere made for the periodsbefore FY1952 or after PY 1964. 0S Source:JDB ChopterV. INDUSTRYCASE STUDIES 5.1 This chapter presents case studies of policy initiatives to develop four industrial groups: infant industries (machine tools and automobile parts), export industries (shipbuilding), basic industries (the iron and steel industry), and declining industries (coal mining).The studies examine each industry's postwar development and the types of industrial policies carried out, as well as the role played by policy-based finance, in each of two time periods.
1. Infant Industries: Machine Tools and Automobile Parts A. 1945 to 1955 5.2 Supported by the marked increase in military demand ushered in by World War II, Japan's machine industry grew extremely rapidly. But with wars end and the loss of the military market, the machine industry fell into a deep depression, with the production level immediately after the war only 51.4% that of 193436 levels. Later, with the reconstruction of Japan's postwar economy, domnesticdemnand increased, and the machine industry also enjoyed a gradual revival, as production grew from the special demand of the Korean War boom. However, while production levels in 1954 were 257.5% of prewar levels and the industry exceeded the average for manufacturing industries (174%), production was only 56% of the level it had been at the industry's peak in 1944, and the recovery of the machine industry lagged behind the recovery of other industries (Tables V-1 and V- 2). 5.3 The postwar growth of the machine industry was fueled by the transfer from military to civilian demand. However, the industry's growth was stunted because the damage from the loss of military demand was large, the Japanese domestic market was still small and unstable, and the machine industry was not successful at tapping the export market. In addition, the business scale of Japan's machine industry was small compared with the scale in the advanced industrializednations in Europe and the United States; moreover, because most machine industry firms were small- or medium-size enterprises, their productivity was low when compared with the productivity of larger companies (Tables V-3 and V-4).
1I)The Report from the Industrial Rationalization Council
5.4 In the postwar period of economic reconstruction,the objective of the Japanese economy was to promote exports, rationalize industry, and strengthen the capital accumulation that was necessary to implement rationalization. This threefold objective was particularly applicable to the machine industry,which was considered to be a significantindustry for the national economy. 5.J., In December 1949, the Industrial RationalizationCouncil was establishedto investigate the actions necessary to support developing industrial strength. In February 1951, it issued a report that recommnendedtwo primary measures: * That macine production facilities be rationalizedand modernized. Because capital investment in plant and equipment was not made during the war and because production facilities had become obsolete, amassing capital was necessary in order to reinvest it in the modernizationof facilities. * That tax laws be revised and government funding used more heavily. These two measures sought to encouragecompanies to accumulate internal reserves. This report culminated in the Enterprise RationalizationPromotion Law (1952), which contained two primary measures for promoting the modernization of machinery facilities: a special depreciation of 50% during the first business year for the purchase of modernization facilities by companies in "designated industries" (for example, machine tools), and a reduction in facility property taxes. In addition, the establishment of JDB paved the way for providing government financing to the machine industry.
190 Table V- 1. Production Index of Major Industries:FY 1934 to 1955 (1934-36 = 100)
Fiscal Mmwfacturing Machine Textiles Chemicals Metals Year Industr"
1934 89.6 84.9 98.5 84.5 84.5 1935 99.1 96.0 100.1 99.7 101.8 1936 110.6 115.8 101.4 115.8 113.7 1937 130.7 147.8 114.2 143.7 130.8 1938 143.7 192.7 98.5 152.9 147.6 1939 149.2 194.8 94.5 164.7 160.8 1940 149.3 208.7 86.0 155.4 170.1 1941 150.0 215.9 68.1 154.1 193.0 1942 144.8 234.1 54.0 125.7 213.7 1943 161.2 315.3 37.0 108.0 243.4 1944 182.1 463.3 21.1 85.5 220.3 1946 28.9 51.4 12.2 26.3 15.6 1947 35.1 59.8 17.8 33.9 23.2 1948 52.5 107.4 22.2 50.8 40.0 1949 68.9 131.6 28.5 70.9 70.4 1950 82.0 125.6 41.3 103.1 96.6 1951 115.1 197.1 58.0 140.7 144.0 1952 128.2 205.1 66.2 168.5 154.2 1953 159.7 266.5 76.5 216.5 183.5 1954 173.8 257.5 81.9 266.7 192.5 1955 188.2 249.9 85.9 317A 2189
Note: Indexes from the Economic Planning Agency. Source: Ministry of InternationalTrade and Industry (ed.), (1956), Kikai Kogyo Shinko No Hoto.
Table V-2. Comparison of the Prewar and Postwar ProductionLevels of Major Industries (1934-36= 100)
PeakPrewar Yea PostwarYear PoatwarYear PbstwarYear 1952 1953 1954 Manufacturing 1944: 182.1 128.2 159.7 172.0 (100) (70.5) (87.5) (94.5) Machines 1944: 463.3 205.1 266.5 257.5 (100) (44.3) (57.5) (55.5) Textiles 1937: 114.2 66.2 76.5 81.9 (100) (58.0) (67.0) (71.6) Cheniicals 1939: 164.7 108.5 216.5 266.7 (100) (65.9) (131.6) (162.0) Metals 1943: 243.4 154.2 183.5 192.5 (100) (154.2) (75.5) (79.1)
Note: Indexes forn the Economic PlanningAgency. Source: MlTI (edc),(1956), Kikai Kogyo ShinkoNo Hoto.
191 Table V-3. The CompositionRatio of Employeesin the Machine Industry,by Country
Japan (1953) United States West Germany (1952) (1952)
Tbousand % Thousand % Thousand % Persons Persons Persons
1- to 49-person 317 31.9 10D 7.3 448 9.9 50- to 99-person 102 10.2 _ 97 7.2 100-to 499-person 212 21.2 754 16.6 359 26.5 500-to999-person 98 9.8 515 11.4 185 13.6 1,000+person 267 26.9 2,799 62.1 613 45.4 Total 996 100.0 4,516 100.0 1,354 100.0
Note: Japan: Census of Manufactures. United States: AnnualSurvey of Manufactures West Gernany: S:atis:ischesJahrbuch Source: MITI (ed.), (1956), Kikai Kogyo ShinkoNo Hoto.
Table V-4. Productivityby EmployeeScale, by Country
Value Added e Labor (thousandyen) Country Japan (1953) United States (1952) (A)/(B) (A) (B) (%)
1- to 99-person 240 2,830 8.5 100-to 249-person 359 2,850 12.6 250- to 499-person 368 2,790 13.2 500- to 999-person 422 2,780 15.2 1,000+person 382 2,780 13.8 EmployeeMedians 306 2,790 10.9
Source: MM (ed.), (1956),Kikai Kogyo Shinko No Hoto.
192 2) Tariff ExemptiQns for Machine Togls
5.6 One of the most important "designated" industriesfor modemization was machine tools - the machines that make machines. Because Japan's domestic machine tool industry was technologically behind that of other countries, technologically advanced machines had to be imported. In 1951, the government thus announced the "Ordinance to Exempt Import Duties on Important Machines," which facilitated significantly the import of the new, advanced machines that were required to rationalize and modernize industry. In the early part of the 1950s, Japan imported almost as many machine tools as it produced, and machine tool imports comprised 40% to 50% of Japanese domestic demand (Table V-5). 3) Operating Plan for Managing the Machine Tool Business 5.7 In 1953, as basic developmental policies for the machine tool industry began to take shape, MITI announced the Operating Plan for the Management of the Machine Tool Business to encourage the modernization of facilities and stimulate effective demand. The plan introduced the following measures: * MITI was to positively recommend JDB funding for renovating the facilities of machine tool companies. * The trial manufacture of high-performance and high efficiency machines was to be promoted and, when possible, MITT was to try arduously to provide financial subsidiesto cover the cost of trial manufacture.
* Providing JDB financing to manufacturers of important related products (such as bearings and tools) and extending the application of the Enterprise Rationalization Promotion Law in order to stimulate the rationalization of these industries and to promote the production of high-performanceparts. * The effective demand for domestic machines was to be stimulated through the following measures:
* Based on the revision of the Tariff Law, a review of machines that were exempted from import duties was to be carried out, and, when such machines could be produced domestically,favorable tariff treatment was to be eliminated.
* To eliminate the perception that foreign products are inherently superior, the establishment of the mechanism was to be considered for comparing the functions of imported and domestic machines. * The replacement of old machinery with high-performance machines was to be encouraged during factory examinations or consultations with small- and medium-size companies. * The Enterprise Rationalization Promotion Law was to be extended to all subsectors of the machine industry to facilitate the purchase of new machine tools through a special depreciationsystem.
193 TableV-S. Supply and DemandTrends in the MachineTools Industry: FY 1945to 1965 (weighta thousamdtons; amount* billionyen) Production Amount Amount Demand Import of of Dependence Exports Inports Fisca Year Weight Amount (D)=(A)- (C)t(D)(%) (A) (B) (C) (B)+(C) 1945 11.8 0.1 0.0 0.0 0.1 0
1946 4.3 0.1 0.0 - 0.1
1947 3.2 0.1 0.0 - 0.1
1948 4.7 0.5 0.0 - 0.5 1949 4.5 0.9 0.1 0.04 0.8 5 1950 2.9 0.6 0.2 0.1 0.5 20 1951 4.7 1.1 03 0.1 0.9 11 1952 5.9 1.7 03 0.8 2.2 36 1953 7.7 3.7 OA 2.3 5.6 41 1954 10.5 5.4 0.5 5.2 10.1 51 1955 6.6 3.7 0.7 4.0 7.0 57 1956 11.6 7.2 0.5 2.5 92 27 1957 21A 15.5 0.7 12.2 27.0 45 1958 26.3 2i.1 0.5 13.8 34A 40 1959 31.4 24.3 0.5 10.4 342 30 1960 59.6 45.2 1.6 19.7 633 31 1961 110.1 81.9 2A 389 11S.A 33 1962 127.1 100.9 2.6 47.6 1459 33 1963 126.6 95.1 43 22.8 113.6 20 1964 121.5 90.9 6.5 213 105.7 20 1965 89.2 703 8.9 14.0 75A 19
Source:Japa MachineTool Builder'sAssociation (1982). HahaNaru Kikai" 30-nen no Aymi.
194 4) Funding for the Machine Tool Indust 5.8 The role of fiscalfunds playedin this 1945-55period can be illustratedby the exampleof a trial machinetool manufacturer.Of the VI100nillion allottedfor the manufactureof machinetools in FY 1952-55.the ratio occupiedby subsidieswas 44% on average,a high percentage.In addition, althoughthe ratio of JDB loansto totalcapital investment seemed low for the periodfrom 1953-54 to 1955-57,the overall rate occupiedby bothsubsidies and JDB fundswas consistently40 to 50%. While t-heamount of money was small, these rates are fairly high, and they helped form the foundationf'or the periodof highgrowth (Tables V-6 and V-7). TableV-6. Costof the TrialManufacture of MachineTools to be Coveredby Subsidiesand the Amountof SubsidiesReceived (millionyen) Fiscal TotalCost of Trial Of WhichSubsidies (By(A) (%) Year Manufacture(A) (B)
1952 17.7 5.0 28 1953 31.2 16.0 51 1954 28A 11.0 39 1955 24.0 12.7 52
Total 101.3 44.7 44 Source;Economic Research Institutec Japan Societyfor the Promotionof the MachineIndustry (1968),7aicei Tovushi No KikaiKogyo Ni OyobosuEikyo.
TableV-Z. Breakdown of EquipmentFunds for the TrialManufacter
Investment Of Which Ratioof 3DBFinance JDB Fmance (millionyen) (ili y
Sep. 1953to Sep. 1954 164.2 19.0 12 Sep. 1955to Sep. 1957 182.9 40.0 22 Sep. 1958to Mar. 1961 417.8 240.0 57 Mar. 1964to Sep. 1965 704.6 250.0 36
Total 1,469A 549.0 38 Source:Economic Research Institute, Japan Society for the Promotionof the MachineIndustry (1968),Zaisei Tayushi No KikaiKogyo Ni OyobosuEikyo.
195 B. 1956 to 1965 5.9 By the end of the 1950s, the Japaneseeconomy achieved postwarreconstruction and accomplishedremarkable economic development. By 1965,the productionindex for the machine industrywas 4.7 times that of 1956.However, even in 1956the recoveryof the machineindustry laggedconsiderably behind that of other industries,and the lag in such basic subsectorsas machine tools was particularlyconspicuous. 1) The First Temporary Measures for the Machine Industry Promotion Law (1256 to i1960 5.10 The machineindustry is essentiallyan assemblybusiness with a pyramid-shapedstructure formedby variouslayers of parts manufacturers.Consequently, the performance,quality, and cost of the finishedmachine depend on the technicaland managerialskills of the partsmakersthat supply the parts and half-finishedproducts to the finishedmachine manufacturer. However, during this period,most Japanese partsmakers in the machinebusiness were small- and medium-sizefirms that subcontractedto the largercompanies producing the finishedmachines. Thus, because the postwar developmentof the machinebusiness centered around the makerof the finishedproduct -- the larger comnpany-thepartsmaikers were left behind.In addition,the large manufacturersubcontracted with the partsmakerprimarily to take advantageof lower wagesand costs, thereby wideningthe gap betweenthe producerof the finishedmachine and the partsmaker. 5.11 Similarly,for the basic machineindustry (which includes machine tools), the performance and precision of its products are reflected in the quality of the manufacturedend product. But becausethe basic machinesector also had a subcontractingrelationship with the finishedmachine manufacturer,its developmentwas insufficient,and an imbalancedeveloped between it and the finishedmachine sector. 5.12 Thesetypes of strutural deficienciesin the machineindustry (that is, its "dual structure") impairedthe balanceddevelopment of the entireindustry, which it had been hoped would lead to the productionof value-addedproducts, and the absorptionof labor, and would thus cease to be a bottleneck to economic growth. Overcomingthese structural problems in the industry and increasingdemand necessitated fostering and strengtheningthe weakest segmentof the machine industry,the basic sector. Ihus, in 1956,the Lawon TemporaryMeasures for the Promotionof the MachineIndustry (Machine Industry Promotion Law) was enacted to supportpolicies for promoting basicmachines, conmnon parts, and so forth. 5.13 The law targetedthose sectorsthat wereboth the mostbasic and the farthestbehind in terms of rationalization.The goal was to modernizethe productionstructure of the entire machine industry by promoting the renovationof obsolete facilities, the accumulationof capital and technology,and the creationof a specializedproduction system. The mainpoints of the law are as follows: * Individualbasic rationalizationplans and enforcementplans are to be drawn up for the machineindustries designated by M=. * The governmentwill endeavorto secure the financingnecessary for implementing these enforcementplans. * If necessary,MMTI can delegatejoint operationsto companiesin order to meet the rationalizationgoals outlined in the basic plan. 5.14 The remainderof this section presentstwo case studies:machine tools (representingthe basic machineryindustry) and autoparts (representingthe componentindustry).
196 a) Machine Toob 5.15 In the first stage of the machine industry's postwar development, capital investment dramatically increased, primarily for basic machinery and common parts. The goal of the Basic Rationalization Plan for the machine tool industry was twofold: to raise quality, and to lower production costs by at least 20%. To modernizefacilities, the industry was to spend 16.0 billion on capital investment, including V5.5 billion on specified equipment (that is, metal-cutting machine tools, metal processing machines, and testing and inspectingequipment); the emphasis was to go to new metal cutting machines, and anotherV500 million was to be spent on other machines (Table V-8). However, with a rapid increase in the demand for machine tools, the actual pace of rationalization was much faster than was outlined in the plan. The plan was revised twice during the plan period. In the end, V1I7.2billion was spent, around three timnesthe amount in the initial plan. Of the amount of capital investment in the machine tool manufacturing industry in this period (Table V-9), 7Y13.4billion was spent on specified equipment, about 20% (12.6 billion) of which was supplied by JDB. During this period, JDB's total financing for designated machinery was V10.6 billion, 53% of which went to basic machines,including 25% for machine tools, the largest share in designated machinery (Table V-10). 5.16 With the active private capital investmentsthat accompanied a favorable economic period, machine tool production increased from its fairly low 1955 level of 15.0 billion to 145.2 billion in 1960, or more than 6 times the 1956 level (Table V-5).
TableV-8. Summaryof the BasicPlans for MachineTools BasicRationalization Plan Basic PromotionPlan
TimePeriod FY 1956-60 FY 1961-65 Aim Modernizingfacilities Strengtheninginternational competitiveness Rationalization Improvingproduct quality Improvingproduct quality Reducingproduction costs by 20% or Reducingproduction cost by 15%or more more
ProductionI Exports FY 1960Target: FY 1965Target Production:20.0 billionyen; Production:135-0 billion yen; Exports:4.0 billionyen Exports:13.5 billion yen CapitalInvestment FY 1956-60 FY 1961-65 Specifiedequipmnent 5.5 billionyen Specifiedequipment: 68.0 billionyen Others:0.5 bilion yen Others: 17.0billion yen Total:6.0 billionyen Total: 85.0billion yen Oters Standardizingproducts Expandingenterprise scale Establishinga jointresearch R&Dfor basictechnology organization Promotingexports with establishmentof the CooperativeExport Organization
Source: Japan Machine Tool Builder's Association(1982). "Haha Naru Kikai"' 30-Nen No Ayumi.
197 TableV-9. Amount of CapitalInvestnent in the MachineTools Mmufacturing Industry (billionyen)
Planned Actual Specified Odter. Total Specified Other. Total FY Equipment a Ecquipmenta
1956 1.5 0.5 2.0 1957 1.9 0.2 2.1 1958 5.5 0.5 6.0 2.1 0.6 2.6 1959 3.7 1.5 5.2 1960 4.2 1.5 5.7
Subtotal 55 0.5 6.0 13A 4.3 17.7
1961 13.5 6.5 20.0 1962 5.3 3.9 9.2 1963 68.0 17.0 85.0 6.1 3.0 9.1 1964 2.2 1.5 3.7 1965 1.5 1.3 2.8
Subtotal 68.0 17.0 85.0 28.6 16.2 44.8
Total 73.5 17.5 91.0 42.1 20.5 62.5 a. Specifiedequipment includes machine tools and facilitiesfor experimentationand research. Somce:Japan Machine Tool Buildes Association(1982), "HahaN;mKikai"30-nennoAmwi.
198 Table V- 10. Actual Amount of Financingfor DesignatedMachines
1956-60 1961-65 Total MachineCategory Amount ratio Amount ratio Amount ratio (lUnin yUa)) ( o6flianyen) (%) (lon) (*) Basic Machines 5.7 53.3 8.8 25.7 145 32.2
Machine 2.6 24.8 3.8 10.9 6A 14.2
Tools 1.5 13.9 2.0 5.S 3.5 7.7
Metal Patterns 0.4 3.7 0.3 1.0 0.7 1.6
Shared Parts 3.0 28.8 7.7 22.3 10.7 23.8
Bearings 0.3 2.6 2.7 8.0 3.0 6.7
Screws 0.3 3.2 0.8 2.4 1.1 2.6
Gears 0.9 SA 0.8 22 1.7 3.7
Specified Parts 1.9 17.9 17.9 52.0 19.8 44.0
AutomobileParts 1A 13.1 11.0 32.1 12A 27.6
Total 10.6 100.0 34A 100.0 45.0 100.0
Note: Subtotas for machine categoriesdo not capture all of the componentsfor those categories. Source: JDB (1976), Nihonaihatu Ginkgo25inShi
b) AutomobileParts 5.17 The underdevelopmentof partsmakers was particularly evident in the automobile industry. In nations with developed automobile production - especially in the United States - the automobile industry was horizontally structured:the managementand technologyof the parts manufacturer are independent from those of the assembler, and a division of labor existed in production as well. In contrast, Japanese parmakers at that time were subordinate to the assembler, the division of labor was not clear, and the industry had a vertical struturc. The goal of the Machine Industry Promotion Law was to nurture independent, specialized manufacturers similar to those that existed in the United States. Automobile parts were specified as designated machinery under the Machine Industry Promotion Law, and the automobile parts subcommittee selected the most important and essential parts to be targeted. (In 1956, the list contained 27 items; in the following year, the list was increased to 42 items.) The goal of rationalization was to lower costs and improve quality by modernizing,plant and equipment; in 1955, the price of parts was 60% more than the international average, and it was to be cut to 125% by 1960. At the same time, the quality of the parts was to be brought up to intemnational stuadards. Thus, plans were made to replace and modemize facilities and to specialize parts manufactme so that production facilities could be used more extensively (Table V-1l).
199 Table V-lI1. Summary of the Basic Plans for AutomobileParts
Basic RationalizationPlan Basic PromotionPlan
Time Period FY 1956-60 FY 1961-63
Goals of Rationalization Reduce price Target by end of FY 1960: at least Target by end of FY 1963: at least 15% 12.5% to 30% Improve product Improving uniformity,precision, Improving uniformity,precision, quality durability, etc. durability,etc.
Production Target by end of FY 1963: two times the productionamount at the end of FY 1960
Capital Investment 4.3 billion yen 23.1 billion yen
Odters Reducing manufacturedproducts, parts Merging companies Specializingproducts manufactured Coordinatingof production areas Increasing productionvolume per Limiting productionvarieties enterprise Carrying out joint research
Source: Japan Auto Parts IndustriesAssociation, Jigyo Hokokusho. FY 1956.1961.
5.18 JDB financing supported the implementation of these rationalization plans. Because the subsector contained numerous small- and medium-size firms, their management bases had to be strengthened. Thus, the most preferential lending rate, 6.5%, was applied, and the period of the loan was set at approximately 10 years. JDB funds accounted for about 28% of the investment (595.0 billion) in specified equipment for the auto parts industry, and contributed to the rationalization of parts companies. As a result, 22 of the items targeted in the plan achieved levels higher than the targeted figure, and for most of the remaining items more than 80% of the plant and equipment originally slated was installed. On average, costs also were cut more than initially planned. Thus, with the industry-fostering measures under the Machine Industry Promotion Law, the development of the parts industry was underway. Between 1956 and 1960, the value of production increased from V58.5 billion toVl75.8 billion.
2) The Second Machine Industry Promotion Law
5.19 After the General Plan for the Liberalization of Trade and Foreign Exchange was formulated in June 1960, import liberalization progressed rapidly. By April 1964,93% of items had been liberlized, about the same as in Western Europe. As trade was liberalized and the economy internationalized, the growing recognition was that the overall machinery industry had to be rationalized and modemized, and its international competitiveness strengthened. Thus, in March 1961 the Machine Industry Promotion Law was revised and extended for another five years. In addition, the previous basic rationalization plans were made into basic promotion plans, while the target dates of the basic plans, which had been set to end after FY 1960, were changed under the new law to FY 1965 for basic machinery and to FY 1963 for specified parts. The criteria for selecting items targeted by the law also shifted, from correcting the dual structure of the machine industry to preparing the industry for a free-trade environment. The goal in upgrading plant and equipment was to establish a mass production system by expanding the size of ftrms and specializing production. To this end, the industry was designated as outside the purview of the Antimonopoly Law, emphasis was placed on such joint activities as rationalization cartels, and restrictions were imposed on product standards. Because many of the targets of JDB financing were small- and medium-size businesses, the Small Business Fmance Corporation (SBFC) also became
200 involved. The JDB and the SBFC worked together to resolve how they would divide the work, and companies classified as small- and medium-size enterprises under the Basic Law on Small- and Medium-SizedBusinesses were transferred graduallyto the SBFC between FY 1961 and FY 1963. a) MachineTools 5.20 During this period, the postwar machine industry reached its first stage of maturity. But in order to respond to the liberalization of trade and capital joint activities, designated machine industries, particularly auto parts and machine tools, were encouraged to promote production tie- ups, sales, and technological development based on free negotiation among firns. This measure helped expand and consolidate the management base. Moreover, when plant and equipment were replaced, firms were encouraged to substitute high-performance,advanced facilities in their place. While firms still depended heavily on foreign technology, progress in manufacturing technology was phenomenal, and many new products and technologicalimprovements were made. To establish an industrial structure geared toward mass production, the Basic Promotion Plan initially targeted V85.0 billion in capital investments. But with the subsequent decline in demand, actual capital investments were cut in half, to about 144.8 billion (Table V-8). JDB financing for machine tools accounted for about 13% (13.8 billion) of the financing for capital investment in specified equipment (totaling 128.6 billion), still a significant share. 5.21 Given the reduction in capital investment after 1962, the production of machine tools fell to the 170.3 billion level in 1965, representing a 30% decline from its peak in 1962. Imports also feU steadily and rapidly, and by 1966 were at approximately Vg billion. Yet exports continued to increase as facilities rationalization and cost reductions helped strengthen international competitiveness, and in 1966 the export-import imbalance in favor of imports was completely reversed. 5.22 During the ten years from 1956 to 1965, JDB provided V6.4 billion in funds for machine tools, accounting for 14% of the total funds that went to designated machinery (145.0 billion), the second largest category after auto parts (28%) (Table V-10). In this same period, JDB provided 15% of the financing for the 142.1 billion in capital investment in specified equipment, and as co-financier with private financial institutions was instrumental in fostering and strengthening the machine tool industry. With these measures, the ratio of the average number of usage years for machine tools in the metal cutting machine manufactring industry in 1963 was less than five years for 45% of the machines (40% for machine tools in all industries). b) AutomobileParts 5.23 Because the import of finished passenger cars was to be liberalized in October 1965. a basic promotion plan for auto parts was drawn up and its targets were set for the end of FY 1963. These targets included cost reductions ranging from 15% to 30% of 1960 levels depending on specific parts, and an increase in product quality to intemational standards. To reach this goal, the plan called for promoting company mergers, adjusting production areas, undertaking joint research in developing new technology, and modemizing related industries (Table V-11). JDB provided financing to first-tier partsmakers that had to become more competitive internationally, and the SBFC provided funds to second-tierparts manufacturersthat were cooperating with first tier makers to implement rationalization plans. JDB and the SBPC provided 27% (113.3 billion) of the total amount of funds (149.3 billion) for capital investment in specified equipment used by the auto parts industry. In addition, from FY 1964 to FY 1965, approximately 50% of JDB's total financing for designated machinery went to auto parts. At the request of the Ministry of Finance to raise interest rates, JDB loan conditions during this period included a 7.5% interest rate and a five- to six-year average loan period. Thus, Japan's auto-parts industry expanded rapidly. The value of production quadrupled between FY 1961 and FY 1968, from 1206.9 billion to 1833.0 billion. And bv the end of FY 1965, prices had fallen by 29.4% below those at the end of FY 1960.
201 3' Surmm of Trends in Desigated Machine IndUtre 5.24 The various measuresfor fosteringthe growthof the parts and other designatedmachine industrieshelped lay the foundationsfor Japan'smachine industry today. During this periodof high growth, many powerful small- and medium-sizefirms in Japan's machine industry grew into enterprisesof mid-level standing(Tables V-12 and V-13). The Law for the Promotion of the MachineIndustry and fundingfor designatedmachinery provided the foundationfor the evolution of these enterprises.In addition,the fundingprovided to designatedmachinery industries under the Law for the Promotionof the MachineIndustry contributed greatly to the rationalizationof each sector.For example,during the first five-yearperiod in whichthis law was in effect,the numberof person-hoursfell by more than 30% for each machinetype (Table V-14), and, even during the secondfive-year period, the numberof person-hoursfell by 40% for an illustrativemachine tool manufacturer(Table V-1S). The selectiveinvestment of govemmentfunds for financingdesignated machineryindustries helped guide private financial institutionstowards importantand growth industries of the future (Table V-16). As we have seen, the industrial equipment funds provided by JDB were only a part of the capital required by the industry. But once JDB decided to provide financing, private financial institutions followed suit, largely without credit checks. Thus, JDB financing played an important role in fostering and strengthening the basic and strategic sectors of the machine industry by guiding private financing in line with governmentpolicies.
TableV-12. Composition Ratio of Enmployeesby EmployeeScale in t.c MachineIndustry: 1950 to 1965
1950 1955 1960 1965 Thousand (%) Thousand (%) Thousand (%) Thousand (%) Persons Persons Persons Persons
I-to 49-person 274 32.6 334 32.9 532 25.7 645 24.7 50-to99-person 79 9.4 106 10.5 226 10.9 270 10.3 100-to299-person 73 8.7 150 14.8 342 16.5 418 16.0 300-to499-person 61 6.0 148 7.2 198 7.6 500-to999-person 414 49.3 89 8.8 172 8.4 237 9.1 1,000+person 1 275 27.0 647 31.3 843 323 EmployeeTotal 841 100 1,015 100 2,068 100 2,610 10o
Note:Based on factoriesthat employedmore than fourpersons. Source:International Trade andIndustry Statistics Association (ed.), (1982). Sen&oNo KogwoTokei Hyo andusoy Volume) Vol.1.
202 TableV-13. Productivity by EmployeeScale in the MachineIndusty 1950to 1965 1950 1955 1960 1965 Thousand Thousand Thousand Thousand Persons Persons Persons Persons
1-to49-person 112 231 382 723 50-to99-person 168 349 501 820 100-to299-person 176 431 583 908 300-to499-person 510 667 958 500-to999-person 171 533 705 1,191 1,000+person 480 1,185 1,579 EmployeeAverage 152 384 733 1,099 Note:Based on factoriesthat employedmore than four persons. Source:International Trade andIndustry Statistcs Association (ed.) (1982), SengoNo KogyoTokei Hyo.ndusty Volume')Vol.l.
TableV- 14. Reduction in Pason Hoursamong the DesignatedMachine Industries (1955 = 100)
DesignatedMachine Industry 1960 Index MiachbkTools EngineLatdes (Middle) 47 VerticalType Miling Machines 75 FigBorers 52 SurfaceGrinders 44
Autmobile Pars Piston 34 Jet Pwnp of Fuel 43 Radiator 55 Brake Lining= 58
Source:JDB (1963), Tokutei Kikai Yushi To SonoGorika Koka
TableV-I5. Reductionin PersonHours in theJig BorersManufhcture: 1960 to 1965 (1960=100)
;______PersonHours by EachManufacuring Ptocess Total Machine Finishing Sheetingand Heat Attachment Painting Person Processing Assembly Tube Treatmnent of Electric hours Anrangement Parts 1960 100 100 100 100 100 100 100 1962 67 59 80 99 86 66 63 1963 69 60 82 89 78 69 93 1964 63 54 77 76 70 62 80 1965 60 50 70 69 67 54 54
Source: EconomicResearch Institute, Japan Society for the Promotionof the Machine Industry(1968), ZaiseiToyusfi No KikaiKouvo Ni OyobosuEijk.
203 Table V- 16. Funding Procurementfor the ProjectCost of DesignatedMachinery (millionyen)
Funding Procurement Industry Project Of which Boffowing Own Of which Cost Specified Funds Capital Equipment Increase Cost JDB SBFC Private Total Financial Institutions etc. Machine Tools 9,299 7,557 2,860 tO 1,672 4,542 4,757 769
Tools 3,359 2,737 1,164 35 284 1,483 1,876 220
Press 2,148 1,569 456 14 428 898 1,250 235
Gear 2.915 2,499 879 23 814 1,717 1,198 197
Automobile Parts 7,987 4,708 1,581 4 3,293 4,879 3,108 1,049
Total Designated 37,139 27,553 11,173 323 9,010 20,507 16,631 3,405 Machinery
Note: Based on JDB's research. Figures are from June 1956 to the end of May 1961. Source: Economic ResearchInstitute, Japan Society for the Promotion of the Machine Industry (1968), Zaisi To=shi No Kikai Kogyo Nt Oyobosu Eikvo.
2. Export Industries: Shipbuilding A. 1945 to 1954 5.25 The postwar Japanese shipbuilding industry can broadly be divided into two separate periods, with FY 1955 as the dividing time. That is, the volume of orders in the pre-1955period was considerably below 1,000,000 gross tons, and the volume of work on hand, particularly when compared with annual construction capacity, was incredibly small. However, the volume of orders expanded rapidly after FY 1955. The types of ships constructed during these two periods also differed: in the early period, most of the ships were primarily domestic ships; in the later period, the ratio of export ships increased and began to occupy more than half of the work volume each year (Table V-17). The remainder of this introductory section provides the historical context for the growthof the shipbuildingindustry. 5.26 Because Japan's shipbuildingindustry had not suffered excessive damage during the war, its shipbuilding capacity at the end of the war stood at about 800,000 gross tons annually, a reasonable level at the time. Moreover, the necessary labor-skill levels and equipment technology that would allow the industry to meet the increase in the global demand for shipbuilding thereafter had been maintained. However, the reconstruction and development of the shipbuildingindustry just after the war was constrainedby two factors: occupationpolicy, and the loss of the shipbuildingmarket.
204 Table V-17. ShipbuildingOrders: FY 1946 to 1965
DomesticShips ExportShips Total
Fiscal No.of GT Ratioof No. of GT Ratioof No.of GT Year Ships (thousand) Domestic Ships (thousand) Export Ships (thousand) Shivs(%) Ships_
1946 37 60 100.0 - - - 37 60 1947 23 24 100.0 - - - 23 24 1948 70 161 72.2 16 62 27.8 86 223 1949 44 281 87.8 13 39 12.2 57 319 1950 36 260 83.6 32 51 16.4 68 310 1951 50 380 62.0 233 233 38.0 283 613 1952 54 441 90.7 21 45 9.3 75 486 1953 35 247 60.0 13 165 40.0 48 412 1954 34 195 24.8 52 590 75.2 86 785 1955 54 357 13.8 146 2,232 86.2 200 2.589 1956 165 1,040 35.9 96 1,857 64.1 261 2,898 1957 137 800 43.5 48 1,041 56.5 185 1,841 1958 82 450 37.1 38 763 62.9 120 1,213 1959 121 550 62A 35 331 37.6 156 881 1960 181 861 48.9 75 898 51.1 256 1,759 1961 180 1.176 57.1 50 882 42.9 230 2,057 1962 93 745 32.5 61 1,548 67.5 154 2,293 1963 149 1,037 19.2 156 4,370 80.8 305 5,406 1964 174 1.802 35.6 146 3,267 64.4 320 5,070 1965 203 2.497 31.2 193 5,500 68.8 396 7,997
Note: Based on approvals by the Ministy of TransporL Soumce:Shipbuilder's Society of Japan (ed.), (1973),Sh ZosenShi (Vol.2).
205 5.27 Occupation policy immediately after the war attempted to reduce the annual shipbuilding capacity to 150,000gross tons. However, changes in the global economicenvironment forced occupation policy to relax these stringent controls gradually.With the suspension of war reparations in May 1949, the policy was finally eliminated, but Japan's shipbuilding industry had started its operations with the threat of its complete destruction. 5.28 With the loss of the shipbuildingmarket, about half of the total tonnage could not operate at the end of the war; thus, improvingshipping tonnage was an urgent policy priority. Yet the shipping industry was near collapse, having lost its financial and institutionalability to order ships dueto the dissolution of the Navy, its most important client, and the termination of wartime compensation. Thus, in 1947, the governmentestablished the Shipping Public Corporation with financing from the Reconstruction Finance Bank, also establishedthat year, and ship construction proceededaccording to a system of joint ownership between shipownersand the ShippingPublic Corporation. 5.29 With the outbreak of the Korean War in 1950 came a shortage of shipping on a global scale. It was the special demand arising from the war that gavethe Japanese shipbuildingindustry its first opportunity to make a quantitative expansion. In FY 1951, more than 230,000 gross tons in export vessels were ordered, strengthening the foundation of shipbuilding as an export industry. While works on hand in shipyards in other countries were equal to three or four years' output, Japan's shipyards could commence construction immediately. And, as will be discussed later, Japan could take orders by offering short delivery dates and technologicaladvances. 1' Policies to Promote Exports in the Shipbuilding Industy a) Measuresto ReduceCosts Itn hr and Steel Materias 5.30 With the end of the special demand boom brought about by the Korean War, industry received few orders and entered a recession. To break out of this recession by increasing exports and strengtheningthe industry'sinternational competitiveness,the govemment drew up "provisional measuresto lower shipbuilding costs" from 1953 to 1954. These measures sought to increase demand by reducing constructioncosts. With a reduction in the interest rates for both JDB loans and BOJ extra foreign-currency lending to the iron and steel companies that supplied materials to shipbuildingcompanies, the prices for the iron and steel materials supplied to these companieswere to be lowered by corresponding amounts (from September 1953 to March 1954).These measures wereapplied to 9 export ships for a total of 102,000 gross tons (TableV-1 8).
TableV-l B.Export Ships to Which Measues for Reducingthe Priceof Ironand Steel Materials Were Applied
No.of Ships ThousandGT Milliondollars
CargoShips 3 9.6 5.6 Tankers 4 78.9 17.8 Others 2 13.6 4.8
Total 9 102.1 28.3
Note:Contracts were made firm September1953 to December1953. Source: Shipbuilders'Society of Japan (ed.),(1973), ShowaZosen Shi(Vol. 2.
b) Special lDeduco Systemfor Export Income 5.31 As an additional measure for promoting exports, a special deduction system for export income was applied as a tax system (from April 1954 to March 1964). The system consisted of two
206 measures. First, the smaller of two amounts -- 50% of export earnings and 5% of gross export sales -- was deducted from total earnings as a regular deduction, and the remainder was targeted for income-tax purposes. Second, 7.5% of the difference between *heexport total for a given business year and the standard export total (the equivalent of half of the previous yeaes total exports) was deducted from total earnings as a premium deduction. c) The Raw Suagr Link System 5.32 In 1954, the "raw sugar link system," an emergencyexport promotion policy for addressing the deterioration in the international balance of payments, was also applied to the shipbuilding industry (from January 1954 to November 1954). Under the "raw sugar link system", foreign currency for the imports of crude sugar was allocated to sugar importers on the condition that the profit difference between the imported price of raw sugar from Cuba and its domestic retail price was to be allocated to covering a portion of the deficit orders for the plants exported by the sugar importers. This system was applied to a total of 42 vessels (approximately500,000 gross tons), and helped compensate a portion of the deficit-ordered shipbuilding industry. The system also contributed greatly to improvingthe industry'sprofits (Table V-19). TableV-19. Export Ships to Whichthe Raw SugarLink SystemWas Applied
No. of Thousand Million Ships GT dollars
Cargo 20 138.6 34.7 Ships Tankers 18 356.5 63.5 Odhers 4 4.5 2.5
Total 42 499.6 100.7 Note:Contracts were made from March 1954 to December1954. Source:Shipbuilders' Society of Japan(ed.), (1973), Showa Zosen Shi (Vol. 2).
d) Export Insurance System 5.33 With the enactment of the Export Credit InsuranceLaw in March 1950, an export insurance system was established to cover possible damages related to exports that were not covered by ordinary insurance companies. Later, as the deferred payment on shipping and other plants expanded, the export insurance system was expanded in July 1953 to include an "export cost insurance system" to insure the risk of this repayment. This system greatly promoted shipping exports. 2) Formulas for Deferred Payments (Export-Imort Bank of Japan) 5.34 With the establishment of the Export Bank of Japan in 1950 (the Export-Inport Bank of Japan after 1952) with investment entirely by the government,measures were taken to increase the export of plants, including those for shipping, vehicles, heavy machinery, and industrial facilities. Before 1950, the time required from the point at which export contracts were formed, to the time products were actually exported, was considerable. Moreover, the payment for these plants was spread out over a period of several years after the plant had been exported, and the so-called deferred-payment contracts had also become more prevalent. The EIBJ promoted exports by providing long-term, low-interest loans in order to cope with this demand (7.5% in January 1951; 6.5% in August 1953;and 4.0% from October 1954 to April 1966). Shipping occupied the greatest share in plant exports. In FY 1956, the first boom year of shipping exports, 77% of the EIBJ's total lending went to shipping.
207 5.35 Moreover, EIBJ lending to the shipbuilding industry expanded greatly, even after accounting for the demand effects of the iron and steel and other related industries. Thus, for the approximately ten years after 1955, the shipbuilding industry received about 50% of total EIBJ lending (Table V-20). 5.36 Bear in mind that, during the reconstruction period, the business community made a tremendous effort to rationalize and modernize facilities, thus supplementing aid policies. As explained earlier, although the capacity of basic facilities was maintained for a period of time after the war, these facilities were in disrepair, were damaged during the war, and were in a remarkable state of decrepitude. In addition, since these facilities were obsolete compared with those in other countries, it was difficult to lower the price of shipbuilding. In response, the industry adopted electric arc-welding construction methods and block-building formulas, and pursued technological innovation. These technical innovations reduced the costs of construction and helped promote higher-qualityproducts and shorter delivery dates. TableV-20. Export-Import Bank Financing Amounts FY 1950to 1965 FiscalYear Amount No.of Ships Ratio (billionyen) (%) 1950 1.6 0.3 19 1951 10.7 5.7 53 1952 7.1 4.0 56 1953 18.2 7.4 41 1954 35.8 22.1 62 1955 61.3 49.3 80 1956 58.1 44.8 77 1957 56.9 38.0 67 1958 43.7 28.8 66 1959 69.8 30.1 43 1960 102.2 42.6 42 1961 142.0 46.5 33 1962 104.3 55.4 53 1963 191.3 98.5 52 1964 223.1 127.5 57 1965 205.8 91.7 45
Source: Export-InportBank of Japan(1983), Yugin 3S-nen no Ayumi.
5.37 In addition to technological innovation in the area of electric arc-welding construction methods and block-building formulas, capital investment was made to rationalize and modemize facilities. From FY 1950 to 1954, a total of V16.4 billion was invested, primarily for constructing arc-welding factories, increasingthe capacity of cranes, and rationalizing and enlarging transporters (Table V-21). Because the accumulation of capital was insufficient,companies relied on bonds and loans from commercial banks to supplementthe supply of funding in 1950-51. However, due to the special demands of the Korean War, business conditions improved in 1952-53, and investments of intemal capital, primarily company intemal reserves, increased(Table V-22). B. 1955 to the mid-1960s 1) The First Export Boom in Ships 5.38 Starting in late 1954, orders for ship exports were brisk, primarily for tankers. This so-called "first export boom in ships' lasted until 1957. The volume of orders for exported ships reached 590,000 gross tons in FY 1054, and marked the first time that the quantity of orders for
208 exported ships exceeded orders for dormesticships. In 1956, Japan surpassedGreat Britain and set a record for the most launchings in the world. 5.39 Again, beginning around 1955, large-size (shipbuilding) berths were selectively planned. From the standpoint of balancing supply and demand, much initial effort was put into restraining large increases of construction capabilitieson the whole. But, after 1960, the perception was that the demand for ultra-large ships would increase in the future; thus, an increase in capacity was actively promoted. The disposal or diversion of existing facilities was promoted as a response to avoid excess capacity. The types and size of ships built at each factory were also standardized, so as to clarify specialty construction areas, to the extent possible. TableV-21. Capital Investment in the ShipbuildingIndustry: FY 1950to 1965
Equipmentfor Equipmentfor Indirect Investmentin Non- Total Shipbuilding Manufacturing Equipment Shipbuilding Development FY Amount Amount Amount Amount Amount (biilonyen) (biln yen) (bifionYen) (bilNORye) (bMiliOnyen)
1950 512 29.8 567 33.0 263 15.3 376 21.9 1,718 100 1951 1,423 49.4 882 30.6 195 6.8 379 13.1 2,879 100 1952 2,941 709 658 15.9 196 4.7 356 8.6 4.151 100 1953 1,976 43.6 1,588 35.1 372 8.2 593 13.0 4,529 100 1954 895 29.0 1,197 38.8 521 16.9 469 15.2 3,082 100 1955 3,703 58.6 1,396 22.1 489 7.7 734 11.6 6,323 100 1956 4,301 47.8 2,750 30.6 1,147 12.8 796 8.8 8,995 100 1957 5,834 42.1 4,836 349 1,953 14.1 1,251 9.0 13,873 100 1958 4,573 36.6 4,333 34.7 2.137 17.1 1,448 11.6 12,491 100 1959 3,998 37.9 3,195 303 2,280 21.6 1,070 10.1 10,543 100 1960 3,038 189 6,732 41.8 2,773 17.2 3,545 22.0 16,089 100 1961 5,177 26.2 7,536 38.1 3,051 15.4 3,988 20.2 19,752 100 1962 5,302 27.7 6,745 352 3,156 16.5 3,949 20.6 19,152 100 1963 10,043 42.9 5,054 21.6 4,711 20.1 3,595 15A 23,404 100 1964 19,716 56.5 5,143 14.7 6,524 18.6 3.691 10.5 35,074 100 1965 21,552 61.1 3,400 9.6 6,059 17.0 4245 12.2 35,256 100
Notes:1. Basedon the ShipbuildingBureau, the Ministryof Transport 2. The numberof majorfactories surveyed was 24 up to FY 1959and 27 thereafter. Source:Shipbuilders' Association of Japan(1980), 30nen Shi.
5.40 Furthermore, because the modernization of small- and medium-size enterprises lagged behind larger enterprises, rationalization plans were fonnulated on the basis of the 1959 Law on Temporary Measures for the Rationalization of Small- and Medium-Sized Steel Shipbuilding Industry and the 1963 Law for the Promotion of the Modernization of Small- and Medium-Sized Enterprises. These plans stipulated the number and amount of facilities that required improvement, provided a low-interestfinancing system for moderiion, and establisheda premium depreciation system for berdts, docks, and iron and steel material processing machinery. 5.41 With the re-opening of the Suez Canal in April 1957, the world entered a global maritine transportation slump. The shipping export boom waned, and the shipbuilding industry remained depressed from 1958 to 1961. What should be remembered about this recessionary period is that, by rationalizing management and entering into land-based sectors. the shipbuilding industry had strengthened its resistance to recessions, while also positively promoting technological development, including the development of low-cost ships. With the December 1960 cabinet decision to enact the National Income-DoublingPlan, industry received much capital investment, thereby spurring and expanding the land-based sector.
209 TableV-22. Funding Procurement ofCapital Invesiment for theShipbuilding Industfy: FY 1950to 1965 (millionyen)
Fiscal Net Inoomo CapitalIncrease Bonds Borowingfrom Borrowingfrom JDB Others Total Year Retained PrivateFinance Amount % Amount % Amount % Amount 9 Amount % Amount % Amount %
1950 172 10.0 74 4.3 771 44.9 689 40.1 12 0.7 . . 1,713 100 51 534 18.6 63 2.2 945 32.8 913 31.7 424 14.7 - 2,879 100 52 1,439 34.7 692 16.7 234 5.6 1,071 25.8 715 17.2 . - 4,151 100 53 1,629 35.9 553 12.2 696 15.4 935 20.7 716 15.8 - - 4.529 100 54 1,784 57.9 156 5.2 303 9.8 568 18.4 271 8.8 - - 3,082 100 S5 2,728 43.2 230 3.6 90 1.5 3,120 49.3 154 2.4 . 6,323 100 56 4,037 44.9 1,843 20.5 1.080 12.0 1,120 13.3 248 2.8 587 6.5 8.995 100 57 6,299 45.4 3,015 21.7 537 3.9 2.620 18.9 90 0.6 1,312 9.5 13,873 100 58 5,610 44.9 2,929 23.4 869 7.1 854 6.8 116 0.9 2.114 16.9 12,491 100 59 4,362 41.5 800 7.6 1,428 13.5 3,884 36.8 6 - 63 0.6 10,543 100 0 1960 3,962 24.6 4,203 26.1 3,955 24.6 3,700 23.0 100 0.6 168 1.0 16,089 100 61 6,848 34.7 3,633 18.4 2,836 14A 5,565 28.2 241 1.2 631 3.2 19,752 100 62 8,136 42.5 1,800 9.4 1,546 8.1 5,784 30.2 331 1.7 1,555 8.1 19,152 100 63 6,011 25.7 1,176 5.0 2,169 9.3 10,743 45.9 1,564 6.7 1,741 7.4 23,404 100 64 12,139 34.6 2,304 6.6 1,902 5.4 9,340 26.6 1,914 5.5 7,475 21.3 35,074 100 65 8,309 23.6 5,446 15.4 7,579 21.6 11,365 32.4 2,428 6.8 129 0.2 35,56 100
Notes:I.Based on theShipbuilding Bureau, the Ministryof Trnsport. 2.Figures up to PY1959represent 24 major factories ; figures for FY1960and after represent 27 major factories. Source:Shipbuilders' Association of Japan (I 980),30QnnShi. 2) The Second Boom in Export Ships 5A2 The recession in shipbuilding lasted until the end of FY 1961; in FY 1963, a "second export boom" in ships emerged. Since this boom was based on low-cost tonnage, it had very low profit margins and was called "business prosperity without profit." However, the system for receiving orders was strengthened - in particular, after October 1962, the deferred payment conditions for shipping exports set up by EIBJ became more favorable, with 80% financing for the ship price with an 8-year repayment period (70% and a 6-year repayment period from October 1958 to 1962). This payment conditions led to an unprecedented level of orders. 5.43 From 1955 to 1965, the gross amount of capital investments surged to V201 billion, due to several factors: the enhancements in equipment for shipbuilding and manufacturing engines that occurred during the first boom in exported ships, business rationalization policies that supported modernizing other sectoral facilities (for example, machinery) from 1958 to 1961, and the expansion and modernization of shipbuilding facilities corresponding with the second boom in export ships after 1962. These factors markedly reduced the amount of steel materials and the number of person-hours used per gross ton, as well as the price of each ship (Table V-23), making it possible for the Japanese shipbuilding industry to strive toward intemational competitiveness from the standpoint of both shipbuilding technology and price. In addition, while it was possible to rely largely on the internal reserves generated by increased profits -- themselves due to the boom in export ships -- conmercial bank loans to the industry increased during shipbuilding slumps. On the other hand, the ratio of JDB loans to the total did not go beyond several percent (Table V-23). 3) Summary of ShipbuildingDevelopment 5.4 While the volume of shipping orders receded along the way, it grew 133 times during the 20-year period after the war. In the 15 years after 1950, the amount of value added increased by approximately 15 tines, so that net productivity in 1965 was V1,461,000per person, higher than the manufacturing industry average (VI.004,000 per person) and representing an extremely large increase in productivity (Table V-24). In addition, the industry had evolved into one of Japan's representative export industries, launching about one third of the world's ships from 1956 to 1964 and approximately 50% of the world's ships in 1965. Clearly, the international competitiveness of the shipbuilding industry was strengthenedduring the first boom in exported ships in the late 1950s and therafter. Also supporting the development of the shipbuilding industry during this period various governmental measures that targeted the shipbuilding industry as an export industry and the efforts of the companies themselves both to modernize and rationalize. In other words, deferred loans and policies to promote exports went hand in hand with the independent efforts of firms to rationalize business diversification, and branching out into the other sectors (for example, machinery) helped establish the shipbuildingindustry as an export industry, ushering in the boom in exported ships thereafter.
3. Basic Industries : kon and Steel 5.45 Japan's iron and steel industry had suffered serious damage during WWII. When the iron and steel industry began its reconstruction, its output of crude iron and steel was a mere 557,000 tons, barely one fourteenth of its wartime peak of 7.65 million tons in 1943. Yet the recovery that soon came after, was phenomenal: total production in 1953, just eight years after the war, was 7.662 million tons, quickly surpassing the previous peak. The growth after 1960 was especially remarkable, and in 1964 production reached 39.8 million tons, making Japan the third largest producer of iron and steel in the world, behind the United States and the Soviet Union. By 1970, production reached 93.32 million tons. 5A6 Several factors underscored this phenomenal development in the iron and steel industry. The first factor was the structural change in the demand for iron and steel. In the prewar period, about half of all demand came from the military.After the war, however, two pillars supplanted the military demand for iron and steel: the expansion in the demand for capital goods, and the demand in new areas, including material support for the miraculousgrowth of durable consumergoods, such as consumer electronics goods and automobiles.The second factor was the rise in exports.
211 TableV-23. Ship Prices: 1949 to 1959 (1) CargoShips with medium speed capacity (Aug. 1949=100)
Aug. Oct. Jan. Oct. Apr. Feb. Aug. Aug. Aug. Mar. Mar. Oct. Jul. 1949 1950 1951 1951 1952 1953 1953 1954 1955 1956 1957 1958 1959 Neededsteel materialsper GT 100 99 97 95 93 93 93 83 83 82 82 78 77 NeededstepsperGT 100 94 91 86 86 79 77 68 62 54 52 43 44 ShippriceperGT 100 106 144 204 195 185 151 129 125 138 168 122 117
(2) LargeTankers (FY 1958= 100)
N 1958 1959 1960 1961 1962 1963 1964 1965 Neededsteel materialsperGT 100 96 92 88 79 71 70 70 Neededsteps per GT 100 83 80 71 64 40 42 42 Shipprice per GT t00 94 84 84 78 63 65 65 Source:Shipbuilders Association of Japan(1980), 30-nen Shi. TableV-24. Trends in the Amountof ValueAdded and Value Added per Laborin the Machine, Shipbuilding,and Iron and Steel Industries MachineIndustry Shipbuilding(Steel Ships) Ironand Steel Year Value Index Value Index Value Index Value Index Value Index Value Index Addeda Added Added2 Added Addeda Added per per per Laborb Laborb Laborb
1950 124 100 156 100 14 100 135 100 70 100 287 100 51 199 160 235 151 16 114 148 110 113 161 401 140 52 276 223 314 201 32 229 299 221 99 141 354 123 53 353 285 368 236 54 386 529 392 147 210 497 173 54 390 315 413 265 42 300 424 314 139 199 513 179 55 390 315 397 254 28 200 269 199 171 244 624 217 56 525 423 439 281 52 371 426 316 252 360 837 292 FJ 57 797 643 573 367 99 707 723 536 304 434 918 320 58 826 666 574 368 Ito 786 840 622 187 267 592 206 59 1.046 844 619 397 108 771 812 601 313 447 869 303 1960 1,515 1,222 746 478 101 721 821 608 391 559 933 325 61 1,907 1,538 830 532 121 864 924 684 530 757 1,123 391 62 2,187 1,764 920 590 108 771 864 640 414 591 892 311 63 2,447 1,973 967 620 125 893 1,000 741 484 691 1,015 354 64 2,826 2,279 1,079 692 177 1,264 1,341 993 663 947 1,348 470 65 2,854 2,302 1,107 710 206 1,471 1,461 1,082 632 903 1,333 464
Note:Based on factoriesthat employedmore than four persons. a. Valueadded is in billionyen. b. Valueadded per laboris in thousandyen. Source:International Trade and Industry Statistics Association (ed.),1982, Senao No KoayoTokei Hyo (IndustryVolume), Vol. 1. BOX V- 1. Policies Supporting the IndustrialAdjushtent of the ShlpboulldngIndustry: Second Half of the 1970s In the second half of the 1970s,Japan's shipbuildingindustry fell into a serious recession with the rapid reduction in the number of orders following the oil shock of 1973, the cancellation of existing orders, and the decline in the profitability of export ships as the yen appreciated. In response, the government implemented measures for stabilizing employment and adjusting opeations. However, business conditions deteriorated rapidly, and bankruptcies continued to occur among inferior business entities, such as companies of medium standing and below. Thus, in line with the report of the Ocean Shipping and Shipbuilding RationalizationCouncil released in July 1978, the Ministry of Transport drew up measures, to counter the recession, which includeda reductionin facilities (by 35% on average).
In May 1978, the Law on Temporary Measures for the Stabilization of Designated Depressed Industries was enacted, targeting structurally depressed industries. This law was appled to the shipbuilding industry, and progress was made toward reducing plant and equipment. A summary of the proceduresfor applying this law is as follows:
1. By request from the industry, targetedsectors were specified by governmentordinance.
2. Relevant ministerswere to draw up Basic StabilizationPlans (for the disposal of plant and equipment).
3. When the disposal of plant and equipment could not be carried out solely through the autonomy of the industry, the relevant ministerswere to designatecartels for the disposalof plant and equipmenL
4. The Stabilization Credit Fund for Designated Depressed Industries (established in July 1978) guaranteedobligations for the borrowing of funds necessitatedby the disposal of plant and equipment.
In line with these procedures, the Ministry of Transport drew up a Basic Stabilization Plan in November 1978. Until the end of March 1980,the shipbuildingindustry carried out an average of a 35% reduction in plant and equipment(of 61 targetedcompanies, 7 leading companieshad a reduction of 40%, 17 medium-size companies had a 30% reduction, 16 companies of less than medium size had a 27% reduction,and 21 other companies had reductionsof 15%).
While the leading shipbuildingcompanies were able to reduce plant and equipmenton their own, it was assumed that companies of medium size or smaUerwould have difficulties, so the government created a special law and throughjoint government-businessinvestment established (in December 1978) an organization (the Association for Projects for the Stabilization of Designated Shipbuilders) for the purchase of facilities and land. The structure of this association is as follows (see Chart 1).
1. The Association was to purchase the land and facilities of targeted shipyards.
2. The funds for these purchases were to be suppliedthrough JDB loans (70% of the funding required for land purchases) and private banks (30% of the funds for the purchase of land and 100%of the funds for plant and equipmentpurchases).
3. Theseloans were to be repaid over a period of approximatelyten years with such financial resources as the proceeds from the sale of purchased land, the burden charges of the remaining industries (when new shipbuildingcontracts were made, a set pecentage of the ship's price was to be paid to the Association), and government subsidies.
Purchases carried out by the Association,both for land and plant and equipnent, reached a total of X36.8billion (9 targeted companies).Of this, 1DB carried out V10.3billion in funding.
By the end of March 1980, these measures enabled the industry largely to dispose plant and equipment according to plan (see Table 1).
214 Box V-1 (continued)
Chart 1 Flow of Funds for Specified Shipbuilding Stabilization Association
Propertiesto be purchased Govemmente: 1 billionyen Equipmentand landowned PrivaLesector: 1 billion yen by specifiedshipbuilding manufactures Eqtutypamcipaion (only whenthey temte (2 billion yen) themanufacturing specResources shipbuildingby facory unit) ____Resources to rcpay borrowings
Applicationfrom companies SpecifiedShipbuilding POceedsby the StabilizationAssociation s of purchased S ~~~~~~~~~~~~~~~~~~~land
..* -:__\,^...... e...... n..e..e..,,,;F.. .a.. ... _ C:ontributionfrmm remaining 3* .SPurct asc compaues
To be 1aS N rdalsc . . _ t ~~~~~subsidy collatraland to pay of submdy
I~ ~e .Loan pnncipal and
JDB Privae Banks
(Cofinance] MDB (70 * of land) PrivateBanks (30 % of land) and (100 % of equipment)
Source: Nakaia, Kohachi (1979), Zosen Gyokai
215 Box V-1(continued) Table 1. Capacity Adjustment:Capacity Scrapped in DesignatedShipbuilding Industry, by Size of Firn
BasicStabilization Plan Actial ScrappedCaacity Post-Scapping Capacity Class Capacitybefore Tonnage Reduction Capacity Achievement Scrapping Targaedfor in Scrappedg Ratioh No.______Scrapping Number _ __0_0__ No. 10,000 10,000 No. 10000 No. 10000 CGRTf CGRTf CGRTf CGRTf 7 Large firmsa 55 569 228 25 225 99 30 343 (40%)b 17 Medium- 38 289 87 10 103 (100) 28 205 sized 119 firms C (30%) 16 Medium 23 79 21 9 25 (98) 14 45 sized 119 fins d (27%) 21 Other frms e 22 40 6 6 5 (78) 16 26 (15%) 81 Total [average: 138 977 342 50 358 (99) 88 619 35%] 105
a. Those equipped for building ships of more than 10,000gross tons, and producing more than 1,000,000 gross tons (launchingbase) annually. b. Figures in parentheses representtargets for capacity scrapping. c. Those equipped for building ships of mormthan 10,000gross tons, and producing more than 100,000 gross tons but less than 1,000,000gross tons (launchingbase) annually. d. Those equipped for building ships of more than 10,000grss tons, and producing less than 100,000gross tons (launchingbase) annually. e. Those equipped for building ships of more than 5,000 gross tons but not included above. f. CGRT = Compensated Gross RegisteredTonnage. g. Capacityscrapped is the reduction in capacity and readjustmentswithin the grup between building up new capacity of less than 5,000 gross tons and capacity scrappingusing the number of ships to be scrapped as the base. h. Figures within parenthesis exclude 9 firms related to purchases by dte association. Source: Komiyaet al. (eds.), (1988), Industrial liy of apan p. 441.
216 As explained later, iron and steel exports surpassed the 2 million-ton level for the first time in the last year (1955) of the First Rationalization Plan. In 1955, exports accounted for 21% of Japan's output in crude steel equivalent, and 13% of total Japanese exports. Later as well, exports increased each year, reaching 17.98 million tons in 1970, and accounting for 16% of total exports (Table V-25). Third, competition in the iron and steel industry itself created a new market, and led to product upgrading. After Kawasaki Steel became an integrated iron and steel manufacturer by building a steel factory in Chiba in 1951, Sumitomo Metals, Kobe Steel, and other major open-hearth fumace manufacturers successively installed blast furnaces. As Sumitomo Metal's advance into planks illustrates, all companies competed to move toward product diversification. Furthermore, they lost no time in reaping the fruits of the postwar global technologicalinnovation in iron and steel manufacturing. 5.47 The development of the iron and steel industry during this time can be divided into four five-year periods: the postwar reconstruction process (1945-50), the period of the First Rationalization Plan (1951-55), the period of the Second Rationalization Plan (1956-60), and the period of the Third Rationalization Plan (1961 to mid-1960). As the iron and steel industry developed, it became one of the main targets of industrial policy, and various measures were taken to protect and foster the industry. A. The PostwarReconstruction Process (1945 to 1950) 5.48 Just after the war, the equipment of the iron and steel industry was made idle by the loss of military demand and the shortage of coal. Moreover, equipment was in disrepair and obsolete. The first opportunity to reconstruct production facilities came from the Coal and Iron and Steel Super-Ptiority Production Increase Plan, better known as the Priority Production System. This plan contained three policy measures: (1) the allotment of materials, (2) RFB financing, and (3) price-supportsubsidies. The measures helped increasecoal distribution for iron and steel production by 62% from FY 1946 to 1947, and helped secure 61% of the coal industry's demand for steel materials. Furthermore, from 1947 to 1949, the RFB provided a total of V3.5 billion in funding to the iron and steel industry. Of this, equipment funds were used primarily for repairing blast and 3open-hearthfurnaces, and comprised 14% of the total capital investment in the iron and steel ndustry in this period. The subsidies amounted to V76.0 billion from FY 1947 to FY 1949, and m.adeit possibleforthe industry to expand industrialoutput, thus keeping the official price low. The -ioriityProduction System helped increase the production of crude steel in the reconstruction period - from 560.000 tons in 1946 to 4,840,000 tons in 1950, a recovery that was 60% of its prewar pear 549 Later, with the special demands of the Korean War, production increased rapidly and investment gradually became more active. Moreover, the motivation of enterprises to tnvest was greatly stimulated in 1950, when Japan Steel was split up, which created a competitiveenvironment among the major producers of ordinary steel, and when Kawasaki Steel was separated from Kawasaki Heavy Industries; shortly thereafter, Kawasaki Steel announced its plan for an integrated iron and steel factory in Chiba. Meanwhile, industrial policy makers gave top priority to cultivating international competitiveness in heavy industries, especially in iron and steel. This investment motivationof enterprises was combined with industrial policy demands in the First Rationalization Plan. B. The First Rationalization Plan (1951 to 1955) 5.50 The First RationalizationPlan was based on the General Plan for the Rationalizationof the Iron and Steel and Coal Mining Industries. This plan supported the first full-scale real capital investment of the postwar period. The primary objective of the plan was to raise production volume in order to respond to the increased demand for iron and steel, as well as to enhance the quality of products and raise prices to international standards. Thus, progress was first made toward rationalizing the rolled-steel sector and to integrate the manufacture of iron and steel. In particular, one of the special features of this plan was that the rolled-steel sector would capture 50% of total capital investments,with priority placed on modernizingrolling equipment. Of the total capital
217 TableV-25. Productionand Exportsof Ion aindSteel: 1951 to 1970 Fiscal CrudeSteel Iron andSteel Exports Iron and SteelExport Ratio Year Output Volume Amount As a Percentageof As a Percentageof (thousandtons) (thousandtons) (millionyen) Crude Steel Output Total Exported Products
1951 6,502 1,024 219 16 16 52 6,989 1,654 268 24 21 53 7,662 866 144 11 1l 54 7,750 1,2S4 177 16 11 55 9,408 2,099 275 22 13 56 11,106 1,372 238 12 10 57 12,570 1,060 222 8 8 58 12,118 1,837 274 15 10 59 16,628 1,o04 291 11 8 1960 22,138 2,504 428 19 11 61 28,268 2,513 422 9 10 62 27,546 4,132 582 15 12 63 31,501 5,638 759 18 14 64 39,799 6,921 973 17 15 65 41,161 9,909 1,369 24 16 66 47,784 9,895 1,377 21 14 67 62,154 9,135 1,359 15 13 68 66,893 13,153 1,812 20 14 69 82,166 16,006 2,297 19 14 1970 93,322 17,981 2,996 19 16
Source:Japan Iron andSteel Federation, Tekko Tokei Yran. investment of V128.2 billion that was made under the First Rationalization Plan, JDB financed a total V117.2billion or about 13% (Table V-26). 5.51 From 1954 to 1955, the demand for iron and steel increased tremendously. However, with the instability of the scrap-iron supply, expanding the capacity of iron and steel facilities was difficult because the current production structure depended highly on scrap iron. As such, making revolving fumnacesthe core of steel production was necessary in order to meet the consequent need for an increased supply of pig iron, which in tum made it necessary to move forward with the construction of blast furnaces to produce the pig iron. This policy was incorporatedinto the Second RationalizationPlan. C. The Second Rationalization Plan (19S6 to 1960) 5.52 The Second RationalizationPlan was implemented from FY 1956 to FY 1960. In addition to pursuing the modernizationpolicy of the First Rationalization Plan, the Second Plan called for the ongoing construction of integrated, modem factories and the creation of mass-production systems. The only new blast furnace installed under the First Plan was in the Chiba factory of Kawasaki Steel. However, under the Second Plan, 11 blast furnaces had been completed by the end of FY 1960. This expansion in the construction of revolving furnaces and blast furnaces was necessitated by the instability of scrap iron and the difficulty of constructing only on existing sites, but also by forecasts that a real maket expansion would materialize in the future. Finally, the plan also called for adopting the new revolving furnace technology. This marked the beginning of the movement toward the revolving-furnace method of steelmaking. Spurred by the Second Plan, capital investment in this period totaled '622.7 billion, surpassingthe Frst Plan by a wide margin.
218 TableV-26. Long-Term Funding Plan for the Firstand SecondRationalizaton Plans - ~ ~ ~ ~ ~ ~ FirstRationalization SecondRatonalization Plan Plan (FY 1951-55) (FY 1956.60) Amount % Amount 9 ______I yen) (billicon w)
Funding CapitalInvestment 128.2 68 622.7 82 Demand Loan Repayment 60.3 32 137.5 i8 Total 188.5 100 760.2 100
Funding Self-Financing 43.8 23 232.9 31 Poue- ment Boffowing 84.1 45 318.2 42 JDB 17.2 9 61.3 8 (DomesticFunds) 9.5 1 (WorldBank Loans) 51.8 7 PrivateFinancial I-.titutions 66.9 35 256.9 34 Stocksand Bonds 46.6 25 187.9 25 Others 14.0 7 21.2 3 Total 188.5 100 760.2 100
JDBFinancing DonmesticFunds (1.5) + /CapitalInvestment (%) 13.4 WoddBank Loans (8.3) - =~~~~~9.8
Source:3DB (1976), Nihon aGink 25-nenSh.
At the same time, total financing by 1DB fell to just 9.5 billion, or 1.5% of total investments, marking a decline in rliance on governmentfinancing. In its place, foreign capital, primarily in the form of World Bank loans, became an important source of capital (Table V-26). It was becase the steel industry had been strengthened by the time the First Rationalization Plan was completed that the direct investment of government funds was not as necessary as it had been, and also because for a short while after the Second Plan had come into effect, the reduction in foreign exchangereserves led to tighter monetary policy. 5.53 The rationalization carried out under these two plans and the expansion of domestic demand helped boost crude steel production from 6,500,000 tons in 1951 to 9,410,000 tons in 1955, considerably surpassing the prewar peak. By 194O,Japan was producing 22,140,000 tons of iron and steel and was the world's fifth larest iron at,u steel producer. 5.54 Beyond the financing supplied by JDB to the iron and steel industry, special tax measurs were used to promote rationalizatiun. For important machines, a special depreciation of an additional 50% over and above the normal depreciation amount for a period of three years was allowed; moreover, certain types of important machines were exempt from import customs duties, and, based on the Enterprise Rationalization Promotion Law, a special depreciation of 50% of facility acquisition costs for the first business year was also allowed. A deduction system for export-eaned income, an approval system for intrducing technology based on a foreign exchange allocation system, and an inport quota system were also established.With a view to protecting and nurturing the iron and steel industry, these policies had four primary objectives: (1) to promote
219 capital investment through the stategic supply of financing and tax reductionsand exemptions, (2) to promote technology and exports through tax exemption measures, (3) to introduce technology strategically, and (4) to protect the industryfrom internationalcompetition. 1) The Special Depreciation System 5.55 At the heart of the special deprecdation system were the three-year, additional 50% depreciation for important machines (from 1951 onward) and the 50% depreciation in the first business year for machinery to support rationalization (from 1952). In particular, the 50% depreciation in the first business year created a substantial tax deferment rate, which was instrumental in promoting investment. During the Second RationalizationPlan, the six major iron and steel manufacturers captured 40% of the total depreciation (Table V-27) with only the amount of their 50% depreciation in the first business year. Thus, special depreciation was an important financial resource for capital investment. 2) The Exemption of Tariffs on IMportant Machines 5.56 The tariff exemption system was applied from i951 onward to certain types of industrial machines that were both difficult to manufacture in Japan and necessary for promoting the self-sufficiency of the Japanese economy. Later on, this system greatly contributed to the modernization of facilities in this industry. From FY 1951 to FY 1955,the total import of important machines reached about V19billion, about V2.5billion of which was exemptunder the system. 3) The Deducion Systemnon Ex[p-Earned Income 5.57 From 1953 to 1963, a fixed rate of export business earnings could be deducted. This system had a considerable tax-reducing effect. In the second half of FY 1957 and during the Second RationalizationPlan, about 12% of the total eanings of the major iron and steel manufacturers were eligible for this export-earningsdeduction system; the amount was the second largest after the 13% captured under the special depreciation system. TableV-27. Capital Investment and Depreciation in the Six MajorIon andSteed Companies (billionyen) Fsal Amountof Capital Depreciation SpecialDepreciation forRationalization B/A C/B Year Investment[ Amount WI Machines,and so forth [CL % M 1 '6 41.8 18.1 4.7 43.3 26.0 057 77.3 23.5 8.9 30.4 37.8 1958 85.2 22.0 2.8 25.8 12.8 1959 122.7 49.5 24.7 40.4 50.0 1960 1743 62.2 29.7 35.7 47.4
Total 501.3 1753 70.8 35.0 40.4 Source: JapanIron and Stel Federation(1969), Tekkol1-nen Shi.
-4)The Approval Systm for the Introducton of Technlology 5.58 The approval system for introducingtechnology was based on the Law Conceming Foreign Capital, under which foreign capital transactions were to be approved by the relevant Cabinet
220 Minister.But becausecapital transactionsin the formof royalty paymentswere usuallyrequired with the- adoption of foreign technology, these transactions fell automatically under the government'sjurisdiction. Thus, based on the GeneralPlan for the Rationalizationof Ironand Steel that was approvedby the cabinet in 1950,the selectiveallocation of foreignexchange for importing foreignmachinery and technologywas one of the prioritymeasures implemented for the iron and steel industry,giving rise to this approvalsystem for introducingtechnology into the ironand steel industry.From FY 1950 to FY 1960,69 approvalswere made for a total of approximatelyV9.2 billion.Among the most importanttechnologies introduced, some were operationtechnology for strip mills in 1951,the pure-oxy4en-basedsteel-making process in revolvingfumaces in 1956,and the continuouscasting method in 1954.These technologies provided an importantbase for the technologicalinnovations made laterby Japan'siron and steel industry. 5) IMwrt Quotas 5.59 Since the Foreign Exchangeand ForeignTrade Control Law was controlledunder the import quota system, the system functionedas a nontariff barrier to imports. Still, the tariff standardsthat wereapplied were high in relationto those of other countries.The nontariffbarrier createdby the foreignexchange allocation system, as wellas the existingtariff barriers,especially thosefor the iron and steel industry,in the 1950shad a veryimportant import regulatory effect. D. The Third RationalizationPlan (1961 to the mid-1960s) 5.60 The govemment's National Income DoublingPlan estimated in 1960 that crude steel output would be 48 million tons by FY 1970. Using this goal as a starting point, and based on the voluntary plans and investment adjustment by the industry, the Third Rationalization Plan was inaugurated in FY 1961. Yet, given the rapid expansion in crude-steel output with the long-term economic boom after FY 1956, this original target of 48 million tons was achieved as early as FY 1966. By the target year, FY 1970, production had soared to nearly double the original estimate, exceeding 90 million tons. 5.61 A distinctivefeature of the Third RationalizationPlan was the construction of eight steel factories in new locations, including those with crude-steel outputs in excess of 10 million tons. These new factories comprised 46% of total national production of crude steel. Under the First and Second Rationalization Plans, the government was responsible for the aggregation, guidance, and adjustment of the long-term investmnentplans in the industry. Under the Third RationalizationPlan, however, capital investment was adjusted voluntarilyby the industry itself. 5.62 As explained previously, financingfrom the RFB and JDB for the First RationalizationPlan clearly contributed to the reconstruction of the iron and steel industry, and helped strengthen its foundation for later expansion. Later, during the Second Rationalization Plan, the iron and steel industry established a solid business foundation for procuring capital through stocks, industrial bonds, private financial institutions, and so forth. The industry ne longer had to rely on public finance. After 1954 the weight of fiscal funds provided to the ind. try, primarily by JDB. fell rapidly; and in the second half of the 1950s the use of stock financing creased, while in the latter half of the 1960s loans from private financial institutions increa. - .apidly (Table V-28). Consequently, JDB shifted its funding to special steel, which was a vulne. ble industry.At the time, the special steel sector was in technological competition with revolving furnace steel producers, which used pig iron produced by blast furnaces. Serious competition in plant capacity arose from the rapid increase in demand for structural carbon steel, and the gap in strength in firms among the industry widened rapidly. As such, JDB targeted its financing at building an integrated production system that was cost competitive and able to provide a stable supply of products. In addition. lending to the ordinary steel sector was in line with newly established policy goals, such as pollution controls for improving national life and through the promotion of domestic technology to maintain the foundation for development. In particular, financing for the pollution prevention was distributed primarily to the iron and steel industry because it was a pollution-causing industry. Between FY 1961 and 1974, about 60% of JDB financing for the ordinary steel sector went toward preventing pollution.
221 TableV-28. Thc Supplyof EquipmentFunds for the Iron and SteelIndustry
Private Funds Government Funds Bonds Stocks Total Fiscal Amount Ratio Total Ratio JDB Ratio Amount Ratio Amount Ratio Amount Ratio Year (bililon yen) Amount) (suiBoB yen) (bilionyen) (billion yen) (billion yen)M
1952 145 40.9 69 19.4 69 19A 80 22.5 61 17.2 355 100 53 163 51.3 47 14.8 44 13.8 56 17.6 52 16.3 318 100 54 193 76.9 12 4.8 8 3.2 7 2.8 39 15.5 251 I0 55 185 82.6 5 2.2 1 OA - .- 34 15.2 224 100 5b 227 51.7 30 6.9 20 4.6 1 0.2 181 41.2 439 100 57 381 55.9 52 7.6 29 4.3 18 2.6 231 33.9 682 100 58 588 69.9 41 4.9 19 2.3 55 6.5 157 18.7 841 100 59 869 54.0 54 3.4 20 1.2 160 9.9 527 32.7 1,610 100 1960 537 29.7 32 1.8 11 0.6 481 26.6 759 41.9 1,809 100 61 1,064 47.4 87 3.9 28 1.2 203 9.0 892 39.7 2,246 1o0 62 1,250 56.5 86 3.9 28 1.3 111 5.0 765 34.6 2,212 100 63 1,713 68.7 74 3.0 18 0.7 188 7.5 517 20.8 2,492 100 64 1,547 63.6 86 3.5 21 0.9 IsO 7.4 619 25.5 2,432 100 65 1,903 82.7 61 2.7 17 0.7 328 14.2 9 0.4 2,301 1o0
Source:JDB
5.63 As mentioned, Japan's iron and steel industry received various forms of policy-bas I assistance between the end of the war and the mid-1960s. JDB financing and favorable tax-treatment measures, such as the special depreciation system and the system of deductions on export-earned income, made itself easier to procure funds for capital investment. Moreover, the First and Second RationalizationPlans, and the approval system for introducingtechnology through facility modernization, helped lower production costs (Table V-29). In addition, import regulations based on the foreign exchange allocationsystem and the existing system of tariffs protected the iron and steel industry from competitive pressure from imports. However, even with this strong financing environment, iron and steel manufacturerscarried out positive capital investment to lower costs and create high added-value products, in the hopes of meeting the demand that would accompany high growth; moreover, a strong competitive environment had emerged within the industry. As such, in the 15-year period after 1950, value added increased ninefold. Indeed, productivity in 1965, at V1,333 thousand per person, was higher than the manufacturing industry average (V1,004 thousand per persons) (See earlier Table V-24). With regard to these points it also should be added that high growth would not have been possible without inter-enterprise competition.
4. Declining Industries: Coal Mining 5.64 RFB funding for priority production played a major role in restoring and reconstructingthe postwar coal mining industry. In addition, during the first ten years after its establishment, JDB also provided a colossal sum of 799.3 billion in funding to the industry. Although characteristics and funding roles of the RFB and 1DB differed throughout the postwar period, the high level of dependence on these two policy-based finance institutions was one of the most distinct features of the industry. 5.65 Yet, with the energy revolution that swept the globe beginning around 1956, Japan's coal mining industry fell into a structural slump. Although government support measures were provided on several occasions and firms made efforts to carry out rationalization,the coal mining industry ultimately declined.
222 Table V-29.Unit Production Cost Index in the JapaneseIron andSteel Industry: FY 1956to 1970 (OrdinarySteel, 1956 = 100) Year UnitProduction CostIndex 1956 100.0 57 111.2 58 82.3 59 75.1 1960 71.0 61 76.4 62 68.1 63 65.9 64 62.7 65 63.7 66 60.0 67 58.0 68 56.6 69 58.4 1970 65.1
Note:Unit production cost is materialinput plus labor cost. Source: Komiya Ryutaro et al. (ed.), (1984), NihonNo Sangyo Seisaku.
5.66 From the end of the war to 1951, a series of policies that sought to increase output helped boost coal production from 22,520,000tons in FY 1947 to 46,490,000 tons in FY 1951,multiplying 2.1 times in four years. From FY 1951 to 1959, the period in which rationalization policies were implemented, coal production shifted according to the favorable or unfavorable state of the ecofiomy, beginning with the special demands of the Korean War and the recession thereafter, and followed by the Jimmu and Iwato booms. Yet coal production overall expanded only marginally in this period; moreover, the number of coal mines declined from 882 to 662, and the number of regular workers fell from 353,000 to 213,000. It was during this period of output increases and mine and labor reductions that scrapping and building was carried out in earnest. The number of mines fell conspicuously after FY 1960; by FY 1965, the number had been reduced by more than 50%, falling to 287. Similarly, the number of regular workers was nearly halved, falling to 110,000. The pace of these reductions greatly exceeded their pace in the 1950s. indicating that remarkable progress had been made in scrapping coal mines. While production efficiency greatly expanded from the FY 1960 level of 20.5 tons per person monthly to 34.4 tons per person monthly in FY 1965, coal production began its downward trend after its peak of 55,410,000 tons in FY 1961. Thereafter, the decline of the coal mining industry gradually became apparent (Table V-30; Figure V-1). 5.67 One of the fundamental reasons for the decline was the shift in the demand structure as the consumption of fluid energy such as heavy oil and natural gas, increased. In 1950, domestic coal captured 50% if the total supply of energy; by FY 1965 it had dropped sharply to 19%. A second reason for the decline of the coal mining industry was that the structure of the industry made it extremely difficult to establish the long-term, stable production system necessary to cope with the shift in the demand structure. Not only did the coal mining industry lack flexibility on the production volume and cost side, but the natural condition of Japanese coal was also not particularly favorable. Thus, the overriding policy issue was how to reduce the gap in the economic efficiency of coal and its competitor, oil, with rational policy objective for maintainingan optimal scale in the domestic natural resource industry - coal mining. 5.68 Policies targeted at the declining coal mining industry in the face of energy imports liberalization fall into two separate periods in time: FY 1951 to FY 1959, when rationalization policies were implemented,and FY 1960 and after when coal policies took on a new direction.36
223 Table V-30. The Productionof Coal: FY 1947 to 1975
Fiscal Numberof Coal Mines Coal Output Volume Regular Employees Productivity Year - (1,000 tons) (1,000persons) (ton / person I month) Large Medium Total Large Medium Total Large Medium Total Large Medium Total and Small and Small and Small and Small
1947 497 21,059 8,276 29,335 288 119 407 6.1 5.8 6.0 48 628 24,056 10,737 34,793 310 410 450 6.5 6.4 6.4 49 803 26,566 10,729 37,296 283 122 405 7.8 7.3 7.7 1950 781 28,243 11,087 39,330 255 105 360 9.2 8.8 9.1 51 882 31,669 14,821 46,490 232 121 353 11.4 10.2 11.0 52 949 28,422 15,325 43,747 232 134 366 10.2 9.5 10.0 53 945 28,940 14,598 43,538 214 117 331 11.3 10.4 11.0 54 805 29,797 13,115 42,912 193 94 287 12.9 11.6 12.5 55 81 726 807 28,511 14,004 42,515 183 91 274 13.0 12.8 12.9 56 84 759 843 31,988 16,293 48,281 183 100 283 14.6 13.7 14.2 57 81 783 864 33,944 18,310 52,254 186 111 297 15.2 13.7 14.6 58 80 744 824 31,132 17,357 48,489 186 104 290 14.0 13.9 13.9 59 81 673 754 30,829 17,057 47,886 176 92 268 14.7 15.5 14.9 1960 80 602 682 33,805 18,802 52,607 158 86 244 17.9 18.2 18.0 61 76 586 662 36,874 18,539 55,413 138 75 213 22.3 20.5 21.7 62 72 536 608 36,313 17,274 53,587 118 61 179 25.6 23.6 24.9 63 62 374 436 35,400 15,699 51,099 90 46 136 32.9 28.4 31.3 64 54 268 322 35,356 15,418 50,774 77 39 116 30.5 32.5 36.4 65 51 236 287 34,636 15,479 50,113 72 38 110 40.1 34.4 38.1 1975 N.A. N.A 39 N.A. N.A. 18,597 N.A. N.A. 22 N.A. N.A. 67.8
Sources:Coal Mining Industry RationalizationCorporation (1975), Sekilan Kopyo 30-nen No Avumi. MITI, EnerevStatistics Annual. Figure V-I. Shiftsin the Key Index of LheCoal MiningIndustry
-Coal OutputVolume NumaeoftU MinUMC Regularemnployees ...... Number of Mines (10,000 persons) Labor productivity(coal Output No. of coal nunes -.-- Regular Employees (10,000 production efficiency) tons) LbrPoudiy45 -(tor/person 6,000 1,000 - - Labor/Productiviy 4580 o mondh) '\ "' .. 40 7 900 70 5,000 8 35 * 30~~~~~~~~~~~~~~~~~~~6 700 %3 4,000 ._.. 50 3,000 600 . 25 40 3.000 300 @ - \*_ _Ws. * 2010 - t 400t \ >, < 251~~~~~~I40O 400 - 30 2,000 300 200 ,,._._. - t >*,.\ , 2 10 2 200
1,00 *....5 1
0 0 FY 50 55 60 65 70 75 1947
Source:Agcncy of Natural Resourcesand Energy(1990); Seldian Koovo Gorika SeisakuShi. A. Rationalization Polikes (1951 to 1959) l) The High Price of Coal 5.69 The necessityfor rationalizingthe coal miningindustry was first recognizedin 1950with the increasein the price of coal. To halt the overalleconomic slump caused by the Dodge Line,the government'smost critical priorides were to promoteexports from and to rationalizeeach industry. However,it was also clear that the high price of coal -- the most basic productiongood -- was increasing the price levels of commoditiesand was one of the deterrents to Japan's export competitiveness.Thus, reducing coal priceswas vitalto the healthof the economy-- particularlyto the iron and steel industry,the largestdemand sector. 5.70 In 1950, the IndustrialRationalization Council was established; it immediatelybegan consideringpolicies to rationalizethe coal miningand iron and steel industries,culminating in a report entitled the "GeneralPlan for the Rationalizationof the Iron and Steel and Coal Mining Industries."In response,the governmentimplemented several measures to promoterationalization -- providingvehicles for securingfunding, reducing interest rates on loans, reducinginterest rates on and postponingthe repaymentof RFB loans, and supportingthe introductionof machinery.In addition,taxation measures were introduced;they includedthe specialdepreciation system for mine drifts providedafter 1951,and a specialdepreciation system for miningmachinery made possible by a revision in the Law for the Promotionof EnterpriseRationalization and the Special Tax MeasuresLaw. 2) The Law on Temorary Measures for the Rationalizationof the Coal Mining IndusUy 5.71 The Law on TemporaryMeasures for the Rationalizationof the Coal MiningIndustry was enacted in September1955 (hereafter,the Rationalization);it later served as the basis for coal policies. The law was enacted to reform the weakenedproduction structure of the coal mining -industry, to reduce the cost of coal production,and to rationalizethe coal mining industry. It includedthree majorpolicies for promotingrationalization. a) TheCoal Ming Council 5.72 The Coal MiningCouncil was establishedas a consultativebody under the jurisdictionof the Ministerof InternationalTrade and Industryto enforceand administerthe RationalizationLaw. Suborganizations under the Council included the rationalization subcommittee, the price subcommittee, the basic issues subcommittee, and the productivity subcommittee. It was among these subcommittees that the Basic Rationalization Plan (Table V-31) and the annual Rationalizaton EnforcementPlan were drafted.3 7 TableV-3 1. Summaryof the BasicRationalization Plan PolicyArea Tariet Year FY 1959 Coal Output 49,500,000tons ProductionEfficiency 18Atons/personhmonth Grade 6,200calories Puichaseof InefficientMines 3,000,000tons
Source: Agencyof NaturalResources and Energy(1990), Sekitan Koeyo Gorika Seisaku Shi.
226 b) The Coal MiningIndusty ImprovementPublic Corporation 5.73 Based on the RationalizationLaw, the Coal MiningIndustry Reorganization Corporation was established in October 1955as an institutionfor purchasing inefficientcoal mines. Its objective was to purchase a 3 million tons of inefficient coal mining capacity, to concentrate production in highly efficient mines, and to balance the supply and demand of domestic coal by FY 1959. With the formation of the New Long-Term Rationalization Plan in September 1960,which outlined targets for FY 1963, the Coal Mining Industry Reorganization Corporation expanded the scope of its operations, began to provide new funding operations for modemizing the industry with the construction of highly efficient coal mines, and changed its name to the Coal Mining Industry RationalizationCorporation. c) RegulatingMine Constructionand AdjustingMine Borders 5.74 To ensure that mines did not again become inefficient, the government established certain license standards for various mining outcomes (ore volume, grade, and production efficiency) that would support the construction of highly efficient coal mines; moreover, mine construction became one of the items licensed by the MlTl minister, and the Mining Area AdjustmentConference was established to handle claims regarding mine border issues. 5.75 In additionto the policiesformulated under the RationalizationLaw, the Law on Temporary Measures for Restricting the Constructionof Heavy Oil Boilers was enacted also in 1955. This law sought both to control the progression of heavy oil and to promote the rationalization of the coal mining industry by limiting the construction of heavy-oil boilers. 5.76 Beginning in 1956 with the Jimmu boom, coal demand, which had deteriorated steadily after FY 1953, suddenly recovered,and coal market conditions took a favorable turn. Occurring in the heels of the enactment of the Rationalization and Heavy Oil Boilers Laws, this shift significantly reduced the urgency of coal mining reform. However, in the fall of 1957, the Jimmu boom stalled. After 1958, as the economy entered the sluggish period known as the Nabezoko depression,the demand for coal again declined. 3) The Energy Revolution and the Intensification of the Coal Mining Problem 5.77 After FY 1958, an increase in the use of fluid energy also spurred the reduction in the demand for coal. This period ushered in the so-called 'energy revolution," when, with the cheaper price and superiority of oil, coal began being supplanted as an energy source (Table V-32). 5.78 As this energy revolution progressed, a serious structural depression in the coal mining industry materialized, and the goals of the Rationalization Law - to rationalize the coal mining industry and form an economnicbase to support the coexisting of dornestic coal and oil - finally took hold. In December 1959, the Coal Mining Industry Council released its interim report on rationalization, seeking to secure the economic efficiency of the coal mining industry, and to stabilize and strengthen the energy base. Given that the recession in the coal mining industry could be attributed to the shift in the dernand structure caused by the advance of fluid energy, the report included a plan to reduce the coal price to V1,200 per ton by FY 1963, in order to establish economic efficiency in the coal mining industry. To do so, the Council called for concentrating production in highly efficient mines and closing inefficient mines. In addition, the Law on 'remporary Measures for UnemployedCoal Miners was enacted to address the employment effects of the process of rationalization. 4' Unemployment Policies 5.79 Given the special occupational know-how and skills of coal mining work, transferring unemployed coal mine workers was not feasible, and, it was extremely difficult to reemploy these workersin otherindustries.
227 TableV-32. Primary Energy Supply: FY 1955and FY 1965 FY 1955 FY 1965 Calories Calories EnergySource (1010 Kcal) % (1010Kcal) %
Hydroelectric 11,883 21.2 18,722 11.3
Nuclear Power - - g 0.0 Coal 27,562 49.2 45,217 27.3 Domestic 25,097 44.8 31,637 19.1 Imported 2,465 4.4 13,580 8.2
linported Ccke - - 33 0.0 Lignite 573 1.0 224 0.1 Oil 11.301 20.2 96,704 58A Domesticcrude oil 335 0.6 740 0.4 linportedcrude oil 10,966 19.6 95,964 58.0 and products NbawalGas 238 0.4 2,008 1.2 Chrcoal 1,462 2.6 392 0.2 Firewood 2,997 5.4 2,305 1.5 Total 56,016 100.0 165,614 100.0
DomesticEnergy 42,585 76.0 56,037 33.8 Inported Energy 13,431 24.0 109,577 66.2
Source:MIUI, Sogo Energi Tokei.
5.80 Consequently, the general measures that had been devised either to arrest the coal depression or to implement the Rationalization Law - public works projects, projects to reverse mine damage, and unemployment projects - were insufficient to handle the special needs of unemployed coal workers. Thus, with the enactment of the Law on Temporary Measures for Unemployed Coal Mine Workers in December 1959. a comprehensive policy base was established to address these needs. This unemploymentpolicy consisted of three primary measures: * Given occupational training and job referrals, unemployed mine workers were to be dispersed to other regions in which economic stability would enable them to be reemployed in other industries. Support associations for unemployed mine workers were established to provide funds for moving and allowances for occupational training, job counseling for those seeking employment, leased housing for workers, and occupationaleducation.
228 * As a supplement to the occupational training and job referral system, unemployment measures and public works projects were also implemented. These activities were meant to augment projects established under the emergency employment measures for unemployedcoal mine workers to provide provisional employmnent. * Unemployment insurance, public assistance, and other social security measures were implemented - in particular, the payment periods for unemployment insurance were extended in areas where employment referrals were made, and the support associations for unemployed coal mine workers also implemented such activities as lifestyle guidance, 5.81 During the peak period of unemployment in the coal mining industry (FY 1962 - 63), the job referrals efforts of the Public Employment Security Office helped 30,000 to 40,000 of the 50,000 to 60,000 job applicants obtain jobs (Table V-33). The various training and job referral measures were not completelyeffective given the strength of the job attachment among unemployed mine workers in coal-producing regions. Thus, a new policy measure targeted at unemployedcoal workers -- The Coal Producing Regions Promotion Project - sought to create positive employment opportunities in the coal-producingregion themselves.
TableV-33. Actual Reemployment of UnemployedCoal Mine Workers (persons) Fiscal Job- Employmentthrough Public Employment Year applicants SecurityOffice Referrals Others TotalEmployed WideArea General Total
1962 49,100 5,800 9,100 14,900 15,400 30Q300 1963 59,800 10,900 9,500 20,400 19,500 39,900
Source:Employment Promotion Corporation (1981), Kovo Sokushin Jkvodan 20-nenno AYumi.
5.82 Fairly active capital investment was carried out in line with the rationalization plans established by the government. Between FY 1957 and 1960, the amount of financing reached the '30 billion level each year. 5.83 In the first part of this period (FY 1951-55), JDB funding for the coal mining industry was provided primarily for rationalizationinvestments. The financed amount (VI6.6 billion) was second only to the funding provided to the electric power and ocean shipping industries, occupying 19% of the V86.5 billion in tota! capital investment in the industry. In addition, JDB provided partial exemptions from loan interest as part of the rationalization policies implemented under the RationalizationLaw. On the condition that the coal mining companiespay the Coal Mining Industry Reorganization Corporation an amount equivalent to the difference between 6.5% and the contracted interest rate for loans, JDB exempted the said amount from interest for the company as part of financing for coal mine purchases. 5.84 In FY 1956-59, as capital investments were positively carried out in line with the rationalization plan, the amount of funding provided by JDB, primarily for large-scale superior mines, also increased greatly (V25.5billion), occupying 18% of a total capital investmentof V141.1 billion. Thus, J1DBfunding was a significant source of financing for implementing rationalization projects. 5.85 During this period, more than 80% of the funds for plant and equipment among the 18 major coal mines were initially own funds. However, this ratio declined gradually to less than 60% in FY 1959. In contrast, the net decline in loans in FY 1954-56shifted to a net increase beginning in
229 TableV-34. Actual Procurement of EquipmentFunds for CoalMining Industry: FY 1950to 1959 (millionycn) Breakdown Fiscal Amountof Equity Bonds Bonowing Borrowing Others Sub Depreci- Others Sub Total Year Capital fromJDB fromPrivate total ation total Investment Financial Insdtudons
1950 91 2 13 13 19 -1 31 61 -16 45 91 51 129 7 7 8 0 -3 5 109 1 110 129 52 174 17 11 -17 26 - 9 103 34 137 174 53 163 6 8 -2 31 - 29 105 15 120 163 54 111 I -1 -14 12 - -2 104 9 113 111 55 92 1 - -16 2 2 -12 97 6 103 92 56 151 21 - -45 -25 4 -66 121 75 196 151 57 242 22 -I -15 10 15 10 133 78 211 242 58 271 27 7 11 59 21 91 110 36 146 271 59 229 9 13 24 34 16 74 137 -4 133 229
Notes:Figures for bondsand borrowings are basedon the net increase1DB funds includethose from the ReconstructionFinance Bank and Assistance Goods Fund. Source: EconomicInstitute for Coal(1962), Sekitan Kogyo no Shomondai.
FY 1957 when the percentage occupied by loans irncreasedto the 30% level. The trend towards a net decline for JDB loans from FY 1952 to FY 1957 shifted to a net increase after FY 1958 as JDB aimed to respond positively to the rationalizationof the coal industry (Table V-34). B. New Developments in Coal Policy (1960 to the mid-1960s) 5.86 Three major coal policies were implemented in this period: the September 1960 Coal Mining Industry Basic RationalizationPlan (FY 1961 - 62); the November 1962 First General Plan for Coal Mining (FY 1963 - 64); and the December 1964 Second General Plan for Coal Mining (FY 1965 - 66). These coal policies were implemented in response to the frequent demands for reconsideringthe rationalizationplan, in light of two factors: (1) a reduction in the price of oil as the price of imported crude petroleum fell, which reduced the benefits of rationalizing the coal mining industry and invited a sudden increase in coal stockpiles; and (2) the deterioration in management-labor relations caused by rationalization. 5.87 The Basic RationalizationPlan was revised in September 1960 when a report issued by the Coal Mining Industry Council in December 1959 recommended that rationalization policies be strengthened. Accordingly, the plan called for promoting the more widespread application of the scrap-and-buildmethod (Table V-35). With this partial reform of the RationalizationLaw, the Coal Mining Industry Reorganization Corporation was reorganized and renamed the Coal Mining Industry Rationalization Corporation. At the same time, it also established operations to provide interest-free loans for modemization. Thereafter, government-basedequipment funds for the coal mining industry were provided simultaneously by JDB and the Corporation. Furthermore, in April 1962, the Rationalization Law was again revised to establish a system for providing funds to support closing inefficientcoal mines as a supplementto the existingcoal-mine purchasing system.
230 TableV-35. Summary of the BasicRationalization Plan Tartet Year: FY 1963
Coal Output 55,000,000tons
ProductionEfficiency 26.2 tons/personlmonth
Grade 6,380 Calories
Purchaseof Inefficient Mines (Total) 6,300,000 tons
Source: Agency of Natural Resourcesand Energy (1990), Sekitan Kogyo Gorika Seisaku Shi.
1) The First Coal Policy 5.88 In the early 1960s, the price of oil dropped, bringing with it a drop in the price of coal. At the same time, an increase in the price of various commodities led to an increase in the cost of coal production, thereby further harming the coal mining business.Thus, in April 1962, the Investigation Committee on Coal Mining was organized, and in October of that year the Committee issued a report on new reconstruction policies for the coal mining industry. In November, the government drew up the First General Plan for Coal Mining. The report recognized that coal could not compete with heavy oil, but indicated that the impact of the collapse of the coal mining industry would be enormous, and thus that preventing this crushing loss to the national economy should be a national goal. The basic concepts outlined in this report sought to shift rationalization policy from "icompetingon the price front with oil, which has been a competitor" to "avoiding the social friction that would result from the collapse of the coal mining industry." The report, supported the following concrete measures: * Policies to secure demand: making long-term purchasing agreements with the electric power and iron and steel industries;establishing a standard coal price. • Poles to establish a prodcion structure: promoting scrap-and-buildmeasures and striving for concentratedproduction in highly-efficient,superior mines. * Policies to secure financing: JDB financing, and the financing of the Coal Mining Industry RationalizationCorporation with modernizationfunds, improvement funds, and reconstructionfunds. * Polcies to cope with unemployment- establishing a reemploymentplan based on the number of unemployed from mine closures, and stipulating rationalization enforcement plans each fiscal year. * Policies to promote coal-producing regions: establishing the Coal Mining Area Development Agency to reclaim industrial sites and to provide funds for firms that would invest in coal-mining areas, thereby creating a place for employment.
2) The Second Coal Policy 5.89 After 1964, costs in the coal mining industry jumped suddenly again, placing pressure on the profitability of firms. Moreover, conditions in the coal mining industry continued to deteriorate as policies overstimulated the desire to leave the mines and production stagnated. Thus, in August 1964, a Second Investigation Committee on Coal Mining was organized, announcing the results of its investigation in December that year. Based on this report, the Second Coal Policy was passed by a Cabinet resolution in December. This report had followed the policy recommendationsof the First
231 Investigation Committee, focusing primarily on improving enterprise management through two basic policy measures: * Increasing the price of coal. * Establishing a system of subsidies for interest payments. In order to reduce the interest burden on coal-mining companies, the govemment provided subsidies for interest payments of 3% for firms which showed that they could adhere to appropriate business plans; for firms whose accounts had deteriorated,subsidies were provided for the entire interest amount, special funding was provided for reconstruction capital, and repayment on existing debts was postponed. 5.90 The primary objective of policy-based funding by JDB was to support the coal companies that were screened out as those to be "built" in line with the "scrap-and-build system." JDB financing exceeded V10.0billion each year, between FY 1962 to 1965 for a total of Y57.2 billion (8.5% of JDB's total loan amount during the period). Thus, together with the Coal Mining Industry Rationalization Corporation, JDB played a major role in providing financing for rationalizing the industry. 5.91 As the foundation of energy policy began to shift in the later half of 1960s towards comprehensive reliance on oil, the protective policies that had been directed at the coal mining industry were abolished, and, from the viewpoint of preventing social instability, policies began emphasizing a gradual withdrawal from the coal mining industry. In FY 1967, the (first) transfer of V100.0billion in subsidies for both principal and interest, was carried out with revenue from duties on petroleum and heavy oil, and stabilization subsidies were transferred in an effort to revive the managerial foundation. However, because the reduction in demand and the sudden jump in labor costs had deterioratedprofitability further, V85.0billion in reconstructiongrants was transferred (the second transfer) to the industry in FY 1969. The primary source of loans for plant and equipment funds shifted to the interest-free loans provided by the Coal Mining Industry Reorganization Corporation from JDB loans, while JDB funding took on a more supplemental role, targeting its funds at those companies that would be profitable in the long term.
232 Chapter VI. SUMMARYAND LESSONS 6.1 This chapter summarizesthe structure,evolution, and operationof policy-basedfinance in postwir Japan; it captures the period roughly from end of the WorldWar nIto mid 1960s'. As highlightedfrequently in the precedin; chapters, policy-basedfinance has been a major force behindJapan's postwar economictransition from reconstructionto its high growth.Clearly, the govermmenthas used this vehiclesuccessfully as a responsemechanism for revitalizingindustry and enhancingnational life -- thustransformning Japan intoa majoreconomic power in the international scene.The first section of this chaptersummarizes the majorpoints of discussionin each of first five cliaptersof thereport. The secondthen highlightsseveml key lessons that might help other countriesimplement this vehiclefor effectingnational policy.
1. Summary of Policy-BasedFinance in Postwar Japan A. The Core of Policy-BasedFinance In Japan: The Fiscal Investment and Loan Program 6.2 Policy-basedfinance in Japanis part of governmentfunding activities carried out in orderto realize nationalpolicy objectives.To ensure that the distributionof fundingcaptures these policy objectives appropriately, the governmentannually draws up the Fiscal Investment and Loan Program (FILP). Along with the GeneralAccount, FILP provides a comprehensive,uniform frameworkfor allocatingfunds judiciouslyto the variousinstitutions responsible for actualizing govemmentpolicy. FILP draws its primaryfunding resources from special nationalaccounts of depositsof postalsavings, insurance premiums, and pensions.These funds are not gratuitous;they mustbe repaid. Thus, the funds provided by FILP are extended only when it is likely that repaymnentis ensured. 6.3 The flow of fiscal investmentsand loans from FILP to recipientinstitutions and thento policyprojects constitutes fund operations.Recipient policy-based financial institutions include banksand govemmentfinance corporations, public and specialcorporations, and localgoverments - otherwiseknown as FILPagencies. 6.4 The scale of operation funds and the funding recipients are decided simultaneously with FILPbudgetary preparations and those of the Generaland SpecialAccounts. In this process,the variousgovernment ministries and agenciesdiscuss how theirpolicy needs and objectivesfit within theFILP framework,as well as the typesof policy-basedguidance, policy tools, and systemic evaluationsnecessary to promote their objectives.This discussionis summarizedas reference materialfor Diet deliberationwhich essentially controls funding allocations to FILP agencies.As such,even if a specificpolicy-based financial institution had an ^xcessivedemand for funding,this institutioncould not unilaterallytake measuresthat exceedthe budgetarylimits established by this framework.This budgetaryprocess culmninates in three 'tables' of fiscaland investmentloan uses - that is, for the applicationof fundingto various policyfields, definedbroadly as specialwelfare, infrastructureand regional development, industry and technology, and trade and economic cooperation. 6.5 The financial resources, fund operations, and recipient institutions, have changed considerablyin responseto the structuralchanges in the Japaneseeconomy during the 40 years of the postwarperiod. FILP currently captures an approximately8% shareof GNP and a 50% shareof the GeneralAccount; these shares have grown from approximately3% and 30%,respectively, at its inception.Thus, FIL? has a fairly substantialweight in the Japaneseeconomy. At the start FILP relied for its fundingresources substantially on fiscalfunds; but as the Japaneseeconomy grew, the weightof Trust Fund Bureaufunds (postalsavings, welfare insurance, national pensions, and loan repayments)became more pronounced (they currently provide approximately 80% of FLP fimding resources).Fund opertions have also shiftedin the postwarperiod, also reflectingthe considerable changein policyobjectives accompanying the structual shiftsin the Japaneseeconomy. In terms of theoperation of these funds,from the perspectiveof allocationsto the governmentsector and the privatesector, taking the middleof the 1970as a tuniingpoint, the weightof the allocationsto the
233 public sector have increased, mainly for the underwritingof govemment bonds. On the other hand, looking at distribution by use, the weight given to the initial target, "industry," has shifted and the weight given to sectors related to "nationallife," such as housing, has increased. Policy-Based Pinance: The Importance of the JDB 6.6 As its most basic level, Japan's policy-based finance is supposed to "supplement private finance." Its role is to guide the resources of the nation as a whole toward areas most desirable for the national economy.In order for policy-basedfinance to effectivelyfunction, there are numerous occasions when it is necessary for conditions (such as interest and loan periods) to be more favorable than those of private finance. As such, beyond supplementing private finance, Japan's policy-basedfinance serves as a "pump-primingmechanism" -- applying interest rate andother loan conditionsjudiciously, transmittingpolicy directives from the governmentto the private sector, and guiding the investmcnts of private firms toward policies to support a strong national economy. Consequently, for comprehensive policy-based financial institutions such as JDB, which do not target specific industries and areas, their role changes according to shifts in the policy objectives underlying the Japanese economy. Indeed, while the share of policy-based finance in the overall loans outstanding has been approximately 10% throughout the postwar period, the maturationof private financeand the growth of enterprises has shifted the content of policy-based finance from industry related financing to other areas, and its substance from quantitative supplements to qualitative supplements. 6.7 The administration of the budgets that have been thus decided is carried out under the discretion of each institution concerned. But in the case of JDB, while the govemment decides the basic policy for TDB'sfund operations, a system has been established to allow the JDB to make its own decisions about selecting individual projectsfor funding and their funding amounts. Thus, JDB carriesout its own assessments about whether projects conform to policy, the creditworthiness of the targeted firn, and other issues. After providingfunds, JDB then verifies how the funds are being spent and the impact of its investment. But to guarantee that JDB is administering its business affairs properly, the Board of Audit, a public auditor, conducts a regular annual audit of JDB. 6.8 Thus, the inappropriateor illegal use of the funds for policy-basedfinancing is prevented by a svstem of multiple checks: the policies set by the govimment, the strict funding appraisal and verificationprocedures of the JDB, and an audit of JDB business by an independent government organization,the Board of Audit. 6.9 Clearly, this system has been successful.The independence grantedto the JDB by law has enabledit to respond flexibly to the economic challenges facing Japan, transforming govemment policy into concrete responses at each stage of postwar revitalization. To this day, the strong managerial structure and financial compositionof the JDB continueto make it Japan's preeminent financing mechanism for effecting national policy. B. Industrial Policy: The Foundation for Economic Growth in the Postwar Period 6.10 Industrial policy captures a range of definitions, objectives and tools. While it may be defined broadly as a mechanism for promoting the industry as a whole, its aims, targets, and direction are much more complex and comprehensive (see the industrv case studies in section E). Anxunderstanding of the progress and transformation of Japan's economic development is key to understanding how industrial policy evolved in the postwar period. Industrial Policy in Transition: The Road to Economic Development 6.11 The historical evolution of industrial policy in postwar Japan consists of four stages, corresponding roughly to the four decades following the allied occupation. In the 1950s, when economic reconstruction was paramount,industrial policy sought tofoster select indsbhies. such as electric power and iron and steel, in order to promote Japan's industrialization.In the 1960s, when the now vigorous Japanese economy began to enter the intemational scene, industrial policy sought to promote industr&l organization among individual industries, enabling them to cope with trade
234 and capital liberalization.However, in the 1970sJapanese industrial policy targeted the srwtral adjustmentof industry, to correct the environmental and other distortions caused by industrialization,and to cope witheconomic changes brought about by the "oilshock." Then, in the 1980s, the new industrialpolicy sought primarily to promotetechnelogy, energy conserwtion, and informationnetwork so as to improvethe industrialbase. Thus, in the postwarperiod, the concept of Japaneseindustrial policy evolvedgradually from measuresthat focusedon specificindustries early to measuresthat crossedindustrial boundaries later. The Policy-FormationProcess: A Successful Response Mechanism 6.12 Industrialpolicy played the key role in the reconstruction,stabilization, and highgrowth of the Japanese cconomy. Its most distinctiveelement as a response mechanismfor promoting economicgrowth is the cooperativerelationship between government and industryin the policy formationprocess -- that is, the "public-privatecooperative system." This systemis most clearly reflected in the "deliberativecouncil system." If industrial policy can be thought of as the government's guiding the private sector toward "desirabledevelopment" based on a market economy,the most importantingredient of successis incorporatingthe willand desireof the private sectorsinto the govemment'seconomic plans. The deliberativecouncil system provides the fomm for effectingthis resolutionof opinion,and had been wellestablished by the 1960s.In the postwar period, almost all important industrial policies were decided in their related councils, which comprisedindustry representatives, business leaders, former bureaucrats, academics, and others. 6.13 Based on reportsand recommendationsprepared by the councils,the reconstructionof the postwarJapanese economy was carriedout under variouslegislative and administrativeinitiatives, such as the NationalIncome Doubling Plan. In responseto the policyobjectives of these plans, a process was establishedto capturethe various"visions" of governmentand privateentities. These visions- either industry-specificor crossingindustrial boundaries - formedthe basisfor industrial policyplanning. In formulatingpolicy, each governmentministry or agencywould investigate and assess the variouspolicy tools availablefor implementingthe policy.These policytools consisted of either "directregulations" (special legislation and administrativeguidance) or "indirectguidancew (improvingthe industrialfoundation, taxation, subsidies, and policy-basedfinance). Each policy tool was selectedaccording to its own abilityto respondto policyobjectives or to its abilityto work well as part of a policy mix. For example, in a series of industrial rationalizationpolicies implementedin the 1950s,po!icy tools rangedfrom subsidiesfor technologicalimprovements to specialtax exemptionsand specialdepreciations, to administrativeguidance and speciallegislation, to policy-basedfinance. Each measurewas targeted variously at specificindustries and at industry overall,and eachwas appliedseparately or togetherwith other policytools as appropriatt. C. The Evolution of the Postwar FinancialSystem 6.14 As a responsemechanism, industrial policy guidedthe efforts of Japan to emerge as an economicforce - both domesticallyand internationally.But to actualizepolicy, the govemment was obligedto shapea fiscal and monetaryenvironment that could supportpolicy implementation in both the immediateand long term.Several economic problems had to be overcome. The Transition from Reconstruction to High Growth: Meeting the Economic Challenges 6.15 Japan's economyjust after the war was hard hit by widespreadproduction declines and rapid inflation.To increase production,the governmentadopted a Priority ProductionSystem, whichsought to increasethe outputof the coal and iron and steel industriesas bellwethersfor other industries. It also establisheda variety of public corporationsto centralize the collection and distribution of goods, and imposed price controlson importantcommodities. To back up these measuresfinancially, it establishedthe ReconstructionFmance Bank. However,because a large portionof the RFBfunding supply camefrom BOJ credit, RFB financingfueled inflation. 6.16 With the adoptionof GHQ'sNine Principles for EconomicStabilization in 1948,the Dodge Line was implementedto eradicate postwarinflation. With inflation under control,the Japanese economy began striving for self-sufficiencyas the 1950s unfolded. Policy was targeted at
235 modernizingindustrial facilities - but one problemwas paramount:securing long-term funding for capital investment.The responsewas to establisha two-prongedmechanism for providinglong- tenn funds:Using policy-based finance to channelthe AssistanceGoods Fund and fiscalinvestment and loan funds towa industrial modernization;and relying on funds from private financial institutions,in the formof bankdebentures, and loan trusts,as an "indirect' channelfor supplying equipmentfunds. This systemprovided not onlythe frameworkfor addressingthe immediateneed for industrialrationalization, but also the foundationfor a financialsystem that would supporthigh growth in the future. Backdr to the Fiscal and Monetary Environment 6.17 Three determinantsshaped the financing environmentfor supporting this "indirect" financingframework for long-termlending -- the structureof privateinstitutions, the conditionof the capitalmarket, and the directionof publicfinance. hwivateinstiuions faceda rapid increasein demand from the KoreanWar -- and some banks were positionedmore favorably to promote lending. Legislationwas enacted to establish and then enable long-termcredit banks to obtain fundingresources with bank debentures. Legislation also sought to strengthenthe long-termlending capacity of other banks.To provide a frameworkfor providingfunding for industries,the GHQ sought to establisha frameworkwhereby commercial banks would shoulder short-term finance, and securitiesfirms to shoulderlong-tern finance.But the capita market in postwarJapan could not providea sufficientbase of supportfor this strategy,for two reasons:the financeadministration that served in favor of indirectfinancing and the lack of the developmentof the governmentbond market as a result of balancedfinance policies.In the periodimmediately after the war, public f,ance in Japanplayed a role in supplyingthe capitalprocured through taxation to basic industries in the form of price-supportsubsidies. However, after the implementationof the super-balanced financial policies,its characteristicsgreatly changed. Thereafter, less weightwas given to direct policy intervention.Public finance bore the role of developingthe social infrastructure,adjusting te industrialstructure of the declining industriesthat accompaniedhigh growth, and assisting underdevelopedregions. The supply of funds to growth industrieswas appropriatedfrom the savingsof the householdsector through financial institutions, including policy-based finance using fiscal investments and loans. The Private and Policy-Basd Finance System that Emered for Long-Ter Fundig 6.18 The postwarfinancial system, the basic frameworkof the high growthperiod, took shape from the end of the 1940sto approximately1955. There are several points which served as preconditionsfor the formationof this kind of system.First, through postwar inflation the actual value of financialassets drmatically decrased, and there was a bias towardsthe short-termsupply of capital.In addition,as a result of inflation,asset levels dropped and assetdistribution evened out (there was a scarcityof financialgoods to substitutefor savings).Second, through the separationof the ownershipand managementof financialinstitutions, progress was made in establishingthe homogenizationof financialinstitutions, and stabilizingtheir managementbases to a degree (it was thus easier for them to adapt uniform regulations).Third, internal and extemal financingwas basically separated with an objective to improvingthe intemationalbalance of payments.1he prw Jefinancingsystem in the postwarperiod was foundedon two principles:a divisioncf labor, and interestrate regulations.The govemmentadopted a divisionof labor philosophy- separating the responsibilitiesof variousprivate financial institutions- in order to deliver funding most effectively. The hallmark of this philosophy was the separationof short-termand long-term funding. 6.19 Given that there was not adequateinternal accumulatedsavings by private corpoations from the reconstuctionperiod after the war up throughthe high growth period,and in light of the underdevelopedcondition of the capital market,the policy of holding interestrate levels below marketrealities was one methodused to lowerthe cost of fundsto corporationsand promotecapital investment.Furthermore, regulation of depositinterest rates stabilizedthe cost of funds to financial institutionsand also preventedfund operationsfrom tuming towards high-risk activities in pursuit of high returns.In short, maintainingthe credit order and stabilizingthe managementof financial iinsttutionswere the fundamentalsof financialadministration during this period.
236 6.2(0 Policy-based financial institutions were established in recognition of the fundamental difficulty of using only private financial institutions to reconstruct and maintain a society that would support the national economy. Indeed, private finance and policy-based finance coexisted and supplemented each other from postwar reconstruction to the high-growth period. But how did the system perform? Four elements reflect their interaction in the postwar period.
6.21 The first is their lending scale. The weight of policy-based finance reached its peak in the 1950s when long-term funding was scarce. In the 1960s, in terms of volume, private financial institutions were the main lending source, handling the considerable demand for capital.
6.22 The second is interest rates. Because they are supposed to supplement private sector finance, policy-based financial institutions use a standard lending rate, similar to the long-term prime rate of the private sector. However, policy-based financial institutions offered a lower rate when circumstances dictated it. For instance, while the difference between the private-sector long-term prime rate and the rate for borrowing from the Trust Fund Bureau (that is, the most favorable interest rate offered by policy-based financial institutions) was 3.5% in the early 1950s, it declined gradually to 2% in the high-growth period.
6.23 The third is loan periods. Essentially, a stable capital supply from fiscal investments and loan funds that were themselves based primarily on postal savings allowed JDB in particular to offer markedly longer loan periods than private-sector finance.
6.24 The last is the ratio of loan losses. Given that the mandate of policy-based finance (and JDB in particular) was to appraise the credit worthiness of firms and the viability of their projects, it is perhaps not surprising that JDB's ratio of loan losses was considerably lower than the ratios of private institutions. Taken at face value, the lower ratio of losses by JDB means that JDB made relatively few mistakes in selecting loan projects.
6.25 In the end, the financial framework and environment culminated in a system that met the economic challenges of postwar Japan. This system can be characterized by three fundamental developments:
* The growth of indirect finance and bank-centered financial intermediation.
• The emergence of a mechanism for providing long-term funds.
* A stronger credit order based on sound financial principles, administrative guidance, and regulations. D. Policy-Based Finance in the Postwar Period: The Evolution of the JDB
6.26 Japan's first postwar policy-based financial institution was the RFB. It was established in 1947 in response to the insufficient supply of capital among private financial institutions. It immediately supplied a considerable share of funding, primarily for capital investment, accounting for 44% of the funding provided by all financial institutions. The RFB played a key role in reviving production in important industries, beginning with coal and iron and steel. However, when the Dodge Line was implemented in 1949 to provide a super-balanced budget, the operations of the RFB were suspended. And while the hope was that the Assistance Goods Fund would be able to meet the growing demand for equipment funds in the absence of the RFB, it was clear that, with overloans among private financial institutions, government-based funding would have to be increased. It was against this financial climate that the JDB and other policy-based financial institutions were established. JDB immediately began providing long-term equipment funds to industry that contributed to the high growth of the Japanese economy which followed; it also began playing a key role in introducing foreign capital through World Bank loans and serving as guarantor for private-sector foreign currency loans.
237 Economic Planning and the JDB 6.27 With the special demands of the Korean War, postwar reconstruction sped along until the mid-1950s, when it became clear that the country had not yet achieved full employment. In response the government drew up a series of long-term economic plans that clarified long-term policy goals and developed measures for guiding the economic activities of the private sector. Beginning with the Economic Self-Support Five-Year Plan of 1955, the government went on to introduce the New Long-Term Economic Plan and the National Income Doubling Plan in 1960. As the primary policy-based financial institution, JDB funding also shifted from providing quantitative supplements to basic industries to providing qualitative supplements that focused on interest and loan periods in response to the growing diversification of industrial policies. Consequently, the weight occupied by JDB for financing equipment funds declined each year. 6.28 Thus, JDB funding areas became diversified,and it began targeting such infant industries as machinery, and such new industries as petrochemicals.In providing funding, JDB carried out strict, objective assessments that sought to achieve a funding balance and equality. As such, this assessment-basedfunding was key to guiding private financing. 6.29 At the start of the high growth period in the 1960s, JDB also began targeting its funding to such policy priorities as "coping with trade liberalization" and "correcting regional disparities" -- again in response to the shifting objectives of the Japanese economy. In 1961, JDB also issued foreign currency bonds in an effort to diversify funding procurement; in addition to improving the balance of payments. This JDB activity also pioneered the introduction of foreign capital to Japanese firms. 6.30 JDB currently derives its financial resources primarily from government loans; yet, at its inception, it drew much of its financial resources as equity. Moreover, as it amassed statutory reserves beyond its increase in its loan balance, the JDB was able to maintain a favorable financial structure. Its sound financial constitution enabled the JDB to establish a preferential interest rate in line with policy demands without subsidies from public finance. In turm,this was also powerful in ,uaranteeing management independence. E. The Application of Policy-BasedFinance: Industry Case Studies 6.31 How is policy-based financing applied in combination with other policy vehicles? What are its policy ends? The answers to these questions are captured in a series of case studies of Japanese industries that in the postwar period were at different stages of evolution. The brief summaries here indicate the dynamics of the policy-applicationprocess - how the policies that emerged from the deliberative process were set into motion by the government and then actualized with policy-based financing. Clearly, the interaction between the government and the JDB was a significant determinantof the fate of these industries. The Machinery: Nurturing an Infant Industry 6.32 At war's end, the machine industry that had expanded so rapidly with the military demand had lost its prime customer. But after several years of dormancy, industry demand shot up with the onset of the Korea War. Yet, because capital investment had been stagnant between the two wars, much of the production equipment was obsolete. Thus, the government enacted the Law on Temporary Measures for the Promotion of the Machine Industry, seeking to modemize the machine industry by supporting measures to renovate obsolete facilities and to amass capital and technology. The government established individual rationalization plans according to machine types, and established a framework for enabling JDB to provide funding at a low interest rate. JDB funding played a key role particularly in fostering the emergence of the machine tool and automobile part subsectors, and it was instrumental in guiding private financial institutions towards the important and growth industries of the future.
238 Shipbuilding: An Export Indust 6.33 Due also to the war's end,the loss of the shipbuilding market was a major setback to the industry. Yet its facilities capacity was largely intact and stable. For a short timc af-terthe war, shipbuilding orders were primarily for domestic ships. After 1950,the orders for export ships increased, triggered by a global shipping shortage. To take advantagc of this exportopportunity, the government promulgated an export promotion policy and implemcnted various tax mcasures, including special deeuctions for income carned on exports.It also establishedan exports insurancc system, and arranged for long-term, low-interestdeferred payment funding by EIBJ. From 1950 to the early 1960, policy-based financing for shipbuilderscaptured a large share of EIBJ funding. This funding -- targeted primarily at increasing the export of plants -- was supplemented with capital investment in technological improvements and the modemizationof facilities. The shipbuilding case is a prime example of how the government, policy-basedfinancial institutions, and the private sector worked together to promote an industrycrucial to the Japanese economy. Iron and Steel: A Basic Industry 6.34 Perhaps more so than other industries, iron and steel suffered serious damage from the war. Yet just eight years after war's end, the industry made a phenomenal recovery. As part of the postwar priority production system, a variety of policy tools were used to refurbish importchannels for the industry, as well as fumace equipment. These tools included the priority distribution of materials, RFB financing, and price-support subsidies. Later, the special demands of the Korean War triggered the activation of capital investment by enterprises. Combined with govemment demands that the industry become intemationally competitive, this investment activity spurred a seriesof rationalization plansfrom 1951 to the mid-1960s. The government used a mix of tools to rationalizethe iron and steel industry, Japan's basic industry at that time: to promote greater capital investment,the government arranged JDB financing, special depreciations, and tariff exemptions on importantmachinery; to promote technology and exports, it provided deductions for income earned on exports, and implemented a priority system for allocating foreign currency to introduce technology;and to protect the industry from intemational competition, the government allocated foreign currency for imports and tariffs. JDB provided 13% of the funding for capital investments underthe First RationalizationPlan from 1951 to 1955, and during the Second RationalizationPlan (1956to 1960) served as the "window' through which loans were borrowed from the World Bank.
Coal Mining: A Declining Industry 6.35 Coal mining slumped due to the remarkable energy revolution that swept the globe around 1956. And despite government support measures and efforts at rationalization, the industry ultimately declined. Yet government policy adapted readily to this reality. Based on the Law on Temporary Measures for the Rationalizationof the Coal Mining Industry, the govermmentdrew up a rationalization plan for the industry, including plans for purchasing inefficient mines and concentrating production in highly efficient ones, thus attempting to balance the supply of domestic coal. However, as the coal mining industry continued to deteriorate, rationalization policies shifted in 1962 to alleviating the social friction accompanyingthis declining industry. Of these policies and measures, the government requested that the JDB supply rationalization funds to highly efficient mines. The govemment also implemented various measures to improve the business performance of the industry. It raised the price of coal, provided subsidies for interest payments, mediated the reemployment of those who lost their jobs when mines closed, and, to increase employment opportunities,formulated policies to promote industrial location in coal-producingregions.
2. The Postwar Policy-Based Financial System in Japan: Key Lessons and Response 6.36 There is no question that Japan's policy-basedfinancial system (particularly JDB) played a considerable role in postwar high economic growth. Several socio-political and operational factors made it possible for this system to function effectively. These ftatures of the system provide extremely valuable guidance for other countries that are seeking to establish policy-basedfinancial systems. Three characteristics of the Japanese system are particularly important.
239 6.37 The First is a respec for themarke economny.A precondition lor a successfulsystem is the existence of a private-sector business structure that can make investment. Morcover, a solid presence of private financial institutions is also necessary, given that policy-based finance is supposed to supplement private financing. In addition to its prewar experienceas a market economy,Japan's postwar economicreform created an environmentthat enabledthe private sector to pursue its entrepreneurialspirit, thus fostering growth based on vigorous competition. 6.38 The second characteristic (which was particularly cvident in Japan as it entered its high- growthperiod) is the close relationshtipbetween the guiding policies that support economic plans and policy-based finance. Policy-based finance in Japanprioritized its funding allocation according to government policies that incorporated the will of the private sector. The precondition for this system is the existence of a public savings framework. In Japan,postal savings could provide financial resources, and the Fiscal Investment and Loan Program served aisthe vehicle for allocating funds efficiently and supporting balanced finance. 6.39 The third characteristic, which is particularly relevant to JDB, is respectforthe managerial independence of policy-basedfinancial institutions, given the existence of a sound financial composition and managerial philosophy. While JDB was inherently somewhat limited as a government-related financial institution, its professionalism,neutral and fair appraisal system, and sound financial practices enabled it to make individualfunding decisions autonomously. 6.40 In addition to the characteristics listed above, one can also point to an industrious national character, and the high-level of human capital backed by the educational system, which we do not elaborate here. However, beyond these three characteristics of the policy-based finance system of Japan,inherent conditions, both those related to Japan and those related to the period in which they werecarried out, influenced how the system worked and evolved. Thus, not only must the system itself be considered, but it is necessary that the surrounding economic and historical climate be captured. Response 6.41 As pointed out by the World Bank, many developing countries lack "appropriate" macroeconomic management and policy (planning) designs or do not enforce monitoring rigorously. Thus, for example, when preferential measures such as low-interest loans from the government (institutions)are freely adopted, it is quite possible that they will have several adverse effects on the overall economy. But the Japanese case indicates tha; several points can be made about this contention. The remainder of this sections comments on questions raised by the World Bank about the desirability of such preferential measures as low-interestgovernment lending. 6.42 Do such measures encourage the substitution of creditfor the borrowers' ownfunds and promote excessive indebtedness? In an environment such as Japan's at war's end, in which the scale of private householdsavings was small, some academics believe that savers tend to prefer secure and highly liquid assets and avoid holding assets, such as stocks and bonds. In this case, capital markets cannot develop sufficiently, and it becomes necessary to rely on loans (in Japan, important investors in the capital marketwere also banks). Yet, although one of the reasons for offering low interest rates is to support projects that, despite their policy necessity, may not be particularly profitable, it is clear that depending excessively on (albeit low-interest)loans will harrn the projects profitabilitv. With the existence of sufficient project appraisal capabilities, this type of project does not become a funding target. In JDB's case, it sometimes stipulated that the loan recipients had to invest their own funds as a condition for receiving JDB funding. 6.43 Do such measures skew incentives in favor of capital-intensive techniques of production? Without a doubt, the issue here is whether targeting capital-intensive industries as a part of the industry-fostering policies of the government is appropriate given a certain level of development within a given industry in a given country. But this problem is not inherent to low-interest "loans"- other policy measures for promoting capital investment (subsidies, preferential tax measures, and so
240 forth) face the same problem. From the standpoint of being able to check the profitability of such investmentswith appraisal procedures,such "loans" are superior when compared with other means. 6.44 Do such measures encourage corruption and the rationinigof credit in favor of groups that already benefit? Assuming that the overall framework for the scale and targets of loans is set clcarly by the government (Diet or parliament), and, that a system has been established to carry out lending decisions based on the professional appraisals of the institutions that handle these loans, it is possible to prevent corruption and favoritism. But the institutions must be able strictly to verify the payment of project expenses and actual completion, and regular audits must be enforced by the institutions internally or through a third party (as with the Board of Audit in Japan). This type of system was established when JDB was founded. Moreover, JDB policy is to hire staff who have high ethical standards,and to rotatea staff every 2 to 3 years. 6A5 Do such measures weaken the incentives of botht borrowers and lenders for recovering debt? This is not a matter that, as it pertains to low interest rates, can be explained by economic theory. Rather, this issue requires solutionsbased on the social and institutionalaspects of a country. 6.46 Do such measures ad to thefscal deficit? To begin with, low interest loans are not the only measure associated with expanding the deficit. Subsidies and other measures also add to the fiscal burden. In addition, when the interest rate for low interest loans is set at a level slightly lower than the market interest rate, a fiscal deficit does not always occur. (Indeed, government financial institutions are able to raise funds more easily than private institutions based on differences in credit worthiness.) Second, even if low interest loans reduce fiscal revenue for a period of time, if viable projects are funded, future profits will increase and, in turn, tax revenue will increase. Third, when the financial resources for loans in developing countries come from extemal sources whose interest rates are fairly low (such as IDA), a fiscal deficit will not occur when the final loan interest rate is set using the low interest rate as a base. The role of the AssistanceGoods Fund in the post war period was considerable, since it provided a large portion of JDB's capitalization. The Fund derived its proceeds from the sale of goods provided as U.S. aid; JDB obtained its capital by inheriting repayments for debts from the Reconstruction Finance Bank and Assistance Goods Fund Special Account (by 1950 RFB's debts had been repaid by the AssistanceGoods Fund). Thus, JDB could provide low-interestfunds without the infusion of additional fiscal funds. Although the method was different, it is one example of how aid from an external source can be used effectively. 6.47 Do such measures reduce the returns to savers? If the difference between the low interest rate and the market interest rate can be narrowed, the impact on savers becomes less severe. But, regardless, in developing countries in which savings alternatives are limited, savers would probably opt for a savings method that is secure and reliable, despite its low interestrate. 6A8 Do such measures increase the costs of borrowing by others? The answer differs according to how the financial resources for low interest rates are obtained. It is possible that low interest rates might increase these costs if financial resources are shouldered by the same domestic financial system; yet, to the extent that low interest rates are deemed to be a policy necessity, the increase should be accepted. Regardless, when these financial resources are introduced from outside the financial system. the costs to other borrowers will not inevitably increase. 6.49 As also recognizedby the World Bank, low interest rate can indeed work effectively, under three assumptions-- that a financial institution does not bend to politicalpressure to fund non-viable projects, that it makes financing decisions independently,based on sufficient appraisal capabilities, and that it implementsa strict ex-post-f:.cto audit. In this sense, it is not an exaggeration to say that the Japan DevelopmentBank has been this type of institution.
241 ENDNOTES
I When FILP was inaugurated in FY 1953, there were just 14 F[LP agencies and 6 financial resources, including not only the Industrial Investment Special Account, the Trust Fund Bureau Fund, and the Postal Life Insurance Fund, but also the General Account (up through FY 1956), the Assistance Goods Fund Special Account (only for FY 1953), and the Public Issue Bonds and Borrowings(renamed Government-GuaranteedBonds and Borrowings as of FY 1973).
2 The categories "Own Funds" and "Sum Total" have been included in the Fiscal Investment and Loan Program for reference. In order to carry out their projects, FILP agencies use both fiscal investment and loan funds and independently procured funds (for example, funds received through loan repayments, organizational profits, and foreign and domestic bonds). This latter source of funds is noted under "Own Funds," and each agency's overall project total is noted under "Sum Total." 3 In FY 1961, the system was changed whereby the addition of a special interest bonus is determined by a Ministry of Finance ministerial ordinance, based on the opinion of the Fund Operations Council. Since 1972, the interest bonus has been adjusted flexibly according to movements in long-term interest rates and other factors.
4 Ryu (1988). Gendai Nihon no Zaisei Toyushi, and others.
5 Most of the activities in the "Local" category are social capital development projects that are included in use classifications (1) to (10) and that now receive more emphasis than previously.
6 Noguchi (1989). "Zaisei Toyushi to Nihon Keizai," in Uzawa (ed.), Nihon Keizai - Chikuseki to -Seicho no Kiseki
7 Legally prescribed purpose: • Japan Development Bank: to supplement and encourage such activities as financing by ordinary financial institutionsin order to promote industrialdevelopment, as well as economic and social progress. - Export-Import Bank of Japan: to supplement and encourage financing by ordinary financial institutions for imports, exports, and overseas investments in order to promote economic exchange between Japan and foreign countries, primarily through trade.
8 Amendment of the Purpose Clause [Article 1]: By replacing the phrase "to promote the reconstruction of the economy and industrial development" with "to promote both industrial development and economic and social progress,"this revision clearly expandsthe scope of JDB's financing to include social development fields.
9 The Overseas Economic Cooperation Fund (OECF) was established in 1961. The fundamental difference in the nature of the "economic cooperation" activities of these two institutions is that EIBJ encourages primarily overseas transactions by Japanese firms, whereas the OECF acts as a foreign aid organization. Consequently, their business functions differ in several respects.
10 Some government finance corporations that have socially specific goals regularly receive many requests for interests rates considerably below those offered by the private sector, and carry out their activities with subsidies (investments through 1964) from such sources as the General Account.
242 I1 Tsuruta ( 1982).Senoo Nihon no Sangyo Seisaku.
12 Uckusa (1984). "After the Oil Crisis," in Komiya et al. (eds.), Nihon no Sangyo Seisaku.
13 Ito, Kiyono, Okuno, and Suzumura (1984). "Shijo no Shippai to Hoseiteki Sangyo Seisaku," in Komiya et al. (eds.),. Nihon no Sangyo Seisaku.
4 Revised in part in 1972. See paragraph 1.79.
15 Article 36 was revised in 1952. Originally, the total balance of profits remaining after corporate taxes were paid was held by JDB as internal reserves.
16 Ono, Jissenteki Sangyo Seisaku Ron.
17 Ito et al., Sangyo Seisaku no Keizai Bunseki.
18 Komiya et al. (eds.)(1988), Industrial Policy of Japan. AcademicPress, Tokyo.
19 "Softening" refers to the increase in the relative importance of knowledge-intensive and service industries in the economy. For example, for computers, the sale of software has increased more than the sale of hardware, and the importance of the knowledge and service components of the industry has increasedin diverse ways.
20 Over time, the relationship between the activities of private financial institutions and policy goals has shifted from semi-compulsorypolicy-based intervention right after the war to voluntary adjustment carried out by the industry. This voluntary adjustment was carried out through the Federation of Bankers' Associations of Japan, but the Federation did not have the power to compel complianceand merely indicated guidelinesfor each member bank. The emergency financial measures, implemented in March 1947, set funding ceilings for each financial institution and, based on the Industrial Fund Loan Priority Order List, provided priority funding to accommodatepriority production. The Bank of Japan also facilitated loans to supplement priority funding. After the Dodge Line was implemented in 1949, this system began to emphasizeessentially voluntary adjustment. Under the leadershipof the financial authorities, a Voluntary Restraint Committee for Financing was established within the Federation of Bankers' Associations of Japan and carried out voluntary adjustment,primarily using the control of non- urgent funding. From 1955 to 1956, there was a movement to enact legislationto place strict controls on the allocation of funds by private banks, based on the Bill for the Coordination of Fund Utilization among Financial Institutions. Clearly, the govemment and the private sector agreed that basic industries should receive funding priority during the postwar period of reconstruction and throughout the period of high growth. However, because not only private enterprises and banks, but also the financial authorities, indicated their opposition to the bill that legally restricted funding by private banks, the bill did not pass the Diet. This bill was the finance equivalent of the Bill for Temporary Measures for Promoting Designated Industries of later years. However, in recognition that this kind of movement was too powerful to be ignored at that time, the government established the Financial Institution Fund Council in February 1956 to carry out the control of non-urgentfunding and examine the basic guidelines and policies for expanding the supply of funds for priority industries. As the private sector counterpart, the Federation established a Loans and Investments Committee as an internal organization in October 1955; in December 1957, it became the Funds AdjustmentCommittee. However, there were cases in which, under the leadershipof the Financial Institution Fund Council and the government, effective fund coordination corresponding to the policy-based demands of the time was carried out through the voluntary adjustment organization within the Federation. For example, in FY 1955. a vear marked by funding scarcities due to a slump in postal savings, the transfer of JDB funds to the private sector was carried out (V13.0 billion of the 131.0 billion of planned JDB Funding).In FY 1958, when there was a shortage of funds for iron
243 and steel and ocean shipping, the underwriting of bank debentures with the surplus funds of the Trust Fund Bureau, as well as the allocation of these funds to both industries was proposed and eventually translated into action. In addition, in FY1957, when aggregate demand had to be suppressed because the international balance of payments had become an urgent policy issue, a reduction in capital investment (15%) was proposed, in recognition that the prospective funding demand of industries would exceed financial institutions' supplyof funds. 21 Some of the few exceptions are World Bank credits to Japanese industries, such as electric power and iron and steel, which were transferred through JDB starting in 1953, and foreign currency guarantees by JDB from 1954. In addition, by 1968, 7 govemment foreign bonds had been issued (for a total of V61.9 billion), beginning with the first dollar bond ($30.0 million) in 1958 through the Industrial Investment Special Account. However,their scale was relativelysmall, and they were intended to be used as loans to JDB, the Electric Power DevelopmentCorporation, and the Japan Highway Public Corporation, and restrictedto funding development projects.
22 Current and capital transactions were regulated until Japan became an Article 8 IMF Member Nation in 1964. Current transactions were liberalized from 1964, but capital transactions were regulated until the 1980 revision of the Foreign Exchangeand Foreign Trade Control Law.
23 For overloans, not only was a bank's soundness at issue, but the continuation of a condition of permanent overloaning also raised macro-policy questions, such as why this did not induce inflation in Japan. It can be argued that, because one of the crucial policy goals from the 1950s to mid-1960s was to maintain balanced internationalpayments, a certain degree of moderation was in effect in the management of the economy, whereby it was possible to avoid the excessive overheating of domestic business activities. On the monetary side, the money supply had almost been managed within the amount of appropriatecash supply for economicgrowth during this period. The supply of high-powered money during the early half of the high growth period consisted primarily of Bank of Japan lending, because govemment debts had not increased under the principle that government bonds not be issued, and because the development of a trading market for government and other public bonds lagged. Under the circumstances, it was necessary to directly control the funding activities of private banks so that Bank of Japan lending would not trigger the haphazard expansion of this funding. Until the Bank of Japan used its bond operations to introduce the New System of Monetary Control to diversify monetaryadjustment methods, it was able to maintain the effectiveness of its macro-level financial policies by focusing on lending policies carried out through "window guidance," which took into consideration the quality of the funds of private banks.
24 Provisions concerning public bonds in the Finance Law: the fundamentals of postwar administrationof public finances are based in the Finance Law, which was enacted in April 1947. The law contains two provisions for maintaining sound public finances - the "principle of not issuing public bonds" to procure funds for public investments, except in construction bonds (Article 4), and a "prohibitionagainst Bank of Japan underwriting of public bonds, except short- term government bonds" (Article 5).
25 The separation of banks and trusts was first clearly laid out in 1922 in the Trust Law and the Trust Business Law, but at that time the basis of the separation focused heavily on conflict-of- interest problems.
26 The "Assistance Goods Fund" represents proceeds from the sale to citizens of assistance goods received by Japan through U.S. GARIOA (Govemment Account for Relief in Occupied Areas) and EROA (Economic Rehabilitation in Occupied Areas) Funds that were transferred to the Trade Speciiil Account. Originally, it provided subsidies for export and import goods, but in April 1949 this practice was completely abolished, and these funds were set aside as the Assistance Goods Funds Special Account. When this new system was inaugurated,emphasis was
244 placed on such activities as the purchase of government bonds and the redemption of old debt, including RFB bonds; afterwards, as deflationary factors faded, these funds were activated for investments directed at private corporations, centering on electric power and ocean shipping. However, GHQ actually managed the Assistance Goods Fund, and many aspects of its managementlacked maneuverability,including the long time period necessary for completing the loan procedures, ranging from application to loan determination. Under the Dodge Line, the government was not allowed to supply industrial funds, except through the Assistance Goods Fund; as a result, demands for the active use of fiscal funds increased, especially from industry.
27 When making loans, JDB requested a reasonable level of collateral (JDB could demand a superior mortgage ranking in light of the collateral value) and gave careful consideration to setting loan conditions. When necessary, the JDB requested that the guarantor be someone who had a relationship with the borrowing company as an interested party (a parent company, etc.). As a result, there were cases in which, through the disposal of collateral, the repayment of the debt became possible and, through the transfer of the debts to the guarantor and the parent company, repaymentbecame possible at an early stage.
28 An international comparison of companies in the medium range and above, including listed companies, shows the following equity rates: Japan (FY 1961) 25.6%; United States (1961) 66.3%; Great Britain (1961) 64.1%; and West Germany (1960) 42.9%. (Source: Committee on Financial SystemsResearch, 1963.)
29 Zaibatsu was the form of enterprise concentration under the control of wealthy families that originated during the Japanese economic development period after the Meiji Restoration (1868), and which established a structure of control in the 1920s. The zaibatsu were similar to the prewar German Konzem. Structurally, the zaibarsuwere pyramid-shapedenterprise groups, with holding companies controlled by the zaibatsu families at the top. Under this "umbrella," they maintained oligopolistic and monopolistic business enterprises in broad-ranging industrial areas, including the mining and manufacturing industry, transportation, trading firms (shosha), and finance. Below these business enterprises was yet another level, which included the numerous subcontracting firns that comprised the base of the pyramid. These groups were united through the ownership of stocks by stock holding companies. The financial institutions and trading companies below them served as the nucleus of the groups, through interlocking directorates, financing, and the procurement and sales of goods. The most well-known zaibatsu were Mitsui, Mitsubishi, Sumitomo,and Yasuda.
30 In December 1946 the issuance of Industrial Bank of Japan discount bonds was resumed at an issue price of I95.62.Furthermore, as of June 1947, the rate of bank time deposits for one year was 3.6%, while the rate of savings certificatesof postal savings for two years or less was 3%.
31 Mr. Kobayashi later noted in his memoirs: "We carried out operations based on the recognition that 1DB was a new kind of financial organization, one entirely different from the Reconstruction Finance Bank. That is to say, although JDB was a government financial institution, it was not to act as a spokesperson for the govemment all in all, and, although it would comply with government policies and guidelines, it was now thought that it should carry out lending operations autonomouslyand of its own accord as a financial institution.Therefore, when then Prime Minister Shigeru Yoshida asked me to assume the govemorship, I accepted the position on condition that when requestscame from political parties and others, if these requests differed from the Governor's own thinking on a particular matter, even if they came from the Prime Minister himself, I would have the right to deny the request."
32 Export-Import Bank (U.S.) development loans were direct financing for foreign countries' development plans. The Export-Import Bank (U.S.) provided between 70% and 75% of a project's operational costs; the remainder was provided by manufactures (15% to 20%) and borrowers own funds (10%).
245 33 The BOJ Special Foreign Currency Fund and JDB financing werc used to reduce interest rates on loans to the iron and steel industry; the portion recovered from the iron and steel industry was then shifted to the Shipbuilding Industry Association, which then distributed this money throughout the industry in order to reduce the costs of ships.
34 When Kawasaki St -el announccd in 1950 that an integrated steel factory would be constructed outside Chiba City, debatc arose among industrialand financial circles and related government agencies about whether this equipment was necessary for rationalizingthe industry,or whether it might be a dual investment that would create excess facilities. In February 1952, MITI agreed that building the factory was necessary for modernizing the iron and steel industry, improving product quality, and reducing costs. After carrying out an independent investigation into the financing of loans for this project, JDB approved loans totaling V5.1 billion for the first- and second-period construction.
35 In drawing up the Second Five-Year Plan for the Rationalizationof Ammonium Sulphate, the government asked JDB to provide long-term low-interest loans for gas conversion projects without accompanying increases in capacity. While JDB recognized that the ammonium sulphate industry had to be rationalized, it also recognized several problems with this strategy. The major problem was that, even if rationalization lowered costs, laws to protect the domestic agricultural industry would not enable the ammonium sulphate industry to benefit from these cost savings, since the entire reduced amount would be used to lower the price of ammonium sulphate. However, the funding of commercial financial institutions required JDB support, and, as the governmentbegan reevaluatingprice setting, 1DB provided low-interest loans for gas conversion projects that did not call also for capacity increases.
36 Again, because policies between the postwar priority production period (1946-47) and the period in which coal mining was state-managed (1948-50) were targeted solely at increasing output, they differ considerablyfrom the coal policies that unfoldedthereafter and are not discussed here.
37 The Basic RationalizationPlan addressed such issues as targets for production scale, efficiency and production costs, the rationalization projects to be carried out, and the improvements necessary for increasingcoal productioncapacity.
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